Is your appointment valid? ASIC v Sino Australia Oil & Gas Ltd

18 April 2016

The recent Federal Court of Australia decision in Australian Securities and Investments Commission v Sino Australia Oil and Gas Ltd (prov liq apptd) [2016] FCA 42 is a useful reminder to practitioners about taking steps to ensure that their appointment as voluntary administrators has been properly made.

Background

Section 436A of the Corporations Act 2001 (Cth) (the Act) provides that a company may appoint an administrator if the board resolves that the company is insolvent or is likely to become insolvent at some future time.

The authorities have established that, in order for the appointment of voluntary administrators to be valid, the directors must have formed a genuine, bona fide and concluded opinion as to the insolvency or likely insolvency of the company.

Facts

Sino Australia Oil and Gas Ltd (Sino) was a mining company that predominantly provided technology and services to State Owned oil and gas drilling enterprises in China and was the ultimate holding company of the Sino Australia Oil and Gas group of companies.

One of its subsidiaries included Zhaodong HuaYing Oil Drilling Service Company Limited (HuaYing), a Chinese-based company which was the operating entity within the group.

Sino was listed on the ASX in December 2013 following an Initial Public Offering (IPO) earlier that year which raised approximately $12 million.

In March 2014, ASIC commenced an investigation into whether Sino had contravened the Act by making misstatements in its prospectus about oil service contracts entered into by HuaYing with Chinese based oil companies.

On application by ASIC, the Court made an order restraining Sino from dealing with the remaining funds received from the IPO. The restraining order remained in place when administrators were appointed to Sino.

In May 2015, a director of Sino sought advice from the company’s lawyers as to the best course to protect shareholder interests. The lawyers sent the company written advice which recommended it take steps to appoint provisional liquidators.

A short time later the board met and resolved that as Sino was likely to become insolvent in the near future and administrators be appointed to Sino.

Issue

ASIC sought a declaration that the appointment of the administrators was invalid and submitted that:

  • The board lacked sufficient financial information to form a concluded view as to insolvency;
  • While the directors had a real and honest concern as to the solvency of Sino, the board minutes did not show that they had formed a genuine opinion that the Company was actually insolvent or likely to become insolvent; and
  • The purpose of appointing administrators was to deal with dysfunction in the management of the company.
The Court’s decision

The Court held that the appointment of the Administrators was valid as:

  • The Board had sufficient information to form a view on Sino’s insolvency. The Board resolved “on the basis of information provided to it” that Sino was likely to become insolvent in the formed the opinion required by s 436A as to the likely insolvency of the Company in the future, notwithstanding its inability to consider Sino’s financial  accounts. Although the minutes of meeting did not set out the precise information relied upon by the directors, the directors gave evidence as to their knowledge of Sino’s financial position in April/May 2015 and that evidence was not challenged. Their views on the likely future insolvency were based on the deterioration in HuaYing’s business and the prospect of ASIC’s claims against Sino being successful and Sino being liable to repay the IPO shareholders an amount of $12 million when Sino only held slightly over $5 million in funds. The Court also noted that the provisional liquidators’ subsequent report supported the conclusion that the Board was able to form a view on Sino’s likely insolvency;
  • The Board gave genuine consideration to the question of solvency. The solvency issue had been raised with Sino’s solicitors when advice had been sought about how to best protect shareholders’ interests and the minutes of the Board meeting noted that the future solvency of Sino was the “key question”; and
  • The Court rejected ASIC’s submission that the appointment was made for the ulterior or extraneous purpose of dealing with the dysfunction in the management of Sino. The company’s solicitors had advised that provisional liquidators be appointed to deal with Sino’s governance issues. The fact that the Board appointed voluntary administrators (and not provisional liquidators) and that the Board considered that the future solvency of Sino was the “key question” supported the view that the appointment was made for the proper purpose of dealing with Sino’s likely future insolvency.
What should you do?

Upon being informed of their appointment, voluntary administrators should review the appointment documents to ensure that:

  • The meeting of directors has been properly convened and conducted in accordance with the company’s constitution and other statutory requirements;
  • The persons voting on the resolution are properly appointed directors and entitled to so vote;
  • The directors have in fact passed a resolution that the company is insolvent or likely to become insolvent, as well as a resolution that the administrators be appointed; and
  • The directors appear to have formed a genuine, bona fide and concluded opinion as to the insolvency or likely insolvency of the company.

In determining whether the directors have formed the requisite opinion as to insolvency, an administrator should review the minutes of the board meeting and any other relevant materials which formed part of the board’s deliberations.

If, upon reviewing the above matters, an administrator is uncertain about the validity of their appointment, they should take advice about making an application to the Court seeking directions or orders validating their appointment.

This article has been prepared by Polat Siva, Partner and Jason Frydman, Solicitor.

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