Spectrum Rare Earths Limited, in the matter of Spectrum Rare Earths Limited [2017] FCA 883

BARKER J: 1 On 28 July 2017, I made the above orders. These are the reasons for so doing. 2 This is an application for orders under s 1322(4)(a) and s 1322(4)(c) of the Corporations Act 2001 (Cth) to: validate the offers and sales of a tranche of 76,850,000 shares after their issue on 3 March 2017 (March shares) until 30 May 2017 and a tranche of 96,150,000 shares after their issue on 28 April 2017 (April shares) until 30 May 2017; and relieve any seller from civil liability arising out of a contravention of s 707(3) and s 727(1) of the Act or by reason of the plaintiff's failure to satisfy s 708A of the Act. 3 This relief, more fully set out in a minute of proposed orders dated 27 July 2017, was sought in order to allow the plaintiff to regularise the offer and sale of the March shares and April shares since their initial offer and to provide relief from civil liability for the sellers of those shares, some of which have on sold them. 4 In support of its application, the plaintiff relied on the following materials: The affidavit of Mr Graeme Raymond Boden affirmed on 15 June 2017 (Boden affidavit), Mr Boden is the Company Secretary of the plaintiff. The affidavit of Mr Daniel Richard Tydde, of the law firm Steinepreis Paganin, affirmed on 27 July 2017 (Tydde affidavit). Mr Tydde deposes to communications with the Australian Securities and Investments Commission (ASIC) and the Australian Stock Exchange (ASX) in respect of this matter. The affidavit of Mr Boden affirmed on 27 July 2017 (Second Boden affidavit). The affidavit of Mr Tydde affirmed on 28 July 2017 (Second Tydde affidavit). 5 The relief is required because of a defect in the offer of the March shares and April shares to remedy past transactions. That defect was the use of purported cleansing notices on 7 March 2017 and 28 April 2017, instead of releasing disclosure by way of prospectus, when the use of cleansing notices was not open to the plaintiff because of a suspension of trading for more than five days in the prior 12 months, under s 708A(5)(b). 6 On 30 May 2017, a cleansing prospectus was issued and lodged with ASIC pursuant to s 708A(11) which was directed to disclosure for secondary sales of the March shares and April shares after 30 May 2017. Accordingly, the relevant period for the purposes of this application, and the period for which relief was sought, is: (1) the period from 3 March 2017 to 30 May 2017 in respect of the March shares (orders 1 and 2); and (2) the Period from 28 April 2017 to 30 May 2017 in respect of the April shares (orders 3 and 4). 7 The issues the subject of this application for relief arise by reason of an error on the part of the company secretary of the plaintiff, Mr Boden, who caused the cleansing notices to be issued and released on the ASX . 8 Once the oversight and the subsequent error concerning the purported use of cleansing notices was identified by the plaintiff in May 2017, the plaintiff sought to address the issue with the ASX and ASIC and took remedial steps, as more fully described below. 9 The plaintiff consulted with ASIC and the ASX, including in respect of these proceedings. Neither ASIC nor the ASX appeared at the hearing or opposed the relief sought. The positions of ASIC and the ASX are set out in more detail below. 10 Unlike some other cases of this kind, this is not an instance where the shares in the plaintiff are suspended pending this application for declaratory relief from the Court. The shares in this instance were only suspended from 29 May 2017 to 31 May 2017. Rather, the purpose of the application is, as identified above, to regularise the offers for and sale of shares during the relevant periods and to relieve any seller from civil liability. 11 The Court has jurisdiction and power to make the orders sought. 12 By s 1337B(1) of the Act, original jurisdiction is conferred on this Court with respect to such civil matters arising under the Corporations Act: Federal Court of Australia Act 1976 (Cth), s 19. 13 Section 1322 of the Act confers the necessary jurisdiction (and powers) upon the Court. 14 Orders 1 and 3 of the orders proposed will validate the offers of shares referred to above in that the plaintiff seeks the following relief: 1. validate and confirm the sale of the shares in the Company during the period after their issue on 3 March 2017 and [until] 18.39 (AEST) on 30 May 2017 and exempt the seller from the obligation of disclosure under the Act and the seller 's consequential failure to comply with sections 707(3) and 727(1) of the Act; … 3. validate and confirm the sale of the shares in the Company during the period after their issue on 28 April 2017 and [until] 18.39 (AEST) on 30 May 2017 the date of this application and exempt the seller from the obligation of disclosure under the Act and the seller's consequential failure to comply with sections 707(3) and 727(1) of the Act; 15 Those orders are substantially in the form made by McKerracher J in respect of eight separate issues of shares in Sprint Energy Limited, in the matter of Sprint Energy Limited [2012] FCA 1354; and also substantially in the form made, more recently, by Siopis J in TV2U International Limited, in the matter of TV2U International Limited [2016] FCA 1556. 16 These orders will confirm that offers and sales of the March shares and the April shares in the period between their respective offers and 30 May 2017 are not invalidated by reason of the contravention. 17 As noted above, that contravention arises by reason of the inability of the plaintiff to issue the cleansing notices on account of a suspension from trading for more than five days in the prior 12 months under s 708A(5)(b) . In fact, from 19 May 2016 to 10 June 2016, share trading in the plaintiff had been suspended for a period of about 23 days. Consequently, there was a contravention of s 707(3), as the purported cleansing notices could not be validly issued. 18 Mr Boden has deposed to the circumstances surrounding that earlier suspension of the plaintiff's shares in May and June 2016. They related to a Heads of Agreement concerning the potential acquisition by the plaintiff of all of the issued share capital in a company, BCAL Diagnostics Pty Ltd, which would have brought about a significant change in the scale and nature of the plaintiff's business, given that it operates as a mineral resources exploration company. In June 2016, the Heads of Agreement was terminated by mutual consent of the parties, and the suspension was immediately lifted. 19 As stated above, trading of the March shares and April shares after 30 May 2017 is regularised for future trading by the cleansing prospectus issued on 30 May 2017 under s 708A(11). The "relevant securities" for the purpose of s 708A(11) are the March shares and April shares and any secondary "sales" (being the sales to which s 708A(11) is directed) are to be treated following that date as having been undertaken with the required disclosure for the purposes of ss 706, 707(1) and 707(3). See Sprint Energy at [25]. 20 It is retrospective validation of offers and earlier sales that is achieved by the making of these orders. Validation of contraventions can occur retrospectively: Re Golden Gate Petroleum Ltd (2010) 77 ACSR 17 at [42]; [2010] FCA 40; Sprint at [36]. 21 I am satisfied that the statutory requirements of s 1322(4)(a) are each met. 22 The plaintiff is an interested person who may seek relief, as required by s 1322(4). See Golden Gate at [44]. 23 The orders are orders declaring that any act, matter or thing purported to have been done under the Act or in relation to a corporation is not invalid by reason of any contravention of a provision of the Act, as: the validation orders are framed in a declaratory form; the act, matter or thing, is the offer and sale of securities for the purposes of s 707(1) and s 707(3) of the Act; and the contravention is of those provisions of the Act, for non­compliance with the requirements in s 708A(5)(b) (and, therefore, ss 707(1), 707(3) and 727(1)). 24 At least one, but not all, of the pre-conditions in s 1322(6)(a)( i), (ii) or (iii) must be satisfied/ See Golden Gate at [39]; Sprint Energy at [32] 25 As to s 1322(6)(a)(ii), the pre-condition in that provision is also satisfied in that there is no failure of the persons concerned or the plaintiff to act honestly. There is no evidence before the Court in the Boden Affidavit, or from any third party or objector, that the plaintiff or its directors and officers have acted dishonestly. Further, the circumstances do not suggest dishonesty. 26 The evidence before the Court is that Mr Boden was mistaken in his belief, when issuing the purported cleansing notices, as to the ability to issue such notices under s 708A(5). 27 In March and April 2017, Mr Boden purported to use the cleansing notice procedure which he thought applied. He was aware that a placement of this kind would usually include a prospectus. But he incorrectly assumed that the plaintiff was entitled to issue a cleansing notice. 28 He did not turn his mind to s 707(3) of the Act or appreciate its significance at the relevant time. Mr Boden has deposed that the earlier suspension of the plaintiff's shares in May and June 2016 did not occur to him as a reason for questioning whether cleansing notices were permitted. 29 Mr Boden also deposes that he did not realise this error until around 19 May 2017, or 22 May 2017, when he sought legal advice on the issue. 30 As to s 1322(6)(a)(iii), the pre-condition in that provision that it be "just and equitable" for the order to be made is satisfied in this case. This limb is satisfied, essentially for the following reasons. 31 First, the circumstances of the contraventions warrant relief. They have arisen by way of inadvertence on the part of the company secretary of the plaintiff. He is not legally trained. Although some documentation concerning the share placements was prepared by external advisers, including Fairweather Corporate Lawyers, there is no suggestion that legal advice was sought or obtained, so as to reveal the correct position in relation to the ability to issue cleansing notices, prior to their issue. To the contrary, Mr Boden gives evidence of having made a mistaken assumption. The mistake that was an honest one. Upon becoming aware of the possible contravention, Mr Boden sought legal advice on behalf of the plaintiff, and then took steps to remedy it. 32 Secondly, the contraventions can be remedied by the curative orders sought by the plaintiff on sufficient terms. That is, the public policy of Chapter 6D, which is to ensure disclosure to shareholders (Golden Gate at [69]) is not infringed. 33 Thirdly, any persons who on sold the March shares and April shares in the intervening period between those shares being offered and traded until 30 May 2017 should have any defects in disclosure for secondary trading fixed. 34 Fourthly, it is unlikely that any prejudice will be suffered by any purchasers of the shares and, to the extent that there is any prejudice, then the curative orders are made on terms which preserve the rights of those affected. 35 Further, even if a shareholder or former shareholder considers they were misled, the orders proposed to be made do not prevent those persons from pursuing any rights they assert they have against the plaintiff. That is, the orders proposed do not relieve the plaintiff from liability to any of its current or former shareholders. 36 Further still, the existence of these proceedings have been the subject of an ASX Announcement dated 7 July 2017 and, on 10 July 2017, the plaintiff wrote to the particular shareholders who may have on sold shares purchased during the impugned period. Mr Boden has given evidence that no person who has been adversely affected in respect of the purported cleansing notices has contacted him. 37 Pursuant to proposed orders 5, 6 and 7, any affected parties will see the orders of this Court upon release to the ASX and will have 28 days to apply to take steps if they are concerned as to the effect of the orders on their rights. This is consistent with the approach taken in the authorities: for example, TV2U; Sprint Energy at [51]. 38 Fifthly, both ASIC and ASX have been given notice of this application and have been served with this application and relevant Court papers, including the minute of proposed orders, as set out in the Tydde Affidavit. Both ASIC and ASX have indicated an intention not to appear at the hearing. Further, ASX "does not oppose the orders proposed in the originating process application" while ASIC "neither supports nor opposes the application". 39 If either of s 1322(6)(a)(ii) or (iii) (above) apply, then the plaintiff does not need to rely on s 1322(6)(a)(i). This Court does not, therefore, need to resolve the question as to whether the contraventions of s 708A(5) in this case constitute a "procedural irregularity", noting that there is divergence of authority on that issue. 40 Further, as to the requirement in s 1322(6)(c) that no substantial injustice has been or is likely to be caused to any person by the orders proposed (on terms), this is satisfied. 41 The purchasers of the March shares are identified in the Boden Affidavit at "GB-7". The purchasers of the April shares are identified in the Boden Affidavit at [20] and "GB-9". As was identified in Golden Gate at [45], prejudice may flow to them if the shares are not validated in that valuable consideration they received in the form of shares may be void or voidable. 42 More significantly, four of the shareholders identified in "GB-7" (for the March shares) and "GB-9" (for the April shares) have on sold shares in the plaintiff during the impugned period. Mr Boden deposes to the relevant trades at [28] of the Boden Affidavit. He also annexes, as "GB-14", the relevant account histories for such shareholders, showing the on sales during the impugned period, from the website of Security Transfer Australia Pty Ltd, the share registry of the plaintiff. 43 The further sales of shares disclosed may have been without the requisite disclosure, which could expose these sellers to civil liability. Orders made under s 1322(4)(c) will address this potential prejudice. 44 There is no evidence that any person claims to have suffered prejudice consequent on such sales, or otherwise in respect of the issue of the March shares and the April shares. In any event, even if a person claimed to be adversely affected, then they still have relevant rights of action against the company and the orders on terms will allow them to take steps if need be. 45 As to the general discretion under s 1322(4)(a), by reason of the circumstances addressed above in respect of the just and equitable requirement in s 1322(6)(a)(ii), I am satisfied there is no reason why the curative orders should not be made. 46 The second and fourth orders, as proposed, are: 2. any seller in order 1 be relieved from civil liability arising out of a contravention of sections 707(3) and 727(1) of the Act or by reason of the plaintiff's failure to satisfy section 708A of the Act; 4. any seller in order 3 be relieved from civil liability arising out of a contravention of sections 707(3) and 727(1) of the Act or by reason of the plaintiff's failure to satisfy section 708A of the Act; 47 These orders are in a standard form, as made by the Court in Sprint Energy (see [53]­[55]) and in TV2U. By these orders, s 1322(4)(c) will relieve sellers of any liability under s 707(3) and s 727(1) of the Act for offers of and sales of shares affected by the identified contraventions . 48 In conclusion, the statutory requirements of s 1322(4)(c) are each met as follows. 49 The plaintiff is an interested person who may seek relief, as required by s 1322(4). 50 The orders will relieve a person in whole or in part from any civil liability in respect of a contravention or failure of a kind referred to in s 1322(4)(a), as: the validation order in s 1322(4)(a) is for a contravention, or failure to comply with, ss 707(3), 708A(5) and 727(1); the persons to be relieved in whole from civil liability are the purchasers of shares from the plaintiff, and who may have on sold them; and the liability from which those persons are to be relieved is civil liability for under the Act. 51 A pre-condition to an order under s 1322(4)(c) is found in s 1322(6)(b), that the person to be relieved from civil liability acted honestly. 52 There is no evidence before the Court that any of the parties identified above, who may have on sold shares originally acquired as March shares or April shares, have acted dishonestly. To the contrary, the circumstances before the Court allow appropriate inferences to be drawn, including that no sellers have acted dishonestly. 53 As has been the case in Golden Gate at [51] and Sprint Energy at [51]-[52], the Court can infer that by reason of the inadvertence or error of the company and the misrepresentation of the position to the shareholders by a defective cleansing notice (or no cleansing notice), the purchasers were likely to be acting honestly and would not have on sold shares knowing of the absence of proper disclosure. 54 Further, as to the requirement in s 1322(6)(c), that no substantial injustice has been or is likely to be caused to any person, the validation orders proposed (on terms) for the shares offered will cause no substantial injustice if made but may do if not made, for the reasons explained above. 55 There is no evidence of any substantial misconduct, serious wrongdoing or flagrant disregard of the corporate law, so as to warrant refusal of the relief sought. 56 The circumstances concerning the error and the steps taken to address it are set out in the Boden Affidavit. The possibility of error was realised by the company on around 19 May 2017, and from around 22 May 2017, legal advice was sought. The ensuing non-compliance was disclosed to the ASX on 29 May 2017, and the cleansing prospectus was lodged with ASIC, and announced on release to the ASX Announcement Platform, on 30 May 2017. 57 The plaintiff commenced these proceedings on 19 June 2017. The Tydde Affidavit addresses the correspondence which has occurred with ASIC, the ASX and particular shareholders since that date. 58 There is nothing to suggest in the papers, or by the raising of any issues by any attempted objector or intervening regulator, that any person would suffer prejudice by the grant of the orders. Further, and in any event: The reservation of liberty to apply in order 7 has, as in other cases, been considered sufficient to protect the interests of any aggrieved person that can raise a legitimate and sufficient concern. The plaintiff has not sought relief from civil liability for itself or its officers under s 1322(4)(c), such that there is no bar against those with rights affected who suffer loss or damage to commence proceedings or for any other civil penalty or criminal enforcement proceedings. The plaintiff has acted relatively promptly after discovering the irregularities, in the manner set out above. This may be compared with the relief sought after the irregularities in Golden Gate (some 10 months). 59 As indicated above, proposed orders 5, 6 and 7 are conditions of the relief in orders 1 to 4, to allow fair notice to any third parties, the regulator and the ASX, and permit any affected parties the opportunity to make an application to the Court to be heard. 60 Again, these orders are in standard form, as made more recently by the Court in, for example, Sprint Energy and TV2U. 61 For these reasons, I made the above orders. I certify that the preceding sixty-one (61) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Barker.