FEDERAL COURT OF AUSTRALIA

ICandy Interactive Limited, in the matter of ICandy Interactive Limited [2018] FCA 533

ORDERS

THE COURT ORDERS THAT:

1.    Pursuant to s 1322(4)(a) of the Corporations Act 2011 (Cth), it is declared that any offer for sale or sale of the quoted securities being 20,500,000 ordinary fully paid shares in the plaintiff during the period after their issue on 9 October 2017 to 11 January 2018 is not invalid by reason of the sellers' failure to comply with s 707(3) and s 727(1) of the Corporations Act.

2.    Pursuant to s 1322(4)(c) of the Corporations Act, any sellers of securities referred to in order 1 are relieved from any civil liability arising out of a contravention of s 707(3) and s 727(1) of the Corporations Act.

3.    A sealed copy of these orders is to be served on the Australian Securities and Investments Commission (ASIC) as soon as reasonably practicable and upon service of these orders on ASIC. ASIC is to include these orders on its database.

4.    A copy of these orders be given to each person to whom the securities referred to in order 1 were issued and as soon as reasonably practicable the plaintiff is to publish an announcement to the Australian Securities Exchange (ASX) in which a copy of these orders is included.

5.    The plaintiff make a request forthwith of the ASX for the class of securities 'ICI' to be reinstated.

6.    For a period of 28 days from the date of reinstatement by the ASX of the class of securities 'ICI' and the publication of these orders on the ASX website, any person who claims to have suffered substantial injustice or is likely to suffer substantial injustice by the making of any or all of these order has liberty to apply to vary or to discharge them within that period.

7.    There be no order as to costs.

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

REASONS FOR JUDGMENT

BANKS-SMITH J:

Introduction

1    The applicant (iCandy) seeks relief under s 1322(4) of the Corporations Act 2001 (Cth) (Act) relating to contraventions of s 707(3) and s 727(1) of the Act.

2    In October 2017 iCandy issued shares to subscribers. Some of those subscribing shareholders have on-sold their shares. There may have been further on-sales. Section 707(3) and s 727(1) require the issuers and sellers of shares to make disclosure to investors in accordance with Part 6D of the Act. It is not in issue that shareholders have on-sold shares without making the necessary disclosure. Had iCandy undertaken certain steps, disclosure by those shareholders would not have been required. ICandy seeks relief that protects the seller shareholders from civil liability for failing to make disclosure.

3    The application first came before Siopis J on 18 January 2018. For reasons discussed further below, his Honour expressed reservations about the application and appointed both the Australian Securities and Investments Commission and the Australian Stock Exchange as amicus curae, with liberty for one to withdraw. The matter was adjourned to a hearing before me. ASIC continued as amicus curae and I was greatly assisted by oral and written submissions made on its behalf.

4    The ASX took no further role other than to indicate to ASIC that in the absence of an order declaring the share issue or on-sales invalid, it would be likely to reinstate iCandy's securities to quotation.

5    During the hearing, ASIC offered to provide supplementary submissions on a point that occupied some debate. I gave the parties until 16 April 2018 to file supplementary submissions, and they were subsequently received from ASIC. On 11 April 2018 iCandy informed the Court that it did not intend to file further submissions. Accordingly, on 13 April I proceeded to make orders, on the basis these reasons would be published later.

Statutory framework - disclosure

6    Part 6D.2 of the Act deals with disclosure to investors. The manner of disclosure is prescribed in s 709.

7    Section 706 provides that an offer of securities for issue needs disclosure to investors unless s 708 or s 708AA says otherwise. In this case, it appears that the share issue was to sophisticated investors and so under s 708(8) iCandy was relieved from the obligation to make disclosure.

8    However, s 707 provides that an offer of securities for sale needs disclosure to investors in certain circumstances. Section 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 shares for sale to investors without disclosure: Re Golden Gate Petroleum Ltd (2010) 77 ACSR 17 [27] (McKerracher J).

9    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 exceptions provided by s 708 and s 708A.

10    It is not in issue in this matter that under s 707(3) and s 708A(1), the offer of the shares issued in October 2017 for on-sale and any sale required that there be disclosure on the part of the shareholders unless one of (relevantly) s 708A(5) or 708A(11) provides otherwise.

11    Section 708A(5) provides for the issue of what is known as a 'cleansing notice'. Section 708A(11) provides for the issue of what is known as a 'cleansing prospectus'.

12    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 (five day rule).

13    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.

Facts

14    The primary affidavit relied upon by iCandy was that of Mr Kin Wai Lau filed 16 January 2018. He is the chairman of the board of iCandy. He deposed to the following matters.

15    In September 2017 iCandy proposed a share issue to raise capital of A$1,332,500 to meet working capital requirements. It engaged CPS Capital Group Pty Ltd to coordinate and manage the capital raising (referred to in the various affidavits as the 'lead manager'). At about the same time, iCandy was proposing to become involved in a project referred to as Project Nitro that was intended to provide on-line services for crypto currency and gaming.

16    Based on communications between iCandy's then lawyers and the ASX, it was apparent that the ASX had concerns about whether involvement in Project Nitro might constitute a change in the nature or scale of iCandy's business. On 25 September 2017 iCandy initiated a voluntary trading halt while it was in communications with the ASX about the nature of Project Nitro.

17    Mr Lau knew about the five day rule. Initially he did not expect the communications with the ASX would result in a suspension that exceeded five days, but in the end that was the case.

18    On 6 October 2017 Mr Lau was told by his lawyer that as the five day rule period had been exceeded, it was not possible to issue a cleansing notice for a share issue. However, his lawyer said that iCandy could apply to ASIC for relief from the five day rule. Mr Lau says his lawyer told him such an application would have a reasonable prospect of success (the grounds for that view were not disclosed to the court).

19    Mr Lau said he was also advised by the lawyer that there was an option to issue a cleansing prospectus under s 708A(11) of the Act.

20    Having received that legal advice, Mr Lau told the lead manager and the company secretary to proceed with the share issue that day. The day (6 October 2017) was the tenth day of suspension of trading.

21    On 9 October 2017 the shares were reinstated to the ASX and the share issue proceeded. The company released two documents to the market via the ASX, being a market announcement and an Appendix 3B announcement (as required under the ASX Listing Rules).

22    The Appendix 3B announcement included a warranty that an offer of the securities for sale within 12 months after their issue will not require disclosure under s 707(3) or s 1012C(6) of the Act.

23    Two days later, iCandy applied for relief with respect to the five day rule from ASIC.

24    On 27 October 2017 iCandy was informed by its lawyers that the application to ASIC may not succeed. Despite that information there was no voluntary trading halt or lock imposed.

25    On 31 October 2017 iCandy appointed its current lawyers to address the options in light of the suspension period.

26    On 7 November 2017, Mr Lau asked the manager of its share register whether shares were being traded and was informed that they were. Therefore, by the latest, on 7 November 2017 Mr Lau knew that shares were being traded. A report annexed to Mr Lau's affidavit indicates considerable trading in shares. For example, they indicate that about one third of the shareholders who received shares by way of the October 2017 share issue disposed of such shares (Annexure KWL14). A further report indicates that there was movement in the share price during this period (Annexure KWL15).

27    It was not until 15 November 2017 that a voluntary suspension of shares was facilitated.

28    On 15 December 2017 iCandy withdrew its application for an extension of the five day rule period.

29    On 11 January 2018 iCandy issued a cleansing prospectus.

30    On the same day, an email was sent to all shareholders who had received the October 2017 shares. The email provides background information to Project Nitro and a potential change of its scope, but does not clearly refer to or expose the significance of the disclosure issue or the proposed court application. Further, the email emphasises that 'You are not required to do anything with this.' The information about the disclosure issue and court application was provided separately in an attached letter and copy ASX announcement. Perhaps unsurprisingly in light of the content of the email, none of those shareholders replied or sought to be heard on this application. Nor has iCandy received responses from any other person in connection with the issue of the October 2017 shares.

31    It was against that backdrop that Siopis J considered the application for relief on its first return date. His Honour had concerns about the conduct of the directors in circumstances where the shares were issued with knowledge that the application to ASIC had not been dealt with and where no holding lock was in place. On its face, iCandy had taken a calculated risk, and such conduct required some scrutiny.

32    Having raised such concerns, his Honour granted iCandy the opportunity to provide further evidence and also sought assistance from an amicus curae, as discussed above.

33    In particular, Siopis J sought submissions as to the meaning of 'acted honestly' in s 1322(6)(a)(ii) in the circumstances of this case.

34    Relevantly, a further three affidavits were then filed on behalf of iCandy.

35    Donald Low was at all material times a director and secretary of iCandy. He deposed that:

(a)    he has considerable experience as a corporate advisor and management consultant;

(b)    his knowledge of disclosure requirements for corporate fundraising under the Act is derived from his employment experience and work as a company director and secretary in Australia;

(c)    he understands that offers of securities by listed companies must generally be accompanied by a prospectus or other disclosure statement and has knowledge of the mechanism by which a company can issue a cleansing notice. He is aware of the five day rule;

(d)    on 6 October 2017 Mr Lau asked him to proceed with the October 2017 share issue. Mr Lau told him that he (Mr Lau) would instruct iCandy's lawyers to apply for relief from ASIC in relation to the five day rule;

(e)    iCandy's then lawyers prepared the Appendix 3B. He signed the Appendix 3B without putting his mind to whether it was true and correct and would not have done so had he considered it properly, but would have sought further advice or spoken to Mr Lau. He saw the warranties on page 9 but assumed they were standard warranties;

(f)    he understood at the time he arranged the issue that there would be no trading in the shares. He recalls that his understanding was based on something Mr Lau had said to him but does not have a specific recollection. He anticipated that the relief application would be successful because the time of the suspension had been extended due to correspondence with the ASX about the potential change in the company's main undertaking and business. He also anticipated a cleansing notice would be issued once the relief was granted. He understood there would be no trading until after those steps occurred, and did not appreciate that shares were in fact being traded until around 7 November 2017 when he was told of the trading by Mr Lau; and

(g)    he only proceeded with the share issue because of his understanding about the shares not being traded and because he understood the relief application was likely to succeed.

36    Mr Lau in a supplementary affidavit deposed that:

(a)    during September 2017 he had discussions with Phillip Lord about him joining the board of iCandy as a director;

(b)    during the telephone conversation with the solicitor on 6 October 2017, the solicitor also said that the ASX had been considering the question of whether iCandy's involvement in Project Nitro would amount to a change in its understanding and activities for an extended period, during which the trading suspension had remained in place. Mr Lau said:

I understood from these comments that [the solicitor's] view was that this should mean that ASIC would not have any issue with granting the relief sought in the Relief Application.

(c)    he understood that it would be best to ensure there was no trading until ASIC had determined the Relief Application;

(d)    he understood that could be done by arrangements with the lead manager;

(e)    sometime during the period 6 October 2017 to 9 October 2017 he had a conversation with Mr Lord and told him that the placees of the share should not be trading their securities until iCandy had been granted the relief from ASIC and lodged the cleansing notice;

(f)    he asked Mr Lord to get in touch with the lead manager to make arrangements and he assumed Mr Lord had done so. He knew Mr Lord was not a director at that stage but expected that he would become one shortly;

(g)    he did not know about the mechanism of a holding lock at that time;

(h)    in hindsight he should have been more diligent and careful in ensuring that there would not be any on-sales by placees. He took no steps in that regard other than his conversation with Mr Lord prior to checking with the manager of the share registry on 7 November 2017. At the time he did not fully appreciate the potential consequences for the placees of the shares.

37    Mr Lau did not say why the involvement of Mr Lord was not disclosed by his primary affidavit.

38    Mr Lord was appointed a director on 11 October 2017. He deposed that:

(a)    his work experience was mainly in project development and marketing, with some involvement in fundraisings, mostly overseas;

(b)    in the weeks prior to 11 October 2017 he had various conversations with Mr Lau and Mr Low about Project Nitro and he was keen to get involved in marketing Project Nitro in roadshows overseas;

(c)    he was told in those conversations that the ASX had taken the position that Project Nitro would involve a significant change to its activities and so iCandy would be proceeding with a more limited involvement in the project;

(d)    Mr Lau told him that iCandy would be proceeding with a securities issue to raise some $1.3 million by way of working capital and that placees of the securities may not be able to trade their shares for around two weeks after the allotment;

(e)    he assumed that arrangements would be put in place with the lead manager in that regard;

(f)    Mr Lau told him that the company's solicitors were applying to ASIC for relief from the five day rule but he cannot recall details of the conversation;

(g)    it was his understanding that when the securities were issued, based on his conversation with Mr Lau, there were arrangements in place so that the placees of the shares would not be trading until the application to ASIC had been resolved; and

(h)    he had little involvement in the compliance matters of iCandy.

39    There is clearly an inconsistency between the evidence of Mr Lord and Mr Lau. Mr Lau asserts in effect that it was Mr Lord's responsibility to contact the lead manager to take steps to protect the shareholders, although Mr Lord was not at that time a director and had only just become involved in the company.

40    Mr Lord says nothing about having been asked to make contact with the lead manager. His evidence is that he assumed arrangements were being put in place. That assumption is inconsistent with any knowledge on his part that he was responsible for such step.

41    In the end, aspects of the conduct of the directors and officers, and in particular Mr Lau, was unsatisfactory. The responsibility for dealing with an issue as important as suspending trading to protect the position of shareholders fell through cracks in the company's governance and communications. Why Mr Lau assumed on the basis of the disclosed communication with his lawyer that ASIC would grant the requested relief is unclear. Even if Mr Lau asked Mr Lord to take steps to contact the lead manager about ensuring the placees did not offer or trade their shares (and there is some doubt about that on the evidence), Mr Lau ought to have ensured there was a record of such direction and confirmed that Mr Lord had taken appropriate steps, particularly as Mr Lord was not in fact a director at that stage. The delay between ascertaining on 7 November 2017 that shares were being traded and the voluntary suspension of 15 November 2018 was not explained.

42    I will return to the relevance of the directors' conduct in the context of s 1322(6)(a)(ii).

Section 1322

Relevant provisions – section 1322(6)(a)(ii)

43    Section 1322 contemplates that there may be instances of non-compliance with the Act and facilitates the validation of non-compliance in certain circumstances. It is remedial in nature and is to be given a liberal interpretation: Re Wave Capital Ltd [2009] FCA 969 [29]. It has been utilised to validate non-disclosure by shareholders who on-sell shares on a number of occasions: Re Golden Gate Petroleum and cases collected at [41(e)]; Re Sprint Energy Limited [2012] FCA 1354; Re Elemental Minerals Ltd [2010] FCA 687; Re European Lithium Limited [2017] FCA 894; Re Silver Lake Resources Ltd [2012] FCA 32; TV2U International Limited [2016] FCA 1556; Re Spectrum Rare Earth Limited [2017] FCA 883.

44    Section 1322 may be invoked even where an irregularity is deliberate: Nenna v Australian Securities and Investments Commission [2011] FCA 1193 [50] – [82].

45    Those parts of s 1322 relevant to this application are as follows:

(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;

(b)    an order directing the rectification of any register kept by ASIC under this Act;

(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.

Interested party

46    Although seeking relief for the benefit of shareholders and not as to any potential liability on its part or that of its directors, iCandy is clearly an interested party and has standing to bring the application: Sprint Energy [40].

Act, matter or thing that may be invalid by reason of contravention

47    By its application, iCandy seeks relief by way of a declaration that any offer for sale or sale of the quoted securities during the period 9 October 2017 to 11 January 2018 is not invalid by reason of the seller's failure to comply with s 703(3) and s 727(1) of the Act. Those dates reflect the date of the issue of the shares and the lodgement of the cleansing prospectus respectively, and so bookend the period during which there was trading involving contravention of the provisions. It also seeks an order relieving any sellers of those securities from civil liability arising out of such contravention.

48    The contravention is the offering of shares for sale without proper disclosure in contravention of s 707(3) and s 727(1) of the Act.

49    Whilst divergent views have been expressed, I prefer the view that a contravention of s 707(3) of the nature of that in issue is not a procedural irregularity: Sprint Energy [42]; Golden Gate [46]; and in contrast Elemental Minerals [36] – [39]. Accordingly, it was not open for iCandy to rely on s 1322(6)(a)(i). Nor did it seek to do so. The question on this application is whether either s 1322(6)(a)(ii) (the honesty limb) or s 1322(6)(a)(iii) (the just and equitable limb) were satisfied. It is only necessary to satisfy one of those limbs.

50    In all of those cases to which counsel referred and in those listed at paragraph [43] above, the court has found that the just and equitable limb is satisfied.

51    However, as Siopis J's orders reveal, his Honour held some concern as to the conduct of the directors in this case and how that conduct should be viewed under the honesty limb.

52    For the reasons set out below, I am of the view that on the facts of this case it is just and equitable that the declarations and orders sought be made. However, considerable attention on the part of both ASIC and iCandy was paid to the honesty limb and so it is appropriate that I address those submissions, albeit that my comments are not decisive in the circumstances.

53    In issue is the scope and meaning of the phrase, 'whether the person or persons concerned in or party to the contravention or failure acted honestly'. On a narrow view, in a case such as this the honesty of only the shareholders is in issue. On a broader view, the court may also consider the honesty of the officers or other persons.

Meaning of honesty

54    When determining whether someone has acted honestly for the purposes of s 1322 of Act the court looks to an absence of evidence of dishonesty: G8 Communications Ltd, in the matter of G8 Communications Ltd [2016] FCA 297 [35]. It also takes into account whether the applicant has taken prompt action to remedy the error: Sprint Energy [44]; Golden Gate [48].

55    The concept of acting honestly can embrace the following:

(a)    inadvertence or a failure to turn their mind to the relevant issue: Re QBiotics Limited [2016] FCA 873 [38];

(b)    an active, but incorrect, consideration of a legal issue as well as failure to consider the issue at all: Primelife Corporation Ltd v Aevum Ltd [2005] NSWSC 269; (2005) 53 ACSR 283 [8]; Golden Gate [47]; Sprint Energy [43];

(c)    failure to understand or appreciate the significance of non-compliance: Sprint Energy [44].

56    Consideration of the honesty of an applicant also arises in the context of s 1318 of the Act. In Hall v Poolman [2007] NSWSC 1330 Palmer J stated (at [325]):

In my view, when considering whether a person has acted honestly for the purposes of a defence under CA s 1317S(2)(b)(i) or s 1318, the Court should be concerned only with the question whether the person has acted honestly in the ordinary meaning of that term, i.e. whether the person has acted without deceit or conscious impropriety, without intent to gain improper benefit or advantage for himself, herself or for another, and without carelessness or imprudence to such a degree as to demonstrate that no genuine attempt at all has been to carry out the duties and obligations of his or her office imposed by the Corporations Act or the general law. A failure to consider the interests of the company as a whole, or more particularly the interests of creditors, may be such a high degree as to demonstrate failure to act honestly in this sense. However, if failure to consider the interests of the company as a whole, including the interests of its creditors, does not rise to such a high degree but is the result of error of judgment, no finding of failure to act honestly should be made, but the failure must be taken into account as one of the circumstances of the case to which the Court must have regard under CA s 1317S(2)(b)(ii) and s 1318.

57    The obtaining of advice does not conclusively establish that a person was acting honestly. It is however an important consideration in determining whether proper competent and expert advice was sought and obtained: Clarke v Great Southern Finance Pty Ltd [2014] VSC516 [1960].

Honesty of seller shareholders

58    It is not in issue that the honesty of the shareholders as the persons who offered or sold shares without disclosure is relevant under s 1322(6)(a)(ii). There is a body of authority that supports the view that it is open to the court to readily infer that the shareholders have acted honestly in on-selling the shares: Silver Lake [23].

59    Certainly, in this case there is nothing to suggest the shareholders have acted other than honestly.

Honesty of others

60    ICandy contends that the section is to be construed narrowly, such that it is only the conduct of those who may in fact have contravened the relevant provision that is relevant. Therefore, the court should have regard only to whether the shareholders who have on-sold shares without disclosure acted honestly. The honesty of the directors is not relevant. To the extent that there are similar cases where the court has had regard to the conduct of directors or other officers, iCandy submitted they were wrong.

61    ASIC's position in its first written submissions is to the effect that the contravention in this case was limited to actions by the shareholders who offered or on-sold shares:

In the circumstances of this case, it is important to recall that the relevant questions for the Court under ss 1322(6)(a)(ii) and (b) are respectively:

(a)    whether the person or persons involved in the contravention or failure (to which the s 1322(4)(a) relief sought in the application relates) acted honestly; and

(b)    whether the person the subject of the civil liability (sought to be relieved under s 1322(4)(c)) acted honestly.

The relevant question in both cases is therefore whether the Court is satisfied that the sellers of the Relevant Shares acted honestly as regards their offering those shares for sale without proper disclosure in contravention of ss 707(3) and 727( 1) of the Act.

It is not the honesty of the directors and secretary of the plaintiff in taking, or not taking (as the case may be), certain steps or actions which had the consequence of creating the situation in which the contraventions by those sellers took place, which is relevant in considering the application before the Court. No relief is sought in respect of any contravention which may have been committed by the plaintiff, its directors or secretary as a result of the events which have transpired.

62    Counsel for ASIC pointed out that the submission was made in the circumstances of this case and not more generally. However, on its face it is a submission that accords with the narrow view propounded by iCandy.

63    ICandy and ASIC referred in their submissions to a number of cases where the court has commented on the conduct of the company or its officers in the context of the honesty limb.

Authorities dealing with the honesty limb

64    In Golden Gate, placement options were issued less than three months after they were first listed on the ASX and so did not fall within the s 708A(5) exemption provided by the Act because of the three month rule in s 708A(5)(a). Offers and sales by sellers were therefore in contravention of s 707(3). The company purported to issue a cleansing notice under s 708A(5)(e) to the effect that disclosure was not required but omitted to take into account the three month rule (see [11] and [70]). A prospectus was later lodged.

65    Originally, the company sought relief from civil liability that extended to the conduct of the company, its secretary and consultants, but at the hearing it was limited to the position of the sellers. The orders made were, relevantly:

1.    Pursuant to s 1322(4)(a) of the CA it is declared that any offer for sale or sale of the quoted securities being 65,381,808 options, quoted on 8 December 2009, and 16,000,000 options, quoted on 24 December 2009, to acquire ordinary shares in the plaintiff exercisable at 8 cents and expiring on 31 August 2012 (securities) during the period after the date of their issue on 8 December and 24 December 2009 respectively until 12 January 2010 is not invalid by reason of the failure of notices, purportedly issued by the plaintiff on 8 and 24 December 2009 pursuant to s 708A(5)(e) of the CA, to exempt the seller from the obligation of disclosure under the CA and the seller’s consequent failure to comply with ss 707(3) and 727(1) of the CA (seller).

2.    Pursuant to s 1322(4)(c) of the CA, any seller be relieved from any civil liability arising out of a contravention of ss 707(3) and 727(1) or by reason of the plaintiff’s failure to satisfy s 708A on 8 December and 24 December 2009 respectively.

66    The fact that the relief in paragraph 1 of McKerracher J's orders refers to the failure of the notices and the consequent failure to comply with s 707(3) and s 727(1) takes on some importance, as discussed further below.

67    In applying s 1322(6), his Honour considered the honesty limb and assessed the conduct of the consultant upon whom the company relied and the company itself (at [48] – [50]). His Honour did not consider the honesty of those who contravened the disclosure provision by offering or selling the options during the relevant period in that context.

68    In Elemental Minerals, the company was not in a position to lodge a cleansing notice because of the five day rule. It lodged a cleansing prospectus which was rejected because it did not comply with s 708A(11)(c), namely that 'the prospectus is for an offer of securities issued by the body that are in the same class of securities as the relevant securities' (at [12]). It then lodged a revised prospectus. A number of shareholders sold their shares between the date of the first prospectus and the revised prospectus and in contravention of the disclosure rules. Declaratory relief was sought to validate the trading of the shares during that period and to relieve the sellers from civil liability. Justice Gilmour referred to offers made and sales of shares during that period and said (at [35]):

Offers for sale of the shares of the plaintiff between [the dates] fall within s 1322 (4)(a) of the Act because:

(a)    The offers meet the description of any act purporting to have been done in relation to the corporation. In this case it is the offer for and sale of shares issued by the plaintiff.

(b)    The offers contravened s 707(3) of the Act as the plaintiff did not comply with s 708A(11)(c) of the Act and the sellers, in turn, offered for sale and sold securities without a disclosure document.

(c)    The transactions resulting from the offers may be void: s 1324 of the Act.

69    His Honour then considered 'honesty' in the context of s 1322(6)(a)(ii) and assessed the conduct of the plaintiff company, noting its reliance on its solicitors and its prompt request for a trading halt once the error in the original prospectus was disclosed (at [42]). His Honour did not consider the honesty of the shareholders in this context, although he found they acted honestly within the meaning of s 1322(6)(b) (at [52]). Whilst the finding is not made expressly, it is implicit in his Honour's reasoning that he considered the company acted honestly.

70    It should be noted that his Honour included reference to the company's conduct when describing the contravention. This is relevant to an aspect of ASIC's submissions discussed below.

71    In Silver Lake, as a result of the exercise of options, the company issued shares in circumstances that required disclosure under s 707(3) and without the issue of a cleansing notice. Shares were traded by sellers until the company secretary received advice that he should have issued a cleansing notice. A cleansing prospectus was then lodged. The company sought a declaration that the offer for sale or sales during the relevant period were not invalid by reason of the company's failure to comply with s 708(5)(e) of the Act or the sellers' failure to make disclosure under s 707(3) of the Act.

72    Justice Siopis addressed s 1322(6)(a) by listing the elements and then considering the honesty of the company secretary. His Honour found that in failing to issue a cleansing notice and in filing the relevant Appendix 3B announcement the company secretary had acted honestly (at [18]). He did not address the honesty of the sellers in that context. His Honour considered their honesty in the context of s 1322(4)(c) (at [23]).

73    In Sprint Energy, there was a series of six share issues in circumstances where at least for some of the issues, cleansing notices were lodged indicating that disclosure was not required. It was not appreciated by the company that in the circumstances, the sale of the shares within 12 months following their issue required disclosure by their sellers. The relief sought was in effectively the same terms as in Golden Gate.

74    Justice McKerracher found that the honesty limb of s 1322(6)(a) was satisfied. His Honour considered the conduct of the company secretary who had not appreciated the significance of the criteria providing for the issue of a cleansing notice were not satisfied, and took into account the actions of the company once the error was ascertained.

75    The facts in QBiotics are somewhat different, in that it is not a disclosure case but a case of failure of shareholders to comply with pre-emptive rights in the company's constitution. The constitution required shareholders who wished to sell their shares to third parties to notify all shareholders and the company of their intention to do so. No process was put in place by the board to facilitate compliance with that provision and the chief executive officer and chief financial officer gave evidence that they had at all times failed to consider the provision. The company was transparent in its communications with shareholders as to the fact that shareholders were buying and selling shares. Justice Gleeson accepted that sellers had not complied with their obligations and were in contravention of the constitution. The Board had failed to consider the pre-emptive rights issue at all.

76    Justice Gleeson said as follows (at [40]):

By this conduct, the Board of QBiotics was probably concerned in the contraventions, and acted honestly in permitting and facilitating the contraventions. On this basis, s 1322(6)(a)(ii) is satisfied. Alternatively, s 1322(6)(a)(iii) is satisfied…

77    Her Honour did not consider the conduct of the contravening sellers in the context of the honesty limb.

78    In European Lithium, the company was not qualified to issue cleansing notices because of the five day rule. It had purported to lodge such notices after various share issues. It sought validation of the share offers and sales by sellers. It sought declarations in almost identical terms as in Golden Gate, to the effect that the share offers and sales were not invalid by reason of the failure of the notices and the seller's consequent failure to comply with the disclosure obligations.

79    Justice Barker considered the honesty limb was met. He described the subject conduct as 'the issuing by the plaintiff of the invalid cleansing notice'. He did not refer to the contravention by the shareholders. His Honour assessed carefully the conduct of the company and in particular the company secretary, who prepared and issued the cleaning notices and found that she did not engage in dishonest conduct, but made an honest mistake.

80    His Honour turned to the conduct of the shareholders when considering s 1322(6)(b), stating that it required an 'additional statutory requirement of honesty' on their part to be relieved from civil liability (at [70]).

81    In Spectrum Rare Earths Limited, the company sought to issue cleansing notices where their use was not open to it because of the five day rule. It subsequently issued a cleansing prospectus. The relief sought was in substance the same as in Golden Gate. Justice Barker found that s 1322(6)(a)(ii) was satisfied in that, 'there is no failure of the persons concerned or the plaintiff to act honestly'. His Honour continued, '[t]here is no evidence…that the plaintiff or its directors and officers have acted dishonestly' (at [25]). The only consideration of the honesty of the sellers was in the context of s 1322(4)(c).

82    As these cases reveal, the narrow view contended for by iCandy has not been adopted. The court has regularly looked to the involvement of the directors and officers.

83    It has done so where the relief as framed refers directly to a failure on the part of the company instead of or in addition to a contravention on the part of the sellers: Golden Gate; Elemental Minerals; Silver Lake; Sprint Energy; European Lithium. It has done so where the relief claimed refers only to contraventions by the sellers: QBiotics.

84    It has done so in cases where there has been inaction on the part of the directors: Silver Lake; QBiotics. It has also done so where there has been action but it has been ineffective or incorrect: Golden Gate; Elemental Minerals; Sprint Energy; European Lithium; Spectrum Rare Earths.

The drafting of relief sought is not determinative

85    Counsel for ASIC submitted that there is a distinction between each of Golden Gate, Elemental Minerals, Silver Lake, Sprint Energy and European Lithium which explains the court's reference in those cases to the conduct of the directors or officers. The distinction was said to be that the relief under s 1322(4)(a) refers to conduct on their part (filing ineffective notices or an invalid prospectus) in addition to the contravention by the sellers.

86    In this case, the relief sought does not refer to the company's failure to file a notice, but refers only to the failure on the part of the sellers to comply with the disclosure rules. However, the effect of the orders, regardless of whether the failure to issue any or any effective cleansing notice is expressly referred to is the same: it is the offer and sale of shares in the absence of disclosure that is validated. The effect of the order under s 1322(4)(a) in such disclosure cases is in fact limited to such validation. It is not the conduct of the company officers in failing to file an effective notice that is validated or excused. Nor is their conduct in failing to file effective cleaning notices of itself a contravention of the Act (although, as ASIC submits, there may be other ramifications for the officers depending on the circumstances, such as potential breach of duty claims).

87    Despite that limitation, the courts have routinely considered the role of the company officers where the relevant contravention is the seller's non-disclosure. At one level it could be said that the court's attention is drawn to the conduct of the company's officers if the relief claimed expressly refers to the failure to lodge an effective notice, as was the case in each of Golden Gate; Elemental Minerals; Silver Lake; Sprint Energy and European Lithium. However, the more compelling reason is that as a matter of construction, s 1322(6)(a)(ii) expressly refers to the honesty of 'a person or persons concerned in or party to the contravention or failure'. It does not on its face limit the inquiry to the honesty of a person who contravenes a provision of the Act or constitution. It is perhaps curious that s 1322(6)(a)(ii) refers to 'contravention or failure' when s 1322(4)(a) refers only to a 'contravention', but nothing appears to turn on such language where (as in the s 707(3) and s 727(1) cases) the relief sought relates to a contravention (noting the specific reference to contravention in s 727(5)).

88    In QBiotics the court was open to the argument that the officers were persons concerned in or a party to the contraventions by the shareholders who failed to comply with pre-emptive rights. Each of the decisions in Golden Gate; Elemental Minerals; Silver Lake; Sprint Energy and European Lithium seems to proceed on the basis that the court considered the relevant officers of the company were concerned in the contravention. The scope of those words is therefore important.

Person or persons concerned in or party to the contravention

89    At the close of the hearing before me, and because of its importance during the hearing, I invited the parties to file supplementary submissions dealing with the meaning and scope of the words, 'person or persons concerned in or party to the contravention'.

90    In its supplementary submissions, ASIC noted that there do not appear to be any cases where the meaning of that phrase in the context of s 1322 of the Act has been considered. It referred to the following matters which it said informed the proper construction of the provision:

(a)    the expression 'directly or indirectly concerned in the commission of a forest offence' as considered in Ashbury v Reid [1961] WAR 49;

(b)    the meaning of 'concerned' in the context of 'being concerned in' the importation of illicit drugs, as considered in Lam v R (1990) 46 A Crim R 402;

(c)    cases that deal with accessorial liability for a statutory contravention on the basis the party is 'knowingly concerned'; and

(d)    cases that address the meaning of 'party' to a contravention or offence.

91    In Ashbury v Reid the court overturned a conviction for felling State forest timber. The appellant did not fell the timber himself. It was done by a contractor retained to carry out work on the appellant's adjoining land. The appellant had therefore brought the contractor and its bulldozers onto his land. In issue was the meaning of s 54 of the Forestry Act 1918 – 1945 (WA):

Whoever aids, abets, counsels, or procures, or by any act or omission is in any way directly or indirectly concerned in the commission of a forest offence, shall be deemed to have committed the offence…

92    It was contended at first instance that those words would extend to the conduct of a person which formed a link in the chain of events which ultimately leads to the commission of the offence.

93    The Full Court said (at 51):

The question which a court should ask itself in determining whether an act or omission on the part of an individual comes within the terms of s 54 is whether on the facts it can reasonably be said that the act or omission shown to have been done or neglected to be done by the defendant does in truth implicate or involve him in the offence, whether it does show a practical connexion between him and the offence. The mere fact that he has been responsible for bringing onto his property the instrument with which the offence is subsequently committed is not sufficient. Nor is an omission sufficient unless it can reasonably be said, looking at the matter from a common-sense point of view, that the defendant’s failure to act, whether intentional or otherwise, really contributed to the commission of the offence.

94    In Lam v R, and in the context of criminal liability, the court considered the expression 'concerned in' is one of general import and what it comprehends is to be considered in the facts and circumstances of any particular case, citing R v Kelly (1975) 12 SASR 389, 400 where the Full Court said:

The word is no doubt deliberately chosen to cover a wide range of activities since it would be well-nigh impossible to define more closely the various acts which could go towards the fulfilment of a plan for the importation of prohibited articles.

95    A person will be knowingly concerned in a contravention if that person was an intentional participant in the contravention, with knowledge of the essential elements constituting the contravention at the time of the contravention: Yorke v Lucas (1985) 158 CLR 661, 670; Australian Securities and Investments Commission v ActiveSuper Pty Ltd (in liq) (2015) 235 FCR 181 [398]-[410]. In Yorke v Lucas, the word 'knowingly' in the phrase 'knowingly concerned in or a party to the contravention' was held to qualify the word 'concerned'. Its absence in s 1322(4)(6)(a)(ii) is a distinguishing feature.

96    This position was confirmed in Gore v Australian Securities and Investments Commission [2017] FCAFC 13. The court was considering accessorial liability for a contravention of s 727 of the Act. Dowsett and Gleeson JJ said:

There is, in our view, a distinction between being concerned in, or party to a contravention and being knowingly concerned in, or party to that contravention. Neither participation in the alleged contravention, nor knowledge of the elements of the contravention is sufficient in itself to attract accessorial liability under s 1324(1)(e). Rares J has demonstrated that Ms Gore so participated. We need say nothing further about that aspect. The remaining question concerns the state of Ms Gore’s knowledge at the times at which she participated.

97    I do not need to consider the meaning of 'party' further: it is generally accepted that the word 'party' is used to refer to a participant in the nature of an accessory: Yorke v Lucas (670). It is the words 'concerned in' that are of particular importance, as they potentially extend the definition of person beyond a person who is a party.

Meaning not confined

98    I do not consider the meaning of the words 'concerned in' in s 1322(6)(a)(ii) is to be confined by reference to the principles applicable to a claim that a person is knowingly concerned in a contravention or offence in the context of accessorial liability. Section 1322(6)(a) does not address accessorial liability.

99    The absence of the word 'knowingly' is a real distinction, as noted in Gore v ASIC.

100    Its absence is also relevant because there are a number of examples in the Act where the expression 'knowingly concerned in' as against 'concerned in' is used: see, for example, s 79 (involvement in contraventions); s 437D(5) (contravention by officer or employee when company in administration); s 592(6) (fraudulent conduct – incurring of debts); s 761F(1)(b)(ii) (contravention by partners); s 1314(4)(b) (derivative offender); s 1332(d) (standard of proof where establishing civil contraventions); and s 1324(1)(e) (injunctions). If the legislators sought to limit the persons considered for the purposes of s 1322(6)(a)(ii) to those who are 'knowingly concerned', they could have mirrored such language.

101    In my view, if an applicant seeks to rely upon s 1322(6)(a)(ii) as a pre-condition to making a validation order under s 1322(4) as to non-disclosure by relevant shareholders, then the court is entitled to take into account the role of the company and those involved in the securities issue, even where such person may not have been knowingly concerned in the shareholders' contravention as that phrase is understood. That is, a person may be concerned in the contravention within the meaning of s 1322(6)(a)(ii) even if they do not know the essential facts constituting the particular contravention by any particular shareholder.

102    That is not to say that any minor or peripheral role will result in a person being 'concerned in' a contravention.

103    Ashbury v Reid provides some guidance, even allowing for its context of accessorial liability. In my view, it is open to the court to consider whether there is a practical connection between the person's actions and the contravention by the seller, the nature of the connection between those actions and the contravention and whether, from a common sense perspective, the actions really contributed to the commission of the contravention. If so, the definition of a person concerned in the contravention may be met. Their honesty may then be considered.

104    The decisions referred to above (Golden Gate; Elemental Minerals; Silver Lake; Sprint Energy; QBiotics and European Lithium) are consistent with this approach.

105    In this case, I consider the conduct of Mr Lau was such as to make him a person concerned in the sellers' contraventions. He knew about the five day rule. Armed with that knowledge he made a decision to seek an extension from ASIC and assumed relief would be granted, although it is unclear on what basis he made that assumption. ASIC submitted it was not reasonable for him to have made such an assumption and I accept there is no compelling evidence of a connection between advice received and the assumption. Mr Lau contacted the share registry and learned that shares were being traded. He did not act to immediately ensure trading was suspended. Viewed collectively, such actions and conduct were closely connected to the contravention by the sellers, in that they were placed in a position where they had no reason to believe they were contravening the law and arguably would not have contravened the law but for certain decisions and inadequate communications. Mr Lau's actions contributed relevantly to the commission of the contraventions.

106    However, that does not deny satisfaction with the precondition. It would still be necessary for me to be persuaded that Mr Lau acted dishonestly.

No dishonesty

107    I do not consider Mr Lau's conduct was dishonest. Some aspects of his conduct can be put down to inadvertence, but others are more properly seen as a failure to properly understand the significance of compliance in a timely manner and an active, but incorrect, consideration of advice and the risks and options available to the company. I do not consider there was conscious impropriety or a disregard of the company's obligations to the extent of dishonesty.

108    It follows, taking into account their far more limited roles, that even if I were to find that Mr Low or Mr Lord were concerned in the sellers' contraventions, I would not have found they failed to act honestly.

Section 1322(6)(a)(iii) – just and equitable

109    As foreshadowed above, it is appropriate in this case that the orders be made on the basis that the just and equitable limb is satisfied.

110    The court has generally focused on the interests and conduct of the shareholders in assessing whether it is just and equitable that validation orders be made.

111    It is likely that the shareholders made offers or on-sold in good faith and on the assumption that no disclosure was required by them. They had available to them the Appendix 3B incorrect representation to the effect that disclosure was not required. There is no reason the inadvertent error on the part of the company should deny relief or deny any defects in the disclosure from being corrected.

112    The making of the orders sought will serve to give effect to their expectations as to disclosure: Sprint [48].

113    Accordingly, absent any evidence of knowledge or deliberate nondisclosure on the part of the shareholders, it is just and equitable that the orders be made.

Section 1322(6)(c) – no substantial injustice

114    It is not known whether any person who acquired shares from a shareholder between the relevant dates and until the cleansing prospectus was filed on 11 January 2018 was adversely affected by the lack of disclosure.

115    However, there is no ground for inferring that validation of such sales would prejudice any person.

116    It is common for the court in such circumstances to provide a window of time during which affected persons may apply to vary or set aside these orders, and I will do so in this case: see for example Golden Gate [55].

117    I must weigh the prejudice that would be suffered if the order is made against the prejudice that will be suffered if an order was not made: QBiotics [46]. Such an order is 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. To the extent there is prejudice to third party purchasers by such validation, such prejudice is tempered by the ability to apply to court under the orders.

118    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

119    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 from civil liability.

Relief

120    I do not consider public policy will be undermined by the making of the orders. Although open to criticism, the conduct of the directors did not involve blatant disregard of the provisions of the Act.

121    ASIC has had the opportunity in this case to consider the matters carefully and neither opposes nor consents to the application.

122    ASIC contends that insofar as the s 1322(6)(a) preconditions are met and as no relief is sought for the benefit of directors, officers or the company itself, then there is no suggestion that the public policy of the remedial provision is undermined by the making of the orders.

123    I accept that submission.

124    I am satisfied in the circumstances of this case that the relief should be granted.

COSTS

125    ASIC raises the question of whether it might be appropriate in this case and taking into account the conduct of the directors to make a costs order analogous to that made by French J in Re Wave Capital [2003] FCA 969.

126    In Wave Capital, French J was of the opinion that responsibility for the failure on the part of the company to seek quotation of shares within 7 days after the date of the prospectus rested with the directors and/or the company secretary personally. There was in that case a specific promise in the prospectus that the application for quotation would be made within a statutory time period.

127    French J considered it would be unfair and inappropriate for the newly raised capital of the company to be expended on the application to the detriment of new shareholders and made an ancillary order that the costs of the application not be paid out of company funds, although subject to liberty to vary such orders.

128    ASIC pointed to the number of applications such as that brought by iCandy currently being brought and the need for some incentive to ensure that directors properly understand and supervise the company's obligations with respect to share issues and disclosure.

129    I note also that it is important that directors and companies move quickly to bring such applications for the benefit of shareholders. The risk of a personal costs order should not affect the decision to apply to court.

130    There is no doubt that the facts of this case reveal a lack of focus on the part of the directors as I have already noted.

131    A difficulty with making a costs order as in Wave Capital is that it is not clear where the obligation to pay the costs would ultimately lie. Whilst I have the power to order that a third party meet the costs of an application, I would be reluctant to do so without representation or submissions on the part of the party considered liable to bear such costs. In this case, it is not clear that the costs should be met by, for example, Mr Lau, albeit that he appears to have played the principal role in the share issues. There is some dispute as to whether he validly assumed that Mr Love would ensure shares would not be traded and such dispute may well affect whether it is proper for Mr Lau to be ordered to pay all of the costs of the application personally.

132    I have considered whether I should allow for Mr Lau to be heard with respect to the question of costs. However, it seems to me that in this case, the ongoing costs to the company of an enquiry into who should bear the costs of the application may well be disproportionate to the outcome.

133    Bearing in mind that the company itself through counsel made strident submissions that no such order should be made against the directors, I will not on this occasion make an order similar to that made in Wave Capital. However, the potential for a costs order against directors or other officers in such an application is real and is a matter which should be considered by counsel representing the company, noting that the interests of the company and the directors as to costs are not necessarily aligned.

134    On this occasion I will make no order as to costs.

Associate:

Dated:    18 April 2018