The Federal Court has recently found that the Chairman of a former ASX listed company breached his directors duties after he signed off on a number of prospectus documents which, it appears, he was unable to read and understand.
In ASIC v Sino Australia Oil and Gas Limited (in liq) [2016] FCA 934, the Court examined the circumstances surrounding the listing of Sino Australia Oil and Gas Limited (Sino) on the ASX in 2013. The Federal Court found that Sino made false representations, misleading and deceptive statements and failed to disclose declines in forecast profit. The former Chairman, Mr Shao, was also found to be involved in the company's contraventions as well as breaching his directors duties.
Contraventions by Sino
The Court held that Sino contravened a number of provisions of the Corporations Act relating to Sino's disclosure obligations. The Corporations Act prohibits a company from offering securities under disclosure document if there is:
- a misleading or deceptive statement;
- an omission from the disclosure document of material which is required to be disclosed under Chapter 6D; or
- a new circumstance that has arisen since the disclosure document was lodged and would have been required to be disclosed under Chapter 6D.
It was held that Sino contravened the above provision in its prospectus documentation by:
- making false representations in relation to patents that it claimed it and its Chinese-based subsidiary held;
- making misleading and deceptive statements in relation to the existence of service contracts it claimed to hold in China;
- making 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;
- failing to disclose that its profit forecast for the 2013 would be significantly less than forecast in its replacement prospectus; and
- failing to disclose the existence of a loan agreement with the sole director of Sino's Chinese-based subsidiary.
The Court additionally held that Sino breached its continuous disclosure obligations by failing to notify the ASX about the change in its profit forecast that it had previously disclosed.
Contraventions by the Chairman
The Court held that Mr Shao was "involved" in Sino's contravention of its continuous disclosure obligations and therefore had breached section 674(2A) of the Corporations Act.
It was also found that Mr Shao breached his directors duties by:
- failing to understand the prospectus documents he signed off on despite not speaking or reading English (and failing to obtain a Chinese translation);
- failing to acquaint himself with the disclosure requirements for ASX listed companies;
- failing to disclose to the Board that Sino's profit forecast disclosed in the replacement prospectus would not be achieved; and
- by seeking to cause Sino to transfer approximately $7.5 million to its Chinese-based subsidiary without providing the Board with a proper explanation for the transfer and without taking steps to ensure that the loan would be recoverable.
Relevantly, the Court rejected Mr Shao's argument that he had received and relied on the advice given to him by his Australian advisers in respect of the information that was required to comply with his disclosure requirements:
"[t]he 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."
Takeaways
While the deficiencies by Mr Shao are at the more extreme end of the spectrum, the case reinforces the importance of all directors (both English and non-English speaking) being fully engaged in a robust due diligence process for the lodgement of disclosure documents. It is not simply enough for directors to review the final version of a prospectus or to leave the responsibility of due diligence to others. Further, as was the case in Sino, signing off on a prospectus when its contents are unknown shows a complete disregard for directors' duties of care and diligence.
The Sino decision has once again made it clear that ASIC's spotlight on directors will not be fading. Directors must ensure that they take responsibility for their own actions by informing themselves of their disclosure obligations and taking a critical and active role in due diligence.
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