Research on an Australian case (ideally not more than 10 years old since the decision by the Court) involving breach of company director’s/officer’s duties under the Corporations Act 2001.
This report will evaluate the case of ASIC v Narain [2008] FCAFC 120 which focuses on the disclosure regulations given under the Corporations Act 2001 (Cth) (‘the Act’). The case also evaluates the rule regarding misleading or deceptive conduct which is performed by a person in relation to financial services and products. This case focuses on the statements made through letters which were released to the Australian Securities Exchange (ASX) which were misleading or deceptive. The case also concerns regarding whether the person who is appointed as the Chief Executive Officer (CEO) and managing director had breached his duties as a director of the company by authorising or allowing the issuing of misleading or deceptive statements which are made in relation to financial products. In this case, the Australian Securities and Investments Commission (ASIC) filed a legal suit against Citrofresh International Ltd (CIL) and Mr Ravi Narain who was the CEO and managing director of the corporation. The suit alleged that the two letters sent by the company to the ASX contained misleading or deceptive content in a number of respects which are made by the enterprise and the managing director. ASIC argued that CIL had failed to comply with section 1041H of the Corporations Act 2001 (Cth) (Jade, 2008). As per this section, a person has a duty to ensure that he/she must not engage in any conduct relating to financial product or service which is misleading or deceptive or likely to do so. This report will analyse the facts of this case and evaluate the duties infringed by the directors as given under the Corporations Act 2001 (Cth). The judgement of the court will be critically evaluated in the report along with the impact of the case.
ASIC brought an appeal regarding the earlier proceedings against Mr Narain and the corporation in which the ASIC alleged that both the parties had engaged in misleading or deceptive conduct regarding the announcement made by the enterprise to the ASX. The company made the announcement on 27th September 2005 in which the corporation claimed along with various other things that they have found a solution to reduce and eventually stop the HIV or human immunodeficiency virus and solution for preventing the common cold (ASIC, 2010). ASIC alleged Mr Narain for engaging in conduct regarding financial product or services which breached the provision given under section 1041H because:
The trial judge found the involvement of Mr Narain in the formation of the letter; it was also found that the announcement did not relate to any financial product because the matter of the letter did not refer to the shares of the corporation. The first claim of ASIC was dismissed on 30th November 2007, and it lodged an appeal against the judgement which was given by the Honourable Justice Goldberg (Legg and Jordan, 2008). Following are the reasons based on which Goldberg J rejected the claim of ASIC:
The appeal made by ASIC to the Full Federal Court was accepted and it was held that the content of the letter includes information about the financial product and Mr Narain is personally liable for making an announcement by drafting and authorising the letters. The judgement of Goldberg J was remitted by the Full Federal Court. It was held that the letters were misleading or deceptive hence they breached section 1041H of the Act. Furthermore, Mr Narain was involved in drafting and authorisation of the letters based on which he breached his duties as provided under section 180.
Section 1041H of the Act provides provision regarding misleading or deceptive conduct which creates civil liability of the parties. Sub section (1) provides that a person has a duty to ensure that he/she did not involve in any conduct relating to financial product or service which is likely to or is misleading or deceptive. The liability for breach of this subsection can be a civil liability which is given under section 1041I. Subsection (2) provides information regarding a financial product or services described in the subsection (1) which include dealing, issuing, publishing, making, applying permitting, trustee, apply on behalf of other or carrying a financial product (Austlii, 2018). Section 180 provides provisions which are required to be followed by directors regarding care and diligence; it creates a civil obligation of a party. Sub section (1) requires that a director or other officer should use their power and perform their obligations by ensuring a level of care which is reasonable to be maintained as per a reasonable person. The penalty for breach of this subsection is provided under section 1317E. Sub section (2) requires a director to make business decisions or judgements by ensuring the compliance with provisions given under sub section (1) (Austlii, 2018). The breach of this section did not occur when directors take business decisions:
In Narain case, the court evaluated that the breach of section 180 (1) depends upon the extent of misleading nature of the statement. It was noted that Mr Narain sought advice from external advisors however he was not entitled to rely on them. Furthermore, Mr Narain did not have a background of processing or drafting; however, due to circumstances, he was involved in the drafting process based on which the court held him liable for creating section 1041H (1) and 180 (1) (Jacobson, 2008).
After the appeal made by ASIC, all the three judges of Full Federal Court agreed to reverse the decision given in the first instance. The court held that the CEO of the CIL is liable for making allegedly misleading or deceptive statements to the ASX. The court held the managing director liable even though the announcement was made under the name of the company secretary. The court evaluated the arguments made by ASIC regarding that the statements are misleading or deceptive. The court provided that the judgement is misleading based on the fact that the company did not disclose information such as Citrofresh wasn’t a vaccine, it was a disinfectant, and all the tests regarding the products were conducted in the laboratory of CIL. The court held that even though Mr Narain denied that these matters are not material to the announcement however the court held they are vital to the announcement (ASIC, 2008). These factors are integrally tied up based on which the announcement made by CIL is considered as misleading or deceptive. The court held Mr Narain liable for not including this information in the announcement based on which he was held liable for breaching section 1041H (1). Mr Narain was held liable because he was in authority, and he did not stop CIL from contravening the section. The majority judgement held Mr Narain liable for authorising the company secretary (Mr Hanlon) to send the letter of announcement to the ASX (Jade, 2008).
The actions of Mr Hanlon were considered as ministerial because he was the agent of Mr Narain or an organ of the corporation based on which he was independent of any liability regarding this matter. It was also held that Mr Narain was involved in the drafting and preparation of the letters which contain the announcement. Furthermore, he adopted and approved the content of the letters and authorised the company secretary to send the documents to the ASX. The majority held that it was in plain view that Mr Narain is liable for breaching section 1041H due to involvement and authorisation in the process. The court also provided that Mr Narain has beached his duties by involving in the process of drafting and processing the letters which contain misleading announcements (Ward, 2008). Although he sought advice from external advisors, however, they were not experts in the field of science or infectious diseases or areas relating to their treatment, and he was not entitled to rely on their advice. Based on these factors, the court held Mr Narain liable for breaching section 180 (1) and 1041H (1) of the Act. The court ordered Mr Narain to pay the penalty as per section 1317G for breaching section 180, and under section 206C (1) he was disqualified to act as a director for a period that the court considers appropriate.
This case is relevant because it shows the importance of compliance with directors’ duties. A director can be held personally liable for any misleading or deceptive announcement made by the corporation; therefore, he/she should ensure proper care and diligence while taking business decisions. The first judgement was set aside by the Full Federal Court to held Mr Narain liable for breaching his duties. Furthermore, the appeal of Mr Narain made in the High Court was rejected. This case is significant because it provides that section 1041H is widely acceptable and the words “in relation to” include a wide range of conduct based on which a person can be held liable for breaching the provision of this section. This case has been cited in 27 cases in which the court gave judgement based on the definition of section 1041H given in this case (Jade, 2008). It shows that directors are required to ensure that they take proper care and diligence while taking business decisions for avoiding any actions or announcement that might affect a large number of people, therefore, the judgement of this case remains substantially important.
Conclusion
In conclusion, the case of ASIC v Narain is an important case which deals with issues regarding misleading or deceptive announcement. The summary of the case includes that the CEO and managing director of CIL, Mr Narain was held liable by the Full Federal Court for breaching his duties which are imposed by the Corporations Act 2001 (Cth). The company announced to the ASX that is has found a cure for preventing and eliminating HIV and the common cold. ASIC filed a suit against the corporation alleging them to issue a misleading or deceptive announcement. ASIC also provided that Mr Narain is personally liable for the announcement since he was involved in the process of drafting, and he authorised the announcement. The court rejected the claim based on the fact that the announcement did not come under the definition of a financial product or service. ASIC appealed in the Full Federal Court which accepted the claim of ASIC which rejecting the first judgement. It was held that the corporation made a misleading or deceptive announcement based on which it is liable under section 1041H, and Mr Narain is personally liable under this section because he breached his duties as provided in section 180 (1). The court held that Mr Narain did not take appropriate care and diligence while making the false announcement, and he was involved in the process of drafting and authorisation of the announcement. The judgement of this case is relevant because it expanded the scope of implementation of section 1041H and it has been since cited in a number of cases.
References
ASIC v Narain [2008] FCAFC 120
ASIC. (2008) 08-146 ASIC appeal successful against former Citrofresh International Limited director. [Online] ASIC. Available at: https://asic.gov.au/about-asic/media-centre/find-a-media-release/2008-releases/08-146-asic-appeal-successful-against-former-citrofresh-international-limited-director/ [Accessed on 15th May 2018].
ASIC. (2010) 10-69AD ASIC obtains pecuniary penalty and disqualification order against former Citrofresh International Limited director. [Online] ASIC. Available at: https://asic.gov.au/about-asic/media-centre/find-a-media-release/2010-releases/10-69ad-asic-obtains-pecuniary-penalty-and-disqualification-order-against-former-citrofresh-international-limited-director/ [Accessed on 15th May 2018].
Austlii. (2018) Corporations Act 2001 (Cth). [Online] Austlii. Available at: https://www.austlii.edu.au/au/legis/cth/consol_act/ca2001172/ [Accessed on 15th May 2018].
Corporations Act 2001 (Cth)
Jacobson, D. (2008) Who Is Liable For Company Statements?. [Online] Bright Law. Available at: https://www.brightlaw.com.au/who-is-liable-for-company-statements/ [Accessed on 15th May 2018].
Jade. (2008) Australian Securities and Investments Commission v Narain. [Online] Jade. Available at: https://jade.io/article/79960 [Accessed on 15th May 2018].
Legg, M. and Jordan, D. (2008) Directors’ personal liability for misleading and deceptive conduct in relation to shares. [Online] Clayton UTZ. Available at: https://www.claytonutz.com/knowledge/2008/september/directors-personal-liability-for-misleading-and-deceptive-conduct-in-relation-to-shares [Accessed on 15th May 2018].
Ward, L. (2008) Australia: Personal Liability for Misleading or Deceptive Public Announcement. [Online] Mondaq. Available at: https://www.mondaq.com/australia/x/69090/Compliance/Personal+Liability+For+Misleading+Or+Deceptive+Public+Announcements [Accessed on 15th May 2018].
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