Clancy Exploration Limited, in the matter of Clancy Exploration Limited [2018] FCA 569

Introduction 1 The applicant seeks relief under s 1322(4) of the Corporations Act 2001 (Cth) (Act) relating to contraventions of s 707(3) and s 727(1) by shareholders in circumstances where there had not been disclosure as required by Part 6D.2 of the Act. 2 The relevant share issue occurred on 1 December 2017 and was for 270,000,000 ordinary shares. This was not a scenario where it was open to the applicant to file a cleansing notice. A cleansing prospectus was lodged on 21 March 2018. There was trading of shares in the interim period. 3 The applicant has provided a frank explanation as to the failure to file a cleansing prospectus and I am satisfied that the failure was caused by inadvertence, 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 10 April 2018, granting the relief sought. These are the reasons for doing so.

Statutory framework 4 The statutory framework is summarised in many of the cases dealing with such applications, but for ease of reference I repeat a short summary. 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), any sale of the shares once issued 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 a cleansing notice. Section 708A(11) provides for the issue of a cleansing prospectus. 10 The cleansing notice exception can be relied upon only 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 The relevant shares were issued in performance of obligations owed by the applicant to a third party, Red Field Pty Ltd, for the acquisition of a tenement. The acquisition had been disclosed to the market and the applicant had filed an Appendix 3B at the Australian Securities Exchange (ASX), requesting quotation of the shares. The Appendix 3B contained a warranty that an offer of the securities for sale within a 12 month period after their issue would not require disclosure under s 707(3) of the Act. 13 The company secretary, Mr Caren, prepared the Appendix 3B and deposed to the fact that he was familiar with the need to lodge a cleaning prospectus. He said that on this occasion he did not turn his mind to filing a cleansing prospectus and that he really has no other explanation other than that he was very busy at the time, and acting for 4 other listed clients and a private client. He has since taken steps to reduce his workload. 14 Other officers of the applicant gave evidence that they assumed Mr Caren would deal with the cleansing prospectus. At least one of the directors knew that the applicant did not meet the five day rule due to periods of suspension of trading. However, there is nothing in their evidence to suggest they acted in deliberate disregard of the obligations of the applicant under the Act. On 12 March 2018 one of the other directors became aware that no cleansing notice or cleansing prospectus had been filed and that accordingly those shareholders who had traded shares would be exposed to claims of breach of disclosure obligations. The applicant took legal advice and moved quickly to arrange a voluntary trading suspension, lodge a cleansing prospectus and file this application. Further, the directors have put in place steps by way of set procedures to identify when cleansing notices and prospectuses must be filed, to reduce the risk of such an oversight occurring again. 15 Shareholders are vulnerable to claims for offering or trading shares without making the requisite disclosure between the date of issue and the date of the cleansing prospectus, in contravention of s 703(3) and s 727(1) of the Act. 16 Accordingly, the applicant approached the Court seeking relief as to the shareholders' liability under s 1322(4) of the Act. 17 The applicant sent emails to all shareholders (including Red Field) or parties that it identified may be affected and disclosed that it was applying to this Court for relief. Red Field confirmed that it had no knowledge at the time that it on-sold shares that there were any restrictions on it being able to trade them. No other responses of substance were received.

Relevant relief provision - section 1322 18 Again, the requirements of s 1322 are summarised elsewhere but for ease of reference I repeat the relevant principles here. 19 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 (2003) 47 ACSR 418 [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 my reasons in Re ICandy Interactive Ltd [2018] FCA 533 [43]. 20 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. 21 Only one of those limbs must be satisfied to meet the requirements of s 1322(6)(a). 22 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)(b) 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. 23 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 24 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 25 The applicant seeks relief by way of a declaration that any offer or sale of the quoted securities during the period 1 December 2017 to 21 March 2018 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. 26 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) 27 The applicant says the Court can be satisfied that the second or third limbs of s 1322(6)(a) are met. 28 I am satisfied that the actions of Mr Caren were not dishonest. He made an inadvertent error, and such conduct of itself does not comprise dishonesty: Re QBiotics Ltd [2016] FCA 873 [38] (Gleeson J); Sprint Energy [43]. He was very open with the Court as to his error. 29 I also have regard to the fact that once the error was disclosed, the applicant moved quickly to suspend trading, file a cleansing prospectus and bring this application. There is no conduct on the part of other directors of the applicant that raises the concern of the Court. 30 There is no suggestion any of the shareholders acted other than honestly. They had access to the Appendix 3B with its warranty. 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). Further, there is at least some evidence that Red Field had no knowledge of the risk it was breaching disclosure obligations. 31 Accordingly, I am satisfied that the relevant persons acted honestly. 32 I also consider that it is just and equitable that the orders be made. 33 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. 34 For the reasons already mentioned, 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]. 35 It is just and equitable that the orders be made.

Section 1322(6)(c) - no substantial injustice 36 There is no ground for inferring that validation of share sales would prejudice any person. However, there will be a period of 28 days 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, they may apply to Court under the orders. 37 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. 38 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 39 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 40 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. This is in my view a clear case for relief. 41 The Australian Securities and Investments Commission (ASIC) has indicated that it neither opposes nor consents to the application. It reported that it formed that view taking into account that the applicant does not seek relief as to its own conduct or that of its former or current officers. The ASX wrote to the applicant's solicitors and informed them 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 matters of compliance with the Act to be a matter for ASIC. It said it was not in a position to support or oppose the application. 42 I am satisfied in the circumstances of this case that the relief should be granted. I certify that the preceding forty-two (42) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Banks-Smith.