Commercial Law Series – How to Cure Cleansing Notice Failures – Part 3: Cleansing Notice / Section 1322(4) Cases of Note

Introduction

If you have not yet read Parts 1 and 2 of this series to gain an understanding of the relevant provisions and the key principles as to their application, you may find it useful first to do so. They may be read here (Part 1) and here (Part 2).

As useful illustrations of the facts of the authorities in this area, and other recent or useful cases of note, I now set out summaries of these cases, in chronological order. Interestingly, whilst not all, the overwhelming majority of decisions in this area come out of Western Australia – either their Supreme Court, or the West Australian division of the Federal Court of Australia. I have added the outcome of the unusual costs hearing last month in Sprintex Limited (No 3).

In my assessment, the leading authorities are the 2018 decision of Justice Banks-Smith of the Federal Court in Re iCandy Interactive Ltd, and that of Justice Derrington of the Federal Court in 2022 in Lake Resources NL, particularly for more challenging cases of multiple cleansing notice failures.

The high water mark cases in terms of the number of cleansing notice failures are Re Structural Monitoring Systems PLC (31 failures) and Re Power Minerals Ltd (61 failures). The high water mark case in terms of evidence indicating possible dishonest conduct on the part of the (former) company secretary is Re Austpac Resources. The high water mark case in terms of “repeat offences” and, whilst unusual and in most cases unlikely, for potential costs consequences for company secretaries and board members, is Re Sprintex Ltd (Nos 2 and 3).

Cases of Note

Re iCandy Interactive Ltd [2018] FCA 533; (2018) 125 ACSR 369 (WA)

1. In iCandy Interactive, the chairman of the board had been advised that he could apply to ASIC for relief from the five day rule (cannot issue a cleansing notice if shares have been in suspension for more than five days) or issue a cleansing prospectus. Having received that legal advice he told the lead manager and company secretary to proceed with the share issue that day in any event. No cleansing prospectus was issued. No holding lock was in place and the company did not apply to ASIC for relief until two days after the shares had been reinstated to the ASX and the share issue had proceeded. 29 days then passed before a voluntary suspension of the shares was facilitated, in which time about one third of recipient shareholders had traded their shares.^[1] The company relied upon the honesty (ii) and just and equitable (iii) limbs of s 1322(6)(a), for the order sought under s 1322(4)(a).
2. Both limbs were found satisfied. Banks-Smith J found that aspects of the conduct of the directors and officers, in particular the chairman, were unsatisfactory.^[2] However her Honour found the failures occurred through inadvertence and a failure to properly understand the significance of compliance in a timely manner, and did not consider there was conscious impropriety or a disregard of the company’s obligations to the extent of dishonesty.^[3] Her Honour found it was likely the shareholders had made offers or on-sold their shares in good faith and on the assumption that no disclosure was required by them, and there was no reason the inadvertent error on the part of the company should deny relief or deny any defects in the disclosure from being corrected. It was just and equitable that the orders be made.^[4]
3. The Court then weighed the prejudice that would be suffered if the order was made against the prejudice that would be suffered if it was not, concluding that such an order was clearly in the interests of affected shareholders, as they risked exposure to claims against them absent validation. There was no good reason for inferring that validation of the relevant shares would prejudice any person. To the extent there was any prejudice to third party purchasers by such validation, that was tempered by the ability to apply to court under the orders. Her Honour concluded that in the circumstances she did not consider there would be any substantial injustice in making the orders.^[5]
4. The application was granted and s 1322(4) orders were made.

Re Caeneus Minerals Ltd [2018] FCA 560 (WA)

1. In Caeneus Minerals, there were 31 failures to issue cleansing notices over three and a half years. The company secretary resigned after the failures came out, but deposed to the circumstances of his failures as to the company’s compliance obligations when he had been company secretary. The company relied upon the honesty (ii) and just and equitable (iii) limbs of s 1322(6)(a), for the order sought under s 1322(4)(a).
2. Banks-Smith J was satisfied that the failures were not dishonest. The company secretary had made relatively simple errors and misunderstood the legal position as to the effect of shareholder approval or prior disclosure. The mere fact that there were many separate instances did not elevate his conduct to dishonesty.^[6]
3. The application was granted and s 1322(4) orders were made.

Re Structural Monitoring Systems PLC [2022] FCA 473 (Vic)

1. In Structural Monitoring Systems, there were multiple failures to issue cleansing notices arising in three categories of issue of securities over two years.
2. Anastassiou J was satisfied that the honesty (ii) limb of s 1322(6)(a) was made out, for the purposes of the order sought under s 1322(4)(a), in the sense not of inadvertence, but an incorrect assumption as to the effect of the relevant ASIC Class Order.^[7]
3. The application was granted and s 1322(4) orders were made.

Lake Resources NL, in the matter of Lake Resources NL [2022] FCA 197 (Qld)

1. In Lake Resources, there were 4 failures to issue cleansing notices over two months.
2. The question of the honesty of the responsible officer arose there where the honesty limb under s 1322(6)(a) was relied upon in seeking an order under s 1322(4)(a). The Court found that the relevant officers were under immense pressure given their volume of work and duties, and were overstretched, and the failures appeared to be by oversight.^[8] Moreover, the failures accounted for just 4 share issues, when there had been 28 other share issues where cleansing notices had been duly issued through the same period.^[9]
3. In relation to the company itself, Derrington J observed^[10] –
4. Further, the company’s swift actions following the discovery of the omission also speak of an intention to comply with the regulatory requirements. It immediately notified the ASX of the issue of its failure or omission to lodge the cleansing notices. It made an appropriate announcement and voluntarily suspended trading in its shares. Its transparency and willingness to rectify the problem is both commendable and negates any suggestion of a lack of honesty on its part.
5. The question of honesty was also considered as relevant to s 1322(6)(b) in seeking an order for relief for liability under s 1322(4)(c) – that is, the honesty of the shareholders. The Court noted that the difficulty with respect to subsequent vendors of uncleansed shares could be ameliorated in circumstances where Appendix 2A notices were issued. The warranty carried by those notices effectively indicates to the purchasers that there was no evidence of non-disclosure in the dealing with the shares. In any event the Court was willing to draw the inference that the recipients of the allocations would not have been aware of the failure to lodge the cleansing notices, and the subsequent non-disclosure, and observed it should be concluded that the subsequent vendors of the shares acted honestly.^[11]
6. The Court was also satisfied that the granting of the relief would not cause substantial injustice to any person.^[12]
7. The jurisdictional facts having been enlivened, the Court considered and was satisfied that the discretion under s 1322(4) should be exercised to grant the orders, given: the substantial benefits from the making of the orders; the remedial action the company had taken to avoid any repetition of a similar issue the future including the reorganisation of its corporate structure giving increased oversight to compliance; the extension of time sought in that case was relatively short, measured in months not years; the ASX and ASIC had been informed of the proceedings and neither objected to the making of the relief sought; and while some shareholders had contacted the company none opposed the making of the orders.^[13]
8. The application was granted and s 1322(4) orders were made.

Re Austpac Resources NL [2023] FCA 108 (NSW)

1. In Austpac Resources there were 8 failures to issue cleansing notices over three years. This had happened before. The company had previously sought and obtained s 1322 orders as to a failure to provide a cleansing notice in 2010. On this occasion, the discrepancies were only discovered after the company secretary was replaced. The company relied upon the honesty (ii) and just and equitable (iii) limbs of s 1322(6)(a), for the order sought under s 1322(4)(a).
2. In this case, Goodman J could not conclude that there was an absence of dishonesty on the part of the former company secretary or his service company, who were amongst the on-sellers of affected shares for whose benefit the relief of liability orders were sought under s 1322(4)(c). There had been an apparently clandestine placement of shares to the former company secretary’s service company, which ‘might cast doubt on Mr Gaston’s integrity’.^[14]
3. The application was granted and s 1322(4) orders were made, excepting a carve-out from the relief from liability order under s 1322(4)(c) for the former company secretary and his service company.

Re Power Minerals Ltd [2024] WASC 121

1. In Power Minerals there were 61 failures to issue valid cleansing notices over five and a half years. The former managing director – who did not give evidence – was responsible for the first 28, and the company secretary was responsible for the other 33. The company relied upon all three limbs of s 1322(6)(a) – the procedural (i), the honesty (ii) and the just and equitable (iii) limbs, for the order sought under s 1322(4)(a).
2. The company secretary gave evidence that while the former MD was responsible, she had issued cleansing notices for 13 share issues over 4.5 years, and the company contended that on that basis the reason for the failures was inadvertence. As to the remainder, the company secretary gave evidence that her own failures were inadvertent and due to two primary factors – her competing priorities, as she was company secretary for 6 other companies and was distracted by other urgent tasks, and for share issues upon the exercise of options, that she did not know at he time that a cleansing notice was required to be given for those.^[15]
3. Hill J accepted that the relevant act, the failure to lodge the cleansing notices, was essentially of a procedural nature.^[16] As to honesty, her Honour found that the failures of the company secretary were honest and inadvertent. As to the failures of the managing director, there was no direct evidence as to why they occurred. However based upon evidence that cleansing notices were issued in respect of other share issues undertaken at similar times, the Court inferred that the failures were due to inadvertence.^[17] Her Honour held that it would be just and equitable to grant relief to the extent necessary to protect the interests of current shareholders and for the integrity of future trading in the plaintiff’s shares.^[18]
4. Hill J found that there was no basis for inferring that substantial injustice has been or is likely to be caused to any person by the making of the proposed orders, and provided the usual opportunity for any party to raise a complaint within 28 days of the orders being made. Her Honour also found that there was no discretionary reason to withhold relief. There was no evidence of any substantial misconduct, serious wrongdoing or flagrant disregard of the corporate law or the company’s constitution so as to warrant refusal of the relief sought. There was nothing in the evidence to suggest any minority shareholder might be oppressed. Shareholders had been notified of the contraventions, as had ASIC and the ASX, and given notice of the hearing. No shareholder had sought to intervene or given notice they wanted to be heard. The plaintiff had acted promptly to take steps to remedy the issue, including seeking a trading halt within 2 days of becoming aware of the failures, and commencing the proceedings 2 days thereafter.^[19]
5. The application was granted and s 1322(4) orders were made (though a deeming order there sought under s 1322(4)(a) as to the filing of a fresh cleansing notice was declined, on the basis there was no evidence there had been any trading in the affected shares).

Re Sprintex Limited (No 2) [2025] WASC 15

1. Previously in 2022, Sprintex Limited (Sprintex) had sought curative orders under s 1322(4) following a failure to lodge a cleansing prospectus for an issue of shares in February 2022. The evidence included affidavits from Sprintex’s company secretary Michael Scott van Uffelen, in which he deposed to the failure being a result of inadvertent oversight, and that he was taking measures to ensure that all disclosure requirements would be complied with and that to this end, with the assistance of Sprintex’s external legal advisors, was developing a protocol for the issue of securities. The relief was granted by Justice Hill.^[20]
2. No such protocol was ever prepared. Sprintex retained its company secretary Mr van Uffelen.
3. Mr van Uffelen was also company secretary for Nanoveu Ltd (Nanoveu), which in March 2024 sought curative orders under s 1322(4) for 3 share issues in January and June 2023 for which it had failed to lodge cleansing notices, the late lodgment of a half year financial report, directors’ report and auditor’s report. Justice Strk accepted that the failures were inadvertent and while there was 8 months delay between discovery of the cleansing notice omissions on 10 July 2023 and filing the application on 11 March 2024, the relief was granted.^[21]
4. In November 2024, Sprintex returned to the Court this time seeking curative orders following 24 share issues affected by failures. 13 share issues were issued with cleansing notices between February and July 2024 which falsely stated that Sprintex had complied with Chapter 2M of the Act when it had not, as it had failed to lodge annual reports in the timeframe required. A further 11 share issues had been issued between September and December 2023 with no cleansing notice when one was required. Sprintex terminated Mr van Uffelen as its CFO and company secretary in October 2024.
5. Satisfied as to the pre-conditions for relief, Justice Lundberg gave thought to whether he should exercise his discretion to grant the relief, given the decision by Sprintex to leave its corporate secretarial function in Mr van Uffelen’s hands, without proper controls in place, given his prior contraventions both at Sprintex and at Nanoveu, and without ensuring that the protocols spoken of in 2022 were actually in place. His Honour was also troubled by the decision of Mr van Uffelen not to provide affidavit evidence when Sprintex did not pay fees he had demanded. However in light of evidence and inferences that could be drawn that the failures were inadvertent and not deliberate or dishonest, and that there was no substantial injustice, his Honour granted the relief sought.^[22]
6. However his Honour found there were unusual or distinctive features in this case which justified departure from the usual position that there be no order made as to costs. In this case Justice Lundberg ordered that the costs of the application not be met out of company funds, with liberty to apply granted to Sprintex, its former company secretary Mr van Uffelen and each of the directors, noting that each will require an opportunity to be heard before any costs orders may be made against them. The unusual or distinctive features included that: Sprintex had had to seek curative orders from the Court before in 2022, when it had the same company secretary Mr van Uffelen and the same board members, yet it thereafter continued to repeatedly fail to meet is compliance requirements; Mr van Uffelen was also directly involved in Nanoveu’s contraventions which also had required a Court application – at least one of Sprintex’s directors knew about that, and at least 10 of Sprintex’s latest contraventions occurred after Nanoveu’s Court application; and that the protocol proposed to the Court in Sprintex’s 2022 application to prevent future failures of compliance was never prepared.^[23]
7. His Honour made the order whilst acknowledging the counterveiling concerns weighing against such an order, noting that in many cases the Court has given weight to the counterveiling concerns. One is that the risk of a personal costs orders should not impact the decision of past or present officers of the company to investigate matters or bring an application before the Court. Another is that the costs of an enquiry into who should bear the costs of an application may outweigh any benefit obtained. His Honour noted that in iCandy Interactive Justice Banks-Smith had considered whether to make such a costs order, which had been raised by ASIC. Her Honour observed that 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, and declined to depart from the usual position that no order be made as to costs.^[24]

Re Sprintex Limited (No 3) [2025] WASC 59

1. Further to Justice Ludberg’s decision in January, the company then filed an interlocutory application that costs be borne as follows: 3/4 to be apportioned to the former company secretary and his service company jointly and severally, and 1/4 to be paid equally by the company directors, and that the costs of this application be paid jointly and severally by the former company secretary and his service company. The former secretary chose to file no affidavit evidence or take any part in the application.
2. Last month on 5 March 2025, Justice Lundberg delivered judgment on this. After consideration of the principles to be applied, including those as to awards of costs against non-parties, and of the evidence, his Honour awarded a sum which was approximately 70% of costs against the former company secretary and his service company jointly and severally, and 30% against the directors similarly. His Honour held over the decision as to the costs of this costs application for further determination, with liberty to apply.

********

Next/final instalment – Part 4 of 4: Steps to take upon discovery of a failure to lodge a cleansing notice, to successfully achieve curative orders