Tag Archives: Failure to lodge cleansing notice

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

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*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.

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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

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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 1: The Statutory Disclosure Regime for Public Companies, and When Cleansing Notices are Required for Particular Types of Share Issues

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*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.

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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.

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Liability limited by a scheme approved under Professional Standards Legislation