Duties of foreign (and Australian) directors

In the recent Federal Court case of ASIC, in the matter of Sino Australia Oil and Gas (“Sino”) [2016] FCA 934 Sino operated as the Australian holding company of a Chinese-based company.  Sino and its directors were found to have breached the Corporations Act 2001 (Cth).  Sino had issued a prospectus for an IPO on the ASX and later issued a replacement prospectus and three supplementary prospectuses.

Mr Shao, a director, signed each of the documents but had no understanding of English and had not had a translation undertaken of any of the documents.

The Court found numerous breaches of the Act by Sino – false representations in relation to patents, misleading claims in relation to service contracts, non-disclosure of profit downgrades, failure to fulfil continuous disclosure obligations and the provision of false information to its auditors.  The Court held that Mr Shao was involved in Sino’s failure to fulfil its continuous disclosure obligations and had breached his director’s duties under the Act.

Davies J held that 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”. Davies J further held that “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”.

In addition to reinforcing the equivalent standard for foreign directors under Australian law, the case also highlights the need for effective and comprehensive, sometimes international, D & O insurance coverage.

Davies J referred, with approval, to ASIC v Healey (2011) 196 FCR 291 in which Middleton J stated :

“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.”