Bovis Lend Lease Pty Ltd v Wily

GENERAL DIVISION WAD 92 of 2010

IN THE MATTER OF ELEMENTAL MINERALS LIMITED (ABN 31 108 066 422) ELEMENTAL MINERALS LIMITED (ABN 31 108 066 422)

The application 1 On 24 May 2010 I made orders for declaratory relief pursuant to s 1322(4) of the Corporations Act 2001 (Cth) (the Act) in the terms set out in the plaintiff's originating application. At that time I indicated that I would, in due course, provide written reasons. I now do so. I have adopted much of the plaintiff's very helpful written outline of submissions without attributing this fact at every point. 2 Shortly put, two declarations are sought. The first is to the effect that no offer for sale or sale of certain of the plaintiff's shares during a period of six days in February this year are invalid by reason of the plaintiff's failure to comply with s 708A(11)(c) of the Act. The second is to relieve certain persons from civil liability arising out of their contravention of s 707(3) of the Act or by reason of the plaintiff's failure referred to above. 3 The plaintiff relies upon the affidavit of Simon Owen sworn 27 April 2010. Mr Owen is a solicitor employed by the plaintiff's solicitors. He has first hand knowledge of the facts relevant to this application. 4 The application has been served on the Australian Securities and Investments Commission (ASIC) and the Australian Securities Exchange (ASX).

Summary of relevant facts 5 During February 2010 the plaintiff was intending to make a significant placement (Placement) of shares to selected individuals pursuant to s 708A of the Act. 6 The Placement saw 25,000,000 fully paid ordinary shares allotted at an issue price of $0.35. 7 Ordinarily the plaintiff would have facilitated the secondary trading of the shares by way of a Cleansing Notice issued pursuant to s 708A(5) of the Act. 8 The plaintiff could not do so because it had been suspended for longer than five days in the previous 12 months: s 708A(5)(b). 9 Accordingly, the plaintiff had to facilitate secondary trading of the shares by issuing a Cleansing Prospectus (the Prospectus) under s 708A(11) of the Act. It was not intended that any shares would be offered under the Prospectus, other than the shares already issued under the Placement. 10 On 12 February 2010, the plaintiff lodged the Prospectus with the ASX to facilitate the secondary trading of shares previously issued by it, without offering any securities save for reference to the shares offered under the Placement. 11 It was at all times the plaintiff's intention and all recipients of the Placement had been informed and were relying upon, it appears reasonably, the understanding that any secondary trading of those securities would be facilitated by the plaintiff lodging a valid Prospectus. 12 On or about 17 February 2010 ASIC rejected the Prospectus on the basis that it did not satisfy all of the requirements of s 708A(11) of the Act. 13 The Prospectus did not comply with s 708A(11)(c) of the Act, namely that "the prospectus is for an offer of securities issued by the body that are in the same class of securities as the relevant securities". 14 On 17 February 2010, the plaintiff wrote to the ASX requesting that the securities of the plaintiff be placed in a trading halt pending an announcement on the clarification of the status of the plaintiff's Prospectus lodged on 12 February 2010 and stating that the trading halt should be until the release of an announcement by the plaintiff, expected to be no later than 19 February 2010. 15 The ASX released a market release on 17 February 2010 stating that the securities of the plaintiff would be placed in pre-open at the request of the plaintiff, pending a release of an announcement by the plaintiff. 16 The plaintiff produced a revised version of the Prospectus on 18 February 2010 to facilitate the secondary trading of shares previously issued by the plaintiff and offer to issue up to 100 new shares at $0.35 each to raise up to $35.00 (the Revised Prospectus). 17 The Revised Prospectus was lodged with the ASX on 18 February 2010. 18 A number of parties who received shares in the Placement sold some of those shares in the period between the filing of the Prospectus and the lodgement of the Revised Prospectus. 19 The plaintiff seeks declaratory relief in relation to the offer for sale and sale of the shares during the period after the date of issue on 12 February 2010 until 18 February 2010.

Jurisdiction 20 Section 1322(2) provides that a proceeding under this Act is not invalidated because of any procedural irregularity unless the irregularity has caused or may cause substantial injustice that cannot be remedied by any order of the Court and by order declares the proceeding to be invalid. 21 The Court has jurisdiction under s 1322(4) of the Act relevantly to make, on application by any interested person, 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. (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. 22 An order may be made under s 1322(4)(a) or (c) notwithstanding that the contravention or failure referred to in the paragraph concerned resulted in the commission of an offence: s 1322(5). 23 Section 1322(6) of the Act provides that 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. 24 Section 707(3) of the Act provides: An offer of a body's securities for sale within 12 months after their issue needs disclosure to the 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. 25 Section 708A(5) of the Act states: The sale offer does not need disclosure to investors under this Part if: (a) 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. 26 Section 708A(11) of the Act states: The sale does not need disclosure to investors under this Part if: (a) the relevant securities are in a class of securities that are quoted securities of the body; and (b) either: (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.

Section 1322(4) of the Act 27 In order to satisfy the requirements of s 1322(4) of the Act and in support of the first declaration sought, the plaintiff must demonstrate that: (a) it is an interested person within the meaning of s 1322(4); and (b) 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); and (c) (i) the act, matter or thing was essentially of a procedural nature; or (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: s 1322(6)(a) of the Act; and (d) no substantial injustice has been or is likely to be caused to any person: s 1322(6)(c) of the Act. 28 I will deal with each of these in turn. Before I do, it is important to note that the discretionary power conferred under s 1322 of the Act is remedial in nature and should be interpreted liberally: Re Insurance Australia Group Ltd (2003) 128 FCR 581 at [27] per Lindgren J citing Re Australian Koyo Ltd (1984) 8 ACLR 928 at 930 and Elderslie Finance Corporation Ltd v Australian Securities Commission (1993) 11 ACSR 157 at 160. 29 French J, as his Honour then was, adopted this view in Re Wave Capital Ltd (2003) 47 ACSR 418. His Honour also stated at [29]: As may be seen from the range of these powers there is no unifying theme which links the provisions of Pt 9.5 beyond their common subject matter which is the powers of the courts. Sections 1318, 1322 and 1325D, however, may be taken to reflect a broad legislative policy that the law should not inflict unnecessary liability or inconvenience or invalidate transactions because of non-compliance with its requirements where such non-compliance is the product of honest error or inadvertence and where the court can avoid its effects without prejudice to third parties or to the public interest in compliance with the law. That broad policy does not authorise the court lightly to set aside the requirements of the Act where they have not been observed. Each application for the exercise of the court's relieving power will require consideration of all the circumstances of the case to ensure that the indulgence sought is appropriate and does not undermine the requirements of the Act. …the power conferred by s 1322 must be exercised having regard to the requirements of the purposes of the Corporations Act and any other relevant statutes whose application may be in issue. It must also be exercised having regard to the interests of all parties affected and the public interest in ensuring compliance with statute law and company constitutions. Evidence of a blatant disregard of the provisions of the Act or the constitution of the company may lead to refusal of relief: Re Onslow Salt Pty Ltd (2003) 198 ALR 344; 45 ACSR 322 and cases there cited. The provision is, however, remedial in character and should be given a liberal construction: 30 Only one of the three sub-paras in s 1322(6) (a) needs to be satisfied in order to grant an order under s 1322(4): Re Charter Hall Ltd [2007] FCA 1316 at [7]; Re MLC Ltd (2006) 60 ACSR 187; Primelife Corp Ltd v Aevum Ltd (2005) 53 ACSR 283 at [8]; Re Westpac Banking Corporation (2004) 53 ACSR 288 at [27]; Jordan v Avram (1997) 141 FLR 275 at 281. The sub-paragraphs are disjunctive and not cumulative: Re Charter Hall Ltd at [7]. 31 The validation of a contravention may operate retrospectively: Re Wood Parsons Pty Ltd (in liq) (2002) 43 ACSR 257 at [52], [61]. 32 In Re Golden Gate Petroleum Ltd (2010) 77 ACSR 17, McKerracher J stated at [43]: … interested persons should be relieved of unnecessary liability or inconvenience or the consequence of invalid transactions where: (a) non compliance with the CA [Corporations Act] is the product of honest and reasonable error or inadvertence; (b) to do so is without prejudice to third parties; and (c) to do so is without prejudice to the public interest in compliance with the CA.

Interested person 33 The plaintiff is an "interested person". The legislature intended that s 1322(4) be available to a wide class of applicants: Re Golden Gate Petroleum at [44]. 34 Section 1322(4) of the Act is wide enough to include an applicant whose material legal rights, pecuniary or other economic interests are or may be substantially affected by the matter in issue. A real financial interest in the result also suffices to confer standing as an interested person: Twin v Deputy Commissioner of Taxation [2004] 1 Qd R 450 at [15]-[16].

Act, matter or thing 35 Offers for sale of the shares of the plaintiff between 12 February 2010 and 18 February 2010 fall within s 1322 (4) (a) of the Act because: (a) the offers meet the description of any act purporting to have been done in relation to the corporation. In this case it is the offer for and sale of shares issued by the plaintiff. (b) The offers contravened s 707 (3) of the Act as the plaintiff did not comply with section 708A (11) (c) of the Act and the sellers, in turn, offered for sale and sold securities without a disclosure document. (c) The transactions resulting from the offers may be void: s 1324 of the Act.

Procedural act 36 In Cordiant Communications (Australia) Pty Ltd v Communications Group Holdings Pty Ltd (2005) 194 FLR 322, Palmer J set down the following general propositions regarding the distinction between procedural and substantive irregularities for the purpose of s 1322 at 346: (a) what is a "procedural irregularity" will be ascertained by first determining what is "the thing to be done" which the procedure is to regulate; (b) if there is an irregularity which changes the substance of "the thing to be done", the irregularity will be substantive; (c) if the irregularity merely departs from the prescribed manner in which the thing is to be done without changing the substance of the thing, the irregularity is procedural. 37 On these facts, the "thing to be done" was the offer of securities. The procedure to regulate the offer of securities was the requirement of a disclosure document. 38 The substance of the thing to be done, that is the offer of the securities, was not changed by the irregularity. 39 The irregularity merely departed from the prescribed manner in which the offer of securities was done. The offer of securities was still made.

Honesty 40 Hamilton J stated in Primelife Corp v Aevum Ltd at [8] that a person who incorrectly interprets legal requirements can still be "acting honestly": For the purposes of fulfilling s 1322(6)(a)(ii) of the CA, namely, that a person seeking a remedial order was acting honestly, the actions or inactions of a solicitor acting on behalf of that person are capable of being sufficient to fulfil the requirement. In Winpar, the trial judge (Santow J) found that the solicitor, advising on a selective reduction of capital, considered the concluding words of s 256C(2), which required a special resolution at a meeting of those members of the company whose shares were being cancelled. The solicitor construed the words as meaning that the resolution could be considered at the general meeting of all members to consider the reduction of capital: Winpar Holdings Ltd v Goldfields Kalgoorlie Ltd (2000) 157 FLR 59; 176 ALR 86; 34 ACSR 737; [2000] NSWSC 728 at [31]-[33]. The Court of Appeal regarded this view as wrong but, the solicitor having acted honestly, held there was an appropriate basis for s 1322(4) relief: CA at [76]. 41 The concept of "acting honestly" can embrace active but incorrect consideration of a legal issue, as well as failure to consider the issue at all. 42 In the plaintiff's case: (a) The plaintiff engaged the services of its solicitor to prepare the Prospectus. (b) The plaintiff's solicitor incorrectly interpreted the legal requirements set out under s 708A(11) of the Act, neglecting to read sub-para (c) of s 708A(11) of the Act as conjunctional and essential to the operation of the Prospectus. (c) As soon as the plaintiff became aware of the defective Prospectus, it requested the ASX that the securities of the plaintiff be placed in a trading halt pending an announcement on the clarification of the status of the plaintiff's Prospectus lodged on 12 February 2010. (d) The plaintiff's solicitor produced a Revised Prospectus the day after the applicant had been informed of the defective Prospectus. (e) The Revised Prospectus was lodged on 18 February 2010.

Justice and equity 43 The persons who subsequently offered Shares for sale between 12 February 2010 and 18 February 2010 did so, I infer, in good faith and in reliance on the plaintiff's representations to the effect that offers for sale did not require disclosure under s 707(3) of the Act due to the exemption under s 708A(11) of the Act. 44 In Bovis Lend Lease Pty Ltd v Wily (2003) 45 ACSR 612, where a genuine misreading of the legislative requirements led to the contravention of s 439B(1) of the Act, it was held that the fact that the applicant for relief acted in good faith (including where they made an innocent mistake) may be used to support an argument that it is just and equitable that the orders sought be made. 45 It is difficult to identify the persons to whom the shares were transferred between 12 February 2010 and 18 February 2010. 46 These considerations lead to a conclusion that it is in the interest of justice and equity that the sellers of the shares between 12 February 2010 and 18 February 2010 be relived of the adverse consequences of the plaintiff's inadvertent failure to comply with s 708A(11) of the Act before the offers for sale were made.

No substantial injustice 47 In Elderslie Finance Corp Ltd v Australian Securities Commission, Owen J said at 160: The word "injustice" requires the Court to consider real, and not merely insubstantial or theoretical prejudice. 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. 48 In Super John Pty Ltd v Futuris Rural Pty Ltd (1999) 32 ACSR 398, Santow J stated: [A substantial injustice depends] upon whether the remedial order which gave rise to the detriment was unjust in the sense that it would have caused such prejudice overall as to have been unfair or inequitable, taking into account the interests of all those who would have been directly affected by such dispensation. 49 It is unlikely that any person who sold or acquired shares between 12 February 2010 and 18 February 2010 was adversely affected by the plaintiff's failure to comply with s 708A(11) of the Act before 18 February 2010. 50 As to the second declaration sought, s 1322(4)(c) of the Act provides that the Court may, on application of any interested person make 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 para (a). 51 Pursuant to s 1322(6)(b) and (c) of the Act an order may only be made under s 1322(4)(c) if the person acted honestly and no substantial injustice has been or is likely to be caused to any person. 52 For the reasons referred to above at paras [42]-[45] the sellers of the Shares acted honestly. 53 Further, for the reasons outlined above there was no, nor was there likely to have been any substantial injustice caused to any person who acquired the Shares from a person to whom they were issued or a subsequent seller. 54 For these reasons I am persuaded that the declaratory relief sought in the application ought be granted. I would also order that: A sealed copy of these orders be served on the Australian Securities and Investments Commission (ASIC) as soon as reasonably practicable and upon service of any orders made on ASIC, ASIC is to include the orders on its database. A copy of the orders be served on Elemental Minerals Limited as agent for all relevant shareholders. A copy of the orders is to be given to each person to whom the shares were issued and an announcement in which a copy of the orders is included is to be published on the ASX website as soon as reasonably practicable. For a period of 28 days from the date of publication by the ASX of the orders on the ASX website, any person to whom substantial injustice has been or is likely to be caused in respect of the orders made pursuant to subsections 1322(4)(a) and (c) of the Act has liberty to apply to vary or discharge the order. 55 These last orders reflect the approach, with which I respectfully agree, adopted by McKerracher J in Re Golden Gate Petroleum (2010) 77 ACSR 17. I certify that the preceding fifty-five (55) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Gilmour.