Director Duties and Breach Analysis

This assignment delves into a case study concerning Sino Australia Oil & Gas Limited. It focuses on analyzing the breach of director duties committed by a foreign director who failed to adequately inform himself about financial matters, disclose crucial information regarding profit reduction, and acted irresponsibly with company funds. The analysis examines relevant legal provisions, court rulings, and the implications of this case for future director conduct.

Running head: BUSINESS LAW
Business law
Name of the Student
Name of the University
Author Note

1BUSINESS LAW
Table of Contents
Case introduction.............................................................................................................................2
Breach of directors Duties...............................................................................................................3
Critical analysis of the decision provided by the judges.................................................................4
Future implications of the decision a statutory reminder had been set by the court in relation
directors duties.................................................................................................................................7
References........................................................................................................................................9

2BUSINESS LAW
Case introduction
In the case of 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 it had been ruled by the federal court of Australia that the defendant company is liable to a
pecuniary penalty worth $800,000 and the chairman of the organization (MrTianpeng Shao) was
suspended for a period of 20 years from taking part in management of any company. The
decision of the court had been followed by the above discussed penalty and disqualification order
where the court ruled that the organization and its director have contravened the provisions of the
Corporation Act 2001. The court in this case found that a director does not have the power right
to rely on other directors only because he does not have the capacity of reading, writing or
understanding English and thus he cannot sign the prospectus of a company without
understanding it.
The defendant organization was an Australian holding company of a Chinese
organization which indulged in providing special drilling services to the oil and gas sector. The
organization raised an approximate $13.6 Million through a public offering and had been
registered on the ASX on 12th December 2013. An injunction had been obtained by the
Australian Securities and Investment commission in march 2014, through which it blocked the
Australian Bank account of the company after it expressed concerns that the director want to
transfer $7.5 million to China.
It had been order by the court on 21st May 2015 that a liquidator is to be appointed by the
company and he is to further make inquiries in relation to the business operations. It had been
declared by the court that defendant organization had violated the provisions of sections 674(2),

3BUSINESS LAW
728(1)(a), 728(1)(b), 728(1)(c), 1041H of the Corporations Act 2001 (Cth) and the defendant
director had violated the provisions of section sections 180(1) and 674(2A) of the CA.
It this case the organization had issued a prospectus in a way which contravened the
provisions of the CA in relation to a misleading and deceptive conduct as well as a failure to
make compete disclosure. The prospectus if issued in a proper manner would have had
materialistic impact on the share price of the company. It was claimed by the defendant director
that he did not have proper understanding in relation to Australian Law and English and thus he
totally relied on the other directors while making a decision.
Breach of directors Duties
In the given case the allegations which have been made by the ASIC is that the director
of the organization have not complied with the duty which has been provided through the
provisions of section 180(1) of the corporate legislation regarding diligence and care while
discharging duties. This is because he had himself violated or made the company to violate the
following provisions
Section s.728(1)(a) as he made the organization to indulge in a misleading and deceptive
conduct in relation to its prospectus documents with respect to the oil and gas technology patents
as claimed to be held by the company towards service contracts with Chinese customers and
depicted receipt of AUD 3.1 million.
Section s.674 (2) as he had made the organization not to make proper disclosure to the
market in relation to the circumstances which were actually present and because of which a
reasonable person would feel to have a materialistic impact on the price of the company shares

4BUSINESS LAW
Section 728(1)(b) was made to be violated by him in relation to the organization as it did
not include information in relation the loan which has been provided by tit to a Chinese
subsidiary.
Section 728(1)(c) as the organization was made by him to not refer in relation to the
prospectus document about the circumstances which clearly depicted that the profit forecast of
the organization would not be achieved.
Section 1041H was also made to be violated by him in relation to Sino as the
organization provided incorrect information to the auditor with respect to the china bases
subsidiary of the company.
Thus by making the organization violate the provisions discussed above the director had
failed to comply with his duty under section 180(1) as he did not incorporate care and diligence
while discharging his obligations. In addition this section was also violated by the director as he
did not indulge in an informed decision making which would have been done by a director in the
same position as him.
Critical analysis of the decision provided by the judges
In relation to contraventions of disclosure obligations under s.674(2) it had been ruled by
the court that the violation has been done by the director. The reliance of the court in relation to
this decision was on the examination of Mr Shao under section 19 through a translator. The
director had the knowledge that the profit in relation to the organization had deteriorated in the
latter part of 2013 and also had the knowledge that the information was not available generally
and was a information which would be expected by a reasonable person. In addition the director

5BUSINESS LAW
had a knowledge that extra equipment lease expenses, increased cost and delay in payments is
decreasing the profit of the company.
In relation to the failure of understanding and reading the prospectus document, it had
been held by the court that this cannot be used as defense by the director. It has been admitted by
the director that he did not have the capacity of understanding English and was not able to obtain
total Chinese translation in relation to every prospectus document before it had been duly signed
and issued. It was stated by the judges in this case that the failure of the director to get a full
translation of the prospectus in Chinese before it had been signed was a failure of the director to
deploy a reasonable degree of care and diligence which another director would have observed in
the same situation. In this case the judges cited the case of Australian Securities and Investments
Commission v Healey where it had been stated by the court that the director must fully
understand a financial statement before giving assent to it. This must not only correct
grammatical and typographical error the reading has to done in relation to understanding the
matter which have been stated in the document totally. It had been found by the judges that the
comment were apposite equally in relation to the prospectus document. It was stated by the court
that as the director in this situation has signed all the prospectus documents it was a requirement
for him to ensure that all information which are present in the document are correct. Thus as
stated by the director that he was not able to understand what had been stated in the prospectus in
a simple way was a failure on his part to comply with the provisions of section 180(1).
In relation to the reliance on other it had been provided by the plaintiff he did not have
adequate information in relation to the disclosure requirement under the Corporation Act and that
is why he did not have known the matters which needed to be included in the prospectus. It had
been alleged by the defendant director that reliance had been put by him on the advice provided

6BUSINESS LAW
to him by the other directors of the company namely Mr Faulkner and Mr Johnson along with a
legal and professional team of advisors.
It had been stated by the defendant director with respect to his direction under section 19
that he was totally dependent on the two Australian directors and their profession in relation to
management as he was not aware about the disclosure policy in Australia. He further stated that
the company had made the breaches as he was not the master of Australian law.
In this situation it was provided by the judge that the fact that the defendant director does
not understand English as well as the rules under the Australian legal system cannot mean that he
could just leave the decision making to others and not observe care and diligence in relation to
his own duties. The judge referred to the case of stralian Securities and Investments Commission
v Citrofresh International Limited (No 2). In this case it had been stated by the court that
although the director possessed a ackground in abalone processing and did not have professional
knowledge in relation to the operations of the organization it does not mean that he is going to be
excused from observing diligence and care which a reasonable director would have done in the
same situation. In addition the director was not allowed to put his reliance on the advice provided
by experts which he had no resources or capacity to duly understand. In the given situation he
had the duty to participate actively on drafting and to exercise a considerable amount of care and
skill just like a responsible director. In the present case it had been found by the judge that by
failing to make proper disclosure the director did not comply with the provisions under section
180(1) of observing care and diligence in relation to his duties like a reasonable director.
In relation to profit downgrade contradictory evidence had been provided by the
defendant director and the other two directors. There was a $5 million difference between the

7BUSINESS LAW
profit predicted by them. It had been ruled by the judge in this case that information in relation to
the reduction towards the profit of the organization was very important and had to be disclosed
by the director. In this situation the court cited the case of Australian Securities and Investments
Commission v Rich where it had been provided by the court that where the director did not
manage to adequately inform himself about the financial matters relevant to the company they
have violated the provisions of section 180(1) of the CA. although the defendant director has
knowledge in relation to the deterioration of the organization’s profit he failed to make proper
disclosure and thus violated provisions of section 180(1).
In relation to the transfer of money by the director to china it was evident that the other
directors were not informed about this situation by the defendant director. He failed to document
the loan and take steps to make sure that it can be recovered which would not have been done by
a reasonable director and thus the provisions of section 180(1) of the CA have been violated. The
conduct was serious as there was an attempt be the defendant director to transfer the money
without consulting the board.
The court also referred to the rules stated by the case Australian Securities and
Investments Commission v Maxwell where it had been held by the court that the interest of the
company has to be jeopardized in order to establish the provisions of section 180(1) have been
breached. In the given situation the defendant director by making the organization to violate the
provisions of s.728, s.674 and s.1041H have subjected to organization to the risk of legal
proceedings and financial losses.

8BUSINESS LAW
Future implications of the decision a statutory reminder had been set by the court in
relation directors duties.
The most important implication of this case is that the foreign directors who do not
understand English or the Australian law have the same obligation as any other reasonable
director. In addition such directors also cannot put reliance on the advice provided to them by
others while discharging their duties if they do not understand the subject matter of the advice.
In the given situation the directors must totally make them self informed about the subject matter
of the decision before the decision is taken by them. This may include any translation services
which may be required by the directors of the company. Considerable media attention had been
attained by the court specifically as it involved a foreign director. The court also made it clear
that it has a very serious stance in relation to such cases by imposing a severe suspension period
of twenty years.

9BUSINESS LAW
References
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 (Justice Jennifer
Davies).
Australian Securities and Investments Commission v Healey [2011] FCA 717 per Middleton J at
[22] (the Centro case).
Australian Securities and Investments Commission v Citrofresh International Limited (No 2)
[2010] FCA 27 per Goldberg J at [56].
Australian Securities and Investments Commission v Rich [2003] NSWSC 186. Her Honour
also cited Australian Securities and Investments Commission v Macdonald (No 11) [2009]
NSWSC 287 (the James Hardie case).
Australian Securities and Investments Commission v Maxwell [2006] NSWSC 1052 per
Brereton J at [104]–[105].