The size of the company and its financial position
96 ASIC submitted that as a group, the operations of the Corporate Defendants were reasonably substantial. The Corporate Defendants were said to have had a reasonably large management structure and a large number of employees and agents. There was also said to be a significant and rapid revenue growth in the period of the contravening conduct, with the 2017 commission revenue of $19.058 million being approximately 150 percent of the 2015 figure of $12.729 million. It was submitted that, as funds were distributed between the three Corporate Defendants as reimbursement for services provided, effectively stripping Select (the primary income earner from St Andrew's, the policy underwriter) of income and profits, it is difficult to establish the true levels of cost of sales and profit. Relevantly, it was submitted that: Select derived significant revenue in the relevant period from St Andrew's; the bulk of Select's revenue from St Andrew's was passed on to IMS as "cost of sales" as a "marketing service fee" (in FY2014 and FY2015) or as "direct costs" as "commissions paid" (in FY2016 and FY2017); and BlueInc Services, which was the employing entity and thus largely responsible for wages and office costs (save for payments to labour hire providers made by IMS), received funds from IMS, and its financial records record the salary costs.
97 ASIC also submitted, referring to Australian Securities and Investments Commission v Forex Capital Trading Pty Ltd [2021] FCA 570 (Forex) at [153] that because of the cost shifting between the three Corporate Defendants, the surest guide to assessing the financial strength of the companies is to have regard to revenue. ASIC analysed those figures in relation to each Corporate Defendant. It submitted that Select ceased distribution activities in Australia on 19 March 2018. Select's revenue of $7 million for the financial year ending 30 June 2019 was said to be largely from retention activities and ongoing trailing commission entitlements. It was submitted that thereafter, the revenue position for Select has remained largely stable, with Select receiving $5.994 million for the financial year ending 30 June 2020, $6.154 million for the financial year ending 30 June 2021 and $5.918 million for the financial year ending 30 June 2022. Accordingly, it was submitted that, on any view, Select has continued to earn significant revenue since ceasing its Australian distribution business. BlueInc Services was said to have received revenue of $6.896 million and $6.096 million, and IMS $7.554 million and $8.035 million, for the years ending 30 June 2020 and 30 June 2021 respectively. However, the precise distribution within the group was said not to be clear from the financial statements, nor it was it said to be possible to identify whether there were any other sources of revenue during those years. Both IMS and BlueInc Services were said to have ceased trading, as at 30 June 2021 and 31 December 2021, respectively.
98 ASIC submitted that the income generated by Select during the relevant period was essentially commission and fees in respect of sales and retention services, and as such was at the heart of the contravening conduct in this matter. It was also submitted that: since Select ceased distributing in Australia, it has nonetheless continued to earn commission income; and, as such, the revenue remains linked to the subject matter of the contravening conduct, being insurance products sold prior to and during the relevant period.
99 ASIC accepted that the overall size and scale of the Corporate Defendants' business is, and was to a lesser degree during the relevant period, at the smaller end of the scale and does not form part of a much larger financial undertaking.
100 However, ASIC took issue with the consolidated results of the Corporate Defendants set out in their submissions, as their source and therefore reliability is not known. ASIC submitted that the basis on which intercompany transactions have been identified and eliminated was not made clear and the calculations are not transparent, in circumstances where Mr Howden chose not to explain these matters in his affidavit. Accordingly, it was submitted that the Court should place little, if any, weight on the consolidated results.
101 ASIC submitted that despite its cessation of business in Australia, the BlueInc Group continues to have a significant trailing commission asset, which, until 1 July 2021, was effectively owned by IMS (pursuant to an internal agreement that Select would pay future marketing fees to IMS). That trailing commission asset was said to have been sold to BlueInc Group on 1 July 2021 for $8,021,628, the cash component of which was $6,016,221. It was submitted that IMS effectively transferred the $6 million cash payment for that asset to BlueInc Group as dividends. ASIC submitted that by doing so, Mr Howden caused the BlueInc Group to effectively place its largest asset out of the hands of the Corporate Defendants, and closer to the hands of his wife, who is the sole shareholder of Howden Family Holdings, the ultimate owner of BlueInc Group. In addition, BlueInc Services was said to have paid BlueInc Group dividends of $375,000, $675,000 and $300,000 on 19 January 2021, 16 June 2021 and 10 August 2021, respectively.
102 ASIC submitted that as a result, the capacity of each Corporate Defendant to pay pecuniary penalties is purportedly limited after the movement of the trailing commission asset to the parent company. It was submitted that, as at 30 June 2022, Select was recorded as having net assets in the order of $1 million, BlueInc Services in the order of $600,000 and IMS in the order of $3.3 million (of which $3.1 million was said to be an unspecified intercompany loan, with opaque recoverability). However, it was submitted that the Corporate Defendants' current financial position must necessarily be viewed against the backdrop of the deliberate decision to transfer assets out of the hands of the Corporate Defendants since reservation of the Liability Judgment in this matter.
103 Further, ASIC submitted that the capacity of the Corporate Defendants to meet penalties ought to be given relatively minimal weight, particularly in light of that recent movement of assets and the payment of dividends. It was also submitted that significant weight should be given to the levels of revenue received during the period of the contravening conduct, and the fact that sales achieved during that period continue to bring revenue into the group by reason of the trailing commission asset.
104 The Corporate Defendants submitted that their size and financial position must be considered by reference to them as a collective as: they were managed as a single entity with the same interests; they shared the same owners and management structure; and the work done by each was an aspect of the same basic function of marketing, distributing and administering insurance policies. Further, it was submitted that the Corporate Defendants are essentially a family business. The Corporate Defendants provided figures (collectively) for revenue and profit for each of the financial years from that ending June 2015 until June 2022, eliminating intercompany transactions to avoid double counting of the same revenue and expense items. Those figures were as follows: for the financial year ending 30 June 2015, total revenue of $14,232,063 with a profit after tax of $734,867; for the financial year ending 30 June 2016, total revenue of $21,261,762 with a profit after tax of $496,253; for the financial year ending 30 June 2017, total revenue of $23,654,510 with a profit after tax of $3,885,223; for the financial year ending 30 June 2018, total revenue of $20,007,244 with a loss after tax of $332,166; for the financial year ending 30 June 2019, total revenue of $11,859,492 with a profit after tax of $1,058,560; for the financial year ending 30 June 2020, total revenue of $11,374,349 with a loss after tax of $3,821,256; for the financial year ending 30 June 2021, total revenue of $12,077,446 with a profit after tax of $3,003,160; and for the financial year ending 30 June 2022, total revenue of $8,198,777 with a profit after tax of $23,676. I note that these are the figures criticised by ASIC, as described at [100] above.
105 The Corporate Defendants also submitted that as a result of this proceeding, they have suffered a significant diminution in the value of their businesses. They submitted that: Select has ceased trading and no staff work on its behalf; BlueInc Services has ceased active trading and does not have any staff or clients; and IMS has ceased trading and does not have any staff or clients. As at 30 June 2022, Select was said to have had net assets of $1,012,378, BlueInc Services was said to have had net assets of $601,318 and IMS was said to have had net assets of $3,328,145.
106 The Corporate Defendants took issue with ASIC's criticism of Mr Howden for causing IMS to sell a trailing commission asset to BlueInc Group and transferring the sale price to BlueInc Group as a dividend. They submitted that: by 25 August 2021, when the dividend was declared, IMS had ceased trading; and the dividend was declared so that the operating parts of the business would have working capital. It was said to be no more than sound commercial sense that money should be put to use. It was submitted that Mr Howden has not embarked on a course of stripping the Corporate Defendants of assets. The stated intention of Mr Howden is for the Corporate Defendants to trade again after the resolution of this proceeding, which was said to obviously necessitate the Corporate Defendants being able to pay the pecuniary penalty imposed on them. It was also submitted that: the only remuneration Mr Howden and his wife received from the Corporate Defendants was a salary (said not to be extravagant or out of keeping with the services performed); and the BlueInc Group has not paid Howden Family Holdings any dividends.
107 The Corporate Defendants also took issue with ASIC's submission that the "surest guide" to assessing the financial strength of the Corporate Defendants is to have regard to revenue. They submitted that it fails to take account of the fact that the Corporate Defendants had substantial liabilities. Their profit over this period was said to be far less than the amount ASIC seeks in pecuniary penalties. Logic and financial orthodoxy were said to dictate that financial strength is demonstrated by profit rather than by revenue. Accordingly, the Corporate Defendants submitted that reliance on Forex is misplaced on the basis that, inter alia, in that case there was a vast and inexplicable gap between revenue and profit, and a lack of detail available about the relevant profit-sharing arrangement, which do not apply here.
108 It can be accepted: that the size and scale of the Corporate Defendants was, although reasonably substantial, at the smaller end of the scale; and that they do not form part of a much larger financial undertaking.
109 The approach adopted in Forex at [153], which is relied on by ASIC in support of its submission directing attention to revenue, must be read in its context. That can be readily seen by the following at [152]-[153]:
[152] As a result of the contravening conduct, clients incurred significant financial losses of money deposited to their trading accounts, and Forex CT earned significant revenue. There was no evidence before me of the specific loss or damage suffered by the eight identified clients. However, the parties agreed that Forex CT and Mr Yoshai gained a significant benefit and vast losses were incurred to clients when looking at Forex CT's operations across the Relevant Period. The realised losses incurred by all of Forex CT's clients during the Relevant Period amounts to approximately $141,886,180. Even when the realised profits of clients during the Relevant Period are taken into account (as I have already observed above) there were net losses amounting to approximately $77,619,914 which translated to a corresponding net gain to Forex CT. I am satisfied that the revenue earned by Forex CT throughout the Relevant Period was the result of the unconscionable system of conduct.
[153] As I have also observed above, after operating expenses, Forex CT's profit during the Relevant Period was $461,564. These operating expenses included costs under a risk mitigation agreement between Forex CT and a related body corporate incorporated in a foreign country. It is clear that the benefit obtained by Forex CT is broader than the financial profit. The total revenue was substantial, and Forex CT employed hundreds of employees. I am satisfied that the benefit gained by Forex CT and Mr Yoshai and the vast losses incurred by clients support the imposition of a significant pecuniary penalty.
110 As apparent from that passage, there was over $77 million in revenue, a risk mitigation agreement in place, and an ultimate profit of less than half a million dollars. It is hardly surprising that in that context, regard was had to the revenue in assessing the benefit. That case is removed from this.
111 That said, the evidence relied on by the Corporate Defendants has unsatisfactory elements. The consolidated results for the Corporate Defendants in Mr Howden's affidavit, and relied on by the Corporate Defendants, is unsourced. There is no real explanation as to how it was compiled, even though the Corporate Defendants were on notice that its lack of sourcing was a criticism made by ASIC in its written submissions, and said to impact on its reliability. Its admissibility is challenged by ASIC on that basis. Although I am prepared to accept its relevance given the relatively low bar in s 55 of the Evidence Act 1995 (Cth), the absence of explanation and source material significantly impacts on the weight that can be placed on it. There is also an absence of evidence as to the internal arrangements between the companies, including as to "management fees" and "cost recovery fees". Although referred to briefly in Mr Howden's affidavit, this was not further explained. It is apparent, as ASIC submitted, that almost all of Select's revenue was paid to IMS, and a lesser amount paid to BlueInc Services by both Select and IMS. As a result, ASIC accepts that the primary source of income for the three Corporate Defendants came in via Select, but that by reason of their choice of financial arrangements, each Corporate Defendant received significant revenue during the relevant period.
112 The Corporate Defendants were correct to accept that I might consider I do not have enough evidence to determine their real value. I accept it cannot be determined by their revenue alone. There was cost shifting between the Corporate Defendants, which makes it difficult to determine the financial strength of the companies. Further, that is not overcome simply by submitting it is necessary to look at the group together. The figures provided by the Corporate Defendant, on an all group basis, are not transparent.
113 Consequently, I only have some general sense of the size of the profits and assets.
114 This is impacted by IMS selling its trailing commission asset from the sale of the insurance policies, to BlueInc Group for about $8 million, the cash component of which was about $6 million (that is, the amount from the $8 million after tax). BlueInc Group paid the cash component to IMS, and IMS transferred the value of the trailing commissions to BlueInc Group. After that had occurred, IMS paid a $6 million dividend to the BlueInc Group. Therefore, IMS no longer has the benefit of the trailing commissions. Rather, their financial benefit is now with the BlueInc Group. In addition, the cash component that IMS obtained from the transaction is no longer with IMS because it then paid a $6 million dividend to BlueInc Group. BlueInc Group is not one of the Defendants. This all occurred in July 2021, after the liability hearing had finished and judgment was reserved. By that time the Corporate Defendants had admitted four contraventions of unconscionability and accepted four representations as false or misleading.
115 Mr Howden was the sole director of both IMS and BlueInc Group: LJ at [1]. The shareholder of the BlueInc Group, Mrs Howden, holds the shares as trustee for the Howden family's trust (which includes Mr Howden and their children).
116 The trailing commissions and the $6 million are no longer available to be used in payment of any penalty or costs that may be ordered.
117 Mr Howden denied that the sale transaction and the dividend were intended to remove money from the Corporate Defendants and put it out of the reach of the Court. He gave evidence that it was instead to make funds available for another company in the group in New Zealand, which required capital.
118 However, the timing of the sale is, to say the least, very curious. There is no evidence as to the financial status of that company in New Zealand or any other company requiring any capital at that time. The financial position of BlueInc Group is unknown. Again, the information provided by Mr Howden is scant. Regardless of Mr Howden's intent, he must at the very least have been aware that the consequence of the transaction was that the value of the asset had been removed from the hands of the Corporate Defendants at a time when they would be faced with a pecuniary penalty. It would also have been obvious to him, that this would reduce the ability of Corporate Defendants to pay any penalty and costs orders. The financial benefit is still with BlueInc Group, with the shares being held by Mrs Howden for the Howden family's trust.
119 That is relevant in assessing the Corporates Defendants' submission as to its ability to pay any pecuniary penalty. Further, in light of the Corporate Defendants' submission that the penalties sought by ASIC would lead to liquidation (based on their size and current operations), I also note that capacity to pay is not determinative. In Australian Securities and Investments Commission v One Tech Media (No 6) [2020] FCA 842, Davies J observed at [12] that:
[12] … the fact that the company may not be able to pay a pecuniary penalty does not mean that an order for a pecuniary penalty should not be made: Australian Securities and Investments Commission v The Cash Store Pty Ltd (in liquidation) (No 2) [2015] FCA 93 at [12]. It is still appropriate to impose a pecuniary penalty as a measure of the Court's disapproval of the company's conduct and as a measure of the seriousness with which the Court regards the contraventions.
120 In Australian Competition and Consumer Commission v High Adventure Pty Ltd [2005] FCAFC 247; (2006) ATPR 42-091, the Court considered a circumstance where the trial judge had expressed that he had "no intention 'of impos[ing] penalties that would ruin the respondents'": see [9]. In allowing the appeal, the Court observed at [11] that:
[11] … by focusing on the detriment to the respondents the judge ignored both the seriousness of the contravention as well as the need to fix upon an appropriate penalty by reference to the need to deter future contraventions. As the cases to which the judge was referred show, the principal, if not the sole, purpose for the imposition of penalties for a contravention of the antitrust provisions in Part IV is deterrence, both specific and general. This rule is so well entrenched that citation of authority is unnecessary. Moreover, as deterrence (especially general deterrence) is the primary purpose lying behind the penalty regime, there inevitably will be cases where the penalty that must be imposed will be higher, perhaps even considerably higher, than the penalty that would otherwise be imposed on a particular offender if one were to have regard only to the circumstances of that offender. In some cases the penalty may be so high that the offender will become insolvent. That possibility must not prevent the Court from doing its duty for otherwise the important object of general deterrence will be undermined.
121 Applying this proposition, Gordon J observed in Australian Competition and Consumer Commission v Dimmeys Stores Pty Ltd [2011] FCA 372 at [54], that:
[54] However, as deterrence is the primary objective of penalties, the financial capacity of a respondent to pay must not prevent the Court from doing its duty even if in some cases, the penalty is so high that the offender will become insolvent: … Put another way, I accept that capacity to pay is a relevant factor, but one of "less importance when balanced against the necessity of imposing a penalty that satisfies the objective of general deterrence": Australian Communications and Media Authority v Mobilegate Ltd A Company Incorporated in Hong Kong (No 6) [2009] FCA 1533 at [28] and Leahy Petroleum (No 2) [2005] FCA 254 at [9] and [11].
122 Her Honour referred to the observation of Merkel J in Australian Competition and Consumer Commission v Leahy Petroleum (No 2) [2005] FCA 254; (2005) 215 ALR 281 at [9] and [11]:
[9] … However, a contravening company's capacity to pay a penalty is of less relevance to the objective of general deterrence because that objective is not concerned with whether the penalties imposed have been paid. Rather, it involves a penalty being fixed that will deter others from engaging in similar contravening conduct in the future. Thus, general deterrence will depend more on the expected quantum of the penalty for the offending conduct, rather than on a past offender's capacity to pay a previous penalty …
…
[11] … Giving significant weight to capacity to pay in such circumstances would not only produce anomalous outcomes, such as the most culpable offender receiving the lightest penalty, but it would also reward companies for carrying on business in a manner that resulted in those companies having few, if any, assets available to pay a penalty when it is imposed …
123 There are two further submissions that it is appropriate to address at this stage.
124 As explained above at [105], the Corporate Defendants submitted that as a result of this proceeding, they have suffered a significant diminution in the value of their businesses. ASIC took issue with that submission. It must be put in context. As ASIC submitted, on Mr Howden's evidence, Select ceased trading well before this proceeding was commenced. Mr Howden's evidence was that that it did so because it was no longer commercially viable to distribute insurance policies after the Corporations Amendment (Life Insurance Remuneration Arrangements) Act 2017 (Cth) commenced, rendering its previous distribution model unviable. BlueInc Services ceased trading, on Mr Howden's evidence, as a result of the expiry of its Administrative Services Agreement with St Andrew's, which was not renewed because, under amendments to the Corporations Act on 1 January 2022, BlueInc Services would have required an AFSL to continue providing its services to St Andrew's. Accordingly, its cessation of trading was not as a result of this proceeding. On Mr Howden's evidence, IMS' business was to service the two insurance distribution businesses within the BlueInc Group, Select and Momentum Life Services (which operates in New Zealand). Its Distribution Agreement with Momentum Life Services, which is unaffected by this proceeding, ended in March 2021, and Select is not trading due to a change in legislation.
125 The submission that BlueInc Group is a "family business", must also be considered in context. Although at one level that may be correct, it is not the complete picture. BlueInc Group is a corporate group, which is controlled and run by Mr Howden, and made up of at least 10 companies, including a registered life insurer. As ASIC submitted, as at 23 August 2017, the Australian operations employed 119 persons, as well as contracted personnel through labour hire providers. As referred to above, the financial position of BlueInc Group is unknown, as the Defendants have not provided evidence of that, or of the overall size of the Group.