Weinstock v Beck

COLVIN J: 1 The present proceedings concern the admitted failure of Wangle Technologies Ltd to comply with the disclosure requirements under s 707, s 708A and s 727 of the Corporations Act 2001 (Cth). The failure relates to shares issued by Wangle on 3 and 10 November 2016 and 8 December 2017. 2 On the evidence before me, the failure to comply with the disclosure requirements was discovered on 12 April 2018 in the course of undertaking due diligence for an upcoming capital raising by Wangle. Wangle sought immediate legal advice and on 13 April 2018 requested a voluntary suspension of trading in its securities. Since then, trading in its shares has been suspended pending an application to this Court for declarations and orders under s 1322 of the Corporations Act. 3 Wangle applies under s 1322(4) of the Corporations Act for orders that dealings in the shares issued were not invalid by reason of the failure by those who have sold the shares to comply with s 707(3) and s 727(1) of the Corporations Act and that the sellers be relieved from any civil liability in respect of a contravention of those provisions. 4 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. 5 The application seeks orders which, in substance, would protect the validity of trading in shares notwithstanding the failure to comply with the disclosure requirements. It is brought on the basis that the breach was inadvertent, the shareholders may be inferred to have acted honestly in trading shares and it is just and equitable for the orders to be made. 6 Wangle seeks no orders that would relieve it or its officers from civil liability. The orders sought are confined to protecting the interests of shareholders who have been involved in trading the shares. 7 Shareholders who were issued with shares on the relevant dates and who on-sold their shares within 12 months of the date of issue have been sent a letter informing them of the failure to comply with the disclosure obligations. The letter states that the failure 'arose by way of administrative oversights and the Company is taking appropriate steps to rectify the situation'. The letter refers to a cleansing prospectus which was lodged with the Australian Securities and Investments Commission on 11 May 2018 which will effectively cleanse on-sales of shares occurring after that date. The letter then refers to the application to this Court. It states: The Federal Court application is likely to be heard in the next few weeks, and the Company understands that there are reasonable prospects that validating orders will be made. There is no need for you to attend at the hearing, but you can do so if you wish. The Company has requested a suspension of trading in its Shares. The suspension will be withdrawn upon the Federal Court making orders as sought in the application. The Company will keep the market informed, including as to the date of the hearing of the Federal Court Application, and the outcome when the Court's decision is delivered. Please contact Loren King, Company Secretary … if you have any queries. 8 On 18 May 2018, Wangle made a public announcement to the Australian Securities Exchange advising that the application would be listed for a final hearing on 7 June 2018 at 2.15 pm. The matter proceeded to a final hearing on that date and at that time. 9 Wangle has received no communications from shareholders in response to these letters and announcement and no shareholders appeared at the final hearing. Notice of the application has been given to the Australian Securities and Investment Commission but it did not appear at the final hearing. 10 The principles to be applied on an application of this kind were recently reviewed by Banks-Smith J in ICandy Interactive Limited, in the matter of ICandy Interactive Limited [2018] FCA 533 at [43]-[44]. The orders are sought under a provision that is remedial in nature and is therefore to be given a generous interpretation: Weinstock v Beck [2013] HCA 14; (2013) 251 CLR 396. 11 The person responsible for ensuring compliance by Wangle with the disclosure obligations in relation to the share issues was Loren King, the company secretary of Wangle. 12 As to the November 2016 share issues, Ms King deposed to her awareness at that time of the requirements in relation to cleansing notices and cleansing prospectuses in the Corporations Act. She says that she cannot recall why she did not ensure that a cleansing notice was issued for the share issues in November 2016 and that it appears to be something that she overlooked at the time. 13 As to the December 2017 share issue Ms King deposed that she was aware that a cleansing notice could not be issued when a company's shares had been suspended from trading for more than five days over the 12 month period prior to the date of a new securities issue. As to that requirement she said: I did not review [Wangle's] announcements to check whether [Wangle's] shares had been suspended for more than 5 days in the previous 12-month period. Instead, I relied on a document in [Wangle's] files that stated that the total suspension period was not more than 5 days. 14 Ms King deposed that this information was not correct and that if the announcements made by Wangle in the previous 12 months had been identified then it would have been evident that securities in Wangle had been suspended for a total of 23 days in the previous 12 month period. She then says: In hindsight, I should have checked the past announcements. This was an oversight on my part. I would have taken steps for a cleansing prospectus to be lodged, if I had known that a cleansing notice could not be issued. I did not at any time knowingly fail to follow the fundraising requirements under the Act. 15 Sean Smith, a director of Wangle, deposed to the steps that were taken as soon as the issue was drawn to his attention by Ms King. He also deposed to his belief that it is very unlikely that any substantial injustice has been caused to any person as a result of the secondary trading in the shares and that he is not aware of any concerns being expressed by shareholders. 16 The above matters were deposed to by Ms King and Mr Smith in affidavits dated 16 May 2018. 17 On 5 June 2018 Ms King deposed to the following matters: 4 In paragraph 18 of my First Affidavit I said that the source of my error in not arranging for a cleansing notice to be issued in relation to the December 2017 Share Issue was a document on the plaintiff's files. 5 On 23 May 2018 Steinepreis Paganin informed me that the Australian Securities and Investments Commission had sought further details of the document referred to in paragraph 18 of my First Affidavit. 6. I then re-read my First Affidavit, and noted that paragraph 18 is not correct in that the source of my failure to arrange for the issue of a cleansing notice for the December 2017 Share Issue was not a document I had seen in the plaintiffs files. 7 My failure to arrange for the issue of a cleansing notice occurred because I did not review the plaintiff's Australian Securities Exchange (ASX) announcements in the 12-month period ending on the date of that securities issue, being 8 December 2017, to see whether the plaintiffs securities had been suspended from trading for more than 5 days over that period. If I had done so, I would have seen from the announcements that the plaintiff's securities had been suspended from trading for a total of 23 days during that 12-month period. I refer to annexures LK-9 and LK-10 of the First Affidavit. 8 I cannot now explain why I did not review the announcements referred to above. I generally do make such enquiries and I can only assume that my oversight was due to work pressures at the time. 9 When I signed my First Affidavit, I did not read it through with much care and I did not note the error referred to above. I acknowledge that I should not have sworn my First Affidavit with that error. I did not swear the affidavit knowing it to be incorrect in that regard. 18 The affidavit also deposed that on 29 June 2017 there had been another issue of securities where a cleansing notice had been issued despite the plaintiff having been suspended for more than five days in the previous 12 months. However, as there has not been any secondary trading of those shares, validating orders are not sought in respect of dealings in those shares. 19 These matters reveal a cavalier attitude to compliance with the disclosure obligations which provide important protections for shareholders participating in capital markets. Notwithstanding Ms King's frank admission that she was aware of the relevant requirements at all times, there has been a series of failures to comply. 20 It is the case that the issues were drawn to the attention of Mr Smith and legal advisors to the company by Ms King when she became consciously aware of the failure to comply. However, as to the share issue in December 2017 she provided an explanation which she now accepts was not correct. Having regard to the terms in which her affidavit of 16 May 2018 was expressed it is difficult to see how the reference to reviewing an incorrect document could have been overlooked in reading the affidavit. The affidavit is not long. The only explanation which it provides for the failure to comply in respect of the December 2017 share issue is a claimed reliance on a document in Wangle's files that stated that the total suspension period was not more than five days. When that document was requested by the Australian Securities Investments Commission, Ms King then deposed to the fact that the source of her failure to arrange for the issue of a cleansing notice was not a document that she had seen in the files of Wangle. Rather, it was because she did not review the relevant announcement to the Australian Securities Exchange to see whether there had been a suspension from trading for more than five days over the previous 12 months. 21 It is of concern that an explanation that was proffered for what occurred is now retracted. 22 Nevertheless, on the material before me I do not consider that the evidence of Wangle that resulted in the failure to comply with the disclosure requirements discloses behaviour that was dishonest. Further, on the evidence it is likely that the shareholders who made offers or on-sold their shares within the 12 month period did so on the assumption that no disclosure was required by them. It is reasonable to expect that shareholders in Wangle who sold shares issued to them without the requisite disclosure, unwittingly contravened s 707 by offering for sale or by selling those shares and did not act dishonestly in doing so: see the approach by Siopis J in TV2U International Limited, in the matter of TV2U International Limited [2016] FCA 1556. The making of orders will serve to give effect to their expectations and no party appears to raise any issue in relation to the non-disclosure. 23 On applications of this kind the Court focuses on the interests of the shareholders. Principally by reference to those interests I am satisfied that it is just and equitable that the orders sought should be made, and that orders should be made relieving shareholders from civil liability. 24 Wangle invites the Court to make no order as to costs. I have considered whether there should be an order as to costs of a kind that ensures that Wangle does not have to bear the costs of making the present application. I would distinguish the present case from a case such as Re Wave Capital Ltd [2003] FCA 969 at [32], where there was a failure to meet a requirement in circumstances where there had been an express statement in a prospectus that the requirement would be met. I make no order as to costs. I certify that the preceding twenty-four (24) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Colvin.