Weinstock v Beck

BEACH J: 1 The plaintiff, 333D Limited, has applied for orders under s 1322 of the Corporations Act 2001 (Cth) to cure a failure under s 708A(5)(e) to lodge a cleansing notice in respect of the issue of new shares. 2 This morning I made the necessary orders that operated to negate the effect of the omission under s 708A(5)(e), which omission would otherwise have entailed the consequence that any on-sales of such new shares would have amounted to an indirect issue within 12 months of the direct issue requiring disclosure to investors under Part 6D.2, and thereby placed certain on-sellers in breach of their disclosure obligations for on-sales that occurred within the week or so following the new issue, absent the ameliorating effect of the s 1322 orders and declarations. 3 Let me explain my reasons. 4 333D's shares are listed for quotation on the ASX. On 9 and 12 February 2021, 333D issued in total 311,159,510 new shares (the new shares). This included 135,000,000 shares issued to LAX Consulting Pty Ltd and 5,000,000 shares issued to an employee of 333D, Mr Parminder Badwal. The shares issued to LAX Consulting on 9 February 2021 were issued in lieu of an interest payment due under a loan made to 333D. The shares issued to Mr Badwal on 12 February 2021 were issued as an employee incentive and reward for past performance. The balance of the shares were issued to interests associated with the directors of 333D and to a firm that had provided accounting services to 333D. For the moment, I need only focus on the on-sales concerning LAX Consulting and Mr Badwal. 5 In this regard, on 18 February 2021, LAX Consulting on-sold 98,000,000 of the new shares. And on 19 February 2021, Mr Badwal on-sold his 5,000,000 new shares. 6 No cleansing notice was given in relation to the 9 and 12 February 2021 issue of the new shares. 7 At this point I should make reference to some of the relevant statutory provisions. 8 Generally, Pt 6D.2 of the Act imposes disclosure obligations concerning the issue and sale of securities or shares. In particular, ss 706, 707, 708, 708A and 727 are relevant to the present context. 9 Section 706 provides: An offer of securities for issue, other than a CSF offer, needs disclosure to investors under this Part unless section 708 or 708AA says otherwise. 10 Relevant parts of s 707 provide: Only some sales need disclosure (1) An offer of securities for sale needs disclosure to investors under this Part only if disclosure is required by subsection (2), (3) or (5). … Sale amounting to indirect issue (3) An offer of a body's securities for sale within 12 months after their issue needs disclosure to investors under this Part if: (a) the body issued the securities without disclosure to investors under this Part; and (b) either: (i) the body issued the securities with the purpose of the person to whom they were issued selling or transferring the securities, or granting, issuing or transferring interests in, or options over, them; or (ii) the person to whom the securities were issued acquired them with the purpose of selling or transferring the securities, or granting, issuing or transferring interests in, or options over, them; and section 708 or 708A does not say otherwise. … 11 I should note that s 707(3) is relevant to the on-sales, whether actual or anticipated, that I have referred to in these reasons. 12 Relevant parts of s 708 provide: … Sophisticated investors (8) An offer of a body's securities does not need disclosure to investors under this Part if: (a) the minimum amount payable for the securities on acceptance of the offer by the person to whom the offer is made is at least $500,000; or (b) the amount payable for the securities on acceptance by the person to whom the offer is made and the amounts previously paid by the person for the body's securities of the same class that are held by the person add up to at least $500,000; or (c) it appears from a certificate given by a qualified accountant no more than 6 months before the offer is made that the person to whom the offer is made: (i) has net assets of at least the amount specified in regulations made for the purposes of this subparagraph; or (ii) has a gross income for each of the last 2 financial years of at least the amount specified in regulations made for the purposes of this subparagraph a year; or (d) the offer is made to a company or trust controlled by a person who meets the requirements of subparagraph (c)(i) or (ii). … Offers of securities to people associated with the body (12) An offer of a body's securities does not need disclosure to investors under this Part if it is made to: (a) a senior manager of the body or a related body or their spouse, parent, child, brother or sister; or (b) a body corporate controlled by a person referred to in paragraph (a). 13 Some of these exemptions applied to the direct issue of the new shares by 333D. 14 Relevant parts of s 708A provide: Sale offers to which this section applies (1) This section applies to an offer (the sale offer) of a body's securities (the relevant securities) for sale by a person if: (a) but for subsection (5), (11) or (12), disclosure to investors under this Part would be required by subsection 707(3) for the sale offer; and (b) the securities were not issued by the body with the purpose referred to in subparagraph 707(3)(b)(i); and (c) a determination under subsection (2) was not in force in relation to the body at the time when the relevant securities were issued. … Sale offer of quoted securities - case 1 (5) The sale offer does not need disclosure to investors under this Part if: (a) the relevant securities are in a class of securities that were quoted securities at all times in the 3 months before the day on which the relevant securities were issued; and (b) trading in that class of securities on a prescribed financial market on which they were quoted 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; and (c) no exemption under section 111AS or 111AT covered the body, or any person as director or auditor of the body, at any time during the relevant period referred to in paragraph (b); and (d) no order under section 340 or 341 covered the body, or any person as director or auditor of the body, at any time during the relevant period referred to in paragraph (b); and (e) either: (i) if this section applies because of subsection (1) - the body gives the relevant market operator for the body a notice that complies with subsection (6) before the sale offer is made; or … (6) A notice complies with this subsection if the notice: (a) is given within 5 business days after the day on which the relevant securities were issued by the body; and (b) states that the body issued the relevant securities without disclosure to investors under this Part; and (c) states that the notice is being given under paragraph (5)(e); and (d) states that, as at the date of the notice, the body has complied with: (i) the provisions of Chapter 2M as they apply to the body; and (ii) section 674; and (e) sets out any information that is excluded information as at the date of the notice (see subsections (7) and (8)). 15 It is of course ss 708A(5)(e) and 708A(6) that are of direct relevance to the present application. 16 Section 727(1) provides: Offer of securities needs lodged disclosure document (1) A person must not make an offer of securities, or distribute an application form for an offer of securities, that needs disclosure to investors under Part 6D.2 unless a disclosure document for the offer has been lodged with ASIC. 17 That provision bites in the present case in conjunction with the mandate set out in s 707(3), absent the orders sought by 333D. 18 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; … (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. (5) An order may be made under paragraph (4)(a) or (c) notwithstanding that the contravention or failure referred to in the paragraph concerned resulted in the commission of an offence. (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. 19 In summary, Pt 6D.2 of the Act requires the provision of information about securities when an offer to issue or sell them is made. In particular, an offeror of securities for issue must make disclosure to investors under Pt 6D.2, unless s 708 says otherwise (s 706), and an offeror of securities for sale within 12 months after their issue must make a disclosure to investors under Pt 6D.2 of the Act if (s 707(3)): (a) the shares were issued without disclosure; and (b) they were issued by the company or acquired by the recipient for the purpose of being sold; and (c) ss 708 and 708A do not say otherwise. 20 An exception applies to an on-sale of shares where the issuer has provided a cleansing notice within 5 days of the issue of the securities, and before the sale offer is made (ss 708A(5) and (6)). If issued, such a notice allows quoted securities to be on-sold without further compliance with the disclosure requirements of Pt 6D.2. But if an issuer of shares does not issue a valid cleansing notice, then there is a prospect that the party to whom the shares are issued must itself cause such disclosure if it wishes to on-sell those shares within 12 months (s 707(3)). Further, there is the prospect of a contravention of the Act and the commission of an offence if such disclosure does not occur (s 727(1)). 21 Now 333D inadvertently failed to lodge a cleansing notice following the issue of the new shares. Briefly, Ms McDow from Boardroom Pty Ltd was performing the role of company secretary for 333D, and she had recently taken over from Ms Betteridge (also from Boardroom) who had gone on maternity leave. Due to an oversight contributed to by this changeover, Ms McDow failed to lodge a cleansing notice in respect of the new shares. 22 Now I should note that 333D was not required to make a disclosure under s 706 in respect of the issue of the new shares, as the issue was subject to the exception for shares issued to a senior manager of the relevant body or a related body, or a body corporate controlled by such senior manager or related body (s 708(12)). This exception applied to all of the new shares issued, except those issued to LAX Consulting, which were subject to the exception for sophisticated investors in s 708(8). 23 But some of the new shares were later on-sold by LAX Consulting and Mr Badwal, without disclosure to investors. Hence the present difficulty. 24 333D has sought orders extending the time to enable it to give a valid cleansing notice, which in turn will ensure that the on-sale of the new shares within 12 months of the date of their issue will be exempt from the disclosure requirements which apply to a sale offer pursuant to s 707(3). 333D has also sought orders validating the on-sale of any of the new shares, and absolving past sellers of liability under s 727(1). 25 In my view, the evidence that has been carefully drawn to my attention by Mr Brad Holmes, counsel for 333D, establishes a sufficient basis for the exercise of my discretion to make the orders sought under s 1322. But first, let me say something about the question of statutory power. 26 Section 1322(4) is "cast in very broad terms" and "is not to be hedged about by any implied limitation" (Weinstock v Beck (2013) 251 CLR 396 at [53] and [55] per the plurality). And as explained by French J in Re Wave Capital Ltd (2003) 47 ACSR 418 at [29], the powers under s 1322(4) 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. 27 But the power is not to be exercised lightly and is to be exercised having regard to the general purposes of the Act, including the provisions in respect of which relief is sought, the interests of all parties affected and the public interest in ensuring compliance with the Act. 28 The relevant exercise of power can be described as involving a two step process. First, is it appropriate to make one or other of the orders in 1322(4)? Second, are the conditions in s 1322(6) satisfied? 29 Section 1322(6)(c) provides that I must not make any order under s 1322(4) unless I am satisfied "that no substantial injustice has been or is likely to be caused to any person". The first part of the disjunction "has been" invites an inquiry as to the consequences of the non-compliance sought to be cured. The second part of the disjunction "likely to be" focuses on the effect of the proposed order. 30 Further, s 1322(6)(b) provides that an order under s 1322(4)(c) may not be made relieving a person of civil liability unless I am satisfied that the person acted honestly. It is not in doubt that the concept of acting honestly can embrace an active but incorrect consideration of an issue, a failure to turn one's mind to the relevant issue or a failure to appreciate the true significance of non-compliance (see In the matter of DAC Finance (NSW/QLD) Pty Ltd [2020] NSWSC 182 at [32] and [33] per Gleeson JA). 31 But even if the pre-conditions or criteria in ss 1322(4) and (6) are satisfied, I still retain a discretion whether to make the orders sought. So, it is necessary to take into account whether the relevant applicant has taken prompt action to remedy the error. Further, the public interest is a relevant consideration in the exercise of my discretion. 32 Now I am satisfied that the requirements of s 1322(4) have been met. 33 First, 333D is an interested person for the purposes of s 1322(4) and as such has standing to bring this application. Further, each recipient of the new shares has been notified of 333D's intention to seek the orders sought, and each has indicated to Mr John Conidi, the executive chairman of 333D, that they support the making of those orders. 34 Second, as s 1322(4)(d) provides that I may make orders extending the period for doing any act, including where the relevant period ended before the application was made, I am empowered to declare that the period of five business days from the date of issue of the new shares, which is the period within which a cleansing notice had to be issued (s 708A(6)(a)), be extended to the second business day after the day on which I made the orders sought. So, such orders enable 333D to lodge a valid cleansing notice in respect of the new shares. 35 Third, s 1322(4) provides that I can make such consequential or ancillary orders to other orders made under s 1322(4) as I think fit. So, I am empowered to declare that the cleansing notice that will be given is deemed to take effect as if it had been given to the ASX on 15 February 2021, which is a date before any of the on-sales occurred, as contemplated by s 708A(5)(e). Such orders would apply to the on-sales by LAX Consulting and Mr Badwal, and also to any future sales of the new shares within 12 months of the date of their issue. 36 Fourth, s 1322(4)(a) provides that I can make orders declaring that any act, matter or thing done under the Act or in relation to 333D is not invalid by reason of any contravention of the Act. This empowers me to declare that any sale of the new shares during the period after their issue to the date of my orders is not invalid by reason of the initial failure to lodge a cleansing notice or the sellers' failure to make disclosure. 37 Now s 1322(6)(a) provides that I must not make a s 1322 order unless I am satisfied that the act, matter or thing is essentially of a procedural nature, or that the person concerned in or party to the contravention or failure acted honestly, or that it is just and equitable that the order be made. In my view, 333D's failure to lodge a cleansing notice was the result of an honest mistake, as opposed to the deliberate disregard of the requirements of the Act. Moreover, in my view it is just and equitable that the relevant orders be made. So, on any view, either or both of limbs (ii) and (iii) of s 1322(6)(a) apply in relation to the order made under s 1322(4)(a). 38 Fifth, s 1322(4)(c) provides that I can make an order relieving a person from any civil liability in respect of a contravention of a provision of the Act, which empowers me to order that any person to whom any of the new shares were issued, or have been sold, and who have in turn on-sold any of those shares up until the date of my orders, is relieved from any civil liability in respect of the failure to lodge a cleansing notice or the sellers' failure to make disclosure. 39 Now s 1322(6)(b) provides that I must not make such an order unless I am satisfied that the person subject to the civil liability concerned acted honestly. In my view there is no basis to conclude that LAX Consulting or Mr Badwal did not act honestly. In this context it is relevant to note that the Appendix 2A lodged by 333D to apply for quotation of the new shares included a warranty that an offer of the securities for sale within 12 months after their issue would not require disclosure under s 707(3). In light of this warranty, I can readily infer that shareholders acted honestly in on-selling their allocation of the new shares without making disclosure. 40 Sixth, I of course may not make any order under s 1322(4) unless I am satisfied that no substantial injustice has been or is likely to be caused to any person (s 1322(6)(c)). But I am satisfied that there is no substantial injustice. Rather, if the orders were not made, injustice may be suffered by those shareholders who may have inadvertently contravened their own disclosure obligations. In any event, I do not need to linger on this question. Any potential for injustice can be accommodated by giving liberty to apply to any person who may claim to suffer substantial injustice by reason of the orders to vary or discharge the orders within a limited period. In other words, I accept that in the unlikely event that a purchaser of shares from an on-seller may contend that the purchase would not have been made had the seller complied with its disclosure obligations, any potential for injustice can be remedied by invoking any liberty to apply (see In the matter of Micro-X Limited [2019] FCA 1154 at [12(h)] per Moshinsky J). 41 In light of the foregoing, I am satisfied that I have power to make the orders sought. Further, I consider it appropriate to exercise my discretion in favour of granting the relief sought, including because it is just and equitable to do so. 42 First, 333D was able to give a cleansing notice at the relevant time, including because there was no "excluded information" (ss 708A(6)(e), (7) and (8)) at the time the notice would have been given. In other words, if the cleansing notice had been given within the relevant time limits, that would not have altered the information disclosure that would have been required to have been given to those concerned. 43 Second, the failure to give the cleansing notice was inadvertent and 333D acted honestly. So too did the on-sellers. 44 Third, 333D acted promptly in addressing the non-compliance by investigating its cause, seeking legal advice and requesting a trading halt. 333D has also taken steps to avoid any recurrence of such non-compliance. 45 Fourth, there were no discretionary factors militating against the grant of the orders. 46 Finally, neither the Australian Securities and Investments Commission nor the Australian Securities Exchange, who were served with the application and supporting material, opposed the orders sought. 47 For all of these reasons, I made this morning's orders. I certify that the preceding forty-seven (47) numbered paragraphs are a true copy of the Reasons for Judgment of the Honourable Justice Beach.