Caeneus Minerals Ltd, in the matter of Caeneus Minerals Ltd [2018] FCA 560

Introduction 1 In Greek mythology, Caeneus was accorded the status of 'invulnerable warrior'. 2 Regrettably, the applicant in this case has found that it is not invulnerable to the disclosure obligations of Part 6D.2 of the Corporations Act 2001 (Cth) (Act). 3 It seeks relief under s 1322(4) of the Act relating to contraventions of s 707(3) and s 727(1) of the Act as a result of trading following 31 separate instances of shares or options being issued without a valid cleansing notice or immediate cleansing prospectus. 4 On its face, that is a large number of relevant incidents. However, the company has provided a detailed and frank explanation as to the failure to file cleansing notices and I am satisfied that the failure was caused by inadvertence or an incorrect assessment of the legal position, rather than any deliberate disregard of its obligations. Accordingly, and in light of the urgency with which such applications are generally brought, I made orders at the conclusion of the hearing on 9 April 2018, granting the relief that was sought. These are the reasons for doing so.

Statutory framework 5 Part 6D.2 of the Act deals with disclosure to investors. The manner of disclosure is prescribed in s 709. 6 Section 707 provides that an offer of securities for sale needs disclosure to investors in certain circumstances. Section 707 is an anti-avoidance provision designed to prevent the avoidance of disclosure requirements by, for example, the issue of shares to a party to whom disclosure is not required and that party then offering the securities for sale to investors without disclosure: Re Golden Gate Petroleum Ltd (2010) 77 ACSR 17 [27] (McKerracher J). 7 Section 707(3) provides that an offer of a body's securities for sale within 12 months after their issue needs disclosure to investors, subject to exceptions provided by s 708 and s 708A. 8 It is not in issue in this matter that under s 707(3) and s 708A(1), the offer of the securities and any sale required that there be disclosure on the part of the shareholders unless one of (relevantly) s 708A(5) or 708A(11) provides otherwise. 9 Section 708A(5) provides for the issue of what is known as a 'cleansing notice'. Section 708A(11) provides for the issue of what is known as a 'cleansing prospectus'. 10 The cleansing notice exception can only be relied upon if the securities are quoted and their trading has not been suspended for more than five 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 securities were issued (five day rule). 11 The cleansing prospectus exception applies (relevantly) where a prospectus is lodged on or after the date that shares are issued but before the day on which a sale offer is made. It will have the effect of meeting disclosure requirements for relevant offers and sales going forward.

Facts and background 12 In November 2017, the applicant sought relief with respect to trading in shares arising from two share issues. Those share issues were made on 23 October 2017. On 9 November 2017 the applicant filed a cleansing prospectus (first cleansing prospectus) such that for trading after 9 November 2017, the issue of non-disclosure relating to those share issues does not arise. However, shareholders are vulnerable to claims for offering or trading shares between the date of issue and 9 November 2017 without disclosure, in contravention of s 703(3) and s 727(1) of the Act. 13 Accordingly, the applicant approached the Court seeking relief as to the shareholders' liability under s 1322(4) of the Act. 14 In the course of preparing for the hearing of the application, and following correspondence received from the Australian Securities and Investments Commission (ASIC), the applicant undertook a review of its previous issues of shares and options, and identified that there had been failure to lodge valid cleansing notices on another 29 occasions between April 2014 and October 2017. The originating process was amended so that all 31 instances could be dealt with by the Court at the same time. 15 Mr Keith Bowker was the company secretary during the relevant time until he resigned at the end of November 2017. Mr Johnathon Busing was appointed in his place. Mr Busing was appointed a director of the applicant on 30 November 2017. 16 Mr Bowker deposed as follows as to his knowledge of fundraising disclosure obligations when he was the company secretary: The starting position was that a public company had to make full disclosure in relation to securities issues, so that the market was fully informed and investors were not misled about investment opportunities. Full disclosure meant that a prospectus or a similar document had to be issued. There were some exceptions to the disclosure requirement, one of which was where the securities issue was made to sophisticated investors. If an issue of securities is made without disclosure, then any offers or sales within 12 months of issue will generally require disclosure. Such disclosure will not be required in some situations, including where the company issued a cleansing notice or cleansing prospectus when the securities were issued. A cleansing notice must state that the securities referred to in the notice were issued without disclosure under Part 6D.2 of the Act, that the company had complied with certain provisions of the Act as at the date of the notice, and that there was no information to be disclosed which is excluded information. Excluded information is information about a company's activities that investors and advisors would expect to be set out in a disclosure document. When a public company's shareholders have approved an issue of securities at a general meeting, the company will not need to issue a cleansing notice in order for subscribers to be able to on-sell without disclosure within 12 months. As part of this, I understood that shares issued on conversion of options would not require any further disclosure or a cleansing notice if the issue of those options proceeded with shareholder approval. My understanding has been that a cleansing notice is not required in those circumstances because the announcements in relation to the calling of a general meeting, in particular the details required for a notice of meeting and any associated announcements, would be regarded as sufficient disclosure to the market about the security issues resolved upon by the shareholders. Another type of exemption from the disclosure requirements was where the issue of securities was made as part of a transaction which itself had been the subject of announcements to the market through a prior ASX announcement. My understanding was that through such prior announcements the market would have been fully informed so that there was no excluded information, and a cleansing notice would not be required. 17 Mr Bowker was incorrect in his understanding that prior disclosure at a shareholders meeting or by a transaction disclosed to the Australian Securities Exchange (ASX) meant that disclosure was not otherwise required. I will return to this evidence in the context of relief. 18 Mr Busing deposed to the investigation he undertook once he was appointed in order to ascertain whether there had been other examples of on-sales without disclosure. He provided a table that summarised the outcome of his inquiries, and rather than set out here the 31 different instances, I have attached the table (with minor modifications) as a schedule to these reasons (Table). 19 Mr Bowker provided evidence as to his conduct relating to each of the entries in the Table. As is apparent, the examples of securities issues which offend the disclosure obligations fall into various categories. 20 The securities issues referred to at items 6.1, 6.2, 7.1, 7.2, 9.1 - 9.3, 11 - 13, 16.1 - 16.5, 18.1 - 18.3, 21, 22 and 23.1 of the Table proceeded pursuant to shareholders resolutions and without a cleansing notice. Mr Bowker explained he did not file a cleansing notice because of his misunderstanding about the position of issues approved at shareholders meetings. 21 As to item 5.1 of the Table, the particular share issue occurred on the same date and subject to the same Appendix 3B lodged at the ASX as another share issue by the applicant. However, as to the item 5.1 shares (100,000 shares to Poseidon Nickel Ltd), a cleansing notice was not filed, because Mr Bowker wrongly understood that as there had been prior disclosure to the ASX about an overall transaction with Poseidon, further disclosure was not required. 22 As to the securities referred to at items 20.2 and 20.3 (options and shares respectively), they occurred on the same date as a third securities issue for which there was a valid cleansing notice, but that cleansing notice did not include a proper addition of the share issue referred to in item 20.3. The error was a miscalculation. 23 As to item 20.2, a cleansing notice was filed but it was not valid because the options were not of a class of securities that had been quoted at all times in the three months before the issue. This was, as far as Mr Bowker can ascertain, an administrative error on his part. 24 As to the securities issues referred to at items 14.1, 14.2, 15 and 23.2 of the Table, they were all made following disclosure to the ASX of particular transactions that also disclosed the prospective security issues. Mr Bowker wrongly assumed that disclosure to the market by ASX announcement of the broader transaction satisfied disclosure obligations. 25 Further as to item 23.2 of the Table, Mr Bowker says he must have simply overlooked the need for a cleansing notice for the particular share issue, which was made under a corporate advisory mandate. Mr Bowker says he failed to check whether an appropriate announcement had been made. 26 As to each of items 14.1, 14.2, 15 and 23.2 it would have been possible to issue a cleansing notice. The company had not exceeded the five day rule in terms of days of suspension. Mr Bowker says he would have filed a cleansing notice had he properly understood the position. There was no excluded information that would have affected that course. 27 As to items 18.1 - 18.3 of the Table, Mr Bowker says he was told by one of his colleagues that he had been in discussions with an employee of the ASX. Mr Bowker was also in communications with the applicant's lawyers about those particular quoted options. He does not recall being aware that the ASX or the lawyers mentioned the need for a cleansing notice or cleansing prospectus and he accordingly wrongly assumed that none was required in the circumstances. He would have attended to it had he properly understood the position. 28 As to item 24, the share issue was connected with the Pardoo Nickel Project. The applicant had previously made a public announcement about its involvement in that project and Mr Bowler wrongly assumed there was no further disclosure obligation. A representative of the recipient of the shares later contacted Mr Bowker and asked why a cleansing notice had not been issued. Mr Bowker then issued a cleansing notice but outside the five day timeframe specified in s 708A(6)(a) of the Act. 29 Items 26.1 and 26.2 are the 23 October 2017 share issues that resulted in the original application to Court. Mr Bowker purported to file cleansing notices with respect to those issues. He knew there had been a period of suspension of shares and so was conscious of the need to calculate those days for the purpose of the five day rule. However, he miscalculated by one day. He took advice about the error and shortly after filed the first cleansing prospectus (9 November 2017). There was some trading in placement shares by the three placees between their date of issue and the filing of the first cleansing prospectus. The applicant informed the placees of the failure to lodge a valid cleansing notice. The placees have raised no issue with the applicant. 30 The first cleansing prospectus referred only to shares. It did not refer to the options the subject of items 18.1 - 18.3 and 20.2. On 25 January 2018, the applicant filed a second cleansing prospectus that referred to the options. The orders made in this matter therefore refer to a longer time period for the options for the purpose of relief, ending on 25 January 2018 rather than 9 November 2017. 31 Mr Busing investigated the on-sale of shares and options under the 31 various securities issues. He ascertained that 97.53% of the shares have been on-sold. Some 89.04% of the options have been on-sold at least once. Those percentages indicate that potentially a large number of purchasers acquired shares or options in circumstances where the sellers had not complied with the disclosure provisions of Part 6D.2. 32 Mr Busing also deposed to and attached sample correspondence with all the identified placees or sellers of shares and options, placing them on notice of the original failure to lodge valid cleansing notices, the filing of the cleansing prospectuses and these Court proceedings. No relevant responses were received. Public announcements were also made.

Relevant relief provision - section 1322 33 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: Re Wave Capital Ltd [2009] FCA 969 [29] (French J). It has been utilised to validate non-disclosure by shareholders who on-sell shares on a number of occasions: see cases collected in ICandy Interactive Limited, in the matter of ICandy Interactive Limited [2018] FCA 533 [43]. 34 Section 1322(4) prescribes when any act, matter or thing purporting to have been done under the Act may be validated. Under s 1322(4)(a), the court must not make an order validating the act, matter or thing unless the court is satisfied: (1) that the act, matter or thing, or the proceeding, is essentially of a procedural nature; (2) that the person or persons concerned in or party to the contravention or failure acted honestly; or (3) that it is just and equitable that the order be made. 35 Only one of those limbs must be satisfied to meet the requirements of s 1322(6)(a). 36 The court may make orders relieving the shareholders from civil liability with respect to disclosure on their part under s 1322(4)(c). By s 1322(6)(c) it is a precondition to such an order being made that the court is satisfied that the person subject to civil liability has acted honestly. 37 By s 1322(6)(c), the court must not make an order in any case unless it is satisfied that no substantial injustice has been or is likely to be caused to any person.

Interested party 38 An application may be made under s 1322 by an interested party. Although seeking relief for the benefit of shareholders and not as to any potential liability on its part or that of its directors, the applicant is clearly an interested party and has standing to bring the application: Re Sprint Energy Ltd [2012] FCA 1354 [40] (McKerracher J).

Act, matter or thing that may be invalid by reason of contravention 39 The applicant seeks relief by way of a declaration that any offer or sale of the quoted securities during the period from each of the respective share issue dates until 9 November 2017 (in the case of the shares) or 25 January 2018 (in the case of the options) is not invalid by reason of the seller's failure to comply with s 703(3) and s 727(1) of the Act. It also seeks an order relieving any sellers of those securities from civil liability arising out of such contravention. 40 The contravention is the offering of securities for sale without proper disclosure in contravention of s 707(3) and s 727(1) of the Act.

The pre-conditions in s 1322(6)(a) 41 The applicant says the Court can be satisfied that the second or third limbs of s 1322(6)(a) are met. 42 In ICandy Interactive, I dealt with the meaning of 'acting honestly' and the persons whose conduct might be considered under that limb: ICandy Interactive [54] -[106]. 43 In this case, I am satisfied that the actions of Mr Bowker were not dishonest. He made relatively simple errors and misunderstood the legal position as to the effect of shareholder approval or prior disclosure. Such conduct of itself does not comprise dishonesty. 44 I have taken into account that there were some 31 separate incidents where the requirements of Part 6D.2 were overlooked by Mr Bowker. However, the mere fact that there were many separate incidents does not elevate his conduct to dishonesty. 45 I also have regard to the fact that once the failures on the part of the applicant were understood, it moved quickly to bring this application and then check its conduct over the period of several years. 46 There is no conduct on the part of other directors of the applicant that raised the concern of the court. 47 Nor is there any suggestion any of the shareholders acted other than honestly. In such cases it is open to the court to readily infer that the shareholders have acted honestly in on-selling the shares: Re Silver Lake Resources Ltd [2012] FCA 32 [23] (Siopis J). 48 Accordingly, I am satisfied that the relevant persons acted honestly. 49 Regardless, I also consider that it is just and equitable that the orders be made. 50 The court has generally focused on the interests and conduct of the shareholders in assessing whether it is just and equitable that validation orders be made. There are potentially many such shareholders in this case, taking into account the high percentage of shares and options that were traded post issue. 51 It is likely that the 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 errors on the part of the applicant should deny relief or deny any defects in the disclosure from being corrected. The making of the orders sought will serve to give effect to their expectations as to disclosure: Sprint Energy [48]. 52 Absent any evidence of knowledge or deliberate nondisclosure on the part of the shareholders, it is just and equitable that the orders be made.

Section 1322(6)(c) - no substantial injustice 53 It is not known whether any person who acquired shares or options from a shareholder between the relevant dates and until the cleansing prospectuses were filed was adversely affected by the lack of disclosure. 54 There is no ground for inferring that validation of such sales would prejudice any person. However, I will provide a window of time during which affected persons may apply to vary or set aside these orders. To the extent there is prejudice to third party purchasers by such validation, any such prejudice is tempered by the ability to apply to court under the orders. 55 The orders sought are clearly in the interests of shareholders who have made offers or on-sold their shares, as they risk exposure to claims against them absent validation. 56 In the circumstances, I do not consider there will be any substantial injustice in making the orders.

Section 1322(4)(c) - relief from civil liability 57 For the reasons I have discussed with respect to the honesty of the shareholders, the just and equitable element and the absence of substantial injustice, it is appropriate that orders be made under s 1322(4)(c) relieving the shareholders who made offers or sales during the relevant periods from civil liability.

Relief 58 I do not consider public policy will be undermined by the making of the orders. The applicant's conduct did not involve blatant disregard of the provisions of the Act. 59 ASIC has indicated that it neither opposes nor consents to the application. It formed that view taking into account the fact that the applicant does not seek relief as to its own conduct or that of its former or current officers. The ASX indicated that it did not consider itself to be in a position to comment on the matters before the Court in order to support or oppose the application, and said it considered such role to be that of ASIC. 60 I am satisfied in the circumstances of this case that the relief should be granted. I certify that the preceding sixty (60) numbered paragraph is a true copy of the Reasons for Judgment herein of the Honourable Justice Banks-Smith.

TABLE No. Item Date of Issue Securities Issued Validity of onsales without disclosure Amount Raised Shareholder Approval Obtained

1. 5.1 28 October 2015 100,000,000 Shares No. No cleansing notice. Nil (Issued as consideration for settlement pursuant to Deed of Release) No
2. 6.1 1 December 2015 75,000,000 Shares No. No cleansing notice. Nil (Issue of free-attaching unlisted options) Yes (Shareholder approval obtained at AGM held on 27 November 2015)
3. 6.2 1 December 2015 8,150,660 Shares No. No cleansing notice. Nil (Issued to creditors of the plaintiff in satisfaction of amounts owing) Yes Shareholder approval obtained at AGM held on 27 November 2015)
4. 7.1 17 December 2015 300,000,000 Shares No. No cleansing notice. $150,000 Yes (Shareholder approval obtained at AGM held on 27 November 2015) (Sophisticated investor placement)
5. 7.2 17 December 2015 750,000,000 Shares No. No cleansing notice. Nil (Issued as consideration for acquisition of Port Exploration Pty Ltd) Yes (Shareholder approval obtained at AGM held on 27 November 2015)
6. 9.1 30 June 2016 600,000,000 Shares No. No cleansing notice. Nil (Issued as consideration for acquisition of Nevada Metals Pty Ltd) Yes (Shareholder approval obtained at General Meeting held on 28 June 2016)
7. 9.2 30 June 2016 225,000,000 Shares No. No cleansing notice. Nil (Issued as consideration payable under Mining Claims Acquisition) Yes (Shareholder approval obtained at General Meeting held on 28 June 2016)
8. 9.3 30 June 2016 30,000,000 Shares No. No cleansing notice. Nil (Issued to creditors of the plaintiff in satisfaction of amounts owing) Yes (Shareholder approval obtained at General Meeting held on 28 June 2016)
9. 11. 25 July 2016 40,264,309 Shares No. No cleansing notice. $120,792 (Issued upon exercise of options) Yes (Shareholder approval for options obtained at General Meetings held on 27 November 2015 or 28 June 2016)
10. 12. 1 August 2016 47,500,000 Shares No. No cleansing notice. $142,500 (Issued upon exercise of Options) Yes (Shareholder approval for options obtained at General Meetings held on 27 November 2015 or 28 June 2016)
11. 13. 3 August 2016 37,500,000 Shares No. No cleansing notice. $112,500 (Issued upon exercise of options) Yes (Shareholder approval for options obtained at General Meetings held on 27 November 2015 or 28 June 2016)
12. 14.1 3 August 2016 50,000,000 Shares No. No cleansing notice. Nil (Issued as part consideration to acquire ATC Resources Pty Ltd) No
13. 14.2 3 August 2016 30,000,000 Shares No. No cleansing notice. Nil (Issued to Global Exploration Management re acquisition of ATC Resources Pty Ltd) No
14. 15. 12 September 2016 35,000,000 Shares No. No cleansing notice. Nil (Issued pursuant to Deed of Variation to acquire 51% of Pardoo Nickel Project) No
15. 16.1 2 December 2016 50,000,000 Shares No. No cleansing notice. Nil (Issued as final consideration to acquire ATC Resources Pty Ltd) Yes (AGM held on 30 November 2016)
16. 16.2 2 December 2016 30,000,000 Shares No. No cleansing notice. Nil (Issued to Gold Exploration Management Inc as part of acquisition of ATC Resources Pty Ltd) Yes (AGM held on 30 November 2016)
17. 16.3 2 December 2016 24,000,000 Shares No. No cleansing notice. Nil (Issued to Venex Capital Corp Ltd pursuant to corporate advisory mandate) Yes (AGM held on 30 November 2016)
18. 16.4 2 December 2016 140,000,000 Shares No. No cleansing notice. Nil (Issued as consideration to acquire Nevada Clays Pty Ltd) Yes (AGM held on 30 November 2016)
19. 16.5 2 December 2016 35,000,000 Shares No. No cleansing notice. Nil (Issued to Gold Exploration Management Inc as part of the acquisition of Nevada Clays Pty Ltd) Yes (AGM held on 30 November 2016)
20. 18.1 24 February 2017 1,049,431,085 Quoted Options No. No cleansing prospectus. Nil Yes (Shareholder approval obtained at General Meeting held on 24 February 2017)
21. 18.2 24 February 2017 50,000,000 Quoted Options No. No cleansing prospectus. Nil Yes (Shareholder approval obtained at General Meeting held on 24 February 2017)
22. 18.3 24 February 2017 1,181,515,612 Unquoted options (options already on issue, plaintiff seeking quotation) No. No cleansing prospectus. Nil Yes (Shareholder approval obtained to vary the terms of options at General Meeting held on 24 February 2017) (options already on issue)
23. 20.2 13 April 2017 220,000,000 Quoted Options No. Nil No Cleansing notice issued but not valid as securities not quoted for 3 months (s 708A(5)(a)).
24. 20.3 13 April 2017 15,000,000 Shares No. No cleansing notice. Nil No (Issued to a creditor of the plaintiff in satisfaction of amounts owing)
25. 21 12 May 2017 125,000,000 Shares No. No cleansing notice. Nil Yes (Issued as part of the consideration payable to DG Resources Management Ltd under Mining Claims Acquisition) (General Meeting held on 28 June 2016)
26. 22 20 June 2017 16,000,000 Shares No. No cleansing notice. $48,000 (Issued upon exercise of Options) Yes (Shareholder approval for Options obtained at General Meetings held on 27 November 2015, 28 June 2016 and 24 February 2017)
27. 23.1 28 June 2017 100,000,000 Shares No. No cleansing notice. Nil Yes (Issued as part of the consideration payable to DG Resources Management Ltd under Mining Claims Acquisition) (General Meeting held on 28 June 2016)
28. 23.2 28 June 2017 30,000,000 Shares No. No cleansing notice. Nil No (Issued pursuant to corporate advisory mandate)
29. 24. 28 September 2017 58,333,333 Shares No. Cleansing notice issued on 9 Oct 2017 but not valid as outside the 5-day period (s 708A(6)(a)). Nil No (Issued pursuant to Deed of Variation to acquire 80% of Pardoo Nickel Project)
30. 26.1 23 October 2017 133,333,333 Shares No. Cleansing notice issued but not valid as plaintiff suspended from 12 to 19 October 2017 $200,000 (Sophisticated investor placement) No (s 708A(5)(b))
31. 26.2 23 October 2017 138,000,000 Shares No. Cleansing notice issued but not valid as plaintiff - suspended from 12 to 19 October 2017 Nil No (s 708A(5)(b)) (Issued pursuant to corporate advisory mandate)