Tag Archives: Convertible note issues

Series – How to Cure Cleansing Notice Failures – Part 3: Cleansing Notice / Section 1322(4) Cases of Note

Posted on by
Reply

*This is the third in a 4-part series I am publishing to assist publicly listed companies, and those who represent them, when there has been a failure to lodge a cleansing notice or prospectus (or multiple such failures), and thus a need to seek curative Court orders. The series will explain the relevant law, and what needs to be done. I appeared at the hearing of such an application in the Federal Court in January this year, which was successful. The Court’s ex tempore reasons have not been reduced to writing and published (though there are no suppression orders). By the first 3 parts of this series I am sharing extracts drawn from my written submissions, excluding the parts specific to my case. In parts 1 and 2 I have identified the legislative provisions relevant to such applications, and provided an up-to-date distillation of the applicable principles from the authorities. This part 3 of the series is illustrative, providing case summaries of recent and/or useful reported cases where public companies have failed to lodge cleansing notices. In the final part of the series, I will run through the steps that should swiftly be taken at an early stage, to successfully achieve the orders needed. My thanks and due credit for the success of our recent application goes to my high calibre instructing solicitors, Emma Cook (corporate) and Scott Guthrie (litigation), partners with Thomson Geer in Brisbane.

Introduction

If you have not yet read Parts 1 and 2 of this series to gain an understanding of the relevant provisions and the key principles as to their application, you may find it useful first to do so. They may be read here (Part 1) and here (Part 2).

As useful illustrations of the facts of the authorities in this area, and other recent or useful cases of note, I now set out summaries of these cases, in chronological order. Interestingly, whilst not all, the overwhelming majority of decisions in this area come out of Western Australia – either their Supreme Court, or the West Australian division of the Federal Court of Australia. I have added the outcome of the unusual costs hearing last month in Sprintex Limited (No 3).

In my assessment, the leading authorities are the 2018 decision of Justice Banks-Smith of the Federal Court in Re iCandy Interactive Ltd, and that of Justice Derrington of the Federal Court in 2022 in Lake Resources NL, particularly for more challenging cases of multiple cleansing notice failures.

The high water mark cases in terms of the number of cleansing notice failures are Re Structural Monitoring Systems PLC (31 failures) and Re Power Minerals Ltd (61 failures). The high water mark case in terms of evidence indicating possible dishonest conduct on the part of the (former) company secretary is Re Austpac Resources. The high water mark case in terms of “repeat offences” and, whilst unusual and in most cases unlikely, for potential costs consequences for company secretaries and board members, is Re Sprintex Ltd (Nos 2 and 3).

Cases of Note

Re iCandy Interactive Ltd [2018] FCA 533; (2018) 125 ACSR 369 (WA)

  1. In iCandy Interactive, the chairman of the board had been advised that he could apply to ASIC for relief from the five day rule (cannot issue a cleansing notice if shares have been in suspension for more than five days) or issue a cleansing prospectus. Having received that legal advice he told the lead manager and company secretary to proceed with the share issue that day in any event. No cleansing prospectus was issued. No holding lock was in place and the company did not apply to ASIC for relief until two days after the shares had been reinstated to the ASX and the share issue had proceeded. 29 days then passed before a voluntary suspension of the shares was facilitated, in which time about one third of recipient shareholders had traded their shares.[1] The company relied upon the honesty (ii) and just and equitable (iii) limbs of s 1322(6)(a), for the order sought under s 1322(4)(a). 
  2. Both limbs were found satisfied. Banks-Smith J found that aspects of the conduct of the directors and officers, in particular the chairman, were unsatisfactory.[2] However her Honour found the failures occurred through inadvertence and a failure to properly understand the significance of compliance in a timely manner, and did not consider there was conscious impropriety or a disregard of the company’s obligations to the extent of dishonesty.[3] Her Honour found it was likely the shareholders had made offers or on-sold their shares in good faith and on the assumption that no disclosure was required by them, and there was no reason the inadvertent error on the part of the company should deny relief or deny any defects in the disclosure from being corrected. It was just and equitable that the orders be made.[4]
  3. The Court then weighed the prejudice that would be suffered if the order was made against the prejudice that would be suffered if it was not, concluding that such an order was clearly in the interests of affected shareholders, as they risked exposure to claims against them absent validation. There was no good reason for inferring that validation of the relevant shares would prejudice any person. To the extent there was any prejudice to third party purchasers by such validation, that was tempered by the ability to apply to court under the orders. Her Honour concluded that in the circumstances she did not consider there would be any substantial injustice in making the orders.[5]  
  4. The application was granted and s 1322(4) orders were made.

Re Caeneus Minerals Ltd [2018] FCA 560 (WA)

  1. In Caeneus Minerals, there were 31 failures to issue cleansing notices over three and a half years. The company secretary resigned after the failures came out, but deposed to the circumstances of his failures as to the company’s compliance obligations when he had been company secretary. The company relied upon the honesty (ii) and just and equitable (iii) limbs of s 1322(6)(a), for the order sought under s 1322(4)(a). 
  2. Banks-Smith J was satisfied that the failures were not dishonest. The company secretary had made relatively simple errors and misunderstood the legal position as to the effect of shareholder approval or prior disclosure. The mere fact that there were many separate instances did not elevate his conduct to dishonesty.[6]
  3. The application was granted and s 1322(4) orders were made.

Re Structural Monitoring Systems PLC [2022] FCA 473 (Vic)

  1. In Structural Monitoring Systems, there were multiple failures to issue cleansing notices arising in three categories of issue of securities over two years. 
  2. Anastassiou J was satisfied that the honesty (ii) limb of s 1322(6)(a) was made out, for the purposes of the order sought under s 1322(4)(a), in the sense not of inadvertence, but an incorrect assumption as to the effect of the relevant ASIC Class Order.[7]
  3. The application was granted and s 1322(4) orders were made.

Lake Resources NL, in the matter of Lake Resources NL [2022] FCA 197 (Qld)

  1. In Lake Resources, there were 4 failures to issue cleansing notices over two months. 
  2. The question of the honesty of the responsible officer arose there where the honesty limb under s 1322(6)(a) was relied upon in seeking an order under s 1322(4)(a). The Court found that the relevant officers were under immense pressure given their volume of work and duties, and were overstretched, and the failures appeared to be by oversight.[8] Moreover, the failures accounted for just 4 share issues, when there had been 28 other share issues where cleansing notices had been duly issued through the same period.[9]
  3. In relation to the company itself, Derrington J observed[10] –
  4. Further, the company’s swift actions following the discovery of the omission also speak of an intention to comply with the regulatory requirements. It immediately notified the ASX of the issue of its failure or omission to lodge the cleansing notices. It made an appropriate announcement and voluntarily suspended trading in its shares. Its transparency and willingness to rectify the problem is both commendable and negates any suggestion of a lack of honesty on its part.
  5. The question of honesty was also considered as relevant to s 1322(6)(b) in seeking an order for relief for liability under s 1322(4)(c) – that is, the honesty of the shareholders. The Court noted that the difficulty with respect to subsequent vendors of uncleansed shares could be ameliorated in circumstances where Appendix 2A notices were issued. The warranty carried by those notices effectively indicates to the purchasers that there was no evidence of non-disclosure in the dealing with the shares. In any event the Court was willing to draw the inference that the recipients of the allocations would not have been aware of the failure to lodge the cleansing notices, and the subsequent non-disclosure, and observed it should be concluded that the subsequent vendors of the shares acted honestly.[11]
  6. The Court was also satisfied that the granting of the relief would not cause substantial injustice to any person.[12]
  7. The jurisdictional facts having been enlivened, the Court considered and was satisfied that  the discretion under s 1322(4) should be exercised to grant the orders, given: the substantial benefits from the making of the orders; the remedial action the company had taken to avoid any repetition of a similar issue the future including the reorganisation of its corporate structure giving increased oversight to compliance; the extension of time sought in that case was relatively short, measured in months not years; the ASX and ASIC had been informed of the proceedings and neither objected to the making of the relief sought; and while some shareholders had contacted the company none opposed the making of the orders.[13]
  8. The application was granted and s 1322(4) orders were made.

Re Austpac Resources NL [2023] FCA 108 (NSW)

  1. In Austpac Resources there were 8 failures to issue cleansing notices over three years. This had happened before. The company had previously sought and obtained s 1322 orders as to a failure to provide a cleansing notice in 2010. On this occasion, the discrepancies were only discovered after the company secretary was replaced. The company relied upon the honesty (ii) and just and equitable (iii) limbs of s 1322(6)(a), for the order sought under s 1322(4)(a). 
  2. In this case, Goodman J could not conclude that there was an absence of dishonesty on the part of the former company secretary or his service company, who were amongst the on-sellers of affected shares for whose benefit the relief of liability orders were sought under s 1322(4)(c). There had been an apparently clandestine placement of shares to the former company secretary’s service company, which ‘might cast doubt on Mr Gaston’s integrity’.[14]
  3. The application was granted and s 1322(4) orders were made, excepting a carve-out from the relief from liability order under s 1322(4)(c) for the former company secretary and his service company.

Re Power Minerals Ltd [2024] WASC 121

  1. In Power Minerals there were 61 failures to issue valid cleansing notices over five and a half years. The former managing director – who did not give evidence – was responsible for the first 28, and the company secretary was responsible for the other 33. The company relied upon all three limbs of s 1322(6)(a) – the procedural (i), the honesty (ii) and the just and equitable (iii) limbs, for the order sought under s 1322(4)(a). 
  2. The company secretary gave evidence that while the former MD was responsible, she had issued cleansing notices for 13 share issues over 4.5 years, and the company contended that on that basis the reason for the failures was inadvertence. As to the remainder, the company secretary gave evidence that her own failures were inadvertent and due to two primary factors – her competing priorities, as she was company secretary for 6 other companies and was distracted by other urgent tasks, and for share issues upon the exercise of options, that she did not know at he time that a cleansing notice was required to be given for those.[15]
  3. Hill J accepted that the relevant act, the failure to lodge the cleansing notices, was essentially of a procedural nature.[16] As to honesty, her Honour found that the failures of the company secretary were honest and inadvertent. As to the failures of the managing director, there was no direct evidence as to why they occurred. However based upon evidence that cleansing notices were issued in respect of other share issues undertaken at similar times, the Court inferred that the failures were due to inadvertence.[17] Her Honour held that it would be just and equitable to grant relief to the extent necessary to protect the interests of current shareholders and for the integrity of future trading in the plaintiff’s shares.[18]
  4. Hill J found that there was no basis for inferring that substantial injustice has been or is likely to be caused to any person by the making of the proposed orders, and provided the usual opportunity for any party to raise a complaint within 28 days of the orders being made. Her Honour also found that there was no discretionary reason to withhold relief. There was no evidence of any substantial misconduct, serious wrongdoing or flagrant disregard of the corporate law or the company’s constitution so as to warrant refusal of the relief sought. There was nothing in the evidence to suggest any minority shareholder might be oppressed. Shareholders had been notified of the contraventions, as had ASIC and the ASX, and given notice of the hearing. No shareholder had sought to intervene or given notice they wanted to be heard. The plaintiff had acted promptly to take steps to remedy the issue, including seeking a trading halt within 2 days of becoming aware of the failures, and commencing the proceedings 2 days thereafter.[19]
  5. The application was granted and s 1322(4) orders were made (though a deeming order there sought under s 1322(4)(a) as to the filing of a fresh cleansing notice was declined, on the basis there was no evidence there had been any trading in the affected shares).

Re Sprintex Limited (No 2) [2025] WASC 15

  1. Previously in 2022, Sprintex Limited (Sprintex) had sought curative orders under s 1322(4) following a failure to lodge a cleansing prospectus for an issue of shares in February 2022. The evidence included affidavits from Sprintex’s company secretary Michael Scott van Uffelen, in which he deposed to the failure being a result of inadvertent oversight, and that he was taking measures to ensure that all disclosure requirements would be complied with and that to this end, with the assistance of Sprintex’s external legal advisors, was developing a protocol for the issue of securities. The relief was granted by Justice Hill.[20]
  2. No such protocol was ever prepared. Sprintex retained its company secretary Mr van Uffelen. 
  3. Mr van Uffelen was also company secretary for Nanoveu Ltd (Nanoveu), which in March 2024 sought curative orders under s 1322(4) for 3 share issues in January and June 2023 for which it had failed to lodge cleansing notices, the late lodgment of a half year financial report, directors’ report and auditor’s report. Justice Strk accepted that the failures were inadvertent and while there was 8 months delay between discovery of the cleansing notice omissions on 10 July 2023 and filing the application on 11 March 2024, the relief was granted.[21]
  4. In November 2024, Sprintex returned to the Court this time seeking curative orders following 24 share issues affected by failures. 13 share issues were issued with cleansing notices between February and July 2024 which falsely stated that Sprintex had complied with Chapter 2M of the Act when it had not, as it had failed to lodge annual reports in the timeframe required. A further 11 share issues had been issued between September and December 2023 with no cleansing notice when one was required. Sprintex terminated Mr van Uffelen as its CFO and company secretary in October 2024.
  5. Satisfied as to the pre-conditions for relief, Justice Lundberg gave thought to whether he should exercise his discretion to grant the relief, given the decision by Sprintex to leave its corporate secretarial function in Mr van Uffelen’s hands, without proper controls in place, given his prior contraventions both at Sprintex and at Nanoveu, and without ensuring that the protocols spoken of in 2022 were actually in place. His Honour was also troubled by the decision of Mr van Uffelen not to provide affidavit evidence when Sprintex did not pay fees he had demanded. However in light of evidence and inferences that could be drawn that the failures were inadvertent and not deliberate or dishonest, and that there was no substantial injustice, his Honour granted the relief sought.[22]
  6. However his Honour found there were unusual or distinctive features in this case which justified departure from the usual position that there be no order made as to costs. In this case Justice Lundberg ordered that the costs of the application not be met out of company funds, with liberty to apply granted to Sprintex, its former company secretary Mr van Uffelen and each of the directors, noting that each will require an opportunity to be heard before any costs orders may be made against them. The unusual or distinctive features included that: Sprintex had had to seek curative orders from the Court before in 2022, when it had the same company secretary Mr van Uffelen and the same board members, yet it thereafter continued to repeatedly fail to meet is compliance requirements; Mr van Uffelen was also directly involved in Nanoveu’s contraventions which also had required a Court application – at least one of Sprintex’s directors knew about that, and at least 10 of Sprintex’s latest contraventions occurred after Nanoveu’s Court application; and that the protocol proposed to the Court in Sprintex’s 2022 application to prevent future failures of compliance was never prepared.[23]
  7. His Honour made the order whilst acknowledging the counterveiling concerns weighing against such an order, noting that in many cases the Court has given weight to the counterveiling concerns. One is that the risk of a personal costs orders should not impact the decision of past or present officers of the company to investigate matters or bring an application before the Court. Another is that the costs of an enquiry into who should bear the costs of an application may outweigh any benefit obtained. His Honour noted that in iCandy Interactive Justice Banks-Smith had considered whether to make such a costs order, which had been raised by ASIC. Her Honour observed that the ongoing costs to the company of an enquiry into who should bear the costs of the application may well be disproportionate to the outcome, and declined to depart from the usual position that no order be made as to costs.[24]

Re Sprintex Limited (No 3) [2025] WASC 59

  1. Further to Justice Ludberg’s decision in January, the company then filed an interlocutory application that costs be borne as follows: 3/4 to be apportioned to the former company secretary and his service company jointly and severally, and 1/4 to be paid equally by the company directors, and that the costs of this application be paid jointly and severally by the former company secretary and his service company. The former secretary chose to file no affidavit evidence or take any part in the application.
  2. Last month on 5 March 2025, Justice Lundberg delivered judgment on this. After consideration of the principles to be applied, including those as to awards of costs against non-parties, and of the evidence, his Honour awarded a sum which was approximately 70% of costs against the former company secretary and his service company jointly and severally, and 30% against the directors similarly. His Honour held over the decision as to the costs of this costs application for further determination, with liberty to apply.

********

Next/final instalment – Part 4 of 4: Steps to take upon discovery of a failure to lodge a cleansing notice, to successfully achieve curative orders

*******

Liability limited by a scheme approved under Professional Standards Legislation

[1] iCandy Interactive at [18]-[27].

[2] At [41].

[3] At [107]-[108].

[4] At [109]-[113].

[5] At [115]-[118].

[6] Re Caeneus Minerals Ltd [2018] FCA 560 at [43]-[44] per Banks-Smith J.

[7] Re Structural Monitoring Systems PLC [2022] FCA 473 at [24] per Anastassiou J.

[8] Lake Resources NL, in the matter of Lake Resources NL [2022] FCA 197 at [30] per Derrington J.

[9] At [31].

[10] At [32].

[11] At [34]-[37].

[12] At [38].

[13] At [44]-[49].

[14] Re Austpac Resources NL [2023] FCA 108 at [78]-[79] and [117]-[118].

[15] Power Minerals at [11]-[13].

[16] At [33]. See submissions above as to the authorities at [60]-[66].

[17] At [35].

[18] At [36].

[19] At [42]-[44].

[20] Re Sprintex Limited [2022] WASC 188.

[21] Re Nanoveu Limited [2024] WASC 329.

[22] At [100]-[104].

[23] At [118]-[119]. As noted at [118], in Re Wave Capital Limited [2003] FCA 969; (2003) 21 ACLC 1, where such an order was also made, the unusual or distinctive feature was the failure by the directors to honour a specific promise in the relevant prospectus.

[24] At [110]-[114].

Series – How to Cure Cleansing Notice Failures – Part 2: Relief under section 1322(4) of the Corporations Act – Key Provisions and Principles

Posted on by
1

*This is the second in a 4-part series I am publishing to assist publicly listed companies, and those who represent them, when there has been a failure to lodge a cleansing notice or prospectus (or multiple such failures), and thus a need to seek curative Court orders. The series will explain the relevant law, and what needs to be done. I appeared at the hearing of such an application in the Federal Court in January this year, which was successful. The Court’s ex tempore reasons have not been reduced to writing and published (though there are no suppression orders). By the first 3 parts of this series I am sharing extracts drawn from my written submissions, excluding the parts specific to my case. In parts 1 and 2 I will identify the legislative provisions relevant to such applications, and provide an up-to-date distillation of the applicable principles from the authorities. The series in part 3 will be illustrative, providing case summaries of recent and/or useful reported cases where public companies have failed to lodge cleansing notices. In the final part of the series, I will run through the steps that should swiftly be taken at an early stage, to successfully achieve the orders needed. My thanks and due credit for the success of our recent application goes to my high calibre instructing solicitors, Emma Cook (corporate) and Scott Guthrie (litigation), partners with Thomson Geer in Brisbane.

Introduction

It has been said of relief sought under ss 1322(4) to validate, relieve from liability or otherwise to cure the effects of failures to issue cleansing notices that[1] –

All of the above relief is within the scope of s 1322. The importance of this section should not be underestimated. It contemplates that errors may occur in relation to complying with the intricacies of the Corporations Act. It is obviously remedial in nature and should be afforded a liberal operation: Re Wave Capital Ltd [2009] FCA 969 at [27] [French J]. Nevertheless, the relatively untrammelled scope of s 1322(4) is circumscribed by the need to satisfy the requirements of s 1322(6). 

Section 1322 is commonly utilised in cases of cleansing notice failures to validate non-disclosure by shareholders who on-sell shares, and to relieve shareholders from liability: see cases collected in Re iCandy Interactive Limited [2018] FCA 533; (2018) 125 ACSR 369 (iCandy Interactive) at [43] per Banks-Smith J.[2] See also the cases summarised in part 3 of this series. 

Key Provisions

Section 1322 of the Corporations Act is entitled “Irregularities”. Relevantly section 1322(4) provides as follows – 

Subject to the following provisions of this section but without limiting the generality of any other provision of this Act, the Court may, on application by any interested person, make all or any of the following others, either unconditionally or subject to such conditions as the Court imposes:

(a) An order declaring that any act, matter or thing purporting to have been done, or any proceeding purporting to have been instituted or taken, under this Act or in relation to a corporation is not invalid by reason of any contravention of a provision of this Act or a provision of the constitution of a corporation;

(b)…

(c) An order relieving a person in whole or in part from any civil liability in respect of a contravention or failure of a kind referred to in paragraph (a);

(d) …

and may make such consequential or ancillary orders as the Court thinks fit. 

Section 1322(6) provides as follows –

The Court must not make an order under this section unless it is satisfied:

(a) In the case of an order referred to in paragraph 4(a):

i. That the act, matter or thing, or the proceeding, referred to in that paragraph is essentially of a procedural nature;

ii. That the person or persons concerned in or party to the contravention or failure acted honestly; or

iii. That it is just and equitable that the order be made; and

(b) in the case of an order referred to in paragraph 4(c) – that the person subject to the civil liability concerned acted honestly; and

(c) in every case – that no substantial injustice has been or is likely to be caused to any person.

Principles

In order to satisfy the requirements of s 1322(4)(a), the Company must demonstrate that[3] – 

  1. It is an interested person within the meaning of s 1322(4),
  2. There was an act, matter or thing purporting to have been done under the Act or in relation to a corporation that may be invalid by reason of a contravention of a provision of the Act: s 1322(4)(a),
  3. Either – (i) The act, matter or thing was essentially of a procedural nature, or (ii) The person or persons concerned in or party to the contravention or failure acted honestly, or (iii) It is just and equitable that the order be made: s 1322(6)(a), and
  4. No substantial injustice has been or is likely to be caused to any person: s 1322(6)(c).

In order to satisfy the requirements of s 1322(4)(c), the Company must demonstrate similar – though not the same matters – as for s 1322(4)(a) – 

  1. It is an interested person within the meaning of s 1322(4),
  2. There was a contravention or failure of a kind referred to in s 1322(4)(a) that may give rise to the civil liability of a person: s 1322(4)(c),
  3. The person subject to the civil liability concerned acted honestly: s 1322(6)(b), and
  4. No substantial injustice has been or is likely to be caused to any person: s 1322(6)(c).

Standing – Interested person

It is well-established that the company whose shares were on-sold in breach of the Act is an interested party with standing to bring the application.[4]

The term is not defined in the Act, but as noted in Re Austpac Resources NL [2023] FCA 108; (2023) 16 ACSR 1 (Austpac Resources) by Goodman J at [92], it has been interpreted broadly. In circumstances where the company seeks relief concerning trading in its shares including the integrity of such trading, and the relief is sought in aid of a foreshadowed application for removal of a suspension of trading in its shares, the Courts are commonly satisfied that the company concerned is an interested person in such an application.[5]

Relief under s 1322(4)(a) – the Validity Declaration

The validity declaration sought is, in summary, that any offer for sale, or sale, of any of the relevant shares occurring in the period after their issue is not invalid by reason of any failure of a notice under s 708A(5)(e) or prospectus under s 706A(11) to exempt the sellers from the obligation of disclosure, and any consequent contravention by selling shareholders of s 707(3) or s 727(1) of the Act. 

There must first be an act, matter or thing purporting to have been done under the Act or in relation to a corporation that may be invalid, for s 1322(4)(a) to be engaged. It is for this reason – that on-sales of a company’s shares may be invalid – that orders are commonly made validating on-sales of shares which had been issued without a requisite cleansing notice.[6]

Section 1322(4)(a) then confers upon the Court a discretion to make a validity declaration, such a discretion being enlivened upon the satisfaction of the pre-conditions set out in ss 1322(6)(a) and (c). 

Satisfaction of one of the 3 alternative limbs of s 1322(6)(a)

Subsection 1322(6)(a) sets out 3 alternative limbs. Only one of those limbs need be satisfied in order to meet the requirements of this sub-section.[7]

In my case in January, the Company relied solely on the third of these – the just and equitable limb. 

(i) – Essentially of a procedural nature

It has been said that “the issuing of a cleansing notice has regularly been held as being essentially of a procedural nature”, and the Court has thereby been satisfied as to this limb.[8]  

However divergent views have been expressed as to this limb, some preferring the view that a contravention of s 707(3) in the nature of on-selling shares without disclosure where there had been no cleansing notice issued is not a procedural irregularity.[9]

In my opinion, the difference appears to be whether, in evaluating whether something is essentially procedural, one is focussed upon the non-issuing of a cleansing notice by the company, or the on-selling of shares without disclosure by the shareholders. In my view it is the latter – the act, matter or thing which is sought to be declared valid – to which attention is directed by the wording of s 1322(6)(a)(i). 

This may be why, as our research had suggested, in numerous cleansing notice cases this procedural limb is often not relied upon by applicants, who more commonly rely upon the just and equitable and the honesty limbs. Hence this issue is often not addressed by the Courts in the cleansing notice cases. 

In any event, it is clear that the application of s 1322(4)(a) has not been confined to procedural or quasi procedural cases. “It may be used to cure substantive as well as procedural contraventions of the [Act].”[10] I suggest that this is because the limb in s 1322(6)(a)(i) is not an essential pre-condition, but one of three alternatives. Hence clearly non-procedural irregularities may be cured through the gateway of one of the other two alternative limbs.

(ii) – That the person or persons concerned in or party to the contravention or failure acted honestly

The principles relevant to this limb were not set out at this point in my written submissions, as this limb was not relied upon in our case. Having said that, the principles relevant to this limb are addressed in a different context, later in these submissions (see below).  

(iii) – Just and Equitable

The expression “just and equitable” are words of significant width and provide the Court with a broad discretion.[11]

It has been observed that[12] – 

The words “just and equitable” are words of the widest significance and do not limit the jurisdiction of the court to any case. It is a question of fact, and each case must depend on its own circumstances. The words give the court a wide discretion. There is no necessary limit on their generality, and they are to be applied in their ordinary meaning as calling for the exercise of judgment in the conventional way.

The Courts have generally focused on the interests and conduct of the shareholders in assessing whether it is just and equitable to make orders validating the on-sales in these cases.[13]

The grounds on which the Courts have held that it is just and equitable to make the validity declaration in these cleansing notice cases include –

  1. that if relief is not granted, the title of any persons who had acquired (or any who in the future might acquire) the affected shares, may be impugned.[14] It would be just and equitable to grant relief to the extent necessary to reasonably protect the interests of current shareholders and for the integrity of future trading in the company’s shares;[15]
  2. that it is in the interests of the company’s shareholders for the contraventions to be cured, so as to allow trading in the shares to resume;[16]
  3. that it is to be inferred that the on-sellers of the affected shares are likely to have acquired their shares on the basis that they were not required to provide disclosure,[17] and that they have made offers or on-sold them in good faith on the assumption that no disclosure was required by them.[18] Those shareholders were entitled to assume that the company had done what was necessary to comply with Part 6D.2;[19]
  4. that the effect of the failure of the company to lodge effective cleansing notices or to otherwise comply with Part 6D.2 has been to expose the on-sellers to claims for relief under s 1325 of the Act; [20]
  5. that there is no evidence of knowledge or deliberate nondisclosure on the part of the shareholders.[21]

No substantial injustice – s 1322(6)(c)

Subsection 1322(6)(c) requires – both for s 13224(a) and s 1322(4)(c) orders – that the Court must be satisfied that no substantial injustice has been or is likely to be caused to any person. 

In this regard, the applicable principles may be distilled as follows – 

  1. “There are two aspects to this requirement: (a) the expression “has been” invites an inquiry as to the effect of the irregularity sought to be cured; and (b) the expression “likely to be” draws attention to the effect of the proposed order”;[22]
  2. The reference to “substantial injustice” in s 1322(6)(c) is to a real and not insubstantial or theoretical prejudice. Whether there is real injustice requires a weighing of any prejudice if the order is made, against the prejudice which would be suffered by those affected if an order is not made;[23]
  3. “A degree of prejudice to a person or persons may be outweighed if the overwhelming weight of justice is in favour of making the order”. [24] “[A]ny prejudice which may have existed may be powerfully outweighed by the benefit to shareholders of being able to resume trading in its shares”;[25]
  4. “Such an order is clearly in the interests of shareholders who have made offers or on-sold their shares, as they risk exposure to claims against them absent validation”;[26]
  5. “One mechanism by which the court may ensure that an order under s 1322(4) does not cause substantial injustice is to make an ancillary order permitting any interested person who may suffer substantial injustice to apply within a set period of time to vary or dissolve the s 1322(4) order”.[27]

Factors to which the Courts have had regard in considering whether any substantial injustice has been or is likely to be caused to any person in these cleansing notice cases include –

  1. whether there is evidence of substantial injustice caused by the contravention/s,[28] or where there is any basis to infer that substantial injustice has been or is likely to be caused to any person by the making of the orders sought;[29]
  2. that if the orders were not made, there may be a substantial injustice to the company as the offers or sale of shares may be void or voidable which could give rise to commercial uncertainty and expense;[30]
  3. that there may be substantial injustice to other ordinary shareholders of the company if the orders are not made, as they may be unable to trade their shares on an open market if the ASX were not to lift the suspension;[31]
  4. that an opportunity is to be afforded in the orders for shareholders or other parties who can demonstrate a sufficient interest to raise a complaint about the proposed orders within 28 days from the date of the orders or their publication.[32]

Exercise of the discretion

Once the Court is satisfied as to the jurisdictional matters identified in s 1322(6), the discretion in s 1322(4)(a) is enlivened, and the Courts then consider whether to exercise the discretion to make the order sought.[33]

The factors to which the Courts have had regard in considering whether to proceed to exercise their discretion to make the validity declaration in these cleansing notice cases include – 

  1. that the orders would be just and equitable & no substantial injustice – the conclusions that it would be just and equitable to make the validity declaration, and that no substantial injustice has been or is likely to be caused to any person, not only enliven the discretion but also weigh in favour of the making of the validity declaration;[34]
  2. that the orders would restore integrity in share dealings – the making of the declaration will serve to remove doubts as to the integrity of dealings in the affected shares caused by the contraventions;[35]
  3. the regulators’ position – the position of the ASX and ASIC on the application, and whether they have any concerns about the making of the validity declaration.[36]
  4. notice to shareholders – whether the company’s shareholders have been on notice of application and have sought to be heard in opposition or support of the application;[37]
  5. public policy – whether public policy would be undermined by the making of the orders.[38] Whether there is evidence of substantial misconduct, serious wrongdoing or flagrant disregard of the corporate law or the company’s constitution so as to warrant refusal of the relief sought;[39]
  6. that public policy is not undermined by protecting shareholders only – notably, in iCandy Interactive, the Court accepted ASIC’s submission that:[40] “[I]nsofar as the s 1322(6)(a) preconditions are met and as no relief is sought for the benefit of directors, officers or the company itself, then there is no suggestion that the public policy of the remedial provision is undermined by the making of the orders.”
  7. prompt action to remedy – the promptness with which the applicant company has acted to remedy the irregularity once it had been identified.[41] Even considerable delay not enough to refuse – if there has been even considerable delay in seeking the relief sought[42] – whether an explanation for the delay has been provided which demonstrates that the company acted promptly once concerns were raised but then was hampered by various factors. Applications such as these should be brought as soon as possible. However, subject to the explanation provided, and the strength of the reasons in favour of making the validity declaration, the delay may not be sufficient reason to refuse to make the validity declaration;[43]
  8. any other reason / whether company has taken steps to address causes of failures – whether there is any other matter which might inform the exercise of the discretion and which provides a reason not to make the declaration sought. For example, whether the company has not taken steps to address the causes of its previous failures to meet its obligations;[44]
  9. frank and detailed account – whether the company applicant has provided a frank and detailed account as to the circumstances surrounding each of the share issues.[45]

As to factor (5) above, where on the evidence there are some concerns about the conduct of those involved in the contraventions, the following statements of principle are apposite – 

  1. when determining whether someone has acted honestly for the purposes of s 1322 of the Act, the Courts look to an absence of evidence of dishonesty; [46]
  2. the Courts also take into account whether the applicant company has taken prompt action to remedy the error;[47]
  3. the concept of honesty can embrace the following – (a) inadvertence or a failure to turn their mind to the relevant issue, (b) an active, but incorrect, consideration of a legal issue as well as failure to consider the issue at all, (c) a failure to understand or appreciate the significance of non-compliance;[48]
  4. any concerns about the honesty of those involved in the contraventions may not be a sufficient reason to refuse to make the validity declaration in circumstances where, relevantly, there is no reason to believe that shareholders who received or purchased the affected shares have acted otherwise than honestly. There may be no reason why doubts as to the integrity of the transactions by which the affected shares have been transferred should not be removed;[49]
  5. “[Section] 1322(6)(a) envisages that the court can make an order under s 1322 even where the court is not satisfied that the person concerned in the contravention acted honestly. So even where a person acts dishonestly, which would normally involve an element of deliberate behaviour, the legislation will permit the court to make an order under s 1322(4)(a). For instance, if the court is justified that it is just and equitable that the order sought be made (see s 1322(6)(a)(iii)), then an order under s 1322(4)(a) can be made, even though an element of dishonesty is involved. The court, of course, may not make the order sought, but s 1322(6) does not prevent the court from doing so in the appropriate circumstance.”[50]
  6. “[A]n order can be made under s 1322(4)(a) even if that provision is concerned with “irregularities” and the order is to declare a deliberate irregularity valid.”[51]

Two things were notable from our research. When I say “our”, I was ably assisted in this task by my reader, junior barrister Pan Pisani, whose research skills are exceptional (her profile may be viewed here) –

  1. invariably in the cleansing notice s 1322 cases we reviewed, where it has been determined that it is just and equitable to make the s 1322(4)(a) order for the protection of affected shareholders, and where for both s 1322(4)(a) and (c) orders the Court has been satisfied that no substantial injustice has been or is likely to be caused to any person –  the orders have been made;
  2. indeed our research of over 60 cleansing notice cases found no cleansing notice s 1322 case where the s 1322(4)(a) and (c) orders protective of shareholders had been refused once the preconditions are satisfied, even where there had been concerns as to the conduct of the officer responsible for the contraventions.[52]

Relief under s 1322(4)(c) – the Relief from Liability order

The relieving order sought is that any person who has on-sold the affected shares is relieved from any civil liability arising out of any failure of a notice under s 708A(5)(e) or prospectus under s 706A(11) to exempt the sellers from the obligation of disclosure, and any consequent contravention by selling shareholders of s 707(3) or s 727(1) of the Act.

Section 1322(4)(c) confers upon the Court a discretion to make such an order, the discretion being enlivened upon the satisfaction of the pre-conditions set out in ss 1322(6)(b) and (c). 

Honesty of the affected shareholders – s 1322(6)(b)

Subsection 1322(6)(b) requires that the person the subject of the civil liability concerned acted honestly. This makes it necessary to identify the civil liability and the persons the subject of such liability, to consider if they acted honestly. The relevant liability is a liability under ss 707(3) or 727(1) of the Act. The persons the subject of such liability and for whom relief here is sought are shareholders – the persons who on-sold affected shares.[53]

There is a body of authority that supports the view that it is open to the Court to readily infer that those shareholders have acted honestly in on-selling the shares.[54]

No substantial injustice – s 1322(6)(c)

Subsection 1322(6)(c) requires – both for s 13224(a) and s 1322(4)(c) orders – that the Court must be satisfied that no substantial injustice has been or is likely to be caused to any person. 

See above. The principles and factors cited above apply here also, but as to orders relieving of liability.

Exercise of the discretion

Once enlivened, there is a residual discretion as to whether or not to make the orders sought. Key principles to be distilled from the authorities as to the exercise of the discretion as to whether to make an order sought under s 1322(4)(c) include –

  1. satisfaction of the pre-conditions not only enlivens the discretion under s 1322(4)(c) but also weighs in favour of making the relief order;[55]
  2. “Relief of this kind is not required in order to ensure the ongoing integrity of the market. However it may be justified to provide an assurance to innocent parties, particularly where their contravention arises from a failure to disclose consequent upon the issuing company creating the impression that the shares were freely tradable at any time”;[56]
  3. “[A]n order under s 1322(6)(c) operates only for the benefit of the party concerned and will not require a consideration of wider public interest issues of a kind that may support the making of an order under s 1322(6)(a) on the basis that it is just and equitable”;;[57]
  4. whether there is any reason, including delay, not to exercise the discretion so as to make the relief from liability order.[58]

Relief from liability is sought for the protection of shareholders in these cleansing notice s 1322 cases. It is not customary to seek such relief to extend to the company or its officers.[59] Where there have been concerns as to the conduct of the officer involved in the contraventions and he and a related entity are shareholders, the Court has made an order excluding them from the protection afforded by the relief from liability order.[60]

The factors to which the Courts have had regard in considering whether to proceed to exercise their discretion to make the order to relieve shareholders from liability under s 1322(4)(c) in these cleansing notice cases have included – 

  1. that the order would relieve anyone who purchased the shares and on-sold them from potential liability or the concern of potential liability in circumstances where that potential has arisen through no fault on their part;[61] 
  2. the position of the ASX and ASIC on the application, and whether they have any concerns about the making of the order relieving shareholders from liability; [62]
  3. whether the company’s shareholders have been on notice of application and have sought to be heard in opposition or support of the application; [63]
  4. whether there appears to be any reason such as delay not to exercise the discretion so as to make the relief from liability order.[64

*****

Skipping past the ‘Contentions’ section of my written submissions, where the provisions and principles were applied to the particular facts of that case to make submissions as to why the orders sought should be granted, I will give you its conclusion –

Conclusion

It is submitted that the Company has acted promptly and diligently in this matter, in obviously difficult circumstances, which speaks to its intention to comply with the regulatory requirements. It has made early and appropriate announcements to the market and voluntarily moved to halt and then suspend trading in its shares. Its transparency and willingness to rectify the problems demonstrate the Company’s honesty and intention to properly comply. This case is not about absolution for the Company and what has occurred. The Company seeks these curative orders directed to the reasonable protection of affected shareholders and former shareholders, and in the interests of all its stakeholders. The relief sought is within the scope of s 1322, which provision is remedial in nature and should be afforded a liberal interpretation. In all the circumstances, it is submitted that the orders sought under s 1322(4) ought be made. 

*****

To this conclusion I added a late postscript, as just a few days before our Court documents and my written submissions were filed, a new case was handed down in the West Australian Supreme Court in which an unusual costs order was made. It did not alter the Company’s position, and I made submissions as to why it ought not be followed in the circumstances of our case. However it involved the potential for adverse costs orders to be made against the Company officer involved in the failures and potentially Board members, in certain cases, subject to an opportunity to be heard. As the company’s application was to be heard without contradictor – ASIC and the ASX having both taken a neutral stance on the application and declined to appear – it needed properly to be brought to his Honour’s attention. It was also brought to ASIC and the ASX’s attention. A summary of the new case will be included in Part 3 of this Series.

The Court accepted the submissions made for the client in our case, and made the orders sought. The usual position on costs was followed.

*******

Next instalment – Part 3 of 4: Some Cleansing notice / section 1322(4) Cases of Note

*******

Liability limited by a scheme approved under Professional Standards Legislation

[1] Re Lake Resources NL [2022] FCA 197 (Lake Resources) at [29] per Derrington J.

[2] Re Caeneus Minerals Ltd [2018] FCA 560 (Caeneus Minerals) at [33] per Banks-Smith J.

[3] Re Golden Gate Petroleum Ltd [2010] FCA 40; 77 ACSR 17 (Golden Gate) at [37] per McKerracher J.

[4] iCandy Interactive at [46].

[5] See also Golden Gate at [44] and Re Sprint Energy Limited [2012] FCA 1354 (Sprint Energy) at [38]-[40], both per McKerracher J, and Lake Resources at [23] per Derrington J.

[6] See Sprint Energy at [41]; Golden Gate at [45]. See further submissions below at [89].

[7] Golden Gate at [39], and the authorities there cited; Nenna v Australian Securities and Investment Commission [2011] FCA 1193; (2011) 198 FCR 32 (Nenna v ASIC) at [47] per Middleton J; Austpac Resources at [98], where Goodman J observed that being satisfied that it was just and equitable to make the validity declaration, this was sufficient to satisfy the pre-condition of s 1322(6)(a), such that it was unnecessary to consider the alternative limb there relied upon of the honesty of those concerned in the contraventions.

[8] It can be seen that this has particularly been the case in decisions of the West Australian Supreme Court. See Re Nanoveu Ltd [2024] WASC 329 (Nanoveu) at [70] per Strk J, citing as examples: Re Sprintex Ltd [2022] WASC 188 at [28]; Re Yandal Resources Ltd [2022] WASC 338 at [82]; Re Memphasys Limited [2022] WASC 269 at [56]; Re Cyprium Metals Ltd [2022] WASC 241 at [54]. See also Re Power Minerals Ltd [2024] WASC 121 (Power Minerals) at [33] per Hill J.

[9] See iCandy Interactive at [49] per Banks-Smith J and the authorities there cited in obiter (the applicant did not rely on the procedural limb in that case); Golden Gate at [46] and Sprint Energy at [42], both per McKerracher J. 

[10] Golden Gate at [40]-[41].

[11] Austpac Resources at [96].

[12] Re Superior Resources Ltd [2020] FCA 635; (2020) 144 ACSR 677 per Jackson J at 681 [18], and the authorities there cited; quoted with approval in Austpac Resources at [96].

[13] iCandy Interactive at [110] per Banks-Smith J; Austpac Resources at [90(h)]; Nanoveu at [74] per Strk J.

[14] Nanoveu at [75(a)]. 

[15] Power Minerals at [36] per Hill J.

[16] Nanoveu at [75(b)]. 

[17] Austpac Resources at [97].

[18] iCandy Interactive at [111].

[19] Austpac Resources at [97]; see also iCandy Interactive at [112]; citing Sprint Energy at [48].

[20] iCandy Interactive at [110(3)], quoted with approval in Austpac Resources at [97], citing the matter of exposure to such liability as also relevant as to whether it was just and equitable to validate on-sales under s 1322(4)(a).

[21] iCandy Interactive at [113].

[22] Austpac Resources at [99] per Goodman J, quoting with approval from Re Murray River Organics Ltd [2019] FCA 931; (2019) 138 ACSR 365 (Murray River Organics) at [35] per Anderson J.

[23] Austpac Resources at [99], quoting with approval from Murray River Organics at [37]. The reference there was in fact to “the corporation and its directors and officers” rather than “those affected”. However Murray River Organics was not a cleansing notice case, where curative orders are properly sought under s 1322(4) for the protection of affected shareholders and not the company or its directors and officers. See also iCandy Interactive at [117]; Re QBiotics Limited [2016] FCA 873 at [46] per Gleeson J.

[24] Austpac Resources at [99], quoting with approval from Murray River Organics at [36].

[25] Nanoveu at [82], per Strk J accepting the submission that this factor supported the grant of relief.

[26] iCandy Interactive at [117].

[27] Austpac Resources at [99], quoting with approval from Murray River Organics at [38]; see also iCandy Interactive at [117].

[28] See Lake Resources at [39]-[40], where the Court found the evidence showed that any information which would have been in the cleansing notices would have been somewhat minimal, or disclosed to the market, of minimal relevance, making it unlikely any person had acted in reliance on its absence. See also Austpac Resources at [100], where the Court noted that the company had provided regular updates to the ASX, and the retrospective review of one of the officers did not reveal any further information requiring disclosure.

[29] Nanoveu at [83].

[30] Nanoveu at [84].

[31] Nanoveu at [84].

[32] Nanoveu at [85]; Austpac Resources at [115]; Golden Gate at [55].

[33] See for example Lake Resources at [43] et seq. 

[34] Austpac Resources at [106].

[35] Austpac Resources at [107].

[36] Austpac Resources at [108].

[37] Austpac Resources NL at [109].

[38] Caeneus Minerals at [58] per Banks-Smith J.

[39] Nanoveu at [88].

[40] iCandy Interactive at [122]-[123]. In that case, the Court found that while the conduct of directors was open to criticism, their conduct did not involve blatant disregard of the provisions of the Act: [120]. See Schedule (summaries of cases of note) for findings as to the relevant conduct in that case, including ignoring legal advice.

[41] Nanoveu at [91]; iCandy Interactive at [54].

[42] In Austpac Resources, the company took 11 months to request a suspension of shares from trading, and almost 2 years to commence the proceeding. The orders sought were still made.

[43] Austpac Resources at [111]; see also fn99 above.

[44] Austpac Resources at [112].

[45] Power Minerals at [3], where this counted against the number of failures (61); Caeneus Minerals at [4], where this counted against the number of failures (31); Re Clancy Exploration Limited [2018] FCA 569 at [3]; Lake Resources at [32]; Re Astral Resources NL [2024] WASC 251 at [3]; Re Haranga Resources Ltd [2024] WASC 105 at [2].

[46] iCandy Interactive at [54]; Austpac Resources at [115].

[47] iCandy Interactive at [54]; Austpac Resources at [115].

[48] iCandy Interactive at [55]; Austpac Resources at [115].

[49] Austpac Resources at [110].

[50] Nenna v ASIC at [80] per Middleton J. The authority of his Honour’s dicta at [80]-[82] has been widely accepted as well established, including in the cleansing notice case of iCandy Interactive at [44] and, for example, in Re Investa Listed Funds Management Limited as responsible entity for the Armstrong Jones Office Fund and the Prime Credit Property Trust [2018] NSWSC 1432 at [21] per Black J, and De Kun Holding (Aust) Pty Ltd v Yuan [2017] NSWSC 106 at [19] per Pembroke J.

[51] Nenna v ASIC at [82] per Middleton J. 

[52] For example in Austpac Resources, there was evidence of self-dealing by the responsible officer. The former company secretary (who did not give evidence) had apparently made a clandestine placement of shares to his own service company, which cast doubt on his integrity. See further the summary in the Schedule. The orders sought were made, with a carve out from relief from liability for the former officer and his service company. 

[53] Austpac Resources at [114].

[54] iCandy Interactive at [58].

[55] Austpac Resources at [124].

[56] Austpac Resources at [126].

[57] Austpac Resources at [126].

[58] Austpac Resources at [124].

[59] In Golden Gate, relief was initially sought to afford protection from liability arising from the share issue contraventions also for the issuing company, its company secretary and its consultant. After concerns were raised by ASIC, the application was amended to remove them from the protections by the orders sought.

[60] See Austpac Resources at [127], where Goodman J also observed that it was open for the officer and his service company to make their own application should they choose to do so. See also [78]-[79] and [117]-[118].

[61] Lake Resources at [45(b)].

[62] Austpac Resources at [124].

[63] Austpac Resources at [124].

[64] Austpac Resources at [124].

Series – How to Cure Cleansing Notice Failures – Part 1: The Statutory Disclosure Regime for Public Companies, and When Cleansing Notices are Required for Particular Types of Share Issues

Posted on by
1

*This is the first in a 4-part series I am publishing to assist publicly listed companies, and those who represent them, when there has been a failure to lodge a cleansing notice or prospectus (or multiple such failures), and thus a need to seek curative Court orders. The series will explain the relevant law, and what needs to be done. I appeared at the hearing of such an application in the Federal Court in January this year, which was successful. The Court’s ex tempore reasons have not been reduced to writing and published (though there are no suppression orders). By the first 3 parts of this series I am sharing extracts drawn from my written submissions, excluding the parts specific to my case. In parts 1 and 2 I will identify the legislative provisions relevant to such applications, and provide an up-to-date distillation of the applicable principles from the authorities. The series in part 3 will be illustrative, providing case summaries of recent and/or useful reported cases where public companies have failed to lodge cleansing notices. In the final part of the series, I will run through the steps that should swiftly be taken at an early stage, to successfully achieve the orders needed. My thanks and due credit for the success of our recent application goes to my high calibre instructing solicitors, Emma Cook (corporate) and Scott Guthrie (litigation), partners with Thomson Geer in Brisbane.

Introduction

There are two sets of legislative provisions (and ASIC instruments and class orders) and associated principles which must be considered in taking instructions and bringing a Court application to cure failures to lodge cleansing notices. The first set is Part 6D.2 of the Corporations Act 2001 (Cth) (Corporations Act or Act). The second is ss 1322(4) and (6) in Part 9.5 of the Act, s 1322 being a provision which empowers the Court to cure irregularities.

This part 1 of the series provides an overview relevantly of the first set – the statutory framework of the disclosure regime for public companies, including as to when cleansing notice may be required for different types of shares issues.

It should be noted that a failure by the company to observe its disclosure obligations has ramifications for shareholders of the affected shares for the next 12 months. This is both as to the validity of on-sale transactions involving affected shares, and as to the exposure of on-selling shareholders themselves to liability for civil penalties. This is so even though the original disclosure failure was that of the company, and shareholders on-selling the affected shares are likely to have assumed in good faith that the company’s share issue had been properly compliant. It follows from these ramifications for shareholders that trading in shares of such companies should be suspended upon discovery of such a problem, and curative orders are needed. The speed and manner in which key actions should be taken will be discussed in the final part of this series (part 4).

STATUTORY FRAMEWORK – DISCLOSURE REGIME

Part 6D.2 of the Corporations Act 2001 (Cth)

Broadly, part 6D.2 of the Corporations Act requires the provision of information to investors about securities when an offer to issue or sell them is made. It is designed to ensure that investors are provided with information that they and their professional advisors would reasonably require to make an informed assessment in connection with securities offered for issue or sale.

The following outline is drawn from the judgment of Goodman J in Re Austpac Resources NL [2023] FCA 108; (2023) 16 ACSR 1 (Austpac Resources)[1], who explained that the following parts of Part 6D.2 are salient, for present purpose and ignoring inapplicable exceptions.

First, as a general proposition:

(1) an offer of securities for issue needs disclosure unless ss 708 or 708AA provide otherwise: s 706; and

(2) a person must not make an offer of securities that needs disclosure under Part 6D.2 unless a disclosure document for the offer has been lodged with the Australian Securities and Investments Commission (ASIC): s 727.

Secondly, the offers of securities that require disclosure under Part 6D.2 are only those for which disclosure is required by s 707(2), (3) or (5): s 707(1).

Thirdly, s 707(3) provides – 

(3) an offer of a body’s securities for sale within 12 months after their issue needs disclosure to investors under this Part if:

(a) the body issued the securities without disclosure to investors under this Part; and

(b) either:

(i) the body issued the securities with the purpose of the person to whom they were issued selling or transferring the securities, or granting, issuing or transferring interests in, or options over, them; or

(ii) the person to whom the securities were issued acquired them with the purpose of selling or transferring the securities, or granting, issuing or transferring interests in, or options over, them;

and section 708 or 708A does not say otherwise.

Fourthly, s 708A provides some exceptions to the requirement of disclosure prescribed by s 707(3). In so far as is presently relevant, s 708A provides:

708A Sale offers that do not need disclosure

(1) This section applies to an offer (the sale offer) of a body’s securities (the relevant securities) for sale by a person if:

Sale offers to which this section applies

(a) but for subsection (5), (11) or (12), disclosure to investors under this Part would be required by subsection 707(3) for the sale offer; and

(b) the securities were not issued by the body with the purpose referred to in subparagraph 707(3)(b)(i); and

(c) a determination under subsection (2) was not in force in relation to the body at the time when the relevant securities were issued.

…

Sale offers of quoted securities – case 1

(5)    The sale offer does not need disclosure to investors under this Part if:

(a)   the relevant securities are in a class of securities that were quoted securities at all times in the 3 months before the day on which the relevant securities were issued; and

(b)   trading in that class of securities on a prescribed financial market on which they were quoted was not suspended for more than a total of 5 days during the shorter of the period during which the class of securities were quoted, and the period of 12 months before the day on which the relevant securities were issued; and

(c)   no exemption under section 111AS or 111AT covered the body, or any person as director or auditor of the body, at any time during the relevant period referred to in paragraph (b); and

(d)   no order under section 340 or 341 covered the body or any person as director or auditor of the body, at any time during the relevant period referred to in paragraph (b); and

(e)   either: 

(i)    if this section applies because of subsection (1) – the body gives the relevant market operator for the body a notice that complies with subsection (6) before the sale offer is made; or

(ii)   if this section applies because of subsection (1A) – both the body and the controller give the relevant market operator for the body a notice that complies with subsection (6) before the sale offers I made.

(6)   A notice complies with this subsection if the notice:

(a)   is given within 5 business days after the day on which the relevant securities were issued by the body; and

(b)   states that the body issued the relevant securities without disclosure to investors under this Part; and

(c)   states that the notice is being given under paragraph (5)(e); and

(d)   states that, as at the date of the notice, the body has complied with:

(i) the provisions of Chapter 2M as they apply to the body; and

(ii) sections 674 and 674A; and

(e)   sets out any information that is excluded information as at the date of the notice (see subsections (7) and (8)). 

(7)    For the purposes of subsection (6), excluded information is information:

(a) that has been excluded from a continuous disclosure notice in accordance with the listing rules of the relevant market operator to whom that notice is required to be given; and

(b) that investors and their professional advisers would reasonably require for the purpose of making an informed assessment of:

(i) the assets and liabilities, financial position and performance, profits and loss and prospects of the body; or

(ii) the rights and liabilities attaching to the relevant securities.

(8)   The notice given under subsection (5) must contain any excluded information only to the extent to which it is reasonable for investors and their professional advisors to expect to find the information in a disclosure document.

…

Sale offer of quoted securities – case 2

(11)  The sale offer does not need disclosure to investors under this Part if:

(b)   either:

(a)   the relevant securities are in a class of securities that are quoted securities of the body; and

(i)    a prospectus is lodged with ASIC on or after the day on which the relevant securities were issued but before the day on which the sale offer is made; or

(ii)   a prospectus is lodged with ASIC before the day on which the relevant securities are issued and offers of securities that have been made under the prospectus are still open for acceptance on the day on which the relevant securities were issued; and

(c) the prospectus is for an offer of securities issued by the body that are in the same class of securities as the relevant securities.

…       

Fifthly, the making of an offer of shares that needs disclosure under Part 6D.2 absent the lodging of a disclosure document with ASIC is a contravention of s 727 of the Act: s 727(1) and (6) (subject to the operation of s 727(5)).

Finally, a person who contravenes s 727 is exposed to proceedings for relief under s 1325 of the Act: s 1325 (and in particular s 1325(1), (5) and (7)(d)).

As to the documents commonly referred to as “cleansing notices” and “cleansing prospectuses”, these were further explained in Re Structural Monitoring Systems PLC [2022] FCA 473 (Structural Monitoring) by Anastassiou J[2] – 

Cleansing notice exception – s 708A(5) – the seller does not need to comply with the disclosure requirements of Part 6D.2 if the issuer provided a cleansing notice in relation to the securities. The cleansing notice must have been given by the issuer to the ASX within 5 days of the issue of the securities, and before the sale offer was made. Sub-section 705A(6) sets out the maters which must be included in the cleansing notice, the most important of which are that the company must state that, as at the date of the notice, it has complied with its financial reporting obligations in Chapter 2M of the Act and its continuous disclosure obligations in s 674 of the Act, and the notice must include any ‘excluded information’, defined as information that has been excluded from a continuous disclosure notice in accordance with the exceptions in the ASX Listing Rules. In addition, to fall within the cleansing notice exception, s 708A(5) sets out a number of other requirements, including that the company’s securities have not been suspended from trading for more than 5 days in the 12 months prior to the issue of securities that were on-sold;

Cleansing prospectus exception – s 708A(11) – the seller does not need to comply with the disclosure requirements of Part 6D.2 if the issuer lodged a cleansing prospectus in relation to the securities with ASIC. The cleansing prospectus must be lodged on or after the day on which the relevant securities were issued, but before the day on which the sale offer is made. The cleansing prospectus must be an offer for securities issued by the entity that are in the same class of securities as the relevant securities that have been issued and are to be on-sold. Unlike the cleansing notice exception, suspension from trading does not prevent reliance upon the cleansing prospectus exception. 

As to the question of the liability of on-sellers where there has been a failure of disclosure by a company upon issue of relevant shares, s 707(3) is set out above. Section 727 relevantly provides as follows – 

(1) A person must not make an offer of securities, or distribute an application form for an offer of securities, that needs disclosure to investors under Part 6.2D unless a disclosure document for the offer has been lodged with ASIC.

…

(6)   A person contravenes this subsection if the person contravenes subsection (1), (2), (3) or (4).

Note:  This subsection is a civil penalty provision (see section 1317E).

When Cleansing Notices are Required for Particular Types of Share Issues

*Credit for this section goes to Emma Cook, corporate law Partner at the firm of my instructing solicitors, Thomson Geer, Brisbane Office.

(1) SPP Issues

For a Share Purchase Plan (SPP) Issue of shares, whereby shares are offered to existing shareholders, ASIC Corporations (Share and Interest Purchase Plans) Instrument 2019/547 (SPP ASIC Instrument) and ASIC Regulatory Guide 125 apply. ASIC gives relief under the SPP ASIC Instrument to allow ASX listed companies to offer shares to existing holders under a share purchase plan without a prospectus, so long as the offer complies with the provisions of the SPP ASIC Instrument.

Where an SPP to existing shareholders is being conducted in conjunction with a share placement, an issuer need not issue a further Cleansing Notice for the SPP offer when it follows a placement, and the issuer has lodged a Cleansing Notice under s708A(6) or s 1012DA(6) not more than 30 days before the SPP offer is made: RG 125.42, ASIC Regulatory Guide 125. 

However, where an offer under an SPP is made as a stand-alone offer (i.e. it is not offered in conjunction with a placement), a Cleansing Notice must be lodged with ASX within a 24-hour period before the SPP offer is made: RG 125.37, ASIC Regulatory Guide 125.

(2) Placements to sophisticated investors, professional investors and senior managers pursuant to ss 708(8), (11) and (12)

For a Placement Issue (i.e. to sophisticated investors, professional investors or senior managers), listed companies are required to issue compliant Cleansing Notices in accordance with section 708A (5)(e) and (6) of the Act. A Cleansing Notice is required to be given within 5 business days after the day that any shares under a placement are issued by the company, and must set out other relevant information as mandated by those provisions. 

A Cleansing Notice is not however required where shares under a Placement Issue are not being on-sold for a period of 12 months following their issue and this is documented by way of some form of escrow agreement. This is because s 707(3) will not be considered to apply to the Placement Issue, because for a 12 month period post issue they were not able to be on-sold, therefore within that period:

  • the body could not be considered to have issued the securities with the purpose of the person to whom they were issued selling or transferring the securities, or granting, issuing or transferring interests in, or options over, them; and
  • the person to whom the securities were issued could not be considered to have acquired them with the purpose of selling or transferring the securities, or granting, issuing or transferring interests in, or options over, them.

(3) Incentive Plan Issues

Prior to it taking effect from 1 March 2023, ASIC Class Order [CO 14/1000] Employee incentive schemes: Listed bodies provided relief from the on-sale provisions of the Act in certain circumstances for incentive plan issues of shares. It provided that a listed body that made an offer under an employee incentive scheme covered by the Class Order did not have to comply with Part 6D.2, 6D.3 or Part 7.9 of the Act in relation to the offer (clause 5). Further, the Class Order provided that a person who made a sale offer of an underlying eligible product within 12 months after issue of the product did not have to comply with Part 6D.2, 6D.3 or Part 7.9 of the Act in relation to the sale offer where the product was issued to an eligible participant under an employee incentive scheme and the person has no reason to believe the employee incentive scheme is not covered by the Class Order (clause 7). 

A new employee share scheme regime was introduced in 2022 as follows:

  • New employee share schemes (ESS) provisions introducing an amendment to Division 1A in Part 7.12 of the Act commenced on 1 October 2022 (ESS Division); and 
  • a new legislative instrument ASIC Corporations (Employee Share Schemes) Instrument 2022/1021 came into effect on 20 December 2022 (ESS Instrument). The ESS Instrument expands the regulatory relief under the ESS Division. Importantly, the ESS Instrument modifies section 1100ZD (regulatory relief for certain subsequent sale offers of ESS interests) so that the disclosure requirements under Part 6D.2, 6D.3 and Part 7.9 of the Corporations Act do not apply in relation to financial products that are in a class that is able to be traded on a financial market.
  • In addition to the ESS Instrument, on 16 December 2022 ASIC issued ASIC Corporations (Amendment) Instrument 2022/1022 (Amendment Instrument) to provide guidance on the continuing application of ASIC Class Order 14/1000 (CO 14/1000). The Amendment Instrument provides that relief under CO 14/1000 and CO 14/1001 may continue to apply to ESS interests offered on or prior to 1 March 2023 and accepted before 1 April 2024: paragraph 5.

For issues of ESS interests (including shares) that occurred before 1 March 2023, listed companies could avail themselves of these provisions, subject to compliance with CO 14/1000 and ASIC Regulatory Guide 49, meaning that a Cleansing Notice was not required to be issued following the issue of shares under an employee incentive plan.

However for ESS interests offered on or after 1 March 2023, the new regime under the ESS Division and ESS Instrument applies. 

For a listed company to be able to avail itself of the relief from the on-sale provisions afforded by the new regime on or after 1 March 2023, and not have to lodge a Cleansing Notice, an offer of shares would need to be made under an employee incentive plan which complied with the obligations introduced in the amendments to Division 1A of Part 7.12 of the Act and in ASIC Corporations (Employee Share Schemes) Instrument 2022/1021. If the incentive plan had not been amended in light of the new scheme and so did not so comply, a Cleansing Notice would be required.

(4) Exchangeable Share Acquisition Issues

As with Placement Issues, for an Exchangeable Share Acquisition issue of shares (which is a term that has been applied for a specific type of contractual share issue), listed companies are required to issue compliant Cleansing Notices in accordance with section 708A (5)(e) and (6) of the Act. A Cleansing Notice is required to be given within 5 business days after the day that any shares under a placement are issued by the company, and must set out other relevant information as mandated by those provisions. 

(5) Convertible Securities Agreement or Convertible Note Issues

Again, similar to a Placement Issue, once shares are issued by a public company on conversion of a Convertible Note, unless a Cleansing Notice has been issued under section 708A(12C)(e) of the Act (as notionally inserted by ASIC Corporations (Sale Offers: Securities Issued on Conversion of Convertible Notes) Instrument 2016/82)  within 2 business days before the first day on which the convertible notes were issued, the company is required to issue a compliant Cleansing Notice in accordance with section 708A (5)(e) and (6) of the Act, and such Cleansing Notice must be given within 5 business days after the day that any shares were issued.

If there are any shares issued up-front under such an arrangement, namely, not on conversion of a convertible note, then such issue will require the issue of a compliant Cleansing Notice in accordance with sections 708A (5)(e) and (6) of the Act, and such Cleansing Notice must be given within 5 business days after the day that any shares were issued.

********

Next instalment – Part 2: Relief under section 1322(4) of the Corporations Act – Key Provisions and Principles

[1] At [4]-[10].

[2] At [11], adopting this summary his Honour drew from the written submissions for the Plaintiff, written by my colleague at the Victorian Bar and fellow member of List G Barristers, Brad K Holmes.

*******

Liability limited by a scheme approved under Professional Standards Legislation