Directors' Personal Liability For Misleading And Deceptive Conduct In Relation To Shares

Key Point

Section 1041H can be employed against not only a

corporation but also its directors and officers in their personal

capacity.

A core prohibition in the Corporations Act 2001 (Cth) is section

1041H which provides "A person must not, in this jurisdiction,

engage in conduct, in relation to a financial product or a

financial service, that is misleading or deceptive or is likely to

mislead or deceive". The provision has historically had a wide

application and been relied upon by a variety of plaintiffs

including the Australian Securities and Investments Commission

(ASIC) and shareholders.

The utility of section 1041H was seriously diminished by the

decision in ASIC v Citrofresh International Ltd (2007) 164 FCR 333.

The decision was appealed to the Full Federal Court in ASIC v

Narain (2008) 66 ACSR 688 which had to consider two important

questions:

is the conduct of publishing a written statement made "in

relation to" a financial product (shares) only if the

statement refers to those shares?; and

is an officer of a company personally liable for a

contravention of section 1041H if that officer prepares the

relevant statement that he fully intends to be published, but does

not publish himself, instead instructing the company secretary to

do so?

The Full Federal Court answered "no" to the first

question, the words "in relation to" have a wide meaning

so that an indirect or less than substantial connection is

sufficient, and "yes" to the second question, an officer

can be personally liable in the above circumstances.

The Full Federal Court's decision reinstated the broad

application of section 1041H and confirmed that the provision can

be employed against not only a corporation but also its directors

and officers in their personal capacity.

The Citrofresh decision

On 27 September 2005, Citrofresh International Ltd sent an

announcement to the ASX stating that in a "landmark" test

result, Citrofresh demonstrated significant virucidal activity

against four major viruses including HIV/AIDS. Shortly after the

release of the announcement to the market, the price of the

company's shares increased from 22.5¢ to a high of

70¢ before trading was halted. In response to an ASX query,

the company made a further announcement on 29 September 2005. This

announcement stated that Citrofresh is not a vaccine and is not a

cure for HIV. The shares fell to $0.295.

The text of the announcement was approved by Mr Ravi Narain, who

was chief executive officer of the...