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.
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Running head: BUSINESS AND CORPORATION LAW Business and Corporation Law Name of the Student Name of the University Author Note
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1BUSINESS AND CORPORATION LAW 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
2BUSINESS AND CORPORATION LAW Case Introduction The Federal Court of Australia announced that the company has committed a violation of theCorporations 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 theCorporations Act 2001 (Cth). The plaintiff(Australian Securities and investment Commission) [ASIC]applied for declarations of contravention of theCorporations Act 2001 (the Act)against theSino company that is, the first defendant and the former executive director and chairperson of the company,Mr. Shaothat 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). TheFederal Court of Australiahas ordered thatSino Australia Oil and Gas Limitedis entitled to a penalty of$800,000and itsformer chairperson Mr. Tianpeng Shaohas 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 theCorporations 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;
3BUSINESS AND CORPORATION LAW ii.the company contravenedsection 728(1)(a) of the Actby offering shares in it under the Replacement Prospectus,which included the misleading and deceptive statements; iii.the company committed a breach ofsection 728(1)(b)by offering shares in it under the Third Supplementary Prospectuswherein the company failed to disclose the loan that wasmadetoitssubsidiarycompanynamedDaqingHuaoShangfengOilField Technology Limited Company; iv.the first defendant violatedsection [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 Prospectuscannot be achieved. The company failed to inform theASX regarding the circumstances, thus, violatingsection [674(2)] of the Act; v.the company further violatedsection [1041H] of the Actby providing false information to its auditors regarding the profit and loss of its subsidiary company during the financial years2012-2014; 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 years2012- 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. Shaoor 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 Actby approving the Supplementary Prospectus, Replacement Prospectuswithout comprehending English text and without even obtaining translations of such Prospectus inChinese language;
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4BUSINESS AND CORPORATION LAW iii.theSeconddefendantfailedtoacknowledgethedisclosurerequirementsthatis mandatory for public listed corporations contraveningsection 180(1); iv.Undersection [180(1)], the Second defendant was unsuccessful to provide proper explanation to the Company Board for allowing the first defendant to transferAUD$7.5 millionto the account of the Chinese subsidiary; v.The second defendant further violatedsection [180(1)]by allowing the first defendant to violatesection [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 for20 yearsfor breachingsection [180(1)] of the Act. The Federal Court based its decision on the following grounds: Breach of section [728(1) (a)] As persection [728(1) (a)], a person must not propose securities under a disclosure document if the document contains ambiguous deceptive statement. According toArmour (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 violatedsection [728(1) (a)] of the Act. Continuous disclosure and profit forecast The plaintiffASICalleged that the first defendant failed to disclose that the profit of the company for 2013 shall be notably less than the amount anticipated in theReplacement
5BUSINESS AND CORPORATION LAW 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 unders [19] of the ASIC Act. Such statement was admissible in court and was used against him under legal provision ofsection [76] of the ASIC Actas well as against the organization undersection [87] of the Evidence Act 1995 (Cth). The admissibility of the statement made by the second defendant during his examination has been upheld inASIC 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 millionbecause 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.
6BUSINESS AND CORPORATION LAW 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 its4E Reportamounting 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 tosection [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 onsection [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 ofsection 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 ofsection [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 undersection 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 ofsection 674(2)but on the other hand, the company also admitted thatReplacement Prospectusincluded that the net profit of the company was expected
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7BUSINESS AND CORPORATION LAW to be$13.66 millionand 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 ofsection 674(2), whichonly implies that the defendants deliberately did not disclose the material facts and committed a violation of theCA 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 of2013and 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
8BUSINESS AND CORPORATION LAW 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 inASIC 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 inRe 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 ofsection [180] of the Act.
9BUSINESS AND CORPORATION LAW 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 ofASIC 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 Thedecisionhighlightstheimportanceofdirectorialobligationsaswell.The Corporations Act 2001 (Cth)sets out provisions that confer certain obligations of the directors ofanAustraliancompany.Thefirstandforemostdirectorialobligationsincludethe 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 theCA 2001 (Cth). Therefore, the decision inSino’s casehas 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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10BUSINESS AND CORPORATION LAW 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.