A cleansing notice is a notice issued by a public company that facilitates an issue or sale of securities quoted on a financial market without the need for fulsome disclosure to the market under Chapter 6D of the Corporations Act 2001 (Cth) (Act).

 

ASIC Deputy Chair Sarah Court said that: ‘cleansing notices are a critical feature of Australia’s low doc capital raising regime. At the time of capital raising, these notices give investors comfort that the company has met its disclosure obligations and that it has no further information that investors would need to make an informed assessment of a company’s prospects …  Company directors and CEOs must ensure their companies comply with their continuous disclosure obligations and ensure that they provide accurate information to the market. If they don’t, ASIC can take action and companies and individuals can face penalties imposed by the Court’.¹

This article outlines the purpose of cleansing notices, the consequences for failing to issue a cleansing notice, and what a court is likely to consider in an application to rectify a failure to issue a cleansing notice.

Disclosure obligation under Chapter 6D of the Act

Chapter 6D of the Act is designed to ensure that investors are provided with all information that they and their professional advisors would reasonably require to make an informed assessment in connection with securities offered for issue or sale.  This includes the rights and liabilities attaching to securities (and the underlying securities in the case of interests in or options over securities) and the assets, liabilities, financial position and performance, profits and losses and prospects of the body that is to issue or issued securities (or the underlying securities in the case of interest in or options over securities) that are offered for issue and, in certain cases, for sale to investors.²

The cleansing notice exception to Chapter 6D disclosure requirements

Part 6D.2 of the Act imposes disclosure obligations in relation to the issue and sale of securities.  In certain circumstances, these obligations can be satisfied by lodging what is commonly referred to as a cleansing notice or a prospectus.  If disclosure has not been made by the issuer and the securities are on-sold within 12 months, the party to whom the securities are issued may be obliged to make disclosure.³

Section 708A(5) deals with a cleansing notice that is regarding sale offers that may need disclosure, and s 708AA(2) deals with a cleansing notice that is regarding rights issues that may need disclosure.  This publication focuses on a s 708A(5) cleansing notice.

Sale offer cleansing notice

The cleansing notice exception can only be relied upon with respect to sale offers (as defined within the Act) if the preconditions in s 708A(5) of the Act are met. These preconditions are as follows:⁴

• the securities offered for sale are in a class that were quoted on the ASX at all times in the 3 months before the day on which they were issued;⁵
• trading in the class was not suspended for more than a total of 5 days in the shorter of the period during which the class was quoted or the period of 12 months before the day on which the securities were issued;⁶
• the body complied with the provisions of Chapter 2M of the Act as they apply to the body (being the chapter of the Act that governs the financial reporting and auditing requirements of companies, registered schemes, and disclosing entities);
• the body complied with the disclosure obligations under s 674 and 674A of the Act (being the sections that are in relation to an ASX listed entity’s disclosure requirements);⁷ and
• a cleansing notice was given to the ASX within 5 days of issue of the securities stipulating certain information and including any information of a character that would have been in a disclosure document (had one been provided), which had been excluded from a continuous disclosure notice in accordance with the ASX listing rules.⁸

The policy underlying s 708A of the Act appears to be that no further disclosure will be required where investors have the benefit of information comparable to or otherwise available in a prospectus.⁹

Consequences of a failure to disclose

A company may be liable for criminal and civil penalties where it fails to issue a cleansing notice, or another type of required disclosure when it is obliged to do so.  Those penalties are as follows:

• the company may be liable for criminal penalties, that may result in penalties of up to 15 years imprisonment.¹⁰  As a corporation is not a natural person and is therefore unable to attend a prison sentence, a relevant prison sentence for a corporation may be equated to a fine that is the greatest of 45,000 penalty units,¹¹ three times the benefit obtained and detriment avoided, or 10% of the annual turnover of the body corporate for the 12 month period starting from the date of the offence.¹²
• the company may be liable for civil penalties,¹³ that may result in a fine of up to 50,000 penalty units,¹⁴ three times the benefit obtained, and detriment avoided, or 10% of the annual turnover of the body corporate for the 12 month period starting from the date of the offence (with a cap of 2.5 million penalty units).¹⁵

Further, where the requisite disclosure is not made at about the time of sale, the party to whom the securities are issued may be obliged to make disclosure if the shares are on-sold within 12 months.¹⁶ Therefore, any on-sale of those shares may result in civil liability for the subsequent seller where they on-sell the uncleansed shares.¹⁷

Court application to rectify failure

If you become aware that your company has failed to issue a cleansing notice, it is vital that you urgently and promptly make an application to the Court to rectify the issue.

A court will consider various factors before it makes orders providing relief sought by a company where that company has failed to issue a cleansing notice or another type of disclosure document to the market.

The Western Australian Supreme Court considered these factors in the case of Re Cyprium Metals Ltd [2022] WASC 241 (Re Cyprium).  In this case Cyprium Metals Ltd (Cyprium Metals) issued two tranches of shares, but only provided a cleansing notice for the first tranche of shares and not the second tranche. As a result, 21,828,213 shares in Cyprium Metals were issued without being accompanied by a cleansing notice or another requisite disclosure document. 

Upon becoming aware of its failure to provide adequate disclosure, Cyprium Metals then made an application to the Court seeking the following relief pursuant to s 1322 of the Act:

1. orders extending the time in which to lodge a cleansing notice;
2. a declaration deeming the effect of the cleansing notice to apply retrospectively, as if the cleansing notice was issued on time; and
3. a declaration that the on-sale of the shares were not invalidated by reason of the sellers’ failure to fulfil their disclosure requirements or comply with other obligations under the Act.

The Court also recently considered these principles in the matter of Argent Minerals Ltd; Ex Parte Argent Minerals Ltd, Re [2023] WASC 34.

The Court’s power to make an order for relief

The court has the power to make orders avoiding the effects of various irregularities as set out in s 1322 of the Act. For present purposes s 1322 relevantly provides:

(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.

…

(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.

Court’s general powers to grant relief

The principles to be applied when considering an application under s 1322 of the Act are: ¹⁸

• the prescriptive requirements of the of the wording in s 1322(4) and the pre-conditions in s 1322(6) need to be satisfied;¹⁹
• the court retains a discretion under s 1322(4) as to whether it makes the orders sought;
• the broad powers reflect a legislative policy that the law should not inflict unnecessary liability or inconvenience or invalidate transactions because of non-compliance with its requirements where such non-compliance is the product of honest error or inadvertence and where the court can avoid its effects without prejudice to third parties or to the public interest in compliance with the law;²⁰
• limitations to the broad powers in s 1322 will not be readily implied.²¹ Section 1322 is remedial in character and should be applied broadly;
• the court can make orders under s 1322(4)(a) on conditions and also make such consequential and ancillary orders as it thinks fit; and
• an order can be made under s 1322(4)(a) even where the contravention or failure concerned resulted in the commission an offence.²²

The pre-conditions in s 1322(6)(a)

Before a court may make an order pursuant to s 1322(4)(a), the preconditions of 1322(6)(a) must be met.  The preconditions may be summarised as follows:

• 1322(6)(a)(i): the act, matter or thing, or the proceeding, must be of a procedural nature;
• 1322(6)(a)(ii): the person or persons concerned in or party to the contravention or failure acted honestly; or
• 1322(6)(a)(iii): it is just and equitable that the order be made.

Courts have often found that a failure to issue a cleansing prospectus to be of a procedural nature therefore satisfying the preconditions in s 1322(6)(a)(i).²³

If the company seeks relief pursuant to s 1322 (4)(a) the court may consider whether the persons concerned, and the company, have acted honestly in accordance with s 1322(6)(a)(ii) above.  The relevant principles to be applied are:

• when determining whether someone has acted honestly for the purposes of s 1322, the courts look to absence of evidence of dishonesty and prompt action to remedy the error; ²⁴
• the concept of acting honestly can embrace:²⁵ 
  • inadvertence or failure to turn one's mind to an issue;
  • active but incorrect consideration of a legal issue;
  • failure to consider an issue at all;
  • failure to understand or appreciate the significance of non-compliance; and
• when testing for honesty, the authorities reveal that the courts look at the company itself, the directors, the company secretary and others as may be concerned. ²⁶

In Re Cyprium, the Court found that Cyprium Metal’s failure to lodge the cleansing notice occurred through “inadvertence” rather than any deliberate disregard by the company or its officers with respect to fulfilling their obligations under the Act.  Further, it was found that there was no failure of the directors to take an active interest in the company’s compliance with the Act or properly define the roles of the officers of the company. ²⁷

Further pre-condition in s 1322(6)(c) – No Substantial Injustice

Section 1322(6)(c) of the Act was enlivened in the case of Re Cyprium, as it is enlivened in every case where relief is sought pursuant to s 1322.

Section 1322(6)(c) of the Act provides that the court cannot make an order unless it is satisfied that no “substantial injustice” has been, or is likely to be, caused to any person.  In determining if there has been a substantial injustice, the court considers those classes of persons who may be impacted by the making of the orders, and the prejudice that they may suffer.²⁸

In Re Cyprium, the Court found that there was no basis to infer that substantial injustice would be caused to any person if the orders were made.²⁹  Further, the Court noted that had the orders not been made, a substantial injustice may arise due to the commercial uncertainty that could occur due to void or voidable sales of uncleansed shares.³⁰

Exercising the Court’s Discretion

The court retains discretion under s 1322(4) as to whether it makes orders sought pursuant to s 1322.  Accordingly, the court may consider if there are any other factors relevant to awarding or refusing relief.

In Re Cyprium, the Court found that there was no evidence of any substantial misconduct, serious wrongdoing, or flagrant disregard of the corporate law or the company's constitution to warrant refusal of relief.³¹ It was found that the company had a good record of complying with the requirement to issue cleansing notices, and this was the only instance of non-compliance.³²

The Court was satisfied that there was nothing in the evidence to suggest that any minority shareholder interest might be oppressed or any other interest might be affected by the grant of the relief sought.³³  Further, the Court was satisfied that all shareholders impacted by the contravention as well as the ASX and ASIC were given notice of the hearing, and no shareholder or regulator sought to intervene or gave notice that they wished to be heard on the application.³⁴

In exercising its discretion to grant relief, the Court placed weight on the promptness with which Cyprium Metals sought to rectify the irregularity.  The Court noted that Cyprium Metals acted diligently when it discovered the cleansing notice had not been issued on Friday 1 July 2022; took legal advice; promptly entered a trading halt on Monday 4 July 2022; and commenced proceedings to seek relief from the Court on that same day.³⁵

Lavan Comment 

If a company has failed to issue a cleansing notice in the requisite timeframe, it is vital that it acts quickly and promptly to rectify this contravention of the Act.  It may be incumbent on the company in breach to seek an order from the Court if it wishes to have relief granted.

For further information about what to do if you or your company is no longer compliant with Chapter 6D of the Act, or if you have any questions in relation to making an order for relief, contact Cinzia Donald, Partner in Lavan’s Litigation and Dispute Resolution team.