RE SPORTSHERO LTD; EX PARTE SPORTSHERO LTD [2021] WASC 108 (14 April 2021)

1. Part 6D.2 of the Act imposes disclosure obligations in relation to the issue and sale of shares. In certain circumstances, these obligations can be satisfied by lodging what is commonly referred to as a cleansing notice or a prospectus.[1] If disclosure has not been made by the issuer and the shares are on‑sold within 12 months, the party to whom the shares are issued may be obliged to make disclosure.[2]
2. The cleansing notice exception can only be relied upon if the preconditions in s 708A(5) of the Act are met.
3. The cleansing prospectus exception applies 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.[3] Where this occurs, the disclosure requirements for offers and sales of that class of securities are met from that date.

1. Sportshero is an Australian public company whose securities are listed on the Australian Securities Exchange (ASX). Sportshero is a social media company focused on the development of real time sports and sports prediction mobile application.[4] As at 3 March 2021, Sportshero had a market capitalisation of approximately $15,198,997, with 474,968,643 shares on issue and 1,916 shareholders.[5]
2. On 22 January 2021, Sportshero issued the following securities:[6]

(a) 18,000,000 shares, pursuant to a subscription agreement between the plaintiff and First Growth Funds Limited (FGF) dated 3 November 2020 (FGF Shares). The FGF Shares were issued to 12 entities nominated by FGF. Each was a sophisticated or professional investor;[7]

(b) 7,720,303 shares, following the conversion of 175 convertible notes (Conversion Shares). The convertible notes were issued under a subscription agreement between the plaintiff and investors dated 30 June 2020,[8] organised by Mr Toby Lei of Novus Capital Limited (Novus Capital).[9] All of the Conversion Shares were issued to a sophisticated or professional investor;[10] and

(c) 1,510,756 shares to the plaintiff's chairman, Mr John Dougall (Chairman's Shares).

1. Sportshero failed to issue a cleansing notice within five business days as required by s 708A(6) of the Act.[11] The evidence of Mr Higginson, the company secretary and a director of Sportshero, is that it was his responsibility to prepare and lodge the cleansing notice. Mr Higginson deposed that in the course of preparing and releasing nine separate announcements to the ASX relating to the share issues on 22 January 2021, he overlooked the requirement to lodge a cleansing notice.[12]
2. On 2 March 2021, while conducting due diligence for the preparation of a prospectus, Mr Higginson became aware of Sportshero's failure to lodge a cleansing notice.[13]
3. Mr Higginson immediately informed Sportshero's chief executive officer and contacted the plaintiff's solicitors to obtain legal advice.[14] Sportshero's solicitors advised Mr Higginson that the failure to lodge a cleansing notice would need to be rectified by making an application to this court and that the plaintiff's shares would need to be placed into a trading halt.[15]
4. On 3 March 2021, Sportshero sought a trading halt to allow it time to consider the issues in relation to this application.[16] On the same date, Sportshero notified Mr Anoosh Manzoori, the executive chairman of FGF, of Sportshero's failure to lodge a cleansing notice.[17]
5. On 5 March 2021, Sportshero lodged a cleansing notice in respect of all of the shares issued on 22 January 2021.[18] On the same date, Mr Higginson notified Mr Lei of Novus Capital of Sportshero's failure to lodge a cleansing notice in respect of the Conversion Shares and requested that Mr Lei advise all holders of the convertible notes.[19] Mr Higginson deposed that Mr Dougall, by virtue of his position as a director and chairman of Sportshero, is taken to have notice of the error.[20]
6. Mr Higginson has conducted a review of the trading history of the shares issued on 22 January 2021. His evidence is that a portion of the FGF Shares have been sold since 22 January 2021 but that none of the other shares have been sold.[21] Mr Higginson also considered whether, as at 22 January 2021, Sportshero could have lodged a cleansing notice. His evidence is that it could have lodged a cleansing notice on that date.[22]
7. On 5 March 2021, Sportshero, by its solicitors, notified the ASX and ASIC of Sportshero's failure to lodge a cleansing notice and its intention to commence proceedings in this court for curative orders pursuant to s 1322 of the Act.[23]
8. On 5 March 2021, Sportshero sought and obtained a voluntary trading suspension from the ASX.[24]
9. On 9 March 2021, Sportshero commenced proceedings in this court.
10. Since discovery of the contraventions, Sportshero has taken steps to ensure the company maintains compliance with the Act and that a breach of the same nature does not take place again. The evidence before me is that Sportshero has reviewed its processes for ensuring compliance with its obligations under the Act and the ASX Listing Rules and has prepared a written checklist setting out the administrative steps required in respect of any future issue of shares or other securities by Sportshero.[25]

Power under s 1322 of the Act to grant the relief sought

(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.

...

(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.

1. In considering an application under s 1322 of the Act, the essential principles are:[26]

(a) the prescriptive requirements of the wording in s 1322(4) and the pre-conditions in s 1322(6) need to be satisfied;[27]

(b) the court retains a discretion to whether it makes the orders sought;

(c) the broad powers reflect a legislative policy that the law should not inflict unnecessary liability or inconvenience or invalidate transactions because of non-compliance with its requirements where such non-compliance is the product of honest error or inadvertence and where the court can avoid its effects without prejudice to third parties or to the public interest in compliance with the law;[28]

(d) implied limitations to the broad powers in s 1322 will not be readily implied.[29] Section 1322 is remedial in character and should be applied broadly;

(e) the court can make orders under s 1322(4)(a) on conditions and also make such consequential and ancillary orders as it thinks fit; and

(f) an order can be made under s 1322(4)(a) notwithstanding that the contravention or failure concerned resulted in the commission of an offence.[30]

Disposition Application by an 'interested party'

1. I accept that Sportshero is an interested party who may seek relief, as required by s 1322(4).[31]

1. The ASX indicated that it was not in a position to comment on the matter as it was still in the process of reviewing the application.[32] In light of the urgency with which the matter was brought, I was satisfied that it was appropriate to proceed with the hearing of the application in the absence of the ASX's position being known to the court.
2. ASIC indicated that it neither supports nor opposes the application and did not intend to appear at the hearing of the matter.[33]

Application for extension of time under s 1322(4)(d)

1. The test under s 1322(4)(d) was set out by Vaughan J in Re Jaxsta Ltd; Ex parte Jaxsta Ltd:[34]

As to s 1322(4)(d), I derived more guidance from the two-stage process embraced by Barker J in Blaze Asset Pty Ltd v Target Energy Ltd.

There Barker J stated:

'[T]he exercise of the power under s 1322(4) [referring to s 1322(4)(d)] involves in effect a two stage process. First, the Court needs to determine whether, having regard to the circumstances of the case and the general objects of the [Corporations Act 2001 (Cth)], it is appropriate to make an order extending a relevant period, or abridging a relevant period. Secondly, if those circumstances are made out, then the Court must address the question whether any substantial prejudice has been or is likely to be caused to any person by the making of such an order.'

Also, the power under s 1322(4)(d) must be exercised having regard to the general objects and purposes of the relevant statutory provision within the Corporations Act 2001 (Cth) - here the statutory purpose evinced by s 723(3). The court's order must not undermine the reasons for the requirements of the Act. The power must be exercised having regard to the interests of all parties affected and the public interest in ensuring compliance with the Act. (footnotes omitted)

1. The period to be extended may be extended even if it has expired. In this case, the period expired on 1 February 2021.
2. For the following reasons, I was and am satisfied that, in the circumstances of this case, it is appropriate to grant the extension of time within which to lodge the cleansing notice until 5 March 2021 as sought by Sportshero in their originating process.
3. First, the extension sought is for a short period, being just over one month. Courts have previously issued extensions for the lodgement of cleansing notices for similar periods.[35]
4. Second, the cleansing notice was not lodged due to inadvertence and was promptly rectified upon its discovery by Sportshero. Mr Higginson's evidence is that he simply overlooked the requirement to lodge a cleansing notice due to the work he was completing for the preparation and release of numerous ASX announcements.[36] As soon as he became aware of the error, he immediately sought the advice of external counsel to rectify the position.
5. Third, in the absence of an extension, there are adverse consequences for Sportshero and its shareholders. Unless orders are made by the court, Sportshero's shares will continue to be suspended from trading which will deny all shareholders the opportunity to trade their shares. In addition, the company will potentially lose its ability to lodge a cleansing notice under s 708A(5)(b) of the Act, which will require the preparation of a prospectus for future issues of shares.
6. Fourth, the shareholders who have purchased shares on market since 22 January 2021 may have purchased some of the shares the subject of the January share issue. Given that any such sales will have occurred without disclosure, this potentially means that these transactions are void or voidable creating title issues for these parties.
7. Fifth, in facilitating the transaction as originally contemplated, the making of the orders sought is consistent with the conduct of commerce generally.[37] Section 1322(4)(d) of the Act should be exercised in a way which does not unnecessarily stifle corporate and financial activity on technical grounds.[38]
8. Sixth, Sportshero brought the application without delay. Sportshero first became aware of the issue on 2 March 2021 and approached the court on 9 March 2021.
9. Seventh, the additional orders sought by Sportshero provide for notice to be given to all persons affected and the ability for them to apply to raise any matters with the court.
10. Eighth, ASIC does not oppose the application, nor do any shareholders of Sportshero.

No substantial injustice (s 1322(6)(c))

1. I have considered the classes of persons who may be impacted by the making of these orders.
2. First, the people who were issued the FGF shares. The prejudice to them is that any sale of these shares may be void or voidable for want of compliance with the statutory requirements.[39]
3. Second, any people who purchased shares from on-sellers may have on‑sold the shares themselves by trading on the open market of the ASX since they were issued. There is evidence before me that a portion of the FGF shares have been traded.[40] Both these sales and any further sales of these shares will have occurred without the requisite disclosure under the Act, pt 6D.2.
4. I find that there is no basis for inferring that substantial injustice has been or is likely to be caused to any person by the making of the proposed orders.
5. I accept that if the orders sought are not made, there may be substantial injustice to Sportshero as the offers of and sales of shares may be void or voidable. This could give rise to commercial uncertainty and expense for the company as it must remain involved in problems caused by void or voidable offers and sales of its shares. I also accept that there may be substantial injustice to the other ordinary shareholders of Sportshero, as they may not be able to trade their shares on an open market if the ASX does not lift the current suspension from trading.
6. It is usual in cases such as these to provide an opportunity for shareholders or other parties to raise a complaint about the proposed orders. The usual timeframe is that there be liberty to apply within 28 days from the date of the order. I accept that this is an appropriate timeframe in this case.

1. I accept and find that there is no evidence of any substantial misconduct, serious wrongdoing or flagrant disregard of the corporate law or the company's constitution so as to warrant refusal of the relief sought.[41]
2. There is nothing in the evidence before me that suggests that any minority shareholder interest might be oppressed or any other interest might be affected. I am satisfied that all shareholders impacted by the contravention as well as the ASX and ASIC have been notified of Sportshero's contravention of the Act and given notice of this hearing.[42] No shareholder or either regulator has sought to intervene in the hearing or given notice that they want to be heard on the application.
3. In exercising the discretion to grant relief under s 1322(4) of the Act, a relevant factor is the promptness with which Sportshero has sought to remedy the irregularity once it has been identified.[43] In this case, on 2 March 2021, Sportshero discovered that it had not lodged the required cleansing notices in relation to the share issues on 22 January 2021. One day after realising this non-compliance, on 3 March 2021, Sportshero sought a trading halt to allow it time to consider the issues in relation to this application before commencing these proceedings on 9 March 2021. I accept that Sportshero acted diligently after being informed of the issue.

Application for orders under s 1322(4)(a)

1. Sportshero also seeks a declaration under s 1322(4)(a) of the Act that any offer for sale or sale of the securities issued on 22 January 2021 is not invalid, by reason of the failure of Sportshero to issue a cleansing notice pursuant to s 708A(6) of the Act or to issue a cleansing prospectus pursuant to s 708A(11) of the Act to exempt the sellers from the obligation of disclosure under the Act, or the sellers' consequent failure to comply with s 707(3) and s 727(1) of the Act.
2. I note that:

(a) the proposed orders are framed in a declaratory form;

(b) the act, matter or thing is the offer and sale of securities;

(c) the contravention is the offering of securities for sale or sales without proper disclosure in contravention of s 707(3) of the Act.[44]

Pre-conditions in s 1322(6)(a)

1. Sportshero submitted that the pre-condition in s 1322(6)(a)(ii) of the Act is satisfied in that there is no failure of the persons concerned or the company to act honestly.
2. In Re ICandy Interactive Ltd, Banks-Smith J undertook a comprehensive review of the relevant principles in respect of whether there is no failure of the persons concerned or the company to act honestly.[45] Relevantly, Banks‑Smith J considered that:

(a) when determining whether someone has acted honestly for the purposes of s 1322, the courts look to absence of evidence of dishonesty and prompt action to remedy the error;[46]

(b) the concept of acting honestly can embrace:[47]

(i) inadvertence or failure to turn one's mind to an issue;

(ii) active but incorrect consideration of a legal issue;

(iv) failure to understand or appreciate the significance of non-compliance; and

(c) when testing for honesty, the authorities reveal that the courts look at the company itself, the directors, the company secretary and others as may be concerned.[48]

1. In this case, I accept that the error in failing to lodge a cleansing notice for the shares issued on 22 January 2021 was honest and inadvertent. Mr Higginson failed to consider whether a cleansing notice or prospectus was required to be lodged and did not seek legal advice. I accept there was no deliberate disregard by Sportshero or its officers of the obligations under ch 6D of the Act.
2. I also accept that this is not a case where there has been a failure of Sportshero's directors to take an active interest in the company's compliance with the Act or to properly define roles of company officers. I accept that Sportshero's directors had delegated this responsibility to the company secretary.
3. For these reasons, I consider it is appropriate to make the orders sought under s 1322(4)(a) of the Act.

1. For the following reasons, I also consider it is appropriate in this case to make the ancillary orders sought by Sportshero. First, the evidence before me is that some of the shares the subject of the 22 January 2021 issue have been sold and it cannot be discounted that there have been re-sales of these shares. In these circumstances, I consider that it is appropriate to make the orders sought to remove any question as to title in the shares of Sportshero. Second, at the time the application came on for hearing, a cleansing notice had been lodged.[49] For that reason, the order did not concern a future act but a past act. Third, I am satisfied that the conduct of Sportshero in failing to lodge the cleansing notice required under the Act was inadvertent and not in blatant disregard of its obligations under the Act. I do not consider that public policy will be undermined by granting Sportshero the relief sought.

1. For these reasons, I was and am satisfied that in the circumstances of this case, relief should be granted in the terms sought by Sportshero. Accordingly, at the conclusion of the hearing, I made orders in the form annexed to these reasons as 'Annexure A'.

I certify that the preceding paragraph(s) comprise the reasons for decision of the Supreme Court of Western Australia.

[1] Corporations Act, s 708A(5).

[2] Corporations Act, s 707(3). See also Re Golden Gate Petroleum Ltd [2010] FCA 40; (2010) 77 ACSR 17.

[3] Corporations Act, s 708A(11).

[4] Affidavit of Michael Higginson filed 9 March 2021 [12].

[5] Affidavit of Michael Higginson filed 9 March 2021 [13].

[6] Affidavit of Michael Higginson filed 9 March 2021 [7].

[7] Affidavit of Michael Higginson filed 9 March 2021 [25] - [27], 'MH-09'.

[8] Affidavit of Michael Higginson filed 9 March 2021 [32] - [37].

[9] Affidavit of Michael Higginson filed 9 March 2021 [33].

[10] Affidavit of Michael Higginson filed 9 March 2021 [33], 'MH-15'.

[11] Affidavit of Michael Higginson filed 9 March 2021 [7], [19] - [21].

[12] Affidavit of Michael Higginson filed 9 March 2021 [20] - [21].

[13] Affidavit of Michael Higginson filed 9 March 2021 [45].

[14] Affidavit of Michael Higginson filed 9 March 2021 [46].

[15] Affidavit of Michael Higginson filed 9 March 2021 [46].

[16] Affidavit of Michael Higginson filed 9 March 2021 [46] - [47].

[17] Affidavit of Michael Higginson filed 9 March 2021 [53], 'MH-09', 'MH-21'.

[18] Affidavit of Michael Higginson filed 9 March 2021 [54], 'MH-23'.

[19] Affidavit of Michael Higginson filed 9 March 2021 [53], 'MH-22', 'MH-15'.

[20] Affidavit of Michael Higginson filed 9 March 2021 [53].

[21] Affidavit of Michael Higginson filed 9 March 2021 [51], 'MH-20'.

[22] Affidavit of Michael Higginson filed 9 March 2021 [52].

[23] Affidavit of Michael Higginson filed 9 March 2021 [56], 'MH-26', 'MH-27'.

[24] Affidavit of Michael Higginson filed 9 March 2021 [63], 'MH-33'.

[25] Affidavit of Michael Higginson filed 9 March 2021 [57] - [59], 'MH-28'.

[26] Re Helios Energy Ltd [2017] FCA 840; (2017) 122 ACSR 174.

[27] Weinstock v Beck [2013] HCA 14; (2013) 251 CLR 396 [43], [53] and [64].

[28] Re Wave Capital Ltd [2003] FCA 969; (2003) 47 ACSR 418, 426 [29].

[29] Weinstock v Beck [43], [55] - [56] and [64].

[30] Corporations Act, s 1322(5).

[31] Re Caeneus Minerals Ltd [2018] FCA 560 [38]; Re Classic Minerals Ltd [2018] FCA 2039 [34].

[32] Affidavit of James Patrick McAuliffe filed 10 March 2021 [7].

[33] Affidavit of James Patrick McAuliffe filed 10 March 2021 [11], 'JM-03'.

[34] Re Jaxsta Ltd; Ex parte Jaxsta Ltd [2018] WASC 390 [41] - [43].

[35] Re Austpac Resources NL [2010] NSWSC 1438; Whitehawk Limited [2020] WASC 388.

[36] Affidavit of Michael Higginson filed 9 March 2021 [20] - [21].

[37] See Re Jaxsta Ltd; Ex parte Jaxsta Ltd [50].

[38] Blaze Asset Pty Ltd v Target Energy Ltd [2009] FCA 698; (2009) 177 FCR 488 [33].

[39] Re Poseidon Nickel Ltd [2018] FCA 1063; (2018) 129 ACSR 57, 67 [63].

[40] Affidavit of Michael Higginson filed 9 March 2021 [51], 'MH-20'.

[42] Affidavit of Michael Higginson filed 9 March 2021 [53], [56], 'MH-09', 'MH-15', 'MH-21', 'MH-22', 'MH‑26', 'MH-37'; Affidavit of James Patrick McAuliffe filed 10 March 2021 [4] - [13], 'JM-01', 'JM-02', 'JM-03', 'JM-05', 'JM-06'.

[43] Re G8 Communications Ltd [2016] FCA 297; (2016) 112 ACSR 22, 34 [60].

[44] See Re Caeneus Minerals Ltd [39] - [40]; Re Classic Minerals Ltd [35] - [36].

[45] Re ICandy Interactive Ltd [2018] FCA 533; (2018) 125 ACSR 369 [54] - [104].

[46] Re ICandy Interactive Ltd [54], [106] - [107].

[48] Re ICandy Interactive Ltd [60] - [104].

[49] Affidavit of Michael Higginson filed 9 March 2021 [54], 'MH-23'.