chris smith
Christopher Smith

In our increasingly global economy, corporate boards are increasingly diverse, and among the diversities boards increasingly encompass are geographic and cultural diversity. However, while diverse directors may serve for many reasons, they still must be able to discharge their duties to the corporation. In the following guest post, Christopher Smith of the Sydney office of the the Clyde & Co. law firm, take a look at an interesting recent case from an Australian Court, in which the court held that directors who sign corporate documents must be able to read and understand the documents in order to discharge their duties. A copy of the August 11, 2016 Federal Court of Australia ruling to which Chris refers in his guest post can be found here. I would like to thank Chris for allowing me to publish this article as a guest post on this site. Readers interesting in submitting guest posts should contact me directly. Here is Chris’s guest post.


In a time of ever increasing investment in Australia from the Asia Pacific region, a recent case serves as a timely reminder that overseas-based directors of Australian companies who do not read or understand English are bound by the same directors’ duties as their Australian co-directors.

The Federal Court of Australia found that the managing director of Sino Australia Oil and Gas Limited (Sino), who was not an English speaker or writer and did not understand Australian legal requirements, could not rely on his Australian co-directors to discharge his duties after he signed off on company prospectus documents without being able to read them [1].


Sino was the Australian holding company of a Chinese subsidiary which provided oil and gas drilling services in China.  Sino’s Board of Directors consisted of a Chinese resident, Tianpeng Shao, who was managing director, CEO and Chairman of the board, and two Australian-resident non-executive directors, Andrew Faulkner and Wayne Johnson.

On 28 February 2013, Sino issued a prospectus for an Initial Public Offering (IPO) on the Australian Securities Exchange (ASX), inviting subscribers to apply for fully paid ordinary shares.  In April 2013, Sino issued a Replacement Prospectus and three supplementary prospectuses were issued after that. Mr Shao signed the Replacement Prospectus and the director’s declaration attached to each subsequent prospectus document before lodgment.

On 11 December 2013, Sino was admitted to the official list of the ASX and announced it had raised A$12.8 million from the IPO.  On 12 December 2013, shares in Sino were listed on the ASX.

On the very next day, Mr Shao sought authorisation from Mr Johnson to transfer almost all the net proceeds of the float of around A$7.5 million out of Australia to a bank account in China.  This would have left Sino with only A$170,000 in its local account.  Mr Johnson refused.  Mr Shao repeated his request later that month and again in January 2014.  When Mr Johnson and Mr Faulkner refused to cooperate, Mr Shao attempted to remove them as directors.  Soon after, they approached Australian Securities and Investments Commission (ASIC) with concerns about corporate governance.

In March 2014, ASIC obtained an injunction to restrain Sino, Mr Shao and others from dealing with the proceeds of the IPO.  ASIC also launched an investigation.

On 1 April 2014, Sino announced net profit after tax of A$8.4 million for its financial year ended 31 December 2013.  This was a drop of around 40% from its forecast of A$13.6 million in the Replacement Prospectus.

Application brought by ASIC

In November 2014, ASIC filed an application in the Federal Court in which it applied for declarations of contraventions of the Corporations Act 2001 (Act) against Sino and Mr Shao.  ASIC also sought a civil penalty against Sino and a disqualification order against Mr Shao.

Subsequently, in May 2015, the court appointed a provisional liquidator.  In March 2016, the court ordered Sino be wound up and appointed a liquidator.

On ASIC’s application, the court declared that Sino had:

  • contravened s.728(1)(a) of the Act by making misleading or deceptive statements in its prospectus documents in relation to patents for oil and gas technology which Sino claimed to hold, in relation to service contracts with customers in China and the purported receipt of A$3.1 million in cash from the proceeds of convertible notes;
  • contravened s.674(2) of the Act by failing, between 13 December 2013 and 1 April 2014, to disclose to the market that circumstances had arisen a consequence of which was that the profit forecast of A$13.6 million in the Replacement Prospectus would not be achieved;
  • contravened s.728(1)(b) of the Act by omitting to refer in its prospectus documents to a loan made to Sino’s Chinese subsidiary by its sole director;
  • contravened s.728(c) of the Act by omitting to refer in its prospectus documents to the circumstances which had arisen which indicated the profit forecast of A$13.6 million would not be achieved; and
  • contravened s.1041H of the Act by providing false information to its auditors about its Chinese-based subsidiary.

Contravention of continuous disclosure obligations

ASIC alleged that Mr Shao was involved in Sino’s contravention of s.674(2) for failing to announce a profit downgrade and had thereby contravened s.674(2A).

The evidence relied on by ASIC included transcripts of Mr Shao’s s.19 examinations conducted by ASIC through a translator.  It was apparent from this evidence that Mr Shao knew profit had deteriorated in the second half of 2013 and knew that this was information which was not generally available and was information which a reasonable person would have expected, if it were generally available, to have had a material effect on the company’s share price.  Specifically, Mr Shao knew of increased costs, additional equipment lease expenses, delays in receiving payments from Chinese state-owned customers and increased costs of approximately A$1 million in preparing for the IPO.  The court concluded that Mr Shao knew of these circumstances, even before the listing in December 2013, and knew they would impact on Sino’s actual profit, announced on 1 April 2014.

Justice Davies found that Mr Shao had contravened s.674(2A).

Failing to read and understand the prospectus documents

ASIC sought declarations that Mr Shao had contravened s.180(1) of the Act.  This requires a director or other officer of a corporation to exercise their powers and discharge their duties with the degree of care and diligence that a reasonable person would exercise if they:

  • were a director or officer of a corporation in the corporation’s circumstances; and
  • occupied the office held by, and had the same responsibilities within the corporation as, the director or officer.

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. Justice Davies found that Mr Shao’s failure to obtain a full Chinese translation of the prospectus documents before signing or authorising them was a failure to discharge his directors’ duties under s.180(1) of the Act with reasonable care.  Her Honour referred with approval to the following well known statement in Australian Securities and Investments Commission v Healey [2]:

“A reading of the financial statements by the directors is not merely undertaken for the purposes of correcting typographical or grammatical errors or even immaterial errors of arithmetic. The reading of financial statements by a director is for a higher and more important purpose: to ensure, as far as possible and reasonable, that the information included therein is accurate. The scrutiny by the directors of the financial statements involves understanding their content.”

Justice Davies found these comments were equally apposite to prospectus documents.  Her Honour 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.”

Reliance on others

As to the allegation that Mr Shao did not have any, or sufficient, knowledge of the disclosure requirements of the Act and did not give specific consideration as to whether each prospectus document accurately reflected all matters requiring disclosure, Mr Shao alleged that he received and relied on the advice given to him by Mr Faulkner and Mr Johnson, as well as a team of legal and professional advisers.

In his s.19 examination by ASIC, Mr Shao said (through an interpreter):

“… I was completely dependent to the two Australian directors and I depended on their profession to manage this and I don’t really know the Australian policies about disclosure and I was totally dependent on the two directors. If our company didn’t do a perfect job please understand I was not a master of the Australian legal system, the language or the culture …”

Her Honour said:

“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.”

Her Honour referred with approval to the following statement in Australian Securities and Investments Commission v Citrofresh International Limited (No 2) [3]:

“[The director] may have had a background in abalone processing and may not have been a professional director with public company experience, but that does not excuse him from exercising the appropriate degree of skill and care required of a company director especially one who was a managing director and chief executive office. Further, he was not entitled to rely on the drafting undertaken by the “experts” who were retained by [the company]. The circumstances required him to have an active participation in the drafting and to exercise a considerable amount of skill and care as the responsible Managing Director and Chief Executive Officer of [the company].”

Justice Davies found that 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.

Profit downgrade

As to the profit downgrade, Mr Shao’s evidence was contradicted by the evidence of Mr Faulkner and Mr Johnson.  They each gave evidence that they were surprised by the A$5 million difference between the forecast net profit and the actual net profit.  This did not tally with the information they had received and the assurances given to them by Mr Shao.

Justice Davies found that the information about deterioration in the company’s profit was clearly a matter of great significance to the board and should have been disclosed by Mr Shao.  Her Honour referred to Re One.Tel Ltd (in liq); Australian Securities and Investments Commission v Rich [4], in which the failure by the managing director to inform the board adequately of matters relevant to the company’s financial position was held to be a breach of s.180(1) of the Act.

Her Honour found that Mr Shao knew of the circumstances affecting the financial position of Sino but nevertheless failed to inform the board of those circumstances. His failure to do so was a breach of his director’s duties to the company.

Transfer of money

There was evidence that the attempted transfer of A$7.5 million to Sino’s Chinese-based subsidiary was by way of undocumented loan. There was also evidence that neither Mr Faulkner nor Mr Johnson were informed of this by Mr Shao.  His failure to document the loan and to take steps to ensure it would be recoverable was found to be a breach of Mr Shao’s duties under s.180(1).  His conduct was found to be all the more serious because he attempted to transfer the money without disclosing to the board that the transfer was to be by way of loan.

Causing or permitting contraventions

The court found that Mr Shao’s conduct breached his duties under s.180(1) in causing or permitting Sino to contravene s.728, s.674 and s.1041H, which exposed the company to the risk of proceedings for contraventions, legal costs and penalties.  In reaching this finding, her Honour referred to Australian Securities and Investments Commission v Maxwell [5] which held that if a contravention of s.180(1) is to be established, it must be founded on jeopardy to the interests of the corporation. Justice Davies held that Sino’s interests were plainly jeopardised by Mr Shao’s conduct, which had led to the ASIC investigation, the legal proceedings and ultimately its entry into liquidation.


At one level this decision provides a salutary reminder of some established principles of law involving directors’ duties.

But it also demonstrates that overseas-based directors of Australian companies who do not read or understand English are bound by the same directors’ duties as their Australian co-directors. They cannot rely on their Australian co-directors or professional advisers to discharge their own duties owed to the company.  In this case, those duties required the Chinese speaking managing director to inform himself fully and comprehensively about the content of the prospectus documents before signing off on them. This included obtaining a full Chinese translation of all the prospectus documents.

The case has to date attracted considerable media attention and will no doubt continue to do so. The next chapter will involve ASIC seeking civil penalty orders against Sino and an order disqualifying Mr Shao from acting as a director.


[1] 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 (Justice Jennifer Davies).

[2] [2011] FCA 717 per Middleton J at [22] (the Centro case).

[3] [2010] FCA 27 per Goldberg J at [56].

[4] [2003] NSWSC 186.  Her Honour also cited Australian Securities and Investments Commission v Macdonald (No 11) [2009] NSWSC 287 (the James Hardie case).

[5] [2006]  NSWSC 1052 per Brereton J at [104]–[105].