In 2012 the Australian Competition and Consumer Commission (ACCC) dedicated many of its resources to upholding the objective of making markets work for consumers, and strong enforcement action resulted in five separate cases being commenced in the Federal Court of Australia, including proceedings against Leslie Forsyth Stott.(1)
The case against Stott was only the second time that the ACCC had successfully obtained an order from the Federal Court disqualifying an individual from managing a company. The case highlights the potential liability of directors for conduct in breach of the Consumer Law.
Stott was a former director of Crime Guard International Security Systems Pty Ltd (CISS). He was found to be knowingly involved with a company engaged in a pyramid selling scheme. CISS carried on a business in Australia as the owner of an exclusive distribution licence for certain etching products that it claimed would safeguard vehicles and home contents from theft.
The business was carried out in several states under a business model whereby investors were given the title of state director and then incorporated a company within that state with the right to distribute CISS products. Further employees were then recruited to various positions and were required to make recruitment payments to the state director. The investor would receive the flow-through of recruitment payments even if no CISS products had been sold.
During the proceedings, such arrangements were agreed by all parties, including Stott, to amount to a pyramid selling scheme for the purposes of the Trade Practices Act 1974 (Cth). Although many of the ACCC's contentions were accepted by Stott at the hearing, the ACCC specifically claimed that:
- CISS had participated in a pyramid selling scheme in contravention of Section 65AAC(1) of the Trade Practices Act and Section 44(1) of the Consumer Law;
- CISS had induced others to participate in a pyramid selling scheme in contravention of Section 65AAC(2) of the act and Section 44(2) of the law;
- CISS had engaged in misleading or deceptive conduct in contravention of Section 52 of the act and Section 18 of the law;
- CISS had made misleading representations about its business activities in contravention of Section 59(2) of the act and Section 37(2) of the law; and
- Stott was liable for CISS's conduct as a person knowingly concerned in and party to the conduct of CISS.
Much of the conduct alleged by the ACCC in its fast-track statement of claim filed with the Federal Court of Australia was admitted by Stott. For example, it was admitted that Stott was knowingly concerned in and party to CISS's pyramid selling schemes in contravention of Section 65AAC(1) of the act and Section 44(1) of the law. Further, Stott admitted that he was knowingly concerned in and a party to CISS's misleading and deceptive conduct in contravention of Section 52 of the act and Section 18 of the law, and that he was knowingly concerned in and party to CISS' misleading representations about its business activities in contravention of Section 59(2) of the Trade Practices Act and Section 37(2) of the Consumer Law.
The primary issues which the court was therefore required to address were:
- whether it should grant an injunction against Stott, preventing him from enacting further schemes like those previously undertaken by CISS in future; and
- the appropriate disqualification of Stott from managing future corporations.
By agreement, the parties submitted that the injunction was necessary in the circumstances, as it was designed to prevent Stott's continued involvement in such schemes and did not have a merely punitive application. To that extent, Stott agreed to the imposition of the injunction and as such, the injunction was granted.
The court was satisfied that a five-year disqualification order was also merited. In imposing that penalty, Justice Middleton found that a short period of disqualification was appropriate on account of:
- Stott's cooperation with the ACCC;
- the fact that he had consented to the orders sought by the ACCC; and
- the fact that he had refunded a partial amount of money received by CISS from the state director.
The court's order in regards to disqualification, which was seen to be below the medium range of penalty, took into account Stott's prior involvement in similar companies that had engaged in similar schemes. It was submitted that Stott had held directorships in seven different companies since December 3 1998, and that all those companies were either deregistered or in the process of being struck off the Register of Companies. Many of those companies shared a similar name to CISS (eg, Crime Guard (Australia) Pty Ltd, which was registered in 2004). At the time of disqualification, Stott was also an undischarged bankrupt, although the court did not specifically take this into account.