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[2022] WASC 188
General information, not legal advice.
Supreme Court of WA
2022-05-30
Hill J
Original judgment source is linked above.
1 On 6 April 2022, the plaintiff, Sprintex Limited (Sprintex), filed an originating process seeking orders under s 1322(4)(a) of the Corporations Act 2001 (Cth) (Act) relating to contraventions of s 708A(11), s 707(3) and s 727(1) of the Act. The contraventions occurred following the issue of shares by the plaintiff on 9 February 2022, without the prior lodgement of a cleansing prospectus pursuant to s 708A of the Act.
2 Sprintex has provided a frank and detailed explanation as to the circumstances surrounding the issue of these shares. Based on the evidence before me, I was and am satisfied that the failure to issue a cleansing prospectus was caused by inadvertence rather than any deliberate disregard of the plaintiff's obligations.
3 In light of the urgency with which the application was brought, I made orders at the conclusion of the hearing on 11 April 2022 granting the relief sought and said that I would subsequently publish reasons for my decision. These are the reasons for my decision.
Reporting requirements under Part 6D.2 of the Act
4 Part 6D.2 of the Act imposes disclosure obligations in relation to the issue and sale of securities. 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 securities are on-sold within 12 months, the party to whom the securities are issued may be obliged to make disclosure.[2]
5 The cleansing notice exception can only be relied upon if the preconditions in s 708A(5) of the Act are met including that:
[T]rading ... 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.
6 The cleansing prospectus exception applies where a prospectus is lodged on or after the date that securities 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.
7 In support of its application, Sprintex relied on four affidavits: two affidavits of Michael Scott van Uffelen, Sprintex's company secretary, filed 6 and 8 April 2022; an affidavit of Steven James Apedaile, a non-executive director and the chairman of Sprintex, filed 6 April 2022; and an affidavit of Benjamin John Rogers, a solicitor at Steinepreis Paganin, the plaintiff's solicitors, filed 11 April 2022.
8 Sprintex is an Australian public company whose securities are listed on the Australian Securities Exchange (ASX). It is an automotive engineering, research, product development, and manufacturing company, engaged in the design and manufacture of compressors for use in clean air applications and combustion engines.[4]
9 As at 5 April 2022, Sprintex had 242,020,993 shares on issue, 761 shareholders and a market capitalisation of approximately $16,457,427.[5]
10 On 2 November 2021, Sprintex announced it had received firm commitments for the issue of 53,333,333 shares to raise $4 million (2021 Placement). The 2021 Placement was intended to be done in two tranches: the first out of the plaintiff's placement capacity under the Listing Rules and the second after obtaining the approval of its shareholders at its annual general meeting.[6]
11 As the plaintiff had been suspended from trading for more than five days in the previous 12 months, Sprintex was not able to lodge cleansing notices for the 2021 Placement.[7] For that reason, on 9 November 2021, the plaintiff lodged a prospectus with ASIC (First Cleansing Prospectus). The offer for shares under the First Cleansing Prospectus closed on 13 December 2021. At the time, the First Cleansing Prospectus was prepared for the purpose of cleansing both tranches of the 2021 Placement.
12 On 9 November 2021, Mr van Uffelen arranged for the issue and quotation on the ASX of the first tranche of 20,409,654 shares in the 2021 Placement.[8]
13 On 10 December 2021, resolutions to approve the 2021 Placement and the issue of shares in two tranches were passed at the annual general meeting of shareholders.[9]
14 The second tranche of the 2021 Placement (being 32,923,680 shares) was intended to be completed on 13 December 2021 and cleansed by the First Cleansing prospectus, prior to its closing on that date.[10] However, not all of the shares in the second tranche were issued on 13 December 2021.
16 On 24 March 2022, Mr van Uffelen received a call from the ASX regarding the 9 February shares. He investigated the issue and discovered he had inadvertently failed to ensure the 9 February shares had been properly cleansed.[13] On discovering the error, Mr van Uffelen informed the plaintiff's managing director and contacted the plaintiff's solicitors to obtain legal advice.[14]
19 On 30 March 2022, Sprintex's solicitors wrote to the court to request an urgent hearing of the application.
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.
22 In considering an application under s 1322 of the Act, the essential principles are:[21]
(a) the prescriptive requirements of the wording in s 1322(4) and the pre-conditions in s 1322(6) need to be satisfied;[22]
(b) the court retains a discretion under s 1322(4) as 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;[23]
(d) limitations to the broad powers in s 1322 will not be readily implied.[24] 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 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.[25]
Disposition Application by an 'interested person'
23 I accept that the plaintiff is an interested person who may seek relief, as required by s 1322(4) of the Act.[26]
25 The plaintiff seeks a declaration under s 1322(4)(a) of the Act that any offer for sale or sale of the quoted securities during the period between 9 February 2022 and the date of the cleansing prospectus issued on 6 April 2022 (inclusive) is not invalid by reason of:
(a) the plaintiff's failure to issue a prospectus under s 708A(11) of the Act to exempt the sellers from the obligation of disclosure under the Act; and
(b) the sellers' consequent failure to comply with s 707(3) and s 727(1) of the Act.
26 I note that the prescriptive requirements of s 1322(4)(a) of the Act are satisfied in that:
(a) the proposed validation orders are framed in a declaratory form;
(b) the act, matter or thing is the offer and sale of securities; and
(c) the contravention is the offering of securities for sale or sales without proper disclosure in contravention of s 707(3) of the Act.[29]
27 The plaintiff submitted that, while only one of the pre-conditions in s 1322(6)(a) of the Act needs to be satisfied, in this case, each of the preconditions was satisfied.
28 I accept that the pre-condition in s 1322(6)(a)(i) is satisfied in that the act, matter or thing is of a procedural nature, being the issue of a cleansing prospectus.
29 I turn then to the pre-condition in s 1322(6)(a)(ii) that there is no failure of the persons concerned or the company to act honestly. 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.[30] 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;[31]
(b) the concept of acting honestly can embrace:[32]
(i) inadvertence or failure to turn one's mind to an issue;
(ii) active but incorrect consideration of a legal issue;
(iii) failure to consider an issue at all; or
(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.[33]
30 In this case, the plaintiff inadvertently overlooked that the First Cleansing Prospectus, under which it purported to issue the 9 February shares, closed on 13 December 2021. As a result, these shares were issued without a valid cleansing prospectus. I accept that this occurred as a result of an error on behalf of Sprintex's company secretary. I find that the error in failing to lodge a cleansing prospectus, as required by s 708A(11) of the Act, was honest and inadvertent.
31 I also accept that this is not a case where there has been a failure of the directors of Sprintex to take an active interest in the company's compliance with the Act or to properly define roles of company officers. I accept that Sprintex's directors relied on the company secretary for compliance matters, such as the issue of cleansing prospectuses.[34]
32 I am also satisfied that it would be just and equitable to make the orders sought. Section 1322(6)(a)(iii) gives the court a wide discretion in exercising its powers under s 1322 of the Act.[35]
33 I have considered the classes of persons who may be impacted by the making of these orders.
34 First, the people who were issued the impugned shares. The prejudice to them is that the sale of these securities may be void or voidable for want of compliance with the statutory requirements.
35 Second, those people who purchased the shares may have re-sold the impugned shares themselves. Any further sales of these shares will also have occurred without the requisite disclosure under pt 6D.2 of the Act.
36 I find 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.
37 I accept that if the orders sought are not made, there may be substantial injustice to the plaintiff 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 there may be substantial injustice to the other ordinary shareholders of Sprintex, as they may not be able to trade their securities on an open market if the current suspension from trading is not lifted.
38 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 orders. I accept this is an appropriate timeframe in this case.
39 I accept and find there is no evidence of any substantial misconduct, serious wrongdoing or flagrant disregard of the Act or the company's constitution to warrant refusal of the relief sought.[36]
40 There is nothing in the evidence before me suggesting 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 the plaintiff's contravention of the Act and been given notice of this hearing. No shareholder or either regulator has sought to intervene in the hearing or given notice they want to be heard on the application.
41 In exercising the discretion to grant relief under s 1322(4) of the Act, a relevant factor is the promptness with which the plaintiff has sought to remedy the irregularity once it has been identified.[37] In this case, on 24 March 2022, Sprintex discovered its failure to lodge a cleansing prospectus prior to the issue of the 9 February shares. After being made aware of the issue, Sprintex immediately sought legal advice and requested a trading halt. Less than two weeks later, on 6 April 2022, Sprintex commenced these proceedings. I accept that Sprintex acted diligently after being made aware of the issue.
42 For the following reasons, I was and am satisfied that, in the circumstances of this case, relief should be granted in the terms sought by Sprintex. First, there is evidence before me that there has been some trading in relation to the 9 February shares.[38] It cannot be discounted that there may have been resales of these shares. In the circumstances, I consider it is appropriate to make the orders sought to remove any question as to title in the shares of the plaintiff. Second, at the time the application came on for hearing, a cleansing prospectus had been lodged in respect of the 9 February shares.[39] Third, I am satisfied that the conduct of Sprintex in failing to lodge a cleansing prospectus was inadvertent and not in blatant disregard of its obligations. Fourth, Sprintex acted promptly upon realising the error, preparing the required paperwork and approaching the court. I do not consider that public policy will be undermined by granting the relief sought.
43 Accordingly, at the conclusion of the hearing on 11 April 2022, 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.
[2] Corporations Act 2001 (Cth) s 707(3). See also Re Golden Gate Petroleum Ltd [2010] FCA 40; (2010) 77 ACSR 17.
[4] Affidavit of Michael Scott van Uffelen filed 6 April 2022 [12].
[5] Affidavit of Michael Scott van Uffelen filed 6 April 2022 [13].
[6] Affidavit of Michael Scott van Uffelen filed 6 April 2022 [19] - [20], 'MVU-03'.
[7] Affidavit of Michael Scott van Uffelen filed 6 April 2022 [21], 'MVU-04'.
[8] Affidavit of Michael Scott van Uffelen filed 6 April 2022 [22], 'MVU-05'.
[9] Affidavit of Michael Scott van Uffelen filed 6 April 2022 [23] - [24], 'MVU-07'.
[10] Affidavit of Michael Scott van Uffelen filed 6 April 2022 [25].
[11] Affidavit of Michael Scott van Uffelen filed 6 April 2022 [26], 'MVU-08'.
[12] Affidavit of Michael Scott van Uffelen filed 6 April 2022 [27].
[13] Affidavit of Michael Scott van Uffelen filed 6 April 2022 [28].
[14] Affidavit of Michael Scott van Uffelen filed 6 April 2022 [29] - [30].
[15] Affidavit of Michael Scott van Uffelen filed 6 April 2022 [30].
[16] Affidavit of Michael Scott van Uffelen filed 6 April 2022 [32], 'MVU-09'.
[17] Affidavit of Benjamin John Rogers filed 11 April 2022 [4], [7], '2', '5'.
[18] Affidavit of Michael Scott van Uffelen filed 6 April 2022 [33], 'MVU-10'.
[19] Affidavit of Michael Scott van Uffelen filed 6 April 2022 [39], 'MVU-12'.
[20] Affidavit of Michael Scott van Uffelen filed 6 April 2022 [37] - [38], 'MVU-11'.
[21] Re Helios Energy Ltd [2017] FCA 840; (2017) 122 ACSR 174 [20].
[22] Weinstock v Beck [2013] HCA 14; (2013) 251 CLR 396 [43], [53] and [64].
[23] Re Wave Capital Ltd [2003] FCA 969; (2003) 47 ACSR 418 [29].
[24] Weinstock v Beck [43], [55] - [56], [60], [64].
[25] Corporations Act 2001 (Cth) s 1322(5).
[27] Affidavit of Benjamin John Rogers filed 11 April 2022 [6], '4'.
[28] Affidavit of Benjamin John Rogers filed 11 April 2022 [9], '7'.
[29] See Re Caeneus Minerals Ltd [2018] FCA 560 [39] - [40]; Re Classic Minerals Ltd [2018] FCA 2039 [35] - [36].
[30] Re ICandy Interactive Ltd [2018] FCA 533; (2018) 125 ACSR 369 [54] - [104].
[31] Re ICandy Interactive Ltd [54], [106] - [107].
[33] Re ICandy Interactive Ltd [60] - [104].
[34] Affidavit of Steven James Apedaile filed 6 April 2022 [12].
[35] Re Bellevue Gold Ltd [2021] WASC 80 [64] and the authorities cited therein.
[37] Re G8 Communications Ltd [2016] FCA 297; (2016) 112 ACSR 22 [60].
[38] Affidavit of Michael Scott van Uffelen filed 6 April 2022 [35].
[39] Affidavit of Michael Scott van Uffelen filed 6 April 2022 [37] - [38], 'MVU-11'.
(2013) 251 CLR 396