Trade Practices Commission v Clarke Eaton & Company Pty Ltd

[1990] FCA 487

JN THE FEDERAL COURT OF AUSTRALIA	)	Nos G 355-394 of 1989
)
YEW SOUTH WALES DISTRICT R E G I S T U	) )
GENERAL DIVISION	)

BETWEEN:  T R A D E P R A C T I C E S

COMMISSION

Prosecutor

AND.	C L A R K E EATON & C O M P A N Y P T Y LIMITED
Defendant

Davies J.
23 August 1990

Sydney

REASONS FOR JUDGMENT

EX TEMPORE

The Court is concerned with the charges brought against the defendant, Clarke Eaton and Company Pty Limited ("Clarke Eaton"). After some days of hearing, charges against the directors were dismissed by consent and it was indicated that a number of the charges against the company would not be pursued. The matter arises out of sales of what might be described as investment plans by employees of Clarke Eaton, an investment adviser, to members of the public.

The plan is no doubt a very good and successful plan and, if properly marketed, would benefit	inexperienced person to understand all its ramifications. Its success is based in part upon s.26AH	the community. But the plan is somewhat equivocal in its nature and it is not easy for an
of the Income Tax Assessment Act 1936 (Cth) which was introduced to regularise a situation that was occurring with respect to life assurance policies. Persons seeking to avoid taxation had adopted the technique of taking out short term life assurance policies, surrendering them either a t the conclusion of the period or earlier and taking the amount paid plus bonuses without penalty and as capital sums which did not attract income tax. Section 26AH was introduced to
provide that bonuses received on the termination, cancellation or surrender of a life assurance
policy would be fully taxable if received in the first eight years, taxable as to two-thirds if
received in the ninth year and taxable as to one-third if received in the tenth year. If received

As I indicated to Mr P.G. Hely Q.C., senior counsel for the prosecution, some of the
problems were brought about by the life assurance company whose package or plan was sold.

_.after.the tenth year the bonuses would not be brought to tax.

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I # _ , , -The sybject plan, which was put out by a reputable Australian life assurance company,

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5 .	II ...	:xusGaian Eag1e:Insurance	-	Company Ltd ("Australian Eagle'),	sought to take advantage of that
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-:\	(se&ion by pro'viding for life assurance policies of which it was intended that the minimum tcrm
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woule b<te,n years and the maximum 34 years or 65 years of age whichever was the earlier.

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That plan was put out by Australian Eagle and developed in such a way that it could, in

the terms of Australian Eagle, be very flexible. The plan could be in effect a straight investment

plan, an investment for ten years with the view to obtaining a tax free benefit at the end. Or

the plan could have attached to i t various options such as a fixed life benefit, disability cover,	superannuation and children's benefits, benefits of the type customarily provided by a life
assurance company.

Unfortunately, the Australian Eagle publications d ~ d not make entirely clear the particular

nature of the plan, including the fact that it was based upon a life assurance policy and involved fundamentally the taking out of life assurance. Moreover, the publications which have been put

in evidence, the plan booklet, the application form and a brochure, say nothing of the minimum term of ten years or of the maximum term of 34 years or age 65. Nor for that matter does the

material in evidence say what was the difference between an A l , an A2 or an A 3 policy or what were the criteria for differentiating between one or the other. In these circumstances, i t is not surprising that persons who were inexperienced in the insurance world might not fully understand the product with which they were dealing. That was the start of everybody's problem.

Clarke Eaton carries on business as a financial adviser and placed advertisements for

persons to enter its employment and to sell insurance and financial packages. It took on a

number of young people. They were given ~nstructions by Clarke Eaton, particularly instructions as to how to sell products and how to be successful salesmen and some limited instructions as to life assurance and financial products These young people were also given some instructions

directly by Australian Eagle. They were given an agency direct from Australian Bagle although

they did not exercise that agency. But the agency was in a sense a qualification.

It is clear from the young salespersons who have given evidence that they did not understand the product with which they were dealing. Each one had a slightly different and incorrect view about the product. When they went out to sell the product, b a n g inexperienced

in thc field in any event and having only a vague idea as to the true nature of the product, they

misled persons to whom they sold it

In each of thc cases with which we are now concerned, what occurred was that the salesperson, having more or lcss an idea that the plan was a 10-year plan, which in one sense it was or could have been, s~gned up each of the clients for thc maximum term, which was 34 years or age 65. In each of the cases, the salesperson failed to tell the client that, if there was surrender prior to the final term of the policy, there would bc a discount for surrender. The discount has been described in the evidence as a penalty, but it was an ordinary discount for

early surrender of a life assurance pollcy.

What was said in each case was likely to mislead and did mislead each of the clients.

Each of the clients failed to understand that the plan was not a 10-year plan but tied them to a

policy of life assurance in respect of which there would be some discount if there was a

surrender before its maximum term which was 34 years or age 65 if that was earlier.

The charges that arc now of concern are the informations in Nos. G361, G362, G363,

G365 and G367 of 1989. The first concerned the salesperson Miss L. Kouzeleas and the product

was sold to a Mrs H.M. Chfford; the second was a sale by Miss M.G. Lawson to a Mr P. O'Brien, the third sale was by Miss Lawson to Mr G. Apostolovski, the next was by Miss Kouzeleas to Mr

I. Corcoran and the final involved a transaction between Miss Lawson and Mrs M. Bojkovski.

I have looked at the evidence in each case The claim made in each is that the effect of

what was said was that, at the end of 10 years, the client could recover the benefit of the moneys

invested and any increment thereto if the client so wished and could obtain those after the 10

ycars free of tax That was of course only one of the misleading statements made. It was not

the only one made in each case and I am sure that the salespersons did not have a real appreciation that they were dealing with a life assurance policy and certainly did not have a proper idea of all the terms on which it could be issued. With respect to that representation,

which has been singled out, I am satisfied that in each case that the reprcsentation alleged was made and that it was false, that it was liable to mislead and did so and that the misiepresentation breached the terms of section 53(g) of t(-eh1974 (Cth) in that it was false and misleading as to the nature of the rights which the client obtained under the arrangement entered into.

In those circumstances I find CLarke Eaton guilty of the five informations laid. I will

order that the company be convicted on each of those charges and I reserve liberty to apply on

seven days' notice with respect to penalty.

With respect to the information in No. G 369 of 1989, I am not satisfied with the proofs

adduced. That charge will be dismissed.

On the other charges against Clarke Eaton, which were not proceeded with. I order that

they be dismissed.

I will also order that Clarke Eaton pay the costs of the prosecution of the proceedings in

respect of the five charges on wh~ch it has been convicted.

I cer t~fy that this and the

preceding 4 pages are a true copy
of the reasons for judgment of

the Honourable Mr Justice Davies.

Associate: h	! b e
Date:	23 August 1990
Counsel for the prosecutor:	Mr P.G. Hcly, Q.C. & Mr C.C. Hodgckiss
Solicitor for the prosecutor:	Director of Public Prosecutions
No appearance for the defendant
Dates of hearing:	20-23 August 1990
Date of judgment:	23 August 1990