The Federal Court of Australia has recently declared that a company and its foreign directors have breached the Corporations Act 2001 (Cth) (Act) and on application by ASIC will likely order the company to pay civil penalties and disqualify the foreign director from acting as a director in Australia.
The company was known as Sino Australia Oil and Gas Limited (Sino) and operated as the Australian holding company of a Chinese company (Subsidiary) from which all of Sino’s revenue was derived. During February 2013, Sino issued a prospectus for an initial public offering for listing on the Australian Stock Exchange, and subsequently issued a replacement prospectus and three supplementary prospectuses. Mr Shao signed each of these documents despite him not understanding English or obtaining a translation of the documents.
Following its listing, Mr Shao requested one of the Australian directors to transfer almost all of the remaining proceeds (approximately $7.5 million) of the float into a bank account of Sino in China of which the two Australian directors had no knowledge. The director refused this request and following actions by Mr Shao to have both directors removed, ASIC commenced an investigation into the company, which ultimately culminated in an action being brought against Sino and Mr Shao.
As part of this action, ASIC alleged that Mr Shao was involved in the company’s failure to make continuous disclosure and that he breached his duties as director of the company.
Breaches of the Corporations Act
The Court found that:
- Sino had made false representations in the prospectus documents in relation to patents claimed to be held by Sino and the Subsidiary;
- Sino had made misleading claims in respect of the number of contracts it held;
- Sino had failed to disclose material information which affected the ability of the company to achieve the forecasted profits;
- Sino failed to disclose market sensitive information including a profit downgrade and a substantial related party loan agreement;
- Sino failed to fulfil its continuous obligation to disclose market sensitive information;
- Sino provided false information to its auditors in relation to the Subsidiary’s financial position;
- Sino had engaged in misleading and deceptive conduct in relation to Sino’s and the Subsidiary’s financial position; and
- Mr Shao was involved in and had knowledge of Sino’s failure to fulfil its continuous disclosure obligations and had breached his director duties under the Act.
Whilst the judgement only provided declarations of contravention, as noted above, ASIC will be seeking civil penalty orders against Sino and an order to disqualify Mr Shao from acting as a director in Australia.
This case should serve as a reminder to directors that they have a number of duties with which they should be familiar. These duties include acting with due diligence and care, acting in the best interests of the company, exercising their powers for proper purpose and in good faith, a duty to avoid conflict of interests and a duty to not misuse their position. The fact that a director does not understand their obligations is not an excuse and as noted in this case reliance on or delegation to other directors and advisors is not sufficient to discharge these obligations as each director is personally required to act with due diligence and care for the respective duties to be satisfied.
In particular, foreign or non-English speaking directors and their advisors should ensure that that they understand their legal obligations and if necessary translations of advices, disclosure documents and contracts should be provided to ensure that the director is able to fully consider the relevant document.
If you require any advice in respect of director duties, disclosure documents or commercial transactions please contact us.