Misconduct and mismanagement: Winding up on the just and equitable ground


In most cases, the precondition for the appointment of a liquidator and the winding up of a company by a court is that a company is insolvent. However, in some cases courts will make these orders in the context of a shareholders dispute where there is a management deadlock or a breakdown in trust and confidence between shareholders. Additionally, a court may make these orders where there has been serious fraud or mismanagement in the conduct of a company’s affairs.

Relevant law

Section 461(1) of the Corporations Act 2001 (Cth) (Corporations Act) permits the court to order the winding up of a company on various grounds, not arising from a company’s insolvency, including where:

  • directors have acted in affairs of the company in their own interests rather than in the interests of the members as a whole;
  • affairs of the company are being conducted in a manner that is oppressive or unfairly prejudicial to, or unfairly discriminatory against, a member or members; and
  • the court is of the opinion that it is just and equitable that the company be wound up.

ASIC succeeds in its application on the just and equitable ground

In the recent Federal Court decision of Australian Securities and Investments Commission v Sino Australia Oil and Gas Limited1 (Sino), the Honourable Justice Davies ordered that Sino (an ASX listed company) be wound up on the just and equitable ground pursuant to section 461(1)(k) of the Corporations Act and a liquidator appointed upon application by ASIC. The application was supported by Sino’s provisional liquidator and was heard unopposed.

Her Honour found that there had been “substantial and serious misconduct and mismanagement in the affairs of the company”2 which justified an order that Sino be wound up notwithstanding that Sino may be solvent.

Her Honour made the following findings:

  • Sino was in contravention of section 728(1)(a) of the Corporations Act in respect of false statements it made in a replacement prospectus regarding:
    • patents allegedly held by the company;
    • its material contracts; and
    • the accounting of proceeds from convertible notes in the amount of $3,114,000 in the company’s forecast statement of financial position.
  • Sino was also found to be in contravention of sections 728(1)(b) and (1)(c) of the Corporations Act for failing to disclose material it was required to disclose in its prospectus before the close of the company’s IPO. These omissions, related to Sino’s profit forecast, would impact on Sino’s net profit to 31 December 2013 and meant that Sino’s projected net profit after tax (as disclosed in the replacement prospectus), was wrong.
  • In failing to disclose a downgrade in the profit forecast to the market, Sino contravened the continuous disclosure requirements in section 674(2) of the Corporations Act.
  • Sino engaged in misleading or deceptive conduct in contravention of section 1041H of the Corporations Act on the basis that there were discrepancies between management accounts and the audited financial statements of Grant Thornton (the company’s auditors).

In the circumstances, Her Honour concluded that the winding up of the company was justified “in order to prevent and condemn the repeated breaches of the law”3.

In the judgment, Her Honour also disclosed that the decision to wind up the company was strengthened by evidence disclosing a lack of confidence in the conduct of Sino and competency of its management. In this regard, the evidence before the court disclosed that the major shareholder, chairman and managing director of the company (Mr Shao) wholly relied upon the two Australian directors and had no knowledge or understanding of the Australian regulatory regime regarding public companies. Although Mr Shao signed the prospectus documents, as chairman of the company, he did not read them as the documents were in English (which he was unable to read or write). Further, Sino’s solicitors noted the dysfunctional management of the company in legal advice provided to Sino.

ASIC’s proceeding against Sino and Mr Shao continues.

Practical implications

This case serves as a reminder of the following pertinent points:

  • Directors must understand the regulatory regime provided for in the Corporations Act and other relevant Australian laws and have in place appropriate practices and procedures to ensure compliance with all applicable laws.
  • Public interest considerations may be relevant to a court’s decision to wind up a company, including that there be confidence in the community in relation to the conduct and management of Australian companies.
  • If a company is in repeated or serious breach of provisions of the Corporations Act (for example where there are breaches of directors duties and/or inadequacies in the company’s books and records), this will support an application by ASIC that the company be wound up on the just and equitable ground.

1Australian Securities and Investments Commission, in the matter of Sino Australia Oil and Gas Limited (Prov Liq Apptd) v Sino Australia Oil and Gas Limited (Prov Liq Apptd) [2016] FCA 201
2Ibid at [24]
3Her Honour cited Australian Securities Commission v AS Nominees Limited (1995) 62 FCR 504; [1995] FCA 1663 at 532–3 (FCR); Australian Securities and Investments Commission v ActiveSuper Pty Ltd (No 2) (2013) 93 ACSR 189; [2013] FCA 234 at [23].


Tom McMahon

Tom is a private client dispute expert with extensive experience in acting for private and public corporations and trustees.

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