FEDERAL COURT OF AUSTRALIA Pursuit Minerals Limited, in the matter of Pursuit Minerals Limited [2018] FCA 1127 File number: WAD 326 of 2018 Judge: BANKS-SMITH J Date of judgment: 30 July 2018 Catchwords: CORPORATIONS – application under s 1322(4) of the Corporations Act 2001 (Cth) to validate on-sale by vendor shareholders without disclosure – where purported cleansing notice invalid – where five day rule not satisfied – where omission by company inadvertent Legislation: Corporations Act 2001 (Cth) ss 707, 727, 1322 Cases cited: QBiotics Ltd, in the matter of QBiotics Ltd [2016] FCA 873 Re Golden Gate Petroleum Ltd [2010] FCA 40; (2010) 77 ACSR 17 Re ICandy Interactive Ltd [2018] FCA 533; (2018) 125 ACSR 369 Re Silver Lake Resources Ltd [2012] FCA 32; (2012) 87 ACSR 436 Re Wave Capital Ltd [2003] FCA 969; (2003) 47 ACSR 418 Sprint Energy Ltd, in the matter of Sprint Energy Ltd [2012] FCA 1354 Date of hearing: 30 July 2018 Registry: Western Australia Division: General Division National Practice Area: Commercial and Corporations Sub-area: Corporations and Corporate Insolvency Category: Catchwords Number of paragraphs: 47 Counsel for the Plaintiff: Mr TO Coyle Solicitor for the Plaintiff: Steinepreis Paganin ORDERS WAD 326 of 2018 IN THE MATTER OF PURSUIT MINERALS LIMITED (ACN 128 806 977) PURSUIT MINERALS LIMITED (ACN 128 806 977) Plaintiff JUDGE: BANKS-SMITH J DATE OF ORDER: 30 JULY 2018 THE COURT ORDERS THAT: 1. Pursuant to s 1322(4)(a) of the Corporations Act 2001 (Cth), it is declared that any offer for sale or sale of the quoted securities being 16,100,045 ordinary shares in the plaintiff during the period after their issue on 7 June 2018 to 6 July 2018 is not invalid by reason of: (a) the failure to issue a valid cleansing notice under s 708A of the Corporations Act to exempt the sellers from the obligation of disclosure under the Corporations Act; and (b) the sellers' consequent failure to comply with ss 707(3) and 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 any contravention of sections 707(3) and 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 above 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 'PUR' to be reinstated. 6. For a period of 28 days from the date of reinstatement by the ASX of the class of securities 'PUR' 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 orders has liberty to apply to vary or to discharge them within that period. 7. There be no orders 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 Pursuit Minerals Limited (company) seeks relief under s 1322(4) of the Corporations Act 2001 (Cth) (Act) relating to contraventions of s 707(3) and s 727(1) by shareholders in circumstances where there had not been disclosure as required by Part 6D.2 of the Act. This is another in a series of cases seeking such relief that has come before this Court in recent months. 2 The relevant share issue occurred on 7 June 2018 and was for 16,100,045 ordinary shares. For reasons explained below, it was not open to the company to file a cleansing notice. A cleansing prospectus was lodged on 6 July 2018. There was quite significant trading of shares in the interim period. 3 The company provided a credible and reasonable explanation as to the failure to file a valid cleansing notice or earlier prospectus and I am satisfied that the failure was caused by inadvertence, rather than any deliberate disregard of its obligations. Accordingly, and in light of the urgency with which such applications are generally brought, I made orders at the conclusion of the hearing on 30 July 2018, granting the relief sought. These are the reasons for doing so. Statutory framework 4 The statutory framework is summarised in many of the cases dealing with such applications, but I repeat a short summary. 5 Part 6D.2 of Chapter 6D of the Act deals with disclosure to investors in the context of fundraising. The manner of disclosure is prescribed in s 709. The rationale for disclosure is obvious: investors should be provided with all information that they would reasonably require in order to make an informed assessment as to the acquisition of securities, including the rights and liabilities that attach to those securities and information about the company that is issuing or has issued them. By s 700(1), 'securities' expressly includes shares. 6 Section 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 securities for sale to investors without disclosure: Re Golden Gate Petroleum Ltd [2010] FCA 40; (2010) 77 ACSR 17 at [27] (McKerracher J). 7 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. 8 Exceptions include circumstances where a cleansing notice or cleansing prospectus may issue. Section 708A(5) provides for the issue of a cleansing notice. Section 708A(11) provides for the issue of a cleansing prospectus. 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. It will have the effect of meeting disclosure requirements for relevant offers and sales after the date of the prospectus. Facts and background 11 Mr Stephen Kelly, the company secretary, deposed to the following matters: (a) the plaintiff was originally listed on the Australian Securities Exchange (ASX) in 2008 as Riviera Resources Ltd. Since that time, it has undertaken a number of name changes; (b) in 2015 the company was suspended from quotation on the ASX as a result of the appointment of voluntary administrators by its then secured creditor; (c) the company successfully recapitalised under the terms of a deed of company arrangement; (d) the company then acquired various base metal projects and a number of mineral exploration tenements; (e) in June 2017 the company (then called Burrabulla Corporation Limited) issued a prospectus for the purpose of complying with the admission requirements of the ASX Listing Rules and it was formally reinstated to the ASX as Pursuit Minerals Limited on 25 August 2017; (f) on 7 June 2018 the company issued 16,100,045 shares to sophisticated and professional investors (June 2018 shares); (g) on the same date the company issued a cleansing notice under s 708A(5)(e) of the Act by way of an ASX release, and also lodged an Appendix 3B 'new issue announcement', by which the company warranted (amongst other things) 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. 12 It is not in issue in this matter that under s 707(3) and s 708A(1), any on-sale of the June 2018 shares required that there be disclosure on the part of the vendor shareholders unless one of (relevantly) s 708A(5) or 708A(11) provides otherwise. 13 Mr Kelly said that he prepared the cleansing notice on the understanding that it was required to enable immediate trading in the June 2018 shares by the shareholders. He was aware of the fundraising disclosure obligations under the Act and was aware of the five day rule. He said that although he was aware that trading in the company's shares had been suspended for more than five days in the 12 months preceding the date of issue, it had not been suspended for more than five days since its relisting. 14 Mr Kelly was in error in making the assumption that he need only take into account the period from the relisting in assessing the five day rule. In fact, he was obliged to take into account the whole 12 month period preceding the date of issue, and on that basis the five day rule could not be satisfied. 15 On 18 June 2018 and at the company's request, trading in the shares was suspended pending the filing of a cleansing prospectus and the outcome of this application. 16 The company issued a cleansing prospectus on 6 July 2018. 17 Mr Kelly conducted an analysis of the shares held by shareholders before and after the issue of the June 2018 shares and concluded that there had in fact been secondary trading by some shareholders since the June 2018 issue and before the issue of the cleansing prospectus. 18 One of the company's directors, Mr Jeremy Read, deposed to having received a telephone call from Ms Madeleine Green of the ASX on about 15 June 2018 who raised the issue of the invalidity of the cleansing notice. The company then sought legal advice and took steps to seek a voluntary trading suspension, lodge the cleansing prospectus and make this application. 19 Mr Kelly also deposed to having checked prior share issues by the company in order to satisfy himself that there had not been prior invalidity with respect to any cleansing notice or cleansing prospectus. He did not find any such problems with prior share issues. 20 Mr Read said that he understands generally the disclosure obligations on a company when it issues shares but assumed that Mr Kelly, as company secretary, would have taken the necessary steps to issue a valid cleansing notice. He was not aware of any difficulty in this case until the Australian Securities and Investments Commission (ASIC) drew it to his attention. 21 Both Mr Kelly and Mr Read deposed to their knowledge that shareholders are vulnerable to claims for offering or trading shares without making the requisite disclosure between the date of issue and the date of the cleansing prospectus, in contravention of s 707(3) and s 727(1) of the Act. 22 Accordingly, the company approached the Court seeking relief as to the shareholders' liability under s 1322(4) of the Act. 23 The company sent an email to all shareholders or parties that it identified as having on-sold shares in the relevant period and who might be affected by the invalidity of the cleansing notice. The company disclosed that it was applying to this Court for relief. The email properly invited shareholders to attend the hearing if they wished to do so. Mr Kelly deposed to there being no responses from shareholders, a matter confirmed close to the hearing by an affidavit of the company's solicitor, Mr Daniel Tydde. Relevant relief provision - section 1322 24 Again, the requirements of s 1322 are summarised elsewhere but for ease of reference I repeat the relevant principles here. 25 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 [2003] FCA 969; (2003) 47 ACSR 418 at [29] (French J). It has been utilised to validate non-disclosure by shareholders who on-sell shares on a number of occasions: see cases collected in Re ICandy Interactive Ltd [2018] FCA 533; (2018) 125 ACSR 369 at [43]. 26 Section 1322(4) prescribes when any act, matter or thing purporting to have been done under the Act may be validated on application of an interested person. Under s 1322(6)(a), the court must not make an order validating the act, matter or thing unless the court is satisfied: (a) that the act, matter or thing, or the proceeding, is essentially of a procedural nature; (b) that the person or persons concerned in or party to the contravention or failure acted honestly; or (c) that it is just and equitable that the order be made. 27 Only one of those limbs must be satisfied to meet the requirements of s 1322(6)(a). 28 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. 29 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. Interested party 30 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 Ltd, in the matter of Sprint Energy Ltd [2012] FCA 1354 at [40] (McKerracher J). Act, matter or thing that may be invalid by reason of contravention 31 The company seeks relief by way of a declaration that any offer or sale of the quoted securities during the period 7 June 2018 to 6 July 2018 is not invalid by reason of the seller's failure to comply with s 707(3) and s 727(1) of the Act. It also seeks an order relieving any sellers of those securities from civil liability arising out of such contravention. 32 The relevant contravention is on the part of the sellers and is the offering of securities for sale without proper disclosure in contravention of s 707(3) and s 727(1) of the Act. The pre-conditions in s 1322(6)(a) 33 The company says the Court can be satisfied that the second or third limbs of s 1322(6)(a) are met. 34 I am satisfied that the actions of Mr Kelly were not dishonest. He made an inadvertent error, and such conduct of itself does not comprise dishonesty: QBiotics Ltd, in the matter of QBiotics Ltd [2016] FCA 873 at [38] (Gleeson J); Sprint Energy at [43]. He was open with the Court as to his error. There was nothing improper in the fact that Mr Read relied upon Mr Kelly in the circumstances of this company, and there is no suggestion of dishonesty on his part. 35 I also have regard to the fact that once the error was disclosed, the company moved quickly to suspend trading, file a cleansing prospectus and bring this application. 36 There is no suggestion any of the vendor shareholders acted other than honestly. They had access to the Appendix 3B with its warranty. In such cases it is open to the court to readily infer that the shareholders have acted honestly in on-selling the shares: Re Silver Lake Resources Ltd [2012] FCA 32; (2012) 87 ACSR 436 at [23] (Siopis J). 37 Accordingly, I am satisfied that the relevant persons acted honestly. 38 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. There is no reason the error on the part of Mr Kelly should deny relief or deny any defects in the disclosure from being corrected. The making of the orders sought will serve to give effect to the expectations of the vendor shareholders as to disclosure: Sprint Energy at [48]. 39 It is just and equitable that the orders be made. Section 1322(6)(c) – no substantial injustice 40 There is no ground for inferring that validation of share sales would prejudice any person. However, as is quite common in such applications, 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. 41 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. 42 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 43 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 during the relevant periods from civil liability. Position of ASIC and ASX 44 ASIC has indicated that it neither opposes nor consents to the application. It reported that it formed that view taking into account that the company does not seek relief as to its own conduct or that of its former or current officers. 45 The ASX wrote to the company's solicitors and informed them that it did not consider itself to be in a position to comment on the matters before the Court in order to support or oppose the application, and said it considered matters of compliance with the Act to be a matter for ASIC. It said it was not in a position to support or oppose the application. Relief 46 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 Act. 47 I am satisfied in the circumstances of this case that the relief should be granted. I certify that the preceding forty-seven (47) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Banks-Smith. Associate: Dated: 30 July 2018