ASIC v Narain: Analysis of Director Duties Breached

The ASIC v Narain case highlights the role of directors in a company and regulations which affect their operations. The report analyses the principles given under the Corporations Act 2001 (Cth) in order to understand the key provisions which companies and directors have to comply with. The issues relating to misleading conduct were raised regarding financial products and services. The judgement of the case and its impact are assessed in the report as well.

0
Business and Corporations Law

1
Table of Contents
Introduction................................................................................................................................2
Background of the case..............................................................................................................3
Director duties breached............................................................................................................3
Judgement of the case................................................................................................................4
Importance of this case...............................................................................................................5
Conclusion..................................................................................................................................7
References..................................................................................................................................8

2
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.

3
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

4
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

5
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.

6
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.

7
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.

8
References
AICD. (2018) What are the duties of directors?. [PDF] Available at:
http://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:
http://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: http://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:

9
http://www.mondaq.com/australia/x/69090/Compliance/Personal+Liability+For+Misleading
+Or+Deceptive+Public+Announcements [Accessed on 26th September, 2018].