Australian Securities and Investments Commission v ACN 092 879 733 Pty Ltd

IN THE FEDERAL COURT OF AUSTRALIA NEW SOUTH WALES DISTRICT REGISTRY GENERAL DIVISION NSD 401 of 2012

BETWEEN: AUSTRALIAN SECURITIES AND INVESTMENTS COMMISSION

AND: ACN 092 879 733 PTY LTD (ACN 092 879 733) (Formerly known as EasyChoice Home Loans Pty Ltd)

JUDGE: NICHOLAS J DATE: 31 august 2012 PLACE: SYDNEY

INTRODUCTION 1 The applicant in this proceeding alleges that during the period on and after 1 January 2011 the first respondent contravened s 30(2) of the National Consumer Credit Protection Act 2009 (Cth) (the National Credit Act) by holding itself out, or advertising, that it engages or is able to engage in credit activity. The applicant also alleges that the second respondent was involved in the first respondent's contravention of s 30(2) within the meaning of s 169 of the National Credit Act. The applicant seeks declaratory relief against both respondents and injunctive relief against the first respondent. It also seeks the imposition of a civil penalty upon the second respondent. 2 The second respondent is and was, at all relevant times, a shareholder of the first respondent and its sole director. Prior to 23 December 2010, the registered name of the first respondent was EasyChoice Home Loans Pty Ltd. However, as I will explain, the first respondent continued to use its former name on the company's website after registration of the change of name occurred.

The Statutory Context 3 The National Credit Act and the National Consumer Credit Protection (Transitional and Consequential Provisions) Act 2009 (Cth) (the Transitional Act) established a national system of regulation and licensing of providers of consumer credit. Under the new arrangements a person could not engage in a credit activity: from 1 July 2011 unless they hold an Australian credit licence (ACL) (see ss 28 and 29 of the National Credit Act); from 1 January 2011 to 30 June 2011 (by way of transitional arrangements) unless they were registered with the applicant and had lodged an application for an ACL (see items 5 and 6 of Sch 2 to the Transitional Act). 4 Section 6 of the National Credit Act includes a table that sets out when a person engages in a credit activity. Under item 1 of the table, a person engages in credit activity if (inter alia) "the person carries on a business of providing credit, being credit the provision of which the National Credit Code applies to". 5 In order to determine whether a person carries on the business of providing such credit, it is necessary to turn to the National Credit Code (the Code) which is found in Sch 1 of the National Credit Act. Section 5 of the Code specifies the kinds of provision of credit to which the Code applies. Relevantly, s 5(1) of the Code provides: This Code applies to the provision of credit (and to the credit contract and related matters) if when the credit contract is entered into or (in the case of precontractual obligations) is proposed to be entered into: (a) the debtor is a natural person or a strata corporation; and (b) the credit is provided or intended to be provided wholly or predominantly: (i) for personal, domestic or household purposes; or (ii) to purchase, renovate or improve residential property for investment purposes; or (iii) to refinance credit that has been provided wholly or predominantly to purchase, renovate or improve residential property for investment purposes; and (c) a charge is or may be made for providing the credit; and (d) the credit provider provides the credit in the course of a business of providing credit carried on in this jurisdiction or as part of or incidentally to any other business of the credit provider carried on in this jurisdiction. 6 Section 29(1) of the National Credit Act relevantly provides: A person must not engage in a credit activity if the person does not hold a licence authorising the person to engage in the credit activity. Civil penalty: 2,000 penalty units. 7 Sections 30(1) and (2) of the National Credit Act provide: (1) A person must not hold out: (a) that the person holds a licence; or (b) that the person holds a licence authorising the person to engage in a particular credit activity; or (c) that a credit activity engaged in by the person or by someone else is exempt from a requirement to hold a licence; or (d) that, in engaging in a credit activity, the person acts on behalf of another person; or (e) that conduct, or proposed conduct, of the person is within the authority of a licensee; if that is not the case. Civil penalty: 2,000 penalty units. (2) A person must not hold out or advertise that the person engages or is able to engage in a credit activity if the person would, if the person engaged in the credit activity, contravene section 29 (which deals with the requirement to be licensed). Civil penalty: 2,000 penalty units. 8 Sections 29(1), 30(1) and 30(2) are civil penalty provisions for the purposes of the National Credit Act: see the definition in s 5 of "civil penalty provision". 9 Section 169 of the National Credit Act provides that a person who is involved in a contravention of a civil penalty provision is taken to have contravened that provision. Section 5 defines the expression "involved in" as follows: involved in: a person is involved in a contravention of a provision of legislation if, and only if, the person: (a) has aided, abetted, counselled or procured the contravention; or (b) has induced the contravention, whether by threats or promises or otherwise; or (c) has been in any way, by act or omission, directly or indirectly, knowingly concerned in or party to the contravention; or (d) has conspired with others to effect the contravention. 10 Sections 1 and 2 of the National Credit Act commenced on 15 December 2009. All other relevant provisions commenced on 1 April 2010. 11 For the purposes of this case, it is necessary to distinguish between two relevant periods. The first covers the period 1 January 2011 to 30 June 2011. The second covers the period commencing on 1 July 2011. For the first period, it is necessary to look to the relevant provisions of the National Credit Act, the Code and the Transitional Act. For the second period, it is not necessary to look beyond the relevant provisions of the National Credit Act and the Code. 12 Part 2 of Sch 2 of the Transitional Act is headed "Transitional prohibitions relating to credit activities". Division 1 of Pt 2 is concerned with the prohibitions that apply from commencement to 31 December 2010 while Div 2 is concerned with the prohibitions that apply from 1 January 2011 to the transition end day. The transition end day is 30 June 2011: see the relevant definition in s 4 of the Transitional Act. Division 3 of Pt 2 applies during the period from commencement to 30 June 2011. It is Div 2 and Div 3 of the Transitional Act that are most relevant to this case. 13 Item 6 in Div 2 of the Transitional Act relevantly provides: (1) A person must not engage in a credit activity unless: (a) the person: (i) is registered to engage in the credit activity; and (ii) has applied for a licence authorising the person to engage in the credit activity in accordance with section 36 of the National Credit Act; or (b) the person holds a licence authorising the person to engage in the credit activity. Civil penalty: 2,000 penalty units. … 14 Item 8 of Div 3 provides: Section 30 (which deals with prohibitions on holding out and advertising etc.) of the National Credit Act applies as if: (a) the reference in paragraph 30(1)(a) of the National Credit Act to a person holding a licence were a reference to a person holding a licence or being registered; and (b) the reference in paragraph 30(1)(b) of the National Credit Act to a person holding a licence authorising the person to engage in a particular credit activity were a reference to a person holding a licence authorising the person to engage in a particular credit activity, or being registered to engage in a particular credit activity; and (c) the reference in paragraph 30(1)(c) of the National Credit Act to a requirement to hold a licence were a reference to a requirement to hold a licence or be registered; and (d) the reference in paragraph 30(1)(e) of the National Credit Act to a licensee were a reference to a licensee or registered person; and (e) the reference in subsection 30(2) of the National Credit Act to contravening section 29 of the National Credit Act were a reference to contravening section 29 of the National Credit Act or item 4 or 6 of this Schedule. 15 Item 8(e) modifies the operation of s 30(2) of the National Credit Act insofar as it concerns holding out or advertising on or after 1 January 2011. As a result, s 30(2) will have been contravened by a person who, during the period 1 January 2011 to 30 June 2011, held out or advertised that they engaged, or were able to engage in, credit activity unless that person: already held an ACL; or was registered pursuant to the provisions of Pt 3 of Sch 2 of the Transitional Act and had applied for a licence under Pt 2-2 of the National Credit Act. 16 Section 166 of the National Credit Act provides: (1) Within 6 years of a person contravening a civil penalty provision, ASIC may apply to the court for a declaration that the person contravened the provision. (2) The court must make the declaration if it is satisfied that the person has contravened the provision. (3) The declaration must specify the following: (a) the court that made the declaration; (b) the civil penalty provision that was contravened; (c) the person who contravened the provision; (d) the conduct that constituted the contravention. (4) The declaration is conclusive evidence of the matters referred to in subsection (3). 17 Section 167 of the National Credit Act provides: (1) Within 6 years of a person contravening a civil penalty provision, ASIC may apply to the court for an order that the person pay the Commonwealth a pecuniary penalty. (2) If a declaration has been made under section 166 that the person has contravened the provision, the court may order the person to pay to the Commonwealth a pecuniary penalty that the court considers is appropriate (but not more than the amount specified in subsection (3)). (3) The pecuniary penalty must not be more than: (a) if the person is a natural person - the maximum number of penalty units referred to in the civil penalty provision; or (b) if the person is a body corporate, a partnership or multiple trustees - 5 times the maximum number of penalty units referred to in the civil penalty provision. (4) The pecuniary penalty may be recovered as a debt due to the Commonwealth.

The evidence 18 The applicant relied upon two affidavits. The first was that of Simon Moran. He is a lawyer employed by the applicant. Mr Moran's evidence shows that at no time has either the first respondent or the second respondent held an ACL or been registered in accordance with the provisions of Pt 3 of Sch 2 to the Transitional Act. 19 According to Mr Moran, the first respondent lodged an application for an ACL with the applicant on 2 December 2010. The application was lodged on the first respondent's behalf by Michael Doueihi who is described in the document as a solicitor and agent for the first respondent. The application included a question and answer in the following terms: What activities best describe the applicant's intended business under this Australian credit licence? finance broker mortgage broker other If other selected, please describe mortgage origination Please indicate the types of credit contracts and consumer leases to which the credit activities the applicant intends to engage in will relate. home loans (first mortgage) home loans (subsequent mortgage) 20 At about the same time as this application was lodged, the applicant sent a letter dated 3 December 2010 to the first respondent drawing attention to the introduction of the National Credit Act and some of the obligations imposed by it upon persons engaged in credit activity. 21 In late May 2011 the applicant commenced an investigation of the first respondent in relation to suspected contraventions of s 30 of the National Credit Act. 22 On 22 June 2011 the applicant issued an infringement notice to the first respondent specifying a civil penalty of $27,500 for its contravention of s 30(2) of the National Credit Act. The infringement notice asserted that between 1 January 2011 and 21 June 2011 the first respondent contravened s 30(2) of the National Credit Act by holding out or advertising that it engaged in or was able to engage in a credit activity that required an ACL. The civil penalty was not paid by the first respondent. 23 On 18 August 2011 the applicant extended the scope of the investigations to include other suspected contraventions of the National Credit Act by the first respondent and the second respondent. 24 Mr Moran deposed to various communications he had with the second respondent (Mr Elali). One of these was a telephone conversation which took place on 14 February 2012. The conversation was to this effect: Mr Moran: I am calling from the Australian Securities and Investments Commission. Mr Elali: I have stopped paying for the website. I will stop the website. Mr Moran: ASIC is considering options, one option is to issue an infringement Notice to you personally, which would be for $5,500. Mr Elali: Lets do that then. Mr Moran: I will send you an email to confirm our discussions. Could you please email back to confirm that you will agree to the Infringement Notice? Could I have your email address? The second respondent then provided Mr Moran with an email address. Later that week Mr Moran sent the second respondent an e-mail attaching a draft infringement notice. He did not receive any reply to that e-mail. 25 The applicant also relied upon an affidavit of Deidre Hunter Ward who is an investigator employed by the applicant. She gave an account of conversations which she had with Mr Doueihi and the second respondent. She had two conversations with the second respondent on 16 March 2011. During these conversations Ms Hunter Ward advised the second respondent that it was an offence for a person to hold out or to advertise that they are able to engage in credit activities when they are not licensed to do so. She told him that this would include making representations on a website that the person is able to or willing to engage in credit activity. 26 In his first conversation with Ms Hunter Ward, Mr Elali told her that the first respondent "was previously associated with GE but it is no longer dealing with them any longer." He said that the first respondent was "not currently in finance and is not doing any credit work." In his second conversation with Ms Hunter Ward, Mr Elali said that "[t]he business has not been in the credit area since 2008 …". It was at this point that Ms Hunter Ward told the second respondent: I need to advise you that even if you are not engaging in credit activity, it is an offence also for a person to hold out or advertise that they are able to engage in credit activities while they are not licensed. That would include any representations that are made on a website that they are able to or willing to engage. 27 The documentary evidence relied upon by the applicant included a transcript of a private examination of the second respondent conducted by the applicant under Pt 6-2 of the National Credit Act, website/screen captures of the website at domain name www.echl.com.au (the EasyChoice website) and various documents produced to the applicant by Melbourne IT in June 2011 that relate to the EasyChoice website. 28 The website captures include images created on 22 March 2011, 20 May 2011, 10 June 2011, 21 June 2011 and 9 March 2012 and reproduce promotional material found at the EasyChoice website which was downloaded on those dates by members of the applicant's Forensic Technology Services Team. This promotional material represents that EasyChoice Home Loans is willing and able to provide home loans to members of the public for "[p]urchase or refinance of owner occupied or investment residential property". The relevant webpages also include the following statements: EasyChoice Home Loans is all about making your finance experience an easy one. We're about balancing security and flexibility for both borrower and lender. When we approve a home loan, we enter a two-way agreement and we pride ourselves on making deals that are honest and fair to all parties involved. If this is also your idea of how a home loan should work, call EasyChoice today. 29 Interest rates are quoted on the relevant webpages, but they do not appear to have been updated for some years. The webpages include statements suggesting that the interest rate information had not been updated since August 2002.

Findings 30 I am satisfied that the first respondent held out and advertised to persons who viewed the EasyChoice website (at the very least, the applicant's investigators) on 22 March 2011, 20 May 2011, 10 June 2011, 21 June 2011 and 9 March 2012, that the first respondent engages in, or is able to engage in, the business of providing credit to persons so that they may purchase owner occupied or investment residential property or refinance credit previously provided to them so that they could purchase owner occupied or investment residential property. 31 Section 30(2) is intended to prevent persons who are not permitted to engage in conduct that is "credit activity" from holding out or advertising that they engage in, or are able to engage in, such conduct. A person may contravene s 30(2) even though he or she may never have engaged in credit activity. 32 I am satisfied that between 1 January 2011 and 30 June 2011 the first respondent was not registered with the applicant under Pt 3 of Sch 2 of the Transitional Act. I am also satisfied that at no stage did the first respondent hold an ACL issued under Pt 2-2 of the National Credit Act. 33 I find that the first respondent contravened s 30(2) of the National Credit Act by publishing on 22 March 2011, 20 May 2011, 10 June 2011, 21 June 2011 and 9 March 2012 on webpages accessible at the EasyChoice website promotional material that represented that the first respondent was willing and able to provide home loans to members of the public for the purpose of financing or refinancing purchases of owner occupied or investment residential property in circumstances where the first respondent was not legally entitled to make such loans. 34 At all relevant times the second respondent was the sole director of the first respondent. On 16 March 2011 he had a telephone conversation with Ms Hunter Ward in which she raised the matter of advertising on the EasyChoice website. In spite of her very clear warning to him, it is apparent that the second respondent did nothing about the EasyChoice website prior to 9 March 2012. 35 I am satisfied that the second respondent was knowingly concerned in the first respondent's contravention of s 30(2) of the National Credit Act and must therefore be taken to have contravened that provision. In particular, I am satisfied that the second respondent had knowledge of the essential facts giving rise to the first respondent's contravention of s 30(2) of the National Credit Act: see Yorke v Lucas (1985) 158 CLR 661 at 670.

Declarations and injunctions 36 Since I am satisfied that each of the respondents contravened s 30(2) of the National Credit Act I will make declarations as required by s 166 of the National Credit Act. 37 I am satisfied that there should be an injunction granted against the first respondent restraining it from engaging in any further holding out or advertising of the kind in which it previously engaged contrary to s 30(2) of the National Credit Act. The fact that neither of the respondents chose to appear weighs in favour of the grant of an injunction even if the conduct giving rise to the relevant contravention appears to have ceased. The applicant did not seek any injunctive relief against the second respondent.

Pecuniary Penalty 38 The maximum penalty that may be imposed for a contravention of s 30(2) of the National Credit Act is $1,100,000 for a corporation or $220,000 for an individual: see s 30(2) and s 167(3) of the National Credit Act and s 4AA of the Crimes Act 1914 (Cth). 39 The applicant did not seek any pecuniary penalty against the first respondent. This seems odd given that the infringement notice that the applicant issued to it was never paid. I would have expected the applicant to seek the imposition of a pecuniary penalty on the first respondent in circumstances where it brought this proceeding against the first respondent and sought the imposition of a pecuniary penalty against the second respondent. The applicant explained its position on the basis that the second respondent is the "alter ego" of the first respondent and that any benefit that may have accrued to the first respondent as a result of its contravention of s 30(2) could only have benefited the second respondent. However, there is no suggestion in the evidence that either respondent obtained any benefit as a result of their contraventions of s 30(2). 40 In the case of the second respondent, the applicant submitted that a pecuniary penalty in the range of $10,000 to $15,000 would be appropriate. 41 The principal object of the pecuniary penalty provisions in the National Credit Act is deterrence. As I observed in relation to s 76E of Trade Practices Act 1974 (Cth) in Australian Competition and Consumer Commission v Jutsen (No 4) [2012] FCA 503 at para [12]: It is well settled that the principal object of a pecuniary penalty under s 76E is deterrence. There are two aspects to the concept of deterrence in this context. The first is specific deterrence; in imposing a pecuniary penalty the Court aims to deter the person upon whom it is imposed from engaging in prohibited conduct of the same or a similar kind. The second is general deterrence; in imposing a pecuniary penalty the Court also aims to deter others from engaging in prohibited conduct of the same or a similar kind. 42 In its submissions the applicant accepted that the website was taken down after the proceeding was commenced. The second respondent's failure to arrange to have the website taken down (or to take other corrective action) sooner than it did was not explained. The evidence shows that the second respondent did not treat Ms Hunter Ward's warning seriously and that his attitude to the regulator's efforts to have his company comply with the law was unjustifiably non-responsive. That is a matter that I take into account in fixing an appropriate pecuniary penalty. But I also take into account that the evidence before me indicates (as the applicant concedes) that the first respondent did not actually engage in credit activity at any relevant time and that there is no reason to think that any person suffered any loss as a result of the respondents' contraventions of s 30(2). 43 In all the circumstances I am satisfied that a pecuniary penalty of $7,500 should be imposed upon the second respondent. The respondents should also pay the applicant's costs of this proceeding. 44 There will be orders accordingly. I certify that the preceding forty-four (44) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Nicholas.