ACCC v Stott [2013] FCA 88

The ACCC dedicated much of its resources in 2012 to upholding the objectives of making markets work for consumers, and strong enforcement action resulted in five separate proceedings commenced in the Federal Court of Australia, which included proceedings against Leslie Forsyth Stott. The case against Mr Stott was only the second time the ACCC has successfully obtained orders 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 Australian Consumer Law (ACL).

The Defendant, Leslie Forsyth Stott, was a former director of Crime Guard International Security Systems Pty Ltd (CISS), and was found to be knowingly involved with a company engaged in a pyramid selling scheme. CISS carried on a business within Australia as the owner of the exclusive distribution licence for certain etching products that it was said would safeguard vehicles and home contents from theft. The business was carried on throughout several States, under a business model whereby investors were given the title of State Director, who would then incorporate a company within that State with rights to distribute the 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. In the proceedings, such arrangements were agreed by all parties, including Mr Stott, to amount to a pyramid selling scheme for the purposes of the Trade Practices Act 1974 (Cth) (TPA). Although many of the ACCC’s contentions were accepted at hearing by Mr Stott, the ACCC specifically claimed in the proceedings that:

  • CISS had participated in a pyramid selling scheme in contravention of Section 65AAC(1) of the TPA and Section 44(1) of the ACL.
  • CISS had induced others to participate in a pyramid selling scheme in contravention of Section 65AAC(2) of the TPA and Section 44(2) of the ACL.
  • CISS had engaged in misleading or deceptive conduct in contravention of Section 52 of the TPA and Section 18 of the ACL.
  • CISS had made misleading representations about its business activities in contravention of Section 59(2) of the TPA and Section 37(2) of the ACL.
  • Mr Stott was liable for CISS’ 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 Mr Stott. For example, it was admitted that Mr Stott was knowingly concerned in and party to CISS’ pyramid selling schemes in contravention of Section 65AAC(1) of the TPA and Section 44(1) of the ACL. Further, Mr Stott admitted that he was knowingly concerned in and a party to CISS’ misleading and deceptive conduct in contravention of Section 52 of the TPA and Section 18 of the ACL, 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 TPA and Section 37(2) of the ACL.

The primary issues which the Court was therefore required to address was whether it should grant an injunction against Mr Stott from enacting further schemes like those previously undertaken by CISS in the future, and appropriate disqualification of Mr Stott from managing future corporations.

By agreement, the parties submitted that the injunction was necessary in the circumstances, as it was designed to prevent Mr Stott’s continued involvement in such schemes and did not have a merely punitive application. To that extent, Mr 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 appropriate. In imposing that penalty, his Honour Justice Middleton found that on account of Mr Stott’s cooperation with the ACCC and having consented to the orders sought by the ACCC, and also the fact that Mr Stott had refunded a partial amount of money received by CISS from the State Director, that a short period of disqualification was therefore appropriate. The Court’s order in regards to disqualification, which was seen to be below the medium range of penalty, took into account Mr Stott’s prior involvement in similar companies that had engaged in similar schemes. It was submitted that Mr Stott had held directorships in seven different companies since 3 December 1998, and that all of 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, for example “Crime Guard (Australia) Pty Ltd”, which was registered in 2004. At the time of disqualification, Mr Stott was also an undischarged bankrupt, although this was not specifically taken into account by the Court.