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All company directors are created equal

Company Law News | August 2016

The integrity of directors in exercising their duties, regardless of the nationality or language skills or the geographical location of the directors, has been examined in a case brought by ASIC in the sobering decision handed down by the Federal Court in Australian Securities and Investments Commission [ASIC] v Sino Australia Oil and Gas Ltd [Sino] (in liq) [2016] FCA 934.

Sino was the Australian holding company of a Chinese operating company providing specialised drilling services to the oil and gas industry. Sino was listed on the Australian Securities Exchange Limited on 12 December 2013 after raising approximately $13.6 million under an initial public offering (IPO).

In March 2014, ASIC obtained an injunction from the Federal Court of Australia freezing the Australian bank account of Sino following concerns that Mr Shao, the chairman of the board of directors, was attempting to transfer $7.5 million – representing almost the entire cash held by Sino in Australia – to bank accounts in China for purposes that were not disclosed, or not properly disclosed, in Sino’s prospectus documentation.

On 21 May 2015 the Court ordered, on the application of ASIC, that a provisional liquidator be appointed to Sino and to make inquiries in relation to, among other things, the business activities of Sino and its subsidiaries in China and provide a report to the court.

On 4 March 2016 the Court ordered the winding up of Sino and the appointment of a liquidator.

The court examined the conduct of Mr. Shao under s.436A of the Corporations Act 2001 and other sections of the Act involving the obligations of directors to exercise ethical conduct as laid out in the Corporations Act 2001 [ss 674(2), 728(1)(a), 728(1)(b), 728(1)(c),1041H].

The content of the prospectus documentation for 2013 was found to be contrary to the continuous disclosure requirements and included misleading and deceptive statements. ASIC further alleged that Mr Shao had failed to act with the appropriate diligence and care in his duties as chairman. Specifically the court raised questions of Shao’s ethical conduct where he purported to approve the prospectus documentation with minimal or no understanding of the English language and no involvement of a translator. This conduct indicated a clear disregard for the duties required of Mr. Shao as a director.

In considering whether the actions by Mr Shao contravened s.108 (1) the court considered previous judgments from ASIC v Maxwell which held that the actions taken by Mr Shao had to ‘plainly jeopardise Sino’s interest’.

Mr Shao was found to have breached his duties by the court, through careless actions that essentially resulted in the company being susceptible to possible legal proceedings and its eventual liquidation.

The continuous globalisation of the financial markets gives rise to many new legal conundrums. In an attempt to deflect his role in the company’s financial dealings, Mr Shao moved overseas to prove that he relied on his Australia co-directors and professional advisers therefore it was not within his duties. The case clarified that, despite being based overseas, directors still have the same responsibilities as their Australian counterparts.

In understanding the significance of this case one must consider the statement made by the ASIC Commissioner John Price who stated,  “The importance of providing accurate and timely information lies at the heart of our financial markets and those principles were breached in this case.” In a world dominated by financial dealings and reliance on equitable outcomes and efficiency within the market, it is essential that cases such as this continue to provide a salutary reminder of the importance to maintain the duties of all parties involved.

The lawyers at Forum Law, have a wealth of experience and knowledge in the areas of company law and corporate governance as our lawyers hold numerous board positions and advise a variety of companies, from public companies to small private companies and not for profit companies. Call us for a free 30-minute conversation on (02) 9560 3388 or in our friendly and professional office in Leichhardt where parking for clients is free.

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