ASIC v Narain Case: Corporate Governance and Legal Implications

This case study examines the Australian Securities and Investment Commission v Narain [2008] FCAFC 120 case, where Mr. Narain, the Managing Director and CEO of Citofresh International Limited, was found to have breached the Corporations Act 2001 by engaging in deceptive and misleading conduct. The case revolves around an announcement made by Citofresh to the ASX, which Mr. Narain authorized, that led to a significant increase in the company's share price, followed by a contradictory statement that downgraded the share price. The court held Mr. Narain personally liable under section 1041H of the Corporations Act 2001 for the misleading announcement and also found him in contravention of section 180(1) for failing to exercise due care and diligence. The decision underscores the responsibilities of company directors to ensure accurate and truthful communication to the market and highlights the potential for personal liability for misleading conduct related to financial products. The ruling has implications for directors engaging in deceptive activities to inflate securities values and reinforces the importance of directors' duties concerning care, diligence, and avoiding misleading conduct.

Running head: CORPORATION AND BUSINESS LAW
Corporation and Business Law
Name of the Student
Name of the University
Author Note

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ASIC v Narain [2008] FCAFC 120
Introduction
For the purpose of this assignment, the case of Australian Securities and Investment
Commission v Narain [2008] FCAFC 120 has been chosen. The case had resulted in a
decision in favour of the Australian Securities and Investment Commission incurring a
pecuniary penalty to be paid by Mr. Narain, the Managing Director and CEO of the
company named Citofresh International Limited. This case also resulted in the
disqualification of Mr. Narain. The case was a civil penalty proceeding. The penalties so
awarded was by way of a decision that was delivered by the court, in which the court was
of the opinion that Mr. Narain was in breach of the provisions contained in the
Corporations Act 2001for engaging in conduct considered to be deceptive and misleading
and has violate the provisions contained in section 1041H of the Corporations Act 2001.
The court held Mr. Narain to be liable personally under this section although the
misleading announcement was not sent by him personally to ASX. This has been
contended by the Australian Securities and Investment Commission that Mr. Narain has
involved in a conduct which was misleading and deceptive although the same has not been
personally communicated by him but the same was effected by under his authority.
The company involved in this present case is Citofresh International was a public
company, which was quoted under the Australian Securities Exchange (ASX) and dealt
with the supply of disinfectant product. The issue regarding this case surfaced with the
announcement made by the company to the ASX. The managing director of the company
namely Mr. Narain has authorised the company secretary of that company to release an
announcement in the market through the ASX. The ASX release was prepared by the
Managing Director with the aid of others. The release had an effect of shooting up the

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price of the shares relating to the company. The price of the shares has increased
considerably from $0.225 to 0.70. Subsequent to this, a request was initiated by the
company requiring the trading to be stopped followed by a statement somewhat
contradictory to the previous one. This had downgraded the share price to $0.295. This has
attracted the attention of the ASX regarding the misleading and the deceptive conduct that
has been previously committed by the company owing to its previous announcement.
The court had regarded the announcement of the company to be made to mislead and
create a deception and held the Managing Director of the company, namely Mr. Narain to
be liable personally under section 1041H of the Corporations Act 2001 which incurs a
personal liability upon the directors who are alleged to indulge in misleading and
deceptive activity. The court held that the managing director in this case has also
contravened the provision contained in section 180(1) of the corporation Act and had
attracted an civil proceeding under section 1317E, a suspension under section 206C and a
liability of pecuniary penalty under section 1317H of the Corporation Act.
Duties Contravened under Corporations Act
The managing director of the company, namely Mr. Narain was alleged to have
contravened the provision contained in section 180(1) of the Corporations Act 2001 by
involving in the deceptive conduct. The provisions enumerated under this section requires the
director of a company to exercise care and due diligence while discharging his functions as a
director acting on behalf of the company. The accusation was backed by the fact that the
director was involved in a deceptive and misleading conduct of the company, which was a
direct blow to the reputation of the company and a failure on the part of the director to use
care and due diligence while discharging his functions.

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The managing director of the company was also alleged to have breached the provisions
contained in section 1041H of the Corporations Act 2001 relating to an incurrence of
personal liability for the indulgence in misleading or deceptive activity. The provisions
contained in this sections requires a director of the company to refrain from indulging in a
conduct regarding a financial product or any services relating to financial nature, which
would amount to deception and is likely to mislead. The section does not render the failure to
abide by the same to be an offence. However, a person violating the provisions contained in
this section would attract a civil penalty followed by suspension and pecuniary damages
under section 206C, 1317E and 1317H.
A director of reasonable conscience will strive to keep the company distant from any
actions, which are contrary to the provisions of the Corporations Act. A case in which a
director while acting under the scope of his position as a director indulges in conducts will
imply a deception and will mislead others who are affected by such conduct cannot be
considered to have exercised due diligence and care while discharging his duties as a director.
Hence it is a violation of section 180(1) of the Corporations Act 2001.
Analysis Decision of the Court
The court in this case has based his decision on the evidence provided by the ASX. The
company itself has provided for an announcement, which was subsequently withdrawn and
replaced by another announcement contradictory to the previous announcement. Both the
announcements were made publicly so the question of evidence to infer the previous
announcement to be misleading or deception does not arise. The contention that the
announcement was made to shoot up the price of the shares of the company was evident as
the shares have considerably escalated on initiating that misleading announcement and had
downgraded readily upon withdrawal of that announcement and replacement of the same with
a contradictory announcement. Now the question that needs to be addressed while analysing

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the decision of the court relating to the present case are, whether there has been any deception
or misleading conduct, whether the deception can be related to a financial product or services
and whether the director has acted in his position as a director, acted on behalf of the
company and has a direct authority over the deceptive conduct.
The first question that needs to be addressed while analysing the decision of the court was
whether the conduct of the company was misleading and deceptive in nature. In this present
case the evidence that has been presented before the court by both the parties has made it
clear that the conduct of the company was misleading and deceptive. The managing director
of the company has prepared an announcement with the assistance of others, which would be
likely to escalate the price of their shares. The managing director has also gave directions to
the company secretary of the company authorising him to release that announcement to the
Australian Securities Exchange. This announcement was released through the ASX and has
the effect of shooting up the price of the shares of the alleged company. This announcement
was later on withdrawn and replaced with another announcement, which was an exact
contradiction of the same. This has resulted in the downgrade in the price of the share. The
incident is a direct indication of the fact that the previous announcement was made with a
view to deceive and mislead. The contrary announcement that was made subsequent to the
previous one, indicates towards the misleading and deceptive nature of the previous one.
Hence, it can be contended that the court had sufficient reason and evidence to render the
announcement to be misleading and deceptive. The court after a thorough analysis of the
evidence and situation of the case has brought the case under the purview of section 1041H.
While deciding on the same the court had made reference to the case of Butcher v Lachlan
Elder Realty Pty Ltd (2004) 218 CLR 592 at 605.
The second question that needs to be resolved while analysing the decision of the court
was whether the misleading conduct has been related to a product or service, which is

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financial in nature. In this case, it can be contended that the misleading announcement was
made regarding a product of the company, which is not financial in nature. However, it was
the contention of the court that as the announcement was not targeted on the product about
which it was made. The announcement was targeted on the shares of the company and was
more precisely made to escalate the price of the same. In this case the subject of the
announcement was the shares of the company and not any product about which the
announcement has been made. It can be stated that shares imply financial product and any
misleading activity involving the shares would amount to a breach of the provision contained
in the section 1041H. While deciding the case the court has Project Blue Sky Inc v Australian
Broadcasting Authority (1998) 194 CLR 355 at [69]-[71].
Another question that arises in analysing the decision of the court was that whether the
director has acted under the scope of his position in the company and on behalf of the
company and whether the announcement was made by the director of the company. In this
case, the director has prepared the draft of the assignment himself. While preparing the same
he had availed the assistance of the others. The preparation of such a draft was made under
the supervision and control of the managing director, so by this contention he can be held
responsible for the misleading announcement. Another contention that might arise against the
decision is that the announcement was released to the ASX by the company secretary of the
company. This contention can be nullified by the fact that the company secretary was mainly
responsible for the communication of the announcement, he had no other liability regarding
the same. The authority was given by the managing director to release that announcement and
the company secretary was just a medium of conveyance of the same. Therefore, the liability
falls on the person who authorised such an announcement and not the company secretary.
This can be rendered from the discussion that the announcement made was under the direct

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authority of the director. While deciding on this contention the court made a reference to the
case of Cleary v Australian Co-Operative Foods Ltd (Nos 2 & 3) (1999) 32 ACSR 701.
Another contention that might crop up while analysing the case is whether the managing
director has acted under the scope of his position as a director of the company and whether he
has acted on behalf of the company. In this case the director has acted in his position as a
director in preparing an announcement release and authorising the same to be sent to the ASX
for public announcement was an act on behalf of the company and within the scope of the
position as a direct. While addressing this contention the court has made references to the
case of Houghton v Arms [2006] HCA 59.
Therefore, the situation can be brought under the purview of section 180(1) and section
1041H of the Corporations Act 2001. And the director in this case have been alleged by the
court to have breached his duty of exercising due care and diligence as a director and has
indulged in misleading and deceptive activity relating to a financial product which has
attracted a personal liability for the director.
Impact
The decision in this case has a wide application in the corporations law and the same is
intended to apply on the director who indulge in deception and fraudulent activities to
escalate the worth of the securities of their company. It might also be applied to the directors
who are involved in fraud in relation to any financial services. The directors of a company are
required to exercise a level of care and due diligence while functioning as a director, which is
expected form a reasonable person put in their position. They are not supposed to rely on the
advice of others blindly and must not base the decision on a mere suggestion without
examining the same. This would render them to be liable personally for compensation.

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Reference
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