FEDERAL COURT OF AUSTRALIA Australian Securities and Investments Commission v Sino Australia Oil & Gas Ltd [2014] FCA 565 Citation: Australian Securities and Investments Commission v Sino Australia Oil & Gas Ltd [2014] FCA 565 Parties: AUSTRALIAN SECURITIES AND INVESTMENTS COMMISSION v SINO AUSTRALIA OIL & GAS LTD File number: VID 161 of 2014 Judge: DAVIES J Date of judgment: 30 May 2014 Catchwords: CORPORATIONS – application for injunction under s 1323(1) of the Corporations Act 2001 (Cth) – ongoing ASIC investigation into alleged contraventions of the Corporations Act 2001 (Cth) by the company and its directors – necessary and desirable to grant injunction in order to protect investors' interests Legislation: Corporations Act 2001 (Cth) ss 180, 181, 182, 674, 710, 724, 728, 729, 1041A, 1041B, 1041H, 1323(1) and 1323(6) Cases cited: Australian Securities and Investments Commission v Adler (2001) 38 ACSR 266; [2001] NSWSC 451 Australian Securities and Investments Commission v Burke [2000] NSWSC 694 Australian Securities and Investments Commission v Burnard (2007) 64 ACSR 360 Australian Securities and Investments Commission; In the matter of Richstar Enterprises Pty Ltd v Carey (No 3) [2006] FCA 433 Australian Securities and Investments Commission v Lee [2007] FCA 918 Australian Securities and Investments Commission v Sigalla (2009) 74 ACSR 710; [2009] NSWSC 1205 Burrup Fertilisers Pty Ltd (Receivers and Managers Appointed) v Oswal (No 4) [2011] FCA 1503 Date of hearing: 29 May 2014 Date of last submissions: 29 May 2014 Place: Melbourne Division: GENERAL DIVISION Category: Catchwords Number of paragraphs: 21 Counsel for the Plaintiff: Mr M Pearce SC with Ms N Moncrief Solicitor for the Plaintiff: Australian Securities and Investments Commission Counsel for the First and Second Defendants: Mr J C Sheahan QC with Mr A P Young Solicitor for the First and Second Defendants: Piper Alderman IN THE FEDERAL COURT OF AUSTRALIA VICTORIA DISTRICT REGISTRY GENERAL DIVISION VID 161 of 2014 BETWEEN: AUSTRALIAN SECURITIES INVESTMENTS COMMISSION Plaintiff AND: SINO AUSTRALIA OIL & GAS LTD First Defendant TIANPENG SHAO Second Defendant RIUYU HE Third Defendant HSBC BANK AUSTRALIA LIMITED Fourth Defendant JUDGE: DAVIES J DATE OF ORDER: 30 MAY 2014 WHERE MADE: MELBOURNE THE COURT ORDERS THAT: 1. Subject to paragraph 2 below, pursuant to section 1323(3) of the Corporations Act 2001 (Cth), until 4pm on 28 August 2014: 1.1 the First Defendant and the Fourth Defendant be restrained from transferring any funds out of the HSBC Business Transaction Accounts numbered 342011-475068001 and 342011-475068002 held in the name of Sino Australia Oil & Gas Ltd by the Fourth Defendant (Bank Accounts); and 1.2 the Second and Third Defendants be restrained from authorising or taking any other step to cause or facilitate the transfer of funds out of the Bank Accounts. 2. Paragraph 1 of this Order does not prohibit the First Defendant from withdrawing from the Bank Accounts funds sufficient to pay: 2.1 The trade creditors and expenses (in the total amount of $673,255.58) listed at page 11 of Annexure WFG2 to the affidavit of Wrixon Frank Gasteen sworn 29 May 2014 (the "Trade Creditors Listing"), other than the re-imbursement of Tian Pang Shao at line 25 of Trade Creditors Listing. 2.2 Such further amounts for trade creditors and legal expenses of the First Defendant bona fide and properly incurred as agreed between the Plaintiff and the First Defendant. 2.3 Contemporaneously with any request to withdraw funds from the Bank Accounts to satisfy payment of creditors and expenses of the kind referred to in paragraph 2.2 of this Order, the First Defendant must provide to the Fourth Defendant a copy of the Plaintiff's consent in writing to that withdrawal. 3. The costs of the application are reserved. 4. The matter is referred to a further directions hearing to be held at 9.30 am Monday 25 August 2014. 5. Liberty to apply. Note: Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011. IN THE FEDERAL COURT OF AUSTRALIA VICTORIA DISTRICT REGISTRY GENERAL DIVISION VID 161 of 2014 BETWEEN: AUSTRALIAN SECURITIES INVESTMENTS COMMISSION Plaintiff AND: SINO AUSTRALIA OIL & GAS LTD First Defendant TIANPENG SHAO Second Defendant RIUYU HE Third Defendant HSBC BANK AUSTRALIA LIMITED Fourth Defendant JUDGE: DAVIES J DATE: 30 MAY 2014 PLACE: MELBOURNE REASONS FOR JUDGMENT Introduction 1 On 13 March 2014, the Court, on the application of ASIC, made an ex parte order pursuant to s 1323 of the Corporations Act 2001 (Cth) ("the Act") restraining the defendants from transferring any funds out of a bank account in the name of the first defendant ("Sino Australia"). The order has since been extended on three occasions and ASIC has applied for a further extension of the order for a period of three months. Sino Australia and the second defendant ("Mr Shao") now oppose the extension, contending that the Court's powers under s 1323 of the Act have not been enlivened or, if they have been enlivened, that the Court should not extend the order in the exercise of its discretion. 2 For the reasons that follow I am satisfied that the Court's powers under s 1323 of the Act have been enlivened and that the further extension of the order should be granted. background 3 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. 4 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. 5 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. 6 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. 7 Following receipt of the Complaint, ASIC commenced an investigation into whether Sino Australia and its directors have contravened the Act. The court's powers under section 1323 of the Act 8 Section 1323 of the Act relevantly provides: (1) Where: (a) an investigation is being carried out under the [Australian Securities and Investments Commission Act 2001 (Cth) ("ASIC Act")] or this Act in relation to an act or omission by a person, being an act or omission that constitutes or may constitute a contravention of this Act; .. and the Court considers it necessary or desirable to do so for the purpose of protecting the interests of a person (in this section called an aggrieved person) to whom the person referred to in paragraph (a), (b) or (c), as the case may be, (in this section called the relevant person), is liable, or may be or become liable, to pay money, whether in respect of a debt, by way of damages or compensation or otherwise, or to account for financial products or other property, the Court may, on application by ASIC or by an aggrieved person, make one or more of the following orders: … (e) an order prohibiting a person holding money, financial products or other property, on behalf of the relevant person, or on behalf of an associate of the relevant person, from paying all or any of the money, or transferring, or otherwise parting with possession of, the financial products or other property, to, or to another person at the direction or request of, the person on whose behalf the money, financial products or other property, is or are held; (f) an order prohibiting the taking or sending out of this jurisdiction, or out of Australia, by a person of money of the relevant person or of an associate of the relevant person; … (6) An order made under subsection (1) or (2) may be expressed to operate for a specified period or until the order is discharged by a further order under this section. … The principles 9 The Court's power to make an order under s 1323(1) is enlivened where relevantly, (a) an investigation is being carried out under the ASIC Act or the Act in relation to an act or omission that constitutes, or may constitute, a contravention of the Act; (b) there is a "relevant person" who is, or may become, liable to pay money whether in respect of a debt, by way of damages or compensation or otherwise; (c) the liability is to another person called "the aggrieved person"; and (d) the Court considers it necessary or desirable to make an order under s 1232(1) for the purpose of protecting the interests of the aggrieved person. The Court's power under s 1323 is enlivened 10 I am satisfied that the Court's power to make an order under s 1323(1) is enlivened in this case. 11 First, there is an investigation being conducted by ASIC into whether Sino Australia has contravened the disclosure requirements in ss 710, 724 and 728 of the Act and whether the directors have contravened ss 180, 181 and 182 of the Act. ASIC has also identified, and has commenced investigating, other possible contraventions of ss 674, 728 and 1041H concerning the shortfall between Sino Australia's reported profit to 31 December 2013 of $8,395,837 and the profit it forecast before the IPO of $13,660,000 and possible trading in Sino Australia's shares aimed at creating or maintaining an artificial price for the shares or giving a misleading appearance of trading in the shares, contrary to ss 1041A or 1041B. 12 Secondly, as the investigation is into whether Sino Australia and its directors have contravened the Act, and there are statutory remedies available to the investors to recover the moneys that they paid or to obtain damages or compensation for loss and damage caused by the potential contraventions, if established, Sino Australia and Mr Shao are therefore "relevant persons" and the investors are "aggrieved persons" for the purposes of s 1323(1). It is clear that ASIC does not need to prove that they are liable in debt or damages to any investor: Australian Securities and Investments Commission v Lee [2007] FCA 918 at [6] per Finkelstein J; Australian Securities and Investments Commission; In the matter of Richstar Enterprises Pty Ltd v Carey (No 3) [2006] FCA 433 ("ASIC v Carey") at [26] per French J. It is sufficient for the purpose of identifying Sino Australia and Mr Shao as "relevant persons" within s 1323(1) that they have a potential liablity to the investors for such a breach: ASIC v Carey at [24]-[26] per French J. 13 The next element is whether the relief sought is "necessary or desirable" to protect the interests of the investors: Australian Securities and Investments Commission v Sigalla (2009) 74 ACSR 710; [2009] NSWSC 1205 at [17], [26] per Barrett J. This element is not concerned with the character of the alleged wrongdoing of the defendants or with the ability or willingness of an aggrieved person to pursue their interests but, rather, is concerned with the protection of the interests of those persons who may have claims against the company, in this case the investors: Australian Securities and Investments Commission v Burke [2000] NSWSC 694 at [6] per Austin J; Australian Securities and Investments Commission v Burnard (2007) 64 ACSR 360 ("ASIC v Burnard") at 365. In ASIC v Burnard Barrett J observed at [14]: The section aims to provide a means by which property that may be in due course represent a source for the vindication of the rights of those person is preserved for their benefit, shielded from inroads that might otherwise be upon it. The section is auxiliary to the investigation, prosecution or civil proceeding which provides access to it. As French J (as His Honour then was) stated in ASIC v Carey at [26] the function to be performed under s 1323(1) is essentially one of risk assessment and management. 14 I consider that it is necessary or desirable to extend the order in order to protect the interests of the investors. The investigation by ASIC is ongoing and is not at an advanced stage and the course of the investigations thus far have disclosed other possible irregularities that require investigation and which are further possible contraventions of the Act. Furthermore, the order is directed at the preservation of the company's assets in Australia. The first and second defendants have proposed that the assets of the company (or at least a significant portion of them) will be removed from the jurisdiction. Given that the company has no substantial assets in Australia other than the funds that it proposes to transfer overseas, an order under s 1323 is justified: cf Burrup Fertilisers Pty Ltd (Receivers and Managers Appointed) v Oswal (No 4) [2011] FCA 1503 at [26] per McKerracher J. Discretionary factors 15 The first and second defendants argued that the Court should not, as a matter of discretion, exercise the power. They contended that the relief sought by ASIC was not desirable or proportionate to the circumstances. This proposition was put in a number of ways. They submitted that if there were inadequate disclosure it was a "technical" breach as it has not had any adverse impact on investors and that the other possible contraventions recently identified by ASIC were not matters that justified the order. They further submitted that if not restrained the company proposes to lend the funds to Huaying for the derivative benefit of all the company's shareholders. They relied on the evidence of Mr Shao and the independent non-executive director to the effect that the equipment purchases are in the best interests of the company. They contended that to make the order sought would disadvantage all shareholders by preventing the company from using its funds in the manner considered to be in the best interests of the company: that is, in the purchase three new drilling rigs. It was submitted that if the company was further restrained from lending funds to Hauying: (a) Huaying will be unable to pay the balance of the purchase price of the pieces of equipment that will fall due within the next three months, with the first payment due on 30 May 2014 and that the failure to complete these contracts will expose Huaying to the possible termination of the contracts or penalties under the contracts; (b) if the purchases of the equipment do not proceed Huaying will be exposed to higher costs as it will need to continue leasing other equipment and/or will forgo potential revenues; and (c) the value of Sino Australia's interest in Huaying will be diminished to the detriment of all the company's shareholders. 16 It was therefore submitted that to make the order sought by ASIC and thereby disadvantage the company and all its shareholders from using the funds was not desirable or proportionate, given that there was no evidence that any complaint had been made by investors about any aspect of the conduct of the company's affairs and the Court cannot require an undertaking as to damages from ASIC as a condition of making any interim order under s 1323(3) of the Act. It was submitted further that the detriment to the company and shareholders by a continuation of the injunction are compounded by the fact that the company is facing liquidity problems because there has been a delay in payment by the Chinese State Owned Enterprises to which Huaying provides its services and that the company may face the prospect of a technical insolvency in circumstances where the company is otherwise profitable. 17 It was also put that in order for it to be desirable and proportionate to maintain the present injunction, the Court would need to be satisfied that: (a) there was a material non-disclosure in contravention of the Act; (b) all of the subscriber for shares in the company, in and as part of the IPO, have a grievance as a result of the material non-disclosure; (c) all of the subscribers for shares in the company, in and as part of the IPO, have suffered loss or damage because of a contravention of the disclosure requirements; (d) all of the subscribers for shares in the company, in and as part of the IPO, will seek, or will seek, compensation from the company or to set aside their subscriptions; (e) all of the funds that are presently frozen must remain so in order to meet the investor claims; and (f) absent an extension of the present injunction, the shareholder claims would be defeated. 18 These last submissions are rejected as contrary to the well settled authority referred to above. In so far as they may be matters that bear upon discretion, it is a balancing act between the protection of the investors' interests and the rights of the company. 19 In Australian Securities and Investments Commission v Adler (2001) 38 ACSR 266; [2001] NSWSC 451 Santow J cautioned at [7(d)] that the Court has a responsibility to make sure that the orders that it makes operate in a manner that is proportionate and not more intrusive than is necessary in the circumstances, recognising that it is inevitable that orders under s 1323(1) will intrude upon private rights. In this case, the compelling factor is that the funds that are the subject of the injunction are the very funds that were raised by the IPO which is the subject of the investigation by ASIC. To put it another way, the very purpose for which the order is sought is to protect the funds raised by the IPO from dissipation. Given the fact that those funds are the company's only assets in Australia, it is appropriate that the interests of the investors are protected by retaining the balance of the funds raised in the IPO in Australia. In so concluding I take into account the show of good faith by the company by the open offer that it made to ASIC (which ASIC refused) and the prejudice that the company has claimed that it will suffer if the order is extended but I consider that the interests of preserving such fund for the benefit of the investors outweighs any potential detriment to the company. conclusion 20 ASIC's evidence is that it requires an extension of the order for another three months to undertake its investigations and I am satisfied that it is necessary and desirable to extend the order for that period of time. If the order is to be continued thereafter ASIC will need to make a further application and justify why a further extension should be granted. I will, however, ask the parties to make submissions as to whether the company should have a portion of its funds released for its reasonable expenses. I will also ask the parties to make submissions as to costs. conclusion 21 Order 1 of the orders made on 29 May 2014 is extended until 4 pm on 28 August 2014. I certify that the preceding twenty-one (21) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Davies. Associate: Dated: 30 May 2014