Corporate Collapse of Sino Australia Oil and Gas: A Case Study

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Business Law and Governance
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Table of Contents
Introduction................................................................................................................................4
Main body..................................................................................................................................4
Occurrence and responsibility................................................................................................4
Ethical and legal issues in corporate collapse........................................................................6
The implication of scandal on the stakeholders and the company.........................................7
Recommendations for avoiding the collapse of corporate governance as a director of the
company.................................................................................................................................8
Conclusion................................................................................................................................10
Recommendations as a whole..................................................................................................10
References................................................................................................................................12
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Executive summary
This report contains how the business organisations shall be managed and who all are
responsible for the business scandals. It has focussed on the Sino Oil and Gas company which
was in the drilling function but has faced corporate collapse due to the negligence and
misleading behaviour of its chairman. This report focuses on the infringement of legal
provisions done by the chairman. It also emphasises the impacts of scams and scandals on the
reputation of the company and its brand name. The report also focuses on the measures which
can be taken in order to resolve legal and ethical issues arising in a company. At last, the
report suggests the measures which can be taken separately by the directors and the measures
in general in order to avoid scandals in a company.
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Introduction
There is a strong governance system all over the world but still, the corporate collapse has
become common. In spite of legislative structure and efforts, corporate governance is facing
crisis and collapse from the past few years. Accounting scandals are a result of business
scandals which are misleading and fraudulent activities of responsible executives of the
company. These activities include misuse of the company's fund, improper expenses,
mismanaging the corporate assets, and this misleading is done to the shareholders and
investors of the company. These fraudulent activities result in huge losses to the company
and at the end leads to the collapse of the same. The legislation needs to look at the causes of
corporate failure and find solutions for the same by the enactment of more effective laws and
policies. Sino Australia Oil and Gas is one of the companies of Australia which has faced
corporate collapse and voluntary administration. This company was established in the year
2009 and was a drilling enterprise in Chinese Oil and Gas.
Main body:
Occurrence and responsibility:
Sino Australian Oil and Gas company got itself listed with the Securities Exchange of
Australia in the year 2013 and was close in raising investments from its investors up to 13
million dollars. The company at that time also got a market capitalisation from the Initial
Public Offering up to 109 million dollars. But there was allegation on the directors to have
violated the provisions of the Corporations Act of 2001 and hence the Commission of
Australian Securities and Investment obtained an order from the federal court in the year
2014 to freeze the bank accounts which the company owned (Asic.gov.au., 2016).
The Commission’s main concern at that time was the Oil and Gas company was transferring
its incomes and profits to the accounts of China with an intention to mislead. The intention of
the bank was to remove transparency from the legislation in order to avoid tax payment.
Further, the Company was also alleged to have made false and misleading statements to the
Initial Public Offering. Though the Commission is seeking and pleading for civil penalties
against the company it is also pleading to prosecute the chairman and scheduled a trial to be
held. Hence, as a result, a provisional liquidator for the company was appointed by the
Australian Federal Court (Ferrierhodgson.com., 2019).
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The provisional liquidator is responsible for the functions of the company until its liquidation.
During this period the liquidator was ordered by the court to inspect into the dealings and
activities of the company. It was also ordered to look and manage the financial assets of the
company and present its opinion before the court regarding how the company can pay its debt
(Keating, 2015).
After the submission of the report by the provisional liquidator, the company was ordered by
the court to undergo winding up procedure on reasonable and fairground. Further, it was
intervened by the court in looking as to how much of the funds are available with the
company to clear the debts of the creditors. Once the creditors are paid their share the
remaining amount of the funds shall be distributed to shareholders of different classes. It was
also observed that the shareholders who invested in shares of prospect receiving shall be
given priority in giving dividends as compared to other shareholders (Newsbase.com., 2016).
The company faces liquidation when there are misconduct and mismanagement seen among
the members or the directive authorities of the company. In the case of Sino Oil and Gas
Company as well, the court ordered liquidation and winding up as the Commission presented
its report before the court stating the responsibility on the directors for mismanaging and
misleading.
The Chairman of this company has been held responsible for this corporate collapse as he
tried to transfer 7.5 million dollars of funds and profits to the Chinese bank account without
having a reasonable cause. One of the main reasons of corporate collapse has been stated by
the Commission which is the investors of the small-scale Chinese companies have very less
or no access to any information about the parent company in China. Some of these companies
are frequently bound under legal contracts and agreements rather than on the basis of equity
which makes more difficult for the company to get background information about the parent
company (Asic.gov.au., 2016).
The Sino Oil and Gas Company is also held liable in contravening the provisions of the
Corporations Act 2001 of Australia. The chairman is held liable for not taking the proper care
and degree of caution and diligence required and he has also breached the laws relating to
disclosures. The allegation is of breaching the provision mentioned in clause (2) of section
674. This section provides that the company listed shall abide by the listing rules and shall
notify the market operator about the matters and events so that the operator shall make it
available to the market participants.
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The company was also held liable through its chairman for breaching the provisions of
section 728 of the Corporations Act 2001. The company has made misleading and deceptive
declarations in the disclosure document and hence it is held liable under this section. Apart
from the liability of the company, the director chairman was also held personally responsible
for contravening the provision of Corporations Act 2001 under clause (1) of section 180. He
is held liable for his involvement in the contraventions committed by the Sino Company. He
also failed to take due care and caution while managing the affairs relating to disclosure
documents (Newsbase.com., 2016).
Ethical and legal issues in corporate collapse:
Every company focuses on increasing its output and profits and fulfilling its corporate
responsibility by good productivity. But sometimes companies lead up to making wrong and
unethical decisions which in turn gives a huge negative impact on the company’s production.
There are a lot of misleading and unethical practices adopted by the companies as they are in
pressure from all four sides. The government and administrative framework pressurise for
tax, the workers pressurise for increased payments, shareholders for increased profits and
much more. Hence, the company and directors adopt some measures to make quick money.
Some of these practices include fraud and insider trading (Lindorff, et. al., 2012).
Fraud is an act which is adopted by the company in order to conceal the truth from the public
and shareholders. Fraud is an illegal act punishable under the provisions of the Corporations
Act of 2001 and hence companies shall avoid adopting fraudulent means to make money.
Further, insider trading is also a method adopted by various companies and workers to make
personal gain. By this method, the worker or employees get the inside confidential
information of the products of a company and hence they leak it in order to get personal gains
at the sake of company's profits (Lee and Fargher, 2013).
The Sino Oil and Gas Company has also faced the challenge of dealing with fraudulent
means as the directive authority and chairman has been alleged for misleading and deception
of the legislation. The company director and chairman have failed to comply with the
provisions of the Corporations Act 2001 and has adopted unethical practices for making
money.
In Sino Oil and Gas Company, the same situation emerged as there were inefficient and
ineffective resolutions to the ethical issues. The company and the directors fail to create a
relationship and maintain the diversities in the corporation. Hence, these problems led to the
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adoption of unethical practices and the chairman and other authorities concerned centralised
on satisfying personal interests.
Along with ethical issues, there are also certain legal issues arising in the company when it
faces corporate collapse or scandals. The company has to be governed by the board of
directors who have to work in maintaining and managing the functions of the company. The
legal aspect of corporate governance means the consolidation of the corporate procedure
legally. It means that the corporation is required to carry on business in a legal manner and
that any violation of the legal provision shall attract penalties. Therefore, corporate law at a
national level is been enacted in order to make it easy for the corporations to abide by one
single consolidated law (Rna-cs.com., 2014).
Generally, corporate governance is a system which regulates relationships among the
shareholders, directors, employees and the public at large. It also includes management of the
corporation but it shall be subjected to the legal framework enacted by the company. Every
company has to abide by and follow the legislative provisions under which they are subjected
by the government. Recently, many developments and reforms have been adopted in the
corporate laws in order to ensure the adopting of different approaches. These corporate laws
create effective legal and management conditions for corporations.
The legal issues arising in any corporation shall be resolved using the arbitration method
instead of approaching the court. This shall save time and money for both the parties. Hence,
legal issues are a major concern in every corporation and shall be dealt with proper care in
order to avoid future consequences.
The implication of the scandal on the stakeholders and the company.
The company should function as per the corporate governance practice that is made by the
company so as to protect the company from being indulging into any type of unethical
corporate governance issues. It is considered that the director of the company plays an
important role in governing a company to practice the best ethical governance in the
company. It is the duty of the director to analyse the factors that can lead to increase in the
companies operational and governance practice which helps the company from being safe
from any type of unethical practice that is done by them.
The scandals taking place in the company affects the loyalty of the stakeholders as the
reputation of the company is affected by these scandals. These scandals also affect the
behaviour of the stakeholders in the social context. Further, the company shall be able to
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answer every question and query of the stakeholder. The company is also required to take
into consideration the ideas of the stakeholder in the process of structuring and business
functions. The company shall also create a balance between the interest of the stakeholders
(Freeman, 2019).
As in the recent case that has occurred in front of the company which includes the voluntary
administration as one of the process. This is considered as a biggest corporate legal liability
of the company where the company is not able to pay their debts and due to this the company
has gone for voluntary winding up as the solution for the debt that they have raised and is not
able to pay back. This is seen that the Sino Australia oil and gas is considered to be the
Australian holding of the Chinese company. The company raised around $12Mn through the
IPO which they made in the year 2013. As the company received a huge amount and in the
year 2014, they came in the eyes of ASIC who started to investigate in weather Sino has
complied with all the rules that are related to raising capital through IPO.
Hence by investigating into the companies profile, they found it incomplete and within two
years it was found that the company was in the position of being insolvent.
This is seen that the unethical practice that is done by the company results in closure of the
company and also resulted in a penalty on the company. This impacted the company
financially as well as legally. The company had to pay a penalty of the amount of $800,000
which is considered as the big amount (Freeman, 2019).
Also, the company reputation in the global world decreased. The price of the stock in
Australia as well as in the domestic country i.e., in China declined. This impacted the
stakeholders as they had to face huge losses. The company also got impacted through this
process as the trust of the shareholders and the investors in the company broke and no new
shareholder or the investor was considering to invest in the company. The inventor of the
company demanded the money that they invested in the company due to which the company
had to enter into voluntary administration process (Hbr.org, 2016).
Recommendations for avoiding the collapse of corporate governance as a director
of the company
As a director of the company this is seen that various objects of corporation act, 2001 was not
followed by the company. It was also seen that the corporate governance practice that the
company was following was not adequate due to which the company was not able to protect
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themselves from being entering into unethical practice. It is the true fact that that corporate
governance practice is being married to the legal provision of the rules which helps in
smoothening the process of the company.
The company should make a policy where the Manager, director and the employee of the
company having a substantial holding in the company should be disclosed. As a director of
the company, the various function would be considered to protect the company from being
entering into the voluntary liquidation. Some of which includes the following:
 The director should check that the company is following all the required laws that are
related to the issue of IPO for the company. it would be checked that whether the
company has considered all the required documents that are related to seeking
permission for raising money through IPO.
 The compliance office would be appointed by the company which will consider all
the legal obligations that are related to the raising of capital through IPO.
 As a director of the company, it would be considered that whether the information
related to raising of money through the process of IPO is being given to the
appropriate authority which will consider the same from the company.
 The director of the company would also consider that timely meeting happens in the
company and the flow of information is given to the stakeholders.
 The director has the responsibility to check that the debt that is raised by the company
does not go above the point which is harmful to the company and the assets of the
company do not support the debt raised.
 The cash reserve of the company must be utilised in a manner that it does not run out
of the obligation of paying out its debts.
 As a director, a reserve would be made by the company where a certain percentage of
the amount that is raised by the company is reserved so that at the time of paying
back, they are able to pay it back to the investigators.
 The director shall assure that all the activities of the company are managed with due
care and diligence and that no mismanagement shall be seen in the company.
 Every issue whether being ethical or legal or any other related to the corporation shall
be resolved in such a way that there is not giving any negative impact on the functions
of the company (Klettner, et. al., 2014).
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Conclusion:
Hence, the corporate scandals and scams are at a rise from past few years and it is the duty of
the managing directors to avoid the happening of such incidents as it spoils the reputation of
the company. Sino Oil and Gas Company has for this reason undergone voluntary
administration as it failed to manage its assets and funds which it raised through IPO. It
further failed to give an account of the fund it received and hence the federal court ordered
the appointment of a provisional liquidator who shall manage the affairs of the company until
it winds up. The company’s main failure was in the functions of the directors as the director
and chairman failed to comply with the provisions of the Corporations Act 2001.
The directors further failed to abide by the disclosure documents policies and hence attracted
penalties. It is the duty of the chairman and directors to make accurate disclosure of the
income and profits. In Sino Oil and Gas Company the chairman transferred the funds to a
Chinese bank account hence tried to conceal the true income. This practice is adopted in
order to avoid the payment of corporate taxes and if paid it shall be in lower rates. As a result
of this, the government and legislation have to adopt tax transparency in order to make the
corporations disclose their true and actual income to the government.
Recommendations as a whole:
Hence, it is recommended for the companies that a corporation is a legal entity and is
separate from its members and directors, it is the responsibility of the directors to take care
while running the organisational business. The directors and other members are required to
follow the legislative statute in order to avoid civil as well as criminal penalties and liabilities
respectively.
The scandals put a huge impact on the organisations from a negative perspective as they
affect the reputation of the company. Once there is any scandal relating to any issue, the
company's brand comes at sake and there is bad publicity done of the company's name. hence
(Hbr.org., 2016). It is recommended that the company in order to avoid scandals shall
implement the following points:
 The company shall keep a check on every activity from member to the managers.
 The directors shall check frequently the managing activities of each other.
 A committee shall be made of independent members in order to check that no member
or employee shall engage in any misleading or deceptive means.
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 Further, a team shall be made in order to resolve issues arising whether it be related to
ethics or politics. It shall be checked that the company is abiding by the provisions of
the Corporations Act of 2001.
 The company instead of only encouraging honesty shall reward honesty and shall
include this reward in their code of conduct.
Thus, the directors are the players in any organisation and they have to be cautious in
managing the activities of the companies. They shall make every endeavour to achieve their
goal along with consistency with the law to avoid pecuniary consequences.
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References
 Asic.gov.au. (2016). The court finds against Sino Australia Oil and Gas Limited and
its former chairman Tianpeng Shao [Online]. www.asic.gov.au. Available at:
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 30th April 2019).
 Ferrierhodgson.com. (2019). Sino Australia oil and gas limited in liquidation
[Online]. www.ferrierhodgson.com. Available at:
https://www.ferrierhodgson.com/au/creditors/sino-australia-oil-and-gas-limited.
(Accessed on 30th April 2019).
 Freeman, R.E. (2019). Stakeholder Management and Reputation [Online].
www.bbvaopenmind.com. Available at:
https://www.bbvaopenmind.com/en/articles/stakeholder-management-and-reputation/.
(Accessed on 30th April 2019).
 Hbr.org. (2016). The Scandal Effect [Online]. www.hbr.org. Available at:
https://hbr.org/2016/09/the-scandal-effect. (Accessed on 30th April 2019).
 Keating, E. (2015). ASX-listed oil and gas company collapses after ASIC investigates
$13 million IPO [Online]. www.smartcompany.com. Available at:
https://www.smartcompany.com.au/finance/asx-listed-oil-and-gas-company-
collapses-after-asic-investigates-13-million-ipo/. (Accessed on 30th April 2019).
 Klettner, A., Clarke, T., & Boersma, M. (2014). The governance of corporate
sustainability: Empirical insights into the development, leadership and
implementation of responsible business strategy. Journal of Business Ethics Vol.
122(1). 145-165.
 Lee, G., & Fargher, N. (2013). Companies’ use of whistle-blowing to detect fraud: An
examination of corporate whistle-blowing policies. Journal of business ethics Vol.
114(2). 283-295.
 Lindorff, M., Jonson, E. P., & McGuire, L. (2012). Strategic corporate social
responsibility in controversial industry sectors: The social value of harm
minimisation. Journal of Business Ethics Vol. 110(4). 457-467.
 Newsbase.com. (2016). Sino Australia Oil and Gas to be liquidated [Online].
www.newsbase.com. Available at: https://newsbase.com/topstories/sino-australia-oil-
and-gas-be-liquidated. (Accessed on 30th April 2019).
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