On 28 May 2012, the Federal Court imposed significant penalties on a number of companies and their director, Laurence Hann, following its finding that the companies and Mr Hann had engaged in conduct that involved an ‘egregious series’ of contraventions of Australia’s consumer protection laws.

The Court’s orders included significant financial penalties, orders disqualifying Mr Hann from managing any corporation for a period of 15 years, and injunctions preventing Mr Hann and the companies from undertaking certain business activities for 15 years.

The Court’s decision is significant because

  • It is the first time the ACCC has sought and obtained orders from the Federal Court disqualifying directors from managing companies. The length of the disqualification is very substantial and reflects the blatant disregard for the law
  • The orders sought by the ACCC are consistent with its recently announced enforcement priorities for 2012, particularly its focus on protecting vulnerable consumers and its stated intention to make full use of the new powers under the Australian Consumer Law
  • The significant financial penalties imposed on both the companies and an ageing and bankrupt director, together with the length of the disqualification order and injunctions, reflect the Court’s willingness to make use of those powers. They also highlight the importance of compliance with the Australian Consumer Law  

The conduct by Mr Hann and the companies

The companies and Mr Hann conducted a “charity” household cleaning products distribution business that they represented as producing and marketing “Heartlink” branded household products with all profits devoted to charities.

Mr Hann and the companies offered “business opportunities” for people, usually retired or semi-retired people in NSW, Queensland and South Australia, to volunteer in the manufacturing and packaging of Heartlink products and/or purchase (with payments of up to $20 000) exclusive distribution rights in particular areas.

In seeking distributors, the companies and Mr Hann placed hundreds of advertisements in local newspapers stating that participants could earn between $900 and $2000 working for just a few days each week. Over a 4 year period between June 2006 and June 2010, approximately $3.5 million was deposited into Heartlink’s business accounts. However, no payments were ever made to the “distributors” or to any charities.

In addition, none of the people who invested in Heartlink as distributors were successfully able to obtain a return of their funds.

The Court’s decision

Justice Tracey of the Federal Court found that Mr Hann and the companies had misled consumers about the profitability and earnings potential of the business, as well as the overall viability of the business.

Specifically, the Court found that Mr Hann and the companies contravened section 52 of the Trade Practices Act (TPA), by engaging in conduct that was misleading or deceptive or likely to mislead and deceive, and section 59(2) of the TPA, by making false or misleading misrepresentations. The decision was made under the TPA provisions as the relevant conduct took place before the comparable provisions under the Australian Consumer Law commenced.

The Court’s orders

Justice Tracey made a number of orders against Mr Hann, including that he pay a pecuniary civil penalty of $450,000 and be disqualified from managing a corporation for 15 years. This is the first time that the ACCC has sought and obtained a disqualification order for contraventions of the TPA (now CCA). The 15 year duration of the disqualification is clearly a very significant penalty. The pecuniary penalty also reflects the Court’s view as to the gravity of the contraventions.

The Court also granted an injunction prohibiting, for 15 years, Mr Hann from carrying on a business or supplying goods or services in connection with which:

  • persons are invited to invest money or perform work;
  • any claim is made that moneys or profits earned by the sale of goods are donated to charity; or
  • goods or services concerned are or include household cleaning products.  

In making these orders, Justice Tracey noted that, despite Mr Hann now being declared bankrupt, general deterrence was an important factor. He also emphasised that Mr Hann “well knew what he was doing was wrong but he still persisted”, Mr Hann’s “conduct …resulted in substantial losses being sustained by people, many of them elderly, across Australia” and that “he should not have the opportunity to do so again”.

The severity of the Court’s orders are comparable to those imposed on certain executives of the James Hardie Group under the Corporations Act in ASIC v Macdonald (No 12) [2009] NSWSC 714. In that case, the most significant penalty, imposed on the former CEO, involved a $350 000 pecuniary civil penalty and disqualification from managing corporations for 15 years.

The Court also imposed a civil pecuniary penalty of $450,000 on one of the companies, and granted an injunction against all the companies in the same terms as that made against Mr Hann.

The ACCC’s enforcement priorities

Following the Court’s decision, the ACCC’s chairman, Rod Sims, stated that “this outcome demonstrates the ACCC will use all its powers to take action against those who engage in unscrupulous business practices which prey on disadvantaged or vulnerable consumers”.

This is consistent with the enforcement priorities announced by the ACCC in February 2012, which include focusing on the protection of vulnerable consumers and an intention to make full use of the significant changes to the Australian Consumer Law in the past 12 months, particularly the ACCC’s new powers.

The severity of the penalties imposed by the Court also reflect its willingness to make use of these powers and suggest support for the ACCC’s stated goals.