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.
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
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.
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 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
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:
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
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:
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 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.
The principles to be applied when considering an application under s 1322 of the Act are: 18
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:
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:
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
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
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
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.
[1] Australian Securities & Investments Commission, 22-346MR ASIC sues McPherson’s and its former CEO alleging continuous disclosure and directors’ duties breaches, misleading statements, 9 December 2022: https://asic.gov.au/about-asic/news-centre/find-a-media-release/2022-releases/22-346mr-asic-sues-mcpherson-s-and-its-former-ceo-alleging-continuous-disclosure-and-directors-duties-breaches-misleading-statements/
[2] Re Golden Gate Petroleum Ltd [2010] FCA 40; (2010) 77 ACSR 17 at [24].
[3] Re Sprintex Ltd; Ex Parte Sprintex Ltd [2022] WASC 188 at [4], [5].
[4] Re Golden Gate Petroleum Ltd [2010] FCA 40; (2010) 77 ACSR 17 at [33].
[5] Act, s 708A(5)(a).
[6] Act, s 708A(5)(b).
[7] Act, ss 708A(5)(c), (5)(d) and (6)(d).
[8] Act, ss 708A(5)(e), (6), (7) and (8).
[9] See Re Golden Gate Petroleum Ltd [2010] FCA 40; (2010) 77 ACSR 17 at [36].
[10] Act, s 727; Act, Schedule 3.
[11] Currently, a single penalty unit amounts to $222, however this will increase on 1 July 2023. 45,000 penalty units equates to $9,990,000.
[12] Act, s 1311C(3).
[13] Act, s 727(6); s 1317E.
[14] 50,000 penalty units equates to $11,100,000.
[15] Act, 1317G(4).
[16] Re Sprintex Ltd; Ex Parte Sprintex Ltd [2022] WASC 188 at [4].
[17] Act, s 707(3); see also Re Golden Gate Petroleum Ltd [2010] FCA 40; (2010) 77 ACSR 17 at [70].
[18] Re Cyprium Metals Ltd [2022] WASC 241 at [48]; see also Re Sprintex Ltd; Ex Parte Sprintex Ltd [2022] WASC 188 at [20].
[19] Re Sprintex Ltd; Ex Parte Sprintex Ltd [2022] WASC 188 at [20] citing Re Helios Energy Ltd [2017] FCA 840; (2017) 122 ACSR 174 [20].
[20] Re Sprintex Ltd; Ex Parte Sprintex Ltd [2022] WASC 188 at [20] citing Re Wave Capital Ltd [2003] FCA 969; (2003) 47 ACSR 418 [29].
[21] Re Sprintex Ltd; Ex Parte Sprintex Ltd [2022] WASC 188 at [20] citing Weinstock v Beck [2013] HCA 14; (2013) 251 CLR 396 at [43], [55] - [56], [60], [64].
[22] Re Sprintex Ltd; Ex Parte Sprintex Ltd [2022] WASC 188 at [20] citing the Act s 1322(5).
[23] Re Sprintex Ltd; Ex Parte Sprintex Ltd [2022] WASC 188 at [28]; Re Cyprium Metals Ltd [2022] WASC 241 at [54].
[24] Re Cyprium Metals Ltd [2022] WASC 241 at [56] citing Re ICandy Interactive Ltd [2018] FCA 533; (2018) 125 ACSR 369 [54] - [104].
[25] Ibid, [56].
[26] Ibid, [56].
[27] Re Cyprium Metals Ltd [2022] WASC 241 at [58].
[28] Ibid, [64] – [65].
[29] Ibid, [66].
[30] Ibid, [67].
[31] Ibid, [70].
[32] Ibid, [71].
[33] Ibid, [72].
[34] Ibid, [72].
[35] Ibid, [73].