Cann Group Limited, in the matter of Cann Group Limited [2021] FCA 129

DAVIES J: 1 On 16 February 2021 I heard an urgent ex parte application by the plaintiff (the Company) for orders under s 1322 of the Corporations Act 2001 (Cth) (the Act) in relation to its omission to lodge a cleansing notice under s 708A(5)(e) of the Act within the prescribed five day period after the issue of 306,846 shares in the Company on 28 January 2021 on the exercise of options. The application was supported by an affidavit of Geraldine Therese Farrell (Ms Farrell), the company secretary and chief compliance officer of the Company. Following the hearing I made the orders sought. These are my reasons for making the orders. 2 The Company is a public Australian company listed on the Australian Stock Exchange (ASX). Its primary business is the cultivation, production and manufacture of medicinal cannabis for supply to Australian and overseas customers. In February 2020 the Company issued 8 million convertible notes to a variety of institutional and sophisticated investors to whom disclosure under pt 6D.2 of the Act was not required because they came within s 708(8) of the Act, being "sophisticated investors". However, under ss 707(3) and 708A(1) of the Act, an offer of a company's securities for on-sale within 12 months of issue needs disclosure to investors, if the company 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)). 3 Under the terms and conditions of the notes, if a noteholder converted the notes into ordinary shares within a particular timeframe of certain events, the noteholder would be granted an equivalent number of options as the number of shares issued to it as a result of the conversion of the notes. A cleansing notice in accordance with s 708A(6) of the Act was issued in relation to the convertible notes and the shares to be issued upon conversion of the convertible notes, however the notice did not include the issue of shares upon exercise of the options. On 29 July 2020 Repertoire Pty Ltd converted 100,000 convertible notes into shares and options. In accordance with the terms of those convertible notes the Company issued 306,846 options with an exercise price of $0.46 and an expiry date of 31 March 2022. On 22 January 2021, Repertoire Pty Ltd gave notice of its intention to exercise the options and was issued 306,846 shares in the Company on 28 January 2021. An application for quotation of securities was filed with the ASX and, at that time, the Company believed it had complied with all relevant listing rules and legislative requirements. The 306,846 shares issued to Repertoire Pty Ltd have since been sold. A further cleansing notice under s 708A of the Act was not given at the time of issuing the shares. Ms Farrell deposed that she did not give a further cleansing notice because she believed that the original cleansing notice issued in relation to the convertible notes extended to any subsequent issue of shares pursuant to the conversion of those notes, including shares issued upon the exercise of the options. Ms Farrell deposed that she became aware on 15 February 2021 that the original cleansing notice did not provide the necessary disclosures to the market regarding the issue of the subject shares and that a further cleansing notice was required on exercise of the options. She immediately notified the chairman of the Company's board, the chief executive officer and the Company's ASX listing compliance advisor of the issue. On 16 February 2021, the Company made a request to the ASX for an immediate trading halt on its shares and trading in its shares on the ASX has temporarily ceased until the earlier of this application being heard and determined by the Court and the commencement of trading on 18 February 2021. 4 Both the Australian Securities and Investments Commission (ASIC) and the ASX were notified of this application and served with the originating application and the affidavit in support of Ms Farrell. The Court had before it an email from the ASX advising that it supports the application and an email from ASIC which advised the Company that it neither supported nor opposed the orders sought. 5 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); (5) An order may be made under paragraph (4)(a) or (c) notwithstanding that the contravention or failure referred to in the paragraph concerned resulted in the commission of an offence. (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): (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 … (c) in every case--that no substantial injustice has been or is likely to be caused to any person. 6 The relevant principles to apply in considering whether or not to make appropriate orders under s 1322 of the Act are helpfully set out by Banks-Smith J in Re ICandy Interactive Limited [2018] FCA 533. In summary: (a) s 1322 is remedial in nature and is to be given a liberal interpretation: at [43]; (b) the provision has been used to validate non-disclosure by shareholders who on-sell shares on a number of occasions: at [43]; (c) s 1322 may be invoked even when an irregularity is deliberate: at [44]; (d) when determining whether someone has acted honestly for the purposes of s 1322(6)(a)(ii), the court looks to an absence of evidence of dishonesty. The honesty of the shareholders who sell shares without disclosure is relevant and the Court may infer that those shareholders have acted honestly in on-selling the shares: at [58]. The Court may also consider the honesty of those responsible for the failure of the Company to lodge a cleansing notice, including company officers. That is so even where the relief sought is framed only in terms of the contraventions committed by on-sellers: at [83], [87], [101]; (e) 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]; (f) the Court takes into account whether the Company has taken prompt action to remedy the error: at [54]; (g) in considering whether it is just and equitable to validate the on-sales, the Court will generally focus on the interests and conduct of the shareholders: at [110]. 7 Having regard to these factors, I was satisfied that it was appropriate to make the orders sought. First, I was satisfied on the evidence of Ms Farrell that the failure to issue the cleansing notice was due to the Company's inadvertence, rather than a disregard for the relevant provisions of the Act. Secondly, the Company acted promptly upon becoming aware of the non-compliance by immediately informing the ASX and bringing this application. Thirdly, although there was no direct evidence before the Court that Repertoire Pty Ltd had acted honestly in its on-sale of the shares without a cleansing notice, there is nothing to suggest that Repertoire Pty Ltd acted other than honestly in relation to the on-sale of its shares. Rather, the explanation lies in the inadvertent error on the part of the Company in failing to issue a cleansing notice. I was accordingly satisfied that an order under s 1322(4)(c) relieving Repertoire Pty Ltd from civil liability is justified. Fourthly, I was also satisfied that it is just and equitable to make the orders sought to relieve Repertoire Pty Ltd from any civil liability in selling shares that have been issued to them without a cleansing notice in circumstances where the lack of a cleansing notice was due to the inadvertence of the Company. Fifthly, the material does not indicate a reason for inferring that validation of the share sales would prejudice any person however, as is common in these matters, the orders will provide that any person who claims to have suffered prejudice by the validation may apply to the Court within 28 days to vary or set aside the orders. Finally, both ASIC and the ASX were on notice of the application and neither authority opposed the making of the orders sought. In the circumstances it was appropriate to exercise the Court's discretion to make the orders sought. I certify that the preceding seven (7) numbered paragraphs are a true copy of the Reasons for Judgment of the Honourable Justice Davies.