AUSTRALIAN SECURITIES AND INVESTMENTS COMMISSION v MAKE IT MINE FINANCE PTY LTD

AUSTRALIAN SECURITIES AND INVESTMENTS COMMISSION v MAKE IT MINE FINANCE PTY LTD - [2015] FCA 1255 - FCA 2015 case summary — Zoe

[19]

REASONS FOR JUDGMENT 1 On 28 April 2015 I handed down judgment in this matter on the question of liability ([2015] FCA 393). These reasons should be read with those reasons. 2 The judgment arose out of two proceedings before the Court. 3 The first proceeding, VID 686 of 2014, was an application by Make It Mine Finance Pty Ltd (MIM) for: (a) a declaration that it had contravened various key requirements under the National Credit Code (the Code) (Sch 1 to the National Consumer Credit Protection Act 2009 (Cth) (the National Credit Act)) as given effect by s 3 of that Act); (b) if it was so declared, a declaration "clarifying" whether one or more of those contraventions had occurred merely because of another contravention of a key requirement of a similar kind; and (c) orders fixing a pecuniary penalty in relation to such conduct (ss 112 and 116 of the Code entitled MIM to apply for such an order). 4 In the period 1 July 2010 to 1 March 2013 MIM entered into 24,377 credit contracts with customers. MIM was obliged to include all information required by s 17 of the Code in each credit contract (the "key requirements"). It was not in dispute that the required information was not provided by MIM to debtor consumers. I granted leave to the Australian Securities and Investments Commission (ASIC) to intervene in this proceeding, although it could have intervened as of right (see s 209(1) of the National Credit Act and s 120 of the Code). 5 The second proceeding was commenced by ASIC against MIM (VID 699 of 2014). ASIC sought declarations (see ss 166, 167, 187 and 202 of the National Credit Act) that: (a) MIM had contravened items 4(1) and 6(1) of Pt 2 of Sch 2 of the National Consumer Credit Protection (Transitional and Consequential Provisions) Act 2009 (Cth) (Transitional Act); Ch 4 of the National Credit Act applies thereto (see item 37 of Pt 4 of Sch 2 to the Transitional Act) including ss 166, 167, 187 and 202; (b) MIM had contravened ss 128(c) and (d) of the National Credit Act in relation to each of 20,763 credit contracts; (c) MIM had contravened ss 130(1)(b) and (c) of the National Credit Act in relation to each such credit contract; (d) MIM was liable under s 167 of the National Credit Act to pay a pecuniary penalty in respect of each contravention. 6 ASIC alleged that MIM had engaged in conduct as a credit provider without holding an appropriate registration or licence. Further, as a credit provider, MIM was bound to take certain steps to evaluate the capacity of its customers to repay the relevant debts. ASIC alleged that between 21 April 2011 and 1 March 2013, MIM failed to: (a) make reasonable inquiries regarding each customer's financial situation; (b) verify each customer's financial situation; and (c) make the assessment required by the National Credit Act. 7 There were 20,763 credit contracts entered into in the period between 21 April 2011 to 1 March 2013 where the responsible lending provisions of the National Credit Act had been contravened. 8 I found that MIM had engaged in the following contraventions, each of which were, strictly, separate contraventions. 9 First, in terms of contraventions of the Code, MIM engaged in four strictly separate contraventions, in that in respect of 24,377 credit contracts entered into in the period 1 July 2010 to 1 March 2013 MIM: (a) contravened the key requirement (as defined in s 111(1)(a)) identified in terms of s 17(3); (b) contravened the key requirement (as defined in s 111(1)(b)) identified in terms of s 17(4); (c) contravened the key requirement (as defined in s 111(1)(c)) identified in terms of s 17(5); and (d) contravened the key requirement (as defined in s 111(1)(d)) identified in terms of s 17(6). 10 Second, MIM contravened item 4(1) of Pt 2 of Sch 2 to the Transitional Act during the period 1 July 2010 to 31 December 2010 in respect of 1,830 credit contracts. 11 Third, MIM contravened item 6(1) of Pt 2 of Sch 2 to the Transitional Act during the period 1 January 2011 to 20 April 2011 in respect of 1,784 credit contracts. 12 Fourth, MIM in the period 21 April 2011 to 1 March 2013 in respect of each of 20,763 credit contracts engaged in four separate contraventions of: (a) s 128(c) of the National Credit Act; (b) s 128(d) of the National Credit Act; (c) s 130(1)(b) of the National Credit Act; and (d) s 130(1)(c) of the National Credit Act. 13 On 15 May 2015, I made the following declarations: 1. Between 1 July 2010 and 31 December 2010 MIM has contravened item 4(1) of the Transitional Act by engaging in a credit activity, namely entering into 1,830 credit contracts, without either being registered, or holding a licence, to engage in that activity. 2. Between 1 January 2011 and 20 April 2011 MIM has contravened item 6(1) of the Transitional Act by engaging in a credit activity, namely entering into 1,784 credit contracts, without either being registered and having applied for a licence, or holding a licence, to engage in that activity. 3. Between 21 April 2011 and 1 March 2013, in respect of 20,763 credit contracts: 3.1 MIM has contravened s 128(c) of the National Credit Act by entering into a credit contract without first making an assessment in accordance with s 129 of that Act. 3.2 MIM has contravened s 128(d) of the National Credit Act by entering into a credit contract without first making reasonable inquiries of the consumer and taking reasonable steps to verify information about the consumer in accordance with s 130 of that Act. 3.3 MIM has contravened s 130(1)(b) of the National Credit Act by entering into a credit contract without first making reasonable inquiries about the consumer's financial situation. 3.4 MIM has contravened s 130(1)(c) of the National Credit Act by entering into a credit contract without first taking reasonable steps to verify the consumer's financial situation. 4. Between 1 July 2010 and 1 March 2013, in respect of 24,377 credit contracts: 4.1 MIM has contravened s 17(3)(c) of the National Credit Code by failing to disclose to the consumer the cash price of the goods the subject of the credit contract. 4.2 MIM has contravened s 17(4)(a) of the National Credit Code by failing to disclose to the consumer the annual percentage interest rate applicable to the credit contract. 4.3 MIM has contravened s 17(5) of the National Credit Code by failing to disclose to the consumer the method of calculation of the interest charges payable and the frequency of payment of interest under the credit contract. 4.4 MIM has contravened s 17(6) of the National Credit Code by failing to disclose to the consumer the total amount of interest payable under the credit contract. 14 I fixed a further hearing of both proceedings to address the question of a pecuniary penalty. No injunctive relief has been sought by ASIC. Moreover, no compensatory order has been sought. 15 The parties have not sought to put an agreed position on either a stipulated sum or the relevant range for the pecuniary penalty. Moreover, ASIC has refrained from separately expressing a view as to the appropriate sum or the relevant range. I do not need to explain how such a situation has been brought about. Accordingly, a contested hearing has been held. Various affidavits were filed by MIM and ASIC. Moreover, Mr Andre Lang, the sole director and shareholder of MIM, was closely cross-examined by Ms Elizabeth Bennett, counsel for ASIC. 16 In my view, and for the reasons that follow, MIM should pay a pecuniary penalty fixed in the sum of $1.25 million. 17 Before proceeding further, there are two preliminary observations that should be made. 18 First, one of the themes resonating through ASIC's submissions at both stages has involved the concept of "truth in lending" as the guiding paradigm. It has been asserted that this is an important contextual matter to consider in assessing MIM's conduct. ASIC has drawn my attention to Australian Finance Direct Ltd v Director of Consumer Affairs Victoria (2006) 16 VR 131 where predecessor legislation, the Consumer Credit (Victoria) Code, was considered. Reference was made to the manifest purpose of that Code being to ensure "truth in lending" (Neave JA at [166] to [168] and [188] to [189]). See also, on appeal, Australian Finance Direct Ltd v Director of Consumer Affairs Victoria (2007) 234 CLR 96 at [19] per Gleeson CJ, Gummow, Hayne and Crennan JJ where it was said, in the context of construing that Code, that "[w]ider considerations of 'truth in lending' are not to be disregarded, but they tend to divert the argument into unproductive speculation about the importance, or possible importance, to the debtors of knowledge of the holdback". I have not disregarded "truth in lending", but the vernacular of social philosophy is not useful to my task. Such phraseology does not answer the question as to the potential relevance and importance of the information said to be omitted to the potential debtor class, given their assumed level of financial sophistication, education and comprehension, and whether disclosure to such a class meaningfully provides "truth" or non-disclosure its converse. Indeed, putting to one side the context of the falsity of a proposition or its informational content, which is not a context relevant to the contraventions in question in the present case, the significance of either the absence of information or its level of generality or specificity is not appropriately analysed through an epistemological concept or by interlarding the statutory framework with a catch-phrase. 19 Second, there is nothing wrong with a commercial operator identifying a commercial opportunity in providing a service to a vulnerable class of consumers and pursuing that opportunity for profit. Such a vulnerable class may then have access to a valuable service that they would not otherwise have. Who can gainsay the direct and indirect potential benefits of such access? But legislation that is protective of such a class who are not able to protect their own interests, or where that is reasonably assumed because of the characteristics of that class, must be complied with by the operator. Such legislation in its dimensions relevant to the present case is designed to address the exogenous conduct and context of pre-contractual disclosure and contract formation, rather than endogenous conduct in the performance of obligations and the exercise of rights under the contract as formed requiring honesty and fair dealing. In the present case, prior to October 2012 Mr Lang paid lip service to MIM's statutory obligations. He kept lawyers' involvement to a minimum. And when MIM's lawyers gave prudent and correct advice, he either ignored it or implemented a variation thereof that conformed to his own convenient apparent misconceptions. Moreover, when MIM's contravening conduct had been exposed, he pursued the theme, which continued before me, that somehow MIM's lawyers should take some measure of the blame. Moreover, he sought to rely upon his relative youth and inexperience to explain the contraventions; at one stage he even referred to being "mentored" in relation to some of the conduct that I have found to be contravening. His excuses carry little weight. They had a veneer of respectability and were asserted with an air of earnestness when giving his oral evidence, but they lacked substance. His pride was to his prejudice. Nevertheless, it would appear that adequate procedures have now been put in place by MIM to remedy any systemic deficiencies. Moreover, no orders have been sought by ASIC as to any compliance program and nor has ASIC identified any deficiencies in MIM's current procedures.

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RELEVANT FACTS 20 On the penalty phase MIM relied upon various affidavits of Mr Lang and Mr Neil Busacca, accountant. 21 ASIC relied upon various affidavits of Ms Thomas, Ms Adamopoulos and Ms Curtis of ASIC, Ms Maree Kennedy of the Department of Human Services and Mr Joseph Rose of Rose Lawyers. 22 There is broad agreement between the parties about the key facts relevant to the question of penalty. In addition, I made relevant findings at the liability stage of this proceeding, with my earlier reasons to be read with these reasons. 23 In summary, from around October 2009, MIM engaged in the business of providing credit to consumers for personal, domestic or household purposes to enable them to purchase goods. MIM financed the provision of computers and associated computer equipment exclusively to customers whose main source of income was Centrelink benefits. From around 26 August 2011, MIM started financing the supply of household whitegoods to such customers. But customers without access to Centrepay (a direct debit payment system operated by Centrelink) were not able to access the service offered by MIM. The business model permitted a customer to "lease" goods, and pay a "hire fee" for 12 months. At the end of that time, title to the goods transferred to the customer. But MIM did not disclose to customers the true cost of the item, the proportion of the amount that represented interest, or the total cost of the item over 12 months. However, by emphasising the low weekly cost of the goods for "hire", MIM created the impression that the goods represented good value to the consumer, although there was a substantial gap between the "cash price" of the goods and the cost price of those goods. The business model was successful. This is unsurprising given that the pricing model applied by MIM was based on a mark up of 100% on the delivered cost excluding GST of the product financed and provided to the customer. The gross margin (gross profit divided by the sale price excluding GST) and the net margin (net profit being gross profit less storage and postage costs divided by the sale price excluding GST) were in the range of 50 to 70%. 24 The principal issues on the penalty phase have been: (a) whether and to what extent MIM sought to ensure compliance with its legal obligations prior to or at the time of its contraventions; (b) whether and to what extent MIM was aware, or ought to have been aware, that it was not complying with its legal obligations in relation to the various categories of breach; (c) whether MIM could rely upon the absence of legal advice concerning the regulatory framework as an excuse for its conduct; (d) the scope of the benefit MIM derived from its non-compliance, and the detriment, if any, suffered by consumers; and (e) MIM's capacity to pay an appropriate pecuniary penalty.

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(b) The responsible lending breaches 29 There were four contraventions of the responsible lending provisions in respect of each of 20,763 credit contracts. As noted above, the maximum penalty where the breach has been committed by a body corporate is 10,000 penalty units. 30 I indicated in my earlier reasons that I would be inclined to treat there in substance to be: (a) one contravention of s 128(c) in relation to such credit contracts; and (b) one contravention of s 128(d) in relation to such credit contracts (as illuminated by the deficiencies referred to in s 130). 31 But I accept that the contravention of s 128(d) involved two sub-categories. In The Cash Store, Davies J considered analogous provisions, where s 115(1)(d) was broadly analogous with s 128(d), and the sub-paragraphs of s 117(1) were broadly analogous with the sub-paragraphs of s 130(1). Her Honour said at [13]: In setting the penalties to be imposed, it is necessary to take into account the extent to which the same wrongful conduct involved a breach of more than one civil penalty provision: s 175 of the Credit Act. In the present case, applying that principle, the failure to make inquiries about a customer's objectives and requirements in relation to a particular contract, which was a breach by TCS of both s 115(1)(d) and s 117(1)(a) in relation to that contract, is to be treated as a single contravention. Similarly, the failure to make reasonable inquiries about a customer's financial situation in relation to a particular contract, which was a breach by TCS of both s 115(1)(d) and s 117(1)(b) in relation to that contract, is to be treated as a single contravention. The failure to verify a customer's financial situation in relation to a particular contract, which was a breach by TCS of both s 115(1)(d) and s 117(1)(c) in relation to that contract, is to be treated as a single contravention. Finally, the failure to make a preliminary assessment in relation to a particular contract, which was a breach by TCS of both s 115(1)(c) and s 116(1) in relation to that contract, is to be treated as a single contravention. A similar approach is to be taken with respect to TCS's and AFA's contraventions of Part 3-2 of the Credit Act. 32 In the context of s 128(c) there was one category of breach, namely, the failure to comply with s 129 which required the assessment for unsuitability of each credit contract, having regard to the period the assessment covered and the potential for any increase of the credit limit over the period of each credit contract. There have been 20,763 breaches of this category. 33 In the context of s 128(d), there have been the following two sub-categories of contravention: (a) First, there was a failure to make reasonable inquiries about the consumer's financial situation as required by s 130(1)(b). (b) Second, there was a failure to take reasonable steps to verify the consumer's financial situation as required by s 130(1)(c). This was a factually distinct although related inquiry. 34 Accordingly, s 128(d) involved two sub-categories of breach. But the obligation in s 130(1)(b) to make inquiries about a consumer's financial position was a precondition to or at least closely connected with the obligation in s 130(1)(c) to verify that consumer's financial position. 35 ASIC has submitted that if I applied the approach of The Cash Store, that would result in the following analysis, grouping classes of contraventions as subject to one maximum penalty per class: Breach No of Breaches Maximum Penalty ss 128(c) and 129: 20,763 $1,100,000 The failure to make an assessment in relation to a particular contract. ss 128(d) and 130(1)(b): 20,763 $1,100,000 The failure to make reasonable inquiries about a consumer's financial situation in relation to a particular contract. ss 128(d) and 130(1)(c): 20,763 $1,100,000 The failure to verify a consumer's financial situation in relation to a particular contract.

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(c) The disclosure breaches 38 Sections 17(3) to (6) of the Code each impose separate key requirements. Each serves a distinct purpose in enabling a consumer to assess the value of the credit contract compared with other credit contracts or to decide not to undertake the transaction at all. For example: (a) Section 17(3) requires disclosure of the amount of credit. This ensures that a consumer is aware that they are taking out a credit contract and the proportion in absolute terms of the cost of that credit. This provision also requires, in the case of sales by instalments, disclosure of the cash price of the goods. This ensures that a consumer is aware of what the goods would cost if he or she were to buy them outright from a retailer. (b) Section 17(4) requires disclosure of the annual percentage rate(s) of interest. This ensures that consumers can easily compare different rates of interest available to them in the marketplace. (c) Section 17(5) requires disclosure of the method of the calculation of interest and the frequency with which interest charges are to be debited. This permits consumers to easily compare offerings in the marketplace and to be fully informed of the consequences of the decision to enter the credit contract. (d) Section 17(6) requires disclosure of the total interest charges payable. This requirement permits consumers to consider the impact of the credit contract on them and to allow comparisons with other options. 39 It is a breach of the Code to fail to include any single key requirement. 40 The disclosure breaches have a separate regime for the determination of an appropriate penalty to that applying to the licensing breaches and the responsible lending breaches. The maximum penalty that can be imposed, where an application is made by either ASIC or a credit provider, for a contravention of a key requirement is an amount calculated so that the total penalty for all contraventions of that key requirement in Australia (as disclosed by the credit provider) does not exceed $500,000 (s 116 of the Code). 41 I have declared that four contraventions occurred in respect of 24,377 credit contracts in the period 1 July 2010 to 1 March 2013. Section 116 of the Code operates to provide a cap on the penalty available in respect of those four classes of breaches to $500,000 per class of breach. Accordingly, the maximum penalty is $2,000,000 for the disclosure breaches.

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(c) The conduct of the credit provider and debtor before and after the credit contract was entered into 57 It is necessary to consider the conduct of both MIM and the relevant debtors. Little further needs to be said concerning each debtor beyond generally what I have said in my earlier reasons. I also repeat what has been said earlier concerning MIM. But it is necessary to elaborate on the position of MIM. In my view, MIM did not take its obligations under the Code seriously until October 2012. 58 Mr Lang said that in late 2008 he engaged Rose Lawyers to draft an agreement between MIM and its customers and to provide advice in relation to the proposed contractual framework. Further, it was asserted that the retainer was sufficiently broad to encompass advice as to the regulatory framework. But the correspondence from Rose Lawyers makes clear that MIM initially engaged Rose Lawyers for only two hours of professional time. MIM provided a draft rental agreement for Rose Lawyers to review. The amount of time required by Rose Lawyers increased to 3 to 3.5 hours. In essence, MIM gave significant priority to obtaining a short and simple contractual document. It sought to keep legal costs and the input of lawyers to the bare minimum. 59 Notwithstanding suggestions to the contrary by MIM, in my view Rose Lawyers was not engaged to advise upon broader issues of regulatory compliance. The firm was engaged for a limited purpose in relation to the consideration of a specific draft agreement. MIM could not reasonably have expected Rose Lawyers to provide comprehensive regulatory advice in the several hours it instructed its lawyers to spend on the matter relating to the draft agreement. In my view MIM did not seek compliance advice. This is confirmed by the affidavit of Joseph Rose, the principal lawyer of Rose Lawyers at the relevant time (see in particular at [5]). His evidence was not the subject of any cross-examination. To the extent that MIM has suggested that it was the advice of Rose Lawyers that led MIM to believe that there were no compliance problems with its business model, that argument is untenable. It is not supported by the evidence. 60 Further, to the extent that Mr Lang said that he believed that he was operating a consumer leasing business, that position is also problematic. On 22 March 2011, Cash for Computers (as MIM was then known) applied for an Australian Credit Licence. In the application for the Australian Credit Licence, the key contact person was identified as Andre Lang. The application involved a number of relevant questions: Q. What activities best describe the applicant's intended business under this Australian credit licence? A. seller of goods by instalments. … Q. Does the applicant intend to provide credit as an original credit provider? A. Yes. … Q. Does the applicant have, or will it have from the date of commencement of its credit licence, arrangements and systems to ensure compliance with the obligations under the Australian credit licence? A. Yes. Q. Does the applicant have, or will it have from the date of commencement of its credit licence, a written plan that documents those arrangements and systems? A. Yes. … Q. Is there a person(s) internal to the business who will be responsible for ongoing monitoring and reporting in relation to the applicant's level of compliance and for maintaining the adequacy of the applicant's compliance arrangements from the date of commencement of its credit licence? A. Yes. 61 The application was made by Andre Lang in his capacity as director of MIM. I would note also at this point that many of the answers given by Mr Lang on behalf of MIM incorrectly stated or overstated the existence or qualities of systems in place to meet ongoing licence and regulatory requirements. 62 As part of the application, MIM also submitted a document of 50 pages to ASIC described as "Documentary Evidence" prepared for MIM and approved by Mr Lang. A number of features may be noted concerning this document: (a) First, it clearly indicated an appreciation by MIM that it was providing credit. (b) Second, it sought to represent to ASIC that it had substantial written and other procedures in place to ensure compliance with the licence, the Code and more generally the National Credit Act. The document had an air of unreality to it. It referred to procedures that were non-existent. It made empty promises. It made statements describing Mr Lang as "our Nominated Responsible Manager", a title which had no substance and in respect of responsibilities he never performed, at least in the sense represented to ASIC. (c) Third, it made statements of the "good corporate citizen" variety that were vacuous. For example, it was said: We have therefore implemented a stringent ethical and company-wide governance model, processes, systems and resources capable of ensuring access to fair and equitable treatment particularly focused on ensuring that all people, particularly low income and vulnerable consumers, have access to fair treatment as consumers in the retail marketplace and that we endeavour to redress all obstacles relating to fair treatment in a prompt and professional manner. 63 Following MIM's application and the grant of the credit licence, it received written advice from Wainwright Ryan Eid. That advice given on 5 April 2011 by Ms Jeannette Eid, a partner of the firm, included the following: (a) MIM was advised to read its Credit Licence "very carefully to understand the conditions imposed" by the Credit Licence; (b) Mr Lang was advised to undertake a formal qualification relevant to providing credit by 30 June 2011 (apparently he later obtained a qualification of some sort); (c) MIM was instructed to provide a Credit Guide (a draft of which was attached) and Information Statement (a draft of which was attached) to clients of MIM; (d) MIM was told to include certain matters in the contract. These matters were described as "very specific". They were listed as including the amount of credit, the cash price of the goods, the annual percentage rate, the calculation of interest charges, the total amount of interest payable, the repayments, and credit fees and charges. Ms Eid of that firm made clear that the above information "will be set out in a schedule for you to tailor make each contract to suit each transaction". The email of 5 April 2011 included a draft credit contract which included provision for the key requirement disclosures, and other disclosures that identified the contract as a credit contract. 64 The draft Credit Guide opened with the statement: Cash for Computers Pty Ltd must as soon as practicable after it becomes apparent to us that we are likely to enter a credit contract with you who will be the debtor under the contract, give you our credit guide in accordance with s 126 of the National Consumer Credit Protection Act 2009 (Cth). 65 The draft Information Statement included as its first heading: "Things you should know about your proposed credit contract" followed closely by "How can I get details of my proposed credit contract?". 66 In an email dated 7 April 2011, Mr Lang responded to the correspondence of Wainwright Ryan Eid: (a) stating that Mr Lang was "working on the Cert 4 as we speak", an apparent reference to the Certificate IV in Financial Services - Credit Management which Mr Lang was told was required by ASIC and was relevant to providing credit; (b) stating that MIM would make the credit guide and information statement available to customers; and (c) asking if it were possible to reduce the length of the contract to make it simpler for consumers. 67 Subsequently, Wainwright Ryan Eid sent a letter to MIM. The first heading was "Your Credit Contract", followed by the words "We enclose your Credit Contract for your approval". While the solicitors had condensed the terms of the contract, they advised that: It is, however, not possible to fit the schedule, precontractual disclosure and execution clauses into one page. The legislation has very specific requirements regarding the font and layout of the credit contract. It must be, amongst other things, easily legible and not less than 10 point. Further, the precontractual disclosure and execution clauses must be on the same page. 68 Notwithstanding the clear and succinct advice given by Ms Eid, Mr Lang deliberately made changes to the form of contract provided by Wainwright Ryan Eid, including: (a) omitting references to cash price, interest, annual percentage rate, and total credit provided; (b) changing the formula in relation to the early payout figure; and (c) deleting the disclosure statement headed "Important", and which referred to the contract as a credit contract. 69 Moreover, despite the clear advice that he had been given, Mr Lang did not retain Wainwright Ryan Eid to provide a final review of the contract, including the amendments that he made. At no stage did he provide to customers the Credit Guide or Information Statement. 70 Mr Lang has deposed that despite the explicit references to the provision of credit in this correspondence and attached documents, he did not understand that he was providing a credit contract. Mr Lang has asserted that he considered that MIM's contractual position with each customer was in the nature of a consumer lease rather than a sale of goods by instalments and that this misunderstanding explains: (a) why he did not follow the advice given in early 2011; (b) the non-disclosures otherwise required by s 17 of the Code. I note though that such an assertion was inconsistent with the credit licence application. Mr Lang's explanation for that discrepancy given in cross-examination was less than convincing. I did not find his evidence reliable on this aspect. At the least, it seems to me that Mr Lang was recklessly indifferent to MIM's obligations and chose to disregard the substance of the true nature of the contracts, namely, that they were credit contracts in the form of sales of goods by instalments. 71 More generally, MIM has suggested that the various contraventions resulted from Mr Lang's "complete dependency on advice he received", but such an excuse is untenable. It should be viewed in the context of Mr Lang: (a) failing to take proper steps to fully inform himself of the statutory regime under which MIM was operating; (b) failing to follow advice, or seek comprehensive advice; and (c) acting inconsistently with advice that he received. 72 In summary, MIM's approach to compliance prior to and during the contravening conduct suggests that it did not take its obligations under the Code seriously. 73 However, MIM has contended that it moved "swiftly" to remedy compliance breaches upon becoming aware of them. It became aware of compliance breaches in October 2012. Nevertheless the non-complying contracts continued to be used until 1 March 2013. MIM has sought to excuse its delay between October 2012 and March 2013 on the basis that time was needed to change documents, procedures and systems. I accept this excuse to some extent although in my view MIM could have acted in a more timely fashion.

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national credit act contraventions - licensing and responsible lending breaches 90 It is appropriate to consider: (a) the licensing breaches; and (b) the responsible lending breaches. 91 As I have indicated earlier, I propose to treat the licensing breaches as one course of conduct with the realistic maximum being $1.1 million. In respect of the responsible lending breaches, I propose to treat the realistic maximum as being $2.2 million with in substance two classes of contravention. But even if I had adopted ASIC's approach with the realistic maximum being $3.3 million, in my view looking at the substance of the matter, applying the totality principle in its various guises and taking into account MIM's capacity to pay, I would have fixed no different pecuniary penalty for the responsible lending breaches even if I had used ASIC's realistic maximum. 92 At the outset it is appropriate to say that I have determined the following penalties: (a) For the licensing breaches, the sum of $250,000; (b) For the responsible lending breaches, the sum of $500,000. 93 I have fixed the same penalty in total for the responsible lending breaches as I have for the disclosure breaches as I consider them to warrant, in the special circumstances of this case, similar treatment, even though the responsible lending breaches attract a higher overall maximum penalty. Although on the one hand the responsible lending breaches might be considered to be more fundamental, on the other hand the disclosure breaches were the subject of detailed legal advice that was in substance ignored. On balance I have decided to fix equal penalties for both classes. 94 Generally, s 167 of the National Credit Act does not prescribe the factors that should be taken into account in fixing penalty. In my view the factors set out earlier (including the general principles previously referred to) should be applied by analogy. I do not propose to repeat the earlier discussion or my first set of reasons. They are to be taken as incorporated by reference into this section. It is appropriate to make only the following additional observations.

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(d) The size and financial position of MIM 100 MIM's accounts disclose substantial profits. The MIM accounts for the year ending 30 June 2014 reveal the following: (a) Net profit of $8,733,484.07 (compared to $5,229,307.49 for FY2013); (b) Retained profits of $15,339,387.97 (compared to $9,507,427.09 for FY2013); (c) Receivables of $5,175,099.11; (d) Net assets of $15,339,387.97 with cash on hand of $577,458.44. 101 I should say that MIM filed an affidavit from Mr Busacca stating that applying various accounting changes suggested by the auditors of MIM, the reported net profits for FY2013 and FY2014 should be adjusted down to $4,754,883 and $5,206,180 respectively to account for further depreciation charges. 102 MIM has filed little evidence regarding its financial position as at 30 June 2015. ASIC has put forward an affidavit of Ms Maree Kennedy of DHS which states that: (a) MIM presently has 17,493 customers with a current Centrepay deduction authority for payments to MIM; and (b) in the financial year 2014/15, MIM received a total of $30,145,539.04 in deductions made via the Centrepay system. 103 At the time of the hearing before me the accounts for 30 June 2015 had not been finalised or audited. But nothing has been put before me to suggest that there has been any deterioration on the 30 June 2014 position, save for the incurring of legal expenses. The relevant income figure shown on the 30 June 2014 financial statements is $20,642,269.97 (being the figure for rental charges). This is approximately $1.72 million per month for the year 2013/2014. Current indications are that this amount has increased to $2.51 million per month for the year 2014/2015. 104 Generally, MIM's operations have been very profitable. But MIM submitted that rather than looking at profitability, cash flow should be considered. It also submitted that if I was to fix a substantial penalty that I should provide that it be paid by instalments over 12 months. 105 First, on the question of cash flow, MIM submitted the following: (a) It needed cash flow to meet its obligations both in relation to paying for goods purchased, but also other costs such as the wages of 50 full time employees, rent and the cost of information systems. (b) Relevant to cash flow was the fact that it was required to pay for products either by cash on delivery or within 30 days, which it then provided and financed to consumers. Contrastingly, the payments that it received for the goods from consumers were over a 12 month period. In summary, MIM contended that there is a mismatch in the timing of revenues and expenditures. But in my view MIM has been adequately compensated to cover the cost of the time/value of money to financially alleviate the mismatch. Moreover, it would be expected that for a maturer business, any timing issue would have been addressed and ameliorated to some extent. (c) MIM also put before me Commonwealth Bank accounts details of monthly balances from April 2012 to August 2015 to demonstrate its fluctuating cash balances which it asserted was symptomatic of its cash flow challenges. (d) Generally, it was said by Mr Lang that although profit was significant, there was not a lot of available cash. It is said that not only is this caused by the timing difficulties referred to above, but that liquid funds have to also be put aside for tax purposes. 106 I am prepared to accept to some extent that there are these cash flow difficulties and that not just the metric of profit should be looked at. Nevertheless, over a 12 month period and with a maturing business, I would have expected these difficulties to have been smoothed out to some extent. Moreover, I cannot ignore the fact that MIM's business is substantial and that its profit has been and is expected to be significant. 107 I do not consider that cash flow difficulties provide any reason not to fix the pecuniary penalties in the amounts that I have set. The scale of MIM's business is such that these penalties will not have a crippling effect upon it. 108 Second, and moreover, any real issue concerning the ability to pay a substantial penalty flowing from a cash flow problem can be dealt with by an order permitting instalment payments over 12 months. But if this is to be sought by MIM, and I have not heard ASIC on this question, I would require a proper application supported by: (a) Audited accounts for the financial year ending 30 June 2015; (b) The management budget for the current financial year; (c) Management accounts for the financial year to date; (d) A cash flow forecast for the next 12 months; (e) Material which would enable me to assess forecast EBIT and EBITDA over the next 12 months.

At a glance

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Judgment (56 paragraphs)

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Legislation Cited (6)

Cases Cited (12)