Weinstock v Beck

BANKS-SMITH J: 1 By this application the plaintiff company seeks urgent relief under s 1322(4) of the Corporations Act 2001 (Cth) relating to contraventions of Part 6D.2, which imposes disclosure obligations with respect to the issue and sale of shares. 2 The relevant share issue occurred on 19 November 2021 and involved the issue of 1,975,769 shares to Asenna Wealth Solution Pty Ltd upon conversion of some of 4,000,000 convertible notes that had previously been issued to it. A holding lock was placed on the trading of shares in the company on 6 December 2021. 3 In the intervening period, Asenna had sold 1,475,769 of those issued shares to third parties (Asenna shares) and those shares, or at least significant numbers of them, appear to have been on-sold prior to the lodging of a prospectus on 1 February 2022, as discussed below. 4 The company seeks relief not as to its own potential liability but to relieve third party shareholders from liability in circumstances where they have on-sold Asenna shares and may have unknowingly contravened the disclosure obligations of the Corporations Act. It also seeks relief by way of a declaration that such share transfers are not invalid.

Statutory framework 5 Part 6D.2 of the Corporations Act deals with disclosure to investors. 6 Section 707(3) provides that an offer of a body's securities for sale within 12 months after their issue needs disclosure to investors, subject to certain exceptions. 7 Expressed generally, s 707 is an anti-avoidance provision designed to prevent the avoidance of disclosure requirements by, for example, the issue of shares to a party to whom disclosure is not required and that party then offering the securities for sale to investors without disclosure: Golden Gate Petroleum Ltd, in the matter of Golden Gate Petroleum Ltd [2010] FCA 40 at [27] (McKerracher J). 8 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 respectively. 9 The cleansing notice exception can be relied upon only 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 (five day rule). 10 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. 11 In this case the cleansing notice option was not available to the company, but a prospectus was issued on 1 February 2022. It has the effect of meeting disclosure requirements for relevant offers and sales going forward. 12 However, that does not address the instances of on-sales of the Asenna shares prior to the lodging of the cleansing prospectus, and accordingly this application has been brought.

Facts 13 The company relies (relevantly) on two affidavits, being an affidavit of Iain Dunstan, a director of the company, and an affidavit of David Hwang, the company's principal and chief compliance officer. The evidence reveals the following matters. 14 On 19 November 2021 Mr Hwang instructed Ms Amy Wong of Automic Group, the share registry manager to the company, to issue 1,975,769 ordinary shares to Asenna with a trading lock applied (also known as a holding lock). The email containing the instruction was in evidence. 15 Mr Hwang said that he understood that a holding lock was to be placed over those shares to prevent any trading in them until such time as a cleansing prospectus was issued. Mr Hwang understood that the company was not qualified to issue a cleansing notice because its shares had been suspended for trading for more than five days in the previous 12 months. 16 On 19 November 2021 Mr Hwang received a reply email from Ms Wong which stated, 'confirming Ned has actioned the below'. 'Ned' held an Automic Group email address and I infer was one of its employees. 17 On the basis of the email exchange, Mr Hwang understood that a holding lock had been placed on all the shares issued to Asenna and that accordingly an appendix 2A announcement (an application for quotation of the securities) was then lodged with the ASX. 18 Mr Hwang understood at that time that the company would be issuing a cleansing prospectus in early 2022 which would enable trading in the shares issued to Asenna. 19 On 6 December 2021 Mr Hwang spoke to Mr Dunstan about share movement reports which showed that the Asenna shares had been sold. Both Mr Hwang and Mr Dunstan expressed surprise that such trading had occurred, because they understood all of the shares were subject to a holding lock. 20 Mr Dunstan had previously advised Asenna that the shares could not be disposed of until they were cleansed. So much is apparent from an email of 1 December 2021 from Mr Dunstan to Mr Kyle Gildea, the back office manager at Asenna, which stated that the shares 'have a holding lock on then until we issue a cleansing statement'. 21 Mr Dunstan contacted Mr Gildea by email on 6 December 2021 to inform him of the error by way of trading, and asked Mr Gildea to explain how the error happened. Mr Dunstan also telephoned Mr Gildea, and told him that Asenna should not have sold any of the shares issued to it. Mr Dunstan said that he understood from what he was told by Mr Gildea that Mr Gildea's principal at Asenna had sold the shares prior to being told anything about the restriction on sales. 22 Meanwhile, also on 6 December 2021, Mr Hwang ensured that the holding lock was put in place that day. 23 Mr Hwang deposed to the fact that Ms Wong told him that despite their email exchange, through oversight she had failed to check that the holding lock requested had been put in place on 19 November 2021. She did not have authority to put the holding lock in place herself. 24 Mr Hwang ascertained through emails and holding statements that Asenna had disposed of 1,475,769 of the shares on 3 December 2021. The holding statements also showed that Asenna purported to acquire from the market the same number of shares by various purchases on 8, 9 and 20 December 2021 (although I note this does not mean it bought back the same shares it had sold). Extracts from share trading records before the Court indicated that there were volumes of trades in the company shares on and around 6 December 2021, and accordingly it would appear likely that some of the Asenna shares were on-sold by some of the purchasers of those shares. 25 On 1 February 2022 Mr Hwang received an email from the ASX with respect to potential secondary trading. He immediately contacted the company's lawyers, Thomson Geer, and received advice as to how the company should proceed. The company was placed in a trading suspension which remains in effect. 26 On 3 February 2022 the company sent a letter to all current shareholders in connection with this application, explaining that the holder of the shares issued as the result of the conversion of certain convertible notes had been able to sell shares that had not been 'cleansed' because of an administrative error in the implementation of a holding lock and because of miscommunication in the holder's office as to the restriction on sales. The letter anticipated the suspension of share trading and this application. It confirmed that the prospectus had been issued on 1 February 2022. 27 The company also made an ASX announcement on 3 February 2022 in similar terms. 28 Mr Dunstan deposed to the fact that he did not believe there would be any injustice to any person if orders were made as sought in this application. He said he had inquired of the other directors as to whether they are aware of any other outstanding contraventions of provisions of the Corporations Act, to which they all responded in the negative.

Section 1322 and the power to grant relief 29 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. The relevant principles have been addressed on numerous occasions, but for convenience I note the following. 30 Section 1322 is remedial in nature and is to be given a liberal interpretation: Wave Capital Limited [2003] FCA 969 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 at [43]. 31 Sections 1322(2), (3), (3AA), (3A) and (3B) confer 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 … 32 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. 33 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). 34 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. 35 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.

Standing to bring the application 36 An application may be made under s 1322 by an interested party. Although seeking relief for the benefit of shareholders and not as to any potential liability on its part or that of its 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).

The 'matter' that may be invalid by reason of the contravention 37 The relevant matter is the sale and on-sale of the Asenna shares. The 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) 38 The company contends that the Court can be satisfied that either or both of the second and third limbs of s 1322(6)(a) are met. 39 I am satisfied that the actions of Mr Dunstan and Mr Hwang were honest. Both appear to have been aware of the company's obligations as to the need to prevent on-sales pending the issue of the prospectus. Errors were caused by the inadvertence of others outside the company. In any event inadvertence does not comprise dishonesty: QBiotics Limited, in the matter of QBiotics Limited [2016] FCA 873 at [38] (Gleeson J); and Sprint Energy at [43]. Both Mr Dunstan and Mr Hwang were very open with the Court as to the error, and their position is supported by the documentary evidence. 40 I also have regard to the fact that once the error was disclosed, the company moved quickly to obtain legal advice, suspend trading, file a cleansing prospectus and bring this application. There is no other disclosed conduct on the part of the company that raises the concern of the Court. 41 There is no suggestion any of the shareholders who acquired the Asenna shares directly or indirectly from Asenna acted other than honestly. It can be inferred that it is probable that those shareholders have acted honestly in on-selling the shares: TV2U International Limited, in the matter of TV2U International Limited [2016] FCA 1556 at [40]. 42 The position with respect to Asenna is somewhat different to that of the third party shareholders. Despite being given express instructions not to transfer the issued shares, including the Asenna shares, it did so. I would not be prepared to absolve it from liability without admissible evidence from it as to the circumstances of the sales and why they occurred in the face of the instructions. It is open to Asenna to seek such relief should it wish to do so, and liberty to apply is reserved in that regard. 43 Accordingly, leaving Asenna to the side, I am satisfied that the relevant persons acted honestly, and that 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 44 There is no ground for inferring that validation of the share sales would prejudice any person. However, 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. There are numerous examples of the provision of a 28 day window in similar applications. 45 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. 46 I do not consider there will be any substantial injustice in making the orders.

Section 1322(4)(c) - relief from civil liability 47 For the reasons I have discussed as to satisfaction of the honesty of the shareholders (noting the requirement of s 1322(6)(b)), satisfaction of the just and equitable limb 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 period from civil liability.

Position of the ASX and ASIC 48 Both ASIC and the ASX were informed of the application. They neither supported nor opposed it. They did not wish to be heard on the application.

Relief 49 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. 50 Accordingly, I am satisfied that in the circumstances of this case the relief should be granted. I certify that the preceding fifty (50) numbered paragraphs are a true copy of the Reasons for Judgment of the Honourable Justice Banks-Smith.