Business and Corporation Law Case Analysis

This case analysis discusses the violation of Corporations Act 2001 (Cth) by Sino Australia Oil and Gas Limited and its former chairperson. The article highlights the importance of timely and accurate disclosure of material facts and directorial obligations.

Running head: BUSINESS AND CORPORATION LAW
Business and Corporation Law
Name of the Student
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Author Note

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Table of Contents
Case Introduction.............................................................................................................................2
Breach of Duties..............................................................................................................................2
Critical analysis of decision of court in the context of Corporations Act 2001 (Cth).....................4
Breach of section [728(1) (a)]......................................................................................................5
Continuous disclosure and profit forecast...................................................................................5
Failure to know disclosure obligations........................................................................................8
Non-disclosure to Company Board about Profit downgrade.....................................................10
Impact of the decision on the operation of Australian companies.................................................10
Relevance of the decision..............................................................................................................11
Conclusion.....................................................................................................................................12
References......................................................................................................................................13

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Case Introduction
The Federal Court of Australia announced that the company has committed a violation of
the Corporations Act 2001 (Cth) by making deceptive or misleading statements in its prospectus,
which is related to the drilling technology. The company failed to disclose about circumstances
that resulted in impairment in the ability to anticipate profits. It endowed its auditors with false
information related to its assets and liabilities of its subsidiaries. The Non-English speaking
director of the company is alleged to have failed to perform his director duties that are stipulated
under the Corporations Act 2001 (Cth).
The plaintiff (Australian Securities and investment Commission) [ASIC] applied for
declarations of contravention of the Corporations Act 2001 (the Act) against the Sino company
that is, the first defendant and the former executive director and chairperson of the company, Mr.
Shao that is, the second defendant. All the charges against the company and its director were
proved and both the company and its director were held liable for committing a breach of the
Corporations Act 2001 (Cth). The Federal Court of Australia has ordered that Sino Australia
Oil and Gas Limited is entitled to a penalty of $800,000 and its former chairperson Mr.
Tianpeng Shao has been disqualified from managing companies for a period of twenty years.
Breach of Duties
The Court declared that Sino (the company) had committed a breach of the following provisions
of the Corporations Act 2001 (Cth):
i. the company made fake representations in its prospectus documents with respect to
patents declared by Sino and which was held by its Chinese-based subsidiary;

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ii. the company contravened section 728(1)(a) of the Act by offering shares in it under the
Replacement Prospectus, which included the misleading and deceptive statements;
iii. the company committed a breach of section 728(1)(b) by offering shares in it under the
Third Supplementary Prospectus wherein the company failed to disclose the loan that
was made to its subsidiary company named Daqing Huao Shangfeng Oil Field
Technology Limited Company;
iv. the first defendant violated section [728(1)(c)] wherein it failed to make disclosure about
the circumstances which hindered their ability to predict that the profit provided in the
Replacement Prospectus cannot be achieved. The company failed to inform the ASX
regarding the circumstances, thus, violating section [674(2)] of the Act;
v. the company further violated section [1041H] of the Act by providing false information
to its auditors regarding the profit and loss of its subsidiary company during the financial
years 2012-2014;
vi. under section [1041H] of the Act, the company has further provided false information
regarding assets and liabilities of the subsidiary company during the financial years 2012-
2014;
The court further declared that the second defendant has committed contravention of the
following provisions of the Act:
i. Under section [674(2A)] of the Act, Mr. Shao or second defendant was involved in the
breach committed by the first defendant under section [674(2)] of the Act;
ii. the second defendant violated section [180(1)] of the 2001 Act by approving the
Supplementary Prospectus, Replacement Prospectus without comprehending English
text and without even obtaining translations of such Prospectus in Chinese language;

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iii. the Second defendant failed to acknowledge the disclosure requirements that is
mandatory for public listed corporations contravening section 180(1);
iv. Under section [180(1)], the Second defendant was unsuccessful to provide proper
explanation to the Company Board for allowing the first defendant to transfer AUD$7.5
million to the account of the Chinese subsidiary;
v. The second defendant further violated section [180(1)] by allowing the first defendant to
violate section [728(1) (a, b, c)], section [674] and section [1041H] of the 2001 Act;
Critical analysis of decision of court in the context of Corporations Act 2001 (Cth)
The Federal Court held both the company and the former chairperson of the company
liable for breaching sections [728(1) (a, b, c)], [674] and [1041 H] of the Corporations Act 2001
(Cth). The company has been ordered to pay penalty amount and the chairperson was barred
from managing corporations for 20 years for breaching section [180(1)] of the Act.
The Federal Court based its decision on the following grounds:
Breach of section [728(1) (a)]
As per section [728(1) (a)], a person must not propose securities under a disclosure
document if the document contains ambiguous deceptive statement. According to Armour
(2014), the company has already admitted that it made false representations regarding patents
claimed by Sino and held by the Chinese-base subsidiary company with respect to the drilling
technology. This established the company violated section [728(1) (a)] of the Act.
Continuous disclosure and profit forecast
The plaintiff ASIC alleged that the first defendant failed to disclose that the profit of the
company for 2013 shall be notably less than the amount anticipated in the Replacement

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Prospectus. Further, Armour (2014) states that the future net profit of the company was
adversely affected by certain circumstances that were highly imperative. The first circumstance
occurred when the company started to render services to consumers in remote areas in China
leading to the incline in transportation and staff costs. (Hannigan 2015) agrees that the second
defendant admitted this circumstance during his examination under s [19] of the ASIC Act. Such
statement was admissible in court and was used against him under legal provision of section [76]
of the ASIC Act as well as against the organization under section [87] of the Evidence Act 1995
(Cth).
The admissibility of the statement made by the second defendant during his examination
has been upheld in ASIC v Astra Resources PLC [2015]. The second circumstances took place
when the company incurred lease expenses in the form of additional equipment worth $2.6
million because of delay in receiving delivery of capital equipment. Armour (2014) stated that
though the defendants denied the allegations but the financial review in the Appendix 4E Report
established the incline in the company expenses.
Thirdly, the company faced unnecessary delay in receiving payments from the Chinese
state-owned enterprise customers and the defendants admitted the same. The last instance
occurred when the company experienced successive delays during the initial public offering,
which led to an incline in the expenses.
However, Tricker and Tricker (2015) states that the defendant contended that first,
second and fourth circumstances affected the future net profit after tax of the company except the
third circumstances. Armour (2014) argues that even if their circumstance did not cause decline
in the net profit of the company but it was likely to affect the company.

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Furthermore, both the defendants have agreed to the fact that the company failed to
disclose either the four crucial circumstances or the prospectus documents to the ASX until it
issued its 4E Report amounting to infringement of section [728(1)(b)] and section [728(1)(c)] of
the 2001 Act.
According to these provisions, a person must not propose securities under a disclosure
document if it encloses an omission of any important material document or circumstances, which
arose since the disclosure document was lodged. Further, the court based its decision regarding
contravention of disclosure requirement with reference to section [710 (1)] according to which a
prospectus must include all material information that financiers must have knowledge about to
make an informed evaluation of the matters. Banerjee and Humphery (2016) asserts that based
on section [728] and s [710] of the Act, the four circumstances were likely to affect the company
adversely and amounted to material information that was essential for an investor to assess the
financial position of the company and that such information fell within the scope of section
710(1) of the Act. Furthermore, the second defendant was aware of such information as admitted
by him and such information was available while prospectus documents were issues, hence,
amounted to violation of section [710] and [728 (1) (a, b, c) of the Act. Further, failure to
disclose that a difference with respect to the profit forecast, amounted to a breach of the
provision stipulated under section 674(1) and (2).
The fact that both the defendants were fully aware that any prudent person would have
revealed such material facts in the same circumstances. However, the defendant denied the
allegation of committing breach of section 674(2) but on the other hand, the company also
admitted that Replacement Prospectus included that the net profit of the company was expected

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to be $13.66 million and that the “actual total comprehensive income net of tax” amounted to
$12.69 million.
There was no relevance of this defense to the contravention claim of section 674(2),
which only implies that the defendants deliberately did not disclose the material facts and
committed a violation of the CA 2001 (Cth). While questioning the second defendant it was
apparent from his answers that he was fully aware of the deterioration of the profit during the
second half of 2013 and this should be disclosed as is expected from any prudent person under
the same circumstances.
Failure to know disclosure obligations
The defense contended by the second defendant that he was not competent with the
English language and that he failed to acquire the Chinese translation for each of the prospectus
document prior to the authorizing and signing of such document, amounts to a violation of his
directorial duty. The court highlighted the significance of the directorial duty to peruse the
financial statements to ensure the accuracy of the content.
Mr. Shao being the director of the company was under legal obligation to implement his
directorial powers and release his obligations with due diligence and care. This part of his duty
required him to be acknowledged with the content of the prospectus ensuring its accuracy and
validity. The failure to understand the content of the documents before signing amounts to a
breach of directorial duties and does not qualify as an adequate defense.
The second defendant further contended that he trusted on the advice given by the other
two Australian directors and the other expert legal advisers who were involved in implementing
the listing on ASX. Tricker and Tricker (2015) believes that the second defendant attempted to

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justify himself by arguing that he trusted the directors and the professional advisers as he was
satisfied with the work based on the previous dealings they carried out.
Here, it can be argued that even though the second defendant was not a competent
English writer or speaker and had no knowledge about the legal requirements in Australia, it
does not imply that he is discharged from his directorial obligations. Banerjee and Humphery
(2016) agree that his non-comprehension and insufficient knowledge about the Australian legal
requirement does not justify that he would simply rely on others regarding the accuracy of the
financial statements without perusing them himself. The court is correct in asserting that he
failed to carry out his obligation with due care and diligence as is expected from any prudent
person to be acquainted with the disclosure requirements if he or she acted as a director or
chairperson of an organization as was upheld in ASIC v Citrofresh International Limited (No 2)
(2010).
Non-disclosure to Company Board about Profit downgrade
The non-executive directors contended that Mr. Shao revealed that the revenue amount
was more than the forecast and the profit margin was slightly down still it is close to the
anticipated numbers. This established that the second defendant failed to make such material
disclosure to the company Board as fact related to the deterioration of the company profits
amounts to a material fact, which requires mandatory disclosure. The significance of this legal
disclosure was highlighted in Re One.Tel Ltd (in liq) and in ASIC v Rich [2003]. It was ruled
that the failure on part of the managing director to notify the Board about facts material to the
financial status of the company should amount to the infringement of section [180] of the Act.

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Impact of the decision on the operation of Australian companies
The decision given in the Sino’s case significantly upheld the significance of timely and
precise disclosure necessities and the obligation of a director to act diligently with due care. In
the words of ASIC Commissioners, it is the foremost duty of a director of a company to ensure
that the content of such disclosure is made accurately and on time. Accurate and timely
disclosure of material facts is crucial for financial markets and violation of such legal principles
not only affects the financial stability of a company but also affects its social standing.
Relevance of the decision
The decision highlights the importance of directorial obligations as well. The
Corporations Act 2001 (Cth) sets out provisions that confer certain obligations of the directors
of an Australian company. The first and foremost directorial obligations include the
responsibility to act diligently and with due care and to act in the greatest interest of the
company.
Conclusion
Any prudent person is expected to disclose any facts or information that the person
believes to be pertinent to the fiscal position of the company, especially, in the financial markets.
Hence, failure to perform such obligations shall amount to violation of the CA 2001 (Cth).
Therefore, the decision in Sino’s case has upheld the significance of the legal principles relating
to the Australian directorial obligations to make timely and accurate disclosures while acting
diligently and with due care.

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References
Armour, J., 2014. The enforcement of director's duties in Australia: a functional and empirical
analysis (Doctoral dissertation, University of Oxford).
ASIC v Astra Resources PLC [2015] FCA 759 at [124-126].
ASIC v Citrofresh International Limited (No 2) (2010) 77 ACSR 69; [2010] FCA 27
ASIC v Healey [2011] 196 FCR 291
ASIC v Rich [2003] 44 ACSR 682
ASIC v Sino Australia Oil and Gas Ltd (in liq) (2016) 115 ACSR 437
Banerjee, S. and Humphery-Jenner, M., 2016. Directors’ duties of care and the value of
auditing. Finance Research Letters, 19, pp.1-14.
Coffee Jr, J.C., Sale, H. and Henderson, M.T., 2015. Securities regulation: Cases and materials.
Corporations Act 2001 (the Act)
Evidence Act 1995 (Cth)
Hannigan, B., 2015. Company law. Oxford University Press, USA.
Re One.Tel Ltd (in liq)
Tricker, R.B. and Tricker, R.I., 2015. Corporate governance: Principles, policies, and practices.
Oxford University Press, USA.

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