In brief

In a recent decision, the Federal Court has re-emphasised the care that must be taken by company officers when making public statements on behalf of their company.

What you need to know

  • Investing in a company’s shares can expose an investor to financial risk, and any loss incurred cannot necessarily be attributed to public company financial statements;
  • If in any doubt about investing in any public company, it is prudent to seek financial advice before investing;
  • Company directors, secretaries and board members need to be extremely careful with statements they make on behalf of their company’s financial status; and
  • Misleading statements can carry personal liability.

Background

Madgwicks successfully defended the client (Client X), against a claim in damages for misleading and deceptive conduct in the Federal Court.

The applicant, a New Zealand company (Investor), claimed that when it made its first and second share purchases in a metal recycling company (Metal Recycling Company), it had relied on public statements made by or on behalf of the Metal Recycling Company by Client X, the managing director and CEO of the Metal Recycling Company and the company secretary and CFO of the Metal Recycling Company.

The Decision

The Court considered that of the numerous statements alleged to be misleading and deceptive, only two were misleading and deceptive conduct of the Metal Recycling Company and Client X. Critically, however, the Court was not satisfied that the Investor proved resulting loss from the misleading and deceptive conduct and as a result, dismissed the proceedings.

Ultimately, the Investor’s claim was unsuccessful as it failed to prove on the balance of probabilities that it would have sold its shares on the day, or a day soon after proper disclosure of the true position of the Metal Recycling Company had been provided.

During the hearing, the managing director of the Investor gave evidence that he relied on optimistic statements about a return to profitability in FY2010. Although the metal recycling company did not return to profitability in FY2010, the managing director failed to say that the Investor’s investment in the Metal Recycling Company would not have been made or maintained if the Metal Recycling Company’s expected return to profitability did not occur until FY2011. Importantly, the managing director also failed to say that the investment in the metal recycling company was strictly a short-term investment.

Conclusion

This case demonstrates the importance for company directors, secretaries and board members to be extremely careful about statements they make on behalf of companies. If a statement is found to be misleading and deceptive there is the potential that it may carry personal liability to the person making the statement.

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