Background
The Whiskey Project Group Ltd, an unlisted public company developing vessels for government agencies, was preparing for an IPO when due diligence identified several past securities issues that did not comply with the company’s then constitution. The constitution required a pre-emptive rights procedure for certain equity securities, and shareholder approval before securities ranking ahead of ordinary shares could be issued.
The irregularities included ordinary shares, employee incentive options and performance rights, and convertible notes issued in 2023 and 2025–26. The 2023 notes were issued despite advice that the constitutional process should be followed, because the board considered an immediate capital raise necessary to avoid insolvency. The company sought declarations under s 1322 of the Corporations Act 2001 (Cth) validating the issues. ASIC and notified current and former shareholders did not oppose the application.
The Court’s Holding
Meagher J declared that each challenged issue, and securities issued on conversion or exercise where applicable, was not and had never been invalid merely because it contravened the company’s constitution. This covered the 2021 and 2023 ordinary-share issues, the incentive options and performance rights, and both convertible-note issues.
The Court found the first group of irregularities resulted from inadvertence or an incorrect consideration of the constitutional requirements, and that the company had acted honestly. The 2023 convertible-note issue was a knowing non-compliance, but the Court held it was just and equitable to validate it: the directors had acted under acute liquidity pressure, sought safe-harbour advice, and made a considered decision aimed at preserving the company, creditors and shareholder value. The 2025–26 notes were also issued honestly, although not in the prescribed manner. No substantial injustice would result from validation; refusing relief could expose the company to repayment claims, disrupt its IPO, and risk external administration.
The Court also ordered that unredacted affidavits containing shareholder personal information and commercially sensitive material remain confidential. There was no order as to costs.
Key Takeaways
- Section 1322 can validate securities issues that breached a company constitution, including substantive and deliberate non-compliance where the statutory conditions are met.
- A deliberate breach is not necessarily fatal where validation is just and equitable and no substantial injustice will result.
- Prompt corrective action, frank evidence, notice to ASIC and shareholders, and the absence of opposition can strongly support relief.
Why It Matters
The decision illustrates the breadth of the Federal Court’s remedial power to cure defective capital raisings before a transaction such as an IPO. It also confirms that constitutional pre-emption rights and approval requirements remain significant, particularly where an issue may dilute ordinary shareholders or rank ahead of them.
For directors, the case does not endorse disregarding a constitution. Rather, it shows that a court may validate an irregular issue where the board acted to protect the company’s viability, the affected parties suffer no substantial injustice, and the evidence candidly explains the breach.