The Full Court of the Federal Court of Australia has again reminded directors and officers that their actions can give rise to direct liability and not merely accessorial liability.
In ASIC v Narain1 (Narain) the Full Court was asked to consider whether ‘a person can engage in conduct if he procures that conduct to be done, or to be partly done, by a third party who may be innocent of any wrongdoing.’2 In short, their Honours answered in the affirmative.
The Citrofresh decision
The facts in the Narain case can be stated succinctly: Mr Narain, Managing Director of Citrofresh International Ltd (Citrofresh)—a public company listed on the ASX, drafted and approved the content of an announcement he directed be sent to the ASX by Citrofresh’s Company Secretary. The announcement was duly uploaded to the ASX platform and had an immediate impact on Citrofresh’s share price.
In its pleading, the Australian Securities and Investments Commission (ASIC) alleged against both Citrofresh and Mr Narain that the announcement contained misleading representations relating to Citrofresh’s securities, and that each of Citrofresh and Mr Narain had contravened section 1041H of the Corporations Act 2001 (Cth). In addition, ASIC alleged breach of one of Mr Narain’s duties as director of Citrofresh.
Citrofresh consented to the orders sought against it. Mr Narain did not.
At trial, his Honour found it unnecessary to finally determine the allegations concerning the substance of the announcement. Instead his Honour ruled as a preliminary matter that the announcement was not in relation to a financial product (a precondition to liability under section 1041H), nor did Mr Narain’s actions properly amount to conduct giving rise to liability as a principal under section 1041H.3
The trial judge reasoned that Mr Narain was not the author of the allegedly misleading statements, but that he adopted them and approved of the sending of the announcement to the ASX.4 His Honour relevantly held that Mr Narain was not involved in the personal distribution of the announcement to the ASX—such distribution being carried out by Citrofresh’s Company Secretary—albeit at Mr Narain’s direction.5
On appeal, the Full Court reversed his Honour’s decision and found that:
- the announcement concerning Citrofresh’s recent test results had sufficient nexus to Citrofresh’s securities to fall within the purview of section 1041H, and
- Mr Narain’s actions in authorising the distribution of the announcement to the ASX (with the natural consequence of publication to shareholders) was sufficient to constitute conduct as a principal, not merely as an agent or ‘organ’ of Citrofresh.
Their Honours remitted the proceeding to the trial judge for further determination in relation to the proper characterisation of the representations contained in the announcement, and the question of potential breach by Mr Narain of his director’s duties.
Key message for directors and officers
This decision is in keeping with an ever-increasing line of authority concerning the direct liability of directors, officers and employees. Relevantly for directors and officers, it is important to remember that whenever one engages in an act which is more than merely ministerial, potential liability as a principal may follow. That is, it may not be necessary to prove the additional elements required for accessorial liability.
A question of fact in each case, this issue is particularly pertinent for directors and officers who authorise the release of statements to the ASX. The Citrofresh decision provides a timely reminder that such persons need not always be aware that the statements are misleading or likely to deceive to be liable for harm which results. Rather, directors and officers who prepare and then cause such statements to be published may be directly liable merely by reason of their involvement in such preparation and publication.
From a practical perspective, prior to dispatch to the ASX, directors and officers ought to satisfy themselves that any statement they release or authorise for release is capable of verification and is not misleading or deceptive or likely to mislead or deceive. Failure to do so could prove costly for both the director or officer and his or her corporation.
Endnotes
1. [2008] FCAFC 120
2. [2008] FCAFC 120 at [16]
3. See ASIC v Narain [2008] FCAFC 120 at [31] and [32]
4. ASIC v Citrofresh International Ltd [2007] FCA 1873 at [78]
5. ASIC v Citrofresh International Ltd [2007] FCA 1873 at [88]
This article was written by Ruth Overington, Senior Associate, Melbourne.
More information
For information regarding possible implications for your business, contact