Narain v Australian Securities and Investments Commission

[2008] HCATrans 408

[2008] HCATrans 408

IN THE HIGH COURT OF AUSTRALIA

Office of the Registry
  Melbourne  No M56 of 2008

B e t w e e n -

RAVI AMRIT NARAIN

Applicant

and

AUSTRALIAN SECURITIES AND INVESTMENTS COMMISSION

Respondent

Application for special leave to appeal

CRENNAN J
KIEFEL J

TRANSCRIPT OF PROCEEDINGS

AT MELBOURNE ON FRIDAY, 5 DECEMBER 2008, AT 10.42 AM

Copyright in the High Court of Australia

MS F.M. McLEOD, SC:   If the Court pleases, I appear with my learned friend, MS J.E. TRELEAVEN, on behalf of the applicant.  (instructed by Russell Kennedy)

MR N.J. YOUNG, QC:   If the Court pleases, I appear with my learned friend, MR J.P. MOORE, for the respondent.  (instructed by Australian Securities and Investments Commission)

CRENNAN J:   Yes, Ms McLeod.

MS McLEOD:   If your Honours please, there are three issues arising in this application.  First, the construction issue:  there is a question of law, frequent application and public importance concerning the correct interpretation of section 1041H of the Corporations Act.  The fundamental error of the Full Court in this case is to have ignored the plain language of the section and the purpose of its introduction in order to justify the application of the section to the conduct of the director in this case.  Thus they have given the section far wider application than was ever intended.  The section provides in relevant parts, your Honours:

(1)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 financial product in this case is the shares of the company.  The conduct in this case is the publication to the stock exchange of a company announcement.  The issue thus concerns the characterisation of the conduct and in particular, whether conduct is conduct in relation to the shares.

Now, in this case an announcement was made to the market about the results of scientific testing of the product of the company, the attributes of that product and its possible future applications.  It was not, importantly, an announcement about the company’s shares or an announcement ancillary to fund‑raising activities.  The conduct of the director found by the learned trial judge was the director’s participation in the preparation of the statement, by way of preparation, drafting, approving, authorising and directing the company secretary to act.

We now have three distinct views, your Honours, emerging as to the correct approach to the interpretation of the section.  The view of the learned trial judge - we say the correct view – which considered the ordinary meaning of the section and concluded there was an insufficient nexus between the conduct and the content of the announcement and the shares of the company for the section to have been satisfied, that is a view supported by Justice Madgwick in the ACCC v Original Mama’s Pizza Case and it is also the view, or was also the view, of the learned authors of Ford, at least before the Full Court judgment and in the materials we have provided your Honours, you will see we have extracted the passage from Ford as it appeared before the Full Court judgment.  That is the first view.

The second view is the view of the majority which permitted an indirect or less than substantial connection between the conduct and the shares of the company, looking instead to all of the circumstances in which the conduct took place, and then the third view, the view of the minority of the Full Court, Justice Finkelstein, suggesting an unrestricted application in that no direct or immediate connection between the conduct and the shares was required so that any impact on the financial product or its value in the marketplace was a sufficient nexus.  So he looked to the consequences of the conduct rather than its character.

CRENNAN J:   He says, I think at application book 51, paragraph 12, he does flesh that point out.  He says that there is a sufficient connection, gives two reasons, because of the contents of the statements concerning the business of Citrofresh and their publication on the stock exchange.

MS McLEOD:   Yes, that is true, your Honour, he does flesh out paragraph 11 at page 50 where he refers to once the information became public it would no doubt have had a material effect on the price of the shares and in fact that is the way the case was run by the Commission below, to point to the consequences of the conduct in terms of the movement of shares as an indication of the connection.  We say that is a wrong view and that certainly is a view of Justice Finkelstein that was not shared by the majority.  For example, look at page 76 ‑ ‑ ‑

CRENNAN J:   Why do you say that is wrong?  Leaving aside agreements or disagreements of others with it ‑ ‑ ‑

MS McLEOD:   Because the connection that is required by a plain reading of the section is a connection between the conduct and, in this case, the shares of the company.  One looks to the character of that conduct and not its consequences to establish that connection, your Honour.  The interpretation of all of the Full Court judges - despite the divergence of that view – we say ignores the ordinary clear meaning of the section requiring that material connection and is contrary to the authority of technical products which states that an indirect relationship between the market and the company shares in this case is sufficient and it cannot be right as a matter of logic, your Honours.

The example given by Justice Madgwick in the Original Mama’s Case illustrates the point nicely.  Can I invite your Honours to turn to tab 5 in our folder, page 45 of the judgment, your Honours, paragraph 118:

There are many cases in which misleading conduct would not have a material connection to financial services even though there be some connection between the conduct and financial services.  The applicants gave as an example the case of a sales assistant who makes untrue representations about certain qualities of a television set so that the consumer is induced by those representations to purchase the television and does so using the store’s charge card.  The charge card is a credit facility and hence a “financial product”.  The store deals in the “financial product’ by offering the charge card and hence provides a “financial service”.

Just stopping there, your Honour, this case of course concerned the consideration of the ASIC Act rather than the Corporations Act, but for our purposes the example is pertinent.  He goes on to say:

There is therefore at least some connection between the representations made by the sales assistant and the credit purchase because the representations induced the consumer to make the purchase.  However, it could hardly be said that, without more, there was a material connection.  In the words of Dawson J in Technical Products 167 CLR at 51 it was a purely “coincidental or extraneous” connection. Such a case is hardly one that should be pursued under the ASIC Act. The misrepresentations have nothing of any substance to do with the financial service, no “material connection” with it. Such a misrepresentation about the nature and quality of a product would appear to fall squarely within the TPA.

That was a case concerned with an application for a lease. In this context the issue was whether the misleading statement was conduct in relation to financial services either under the ASIC Act or the Trade Practices Act.

CRENNAN J:   The allegedly misleading statement was about a landmark result for the company, was it not, in terms of having had test results that indicated that the company could offer a solution in relation to disease.  It was some landmark medical test results.

MS McLEOD:   Yes, the statement was concerned with the attributes of the company product and its future potential applications.

CRENNAN J:   In relation to bacteria and viruses particularly.

MS McLEOD:   Yes.  The way ASIC conducted the case was to say that because that statement affected a movement in shares, therefore this case falls within section 1041H.  We say, arguably, it might have fallen within section 52 of the Trade Practices Act assuming the statement was misleading and deceptive, but not within this section, 1041H.  That is not the work this section is designed to do and that is made clear, your Honours, if you look to the definition sections, sections 766A through to 766D.  The section, remember, refers to a “financial service” and a “financial product”.  A “financial service” relevantly includes providing financial product advice and dealing in a financial product.  That is section 766A.  The first of those, “financial product advice” means:

a recommendation or a statement of opinion, or a report of either of those things, that:

(a)is intended to influence a person or persons in making a decision in relation to a particular financial product -

Dealing in a financial product means “applying for or acquiring”, “issuing”, “underwriting”, “varying” or “disposing of a financial product”, none of which is occurring here.  Conduct in relation to a financial service or a financial product must be conduct contemplated by those activities and that is consistent with the explanatory memorandum that was referred to by the learned trial judge at paragraph 64, page 30 of the application book, your Honours.  If I can read from paragraph 64, the passage he sighted:

“A general prohibition on misleading and deceptive conduct will apply to dealings in financial products and provision of financial services.  The provisions in the Corporations Act and other applicable legislation will be harmonised to provide a single regime with respect to conduct in relation to financial products.”

This intention, your Honours, is also manifested by the examples of conduct articulated in section 1041H(2) which relate to fund‑raising activities and the like.  It is also consistent, we say, your Honours, with the protective purposes of Chapter 7.

CRENNAN J:   Is your complaint to some extent that 1041H was not the appropriate section, when one looks at 1041E for argument’s sake?  Is that part of your complaint?

MS McLEOD:   It was originally, your Honour, part of our complaint, because we said if you wanted to bring this type of application you could look to 1041E, for example, if you had an allegation of the necessary intention, but we accept that the general provision, 1041J, indicates that the sections are to have independent operation.  It may well, as I have said, your Honour, have been a matter that was to be picked up under section 52 of the Trade Practices Act but that was not pleaded either.  Can I turn to the second issue, your Honours?

CRENNAN J:   Yes.

MS McLEOD:   The second issue, the issue of liability as a principle is also a question of law and of public importance.  The Full Court in this case wrongly found personal liability of the director in the absence of findings of fact which attributed the announcement to the director personally.

CRENNAN J:   Was any consideration given to section 52?

MS McLEOD:   Not in this case, your Honour.

CRENNAN J:   It is in Division 7.  It provides that:

A reference to doing an act or thing includes a reference to causing or authorising the act or thing to be done.

MS McLEOD:   Remember in this case, your Honour, it was not alleged he act as an accessory to the publication.  It was not alleged he was indirectly liable or that he aided or abetted.  Nor was it alleged he was acting on his own behalf.  That is the context in which these allegations were made.  The notice here was sent by the company secretary to the market and it was that act, that conduct that was described as the misleading conduct.  The way the respondent put its case at first instance provided the foundation for these findings of fact by the trial judge, particularly at paragraph 87, and those findings were not challenged on appeal.

The issue of interest to the Court is then whether and in what circumstances a director may find himself or herself directly liable for the conduct of the company, which is an issue, we say, of potentially enormous significance to those conducting business in the market and beyond.  We say in this case it was an extraordinary thing in the circumstances for the Full Court to have interpreted the conduct of the announcement to the market as conduct being engaged in by the director on behalf of the company and also on his own behalf.  Nothing in the findings of fact points to that conclusion and nor do the facts in this case support the finding that the company secretary was acting as agent for the director, as Justice Finkelstein found.

That finding, we say, is contrary to the principles articulated in Cleary, particularly at paragraph 55, where the directors in that case resolved to express personal opinions in a communication to members.  Plainly such conduct may be caught in a case such as Cleary or a case such as Houghton v Arms where there were directors making oral statements to people about matters of opinion and in Cleary they were expressing views in a memorandum to members purporting to express individual opinions.

If we use the example, your Honours, of the store clerk from the Mama’s Pizza Case, when he uses the credit card or enters the lease for the customer, having passed on misleading information on the instruction of the director or store manager, is he acting as an agent for the manager or the company, we ask rhetorically?  With nothing more, of course he is the agent of the company, and is it the company or the manager who is engaged in the conduct.  Of course it is the company in this case.

The error of the Full Court is further revealed, or perhaps compounded, when we look to paragraphs 94 to 99 of the majority judgment, where the majority appeared to start from the assumption that there was a dual liability and then explored whether the director had divested himself of personal liability.  In effect, the starting positioning revealed by this line of reasoning is that you start by removing the corporate veil and then examine whether the director has reclothed himself with that protection.

Now, this issue, your Honours, is one, we say, of potentially enormous ramification.  A director who is not the sole author of a document can be liable for a statement made by a company even though it cannot be said he has made those statements personally.

CRENNAN J:   If you look at paragraph 99 there are matters referred to there which are said to distinguish Mr Narain’s participation, for example, from that of the directors in Cleary’s Case and the matter is referred to with “the preparation and drafting of the announcement”, adopting and approving its contents, and “authorising and directing” its transmission to the Australian Stock Exchange.

MS McLEOD:   We take issue with the statement in that paragraph, your Honour, that his participation was even greater than some of the directors in Cleary because as we have indicated, and it might be worth going to Cleary, that was a statement made expressing or purporting to express personal opinion.  Cleary is in our learned friend’s book of authorities, your Honour, behind tab 5, and at page 717, line 15, Justice Austin says:

Servants and agents of a corporation are not the servants and agents of each individual director merely by virtue of the fact that the directors, acting as a corporate organ on the corporation’s behalf, have engaged them or authorised them to act.  In the present case, however, it was clear that the 6 September materials, when prepared, would communicate to members and MCU holders the opinions of each of the directors individually, just as the restructure booklet had done . . . The directors must have realised that the materials that they then authorised the chairman the management team to prepare would attribute unanimous views to the board, and in that way would purport to express the individual views of each director.

This was not a case where the directors acted merely as a corporate organ, binding the corporation but not binding themselves individually.

We say on this point, your Honours, that it is an issue of importance and we understand it is an issue of importance to at least one significant matter bought by the Commission currently before the courts and potentially many others underway.

Can I turn to the third issue then briefly, your Honours.  That is the penalty privilege issue, which we say involves a question of public importance and a matter of significant injustice to the applicant.  It concerns the question of whether a respondent, particularly a respondent in a civil penalty suit, is entitled to have the case against him proved strictly and in this case to take advantage of flaws in the pleadings.

The trial judge identified the conduct which was relied upon by the respondent as the sending of letters to the stock exchange.  This is the case as expressed in the statement of claim and it was the case opened by the Commission.  The Full Court erred in deciding that because the case had been conducted by the applicant assuming a link between the conduct of the director and the contravening conduct that was not expressed in the pleading, then the director was not entitled to the benefit of that failing.  Now the flaws in the pleading were acknowledged by senior counsel for the respondent at the Full Court and they are described as a gap in our learned friend’s submissions.

CRENNAN J:   No complaint was made before the primary judge, I take it?

MS McLEOD:   No complaint was made, your Honour, but my learned friend, at first instance did open the case that way.  He said it is the conduct that constitutes the misleading and deceptive conduct, the conduct being the announcement to the market.  There are two paragraphs which seek to pin liability on the director in this case.  They are paragraphs 22 and 23, but as Mr Myers said to the Full Court, they are motivational paragraphs that do not lead anywhere.  They are not tied in ultimately and your Honours have the statement of claim in our book of authorities.  They are not paragraphs that ultimately lead anywhere at all.  It is simply a statement.

The Full Court was led into error, we say, by the way the respondent’s submission the case had been run below.  Although the respondent accepted the flaws in its pleadings, it submitted a general approach was adopted and it was not the subject of complaint by the applicant and that is reflected, we say, in the judgment of the Full Court.

Even if the case was run in the manner suggested by the respondent, it is not for a defendant to look for inferences in pleadings, to assume pleadings designed to motivate or effective or doing at something more and we say it is grossly unfair in a civil penalty case to expect the director to respond to such a case.  He is entitled to hear the case against him and decide how to respond and that is the way the case was conducted through the interlocutory stages and that is the way the case was run before the trial judge.

To allow a regulator to slide home on a general case approach and inexact proofs produces, we say, a grossly unjust result for the respondent, who is entitled in a civil penalty proceeding to know the case against him, to have it established by strict proof and to have the benefit of any flaw or ambiguity in the pleadings.

This case is, we say, of significance beyond the injustice to the individual director in this case and the Court has an opportunity to develop the law concerning civil penalty cases since Daniels and ASIC v Rich.  Now, since Daniels and ASIC v Rich, there have been a series of interlocutory decisions on issues such as discovery, interrogation and things of that nature, which have divergent views about the extent of the protection provided by the civil penalty immunity.

Those cases have been dealt with, to some extent by the introduction of section 1349(1) of the Corporations Act which abrogates the privilege against exposure to penalty to an extent by requiring a defendant to product documents and file witness statements prior to trial, but they do not address this issue as to what approach should be taken at trial and we say that should be a matter of importance and of interest to this Court.

In Vines, of course, the discussions at pages 16 and 17 in the judgment of the Chief Justice note the need to assess pleadings burdened by uncertainty in the context of civil penalty proceedings not readily understood in their broader sense.  The issue there is one, of course, of procedural fairness.  That is paragraphs 53 and 55 of the Chief Justice’s judgment.

CRENNAN J:   Of course the pleadings are not in the application book, are they?

MS McLEOD:   No, they are not, your Honour.  You have the statement of claim behind the final tab in our application book.  Tab 10 – in the volume of materials, I am sorry - tab 10 we have reproduced the statement of claim and if you look to paragraphs 22 and 23, your Honours, which are the culmination of the case against Mr Narain, there is the allegation of the engagement in the conduct in relation to a financial product or financial service and the allegation that the representations were not only made by the company but also by the director.  Those paragraphs, as we have indicated, motivate but do not lead ultimately to any complaint about conduct on his behalf.

CRENNAN J:   Was there any misunderstanding about the fact that what was conveyed by the pleading was an allegation that Mr Narain had made the representations by preparing the release and authorising and directing that it be sent to the Australian Stock Exchange?  I am not quite following what you say is the departure or problem in relation to the pleadings and Mr Narain.

MS McLEOD:   The director took advantage of the gap or the flaw in the pleadings which has been acknowledged by our learned friends.  At the Full Court ‑ ‑ ‑

CRENNAN J:   I am asking you against the background of that acknowledgment to explain how it is that you are asserting – how it is that there would be any misunderstanding or failure to know what the case against him was, having regard to the fact that it seems, from the pleadings, pretty clear that the allegation was that he had made misrepresentations by preparing this release which was the subject matter and authorising and directing that it be sent to the Australian Stock Exchange.

MS McLEOD:   He, amongst others, your Honour, but there is no allegation – and this is the crucial issue – that the contravention of the director was in breach of the section and the section, 1041H, was the gateway and the only gateway in this case through which ASIC sought to establish a breach of director’s duties.  It was not an allegation generally that his conduct in the participation of the preparation and the direction of the statement to market had put the company in jeopardy.

CRENNAN J:   They are complaining really, no final averment, no concluding averment that made a reference to the section.

MS McLEOD:   Yes, your Honour.

KIEFEL J:   What about paragraph 35 of the statement of claim?

MS McLEOD:   You will see, your Honour, that paragraph 35 commences with the words:

By making the representations referred to in paragraphs 24 and 25 -

so one must go back to 24 and 25 which refer to the statement contained in the letter.  The statement contained in the letter, as the trial judge correctly found, was conduct of the company, the announcement to the market was conduct of the company.

KIEFEL J:   Was this point taken before the trial judge?

MS McLEOD:   The point was taken that section 1041H was not made out, your Honour, and that it was not possible to use that gateway in any event to reach section 180, but certainly the learned trial judge followed the pleadings strictly and closely to reach the decision that he reached.  If the Court pleases.

CRENNAN J:   Yes, thank you, Ms McLeod.  Mr Young, we would appreciate your assistance on that last point.

MR YOUNG:   On the pleading point?

CRENNAN J:   On the pleading point.  We will not otherwise trouble you.

MR YOUNG:   Can I ask that your Honours open our summary of submissions in response.  The pleading point is dealt with at paragraphs 49 to 52.  Can I also ask your Honours to go to the pleading at the back of the applicant’s authorities?  One needs to read the pleading as a whole as the members of the Full Court all said.  There are several groups of paragraphs that come together to found the allegation against Mr Narain in terms of engaging in misleading conduct.

Paragraphs 6 to 11 deal with the drafting, approving and dispatch of the letter to the ASX and they contain allegations against Mr Narain personally.  The first parts of those paragraphs deal with his involvement in the drafting.  Paragraph 8 was the subject of a finding by Justice Goldberg to the effect that Mr Narain was not seeking the approval of the other directors; he was informing them that he would be releasing the document to the ASX.  Paragraph 11 is an allegation that he approved the content of the letter.  Paragraph 12 is the allegation that he directed Hanlon to send it and Hanlon was relevantly just a cipher.

Then there is the fact that it was in fact sent over Narain’s name in paragraphs 14 and 15.  Then paragraphs 22 and 23 use the allegations of conduct by Narain to found two allegations:  in paragraph 22 that Narain engaged in conduct in relation to a financial product and, secondly, that the representations in the letter were representations made not only by Citrofresh but also by Narain.  So that is an allegation that Narain, by all that conduct, engaged in conduct of making representations in relation to a financial product.

The representations in the 27 September letter are then alleged to be false and misleading in the paragraphs that follow leading up to paragraph 35 and then paragraph 35 alleges by making the representations Narain, that is, personally, engaged in conduct contrary to section 1041H.  There is no relevant gap in the pleadings.  There was no misunderstanding of the case at the trial.  Read as a whole, it is quite plain that there is an allegation that Narain personally engaged in conduct of approving, directing, authorising and making representations in contravention of section 1041H.

Those paragraphs are not motivational – whatever that means.  They directly allege the relevant individual conduct on the part of Mr Narain and both Justice Finkelstein and the other judges, Justices Jacobson and Gordon, pointed these matters out in the paragraphs that we have referred to in our summary of argument.  Relevantly, it is Justice Finkelstein at paragraphs 13 and 14 and it is Justices Jacobson and Gordon at paragraphs 90 and 91.

In our submission, there is no substance in that matter.  In any event, having regard to the way in which the case was run at trial and in the appeal, there is no question of general importance.  There really is, in our submission, no question in the respects raised.  Does the Court wish me to deal with the other two points?

CRENNAN J:   No.  We will not trouble you about those.  Ms McLeod, you want to say something in reply in relation to that pleading aspect?

MS McLEOD:   Yes, your Honour, in the judgment of Justice Goldberg at paragraph 89, after considering the question as to whether the director personally engaged in the conduct of publishing the announcement and making representations, he says at paragraph 89, the fact that the letter, in this case the 27 September letter:

contained the name of [the director] as one of two persons to contact for further enquiries does not carry with a finding or implication that [he] personally transmitted them to the Stock Exchange.

It follows that [he] did not engage in conduct that was misleading or deceptive or likely to mislead or deceive within s 1041H(1).  I have already found that the conduct relied upon by the Commission was not conduct “in relation to a financial product or a financial service”.

In our learned friends’ submissions, they say at paragraph 53, which appears to contradict what my learned friend has just said, that “gaps in the statement of claim may be conceded”.  They make two points there: 

First, it was obvious and incontrovertible that when the applicant directed that the release be sent to the ASX his purpose –

Just stopping there –

was that it would be published -

They take that, your Honours, from an assertion about the evidence or an inference to be drawn in relation to the announcement of 29 September.  There was no such evidence in relation to the announcement of 27 September.  We say that assertion in paragraph 53 of our learned friends’ submission has no foundation in the evidence and they say in the previous paragraph:

The gaps in the pleading which Finkelstein J considered were properly filled by the way the case was run –

Now, first of all, that raises the question, must a respondent complain about gaps in the pleading or is it entitled as a matter of fairness and justice to take advantage of those pleadings.

KIEFEL J:   It is sometimes indicative of whether or not a respondent is misled, if they say something or do not say something.

MS McLEOD:   I understand that, your Honour, but we are not saying that there was something misleading about the way it was put in this case, we are saying that ‑ ‑ ‑

KIEFEL J:   Or confused.

MS McLEOD:   No, not at all.  We are saying we are entitled to the benefit of strict proof in accordance with the pleadings.

CRENNAN J:   Thank you, Ms McLeod. 

The applicant seeks special leave to appeal against orders of the Full Court of the Federal Court of Australia (Finkelstein, Jacobsen and Gordon JJ) unanimously allowing an appeal against a decision of his Honour Goldberg J concerning an announcement to the Australian Stock Exchange. 

We are not persuaded that the points which the applicant seeks to agitate in this Court, including a complaint based on pleadings, would enjoy sufficient prospects of success to warrant a grant of special leave.  Accordingly, special leave is refused.

Are you making an application, Mr Young?

MR YOUNG:   For costs, yes, your Honour.

CRENNAN J:   It must be refused with costs.

The Court will now adjourn to reconstitute.

AT 11.17 AM THE MATTER WAS CONCLUDED