Answer:
Case Introduction
Australian Securities and Investments Commission v Sino Australia Oil and Gas Limited (provliqapptd) [2016] FCA 42 is a case that deals with duties of directors of an Australian corporation and the remuneration owed to company administrators whose appointments were subsequently deemed void. Sino was the holding counterpart of a Chinese corporation that transacted in drilling services for the oil and gas industry. Sino was listed with the Australian Securities Exchange and raised capital worth $13.6 million through its initial public offer. The Australian Securities and Investment Commission alleged that Sino and its chairperson were in breach of their statutory disclosure duties which warranted continuous disclosures from the company. There were further allegations relating to the director’s duty of care and diligence provided for by theact and a substantial breach of the same by the chairperson by not making continuous disclosures as prescribed by the act. The Chairperson of Sino Mr. Tianpeng Shao attempted to transfer approximately $7.5 Million from Sino’s funds to accounts in China (which consisted of almost all of Sino’s cash reserves in Australia) in March 2014. The Australian Securities and Investment Commission construed this as an undisclosed transfer (which it was as the purpose of the same was not stated) and applied for an injunction restraining the company from making such a transfer. The injunction was granted by the court. Subsequently on the application of the Australian Securities and Investment Commission a liquidator was appointed for the company by the court.
Duties breached
As per ASIC’s allegations the provisions of the Corporations Act, 2001 that were breached by Sino are enumerated below:
- Section 674 (2): This section mandates that a listed entity must make appropriate continuous disclosuresin accordance with the provisions of the listing rules. The section also mandates that a listed entity should disclose any information that is not available to the general public especially if such information has any implications on the share prices of the company.
- Section 728 (1) (a): This section regulates dealing in securities when there is a deceptive statement or a misstatement in the disclosure document regarding the securities and imposes a prohibition on such transactions.
- Section 728 (1) (b): This section regulates securities transactions where the disclosure documents have omissions as far the disclosure requirements prescribed by the act are concerned (sections 710-715) and prohibits such transactions from taking place.
- Section 728 (1) (c): This section states that when new circumstances have arisen in relation to a disclosure document which was previously released or any information that was required to be added by the disclosure requirements prescribed in the act but has not the company must undertake the responsibility of notifying the same to all parties involved.
- Section 1041H: This section defines and regulates Replacement Product Disclosure Statement. This is a statement that rectifies a Product Disclosure Statement and adds in any disclosure requirements that were required by the Product Disclosure Statement as per the provisions of Section 1014G (a) of the Corporations Act, 2001. Thus, this is an obligation on the company to make appropriate disclosures as per the provisions of this section.
The allegations against the Chairperson Mr.Tianpeng Shao comprised of contravention of the following sections:
- Section 180 (1): This section mandates that the directors of a corporation have a statutory duty to observe due care and diligence when acting on behalf of the company and must act in the best interests of the company.
- Section 674 (2A): This section talks about the contravention of the provisions prescribed in Section 674 (2) and states that any person involved in the contravention of subsection (2) would be deemed to have contravened this subsection.
The determination of the breaches by the company and its chairman are set out in seriatim below:
The company:
- There were false representations made in the prospectus of the company relating to patents that it claimed it held but in fact did not.
- It refrained from disclosing that its profit would not be as much as it had stated earlier in its replacement prospectus.
- It also refrained from disclosing a loan obligation owed to the Chinese subsidiary of Sino.
- It made misrepresentations in its prospectus regarding service contracts that it allegedly was a part of in China.
- It made further misrepresentations relating to a claim that it had gained $3.1 Million from sale proceeds in relation to convertible notes.
- It further made misrepresentations regarding its subsidiaries in China to auditors.
These omissions are a failure to observe their continuous disclosure obligations under Section 674 (2), Section 728 (1) (a) (b) and (c) and Section 1014H of the Corporations Act, 2001. Thus the company was in breach of specific provisions of the act due to their inability to observe duties to act in the best interests of its shareholders.
The Chairman of the Board of directors:
- The chairman was involved in the breaches committed by the company and is thus in breach of the provisions of the Corporations Act, 2001 as defined in Section 674 (2A). He also failed to fully understand the implications of the prospectus documents that were drafted by the company hence breaching his duties to observe due care and diligence.
- The chairman attempted to transfer $7.5 Million to accounts of its subsidiary in China as a loan which would other not be recoverable in practicality. This was also a breach of his duties under Section 180 (1) as he was not acting in the best interests of the company.
Thus the above facts sufficiently establish a breach of the provisions of the Corporations Act, 2001 by the Chairman of the Board of Directors of Sino.
Analysis of the Decision
The judge Justice Davis upheld all allegations made by the ASIC and affirmed their claims in light of the braches committed by Sino and it chairman. Justice Davis further observed that the Chairman of the board was tasked with approving all disclosure documents by attesting them with his signature. These documents were published in English and the chairman did not speak or understand English and yet he continued to give approvals without having the faintest idea regarding the contents of the disclosure documents. This was a direct breach of his duties under the act and he failed to observe due care and diligence in approving all these disclosure documents without knowing the contents of the same. Thus this was the most substantial breach of Section 180 (1) of the Corporations Act, 2001. A loan cannot be granted to a subsidiary unless its recovery is imminent when grating the loan. In this case after granting the loan the company would effectively be bankrupt and would go into liquidation. In such a case the shareholders and creditors of the company would face the repercussions for the acts while the board would be absolved of all responsibility. This would effectively lead to a loss only for the shareholders and creditors. Furthermore, granting such a loan which is will bankrupt the company is not an act that is in the best interests of the company and hence is a conspicuous breach of the chairman’s statutory duties when such a loan is approved. Thus Justice Davis held that the company and its chairperson had breached their duties under the Corporations Act, 2001. The court however did not observe that the grant of such a loan could be construed as a conflict of interest and a breach of the director’s obligation to act in good faith and in the best interests of the company as provided for in Section 181 of the Corporations Act, 2001 and thus is for the financial self-interests of the chairman. The court also failed to observe that the act of the chairman of the board in approving all disclosure documents and the approval of such an irrecoverable loan would be a misuse of position that caused detriment to the company and is a substantial breach of the director’s duties under Section 182 of the Corporations Act, 2001. These braches should also be ideally accounted for when attributing liability to a director for a breach of his statutory breach under the act. It would also follow that equivalent common law duties have also been breached by the directors of the company and it would ideally follow that the applicable damages for the same must also be awarded by the court. Finally, the information regarding these transactions and omissions of disclosure were known to the chairman of the board and this was thus use of information which lead to a detriment for the company and the same would also have to be considered by the court as it is embodied in Section 183 of the Corporations Act, 2001. Thus there were other substantial breaches which the ASIC did not legally pursue and the same was not taken into account by the court. The judgment delivered by Justice Davis however was accurate in its findings and has attributed adequate liabilities on the Chairman and the Board.
Relevance
The judgment delivered in Australian Securities and Investments Commission v Sino Australia Oil and Gas Limited (provliqapptd) [2016] FCA 42 clearly illustrates the essence of the duties of a director of a corporation. From Justice Davis’ observation regarding the approval of disclosure documents without the Chairman having understood the same is a conspicuous breach of a director’s duty to observe due care and diligence when acting on behalf of the company as prescribed by the Corporations Act, 2001 and as mandated by common law. As a director the individual is placed at the apex position in the organizational structure in order to responsibly administrate the affairs of the company. The directors of a corporation are thus conferred a wide range of powers and must act on behalf of the company in ways that do not have detrimental effects on the company. Additionally a director of a company must not use his position or any information he may have gained by virtue of such position to cause detriment to the company as prescribed by the act. Here the company had acted in ways that would have detrimental effects on the interests of the stakeholders and had failed to make adequate disclosures as required by law and the Chairman of the board used his powers arbitrarily by approving disclosure documents without comprehending the implications of the same. This judgment is thus an ardent reminder of the duties of due care and diligence when acting on behalf of the company. This judgment also reiterates that a failure to safeguard the interests of the shareholders and other stakeholders is a failure to observe the duties of the directors as prescribed by the Corporations Act, 2001.
Conclusion
To conclude Sino’s failure to make continuous disclosures that would ideally affect shareholder’s interests was a major failure on the part of the company as far as its obligations towards its stakeholders is concerned. The board of directors, especially the Chairman of the board, could be held liable for the breaches committed by the company as they were responsible for the decision making process which aided in the respective breaches.
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