Car Buyers Australia Pty Limited v Australian Securities and Investments Commission, in the matter of Car Buyers Australia Pty Limited

COLVIN J: 1 On 27 April 2021, I determined that orders should be made pursuant to s 1322(4)(a) of the Corporations Act 2001 (Cth) in circumstances where questions had arisen as to whether there had been a failure by Oliver's Real Food Ltd (ORFL) to comply with the disclosure provisions in Part 6D.2 of that Act. At the time I indicated that I would publish my reasons. These are my reasons. 2 ORFL is a public company whose shares are listed for trading in the markets that form part of the Australian Securities Exchange conducted by ASX Limited. On 28 February 2019, ORFL resolved to grant 5,000,000 options to each of its four directors, one of whom was Mr Nicholas Dower. Mr Dower was also the board chairman. The grant of the options was subsequently approved at an extraordinary general meeting of shareholders in ORFL. 3 The other directors were Mr Steven Metter, Ms Amanda Gunn and Mr Jason Gunn (the husband of Ms Gunn). 4 At the time of the extraordinary meeting, shareholders were informed that it was the intention of ORFL and the individual directors 'that the options proposed in the resolutions put to shareholders at today's meeting, and the shares held by the recipients at the time of exercising these options, should be held by the recipients for a minimum of 12 months from the date of issue, should these resolutions be passed and the options granted'. However, the making of that statement did not mean that thereafter there was a legal restriction upon selling the options (or shares held as a result of exercise of the options) for 12 months. It was a statement of intention only. 5 Part 6D.2 of the Corporations Act imposes disclosure requirements in respect of the issue of securities. The legislative scheme was described by McKerracher J in Sprint Energy Limited, in the matter of Sprint Energy Limited [2012] FCA 1354 at [17]-[21]. In some circumstances, those requirements may be met by the issue of a notice that complies with s 708A(6) (generally known as a cleansing notice): s 708A(5). More generally, if a prospectus has been lodged in accordance with s 708A(11) then no further disclosure is required under Part 6D.2. Some provisions allow securities the subject of the regulation in Part 6D.2 to be issued without disclosure. However, where securities are issued without disclosure (as permitted) but nevertheless with the purpose of there being a dealing in the securities as issued then the disclosure provisions apply to any offer of those securities for sale within 12 months after their issue: s 707(3). 6 In the present case the options were issued without the publication of a cleansing notice or a prospectus. It was claimed that exceptions applied and for present purposes the basis for that claim need not be considered. The issues that have arisen concern subsequent dealings in the options that fall into two categories. 7 The first category arises because, shortly after they were granted, the options granted to Ms Gunn were transferred to her husband and then exercised in favour of his nominee Hauraki Trustee Company. There was no further dealing in those shares within 12 months thereafter. It appears that by reason of the nature of the relationship between Mr and Ms Gunn, they did not advert to the possibility that disclosure may be required. The shares as issued have not otherwise been dealt with during the 12 month period in which a need for disclosure would arise. 8 The second category arises because, Mr Dower resigned as a director of ORFL on 2 May 2020. The options granted to Mr Dower had been exercised in favour of his nominee Niche Group Pty Ltd. Mr Dower spoke to a director of ORFL and indicated that he wished to arrange to sell the shares. He said that there was a holding lock on the sale of the shares. He said that he had obtained legal advice and based on that advice he believed that Niche Group could sell the shares even though the 12 month period had not elapsed. He said that his financial circumstances had changed and although his intention at the time of grant of the options had been to hold on to them, he could not foresee the effect that the Covid pandemic would have on his business. Mr Dower then showed the advice to the director. 9 On the basis of the matters presented by Mr Dower, the board of ORFL arranged to remove the holding lock. Concerns were then raised by Gelba Pty Ltd, a major shareholder, about share sales by Niche Group. As a result, the directors of ORFL re-instated the holding lock, sought legal advice as to whether to issue a cleansing prospectus and apply to this Court for appropriate orders and communicated with ASX Limited concerning the issues raised. By that time, some of the shares held by Niche Group had been on-sold. 10 Solicitors acting for ORFL advised it to consider whether to issue a cleansing prospectus and apply to this Court for appropriate orders validating the dealings in the securities. However, in the result, legal advice was received from counsel acting on instructions for Mr Dower and Niche Group that there had been no failure to comply with the disclosure requirements when the options were issued (even though no cleansing notice or prospectus had been issued at the time) and that Niche Group could now deal with the shares because there had been no purpose to deal in the options at the time they were issued and converted to shares. A copy of the advice was provided to ORFL. Also, the explanations provided to ASX Limited appeared to the directors to have been accepted. 11 In the above circumstances, the directors of ORFL resolved not to issue a prospectus or make any application to the Court. The holding lock was again lifted and further shares were sold by Niche Group. 12 In February 2021, the affairs of ORFL came under the scrutiny of ASX Limited when trading in its shares was suspended in view of a determination made by ASX Limited about its financial position. Questions were raised that led to ORFL issuing a prospectus. Concerns were raised about the two categories of trading were raised by ASX Limited with ORFL. As a result of those matters, ORFL announced to the market that those queries had been raised. It responded to them promptly and then announced that it would seek orders from this Court seeking to validate on-sales that may have infringed the disclosure provisions. 13 As it is would be very difficult to identify those shareholders in particular who purchased shares from Niche Group or as a result of further on-sales of those shares, all current shareholders in ORFL were notified of the proposed application. 14 It is apparent that when the possibility of contravention was raised the directors took prompt steps to take appropriate legal advice. To some extent, as to the dealings in shares by Niche Group, the application is made without admission of any contravention by reason of the claims as to the purpose of the parties when the options were granted and converted to shares. In that regard, it is to be noted that s 707(4) provides that securities are taken to be issued with the purpose of dealing in those securities if there are reasonable grounds for concluding that they were issued for that purpose and there is a reverse onus provision if there was actual dealing in the securities within 12 months. 15 In the result, the application is brought by ORFL on the basis that there was trading in shares without the required disclosure, but the market is now informed by means of the prospectus that has since been issued as to the financial circumstances of ORFL. 16 It is significant that there has been no trading in the relevant shares within the 12 month period other than by Niche Group. 17 The failure to comply with the disclosure requirements was not dishonest in any way. The concept of acting honestly can include an active but incorrect consideration of the legal position: ICandy Interactive Limited, in the matter of ICandy Interactive Limited [2018] FCA 533 at [54]-[106]. As was noted by Siopis J in TV2U International Limited, in the matter of TV2U International Limited [2016] FCA 1556 at [40] in similar circumstances to the present case, it is reasonable to expect that those involved in the transfer of shares did so without being aware of the failure to comply with the disclosure requirements. 18 ORFL seeks remedial orders pursuant to s 1322(4)(a) and s 1322(4)(c) of the Corporations Act. It has standing to do so: Sprint Energy Limited at [40]. I explained the requirements of those provisions in Poseidon Nickel Ltd, in the matter of Poseidon Nickel Ltd [2018] FCA 1063 at [71]-[86]. 19 Notice of the application has been given to the Australian Securities and Investments Commission and ASX Limited and neither party raises any concern or seeks intervene. ASX Limited maintains that issues of compliance with the Corporations Act are solely matters for the Australian Securities and Investments Commission. 20 There being no dishonesty, it being demonstrated to be just and equitable that the orders should be made and there being no substantial injustice, I was satisfied that the order should be made. I did so recognising the three aspects that I described in Poseidon Nickel Ltd at [62]-[65] each of which is apposite in the present case. There is no indication of any real or substantial prejudice to others that would need to be weighed in the consideration and there is no basis disclosed upon which the Court might exercise its residual discretion to refuse relief: as to which see Car Buyers Australia Pty Limited v Australian Securities and Investments Commission, in the matter of Car Buyers Australia Pty Limited [2020] FCA 599 at [31]-[32] (Gleeson J). 21 The orders sought proposed an exclusion for directors and officers of ORFL but did not expressly identify the exclusion of Mr Dower and Niche Group from their salving effect when it came to liability under the Corporations Act. The justification advanced for the present application was to provide assurance to the market for ORFL shares and to avoid the injustice to innocent parties who had bought shares. Therefore, it was not necessary to adjudicate upon the conduct of the directors or Mr Dower and Niche Group or their associates and whether they should have the benefit of an order under s 1322(4)(c). For those reasons, the orders made were qualified as to the extent of relief that they conferred from civil liability. Expressing the orders in those terms simply leaves that question undetermined. 22 The usual approach is to require the orders to be published in an appropriate way and to provide a period of time for any party who claims to have suffered substantial injustice to make application to vary or discharge the orders. This enables the substantial injustice of not granting relief to be avoided, while preserving the position for those parties who may claim substantial injustice (even though none is apparent on the application) to make application for different relief. As a balance between providing the certainty for future trading, a relatively short period of 28 days is usually expressed: see, for example, Golden Gate Petroleum Ltd, in the matter of Golden Gate Petroleum Ltd [2010] FCA 40 at [54]-[55]. For that reason, I determined that the period proposed in that regard was appropriate. 23 Having regard to the explanation provided by those involved, I was satisfied that there should be no order as to costs. I certify that the preceding twenty-three (23) numbered paragraphs are a true copy of the Reasons for Judgment of the Honourable Justice Colvin.