Lake Resources N.L., in the matter of Lake Resources N.L. [2022] FCA 197

Introduction 1 This is an application for relief under s 1322 of the Corporations Act 2001 (Cth) (Corporations Act) relating to the failure to lodge certain "cleansing notices" in respect of the issue of four allocations of shares by the applicant, Lake Resources N.L. (Lake Resources). It is yet another in an increasing line of cases in which a corporate failure to comply with the disclosure rules in relation to share issues has led to urgent applications to the Court for this type of relief.

Background 2 Lake Resources was incorporated on 24 July 1997. Its business activities were previously as a diversified miner involved in several projects around the world. Its present activities focus on the mining and production of lithium and, predominantly, the development of a mine in South America. It was admitted to the official list of the Australian Securities Exchange (ASX) on 29 August 2001. It presently has a market capitalisation of $1.106 billion and has 1,222,501,497 ordinary shares on issue. 3 On 25 January 2021, it completed a significant capital raising of approximately $20.6 million in respect of which 125,000,000 shares were issued to institutional investors. Every two of those placement shares entitled the holder to apply for an attaching option with an exercise price of $0.30 within a two year period. In these reasons they are referred to as the "Placement Options". After obtaining the necessary shareholder approval, some 62,500,000 Placement Options were issued. 4 It appears that the period from 2021 was one of substantial growth for Lake Resources and early in 2021, Mr Garry Gill was made the company secretary to conduct the duties of that office which had previously been outsourced. A new Chief Financial Officer, Mr Peter Neilson, was also employed and he was given the position of joint company secretary. Necessarily this resulted in a period of adjustment within Lake Resources. 5 On 28 July 2021, Lake Resources announced a bonus option issue to all existing shareholders. A prospectus was lodged with the ASX in relation to this offer. The Bonus Option, as it is called, provided that it was exercisable on or before 15 October 2021. 6 Importantly, for the purposes of this matter, the share price of Lake Resources increased rapidly and substantially over the course of 2021. This had the result that during September and October 2021 many of the Placement Options and the Bonus Options were exercised. This had the further consequence that the workload for Mr Gill, in his role as a company secretary, increased substantially. He was required to deal with issuing shares in response to the exercised options whilst at the same time dealing with a range of other duties. In his affidavit filed in this application, Mr Gill identified those other matters which required his attention at this time. They included the following: (a) He was required to liaise with new auditors. (b) He was required to attend to the preparation of the financial year 2021 financial statements. (c) He had to attend disclosure which had to occur with respect to the Bonus Options which had been exercised, as well as with respect to the Placement Options which were also being exercised. During this period Lake Resources issued 32 separate tranches of shares for which a cleansing notice was required. It appears that the required notices were issued on 28 occasions. (d) He was also required to attend to the production of a prospectus for the Bonus and Additional Options which was issued on 17 August 2021 and a Refreshed Prospectus which was issued on 2 September 2021. (e) He was involved in resolving certain postal issues which arose with respect to the mailing out of information surrounding the Bonus Options, including dealings with shareholders as well as an external company which had been engaged to deal with the fallout from this issue. (f) As part of his ordinary duties Mr Gill was required to prepare for board meetings during this period as and when they occurred. (g) He was also involved in the production and making of numerous announcements to the ASX. 7 It was in this context that shares were issued to three entities consequent upon the exercise of the Bonus Options. They were: (a) On 17 September 2021, 700,000 shares were issued to Hudson Bay Master Fund Ltd and 6,062,600 shares were issued to Acorn Capital Ltd; (b) on 14 October 2021, 700,000 shares were issued to Hudson Bay Master Fund Ltd; (c) on 18 October 2021, 3,580,000 shares were issued to FiveT Capital Holding AG; and (d) on 21 October 2021, 1,000,000 shares were issued to Hudson Bay Master Fund Ltd. 8 No "cleansing notice" under s 708A(5) of the Corporations Act was lodged with the ASX in relation to these allocations. Had such notices been lodged, it would have had the consequence that no disclosure under Part 6D.2 of Chapter 6D of the Corporations Act would have been required. These share issues in respect of which the notices were not issued are referred to as the "uncleansed share issues" and the shares themselves are referred to as the "uncleansed shares". As the applicant had assumed that such notices had been issued, there was no relevant disclosures accompanying those share issues. 9 The omission to lodge a cleansing notice with those allocations of shares was not realised for some time. However, in late 2021, during the course of Mr Gill attempting to reconcile the company's share register with the records of the ASX, some discrepancies appeared which provided an indication that the omissions may have occurred. 10 From the affidavit material filed it is apparent that knowledge of the omissions only fully arose on 21 February 2022. On that day it was perceived that the uncleansed share issues might have been covered by the Prospectus for the Bonus Options, however that thought was rejected. 11 On 22 February 2022, the applicant entered into a voluntary trading halt on the ASX and issued an announcement to the ASX regarding the delayed lodging of the cleansing notices. 12 Very properly, Mr Stephen Promnitz, the CEO and Managing Director of Lake Resources, made contact with each of the shareholders to whom the uncleansed shares had been issued. He ascertained that they had on-sold them to other purchasers. 13 On the basis of the filed evidence it can be accepted that it would be extremely difficult to trace the current holders of the uncleansed shares. 14 On 24 February 2022, the applicant lodged cleansing notices with the ASX in respect to the four allocations with the ASX. 15 On 26 February 2022, the applicant filed the present application seeking orders extending the period of five business days referred to in s 708A(6)(a) of the Corporations Act to 24 February 2022. It also sought other related relief for the lodging of cleansing notices.

The legislative context 16 In general terms, Part 6D.2 of Chapter 6D of the Act deals with disclosure to investors in the course of fund raising. The form of disclosure required is prescribed by s 709. The general operation of Part 6D.2 was summarised by Banks-Smith J in Castillo Copper Limited, in the matter of Castillo Copper Limited [2018] FCA 602 at [4] - [7]: 4 Part 6D.2 of the Act deals with disclosure to investors. The manner of disclosure is prescribed in s 709. 5 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. 6 The applicant seeks to rely on the exemption from disclosure provided by s 708A(5), which provides that disclosure is not required if the company issues a notice in a particular form, referred to generally as a 'cleansing notice'. In order to be valid the cleansing notice must comply with s 708A(6). Relevantly, s 708A(6)(a) provides that the notice must be given to the ASX within five business days after the day on which the relevant securities were issued. The applicant failed to lodge notices within that time period. 7 There are other pre-requisites to the validity of a cleansing notice. For example, by s 708A(5)(b), the cleansing notice exception can only be relied upon 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. The applicant meets all other prerequisites. It seeks relief only because of its failure to lodge the notices with the ASX during the relevant five day period provided by s 708A(6)(a). 17 It is apparent that the rationale for disclosure is that the investors should be provided with all information which is reasonably required in order to make an informed assessment as to the acquisition of securities. Such information would include relevant financial and other material about the company, as well as an indication of the rights and liabilities which attach to the securities. 18 By s 707 of the Act, an offer of securities for sale requires appropriate disclosure to investors in certain circumstances. It is an anti-avoidance provision which seeks to prevent the circumvention of the disclosure requirements by various methods such as the issuing of shares to entities in respect of whom disclosure is not required who then on-sell to investors without disclosure. See generally, the discussion of Banks-Smith J in Re Pursuit Minerals Ltd [2018] FCA 1127. 19 The Act provides by s 708A several exceptions from the obligation to make disclosure on the issue of securities. 20 Section 708A of the Act relevantly provides: 708A Sale offers that do not need disclosure Sale offers to which this section applies (1) This section applies to an offer (the sale offer) of a body's securities (the relevant securities) for sale by a person if: (a) but for subsection (5), (11) or (12), disclosure to investors under this Part would be required by subsection 707(3) for the sale offer; and (b) the securities were not issued by the body with the purpose referred to in subparagraph 707(3)(b)(i); and (c) a determination under subsection (2) was not in force in relation to the body at the time when the relevant securities were issued. (1A) This section also applies to an offer (the sale offer) of a body's securities (the relevant securities) for sale by a person if: (a) but for subsection (5), disclosure to investors under this Part would be required by subsection 707(5) for the sale offer; and (b) the securities were not sold by the controller with the purpose referred to in subparagraph 707(5)(c)(i); and (c) a determination under subsection (2) was not in force in relation to the body at the time when the relevant securities were issued. … Sale offer of quoted securities - case 1 (5) The sale offer does not need disclosure to investors under this Part if: (a) the relevant securities are in a class of securities that were quoted securities at all times in the 3 months before the day on which the relevant securities were issued; and (b) trading in that class of securities on a prescribed financial market on which they were quoted was not suspended for more than a total of 5 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 relevant securities were issued; and (c) no exemption under section 111AS or 111AT covered the body, or any person as director or auditor of the body, at any time during the relevant period referred to in paragraph (b); and (d) no order under section 340 or 341 covered the body, or any person as director or auditor of the body, at any time during the relevant period referred to in paragraph (b); and (e) either: (i) if this section applies because of subsection (1) - the body gives the relevant market operator for the body a notice that complies with subsection (6) before the sale offer is made; or (ii) if this section applies because of subsection (1A) - both the body, and the controller, give the relevant market operator for the body a notice that complies with subsection (6) before the sale offer is made. (6) A notice complies with this subsection if the notice: (a) is given within 5 business days after the day on which the relevant securities were issued by the body; and (b) states that the body issued the relevant securities without disclosure to investors under this Part; and (c) states that the notice is being given under paragraph (5)(e); and (d) states that, as at the date of the notice, the body has complied with: (i) the provisions of Chapter 2M as they apply to the body; and (ii) sections 674 and 674A; and (e) sets out any information that is excluded information as at the date of the notice (see subsections (7) and (8)). Note 1: A person is taken not to contravene section 727 if a notice purports to comply with this subsection but does not actually comply with this subsection: see subsection 727(5). Note 2: A notice must not be false or misleading in a material particular, or omit anything that would render it misleading in a material respect: see sections 1308 and 1309. The body has an obligation to correct a defective notice: see subsection (9) of this section. 21 Section 1322 of the Act 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; (b) an order directing the rectification of any register kept by ASIC under this Act; (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); (d) an order extending the period for doing any act, matter or thing or instituting or taking any proceeding under this Act or in relation to a corporation (including an order extending a period where the period concerned ended before the application for the order was made) or abridging the period for doing such an act, matter or thing or instituting or taking such a proceeding; and may make such consequential or ancillary orders as the Court thinks fit. (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. 22 Some principles which might be applied by a court when exercising its power under s 1322 of the Corporations Act were recently stated by Jackson J in Re Superior Resources Ltd (2020) 144 ACSR 677, 680 - 681 [16] (Superior Resources) where his Honour said: [16] In Re Golden Rim Resources Ltd (2019) 138 ACSR 134; [2019] FCA 1206 at [28] I summarised the following principles, which I took from Banks-Smith J's analysis in Re iCandy Interactive Ltd (2018) 125 ACSR 369; [2018] FCA 533 (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].

Interested party 23 Section 1322 provides that an application may be made by an "interested party". Lake Resources meets that definition because: (a) the general purpose of the application is to extent the lodging of the "cleansing notices"; and (b) the extension of time will have the effect of relieving it and any of its shareholders who have sold the uncleansed shares from any civil liability: Re Sprint Energy Limited [2012] FCA 1354 [40].

Relief is within s 1322(4) 24 In this matter, Lake Resources seeks relief pursuant to ss 1322(4)(a), (c) and (d). 25 In relation to sub-paragraph (d) it seeks an order extending the time for the lodging of the cleansing notices in respect of the uncleansed share issues. The time limit for lodging such a notice was by s 708A(6)(a), five business days after the date on which the shares were issued. 26 In respect of s 1322(4)(a), relief is sought by way of orders that the notices, in respect of which the time for lodgement is extended, takes effect as if they had been lodged with the ASX on the date of issue of the shares. 27 Relief is also sought under sub-paragraph (a) that the offer for sale, or sale of those shares during the period after their issue and prior to the date of the court's order, is not invalid by any reason of: (a) the failure of any notice under s 708A(5)(e) to exempt sellers from the obligations of disclosure; and (b) the sellers' consequent failure to comply with s 707(3) or s 727(1) of the Act. 28 Relief is also sought under s 1322(4)(c) relieving any person to whom the shares were sold from any civil liability in respect of: (a) any failure of a notice under s 708A(5)(e) to exempt sellers from the obligations of disclosure; and (b) the sellers' consequent failure to comply with s 707(3) and s 727(1) of the Act. 29 All of the above relief is within the scope of s 1322. The importance of this section should not be underestimated. It contemplates that errors may occur in relation to complying with the intricacies of the Corporations Act. It is obviously remedial in nature and should be afforded a liberal operation: Re Wave Capital Ltd (2003) 47 ACSR 418 [27]. Nevertheless, the relatively untrammelled scope of s 1322(4) is circumscribed by the need to satisfy the requirements of s 1322(6).

Section 1322(6)(a) and (b) - honesty 30 There is no hint that Lake Resources or any of its officers acted other than honestly in relation to the omission to lodge the cleansing notice in respect of the uncleansed share issue. In the recitation of facts earlier in these reasons I have identified that the relevant officers were under immense pressure given their volume of work and the duties to which they were required to attend. Whilst the failure to lodge the notices was unfortunate and should be avoided, the evidence discloses that it was the result of a confluence of events occurring during a period of substantial growth for the company which overstretched the resources of the company secretary. In the circumstances, the failure to lodge the cleansing notices appears to have been an oversight and nothing more. 31 This conclusion is reinforced by the fact that the omission to lodge the cleansing notices occurred in relation to only four share allocations which, on the evidence, relates to a small fraction of the large number of transactions which Lake Resources were engaged at the relevant time. As mentioned earlier in these reasons, 28 other cleansing notices were duly issued in relation to the activities of the company around this time. 32 Further, the company's swift actions following the discovery of the omission also speak of an intention to comply with the regulatory requirements. It immediately notified the ASX of the issue of its failure or omission to lodge the cleansing notices. It made an appropriate announcement and voluntarily suspended trading in its shares. Its transparency and willingness to rectify the problem is both commendable and negates any suggestion of a lack of honesty on its part. 33 In these circumstances it is appropriate to conclude that Lake Resources and its officers acted honestly at all times. 34 There is some difficulty in relation to the conduct of any subsequent seller of the shares. It seems most unlikely that any such shareholder would have been aware of the failure to lodge the cleansing notice. That is largely a matter of inference but it is one which accords with good business common sense: Superior Resources [16(e)]. Mr Pyle, of Counsel, who appeared for the applicant today, very properly directed the Court's attention to this issue. As the authorities show, the difficulty with respect to subsequent vendors of uncleansed shares can be ameliorated in circumstances where Appendix 2A notices were issued in respect of the allocations. That occurred in this case in respect of the allotments or allocations on 17 September 2021 to Acorn and Hudson Bay respectively and a further allocation to Hudson Bay on 21 October 2021. That warranty carried by those notices effectively indicated to the purchaser that there was no evidence of non-disclosure in the dealing with the shares. That would no doubt give the purchasers of the shares some comfort. 35 There was no evidence of Appendix 2A notices in respect of the allocations on 14 October or 18 October. That being so, the inference made in respect of the other allocations does not arise. Nevertheless, in the present case, the inference should be drawn that the recipients of the allocations would not have been aware of the failure to lodge a cleansing notice and the subsequent non-disclosure. There is nothing in the circumstances of the issue of the uncleansed shares which might suggest that the omission occurred. 36 As Mr Pyle of Counsel submitted, there is simply no evidence of knowledge and indeed it might be surprising if there were. Mr Pyle referred to the fact that ASIC and the ASX have both been informed of the present application and have not sought to intervene or to oppose the orders made. That perhaps gives a slight inference that those regulatory authorities are unconcerned as to the possibility of any misconduct by subsequent vendors of the shares. 37 In the above circumstances, it should be concluded that the subsequent vendors of the shares also acted honestly.

No substantial injustice will be done 38 Here the evidence demonstrates that the granting of the relief will not cause substantial injustice to any person. It is significant that the price of the uncleansed shares and all issued shares in Lake Resources have continued to increase from 2021. That being so, any party who has acquired them will obviously not have suffered damage or loss as a consequence of the sale of their shares. It is unlikely that any party who has acquired their respective shares would seek to vitiate their purchase and thereby surrender any profits. 39 Further, as the evidence of Mr Promnitz discloses, had the cleansing notices been lodged with the uncleansed share issue, the information which they would have contained would have been somewhat minimal. In relation to the issue of shares on 17 September 2021, the only information which it would have relevantly contained concerned the negotiations between Lake Resources and a technology company, Lilac Solutions Inc (which negotiations had already been announced) and information about a refreshed prospectus for the Bonus Option and Additional Options which was, in any event, lodged on 2 September 2021. In relation to the other share issues, there was no "excluded information" which had to be or would have been included in a cleansing notice had it been issued at the time. 40 It follows that, to the extent to which information was not received as a consequence of the omissions, it was of minimal relevance and it is unlikely that any person has acted in reliance on its absence. 41 It was also submitted by Lake Resources that the orders sought in its application would only relieve the entities to whom the uncleansed shares were issued and any subsequent purchasers who on-sold them. Whilst some of the explicit orders sought are to that effect, the orders extending time for the lodgement of the notices and validating their effect would enure to the benefit of Lake Resources and its officers. I do not need to go into that issue any further, given my conclusion that it is most unlikely, if not impossible, that any party has suffered any loss or damage. 42 Further, and despite that latter point, the orders proposed to be made require the Court's orders to be publicised on the ASX website for a period of 28 days and permits a person to make an application within that time to vary or discharge any of them. That proviso is sufficient to protect people who might be affected in the circumstances of this case.

Conclusion as to s 1322(6) 43 It follows, from the foregoing, that Lake Resources has satisfied the jurisdictional facts identified in s 1322(6) and that discretion to make the order has been enlivened.

Should the power under s 1322(4) be exercised 44 In exercising the discretion in s 1322(4) it is not inappropriate to take into account the satisfaction of the jurisdictional facts in subs (6). That means that the remedial power is exercised in a context in which the non-compliance with the Act has, as in this case, been an honest mistake and no substantial injustice will be caused by the granting of relief. 45 Here, the making of the orders sought would have substantial benefits. They include: (a) it would regularise share issues which would otherwise be rendered problematic as a result of an oversight, which has not caused any damage; (b) it would relieve anyone who purchased the shares and on-sold them from potential liability or the concern of potential liability in circumstances where the potential for liability has arisen through no fault on their part; (c) if the orders are not made, the trading in Lake Resources shares will continue to be suspended on the ASX which would have the consequence that the company would no longer be able to rely upon the cleansing notice process in the Act for a period of 12 months. This would cause substantial hardship for Lake Resources in relation to the financing of its projects. The evidence discloses that it is currently engaged with international banks and broking firms and any extended period of suspension will be queried and this may impact upon the cost of finance to it. 46 Lake Resources have also adduced evidence that it has taken remedial action in relation to its internal processes so as to avoid any repetition of any similar issue in the future. It has reorganised its corporate structure and has engaged a dedicated assistant company secretary which will allow for greater focus on corporate compliance in the future. Mr Neilson, the Chief Financial Officer, has assumed a greater oversight in relation to meeting the regulatory requirements in relation to share issues on the exercise of options. That oversight includes the implementation of an enterprise resource planning system to ensure that all requirements are met. He will also instigate regular monitoring of the new compliance program to ensure that it operates to maintain compliance with all regulatory requirements. 47 It ought to be concluded that Lake Resources has taken adequate measures to remediate the circumstances in which the omission occurred in this case. 48 It should also be noted that the period of time in respect of which the extension is sought is s relatively short. It is measured in months rather than years. It is also relevant that the ASX and ASIC have been informed of these proceedings and neither has raised an objection. Each has been informed of this application and neither support nor oppose the making of the relief sought. That is significant given their respective regulatory roles which relate to the issues in the application. 49 Further, the fact that no shareholder has complained about the absence of the cleansing notices carries some weight. The most up-to-date information provided at today's hearing indicated that some shareholders have contacted Lake Resources but none have suggested they oppose the making of the orders.

Conclusion 50 In these circumstances, given the foregoing observations, it is appropriate to exercise the discretion in s 1322(4) to make the orders sought by Lake Resources. I certify that the preceding fifty (50) numbered paragraphs are a true copy of the Reasons for Judgment of the Honourable Justice Derrington.