5G Networks Limited, in the matter of 5G Networks Limited [2019] FCA 698

DAVIES J: 1 On 9 May 2019, an urgent ex parte application was made by the applicant ("the Company") for orders under s 1322 of the Corporations Act 2001 (Cth) ("the Act"). There was urgency in obtaining a decision on the application because of a trading halt of the Company's securities. Following the hearing I made the orders sought and advised that I would deliver written reasons later. These are my reasons. 2 The Company is a licensed telecommunications carrier operating across Australia, which was listed on the Australian Stock Exchange ("ASX") in 2017. In April 2019, the Company conducted an additional capital raising by way of a share issue to professional and sophisticated investors ("the placement"). The Company retained Bell Potter Securities to manage the placement and the law firm Cornwalls, as ongoing legal advisor to the Company, provided advice in respect of the placement. 3 On 12 April 2019, 10 million fully paid ordinary shares were issued and on 15 April 2019 the shares were allotted to sophisticated and professional investors. As the issue of securities was to sophisticated and professional investors, no disclosure in the form of a prospectus or other disclosure document was required under Chapter 6D.2 of the Act: s 708(8) and (11) of the Act. However, under ss 707(3) and 708A(1) of the Act the offer of the shares for on-sale within 12 months of issue needs disclosure to investors, if the body issued the shares without disclosure, subject to certain exceptions in ss 708 and 708A. Relevantly, a disclosure is not required if a "cleansing notice" is given within five days of the issue of the relevant securities (s 708A(5)) or a "cleansing prospectus" is lodged with ASIC on or after the date that shares are issued but before the day on which a sale offer is made (s 708A(11)). Section 727(1) provides that a person must not make an offer of securities that needs disclosure to investors under Part 6D.2 unless a disclosure document for the offer has been lodged with ASIC. 4 On the evening of 7 May 2019, Mr Vaughan Webber, a representative of Bell Potter Securities Limited, contacted Mr Michael Wilton of Cornwalls to advise that a cleansing notice had not been issued in respect of the placement shares. Mr Wilton notified Mr Geoffrey Nicholas, the Company's company secretary, and Mr Joe Demase, the Company's managing director, the following morning, notifying them that a cleansing notice had not been issued at the time of the placement. 5 The Company took the following steps on 8 May 2019: (a) it initially requested the ASX implement a trading pause of the Company's securities; (b) it then requested the ASX implement a trading halt to prevent further trading in the Company's shares, which came into effect on the morning of 8 May 2019; and (c) it prepared and lodged a cleansing prospectus with ASIC pursuant to s 708A(11), which was announced and published the following day. 6 Also on 8 May, Mr Nicholas made enquiries of Link Markets, the Company's share registry, to determine whether any of the investors had on-sold any of their shares. That enquiry revealed that a number of the investors who had been issued with shares in the placement had on-sold their shares. As no cleansing statement or cleansing prospectus had been lodged at the time of the placement, those investors may have contravened ss 707(3) and 727(1) of the Act by offering or trading shares without making the required disclosures under Chapter 6D.2 of the Act. 7 On 9 May 2019, the Company notified the ASX and ASIC and advised that it intended to make application to the Federal Court for relief under s 1322(4)(a) and (4)(c) of the Act. The Company invited both the ASX and ASIC to attend the hearing in the event they wished to be heard on the application. On 10 May 2019 the ASX and ASIC advised the Company that they did not oppose, and had no objection to, the Company's application. 8 On 9 May 2019, the Company lodged an announcement with the ASX that the application was listed at 10.15 am on 10 May 2019 and invited shareholders to attend. No shareholders did attend. 9 Section 1322 of the Act relevantly provides: … (4) 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 orders, 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; … (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); … (6) 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): … (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; … 10 These provisions were recently considered in Re ICandy Interactive Limited [2018] FCA 533 ("ICandy") where the relevant principles were helpfully set out by Banks-Smith J. They may be summarised as follows: (a) Section 1322 contemplates that there may be instances of non-compliance with the Act and facilitates the validation of non-compliance in certain circumstances. It is remedial in nature and is to be given a liberal interpretation. It has been utilised to validate non-disclosure by shareholders who on-sell shares on a number of occasions: at [43]; (b) Section 1322 may be invoked even where an irregularity is deliberate: at [44]; (c) When determining whether someone has acted honestly for the purposes of s 1322(6)(a)(ii) of the Act, the Court looks to an absence of evidence of dishonesty. It also takes into account whether the applicant has taken prompt action to remedy the error: at [54]; and (d) The concept of acting honestly can embrace the following: inadvertence or a failure to turn their mind to the relevant issue; an active, but incorrect, consideration of a legal issue as well as failure to consider the issue at all; and/or failure to understand or appreciate the significance of non-compliance: at [55].

Interested party 11 Although seeking relief for the benefit of shareholders, and not as to any potential liability on its part or that of its directors, the Company is clearly an interested party and has standing to bring the application: see ICandy and the cases cited at [46].

Honesty 12 Although there was no direct evidence before the Court that the shareholders who had offered or on-sold their shares had acted honestly, it is reasonable to infer that they did. In evidence was the Appendix 3B Issue Announcement for the placement which included the warranty that an offer of the securities for sale within 12 months after their issue did not require disclosure under s 707(3) or s 1012C(6) of the Act. It may be assumed that such shareholders relied on that warranty and there is no basis for suggesting that the shareholders have acted other than honestly: see also ICandy at [58]-[59]. 13 I am also satisfied on the evidence that the Company made an honest mistake in failing to issue a cleansing notice. Mr Wilton, who swore an affidavit in support of the application, deposed that although Cornwalls had not been involved in the procedures for the placement which was undertaken by Bell Potter Securities Limited and Mr Nicholas had been responsible for filing the necessary documents, including the Appendix 3B issue announcement and any cleansing statement, he should have realised that a cleansing statement was required in order to allow investors who are issued with shares to trade those shares and advised Mr Nicholas to that effect, and that it was an honest mistake on his part that he did not do so. Mr Nicholas, who also swore an affidavit in support of the application, deposed that he was aware in broad terms that a cleansing notice ought to have been issued but he expected that either Mr Wilton or Bell Potter Securities would have taken responsibility for ensuring that it was issued and the failure to lodge a cleansing notice was an oversight on his behalf. There is no reason to doubt the reliability of that evidence given by either Mr Wilton or Mr Nicholas, which I accept. 14 I am accordingly satisfied that the s 1322(6)(a)(ii) requirement is met.

Just and equitable 15 I am also satisfied that the just and equitable ground under s 1322(6)(a)(iii) is met. Having regard to the incorrect representation in the Appendix 3B issue announcement that disclosure was not required, it can be assumed that shareholders made offers or on-sold in good faith and on the assumption that no disclosure was required by them. There is no reason the inadvertent error on the part of the Company should deny relief or deny any defects in the disclosure from being corrected: ICandy at [109]-[113].

No substantial injustice 16 The orders sought would clearly be in the interests of shareholders who have on-sold their shares as they risk exposure to claims against them, absent validation. The material does not indicate a reason for inferring that validation of the share sales would prejudice the person but, as is common in these matters, the orders will provide that to the extent there may be prejudice to third party purchasers by the validation, those purchasers may apply to the Court within 28 days to vary or set aside the orders. In accordance with the approach taken in similar cases there is no basis for considering that public policy would be undermined by the making of the orders. 17 In the circumstances I do not consider there will be any substantial injustice in making the orders: ICandy at [114]-[118]. 18 I also take into consideration that the Company acted promptly upon becoming aware that a cleansing notice should have been lodged both to rectify the omission and to apply for relief under s 1322. Both the ASX and ASIC were aware of the application and neither authority opposed it. I certify that the preceding eighteen (18) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Davies.