An ounce of prevention is worth a pound of cure – Lessons from ASIC v Sino

The recent decision of the Federal Court of Australia in Australian Securities and Investments Commission v Sino Australia Oil and Gas Limited (prov liq apptd) [2016] FCA 42 serves as a timely reminder to insolvency practitioners to confirm that their appointment as voluntary administrators has been validly made in accordance with section 436A of the Corporations Act 2001 (Cth) (the Act).


Sino Australia Oil and Gas Limited (Sino) was the Australian holding company of a Chinese operating company providing specialised drilling services to the oil and gas industry. Sino was listed on the Australian Securities Exchange (ASX) in December 2013, after an Initial Public Offering (IPO) that raised approximately $12 million.

In March 2014, the Australian Securities and Investment Commission (ASIC) commenced an investigation into whether Sino and its directors had contravened various provisions of the Act in relation to the IPO. ASIC’s enquiries focused on the accuracy of statements made in Sino’s prospectus documents concerning oil service contracts entered into by one of its subsidiaries, HuaYing Oil Drilling Service Company Limited (HuaYing), with Chinese based oil companies.

On 13 March 2014, the Federal Court, on the application of ASIC, made an ex parte order pursuant to section 1323 of the Act, restraining Sino and others from transferring, dealing with, or otherwise dissipating any funds held in Sino’s Australian bank account, which funds had been received from the IPO. The restraining order was extended by the Court on a number of occasions thereafter.

On 4 May 2015, the Board of Sino resolved to appoint administrators to the Company, and relevantly, passed various resolutions including, inter alia, that the Company was likely to become insolvent in the near future.

Between 4 May 2015 and 21 May 2015, the administrators conducted investigations into the affairs of the Company, held meetings with ASIC and considered a proposal for a deed of company arrangement.

On 15 May 2015, ASIC applied for an order pursuant to section 447A of the Act, terminating the administration of Sino, seeking a declaration that the appointment of the administrators was invalid, and for an order that a provisional liquidator be appointed to the Company.

On 21 May 2015, upon ASIC’s application, a provisional liquidator was appointed to the Company, which appointment was not contested by the administrators.

Validity of appointment

When resolving to appoint an administrator to a company under section 436A, the company’s board must pass a resolution that, in the opinion of its directors, the company is likely to become insolvent at some future time. The question for the Court in the Sino case was, therefore, whether that opinion had been validly formed by the directors of Sino.

In short, ASIC’s claim was 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 section 436A, that Sino was insolvent, or likely to become insolvent at some time in the future, yet nonetheless passed the resolution to appoint administrators to the Company so as to address the dysfunction in the management of the Company.

Accordingly, ASIC sought a declaration that the administrators’ appointment was invalid, void or of no effect, and that the proper course was for the board of Sino to have appointed a provisional liquidator.

Relevantly, Sino’s directors had procured legal advice concerning the most appropriate manner in which to safeguard shareholder interests, and had appointed administrators, in circumstances where:

  • the board lacked up to date financial information and, despite repeated requests, had not been provided with any management accounts for the operating subsidiary for the first four months in 2015;
  • the board had not met in 2015;
  • auditors had advised that Sino’s operating subsidiary had run out of cash reserves;
  • there had been a collapse in oil prices which had a significant impact on the business of the operating subsidiary;
  • a number of Sino directors had resigned, and the management was dysfunctional;
  • as a consequence of the ASIC litigation there was a real possibility that all funds raised through the IPO, namely $12 million, would need to be repaid to shareholders, which would require the payment of monies that Sino did not have; and
  • Sino had been the subject of an ongoing ASIC investigation, culminating in legal proceedings commenced by ASIC and the imposition of a restraining on the Company’s bank accounts.

Underlying ASIC’s application to the Court, was that even if Sino’s directors held genuine concerns as to the Company’s solvency,  there was insufficient evidence to suggest that they had formed a bona fide opinion that Sino was insolvent or likely to become insolvent.

In Kazar v Duus[1] Merkel J noted, inter alia, 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. It requires a “concluded rather than a tentative opinion.”

Court’s decision

The Court held that the administrators’ appointment was valid, and noted in particular that:

  • the Board gave genuine consideration to the question of insolvency, namely that advice had been procured from the Company’s solicitors on how to best preserve shareholders’ interests, which advice was available to the Board prior to the impugned board meeting;
  • the Board had sufficient information about the financial affairs of Sino, and could ascertain the likely insolvency of the Company on the information that was available to it as at 4 May 2015. The evidence given by the directors did not disclose that the resolution of the board was based on either ignorance or uncertainty about Sino’s financial position, so as to be wrong or an inadequate basis upon which to form an opinion about lack of solvency. Rather, the evidence given by Sino’s directors, which was unchallenged, was that their views on the likely insolvency of the Company rested on the decline in the HuaYing business and potential ASIC claims against Sino, thereby exposing the Company to be liable to repay IPO shareholders an amount of $12 million, which funds Sino did not have; and
  • it accepted the evidence given by Sino’s directors that the purpose of the appointment was to address solvency issues and not some ulterior or extraneous purpose, namely dealing with Sino’s governance issues. As such the appointment of the administrators was made in good faith and consistent with the objects of Part 5.3A of the Act.[2]

It therefore followed that the administrators were entitled to their remuneration and costs pursuant to section 447E of the Act.


The Federal Court decision in Sino serves to highlight the importance, to both administrators and directors of a company alike, of the various requirements that must be met in order to give effect to a proper appointment pursuant to section 436A of the Act.

For insolvency practitioners in particular, regard must be had to ensuring that the directors of a company appear to have formed a genuine, bona fide and concluded opinion as to the insolvency or the likely insolvency of the company. This includes taking steps to ensure that appropriate resolutions have been passed by the company’s directors with reference to, inter alia, board minutes and other contemporaneous financial information relied upon by directors in forming their decision.

If in doubt, administrators should err on the side of caution and approach the Court to obtain orders validating their appointment.

[1] [1998] FCA 1378 at 231

[2] See also Re Keneally (as administrator of Australian Blue Mountain International Cultural and Tourist Group Pty Limited (admin apptd) 2015 107 ACSR 172

Related News

What happens if you, as an insurer, have not yet concluded whether or not to indemnify an insured, and a third party commences Court proceedings against your insured (with the indemnity decision still pending)?

When these types of claims arise, an insurer (and its panel firm) can continue to act for an insured on a “reservation of rights” basis.

Read More

Can you sue if a “registered” company is “in liquidation”, “under administration” or has become “deregistered”? 

It is common to see Court proceedings commenced in the name of an individual or against an individual.   But sometimes, Court proceedings are commenced by

Read More

The Briginshaw-test

Did you know that the Briginshaw-test requires a higher standard of evidence in civil matters where serious allegations are made, such as fraud. This principle

Read More

Get in touch

Contact our team today

Stay informed

Keep up-to-date with our regular news and insights

This field is for validation purposes and should be left unchanged.
William Roberts Lawyers


Level 22
66 Goulburn Street


Level 21
535 Bourke Street


Level 8
300 Ann Street


Level 19
Singapore Land Tower
50 Raffles Place