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

Federal Court of Australia|2016-02-05|Before: Es J, Davies J

Number of paragraphs: 42

Counsel for the Applicant in the amended interlocutory application filed on 26 November 2015: M Pearce SC with C Lye

Solicitor for the Applicant in the amended interlocutory application filed on 26 November 2015: Australian Securities and Investments Commission

Solicitor for the First Respondent in the amended interlocutory application filed on 26 November 2015: King and Wood Mallesons

Counsel for the Ninth and Tenth Respondents in the amended interlocutory application filed on 26 November 2015: C Möller

Solicitor for the Ninth and Tenth Respondents in the amended interlocutory application filed on 26 November 2015: Mills Oakley Lawyers

BETWEEN: AUSTRALIAN SECURITIES AND INVESTMENTS COMMISSION Plaintiff AND: SINO AUSTRALIA OIL AND GAS LIMITED (PROV LIQ APPTD) (and others named in the Schedule) First Defendant

IN THE AMENDED INTERLOCUTORY APPLICATION FILED ON 26 NOVEMBER 2015:

BETWEEN: AUSTRALIAN SECURITIES AND INVESTMENTS COMMISSION Applicant AND: SINO AUSTRALIA OIL AND GAS LIMITED (PROV LIQ APPTD) (and others named in the Schedule) First Respondent

IN THE AMENDED INTERLOCUTORY APPLICATION FILED ON 30 OCTOBER 2015:

BETWEEN: CHRISTOPHER DAMIEN DARIN (and another named in the Schedule) First Applicant AND: AUSTRALIAN SECURITIES AND INVESTMENTS COMMISSION (and another named in the Schedule) First Respondent

JUDGE: daviEs J DATE OF ORDER: 5 February 2016

THE COURT DECLARES THAT:

The appointment of Mr Christopher Damien Darin and Mr Matthew James Jess as administrators of Sino Australia Oil and Gas Limited on 4 May 2015 was valid. Note: Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.

introduction 1 There are two applications before the Court. One application is by the Australian Securities and Investments Commission ("ASIC") for a declaration that the appointment of Christopher Damien Darin and Matthew James Jess (the ninth and tenth respondents) ("the former administrators") as administrators of the first respondent, Sino Australia Oil and Gas Limited (prov liq apptd) ("Sino" or "the Company"), was invalid, void and of no effect. The other application is by the former administrators for orders in respect of their remuneration. The former administrators have applied under s 449E of the Corporations Act 2001 (Cth) ("the Corporations Act") (if their appointment was valid) for the Court to determine the amount of the remuneration, costs and expenses for their work relating to the administration of Sino that they are entitled to receive. They have applied in the alternative (if their appointment was invalid) for an order under s 447A or s 1322(4) of the Corporations Act entitling them to receive remuneration, costs and expenses for their work relating to the administration of Sino in the amount determined by the Court, notwithstanding any deficiency or default in relation to their appointment as the administrators of Sino.

factual context 2 Sino is the ultimate holding company of three companies that comprise the Sino Australia Oil and Gas group of companies ("the Group"). Its subsidiaries include Zhaodong HuaYing Oil Drilling Service Company Limited ("HuaYing"), a Chinese-based company which is the operating company within the Group. Sino was listed on the ASX in December 2013 following an Initial Public Offering ("IPO") earlier that year under which it raised approximately $12 million. Around $9 million was deposited by Sino into its Australian bank account. 3 On 13 December 2013, the second respondent, Mr Tianpeng Shao, a director and then chairman of Sino, requested one of the non-executive directors, Mr Johnson, to co-sign a transfer of $7.5 million from Sino's Australian bank account to HuaYing's Chinese bank account, which Mr Johnson refused to do. Mr Johnson and another non-executive director, Mr Faulkner, became concerned about the intended use of the raised funds and, by letter dated 28 February 2014, raised with ASIC that the funds may be being used for purposes unrelated to the purposes disclosed in the prospectus documents. 4 In March 2014, ASIC commenced an investigation into whether Sino and its directors had contravened various provisions of the Corporations Act in relation to the IPO. The key focus of ASIC's investigation related to the accuracy of statements made in Sino's prospectus documents about oil service contracts entered into by HuaYing with Chinese-based oil companies. 5 In March 2014, the Court made an order pursuant to s 1323 of the Corporations Act ("the restraining order") on the application of ASIC, restraining Sino and its directors from transferring, dealing with or otherwise dissipating the remaining funds from the capital raising held in Sino's Australian bank account (with exceptions subsequently made for the payment of agreed ordinary business expenses and reasonable legal fees). The restraining order was made in aid of ASIC's investigation and extended on multiple occasions and was still in place on 4 May 2015 when Sino's Board resolved to appoint an administrator to the company. 6 In the course of its investigations, ASIC sought and obtained information from various sources seeking to verify the statements made in Sino's prospectus documents about oil service contracts entered into by HuaYing. As the result of the information received, a number of discrepancies emerged between the statements made in Sino's prospectus documents and the information that ASIC obtained. On 16 April 2015, ASIC emailed a letter to Piper Alderman, the then solicitors for the Company, and to Mr Shao which set out ASIC's principal concerns regarding the Company's prospectus documents and discrepancies between the statements in the prospectus and information that ASIC had obtained relating to HuaYing's contracts and its business in China. The letter identified the discrepancies and sought an explanation within 48 hours from Sino and Mr Shao in relation to those discrepancies. ASIC did not receive a response to that letter and no explanation has been provided.

the appointment of the administrators 7 On 4 May 2015, the Board of Sino resolved to appoint administrators to the Company. The resolutions passed were as follows: IT WAS RESOLVED that on the basis of the information provided to the Board that the Company is likely to become insolvent in the near future and therefore, the Directors unanioumsly [sic] agreed that Voluntary Administrators be appointed to handle the affairs of the company under Part 5.3A of the Corporations Act. IT WAS FURTHER RESOLVED that the Company will appoint Worrells Solvency and Forensic Accountants (Worrells) as the Voluntary Administrators and the Company Secretary to attend to signing the Worrells engagement letter. 8 The following facts are taken largely from the affidavit of Mr Darin who was not cross-examined on his evidence. The former administrators are partners at the firm Worrells Solvency & Forensic Accountants. Prior to the resolution of the Board on 4 May 2015, they had no involvement with Sino. Their first contact with the Company occurred that day when Steven Nichols, a shareholder of the Company, contacted Mr Darin by telephone. Mr Nichols is also an insolvency practitioner who has occasionally referred insolvency matters to Mr Darin's firm and is known to Mr Darin in a professional capacity. Mr Nichols enquired of Mr Darin as to whether he would be interested in speaking with the Board with a view to taking the appointment as an administrator of the Company. Mr Darin indicated that he was, and at approximately 2.40pm Mr Darin received a further call from Mr Nichols who asked whether he was able to attend a call at 4pm to speak with the directors of Sino. Mr Darin stated that he was available. At approximately 4pm Mr Darin called the number given to him for the purpose of speaking with the directors and had a short conversation with Mr Gasteen, one of the directors. Mr Gasteen advised Mr Darin that the Board meeting had not formally commenced and Mr Darin would be contacted later. At approximately 7.50pm, Mr Darin joined the Board meeting by telephone and was advised that he and his partner, Mr Jess, had been appointed as the Company's voluntary administrators. On 4 or 5 May 2015, Mr Darin received an engagement letter from the Company dated 4 May 2015 confirming the appointment and providing a copy of the minutes of the Board meeting. 9 On 6 May 2015, Sino released an announcement on the ASX company platform titled "Appointment of Voluntary Administrators" which stated that the Sino directors had resolved to place the Company into voluntary administration. The release stated that Mr Darin and Mr Jess of Worrells Solvency & Forensic Accountants had been appointed voluntary administrators of the Company 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. 10 Between 4 May and 21 May 2015 the former administrators' firm undertook work in relation to the administration of the Company, which included meetings with ASIC and considering a proposal for a Deed of Company Arrangement from Mr Shao. Mr Darin considered that the proposal was not sufficiently complete to put it to creditors.

the termination of the administration, the appointment of a provisional liquidator and the challenge to the validity of the appointment of the administrators 11 On 15 May 2015, ASIC applied for an order pursuant to s 447A of the Corporations Act terminating the administration of Sino and for an order that Peter Damien McCluskey be appointed as provisional liquidator. The application was listed for hearing on 20 May 2015. On the evening before, ASIC gave the former 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 on 4 May 2015 was invalid. 12 On the day of the hearing of ASIC's application for a provisional liquidator, the former administrators sought, and were granted, a short adjournment of the hearing until the following day to enable affidavits to be filed in opposition to the proposed order declaring their appointment as administrators invalid. Affidavits were filed later that day on their behalf along with an interlocutory application for an order pursuant to s 447A, s 447C(2) and/or s 1322(4) of the Corporations Act that their appointment as joint and several administrators of Sino was valid. 13 On 21 May 2015, ASIC informed the Court that it was unnecessary to deal with the question of validity that day. The Court was informed that whilst the former administrators contested that their appointment as administrators was invalid, they did not contend that it was in the interests of Sino's creditors for the Company to continue under administration, rather than have a provisional liquidator appointed: see s 440A(3) of the Corporations Act. The Court made the order for the appointment of a provisional liquidator to Sino and appointed Mr McCluskey as the provisional liquidator: Australian Securities and Investments Commission v Sino Australia Oil and Gas Limited [2015] FCA 531. Although the former 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 required. Although Mr McCluskey was appointed as the provisional liquidator, the decision to appoint Mr McCluskey, not the former administrators, as provisional liquidator was made because of the possibility of a conflict that would arise if ASIC pursued its claim that the appointment of the administrators was invalid, which in due course, ASIC did. 14 The question of the validity of the appointment of the former administrators was adjourned to 16 October 2015. On that date, the former administrators informed the Court that they proposed to amend their interlocutory process to confine it to an application for relief concerning their entitlement to remuneration. ASIC foreshadowed that it would make an application for a declaration that the former administrators were invalidly appointed. 15 On 30 October 2015, the former administrators filed an amended interlocutory process for various forms of relief concerning their remuneration. On 19 November 2015, ASIC filed an interlocutory process for a declaration that the former administrators' appointment was invalid and had no effect. On 26 November 2015, ASIC amended the interlocutory process to include the former administrators as respondents. Both applications were listed for hearing on 14 December 2015 and orders were made for both parties to file and serve a list of the evidence on which they intended to rely at the hearing of the two applications. ASIC's list included three affidavits filed on behalf of the former administrators in support of their interlocutory process filed 20 May 2015 (which did not proceed) comprising an affidavit of Mr Darin, and affidavits from two of the Sino directors, Ruiyu He and Wrixon Gasteen, both of whom had been present at the 4 May 2015 Board meeting and had voted in favour of the resolution appointing the former administrators as administrators of Sino. Additionally, ASIC listed the twelfth affidavit of Brendan Caridi, a senior manager at ASIC, and the report of the provisional liquidator, Mr McCluskey, dated 4 September 2015. The former administrators did not list any evidence on the basis that the affidavits of Mr Darin, Mr Gasteen and Mr He were included in ASIC's evidence. However, it became apparent during the course of oral submissions when Mr Pearce SC for ASIC was critical particularly of Mr Gasteen's evidence that, contrary to ASIC's list of evidence, ASIC was not relying on the affidavits of Mr Gasteen or Mr He as its evidence, but as the evidence upon which the former administrators relied. However, ASIC did not seek to cross-examine Mr Darin, Mr Gasteen or Mr He.

was the appointment valid? 16 Pursuant to s 436A of the Corporations Act, a company may appoint an administrator if the board thinks that the company is or is likely to become insolvent at some future time. The section provides as follows: (1) A company may, by writing, appoint an administrator of the company if the board has resolved to the effect that: (a) in the opinion of the directors voting for the resolution, the company is insolvent, or is likely to become insolvent at some future time; and (b) an administrator of the company should be appointed. (2) Subsection (1) does not apply to a company if a person holds an appointment as liquidator, or provisional liquidator, of the company. 17 It was not in controversy that for the appointment to be valid, the opinion required by s 436A must have been formed by the Sino directors voting for the resolution. It was also not in controversy that the opinion formed by the Board must have been a genuine, bona fide and concluded opinion as to the insolvency, or likely insolvency of the Company at some future time. The applicable law is set out in Kazar v Duus (1998) 86 FCR 218 at 230-2 (Merkel J). See also Cadwallader v Bajco Pty Ltd (2001) 189 ALR 370; [2001] NSWSC 1193; Darkinjung Pty Ltd v Darkinjung Local Aboriginal Land Council (2006) 203 FLR 394; [2006] NSWSC 1008; Re Keneally (as administrator of Australian Blue Mountain International Cultural & Tourist Group Pty Ltd (admin apptd) (2015) 107 ACSR 172; [2015] NSWSC 937. 18 In short compass, ASIC's claim is that Sino's Board could not have formed a concluded opinion about the company's lack of solvency and did not genuinely hold the opinion required under s 436A that Sino was insolvent or likely to become insolvent at some time in the future but passed the resolution appointing administrators to the Company for the purpose of dealing with dysfunction in the management of the Company. ASIC relied in support of this contention on an advice given to the directors by email dated 2 May 2015 by Sino's then solicitor Mr Grieve of Piper Alderman, and also on the minutes of meeting on 4 May 2015.

The 2 May 2015 advice 19 The 2 May 2015 advice was requested from Mr Grieve by Mr Wrixon Gasteen, one of the non-executive directors of Sino. Mr Grieve confirmed that he had been asked to provide advice to the directors of the Company as to "the best course to protect shareholder interests." Mr Grieve referred to the following circumstances which he understood to be relevant: • [Sino] has been unable to finalise financial statements for the year ending 31 December 2014 and the auditors have been unable to complete the audit because the management of the Company's operating subsidiary have not provided the information requested and required. • Despite repeated requests the non-executive directors have not been provided with any management accounts for the operating subsidiary for the first 4 months of 2015. • The Board has not met in 2015. • You have been informed by the auditors that the operating subsidiary has run out of cash reserves and due to the absence of information you have no idea if or how the operations of the operating subsidiary are being funded. • You understand from the auditors that the collapsing oil price has had a significant impact on the business of the operating subsidiary but due to the lack of financial information you do not know the extent of that impact. • ASIC has, as a result of further investigations into the operating subsidiary's business, raised very serious concerns about the integrity of the Replacement Prospectus. ASIC has sought to verify claims made in the Prospectus about the Company's customers and contracts. ASIC's investigations suggest that the claims in the Prospectus are wildly exaggerated. By letter dated 16 April 2015 ASIC required the Company to verify the claims in the Prospectus about customers and contracts. The Chinese management has failed to provide any information verifying the claims in the Prospectus. • This week the Beijing based CEO of [Sino] has resigned and Perry He has tendered his resignation. Mr He's resignation will become effective after a Board meeting on 4 May 2015 if Mr He is not satisfied with information provided to him. • ASIC has relisted the Federal Court proceeding. The case is before the Court for directions on 20 May 2015 at which time it is likely (assuming ASIC's 16 April letter is not answered to ASIC's satisfaction) that ASIC will seek to expand the case. In the court case ASIC [seeks] orders that [Sino] refund the investment made by shareholders on the IPO. If a refund order was made and all shareholders who invested on the IPO sought to access the refund the money in [Sino's] Australian bank account would not be sufficient. • Of the current Board only [Mr Gasteen] and Mr He had no involvement in the business at the time of the IPO. Hector Lu, had some level of involvement with the IPO but you do not consider he had any direct knowledge of the true nature of the operating business in China. The China based directors are Mr Shao's brother, Tianxiang Shao and Mr Yuan. Both men were involved in the operations of the subsidiary business at the time of the IPO. Tianpeng Shao, [Sino's] majority shareholder has resigned from the [Sino] board but remains a significant figure in the Company and is the senior management person (Managing Director equivalent) of the operating business. 20 Mr Grieve recommended that if the directors at the Board meeting to be held on 4 May 2015 were not satisfied that the matters of concern with the governance of the Company were being addressed, the appropriate and responsible step was to instruct lawyers to make an application to the Court to have a provisional liquidator appointed. In making that recommendation, Mr Grieve had concluded that: Plainly the Company is not travelling well. For the Board to be effective in protecting shareholder interests (and creditors) it must be provided with accurate and timely information. That is not happening possibly because the China management are incompetent, wilfully disregarding governance obligations and/or are dishonest. The practical problem is that because of distance and in your case language the non executive Board are unable to change management behaviour. The problem that has revealed itself through the latest issues raised by ASIC is that there is likely to be a conflict between those members of the Board who were not responsible for or involved in the preparation of the Prospectus and those that were or who owe allegiances to those who were. The vital work for the Board right now in protecting shareholder value is to conduct a thorough investigation into ASIC's concerns. The efforts that you, Perry and Hector have made to have that investigation undertaken are either being ignored or positively frustrated by inaction. At this level the events of the last few weeks have revealed an organisation that is, to look kindly on the situation incompetent and dysfunctional, and to look critically at the situation is quite possibly constructed on a series of falsehoods. What is readily apparent from the events of 2015 is that the Board as a collective is unable to address the serious deficiencies in the Company. Given the confluence of disclosure issues, solvency concerns, the apparent casual disregard for legal requirements by the executive management team, the conflicting interests of those Board members who were involved in the matters that ASIC is investigating and those that were not, concerns about competency of management and the general dysfunction and paralysis my view is that you can have no confidence that left in the hands of the current board and management that the affairs of the Company can be carried out properly and for the benefit of shareholders. 21 The advice concluded that: As this is advice to the Company it is intended that these views be shared with the full board. 22 ASIC submitted that Mr Grieve's advice reveals the following important points: (a) the directors did not have up-to-date information on the financial position of the Company and thus did not know whether or not it was insolvent or likely to become insolvent; (b) the real problems facing the directors, apart from the lack of financial information, were dysfunction in the management of the Company and its inability to respond to questions ASIC had asked about its prospectus documents; and (c) the proper course was to appoint a provisional liquidator.

The minutes of meeting 23 The minutes of the Sino Board meeting of 4 May 2015 recorded as follows: At the request of the Audit Committee Chairman, Mr Gasteen, the Company had received email advice from Mr Gordon Grieve from Piper Alderman that given where the Company is at regarding the outstanding 2014 Annual Report, provision of management accounts, ASIC investigation and CEO and CFO resignations from Beijing office it was considered that the course of action that was in the best interests of the Shareholders was for the Company to place itself in Voluntary Administration. Mr Shao and Mr Yuan were asked their views on the advice received regarding the appointment of an External Administrator to the Company. They advised that the ASIC matter is very complicated, which the Australian directors confirmed and they asked the amount of legal fees paid to date to try to defend the ASIC claims. The Meeting was advised that over one (1) million has been spent to date on legal fees and it was confirmed that there are still unpaid invoices. There is currently a little over five (5) million in the IPO bank account. Given that the legal costs to date are significant, Mr Yuan has suggested that the current legal advisers should be terminated. Mr Gasteen reminded the Meeting that the more pressing issue is that no financial and/or management information has been made available to the Independent Directors and inadequate answers had been provided to the ASIC letter of 16 April 2015 and so what is the current situation with the Company. Mr Gasteen advised that if an External Administrator is appointed then all service contracts with the Company are terminated including the one with the current legal advisers and the decision as to lawyers will cease to be an issue if the Administrator is appointed. Mr Shao and Mr Yuan advised that their priority is to save costs for the Shareholders and therefore want to terminate the contract with the current legal advisers. Mr Shao and Mr Yuan asked if this matter to terminate the legal advisers can be put to a vote. The Meeting discussed whether answers would be provided to the ASIC questions, the claims of fraudulent information in the IPO Prospectus be disputed and whether the Company could complete the 2014 Annual Report and provide to Shareholders. The matter of the termination of Piper Alderman as legal advisers to the Company was put to the Board to vote on. Mr Yuan, Mr Shao, Mr He and Mr Lu voted in favour of the resolution to terminate the current legal advisers and Mr Gasteen abstained from voting on this matter. IT WAS RESOLVED to terminate the Company's current legal advisers effective immediately. Mr Gasteen advised that unless the Company's management can provide the answers to the ASIC queries and provide these answers to the Independent Directors and Company progresses to provide the 2014 Annual Report then there is no point discussing who the current lawyers are. He said the key question is the future solvency of the Company in its current circumstances and with the ASIC investigation. The Company discussed the appointment of an External Administrator given the future solvency, operational, financial and governance issues. Before the Board will discuss and advise on the appointment of an External Administrator the Chairman requested that the termination letter to Piper Alderman be prepared and circulated. The Meeting was adjourned until 5.15pm China and AWST and 7.15pm AEDT until after the preparation of the termination letter. The Meeting recommenced at 5.40pm China and AWST and 7.40pm AEDT. The Board discussed that if positivie [sic] responses can be provided from the Chinese Directors regarding the current situation with the financials, whether the Company was going to be able to answer the latest ASIC queries and attend to the finalisation of the 2014 Annual Report - then there will be no need for an External Administrator to be appointed but if no response can be provided then the appointment of an Administrator might be in the best interests of the Shareholders. Mr Shao said that the ongoing issue with ASIC has been around for more than one (1) year which is too long for the Shareholders and ASIC are looking for information that is two (2) years old, was made with previous Directors and with staff members that have already left the Company and so it is very difficult for the current Board to meet the requests of ASIC and with regards the financials [sic]. Significant funds have been lost and it is difficult to see where the end will be of its own accord. IT WAS RESOLVED that on the basis of the information provided to the Board that the Company is likely to become insolvent in the near future and therefore, the Directors unanioumsly [sic] agreed that Voluntary Administrators be appointed to handle the affairs of the company under Part 5.3A of the Corporations Act. IT WAS FURTHER RESOLVED that the Company will appoint Worrells Solvency and Forensic Accounts (Worrells) as the Voluntary Administrators and the Company Secretary to attend to signing the Worrells engagement letter. Mr Christopher Darin from Worrells then joined the Meeting addressing concerns about the costs of Administration and the process that will be followed. … Mr Darin advised that the Company's financials and those of the Subsidiaries was the first priority for the Administrators to ascertain. 24 ASIC submitted that the minutes confirm that the directors lacked financial information on the Company and thus show that they could not have formed a bona fide and genuine belief that the Company was insolvent or likely to become insolvent. Rather, it was submitted, they show that the most pressing issue for some directors was the amount being spent on legal costs and that the Company did not appear to be in a position to answer the questions ASIC had asked about its prospectus documents. It was also submitted that the minutes show that Mr Darin was aware of the lack of financial information because they record that he said obtaining that information was the first priority. This was said to show that Mr Darin was, or should have been, aware that the directors were not in a position to form an opinion about Sino's solvency. Further, it was submitted that the Board minutes misstated the email advice from Mr Grieve, which was not to place the Company in voluntary administration but to have a provisional liquidator appointed.

The evidence of Mr Gasteen and Mr He 25 Mr He was appointed a director of Sino in February 2014 and Mr Gasteen was appointed a director of Sino in March 2014. Both were appointed after the capital raising and were not involved in the capital raising. Both directors voted in favour of the resolution to appoint an administrator. 26 Mr Gasteen was also the chairman of Sino's audit committee. He gave evidence that during April 2015 he became increasingly concerned about Sino's solvency for the following reasons: a. In April 2015 I and the other directors of [Sino] had received various financial information in respect of [HuaYing], a subsidiary of [Sino]. That information: i. Only showed records up until December 2014; ii. Showed the profits of the company in the amount of approximately only $2,000,000.00 but that profit was only derived from the first half of the year. After the substantial and rapid fall in the oil price in the second half of the year, most customer contracts were cancelled so that in the last quarter of that year, there was no invoicing or collections. b. Grant Thornton in Adelaide, who were the auditors of [Sino] and its subsidiary [HuaYing] had also expressed concern to me about the company's going concern and they had requested additional information from the company to address this issue. This request included the collectability of the debtors. c. I was aware via correspondence from [ASIC] and [Sino's] lawyers that ASIC would only resolve this proceeding on the basis that all of the IPO shareholders of [Sino] were repaid in full. This settlement would require an amount of approximately $12,000,000.00 which [Sino] did not have. [Sino] did not even have close to that amount of liquid assets. d. [Sino] was suffering from significant cash flow difficulties due to approximately $5,000,000.00 in funds being frozen by reason of Court orders obtained by ASIC. Also, the subsidiary was also suffering similar cash flow difficulties. 27 Mr Gasteen was not cross-examined on that evidence. 28 Mr Gasteen deposed that "at different times during April and early May 2015, [he] spoke with the other directors about [his] concerns about the insolvency or future insolvency of [Sino]." 29 He further deposed that on or about 1 May 2015 he sought the advice from Mr Grieve in light of both his concerns regarding the insolvency or future insolvency of the Company and various other corporate governance issues which were causing Sino's Board to fall into disarray. Also on 1 May 2015, Mr Gasteen advised the other directors that he had sought that advice and formally requested Sino's company secretary to issue a notice to all directors for a Board meeting to be convened on 4 May with the sole agenda item to consider and, if agreed, approve the advice from Mr Grieve on the "best course of action to protect shareholders going forward." He received that advice on 2 May 2015, which he circulated to the other directors under cover of an email in which he stated (omitting formal parts): I have now received the advice and recommendation from Mr Gordon Grieve, Chairman of Piper Alderman on the best course of action to be taken to protect shareholders. See Mr Grieve's email below. I am further advised that if the Sino board approves the recommendation and appoints a Receiver/ Liquidator the board would then all resign and the Receiver would then take over the day administration of [Sino]. In these circumstances the appointed Administrator will then be able to deal with ASIC (even with respect to the imminent court hearing), Sino's claim against the insurance company, arrange payment of all creditors and use the balance of funds to provide a limited refund to shareholders. 30 In addition, on 4 May 2015 Mr Gasteen had a telephone conference with Simon Morris of Piper Alderman and Anthony Young of counsel who, he deposed, had both had extensive involvement in representing Sino in this proceeding. In the course of that conference, they discussed "the likely insolvency or future insolvency" of Sino and the Company's corporate governance issues. Mr Gasteen deposed that Mr Morris and Mr Young advised that: … given the information to hand, there may be a likelihood of insolvency or future insolvency of the [Company] and accordingly, an appropriate course to take was to have the directors resolve that a voluntary administrator be appointed to the [Company]. Mr Morris also provided to Mr Gasteen a form of resolution to appoint a voluntary administrator. 31 Mr Gasteen further deposed that following the telephone conference, he spoke to Mr He and Mr Lu (another director) and relayed the advice he had received concerning the appointment of a voluntary administrator and spoke with those directors about the likelihood of present or future insolvency of the Company. Mr Gasteen's evidence is confirmed by Mr He who states that "prior to the meeting of the board of directors of [Sino], I had a conversation with Mr Wrixon Gasteen (Wrix) in relation to the solvency of the [Company]." Mr He also stated that: Wrix told me that earlier that day he had received advice from Piper Alderman and that an alternative to appointing a provisional liquidator was the appointment of an administrator if the board believed that the [Company] was insolvent or likely to become insolvent. 32 Mr Gasteen's evidence was that he was "aware that in order to appoint an administrator the [Company] had to be insolvent or was likely to become insolvent." Mr Gasteen deposed that whilst during the meeting on 4 May other issues regarding corporate governance were discussed: … the directors agreed that given the information to hand and also the lack of information as well as ASIC's requirement that the IPO shareholders be paid back in full, [Sino] was soon likely to become insolvent. Accordingly a resolution was passed unanimously that administrators be appointed to [Sino]. 33 Mr Gasteen deposed that the "determining factor" for the resolution was that the Company would become insolvent in the near future: Whilst those minutes deal with other issues such as termination of the retainer with Piper Alderman, corporate governance problems, the determining factor with respect to passing the resolution to appoint administrators of the [Company] was the unanimous view of the board that it would become insolvent in the near future. 34 Mr He's evidence was similar. He stated that during the meeting on 4 May, Mr Gasteen raised issues concerning what the operating company in China was doing, the possibility that the money raised by the IPO would need to be repaid to the shareholders and that if this occurred, there were insufficient funds in Sino to repay the money. He further deposed that the directors also discussed that in the event that the money raised by the IPO had to be repaid to all shareholders, then there would be insufficient funds to do this and this would create a situation where Sino would be insolvent. Mr He deposed that whilst there was a lot of discussion in relation to providing information in response to ASIC's request of 16 April 2015 and governance problems, he considered the solvency of the Company and voted in favour of the unanimous resolution to appoint voluntary administrators in the belief that the Company was likely to become insolvent in the near future.

Decision 35 Mr Pearce SC for ASIC was prepared to concede that the directors had genuine and bona fide concerns about solvency, but contended that the evidence did not show that they had formed a genuine and bona fide opinion that the Company was insolvent or likely to become insolvent. Mr Pearce SC submitted that the minutes confirmed that the Board lacked financial information about the Company and the advice about solvency obtained by Mr Gasteen was from lawyers and rose no higher than advice that there may be a likelihood of insolvency or future insolvency, not that the Company was likely to become insolvent in the future. 36 In Kazar v Duus (1998) 88 FCR 218 at 231, in a passage relied on by ASIC, Merkel J stated that: An inability to determine whether a corporation is or is not solvent, without more, cannot found an opinion that it is or is not insolvent or likely to become insolvent. As was emphasised by Santow J in Wagner v International Health Promotions (1994) 15 ACSR 419 at 421, s 436A requires a "concluded" rather than a tentative opinion. For example, his Honour found that having reason to believe a company may be insolvent was not a concluded opinion that it is insolvent. 37 In the present case, the Board resolved "on the basis of information provided to [it]" that Sino "is likely to become insolvent in the near future" and therefore that an administrator should be appointed to the Company. Whilst the precise information relied on by the Board was not identified in the minutes or set out by Mr Gasteen or Mr He in their affidavits, Mr Gasteen and Mr He deposed to the state of knowledge that the Sino directors had in April 2015 concerning the financial position of Sino and its operating subsidiary and they were not challenged on any of that evidence. It is telling against ASIC's claim that the directors lacked the financial information about the company to form the opinion required by s 436A of the Corporations Act, that the provisional liquidator's report supports the conclusion that the Board, on the directors' then state of knowledge, was able to make an informed decision about the likely insolvency of the Company. Whilst the provisional liquidator expressed the preliminary opinion that Sino was solvent at the time of his appointment in May 2015, it is material that the provisional liquidator qualified his opinion about the Company's solvency as follows: However, given the significant deterioration of HuaYing's business, had the Company completed the transfer of $7.5 million on 13 December 2013 it would have had insufficient funds to meet its ongoing obligations and was likely to become insolvent at some point in the future. Further, if the content of the Replacement Prospectus was found to be materially misleading and shareholders decided to commence an action against the Company, it is likely that the Company will have insufficient assets to meet in full a judgement against it. It is noteworthy that the deterioration of HuaYing's business and ASIC's claims against Sino were two of the matters mentioned by Mr Gasteen and Mr He as informing their state of knowledge in April-May 2015 about the financial position of the Company. I note also that Mr Gasteen and Mr He both swore their affidavits before the provisional liquidator was appointed, and well before the report was produced in September 2015, which goes to the reliability of the evidence of both of them in this regard about the basis for their opinion that Sino was likely to become insolvent in the near future. Further, the advice from Mr Grieve obtained by Mr Gasteen shortly prior to the Board meeting on 4 May 2015 consistently records that Mr Gasteen raised with Mr Grieve the deterioration in the business of HuaYing and the insufficient funds in Sino's Australian bank account if the Company became liable to repay the IPO shareholders. It is significant in this regard that the Board did not appoint administrators on the basis of forming an opinion that the Company was insolvent at the time. Rather, it was on the basis that Sino was likely to become insolvent at some future time. The evidence does not show that the resolution of the Board was based either on ignorance or on uncertainty about the Company's financial position but, to the contrary, the provisional liquidator's report supports the conclusion that there was a rational basis for forming the view in May 2015 that the Company would be likely to become insolvent at some future time. I am accordingly satisfied on the evidence that the Board was able to, and did, form the opinion required by s 436A as to the likely insolvency of the Company in the future, notwithstanding that the Board did not have up-to-date financial accounts for the Company. At the time of the Board resolution, the Board did have up-to-date information about the affairs of Sino and its operating subsidiary which was neither shown to be wrong or an inadequate basis upon which to form an opinion about lack of solvency. 38 I am also satisfied that the Board gave genuine consideration to the question of solvency. Mr Gasteen had raised his solvency concerns with Mr Grieve in seeking Mr Grieve's advice as to the best way to protect shareholders' interests. He had also provided Mr Grieve's advice to the directors prior to the Board meeting. Whilst the minutes do misstate the actual advice that was given by Mr Grieve, it nonetheless may reasonably be inferred that the directors were aware that Mr Grieve had recommended the appointment of a provisional liquidator, not that the Company be placed into administration. Moreover, the minutes of the Board meeting do record Mr Gasteen as saying that: The key question is the future solvency of the Company in its current circumstances and with the ASIC investigation - and record discussion by the Board on the appointment of an external administrator "given the future solvency" issues, amongst other matters. 39 It is also a requirement for the valid appointment of an administrator that the appointment is one that is made in good faith in furtherance of the objects of Pt 5.3A of the Corporations Act which are set out in s 435A, namely: …to provide for the business, property and affairs of an insolvent company to be administered in a way that: (a) maximises the chances of the company, or as much as possible of its business, continuing in existence; or (b) if it is not possible for the company or business to continue in existence - results in a better return for the company's creditors and members than under an immediate winding up of the company. The exercise of the power to appoint an administrator will be invalid, and the appointment will be invalid, if that power is exercised for an ulterior or extraneous purpose and that purpose is substantial in the sense that the decision would not have been made but for the ulterior purpose: Re Keneally at [96]; Cadwallader v Bajco Pty Ltd at [216]-[218]. 40 Mr Pearce SC submitted for ASIC that the "justification" given by Mr Gasteen and Mr He, that shareholder claims for being misled by the prospectus documents could total $12 million and thus render the Company insolvent, should be disregarded as a post facto rationalisation which was not raised in either Mr Grieve's advice or the minutes of the meeting. It was submitted that it was also inconsistent with the position that the Company was maintaining at the time in the litigation with ASIC. It was submitted that the Court should be "astute to seek the real reason for the appointment and not give undue weight to pretexts which contrive a basis for insolvency." These submissions cannot be accepted. Mr Grieve's advice records that Mr Gasteen did in fact raise with Mr Grieve the potential shareholder claims and the Company's lack of funds to repay $12 million. Moreover, "solvency concerns" were plainly raised by Mr Gasteen with Mr Grieve and taken into account by Mr Grieve in giving his advice, though they were not the basis for Mr Grieve's recommendation, which related to governance issues. In addition, the fact that the Board appointed administrators and did not act on the advice of Mr Grieve is consistent with Mr Gasteen's and Mr He's evidence that the actual purpose of the appointment was to deal with Sino's solvency issues, not its governance issues. This is supported by the minutes of meeting which record, consistently with Mr Gasteen's and Mr He's evidence, that whilst the Board gave consideration to the governance issues at the meeting, the "key question [was] the future solvency of the Company in its current circumstances and with the ASIC investigation." Having regard to documentary evidence and to the unchallenged evidence of Mr Gasteen and Mr He, the evidence does not support the inference that the real purpose of the appointment of Mr Darin and Mr Jess as administrators was to deal with the dysfunction in the management of the Company. 41 Accordingly, I conclude that the appointment of Mr Darin and Mr Jess as administrators was valid. It is therefore unnecessary to deal with the former administrators' further argument that ASIC has no standing to make an application for a declaration as to the invalidity of the administration. The question of standing is unnecessary to deal with in any event as the question of validity arises for determination in the former administrators' application for their remuneration, to which ASIC is named as a respondent. 42 It follows that the former administrators are entitled to their remuneration in an amount to be determined by the Court pursuant to s 449E of the Corporations Act. It is therefore also unnecessary to consider whether an order can or should be made under s 447A in relation to the former administrators' entitlement to remuneration, which arose for determination only if their appointment was held to be invalid. I certify that the preceding forty-two (42) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Davies.

SCHEDULE OF PARTIES VID 161 of 2014 Plaintiff: AUSTRALIAN SECURITIES AND INVESTMENTS COMMISSION First Defendant: SINO AUSTRALIA OIL AND GAS LIMITED (PROV LIQ APPTD) Second Defendant: TIANPENG SHAO Third Defendant: RUIYU HE Fourth Defendant: HSBC BANK AUSTRALIA LIMITED Fifth Defendant: WRIXON GASTEEN Sixth Defendant: ZHANHAU YUAN Seventh Defendant: GUANGBIN ZHONG Eighth Defendant: YU LU Ninth Defendant: TIANXIANG SHAO Amended Interlocutory Application filed on 26 November 2015 Applicant: AUSTRALIAN SECURITIES AND INVESTMENTS COMMISSION First Respondent: SINO AUSTRALIA OIL AND GAS LIMITED (PROV LIQ APPTD) Second Respondent: TIANPENG SHAO Third Respondent: RUIYU HE Fourth Respondent: WRIXON GASTEEN Fifth Respondent ZHANHAU YUAN Sixth Respondent GUANGBIN ZHONG Seventh Respondent YU LU Eighth Respondent TIANXIANG SHAO Ninth Respondent CHRISTOPHER DAMIEN DARIN Tenth Respondent MATTHEW JAMES JESS Amended Interlocutory Application filed on 30 October 2015 First Applicant: CHRISTOPHER DAMIEN DARIN Second Applicant: MATTHEW JAMES JESS First Respondent: AUSTRALIAN SECURITIES AND INVESTMENTS COMMISSION Second Respondent: SINO AUSTRALIA OIL AND GAS LIMITED (PROV LIQ APPTD)

Corporations Act 2001(Cth)ss 435A, 436A, 447A, 449E

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