Crossan, David Stanley v Commons, Allen Stanley

[1984] FCA 349

Re: DAVID STANLEY CROSSAN
And: ALLAN STANLEY COMMONS
Nos. NTG56-68 of 1983
Trade Practices

COURT

IN THE FEDERAL COURT OF AUSTRALIA

NORTHERN TERRITORY DISTRICT REGISTRY
GENERAL DIVISION
Muirhead J.

CATCHWORDS

Trade Practices - Penalties - Misleading advertisements - misleading statement - franchise to sell detergents/disinfectants' chemicals/cleansers - advertisements in newspapers in respect of prospective profitability of business activity - seriousness of offences - guilty pleas - facts relevant to penalty - principles of punishment under Trade Practices Act

Trade Practices Act - sec. 59(2) sec. 79(1) and (2)

Cases referred to -

Ducret v. Colourshot 35 A.L.R. 503

Wells v. John R. Leuins (International) Pty. Ltd. 1975 A.T.P.R. 40-007

Eva v. Mazda Motors (Sales) Pty. Ltd. 1977 A.T.P.R. 40-020

HEARING

DARWIN

#DATE 30:10:1984

JUDGE1

Allan Stanley Commons (hereafter called the defendant) has pleaded guilty to ten counts in seperate informations alleging breaches of s.59(2) of the Trade Practices Act, punishable by s.79(1) of that Act.

Section 59(2) reads as follows -

"(2) Where a corporation, in trade or commerce, invites, whether by advertisement or otherwise, persons to engage or participate, or to offer or apply to engage or participate, in a business activity requiring the investment of moneys by the persons concerned and the performance by them of work associated with the investment, the corporation shall not make, with respect to the profitability or risk or any other material aspect of the business activity, a statement that is false or misleading in a material particular."

I deal with the informations in chronological order.

The first in time alleges that between the 1st January 1983 and the 5th January 1983, the defendant contravened the section in that he invited Merry Nancy Postl and Josef Postl to engage in a business activity requiring the investment of moneys by them and the performance by them of work associated with such investment and did with respect to the profitability of the business activity make a statement that was misleading in a material particular.

The remaining nine counts refer to advertisements which were placed in the Courier Mail by Rite-Price Chemicals (Aust.) Pty. Ltd. (the company), a company of which the defendant and his wife were sole directors, and which, from a practical point of view was at that time under his control and management.

Each of those informations alleges that the defendant was "indirectly knowingly concerned", within the meaning of s.5 of the Crimes Act in the commission of an offence against a law of the Commonwealth, that offence being that the company in trade or commerce did invite by advertisement persons to apply to engage in a business activity requiring the investment of moneys by the person concerned and the performance by them of work associated with the investment, the advertisement being in a material particular misleading with respect to the profitability of the business activity.

The nine offending advertisements appeared in the Courier Mail on the 5th, 12th, 22nd and 26th days of January and the 2nd, 5th, 9th, 12th and 16th days of February 1983. The advertisments appearing under a prominent "Rite-Price" logi read as follows -

"Good cash flow business Rite-Price Australia are currently embarking on a dramatic Expansion Scheme. We have dealerships available in many areas of Brisbane and would also welcome country enquiries. Dealership will nett a suitable Husband and Wife Team between $25,000 and $50,000 in the last year of operation. The business can be run from home and requires simple blending and storage of a range of consumable products together with the day to day maintenance of a local sales team. All plant and stock necessary together with company training in all aspects of this business will be provided. Finance can be arranged to approved applicants."

A short history of the defendant and his activities with the company will suffice.

The company was purchased as a shelf company. Initially, directors and shareholders were the defendant, one Suzanne Hynes and one W. Jolly. There were 98 paid up shares of which 39 were owned by the defendant. The husband of Suzanne Hynes, who was apparently an undischarged bankrupt, had some business dealings with the defendant and it was put to me by Mr Riley for the defendant that Hynes played a part in the promotion of the company and its sales schemes. Be that as it may the defendant and Mr and Mrs Hynes fell out and on 23rd December 1982 the defendant lodged changes of particulars in the Register of Directors with the National Companies and Securities Commission. Suzanne Hynes had resigned as director being replaced by the defendant's wife, who, whilst shown as secretary of the company, apparently played no part in its activities.

The sales scheme promoted was for the sale of dealerships to persons who would have exclusive rights to sell in particularised areas. The company supplied chemical substances and equipment to be utilised by the dealers in the production and bottling for sale of items such as detergents, disinfectants and cleansers. The scheme was that the company would arrange advertising and supply sales teams to canvass areas in the dealer districts as part of an initial "cold sales" campaign. The dealer was to be paid commission on sales distributed through his agency, the dealer himself being responsible for payment of royalties to the company. The defendant's counsel told me that his client had high hopes for the success of the venture but it was early apparent that these hopes would not be realised. The defendant attributed the lack of success to the fact that the dealers were not prepared to work. The results of the efforts of sales teams were poor. Approximately thirteen dealerships were set up in Queensland and I am satisfied that the defendant must have quickly realised that the dealership would not and could not conceivably "nett a suitable husband and wife team between $25,000 and $50,000 in the first year of operation".

It may well be that Hynes, or some other person associated with the company devised the form of advertisment but the defendant was well aware of its recurring display. It was in form likely to attract attention and business. Late in December 1982 the defendant visited Darwin. He had relatives in the area and decided to mix business with pleasure. The following advertisement appeared in the N.T. News on the 20th, 21st and 22nd days of December 1982 -

"Right Price Australia 'Offers the sole Darwin distribution rights for its extensive range of domestic and commercial cleaning products. Some capital will be required. Seriously interested applicants will be interviewed in Darwin by the Managing Director between 24 December and 10 January."

This apparently yielded no suitable enquiries and on the 29th, 30th and 31st December the following appeared in the same newspaper -

"Good cash flow business Rite-Price Australia are currently embarking on a dramatic expansion scheme:- We are seeking a suitable husband and wife team to operate our Darwin dealership. The right people will enjoy a net return of between $25000 and $50000 in the first year of operation.

The business can be operated from home and requires simple blending and storage of a range of readily accepted consumable products. The ability to recruit and maintain an aggressive sales team is of prime importance.

All plant/stock and full company training will be provided. Some capital will be required however, finance can be arranged for a suitable applicant.

Interviews will be conducted in Darwin and can be arranged by phoning Brisbane [phone]."

I mention these as a matter of history as no charge relates to either of such advertisements. Mr and Mrs Postl who ran a shoe repair business at Rapid Creek were interested and communicated with the defendant. In the course of negotiations the defendant admits he told them that the return should net $500 per week. On 5th January 1983, Mr and Mrs Postl, having secured finance, entered into a Dealership Agreement pursuant to which $22,500 was ultimately payable by them to the compnay, which was obliged to supply plant, equipment and management aids. There is a dispute as to whether or not the company fully complied with this section of the agreement and that does not now fall for determination. Certainly some items were despatched and utilised. Mr and Mrs Postl paid $16,500 to the company. The defendant admits that his statement concerning anticipated returns from the business was misleading and this was the foundation for the first count I have referred to.

Whilst the defendant was in Darwin the first two of the misleading advertisements referred to in the other informations appeared in The Courier Mail. Matters were then going from bad to worse in Queensland and yet seven further of the entirely misleadin advertisements I have referred to earlier were published. Apparently the frustration of the Queensland dealers increased and came to a head as a result of the publicity of their predicament in a segment of a television programme "State Affair". The venture collapsed and the company was wound up with no substantial funds in the hands of the liquidator. There appears to have been a considerable reduction of company stock assets in the period leading up to the winding up order. This was not explained to my satisfaction but I am not able to find that the defendant reaped the benefit of such assets. The company ceased to operate about Easter 1983 not a long period after the last advertisement appered.

Mr Riley has made substantial submissions in mitigation. The defendant is a married man with three young children. His wife's present health or emotional condition due to past events is not good. He now works as a salesman earning commissions of about $287 gross per week in the security industry. He left school at an early age and has no trade or professional qualifications. He has no previous convictions. Mr Riley submits he sought to defraud no one, his own enthusiasm for the sales scheme has been his undoing. I am told his own income from the company was meagre. His fault, Mr Riley submits, lay in his "uncompromising optimism" which he retained too long. He became "recklessly indifferent" to the commercial realities of the situation, he hoped the company and the dealers would be successful. He has, Mr Riley submits (and there is no suggestion to the contrary) fully co-operated with the investigating authorities. The family home is the subject of two mortgages, his wife is now working as a waitress. There are two family cars. He has no money in the bank, no other assets save for domestic furniture and effects.

It is true I find that the defendant did not set out to defraud. It was a bona fide commercial business, but naive in conception and from the start impossible to sustain on a basis commensurate with the advertised return to dealers.

On the other hand the advertisements inserted by the company and his misleading assurance to Mr and Mrs Postl, were by their very nature likely to cause very real hardship and loss to other members of the community, especially when intended to induce persons to enter into contractual arrangements involving the outlay of large sums of money, and possible the abandonment of existing means of livelihood. Such a scheme is likely to cause consequences far more serious than the purchase of items by reason of misleading advertisements as to quality and the like. The purpose of the legislation is to protect consumers and no doubt to deter those inclined by fraud or recklessness to profit from the community in advancing personal gain, albeit in a bona fide business. The disregard of the defendant for reality is manifest in his letter of 1st February 1983, written at a time when he must have known the prospects of the company were fading. In that letter he wrote of restriction of "operating arrangements to sustain this company's high growth rate".

The material before me does not suffice to fairly categorise the defendant's motives as cunning or dishonest, but there was a high degree of carelessness and the departure from accuracy was substantial. The defendant did not, as I have said, set out to defraud the public or his dealers to his own profit. He had a large personal stake in the success of the scheme and a foolish and too long enduring hope in its success. In fixing penalties I pay regard to all Mr Riley's submissions, but I must bear in mind the purpose of the legislation and the substantial penalties provided.

A person convicted of a breach of this section is liable by way of punishment to a maximum fine of $10,000. Section 79(2) of the Act provides that where a person is convicted of two or more offences relating to the same provision of Part V "being contraventions that appear to the court to have been of the same nature or a substantially similar nature and to have occurred at or about the sale time the court shall not impose fines that in the aggregate exceed the maximum applicable to one offence".

The section was considered by Smithers J. in Ducret v. Colourshot 35 A.L.R. 503, a case which also involved a series of misleading advertisements. His Honour concluded his consideration of the appropriate time span between offences necessary to withdraw them from a category of offences which "occurred at or about the same time" with these words -

"Separate contraventions of the Act committed at an interval of two months could not reasonably be regarded as having occurred at about the same time. The relevant frame of reference is, I conclude, to offences so close together in time that there is a basis in reality for attributing to them a unity in the commission of the actus reus of each. Construing the section in the light of these observations it would seem that it would be unsound to regard the offences against s59(2) with which this court is concerned as being committed at about the same time as each other if they were separated by more than, at most, say three days. Accordingly, for the purposes of s79(2), I regard those offences which were committed at intervals not less than four days of each other as offences occurring otherwise than at about the same time as each other."

That decision is a useful guide, and the facts there were very serious as the opening words of his Honour indicated in his reasons for judgment. Here I cannot be satisfied on the material before me that the defendant gained much (if at all) from the venture. I am satisfied that others sustained much worry and loss by being induced to enter the dealerships but I have no material before me to assess the extent of loss. The dealers' prospects of recovery of any loss suffered, in separate proceedings may not be good because of the defendant's present financial predicament which will deteriorate by reason of the penalties. I must, upon ordinary principles of sentencing in imposing fines, have some regard to the defendant's ability to pay them. I regard the defendant's culpability as very much less than encountered by Smithers J. in Ducret v. Colourshot (above). The penalties must be sufficient to discourage like conduct, but should not be so high as to be oppressive. (Wells v. John R. Leuins (International) Pty. Ltd. 1975 A.T.P.R. 40-007; Eva v. Mazda Motors (Sales) Pty. Ltd. 1977 A.T.P.R. 40-020).

In proceeding No. NTG 56 of 1983 the defendant will be fined the sum of $1,000.

In proceeding No. NTG 60 of 1983 the defendant will be fined the sum of $500.

In proceeding No. NTG 61 of 1983 the defendant will be fined the sum of $500.

In proceeding No. NTG 62 of 1983 the defendant will be fined the sum of $500.

In proceeding No. NTG 63 of 1983 the defendant will be fined the sum of $500.

In proceeding No. NTG 64 of 1983 the defendant will be fined the sum of $500.

In proceeding No. NTG 65 of 1983 the defendant will be fined the sum of $500.

In proceeding No. NTG 66 of 1983 the defendant will be fined the sum of $500.

In proceeding No. NTG 67 of 1983 the defendant will be fined the sum of $500.

In proceeding No. NTG 68 of 1983 the defendant will be fined the sum of $500.

The total fines thus imposed amount to $5,500.

In addition, as requested by counsel for the prosecution, I direct that the defendant shall pay the costs of these proceedings to be taxed, but not exceeding $1,000.

Counsel for the Crown suggested I should leave open, with liberty to apply, the question of reparation pursuant to s.21B(d) of the Crimes Act which enables this court to order an offender "to make reparation to any person, by way of money payment or otherwise, in respect of any loss suffered by the person as a direct result of the offence".

Those who have suffered loss have their rights to recover their loss or damage by reason of s.82 of the Act and I consider it inappropriate in these proceedings to leave that question open. I decline to make an order under that section.

Lastly, counsel for the prosecution has expressly asked me not to order imprisonment in default of payment of the fines. The powers of this court on this aspect are set out in s.18A of the Crimes Act and s.390 of the Criminal Code (N.T.). I will hear counsel further on this aspect and as to time to pay.