FEDERAL COURT OF AUSTRALIA
Australian Securities and Investments Commission v Citrofresh International Ltd (No 3) [2010] FCA 292
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Citation: |
Australian Securities and Investments Commission v Citrofresh International Ltd (No 3) [2010] FCA 292 |
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Parties: |
AUSTRALIAN SECURITIES AND INVESTMENTS COMMISSION v CITROFRESH INTERNATIONAL LTD (ACN 064 551 426) and RAVI AMRIT NARAIN |
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File number: |
VID 950 of 2006 |
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Judge: |
GOLDBERG J |
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Date of judgment: |
29 March 2010 |
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Catchwords: |
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Legislation: |
Corporations Act 2001 (Cth): ss 180(1), 206B(3), 206C(1), 1041H(1), 1317E(1), 1317G Corporations Law: s 600 |
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Cases cited: |
Rich v Australian Securities and Investments Commission (2004) 220 CLR 129, followed Australian Securities and Investments Commission v MacDonald (No 12) (2009) 259 ALR 116, considered Re HIH Insurance Limited (in prov liq) and HIH Casualty and General Insurance Ltd (in prov liq); Australian Securities and Investments Commission v Adler (2002) 42 ACSR 80, applied Australian Securities and Investments Commission v Vines (2006) 58 ACSR 298, followed ASC v Donovan (1998) 28 ACSR 583, followed Australian Securities and Investments Commission v Beekink (2007) 238 ALR 595, followed Australian Securities and Investments Commission v MacDonald (No 11) (2009) 256 ALR 199, cited R v Harper; R v DeHaan [1968] 2 QB 108, followed R v Gray [1977] VR 225, followed Cameron v The Queen (2002) 209 CLR 339, followed Siganto v The Queen (1998) 194 CLR 656, followed |
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Date of hearing: |
15 March 2010 |
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Place: |
Melbourne |
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Division: |
GENERAL DIVISION |
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Category: |
Catchwords |
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Number of paragraphs: |
63 |
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Counsel for the Plaintiff: |
M R Pearce S.C. and J P Moore |
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Solicitor for the Plaintiff: |
Australian Securities and Investments Commission |
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Counsel for the Second Defendant: |
E Boros |
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Solicitor for the Second Defendant: |
Russell Kennedy |
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IN THE FEDERAL COURT OF AUSTRALIA |
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VICTORIA DISTRICT REGISTRY |
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VID 950 of 2006 |
IN THE MATTER OF CITROFRESH INTERNATIONAL LTD (ACN 064 551 426)
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BETWEEN: |
AUSTRALIAN SECURITIES AND INVESTMENTS COMMISSION Plaintiff
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AND: |
CITROFRESH INTERNATIONAL LTD (ACN 064 551 426) First Defendant
RAVI AMRIT NARAIN Second Defendant
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JUDGE: |
GOLDBERG J |
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DATE OF ORDER: |
29 MARCH 2010 |
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WHERE MADE: |
MELBOURNE |
THE COURT ORDERS THAT:
1. Ravi Amrit Narain, (“the second defendant”) is disqualified from managing corporations for a period of seven years commencing from the date of this order.
2. The second defendant pay the Commonwealth of Australia a pecuniary penalty of $20,000.
3. The second defendant pay the plaintiff’s costs of and incidental to this proceeding, including any reserved costs, insofar as those costs are referable to the proceeding against the second defendant.
Note:Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.
The text of entered orders can be located using Federal Law Search on the Court’s website.
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IN THE FEDERAL COURT OF AUSTRALIA |
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VICTORIA DISTRICT REGISTRY |
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GENERAL DIVISION |
VID 950 of 2006 |
IN THE MATTER OF CITROFRESH INTERNATIONAL LTD (ACN 064 551 426)
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BETWEEN: |
AUSTRALIAN SECURITIES AND INVESTMENTS COMMISSION Plaintiff
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AND: |
CITROFRESH INTERNATIONAL LTD (ACN 064 551 426) First Defendant
RAVI AMRIT NARAIN Second Defendant
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JUDGE: |
GOLDBERG J |
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DATE: |
29 MARCH 2010 |
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PLACE: |
MELBOURNE |
REASONS FOR JUDGMENT
INTRODUCTION
1 On 2 February 2010 I published reasons for judgment in which I concluded that the second defendant, Mr Ravi Amrit Narain, had engaged in conduct in relation to a financial product that was misleading and deceptive in contravention of s 1041H(1) of the Corporations Act 2001 (Cth) (“the Act”) by authorising and procuring Citrofresh International Limited (“CIL”), the first defendant, to make a statement to the Australian Stock Exchange (“ASX”), and by himself making a statement to the ASX, which was misleading and deceptive in the respects referred to in my reasons for judgment: [2010] FCA 27.
2 I also found that Mr Narain had contravened s 180(1) of the Act by causing CIL to contravene s 1041H(1) of the Act.
3 I made declarations accordingly on that day and adjourned the further hearing of the proceeding to enable the parties to make submissions as to whether any, and if so what, orders should be made pursuant to s 1317G of the Act that Mr Narain pay a pecuniary penalty in respect of his contravention of s 180(1) of the Act and whether any, and if so what, orders should be made pursuant to s 206C(1) of the Act that Mr Narain be disqualified from managing corporations for a period that the Court considered appropriate.
4 The adjourned hearing came on before me on 15 March 2010.
5 I do not propose to repeat the facts, circumstances and findings which led to the conclusions and declarations to which I have already referred. I incorporate those reasons in these reasons.
6 The application by the Australian Securities and Investments Commission (“ASIC”) that Mr Narain pay a pecuniary penalty is made pursuant to s 1317E(1) of the Act in respect of his contravention of s 180(1) of the Act. Section 1317E(1) of the Act does not empower the Court to impose a pecuniary penalty in respect of a contravention of s 1041H(1) of the Act.
7 Section 1317G(1) of the Act provides:
A Court may order a person to pay the Commonwealth a pecuniary penalty of up to $200,000 if:
(a) a declaration of contravention by the person has been made under section 1317E; and
(aa) the contravention is of a corporation/scheme civil penalty provision; and
(b) the contravention:
(i) materially prejudices the interests of the corporation or scheme, or its members; or
(ii) materially prejudices the corporation’s ability to pay its creditors; or
(iii) is serious.”
8 I have already made a declaration of contravention by Mr Narain of s 180(1) of the Act pursuant to s 1317E of the Act. A contravention of s 180(1) of the Act is a contravention of a corporation/scheme civil penalty provision as defined in s 1317DA of the Act. For the reasons set out in my earlier reasons for judgment, and in these reasons, I am satisfied Mr Narain’s contravention of s 180(1) of the Act materially prejudiced the interests of CIL in the manner to which I referred in my earlier reasons and also materially prejudiced the interests of its members having regard to the fluctuations in the price of shares in CIL which occurred shortly after the relevant statement was made to the ASX. I am also satisfied that Mr Narain’s contravention of s 180(1) of the Act was serious for the reasons referred to in my earlier reasons for judgment and for the further reasons to which I shall refer.
9 Section 206C of the Act provides:
“(1) On application by ASIC, the Court may disqualify a person from managing corporations for a period that the Court considers appropriate if:
(a) a declaration is made under
(i) section 1317E (civil penalty provision) that the person has contravened a corporations/ scheme civil penalty provision; or
(ii) …
(b) the Court is satisfied that the disqualification is justified.
(2) In determining whether the disqualification is justified, the Court may have regard to:
(a) the person’s conduct in relation to the management, business or property of any corporation; and
(b) any other matters that the Court considers appropriate.
(3) …”
10 Pursuant to the orders made on 2 February 2010 ASIC filed three further affidavits sworn by Raymond Mark Waschl, Shane Francis Tanner and Mark Anthony Simari and written submissions. The substance of these affidavits set out the history of CIL, the effects the statement made to the ASX on 27 September 2005 had on the share price of CIL and the volume of trading in it and the consequential effects on CIL as a result of the statement to the ASX and the proceedings brought by ASIC against it and Mr Narain.
11 Mr Narain appeared by counsel. He filed written submissions but did not file any further affidavits or lead any further evidence.
12 ASIC submitted that Mr Narain should be disqualified from managing a corporation for 10 years and that he should be ordered to pay a pecuniary penalty of $50,000. Mr Narain submitted that no further period of disqualification was necessary, but that if one was to be imposed it should not exceed 12 months. Mr Narain submitted further that no pecuniary penalty should be imposed.
13 ASIC relied upon a Notice of Prohibition dated 17 November 1998 served by it on Mr Narain pursuant to s 600 of the Corporations Law, and the report of the delegate of the Australian Securities Commission which led to that Notice which disclosed that on 17 November 1998 Mr Narain was disqualified by a delegate of the Australian Securities Commission from managing a corporation for three years. In that Report the delegate set out his reasons for reaching the conclusion that Mr Narain should be so disqualified and also made findings that Mr Narain had:
(a) allowed two companies to trade whilst insolvent;
(b) failed to ensure that a company he controlled maintained books in accordance with the Corporations Law;
(c) borrowed funds to support the operations of a company he controlled when the company had no apparent ability to repay those funds;
(d) failed to provide a report as to affairs to an official liquidator that showed all of the assets and liabilities of a company he controlled;
(e) failed to deliver all books of a company he controlled to the official liquidator;
(f) caused a company he controlled to enter into a deed of sale of assets to himself, which caused a detriment to the company’s creditors;
(g) generally demonstrated a lack of understanding of the duties of a director and a disregard for the interests of a company and its creditors;
(h) demonstrated that he did not understand that companies are separate legal entities.
14 ASIC further relied on the fact that as a result of Mr Narain’s conduct CIL had incurred significant costs in relation to the proceeding brought against it. On 29 August 2007 CIL consented to a declaration that it had contravened s 1041H(1) of the Act. As a result of the proceeding it had incurred approximately $150,000 in legal fees and paid $50,000 towards the costs of ASIC in bringing the proceeding. According to Mr Shane Tanner who subsequently became Chairman of CIL that expenditure created a substantial financial burden for CIL at a time when it was in financial distress.
15 Where a court is faced with an application to impose a pecuniary penalty and a disqualification from managing a corporation consequent upon a finding of a contravention of the Act, it has been the practice of the Court, supported by a number of authorities, for the Court to consider first the issue of disqualification before considering whether a pecuniary penalty should be imposed: Australian Securities and Investments Commission v Forem‑Freeway Enterprises Pty Ltd (1999) 30 ACSR 339 at 349‑350; Rich v Australian Securities and Investments Commission (2004) 220 CLR 129 at 150‑151 per McHugh J; Australian Securities and Investments Commission v MacDonald (2009) 259 ALR 116 at 164. I propose to follow that practice.
SHOULD MR NARAIN BE DISQUALIFIED FROM MANAGING CORPORATIONS?
16 There have been a considerable number of cases which have set out the principles, propositions and circumstances which should be taken into account in determining whether, and for what period, an order should be made disqualifying a person from managing a corporation. I do not propose to analyse all those cases in any detail. It is sufficient to note they were analysed in considerable detail and distilled into 15 propositions by Santow J in Re HIH Insurance Ltd (in prov liq) and HIH Casualty and General Insurance Ltd (in prov liq); Australian Securities and Investments Commission v Adler (2002) 42 ACSR 80.
17 Santow J said at 97‑99:
“The cases on disqualification gave orders ranging from life disqualification to 3 years. The propositions that may be derived from these cases include:
(i) Disqualification orders are designed to protect the pubic from the harmful use of the corporate structure or from use that is contrary to proper commercial standards.
(ii) The banning order is designed to protect the public by seeking to safeguard the public interest in the transparency and accountability of companies and in the suitability of directors to hold office.
(iii) Protection of the public also envisages protection of individuals that deal with companies, including consumers, creditors, shareholders and investors.
(iv) The banning order is protective against present and future misuse of the corporate structure.
(v) The order has a motive of personal deterrence, though it is not punitive.
(vi) The objects of general deterrence are also sought to be achieved.
(vii) In assessing the fitness of an individual to manage a company, it is necessary that they have an understanding of the proper role of the company director and the duty of due diligence that is owed to the company.
(viii) Longer periods of disqualification are reserved for cases where contraventions have been of a serious nature such as those involving dishonesty.
(ix) In assessing an appropriate length of prohibition, consideration has been given to the degree of seriousness of the contraventions, the propensity that the defendant may engage in similar conduct in the future and the likely harm that may be caused to the public.
(x) It is necessary to balance the personal hardship to the defendant against the public interest and the need for protection of the public from any repeat of the conduct.
(xi) A mitigating factor in considering a period of disqualification is the likelihood of the defendant reforming.
(xii) The eight criteria to govern the exercise of the court’s powers of disqualification set out in Commissioner for Corporate Affairs (WA) v Ekamper (1987) 12 ACLR 519 have been influential. It was held that in making such an order it is necessary to assess:
• character of the offenders;
• nature of the breaches;
• structure of the companies and the nature of their business;
• interests of shareholders, creditors and employees;
• risks to others from the continuation of offenders as company directors;
• honesty and competence of offenders;
• hardship to offenders and their personal and commercial interests; and
• offenders’ appreciation that future breaches could result in future proceedings.
(xiii) Factors which lead to the imposition of the longest periods of disqualification (that is disqualifications of 25 years or more) were:
• large financial losses;
• high propensity that defendants may engage in similar activities or conduct;
• activities undertaken in fields in which there was potential to do great financial damage such as in management and financial consultancy;
• lack of contrition or remorse;
• disregard for law and compliance with corporate regulations
• dishonesty and intent to defraud;
• previous convictions and contraventions for similar activities.
(xiv) In cases in which the period of disqualification ranged from 7 – 12 years, the factors evident and which lead to the conclusion that these cases were serious though not “worst cases”, included:
• serious incompetence and irresponsibility;
• substantial loss;
• defendants had engaged in deliberate courses of conduct to enrich themselves at others’ expense, but with lesser degrees of dishonesty;
• continued, knowing and wilful contraventions of the law and disregard for legal obligations;
• lack of contrition or acceptance of responsibility, but as against that, the prospect that the individual may reform.
The difficulty with Roussi’s case is that disqualification for 10 years was ordered, as this was the period of disqualification that the ASC had sought. Had a longer period been applied for, Einfeld J may have considered giving a longer period.
(xv) The factors leading to the shortest disqualifications, that is disqualifications for up to 3 years were:
• although the defendants had personally gained from the conduct, they had endeavoured to repay or partially repay the amounts misappropriated;
• the defendants had no immediate or discernible future intention to hold a position as manager of a company;
• in Donovan’s case, the respondent had expressed remorse and contrition, acted on advice of professionals and had not contested the proceedings.
(Citations omitted)
18 It is also relevant to note that in Rich v Australian Securities and Investments Commission (supra), McHugh J said at 152 that Santow J’s judgment is the leading authority on the reasons for a Court exercising its power under s 206C or 206E of the Act. I have included in my consideration Santow J’s propositions.
19 Although considerable guidance can be derived from the principles and propositions extracted from the cases referred to by Santow J, it must be remembered that each case in which disqualification was considered turned on the particular facts in that case. The manner in which previous courts determine that a period of disqualification should be imposed are a useful guide but they must be considered with care as the relevant and material facts in each case will vary from case to case.
20 As Austin J pointed out in Australian Securities and Investments Commission v Vines (2006) 58 ACSR 298 at 313, the propositions expounded by Santow J in Adler must now be reconsidered in the light of the decision of the High Court in Rich v Australian Securities and Investments Commission (supra). Austin J continued at 313:
“[35] … The High Court’s decision, that proceedings in which an application is made for a disqualification order are proceedings for the imposition of a penalty, for the purposes of the privilege against exposure to a penalty, has very little effect on the propositions. It directly affects only proposition (v), to the extent that a disqualification order should now be regarded as involving the imposition of a penalty.
[36] The majority judges in the High Court did not directly consider the principles to be applied by the court when considering whether to make a disqualification order, and if so, the period of disqualification. However, McHugh J considered that topic at some length. His general thesis, expounded at [41], was that although judges frequently said that the purpose of the disqualification provisions is protective, what they did in practice was little different from what judges do in determining what orders or penalty should be made for offences against the criminal law.
[37] His Honour enumerated some factors that the courts take into account, in what he referred to as a “synthesis from which the judges make a value judgment concerning whether to order disqualification and, if so, the period of disqualification that should be imposed” (at [43]):
• whether the defendant now is or in future will be a fit and proper person to manage corporations;
• the size of any losses suffered by the corporation, its creditors and consumers;
• legislative objectives of personal and general deterrence;
• contrition on the part of the defendant;
• the gravity of the misconduct;
• the defendant’s previous good character;
• prejudice to the defendant’s business interests;
• personal hardship; and
• the willingness of the defendant to render assistance to statutory authorities and administrators.
[38] He referred to Santow J’s 15 propositions with approval, and set them out: at [49]. He remarked (at [50]) that some of the propositions go to the protection of the public, while others relate to considerations that reduce the period of disqualification and therefore benefit the defendant, and still others (such as propositions (v) and (vi)) recognise that the disqualification provisions also have objectives of personal and general deterrence, strongly resembling sentencing principles under the criminal law.”
21 Although it follows from the High Court decision in Rich that an order for disqualification should now be regarded as involving the imposition of a penalty, there is no reason why the Court should not, in respect of a single contravention, impose a period of disqualification as well as a pecuniary penalty: ASC v Donovan (1999) 28 ACSR 583 at 602; Australian Securities and Investments Commission v Vines (supra) at 317.
22 ASIC acknowledged that there was no allegation of any dishonesty on the part of Mr Narain or that he had made a personal gain from his contravening conduct. ASIC submitted that on what it called “the aggravating side of the ledger” there were a number of matters to be considered, namely:
· the contravention was serious;
· the Court could infer that particular investors suffered losses and other investors may have reaped windfall gains to which they had no entitlement;
· there was no evidence of remorse or contrition by Mr Narain or that he had insight into his wrongdoing;
· there was no evidence or references of good character placed before the Court;
· there was no evidence of Mr Narain’s ability to pay a pecuniary penalty apart from his bankruptcy;
· Mr Narain’s prior contraventions which, albeit for different matters, demonstrated a lack of business morality and resulted in a prohibition for three years;
· Mr Narain had a direct personal involvement in the conduct which comprised CIL’s contravention;
· market distortion was caused by CIL’s contravening conduct.
23 In the course of oral submissions counsel for ASIC submitted that it was an aggravating factor that it was very significant that Mr Narain, until this hearing, had contested the proceeding at every stage including an application for special leave to appeal to the High Court. I queried that submission and it was subsequently withdrawn after I reserved my decision.
24 That submission was contrary to long‑standing authorities: R v Harper; R v DeHaan [1968] 2 QB 108 at 110; R v Gray [1977] VR 225 at 231. The rejection of this proposition has been confirmed by the High Court. In Siganto v The Queen (1998) 194 CLR 656, Gleeson CJ, Gummow, Hayne & Callinan JJ said at 663‑664:
“[22] A person charged with a criminal offence is entitled to plead not guilty, and defend himself or herself, without thereby attracting the risk of the imposition of a penalty more serious than would otherwise have been imposed. On the other hand, a plea of guilty is ordinarily a matter to be taken into account in mitigation; first, because it is usually evidence of some remorse on the part of the offender, and second, on the pragmatic ground that the community is spared the expense of a contested trial. The extent of the mitigation may vary depending on the circumstances of the case. It is also sometimes relevant to the aspect of remorse that a victim has been spared the necessity of undergoing the painful procedure of giving evidence.
25 The proposition was again rejected by the High Court in Cameron v The Queen (2002) 209 CLR 339. Gaudron, Gummow & Callinan JJ said at 343:
“[12] Although a plea of guilty may be taken into account in mitigation, a convicted person may not be penalised for having insisted on his or her right to trial (10). The distinction between allowing a reduction for a plea of guilty and not penalising a convicted person for not pleading guilty is not without its subtleties, but it is, nonetheless, a real distinction, albeit one the rationale for which may need some refinement in expression if the distinction is to be seen as non‑discriminatory.”
“[104]However, this overlooks that in the present context we are dealing not with a civil penalty, where that reasoning may be applicable, but a disqualification order. There it is highly relevant to know whether the director or officer is likely to contravene again as the earlier statement ([57]) of guiding factors makes clear. Absence of contrition must therefore be a factor favouring disqualification and moreover a lengthy period of it. At the least, Mr Adler could not invoke contrition as a reason for a lesser period of disqualification.”
Counsel for ASIC submitted that in this passage Santow J was saying that absence of contrition, which included whether or not there had been a contest, was a relevant aggravating factor on a disqualification order.
27 I do not read that passage in the way submitted by counsel. Santow J made it clear that absence of contrition was a factor “favouring disqualification” but I do not consider that he regarded contesting the initial proceeding of itself as evidence of absence of contrition.
28 ASIC submitted that, although every case had to be considered by reference to its own particular facts, and that there were no binding precedents in the area of periods of disqualification and imposition of penalties, attention should be drawn to a number of the cases. ASIC referred to ASC v Donovan (supra). The facts in that case were entirely different from the facts presently before me. Cooper J referred to a number of factors to be taken into account in determining whether and for what period a person should be prohibited from managing a corporation and referred to a number of the factors distilled by Santow J in Adler. An analysis of the reasoning in Donovan does not demonstrate any departure from the principles referred to by Santow J in Adler.
29 I make a similar observation in relation to another case relied upon by ASIC, namely Australian Securities and Investments Commission v MacDonald (No 12) (2009) 259 ALR 116. Although that judgment is under appeal, ASIC relied upon those passages in the judgment which referred to the contraventions of Mr MacDonald who is not one of the appellants. The facts and circumstances involved in MacDonald related to the making of an announcement to the ASX that a foundation formed by the James Hardie Group to meet asbestos claims was fully funded and provided certainty for people with legitimate asbestos claims: Australian Securities and Investments Commission v MacDonald (No 11) (2009) 256 ALR 199. Senior Counsel for ASIC acknowledged that there was a significant distinction between the circumstances of that case and the circumstances presently before me as the contravening conduct was held to be dishonest. ASIC relied upon the reasoning in that case because it was, what it called, another case of market distortion caused by an announcement to the ASX and to the public at large. However, there the analogy between the two cases ended.
30 Mr Narain’s submissions in relation to the issue of disqualification may be summarised conveniently in the following terms:
· to the extent that general deterrence required the imposition of a period of disqualification, this had been achieved by Mr Narain’s bankruptcy which disqualified him from managing corporations until 22 January 2011;
· the contravention was not intentional;
· the contravention stemmed from Mr Narain’s inexperience in the governance of public companies and deference to consultants who were experts in that field. He was the inventor of a product and had a background in abalone processing and he was not a professional director;
· he did not benefit financially from the contravention;
· the likelihood of Mr Narain engaging in similar conduct in the future is low given that he acted as soon as possible to impose a trading halt (the evidence did not disclose whether Mr Narain made the request) and correct the statement;
· Mr Narain’s personal hardship from disqualification is high as it will impair his opportunity to develop the product that he invented to its full potential;
· Mr Narain’s previous disqualification was 12 years ago and related to different circumstances;
· the contravention was not serious, particularly when compared with the manner in which Chapter 7 of the Act treats breaches of the continuous disclosure provisions of the Act and compared with other contraventions of the continuous disclosure provisions which ASIC has determined to be less serious breaches;
· ASIC’s analogy with MacDonald is false because there the breach was found to be both serious and flagrant, it was a deliberate attempt to influence the market and there was no attempt by the directors to correct the misleading impression created by the announcement;
· a closer analogy is with Vines where the contravention was not dishonest, was unintentional, was not part of the pattern of non‑disclosure and did not result in any financial gain to the defendant. Nevertheless there are key differences between Vines’ case and Mr Narain’s situation, namely Vines was a qualified accountant and experienced Chief Financial Officer and there was no correction of the misleading impression created by the announcement. Although that breach was found to be serious, no order of disqualification was made;
· a closer analogy is with Australian Securities and Investments Commission v Beekink (2007) 238 ALR 595 where a solicitor was found to have breached his duties as an officer of the responsible entity of a managed investment scheme. The breach was found to have been intentional and 12 months disqualification was held appropriate.
31 Mr Narain’s conduct not only had deleterious consequences for CIL, it also had significant consequences in relation to the market for CIL shares on the ASX and for persons who purchased shares in CIL after the statement authorised by Mr Narain was released to the ASX on 27 September 2005. The consequences of that statement and its subsequent retraction created a substantial distortion of the market for CIL shares on the ASX. Shortly prior to the release of the statement to the ASX and its publication, CIL shares were trading on the ASX at $0.225. Immediately following the publication of the statement the price of CIL shares rose to $0.70. It will be recalled from my earlier reasons that later in the day on 27 September 2005 CIL requested a trading halt and in response to an ASX query made a further statement on 29 September 2005 which stated that Citrofresh was not a vaccine and was not a cure for HIV. Within that day the price of CIL shares on the ASX fell to $0.295.
32 Not only was there a substantial fluctuation in the price of CIL shares on the ASX on 27 and 29 September 2005, there was also a dramatic increase in the volume of trades in CIL shares. In the weeks prior to the statement on 25 September 2005 there were on average four transactions per day. The daily average market value of such trading being approximately $16,000. On the day of the statement 27 September 2005, there were 2,174 trades with a market value of trading in excess of $10 million. Since the middle of 2007 shares in CIL have traded around $0.03.
33 Put shortly, the result of the statement released and authorised by Mr Narain, was to cause a substantial aberration and distortion in the market for CIL shares which had significant adverse consequences for persons who purchased shares in CIL on 27 September 2005 after the publication of the statement by the ASX and held those shares at the close of trading on that day.
34 Mr Narain caused CIL to engage in misleading and deceptive conduct. His conduct in so doing resulted also in a contravention by him of s 180(1). That contravention was serious not only because of the effects and consequences it had on CIL but also because of the distorting effect it had on the market for CIL shares to which I have referred. That distorting effect was serious and is demonstrated by the immediate consequences and aftermath of the publication of the statement by CIL authorised by Mr Narain. The statistics in relation to the variation in the price of shares in CIL and the immediate increase in the number of transactions in the purchase and the trading of those shares demonstrates that were it not for the making and publication of the statement on 27 September 2005, the volume of trades in CIL shares would have been dramatically reduced as would the fluctuations in its share price. It is apparent from those statistics that a considerable number of investors purchased shares in CIL when they would not have otherwise done so had it not been for the publication of the statement.
35 I consider that there are a number of factors which I should take into account in determining whether to impose a period of disqualification on Mr Narain and the extent of such disqualification. I repeat the observation I made in par [52] of my earlier reasons:
“… 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.”
36 I consider that I should also take into account a number of submissions made on behalf of Mr Narain at the earlier hearing, which were repeated at this hearing as my responses to them are apposite to my consideration of whether a period of disqualification should be imposed on Mr Narain.
37 In my earlier reasons I said:
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 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. “
38 These submissions were repeated at the hearing on 15 March 2010 (par [30] above – third point). I reject these submissions as raising exculpatory matters. They do not excuse conduct, or operate to mitigate the seriousness of the conduct where a person assumes the responsibility of a director of a company. Inexperience is not a mitigating factor.
39 There are also other factors which I consider are important in the context of the contravention of s 180(1) of the Act by Mr Narain which I should take into account in considering the issue of disqualification. As I noted earlier, on 17 November 1998 a delegate of the Australian Securities Commission prohibited Mr Narain for a period of three years from being a director or promoter of, or from being in any way (whether directly or indirectly) concerned in or taking part in a management of a corporation without the leave of the Court. That prohibition was brought about by Mr Narain’s involvement in two companies which were in liquidation. Although the factual circumstances which brought about that prohibition were quite different from the present circumstances, the delegate found that Mr Narain’s conduct in relation to the two companies:
“Demonstrated his lack of understanding of the duties of a director and a disregard for the interests of creditors.”
40 That prohibition related to events and conduct twelve years prior to the conduct in issue in this proceeding. The prohibition terminated less than four years before the incidents occurred giving rise to this proceeding. It is apparent that the previous prohibition was not such as to prevent Mr Narain from failing to exercise his powers as a director and to discharge his duties as a director with the degree of care and skill that a reasonable person would exercise in similar circumstances. That previous prohibition related to conduct quite different from the conduct in issue in this proceeding but it demonstrates that a period of disqualification of three years was insufficient to ensure that Mr Narain discharged his duties as a director with the degree of care and diligence required by s 180(1) of the Act. This was made clear by his submission that his contravention stemmed from his inexperience in the governance of public companies and that he was not a professional director.
41 It is necessary to recognise that a period of disqualification is required, not only as a personal deterrent but also as a general deterrent. I do not accept the submission that general deterrence has been achieved by Mr Narain’s bankruptcy which operates and effects a disqualification for at least three years. There is no evidence of a causal relationship between Mr Narain’s conduct or the statement and his bankruptcy.
42 It is also important to note that Mr Narain has not placed any evidence before the Court as to any remorse or contrition he may have in respect of his conduct. I do not therefore accept as a mitigating factor that the likelihood of him engaging in similar conduct in the future is low.
43 I am unable to accept as a mitigating factor the submission that his personal hardship from any period of disqualification will be high and that it will impair his opportunity to develop the product he invented. I accept that any period of disqualification will impair the ability of a person to carry on a commercial activity through the structure of a corporation. That is the purpose of ordering a period of disqualification. Whether a period of disqualification is disproportionate to the effect of the disqualification on the ability of a person to carry on a particular commercial activity depends upon the nature and extent of the evidence in respect of that issue Mr Narain did not put forward any evidence on this issue or on any other issue.
44 The absence of evidence in respect of these issues weighs in favour of a significant period of disqualification particularly having regard to the earlier prohibition and the other factors to which I have referred.
45 Mr Narain may not have been motivated by personal gain in his drafting of the statement and procuring its delivery to the ASX on behalf of CIL, but the consequences of his conduct, to which I have already referred, were to cause significant harm and disadvantage to CIL as well as significant distortion of the market for shares in CIL with consequent deleterious effects on investors. I am prepared to infer from the market fluctuations and volume of trades which followed the publication of the announcement that some investors suffered losses and others achieved windfall gains.
46 It was implicit in the submissions made on behalf of Mr Narain at the earlier hearing that he should not have been found to contravene s 180(1) of the Act because, in the circumstances, he was not up to exercising the relevant degree of skill, care and attention expected of the director of a public company. I rejected that submission then and I reject it again in the context of this hearing. In short, Mr Narain abrogated his responsibility as a director of a listed public company. I am satisfied that a period of disqualification is justified. It is appropriate to impose a significant period of disqualification which will operate as a specific deterrent on Mr Narain in respect of any future conduct by him as a director of a corporation.
47 I consider that it is in the public interest that in such circumstances a significant period of disqualification be imposed so as to bring to the attention of directors of corporations that they must take their duties and responsibilities as directors very seriously. It is also in the public interest that such a period of disqualification be imposed in order to protect the public.
48 I consider that in all the circumstances to which I have referred a period of disqualification of seven years should be ordered against Mr Narain.
49 In reaching this conclusion I have taken into account the fact that Mr Narain has been made bankrupt and that his period of bankruptcy runs for three years from 22 January 2008. It follows that he is automatically disqualified from managing a corporation until at least 22 January 2011: s 206B(3) of the Act. Nevertheless I consider that the period of disqualification should run from the date of this order.
SHOULD A PECUNIARY PENALTY BE IMPOSED?
50 I turn to the issue whether Mr Narain should be ordered to pay a pecuniary penalty.
51 In considering the imposition of a pecuniary penalty when it is also proposed to make a disqualification order it is necessary to take into account the principle of “totality”, that is to say it is important to ensure that the “aggregate amount is just and appropriate”: Australian Securities and Investments Commission v Vines (supra) at 318.
52 As ASIC submitted correctly, it is not open to me to impose a civil penalty in respect of Mr Narain’s contravention of s 1041H(1) of the Act which caused the market distortion to which I have referred. It is only open to me to impose a civil penalty in respect of his contravention of s 180(1) of the Act. Nevertheless, in considering the consequences of Mr Narain’s contravention of s 180(1) of the Act I consider that I am entitled to take into account the fact that his contravention of s 180(1) was brought about by his authorisation and procuring of the statement to the ASX on 27 September 2005 and that I am also entitled to take into account the consequences of that contravention and conduct.
53 In Re HIH Insurance Limited (in prov liq) and HIH Casualty and General Insurance Ltd (in prov liq); Australian Securities and Investments Commission v Adler (supra), as well as setting out a number of principles and propositions in relation to the exercise of the power of disqualification, Santow J also set out a number of principles and propositions in relation to the power and discretion to impose a pecuniary penalty. His Honour said at 114‑116:
125 It is well established that the principal purpose of a pecuniary penalty is to act as a personal deterrent and a deterrent to the general public against a repetition of like conduct (ASC v Donovan; Trade Practices Commission v CSR Ltd). In Donovan, the court said:
“If compliance with the appropriate standards of commercial conduct within the management of corporations by deterrents is the objective, then any penalty should be no greater than is necessary to achieve this objective. Otherwise severity above that figure would be oppressive.”
126 Following a review of the relevant cases, I have attempted to summarise the propositions that may be derived. I recognise that, as with banning orders, there is no simple mechanical process for quantifying the appropriate penalty but some guidance can be derived from the principles and factors that are identified below. I should add that in a context where honesty or propriety of purpose is involved, the sphere of discourse applicable to economic legislation such as antitrust law is wholly distinct from corporations law with its emphasis on proper purpose and honesty; see more generally the discussion by ALRC in “Securing Compliance - Civil and Administrative Penalties in Australian Federal Regulation” discussion paper 65, April 2002 esp. Ch 18. These propositions have guided me in the present case.
(i) the pecuniary penalty has a punitive character, but it is principally a personal and general deterrent to prevent the corporate structure from being used in a manner contrary to commercial standards. The penalty should be no greater than is necessary to achieve this object: ASC v Donovan at 608;
(ii) to determine whether compensation is to be paid and in what amount it is necessary to consider the prospect of the respondent paying such compensation and the hardship to the defendant from such payment. Compensation has been ordered for an amount less than that lost even though there was little prospect of any of it being recovered: ASC v Forem – Freeway at 351;
(iii) the capacity of the defendant to pay is a relevant consideration in determining a pecuniary penalty: ASC v Forem – Freeway at 351‑352;
(iv) in assessing a pecuniary penalty it is important to consider the consequences of an associated disqualification order for the defendant. If the making of such an order has significant consequences, they may operate as a factor in favour of a lesser penalty. Where the disqualification order does not have significant consequences for the defendant, the prohibition order is likely to be only marginally relevant: Re Tasmanian Spastics Association at 751-752;
(v) it is important to assess whether the order will prejudice the rehabilitation of the defendant: ASC v Forem – Freeway at 352;
(vi) the size of the penalty is a question of discretion. The circumstances of one case should not dictate the size of the penalty on another case: ASC v Donovan at 608;
(vii) in ASC v Forem – Freeway civil compensation of $200,000 was ordered. This amount was lower than the losses to the company concerned. This amount was ordered, even though it was highly unlikely that the amount would ever be paid as the respondent was bankrupt. In this case it was held that precision in the amount was therefore unnecessary: ASC v Forem – Freeway at 351;
(viii) a fine was not ordered in ASC v Forem – Freeway. However the ASC was given liberty to apply at a later stage in relation to this matter. The court held that the personal hardship to the respondent, the unintended punitive consequences of the other orders and the lack of capacity to pay, justified such order: ASC v Forem – Freeway at 351 – 352;
(ix) factors leading to the order of a penalty in the range of $20,000 to $40,000 included:
• Defendant was aware of impropriety of actions
• No intention to deprive company permanently of funds
• Amounts in question not large
• No deliberate falsification of accounts
• Cases classed as being serious misconduct, but not worst cases.
Re Tasmanian Spastics Association at 752; ASC v Donovan at 609
(x) relevant factors leading to the court to order the lower range penalties in the range of $4,000 – $5,000 included:
• Remorse and contrition shown
• Efforts to repay misappropriated funds
• Acted upon the advice of professionals
• Did not contest the proceedings, or sought to save costs in proceedings
• Tended to not involve dishonesty, but negligence or carelessness
• Previous unblemished character
• Further contraventions unlikely
ASC v Donovan at 609; ASC v Spencer (1997) 25 ACSR 143 at 144-145
(citations omitted)
54 I have taken Santow J’s principles into account in my consideration. In particular, factor (iv) is relevant in the present circumstances as I consider that the disqualification order which I propose does have significant consequences for Mr Narain. See also Australian Securities and Investments Commission v Vines (supra) at 308; Australian Securities and Investments Commission v Beekink (supra) at 607.
55 ASIC submitted that the following propositions identified by Santow J were relevant in the present circumstances:
· the principal purpose of a pecuniary penalty is to act as a personal and a general deterrent against repetition of like conduct;
· the size of the penalty is a question of discretion and the circumstances of one case should not dictate the size of the penalty in another case;
· factors leading to the order of penalties in other cases in the range of $20,000 to $40,000 included that the defendant was aware of the impropriety of his actions, there was no intention to deprive the company permanently of funds, the amounts in question were not large, there was no deliberate falsification of accounts and although the cases were classed as involving serious misconduct they were not the worst cases.
I have taken these propositions into consideration.
56 Mr Narain submitted that that no penalty should be imposed as, required by s 1317G of the Act, the contravention did not materially prejudice the interests of CIL or its members, nor was it serious. Mr Narain’s submissions, and my responses to them, may be summarised in the following terms:
· the costs associated with the legal action brought by ASIC against CIL and Mr Narain were outweighed by Mr Narain’s guarantee of CIL’s financial liabilities up to $1 million. That guarantee was not called upon. In any event I consider that the costs associated with the action were material;
· the contravention was not serious notwithstanding the market distortion which occurred. Further, the misleading perception in the market created by the initial announcement was promptly corrected. I have already found that the contravention was serious. By the time the announcement was corrected the damage had been done;
· Mr Narain was not receiving great financial rewards from his office and his contravention was not an intentional breach. I accept this submission;
· the penalty of $50,000 submitted by ASIC is out of line with the level of pecuniary penalties in comparable cases such as Vines and Beekink. I accept this submission. Each case must be considered on its own merits;
· as Mr Narain is bankrupt, he has no capacity to pay any penalty imposed and it would be a pointless exercise to order him to do so. Any penalty is not a provable debt in his bankruptcy and if the usual course is followed he will be discharged in January 2011;
· unlike MacDonald Mr Narain toned down the announcement after it had been made. However the damage was done at the moment that the announcement was made public;
· Mr Narain was inexperienced in corporate governance which led him to defer to consultants who were experts in the corporate governance field. I have already rejected this submission. It is not a mitigating factor. Once a person becomes a director that person is obliged to observe the standards appropriate to that position. If they fail to do so inexperience is not a mitigating factor in determining any consequences of their conduct or their contravention;
· Mr Narain is no longer inexperienced in what happens in public companies. I have no evidence from Mr Narain in this respect;
· in relation to his inexperience his counsel submitted that he was “possibly something of a dupe in circumstances where he was out of his depth”. If it was being submitted that he was a victim of deception in the sense that he was duped, I reject that submission. Mr Narain was intimately involved in the preparation of the announcement and insofar as he was “out of his depth” he abrogated the duty he owed to CIL and its members and that is not a mitigating factor;
· insofar as ASIC was submitting that every breach of duty that has a consequence that the market is misinformed is serious, that depends upon the particular facts of the particular case. It is not an automatic consequence of a breach of s 1041H of the Act. Not every contravention that leads to the market being misinformed for a period is serious. That may be so but this misinformation was serious.
57 The maximum penalty which may be imposed under s 1317G is $200,000. Of course, the quantum of the penalty is a matter for the discretion of the Court and although recourse may be made to the penalties imposed in previous decisions, it is important to remember that each case is concerned with different circumstances.
58 I have already found that Mr Narain’s contravention of ss 180(1) and 1041H(1) was serious. It resulted in a direct loss to CIL in excess of $150,000 and it had a substantial serious effect on the market for its shares in CIL which caused losses to a number of the members of CIL.
59 In this context I bear in mind the observations of the Full Court of the Federal Court in Australian Securities and Investments Commission v Beekink (supra) at 608:
“[119] The third reason is that in recent years the courts have been more concerned with the need for the imposition of higher civil penalties to reflect community expectations of the standards to be imposed on company directors; see for example Finkelstein J in Vizard at [33].
[120] This is particularly so at a time when the commercial community demands ever greater financial rewards from the benefit of public office. The expectation of such rewards must be accompanied by an expectation of higher penalties when those in office slip from the standards imposed upon them under the law.
60 As I have already noted, Mr Narain is presently bankrupt. However, a pecuniary penalty payable pursuant to an order made under s 1317G of the Act is not a debt provable in bankruptcy: s 82(3)(AA) Bankruptcy Act 1966 (Cth). Accordingly, any order for the payment of a pecuniary penalty resulting in a debt due by Mr Narain will not be discharged on the discharge of his bankruptcy. He will remain personally liable for the consequences of his conduct after being discharged from his bankruptcy.
61 Nevertheless, I consider that Mr Narain’s present condition of being a bankrupt is a factor which is relevant to the exercise of my discretion and which I should take into account in determining the appropriate level of a pecuniary penalty which should be paid.
62 As I have noted earlier, Mr Narain’s conduct giving rise to the relevant contraventions was serious. He had previously been prohibited from managing corporations for three years yet this does not seem to have had any impact on his approach to the manner in which he should discharge his duties as a director of a public company. What is more, I have had no evidence from Mr Narain or on his behalf as to his character or as to his remorse for the conduct which he had undertaken or for any attitude of contriteness. I do not consider that Mr Narain has yet recognised the seriousness of his misconduct in the present circumstances.
63 In all these circumstances, and particularly taking into account the order which I propose to make prohibiting him from being a director for seven years, I consider that the appropriate pecuniary penalty that he should be ordered to pay is $20,000.
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I certify that the preceding sixty-three (63) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Goldberg. |
Associate:
Dated: 29 March 2010
