Federal Court of Australia

Structural Monitoring Systems PLC, in the matter of Structural Monitoring Systems PLC [2022] FCA 473

ORDERS

THE COURT NOTES THAT:

A.    Defined terms referred to in these orders have the meaning given in Schedule 1.

THE COURT ORDERS THAT:

1.    Pursuant to s 1322(4)(d) of the Corporations Act 2001 (Cth), in respect of the Category 1 CDIs, the period of five business days referred to in s 708A(6)(a) of the Act be extended to the second business day after the day on which these orders are entered.

2.    Pursuant to s 1322(4)(a) of the Act, it is declared that a Cleansing Notice in respect of any of the Category 1 CDIs that is given to the ASX within the period provided for in order 1 above is deemed to take effect as if it had been given to the ASX on the date that the relevant Category 1 CDIs were issued.

3.    Pursuant to s 1322(4)(a) of the Act, it is declared that any offer for sale, or sale of any of the Category 1 CDIs, the Category 2 CDIs or the Category 3 CDIs during the period after their issue to the date of this order is not invalid by reason of:

(a)    any failure of a Cleansing Notice or Cleansing Prospectus to exempt the sellers from the obligations of disclosure under the Act; and / or

(b)    the sellers’ consequent failure to comply with ss 707(3) or 727(1) of the Act.

4.    Pursuant to s 1322(4)(c) of the Act, any person to whom any of the Category 1 CDIs, Category 2 CDIs or Category 3 CDIs were issued, or have been sold, and who have in turn on-sold any of those CDIs up until the date of this order, is relieved in whole from any civil liability in respect of:

(a)    any failure of a Cleansing Notice or a Cleansing Prospectus to exempt the sellers from the obligations of disclosure under the Act; and / or

(b)    the sellers’ consequent failure to comply with ss 707(3) or 727(1) of the Act.

5.    SMS, as soon as reasonably practicable, is to serve a sealed copy of these orders on:

(a)    the Australian Securities and Investments Commission;

(b)    the ASX; and

(c)    each person to whom the Category 1 CDIs, Category 2 CDIs or Category 3 CDIs were issued.

6.    For a period of 28 days from the date of publication of a copy 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 orders has liberty to apply to vary or to discharge them within that period.

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

B.    SCHEDULE 1 - DEFINITIONS

In these orders:

REASONS FOR JUDGMENT

ANASTASSIOU J:

1    By originating process dated 18 February 2022, the Plaintiff, Structural Monitoring Systems PLC, seeks relief pursuant to s 1322(4) of the Corporations Act 2001 (Cth) in respect of its non-compliance with certain notice requirements applicable to CHESS Depositary Interests (CDIs) it issued, some of which were on-sold by the recipients. I shall set out below the events which led to the Plaintiff omitting to file a particular Notice of Reliance with the Australian Securities and Investments Commission (ASIC).

2    In short, the Plaintiff believed that it was not required to give a cleansing prospectus or cleansing notices in relation to the relevant securities as it had formed the (incorrect) view that such notice was unnecessary due to the operation of ASIC CO 14/1000 (ASIC Class Order). The operation of the ASIC Class Order however was contingent upon the filing of a Notice of Reliance with ASIC, which the Plaintiff failed to do. The effect of this being that the on-sellers were prima face in contravention of the Act. Accordingly, the Plaintiff also seeks orders to validate the on-sales and relieve the on-sellers from any civil liability.

3    The Plaintiff’s rely on the Affidavit of Sam Michael Wright sworn on 18 February 2022 (First Wright Affidavit), the Affidavit of Sam Michael Wright sworn on 23 February 2022 (Second Wright Affidavit) and cogent written submissions dated 21 February 2021.

background

4    Between 20 December 2019 and 8 November, the Plaintiff issued a number of securities pursuant to its Employee Incentive Plan (EIP), which had been prepared in 2018 by the Plaintiff’s external lawyers, Fairweather Lawyers.

5    Fairweather was engaged to advise the Plaintiff in relation to establishing and operating an EIP. Its engagement included preparing the terms of such a plan for the Plaintiff. This EIP was intended to be covered by the ASIC Class Order. Specifically, rule 2.3 of the EIP provides that “when offering and granting or issuing Specified Securities” the Plaintiff “intends to comply with [ASIC CO 14/1000] so as to take advantage of relief under [ASIC CO 14/1000] including disclosure document and on-sale provisions relief”.

6    The securities issued by the Plaintiff were in the form of CDIs, which were issued upon the conversion of certain performance rights under the EIP. These included CDIs issued from 26 February 2021 to 8 November 2021 (New CDIs) and CDIs issued from 20 December 2019 to 12 February 2021 (Historic CDIs).

7    Some of the New CDIs and some of the Historic CDIs were on-sold within 12 months of the date of their issue. There was no disclosure made to investors under Part 6D.2 of the Act in relation to either the issue or the on-sale of the New CDIs or the Historic CDIs.

8    As noted above, the Plaintiff did not give the required cleansing notice or cleansing prospectus in relation to any of the relevant CDIs because it assumed that it was covered by the ASIC Class Order and therefore was not required to. However, as the Plaintiff had not lodged a Notice of Reliance with ASIC, it was not covered by the ASIC Class Order.

9    The Plaintiff became aware of its failure to lodge the relevant notice in the period between 31 January 2022 and 2 February 2022. ASIC was advised on 3 February 2022 and on 4 February 2022, the Plaintiff announced via the Australian Securities Exchange (ASX) market announcement platform that it intended to make a Court application in relation to the New CDIs, and that it had sought a continuation of the suspension on trading in SMS securities pending the outcome of that application.

10    The Plaintiff also became aware that New CDIs issued on 3 and 8 November 2021 (November CDIs) would not have been covered by the ASIC Class Order, even if it had lodged the relevant notice to ASIC. This is because in October 2021, the Plaintiff’s securities were suspended for a period of more than five days and the Class Order requires that trading in the company’s securities is not suspended for more than five days in the 12 months prior to the issue of the relevant securities.

Disclosure Regime

11    The Plaintiff’s submissions set out a summary of the disclosure regime under Part 6.2D of the Act at [4] – [10]. I gratefully adopt that summary which is as follows:

4.     Part 6D.2 of the Act requires the provision of information about securities when an offer to issue or sell them is made.

5.     In particular, any offer of securities for issue needs disclosure to investors under Part 6D.2, unless ss 708 or 708AA say otherwise: s 706. Here, s 708 operated so that SMS was not required to make disclosure when it issued the relevant securities.

6.     In addition, an offer of securities for sale needs disclosure to investors in certain specified circumstances. Relevantly for present purposes, s 707(3) requires disclosure where offers for sale are made within 12 months of an initial issue without a disclosure document, if the initial issue was for the purpose of subsequent on-sale. If any of the securities are in fact sold or offered for sale within the 12 months after the initial transaction, the prohibited purpose is taken to be present unless the contrary is proved: s 707(4) and (6).

7.     Section 707(3) is aimed at preventing the avoidance of the disclosure requirements of s 706. The purpose of the provision is to prevent circumvention of the policy of Ch 6D by the issue of securities to a party to whom disclosure is not required (under ss 708 or 708AA) and that party then offering those securities for sale to investors without disclosure.

8.     Once the ingredients of s 707(3) are present, any offer of the securities for sale within 12 months after the issue needs disclosure to investors, whether the offer be made by the subscriber or by any subsequent purchaser, unless the person selling the securities has the benefit of a s 708 exemption, or s 708A applies.

9.     For present purposes, s 708A is the critical provision. Relevantly, it provides than an offer for sale of securities does not require disclosure to investors in either of two circumstances:

(a)     (cleansing notice exception - s 708A(5)) the seller does not need to comply with the disclosure requirements of Part 6D.2 if the issuer provided a cleansing notice in relation to the securities. The cleansing notice must have been given by the issuer to the ASX within 5 days of the issue of the securities, and before the sale offer was made. Sub-section 705A(6) sets out the matters which must be included in the cleansing notice, the most important of which are that the company must state that, as at the date of the notice, it has complied with its financial reporting obligations Chapter 2M of the Act and its continuous disclosure obligations in s 674 of the Act, and the notice must include any “excluded information”, defined as information that has been excluded from a continuous disclosure notice in accordance with the exceptions in the ASX Listing Rules.14 In addition, to fall within the cleansing notice exception, s 708A(5) sets out a number of other requirements, including that the company’s securities have not been suspended from trading for more than 5 days in the 12 months prior to the issue of the securities that were on-sold;

(b)     (cleansing prospectus exception - s 708A(11)) the seller does not need to comply with the disclosure requirements of Part 6D.2 if the issuer lodged a cleansing prospectus in relation to the securities with ASIC. The cleansing prospectus must be lodged on or after the day on which the relevant securities were issued, but before the day on which the sale offer is made. The cleansing prospectus must be an offer for securities issued by the entity that are in the same class of securities as the relevant securities that have been issued and are to be on-sold. Unlike the cleansing notice exception, suspension from trading does not prevent reliance upon the cleansing prospectus exception.

10.     It is common for a cleansing notice or a cleansing prospectus to be given if it can be given. However, if an issuer of securities does not issue a valid cleansing notice or cleansing prospectus, then there is a prospect that the party to whom the securities are issued must cause such disclosure if that party wishes to on-sell those securities within 12 months (s 707(3)), and a prospect of a contravention of the Act and the commission of an offence if such disclosure does not occur (s 727).

11.     Separately, ASIC CO 14/1000 provides that a listed body that makes an offer under an employee incentive scheme covered by the class order does not have to comply with Part 6D.2, 6D.3 or Part 7.9 of the Act in relation to the offer (see clause 5). Further, the class order provides that a person that makes a sale offer of an underlying eligible product within 12 months after the issue of the product does not have to comply with Part 6D.2, 6D.3 or Part 7.9 of the Act in relation to the sale offer where the product was issued to an eligible participant under an employee incentive scheme and the person has no reason to believe the employee incentive scheme is not covered by the class order (see clause 7)..

12.     However, clause 16 of ASIC CO 14/1000 provides that a listed body making an offer in connection with a particular employee incentive scheme must give ASIC a notice of reliance (Notice of Reliance). Clause 17 provides that the body may give ASIC the Notice of Reliance at any time before the body first relies on the class order in relation to the particular employee incentive scheme but, in any event, must give ASIC the Notice of Reliance no later than 1 month after the day the body first relies on the class order in relation to the particular employee incentive scheme.

[Emphasis in original]

consideration

12    At the hearing on Monday, 21 February 2022, I was informed by counsel that the originating process was served on both ASIC and the ASX on Sunday, 20 February 2022. As it was not possible for either party to indicate their position prior to the hearing on Monday 21 February 20221, I adjourned the matter part heard to 24 February 2022, to give both parties the opportunity to indicate their position in relation to the application.

13    On 22 February 2022, the ASX sent a letter to the Plaintiff stating that it does not support or oppose the application and would not appear at the hearing on 24 February 2022.

14    On 23 February 2022, the Plaintiffs received a letter from ASIC stating that:

We have had the opportunity to review the materials. Pages 271-285 of the affidavit contains an Appendix 2A for the quotation of 1,150,978 CDIs (which appears to comprise the issue of 154,342 CDIs on conversion of performance rights, and the issue of another 996,636 CDIs). The table at paragraph 37 of the affidavit which sets out the Historic CDIs only refers to the 996,636 CDIs. Could you please check with the company whether the 154,342 CDIs should also be the subject of this application to the Court?

Subject to resolution of this issue, it is ASIC’s current intention to provide a letter which states that ASIC neither supports nor opposes the application and does not appear to intend at the hearing of the matter.

Can you please advise whether there will be any further materials lodged with the court, apart from any affidavit annexing letters from ASIC and the ASX. We typically refer to all materials which we have reviewed in our letter. Given the timing, we aim to issue this letter by close of business today.

15    In response to this email, the Plaintiff’s filed the Second Wright Affidavit in which Mr Wright deposed that he had mistakenly omitted the 154,342 CDIs, referred to in ASIC’s letter, in the First Wright Affidavit, as he believed that the relevant performance rights had not been converted into CDIs. Mr Wright deposed that on further consideration, he confirmed that the relevant performance rights had in fact been converted to the CDIs and that the omission from his first affidavit had been inadvertent. The Second Wright Affidavit was served on ASIC and, in response, on 24 February 2022, ASIC confirmed that it neither supports nor opposes the application and does not intend to appear at the hearing. Accordingly, I preceded on the basis that the application was uncontested.

16    I am satisfied that the relevant requirements of s 1332(4) of the Act have been satisfied, enlivening the Court’s power to make the orders sought by the Plaintiff.

17    First, the Plaintiff is an interested person for the purposes of s 1322(4) of the Act and as such, has standing to bring this application.

18    Second, I have power pursuant to s 1332(4) to declare that the period of five business days from the date of issue of the New CDIs, which is the period within which a cleansing notice must be issued under s 708A(6)(a) of the Act, be extended to the second business day after the day on which I make the orders sought. This enables the Plaintiff to lodge valid cleansing notices in respect of the New CDIs (excluding the November CDIs). In regard to the November CDIs, I note that the Plaintiff intends to lodge a cleansing prospectus with ASIC following the making of these orders. This will have the statutory effect of protecting any future on-sales of the November CDIs, where those on sales are made after the date that the cleansing prospectus is lodged with ASIC.

19    Third, I have power under s 1332(4) to make any such consequential or ancillary order as I think fit. Accordingly, I have the power to declare that the cleansing notices to be given will be deemed to take effect as if they had been given to the ASX on the date that the relevant New CDIs were issued.

20    Fourth, s 1332(4)(a) provides that a Court may make orders declaring that any act, matter of thing done under the Act or in relation to a corporation is not invalid by reason of any contravention of the Act. This empowers me to declare that any sale of the relevant CDIs within 12 months of their issue up to the date of these orders is not invalid by reason of the initial failure to lodge a cleansing notice or cleansing prospectus or the on-sellers’ failure to make the requisite disclosure.

21    I am not permitted to make such an 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 acted honestly, or that it is just and equitable that the order be made: s 1322(6) of the Act.

22    In these circumstances, I am satisfied that the Plaintiff acted honestly and without knowledge that the disclosure for on-sales was required.

23    Mr Wright deposes in the First Wright Affidavit that he assumed that all relevant steps had been undertaken to ensure compliance with the ASIC Class Order. In particular, Mr Wright deposes that it was his expectation and understanding that Fairweather would have advised the Plaintiff of the requirement, that in order to be covered by the ASIC Class Order, it must lodge a Notice of Reliance with ASIC. As a result of this reliance on Fairweather, the Plaintiff did not give a Notice of Reliance to ASIC as Mr Wright was not specifically aware of this requirement himself. Further, Mr Wright ceased his practice of giving the ASX the relevant cleansing notices.

24    The Plaintiff characterised this error as “inadvertent” which in my view is not quite the right description of the position. Rather, it is plain from Mr Wright’s evidence that he was acting on an incorrect assumption as to the effect of the ASIC Class Order and that mistaken assumption was not corrected by advice given to him by Fairweather. Regardless of the characterisation of the error, I am nonetheless satisfied that the Plaintiff’s failure to lodge the relevant notices was the result of an honest mistake as opposed to the deliberate disregard of the requirements of the Act.

25    Fifth, s 1332(4)(c) empowers the Court to make an order relieving a person from any civil liability in respect of a contravention of a provision of the Act. I therefore have the power to make an order that any person to whom any of the relevant CDIs were issued, or have been sold, and who have in turn on-sold those shares up until the date of these orders, are relieved from any civil liability in respect of the failure to lodge a cleansing notice or cleansing prospectus, or the sellers’ failure to make disclosure.

26    Similar to the limit on my powers under s 1332(4)(a), I am not permitted to make such an order unless I am satisfied that the person subject to the civil liability acted honestly. I am satisfied that the on-sellers acted honestly, having regard to (1) Mr Wright’s evidence that there is no reason to believe that any of the recipients were aware that the on-sale may contravene the Act and; (2) Appendix 2As lodged by the Plaintiff in relation to the relevant CDIs, which included a warranty that an offer of the securities for sale within 12 months after their issue and will not require disclosure under s 707(3) of the Act.

27    Finally, I am not satisfied that there has been or that there is likely to be any substantial injustice caused to any person in making the orders sought by the Plaintiff: see s 1322(4) of the Act.

28    On one view, it is unnecessary to make the orders sought in paragraphs 3 and 4 as the point to orders 1 and 2 is to correct, notionally, the irregularity by deeming the notice to be given following the making of these orders as having been given at the relevant time. However, as the Plaintiff has drawn to my attention a number of authorities in which orders of this kind have been made, I am content to make these orders: see, for example, 33D Limited, in the matter of 33D Limited [2021] FCA 349; Re Aus Tin Mining Limited [2020] FCA 1888; Re Micro-X Limited [2019] FCA 1154.

disposition

29    Accordingly, the Court’s discretion under 1322(4) of the Act should therefore be exercised in making the orders sought by the Plaintiff.

Associate:

Dated:    29 April 2022