Weinstock v Beck

ANNEXURE 'A' Number of Shares Period 1,000,000 21 June 2016 to 9 October 2018 3,500,000 4 August 2016 to 9 October 2018 6,000,000 29 September 2016 to 9 October 2018 33,500,000 8 November 2016 to 9 October 2018 4,000,000 12 December 2016 to 9 October 2018 2,500,000 10 January 2017 to 9 October 2018 2,000,000 10 February 2017 to 9 October 2018 3,000,000 5 May 2017 to 9 October 2018 30,604,372 22 May 2017 to 9 October 2018 68,380,952 30 June 2017 to 9 October 2018 90,626,515 20 July 2017 to 9 October 2018 92,199,999 8 September 2017 to 9 October 2018 25,300,000 27 October 2017 to 9 October 2018 4,852,142 8 November 2017 to 9 October 2018 89,064,093 30 November 2017 to 9 October 2018 109,000,000 29 December 2017 to 9 October 2018 53,125,000 9 March 2018 to 9 October 2018 223,000,000 28 March 2018 to 9 October 2018 22,771,300 11 April 2018 to 9 October 2018 255,548,810 24 April 2018 to 9 October 2018 95,438,147 1 May 2018 to 9 October 2018 194,493,813 16 May 2018 to 9 October 2018 261,816,666 28 June 2018 to 9 October 2018 422,613,796 18 July 2018 to 9 October 2018 53,016,997 4 August 2018 to 9 October 2018 33,333,333 21 September 2018 to 9 October 2018

Note: Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.

BANKS-SMITH J: 1 By this application the plaintiff (company) seeks relief under s 1322(4) of the Corporations Act 2001 (Cth) relating to contraventions of Pt 6D.2, which imposes disclosure obligations with respect to the issue and sale of shares. It seeks relief not as to its potential liability but to relieve shareholders from liability in circumstances where they may have unknowingly contravened the disclosure obligations.

Summary of manner in which Pt 6D.2 operates 2 In some circumstances, the disclosure obligations can be met by the issue of what is known as a 'cleansing notice' or 'cleansing statement' or by the lodgement of a prospectus: s 708A(5) and s 708A(11) of the Corporations Act. Where an issuer of shares has not made requisite disclosure, then the party to whom the shares are issued may be obliged to make disclosure if the shares are on-sold within 12 months: s 707(3) and see Golden Gate Petroleum Ltd, in the matter of Golden Gate Petroleum Ltd [2010] FCA 40; (2010) 77 ACSR 17 at [27] (McKerracher J). 3 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. 4 The cleansing prospectus exception applies (relevantly) 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. It will have the effect of meeting disclosure requirements for relevant offers and sales going forward. 5 In this case, there were 26 separate instances of shares being issued without a valid cleansing notice or immediate cleansing prospectus. The shareholders who on-sold such shares without making disclosure are in a position where they are likely to have contravened the Corporations Act. The company seeks relief in effect to protect the position of those shareholders and to validate share transfers.

Orders made at final hearing 6 On its face, 26 is a large number of relevant incidents on the part of the company. However, the company has provided an explanation as to the failure to file cleansing notices and I am satisfied that the failure was caused by inadvertence or an incorrect assessment of the legal position, rather than any deliberate disregard of its obligations. Accordingly, I made orders at the conclusion of the hearing on 12 December 2018 granting the relief that was sought. These are the reasons for doing so.

First hearing 7 When the matter first came before me there were deficiencies in the evidence, and I adjourned the hearing to enable those matters to be addressed. In particular, on such applications it is important that the court have (at least): (a) a summary of the background to the share issues; (b) general information as to the shareholders who acquired shares, including when they received the shares and may have on-sold them, and whether the shareholders were institutional or sophisticated investors or otherwise; (c) information as to the number or percentage of shares that potentially may have been on-sold; (d) information as to whether there was any excluded information that had not been provided to the market; (e) evidence of any attempt to communicate with the shareholders about the failure to lodge the cleansing notices, such as examples of pro forma letters or emails that have been sent; (f) evidence from the officers of the company at the relevant time as to their knowledge of disclosure obligations; (g) evidence of any steps taken by the company secretary or officers to seek advice about the company's disclosure obligations; (h) evidence from an officer of the company of the system that was in place to deal with disclosure obligations, and explaining who was responsible for supervising or reporting on that system; and (i) evidence as to whether the directors were also shareholders and whether or not they received or on-sold any of the relevant shares - this is highly relevant to the relief sought, because the orders sought may extend to directors and so it is incumbent upon them to explain their knowledge of the circumstances surrounding the failure to issue cleansing notices or lodge a prospectus. 8 When the matter came before me for final hearing, further affidavits had been filed and it was obvious that the company had gone to considerable effort to address those matters.

Facts 9 The company relies on affidavits filed by Madhukar Bhalla, Justin Doutch, John Lester and Jeffrey Nurse. Each is or was an officer of the company during the relevant time. 10 The current company secretary, Mr Bhalla, and previous company secretary, Mr Nurse, deposed to the circumstances that led to the compliance issues arising. 11 Mr Bhalla was appointed as company secretary on 19 October 2018. He stated that he recently undertook a review with other executives and became aware that there were a number of instances where the company had issued securities and notified the Australian Securities Exchange (ASX) by the requisite Appendix 3B document, but where the Appendix 3B should have been issued with a cleansing notice pursuant to s 708A(5)(e) of the Corporations Act. 12 Mr Bhalla checked and collated the 26 instances of failure to provide a cleansing notice which are the subject of the application. 13 Trading in the shares was suspended on 28 September 2018. 14 The company then arranged for a prospectus to be lodged on 9 October 2018. 15 Prior to Mr Bhalla's appointment, the position of company secretary was held by Mr Nurse. Mr Nurse was initially appointed as joint company secretary with Kent Hunter who had been company secretary since September 2010. Mr Hunter resigned as company secretary on 30 November 2016. Attempts to contact Mr Hunter in order to provide an affidavit in these proceedings were unsuccessful. 16 Mr Nurse stated that Mr Hunter is a chartered accountant with many years of experience in providing company secretarial, ASX compliance and regulatory requirement services. 17 Mr Nurse said that he understood the requirement that an issue of securities by an ASX listed company requires that an Appendix 3B and cleansing statement be lodged, and that in order to qualify to lodge a cleansing statement, the securities of the company must have been trading continuously for 12 months. 18 However, in March 2016 the company's securities were suspended and he made enquiries of people, including Mr Hunter, about what was required of the company when issuing securities. He said that he was told to lodge only the Appendix 3B and he adopted that course for subsequent share issues. Mr Nurse stated that after that time he believed his procedure for the lodgement of Appendix 3Bs was correct and none of his supervisors informed him otherwise. 19 Mr Nurse also said that the company lodged a cleansing prospectus on 19 April 2017 and that at that time he was under the impression that once a cleansing prospectus had been lodged, the company was not required to lodge a subsequent cleansing prospectus for 12 months. He said he now understands that position to be incorrect. 20 Mr Doutch, a former director of the company during the relevant time, stated that he is aware of the disclosure requirements in Pt 6D.2 but that he relied on the experience of Mr Hunter and Mr Nurse and assumed that the company was complying with its regulatory requirements. Mr Doutch stated that he was not aware that in about June 2016 the company had ceased lodging cleansing statements with its Appendix 3B documents. 21 Mr Doutch retired as a director on 6 November 2016 and upon his retirement was allotted 3,750,000 shares in the company's share purchase plan on 28 March 2018. He stated that he has sold 750,000 of those shares and retains the balance of 3,000,000 shares. He said at the time he sold the shares he was unaware of the restriction on him selling those shares. 22 Mr Lester, the current chairman of the Board, deposed that following his appointment on 6 November 2017 he had a discussion with Mr Nurse who assured him that the company had in place appropriate procedures and experienced personnel to ensure all regulatory requirements were met. He also stated that the company has now put in place new procedures and is undergoing changes to ensure that future regulatory requirements pertaining to the requirements of the Australian Securities and Investments Commission (ASIC) and ASX are met, including that the company intends to secure the services of a qualified managing director who will have responsibility for regulatory compliance. 23 Mr Lester stated that at each meeting of the Board there is now a standing agenda item that requires the directors to receive a written briefing from the company secretary setting out the requirements that the company was required to satisfy in the previous month, and also the requirements the company is likely to need to meet in the ensuing month. 24 Mr Lester said that he understands that as the company's securities are currently suspended, and have been suspended for more than five days, the company will not be able to lodge a cleansing statement with its Appendix 3B lodgements for 12 months following the reinstatement of the company's securities to trading. 25 Mr Doutch, Mr Lester and Mr Nurse each deposed that as at the relevant times when the company issued shares, there was no excluded information for the purposes of s 708A(1) of the Corporations Act. 26 Mr Bhalla also addressed the issue of share sales. He stated that his enquiries determined the following: (a) the total number of shares issued the subject of the relevant Appendix 3Bs is 2,298,185,935; (b) of those shares, 925,597,375 shares have been on-sold; (c) the number of shares on-sold represents 40.27% of the shares the subject of the Appendix 3Bs; (d) the shares the subject of the Appendix 3Bs have been issued to 308 holders; (e) of the corporations or persons who received shares, 38 have sold all of the shares issued, 59 have sold some of the shares issued and 211 have not sold any of the shares issued; and (f) four of the recipients of the shares were sophisticated investors. 27 The company has sent a letter to all shareholders it identified as having been issued shares the subject of the Appendix 3Bs. The letter disclosed that the company has applied to this Court for relief and invited shareholders to attend the hearing if they wished to do so. I was informed at the hearing that there had been no written responses to the letters but that a number of shareholders called Mr Bhalla and asked for clarification in relation to the matter, but otherwise expressed no concerns. I consider this process to be particularly important where, as in this case, most of the shareholders who have on-sold shares were not sophisticated investors.

Section 1322 and the power to grant the relief sought 28 Section 1322 contemplates that there may be instances of non-compliance with the Corporations Act and facilitates the validation of non-compliance in certain circumstances. It is remedial in nature and is to be given a liberal interpretation: Wave Capital Limited [2003] FCA 969; (2003) 47 ACSR 418 at [29] (French J). It has been utilised to validate non-disclosure by shareholders who on-sell shares on many occasions: see cases collected in ICandy Interactive Limited, in the matter of ICandy Interactive Limited [2018] FCA 533; (2018) 125 ACSR 369 at [43]. 29 Section 1322(1), (2), (3), (3AA), (3A) and (3B) confers upon the court powers to determine the consequences for validity where there has been a failure to comply with the Corporations Act. Section 1322(4) confers a power, on the application of an interested person, to make all or any of the following orders either unconditionally or subject to conditions: (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 rectification of any register kept by ASIC under this Act; (c) an order relieving a person in whole or in part of 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 … 30 Section 1322(6) of the Corporations Act provides: 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. 31 The conditions prescribed in s 1322(6)(a) are not cumulative, and the power to make an order is not limited to cases of procedural irregularity: Weinstock v Beck [2013] HCA 14; (2013) 251 CLR 396 at [10] (French CJ). 32 Relevantly, the court may make orders relieving the shareholders from civil liability with respect to disclosure on their part under s 1322(4)(c). By s 1322(6)(b) it is a precondition to such an order being made that the court is satisfied that the person subject to civil liability has acted honestly. 33 By s 1322(6)(c), the court must not make an order in any case unless it is satisfied that no substantial injustice has been or is likely to be caused to any person.

Application by an 'interested party' 34 Although seeking relief for the benefit of shareholders and not as to any potential liability on its part or that of its current directors, the company is clearly an interested party and has standing to bring the application: Sprint Energy Limited, in the matter of Sprint Energy Limited [2012] FCA 1354 at [40] (McKerracher J).

Act, matter or thing that may be invalid by reason of contravention 35 The company seeks relief by way of a declaration that any offer or sale of the quoted securities during the period 21 June 2016 to 9 October 2018 is not invalid by reason of the seller's failure to comply with s 707(3) and s 727(1) of the Corporations Act. It also seeks an order relieving any sellers of those securities from civil liability arising out of such a contravention. 36 The 'matter' that may be invalid by reason of a contravention is the offering of securities for sale without proper disclosure in contravention of s 707(3) and s 727(1) of the Corporations Act.

The pre-conditions in s 1322(6)(a) 37 The company submits that the court can be satisfied that the second or third limbs of s 1322(6)(a) are met. 38 In ICandy Interactive, I dealt with the meaning of 'acting honestly' and the persons whose conduct might be considered under that limb: ICandy Interactive at [54]-[106]. 39 In this case, I am satisfied that the actions of Mr Nurse were not dishonest. He made an error based on misinformation. As a result, he misunderstood the legal position as to the effect of an Appendix 3B document and the requirement of a cleansing notice. It was not a case of failing to consider the issue or any blatant disregard of governance requirements: he did in fact consider the issue but proceeded on the basis of misinformation. Such conduct of itself does not comprise dishonesty. I am satisfied that proper attempts have been made to contact Mr Hunter. In the end it was Mr Nurse who made decisions on behalf of the company about disclosure. I am not prepared to find that Mr Hunter's conduct was in any way dishonest in circumstances where he has not had an opportunity to explain his position. In any event, Mr Nurse has frankly accepted that it was his responsibility at the relevant times to address disclosure. Nor would I describe the conduct of the other officers as being in blatant disregard of the company's obligations or otherwise dishonest. The non-compliance arose as a result of inadvertence and a failure to have a proper process in place to ensure that Mr Nurse was meeting the company's governance requirements. 40 I have taken into account that there were some 26 separate incidents where the requirements of Pt 6D.2 were not properly addressed. However, the mere fact that there were many separate incidents does not elevate the conduct of the officers to dishonesty. 41 I note the position of Mr Doutch as a former director. He received and on-sold shares after his resignation. Unless excluded, he stands to benefit from the orders sought by the company. I have considered his position carefully. He has been forthcoming in his affidavit and at all times he proceeded on the assumption that the company had complied with its disclosure obligations. He has disclosed the basis of that assumption and I do not consider his conduct disentitles him from the benefit of the relief. In any event, as repeated below, my orders provide for parties who claim to have suffered substantial injustice by the orders to apply to vary or discharge the orders within 28 days. 42 I also have regard to the fact that once the failures on the part of the company were understood, it moved quickly to bring this application. It has also put in place a detailed governance programme going forward to guard against similar issues arising, and that programme was disclosed to the Court. 43 There is no suggestion any of the vendor shareholders acted other than honestly. They had access to the Appendix 3B which contained warranties that disclosure obligations had been addressed. In such cases it is open to the court to readily infer that the shareholders have acted honestly in on-selling the shares: Silver Lake Resources Limited, in the matter of Silver Lake Resources Limited [2012] FCA 32; (2012) 87 ACSR 436 at [23] (Siopis J). 44 Accordingly, I am satisfied that the honesty limb (s 1322(6)(a)(ii)) is satisfied. Further, for those reasons and also for the reasons addressed below as to s 1322(6)(c), I consider it is just and equitable that the orders be made, and so s 1322(6)(a)(iii) is also satisfied.

Section 1322(6)(c) - no substantial injustice 45 There is no ground for inferring that the validation of share sales would prejudice any person. However, as is common in such applications, there will be a period of 28 days during which affected persons may apply to vary or set aside these orders. To the extent there is prejudice to third party purchasers by such validation, they may apply to Court under the orders. 46 The orders sought are clearly in the interests of shareholders who have made offers or on-sold their shares, as they risk exposure to claims against them, absent validation. 47 In the circumstances, I do not consider there will be any substantial injustice in making the orders.

Section 1322(4)(c) - relief from civil liability 48 For the reasons I have discussed with respect to the honesty of the shareholders, the just and equitable element and the absence of substantial injustice, it is appropriate that orders be made under s 1322(4)(c) relieving the shareholders who made offers or sales during the relevant periods from civil liability.

Position of ASIC and ASX 49 ASIC has indicated that it neither opposes nor consents to the application, taking into account the fact that the company does not seek relief as to its own conduct or that of its former or current officers. I note for completion that Mr Doutch, a former director, will in fact stand to benefit from the orders in his capacity as a shareholder. I have addressed his position above. 50 The ASX was informed of the application and did not support or oppose it.

Relief 51 I do not consider public policy will be undermined by the making of the orders. The company's conduct did not involve blatant disregard of the provisions of the Corporations Act. 52 Accordingly, I was satisfied in the circumstances of this case that the relief should be granted. I certify that the preceding fifty-two (52) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Banks-Smith.