Australian Securities and investments Commission Assignment

Australian Securities and Investments Commission v Sino
Australia Oil and Gas Limited (provliqapptd)
Equivalent Citation: [2016] FCA 42
An Analysis

Factual
BackgroundThis is a case that deals with duties of directors of an
Australian corporation.
Sino was the holding counterpart of a Chinese corporation
that transacted in drilling services for the oil and gas industry.
Sino was listed with the Australian Securities Exchange and
raised capital worth $13.6 million through its initial public
offer.
The Chairperson of Sino Mr. Tianpeng Shao attempted to
transfer approximately $7.5 Million from Sino’s funds to
accounts in China (which consisted of almost all of Sino’s cash
reserves in Australia) in March 2014. The Australian
Securities and Investment Commission construed this as an
undisclosed transfer (which it was as the purpose of the same
was not stated) and applied for an injunction restraining the
company from making such a transfer.

Factual Background
The Australian Securities and Investment
Commission alleged that Sino and its chairperson
were in breach of their statutory disclosure duties
which warranted continuous disclosures from the
company.
There were further allegations relating to the
director’s duty of care and diligence provided for by
the act and a substantial breach of the same by the
chairperson by not making continuous disclosures
as prescribed by the act.

Duties Breached by the Company
There were false representations made in the prospectus of
the company relating to patents that it claimed it held but in
fact did not.
It refrained from disclosing that its profit would not be as
much as it had stated earlier in its replacement prospectus.
It also refrained from disclosing a loan obligation owed to
the Chinese subsidiary of Sino.
It made misrepresentations in its prospectus regarding
service contracts that it allegedly was a part of in China.
It made further misrepresentations relating to a claim that
it had gained $3.1 Million from sale proceeds in relation to
convertible notes.
It further made misrepresentations regarding its
subsidiaries in China to auditors.
These omissions are a failure to observe their
continuous disclosure obligations under Section 674 (2),
Section 728 (1) (a) (b) and (c) and Section 1014H of the

Duties Breached by the Chairman of
the Board of Directors
The chairman was involved in the breaches committed by
the company and is thus in breach of the provisions of the
Corporations Act, 2001 as defined in Section 674 (2A). He
also failed to fully understand the implications of the
prospectus documents that were drafted by the company
hence breaching his duties to observe due care and
diligence.
The chairman attempted to transfer $7.5 Million to
accounts of its subsidiary in China as a loan which would
other not be recoverable in practicality. This was also a
breach of his duties under Section 180 (1) as he was not
acting in the best interests of the company.
Thus these were specific breaches of Section 180 (1) and
Section 674 (2A) of the Corporations Act, 2001.

Analysis of the Judgement
The judge Justice Davis upheld all allegations made by
the ASIC and affirmed their claims in light of the
braches committed by Sino and it chairman.
 Justice Davis further observed that the Chairman of
the board was tasked with approving all disclosure
documents by attesting them with his signature. These
documents were published in English and the chairman
did not speak or understand English and yet he
continued to give approvals without having the faintest
idea regarding the contents of the disclosure
documents.
This was a direct breach of his duties under the act
and he failed to observe due care and diligence in
approving all these disclosure documents without
knowing the contents of the same. Thus this was the
most substantial breach of Section 180 (1) of the
Corporations Act, 2001.

Analysis of the
JudgementThe court however did not observe that the grant of such a
loan could be construed as a conflict of interest and a
breach of the director’s obligation to act in good faith and in
the best interests of the company as provided for in Section
181 of the Corporations Act, 2001 and thus is for the
financial self-interests of the chairman.
 The court also failed to observe that the act of the
chairman of the board in approving all disclosure documents
and the approval of such an irrecoverable loan would be a
misuse of position that caused detriment to the company
and is a substantial breach of the director’s duties under
Section 182 of the Corporations Act, 2001.
Finally, the information regarding these transactions and
omissions of disclosure were known to the chairman of the
board and this was thus use of information which lead to a
detriment for the company and the same would also have to
be considered by the court as it is embodied in Section 183

Relevance
The judgment delivered in Australian Securities and
Investments Commission v Sino Australia Oil and
Gas Limited (provliqapptd) [2016] FCA 42 clearly
illustrates the essence of the duties of a director of a
corporation.
From Justice Davis’ observation regarding the approval of
disclosure documents without the Chairman having
understood the same is a conspicuous breach of a
director’s duty to observe due care and diligence when
acting on behalf of the company as prescribed by the
Corporations Act, 2001 and as mandated by common law.
As a director the individual is placed at the apex position
in the organizational structure in order to responsibly
administrate the affairs of the company.
The directors of a corporation are thus conferred a wide
range of powers and must act on behalf of the company
in ways that do not have detrimental effects on the
company. Additionally a director of a company must not

Conclusion
•To conclude Sino’s failure to make continuous
disclosures that would ideally affect shareholder’s
interests was a major failure on the part of the
company as far as its obligations towards its
stakeholders is concerned.
•The board of directors, especially the Chairman of
the board, could be held liable for the breaches
committed by the company as they were
responsible for the decision making process which
aided in the respective breaches.

Thank You