In 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 the Federal Court of Australia declared that the company breached the Corporations Act by making misleading or deceptive statements in its prospectus relating to its drilling technology, failing to disclose that circumstances had arisen the consequence of which was that the profit forecast would not be achieved and by providing its auditors false information concerning the assets and liabilities of its subsidiaries. ASIC claimed that Sino’s non-English speaking director breached his duties.

ASIC alleged that Mr Shao, the former executive director and chairman of the company, was involved in the company’s failure to make continuous disclosure and that he breached his duties as director of the company. There were two Australian resident directors.

Mr Shao admitted that he did not understand the English language, whether in oral or written form and did not obtain a full Chinese translation of each prospectus document before signing it or authorising its release.

ASIC alleged that Mr Shao breached his duties by:

• failing to ensure that he had any, or any sufficient knowledge of the disclosure requirements in the Corporations Act;
• failing to obtain translations of each prospectus document and ensuring that they reflected all matters required to be disclosed;
• failing to disclose to the Board, in the prospectus documents, and to the ASX, the changes in circumstances of the company and profit downgrade;
• attempting to transfer the initial public offering proceeds without giving a proper reason and without proper documentation; and
• causing or permitting the company to contravene certain provisions of the Act, thereby exposing it to the potential jeopardy of civil pecuniary penalties.

UPDATE 12 December 2016: in 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 1488 the Federal Court of Australia ordered that Sino pay a pecuniary penalty of $800,000 and its former chairman, Mr Tianpeng Shao, be disqualified from managing corporations for a period of 20 years. Shao was also ordered to pay compensation to Sino in an amount of $5,539,758.

Justice Davies concluded:

“I accept the submission for ASIC that Mr Shao’s failure to obtain a full translation of the prospectus documents before signing or authorising them was a failure to discharge his duties with reasonable care. …. Mr Shao as chairman of the Board signed off on each of the prospectus documents. As a director of the company, he was under the duty to exercise his powers and discharge his duties with care and diligence. That required him to inform himself fully and comprehensively about the content of the prospectus documents to ensure that the information contained in those prospectus documents was accurate. The failure by Mr Shao to ensure that he could understand, even in the most basic sense, the content of the documents he was signing was a breach of his director’s duties…

In his defence, Mr Shao alleged that he received and relied on the advice given to him by the two Australian directors (Messrs Faulkner and Johnson) and professional advisers in respect of the disclosure requirements of the Act. In one of his affidavits, Mr Shao deposed that he relied on a team of legal and other professional advisers engaged to implement the listing on the ASX to tell him what information they required and to carry out the necessary work. He deposed that he was “trusting in them” and that from his dealings with them he “was satisfied that they knew what they were doing”. He further deposed that from time to time he was asked for information and always made sure that the information requested was provided. …

The fact that Mr Shao was not an English speaker or writer and did not understand Australian legal requirements did not mean that he could just leave it all to others and did not excuse him from performing his own duties with reasonable care and diligence. …

By failing to inform himself about the disclosure requirements, Mr Shao did not discharge the degree of care and diligence that a reasonable person would exercise as director and Chairman of the company…

In this case, Mr Shao’s conduct as a director of Sino has exposed it to the imposition of civil penalties for its contraventions of the Act, to the cost and trouble of this legal proceeding and ASIC’s investigation leading to its placement into provisional liquidation and ultimately, into liquidation, and the company’s interests were plainly jeopardised by Mr Shao’s conduct. A director properly discharging his or her duties to the company would have taken steps to avoid this detriment to the company and by failing to do so Mr Shao has breached his duties to the company.

ASIC seeks a disqualification order against Mr Shao under s 206E of the Act. To obtain that relief, ASIC must establish that Mr Shao was a director of Sino whilst the company on two or more occasions contravened the Act or that he, whilst a director of Sino, committed two or more contraventions of s 180(1). Secondly ASIC must establish that Mr Shao failed to take reasonable steps to prevent the contraventions and that a disqualification order is justified. Whether a disqualification order is justified is a matter for consideration at the penalty hearing but I am satisfied that the other requirements have been met. Specifically, I find that Mr Shao failed to take reasonable steps to prevent the contraventions, in that he failed to confirm the accuracy of the statements contained in the prospectus documents by reading and understanding the prospectus documents himself before signing off; he failed to educate himself about disclosure requirements under Australian law; he failed to accept the advice of Mr Johnson and Mr Faulkner about the transfer of funds; he failed to ensure that false and misleading information was not provided to the company’s auditors; he was not candid and frank with his fellow directors and he failed to consider the interests of the minority shareholders.”