Solco Ltd, in the matter of Solco Ltd [2015] FCA 635

Federal Court of Australia|2015-06-24|Before: McKerracher J

The application in overview 1 Solco Ltd applies under s 1322(4) of the Corporations Act 2001 (Cth) to cure a failure to observe time limits for admission to quotation on the Australian Securities Exchange (ASX) in respect of shares issued following a prospectus published by Solco on 25 November 2014. The share issue was to effect a 'back door' listing of certain companies, assets and businesses comprising what has been described in evidence as the 'Go Group' acquired by Solco from Urban Group Energy Holdings Pty Ltd. 2 The relevant time limit was the date by which shares offered under the Prospectus were to be admitted to quotation on the ASX, being within three months after the date of the Prospectus as prescribed by s 723(3)(b) and s 724(1)(b)(ii) of the Act. 3 Solco also applies under s 254E of the Act for validation of an issue of shares made pursuant to the Prospectus. 4 There are some particular aspects of this application which differ from others based on the same provisions. Nonetheless, for reasons that follow, the relief sought was granted on 2 June 2015. 5 That substantive affidavit evidence in support reveals that the transactions involved in the back door listing were: (a) the acquisition of the Go Group from Urban Group in consideration of the issue of 627,606,378 fully paid ordinary shares of Solco (Consideration Shares); and (b) a 1 for 1 rights issue share offer to existing shareholders of Solco with an associated shortfall offer, to raise up to $4,100,000 before costs, with a minimum subscription of $3,000,000; Urban Group agreed to underwrite $3,000,000 of this capital raising (underwriting agreement). 6 The acquisition of Go Group was approved at the annual general meeting of Solco on 28 November 2014. 7 On 20 February 2015, ASX sent Solco's then solicitors a conditional re-instatement letter. The former solicitors advised Solco that they considered that ASX would admit the shares to be issued under the Prospectus to quotation by 25 February 2015. On 23 and 24 February 2015, in anticipation of re-admission of the securities of Solco to quotation within the three month period, Solco completed the acquisition of the Go Group. This included the issue of the Consideration Shares, appointing three nominees of Urban Group as directors of Solco and issuing 153,000,000 shares to subscribers under the Prospectus. Approximately 70,600,000 of these were pursuant to the Underwriting Agreement. On 25 February 2015, being the last day of the three month period for admission to quotation, at 1.02 pm WST ASX advised Solco's then solicitors that ASX would not be reinstating Solco's shares to quotation. 8 An urgent application was made at around 5.00 pm on 25 February 2015 to ASIC to extend the three month periods for the shares to be admitted to quotation by ASX under s 723 and s 724 of the Act. ASIC refused the application on 16 March 2015. 9 On 12 March 2015 the current solicitors were appointed in place of Solco's former solicitors.

The position taken by ASX 10 The matters that led to the ASX decision not to re-admit Solco's shares to quotation, principally arose from the set off of funds due to the Urban Group in relation to the acquisition, against funds due from the Urban Group to meet its underwriting obligations. The concerns of ASX about that aspect of the transaction have now been resolved. 11 On 24 April 2015, ASX advised that it did not oppose the orders proposed in the Originating Process and did not intend to appear at the final hearing.

Negotiations with ASIC - 'withdrawal rights' 12 In the meantime, on 20 March 2015, ASIC advised of concerns that it had with the disclosures in the Prospectus dated 25 November 2014, together with concerns about disclosures relating to events subsequent to the date of the Prospectus. For a period of about 4 weeks until 15 April 2015 there were negotiations concerning required disclosures, including certain audited accounts of entities and businesses. On 28 April 2015, ASIC advised that it considered that a one month withdrawal right should be offered by way of a supplementary prospectus before the Court hearing, and expected a further one month withdrawal right would be required following the Court hearing upon Solco lodging a further supplementary prospectus providing all disclosures necessary to resolve ASIC's concerns. 13 On 12 May 2015, a first supplementary Prospectus was lodged with ASIC, which contained a number of the disclosures requested by ASIC and provided a one month withdrawal right to subscribers to the offer under the Prospectus. 14 Solco has now obtained the audited accounts for the various Go Group entities and businesses as agreed with ASIC, and has drafted a second supplementary Prospectus that discloses updated historical financial information in respect of the Go Group and the combined Solco/Go Group business, and an updated investigating accountants report, as requested by ASIC. A draft of the second supplementary Prospectus has been sent to ASIC. The second supplementary Prospectus provides for a further one month withdrawal right from its date.

Statutory framework 15 Section 723(3) of the Act relevantly provides that if a disclosure document for an offer of securities states or implies that the securities are to be quoted on a financial market (whether in Australia or elsewhere) and the securities are not admitted to quotation within 3 months after the date of the disclosure document, then an issue or transfer of securities in response to an application made under the disclosure document is void and the person offering the securities must return the money received by the person from the applicants as soon as practicable. 16 By s 724(1), if a person offers securities under a disclosure document and the disclosure document states or implies that the securities are to be quoted on a financial market (whether in Australia or elsewhere) and the securities are not admitted to quotation within 3 months after the date of the disclosure document, the person must deal under s 724 (2) with any applications for the securities made under the disclosure document that have not resulted in an issue or transfer of the securities. Under s 724(2) the person must repay the money received by the person from the applicants or give the applicants the documents required by s 724(3) and one month to withdraw their application and be repaid, or issue or transfer the securities to the applicants and give them the s 724(3) documents and one month to withdraw their application and be repaid. 17 The documents required to be given by s 724(3) are set out in the table to that subsection. Relevantly, if the sole disclosure document is a prospectus, as is the case in this matter, then the document to be given is 'a supplementary or replacement prospectus that corrects the deficiency or changes the terms of the offer'. 18 The other two sections relevant to this application are the remedial provisions, s 254 and s 1322 of the Act. Section 254E provides: (1) On application by a company, a shareholder, a creditor or any other person whose interests have been or may be affected, the Court may make an order validating, or confirming the terms of, a purported issue of shares if: (a) the issue is or may be invalid for any reason; or (b) the terms of the issue are inconsistent with or not authorised by: (i) this Act; or (ii) another law of a State or Territory; or (iii) the company's constitution (if any). (2) On lodgment of a copy of the order with ASIC, the order has effect from the time of the purported issue. (emphasis added) 19 Section 1322 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; (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. (emphasis added) … (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.

Consideration 20 As noted above, in summary, the Act provides that if a disclosure document states or implies that the securities are to be quoted on a financial market, then s 723 and s 724 of the Act set out the consequences if time limits are not observed for an application being made for quotation or for admission to quotation. Under s 723(3) the issue or transfer of the securities is void and the offeror must return the application moneys. Under s 724(2) the offeror must either repay the application moneys or give a supplementary prospectus and one month to withdraw their application and be repaid. The intent of s 723 and s 724, is that investors who expect to be issued securities admitted to quotation on a financial market should receive such securities within the prescribed time frame so that they are able to take advantage of the quotation. Section 254E enables the Court to validate an issue of shares if the issue is or may be invalid for any reason. Section 1322 enables a Court, among other things, to declare any act matter or thing is not invalid by reason of contravention of a provision of the Act or to extend the period for doing any act, matter or thing. The power of the Court is confined by the conditions set out in s 1322(6). 21 The submissions of Mr Young, counsel for Solco, have been very helpful and I gratefully adopt much of their content. The principles applicable for extensions of the times specified in s 723 and s 724 have been set out in numerous decisions of the Court. These include Re Insurance Australia Group Ltd (2003) 128 FCR 581, Re Wave Capital Ltd (2003) 47 ACSR 418, Re Golden Gate Petroleum Ltd (2004) 50 ACSR 659, Re Tony Barlow Australia Limited (2005) 53 ACSR 1, Re NuSep Ltd (2007) 62 ACSR 301 and Re Laserbond Limited [2007] FCA 2056. 22 The same principles have been applied to extensions of time for application for quotation as for admission to quotation. Insurance Australian Group and Wave Capital each dealt with a failure to apply for quotation only; Golden Gate Petroleum and Nusep involved both failure to apply for and failure to be admitted to quotation; Laserbond dealt with failure to be admitted to quotation only. 23 In Wave Capital, French J as his Honour then was, said (at [29] and [31]): 29 [s]ections 1318, 1322 and 1325D however may be taken to reflect a broad 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. That broad policy does not authorise the Court lightly to set aside the requirements of the Act where they have not been observed. Each application for the exercise of the Court's relieving power will require consideration of all the circumstances of the case to ensure that the indulgence sought is appropriate and does not undermine the requirements of the Act. Like the discretion to validate invalid share issues under s 254E, the power conferred by s 1322 must be exercised having regard to the requirements of the purposes of the Corporations Act and any other relevant statutes whose application may be in issue. It must also be exercised having regard to the interests of all parties affected and the public interest in ensuring compliance with statute law and company constitutions. Evidence of a blatant disregard of the provisions of the Act or the constitution of the company may lead to refusal of relief - Re Onslow Salt Pty Ltd (2003) 198 ALR 344 and cases there cited. The provision is however remedial in character and should be given a liberal construction - In the Matter of Insurance Australia Group Ltd [2003] FCA 581 at [27] per Lindgren J citing Re Australian Koyo Ltd (1984) 8 ACLR 928 at 930 and Elderslie Finance Corporation Ltd v Australian Securities Commission (1999) 11 ACSR 157 at 160. … 31 I am satisfied on the facts of the case that no substantial injustice has been caused or is likely to be caused to any person if the orders sought are made. On the other hand there is the risk of unnecessary expense and administrative inefficiency if the company is required to take the steps otherwise mandated by s 724. Once the omission was discovered the directors acted promptly to seek advice about the best ways to rectify it and brought the application in this Court promptly when that advice was provided. … 24 In Golden Gate Petroleum, Lee J said (at [35]): [w]ith regard to the declarations and remedial orders sought pursuant to s 1322 of the act, I accept that, as with like provisions in corporations legislation that preceded the Act, s 1322 is to be given a liberal construction, allowing appropriate orders to be made that facilitate the conduct of commerce and serve the interests of the parties concerned where it is just and equitable that such orders be made. … 25 In Tony Barlow, Nicholson J (at [27]) referred to the materially adverse impact on the Company, its shareholders and creditors if the orders sought under s 1322 were not granted. 26 In NuSep, Lindgren J said (at [38]): [t]he orders that I am asked to make are to be made only "for the purposes of" s 723(3)(a) and (b) of the Act. The orders will therefore only overcome the adverse consequences provided for in s 723(3)(c) and (d), namely, that an issue of securities in response to an application made under the prospectus is void and that NuSep must return the money received by it from the applicants as soon as practicable. Importantly, the orders will not interfere with the contractual relationship between NuSep and its members who took up the rights issue, and, in particular, with the legal consequences of NuSep's failure to perform its contractual promise expressed in cl 2.3 of the prospectus. If any of those members have suffered loss or damage by reason of their shares or options not having been quoted on the ASX as early as they would have been if the application had been made within seven days after 14 December 2006, they will retain their right of action unaffected by the orders made. 27 In both Golden Gate Petroleum (at [33]) and Laserbond (at [23] - [26] and [37]), Lee J and I respectively made orders under s 254E validating the issues of shares under the prospectus as well as orders under s 1322. The question is whether that course is appropriate in this instance. 28 In the instant application, notification of the originating process has been given to both ASX and ASIC. Both ASX and ASIC have provided 'no objections' letters. 29 The time from expiry of the three month period for admission to quotation, being 25 February 2015 to the date sought by this application and two months after the lodgment of the second supplementary Prospectus, is approximately five months. 30 A distinction should be drawn between the reasons for failure to obtain quotation within the three month period and reasons for the length of time for which the extension is sought. 31 Further, Solco submits and I accept, in this instance, the evidence shows that all persons acted honestly. There is no reason to consider that Solco's former solicitors acted otherwise than honestly when they advised the Board of Solco that they considered the ASX would admit the shares of Solco to quotation by 25 February 2015, being the date three months after the date of the Prospectus. The Board of Solco accepted the advice and acted on it to complete the acquisition of the Go Group and the issue of shares pursuant to the Prospectus. 32 The evidence shows that the making of the orders sought will not cause or be likely to cause any substantial injustice to any person, but rather will fulfil the expectations and commercial interests of all persons concerned in the following ways: (a) with regard to subscribers wishing to withdraw, those who wished their shares to be admitted to quotation promptly have had the opportunity to withdraw following issue of the first supplementary Prospectus; those wishing to withdraw by reason of the disclosures in either of the first or second supplementary Prospectuses may do so, and their rights of action to recover for any loss or damage will not be affected; (b) in the case of subscribers wishing to proceed, they will be able to do so with the benefit of the further disclosures; (c) the existing shareholders of Solco will have their shares re-admitted to quotation and will be able to trade their shares on ASX; (d) the Urban Group will have shares that can be traded on the ASX (subject to an ASX imposed escrow) or the value of which can be determined by reference to the price of the shares so traded by others; (e) Solco will be able to use the funds raised by the issue of shares pursuant to the Prospectus for the purposes outlined in the Prospectus, including by payment of its creditors; and (f) Solco will be more readily able to raise capital by further issues of shares or other securities if its shares are admitted to quotation by ASX. 33 The making of the orders sought is consistent with facilitating the conduct of commerce generally, including by maintaining market confidence that technical difficulties will not necessarily prevent or unduly hinder the raising of capital by the issue of securities to be admitted to quotation. 34 In the particular circumstances of this matter, I do not consider that the length of time adversely affects the discretion of the Court to make the orders sought as Solco has acted as promptly as possible given ASIC's further review and ASIC's first raising of disclosure concerns on 20 March 2015. These were not finally resolved until 15 April 2015 due to the need to deal with those concerns by undertaking audits of businesses carried on by a number of different entities. 35 Further, in Golden Gate Petroleum the period of time between lodgment of the second Prospectus and admission to quotation following the making of orders by the Court was ten months. The anticipated time in this case will be about eight months. 36 More significantly, in my view, subscribers will have had two opportunities to withdraw their applications for shares.

Conclusion 37 For those reasons, the following orders were made:

Pursuant to section 1322(4)(d) of the Corporations Act 2001 (Cth) (Act), the period set out in sub-sections 723(3)(b) and 724(1)(b)(ii) of the Act for the admission to quotation by ASX Limited (ASX) of securities of the Plaintiff issued pursuant to the prospectus dated 25 November 2014 (Prospectus) be extended to the date which is 2 months after the date of the Second Supplementary Prospectus for the offer to be lodged with the Australian Securities and Investments Commission (ASIC), a draft of which is annexure ALD-4 to the affidavit of Andrew Lawrence Disney affirmed on 29 May 2015.
Subject to the Plaintiff's securities being admitted to quotation by the ASX within the period of 2 months after the date of the Second Supplementary Prospectus, then pursuant to s 254E of the Act the issue of shares by the Plaintiff pursuant to the Prospectus is hereby validated and confirmed.
The Plaintiff do forthwith: a. lodge a copy of these orders with ASIC; and b. make an announcement to the ASX disclosing the terms of these orders.
The Plaintiff lodge the Second Supplementary Prospectus (in the form of the draft which is annexure ALD-4 to the affidavit of Andrew Lawrence Disney affirmed on 29 May 2015, together with any amendments required or approved by ASIC or by ASIC and the ASX) with ASIC forthwith.
The Plaintiff and all other interested or affected parties have liberty to apply to vary these orders upon first giving 24 hours prior written notice. I certify that the preceding thirty-seven (37) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice McKerracher.

Corporations Act 2001(Cth)ss 254E, 723, 724, 1322

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