Australian Innovation Ltd v Petrovsky

REEVES J: 1 Genetic Technologies Limited, the plaintiff, has applied ex parte and on an urgent basis for remedial orders under s 1322(4) of the Corporations Act 2001 (Cth) (the Act). It has done so because of its failure to provide a cleansing notice to the Australian Securities Exchange (ASX) by 30 May 2019 in accordance with the exception provided for in s 708A(5) of the Act. The notice concerned related to an offer of securities it had made to two United States of America (USA) institutional investors in the USA on 23 May 2019. 2 The factual background to this matter is conveniently summarised in the plaintiff's submissions as follows: 4. The Plaintiff is a dual listed company on the ASX and the NASDAQ. … 8. On 23 May 2019, the Plaintiff paused share trading on the ASX in advance of announcing their entry into a securities purchase agreement ("Securities Offer") with the USA Institutional Investors. 9. Later on 23 May 2019, the Plaintiff, by way of an ASX market announcement, advised that it had agreed to issue 1,476,143 American Depositary Shares at an issue price of USD$0.80 per ADS ("Subscription ADS") representing 221,421,450 underlying fully paid ordinary shares ("Subscription Shares") (the Subscription ADSs and the Subscription Shares together, the "Subscription Securities") without shareholder approval which raised gross proceeds of approximately USD$1.2 million, pursuant to the Securities Offer dated 22 May 2019. 10. The Subscription Securities were offered pursuant to a Form 6-K filed with the United States Securities and Exchange Commission ("US SEC") on 23 May 2016, which included a USA law supplemental prospectus. 11. Inadvertently, the Plaintiff failed to provide a cleansing notice to the ASX in relation to the Securities Offer within the five business day requirement under section 708A(6)(a) of the Corporations Act. (Footnotes omitted; bolded terms in original) 3 Chapter 6D.2 of the Act imposes disclosure obligations in relation to the issue and sale of shares. In certain circumstances, those obligations can be satisfied by lodging what is commonly referred to as a "cleansing notice". If disclosure has not been made by the issuer and the shares are on-sold within 12 months, the party to whom the shares are issued may be obliged to make disclosure. 4 The provisions of Ch 6D.2 of the Act which engage the cleansing notice exception are, relevantly, as follows: 706 Issue offers that need disclosure An offer of securities for issue … needs disclosure to investors under this Part unless section 708 or 708AA says otherwise. 707 Sale offers that need disclosure … Sale amounting to indirect issue (3) An offer of a body's securities for sale within 12 months after their issue needs disclosure to investors under this Part if: (a) the body issued the securities without disclosure under this Part; and (b) either: (i) the body issued the securities with the purpose of the person to whom they were issued selling or transferring the securities, or granting, issuing or transferring interests in, or options over, them; or (ii) the person to whom the securities were issued acquired them with the purpose of selling or transferring the securities, or granting, issuing or transferring interests in, or options over, them; and section 708 or 708A does not say otherwise. … 708A Sale offers that do not need disclosure ... Sale offer of quoted securities--case 1 (5) The sale offer does not need disclosure to investors under this Part if: (a) the relevant securities are in a class of securities that were quoted securities at all times in the 3 months before the day on which the relevant securities were issued; and (b) trading in that class of securities on a prescribed financial market on which they were quoted was not suspended for more than a total of 5 days during the shorter of the period during which the class of securities were quoted, and the period of 12 months before the day on which the relevant securities were issued; and (c) no exemption under section 111AS or 111AT covered the body, or any person as director or auditor of the body, at any time during the relevant period referred to in paragraph (b); and (d) no order under section 340 or 341 covered the body, or any person as director or auditor of the body, at any time during the relevant period referred to in paragraph (b); and (e) either: (i) if this section applies because of subsection (1)--the body gives the relevant market operator for the body a notice that complies with subsection (6) before the sale offer is made … … (Notes omitted) 5 The time limit in respect of which the plaintiff requires an extension is prescribed by s 708A(6) as follows: A notice complies with this subsection if the notice: (a) is given within 5 business days after the day on which the relevant securities were issued by the body; and (b) states that the body issued the relevant securities without disclosure to investors under this Part; and (c) states that the notice is being given under paragraph (5)(e); and (d) states that, as at the date of the notice, the body has complied with: (i) the provisions of Chapter 2M as they apply to the body; and (ii) section 674; and (e) sets out any information that is excluded information as at the date of the notice (see subsections (7) and (8)). (Notes omitted) 6 Section 1322 of the Act contains a number of remedial provisions relating to "irregularities". As is noted at the outset of these reasons, the plaintiff relied, in particular, on subsection 1322(4). That subsection provides: 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 … under this Act or in relation to a corporation is not invalid by reason of any contravention of a provision of this Act … … (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. 7 The plaintiff submitted, and I accept, that it was an interested person, for the purposes of s 1322(4) of the Act, because it was someone "whose material legal rights or pecuniary or other economic interests are or may be substantially affected by" its failure to issue a cleansing notice (see Golden Gate Petroleum Ltd (ABN 090 074 785), in the matter of Golden Gate Petroleum Ltd (ABN 090 074 785) (2010) 77 ACSR 17; [2010] FCA 40 at [44], Australian Innovation Ltd v Petrovsky (1996) 21 ACSR 218, Caeneus Minerals Ltd, in the matter of Caeneus Minerals Ltd [2018] FCA 560 at [38] and Classic Minerals Limited, in the matter of Classic Minerals Limited [2018] FCA 2039 at [34]). 8 Section 1322(6) contains certain pre-conditions to the making of an order under s 1322. Those pre-conditions are: (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. 9 With respect to these pre-conditions, the plaintiff submitted that, in this matter: (a) no question of dishonesty arose; or (b) in the circumstances, it was just and equitable that the order be made; and (c) in any event, no substantial injustice had been, or was likely to be, caused to any person by reason of the making of an order. 10 The principles relevant to the granting of relief under s 1322 were reviewed recently by Banks-Smith J in ICandy Interactive Limited, in the matter of ICandy Interactive Limited (2018) 125 ACSR 369; [2018] FCA 533. In that review, her Honour identified the following principles which are pertinent to the present application: (a) "[w]hen determining whether someone has acted honestly for the purposes of s 1322 of [the] Act", the Court will look "to an absence of evidence of dishonesty" (at [54]); (b) the Court will also take into "account whether the applicant has taken prompt action to remedy the error" (at [54]); and (c) the concept of acting honestly can also embrace the following (at [55]): (i) "inadvertence or a failure to turn their mind to the relevant issue"; (ii) "an active, but incorrect, consideration of a legal issue as well as failure to consider the issue at all"; and (iii) a "failure to understand or appreciate the significance of non-compliance". 11 Mr Viney, the plaintiff's company secretary, chief operating officer and chief financial officer, provided an affidavit in support of this application. In it, he explained the circumstances of his failure to lodge the cleansing notice on behalf of the plaintiff in the following terms: 11. From 20 May 2019 to 24 May 2019 I was in the USA regularly meeting with the Plaintiff's US lawyers, Sichenzia Ross Ference LLP, to obtain legal advice about the Securities Offer. 12. I was advised by Sichenzia Ross Ference LLP that the filing of the Form 6-K with US SEC enabled both the issue and lawful trading of Subscription ADSs on and from the date of its filing. 13. On or about 27 June 2019, I was contacted by phone by Grant Hummel, representing my Australian lawyers, HWL Ebsworth Lawyers. Grant Hummel noted that a Cleansing Notice had not yet been lodged by the Plaintiff on ASX and confirmed his advice that the Plaintiff was required to lodge a Cleansing Notice with ASX pursuant to ss 708A(5)-(6) of the Corporations Act within 5 business days after the day on which the Subscription Securities were issued to the USA Institutional Investors. I acknowledged that I had inadvertently overlooked HWL Ebsworth's earlier advice given that I was in the USA at that time, was working on the Securities Offer without much if any sleep, and had received and followed the advice from Sichenzia Ross Ference LLP about the Securities Offer. My Australian lawyers then explained that even though it was an offer of securities in the USA and the advice from Sichenzia Ross Ference LLP covered the issue and onsale of those securities in the USA, a Cleansing Notice was nonetheless required to be lodged on ASX to cover a scenario whereby the USA Institutional Investors might trade on ASX with 'mum and dad investors' in Australia. … 16. I failed to lodge a Cleansing Notice with ASX by 30 May 2019 (the end of the prescribed 5 business day period) because I genuinely but mistakenly believed at the time that the Plaintiff only needed to comply with the securities laws of the USA in relation to the issue of the Subscription Securities to USA Institutional Investors that were to be quoted on NASDAQ, and that when the Plaintiff filed the Form 6-K with the US SEC, the Plaintiff had complied with all relevant laws. However, I was not aware on 30 May 2019 that it would be possible for the USA Institutional Investors to convert their Subscription ADSs into the underlying Subscription Shares and trade those underlying Subscription Shares on ASX and that, therefore, the Plaintiff was also required to comply with the secondary sale provisions of the Corporations Act by lodging a Cleansing Notice. I did not become aware of this until on or about 27 June 2019. 12 Mr Viney also explained that, on the day after he became aware of his mistake, he instructed his lawyers to make the present application to the Court. 13 On the question of substantial injustice, Mr Viney made the following assertions and explanations in his affidavit: 18. No substantial injustice has currently been caused to any person in the United States because: (a) the Plaintiff provided full disclosure to the USA Institutional Investors; and (b) the Plaintiff has complied with all of its disclosure requirements in the US. 19. No substantial injustice has been caused, or is likely to be caused, to any person by the making of the orders sought in the Application, because: (a) As far as I am aware, as at 30 May 2019, being the last date of the prescribed 5 business day Cleansing Notice period, the Plaintiff had complied with the provisions of Chapter 2M of the Corporations Act regarding financial reports and audit, and section 674 of the Corporations Act regarding continuous disclosure; (b) As far as I am aware, as at 30 May 2019 being the last date of the prescribed 5 business day Cleansing Notice period, the Plaintiff had not failed to disclose any information to ASX which investors and their professional advisers would reasonably expect to find in a disclosure document for the purpose of making an informed assessment of the financial position of the Plaintiff or the rights and liabilities attaching to the Plaintiff's ordinary shares; and (c) I understand that no sale of Subscription Shares on ASX has occurred because I understand that in order for the USA Institutional Investors to sell their Subscription Securities on ASX, the USA Institutional Investors would first need to contact the Plaintiff's share registry to request that the Subscription ADSs be converted into the underlying Subscription Shares. Annexed and identified as "PV-7" is an email from the Plaintiff's share registry confirming that the USA Institutional Investors had not contacted them since purchasing the Subscription Securities. 20. As at the date of this affidavit, the Plaintiff has not received any complaints from any persons who were issued Subscription Securities pursuant to the Securities Offer. 14 Finally, I note from other affidavit evidence filed in support of this application that the Australian Securities and Investments Commission has been served with a copy of the application and has indicated that it neither consents to, nor opposes, the relief being granted. Furthermore, the ASX was also served with a copy of the application and it has indicated, through its Compliance Group, that it takes no position on the relief sought. 15 Based on the explanation contained in Mr Viney's affidavit above, I am satisfied that: (a) he honestly, but mistakenly, believed that the plaintiff only needed to comply with the relevant securities laws in the USA in relation to the issue; (b) he was not aware that it was possible for the USA institutional investors to convert their Subscription American Depositary Shares (Subscription ADSs) into the underlying Subscription Shares and trade those underlying Subscription Shares on the ASX; (c) he did not become aware until on or about 27 June 2019 that the plaintiff was also required to comply with the secondary sale provisions of the Act by lodging a cleansing notice; and (d) he acted promptly to remedy his mistake once he became aware of it. 16 Finally, I am satisfied, based on those parts of the affidavit of Mr Viney set out at [13] above, that no substantial injustice has been, or is likely to be, caused to any person by the Court making the orders sought. Accordingly, I consider that the plaintiff has complied with the provisions of s 1322(6) of the Act and is entitled to relief under s 1322(4) of the Act. 17 As for the form of that relief, the plaintiff has put forward the following draft orders: 1. With respect to the issue of 1,476,143 American Depositary Shares ("Subscription ADS") representing 221,421,450 underlying fully paid ordinary shares ("Subscription Shares") (the Subscription ADSs and the Subscription Shares together, the "Subscription Securities") in the Plaintiff issued on 23 May 2019, the 5 business day period referred to in s 708A(6) of the Corporations Act 2001 (Cth) (Act) be extended to the second business day after the day on which these orders are entered. 2. The notice under s 708A(5)(e) of the Act given to ASX Limited (ASX) with respect to the Subscription Securities within the period provided for in order 1 above be deemed to take effect as if it had been given to ASX within 5 business days of 23 May 2019. 3. A sealed copy of these orders be served on the Australian Securities and Investments Commission and the ASX within 2 business days of the date of these orders; 4. The Plaintiff place a copy of these orders on the website of the Plaintiff as soon as reasonably practicable and remain there for at least 28 days; and 5. Any interested party have liberty to apply within 28 days of the entry of these orders to revoke or vary the orders. 6. There be no order as to costs. 18 Proposed Order 1 does not accurately express the true effect of an order under s 1322(4)(b) of the Act, as that subsection applies in this matter. That is, to extend the period for giving the notice under s 708A(6)(a). The final form of that order will be altered accordingly. 19 Proposed Order 2 appears to rely upon s 1322(4)(a) of the Act. That subsection relates to "any act, matter or thing purporting to have been done". Since the notice under s 708A(6) has not yet been given, I do not consider that subsection applies in the present matter. For similar reasons, I reject the plaintiff's contention that such an order falls within the phrase in the concluding words to s 1322(4): "consequential or ancillary orders as the Court thinks fit". I should also add that, on this aspect, the plaintiff eschewed any reliance on the Court's power to make declaratory orders under s 22 of the Federal Court of Australia Act 1976 (Cth). That was well-advised because the effect of proposed order 2 is, as alluded to above, to declare valid a step that has not yet been undertaken. This conclusion is reinforced by the fact that a valid notice under s 708A(6) must, in addition to complying with the time limit in subsection 708A(6)(a), comply with the four other prescriptions of subsections 708A(6)(b) to (e) (inclusive). I do not therefore propose to make an order in terms of that proposed order. 20 Finally, given the ex parte nature of this application and that, notwithstanding Mr Viney's explanations above (see at [13]), the possibility remains that these orders may have an unforeseen effect on the interests of some person, or persons, I consider the orders proposed in 4 and 5 above are entirely appropriate. They will serve to provide a further measure of protection to such persons if they exist. 21 I will therefore make orders in terms of proposed Orders 1 (as amended), 3, 4, 5 and 6 above. I certify that the preceding twenty-one (21) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Reeves.

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