In a time of ever increasing investment in Australia from the Asia Pacific region, the recent case of Australian Securities and Investments Commission v Sino Australia Oil and Gas Limited (in liquidation) (2016), 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 codirectors and can not rely on their Australian co-directors to discharge their duties.
Sino was the Australian holding company of a Chinese subsidiary. Sino’s Board consisted of a Chinese resident, Tianpeng Shao, who was managing director, CEO and Chairman of the board, and two Australian-resident nonexecutive directors, Andrew Faulkner and Wayne Johnson.
In February 2013, Sino issued a prospectus for an Initial Public Offering (IPO) on the Australian Securities Exchange (ASX). Thereafter, Sino issued a Replacement Prospectus and supplementary prospectuses which Shao signed before lodgment. In December 2013, Sino was admitted to the official list and listed on the ASX. The very next day, Shao sought authorisation to transfer almost all the net proceeds of the float to an account in China. Johnson refused. Shao repeated his request twice and when his co-directors again refused, Shao attempted to remove them. Subsequently they approached the Australian Securities and Investments Commission (ASIC) with concerns about corporate governance.
Further to ASIC’s application to the Federal Court, the court declared that Sino had contravened various sections of the Corporations Act 2001 in relation to the prospectuses. Amongst other things, Shao had contravened s.180(1) of the Act, which requires a director or other officer to exercise their powers and discharge their duties with the degree of care and diligence that a reasonable director would exercise in similar circumstances. Shao admitted that he did not understand the English language and did not obtain a full translation of each prospectus document before signing it or authorising its release. Justice Davies referred with approval to the following well known statement in Australian Securities and Investments Commission v Healey (2011): “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.”
Her Honour found these comments were equally apposite to prospectus documents and held that Shao had a duty to inform himself fully about the prospectuses and ensure they were accurate. His failure to understand the documents at all was a breach of this duty. He also could not rely on his co-directors or professional team. Referring with approval to Australian Securities and Investments Commission v Citrofresh International Limited (No 2) (2010), 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.”
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. 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.