Avecho Biotechnology Limited, in the matter of Avecho Biotechnology Limited [2022] FCA 821

DOWNES J: 1 This is an urgent application under s 1322 of the Corporations Act 2001 (Cth) to rectify an irregularity arising out of the issue by the applicant, Avecho Biotechnology Limited, of 115,000,000 options under a placement of shares and 7,500,000 options as part payment for management fees for the placement. 2 Upon the issue of the options, there was a failure to lodge a prospectus under s 713. 3 The applicant seeks the following orders: (1) Pursuant to section 1322(4)(a) of the Corporations Act 2001 (Cth) (Act), it is declared that any offer for sale, or sale of, the 122,500,000 listed options which were listed on 16 February 2021 (Listed Options) after their issue is not invalid by reason of: (a) any failure to lodge a prospectus under section 713 of the Act to exempt the sellers from the obligation of disclosure under the Act; or (b) the sellers' consequential failure to comply with sections 707(3) or 727(1) of the Act. (2) Pursuant to section 1322(4)(c) of the Act, any person who has sold any of the Listed Options until the date of this order is relieved in whole from any civil liability in respect of any: (a) failure to lodge a prospectus under section 713 of the Act exempting the sellers from the obligation of disclosure under the Act; or (b) consequent failure to comply with sections 707(3) or 727(1) of the Act. (3) As soon as is reasonably practical after the date of this order, the Applicant is to: (a) serve a sealed copy of this order: (i) on the Australian Securities and Investments Commission; (ii) on the ASX; and (iii) by post to each person to whom the Listed Options were issued at the address given by each person for recording on the Applicant's register of holders; and (b) publish an announcement to the ASX including the sealed copy of this order; and (c) place a copy of this order on its own website to remain there for at least 28 days. (4) For a period of 28 days from the date of publication of this order on the ASX website, any person who claims to have suffered substantial injustice or is likely to suffer substantial injustice by the making of any or all of these orders has liberty to apply to vary or discharge them within that period. (5) There be no orders as to costs.

Background 4 Avecho was incorporated on 19 June 1992 as Meshelfco No 152 Pty Limited. On 1 September 1992, the company, then called Greenchip Development Capital Pty Limited, converted to being a public company and its name was changed to Greenchip Development Capital Limited. 5 On 9 August 1993, Greenchip Development Capital Limited was listed on the Australian Securities Exchange (ASX). 6 After a number of name changes, on 23 May 2019, the company changed its name to Avecho Biotechnology Limited. 7 On 10 February 2021, Avecho announced to the ASX that it intended to undertake a placement to raise $5.06 million through the issue of shares with attaching listed options. 8 On 16 February 2021, it completed the capital raising, in which it issued 229,999,999 shares (Placement Shares) to sophisticated and professional investors. Each share had an attaching listed option on a 1:2 basis with an exercise price of $0.035 expiring on 31 December 2023. As a result, 115,000,000 options (Placement Options) were issued under the placement and an additional 7,500,000 options were issued to Peak Asset Management (or its nominees) as part payment of their management fees for the placement (Broker Options). 9 The Placement Options and Broker Options constitute the Listed Options the subject of this application. 10 A "cleansing notice" under s 708A(5) of the Act was lodged with the ASX in respect of the Placement Shares. 11 No "cleansing notice" or disclosure was provided to the ASX in respect of the Listed Options. 12 Trades in the Listed Options have occurred. However, it has not been possible for Avecho to identify the entities to whom the Listed Options were transferred. 13 The omission of any disclosure in respect of the Listed Options was not noticed for some time. 14 On 13 May 2022, Avecho received an exercise notice in respect of some of the Listed Options. 15 Given this, on 6 June 2022, Avecho engaged legal representatives to provide advice. 16 On 6 June 2022, the legal representatives of Avecho contacted Dr Greg Collier, Avecho's non-executive chairman, informing him that the Listed Options had not been issued with disclosure and therefore had on-sale restrictions attached and could not be traded on the ASX as at the time they were listed. 17 On 6 and 7 June 2022, Ms Melanie Leydin, Avecho's company secretary, reviewed and investigated the issue and realised that the Listed Options should have been issued with disclosure in the form of a prospectus pursuant to s 713 of the Act. 18 On 8 June 2022, Avecho requested a voluntary suspension of the Listed Options commencing from the opening of trade on 8 June 2022. This was done, despite the Listed Options no longer being subject to on-sale restrictions pursuant to s 707(3), as they had been issued for more than 12 months, in order to ensure there was no further trading in the Listed Options until the Court considered the relief sought in this application. 19 On 8 June 2022, the Listed Options were suspended from official quotation. 20 Ms Leydin accepts responsibility for the failure to disclose in respect of the Listed Options. Ms Leydin has identified that in order to prevent similar failures occurring in the future, external legal advisers will be engaged each time a corporate fundraising transaction is undertaken and Ms Leydin will ensure that the timeframe established for each corporate transaction allows sufficient time to obtain the necessary legal advice and also to consider any changes to the structure throughout the transaction.

Relevant Principles 21 Section 706 of the Act provides that an offer of securities for issue needs disclosure to investors unless ss 708 or 708AA says otherwise. 22 Section 707(3) of the Act provides: (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 to investors 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. 23 Section 727(1) of the Act provides: (1) A person must not make an offer of securities, or distribute an application form for an offer of securities, that needs disclosure to investors under Part 6D.2 unless a disclosure document for the offer has been lodged with ASIC. 24 Section 1322 of the Act relevantly provides: 1322 Irregularities ... (4) 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, or any proceeding purporting to have been instituted or taken, under this Act or in relation to a corporation is not invalid by reason of any contravention of a provision of this Act or a provision of the constitution of a corporation; ... (c) an order relieving a person in whole or in part from any civil liability in respect of a contravention or failure of a kind referred to in paragraph (a); ... (5) An order may be made under paragraph (4)(a) or (c) notwithstanding that the contravention or failure referred to in the paragraph concerned resulted in the commission of an offence. (6) The Court must not make an order under this section unless it is satisfied: (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. 25 Relevant principles in relation to the Court's exercise of power under s 1322 were identified by Jackson J in Superior Resources Limited, in the matter of Superior Resources Limited (2020) 144 ACSR 677; [2020] FCA 635 at [16] as follows: (a) Section 1322 is remedial in nature and is to be given a liberal interpretation: Re iCandy at [43]. (b) The provision has been used to validate non-disclosure by shareholders who on-sell shares on a number of occasions: Re iCandy at [44]. (c) The company whose shares were on-sold in breach of the Corporations Act is an interested party with standing to bring the application: Re iCandy at [46]. (d) In determining whether those concerned in or party to the breaches acted honestly, the court looks to absence of evidence of dishonesty. The court is concerned only with whether those people acted honestly in the ordinary meaning of that term. The concept of honesty can embrace inadvertence: Re iCandy at [54]-[56]. (e) The honesty of the shareholders who sell shares without disclosure is relevant. It is open to the court to readily infer that those shareholders have acted honestly in on-selling the shares: Re iCandy at [58]. (f) However the court may also consider the honesty of those responsible for the failure of the company to lodge a cleansing notice, including company officers. That is so even where, as here, the relief sought is framed only in terms of the contraventions committed by on-sellers: Re iCandy at [83], [87], [101]. (g) The court takes into account whether the plaintiff has taken prompt action to remedy the error: Re iCandy at [54]. (h) In considering whether it is just and equitable to validate the on-sales (s 1322(6)(a)(iii)), the court will generally focus on the interests and conduct of the shareholders: Re iCandy at [110]. 26 This statement of principles was quoted with approval by Derrington J in Lake Resources N.L., in the matter of Lake Resources N.L. [2022] FCA 197 at [22]. 27 In Micro-X Limited, in the matter of Micro-X Limited [2019] FCA 1154, Moshinsky J stated in respect of s 1322(4)(c) the following: 17. Fourthly, MX1 seeks orders under s 1322(4)(c) relieving any sellers from civil liability arising out of a contravention of ss 707(3) and 727(1) of the Corporations Act in respect of any sales of securities that occurred before receiving notice of the orders. 18. Section 1322(4)(c), when read together with ss 1322(6)(b) and (c), enables the Court to make an order relieving a person in whole or in part from any civil liability in respect of a contravention or failure to have done any act, matter or thing in contravention of a provision of the Corporations Act, so long as the Court is satisfied that: (a) the act, matter or thing is essentially of a procedural nature; (b) the persons concerned in or party to the contravention or failure acted honestly; and (c) no substantial injustice has been or is likely to be caused to any person. 19. In my view, it is appropriate to grant the relief from liability, for the same reasons as set out above. I also note that the mischief to which s 707(3) is directed is to minimise the opportunity for issuers of securities to avoid giving disclosure by first selling to an intermediary and then having the intermediary on-sell to retail investors. That is not what occurred here. On the material before the Court, there was no intention by the issuer, MX1, in issuing the notes or the shares to avoid any of the provisions of the Corporations Act.

Standing 28 Section 1322 of the Act grants standing to bring an application to an "interested party". 29 As recognised by Jackson J in Superior Resources at [16(c)] and Banks-Smith J in ICandy Interactive Limited, in the matter of ICandy Interactive Limited (2018) 125 ACSR 369; [2018] FCA 533 at [46], a company whose shares were sold in breach of the Act is an interested party with standing to bring the application. 30 As such, Avecho has standing to bring this application.

Is the relief sought within the scope of s 1322(4)? 31 Declaratory relief is sought in respect of s 1322(4)(a) of the Act that any offer for sale, or sale of, the Listed Options is not invalid by reason of the failure to lodge a prospectus under s 713 and sellers' consequential failure to comply with ss 707(3) or 727(1). 32 Relief is also sought pursuant to s 1322(4)(c) of the Act to relieve any person who has sold the Listed Options of any civil liability in respect of the failure to lodge a prospectus under s 713 and any consequential failure to comply with ss 707(3) or 727(1). 33 As recognised by Derrington J in Lake Resources N.L., albeit in the context of an issue of shares, relief of this nature falls within the scope of s 1322. His Honour stated at [29]: All of the above relief is within the scope of s 1322. The importance of this section should not be underestimated. It contemplates that errors may occur in relation to complying with the intricacies of the Corporations Act. It is obviously remedial in nature and should be afforded a liberal operation: Re Wave Capital Ltd (2003) 47 ACSR 418 [27]. Nevertheless, the relatively untrammelled scope of s 1322(4) is circumscribed by the need to satisfy the requirements of s 1322(6).

Has s 1322(6) been satisfied? 34 In order for the power of the Court to make an order under s 1322 of the Act to be enlivened, the Court must be satisfied of certain matters contained in s 1322(6).

Section 1322(6)(a) - requirements for relief under s 1322(4)(a) 35 In order to make an order under 1322(4)(a), the Court must be satisfied that the act, matter or thing which is being declared not invalid is essentially of a procedural nature, that the person or persons concerned in or party to the contravention or failure acted honestly, or, that it is just and equitable that the order be made. 36 There is no evidence which indicates Avecho or its officers acted other than in an honest way. 37 Ms Leydin, Avecho's company secretary, deposed that the failure to issue disclosure in relation to the options was an inadvertent mistake and that Avecho has a history of corporate compliance. 38 That "cleansing notices" were issued in respect of the Placement Shares which were issued alongside the Listed Options supports Ms Leydin's evidence that it was not Avecho's intention or practice to not comply with disclosure requirements under the Act. 39 Further, upon becoming aware of the issue, Avecho acted quickly to rectify the situation, including notifying ASX of the issue and voluntarily halting trading in respect of the Listed Options, notwithstanding that the passage of time meant that the Listed Options were no longer subject to on-sale restrictions pursuant to s 707(3) of the Act. 40 That Avecho acted promptly upon discovering the issue, self-reported the issue to the ASX and voluntarily halted trading in respect of the Listed Options are significant indicia of the honesty with which Avecho and its officers has acted. 41 In the circumstances, the failure to provide disclosure in respect of the Listed Options was inadvertent and Avecho and its officers had no intention to contravene the Act and were acting honestly at all times. 42 As identified by Derrington J in Lake Resources N.L. at [34], there exists some difficulty in assessing the honesty of the conduct of any subsequent seller of the Listed Options, such conduct being a relevant consideration pursuant to s 1322(6)(a)(ii). 43 In relation to this issue, Derrington J stated: 34 ... It seems most unlikely that any such shareholder would have been aware of the failure to lodge the cleansing notice. That is largely a matter of inference but it is one which accords with good business common sense: Superior Resources [16(e)] ... 35 ... the inference should be drawn that the recipients of the allocations would not have been aware of the failure to lodge a cleansing notice and the subsequent non-disclosure. There is nothing in the circumstances of the issue of the uncleansed shares which might suggest that the omission occurred. 36 As Mr Pyle of Counsel submitted, there is simply no evidence of knowledge and indeed it might be surprising if there were. My Pyle referred to the fact that ASIC and the ASX have both been informed of the present application and have not sought to intervene or to oppose the orders made. That perhaps gives a slight inference that those regulatory authorities are unconcerned as to the possibility of any misconduct by subsequent vendors of the shares. 44 Similarly in this case, there is an absence of evidence as to the knowledge of subsequent sellers of the Listed Options. Adopting the same approach as Derrington J, the inference should be drawn in the circumstances that subsequent sellers would not have been aware of the failure to lodge a prospectus and the resulting non-disclosure. 45 In this case, both the Australian Securities and Investments Commission (ASIC) and the ASX have been made aware of the proceedings. The ASX indicated that it did not oppose the application. ASIC indicated that it neither supported nor opposed the application. 46 In the above circumstances, it is accepted that any subsequent vendors of the Listed Options also acted honestly. 47 It is also accepted that, in the circumstances, it is just and equitable that the order validating on-sales be made. This is because, amongst other things, the issue arose as a result of an honest mistake by the company secretary, it is in the interests of any entity which has sold or purchased the Listed Options that such an order be made, and no director or officer of Avecho was or is a holder of the Listed Options who might benefit from the orders sought. 48 In this context, it is relevant that Avecho has received no complaints from holders of Listed Options, both ASIC and the ASX have indicated they do not oppose the making of the orders, the orders are required to be published and provide liberty for a person to apply if adversely affected, and Avecho has taken steps to ensure the failure does not happen again. 49 As such, the requirements of s 1322(6)(a) of the Act are satisfied.

Section 1322(6)(b) - requirements for relief under s 1322(4)(c) 50 In order to make an order under s 1322(4)(c) the Court must be satisfied that the person receiving relief from civil liability acted honestly. 51 As outlined above, it is accepted that Avecho, its officers and any subsequent sellers have acted at all times honestly. Similarly to Micro-X Limited, there was no attempt by Avecho to engage in the mischief which s 707(3) seeks to remedy. 52 As such, the requirements of s 1322(6)(b) of the Act are satisfied.

Section 1322(6)(c) - no substantial injustice 53 In addition to the specific requirements in relation to ss 1322(4)(a) and (c), in order to make any order under s 1322, the Court must be satisfied no substantial injustice has been or is likely to be caused to any person. 54 It is relevant in this regard that the orders sought only relieve the entities to whom the Listed Options were issued and any subsequent purchasers who on-sold them. The relief is not sought for the benefit of any of the directors of Avecho or Ms Leydin in respect of the failure and any resulting civil liability. 55 Significant factors in favour of the order being made are that this order will be served on each person to whom the Listed Options were issued, published for 28 days on both Avecho's website and the ASX website, and during this 28 days, certain affected persons have liberty to make an application to vary or discharge any of the orders. 56 This provides satisfaction that there is protection from substantial injustice occurring as a result of the making of the orders. 57 Therefore, the requirements of s 1322(6)(c) of the Act are satisfied.

Should the relief be granted? 58 As the requirements in s 1322(6) are satisfied, the discretion of the Court to make the orders sought has been enlivened. 59 It was submitted by Avecho, by reference to the observations of Derrington J in Lake Resources N.L.at [44]-[47], that there were no other discretionary reasons as to why relief should not be granted. 60 I agree with Derrington J's observation that it is not inappropriate to consider the satisfaction of the requirements in s 1322(6) in exercising the discretion in s 1322(4). As found above, the issue which will be remedied by the making of the orders was the result of an honest mistake and that there will be no substantial injustice caused by the granting of the relief. 61 It is accepted, as was the case in Lake Resources N.L., that the making of the orders sought would have benefits by: (a) regularising issues with the Listing Options which occurred as a result of an oversight; (b) relieving purchasers of the Listing Options who on-sold them from "potential liability or concern of potential liability in circumstances where the potential for liability has arisen through no fault on their part"; and (c) allowing the voluntary trading suspension in respect of the Listed Options to be lifted. 62 Further, that actions have been undertaken by Avecho and Ms Leydin in order to minimise the repetition of a similar issue in the future and there has been no complaint in the absence of any prospectus in respect of the Listed Options supports the making of the orders sought.

Conclusion 63 In light of the above findings, it is appropriate to make the orders pursuant to s 1322(4) and ancillary orders sought by Avecho. I certify that the preceding sixty-three (63) numbered paragraphs are a true copy of the Reasons for Judgment of the Honourable Justice Downes.