Trade Practices Commission v British Building Society

[1987] FCA 553

IN THE FELIERAL COURT OF AUSTRALIA ) )

WESTERN AUSTRALIA DISTRICT REGISTRY NO. WAG 6 4 Of 1986

)

GENERAL DIVISION 1

BETWEEN : .

TRADE PRACTICES COMMISSION

Applicant

AND:

BRITISH BUILDING S O C I W

First Respondent

AND:

BONNEY NOMINEES PTY.LTD.

Second Respondent

AND:

MICHAEL EDWIN BONNEX

Thlrd Respondent

AND :

ANDREW JOHN CAHILL

Fourth Respondent

AND:

BUSINESS MEN'S ASSURANCE

COMPANY OF AUSTRALIA

LIMITED

Fifth Respondent

2 2 OCT 1987

FEDERAL COURT OP

AUSTRALIA

PRINCIPAL REQISTRV

REASONS FOR SUlXHENT

.

2 .

It admlts breaching the provislons of s.47(1) of the

Trade Practices Act 1974, in connexion with a scheme called

“Guaranteed Low Interest Home Loan“. Bonney Nominees Pty.Ltd.,

(“Bonney Nominees“), the second respondent, was responsible for

provlding managerial and other staff, which it employed, to

conduct the business of the British Building Society and to

provide management services to It. The third respondent, Mr.

Bonney, was the Secretary/General Manager of the British Building

Soclety and was one of the t w o Directors and the Manager and

Company Secretary of Bonney Nominees, which was a medium-sized

private company whlch was the trustee of the Bonney Family Trust.

The fifth respondent, Buslness Men’s Assurance Company

of Australia Llmlted, (‘B.M.A.’), 1s incorporated in the

Australian Capital Terrltory and carries on buslness as, lnter

alia, a llfe Insurance company. In 1984, It appolnted Bonney

Nominees its agent to solicit proposals for insurance policles

and to be its Managing Agent in Western Australia. Mr. Bonney

signed that agreement on behalf of Bonney Nominees and Andrew

Cahill, the fourth respondent, was appointed the nomlnated

representatlve of Bonney Nominees. Mr. Cahlll was employed by

Bonney Nominees and, in addition to his function as the nomlnated

representative of that company for B.M.A., was the Marketing and

I

Development Officer for the British Building Society.

The second to fifth respondents admit that they were

each a party to the contravention by the British Building Society

of the third line forcing prohibition	of	6.47 of the	Trade
Practices Act 1974.

3 .

Section 47(1) provides:-

"Subject to this section, a corporation shall not, in trade or commerce, engage Ln the practice of

exclusive dealing. "

*

Sub-section 6 provides:-

"A corporation also engages in the practice of

exclusive dealmg If the corporation -

(a) supplies, or offers to supply, goods or

services;

(b)	supplies, or offers to supply, goods or servlces at a particular price; or
(c)	glves or allows, or offers to give or allow,

a discount, allowance, rebate or credit in

relation to the supply or proposed supply of

goods or services by the corporatlon,

on the condltlon that the person to whom the

corporatlon supplies or offers or proposes to

supply the goods or servlces or, if that person 1s

a body corporate, a body corporate related to

that body corporate wlll acquire goods or servlces

of a particular klnd or descriptlon directly or

indirectly from another person.''

The Trade Practices Commisslon, by an applicatlon filed

on 23 June 1986 seeks orders pursuant to s s . 7 6 and 77 of the

Trade Practices Act 1974, that each of the respondents pay to the Commonwealth of Australia a pecuniary penalty in respect of the

contraventlons of the Act which the Commisslon alleges the

respondents have committed.

Each of the respondents filed a Defence to the Statement

of Claim by the Commisslon in this matter but, well prior to any

contested hearing, the Commission and the first three respondents

agreed to a statement of facts which had the effect of admitting

the contraventions alleged by the Commission and requiring the

Court to be concerned solely with the imposition of the

c

4.

appropriate pecuniary penalty. Subsequently, the fourth and

fifth respondents each adopted a slmilar position. That aspect of

the hlstory of the matter has to be borne in mind as a relevant

factor in the assessment of penalty, as does the fact that each

of the respondents has cooperated fully with the Commission and

there has been full dlsclosure.

The contravention of s . 4 7 came about in thls way. Mr.

Cahill, who has had a long experience at senior managerlal level

in the life insurance industry, as well as experlence with

building societies, devlsed a scheme over a period of some twelve

months in his capacity as the Marketing and Development Officer of the British Buildlng Society. The scheme, the "Guaranteed Low

Interest Home Loan", was a scheme whereby persons could obtain ascertainable amount of loan from the Britlsh Buildlng Soclety at n

a predictable rate of interest. It was a conditlon of

particlpating in the scheme that the person take out life

lnsurance cover with a speclfled company, namely the Buslness

Men's Assurance Company of Australla Limlted. Agents of B.M.A.

in Western Australia would sell term llfe insurance pollcies

which incorporated a savings plan whereby funds would be placed

by the policy holders with the Britlsh Building Society.

Mr. Cahi11 attended the Registrar of Building Societies

and supplied a pro forma of a brochure advertislng the scheme and

was advised that the terms of the scheme met the requirements of

the Buildina Societies Act. The brochure was also submitted to

Cm 19 FPbruarjr 1985. Mr. Bonney introduced th6 scheme

to the Roard o€ Directors of the Brltish Buildlng Society. The

dlrectors were given a copy of the brochure and M r . Bonney

explained that the scheme was one to facllitate the marketing of

pollcles of insurance with B.M.A.. Agents of the fifth

respondent would offer, as an incentlve to effect the pollcy, a "savings plan", under whlch the policy holder would lnvest wlth

the Sorlety for about two years and, provlded all other crlterla

were satisfied, the policy holder would become ellglble for the

Im.7 rate of ~ n t ~ r ~ s t loan.

Thi' dtri'(-tnr5 were also Informed that the brochure had

been cnnsiderd hy the Department of Consumer Affairs, who

considered It to be in order, and that approval had been obtalned

from the Reglstrar of Bullding Socleties. Mr. Bonney told the

directors of the buildlng society that the brochure would be

distributed and the scheme promoted by the agents	of B.M.A.	and
not by the Soclety.

The brochure in its amended form was subsequently

printed and distrlbuted.

Central aspects of the marketing scheme were that the

British Building Society guaranteed that the interest on hone

loans from the fund would not exceed 39 more than the rate paid

I

6 .

on savings provided that the member had complled wlth the

conditions set out in the brochure. It requlred that the member

save a minimum of $15.00 per week for two years with the Soclety,

without withdrawal during the twelve months prlor to applylng for

the loan. Part of the amount of $15.00 per week purGhased a

$50.000 annual renewable term life lnsurance wlth B.M.A.. Each

applicant was required to complete a proposal for a life

insurance policy with B.M.A.,	and one of the "seven slmple rules"
provided:-

"In order to qualrfy as a borrower, you have to

take advantage of the Life Insurance Pollcy

(consumer index Irnked)."

The bulldmg soclety agreed to pay for half the cost of the

preparatlon and prlntrng of the brochure. The bulldlng soclety

did not draplay any of the	brochures at	Its afflce nor	at
branches.

The scheme commenced I n about March 1985 and continued

untll approxlmately April 1986. According to the detailed

enquiries of the Commlssion, there were approxlmately 316

participants rn the scheme who had contrlbuted somethrng of the

order of $95,000. On 15 April 1986, Mr. Bonney told the

directors of the Brltish Building Society that, "due to adverse member response, the marketing of the scheme had been suspended".

It was about this time that, as a result of complaints, the Trade

Practices Commission, had commenced inquiries into the scheme.

Bp letter of 2 May 1986, the building soclety notified

each member of the scheme of its suspension and, in an attempt to

7.

minimise any loss the particlpants may have suffered by virtue	of
their partlclpation in the scheme, advlsed that It would pay

retrospectively to those members who wished to retlre from the

scheme an Increased rate of interest of 15.5% per annum on the

minlmum monthly balance on all funds deposited wlth the Juilding

soclety pursuant to the scheme. In the result, all participants

have since elected to withdraw their funds, wlth that interest.

It is accepted by the Commission that the building

soclety relled upon the advlce of Bonney Nominees and Mr. Bonney

himself that the scheme was lawful; that there was never on the

part of any of the respondents any wllful breach of the

provisions ot the Trade Practlces Act; at all materla1 tlme5 all

respondents belleved that there	had been no breach of any
relevant statutory provision.

While Mr. Cahill devised the scheme and ld a

substantial amount of work in relation to it, including

consulting with some relevant statutory agencies, he at all times

acted with the knowledge and approval of hls employer.

Mr. Kenneth Drummond, a dlrector of the fifth respondent, has sworn an affidavit deposing that I n May 1984, at

a time when Bonney Nominees was that company's managing agent I

Perth, the British Building Society was contemplatlng a new

savings and life insurance plan to be marketed direct to customers of the building society and to employees of Western Australian companies on a salary deduction basis, and that B.M.A. was asked to make a submission to the building society with a

8.

view to providing a low cost form of Insurance and a slmplified

form of proposal for underwritinq. He says that the

partlcipation of B.M.A. in the scheme was handled by Head Office

sales executives of the company as part of its normal busmess

actlvitles. Mr. Drummond says that "B.M.A. did not realsse that

the loan provided under the Scheme was conditional on having life

Lnsurance cover wlth B.M.A.. B.M.A. consldered It possible that

some people would refuse the llfe Insurance offer, or would be refused cover as being unacceptable risks. B.M.A. did not expect

all participants in the Scheme to have llfe cover."

I Find this difficult to accept, as the brochure on its

face clearly indicates the obllgatory nature of the life

insurance cover requirement.

Mr. Drummond gives a dlfferent figure for the number of

partlcipants. He says that between February 1985 and April 1986,

when the scheme was in operatlon, approximately 266 people jolned

the scheme. B.M.A. recelved a letter dated 20 June 1986 from the

Trade Practlces Commlssion, advising of a posslble contraventlon brochures and other advertising material was also put in place

of the Act by reason of the participation of the company in the

Guaranteed Low Interest Home Loan Scheme. B.M.A. circulated a

notice in writlng to all officers, "drawing attentlon to the need

to be alert to any potential areas of concern with respect to the

immediately" and that employees had been made "fully aware	of the
requirements of the Trade Practices Act".

.

9.

The solicitors for B . M . A . , in correspondence wlth the

Trade Practices Commission, advised that out of 264 policies

written, 260 were cancelled at various times early	in 1986 but
predominantly in April 1986.

I

The evldence shows that it was an integral part of the

Guaranteed Low Interest Home Loan Scheme that participants in the

scheme were required to effect a life insurance cover with

B . H . A . . and that the second to flfth respondents were each a

party to that contravention.

I accept that the contravention was not dellberate and

that all of the respondents acted in ignorance that the scheme

was In contraventlon of s.47 of the Trade Practices Act 1974.

The assessment of approprlate pecuniary penalties has to

reflect the factual circumstances of the contraventlon. the

relatlve degree of culpability of the various respondents In that

contravention, as well as having regard to the individual

clrcumstances, lncludlng the financlal capaclty,	of each of	the
respondents.

The Act absolutely prohibits third line forcing of- the

kind In this case. Pursuant to ss.76 and 77 of the T r a d e

Practices Act 1974, the Court 1s empowered to order a person

other than a body corporate to pay to the Commonwealth by way of

pecuniary penalty a sum not exceeding $50,000 and, in the case of

a body corporate, 6250,000 in respect of each contravention of a

provision of Part IV of the Act. Section 47 is In Part IV. T h i s

range of penalties indicates that	offenders of Part	IV can be
visited wlth condiqn punlshment.

It is clear therefore that he legislaturs news

contraventions of Part IV of the Act very seriously. It seems to

me that, judged against those provisions, pecuniary penalties of

almost token amounts cannot be justified. As a consequence,

conduct in breach of the Act requires the impositlon of penalties

which are calculated to leave no doubt that the commerce of this

country must be conducted in conformity	with the requlrements of
the Trade Practices Act.

The first respondent 1 s a small bulldlng socletp. It

has total assets of the order of $20 milllon; the camblned assets

of Western Australian buildlng socleties are of the order of $ 2 . 7

billion. It has a nett statutory worth in the order of $400,000;

in Its last flnanclal year, it had a surplus after income tax of

approx.$112,000. In that period it paid management fees of

approx.$160,000 to the second respondent. to whom it had

entrusted the management of its busmess. Mr. Bonney was a man

very experienced in the management of building societlea, and

enjoyed a high reputation. I accept that the building society

took steps to mitigate any loss	In prospect by participants in
the scheme, that it in fact made	no profit from the scheme, and

that it did not itself market the scheme.

It is not suggested that either the second or the third

respondent is impecunious. Bonney Nominees Pty.Ltd. is a small

.

11.

private company whose directors are the third respondent and his

wife. The evidence (from very impressive sources) establishes

that Mr. Bonney, who is aged 44 years and married with two

chlldren, is a man of good character, has a very high reputation

in business circles, and has been significantly invdlved in

community concerns.

I t is right to say, however, that an affidavit of Xareen

Sackville reveals that m 1976 Mr. Bonney, as secretary of the

British Building Society, applled for authorisation, in respect

of the Society's fire and general insurance, that mortgagors to

the Society insure with a panel of insurers approved by the

Society's board and the Insurance Cornmissloner and who will offer

concession agreements to the Soclety. That authorlsatlon in

respect of "tied" insurance arrangements was granted by the

Commission on 22 December 1976. Kareen Sackvllle's affldavlt

also draws attention to the fact that Mr. Bonney, in his capacity as President of the Assoclatlon of Cooperatlve Housing Societies In Western Australla, had dlscusslons with Mr. Hollow of the

Commlssion concernlng the insurance requirements of those

cooperative socleties. While it was in connexion with

cooperatlve buildlng societies and not with the British Bullding

Society, whlch is a permanent society, that these discussions

concerning requirements that borrowers effect life insurance wlth

an assurer of the borrower's choice took place, nonetheless there

were discussions concerning the applicability of s . 4 7 ( 6 ) in the

context of building societies at a time a few months before the

introduction of the scheme involved in this present matter.

12.

Businessmen, particularly at senlor levels, who remain

in ignorance of the requirements	of the Trade Practices Act 1974,
do so at their perll.

The fourth respondent devised the scheme, wbich was

devlsed and promoted wlth the knowledge and approval of his

employer. He is aged 58 and has a long hlstory of senior

managerial positions. He also is a man of good character.

The annual return for the financlal year ended 30 June

1986 of Business Men's Assurance Company of Australia Limited

lndicates that it had a total nett income of approx. $11 mlllion, investments of nearly $16 milllon, other assets of $10 mlllion, total liahlllties of $ 3 . 3 million, and pollcy holders' funds in excess of $20 mllllon.

As indicated, there are In this case substantlal

mltigatlng clrcumstances. I do not regard the respondents as

equally culpable and their personal financial clrcumstances

differ notably. I necessarily have had regard to these factors

in determining	the pecuniary penalty to impose agalnst each
respondent.

I order that the f i r s t respondent pay to the

Commonwealth of Australia a pecuniary penalty of $10,000 in

respect of the contravention	of 5.47 of the Act set out in the
agreed statement of facts.

13.

Pursuant to 6.77 of the Trade Practices Act 1974,

judqment be entered for the appllcant on behalf of the

Commonwealth of Australia against the first respondent for	the
sum of $10,000.

.

I order that the second respondent pay to the

Commonwealth of Australia a pecunlary penalty of $15,000 in respect of the contravention of s.47 of the Act set out in the agreed statement of facts.

Pursuant to s.77 of the Trade Practices Act 1974,

judgment be entered for the applicant on behalf of the

Commonwealth of Australia against the second respondent for	the
sum of $15,000.

I order that the third respondent pay to the

Commonwealth of Australia a pecuniary penalty of $3,000 in respect of the contravention of s.47 of the Act as set out In the agreed statement of facts.

Pursuant to s.77 of the Trade Practices Act 1974,

judgment be entered for the applicant on behalf of the

Commonwealth of	Australia against the third respondent for the
sum of $3,000.

I order that the fourth respondent pay to the

Commonwealth of Australia a pecuniary penalty of $1,000 in respect of the contravention of s.47 of the Act the subject of these proceedings.

Pursuant to s.77 of the Trade Practlces Act 1974,

judgment be entered for the applicant on behalf of the

Commonwealth of Australia against the fourth respondent for the sum of $1,000.

*

I order that the fifth respondent pay to the

Commonwealth of Australia a pecunlary penalty of $25,000 in respect of the contravention of s.47 of the Act the subject of these proceedings.

Pursuant to s.77 of the Trade Practices Act 1974,

judgment be ntered for the appllcant on behalf of the

Commonwealth of	Australla agalnst the flfth respondent for the
sum of $25,000.

I order that the respondents pay the appllcant’s costs

to be taxed If not agreed; and as to the flrst, second and third

respondents a6 one set of costs and, as to the fourth respondent

and the fifth respondent, as separate sets of costs. I further

order that as between the respondents, the respondents be liable

€or the payment of the applicant’s costs in the proportion of the

pecuniary penalties ordered against them.

I certlfy that t ls , I prccedtng

Pages are a truo copy of the rcasons for iudgmont herein of

Mr. Justico Spender

Associate

Dated