Australian Securities & Investments Commission v Axis International Management Pty Ltd

Affidavit evidence

1. It will be convenient to set out a brief chronology and then identify the affidavit evidence on which KKL relies. Shares in KKL have been listed on the Australian Securities Exchange ("ASX") since 11 February 1993, although trading of those shares is currently suspended. KKL's business previously focused on the development of "Break on Removal RFID [Radio-Frequency Identification] tags" for vehicles and now primarily consists of the "development, marketing and commercialization of security oriented identification, authentication storage technologies, and Sustainable Building Infrastructure and Waste to Energy technologies". KKL has a market capitalisation of approximately $3,612,344 representing 240,822,940 ordinary shares on issue.
2. KKL entered an agreement for the provision of secretarial services with Boardroom Pty Ltd ("Boardroom"), which took effect from 17 June 2011. That agreement provides, in cl 2, for Boardroom to provide specified services to KKL which include, relevantly, executing lodgement of forms and notices required with ASIC and ASX.
3. In November 2016, steps were taken by KKL towards the acquisition of a Singapore company, Isity Global Pte Ltd ("Isity Global"). ASX considered that the transaction could result in a change of KKL's activities and KKL's securities were suspended from quotation between 28 November 2016 and 22 December 2016 as a result.
4. On 30 May 2017, KKL issued 5,000,000 ordinary shares ("Karantzias Placement Shares") to Karantzias Investments Pty Ltd ("Karantzias Investments"). KKL now recognises that, as will emerge below, the issue of the Karantzias Placement Shares and any subsequent offer of those shares for sale required disclosure under ss 707(3) and 708A(5) of the Corporations Act because KKL's ordinary shares had been suspended from trading for more than 5 days during the 12 month period before the day on which the Karantzias Placement Shares were issued.
5. On 2 September 2019, KKL's shares were again suspended from trading due to issues in respect of its accounts. In February 2020, ASX advised KKL that certain issues of securities by KKL between December 2016 and November 2017 would not have the benefit of the cleansing notice regime under s 708A(5)(e) of the Act, because KKL's securities were suspended from official quotation in November and December 2016 as I noted above.
6. On 6 March 2020, KKL made an announcement on ASX's company announcements platform, noting that: "[KKL] has become aware that a number of issues of shares between December 2016 and November 2017 were made without disclosure documents (Placements), to permit the immediate trading of the shares, given that the Company's shares had been suspended for more than 5 trading days in the 12 months prior to the Placements. The Company has identified that in respect of one of the Placements in May 2017, the relevant shares were on sold within 12 months contrary to the secondary trading restrictions under the Corporations Act. Therefore these shares remain subject to those secondary trading restrictions. The Company is taking all necessary steps to rectify the breaches on an expedited basis and will shortly lodge a prospectus to cleanse all shares issued under the Placements, so that subsequent trading is not subject to the secondary trading restrictions under the Act. Once the cleansing prospectus is lodged, the Company will file a [Court application] seeking declaratory relief and ancillary orders relating to prior trading in the shares, so that on sales prior to the issue of the cleansing prospectus will be validated and will not attract any civil liability. The Company understands that there are reasonable prospects that the validating orders will be made."
7. On 8 July 2020, KKL lodged its accounts for the half year ended 31 December 2019, seeking to address one of the matters which appears to have contributed to the suspension of its shares from trading, and, in late July 2020, KKL's board resolved to commence proceedings to validate the Karantzias Placement Shares. KKL retained its present solicitors to bring the application in late August 2020. On or about 7 October 2020, KKL sent a letter concerning these matters to all of the shareholders that had been affected by the invalid cleansing notices issued in respect of the Karantzias Placement Shares that it had been able to trace.
8. KKL subsequently lodged a prospectus dated 13 October 2020, directed to the relevant issue, with ASIC. That prospectus identified its purpose of removing trading restrictions on shares issued on or before the closing date and disclosed the previous issue of shares and the difficulties to which I have referred above and noted that: "After lodgement of this prospectus, the Company will file an application with the Supreme Court of New South Wales to seek declaratory relief and ancillary orders relating to prior trading in the relevant Shares, and to request that the Court issue an order that any on-sales of those shares prior to the issue of the Prospectus will be validated and will not attract any civil liability."
9. The prospectus also noted that: "The Company is lodging this Prospectus under section 708A(11) of the Corporations Act to cleanse Shares issued on or before the Closing Date so that subsequent trading is not subject to secondary trading restrictions under the Corporations Act." The prospectus then referred to relevant provisions, including ss 707 and 708 of the Act. The prospectus in turn contained a confirmation as to the absence of information excluded from a continuous disclosure notice in accordance with the Listing Rules.
10. Turning now to the affidavit evidence, KKL relies on an affidavit dated 15 October 2020 of Mr David Matthews, who is the chief executive officer of KKL. Mr Matthews refers to the history of KKL and notes that KKL is a "small cap" company with a market capitalisation in the order of $3.6 million, and exhibits a copy of its annual report for the year ended 30 June 2019 to his affidavit. Mr Matthews also refers to his background and role as chief executive officer of KKL. Mr Matthews also exhibits a copy of KKL's corporate governance statement, in its current form, which took effect from 19 February 2020, after the matters in issue in this application. That corporate governance statement refers to the respective roles and responsibilities of KKL's board and management, the role of the company secretary in respect of governance matters and KKL's continuous disclosure obligations and its policy in that respect.
11. Mr Matthews' evidence is that he first became aware of the issues addressed in this application in February 2020, by reason of the advice from ASX to which I referred above. Mr Matthews's evidence is that, after receiving that advice, KKL sought legal advice and commenced investigations in relation to the relevant issues of the securities. It has since emerged that several of those issues had the benefit of other exceptions under the Act, other than the issue of securities to Karantzias Investments which is the subject of this application. Mr Matthews also refers to investigations which were undertaken, without complete success, to seek to trace subsequent trading in respect of the shares that were initially issued to Karantzias Investments.
12. Mr Matthews' affidavit also explains the circumstances in which the shares were issued to Karantzias Investments, in reliance on the exemption arising from a cleansing notice under ss 708A(5)(e) and 708A(6) of the Act, notwithstanding that KKL's previous suspension from trading meant that exemption was not applicable. Mr Matthews refers to a representative of Boardroom's role as KKL's company secretary and to KKL's reliance on the services provided by Boardroom in respect of secretarial matters. Mr Grace, who appeared for KKL in the application, fairly did not seek to attribute responsibility for the relevant events to Boardroom, but characterised them as reflecting, as is likely the case, a different understanding on the part of KKL and Boardroom of their respective responsibilities, such that the issue of identification of the limits to the exception for cleansing notices was not treated by either party as within the scope of its respective responsibilities. Mr Matthews also acknowledges that, unfortunately, his then understanding of the Listing Rules was rudimentary and that, while he was aware of the secondary trading provisions prohibiting the sale of shares within 12 months of the date of issue without disclosure, he did not have a detailed understanding of the relevant legal framework.
13. Mr Matthews also addresses the reasons for the delay in bringing this application, which reflect the fact that KKL did not identify the issue until ASX drew it to its attention as noted above and a further delay while KKL has taken steps to address the other issues which have contributed to the suspension of trading of its securities on ASX, including seeking additional funding for KKL's activities. Mr Matthews also refers to his review of KKL's announcements to ASX and to his having satisfied himself that, as at the date of the issue of cleansing notice on which KKL relied for the issue of shares to Karantzias Investments, there was no "excluded information" within the meaning of ss 708A(7)-(8) of the Corporations Act that had not been disclosed to the market at that times.
14. KKL also relied on an affidavit dated 15 October 2020 of its chairman, Mr Riad Tayeh, who noted that he had been a director of KKL since 23 March 2009 and accepted that he and the board were ultimately responsible for KKL's corporate governance and management. Mr Tayeh also referred to the arrangements between KKL and Boardroom and to the factual background to the application, including the suspension of KKL's shares from quotation between 28 November 2016 and 22 December 2016 and subsequent share issues, including the placement to Karantzias Investments. Mr Tayeh also explained the circumstances in which that issue had taken place without disclosure, and his evidence was that, although he was aware of the suspension of KKL's shares from trading, he did not appreciate the significance of that matter for the purposes of s 707(3) and 708A(5) of the Act and the issue of cleansing notices. His evidence is that he did not recall having received any advice from Boardroom as to those matters, and he did not then realise that any sales or offers for sale of the shares issued to Karantzias Investments within 12 months would require disclosure under s 707(3) of the Act and were not exempt from disclosure under s 708A of the Act. Mr Tayeh also referred to the announcement of this issue to ASX on 6 March 2020, to the issue of the prospectus dated 13 October 2020 and to notice of the application given to the affected shareholders.
15. By an affidavit dated 15 October 2020, Mr Thomas Bloomfield, who is the general manager, corporate secretarial services at Boardroom, referred to his background and the circumstances of the suspension of KKL between 28 November 2016 and 22 December 2020 and noted that KKL did not request, and implicitly that Boardroom did not provide, assistance in respect of the relevant issues. Mr Bloomfield also referred to matters which he considered had limited Boardroom's ability to perform company secretarial services, and it is apparent that Mr Bloomfield does not consider that Boardroom was at fault in respect of the application. It is not necessary to find that either KKL, or Boardroom, or both, or neither, were at fault in order to determine the application.
16. An affidavit dated 23 October 2020 of Mr Peter Chapman, KKL's solicitor, in turn refers to notice of the application given to affected shareholders, ASIC and ASX. Only one shareholder had acknowledged the receipt of that notice and he had indicated that he would not be seeking legal advice or appearing, and ASIC and ASX had each indicated that they did not seek to appear on the application.

Applicable principles, submissions and determination

1. I now turn to the provisions which are in issue in the application, before turning to KKL's submissions. The relief sought by KKL is directed to obligations arising under s 707(3) and 727(1) of the Act. Disclosure in respect of an offer to sell, rather than an issue of, securities is required under s 707(3) where the purpose of the issue or acquisition of the securities is for on-sale or transfer and this is an anti-avoidance provision aimed at attempts by on-selling or transferring the shares to circumvent the disclosure requirements for an initial offering of securities: Australian Securities & Investments Commission v Axis International Management Pty Ltd (No 5) (2011) 81 ACSR 631; [2011] FCA 60 at [39].
2. Section 708 specifies several circumstances in which offers of securities do not require disclosure and s 708A in turn specifies circumstances in which a sale offer (as defined) does not require disclosure. These include, under s 708A(5)(e) of the Act, where a company gives ASX a notice that complies with s 708A(6) before the sale offer is made. Section 708A(6) in turn provides that: 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) section 674; and (e) sets out any information that is excluded information as at the date of the notice (see subsections (7) and (8))."
3. Section 727 in turn prohibits a person from making an offer of securities, or distributing an application form for 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. Mr Grace notes that ss 707, 708A and 727 of the Act, to which I have referred above, are part of Ch 6D which seeks "to ensure that investors are provided with all information that they and their professional advisors would reasonably require to make an informed assessment in connection with securities offered for issue or sale": Golden Gate Petroleum Ltd above at [24]. Mr Grace rightly recognises that the purpose of s 707 "is to prevent the policy of Ch 6D being circumvented by the issue of securities to a party to whom disclosure is not required (under ss 708 or 708AA) and that party then offering those securities for sale to investors without disclosure": Golden Gate Petroleum Ltd above at [27]. Mr Grace also refers to Re Austpac Resources N.L. [2010] NSWSC 1438 where Barrett J observed at [10] that: "[Section 707] imposes a disclosure requirement in connection with an offer of securities for sale if, first, the offer is made within 12 months after the issue of the securities, second, the issue of the securities did not take place in the context of Part 6D.2 disclosure by the issuer and, third, one of two purposes existed: either a purpose of the issuer that the issuee should sell or transfer them (or grant, issue or transfer interests in them or options over them), or a purpose of the issuee, in acquiring the securities, to sell or transfer them (or grant, issue or transfer such interests or options)."
5. Mr Grace also points out that the exceptions to the disclosure requirement are found in s 708A where comparable information to that which would be given in a disclosure document is publicly available before an offer for sale is made: Golden Gate Petroleum Ltd above at [30].
6. The Court may in turn grant relief under s 1322(4) of the Act if an offer of securities for sale was made in contravention of this section because the securities had not been quoted at all times during the specified previous period, if the non-compliance resulted from an honest and reasonable error and there is no prejudice to third parties or the public interest in compliance with the Act: Re Golden Gate Petroleum above; Re European Lithium Ltd [2017] FCA 894; Re ICandy Interactive Ltd (2018) 125 ACSR 369; [2018] FCA 533. Mr Grace rightly recognises that, to satisfy the requirements of s 1322(4), KKL must demonstrate that it is an interested person within the meaning of s 1322(4); there was an act, matter or thing purporting to have been done under the Corporation 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)); and, relevantly, that the person or persons concerned in or party to the contravention or failure acted honestly (s 1322(6)(a)(i)) or that it is just and equitable that the order be made (s 1322(6)(a)(iii)) and that no substantial injustice has been or is likely to be caused to any person (s 1322(6)(c)).
7. I am satisfied that KKL is an interested person in respect of the application, so far as it is the issuer of the shares. Mr Grace submits, and I accept, that the offer of the securities was an act, matter or thing done in contravention of s 707(3) of the Corporations Act because the Karantzias Placement Shares were issued without disclosure and the exemption in s 708A(5) could not apply where trading in the class of securities that were issued was "suspended for more than a total of 5 days during … the period of 12 months before the day on which the relevant securities were issued": Corporations Act, s 708A(5)(b). The exceptions in ss 708A(11) and (12) also do not apply.
8. Mr Grace also submits, and I accept, that the evidence to which I have referred above indicates that the persons concerned in the contravention acted honestly for the purposes of s 1322(6)(a)(ii) of the Act. Mr Grace also submits that it would be just and equitable for any sellers of the Karantzias Placement Shares to be relieved of the adverse consequences of KKL's inadvertent failure to comply with ss 707(3) and 708A for the purposes of s 1322(6)(a)(iii) of the Act. Mr Grace submits, and I accept, that the persons who are likely to have on sold the Karantzias Placement Shares will have done so in good faith and in reliance on KKL's representations to the effect that offers for sale did not require disclosure under s 707(3) of the Act due to an exemption under s 708A. The making of the orders sought will serve to give effect to the expectations held by the persons concerned. Mr Grace also points out that the persons who acquired the Karantzias Placement Shares had access to information concerning KKL and the nature and characteristics of the shares by KKL's continuous disclosure requirements, where the evidence is that no material information had then fallen within an exception to disclosure.
9. Mr Grace also submits that no substantial injustice would be caused if the relief sought were granted for the purposes of s 1322(6)(c) of the Act. Mr Grace submits, and I accept that, it is unlikely that any person who acquired any of the Karantzias Placement Shares was adversely affected by KKL's failure and it is probable that all of the persons who engaged in the sale and purchase of the Karantzias Placement Shares acted in the bona fide belief that the shares were tradable without having to make the disclosure called for in s 707(3) of the Act: compare Re Silver Lake Resources Ltd (2012) 87 ACSR 436; [2012] FCA 32 at [19]. I will in any event also make orders 4 and 5 proposed by KKL, which reserves the ability of any person to whom substantial injustice has been or is likely to be caused in respect of the orders made pursuant to sections 1322(4)(a) and 1322(4)(c) of the Act the liberty to apply to vary or discharge that order: compare Re Golden Gate Petroleum Ltd above at 59; Re Sprint Energy Ltd above at [51]-[52].
10. These matters are sufficient to establish both the Court's jurisdiction to grant the relief sought and that that relief should be granted in the relevant circumstances. For these reasons, I made the orders sought by KKL in the application On 30 November 2020.

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: 03 November 2020