ASIC v Narain: Violation of Director Duties and Misleading Claims

The ASIC v Narain case involved issues relating to violation of director duties and misleading public claims made by Citrofresh International Ltd. The court held the company and Mr Narain liable for violating the provisions of section 1041H. This case highlights the importance of maintaining a level of care while discharging duties by directors and avoiding making misleading claims in the public.

Business and
Corporations Law
ASIC v Narain [2008] FCAFC 120

Introduction
• In ASIC v Narain case, the issues relating to
violation of directors duties was raised.
• A lawsuit was filed by ASIC against
Citrofresh International Ltd (CIL) for making
misleading claim to ASX.
• Mr Narain was also involved in the suit since
he was acting as the managing director and
CEO of the corporation.
• The case was rejected by the trial judge,
however, the Federal Court revered the
decision.

Background of the
Case
• Two letters were sent by CIL to the ASX
on 27th September 2005.
• The company claim to find the cure for
HIV and method to prevent common
cold.
• These letters were sent to the ASX by
the company secretary of the
enterprise.
• However, Mr Narain was involved in the
process of drafting of these letters.

Background of the
Case
• The ASIC alleged that the company and
Mr Narain has violated the provisions
given under section 1041H of the act
(ASIC, 2010).
• The trial judge rejected the claims
raised by ASIC.
• However, the judgement of the Federal
Court reversed the order given by the
trial judge and hold both the company
and Mr Narain liable.

Director Duties
Breached
• Section 180 of the act provides that
they have to maintain a standard of
care and diligence.
• Subsection 1 provides that a standard
should be ensured by the directors while
they are using their powers (AICD,
2018).
• They should not act recklessly and
ensure a standard which a reasonable
person would while acting in such
position.

Director Duties
Breached
• Section 1041H provides that misleading
claims should not be made regarding
financial products or services (Austlii,
2018).
• The involvement of a party means
dealing, permitting, publishing, or
conducting on behalf of another party.
• The court can imposed civil liability on
the party under section 1041I of the act.

Director Duties
Breached
• Mr Narain violated these duties since he did not
maintain a standard of care.
• He was involved in the process of drafting and
preparation of the letters send to ASX.
• He omitted material facts from the letter and
failed to disclose key information.
• He also authorised the issuing of those letters
and permitted the company secretary to send
them to the ASX.
• Therefore, the court provided that he had
violated the provisions given under section 180
(1) and 1041H.

Judgement of the
Case
• The judgement of the trial court was reversed by the
Federal Court.
• It was held that Mr Narain violated the provision given
under section 180 since he did not maintained a
standard of care (Ward, 2008).
• The company did not find a vaccine, instead, it was
disinfectant. Mr Narain was also involved in the
process of drafting the letters.
• Financial penalties were imposed under section 1041I.
• Mr Narain was held liable under section 1317G of the
act in which financial penalty was imposed by the court
• He was disqualified from acting as a director under
section 206C (1).

Importance of this
Case
• The judgement of this case is relevant
for other Australian corporations.
• It shows that they should avoid making
any misleading or deceptive claims in
the public.
• Moreover, it highlighted the importance
of maintaining a level of care while
discharging of duties by directors.

Importance of this
Case
• Directors should avoid acting recklessly
and they should ensure that act carefully
while using their powers.
• This case also showed that even though
the letters were send by the secretary,
however, the court hold Mr Narain liable
for the misleading conduct.
• He was involved in the process of drafting
and preparation of those letters which was
considered as a misleading conduct
(Hargovan, 2010).

Conclusion
• In conclusion, this case involved issues
relating to misleading public claim and
violation of director duties.
• The court held the company and Mr
Narain liable for violating the provisions
of section 1041H.
• This case shows that directors should
not act recklessly and they should avoid
making misleading claims in the public.

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. (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].
• Hargovan, A. (2010) Company Secretary: Directors' Liability for Misleading and
Deceptive Market Announcements-the'Citrofresh'Decision. Keeping Good
Companies, 62(8), p.454.
• Ward, L. (2008) Personal Liability For Misleading Or Deceptive Public
Announcements. [Online] Available at:
http://www.mondaq.com/australia/x/69090/Compliance/Personal+Liability+For+
Misleading+Or+Deceptive+Public+Announcements [Accessed on 26th
September, 2018].