Australian Securities and Investments Commission v Sino Australia Oil and Gas Limited

Judgment (9 paragraphs)

[1]

1 The plaintiff have leave to amend its Amended Originating Process filed on 28 November 2014 to add the following relief: an order to wind up the first defendant pursuant to s 461(1)(e), (f), (g), and/or (k) of the Corporations Act 2001. 2 The plaintiff have leave to file its Further Amended Originating Process dated 21 May 2015 in court. 3 Peter Damien McCluskey, official liquidator of Ferrier Hodgson, Level 43, 600 Bourke Street, Melbourne, Victoria, is appointed as provisional liquidator of the first defendant pursuant to s472(2) of the Corporations Act. 4 In addition to the powers conferred on him by the Corporations Act, the provisional liquidator will also have power to investigate into and report on the matters referred to in paragraphs 13 to 68 of the Twelfth Affidavit of Brendan Francis Caridi sworn in this proceeding on 15 May 2015. 5 Within a reasonable time from the date of these orders, and in any event not later than 14 days after the date of these orders, the provisional liquidator send a notice to each creditor and each shareholder of the first defendant, at the last known address for each such person shown in the books and records of the first defendant, giving notice of: a) the appointment of the provisional liquidator pursuant to these orders; and b) a contact address for the provisional liquidator. 6 The provisional liquidator shall, within 28 days of his appointment, or such other time as the Court considers appropriate, provide to the Court and to the plaintiff a report as to the provisional liquidation of the first defendant, including: a) the verification of each of the client services contracts described on pages 71 and 72 of the Replacement Prospectus of the first defendant; b) any other matter referred to in paragraphs 13 to 68 of the Twelfth Affidavit of Brendan Francis Caridi sworn on 15 May 2015 which the provisional liquidator considers material to his functions; c) the identification of the assets and liabilities of the first defendant; d) an opinion as to whether the first defendant has proper financial records; e) an opinion about the solvency of the first defendant; f) any further information necessary to enable the financial position of the first defendant to be assessed; g) a draft report to investors and creditors detailing the provisional liquidator's actions; h) any recommendations as to further steps necessary to complete the investigation into the affairs of the first defendant; i) any suspected contravention of the Corporations Act by the first defendant or any directors and officers of the first defendant. 7 The exhibit to the Twelfth Affidavit of Brendan Francis Caridi sworn on 18 May 2015 identified as confidential exhibit "BFC-80", shall be placed in a sealed envelope and marked confidential exhibit "BFC-80", and access to it restricted to the Justices of the Federal Court of Australia and their staff, ASIC and the first and second defendants. 8 The order made on 6 March 2015 is varied by setting aside paragraphs 7 to 13. 9 The order made on 13 March 2015 is varied by: a) Substituting 25 May 2015 for 20 July 2015 in paragraphs 1 and 2; and b) setting aside paragraphs 3 to 9. 10 The matter is referred to a further directions hearing to be held at 9.30 a.m. on 3 July 2015. 11 The hearing of the second and third respondents' interlocutory process dated 20 May 2015 is adjourned to 9.30am on 3 July 2015. 12 The costs of the first defendant, second respondent and third respondent of ASIC's interlocutory process filed 15 May 2015 are costs properly incurred by them. 13 The order made at 10.15am on 21 May 2015 is vacated in its entirety. 14 Costs reserved. 15 Liberty to apply. Date that entry is stamped: 21 May 2015 Note: Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.

background 2 ASIC's application has a history to it. On 6 March 2015, the Court, on the application of ASIC, made an order pursuant to s 1323 of the Act restraining the defendants from transferring any funds out of a bank account in the name of Sino Australia. That order was made in aid of an investigation that ASIC had commenced in relation to potential contraventions of the Act by Sino Australia and its directors and has been extended on several occasions on an interlocutory basis. The final hearing of ASIC's application was set down for hearing to commence on 20 July 2015. 3 The background to the commencement of the investigation is set out in ASIC v Sino Australia Oil and Gas Ltd [2014] FCA 565, at [3] to [6]: Sino Australia is the ultimate holding company of three companies that comprise the Sino Australia Oil and Gas group of companies ("the Group"). The operating company within the Group is said to be Zhaodong Huaying Oil Drilling Service Company ("Huaying"), which is a technical services company providing services for oil field enterprises. Huaying holds service contracts with various state owned enterprises and the majority of the wells that Huaying services are located in the Daqing Oilfield in North East China. In February 2013, Sino Australia lodged a prospectus with ASIC for an Initial Public Offering ("IPO") to raise between $12 million and $20 million. On 26 April 2013 Sino Australia lodged a replacement prospectus. A supplementary prospectus was lodged on 26 July 2013, a second supplementary prospectus was lodged on 9 August 2013, and a third supplementary prospectus was lodged on 25 October 2013 (together the four documents are referred to as "the Prospectus Documents"). Sino Australia raised $12,829,318 under the IPO and was listed on the Australia Stock Exchange ("ASX") on 12 December 2013. On 28 February 2014, ASIC received a letter ("the Complaint") from Messrs Faulkner and Johnson, Sino Australia's two non-executive directors. The Complaint detailed what those directors described as "matters of grave concern regarding the governance of the company". Those concerns related to their belief that Mr Shao (the chairman and chief executive officer of Sino Australia) was, and is, seeking to transfer funds raised under the IPO for purposes unrelated to the purposes disclosed in the Prospectus Documents. The circumstance giving rise to that concern was that on 13 December 2013, Mr Shao had requested Mr Johnson to co-authorise the transfer of $7.5 million of the funds raised from the company's account with the fourth defendant, HSBC Bank Australia Limited to a bank account of the company with the Industrial and Commercial Bank of China ("ICBC"). The Complaint detailed that Mr Johnson declined to co-authorise the transfer because the Board had not discussed, nor authorised, the opening of an account with ICBC and the transfer would have left Sino Australia with about only $170,000 in Australia as the balance of the funds raised had been paid out for listing and operational and compliance costs of Sino Australia. The Complaint also detailed that Messrs Faulkner and Johnson had sought additional information from Mr Shao about the account and about the reason for the transfer of funds. Mr Shao was said to have told them that the funds had to be transferred in order for Huaying to satisfy payment obligations that it had under contracts that it had entered into for the purchase of additional equipment and copies of what were said to be the contracts were provided to Messrs Faulkner and Johnson on 21 January 2014. Messrs Faulkner and Johnson informed ASIC that they had been unaware that equipment purchase contracts had been entered into and that no such contracts were referred to in the Prospectus Documents. The Complaint also detailed other matters that are not presently relevant. 4 Following receipt of the Complaint, ASIC commenced an investigation into whether Sino Australia had contravened the disclosure requirements in s 710, 724 and 728 of the Act and whether the directors had contravened s 180, 181 and 182 of the Act. That investigation is ongoing and ASIC has also identified, and has commenced investigating, other possible contraventions of the Act. 5 On 6 May 2015, Sino Australia released an announcement on the ASX Company Platform titled "Appointment of Voluntary Administrators" that stated that the Sino Australia's directors had resolved to place the company into voluntary administration. The release stated that Mr Darin and Mr Jess of Worrells Insolvency and Forensic Accountants ("the administrators") had been appointed voluntary administrators of Sino Australia, with effect from 4 May 2015. The reasons for the appointment were described as follows: With no direct improvement in negotiations with ASIC over the continuing investigation into the company's affairs, the uncertainty of the company's financial position and the difficulty in dealing with the day to day operational matters, the company has been unsuccessful in trying to repair its balance sheet and the directors have been left with no option but to place the group under external administration. 6 On 15 May 2015, ASIC applied for an order terminating the administration of Sino Australia pursuant to s 447A of the Act and for an order that Mr McCluskey be appointed as provisional liquidator to Sino Australia. ASIC supported that application with an affidavit of Brendan Frances Caridi, a senior manager in ASIC's Corporations and Corporate Governance Enforcement Team. 7 The application was listed for hearing on 20 May 2015. On the evening before, ASIC gave the administrators a copy of the draft orders that it proposed to seek at the hearing, which included an order that the appointment of the administrators to Sino Australia on 4 May 2015 was invalid. On the day of the hearing, the administrators sought an adjournment of the hearing until the following day, to enable affidavits to be filed in opposition to the proposed order. Affidavits were subsequently filed along with an interlocutory application on behalf of the administrators for an order pursuant to s 447A, s 447C(2) and/or s 1322(4) of the Act in respect of their appointment as joint and several administrators of the company. 8 On 21 May 2015, the Court was informed that the administrators contested that their appointment as administrators was invalid but would not contend that it was in the interests of the company's creditors for the company to continue under administration, rather than have a provisional liquidator appointed; see s 440A(3) of the Act. ASIC's application for a provisional liquidator accordingly proceeded on an unopposed basis and the question of the validity of the appointment was stood over to a later date for determination, if necessary.

reasons for decision 9 Section 472(2) of the Act gives the Court power to appoint a provisional liquidator at any time after the filing of a winding up application and before the making of a winding up order. In the present case, ASIC has applied to wind up Sino Australia under ss 461(1) (e), (f), (g) and/or (k) of the Act. 10 In Loubavitch Mazel v Yeshiva [2003] NSWSC 535, Austin J set out the principles to be applied in considering whether to appoint a provisional liquidator. His Honour stated at [105] to [106]: The principles to be applied in considering whether to appoint a provisional liquidator are not in dispute. In Zempilas v JN Taylor Holdings Ltd (No 2) (1990) 3 ACSR 518, King CJ (with whom Cox and Olsson JJ agreed) observed (at 520) that "the usual, although not the only, purpose for which a provisional liquidator is appointed is to preserve the assets of the company and the status quo in relation to its affairs." Thus, the primary duty of a provisional liquidator is to preserve the status quo so as to ensure the least possible harm to all concerned and to enable the Court to decide, after a proper final hearing, whether the company should be wound up: Re Carapark Industries Pty Ltd (in liq) [1967] 1 NSWR 337; Wimborne v Brien (1997) 23 ACSR 56, at 582 per Dunford AJA. In Zempilas King CJ remarked (at 522) that "the appointment of a provisional liquidator pending adjudication upon the petition for winding up, is a drastic intrusion into the affairs of the company and is not to be contemplated if other measures would be adequate to preserve the status quo." The latter observation was applied by Kirby P (with whom Meagher JA agreed) in Constantinidis v JGL Trading Pty Ltd (1995) 17 ACSR 625, at 635. Subject to these observations, which relate to the special nature of provisional liquidation, there is a broad analogy between the considerations relevant to the appointment of a provisional liquidator and to the appointment of an interim receiver, or other forms of interlocutory relief to protect assets. The Court should only appoint a provisional liquidator where it is satisfied that there is a reasonable prospect that a winding up order will be made: ASC v Solomon (1996) 19 ACSR 73, at 80 per Tamberlin J. Where the ground for winding up is alleged insolvency, the Court must adopt "a realistic assessment" (Constantinidis, at 635-636 per Kirby P). In addition to considering whether there is an arguable case to establish a ground for winding up, the Court should consider the degree of urgency, the need established by the applicant creditor, and the balance of convenience: Re Club Mediterranean Pty Ltd (1975) 11 SASR 481, at 484 per Bright J; ASC v Solomon at 80 per Tamberlin J. See also Australian Securities and Investments Commissioner v Active Super Pty Ltd (2) (2013) 93 ACSR 189 at [11] to [18]. 11 The primary ground relied upon by ASIC for an order winding up the company is s 461(1)(k): the just and equitable ground. ASIC has standing to bring that application under s 462(2) and s 464 of the Act. ASIC relied on several matters in support of its application for the appointment of a provisional liquidator. 12 A key focus of ASIC's investigation is the accuracy of statements made in Sino Australia's replacement prospectus about oil service contracts entered into by its wholly owned subsidiary, Zhaodong Huaying Oilfield Technology Service Company Limited ("Huaying"), with Chinese based oil companies for hydraulic radial drilling or pump maintenance. ASIC's investigations to date have disclosed significant discrepancies between the statements in Sino Australia's replacement prospectus regarding the drilling and maintenance service contracts that Sino Australia claims to have in China as compared to information received by ASIC from a foreign regulatory authority under a request for assistance made under the IOSCO Multilateral Memorandum of Understanding Concerning Consultation and Co-operation and the Exchange of Information. The information received from the foreign regulatory authority has indicated that Huaying has substantially fewer contracts servicing substantially fewer wells than were stated in Sino Australia's replacement prospectus. 13 On 16 April 2015, ASIC emailed a letter to Piper Alderman, the then solicitors for the company and the second defendant, Mr Shao, which set out ASIC's principle concerns regarding Sino Australia's replacement prospectus that related to the number of wells serviced, the existence of certain contracts and the entities described as having business with Huaying in China. ASIC's letter requested an explanation within 48 hours in relation to the discrepancies between the statements in the replacement prospectus and the information referred to in ASIC's letter. ASIC did not receive, and has still not received, a response to that letter and no explanation has been provided. ASIC has serious concerns about whether Sino Australia in fact conducts, or has conducted, (as represented in its prospectus documents) substantial business in China. On the information presently available to ASIC, which is unanswered by the company notwithstanding the request for a response, it would appear that there have been material non-disclosures and/or misleading statements by Sino Australia in the prospectus documents by which the company raised $12 million from investors. In the circumstances there would appear to be a reasonable prospect that a winding up order in respect of the company will be made in the public interest on ASIC's application: Australian Securities Commission v AS Nominees Limited (1995) 62 FCR 504; DCT v Casual Life Furniture Pty Ltd [2004] VSC 157; In Re: Thomas Edward Brinsmead & Sons [1897] 1 CH 406. 14 I considered that the appointment of a provisional liquidator to the company is warranted to preserve the status quo and assets of the company, pending the determination of ASIC's application. ASIC is aware that the proceeds of an issue by Sino Australia of convertible notes to the value of $31,719,523.39 RMB were deposited into an offshore bank account with the Longjiang Bank Daqing Branch in the name of Huaying. The replacement prospectus described the terms of four voluntary escrow agreements associated with the convertible notes issue in the material contracts section. These agreements have varying finalisation dates of 12, 18, and 24 months after Sino Australia is admitted to the official list, being 12 December 2014, 12 June 2015 and 12 December 2015 respectively. ASIC is concerned that in the event that the funds that were raised from Sino Australia's convertible note issue have remained in escrow, they may be at risk of dissipation during the period before the winding up application can be heard. That concern is not theoretical having regard to very serious nature of the potential contraventions of the Act identified by ASIC and the failure of the company to provide any response to ASIC's request for an explanation for the discrepancies it has identified concerning the company's service contracts. The risk is exacerbated by the fact that the funds are not held by an independent escrow company but were deposited in an offshore account held in the name of Huaying. 15 Although the administrators did not oppose the appointment of a provisional liquidator, they submitted that they, and not Mr McCluskey, should be appointed in that position, given the amount of work and investigation already carried out by them in relation to the company's affairs and their capacity to perform the work. However, I considered that it was appropriate to appoint Mr McCluskey. That decision was made without any criticism of the administrators or of their work to date. If appointed as the provisional liquidators they would, however, be in a potential position of conflict by reason that ASIC contends that their appointment as administrators was invalid and it may become necessary for them to pursue their interlocutory application in order to establish their entitlement to be paid their fees as administrators. In the circumstances, it seemed to me that the possibility of a conflict should be avoided by appointing Mr McCluskey as the provisional liquidator. I certify that the preceding fifteen (15) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Davies.

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Judgment (9 paragraphs)

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