- Australian Securities and Investments Commission v Craigside Company Ltd

Supreme Court of NSW|2024-08-02|Before: Black J

Solicitors: HWL Ebsworth (Plaintiff) Parry & Associates Legal Services (Defendant) File Number(s): 2024/280240

Nature of the application

By Originating Process filed on 31 July 2024, the Plaintiff, NSX Limited ("NSX") applies under s 1325A of the Corporations Act 2001 (Cth) ("Act") for an order that approximately 77.59 million fully paid ordinary shares in NSX registered in the name of ISX Financial EU PLC ("ISX") on 8 March 2024 and 31 May 2024 be cancelled, with the cancellation being taken to be a reduction in NSX's share capital authorised by s 258E(3) of the Act, and ancillary orders. That application has the consent of ISX, as the party whose shares would be cancelled.
Notice of the application has been given to the Australian Securities Exchange ("ASX") and the application is brought, at least in part, to address concerns of ASX, and a suspension of trading of NSX's shares on ASX was lifted after NSX had announced its intent to bring these proceedings. Notice of the application has also been given to the Australian Securities and Investments Commission ("ASIC"), which sought further information as to several aspects of the application, which NSX provided, and has confirmed that it neither supports nor opposes the application and does not intend to appear at this hearing.

Applicable provisions and factual background

I should first refer to the applicable statutory provisions. The transactions which are in issue in this application involve the issue of shares in NSX to ISX, in two transactions, which it has now been recognised gave rise to an increase in ISX's relevant interest in shares in ASX in contravention of s 606 of the Act. Section 1325A of the Act permits the Court to make remedial orders in respect of a contravention of Chapter 6 of the Act, including s 606 of the Act. Mr Giles, with who Mr Rogan appears for NSX, rightly points out that NSX has standing under s 1325A(1) of the Act to seek an order under that section, so far as it is the company whose securities are involved in the contravention of s 606 of the Act. It is plain enough that orders made under s 1325A of the Act can extend to a cancellation of a company's shares, so far as is appropriate to remedy the contravention of Ch 6 of the Act, since s 258E(3) of the Act deals with the consequences of such an order by providing that a reduction in a company share capital because of an order under s 1325A is authorised by that subsection. Mr Giles rightly proceeds on the basis that, although s 258E(3) of the Act does not expressly require the Court to have regard to the interests of creditors, the Court would do so, at least in the circumstances of this case, in determining whether to make an order under s 1325A of the Act.

Affidavit evidence

Turning now to the factual background of the application, NSX relies on an affidavit dated 29 July 2024 of its chair, Mr Timothy Hart. Mr Hart refers to the nature of NSX's business, and notes that NSX is listed on ASX, and is also the ultimate parent company of the National Stock Exchange of Australia Ltd, which is the holder of an Australian market licence regulated by the Australian Securities and Investments Commission ("ASIC") and conducts a stock exchange facility for the listing of equity securities, corporate debt and investment scheme units, of a somewhat smaller scale than the market operated by ASX. Mr Hart notes that NSX also has interests in several other entities and, with ISX, also holds an interest in ClearPay Pty Ltd, an incorporated joint venture. Mr Hart's evidence is that NSX's operations are not yet profitable, and that its income by way of listing fees is less than its annual operating expenses, with the result that it requires additional funding of about $3.5 million per annum to maintain its operations. That funding has been obtained, at least in part, by capital raisings from its shareholders.
Mr Hart in turn provides a detailed account of circumstances surrounding 2014 capital raisings by NSX which have given rise to the difficulties which are the subject of this application. It is not necessary to set out the steps which NSX and its shareholders took in respect of those matters in detail, and it is sufficient to note that they have given rise to the issue of securities in ASX to ISX on 8 March 2024 and 31 May 2024, in circumstances which have given rise to the contravention of at least 606 of the Act to which I have referred above. They have possibly also given rise to contraventions of the ASX Listing Rules, so far as NSX proceeded on the basis that an exception to the Listing Rules was available to permit the placements, and ASX has taken a different view in that respect. Importantly, for present purposes, Mr Hart points to the circumstances in which those contraventions occurred, where, in short, NSX did not take legal advice in respect of the relevant placements and other equity issues, in the interests of saving costs, and appears to have focused on compliance with the ASX Listing Rules without giving sufficient attention to the application of s 606 of the Act in respect of the issue of securities to ISX. Mr Hart also refers to the circumstances in which these difficulties were identified, after ASX Compliance wrote to NSX raising a question of compliance as to the ASX Listing Rules in respect of the relevant transactions, and further analysis undertaken by NSX and the solicitors which it then retained to assist it disclosed the further contravention of at least s 606 of the Act in that respect.
Mr Giles accepts that, plainly enough, NSX here fell short of the standard of legal and compliance analysis which would have been expected in respect of issues of securities of this kind. He draws attention to NSX's failure to obtain legal advice in respect of the shares issues, not in justification of events but in explanation of how they have occurred. He also points, fairly, to the fact that NSX appears to have engaged constructively with ASX once these issues came to its attention, and has been in dialogue with both ASX and ISX (as the shareholder to which the shares were issued) as to the steps necessary to remedy the contraventions, which are now reflected in this application. In particular, Mr Hart refers to ASX's expectation that NSX would take steps to remedy the contravention of s 606 of the Act, as NSX now seeks to do, in order to address the issues that arose from those contraventions and remove the suspension of trading of NSX shares on ASX.
Mr Hart also addresses the relief sought by this application, which is to seek to cancel the shares issued to ISX in the two placements, to the extent that those issues would exceed the shares that could properly be issued under s 606 of the Act, on the basis that NSX and ISX will instead enter a convertible loan arrangement, under a Further ISXF Convertible Loan Deed, by which ISX will lend $2.2 million to NSX on a two-year term, conditional on the Court making the order sought by NSX in this application. That arrangement would provide for the loan to be repaid by NSX in money, or, at ISX's election, by the issue of shares to ISX at a specified price, and for the loan to be subordinated to other creditors of NSX and for the execution of a deed of subordination in relation to the loan if required by ASIC.
I pause there to note two structural features of the proposed convertible loan agreement. The first is that, as Mr Giles fairly recognises, any further issue of shares by NSX to ISX would require future compliance by NSX with the requirements of the Listing Rules and s 606 of the Act in respect of that issue. That may well involve, in the relevant circumstances, a requirement for shareholder approval of the relevant share issue. Second, if ISX does not seek to convert the loan and to be issued securities, or shareholders do not approve the relevant issue, then the position of other creditors of NSX is protected by the provision for subordination, so that those other creditors will rank ahead of ISX in respect of the further debt that is now incurred by NSX.
Mr Hart in turn explains why he considers that, in the relevant circumstances, the entry into the Further ISX Convertible Loan Deed was in the best interests of NSX, its shareholders and its creditors. It seems to me that that analysis is not controversial, where it is plain that NSX requires further funds to maintain its operations, and the entry into the convertible loan arrangement provides an alternative manner of obtaining those funds, where the equity issues must now be partly reversed to avoid the contravention of s 606 of the Act; these arrangements are sufficient to bring about the restoration of quotation of NSX's shares, which is plainly of advantage to NSX shareholders, so far as it preserves the market for their shares; the position of creditors of NSX is addressed by the subordination arrangements to which I have referred above; and, importantly, the orders which are sought from the Court, for the cancellation of the relevant parcels of shares under s 1325A of the Act, would be less disadvantageous to NSX, and a fortiori NSX's shareholders, than any substantial sale of the shares in circumstances that NSX shares are relatively thinly traded, and a sale of this volume of shares would have a significantly detrimental effect on the market for NSX shares.

Submissions and determination

Turning now to Mr Giles' submissions for NSX in respect of the application, Mr Giles points to the factual history of the transaction, to which I have referred above. Mr Giles acknowledges that NSX's first issue of shares to ISX on 8 March 2024 was not issued under an entitlement offer, and did not attract the exemption to the operation of s 606 of the Act under item 10 of s 611 of the Act, and also did not attract parallel exceptions in Listing Rule 10.12. Mr Giles also recognises that the further issue of shares to ISX on 31 May 2024 could not, at least in ASX's view which NSX now accepts, properly be characterised as a shortfall under the entitlement offer, and also did not have an exemption from s 606 of the Act. This has the consequence, which NSX fairly accepts, that the contravention in s 606 of the Act exists and that, although the relevant prohibition is contravened by ISX in the relevant circumstances, that contravention has arisen in significant part from errors made by NSX in respect of the conduct of the share issues.
Mr Giles in turn accepts that NSX does not have a "particularly good explanation" for the mistakes, although he points out, and there is no reason to doubt, that the errors were innocent in character, absent legal advice, where that advice was not taken by NSX in order to save costs. Here, as Mr Giles rightly points out, the priority must be to remedy the contravention of s 606 of the Act, which is directly addressed by this application, and the related contraventions of the Listing Rules, where a remedy of the latter contraventions would be facilitated by the success of this application.
Mr Giles in turns points to the applicable legal principles, which are not controversial, and to the Court's power to make a remedial order, including its power to cancel shares in respect of a contravention under s 1325A of the Act, to remedy a contravention of s 606 of the Act: Australian Securities and Investments Commission v Craigside Company Ltd (No 2) [2014] FCA 371; Re Sandon Capital Investments Ltd [2019] NSWSC 1512 at [9]. Mr Giles points to relevant factors in determining whether to make such an order, including whether the contravention was a consequence of an innocent mistake, as I accept this contravention was; whether the party has acted promptly to regularise the position, as I accept that NSX has; and whether ASIC has been served with the application, as is the case here. I also recognise that ASIC has not opposed the application, but, in effect, left the Court to reach its own decision in that respect.
I am satisfied that, here, it is appropriate that the contravention be remedied, and the form of remedy which NSX seeks under s 1325A of the Act, namely a cancellation of the contravening share issues and a consequent reduction in its capital, undertaken in conjunction with the proposed loan and the subordination of that loan so as to preserve the position of existing creditors, provides a proper mechanism to address the relevant issues. I bear in mind, in that respect, that, on 23 July 2024, NSX announced this application on ASX, and also updated the position in respect of its funding arrangements, including by reference to the steps which would be taken in respect of this application. On the same date, ASX announced that the suspension of trading in the securities of NSX would be lifted following the release of that update.
I have also had regard to the terms of the Convertible Loan Deed, which has been executed by each of NSX and ISX, which contains a set off provision, with the result that the amount that would otherwise be repayable by NSX to ISX will be applied as part of the loan now made by ISX to NSX, and additional funds will be lent by ISX to NSX. That Convertible Loan Deed also contains the subordination provisions to which I have referred above, and specifically recognises that any conversion of shares under the relevant arrangement will be subject to a shareholder meeting to approve the conversion and share issue in accordance with s 611 of the Act and any applicable Listing Rules, and imposes an obligation upon NSX to convene the relevant meetings.
Mr Giles also points out that, here, NSX does not seek to preserve the transaction under s 1325D of the Act. It is not necessary to decide whether NSX could have established the basis for an order under that section, although Mr Giles rightly pointed to difficulties which an application for such an order might have faced. In any event, an order under that section would not have advanced the interests of NSX or its shareholders, which are instead to remedy the issues that have arisen so as to reinstate the quotation of its shares on ASX. Mr Giles also pointed out that the relief that NSX now seeks is directed to remedying the contravention of s 606 of the Act and does not affect the rights of any shareholders which might otherwise exist arising from that contravention, although it plainly reduces the difficulties which might otherwise have arisen for such shareholders. I note that Mr Boyle, who appeared for ISX in respect of the application, confirmed ISX's consent to the application, and I have noted above that ISX is party to the proposed Convertible Loan Deed.
I am satisfied that, in these circumstances, the relief which is sought properly addresses the contravention and is likely to advance the interests of NSX and its shareholders, in respect of the continued market for their shares on ASX, and should not be detrimental to creditors in NSX, by reason of the proposed subordination arrangements. I accordingly make orders in accordance with paragraphs 1 and 2 of the Originating Process filed on 31 March 2024, and I also order that the exhibit be returned.

DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated. Decision last updated: 08 August 2024

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