The Federal Court of Australia yesterday made declarations that Sino Australia Oil and Gas Limited (in liq.) (Sino) and its former chairman, Mr Tianpeng Shao, contravened the Corporations Act.

As part of its case, ASIC alleged that Sino breached its continuous disclosure obligations and made misleading and deceptive statements in its prospectus documentation during 2013. ASIC also alleged that Mr Shao failed to act with the proper degree of care and diligence as a Sino director and that he breached continuous disclosure laws.

The Court declared that Sino had contravened sections 674(2), 728(1)(a), 728(1)(b), 728(1)(c),1041H of the Corporations Act, finding that it :

• made false representations in its prospectus documentation in relation to patents that it claimed it and its Chinese-based subsidiary held;
• failed to disclose that its profit forecast for the 2013 calendar year would be significantly less than forecast in its replacement prospectus;
• failed to disclose in its prospectus documents the existence of a loan agreement with the sole director of Sino’s Chinese-based subsidiary;
• made misleading and deceptive statements in its prospectus documentation in relation to the existence of service contracts it claimed to hold in China;
• made misleading or deceptive statements in relation to a claim that it had received a sum of $3.1 million from the proceeds of convertible notes; and
• provided false information to its auditors in relation a Chinese-based subsidiary.

In relation to Mr Shao, the Court declared that he contravened ss180(1) and 674(2A) of the Act, finding that he:

• was involved in the contraventions committed by Sino;
• failed to inform himself about Sino’s disclosure requirements and failed to understand Sino’s prospectus documentation; and
• had attempted to transfer $7.5 million from Sino’s Australian bank accounts to accounts in China for the purpose of advancing a loan to a Chinese-based subsidiary in circumstances where the loan would have been irrecoverable;

In relation to Mr Shao’s approving prospectus documents in English despite not being able to speak or read the language and without obtaining a full Chinese translation, Justice Davies said:

“Mr Shao as chairman of the Board signed off each of the prospectus documents….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.”

ASIC Commissioner John Price said, 'The importance of providing accurate and timely information lies at the heart of our financial markets and those principles were breached in this case. This is a significant decision given these principles are vital to maintain the integrity and efficiency of our markets.'

The Court will hear further submissions as to penalty on a date to be fixed.

Background

Sino was the Australian holding company of a Chinese operating company providing specialised drilling services to the oil and gas industry. Sino was listed on the Australian Securities Exchange Limited on 12 December 2013 after raising approximately $13.6 million under an initial public offering (IPO).

In March 2014, ASIC obtained an injunction from the Federal Court of Australia freezing the Australian bank account of Sino following concerns that Mr Shao was attempting to transfer $7.5 million – representing almost the entire cash held by Sino in Australia – to bank accounts in China for purposes that were not disclosed, or not properly disclosed, in Sino’s prospectus documentation. (refer: 14-045MR)

On 21 May 2015 the Court ordered, on the application of ASIC, that Mr Peter McCluskey, a partner of Ferrier Hodgson, be appointed as provisional liquidator of Sino and to make inquiries in relation to, among other things, the business activities of Sino and its subsidiaries in China and provide a report to the court. (refer: 15-124MR)

On 4 March 2016 the Court ordered the winding up of Sino and the appointment of Mr McCluskey as the company’s liquidator. (refer: 16-062MR)

A copy of the Court’s decision can be found here.

Editor's note:

On 26 October 2016 the Court heard submissions in relation to the penalty to be imposed upon Sino and the disqualification of Mr Shao. The Court reserved its decision.