Breaching of Duties by Sino Australia Oil and Gas Limited and its Chairman

This report discusses the case of Australian Securities and Investments Commission v Sino Australia Oil and Gas Limited (prov liq apptd) [2016] FCA 42 where the company and its chairman breached several duties mentioned under the Corporations Act 2001 (Cth). The report includes the decision of the court and its impact on other companies.

Running Head: BUSINESS AND CORPORATION LAW 0
HA3021 CORPORATIONS LAW
1/17/2019
Student’s Name

Corporations Law 1
Contents
Introduction......................................................................................................................................2
Case Introduction.............................................................................................................................2
Overview 2
Facts 3
Duties Breached...............................................................................................................................4
Why duties were breached...............................................................................................................5
The decision of the court.................................................................................................................6
Impact on the decision on other companies.....................................................................................7
Conclusion.......................................................................................................................................7
Reference.........................................................................................................................................8

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Introduction
Corporations are the artificial and non-individual entities of society. The same works in a
business environment and has many stakeholders. As mentioned, a corporation is an artificial
person, hence the same appoint some individuals to take the business decisions and to manage
the affairs of the same. These individuals hold the position of officers and directors in a
corporation. Being on such a superior position in an organization and being responsible for the
decisions of the corporation, these people owe a duty of care in respect of their performance and
working. This is the reason that it is expected from them to act in a manner, which is the most
suitable and is in the best interest of the corporation. Corporations of a nation are important for
the economy and governments, as well as other stakeholders, have certain expectations form the
same. In such a manner, the behavior of the management of a company is required to be positive.
Every nation has it is separate legislation to regulate the behavior of corporates as well as of its
directors. If to talk about Australia, Corporations Act 2001 (Cth) (act) is the lead legislation that
defines the rights as well as duties of directors. The report presented hereby is focused on one of
the significant cases where company and director of the same breached some of the duties
mentioned under the act. The report will also include the decision of the case and impact of the
same on other companies in the country.
Case Introduction
Overview
The case selected for this report is the Australian Securities and Investments Commission v Sino
Australia Oil and Gas Limited (prov liq apptd) [2016] FCA 42. In the subjective case,

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chairperson of the company named Sino Australia Oil and Gas Limited breached his duties
mentioned under the act. Tianpeng Shao was the chairperson of this company. The company was
a holding company in Australia and was having a subsidiary company in China. At the time of
initial public offering by the company, Mr. Shao made certain non-compliances in respect to the
disclosure requirements. In addition to this, he was also making some fraudulent bank
transactions out of the money received to the company from its IPO. In March 2016, the federal
court of Australia provided an order to wind up the company and made Mr. Shao as well as
company liable for breach of many sections of the act.
Facts
If to talk about the facts of the case, this is to state that in the year 2013, the company for the
purpose of its initial public offering issued prospectus document. Mr. Shao signed the document.
In addition to the chairperson, Mr. Shao was also the executive director of the company. By the
help of IPO, the company has raised the funds worth $12,829,318 (Minterellison.com,
2016). Afterward, Mr. Shao requested two of the resident Australian directors namely Mr.
Faulkner and Mr. Johnson to transfer the money to accounts of the company in China. Both of
these directors had no knowledge about the reasoning of this transaction and therefore they have
refused to co-operate to Shao in the subjective dealings. Cause of their refusal to be a part of the
fraudulent activity, Shao took steps to move both of the said people from the position of
directors. Afterward, these directors have reported the issue of bad corporate governance to
ASIC. Federal court initiated and committed an inquiry on the company and after many of the
finding in the respective matter, the court finally found it suitable to make the Sino wind up. In
March 2016, Federal court issued the order of winding up of the company considering the

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grounds of equity and just and appointed a liquidator named Mr. McCluskey for the same. In
addition to the actions taken by the federal court, ASIC made the application for a declaration of
contravention of the act in against of Mr. Shao as well as the company.
Duties Breached
Only directors and officers of the companies are not required to follow the duties under the act
but the legislation also put certain limitations and obligations on the company itself. It means in
case of breach, the company can also be held liable for the same. For instance, section 674 of the
act prescribes the provisions related to continuous disclosure by listed entities. According to the
provisions of this section, it is the responsibility of a listed company under the act to provide
disclosure to the market operator in respect to those events, which demands so under listing rules
(Austlii.edu.au, 2018). Further, section 728 of the act is also a significant section where a person
is not allowed to make certain disclosures. According to the provisions of section 728(1) of the
act, no person is allowed to offer any securities under a disclosure document if any deceptive or
misleading statement is there in the disclosure document, application form or any document,
which contains the offer. Subsection 2 of section 728 says that a person is not allowed to offer
any security under by using a disclosure document if any material information as required by
sections 710-715 is omitted from such document (Australia, 2011). At last section 728 (3)
requires a person to not to offer any securities under a disclosure document if, after the lodgment
of such document, a requirement has arisen.
In conjunction with the aforesaid sections, section 1041H is another important section which
contains the provisions related to deceptive and misleading conduct and further provides the
penalties under civil liability actions. The section required a person to not to engage in providing

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or dealing with any financial services or products which is deceptive or misleading. Subsection 2
of the section 1041H provides the scope of this section. The discussed sections are few of the
sections, which provide the manner of conduct while offering securities or financial products and
services. In addition to these sections, every officer/directors of an Australian Corporation is
required to act considering their general as well as specific duties. The general duties of such
people are mentioned under section 180-183 of the act. Moving the focus of the discussion
towards these sections, this is to state that as per section 180 of the act all the officers including
directors of the company must act as a reasonable person. Further, they are required to keep the
elements of care, dignity, and diligence in their dealings that they do on behalf of the company. It
was given in the case of ASIC v Healey & Ors [2011] FCA 717, that the director of a company
must use reasonable care and skills while evaluating the financial statements of the company.
Similarly, section 181 demands such officers perform their conduct for a proper purpose as well
as in the best interest of the company. It was given in the case of ASIC v Adler [2002] NSWSC
171 that a person can be treated as liable to breach the breach the provisions of section 182 of the
act if the same misuse their position for the personal benefits. Section 183 of the act prevents
every director and officer of the company by misusing the corporate information for the personal
benefits or for any other act, which leads loss to the company (Klettner, 2016). It was held in the
decision of the case of ASIC v Macdonald (No 11) (2009) 71 ACSR 368 that director/officer can
be held liable for the breach of section 180 of the act if the same performs his/her duties in a
negligent manner.
Why duties were breached
If to talk about the application of the said rules of the act to the case selected hereby, this is to
say that the company, as well as the executive director of the company, breach many of such

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rules. Firstly, Company made some false representation in the prospectus about the patents and
shown itself as the owner of these patents which was not true. The company also made the wrong
forecast for the profits of the calendar year 2013. Further, the company had a loan agreement
with the sole director of the subsidiary, which was established in China. In such a manner, the
company has omitted to provide many of the information, which was required to provide, and
breached the provisions of section 728(2) of the act. The company also breached the provisions
of section 728(1) and 1041H of the act as the same made a deceptive and misleading statement
showing
 Receipt of $3.1 million out of the proceed of convertible notes.
 False information to the auditors regarding Chinese subsidiary company
 False service contracts in China (Pereira and Feng, 2016)
As mentioned above that the chairperson of the company Shao also breached the provisions of
this act, this is to mention that the same was a part of all the contraventions done by the
company. He failed to understand the prospectus of the company and failed to inform himself
regarding disclosure requirements. In addition to this, he tried to transfer the funds raised under
IPO to the chines based subsidiary with the purpose to provide a loan. The loan could be the
irrecoverable cause of the financial condition of this company. Applying the provisions of ASIC
v Macdonald and ASIC v Healey & Ors, Shao was liable to breach the section of 180 of the act
as he failed to understand the financials of the company and also to perform the duty in the
manner as he was expected to do.
The decision of the court

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In the decision of this case, the court held the company liable for the breach of section 728(1),
674(2) and 1041H of the act. In addition to this, the court also held Mr. Shao liable for the breach
of section 180(1) as well as section 674(2A) of the act (Asic.gov.au, 2016). Justice Davis held
that Shao failed to act in the best interest of the company by making some wrong decisions.
Further, the Federal court of Australia imposed worth $800,000 on the company and the former
chairperson of the company, Mr. Shao had been disqualified by managing the companies for the
next 20 years. The court also gave the order to Shao to pay $5,539,758 to Sino in the form of
compensation (Jacobson, 2016).
Impact on the decision on other companies
In the decision of the subjective case, the court not only held the company liable but the
executive director also had to pay the penalties. This decision worked as a lesson for the
directors and officers of the other companies who were used to think that because of the separate
legal status of a company they could do anything. People who are working on the profiles of
directors/officers of the Australian companies are aware of their obligations specifically
regarding the event of IPO and FPO. They know that a small amount of negligence on their part
can attract the heavy penalties. In this case, the company has made some misleading statements
and paid the penalties for the same later on, therefore the directors are more careful while
drafting and approving the prospectus while dealing on behalf of the company.
Conclusion
To conclude this discussion, this is to say that the directors and officers of the company are the
significant people who are responsible for bad or good corporate governance. The discussed case

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is one of the significant cases in the history of Corporations Act 2001 and directors and
company, in this case, breached many of the provisions of this act. The federal court imposed
penalties on director and company and the decision provided by the court brought a positive
result to the other companies. Now, after the decision of this case, directors are aware that they
can be held responsible for breach of those sections where penalties are mentioned for companies
only as ultimately directors are the people who act on behalf of the company. In such a manner,
the facts and decision of the studied case recalled the obligations and expected the behavior of
directors.

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Reference
ASIC v Adler [2002] NSWSC 171
ASIC v Healey & Ors [2011] FCA 717
ASIC v Macdonald (No 11) (2009) 71 ACSR 368
Asic.gov.au. (2016) 16-255MR Court finds against Sino Australia Oil and Gas Limited and its
former chairman Tianpeng Shao. [online] Available from: https://asic.gov.au/about-asic/news-
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 19/01/2019]
Austlii.edu.au. (2018) Corporations Act 2001 - Sect 674. [online] Available from:
http://www5.austlii.edu.au/au/legis/cth/consol_act/ca2001172/s674.html [Accessed on
19/01/2019]
Australia. (2011) Australian Corporations & Securities Legislation 2011: Corporations Act
2001, ASIC Act 2001, related regulations. Australia: CCH Australia Limited.
Australian Securities and Investments Commission v Sino Australia Oil and Gas Limited (prov
liq apptd) [2016] FCA 42
Corporations Act 2001 (Cth)
Jacobson, D. (2016) Case Note: Liability Of Non-English Speaking Director. [online] Available
from: https://www.brightlaw.com.au/case-note-liability-of-non-english-speaking-director/
[Accessed on 19/01/2019]

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Klettner, A. (2016) Corporate Governance Regulation: The changing roles and responsibilities
of boards of directors. Oxon:Taylor & Francis.
Minterellison.com. (2016) Discussion of Directors' Duties in the Recent Sino Australia Oil and
Gas Decision. [online] Available from: https://www.minterellison.com/articles/discussion-of-
directors-duties-in-the-recent-sino-australia-oil-and-gas-decision [Accessed on 19/01/2019]
Pereira, D. and Feng, Y. (2016) Australia: Warning to foreign directors of Australian companies.
[online] Available from:
http://www.mondaq.com/australia/x/527584/Securities/Warning+to+foreign+directors+of+Austr
alian+companies [Accessed on 19/01/2019]