Making an example of wrongdoing: Penalty orders against ASX listed company and its director - Commodities/Derivatives/Stock Exchanges

This week's TGIF considers a decision in which ASIC sought significant penalty orders against a listed public company and its director for misleading and deceptive statements in a prospectus, non-disclosure to the ASX and breach of directors duties.

BACKGROUND

Sino Australia Oil and Gas Limited (Company) is the Australian holding company of a Chinese operating company which claims to provide oil and gas recovery services in China.

In 2013, the Company issued a series of Prospectuses for an initial public offering on the Australian Stock Exchange (ASX), all of which were signed by the former executive director, managing director and chairman of the company (Director). The Company was officially listed on the ASX in December 2013.

Immediately following the float, a non-executive director of the Company approached ASIC with concerns about corporate governance, following a request by the Director to approve a transfer of funds raised in the IPO to a Chinese bank account.

ASIC obtained an injunction freezing the assets of the Company and conducted examinations of each of the directors. Ultimately, the Court ordered that the Company be wound up on just and equitable grounds.

ASIC also commenced proceedings alleging contraventions of the Corporations Act by the Company and the Director, which, once made, formed the basis of the penalty orders sought.

ASIC'S ALLEGATIONS

In an earlier decision, the Court found that the Company and the Director had contravened certain sections of the Corporations Act in relation to the conduct of the IPO and non-compliance with the continuous disclosure obligations once listed.

ASIC alleged that the Company had contravened various sections of the Corporations Act by:

Making false statements in the Prospectuses in relation to patents claimed to be held by the Company;
Failing to make disclosure of material information concerning the profit downgrade for the 2013 year from the profit forecast in the Prospectuses;
Omissions from, and misleading and deceptive statements in, the Prospectuses in relation to a loan and certain service contracts said to be held by the Chinese subsidiary;
Making false statements in the Prospectuses, and the provision of false information to its auditors, in relation to certain financial information of the Company and the Chinese subsidiary; and
Misleading and deceptive conduct in respect of the financial position of the Company and the Subsidiary.

ASIC also alleged that the Director was involved in the Company's contraventions in breach of section 674(2A) of the Corporations Act, as well as, breaching his section 180(1) directors duties.

DECISION

ASIC then sought civil penalty orders against both the Company and the Director.

In imposing the penalty of $800,000 on the Company (of a maximum $1m), Davies J observed that:

It was appropriate to impose a significant penalty on the Company, despite being in liquidation and a penalty not being a provable debt, given that the principle purpose of imposing a pecuniary penalty is as a deterrent not only to the wrongdoer, but to the public at large;
There was a material prejudice caused to shareholders by the contravention;
The responsibility for the contraventions lies with the failure of the Director to understand or attempt to understand, amongst other things:
- His director's duties and obligations in relation to continuous disclosure;
- The contents of the Prospectuses, due to his poor grasp of the English language and the failure to obtain Chinese translations of these documents before signing them; and
- The need to take remedial steps once the breach was brought to his attention.

The Director was also disqualified for a period of 20 years, on the basis that:

Disqualification was justified in the circumstances;
Consideration be given to the importance of public and personal deterrence; and
The nature and extent of the Director's contraventions in:
- Failing to understand the proper role of a director and the duty of due diligence that is owed;
- Causing significant loss to shareholders; and
- Failing to provide evidence of contrition for his failures, and the failure to understand the seriousness of the conduct or accept responsibility for it.

COMMENT

In handing down these penalties, Davies J observed that there is an increasing trend of entities from emerging markets seeking and obtaining listing on the ASX, particularly from the Asia Pacific region. This trend, and the serious nature of the contraventions here, were sufficient grounds for the Court to make an example of the Company and the Director in this case and impose significant penalties.

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