This case demonstrates when the Federal Court will exercise its discretion to  validate trading in shares issued and on-sold on without correct disclosure under the Corporations Act (in this case, where the company issued cleansing notices (rather than a prospectus) in circumstances where the use of cleansing notices was not available as an option for the company).

In March and April 2017Spectrum Rare Earth Limited (Spectrum) issued shares without a prospectus, but instead purported to issue cleansing notices in circumstances where cleansing notices were not open to it because its shares had been suspended from trading for more than 5 days in the prior 12 months (section 708A(5)(b) of the Corporations Act 2001 (Cth) (Act)). 

Spectrum applied to the Federal Court of Australia for orders under sections 1322(4)(a) and 1322(4)(c) of the Act to:

  • validate the on-sale of the shares that had been issued by Spectrum without correct disclosure until 30 May 2017 (being the date on which a cleaning prospectus was issued and lodged); and
  • relieve any seller of the shares from civil liability arising out of a contravention of section 707(3) and section 727(1) of the Act, or by reason of Spectrum’s failure to satisfy section 708A of the Act.

In granting the orders, Barker J in the Federal Court of Australia held that the requirements of section 1322(6) were met because:

  • neither Spectrum (nor its directors or officers) had acted dishonestly.  Rather, Mr Boden (the Spectrum company secretary) was mistaken in his belief as to the ability of Spectrum to issue cleansing notices under section 708A(5);
  • none of the sellers who subsequently on-sold the shares had acted dishonestly;
  • it was just and equitable to make the orders because:
    • the circumstances arose due to the inadvertence of Mr Boden who was not legally trained and who, once he became aware of the possible contravention, sought legal advice on behalf of Spectrum and took steps to remedy it;
    • the public policy of Chapter 6D of the Act (to ensure disclosure to shareholders) would not be infringed.  It was unlikely that any prejudice would be suffered by purchasers of the shares and to the extent that there was, the orders were made on terms that preserved the rights of those affected;
    • the orders did not relieve Spectrum from liability to any of its current and former shareholders;
    • no person who has been adversely affected in respect of the purported cleansing notices had contacted Spectrum and any such person would have 28 days to apply to take steps if they were concerned about the effect of the orders on their rights; and
    • neither ASX nor ASIC opposed the orders; and
  • no substantial injustice had been caused or was likely to be cased to any person by the orders.