Impression Healthcare Limited, in the matter of Impression Healthcare Limited [2019] FCA 772

DAVIES J: 1 On 20 May 2019 I heard an application by the applicant ("the Company") for orders under s 1322 of the Corporations Act 2001 (Cth) ("the Act") with respect to offers for the on-sale of the Company's securities within 12 months after their issue. Section 727(1) of the Act provides that a person must not make an offer of securities that needs disclosure to investors under Part 6D.2 unless a disclosure document for the offer has been lodged with ASIC. By s 707(3) of the Act, an offer of a body's securities for sale within 12 months of issue needs disclosure under Part 6D.2 if the body issued the securities without disclosure and the person to whom the securities were issued acquired them with the purpose of selling or transferring the securities. Section 707(3) is subject to certain exceptions in ss 708 and 708A. Relevantly, by s 708A(5) of the Act, the sale offer does not need disclosure if five conditions are met. One of those conditions is that "the body gives the relevant market operator for the body a notice … before the sale offer is made": s 708A(5)(e)(i). Such a notice - typically referred to as a cleansing notice - must comply with the conditions set out in s 708A(6). One of those conditions is that the cleansing notice is issued within five business days after the day on which the securities were issued by the body: s 708(6)(a). As McKerracher J explained in Re Golden Gate Petroleum Ltd (2010) 77 ACSR 17; [2010] FCA 40 at [36] ("Golden Gate"), the policy underlying s 708A "appears to be that no further disclosure will be required where investors have the benefit of information comparable to or otherwise available in a prospectus". 2 Following the hearing, I made the orders sought. These are my reasons for making the orders. 3 The Company is a manufacturer and supplier of custom fit mouthguards that are provided through an online shop. It is listed on the Australian Securities Exchange ("the ASX"), trading under the ASX Code "IHL". During the period from 21 November 2016 to 26 April 2019, the Company conducted a number of capital raisings including, relevantly: (1) on 6 January 2017, the issue of 625,000 fully-paid ordinary "IHL" shares; (2) on 6 December 2017, the issue of 270,270 fully-paid ordinary "IHL" shares and 26,394,430 listed "IHLOB" options; (3) on 5 March 2018, the issue of 42,453,450 fully-paid ordinary "IHL" shares; (4) on 28 August 2018, the issue of 6,000,000 fully-paid ordinary "IHL" shares and 20,113,362 listed "IHLOB" options (expiring on 30 September 2020); (5) on 20 September 2018, the issue of 16,800,000 fully-paid ordinary "IHL" shares and 13,100,000 listed "IHLOB" options (expiring on 30 September 2020); (6) on 22 November 2018, the issue of 85,534,312 (82,500,000 plus 3,034,312) fully paid ordinary "IHL" shares and 95,677,210 (82,500,000 plus 13,177,210) listed "IHLOB" options; (7) on 30 January 2019, the issue of 77,600,000 fully-paid ordinary "IHL" shares and 6,500,000 listed "IHLOB" options (expiring 30 September 2020) were issued; and (8) on 26 April 2019, the issue of 1,000,000 options and 9,269,086 shares. 4 Each of these capital raisings was made without disclosure under Part 6D.2 of the Act. As no cleansing notice was issued by the Company in relation to these capital raisings (save for the 26 April issue), investors who had been issued with securities in those capital raisings who had on-sold the securities within 12 months of issue may have contravened ss 707(3) and 727(1) of the Act by offering or trading shares without making the required disclosures under Part 6D.2 of the Act. An analysis performed by Mr Glenn Fowles, company secretary of the Company, who swore an affidavit in support of the application, revealed that there had been a number of on-sales of securities. 5 Mr Fowles has been company secretary of the Company since 5 December 2017. He deposed that on 1 May 2019 he received an email from Ms Cheng Tang, senior advisor, Listings Compliance (Melbourne) of the ASX, attaching a letter concerning an Appendix 3Y that the Company had lodged with the ASX on 30 April 2019, notifying of a change to a notifiable interest of a director that occurred in connection with the 30 January 2019 capital raising. In the covering email to which the ASX letter was attached, Ms Tang noted that in the Appendix 4C lodged for the period 31 March 2019, $735,000 was raised from the issue of shares. Ms Tang asked whether this capital raising was undertaken in reliance on s 708A of the Act and, if so, whether a cleansing notice had been lodged. 6 Mr Fowles deposed that before receiving and reading that email, he had heard of the term "cleansing notice" but he was not aware of the circumstances in which a cleansing notice was required to be issued and he had not considered whether a cleansing notice was required for, or should otherwise have been issued in connection with, the capital raisings that had been undertaken by the Company. Nor had he sought legal advice on the Company's disclosure obligations in connection with those capital raisings. 7 Upon receiving the email from Ms Tang, Mr Fowles contacted Mr David Schiavello, a partner at MinterEllison, and sought legal advice on whether cleansing notices should have been lodged in respect of the Company's 30 January 2019 capital raising and any of the earlier capital raisings undertaken by the Company since 2016. On 2 May 2019, the Company issued a cleansing notice in respect of shares and options that had been issued by the Company on 26 April 2019. 8 Mr Fowles deposed that over the course of 3 May and 4 May 2019 he came to understand that the Company should have issued cleansing notices in connection with the 30 January 2019 capital raising and some, but not all, of the earlier capital raisings it had made in order to facilitate subsequent trading in those listed securities. He also deposed that he became aware that the warranty given in the Appendix 3B forms lodged with the ASX in respect of each of the relevant capital raisings to the effect that "an offer of the securities for sale within 12 months after their issue will not require disclosure under s 707(3) or s 1012C(6) of the Corporations Act" was incorrect. 9 The following steps were promptly taken by the Company to remedy the earlier irregularities: (a) Before market open on 6 May 2019, the Company made a request to the ASX pursuant to r 17.1 of the ASX Listing Rules for an immediate trading halt on its securities. In the trading halt request, the Company advised the ASX, amongst other things, that: The trading halt is sought to allow the Company to seek clarification and make an announcement regarding compliance with s 708(A) of [the Act] in respect of Appendix 3B lodged on 30 January 2019. (b) Before market open on 6 May 2019, the ASX granted the trading halt request and as a consequence none of the Company's securities have been traded since 3 May 2019. (c) The Company thereafter sought and obtained a voluntary suspension on the trading of its listed securities which took effect from 8 May 2019 when the trading halt ended. That suspension remained operative as at the time of the hearing on 20 May 2019. (d) Mr Fowles took steps, including by consulting the books and records of the Company, to satisfy himself that a cleansing notice should have been issued in connection with the January 2019 capital raising as well as the offers of listed securities made by the earlier capital raisings undertaken by the Company. (e) Upon learning that cleansing notices were required in respect of those other capital raisings, the Company also prepared a "cleansing" prospectus to facilitate and regularise future trading in all of the affected securities. The Company lodged that prospectus on 10 May 2019. 10 Three of the relevant capital raisings occurred before Mr Fowles commenced as company secretary with the Company. He deposed that he had attempted to make contact with the previous chairman, Mr Kelvin Smith, and the previous company secretary, Mr Roberto Maruso, to confirm why cleansing notices were not issued for those three capital raisings, but at the time of swearing his affidavit he had not received a reply. Based on his investigations of the books and records available to him, he believed that the Company failed to give cleansing notices in connection with those earlier capital raisings either because the relevant officers and employees of the Company at the time were unaware that a cleansing notice was required or the then company secretary inadvertently overlooked lodging the required cleansing notices. He deposed there was no suggestion in any of the Company records he had seen that the failures to give cleansing notices in respect of the capital raisings that occurred before he joined the Company were deliberate. 11 On 14 May 2019 MinterEllison gave notification to ASIC that it had filed an application seeking relief under s 1322(4) of the Act and provided ASIC with a copy of the application and the supporting affidavit of Mr Fowles. MinterEllison confirmed that the application was listed for hearing at 10.15 am on 20 May 2019 and asked if ASIC could advise whether it wished to be heard on the return of the application. On 17 May 2019, MinterEllison served a copy of the outline of submissions in support of the application. The same day, ASIC advised the Company that it neither supported nor opposed the application and did not intend to appear at the hearing. It further advised that in reaching this position, ASIC had considered a number of factors, including that the application did not seek relief in respect of any contraventions of the law committed by the Company, its directors or secretary and ASIC reserved its rights in respect of such contraventions, if any. ASIC also noted that the Company had not requested that ASIC exercise any of its exemption or modification powers in respect of the matter. 12 On 17 May 2019, MinterEllison also notified the ASX of the proposed application and provided the application and submissions filed with the Court. MinterEllison advised the ASX that a copy of the supporting affidavit would also be provided if of assistance and that ASIC had indicated that it did not intend to appear at the hearing and did not oppose or support the making of the orders sought by the Company. Advice was sought from the ASX as to whether it wished to make submissions or be heard on the return of the application. As at the commencement of the hearing on 20 May 2019, no response had been received from the ASX. The matter was called outside Court but there was no appearance by anyone on behalf of the ASX. 13 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); … (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): … (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; … 14 Very recently in the matter of Re 5G Networks Limited [2019] FCA 698, I summarised the relevant principles helpfully set out by Banks-Smith J in Re ICandy Interactive Limited [2018] FCA 533 ("ICandy") as follows: (a) 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. It has been utilised to validate non-disclosure by shareholders who on-sell shares on a number of occasions: at [43]; (b) Section 1322 may be invoked even where an irregularity is deliberate: at [44]; (c) When determining whether someone has acted honestly for the purposes of s 1322(6)(a)(ii) of the Act, the Court looks to an absence of evidence of dishonesty. It also takes into account whether the applicant has taken prompt action to remedy the error: at [54]; and (d) 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].

Interested party 15 Although seeking relief for the benefit of shareholders, and not as to any potential liability on its part or that of its directors, the Company is clearly an "interested person" and has standing to bring the application: see ICandy and the cases cited at [46].

Honesty 16 There was evidence that some shareholders to whom shares had been issued under the capital raisings had on-sold their shares within 12 months after their issue. Although there was no direct evidence before the Court that those shareholders had acted honestly, it is reasonable to infer that they did having regard to the Appendix 3B issue announcement for the capital raisings which included the incorrect warranty that an offer of the securities for sale within 12 months after their issue did not require disclosure under s 707(7) of the Act. It may be assumed that such shareholders relied on that warranty and there is no basis for suggesting that the shareholders have acted other than honestly: see also ICandy at [58]-[59]. 17 I was also satisfied on the evidence of Mr Fowles that the failure to issue the cleansing notices was due to inadvertence, rather than disregard for the relevant provisions of the Act. Whilst Mr Fowles did not obtain legal advice which, with the benefit of hindsight, should have been obtained, that does not mean that the Company did not act honestly: Re Silver Lake Resources (2012) 87 ACSR 436; [2012] FCA 32 at [18] (Siopis J). Instead, the Company "acted honestly but in ignorance of the legal requirements applicable" in the particular circumstances: Golden Gate at [50]. I am also satisfied based on Mr Fowles' inquiries and investigations of the Company records that the failures to give cleansing notices in respect of the three capital raisings that occurred before he joined the Company were not deliberate. 18 It is also relevant to take into consideration that once the Company became aware of the error, the Company took prompt steps to remedy the irregularities. 19 I was therefore satisfied that the honesty requirement in s 1322(6)(a)(ii) is met.

Just and Equitable 20 I was also satisfied that the just and equitable ground under s 1322(6)(a)(iii) is met. Having regard to the incorrect representation in the Appendix 3B issue announcements that disclosure was not required, it can be assumed that shareholders made offers or on-sold in good faith and on the assumption that no disclosure was required by them. The inadvertent error on the part of the Company to issue cleansing notices is not a reason to deny relief: ICandy at [109]-[113].

No substantial injustice 21 The orders sought would clearly be in the interests of shareholders who have on-sold their shares as they risk exposure to claims against them, absent validation. The material does not indicate a reason for inferring that validation of the share sales would prejudice any person but, 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 60 days to vary or set aside the orders. In accordance with the approach taken in similar cases there is no basis for considering that public policy would be undermined by the making of the orders. 22 In the circumstances I did not consider there will be any substantial injustice in making the orders: ICandy at [114]-[118]. 23 Finally, I took into consideration that both ASIC and the ASX were on notice of the application but neither authority attended the hearing to oppose it. I certify that the preceding twenty-three (23) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Davies j.