This case, Australian Securities and Investments Commission v Citrofresh International Limited and Narain [2007] FCA 1873, provides a timely reminder for Australian Stock Exchange (ASX) listed companies and their officers to be vigilant in ensuring that announcements made to the market are accurate, based on reasonable grounds and not misleading.
Companies listed on the ASX often grapple with whether an "event" needs to be disclosed under the continuous disclosure regime mandated by Listing Rule 3.1 and the Corporations Act 2001 (Act). Yet, at other times, companies are keen to make announcements to deliver a good news story to the market.
However, once the decision to disclose is made, the disclosure must withstand scrutiny against several other benchmarks set by the Act: it must not amount to conduct that is in effect market manipulation, false trading and market rigging, inducing persons to deal in financial products or be misleading or deceptive or likely to mislead or deceive.
Justice Goldberg of the Federal Court, in Australian Securities and Investments Commission v Citrofresh International Limited and Narain, [2007] FCA 1873, was asked to examine whether certain announcements made by the company met the necessary benchmarks and whether Mr Narain, the company’s then Managing Director and Chief Executive Officer
(CEO), was personally liable for any breaches found by the Court.
Citrofresh International Limited (CIL) supplied disinfectant products containing a substance known as “Citrofresh”. Citrofresh, an organic biocide, is the active ingredient in several disinfectants, sanitising and cleaning products.
CIL, through Mr Narain, received two expert reports on the medicinal qualities of Citrofresh that were very positive.
On 27 September 2005, CIL sent an "ASX Release" to the ASX in which it made a number of statements including: "Test Results Confirm Citrofresh is Effective Against Four Major Virus Types including HIV & Avain" and "We believe we can now offer a global solution to reduce and eventually stop the spread of this disease using Citrofresh" and "the use of Citrofresh as a postcoital application will act as an "invisible condom” for the protection of STDs including HIV".
On 28 September 2005, CIL sent another "ASX Release" to the ASX in which it sought to clarify and add to the previous day’s announcement. In this announcement, CIL stated " …Citrofresh has not been developed as a vaccine and is not claiming to be a cure for any of the viruses noted in the …report."
The 27 September ASX Release led to a sharp jump in CIL’s share price. CIL requested a trading halt, which came into effect towards the end of that day.
CIL subsequently received a query from the ASX and responded by letter dated 29 September 2005 in which it stated that "Citrofresh is not… a vaccine nor cure for Human Immunodeficiency Virus (HIV1)" and made other claims for the product.
The evidence showed that Mr Narain was principally responsible for the preparation and content of the ASX Releases although he was assisted by external consultants retained by CIL. The 27 September ASX Release was sent to the ASX by the Company Secretary on instructions from Mr Narain. The 27 September ASX Release and the 29 September letter to the ASX nominated Mr Narain as one of two people to contact for further enquiries.
ASIC alleged that by sending the 27 September ASX Release and 29 September letter to the ASX, CIL and Mr Narain engaged in misleading and deceptive conduct in relation to a financial product or a financial service in breach of section 1041H of the Act. CIL consented to orders giving effect to these allegations but Mr Narain did not.
Section 1041H (1) of the Act provides:
"A person must not …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".
Engaging in conduct in relation to a financial product includes "publishing a notice in relation to a financial product".
ASIC’s case against Mr Narain was that the 27 September ASX Release contained representations of fact that were false, representations on a future matter for which there were no reasonable grounds for making the representations and failed to disclose material matters. In essence, the ASIC focussed on the claims made for Citrofresh as a solution to HIV and other infectious diseases and as a barrier protection for use for men as a post intercourse spray or lotion.
ASIC contended Mr Narain by his conduct had contravened section 1041H of the Act, as a principal and not an accessory and also contended he had breached his duties as a director to act with due care and diligence contrary to section 180 (1) of the Act by placing CIL in jeopardy because of the publication of the 27 September ASX Release and 29 September letter.
Mr Narain submitted that the 27 September ASX Release was not a notice or conduct "in relation to" a financial product or financial service. He denied that he acted in any other capacity than as a director of CIL and was not the principal human agent through which CIL acted. He denied the 27 September ASX Release was misleading or deceptive or likely to mislead or deceive.
The critical question the court had to answer was whether Mr Narain engaged in conduct "in relation to" a financial product, namely CIL's listed shares.
ASIC argued Mr Narain’s conduct was in relation to a financial product because it was likely to, and did have, an impact on trading in CIL's shares. The court however found the 27 September ASX Release and 29 September letter were "in relation to" CIL itself or to a product manufactured, distributed and sold by CIL but not to CIL shares or securities. The court was therefore not satisfied there had been a breach of section 1041H of the Act.
The court followed a long line of authority (most recently touched on by the High Court in Houghton v Arms [2006] 225 CLR 553) in rejecting Mr Narain’s argument that if a company’s officers or employees engage in conduct in furtherance of a company’s activities then it is only the company that engages in the relevant conduct. It was possible for the court to find he acted personally even if he did so while trying to further the company's objectives and in his capacity as an officer.
However, the evidence showed that Mr Narain did not send the 27 September ASX Release and 29 September letter to the ASX and did not participate in the drafting of the 29 September letter. He was not the creator or author of the offending statements in the 27 September ASX Release although he did adopt them and directed it be sent to the ASX. It was not enough that he was named as a person to contact for further information.
In the circumstances, the Court held that he did not personally make the offending misrepresentations in the relevant sense and had not breached section 1041H of the Act. This finding made it unnecessary for the court to make any findings under section 180 of the Act.
ASIC took a calculated risk in proceeding against Mr Narain as a principal and not an accessory and only under section 1041H of the Act. By the same token, the Court appears to have taken a very narrow and literal interpretation of how the law should apply to these facts, notwithstanding the authorities relied upon.
The message for directors and company secretaries is clear: before any disclosure is made to the ASX, it must be accurate, complete, justifiable and able to withstand scrutiny by the regulator.
For further information, please contact Stephen Newman on (03) 9608 2219 or s.newman@cornwalls.com.au
