Australian Securities and Investments Commission v Citrofresh International Ltd (No 2) [2010] FCA 27 will serve as a wake up call to directors of Australian companies.  Or will it?

Earlier this year, ASIC was successful in obtaining judgment against the former Managing Director and CEO of Citrofresh International Limited. The former Director of Citrofresh, now Paragon Care Limited, was pulled up on three counts:

•    Misleading and Deceptive conduct
•  Breach of Duty of Care and Diligence
•   Wrongful reliance on third party consultants

The Director was involved in drafting and approving an ASX announcement in connection with his Company’s products. Under section 1041H of the Corporations Act, the Federal Court found that the announcement was misleading and deceptive. The Court held that this announcement was linked to a financial product or service, although remote, it was enough to invoke s.1041H.    

Duty of Care and Diligence

Following a breach of the above section, holding the Director liable for dishonoring the duty of care and diligence was inevitable. Goldberg J was very clear when explaining what this duty entailed. His Honor stated that under section 180 of the Act, the test of a reasonable man was used - directors and officers are expected to demonstrate the same level of care and diligence that a reasonable person would, in the same position.

Wrongful reliance on third party consultants

The Director in defending himself argued that he relied on two consultants hired by the Company. These consultants advised and assisted with the drafting of the announcement. According to the Director, the liability here should have been reduced or removed.

The Court did not accept this argument. Both consultants lacked the technical and scientific expertise required in this matter. This logic raises the operation of section 189 of the Act. Under this section, directors cannot release themselves from their statutory duties by relying on third parties who lack the required know-how or skills.

Australian companies have recently witnessed a spate of similar cases involving misleading and deceptive conduct and breach of the duty of care. Directors, managers and officers occupying fiduciary positions must familiarize themselves with their statutory duties and the repercussions for a breach.