Remedying an inadvertent failure to lodge cleansing notices

HopgoodGanim Lawyers recently acted for Lake Resources NL to successfully seek orders regarding the company’s inadvertent failure to lodge cleansing notices pursuant to s 708A(5) of the Corporations Act 2001 (Act). This situation arises regularly for ASX-listed companies and in this article, we look at the Federal Court’s decision in In the matter of Lake Resources N.L. [2022] FCA 197 and explain what to do when it happens.

What happens when a company fails to lodge a cleansing notice?

When issuing securities, a company must provide disclosure (e.g. in the form of a Prospectus).  However, in some circumstances, a company is entitled to lodge a ‘cleansing notice’ pursuant to s 708A(5) of the Act in lieu of providing disclosure. If a company fails to do either of these things, the issued securities cannot be traded by the recipient for a period of 12 months. 

When a company inadvertently fails to lodge a cleansing notice within the five business day period allowed under the Act, any on-trading of those securities may be in breach of the Act even if the recipient has done so without any knowledge of the breach. The breach may also call into question the validity of any such trades.

Upon becoming aware of a failure to lodge a ‘cleansing notice’, a company must bring an urgent application for relief under s 1322 of the Act. HopgoodGanim Lawyers has successfully obtained relief for a number of companies:

1. extending the time in which to lodge the cleansing notice; and
2. relieving the recipients of the securities and anyone who has traded in the securities from liability under the Act.

In the matter of Lake Resources N.L. [2022] FCA 197

During a period of substantial growth in September and October 2021, the company issued securities to three shareholders in four separate allocations. Due to an honest oversight, no cleansing notices were lodged in relation to the allocations. 

On 21 February 2022, the company became aware that it may have failed to lodge cleansing notices. The company immediately entered a trading halt whilst it investigated the matter. Two days later, the company lodged cleaning notices and went into voluntary suspension whilst it brought an urgent application. On 26 February 2022, the company filed an application to the Federal Court seeking relief relating to the late lodgement of cleansing notices. The matter was heard and orders were made on 28 February 2022. The company exited its voluntary suspension on 1 March 2022 (having been suspended for three days).

The Court’s power to grant relief

Justice Derrington noted the principles to be applied by the court when exercising its power under s 1322 of the Act as follows:

1. s 1322 of the Act is remedial in nature and is to be given a liberal interpretation;
2. the provision has been used to validate non-disclosure by shareholders who on-sell securities on a number of occasions; 
3. the company whose securities were on-sold in breach of the Corporations Act is an interested party with standing to bring the application; 
4. in determining whether those concerned in or party to the breaches acted honestly, the court looks to an absence of evidence of dishonesty;
5. the honesty of the shareholders who sell shares without disclosure is relevant; 
6. the court may also consider the honesty of those responsible for the failure of the company to lodge the cleansing notice (including company officers);
7. the court takes into account whether the company has taken prompt action to remedy the error; and
8. in considering whether it is just and equitable to validate the on-sales, the court will generally focus on the interests and conduct of the shareholders.

Acting honestly

In granting the relief sought, the court must be satisfied that the relevant people acted honestly.

Here, Justice Derrington found that there was no hint of dishonesty by the company or any of its officers. His Honour found that the omission was the result of a confluence of events occurring during a period of substantial growth for the company, which overstretched the resources of the company secretary. His Honour’s conclusion was reinforced by the fact that the company had:

1. undertaken 32 share issues requiring cleansing notices around this time, had lodged 28 cleansing notices and had only omitted to lodge four cleansing notices;
2. acted swiftly to suspend trading and make appropriate announcements to the ASX once it discovered the omission. His Honour considered that this spoke to the company’s intention to comply with regulatory requirements.

His Honour was also willing to infer, in the absence of evidence to the contrary, that the shareholders who received the securities would not have been aware of the company’s failure to lodge the cleansing notices. His Honour also noted that the company had notified the ASX and ASIC of the application and neither had sought to intervene or oppose the orders made. As such, his Honour found that those shareholders (and any subsequent sellers of the securities) had also acted honestly. 

No substantial injustice

In granting the relief sought, the court must also be satisfied that no substantial injustice has been or is likely to be suffered by any person. 

Here, his Honour noted that the company’s share price had continued to increase from 2021. As such, a party who acquired the shares would not have suffered loss or damage and a purchaser was unlikely to seek to avoid their purchase and surrender any profits. His Honour also noted that the information which would have been included in cleansing notices lodged at the relevant time was of minimal relevance. Finally, the orders proposed by the company allowed people to apply to court to vary the orders. His Honour considered that was sufficient protection for any person who was affected by the orders.

Remedial action

Relief under s 1322 of the Act is discretionary. In exercising his discretion, his Honour also considered that:

1. the company had taken adequate measures to remediate the circumstances of the omission;
2. the extension of time sought was relatively short;
3. the ASX and ASIC had been informed of the company’s application and neither supported nor opposed the relief sought; and
4. no shareholder had complained about the absence of the cleansing notices.

In the circumstances, Justice Derrington exercised his discretion to make the orders sought by the company.

What to do if this happens to you

If you find yourself in this situation, the most important thing to do is to act quickly to address the mistake.

For assistance with seeking orders to remedy breaches of the Act, please contact our Litigation and Dispute Resolution team.