Australian Competition & Consumer Commission v Global Prepaid Communications Pty Ltd

REASONS FOR JUDGMENT 1 Several of the respondents to the proceeding move the Court for orders that the Amended Statement of Claim be struck out, alternatively that a number of paragraphs of the Amended Statement of Claim be struck out and alternatively for particulars. These motions have been preceded by voluminous correspondence between the solicitors for the parties. I will refer to the parties according to their description in the principal proceeding rather than on the motions. 2 To say the least, the facts alleged in the Amended Statement of Claim present the pleader with a very considerable challenge. Six individuals and two companies (both now in liquidation) are alleged to have carried out two separate schemes. It is alleged that one, the vending machine scheme, claimed at least 21 victims and that the other, the SIM card scheme, claimed at least six individual and one corporate victims. Many different misleading or deceptive statements are identified as being the way in which it is alleged that particular victims were enticed to part with their money. The individual respondents are alleged to have had differing degrees of involvement. The matter is further complicated by the applicant seeking to obtain compensation for the alleged victims. 3 The facts alleged bring to mind the words of Gavan Duffy CJ, Starke and McTiernan JJ (in another context) in The King v Weaver (1931) 45 CLR 321 at 334: 'It is not necessary, nor, perhaps, possible, to state exhaustively the description of fraud necessary to make criminal a combination to cheat and defraud: it is enough to say that every kind and description of fraudulent statement, conduct, trick, or device by which a party may be induced to part with his property for less than its value, or to give more than its worth for the property of another certainly falls within the description of fraud necessary to make criminal the combination to cheat or defraud.' And (at 337): '…the direction wholly fails to state the essence of the charge, namely an agreement, by means of fraudulent statements, conduct, tricks and devices, to obtain the money of divers persons and to defraud them of it.' 4 Where such a factual substratum is alleged, various strategies are open to a pleader. The one chosen in the present case is to take separate misrepresentations as contraventions of various provisions of Part IVB and V of the Trade Practices Act 1974 (Cth) (the Act) by the relevant company, by individuals knowingly concerned in the alleged contraventions and, in certain cases, by the individuals directly involved in making the misrepresentation. This has resulted in an Application of some 44 pages consisting of 217 paragraphs with numerous sub-paragraphs and an Amended Statement of Claim of 89 pages with 368 paragraphs, many of which have sub-paragraphs. The Amended Statement of Claim has been kept down to that size by means of various drafting devices which have 'rolled up' and incorporated by reference numerous other allegations. Whilst the general structure of the Amended Statement of Claim is clear enough, the commendable desire for compression has led to some obscurity and ambiguity, particularly when put under close scrutiny by counsel for the respondents. With some hesitation, and considerable regret, I have come to the conclusion that the overall result is not a satisfactory basis upon which the matter can proceed. I shall endeavour to outline the primary difficulties. I will not burden this interlocutory judgment with an attempt to summarise the Application or the Amended Statement of Claim. I will assume knowledge of each of them. 5 A potential problem lies in the initial reference to the effect upon the individuals to whom it is alleged that the representations were made. After alleging that the party concerned entered into a transaction it is simply alleged that the party who entered into the transaction 'relied upon' the representations 'including' those pleaded in certain paragraphs, these being called primary representations in argument. That is presumably an indirect way of leading to inducement or causation of damage although at that stage the representations have not been alleged to be misleading or deceptive. 6 The real difficulty arises in the section of the pleading headed 'Contraventions of the Act'. The point can be illustrated by reference to part of the Amended Statement of Claim. The first three paragraphs under that heading are as follows: '219 To the extent that the conduct of the First Respondent pleaded in paragraphs 16.1, 16.3, 16.4, … constituted representations as to the future profitability of the Vending Machines: 219.1 The representations were false or misleading or deceptive or likely or liable to mislead or deceive as, during the period from 1 March 2001 to date, the takings from the Vending Machines sold by the First Respondent to, inter alia, Arida, Bartlett, Bloom, Chaina, Crispin, Kapoor, Petrosyan, Radcliffe, Raphael and Woldemichael have not proved sufficient to meet the expenses incurred by those persons of purchasing, stocking and operating the Vending Machines; and 219.2 the First Respondent did not have reasonable grounds for making the representations and the Applicant relies upon section 51A of the Act. 220 To the extent that the conduct of the First Respondent pleaded in paragraphs 16.2, … constituted representations that the First Respondent would provide Optus Prepaid Telephone Cards for use in the Vending Machines: 220.1 the representations were false or misleading or deceptive or likely or liable to mislead or deceive because the First Respondent did not have in place a suitable agreement or arrangement, with Optus or otherwise, permitting the sale of Optus Prepaid Telephone Cards from the Vending Machines; and 220.2 the First Respondent did not have reasonable grounds for making the representations and the Applicant relies upon section 51A of the Act. 221 To the extent that the conduct of the First Respondent pleaded in paragraphs 16.5, …constituted representations as to the reliability of the Vending Machines: 221.1 the representations were false or misleading or deceptive or likely or liable to mislead or deceive because the Vending Machines were unreliable; and 221.2 the First Respondent did not have reasonable grounds for making the representations and the Applicant relies upon section 51A of the Act.' 7 Par 16 is in the following terms: '16 The First Respondent advertised the sale of the Vending Machines and distribution rights referred to in paragraphs 3.1, 3.2 and 3.3 in a Melbourne newspaper on 10 March 2001. In that advertisement the First Respondent represented, inter alia, that: 16.1 The First Respondent sought to appoint a limited number of active investors to participate in the multi million dollar Pre Paid Telecommunications Industry; 16.2 The selected applicants would be entitled to distribution rights for products including …Optus Pre-Paid Mobile Phone Cards; 16.3 The business would give the selected applicants the opportunity to earn huge profits; 16.4 The business would be the opportunity of a lifetime; 16.5 The First Respondent had introduced Vending Machines which were fantastic and hi-tech; and 16.6 The Vending Machines would be placed in locations such as airports, universities, shopping centres and backpackers hostels' 8 The reference to falsity is only appropriate in limited circumstances. However, it is convenient to use the label 'falsify' to describe the allegation that a representation is misleading or deceptive or likely to mislead or deceive. It will be observed that the representation which is falsified is not that which is pleaded (or the primary representation) but rather a secondary or deduced representation introduced by the words 'to the extent that' in referring to conduct alleged in disparate paragraphs. Further the later allegation of damage occasioned to the identified victim (eg paragraph 367) again merely alleges that the party 'relied on' the primary representations and conduct as originally pleaded although that conduct has not been falsified and there is no allegation that the misrepresentation was understood in the deduced or secondary sense. The problem is repeated rather than solved by the 'wrap up' pleading in paragraphs 326-339 (inclusive). 9 In my opinion counsel for the respondents are correct in submitting that the structure of this pleading involves a fatal mismatch. This is not to suggest that the drawing of and falsification of what have been called secondary or deduced representations which induce a transaction is not an appropriate method of pleading. Indeed, it will often be the best method of proceeding. The real message sent by of the conduct of the representor might be at a level of generality above any particular statement or action, the latter merely being the evidence by which the former is proved. However, in this case it is necessary to clearly allege (even as an alternative) the representation which is relied upon upon, to falsify it and to allege that it induced the representee to act. 10 Complaint is also made as to the effect this mode of pleading has upon the use of s 51A of the Act. The reference to 'to the extent that' and the mismatch between primary and secondary representations means that there is no clear pleading which alleges what is a future and what is not a future matter, whether in the alternative or otherwise. There is substance in this complaint. 11 It is also submitted that in many cases the facts pleaded to falsify the deduced representation could not have that effect. In particular it is submitted that the mere fact that promises or predictions are not fulfilled does not establish that the promises or predictions are misleading or deceptive. That is correct. However, that fact is relevant, and in particular circumstances may prove to be decisive. The scale, nature and timing of the shortfall, and the availability of innocent explanations for it, would all need to be taken into account. The applicant will not necessarily be limited to the experience of any one alleged victim. The complaint is about particulars. I am inclined to the view that this issue is best left to trial provided that the allegation is properly pleaded. 12 The pleading against the individuals gives rise to another set of problems. There is no difficulty in relying upon s 51A of the Act cumulatively and in the alternative against the corporate respondents, assuming it is appropriately pleaded. Reliance upon that section does not preclude other modes of proof of contravention. However it is submitted that the preponderance of current authority is against the use of s 51A to prove the liability of the corporation for breach of s 52 as an element in proof of liability of an individual alleged to be involved in such contravention pursuant to s 75B. (Australian Competition & Consumer Commission v Universal Sports Challenge Limited [2002] FCA 1276 at [43]-[47]; Australian Competition & Consumer Commission v Michigan Group Pty Ltd [2002] FCA 1439 at [298]-[303]; cf King v GIO Australia Holdings Limited (2001) 184 ALR 98 at [28]-[33].) There is no doubt that the pleading makes considerable use of s 51A in the case against the individuals. It is clear that it can have no direct impact upon the individuals except in those cases where extended personal liability is alleged, for example, because of s 6(3). The issue is whether it can be relied upon to prove corporate liability as a precursor to s 75B liability. 13 I would not be disposed to strike out a pleading seeking to utilise s 51A in that fashion. The question is controversial and the submission for the respondents involves reading an unexpressed limitation into s 51A. It is far from clear to me upon what basis that can be done. The section is not an interpretation provision subject to contrary indication. The establishment of reasonable grounds on the part of a corporation pursuant to s 51A does not depend upon the subjective knowledge or belief of those who might be regarded as the mind of the corporation. It is an objective test. That being the case, there is no inhibition upon those reasonable grounds being proved by evidence called by the individual respondent. It should not be overlooked that the requirements of knowledge for the purposes of s 75B (see Yorke v Lucas (1985) 158 CLR 661) make it unlikely that an individual would be found liable who did not have the ability to lead evidence to establish reasonable grounds on the part of the corporation. In this case the conduct of the corporation in question is usually alleged to be the conduct of the individual sought to be implicated. 14 It also needs to be borne in mind that if the submission for the respondents is correct an individual connected with an insolvent company which is either not made a party to a proceeding or becomes an inactive party will escape liability whereas a person connected with a solvent corporation which becomes an active respondent may not so escape. That would be an unlikely and unfortunate result. It is not necessary to come to a final view about this issue as, in my opinion, the single judge decisions to which reference has been made do not compel a contrary result at the pleading stage. The decision of Moore J (King v GIO Australia) is reasoned and considers the authorities. The passages from the judgment of Emmett J (ACCC v Universal Sports) are dicta and do not discuss the authorities. I am in some doubt as to the true effect of the passages from the judgment of Dowsett J (ACCC v Michigan Group) which are relied upon. The issue is best resolved at trial. 15 A number of other detailed criticisms of the pleading were advanced for counsel for the respondents. As I have found that the present Amended Statement of Claim is deficient and will need to be repleaded, it is best to consider such criticisms in a concrete setting if that be required. No doubt, counsel for the applicant will take on board the criticisms and accommodate them insofar as it is deemed necessary. I should say that some of the arguments which have been advanced by the respondents overlook the fact that the case management procedures available to and employed by the Court in cases such as this do not leave very much room for argument over particulars or fine detail as to pleading. When repleading of the matter is being examined, the availability of alternative strategies to achieve the desired objectives will no doubt be considered. 16 The result is: 1 The Amended Statement of Claim be struck out. 2 The applicant be given leave to file a further statement of claim within twenty-eight days. 3 Costs of the application be the costs of the third, fourth and sixth respondents in the proceeding. I certify that the preceding sixteen (16) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Gyles J.