Business Law Case Analysis

This document provides a comprehensive analysis of two business law cases, ASIC v Narain (2008) FCAFC 120 and Australian Securities and Investment Commission v Sino Australia Oil and Gas Limited (in liq) [2016] FCA 934. It discusses the background of the cases, breaches of director's duties under the Corporations Act 2001, analysis of the court decisions, and the impact of these decisions. The document highlights the importance of directors' due diligence and care in discharging their duties.

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ASIC v Narain (2008) FCAFC 120
Background of the case
In this case, ASIC won a favourable judgment over the company called Citofresh
international Ltd, where the Managing director and CEO of the company Mr Narain was held
liable to pay a pecuniary penalty. He was also disqualified as a director, thereby attracting
civil proceeding. The court had held that Mr Narain was found to have breached section
1041H of the Corporations Act 2001 which holds a director liable for misleading and
deceptive conduct. It was contented by ASIC that Mr. Narain had misled and deceived as a
director, even though it was not confessed by Mr. Narain himself.
It was found that Mr. Narain had given authority to the company secretary of
Citofresh International to make a public announcement that the share price of the company
had shoot up and thereby the company share saw a raise in the share price, from $0.225 to
$0.70. However, the scenario was reversed that made the share price fall drastically to
$0.295. Such a drastic change attracted the attention of ASX pertaining to eh misleading
conduct of the director.
The court agreed to the investigation of ASIC and held that the director was liable
under section 1041 H of the Corporations Act. The court also held the ma aging director
liable as well, under section 180(1) of CA, thereby attracting a civil proceeding as per section
1317E, a suspension from the post of director under section 206C and a pecuniary penalty as
per section 1317H of CA.
Breaches of director’s duties under Corporations Act 2001
In this case the company’s managing director, Mr. Narain has been alleged to be
contravening section 180 (1) of the Corporations Act by his involvement in a deceptive
conduct. In the provisions of this section a duty of a director is mentioned to be exercising
due care and diligence in discharging his duties as a director of the company. the accusation

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against him was backed up by the fact that he was in involvement of a misleading and
deceptive conduct. This can be seen as a direct blow towards the reputation of the company
and it is also a failure of the director’s duties to be acting in care and diligence in discharging
his functions in the company.
In furtherance the managing director could also be seen to be allegedly breaching the
provisions of section 1041H of the Corporations Act by incurring personal liability in the way
of indulging in deceptive or misleading activity. This section requires a director to be
refraining from the indulgence in any conduct or service that can likely be misleading and
would amount towards deception.
Any action of the director under the scope of his position in the company that can be
seen as implying to be deceptive or misleading to other people that are affected in the way of
the conduct will be considered as a breach of a director’s duties for acting in care and due
diligence and further considered to be breach of section180 (1) of the Corporations Act 2001.
Analysis of the decision of the Court
The decisions of the court is seen to be based on the decisions on the evidence that
were provided by the company for announcement to ASX and that announcement had been
subsequently withdrawn and replaced by another announcement that contradicted the
previous announcement. Both these announcements public and hence the question of the
evidence to be misleading or deceptive cannot arise.
The first question that arises in the decision of the court is finding the fact if the
nature of the company’s conduct was deceptive or misleading. In the current case the
evidence provided by both the parties led to the fact that the company’s conduct was indeed
deceptive and misleading. After thorough analysis of the evidence present the case was
brought by the court under the purview of the provisions of section 1014H as has been seen
in the case Butcher v Lachlan Elder Realty Pty Ltd (2004) 218 CLR 592 at 605.

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The second question that arises is while analysing the court’s decision if the
company’s misleading conduct was in relation to any product or service. In this context it was
found by the court that the announcement was not targeted on any product but on the
escalation of the prices of the shares of the company. It can be seen to be in breach of section
1041H of the act as seen in the case Project Blue Sky Inc v Australian Broadcasting
Authority (1998) 194 CLR 355 at [69]-[71].
Next question arising in the case is whether the announcement made by the director
can be said to be under the scope of the director’s position in company. It is seen that the
draft of the assignment was made by the director with the assistance and supervision of the
managing director and can be held responsible for the misleading act. Taking reference from
the case Cleary v Australian Co-Operative Foods Ltd (Nos 2 & 3) (1999) 32 ACSR 701 it can
be said that in this case the director can be held directly responsible for the misleading
announcement.
The final question arising in the analysis of the case is whether the managing director
can be held to be acting under the scope of his position in the company. The managing
director of the company had prepared an announcement in his directorial position and sent the
same to ASX for announcing publicly and it can be said that his conduct was within the scope
of his position as director ass mentioned in the case Houghton v Arms [2006] HCA 59. This
issue can be seen as a breach of a director’s duty under the provisions of the sections 180 (1)
and 1041H of the Act. The director has been alleged to be in breach of his duty to exercise
care and diligence by indulging in deceptive or misleading activity in relation to a financial
product.
Impact of the decision
This decision can be said to have a wide application in the Corporation law in
Australia and has the intention to be applied to directors indulging in fraudulent and

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deceptive activities of escalating worth of the company’s securities. The directors are
required to act with care and diligence and not be relying on other’s advice blindly and not
supposed to be basing a decision relying on mere suggestion without even examining. For the
conduct they would personally be held liable for the compensation.
Australian Securities and Investment Commission v Sino Australia Oil and Gas
Limited (in liq) [2016] FCA 934
Background of the case
For the purpose of this assignment Australian Securities and Investment Commission
v Sino Australia Oil and Gas Limited (in liq) [2016] FCA 934 has been selected. This case is
only three years old and the rules regarding director’s duties are involved in it. The court
gave judgment in favor of the ASIC and penalized Sino with $80000 along with giving
suspension order of the director for a term of 20 years from managing any ASX registered
corporation. It has been held that the organization by indulging into illegal conduct and
contravening Section 180(1) of the Act, has breached various provisions of the Corporation
Act 2001 (Cth). It was claimed by the ASIC in the case that the organization indulged into
those actions because he was not good in understanding English and no proper knowledge
regarding disclosure requirements of Australia.
The defendant company in this case was an Australian holding of an organization.
The issue was raised when 13.6 million had been raised approximately in relation to public
hearing in 12 December, 2013. The prospectus provided was not as per the CA disclosure
requirements. The directors also attempted to transfer the company’s entire holding cash to
China of around $7.5 million.

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Breaches of director’s duties under Corporations Act 2001
The ASIC alleged that the actions of the director were not according to rules of
Section 180(1) of the Act. The rule provides for the directors to work with due care and
diligence while discharging their duties. It was alleged that the organization indulged in the
following violative actions of the Act.
The provisions of Section 728(1)(a) relating to misstatement and omission were
breached by the directors on behalf of the organization. The prospectus of the company
claimed of having patent of oil and gas technology which were not actually held at the time
of the issue of the prospectus.
The provisions of Section 674(2) relating to disclosure of requirements were breached
by the directors on behalf of the organization as the organization had not disclosed the
relevant factors of the prospectus that would have materialistically affected the price of the
share.
The organization was made to violate the provisions of Section 728(1)(b) of the Act
for omitting loan information provided to a Chinese subsidiary.
The director made the organization to breach the provisions of Section 728(1)(c) as
the organization failed to accurately indulge the profit forecast in the prospectus.
A director who made a company to not comply with various provisions of law, cannot
be considered as to take due diligence and care regarding his duties, thus it is the violation of
Section 180(1) of the Act.
Analysis of the decision of the Court
In light of the evidences available in respect of the breach of disclosure of
requirements provided in Section 674(2) of the Act, it was held by the court that the director
actually violated the rules in the context. The evidences were relied by the court which was
obtained by the director’s examination with the translators help under section 19. The director

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was informed that the organization has negative growth of profit in 2013’s second half. The
public could not have achieved the information and also such situation have not assumed by a
reasonable person. The directors also had the knowledge that the leasing equipment’s
expenses had increased and about the delay in payment which results in company’s
decreasing profit.
The director defended that as he do not have good command over English, he was not
able to understand the contents of the prospectus. The director admitted in form of evidence
that without understanding the contents of the prospectus he signed. The court provided that
as the director was not able to understand the contents of the prospectus document, has
violated the provisions of section 180(1) of the Act and a reasonable director would not have
signed a prospectus without understanding its contents. The Australian Securities and
Investments Commission v Healey case was referred by the court in this situation. The court
ruled that without having full understanding of the financial statement a director must not
assent through signature. The director should take into account the typographical errors as
well as the compliance issues of the document. The judge found that the comment of the case
perfectly fits in this present case. The director must ensure while signing the prospectus that
all the requirements imposed by law are fulfilled. Thus, the director by not considering the
legal requirements of the prospectus has contravened section 180(1).
The director also tried to avail another defense by saying that his decisions were based
on relying on decisions of others. He claimed that he had not much information about the
disclosure requirements. He also stated that the other two directors of the company Mr.
Faulkner and Mr. Johnson as well as the team of professional and legal advisors influenced
him in taking decisions. Moreover, it was stated that in his defense that the violation of law
were made unknowingly.

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However, all such submission of the director were rejected by the court. The judge
ruled that not understanding a language gives someone the power of relying upon someone
else’s decision. A reasonable director in such situation should have taken due diligence and
care while discharging his duties. The reference of the Australian Securities and Investments
Commission v Citrofresh International Limited (No 2) case has been given here. In this case a
reasonable director would have participated in drafting and applying adequate skill with due
diligence and care. The director by not understanding the matter had violated the sections of
180(1).
Mr. Shao, Mr. Faulkner and Mr. Johnson had given contradictory evidence in respect
of downgraded profit. The differed profit predictions by the directors were $5 million
approximately. The mandatory information related to profit of the company in the prospectus
documents. The Australian Securities and Investments Commission v Rich case was referred
by the court in this case. It was ruled here that failing of the director in informing himself of
the financial matters of the company, is violation of section 180(1) of the Act.
Attempts were also made by the directors in transferring company’s cash holding to
china without discussing with the other directors. Thus is violation of section 180(1).
Australian Securities and Investments Commission v Maxwell was also referred by
the court in this case. The court held in the case that when the company’s interest is under
threat is a violation of section 180(1). Thus the court ruled in this case that violations of
section 180(1) was made by the directors as the breach of s.728, s.674 and s.1041H of the Act
has been violated by the organization.
Impact of the decision
The decision of the court was primarily applicable to the directors in Australia having
less command over English. The directors are expected to have same diligence and care in
discharge of his duty as expected form other directors. The directors must avoid signing

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documents when they don’t have proper understanding of the contents in it. They cannot rely
on others in case of discharging his duty.

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Reference
Australian Securities and Investments Commission v Citrofresh International Limited (No 2)
[2010] FCA 27 per Goldberg J at [56].
Australian Securities and Investments Commission v Healey [2011] FCA 717 per Middleton
J at [22] (the Centro case).
Australian Securities and Investments Commission v Maxwell [2006] NSWSC 1052 per
Brereton J at [104]–[105].
Australian Securities and Investments Commission v Rich [2003] NSWSC 186. Her Honour
also cited Australian Securities and Investments Commission v Macdonald (No 11) [2009]
NSWSC 287 (the James Hardie case).
Australian Securities and Investments Commission, in the matter of Sino Australia Oil and
Gas Limited (in liq) v Sino Australia Oil and Gas Limited (in liq) [2016] FCA 934 (Justice
Jennifer Davies).
Butcher v Lachlan Elder Realty Pty Ltd (2004) 218 CLR 592 at 605
Cleary v Australian Co-Operative Foods Ltd (Nos 2 & 3) (1999) 32 ACSR 701
Houghton v Arms [2006] HCA 59
Project Blue Sky Inc v Australian Broadcasting Authority (1998) 194 CLR 355 at [69]-[71]
The Corporations Act 2001