Australian Competition & Consumer Commission v Bio Enviro Plan Pty Ltd

The contravening schemes 3 The evidence of contravention referred to in this section is a reference to the evidence identified and set out in the summary of pleadings contained in Schedule 3 of the applicant's book of submissions at opening. That evidence is relied upon to the extent it is derived from the evidence of the witnesses Mr Lathlean, a consumer; Mr James Dean, a member of the Greenstar co-operative; and Mr Jackson, a former sales representative of the first respondent. It is also to be understood in the context of the additional evidence given at trial.

The BEP Scheme 4 This was an investment scheme involving a purchase of worms and their use in waste management projects conducted by the first respondent or other entities. The aggregate investment by investors was $1,084.00 comprising an initial payment of $220.00 for 2kg of worms followed by 36 monthly "worm farming fee" payments of $24.00. With this was an unqualified guarantee by the first respondent of a return to investors of $9,500.00 after 36 months. 5 The alleged contravention by the first respondent of s 52 for engagement in misleading or deceptive conduct comes about in relation to the representation of a guaranteed return for investors of $9,500.00 after 36 months on an investment of $1,084.00. This was both a representation of present and future fact to which s 51A of the Act applies. There is abundant evidence of the making of the representation. Furthermore it is one in respect of which there is a deemed infringement of s 52 of the Act in the absence of evidence that there were reasonable grounds for the representation. In this respect, there was no evidence for the first respondent and hence no evidence upon which a finding of reasonable grounds could be made. 6 The representation of the existence for the guaranteed return of $9,500.00 was also false within s 53(g) of the Act. This is because the contract signed by The Bio Enviro Plan Pty Ltd ("the BEP") investor provided in the small print that the first respondent was required to render payment of the sum of $9,500.00 to the investor within 90 days but only if the investor gave the first respondent a notice requiring such a payment within 14 days of expiry of the 36 month period. 7 The representations made in connection with the BEP scheme are also representations to which s 59(2) of the Act applies, as they are concerned with invitations to participate in a business activity requiring the investment of monies and work associated with that investment. An investor in the BEP scheme paid the first respondent an initial fee of $220.00 which comprised $60.00 for 2 kg of worms and an "administration fee" of $160.00, being the investment of money. The scheme also provided that the investor would use their 2kg of worms to generate income (work by the investor associated with the investment). However, the investor was required to appoint the first respondent to manage the worms to generate the income and the investor paid the first respondent a monthly worm farming management fee of $24.00 for this service.

The BUYPLUS scheme 8 This involved membership of a profit sharing scheme by payment in the case of new members of an initial registration fee of $180.00 plus a monthly fee of $70.00. For existing members of the BEP scheme the payment was of $24.00 per month. On joining the member would be allocated a position "downline" from an existing "sponsor" member. The level of profit shared amongst members depended upon the growth of the BuyPlus scheme membership and upon the number of new members which existing scheme members could "sponsor" to the scheme or who became members of the existing members' "downline." 9 The alleged contravention of the provisions relating to referral selling in s 57 of the Act by the second and third respondents by these means is uncontroverted. I accept the submissions for the applicant that the requirements of the section are met on the facts in relation to each of the respondents. 10 For the same reason I accept the submissions for the applicant that those facts also establish that the second respondent has contravened s 61(1) of the Act. There is therefore no need to reach a finding on the alternative submission that the second respondent attempted to induce payments of the relevant kind in breach of s 61(2). 11 The liability in respect of the above two sections is pressed also against the fourth respondent and remains uncontroverted.

The Greenstar Scheme 12 This scheme involved the provision of worm stock and associated products for use in waste management projects conducted by the fourth respondent and supplied to other entities (including members) pursuant to contractual arrangements under which the fourth respondent received payment. It also involved the use of a transaction card (the Greenstar card) which operated as a debit card and was used for making purchases anywhere in the world where major credit or debit cards were accepted, including use over the internet. It permitted cash withdrawals from automatic teller machines worldwide, the transfer of money worldwide and telephone calls at cheap international rates. Membership of this scheme required payment, in the case of persons who were not members of the BEP scheme, of US$150.00 joining fee and US$30.00 monthly fees. In the case of members of the BEP scheme monthly fees of US$26.40 (inclusive of GST) for 12 Months and thereafter US$30.00 per month were payable, such fees being payable out of anticipated dividends and income to be derived from participation in the Greenstar scheme. On joining a member would become a class A member, being the first level in 9 membership levels, and would be allocated a position "downline" from an existing "sponsor." A member's membership level depended upon the number of consumers who became members in the existing member's "downline." Membership of the scheme resulted in revenue being earned by the member, such revenue being dependent on the number of "downline" members of the Greenstar scheme, use of the Greenstar card and sales of worm and worm related products. Such membership also resulted in the member's entitlement to revenue derived from a share of commissions or fees. 13 I accept the submissions for the applicant that this scheme conducted by the third and fourth respondents breached the requirements of the Act in respect of misleading and deceptive conduct (s 52), referral selling (s 57), pyramid selling (s 61), s 53(c) and (g) and 59(2) of the Act. The submissions were entirely uncontradicted.

Fifth respondent 14 The requirement for proof of actual knowledge of the essential facts giving rise to the contraventions has been referred to above. 15 The fifth respondent did not give evidence. In making submissions to the Court from the bar table the fifth respondent very substantially mixed assertions of fact with submission. It should be stated that the assertions of fact form such a large part of the submission and are so heavily intertwined with any submissions as to make the task of separation of fact and submission extremely difficult. The Court has been assisted in relation to this by having a copy of the transcript of these submissions marked up by the applicant so as to distinguish assertions of fact from submissions. The Court has not given any weight to such assertions of fact because they have not qualified for acceptance as evidence. 16 So far as the closing submission of the fifth respondent make admissions of fact adverse to the interest of the fifth respondent, the case for the applicant relies upon them. I accept the submission made for the applicant that read as a whole, the closing address of the fifth respondent confirms, rather than detracts from the case against him concerning his heavy involvement in the impugned conduct of the first to fourth respondents. 17 Additionally for consideration is the fact that the failure by the fifth respondent to give evidence is unexplained. The consequence is that the Court may infer that the uncalled evidence would not have assisted his case: Jones v Dunkel (1959) 101 CLR 298. While that is not to be understood as permitting an inference that the evidence not called would have been damaging to his case, it does enable the Court to more readily draw any inference fairly to be drawn from the available evidence by reason that the applicant may have been able to prove to the contrary of the fifth respondent's evidence had he chosen to give or call evidence and been subject to cross-examination: at 308, 312 and 320-321. 18 In these circumstances the evidence of both collective and individual involvement of the fifth respondent with the corporate respondents is overwhelming. 19 The evidence discloses that the fifth respondent was intimately involved in constructing, promoting and operating each of the BEP, BuyPlus and Greenstar schemes. He was the controlling director of the first to fourth respondents. He was a 50 percent shareholder of the fourth respondent. He personally benefited from the promotion of the schemes in a number of ways. These circumstances establish that he was knowingly concerned in all of the corporate respondents' contraventions of Pt V of the Act. 20 The fifth respondent also aided and abetted each of the contraventions of the Act by the corporate respondents: s 80(1)(c) of the Act. It was he who was the driving force behind each of the schemes.

Sixth respondent 21 The sixth respondent did not give evidence so that the ability of the Court of draw a Jones v Dunkel inference applies also in his case. 22 In his submissions he denied any breach of the Act, stating his belief that Greenstar operated in a legal manner and that he had been working within the law. He denied ever having any intention to mislead or deceive people in the Greenstar program. He said he had been following the orders of the fifth respondent, believing in what was being done. 23 His submissions have to be considered with respect to the admixture of fact and submission and the presence of admissions in the same way and for the same reasons as those of the fifth respondent. I accept the submission for the applicant that nothing said in closing by the sixth respondent challenged or sought to minimise the extent of his involvement. 24 Nevertheless, the sixth respondent appeared as a person who considered he had acted with integrity and honesty and without any intention to commit the offences sought to be brought against him on the basis of his accessorial liability. The significance of that needs to be considered against the legal requirements for such liability. 25 It is important for the purposes of this proceeding to note that it was said in Yorke v Lucas at 666 in the reasons for judgment of Mason ACJ, Wilson, Deane and Dawson JJ: "It is, of course, established that contravention of [s52] does not require an intent to mislead or deceive and even though a corporation acts honestly and reasonably, it may nonetheless engage in conduct that is misleading or deceptive or is likely to mislead or deceive: Hornsby Building Information Centre Pty Ltd v Sydney Building Information Centre Ltd (1978) 140 CLR 216 at 228; Parkdale Custom Bult Funriture Pty Ltd v Puxu Pty Ltd (1982) 149 CLR 191 at 197." That being the case in respect to the principal offence by the corporation, accessorial liability cannot be different in that respect. 26 The same reasons for judgement (at 667) make apparent that for accessorial liability to be established within par (a) of s 75B (the same words as appear in s 80(1)(a)) on the basis of aiding, abetting counselling or procuring the contravention it is necessary to establish an intentional aiding, abetting, counselling or procuring. This requires that it must be established that the person said to be the subject of the accessorial liability must have knowledge of the essential matters which go to make up the offence. The High Court said in relation to Lucas: "whilst Lucas was aware of the representations - indeed they were made by him - he had no knowledge of their falsity and could not for that reason be said to have intentionally participated in the contravention." The findings of the primary judge in that case were that Lucas had acted exactly in accordance with the instructions and information given to him as managing director by a director of Treasureway. This latter company had been found to have engaged in conduct which was both misleading and deceptive by falsely representing the average weekly turnover of the business during a period preceding the sale. The primary judge found that Lucas did not know of, suspect or have reason to suspect the inaccuracy of the turnover figures and that he had in no way acted recklessly or deliberately abstained from asking questions or pursuing enquiries. 27 Brennan J in separate reasons in Yorke v Lucas at 677 addressed the point here under consideration as follows: "But s.75B(a) does require knowledge of the acts constituting the contravention and of the circumstances which give those acts the character which s.52 defines, namely, "misleading or deceptive or…likely to mislead or deceive." As the net of civil liability for a contravention does not catch those who would not be caught if s.52 created an offence, honest ignorance of the circumstances which give a representation a misleading or deceptive character or the character of a representation which is likely to mislead or deceive is inconsistent with civil liability under s.75B(a). The operation of s.75B(a) in conjunction with s.52 may be incongruous, for s.52 throws a strict liability on a corporation, but s.75B(a) does not extend liability for a s.52 contravention to a person who procures the corporation to engage in contravening conduct if that person is honestly ignorant of the circumstances that give that conduct a contravening character. 28 On liability arising pursuant to par (c) of s 75B of the Act, the joint reasons state at 670 that there can be no question that a person cannot be knowingly concerned in a contravention if he does not have knowledge of the essential facts constituting the contravention. The paragraph so far as it applies to a party requires that there be an intentional participation with the necessary intent being based upon knowledge of the essential elements of the contravention. 29 I have set these elements of the reasoning in Yorke v Lucas out in some detail because they inform the consideration of this respondent as well as others who, like him, did not give evidence and relied upon statements from the bar table that they were unaware of the element of contravention as alleged in relation to their conduct. If the present respondent had given evidence and stated his ignorance of essential facts, that would have opened his state of knowledge to cross-examination so that the Court could make findings of fact based on what the evidence properly disclosed. In the absence of such evidence, the Court has only the evidence brought for the applicant of the sixth respondent's collective and individual involvement in the events at issue. Despite his statements from the bar table, there is not present in respect of this respondent any evidence such as that given by Lucas in Yorke v Lucas. 30 The case brought against the sixth respondent is that for the purposes of s 80(1)(e) actual knowledge may be inferred from the circumstances proven at trial: Compac Computer Australia Pty Ltd v Merry (1998) 157 ALR 1; HECEC Australia Pty Ltd v Hydro-Electric Corporation (1999) ATPR 46-196; Williams v FAI Home Security (No 2) [2000] FCA 726. 31 The Court, in both Compac Computer and in Williams v FAI, relied upon the decision of the High Court in Pereira v Director of Public Prosecutions (1989) 82 ALR 217 where the High Court stated, at 219-220: "Even where, as with the present charges, actual knowledge is either a specified element of the offence charged or a necessary element of the guilty mind required for the offence, it may be established as a matter of inference from the circumstances surrounding the commission of the alleged offence. However, three matters should be noted. First, in such cases the question remains one of actual knowledge: Giorgianni v R (1985) 156 CLR 473 at 504-7; 58 ALR 641; He Kaw Teh (CLR at 570). It is never the case that something less than knowledge may be treated as satisfying a requirement of actual knowledge. … Finally, where knowledge is inferred from the circumstances surrounding the commission of the alleged offence, knowledge must be the only rational inference available. All that having been said, the fact remains that a combination of suspicious circumstances and failure to make inquiry may sustain an inference of knowledge of the actual or likely existence of the relevant matter. In a case where a jury is invited to draw such an inference, a failure to make inquiry may sometimes, as a matter of lawyer's shorthand, be referred to as wilful blindness." (Emphasis added). 32 It is then submitted that the sixth respondent had sufficient knowledge of the essential elements of the third and fourth respondents' contraventions of ss 57, 61(1) and 61(2) of the Act given: (a) the third and fourth respondents' primary activity, if not sole activity, was managing and promoting the Greenstar Scheme (which contravened the pyramid selling and referral selling provisions of the Act); (b) the sixth respondent was a director of the fourth respondent and participated in the fourth respondent's affairs as a director; and (c) the sixth respondent's personal involvement with the Greenstar Scheme, including attending, presenting and promoting the Greenstar Scheme at various meetings, and via various websites. 33 The sixth respondent as a director of the fourth respondent, took part in its activities, including the ongoing promoting of the Greenstar Scheme in contravention of ss 61(1), 61(2) and 57 of the Act. By virtue of these matters it is said the sixth respondent had actual knowledge of the falsity of the representations. 34 Alternatively, it is submitted that the sixth respondent had sufficient knowledge of the fourth respondent's activities such that they should have been suspicious and should have made inquiries, for example, about the existence of the Greenstar Card or the source of the fourth respondent's revenue. The failure to make any or any proper inquiry in these circumstances is said to be sufficient to sustain an inference of knowledge by them as to existence of the representations and their falsity. 35 Further and alternatively it is submitted that the sixth respondent has aided and abetted the third and fourth respondents' contraventions of the referral selling provisions of the Act (ss 61(1), 61(2) and 57) and of the misleading and deceptive conduct provisions (ss 52, 58(a), 53(aa), 59(2), 53(c) and 53(g)). 36 There is evidence the sixth respondent took part in promoting the Greenstar Scheme to varying degrees. It is said that if the Court finds that he was directly or indirectly, knowingly concerned in or a party to the contraventions of the Act within the meaning of s 80(1)(e), then he must have also aided and abetted such contraventions of the Act within the meaning of s 80(1)(c). 37 Additionally it is submitted that the sixth respondent was a director of the third respondent. As such he had an obligation to know the general, if not specific, activities of the third respondent. The principal, if not sole activity, of the third respondent, was to promote the Greenstar Scheme, the principal elements of which contravened ss 61(1), 61(2) and 57 of the Act. 38 It is submitted that any director of the third respondent exercising minimum obligations of a director must have become aware of the elements of the Greenstar Scheme. In fact, each of the individual directors took some part in the management of the third respondent. Therefore, each of the individual directors were, or should have been aware for the purposes of s 80(1)(c), of the essential elements of the fourth respondent's contraventions of both the referral/pyramid selling provisions of the Act and of the misleading and deceptive conduct provisions. 39 It is not necessary here to make specific findings concerning the particulars of the involvement of the sixth respondent as alleged because the evidence is uncontroverted and so must be accepted. The relevant evidence has been identified in the written closing submissions for the applicant. That evidence raises the case against the sixth respondent. The onus moved to him to negate the inferences open from that evidence that he was knowingly concerned in and was a party to the contraventions of Pt V of the Act and that he aided and abetted their commission. His statements from the bar table cannot do that. In the absence of any evidence for the sixth respondent the Court finds on the evidence that the case for the applicant is made out against him in each of the above contended respects.

Seventh respondent 40 The seventh respondent also gave no evidence. From the bar table he asserted his honesty, denied his liability and stated his view that the cooperative project was never a "scam or a rip-off." Much of what he stated was evidence and attracted objection from senior counsel for the applicant. 41 The seventh respondent's position is therefore the same as the sixth respondent's and for the reasons there set out.

Ninth respondent 42 Unlike the fifth, sixth and seventh respondents, the ninth respondent gave evidence which was open to cross-examination. 43 In his statement the ninth respondent stated that in April 1997 he became involved in worm farming. He rented a property in Upper Swan consisting of 10 acres and expended a sum of $120,000.00 for establishment and maintenance of that property. In mid-1998 he was approached by the fifth respondent who agreed to purchase worms and worm casting. In mid-September of that year the fifth respondent proposed to him that, in lieu of being paid for his worms, the ninth respondent should become a ten percent shareholder in "his company" and a director of it. Additionally the fifth respondent proposed that the ninth respondent be employed on a salary of $40,000 per annum to maintain and manage the worm facility. The ninth respondent accepted these offers. 44 The ninth respondent also stated that he was not sure of which company he had become a director. He thought it was Australian Environmental Technologies Pty Ltd but now understood it to be Australian Environmental Technologies International Pty Ltd. In late 1999 he discovered that the fifth respondent had made him a director of the BuyPlus Co-operative, now know as the Greenstar Co-operative. 45 The lease of the ninth respondent's worm farm remained in his name and he has a present liability to meet the rental. Since September 1998 his role has been to manage and farm the worms at Upper Swan. Expenses were paid by "Mr Smith's companies" but he was not sure which ones. He took no part in the active management or administration of any of "Mr Smith's companies" apart from his duties in maintaining the worm farm. His involvement in the administrative office at Midvale was limited to picking up his wages, attending staff meetings, providing technical information when requested and attending directors' meetings. So far as staff meetings were concerned he had no reason to doubt that there was anything improper or wrong with any of the companies and it was not until the intervention of the applicant that he became concerned. Directors' meetings were characterised as providing very little detail and no financial reports. When he raised concerns about the Greenstar card, he was informed by the fifth and seventh respondent that he was being negative and that he should stick to his duty to maintain the farm. He said that the situation was therefore not one where you could automatically come to a conclusion that something was wrong. Again it was not until the intervention of the applicant that he realised the card would "probably not happen." 46 Additionally the ninth respondent testified that he did not have anything to do with authorising or setting up the companies' website or in promoting the scheme at any meetings. When asked to attend a meeting to provide technical information he did so but without any understanding that such attendance involved him in any illegal activity. He had no input to the issue of any brochure nor the authorisation of its use. Neither the brochures, the website nor any other material the companies produced was ever seen at a directors' meeting or authorised by it. It had been produced and distributed without any reference to him. 47 It is not necessary to rehearse the cross-examination in detail because the effect of it is reflected in the submissions for the applicant concerning the evidence of the ninth respondent. The submissions are that he was at all times a director of the third respondent. He was in addition a signatory to bank accounts until 17 October 2001. He attended directors' meetings from time to time. He was present at the launch of Greenstar on 19 August 2000 and was aware of the circulation and distribution of the green and red brochures and their contents. He took no steps to personally establish any degree of fact in justification for the representations identified and complained of by the applicant, relying on what the other directors, primarily the fifth respondent, had told him. He was also aware that a very significant amount of money went into Greenstar from investor consumers subsequent to 19 August 2000 whilst at the same time knowing that there were doubts and uncertainties as to in fact getting access to a performing Greenstar card as referred to in the Greenstar brochure. This was mentioned by the fifth respondent to the audience on 19 August 2000 and was also constantly promised thereafter in internet publications to Greenstar members on various websites. It is submitted for the applicant that the ninth respondent knew about all the card problems and, at minimum, acquiesced in continuance of holding out the prospect of its imminent arrival whilst acquiescing in the money to inflow in the meantime. 48 Reverting to the earlier consideration of the reasoning in Yorke v Lucas above, in reaching a finding that the ninth respondent aided and abetted the first to fourth respondents, it is necessary to consider whether he intentionally aided and abetted. Such a finding can only be reached if the ninth respondent had knowledge of the essential matters which go to make up the offence. Absent knowledge of the misleading and deceptive character of the representations, it cannot be concluded that he intentionally participated in the contravention of s 52 of the Act. Unlike the case of the fifth, sixth and seventh respondents, there is evidence of his state of mind at the relevant time. In my opinion that is not negated on this point by the considerations made for the applicant on the evidence of the ninth respondent. Evidence of participation is open to be understood in the context of the evidence of the state of knowledge at the time of participation. Duty to act as a director does not negate the evidence of the state of knowledge where the state of knowledge is itself determined by an arguable failure to inform the mind to the level required by proper performance of the duties of a director. The question is one of fact: what was the state of mind and not what it ought to have been if the duties of a director had been properly performed. 49 I accept the evidence of the ninth respondent that he was not aware of any possibility of any contravention until such time as the applicant intervened. The view of him which I formed from my observations of him giving evidence was that he was as he claimed a worm farmer, unexperienced in the world of business and finance, led by and reliant upon what he was told primarily by the fifth respondent. He was a person who had played a technical and low key role in the events in which he participated. His participation, therefore, was not a knowing participation in the essential character of the conduct contravening s 52. 50 The application of the concept of aiding and abetting is also sought in relation to the contravention of s 58(a) of the Act. That paragraph provides that a corporation shall not, in trade or commerce, accept payment or other consideration for goods or services where, at the time of the acceptance the corporation intends not to supply the goods or services or to supply goods or services materially different. While it is the case that the ninth respondent knew of the problems facing the Greenstar card, I do not consider there is any evidence which either expressly or by inference can support a finding that the ninth respondent had knowledge at any time that the first to fourth respondents or any of them intended not to supply the card or to supply something materially different. His knowledge of the problems facing the card goes nowhere near this. It is in any event to be understood in the context of his evidence that he was told optimistic things concerning the card and was told to adhere to his side of the business in maintaining the worm farm. His participation in a promotional article on the green matters website was itself limited to his knowledge of the characteristics of worms and their role in regenerating the earth's topsoil. 51 For these reasons I do not consider the applicant's case against the ninth respondent is made out.

Relief 52 Other than in respect of the ninth respondent it is appropriate that relief be granted in the terms of the minute of proposed final orders tendered on behalf of the applicant and uncontroverted at the hearing. 53 In addition to declarations, the relief appropriately includes injunctions cast without geographical restriction having regard to s 5(1) of the Act, the international scope of the Greenstar Scheme and its promotion on the internet. 54 The mandatory injunctions are supported by s 80 and s 80A (this latter section being unaffected by its repeal). Corrective advertising orders are supported by reference to the same sections. 55 The Court has been advised of reports that the fifth respondent has recently died while overseas. Other parties, namely the applicant and the seventh respondent, have not accepted the correctness of those reports in the absence of production of a death certificate. The Court has not been informed that such a certificate is yet available. There is no reason in law arising from these circumstances why these reasons should not be delivered, given that the hearing of the case against fifth respondent was one in which he fully participated. Parties or their counsel will be heard on the making of the orders if appropriate. I certify that the preceding fifty-five (55) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice RD Nicholson.

Counsel for the Applicant: Mr KJ Martin QC with Mr S Adams

Solicitor for the Applicant: Corrs Chambers Westgarth

No appearance for the First, Second, Third and Fourth Respondents

The Fifth, Sixth and Seventh Respondents appeared in person

Counsel for the Eighth Respondent: Mr M de Kerloy

Solicitor for the Eighth Respondent: Moni de Kerloy Solicitors

Date of Hearing: 24 - 28 June 2002

Date of last written submissions: 11 February 2003

Date of Judgment: 24 March 2003