14 October 2019

The ultimate panacea for faulty paperwork

This article was written by Miriam Kleiner.

Running a company, no matter what size, requires an extraordinary amount of paperwork to be completed within particular time frames. It is not unusual for there to be instances where a form is not lodged in time (or at all) or a notification is not made. Discovery of such omissions can lead to very stressful situations for the people involved. Thankfully, a little-known section of the Corporations Act can assist in times like these.

Section 1322 of the Corporations Act provides that a proceeding, a notice or a meeting is not invalidated because of any procedural irregularity, unless a court determines otherwise. A court may only declare that something is invalid if it is satisfied that the irregularity has caused substantial injustice that cannot be remedied by a court order.

Section 1322 also enables a court to make an order declaring any act etc purporting to have been done as valid regardless of a contravention of the Corporations Act or of a relevant constituent document , order ASIC to rectify its registers, relieve a person from any civil liability and/or extend or abridge the period for the doing of any act etc under the Corporations Act where:

  • The act etc is essentially procedural;
  • The people involved acted honestly (meaning an absence of evidence of dishonesty);
  • It is just and equitable to make the order; and
  • No substantial injustice (meaning a real and not insubstantial injustice) has been or is likely to be caused to any person.

This power is to be construed very broadly on the basis of “broad legislative policy that the law should not inflict unnecessary liability … or invalidate transactions because of non-compliance … where that 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 …” (Re Wave Capital Ltd (ACN 006 031 161 (2003) 47 ACSR 218 at [29]).

Below are some examples from this year alone which demonstrate the utility of section 1322:

  • Failure to lodge cleansing notices (Goldin Rim Resources Ltd, in the matter of Golden Rim Resources Ltd [2019] FCA 1206 (“Golden Rim”)): Golden Rim Resources Ltd, an ASX listed company, failed to lodge a cleansing notice following two issuances of shares. The cleansing notice regime provided for in the Corporations Act, allows companies to issue securities without a prospectus where certain terms are complied with. One of those terms is the requirement to lodge a cleansing notice. The general manager of Golden Rim was tasked with lodging the cleansing notices but forgot to do so. Shares were issued and then traded prior to Golden Rim realising that no cleansing notice had been lodged with the ASX. Golden Rim applied to the Court for declarations that any sale of the shares which were issued without the cleansing notice were not invalid due to Golden Rim failing to lodge the cleansing notice. The Court granted the declaration because:
    • The failure to lodge the cleansing notice was honest and inadvertent;
    • The inadvertent error of Golden Rim should not expose the shareholders to any consequence of that error;
    • There was no substantial injustice suffered; and
    • GoldenRim took immediate action on realising that the cleansing notices had not been lodged – it contacted ASX and the stock was placed in voluntary suspension and wrote to all shareholders in a “candid” manner. 
  • Defects in the appointment of a director (Gallop Reserve Pty Ltd v Matton Development Pty Ltd & Ors [2019] QSC 113 (“Gallop”)]: One of the issues considered in Gallop was whether a Mrs Kenward had been properly appointed as a director of Matton Development Pty Ltd (“Matton”).  

Gallop argued that:

  • Mrs Kenward had been properly appointed as the only issue regarding her appointment was an absence of quorum at the relevant directors’ meeting; and
  • The appointment was procedural only and the other director present honestly believed that the way he was proceeding was proper

Mr Clark, one of the defendants, argued that the directors’ meeting and subsequent appointment were invalid and that the meeting equated to “quorum busting” – that is, he was deliberately not informed of the meeting because Mr Kenward knew he would vote against Mrs Kenward’s appointment.

In this case Chief Justice Holmes found that what had occurred was not merely a procedural irregularity – the intention of Mr Kenward had been to deliberately exclude Mr Clark from involvement. “What occurred was intended to subvert Mr Clarke’s right to participate in decisions … so that Mr Kenward could then pass resolutions which would not have been passed otherwise … this was an irregularity which change[d] the substance of the thing to be done” (at [65]).

Chief Justice Holmes declined to make the section 1322 order as he found that Mr Kenward was not honest and was acutely aware that Mr Clark would have been opposed to the appointment of Mrs Kenward. There was substantial injustice here because Mr Kenward had designed a process to diminish Mr Clark’s rights as a director.

  • Murray River Organics Limited (“Murray River”), [2019] FCA 931 (Deed of Cross Guarantee – failure to lodge opt in notice in time): Murray River failed to lodge an opt-in notice in the time required by ASIC class order 2016/785 due to an innocent oversight. The relevant document had been prepared and executed but was never lodged. The Court found that this was an unintentional, honest and inadvertent mistake which would not cause any prejudice or adverse impact on any third party. Accordingly, it was just and equitable to grant an order that Murray River and its directors were relieved from any civil liability for failing to lodge financial reports for the relevant year and extending the time for lodgement of the opt-in notice.
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