Australian Securities and Investments Commission v Citrofresh International Ltd [2010] FCA 27 | Case summary

REASONS FOR JUDGMENT 1 This proceeding relates to two letters sent to the Company Announcements Office of the Australian Stock Exchange ("the Stock Exchange") by the first defendant Citrofresh International Ltd ("CIL") of which the second defendant Mr Ravi Narain was at relevant times Managing Director and Chief Executive Officer. 2 The plaintiff, Australian Securities and Investments Commission ("the Commission"), alleged that the contents of those letters were misleading and deceptive in a number of respects and contained misrepresentations by CIL. The Commission alleged that by sending the letters to the Stock Exchange, CIL engaged in conduct in relation to a financial product or a financial service in contravention of the provisions of s 1041H of the Corporations Act 2001 (Cth) ("the Act"). The Commission further alleged that by reason of his participation in the drafting and preparation of the first letter in the manner alleged, his approval of the contents of the letter, his direction to CIL's company secretary to send the first letter to the Stock Exchange, the sending of the first letter to the Stock Exchange and the fact that both letters contained his name as one of two persons to contact for further enquiries, Mr Narain engaged in conduct in relation to a financial product or a financial service in contravention of s 1041H of the Act. CIL consented to orders being made against it and the proceeding continued against Mr Narain who denied the allegations made against him. 3 On 30 November 2007 I dismissed the application against Mr Narain I found, relevantly that: (a) the letters sent to the Stock Exchange were not statements in relation to a financial product or service; (b) Mr Narain was not personally liable for the sending of the letters to the Stock Exchange, so that Mr Narain did not contravene s 1041H of the Act. I therefore found it unnecessary to make any findings as to the statements in the letters and their contents or as to any liability of Mr Narain under s 180 of the Act: Australian Securities and Investments Commission v Citrofresh International Ltd (2007) 164 FCR 333. 4 The Commission appealed to the Full Court and on 3 July 2008 the Full Court allowed the appeal, set aside the orders I had made and remitted the matter to me for further hearing: Australian Securities and Investments Commission v Narain (2008) 169 FCR 211. 5 In summary, the Full Court found that the two letters and statements in them related to shares in CIL and that Mr Narain was responsible for the publication of those statements. 6 The result of the Full Court judgment is that I now have to determine whether the statements made in the letters were misleading and whether Mr Narain breached his duties as a director of CIL and thereby contravened s 180 of the Act by causing CIL to contravene s 1041H whether or not he also had contravened s 1041H. 7 In this respect I refer to pars [21] and [22] of the judgment of Finkelstein J: Australian Securities and Investments Commission v Narain (supra). "[21] In the view that I take, the release does relate to CTF shares and Mr Narain is responsible for its publication. That, however, is not sufficient to dispose of the case. There is still the question whether the statements in the release were misleading. The judge did not make any finding to that effect, though the evidence of Professor Wesselingh, the Dean of Medicine at Monash University, who was called by ASIC, leaves me in no doubt that they were. But, because the case must go back to the judge for a different reason, it is best to leave it to him to determine in precisely what respects the statements were misleading. [22] The aspect that must go back to the judge in any case is whether, by authorising the publication of the release, Mr Narain breached his duties as a director and thereby contravened s 180. The judge approached the matter on the basis that for there to be a breach of s 180 it was necessary to find that Mr Narain had breached s 1041H. That is not how the case was put at trial. The ASIC contended that Mr Narain had breached s 180 for having caused CTF to contravene s 1041H, whether or not he had also contravened s 1041H. Such a finding is clearly open, but it is a matter that requires full examination." 8 I also refer to pars [100]‑[105] of the joint judgment of Jacobson and Gordon JJ: Australian Securities and Investments Commission v Narain (supra): "[100]It is plain in our view that Mr Narain was personally liable for any contravention of s 1041H. Misleading and deceptive conduct [101] The primary judge made no finding as to whether the announcement was misleading or deceptive because of the views he reached in relation to the two issues referred to above. [102] The learned primary judge summarised the expert evidence of Professor Wesselingh and we have referred to that evidence. [103] Professor Wesselingh was a director of the Macfarlane Burnet Institute for Medical Research and Public Health, a Professor of Microbiology and Medicine at Monash University and a Professorial Fellow at Melbourne University when he gave evidence before Goldberg J. He is now the Dean of Medicine at Monash. [104] Mr Narain apparently led no expert evidence in response to that of Professor Wesselingh. He gave his own evidence to meet the claim that the announcement was misleading in the respects claimed. [105] In our view, the evidence points strongly in favour of a finding that the announcement was misleading. However, since the matter must be remitted to the primary judge, or another judge of the court, to determine the claim of contravention of s 180 of the Corporations Act, we think the appropriate course is that the remitter include the issue of whether the announcement was misleading." 9 I turn to the question whether the five statements relied upon by the Commission were misleading and deceptive. The circumstances leading up to the sending of the two letters to the Stock Exchange dated 27 and 29 September 2005 are set out in my earlier reasons for judgment (pars [4]‑[25]). I do not propose to repeat those circumstances but my earlier reasons should be read in conjunction with these reasons. The text of the letter dated 27 September 2005 is set out in pars [6]‑[9] of my earlier reasons. 10 The Commission claimed that: (a) two of the statements contained in the 27 September letter constituted representations of existing fact which were false; (b) three of the statements contained in the 27 September letter constituted a representation with respect to a future matter and that Mr Narain had no reasonable grounds for making the representations; (c) the letters did not disclose to the Stock Exchange, or to the public, a number of issues which were material to the matters disclosed in the letters and were also material to the prospects of commercial success for CIL, material to its business prospects, relevant to its share price and were matters that should have been disclosed in the letters in order to avoid the letters being misleading or deceptive or likely to mislead or deceive. 11 The first statement was that CIL: "… can now offer a global solution to reduce and eventually stop the spread of [human immunodeficiency virus ("HIV")] using Citrofresh." The Commission claimed that this statement constituted a representation of existing fact, namely that, CIL could, as at 27 September 2005, offer a global solution to reduce and eventually stop the spread of HIV. 12 The second statement was that: "Citrofresh provides a non‑hazardous, non‑toxic and effective solution that deal [sic] with emergency disease control and prevention for HIV, human influenza A virus, SARS virus and human rhinovirus". In his defence Mr Narain denied that the letter contained the first two statements but I have no doubt that these statements were made in the letter. 13 The third statement was that: "[CIL] will market a range of 'Barrier Protection' products to be used in the first instance for Men's Health (post intercourse spray or lotion)". 14 The fourth statement was that: "the use of Citrofresh as a postcoital application will act as an 'invisible condom' for the prevention of STD's including HIV". 15 The fifth statement was that: "the ability to use Citrofresh as a postcoital application will have a significant impact on reducing the transmission of HIV and STD's". 16 The basis for the Commission's claims are set out in pars [29], [31], [33], [35], [37] and [38] of my earlier reasons. 17 The evidence of Professor Steven Wesselingh who was called by the Commission is set out in pars [43]‑[55] of my earlier reasons. Professor Wesselingh's evidence may be summarised in the following terms: (a) there was no evidence provided that Citrofresh could act in any way other than as a disinfectant which cannot offer a global solution to reduce and eventually stop the spread of HIV; (b) the data presented indicated that Citrofresh could be a moderately effective disinfectant but this provides no novel, innovative solution or support for emergency disease control; (c) there was no scientific evidence presented, either in the Retroscreen Virology Ltd Report or in the second letter from Australian Rickettsial Reference Laboratory Foundation Ltd that indicated a basis for use of Citrofresh as a barrier protection product; (d) there was no evidence that post‑coital application of gels or other products with anti‑HIV activity either on the penis or vaginally would have any significant impact in reducing the transmission of HIV or other sexually transmitted diseases. 18 Mr Narain submitted that the representations in the letter of 27 September 2005 were not misleading or deceptive or likely to mislead or deceive. 19 The Commission led evidence from a number of share traders and investors in relation to their dealings in CIL shares on 27 September 2005 after the Stock Exchange released the letter of 27 September 2005 but their evidence was of limited value. The five statements should be read in the context of the letter in which they appeared. Notwithstanding the views of some of the investors, I am satisfied that the letter did not say words to the effect "we have a cure for AIDS". Nevertheless, the five statements made factual assertions and statements as to the future which, according to the evidence led by the Commission, could not be substantiated and in respect of which there was no reasonable grounds for making the statements. 20 The Commission relied principally upon the evidence of Professor Wesselingh. Mr Narain submitted that his evidence was of limited use. It was submitted that his expertise was principally with microbiosides developed for female use, that he only had a working knowledge of the United States Federal Drug Administration ("FDA") guidelines and no relevant experience with the Therapeutic Goods Administration ("TGA") requirements. I do not accept that Professor Wesselingh's evidence was of limited use. I am satisfied that he was eminently and suitably qualified to express an expert opinion on the issues raised by the five statements. His field of expertise was in relation to infectious diseases and the positions he held are set out in par [43] of my earlier reasons. 21 Mr Narain criticised the evidence of Professor Wesselingh and submitted that his evidence was confined to addressing whether the two reports provided evidence supporting the statements. It was submitted that this inquiry was not helpful as the reports were only one basis for the matters contained in the reports, another basis being the commercial activity of CIL, its standing and its prospects. I do not consider that this criticism of Professor Wesselingh's evidence is justified. Professor Wesselingh responded directly to the five statements and addressed directly whether in his opinion the statements were correct and justified and whether there were grounds supporting the statements. 22 The first statement relied on by the Commission was the statement that CIL: "… can now offer a global solution to reduce and eventually stop the spread of [human immunodeficiency virus ("HIV")] using Citrofresh." The context in which this statement appeared in the letter was text relating to the number of people infected with HIV and its growth. The letter then stated: "We believe that we can now offer a global solution to reduce and eventually stop the spread of this disease using Citrofresh". Professor Wesselingh's unchallenged evidence was that: "There is no evidence provided that Citrofresh could act in any way other than as a disinfectant. A disinfectant cannot offer a global solution to reduce and eventually stop the spread of HIV." 23 I have no hesitation in accepting Professor Wesselingh's evidence which demonstrates unequivocally that the first statement is misleading and deceptive. No evidence to the contrary was led by Mr Narain. 24 The second statement was that: "Citrofresh provides a non‑hazardous, non‑toxic and effective solution that [deals] with emergency disease control and prevention for HIV, human influenza A virus, SARS virus and human rhinovirus". The context in which that statement appeared in the letter was that CIL considered the results of the Retroscreen study to be a major milestone in CIL's strategy of further validating the efficacy of Citrofresh. The letter then stated: "Emergency disease control and prevention is a primary objective of government organizations world‑wide and Citrofresh providesa non‑hazardous, non‑toxic and effective solution that [deals] with these problems." 25 The clear meaning and interpretation of this sentence is that Citrofresh provides an effective solution that deals with "these" problems, namely HIV, Urbani SARS, human influenza A and human rhinovirus. Professor Wesselingh's unchallenged evidence was that the data presented in relation to Citrofresh provided no support for emergency disease control. That is to say, Citrofresh did not provide any effective solution that dealt with emergency disease control. 26 The third statement was that: "[CIL] will market a range of 'Barrier Protection' products to be used in the first instance for Men's Health (post intercourse spray or lotion)". The context in which that statement appeared was the observation that there was not a single drug that could treat all sexually transmitted diseases. The letter then stated: "The ability of Citrofresh to be both a broad spectrum biocide (including efficacy against HIV) and to meet the ideal 'criteria' as noted by the CDC provides Citrofresh with a unique market opportunity. CTF will market a range of 'Barrier Protection' products to be used in the first instance for Men's Health (post intercourse spray or lotion)and subject to the results of trials on efficacy; [sic] we will then introduce a vaginal biocide to the market." 27 Professor Wesselingh's evidence was that the term "Barrier Protection" was a term used: "to describe the use of a condom or other "barrier" to prevent direct contact occurring between the male genitals and/or ejaculate and the female genital mucosa". Professor Wesselingh then continued: "There is no scientific evidence presented, either in the Retroscreen Report or in the second Rickettsial Letter, that indicates a basis for use of Citrofresh as a barrier protection product. The statement suggests that in the first instance Citrofresh would be used as a post intercourse spray or lotion. This is not what would be considered by experts as barrier protection but would be considered post intercourse cleaning of the penis. There is no evidence that cleaning of the penis post intercourse reduces the spread of HIV from male to female or female to male." 28 This unchallenged evidence demonstrates that there were no reasonable grounds for making what was, in substance, a representation with respect to a future matter. 29 The whole context of the letter was the effectiveness of Citrofresh against a number of virus types including HIV. Professor Wesselingh's evidence was that there were no reasonable grounds for stating that CIL would be able to market a product with the ingredient Citrofresh which could be used as a barrier to prevent direct contact occurring between the male genitals and/or ejaculate and the female genital mucosa. 30 Mr Narain pointed to what he said was a qualification at the end of the third statement "subject to the results of trials on efficacy; we will then introduce a vaginal biocide to the market". However, that qualification does not qualify the statement that CIL would market a barrier protection product for use in men's health. Rather, it was a qualification on the use of the product as a vaginal biocide for women. This interpretation is supported and corroborated by the paragraph which appears on page 3 of the letter: "To secure a quick an [sic] effective path to market, Citrofresh is undertaking discussions with several market leaders for the distribution of the Men's Health product range. Collaboration is also being sought by CTF to undertake further trials for applications in the Women's Health market segment i.e. a vaginal biocide." As the Commission submitted, there is no suggestion in this statement that the "quick an [sic] effective path to market", for the men's health product depended on efficacy trials. The only reference to trials was with respect to the women's health product. 31 The fourth statement was that: "the use of Citrofresh as a postcoital application will act as an 'invisible condom' for the prevention of STD's including HIV". The context in which this statement was made related to the potential market application of Citrofresh which would "fit" four criteria, one of which was that: "In reality, the use of Citrofresh as a postcoital application will act as an "invisible condom" for the prevention of STD's including HIV. This is a significant development for the global health markets and for communities that through social custom, religious belief or sexual practice; do not use condoms for disease protection." 32 Professor Wesselingh's evidence to which I have referred earlier in par [27] above, makes it clear that there is no basis for saying that Citrofresh can be used as a "barrier" or as a "protection" for the prevention of sexually transmitted diseases including HIV. Professor Wesselingh's evidence makes it abundantly clear that there were no reasonable grounds for making this representation as to a future matter, namely that Citrofresh would act as an invisible condom for the prevention of HIV. 33 The fifth statement was that: "the ability to use Citrofresh as a postcoital application will have a significant impact on reducing the transmission of HIV and STD's". This statement appeared immediately after the four criteria to which I have referred in par [31] above. 34 Professor Wesselingh's unchallenged evidence was to the effect that there was no basis, let alone a reasonable basis, for making this statement which was with respect to a future matter, namely the impact which Citrofresh would have in the future on reducing the transmission of HIV and sexually transmitted diseases. Professor Wesselingh addressed this statement and responded to it by stating: "This again goes to the issue of postcoital application as opposed to applications of gels or microbicides that have anti‑HIV activity prior to sexual intercourse. There is no evidence that postcoital application of gels or other products with anti‑HIV activity either on the penis or vaginally will have any significant impact in reducing the transmission of HIV or other STDs." This evidence makes it clear that there was no reasonable basis for the making of the fifth statement. 35 It follows from this analysis of the five statements and Professor Wesselingh's evidence and my findings in relation to them that Mr Narain was a person who engaged in conduct in relation to a financial product that was misleading and deceptive and that he contravened, and caused CIL to contravene, s 1041H of the Act as the five statements were misleading and deceptive. 36 I am also satisfied that the letters were misleading and deceptive by virtue of the fact that there was non‑disclosure of the facts that: (a) Citrofresh was a disinfectant and not a vaccine; (b) the tests that had been carried out on Citrofresh by Retroscreen Virology Laboratory Ltd were in vitro and not in vivo; (c) further in vivo tests were necessary before Citrofresh could be marketed for use as a pre‑ or post‑ coital application designed to prevent sexually transmitted diseases; (d) further tests and trails would need to be conducted before Citrofresh could be marketed for use as a penile sanitizer pre or post intercourse. Although Mr Narain denied that those matters were material and that they should have been disclosed I do not accept that submission. Each one of those matters was integrally tied up with what was the misleading thrust of the statements to which I have referred, namely that Citrofresh was available to counter the spread of HIV and other sexually transmitted diseases. 37 In its originating process the Commission sought the following relief against Mr Narain: (a) a declaration that Mr Narain had contravened s 1041H(1) of the Act; (b) alternately, a declaration that Mr Narain was involved in the contravention of s 1041H(1) of the Act by CIL; (c) pursuant to s 1317E of the Act a declaration of a contravention by Mr Narain of s 180 of the Act and an order under s 1317G that he pay a pecuniary penalty in respect of that contravention; (d) an order under s 206C(1) that Mr Narain be disqualified from managing corporations for a period that the Court consider appropriate. 38 There appears to be a difference of opinion between the members of the Full Court as to how the case was put against Mr Narain at trial. Finkelstein J (par [22]) said: "The aspect that must go back to the judge in any case is whether, by authorising the publication of the release, Mr Narain breached his duties as a director and thereby contravened s 180. The judge approached the matter on the basis that for there to be a breach of s 180 it was necessary to find that Mr Narain had breached s 1041H. That is not how the case was put at trial. The ASIC contended that Mr Narain had breached s 180 for having caused CTF to contravene s 1041H, whether or not he had also contravened s 1041H. Such a finding is clearly open, but it is a matter that requires full examination." Jacobson and Gordon JJ concluded (par [100]) that Mr Narain was personally liable for any contravention of s 1041H. Their Honours noted at par [98] that Mr Narain was personally liable for the contravention by having authorised the company secretary to send the announcement to the Stock Exchange. 39 In any event, having regard to the findings I have made and the conclusions I have reached as to the misleading and deceptive nature of the statements, the Commission is entitled to a declaration that Mr Narain contravened s 1041H(1) and also a declaration that he caused CIL to contravene that section. 40 The next issue to address is whether Mr Narain's conduct contravened s 180 of the Act. Section 180(1) of the Act provides that: "A director or other officer of a corporation must exercise their powers and discharge their duties with the degree of care and diligence that a reasonable person would exercise if they: (a) were a director or officer of a corporation in the corporation's circumstances; and (b) occupied the office held by, and had the same responsibilities within the corporation as, the director or officer." 41 Section 1317E(1) of the Act provides that if a Court is satisfied that a person has contravened, inter alia, s 180(1) of the Act, the Court must make a declaration of such contravention. Section 1317G(1) provides that a Court may order a person to pay to the Commonwealth a pecuniary penalty of up to $200,000 if a declaration of contravention by a person has been made under s 1317E and the contravention is of, inter alia, a civil penalty provision (such as s 1317E) and the contravention either: (a) materially prejudices the interests of the corporation; or (b) materially prejudices the corporation's ability to pay its creditors; or (c) is serious. 42 Section 206C(1) of the Act provides that on an application by the Commission the Court may disqualify a person from managing a corporation for a period that the Court considers appropriate if a declaration is made under, inter alia, s 1317E that the person has contravened a civil penalty provision. The Court also has to be satisfied that the disqualification is justified. 43 As the Commission submitted, not every misleading statement made by a director on behalf of a company results in a contravention of s 180(1). Much depends upon the degree and extent of the misleading nature of the statement and its falsity. 44 The Commission submitted that no reasonable managing director and chief executive officer of a publicly listed company would have authorised the release of these statements to the Stock Exchange and the public. It was submitted that Mr Narain's conduct in partly authoring, expressly approving and directly authorising the sending of the letter of 27 September 2005 to the Stock Exchange was conduct which placed CIL in jeopardy. That submission is correct as Mr Narain's conduct resulted in a contravention of the Corporations Act by CIL and exposed it to a legal proceeding in which it consented to judgment against it. This obviously had an effect on CIL's financial interests and its reputation. It put CIL into a materially adverse position. 45 The Commission submitted that by exposing CIL to these circumstances, Mr Narain failed to exercise a degree of care and diligence that a reasonable person acting as a managing director and chief executive officer of CIL would exercise and that he thereby contravened s 180(1) of the Act. The Commission relied in particular in support of this submission on Australian Securities and Investments Commission v Maxwell (2006) 59 ACSR 373 at [104], [105], [110] and [144] and Australian Securities and Investment Commission v Warrenmang Limited [2007] FCA 973 at pars [23] and [24]. 46 Mr Narain submitted that the Commission's reliance upon s 180 was a device to introduce the pecuniary penalty and disqualification provisions into the case which were not otherwise available against Mr Narain. He submitted that this was not permissible and relied upon the following observation of Brereton J in Australian Securities and Investments Commission v Maxwell (supra) at 402, par [110]: "Generally speaking, therefore, ss 180, 181 and 182 do not provide a backdoor method for visiting, on company directors, accessorial civil liability for contraventions of the Corporations Act in respect of which provision is not otherwise made. This is all the moreso since the Corporations Act makes provision for the circumstances in which there is to be accessorial civil liability. Whether there were in this case breaches of the directors' duties - and, in particular, of their duty of care and diligence - depends upon an analysis of whether and to what extent the corporation's interests were jeopardised, and if they were, whether the risks obviously outweighed any potential countervailing benefits, and whether there were reasonable steps which could have been taken to avoid them." 47 I do not accept this submission. Although s 1317E does not include a contravention of s 1041H as a "civil penalty provision", it does specifically include s 180(1). That subsection is expressed in very general terms and clearly covers a multitude of fact situations. There is no reason why a finding that a company director has contravened s 1041H of the Act should not result, in appropriate circumstances, in a contravention of s 180(1). Mr Narain's reliance on the observation of Brereton J in the previous paragraph is misplaced. In this proceeding, the Commission sought a declaration that Mr Narain had contravened s 1041H(1) directly in the sense that he was personally liable (that is to say not as an accessory) for a contravention of s 1041H. It also sought, in the alternative, a declaration that he was involved in a contravention of s 1041H(1) by CIL. I have found, consistently with the reasoning of the Full Court, that Mr Narain contravened s 1041H(1) personally. As I conclude later in these reasons, Mr Narain acted in breach of his duties as a director of CIL and thereby contravened s 180(1). This conclusion does not result in the use of s 180(1) as a backdoor method for visiting on Mr Narain accessorial civil liability for a contravention of the Corporations Act in respect of which provision is not otherwise made. As Brereton J points out in the passage relied upon by Mr Narain, whether Mr Narain has breached his duties as a director of CIL depends upon an analysis of the extent to which CIL's interests were jeopardised and, if they were, whether the risks resulting from his conduct outweighed any potential countervailing benefit to CIL. 48 Mr Narain submitted that it could not be said that a breach of the Corporations Act by a company would necessarily lead a Court to find that a director, in allowing that breach to occur on his watch, acted in breach of his duty even where the contravention might result in exposure of the company to civil penalties or other liability. He submitted further, whether there had been a breach of duty depended upon an analysis of whether, and to what extent, the corporation's interests were jeopardised and whether the risks obviously outweighed any benefits and whether reasonable steps could have been taken to avoid them. 49 Brereton J in Maxwell (supra) explained the scope of s 180(1) of the Act in par [100] in the following terms: "In determining whether a director has exercised reasonable care and diligence, as s 180(1) expressly contemplates, the circumstances of the particular corporation concerned are relevant to the content of the duty. These circumstances include the type of company, the provisions of its constitution, the size and nature of the company's business, the composition of the board, the director's position and responsibilities within the company, the particular function the director is performing, the experience or skills of the particular director, the terms on which he or she has undertaken to act as a director, the manner in which responsibility for the business of the company is distributed between its directors and its employees, and the circumstances of the specific case: …" (citations omitted) This paragraph was adopted and followed by Gordon J in Warrenmang (supra), Hamilton J in Australian Securities and Investments Commission v Sydney Investment House Equities Pty Ltd (2008) 69 ACSR 1 at 10 par [27] and Gzell J in Australian Securities and Investments Commission v Macdonald (No 11) (2009) 256 ALR 199 par [236]. 50 The consequence of Mr Narain's conduct and his involvement in the preparation and publication to the Stock Exchange and thereby the investment community was that he caused it to contravene s 1041H(1) of the Act and exposed it to legal proceedings. There was no countervailing potential benefit of any significance to the Company in him so doing. This was one of the cases identified by Brereton J in Maxwell (supra) where he said at par [104]: "There are cases in which it will be a contravention of their duties, owed to the company, for directors to authorise or permit the company to commit contraventions of provisions of the Corporations Act. Relevant jeopardy to the interests of the company may be found in the actual or potential exposure of the company to civil penalties or other liability under the Act, and it may no doubt be a breach of a relevant duty for a director to embark on or authorise a course which attracts the risk of that exposure, at least if the risk is clear and the countervailing potential benefits insignificant. …" 51 Brereton J in Maxwell (supra) also pointed out at par [105]: "… if a contravention of s 180(1) is to be established, it must be founded on jeopardy to the interests of the corporation, and not to protection of the interests of potential investors (though the interests of investors may be relevant to the interests of the corporation, as potential creditors)." 52 The Commission submitted that no reasonable managing director or chief executive officer of a publicly listed company would have authorised the release of such grossly misleading statements to the Stock Exchange and the public. Although other persons were involved in the preparation and drafting of the letter that went to the Stock Exchange on 27 September 2005, Mr Narain was directly and intimately involved in its preparation and drafting. From early on Monday morning, 26 September 2005, Mr Narain, Mr Sam Taylor and Mr Haydn Wright were involved in the drafting of the announcement to the Stock Exchange. Notwithstanding the two reports which he had received there was no justification for the five statements which were made. This was not a case where Mr Narain could say he was entitled to rely on what he was being told as justification for the misleading and deceptive statements which were made. 53 Mr Narain submitted that: (a) there was no evidence to suggest that he was motivated by personal gain; (b) there was no evidence that he failed to seek the assistance of external advisers with appropriate expertise; (c) the evidence suggested that he did seek such assistance; (d) as soon as it was observed that the market was reacting as it did, he and Mr Hanlon requested a trading halt. 54 In the course of final submissions Senior Counsel for Mr Narain submitted that in determining whether Mr Narain's duties to CIL had been breached, the Court should take into account the following matters: (a) Mr Narain, the inventor of Citrofresh, had a background in abalone processing. He was not a professional director or an experienced director with public company experience. (b) It was entirely reasonable for Mr Narain to rely upon CIL's consultants and experts who were appropriate to draft the announcements. (c) There should be allowance for business judgment and entrepreneurial goals. (d) There was no suggestion of dishonesty by Mr Narain. 55 There are a number of responses to these submissions. It is true that there was no evidence to suggest that Mr Narain was motivated by personal gain but that was only one factor amongst many to be taken into account. Although he sought the advice of external advisers, namely Mr Wright and Mr Taylor, Mr Narain was not entitled to rely on such expertise as they had, which was not in the area of science or in relation to infectious diseases and their treatment, in drafting or participating in the drafting of the statement in the manner he did. Mr Narain may have requested a trading halt after he observed the market reaction to the statement which had been released by the Stock Exchange but by that time the damage was done and the jeopardy to CIL was in place. 56 Mr Narain may have had a background in abalone processing and may not have been a professional director with public company experience, but that does not excuse him from exercising the appropriate degree of skill and care required of a company director especially one who was a managing director and chief executive officer. Further, he was not entitled to rely on the drafting undertaken by the "experts" who were retained by CIL. The circumstances required him to have an active participation in the drafting and to exercise, a considerable amount of skill and care as the responsible Managing Director and Chief Executive Officer of CIL. 57 I am satisfied that in all the circumstances Mr Narain contravened s 180(1) of the Corporations Act. I do not consider that Mr Narain is entitled to rely upon the drafting and advice in relation to the statement he received from Mr Wright and Mr Taylor on the basis that they were "experts" in relation to the subject‑matter of the statement. They were not. They had no technical or scientific qualifications or experience which warranted or justified Mr Narain relying upon them for the validity or accuracy of the statement generally and, in particular, the five statements relied upon by the Commission. This was well known to Mr Narain. His evidence was that he had no experience in governance of public companies. He said that CIL retained consultants to assist with corporate governance matters and the development of international markets. According to Mr Narain, Mr Sam Taylor worked for CIL on an adhoc basis for six months and in June 2005, an agreement was reached between CIL and Axis Financial Group Australia Limited ("Axis") whereby Axis was retained to assist with company announcements for CIL. Mr Taylor was associated with Axis. Axis was retained to provide corporate governance advice and assistance on corporate structure, capital raisings and business strategy, to prepare company announcements and conduct research into possible application of Citrofresh products, registration requirements and comparative studies. Mr Narain also retained Mr Taylor to undertake research of markets, regulation and microbiology. 58 Mr Wright was associated with Teraform Advisory Pty Ltd. Mr Wright had economics, taxation and accounting qualifications and had substantial experience in the finance and corporate advisory sectors. Mr Haydn Wright's role generally was to raise the profile of CIL through public relations and marketing and the development of what Mr Wright called "path to market" for health care and personal care products. Mr Wright also helped with the writing of announcements. 59 It can therefore be seen that Mr Narain was not reasonably entitled to rely on either Mr Taylor or Mr Wright for drafting statements in relation to technical, scientific or microbiological matters relating to the characteristics or effect of Citrofresh or infectious diseases, in particular, HIV. 60 It follows from these reasons that I am satisfied that Mr Narain has contravened s 1041H(1) and s 180(1) of the Act and that the Commission is entitled to declarations accordingly. There remains for further consideration the Commission's application for orders that pursuant to s 1317G of the Act, Mr Narain pay a pecuniary penalty in respect of the contravention of s 1041H(1) and that pursuant to s 206C(1) of the Act Mr Narain be disqualified from managing corporations for a period that the Court considers appropriate. 61 It was agreed at the commencement of the initial trial of this proceeding that the determination of that relief, if it became relevant, be put over until the Court had determined whether findings should be made in relation to contraventions of s 1041H(1) and s 180(1) of the Act by Mr Narain.

Australian Securities and Investments Commission v Citrofresh International Ltd

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Judgment (6 paragraphs)

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