Background
In this case, an announcement was sent by Citrofresh International Ltd. to the ASX on 27 September 2005. In this announcement it was mentioned that the company had concluded a landmark as a result, in which it was successful in showing significant virucidal activity against four major viruses, which included the HIV/AIDS virus. Soon after the announcement was made in the market, there was a significant rise in the share prices of the company, from 22.5 cents to $.70 before the trading stopped in the market. In reply to a question asked by the ASX, a further announcement was made by the company on 29 September, 2005. It was mentioned by the company that Citrofresh is not a vexing and therefore it is not the cure for HIV. The result was that the price of the shares of the company failed to $0.295.
The text of this announcement had been approved by Mr. Ravi Narain, the Chief Executive Officer of Citrofresh. He also took part in preparing and drafting the announcement, along with two consultants from outside and he had approved the contents of the announcement and directed the company secretary to make this announcement to the ASX. The CEO of the company, Mr. Narain had also distributed a draft version of the announcement to the board members of the company. However, while doing so, the comments of the members were requested, but not the approval or the authorization of the board members for publishing the announcement.
Under these circumstances,, proceedings were initiated by the ASIC against the CEO of the company Mr. Narain and the Corporation. The ASIC had sought a declaration from the court against both an account of the reason that they were involved in misleading and deceptive conduct that breached section 1041H, of the Corporations Act, particularly by making statements like “ CTF can now offer a global solution for reducing and eventually preventing the spread of HIV with the help of Citrofresh”. While the company gave its consent for making orders against it, but the proceedings were defended by Mr. Narain. At the first instance, the Federal Court dismissal proceedings against the CEO of the company Mr. Narain on two accounts:
- It was held that Mr. Narain was not involving conduct related with the financial product. According to the primary judge, it was stated that the statements made by the company in the announcement on which the ASIC had relied upon, were not made regarding the shares of the company but the primary judge pointed out that the statements were made regarding the company itself or regarding a product that was manufactured and sold by the company.
- Regardless of the role played by Mr. Narain in the preparation and publication of the announcement, he had not actually published the statements and as a result it cannot be stated that he had violated section 1041H.
The impact of first finding of the court was that there was a direct and clear nexus present between misleading conduct and financial product guide shares of the company that is required for the application of section 1041H. If this proposition is considered to be correct, it would allow the side stepping off the liability by making statements regarding the Company or the business instead of considering the impact of the statement on the price of the shares of the company (Grave and Mould, 2009,). For instance, according to this view, it would not be the breach of this section effect is incorrectly mentioned that the company has struck gold. The reason is that in such a case, the statement is not related with a financial product. However, the statement can be considered as a breach, if it is stated that “purchase the shares of the company because the company has struck gold”.
Legal Action Taken by ASIC
Therefore in this regard, it needs to be noted that a basic prohibition has been imposed by the Corporations Act in the form of section 1041H.. According to this provision, a person should not be involving conduct, regarding the financial product of financial service that can be described as misleading or deceptive on if the conduct is likely to mislead or deceive (Bednall and Hanrahan, 2013). Historically, the above-mentioned provisions have a wide application. A variety of plaintiffs, including the ASIC and shareholders have relied on this provision. The utility of section 1041H, had been seriously diminished as a result of the decision given in ASIC v Citrofresh International Ltd (2007). An appeal was made to the Full Federal Court in ASIC v Narain (2008). The two significant issues before the court in this case were:
If the conduct of publishing a written statement made in relation to a financial product only is the statement refers to such financial product (shares); and
If an officer of the company can be held personally responsible for the breach of section 1041H if it is found that the relevant statement was prepared by such officer and it was fully intended to be published, but the statement was not published by the office and instead the company secretary was instructed by the officer to do so (Herzberg and Anderson, 2012).
The answer to the first question, given by the Full Federal Court was in the negative. The court pointed out that a wide meaning has to be given to the term “in relation to” and as a result, and indirect or less than substantial connection is sufficient. Regarding the second question the answer was “yes” and an officer can be held personally responsible under the circumstances mentioned above. In this way the decision given by the full Federal Court has reinstated the wide application of s1041H.. It had also been confirmed that the provision can be used against the corporation and also against the directors and officers of the corporation in their personal capacity.
In this case, it was discovered by the Full Federal Court that the words “in relation to” should be interpreted widely. The meaning of this term is also informed by the context regarding which it has been used. The words signify the importance for the presence of some relationship or a correlation that should exist, to subject matters that have been specified, a question of degree will always be present regarding how close the relationship between the matters should be and if a less direct or less substantial connection can be considered as sufficient (Allen, Jacobs and Strine, 2002). For this purpose the context of s1041H was evaluated by the Federal Court, including the fact if the provision was going to act as a general prohibition or if it was to make sure that the versus taking part in the market for financial products and services act with honesty and integrity and that adequate protection was available to the consumers. On account of the facts of this case, it was held by the court that the words “in relation to” were functional when there was a connection between the financial product (shares) and misleading statement was indirect if it can be stated as less than substantial (Black, 2013).
The Federal Court Decision
Regarding the second issue, the court noted that even if an officer is an organ of the company, but the actions of the officer may result in personal as well as corporate liability. For example in the present case, it was discovered by the Full Court that the actions of the company secretary were ministerial as an organ of the corporation or, while acting as agents of the CEO of the company Mr. Narain. As a result, it was not the company secretary, but Mr. Narain, who was held as we personally responsible. In this regard, the court explained that, “the real culprit will be not the person who has been statement to the ASX; as in several cases, such person can only be the office worker. Therefore, the, responsible person will be the person in authority who, having the knowledge of the contents of the statement, gave the instructions that the statement should be sent for publication to be ASX”.
Hence, the judgment reveals the significance of ensuring the fact that public statements made by corporations do not mislead or deceive the public operating in financial markets. At the same time, this judgment also provides guidance regarding the situation where the officers of the company can be held personally responsible for the misleading statements that have been made by the Corporation. Therefore, civil action was initiated by ASIC against the officer of Citrofresh International Ltd. on account of the statement made by the company to the ASX. In this case, the company secretary was authorized by the managing director to release the announcement in the market. As a result, action was initiated in accordance with s1041H. This section provides that a person should not be involved in conduct regarding financial product (in the present case, shares of the company) that can be described as misleading or deceptive (Jason, 2009). Therefore the previous decision given by a single judge was overturned by the full court as the earliest it was considered to be based on the narrow interpretation of the term, “in relation to” and the Full Federal Court interpreted the term widely. Therefore, it was stated that an indirect or less and substantial connection existing between the conduct of the corporation and the financial product is sufficient. And there is no need of a direct relationship with the product or service. At the same time, it was also stated by the court that the managing director of the company, Mr. Narain can be held personally responsible for the breach of section 1041H due to the reason that the release of the statement to the ASX was authorized by him. The action had been admitted to the primary therefore deciding on particular facts if the announcement can be described as misleading and if by authorizing the release of the statement, Mr. Narain can be held to have violated his statutory duties imposed on the directors.
Interpretation of Section 1041H
In this way, this case shows that clear protocol should be present in the listed companies in order to make sure that the statements released to the ASX are complete and accurate. If this is not the case, the liability under s1041H may arise as a result of a statement, which does not directly refer to the company’s securities. At the same time, it is also important to keep in mind the principle regarding all the public announcements made by the Corporation, including the statements made on the website of the company that made the considered as having any relation with the securities of the company. It is also revealed by the decision given in this case that any person can be held personally responsible under section 1041H if such person has authorized any other person, who having knowledge of the contents of the statement, had prepared, instructed or authorized the release of a misleading or deceptive statement.
On the basis of this decision, it can be stated that the decision removes a serious question regarding the scope of s1041H. The view held by the ASIC is confirmed by the decision that misleading or deceptive conduct, in context of s1041H, may cover the statements that have been made by a corporation (or its officers) to the ASX regarding the company, its products or services even if such statements do not expressly mentioned the shares or securities of the company.
In this way, the ASIC succeeded in its appeal against the orders of Goldberg J, who had dismissed the claim of the ASIC against Mr. Narain, the former director of Citrofresh international Ltd. The Full Court stated that Mr. Narain can be found personally responsible for the breach of section 1041H even if we had not personally sent a statement to the ASX.
References
Bednall T and Hanrahan P., 2013, Officers’ liability for mandatory corporate disclosure: Two paths, two destinations? 31 C&SLJ 474
Black A., 2013, Directors’ statutory and general law accessory liability for corporate wrongdoing, 32 C&SLJ 511.
Grave, W. and Mould, P., 2009, Causation Loss and Damage: Challenges for the new shareholder class action, 27 C&SLJ 481
Herzberg A and Anderson H., 2012, Stepping Stones – From Corporate Fault to Directors’ Personal Civil Liability, 40 FLR 181 at 182
Jason H, 2009, “Director liability for insolvent trading: Is the cure worse than the disease?”, 23 Australian Journal of Corporate Law 266, 286
W Allen, J Jacobs and L Strine, 2002, Realigning the Standard of Review of Director Due Care with Delaware Public Policy: A Critique of Van Gorkom and its Progeny As a Standard of ReviewProblem, 96 Nw. U.L. Rev. 449.
ASIC v Citrofresh International Ltd (2007) 164 FCR 33
ASIC v Narain (2008) 66 ACSR 688
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