Sherman re Giraffe World v ACCC

Supreme Court of NSW|2003-11-05|Before: Barrett J, Mr J, Lindgren J

47 ACSR 505 Reported Decision : (2004) Aust Contract Reports 90-187 (2004) ATPR 41-974

CITATION : Sherman re Giraffe World v ACCC [2003] NSWSC 996 HEARING DATE(S) : 22/09/03 JUDGMENT DATE : 5 November 2003

JURISDICTION: Equity Division Corporations List JUDGMENT OF : Barrett J DECISION : Directions given to liquidator

IN THE SUPREME COURT OF NEW SOUTH WALES EQUITY DIVISION CORPORATIONS LIST

3241/03 - STEVEN JOHN SHERMAN AS LIQUIDATOR OF GIRAFFE WORLD AUSTRALIA PTY LTD v AUSTRALIAN COMPETITION AND CONSUMER COMMISSION JUDGMENT 1 The plaintiff is the liquidator of Giraffe World Australia Pty Ltd ("Giraffe World") which is subject to the form of creditors voluntary winding up that arises pursuant to s.446A of the Corporations Act 2001 (Cth) as a sequel to voluntary administration under Pt 5.3A. In that capacity, he seeks by his amended summons filed on 16 September 2003 the opinion, advice and direction of the court on questions set out in a statement of facts filed on 11 June 2003. The claim for relief is thus framed in terms appropriate to a trustee's request for advice under s.63 of the Trustee Act 1925. I approach it, however, as a request by a liquidator in a creditors voluntary winding up for directions. Discussion of the question whether directions may be given to such a liquidator may be deferred until the substantive issues have been examined. 2 Giraffe World, along with others, became in 1998 a defendant in proceedings brought by the Australian Competition and Consumer Commission ("ACCC") in the Federal Court. The ACCC alleged, in essence, that Giraffe World operated a "referral selling" and "pyramid selling" scheme contrary to the provisions of the Trade Practices Act 1974 (Cth). Those proceedings were determined adversely to Giraffe World in September 1999. The selling scheme centred upon an object called the "Ion Mat" which was said to possess particular health-giving properties. The modus operandi of Giraffe World was described at paragraph 14 of the judgment of Lindgren J (Australian Competition and Consumer Commission v Giraffe World Australia Pty Ltd (No 2) [1997] FCA 1161) in these terms ("GW" being the company I am calling "Giraffe World", "GC" being a "Giraffe Club" and "GRS" being a "Grow Rich System"): "GW conducted 'Happiness Circle' meetings (sometimes referred to simply as 'Happiness Circles' or 'HC's' within GW, - I will speak of 'HC meetings'). At these meetings the health benefits of the Mat were extolled in on-stage 'presentations' to prospective buyers in an audience. It was by being invited to attend and attending a HC meeting that a person was introduced to GW, the Mat, the GC and the GRS. Those attending were told that upon paying $2,900 for the Mat, $50 as a 'membership application fee' and $300 as a 'membership fee', they could become members of the GC. To become a member of the GC they had to sign an application form and their application had to be accepted by GW. It was possible to buy the Mat without joining the GC, but this possibility was not emphasised if it was ever volunteered at all. Persons in the audience were also told that if they joined the GC they were eligible to apply to join the GRS. In order to join the GRS, they had to sign a separate form of application for membership and be accepted by GW. It was also made clear that pre-conditions of their admission to membership of the GRS were that a person had to attend a 'Business School' (often referred to within GW as 'BS'), attend a two-day 'Management Consultant Class' (often referred to within GW as 'MCC') and 'pass an interview'. (Mr Paul Hsu, the Chief Executive Officer of GW, deposed that in practice, attendance at the Management Consultant Class was a precondition, not of membership of the GRS, but of advancement from the rank of 'Giraffe Member' to 'Giraffe Leader' (see below), however nothing turns on the matter). Membership of the GC gave the right to attend the Business School and the Management Consultant Class as well as to be interviewed with a view to acceptance as a member of the GRS. No additional money beyond the $3,250, necessarily paid in order to attain membership of the GC, was payable for membership of the GRS. Importantly, however, it was membership of the GRS that was the key to entitlement to earn 'commissions' (I need not distinguish between 'commissions' and 'bonuses' and will refer only to 'commissions') in the manner referred to below." 3 Further information about the methodology appears in the statement of facts as follows: "In brief, Giraffe World conducted 'Happiness World' meetings at which the benefits of the Ion Mat were extolled in on-stage presentations to prospective buyers. People at those meetings could become members of the 'Giraffe Club' by: (a) paying approximately $200.00 for the Ion Mat; (b) paying approximately $50.00 as a membership application fee; (c) paying approximately $300.00 as a membership fee; and (d) signing an application form which had to be accepted by Giraffe World. Members of the Giraffe Club could then also become members of the Grow Rich System by: (a) attending a business school; (b) attending a management consultant class; (c) passing an interview; and (d) signing a separate application form which had to be accepted by Giraffe World." 4 Members of the Grow Rich System became entitled to earn "commissions" from Giraffe World in a way described by Lindgren J as follows: "I need not describe every aspect of the GRS, and, therefore, of the Scheme of which the GRS was the most important part. It suffices that I give an outline at this stage. A member of the GRS was entitled to be paid commission by GW for successfully introducing' newcomers. The evidence is not clear as to what the notion of 'introduction' meant. Ultimately, nothing turns on the point, and I will assume in favour of GW and as it contends, that the commission earning event was the introduction of someone who bought a Mat, whether or not that person also joined the GC or the GRS or both.

The commissions earned were calculated according to a formula based on 'Business Volume' measured by dollar amount. Each successful introduction had a Business Value of $2,500. There is ample evidence, and it is not and could not be disputed, that an introduction of a person who bought the Mat, joined the GC and joined the GRS, and therefore paid out $3,250, generated a Business Volume of $2,500. There is also some evidence that an introduction of a person who only bought the Mat also did so. But all the promotional activity by and on behalf of GW strongly emphasised the desirability of 'going all the way' by joining the GC and the GRS, and does not seem to have drawn attention at all to the possibility of buying the Mat alone. Nonetheless, as stated above, I proceed on the assumption that the introduction of a person who bought the Mat alone generated a Business Volume of $2,500 and that if the person also joined one or both of the GC or the GRS, this did not give rise to the crediting of additional Business Volume beyond the sum of $2,500. Thus, member A of the GRS would earn a direct commission for introducing another person (B) to buy the Mat, and if B became a member of the GRS, A would earn indirect commissions as B introduced others to buy the Mat.

In addition to being entitled to be paid commissions by GW in respect of purchases of the Mat by individuals introduced by him or her, a member of the GRS was also entitled to be paid further commissions by GW as his or her 'downline agents' introduced further persons. But a downline agent was necessarily himself or herself also a commission earner, that is, a member of the GRS. In sum, a successful introduction generated the earning of commissions only for members of the GRS and it was in the interests of the immediate introducer as well as his or her 'uplines', that an 'introducee' should not only buy the Mat, but also join the GC and the GRS.

Both in the GW literature and in oral statements, references were made to the earning of commissions by 'introducing'. It is clear that in many instances this non-specific term was being used to refer to the introduction of a person to buy the Mat and to join the GC and the GRS. And it must be remembered that membership of the GRS predicated a purchase of a Mat and membership of the GC. Accordingly, to speak of paying $3,250 to join the GRS was to speak of paying that sum to buy the Mat, join the GC and join the GRS.

There were eight classes of membership of the GRS. They were ranged in ascending order beginning with 'Giraffe Member' or 'GM'. As with so much of GW's business, acronyms were used to denote the various classes of membership. The higher one's category of membership, the more 'downline' agents one had and the more indirect commissions one could earn. The progression of memberships was as follows: Giraffe Member (GM) Giraffe Leader (GL) Giraffe Retail Assistant (GRA) Giraffe Retail Manager (GRM) GRM 3 Star GRM 5 Star GRM 7 Star GRM Super Star

The system was pyramidal: each member of any particular class had more than one member of the class immediately below as a downline, that is, more than one 'downline', with GM at the base. A member's progress upwards depended on the 'Business Volume' credited to the member, that is, on the number of successful introductions made by the member or, more significantly, by his or her downline agents. For each successful introduction, the direct introducer was credited with a Business Volume of $2,500, while each upline agent of the introducer was credited with an amount determined by reference to his or her position in the pyramid in relation to the introducer. It was in a member's financial interests that his or her downlines should introduce new members.

A person was able to buy the Mat for $2,900 without becoming a member of either the GC or the GRS, although, as noted earlier, it is clear to me that this possibility was not emphasised. Apparently, as at 3 April 1999, 330 persons had bought the Mat alone. Obviously it was not in the interests of uplines or even the longer term interests of the immediate introducer that a newcomer should merely buy the Mat and not join the GC or the GRS.

Similarly, a person could pay the sum of $3,250 for the Mat and membership of the GC without joining the GRS. No doubt this might happen because the GC member did not apply to join the GRS or did not attend the Business School or the Management Consultant Class or attend or pass the interview. Apparently, as at 3 April 1999, 1,196 persons had bought a Mat and become members of the GC, but had not become members of the GRS. As indicated above, however, a person who did not join the GRS was not entitled to earn commissions. And if such a person introduced others, he or she would not generate indirect commissions for members of the GRS. Again, it was in the interests of the immediate introducer and of his or her upline agents that the introducee should join the GC and the GRS as well as buy the Mat." 5 The plaintiff, as liquidator, was successful in recovering certain moneys from persons associated with Giraffe World. Some of those moneys are the subject of an order made by this court on 20 March 2003 that they are not to be disbursed by the liquidator "until judicial advice regarding whether it is appropriate for commissions and refunds to be paid to the members of Giraffe World is first had and obtained". The plaintiff therefore seeks the opinion of the court on two questions:

(a) whether it is appropriate for claims made in respect of "commissions" to be accepted by the plaintiff and paid to the members of Giraffe World;

(b) whether it is appropriate for claims for "refunds" to be accepted by the plaintiff and paid to members of Giraffe World. 6 By order made on 15 July 2003, the ACCC was joined as defendant. Written submissions were, by direction made on 15 September 2003, filed by both the plaintiff and the ACCC. On 22 September 2003, these were supplemented by oral submissions made by their respective counsel, Mr J. Hogan-Doran and Mr Michael Evans. 7 I should deal first with a matter of terminology. Giraffe World is a company limited by shares. References to "members" of Giraffe World in the present context are not, however, references to members in the company law sense of shareholders. Rather, "members" is a term used to describe those creditors of Giraffe World who claim a refund of money paid to Giraffe World (for an Ion Mat or for other matters related to the selling scheme, including so called "membership fees" and "application fees") or make a claim for payment by reference to the terms of the "Giraffe Club" and the "Grow Rich System" arrangements purporting to create rights to "commissions". Those rights are, of their nature, contractual. Some persons make claims under both headings. 8 The submissions made on behalf of the liquidator are to the effect that the payment claims for commissions should not be met because either the agreements to pay commissions were impliedly prohibited by the Trade Practices Act or, if not so prohibited, were made to effectuate a purpose made unlawful by that Act. Corresponding submissions with respect to commissions are made by the ACCC. The second question for consideration (concerning "refunds") is addressed by the liquidator's submissions but not those of the ACCC. The liquidator submits here that refunds should be made since the joining of the Giraffe Club and the GRS were not of themselves illegal acts and public policy would be offended if the promoter of an illegal scheme were allowed to keep them. Underlying submissions in relation to the first matter is the proposition, which I do not consider controversial, that claims which could not have been enforced against the company before winding up because of illegality must not be recognised when provable debts are determined for the purposes of the wind up: Re Charles Ellis Ltd [1955] VR 214. 9 To determine the scope and effect of the relevant illegality in this case, it is necessary to look to the precise findings of Lindgren J. At paragraph 112 of his judgment, his Honour found that the ACCC had established contravention by Giraffe World of s.57 of the Trade Practices Act concerned with "referral selling". The prohibition imposed by that section is directed towards a corporation's inducing a consumer to acquire goods or services by representing certain matters. Lindgren J also found in favour of the ACCC under s.61. The general scope of that section may be appreciated by a brief description of the effect of sub-section (1) which says that a corporation contravenes the section if it is a promoter of or participant in a trading scheme of a particular kind and a participant or prospective participant makes a payment to or for the benefit of the corporation, being a payment that person s induced to make because the prospect is held out to the person of receiving payments or benefits in respect of the introduction of other participants in the scheme. By virtue of s.79, contravention of s.57 or s.61 is an offence. 10 It is appropriate to set out in full orders 1 to 11 made by Lindgren J on 2 September 1999 (noting that the applicant is the ACCC, the first respondent is Giraffe World, and the second to sixth respondents are persons associated with Giraffe World): " THE COURT GRANTS LEAVE: 1. To the applicant pursuant to s.471B of the Corporations Law to proceed with this proceeding against the first respondent ('GW') which is being wound up in insolvency. THE COURT DECLARES THAT: 2. GW contravened s.57 of the Trade Practices Act 1974 by, in trade or commerce, inducing consumers to acquire its ion mat ('Mat') and the rights and benefits, privileges and facilities associated with membership of the Giraffe Club ('GC') and the Grow Rich System ('GRS') ('Membership Services') by representing that they would, after the contracts for acquisition were made, receive commissions for successfully assisting GW to supply the Mat and Membership Services to other consumers. 3. GW contravened s.61(1) of the Trade Practices Act 1974 by, in trade or commerce and as the promoter of trading scheme known as the Giraffe Club and the Grow Rich System, inducing persons who had been invited to become participants in that trading scheme to make payments to GW by holding out to them the prospect of earning commissions in respect of the successful introduction of other persons to become participants in that trading scheme. 4. GW contravened s.61(2) of the Trade Practices Act 1974 by, in trade or commerce and as the promoter of a trading scheme known as the Giraffe Club and the Grow Rich System, attempting to induce persons to become participants in that trading scheme and to make payments to GW, by holding out the prospect of their receiving commissions in respect of the successful introduction of other persons to become participants in tat trading scheme. 5. GW contravened s.52 of the Trade Practices Act 1974 by, in trade or commerce, representing that: (i) the Mat generated or emitted negative ions; (ii) the Mat generated or increased negative ions in the human body; (iii) the use of the Mat would cure particular ailments or health conditions; (iv) the use of the Mat would relieve particular ailments or health conditions;

(v) the use of the Mat would promote health; and (vi) Australian and other Government approvals of the Mat provided endorsement of the capacity of the Mat to influence health. 6. Each of the second respondent, Akihiko Misuma, the third respondent, Robin Han, and the fourth respondent, Mark Scotte, was knowingly concerned in, and a party to, the contraventions by GW of ss.57, 61(1) and 61(2) of the Trade Practices Act 1974 referred to in declarations 2, 3 and 4 above. 7. The sixth respondent, Lucille Orr, was knowingly concerned in, and a party to, the contravention by GW of s.61(2) of the Trade Practices Act 1974 referred to in declaration 4 above. THE COURT ORDERS THAT: 8. GW be restrained from, by itself its servants or agents, in trade or commerce, engaging in conduct of the kind described in declarations 2, 3, 4 and 5 above. 9. Each of the second respondent, Akihiko Misuma, and third respondent, Robin Han, be restrained from, in trade or commerce, being knowingly concerned in, or a party to, conduct by GW of the kinds described in declarations 2, 3 and 4 above. 10. The following respondents pay in the following proportions the applicant's costs of this proceeding: (i) the first respondent, GW 60%; (ii) the second respondent, Akihiko Misuma 20%; (iii) the third respondent, Robin Han 20%. 11. The applicant have leave to move by notice of motion for orders for compensation under s.87(1A) and (1B) of the Trade Practices Act 1974." 11 The contraventions relevant for present purposes are those referred to in orders 2 and 3. In each case, the court declared that there had been a statutory contravention by inducing persons to do certain things by representing to them that they would receive commissions or by holding out to them the prospects of earning commissions. 12 These orders reflect the purpose and intent of the respective sections. The aim of s.57 is, clearly enough, to shield members of the public from attempts to persuade them to enter into transactions of a certain kind under which they will, in expectation of rebates, commissions or other benefits, assist in the introduction of prospective customers. The legislative policy works on the premise that such transactions should not be undertaken by corporations and, therefore, that people should not be put into a position in which they may effect introductions and thereby receive rebates, commissions or other benefits. In the particular circumstances considered by Lindgren J, future payment of commissions to members of Giraffe World (or a representation as to such payment) was an element of the course of conduct found to be unlawful. The illegal conduct consisted, in part, of drawing persons into introducing further potential purchasers by promise of reward. If the reward were to be given, the statutory purpose of ensuring that corporations do not, by creating an expectation of that reward, induce persons to solicit participation by others would be defeated. I am of the opinion that s.57 should be seen as impliedly precluding both the giving and the receiving of rebates, commissions and other benefits of the kind central to the success of the conduct the section makes it unlawful for corporations to undertake. 13 The same analysis seems to me to hold good in relation to s.61. A core element of the conduct engaged in in contravention of s.61(1) was an inducement consisting of or contributed to by a representation as to prospect of future reward. The section aims to preclude the effectiveness of such inducements and must therefore be taken to indicate that the prospect of reward activating the inducement is not to be effectuated by the giving of the reward. 14 There is in each section an objective of protecting the public. Rendering ineffective the inducement by which the wrongdoer seeks to beguile persons into soliciting further persons to participate is an essential element of the protection, with the result that the giving of the reward the inducement foreshadows must be denied in order to ensure that the inducement is in truth ineffective. Only if any purported contractual right of the potential recipient of the reward is rendered inoperative as a source of recovery is the statutory objective achieved. 15 Little is, I think, to be gained by any extensive analysis of the case law on the effect of statutory illegality upon contracts. The basic principle is that regard must be had to "the true effect and meaning of the statute" (St John Shipping Corporation v Joseph Rank Ltd [1957] 1 QB 267 at 286) and to "the language used and to the purpose of the statute" (Archbolds (Freightage) Ltd v S Spanglett Ltd [1961] 1 QB 374 at 390). Adopting that approach, I consider the position in this case to be that the effectiveness of contracts to pay commissions the promise or foreshadowing of which enlivens an inducement sought to be precluded by s.57 or s.61 is so inconsistent with the attainment of the purposes of the section as to indicate a legislative intention that such effectiveness is to be denied. 16 I therefore consider the submissions made by both the liquidator and the ACCC with respect to meeting of claims for commissions to be correct. 17 I must next deal with the separate question in relation to "refunds", that is, claims by persons who paid one or more of the purchase price of the Ion Mat, the $50 "membership application fee" and the $300 "membership fee". These were sums paid by members of the public as, in effect, a price for the opportunity to obtain (or, at least, to have the chance of obtaining) the benefits by way of commission and the like that were represented as available through participation in the illegally promoted schemes. By and large, people paid these moneys without receiving anything in return (except the physical Ion Mat item apparently of no real worth) and, for reasons I have already explained, must be regarded as having no enforceable claims to any commissions they may consider themselves to have earned. 18 Neither expressly nor by implication, it seems to me, can the Trade Practices Act provisions be seen as precluding claims by persons seeking to recover "refunds". It will, I think, be a matter of the liquidator's turning his mind to each claim for a "refund" and dealing with it according to the particular circumstances. If the liquidator is satisfied that, on ordinary contract and unjust enrichment principles, the claimant has shown grounds for recovery, then a refund should be made. A positive view might perhaps not be formed where a particular person had in fact received commissions (albeit commissions of the kind to which my earlier observations relate) and thereby enjoyed some quid pro quo for the outlay of the sums in respect of which a refund is sought. Such a case might be viewed differently from one in which the person concerned had received no real value from the outlay of the sums in respect of which a refund was sought. For present purposes, the point is that the Trade Practices Act provisions should not be seen as affecting in any way the decision whether a refund claim should be met. 19 The specific questions asked by the liquidator should, in my opinion, be answered as follows:

It is not appropriate for claims made in respect of commissions to be accepted by the liquidator and paid to the "members" of Giraffe World.

No provision of the Trade Practices Act 1974 should be regarded as making it inappropriate for claims for "refunds" to be accepted by the liquidator and paid to the "members" of Giraffe World. 20 It remains to consider whether the court should give to the liquidator a direction to this effect. Because this winding up is, by force of s.446A, a voluntary winding up, s.479(3) is not available as a source of jurisdiction to give directions to the liquidator. That section applies only in relation to a liquidator in a court-ordered winding up. I am nevertheless satisfied that, in terms of s.511(2) (which does apply in a voluntary winding up), it will be "just and beneficial" that the liquidator be guided by the court's determination of the questions the liquidator has raised, they being questions "arising in the winding up" as referred to in s.511(1)(a). Furthermore, any reservations there might be about determining such questions on an ex parte application by a liquidator (see Shiraz Nominees Pty Ltd v Collinson (1985) 10 ACLR 7) do not arise here, given the ACCC's active participation as a defendant. 21 The court determines the questions raised upon the liquidator's amended summons filed on 16 September 2003 in the manner stated in items 1 and 2 of the paragraph 19 of these reasons. The court also makes order 2 in the amended summons as to costs. The liquidator is at liberty to apply in the present proceeding should he perceive a need for further guidance concerning compliance with the order of 20 March 2003 in light of the determination now made. **********

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Trade Practices Act 1974(Cth)

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