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HI6027 Business And Corporations Law 4

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Question:

  1. 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(Cth).

  2. Group report:Write a report outlining the following:
    1. Case introduction.
    2. The duties/responsibilities breached (ex. CA sections 181 or 588G)and explain why the duties were
    3. Discuss and critically ANALYSE the court/tribunal decision and thereason for the decision in view of the Corporations
    4. Where possible and applicable, the relevance of the decision to the development of Australian corporations law or the impact of thedecision on the operation of companies in
    5. Group report must be submitted via SafeAssign on Blackboard
 

Answer:

Introduction

The ASIC v Narain [2008] FCAFC 120 is a relevant case. This case has highlighted the role which directors play in a company and regulations which affects their operations. This report will analyse the principles given under the Corporations Act 2001 (Cth) (Act) in order to understand the key provisions which companies and directors have to comply with. The issues relating to misleading conduct was raised regarding financial products and services. In this case, the duties and responsibilities of a Chief Executive Officer (CEO) and managing director of a company were violated (Hargovan, 2010). The issue regarding making misleading and deceptive claims is raised in this case as well. In this case Australian Securities Exchange (ASX) was involved. The misleading clam was made to ASX. A suit was filed against the misleading conduct of the company and its director by ASIC. There were two key defendants in this case which include Mr Ravi Narain and Citrofresh International Ltd (CIL). Section 1041H is the key provision which was violated in this case. This section was violated while two letters were sent by the company to ASX. The facts of case will be analysed and infringement of director duties will be discussed. The decision made by the court and its impact will be assessed in the report as well.

 

Background of the case

The proceedings of this case started when a lawsuit was filed by the ASIC. The law was filed against the company and its director Mr Narain. In the lawsuit, ASIC alleged the parties for indulging in misleading or deceptive activities. These activities were conducted by the parties while making claims to the ASX. On 27th September 2005, the company made a public claim. In this claim, it provided that a cure for preventing the common cold has been found by it. The enterprise also claimed that the cure for HIV is found as well (Boros, 2009). In its lawsuit, ASIC alleged Mr Narain for engaging in the misleading and deceptive conduct. While making the announcement, Mr Narain was involved in the process of preparation of the letter. The first letter which was issued by the company was drafted by Mr Narain himself. It was held by ASIC that he had violated section 1041H of the act. These allegations were imposed on him because he approved that content which was written in the letter.

Furthermore, he permitted and authorised the issuing of the letter. In the letter, the names of two parties were written. One name was Mr Narain’s which was written in case people wanted to clear any queries. The first claim was filed by ASIC which was rejected by the trial court. It was held that the announcement made by Mr Narain did not contain any financial product based on which section 1041H is not violated. An appeal against the order was filed by ASIC. The first claim of ASIC was rejected by Honourable Justice Goldberg for two main reasons. The first reason was that no financial product was involved in the letter. Secondly, there is no personal liability of Mr Narain in the case. The appeal against this order was made to Full Federal Court. The order of the trial court was reversed by the court by holding Mr Narain personally liable (Ward, 2008). The main reason for that being he was involved in preparing and drafting the letter. The court provided that section 1041H is violated because a misleading and deceptive claim has been made.

 

Director duties breached

Section 1041H imposes restrictions regarding financial products. It provides that parties should avoid misleading and deceptive conduct regarding financial products. In case this section is violated, then civil liability is imposed on the guilty parties. Subsection (1) of this act imposed duty on a party. This duty is imposed to ensure that such party is not involved in the conduct which is misleading and deceptive regarding financial products. Subsection 2 defines the meaning of involvement. It provides that a party should not deal, publish, permit, issue, or conduct on behalf of another party regarding any financial product (Austlii, 2018). The civil liability which is imposed on the party while violating this section is given under section 1041I. Moreover, while acting as a director of the company, the parties have to comply with various general duties. These duties guide the actions of directors to ensure that they are focused on achieving the organisational goals. Section 180 provides provisions regarding care and diligence. This act requires that the director must act with a standard of care. The standard is judged by an objective test which evaluates what does a reasonable person would do in this situation.

Based on this section, the officer or directors of a corporation have to ensure that they maintain a standard of care. This is given under subsection 1 based on which a degree of care which a reasonable person would maintain must be ensured by the directors (AICD, 2018). In case this section is violated by the party, then penalty can be imposed by the court which is given under section 1317E of the act. The directors have to ensure that they act in good faith in order to maintain a degree of care. They should focus on achieving the interest of the company and its members. They should not misuse their powers and position for gaining personal advantage. In this case, Mr Narain failed to comply with the provisions given under section 180 (1) of the act. He failed to maintain a standard of care due to which the misleading claim was made to the ASX. If Mr Narain had ensured care while drafting and preparing the letter, then the misleading claim would not have made by the company to the ASX (ASIC, 2010). He also violated section 1041H (1) since he made misleading claims regarding financial products. The duties were violated since it resulted in adversely affecting the company and its members.

 

Judgement of the case

The Full Federal Court provided its judgement based on the appeal made by ASIC. In the judgement, the decision given by the trial court was reversed by the court. The court agreed that CIL and Mr Narain had violated section 1041H of the act. The statements made by the corporation and its director were misleading and deceptive. These statements were given to ASX. The court provided that the announcement was given by the company secretary of the firm. However, Mr Narain was involved in the process of drafting the letter and its preparation. Moreover, Mr Narain authorised the formation of the letter, and he permitted that this letter should be issued to ASX. The statement was misleading because all the tests conducted by the company were done in the laboratories which were owned by the company itself (Legg and Jordan, 2008). Moreover, Citrofresh was not a vaccine; instead, it was a disinfectant. This statement was not mentioned by the company in the letter based on which it was considered as misleading.

Mr Narain argued in the court that these facts are not material. However, the court rejected these arguments by providing that these were key material which should have been included in the letter. All these information is integrally tied up which should have been included by the corporation in the letter issued by it. By not authorising the company to include this information in the letter, Mr Narain violated the duties given under section 1041H. He was acting as the MD and CEO of the company, yet he allowed the enterprise to make a misleading claim (Hargovan, 2010). Since Mr Narain has violated his duties given under section 180, the court holds him liable. The court provided a majority judgement in which it was held that the company and Mr Narain is liable for violating these sections. The court imposed penalty on Mr Narain under section 1317G of the act. Furthermore, he was disqualified from acting as the director of the company under section 206C (1).

 

Importance of this case

A large number of companies operate in Australia which has to comply with regulations given under the Corporations Act. This case has shown the duties which directors in such companies should comply with. The director operates at the highest post in a company, and they have to ensure that they maintain a standard of care which is necessary for avoiding causing harm to the corporation or its members. Mr Narain was operating in an apex position in the company. He was the CEO and managing director of CIL. He was responsible for making business decisions in order to direct the company to achieve its corporate goals. However, he misused his position and violated his responsibility. This is a relevant case since it shows that it is expected from the directors that they should ensure that they did not act recklessly. They should think about the consequences of their decisions since they could have a negative impact on the enterprise and its members (Company Directors, 2008). It is also expected of them that they should comply with the duties which are imposed on them by the Corporations Act. By effectively complying with these duties, the directors can take business decisions which contribute to the growth of the corporation and its members.

The key takeaway from this case is that the court held Mr Narain liable for making misleading claims to ASX even though such claims were made by the company secretary. The reason for that was Mr Narain was operating at an apex position, and he authorised the formation of those letters. He permitted the company secretary to prepare them and send them to the ASX. Moreover, he was involved in the process of drafting and preparation of the letters as well. These factors show that directors have to be active while discharging their duties to ensure that they did not misuse their position and comply with their responsibilities. The judgement of this case shows that it should be the duty of directors that they avoid acting recklessly in the organisation because they can be held personally liable for the actions of the company (Hargovan, 2010). The actions taken by directors could have an adverse impact, for example, Mr Narain was disqualified from acting as the director, and financial penalties are imposed by the court as well. Therefore, this case is important to understand that effective compliance with director duties is relevant for directors while discharging their duties.

Conclusion

In conclusion, this case focused on the violation of different provisions given under the Corporations Act. A lawsuit was instituted by ASIC against CIL and Mr Narain for misleading conduct. The claim was made based on the two letters which were issued by the company to ASX in which false claims were made. Although the trial court rejected the claims made by ASIC, however, the Federal Court hold CIL and Mr Narain liable for misleading conduct. The court imposed financial penalties on both the company and the director. Mr Narain was disqualified from acting as the director as well. He was involved in the preparation and drafting of the letters which were sent by the corporation to the ASX. He also authorised the issuing of such letters. Therefore, the court provided that he violated section 1041H and 180 (1) of the act. The judgement of this case is relevant for other Australian corporations. It shows that directors have to ensure that they discharge their duties with care. Effective compliance with the guidelines given under the Corporations Act can assist them in avoiding legal consequences and discharge their duties successfully.

 

References

AICD. (2018) What are the duties of directors?. [PDF] Available at: https://www.awlnsw.com.au/assets/Latest%20news/Duties%20of%20Directors.pdf [Accessed on 26th September, 2018].

ASIC v Narain [2008] FCAFC 120

ASIC. (2010) ASIC obtains pecuniary penalty and disqualification order against former Citrofresh International Limited director. [Online] 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 26th September, 2018].

Austlii. (2018) Corporations Act 2001 – Sect 1041H. [Online] Available at: https://classic.austlii.edu.au/au/legis/cth/consol_act/ca2001172/s1041h.html [Accessed on 26th September, 2018].

Boros, E. (2009) Public and private enforcement of disclosure breaches in Australia. Journal of Corporate Law Studies, 9(2), pp.409-438.

Company Directors. (2008) Directors Counsel The start of the avalanche Oct 08. [Online] Available at: https://www.companydirectors.com.au/director-resource-centre/publications/company-director-magazine/2000-to-2009-back-editions/2008/october/director-s-counsel--the-start-of-the-avalanche-oct-08 [Accessed on 26th September, 2018].

Corporations Act 2001 (Cth)

Hargovan, A. (2010) Company Secretary: Directors' Liability for Misleading and Deceptive Market Announcements-the'Citrofresh'Decision. Keeping Good Companies, 62(8), p.454.

Legg, M. and Jordan, D. (2008) Directors' personal liability for misleading and deceptive conduct in relation to shares. [Online] Available at: https://www.claytonutz.com/knowledge/2008/september/directors-personal-liability-for-misleading-and-deceptive-conduct-in-relation-to-shares [Accessed on 26th September, 2018].

Ward, L. (2008) Personal Liability For Misleading Or Deceptive Public Announcements. [Online] Available at: https://www.mondaq.com/australia/x/69090/Compliance/Personal+Liability+For+Misleading+Or+Deceptive+Public+Announcements [Accessed on 26th September, 2018].

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