Environmental Clean Technologies Limited, in the matter of Environmental Clean Technologies Limited [2021] FCA 440

BEACH J: 1 Yesterday, Environmental Clean Technologies Limited applied for orders under s 1322 of the Corporations Act 2001 (Cth) to cure a failure under s 708A(5)(e) to lodge a cleansing notice in respect of the issue of new shares. 2 Because of the urgency of the matter, given that the shares in Environmental were in a trading halt because of the failure, I made the necessary orders then and there that operated to negate the effect of the omission under s 708A(5)(e), which omission would otherwise have entailed the consequence that any on-sales of such new shares would have amounted to an indirect issue within 12 months of the direct issue requiring disclosure to investors under Pt 6D.2, and thereby placed certain on-sellers in breach of their disclosure obligations for on-sales following the new issue. These are my reasons for making those orders. 3 Environmental's shares are listed for quotation on the Australian Securities Exchange. 4 This month, Environmental raised capital through a placement of shares to professional and sophisticated investors. The placement was announced on the relevant ASX platform on 7 April 2021. It concerned 1,500,000,000 shares, which were then issued on 15 April 2021. 5 Environmental was not required to comply with various disclosure requirements under Pt 6D.2 because the new shares were offered by way of placement to professional and sophisticated investors. But this did not avoid any disclosure obligations of on-sellers of the new shares within 12 months, absent the necessary cleansing notice. 6 Environmental omitted to file the necessary cleansing notice pursuant to s 708A(5) within 5 business days of issuing the new shares. 7 The company secretary of Environmental said that he was aware of the requirement to file a cleansing notice and sought to explain why it was not filed within 5 business days in the following terms: I was aware in broad terms that a cleansing notice ought to have been issued in relation to the Placement Shares. The issue of a cleansing notice was included in timetables for the Placement. However, as a result of various delays in obtaining approvals for certain documents relating to the Company's upcoming share purchase plan (SPP) and extraordinary general meeting (EGM), and consequential changes to the timetables relating to the SPP and EGM, the lodgement of a cleansing notice for the Placement Shares was overlooked. For that reason, the failure to lodge a cleansing notice was an oversight. 8 The explanation is thin but sufficient in the present circumstances. 9 Let me say something about the relevant statutory provisions. Generally, Pt 6D.2 of the Act imposes disclosure obligations concerning the issue and sale of securities. In particular, ss 706, 707, 708, 708A and 727 are relevant to the present context. I have recently discussed in detail these provisions in In the matter of 333D Limited [2021] FCA 349. Generally, I adopt that discussion, but it is worth briefly summarising the provisions in the present context. 10 Part 6D.2 requires the provision of information about securities when an offer to issue or sell them is made. In particular, an offeror of securities for issue must make disclosure to investors under Pt 6D.2, unless s 708 says otherwise (s 706), and an offeror of securities for sale within 12 months after their issue must make a disclosure to investors under Pt 6D.2 if (s 707(3)): (a) the shares were issued without disclosure; (b) they were issued by the company or acquired by the recipient for the purpose of being sold; and (c) ss 708 and 708A do not say otherwise. 11 An exception applies to an on-sale of shares where the issuer has provided a cleansing notice within 5 days of the issue of the securities, and before the sale offer is made (ss 708A(5) and (6)). If issued, such a notice allows quoted securities to be on-sold without further compliance with the disclosure requirements of Pt 6D.2. But if an issuer of shares does not issue a valid cleansing notice, then there is a prospect that the party to whom the shares are issued must itself cause such disclosure if it wishes to on-sell those shares within 12 months (s 707(3)). Further, there is the prospect of a contravention of the Act and the commission of an offence if such disclosure does not occur (s 727(1)). 12 Now I should note that Environmental was not required to make a disclosure under s 706 in respect of the issue of the new shares, as the issue was subject to relevant exceptions (s 708) concerning professional investors and sophisticated investors. But that does not address the position of the on-sellers. 13 It is for that reason that Environmental sought orders extending the time to enable it to give a valid cleansing notice, which in turn would ensure that the on-sale of the new shares within 12 months of the date of their issue would be exempt from the disclosure requirements which apply to a sale offer pursuant to s 707(3). Environmental also sought orders validating the on-sale of any of the new shares and absolving past sellers of liability under s 727(1) to the extent that any such on-sale had occurred prior to my making the necessary orders. 14 In my view, the evidence established a sufficient basis to make the orders sought under s 1322. 15 Now as I said in 333D, s 1322(4) is cast in very broad terms, but the power is not to be exercised lightly and is to be exercised having regard to the general purposes of the Act, including the provisions in respect of which relief is sought, the interests of all persons affected and the public interest in ensuring compliance with the Act. But the existence and exercise of any s 1322(4) power is conditioned by s 1322(6). 16 Section 1322(6)(c), which applies to all limbs of 1322(4), provides that I must not make any order under s 1322(4) unless I am satisfied "that no substantial injustice has been or is likely to be caused to any person". The first part of the disjunction "has been" invites an inquiry as to the consequences of the non-compliance sought to be cured. The second part of the disjunction "likely to be" focuses on the effect of the proposed order. 17 Further, s 1322(6)(a), which only applies to the s 1322(4)(a) limb, provides that I must not make an order under that limb unless I am satisfied that the act, matter or thing is essentially of a procedural nature (sub-limb (i)), or that the person concerned in or party to the contravention or failure acted honestly (sub-limb (ii)), or that it is just and equitable that the order be made (sub-limb (iii)). 18 Further, s 1322(6)(b), which only applies to the s 1322(4)(c) limb, provides that an order under that limb may not be made relieving a person of civil liability unless I am satisfied that the person acted honestly. As I said in 333D, it is not in doubt that the concept of acting honestly can embrace an active but incorrect consideration of an issue, a failure to turn one's mind to the relevant issue or a failure to appreciate the true significance of non-compliance. 19 But even if the pre-conditions or criteria in ss 1322(4) and (6) are satisfied, I still retain a discretion whether to make the orders sought. So, it is necessary to take into account whether the relevant applicant has taken prompt action to remedy the error. Further, the public interest is a relevant consideration in the exercise of my discretion. 20 I am satisfied that the requirements of s 1322(4) have been met and that there is no operative impediment by reason of my not being relevantly satisfied of a matter under s 1322(6). 21 The failure to file a cleansing notice appears to have been an honest mistake given the evidence that I have already set out. Further, Environmental acted promptly. The company secretary of Environmental said that he became aware of his mistake as a result of advice from Environmental's solicitors on 27 April 2021. He then requested that the ASX impose a trading halt to prevent further trading of the shares on that day. This came into effect at around 2.50 pm on 27 April 2021. Further, the timing of the present application was only four business days after the cleansing notice should have been filed. Moreover, because of the short amount of time that has elapsed since the period for filing the cleansing notice concluded on 22 April 2021, it is unlikely that any substantial injustice will have occurred. 22 As I say, Environmental's failure to lodge a cleansing notice was the result of an honest mistake. Moreover, it was just and equitable that the relevant orders be made. So, on any view, either or both of sub-limbs (ii) and (iii) of s 1322(6)(a) applied in relation to the order made under s 1322(4)(a). 23 Further, I could not make any order under s 1322(4) unless I was satisfied that no substantial injustice had been or was likely to be caused to any person (s 1322(6)(c)). But I was satisfied that there was no substantial injustice. Rather, if the orders were not made, injustice may have been suffered by those shareholders who may have inadvertently contravened their own disclosure obligations. In any event, I do not need to linger on this question. Any potential for injustice has been accommodated by giving liberty to apply to any person who may claim to suffer substantial injustice by reason of the orders to vary or discharge the orders within a limited period. In other words, in the unlikely event that a purchaser of shares from an on-seller may contend that the purchase would not have been made had the seller complied with its disclosure obligations, any potential for injustice can be remedied by invoking any liberty to apply. 24 It is for these reasons that I made yesterday afternoon's orders. I certify that the preceding twenty-four (24) numbered paragraphs are a true copy of the Reasons for Judgment of the Honourable Justice Beach.