Australian Securities and Investments Commission v Narain

• Jurisdiction: Australia Federal only
• Court: Federal Court
• Judgment Date: 03 July 2008
• Neutral Citation: [2008] FCAFC 120

FEDERAL COURT OF AUSTRALIA

Australian Securities and Investments Commission v Narain [2008] FCAFC 120

CORPORATIONS – misleading conduct – publication of statement to ASX – director instructed statement to be sent to ASX – publication act of director – statement about the business of the company – statement “relates to” shares in the company

Corporations Act 2001 (Cth) ss 761A, 763A, 764A, 1041H

Corporations Law s 995

ASX Listing Rules

Australian Competition and Consumer Commission v Maritime Union of Australia (2001) 114 FCR 472 cited

Butcher v Lachlan Elder Realty Pty Ltd (2004) 218 CLR 592 referred to

Cleary v Australian Co-Operative Foods Ltd (Nos 2 & 3) (1999) 32 ACSR 701 referred to

Genocanna Nominees Pty Ltd v Thirsty Point Pty Ltd [2006] FCA 1268cited

Hamilton v Whitehead (1988) 166 CLR 121 referred to

Houghton v Arms (2006) 225 CLR 553 applied

Ingot Capital Investments Pty Ltd v Macquarie Equity Capital Markets Ltd (No 6) (2007) 63 ACSR 1cited

Joye v Beach Petroleum NL (1996) 67 FCR 275 referred to

Pico Holdings Inc v Voss [2004] VSC 263 cited

Project Blue Sky Inc v Australian Broadcasting Authority (1998) 194 CLR 355 cited

R v Butcher (1858) Bell 6 [169 ER 1145] applied

R v Michael (1840) 9 Car & P 356 [173 ER 867] applied

Standard Chartered Bank v Pakistan National Shipping Corp (No 2) [2003] 1 AC 959 applied

Tooheys Limited v Commissioner of Stamp Duties (NSW) (1961) 105 CLR 602 distinguished

ASX Discussion Paper, “The Role of the Australian Stock Exchange and Its Listing Rules” (October 1990)

AUSTRALIAN SECURITIES AND INVESTMENTS COMMISSION v RAVI AMRIT NARAIN

VID 1173 of 2007

Finkelstein, JACOBSON AND GORDON JJ

3 JULY 2008

MELBOURNE

IN THE FEDERAL COURT OF AUSTRALIA
VICTORIA DISTRICT REGISTRY	VID 1173 of 2007

ON APPEAL FROM A SINGLE JUDGE OF THE FEDERAL COURT OF AUSTRALIA

BETWEEN:	AUSTRALIAN SECURITIES AND INVESTMENTS COMMISSION Appellant
AND:	RAVI AMRIT NARAIN Respondent

JUDGES:	Finkelstein, JACOBSON AND GORDON JJ
DATE OF ORDER:	3 JULY 2008
WHERE MADE:	MELBOURNE

THE COURT ORDERS THAT:

1. The appeal be allowed.

2. The orders made by the primary judge be set aside.

3. The proceedings be remitted to the primary judge for rehearing.

4. The respondent pay the appellant’s costs of the appeal.

Note: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.

IN THE FEDERAL COURT OF AUSTRALIA
VICTORIA DISTRICT REGISTRY	VID 1173 of 2007

ON APPEAL FROM A SINGLE JUDGE OF THE FEDERAL COURT OF AUSTRALIA

BETWEEN:	AUSTRALIAN SECURITIES AND INVESTMENTS COMMISSION Appellant
AND:	RAVI AMRIT NARAIN Respondent

JUDGE:	FINKELSTEIN J
DATE:	3 JULY 2008
PLACE:	MELBOURNE

REASONS FOR JUDGMENT

FINKELSTEIN J:

1 The provisions dealing with market misconduct – market manipulation, false trading and market rigging, dissemination of information about illegal trading, false and misleading statements, fraudulent inducement to deal and insider trading – are to be found in Part 7.10 of the Corporations Act 2001 (Cth). One provision, s 1041H(1), provides that “a person must not … engage in conduct, in relation to a financial product … that is misleading or deceptive or is likely to mislead or deceive.” (By a complex series of interlocking sections “financial product” is defined to include “a share”.) There are two questions in this appeal that depend on the proper construction of s 1041H. The first is whether conduct that is constituted by publishing a written statement will only be “in relation to” a financial product (shares) if the statement refers to those shares. The second question is whether s 1041H is infringed if an officer of a company prepares a misleading statement that he intends to be published but does not publish himself, instead instructing the company secretary to do so.

2 Citrofresh International Ltd (CTF) is a public company whose shares are quoted on the Australian Securities Exchange (ASX). Its business includes the supply of disinfectant products that contain a biocide called “Citrofresh”. The respondent, Mr Narain, was the managing director of CTF. On 25 August 2005 CTF received a report of tests that had been conducted by Retroscreen Virology Laboratory to determine the efficacy of Citrofresh in reducing the presence of various bacteria and viruses. The report claimed that “Citrofresh exhibits significant virucidal activity against all four viruses [which the laboratory had] tested.” The viruses were Human Immunodeficiency Virus (HIV), Human Influenza A-Type virus (Influenza), Urbani SARS virus (SARS) and Human Rhinovirus (the cause of common colds).

3 Mr Narain, with the assistance of others, prepared an “ASX Release” by which CTF would announce the results of the tests through the ASX. The Release contained the following statements: “[CTF] can now offer a global solution to reduce and eventually stop the spread of [HIV] using Citrofresh”; “Citrofresh provides a non-hazardous, non-toxic and effective solution that deal[s] with … emergency disease control and prevention [of the four viruses]”; “[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)”; “[T]he use of Citrofresh as a postcoital application will act as an ‘invisible condom’ for the prevention of STD[s] including HIV”; “The ability to use Citrofresh as a postcoital application will have a significant impact on reducing the transmission of HIV and STD[s]”.

4 At about 11.29 am on 27 September 2005 Mr Narain instructed the company secretary, Mr Hanlon, to send the Release to the Company Announcements Office of the ASX. Within a few minutes it was received by the ASX. It was released to the market shortly thereafter. The publication had an immediate effect on the price of CTF shares. Just prior to publication the shares were trading at $0.225. Following the announcement the price surged to $0.70. Later in the day CTF requested a trading halt. In response to an ASX query, CTF made a further announcement on 29 September 2005. This announcement stated that Citrofresh is not a vaccine and is not a cure for HIV. Within a day the shares fell to $0.295.

5 In this action it was alleged that the Release contained misleading representations (as to present facts, future matters and implicitly by non-disclosure) relating to CTF shares. In broad outline the complaint was that Citrofresh: (1) was a disinfectant and not a cure or vaccine; (2) would not stop the spread of HIV; and (3) would have only a minimal impact in controlling or preventing HIV, Influenza, SARS and the common cold. Presumably the statements related to CTF’s shares because they concerned CTF’s business prospects and would have an impact on its share price. Finally it was alleged that by virtue of his role in preparing the Release and directing that it be sent to the ASX, Mr Narain contravened both s 1041H and s 180 (the directors’ duties section).

6 The trial judge did not make any finding about the accuracy of the statements in the Release. There was no need to do so because he was satisfied that the case against Mr Narain was not made out on two threshold points. First of all he found that the Release did not contain representations “in relation to” CTF shares. His reasoning was as follows. The cases that considered the expression “in relation to” show that its meaning is to be gathered from the context in which it is used. The expression has a wide meaning, but it does not necessarily extend to any relationship between two subject matters however tenuous. Sometimes the relationship must be direct and substantial and, in other circumstances, an indirect or less than substantial connection will suffice. In the context of s 1041H the judge said that the relationship must appear “on the face of the conduct”, that is, the conduct (in this case the statements) must “deal with shares”. The judge held that the statements in the release were made “‘in relation to’ [CTF] itself or to a product manufactured, distributed and sold by [CTF]”, but were not statements made in relation to the company’s shares.

7 Secondly, the judge found that Mr Narain had not engaged in any conduct that could result in a contravention of s 1041H. He said: “The fact that [Mr Narain] has participated in the preparation and drafting of the [Release], approved of its contents and authorised and directed its transmission to the Stock Exchange” was not enough to bring him within the operation of the section. The judge went on to say: “Mr Narain may have been engaged personally in the conduct of the preparation and drafting of the [Release] but he was not personally engaged in sending it to the Stock Exchange. That conduct was engaged in by [CTF] and the person who transmitted [the Release] to the Stock Exchange. That was not Mr Narain.”

8 I regret to say that I think the judge has fallen into error both as to the construction of s 1041H and as regards the section’s application to the facts as found.

9 As regards the first issue in the appeal (whether the representations were “in relation to” CTF shares), it is of course true, as the judge said, that the words “in relation to” require a relationship or connection between two subject matters. In the context of Part 7.10 generally, and s 1041H in particular, the expression ought to receive broad construction. One important object of the Part is to ensure that participants in the market for financial products and financial services act with integrity and honesty and that consumers are adequately protected. To further this object I do not think...