ASIC v Sino Australia Oil and Gas Limited: Breach of Continuous Disclosure Requirements and Directors' Duties

The report discusses the case of ASIC v Sino Australia Oil and Gas Limited which deals with issues regarding breaching of continuous disclosure requirements and directors duties provided in the Corporations Act. The judgement of the court is analysed along with the relevance of the case.

Corporations Law
ASIC v Sino Australia Oil and Gas Limited (prov liq apptd) [2016] FCA 42

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Table of Contents
Introduction................................................................................................................................2
Background of the case..............................................................................................................3
Duties and Responsibilities Breached........................................................................................4
Analysis of the Judgement of the Court with respect to the Corporations Act..........................4
Impact of the Decision...............................................................................................................5
Conclusion..................................................................................................................................7
References..................................................................................................................................8

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Introduction
The decision was given by the court in ASIC v Sino Australia Oil, and Gas Limited (prov liq
apptd) [2016] FCA 42 case is a good reminder which shows that directors are required to
comply with their duties and continuous disclosure requirements. These regulations are given
in the Corporations Act 2001 (Cth) (the Act). There are a number of duties imposed by the
Act on directors which are mandatory to comply with them while discharging their duties. In
case of noncompliance or breach of such duties, the directors can be held liable by ASIC, and
a legal suit can be filed against them. In the case of ASIC v Sino Australia Oil and Gas
Limited, the issues include misconduct and mismanagement of the company’s affairs and
involvement of Mr Shao regarding the commitments made by Sino which were violating the
regulations (Jade, 2016). There are also issues regarding misrepresentation and misstatement
of wrong facts by the directors and non-disclosure of transferring of funding by the directors
of the company. Furthermore, the directors of the corporation make a business decision
without complete information which is required by them to take the sound decision in the
particular situation. These issues occurred because of the breaching of the directors’ duties. In
this report, facts of the case will be discussed along with an evaluation of the directors’ duties
breached in this case. Moreover, the judgement of the court will be analysed along with the
relevance of the case.

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Background of the case
Sino was a Chinese based enterprises operating in the oil and gas industry. It was specialised
in providing drilling services to its clients. Its parent company was operating from China. The
corporation was listed on the Australian Securities Exchange (ASX) on 12th December 2013
after an IPO or Initial Public Offering. The corporation raised approximately $13.6 million
from its IPO. The Federal Court of Australian issued an injunction for freezing the Australian
bank account of the corporation in March 2014. The court issued the injunction based on the
investigation which was commenced by the ASIC which provides that the company and its
directors have contravened a number of regulations regarding making misstatements in the
prospectus issued by them during the IPO (ASIC, 2016a). The investigation led by the ASIC
focuses on evaluating the accuracy of the statements which are made by the corporation in its
prospectus documents regarding the oil service contract which was entered by the company
with one of its subsidiaries called Zhaodong HuaYing Oil Drilling Service Company Limited
(HuaYing).
HuaYing was a Chinese based oil company operating in oil and gas industry. The Federal
Court issued the injunction for the freezing of Sino's Australian bank accounts because Mr
Tianpeng Shao, the chairman, was trying to transfer the amount of $7.5 million which was
raised by the company through its IPO to the bank accounts of the corporation situated in
China. The main reason or the purpose of transferring the amount to the Chinese bank
account of the company was not disclosed in the prospectus issued by Sino. The Federal
Court issued an ex parte order based on the application of ASIC as per the section 1323 of the
Act on 13th March 2014 (Minter Ellison, 2016). The order was to restrain the corporation and
others from transferring, dealing or dissipating any of its funds which are raised by the
company from its IPO and kept in its Australian accounts. After which the court extended the
restraining order a several times.
The board of directors of Sino appointed administrators in the corporation on 4th May 2015
and passed a number of resolutions which provides that the company is likely to become
insolvent in the near future. An investigation was conducted by the administrator between 4th
and 25th May 2015 in the affairs of the company. Many meetings were held with ASIC and a
proposal for arranging deed of the company as well. The ASIC applied for order as per
section 447A of the Act on 15th May 2015 regarding termination of the administration of Sino

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by providing that the appointment of the administrator was invalid (Hibberd and Kingston,
2017). Furthermore, an order for appointment of a provisional liquidator was made by the
ASIC. On 21st May 2015, Mr Peter McCluskey was appointed as the provisional liquidator of
Sino to make inquiries into business activities of Sino and its subsidiaries and provide the
report to the court. On 4th March 2016, an order for winding up of Sino was issued by the
court, and Mr McCluskey was appointed as the liquidator.
Duties and Responsibilities Breached
Directors have to comply with duties which are issued by the Act since it assists in protecting
the interest of the corporation and its stakeholders. Section 180 of the Act provides that a
director is required to ensure care and diligence. The breach of this section creates a civil
obligation of the directors (Austlii, 2018). Subsection (1) provides that while discharging
their duties and exercising their powers, directors have to ensure a level of care and diligence
which would have taken by a reasonable person in the particular position. Subsection (2)
provides that the requirements given in subsection (1) should be maintained by directors or
any other officer while making a business judgement in the corporation and their judgement
should be based on good faith, without having a material personal interest, best interest of the
corporation and what they considered as appropriate (Austlii, 2018). In the case of ASIC v
Sino Australia Oil and Gas Limited, Mr Shao was reasonable for handling the processes of
the company and made an appropriate business judgement. Judge Davies held that the
statement given by Mr Shao that he was not familiar with the legal requirements of
Australian law is considered as a failure to maintain a lack of care and diligence by him. He
should have informed himself about the legal obligations of the company before making the
business decisions, and he failed to give importance to the continuous disclosure
requirements given under section 674 (Petrovski, 2016). Based on which he had breached the
directors’ duties which are imposed by the Act.
Analysis of the Judgement of the Court with respect to the
Corporations Act
ASIC alleged that Sino failed to maintain the disclosure requirements obligations and the
statements made in its prospectus are misleading and deceptive. It was further held that the
chairman did not maintain proper care and diligence which is expected in the particular
situation, and he failed to comply with disclosure requirements. It was held by the Federal

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Court held that the corporation had breached section 674(2), 728(1) (c), 728 (1), 728 (1) (b)
and 1041H of the Act. It was held that the corporation had included various representations
which were false in its prospectus based on the patents which are hold by its Chinese based
subsidiary (Federal Court of Australia, 2016). It was held to disclose that the profit forecasts
made for 2013 are considerably lower than compared to the figures mentioned by the
company in its replacement prospectus. Further, information about the loan agreement
between a subsidiary of Sino and the director was not included in the prospectus. The
information about the existence of service contracts was considered as misleading and
deceptive.
Furthermore, a misleading and deceptive statement was given regarding the claim of $3.1
million which it raised by profits of convertible notes. The information given to the auditors
was wrong regarding the subsidiary of the firm. Moreover, Mr Shao was held liable by the
court for breaching section 180 (1) and 674 (2A) of the Act. He was found guilty of involving
in issuing false prospectus and failing to fulfil disclosure requirements. He did not learn about
the facts which are necessary to be known by him while taking business actions.
Additionally, he attempted to transfer $7.5 million to Chinese accounts of the company which
a purpose of advancing loan to the Chinese based subsidiary of Sino and in circumstances in
which the loan would have been irrecoverable. A penalty of $800,000 was levied by the court
over the company. Furthermore, Mr Shao was held liable for breaching his duties for which
he was disqualified for 20 years from managing the operations of the firm (ASIC, 2016b).
Impact of the Decision
The decision of this case focuses on the importance of continuous disclosure requirements
which are necessary to be fulfilled by organisations operating in the industry. The law clearly
provides regulations which are mandatory to be fulfilled by the listed enterprises in Australia
for ensuring the interest of the company and its stakeholders. It was also seen that the duties
imposed by the Act should also be followed by the directors while discharging their duties
and exercising their powers (Mills Oakley, 2016). This case also shows the importance of
disclosures which are mandatory to be made by a corporation during its IPO and various
other continuous disclosures which are required to be made by the enterprise while it is listed
on the ASX. As per the remarks made by Judge Davies it can be seen that a director is
required to informed himself regarding the regulations which are mandatory to comply by the
company in case he/she is not aware of the same (Petrovski, 2016). Furthermore, the

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compliance with section 674 is mandatory to be followed by directors in order to avoid legal
consequences.

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Conclusion
In conclusion, the case of ASIC v Sino Australia Oil and Gas Limited deals with issues
regarding breaching of continuous disclosure requirements and directors duties provided in
the Corporations Act. The investigation conducted by ASIC found that there are a number of
regulations which are not fulfilled by Sino while issuing its prospectus for IPO. Furthermore,
Mr Shao did not disclose the purpose of transferring $7.5 million to the Chinese accounts of
the company which are raised from its IPO. The court held that the explanation given by Mr
Shao that he did not know about the Australian regulations is considered as a breach of
section 180 based on which he is required to maintain care and diligence while making
business decisions and exercising his powers. The court held the corporation, and the director
is liable for breaching a number of regulations given under the Corporations Act. This case is
relevant because it shows the importance of continuous disclosing requirements and directors
duties which are mandatory to comply by the corporation and its directors respectively.

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References
ASIC. (2016a) 16-255MR Court finds against Sino Australia Oil and Gas Limited and its
former chairman Tianpeng Shao. [Online] ASIC. Available from: http://asic.gov.au/about-
asic/media-centre/find-a-media-release/2016-releases/16-255mr-court-finds-against-sino-
australia-oil-and-gas-limited-and-its-former-chairman-tianpeng-shao/ [Accessed on 22nd May
2018].
ASIC. (2016b) 16-431MR Court fines Sino Australia Oil and Gas Limited and disqualifies
former chairman, Tianpeng Shao. [Online] ASIC. Available from: http://asic.gov.au/about-
asic/media-centre/find-a-media-release/2016-releases/16-431mr-court-fines-sino-australia-
oil-and-gas-limited-and-disqualifies-former-chairman-tianpeng-shao/ [Accessed on 22nd May
2018].
Austlii. (2018) Corporations Act 2001. [Online] Austlii. Available from:
http://www8.austlii.edu.au/cgi-bin/viewdb/au/legis/cth/consol_act/ca2001172/ [Accessed on
22nd May 2018].
Federal Court of Australia. (2016) Australian Securities and Investments Commission, in the
matter of Sino Australia Oil and Gas Limited (in liq) v Sino Australia Oil and Gas
Limited (in liq) [2016] FCA 934. [Online] Federal Court of Australia. Available from:
http://www.judgments.fedcourt.gov.au/judgments/Judgments/fca/single/2016/2016fca0934
[Accessed on 22nd May 2018].
Hibberd, M. and Kingston, S. (2017) Voluntary administration-Is your appointment
valid?. Australian Restructuring Insolvency & Turnaround Association Journal, 29(1), p.18.
Jade. (2016) Australian Securities and Investments Commission v Sino Australia Oil and Gas
Limited (prov liq apptd) [2016] FCA 42. [Online] Jade. Available from:
https://jade.io/article/445843 [Accessed on 22nd May 2018].
Mills Oakley. (2016) Litig8: A warning to administrators when accepting their appointment.
[Online] Mills Oakley. Available from: http://www.millsoakley.com.au/litig8-a-warning-to-
administrators-when-accepting-their-appointment/ [Accessed on 22nd May 2018].
Minter Ellison. (2016) Discussion of Directors' Duties in the Recent Sino Australia Oil and
Gas Decision. [Online] Minter Ellison. Available from:

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https://www.minterellison.com/articles/discussion-of-directors-duties-in-the-recent-sino-
australia-oil-and-gas-decision [Accessed on 22nd May 2018].
Petrovski, B. (2016) An ounce of prevention is worth a pound of cure – Lessons from ASIC v
Sino. [Online] William Roberts. Available from: https://www.williamroberts.com.au/News-
and-Resources/News/Articles/An-ounce-of-prevention-is-worth-a-pound-of-cure---Lessons-
from-ASIC-v-Sino [Accessed on 22nd May 2018].