Eddy Lau Constructions Pty Ltd v Transdevelopment Enterprise Pty Ltd

JACKSON J: 1 The plaintiff, Superior Resources Limited, applies for relief under s 1322 of the Corporations Act 2001 (Cth) in relation to its omission to announce a cleansing notice to the Australian Securities Exchange (ASX), that was legally effective to permit secondary sales of certain shares without disclosure to investors under Part 6D.2 of the Act. While there was a cleansing notice for the original placement of the shares in question, the notice was announced prematurely, and not within the period required under s 708A(6)(a) of the Act in order for it to be effective for the purpose of secondary sales.

Statutory framework 2 Sections 1322(4), 1322(5) and 1322(6) of the Corporations Act relevantly provide: (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 (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. 3 Superior Resources' need to apply under this section arises in the following statutory context. 4 Section 727(1) prohibits an offer of securities that needs disclosure under Part 6D.2 of the Corporations Act unless a disclosure document for the offer (such as a prospectus) has been lodged with the Australian Securities and Investments Commission (ASIC). 5 By combined operation of s 704 and s 707(3) of the Act, an offer of securities for sale within 12 months after their issue needs disclosure under Part 6D.2 if the securities were issued without disclosure to investors and, (broadly speaking) the securities were issued or acquired with the purpose of on-sale and, relevantly, s 708A does not say otherwise. 6 Section 708A(5) provides that a sale offer of quoted securities does not need disclosure to investors if certain conditions apply, including that the body who issued the securities lodges with the market operator a notice complying with s 708A(6), that is, a cleansing notice, before the sale offer is made. In order to comply with s 708A(6) the notice must, among other things, be issued within five business days after the day on which the relevant securities are issued: s 708A(6)(a). So a cleansing notice given before the issue of the securities will not be effective to exempt offers for sale from the requirement for disclosure.

The evidence 7 Carlos Fernicola provided an affidavit in support of the application. Mr Fernicola is the chairman and company secretary of Superior Resources. The company is a Brisbane based explorer for copper-lead-zinc and gold. Fully paid ordinary shares in the company are quoted on ASX. It has approximately 745 million shares on issue held by approximately 830 shareholders. 8 On 31 July 2019 Superior Resources announced a placement of 60,750,000 shares to investors to whom disclosure under Part 6D.2 of the Corporations Act was not required because they came within s 708(8) of the Act, which concerns what are often called 'sophisticated investors'. A cleansing notice was announced on ASX on the same day. However the placement, which ended up involving the issue of 57,375,000 shares, did not occur until 15 August 2019. No cleansing notice was issued within five business days after that date. So the cleansing notice that had been issued did not comply with s 708A(6) for the purposes of sale of the securities that were issued on 15 August. 9 Mr Fernicola cannot specifically recall why no cleansing notice was issued within the necessary five business day window. But he has deposed to his belief that it was because he mistakenly thought that the cleansing notice issued on 31 July 2019, the day of the announcement, was effective. He has, however, admitted that he was responsible for the necessary announcements for a previous placement by Superior Resources in May 2017, in which the shares were issued on 15 May 2017 and a cleansing notice was issued on 16 May 2017. So he cannot explain why, in the case of the more recent placement, a cleansing notice was issued on the day of the announcement, rather than within five business days after the day of the issue. The cleansing notice that was issued on 31 July 2019 said that the company had already issued the shares. That was incorrect and suggests inattention to the contents of the notice. 10 Mr Fernicola has reviewed the company's records and is not aware of any information which had, as at August 2019, been excluded from continuous disclosure announcements in accordance with ASX's continuous disclosure rules, and which investors and their professional advisers would reasonably require for the purpose of making an informed assessment of Superior Resources' assets and liabilities and other relevant matters. In other words, if a cleansing notice had been issued in the five business day window after the issue of shares in August 2019, it would not have contained any 'excluded information' that would have been required to be included in the notice by operation of s 708A(5), s 708A(6), s 708A(7) and s 708A(8). The cleansing notice that was issued on 31 July 2019 did not set out any excluded information. 11 The omission to lodge an effective cleansing notice permitting secondary sales of the shares issued in August 2019 was discovered very recently, as a result of due diligence in relation to a capital raising which is the subject of a trading halt which the company entered on 13 May 2020. That capital raising is proposed to include a placement and an entitlement issue. 12 At about 3.35 pm on Friday, 15 May 2020 Mr Fernicola and Peter Hwang, Superior Resources' managing director, received a telephone call from Julian Atkinson, a solicitor advising the company on the proposed capital raising. Mr Atkinson advised them that his due diligence in connection with the capital raising had revealed that because there had only been a cleansing notice on 31 July 2019, before the issue of the shares in August 2019, those shares had not been 'cleansed' so that it was not lawful to offer them for sale. Mr Atkinson advised the company to apply to the court for orders validating any sales of the shares and relieving shareholders who had sold of liability. Mr Fernicola has reviewed the company's share register and identified that some of the persons who took shares in the placement of August 2019 are no longer shareholders, which suggests that they have indeed sold some of those shares. 13 On instructions from Mr Fernicola and Mr Hwang, Mr Atkinson immediately notified ASX of the problem, and shares in Superior Resources have been suspended from trading since then. The court was notified of the application on the same day and the application was lodged on Monday 18 May 2020, the next business day. 14 Superior Resources intends, prior to 10.00 am on 20 May 2020, to issue a prospectus in relation to the entitlement issue and to announce the proposed capital raising, and to have the suspension of trading in its shares lifted with effect from 10.00 am on that day. 15 Mr Fernicola's evidence, which I accept, is that the omission to issue a cleansing notice within the five business day window after 15 August 2019 was an honest mistake about the lodgement timeframe which happened because he mistakenly thought that the cleansing notice issued on 31 July 2019 meant that secondary sales could lawfully occur. Some 12,375,000 shares from the placement of August 2019 have been transferred since they were issued.

Consideration 16 In Re Golden Rim Resources Ltd [2019] FCA 1206; (2019) 138 ACSR 134 at [28] I summarised the following principles, which I took from Banks-Smith J's analysis in Re iCandy Interactive Ltd [2018] FCA 533; (2018) 125 ACSR 369 (Re iCandy): (a) Section 1322 is remedial in nature and is to be given a liberal interpretation: Re iCandy at [43]. (b) The provision has been used to validate non-disclosure by shareholders who on-sell shares on a number of occasions: Re iCandy at [44]. (c) The company whose shares were on-sold in breach of the Corporations Act is an interested party with standing to bring the application: Re iCandy at [46]. (d) In determining whether those concerned in or party to the breaches acted honestly, the court looks to absence of evidence of dishonesty. The court is concerned only with whether those people acted honestly in the ordinary meaning of that term. The concept of honesty can embrace inadvertence: Re iCandy at [54]-[56]. (e) The honesty of the shareholders who sell shares without disclosure is relevant. It is open to the court to readily infer that those shareholders have acted honestly in on-selling the shares: Re iCandy at [58]. (f) However 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, as here, the relief sought is framed only in terms of the contraventions committed by on-sellers: Re iCandy at [83], [87], [101]. (g) The court takes into account whether the plaintiff has taken prompt action to remedy the error: Re iCandy at [54]. (h) In considering whether it is just and equitable to validate the on-sales (s 1322(6)(a)(iii)), the court will generally focus on the interests and conduct of the shareholders: Re iCandy at [110]. Those principles are applicable here. 17 Superior Resources seeks an order under s 1322(4)(a) to validate secondary sales of the shares issued on 15 August 2019. It is therefore necessary for at least one of the three requirements in s 1322(6)(a) to be satisfied. The company relied chiefly on the requirement that it is just and equitable that the order be made (s 1322(6)(a)(iii)) although it also contends that the person or persons concerned in the contraventions acted honestly (s 1322(6)(a)(ii)). 18 The words 'just and equitable' are words of the widest significance and do not limit the jurisdiction of the court to any case. It is a question of fact, and each case must depend on its own circumstances. The words give the court a wide discretion. There is no necessary limit on their generality, and they are to be applied in their ordinary meaning as calling for the exercise of judgment in the conventional way: Eddy Lau Constructions Pty Ltd v Transdevelopment Enterprise Pty Ltd [2004] NSWSC 273 at [45]-[47] (Barrett J), citing Loch v John Blackwood Ltd [1924] AC 783 at 791 and Thomas v Mackay Investments Pty Ltd (1996) 22 ACSR 294 at 302. 19 I am satisfied that it is just and equitable that the order sought be made. I have already accepted Mr Fernicola's evidence that the mistake was an honest and inadvertent one. There is nothing to suggest otherwise. It may also be readily inferred that persons who took shares in the placement and who subsequently offered to sell them or sold them did so in the honest belief that it was permissible to do so. That inference is strengthened by the fact that there was a cleansing notice announced at the time of the announcement of the issue, and it would take an understanding of somewhat complex legislative provisions to appreciate that the notice was ineffective to permit secondary sales. 20 The effect of not making the order sought will potentially be that sales of shares from the August 2019 placement that have already occurred will continue to be unlawful, and it may restrict further sales until August 2020, when the 12 month limitation on sales under s 707(3) expires. It could even require shares in Superior Resources to remain suspended from quotation on ASX until then, which will prevent capital raisings during that time, including the one that the company wishes to announce tomorrow. That would be likely to prejudice the company and all its shareholders. Since the mistake was an honest oversight, it is just and equitable to make orders avoiding those consequences. 21 The requirement as to acting honestly in s 1322(6)(a)(ii) has also been met. The only persons who could possibly be 'concerned in or party to the contravention or failure' within the meaning of that provision are the officers of Superior Resources, and the shareholders who have sold shares in the placement. I have found that Mr Fernicola acted honestly. There is no suggestion of dishonesty on the part of any of the other relevant people and I infer that they have acted honestly. That makes it unnecessary to determine whether it is only some smaller group of people who were 'concerned in or party to the contravention'. 22 Superior Resources also seeks an order under s 1322(4)(c) relieving persons who made such secondary sales from civil liability. Under s 1322(6)(b), the court cannot make that order unless it is satisfied that the persons who made the sales, being the persons who are subject to the civil liability concerned, acted honestly. I have already concluded that this requirement has been satisfied here. 23 It is also necessary in every case that the court is satisfied that no substantial injustice has been or is likely to be caused to any person: s 1322(6)(c). Mr Fernicola has deposed that he is not aware of any prejudice having been suffered by shareholders or anyone else as a result of the failure to comply with s 708A(5) and s 708A(6). He also says that Superior Resources is in compliance with its continuous disclosure obligations under the Corporations Act and the ASX Listing Rules. I have already mentioned that the evidence is that no 'excluded information' would have been included in the cleansing notice had it been announced during the five business day window. 24 However it is not uncommon for the court to ensure that no substantial injustice has been, or will be suffered by making provision for a period of time within which any person claiming that they have suffered substantial injustice, or are likely to suffer it, may apply to vary or to discharge the orders. Since the shares which are the subject of the application have been on issue for some nine months, and 12,375,000 of them appear to have been transferred, I consider it is appropriate to make an order of that kind here. 25 I am therefore satisfied that s 1322(6) does not preclude the orders sought. The matters discussed above are also in favour of exercising the court's discretion in favour of making the orders. The interests of shareholders who have acted honestly in selling shares that have been issued to them without an effective cleansing notice are particularly relevant. It is a legitimate purpose of exercising the discretion under s 1322(4) to relieve those shareholders of any civil liability. 26 It is also relevant to consider Superior Resources' approach to dealing with the omission, once discovered. The company has acted as promptly as it could have to rectify the omission. While, as I have said, the evidence suggests that inattention on the part of Mr Fernicola contributed to the error here, in his affidavit he says that the error has prompted Superior Resources' board to resolve to seek legal advice for every security issue, to ensure that the Corporations Act is complied with. I am satisfied that the omission does not reflect any culture of non-compliance at the company and it appears that reasonable efforts will be made to ensure that a similar failure does not occur again. 27 It is also relevant to note that Superior Resources has tendered letters from ASIC and ASX about the application. Both ASIC and ASX neither support nor oppose the application and they indicated an intention not to appear at the hearing of the application, and did not in fact appear. 28 On the basis of all these matters, it is appropriate to exercise the court's discretion to make orders largely in the terms sought. I certify that the preceding twenty-eight (28) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Jackson.