The Federal Court of Australia has ordered two company directors to personally compensate customers, pay a large fine and be disqualified from managing a corporation for being ‘knowingly concerned’ in unconscionable conduct by their company and ‘causing it’ to make false or misleading representations, in contravention of the Australian Consumer Law.
The orders made by the Federal Court of Australia against the company directors of Australian 4WD Hire, a vehicle rental company, were:
- To pay the vehicle hirers amounts of between $550 and $4,760 within 21 days to compensate them for amounts wrongly deducted from their security bond for ‘excessive wear and tear’ (as non-party consumer redress); and
- To pay a pecuniary penalty (a fine) to the Commonwealth Government: Vitali Roesch to pay $179,000 and Maryna Kosukhina to pay $174,000; and
- That Vitali Roesch and Maryna Kosukhinabe disqualified from managing a corporation for a period of three years; and
- That Vitali Roesch and Maryna Kosukhina pay the legal costs of the proceeding.
The orders were made separately from an order that the company pay a pecuniary penalty of $870,000. The fact that the company was in liquidation and had no assets, was irrelevant to the order made because the penalty was a ‘general deterrence’.
Neither the liquidation of the company nor bankruptcy protected a director from the orders.
The decision was Australian Competition and Consumer Commission v Smart Corporation Pty Ltd (No 3)  FCA 347 (15 April 2021) (Jackson J).
The contraventions of the Australian Consumer Law (the ACL)
Australian 4WD Hire (‘A4WD’) specialised in hiring 4-wheel drive vehicles for recreational off-road use. It had between 83 and 92 vehicles for hire. A4WD took a security bond of $5,000 when hiring a vehicle.
It was a successful business. In the year to 30 June 2017, A4WD entered into 2,000 contracts and had a turnover of about $3 million; and in the year to 30 June 2018, it entered into 3,000 contracts and had a turnover of about $4 million.
The contraventions of the Australian Consumer Law were of three different kinds:
1. Misleading and deceptive conduct (s 18) false or misleading representations (s 29(1)(g))
The Court declared that A4WD engaged in conduct / made representations “that the rental vehicles had characteristics or benefits which they did not have’.
The representations were two ‘Insurance Coverage Representations’ which A4WD made on its website and in the quote emails it sent.
The first was that all of A4WD’s vehicles had the benefit of being insured for off-road use. This was false because only half of the vehicles were insured.
The second was that if any damage occurred to the vehicle while being hired, including while being used on unsealed roads, it would be covered by insurance under A4WD’s insurance policies. This was false because where a vehicle was insured, it was at A4WD’s sole discretion if it made a claim on its insurance and if it did not, could hold the customer liable to pay for either the repair costs or the replacement value or the finance contract payout.
2. Unconscionable conduct (s 21)
The Court declared that A4WD engaged in unconscionable conduct by sending emails to 31 customers containing unconscionable threats or advices after the vehicle was returned, to justify retention of part or all of the security bond.
A representative example of an email is:
“Upon downloading your Driver Behaviour Report (DBR) through the GPS tracking system, we were shocked to find how misused the vehicle was. In total you have managed to accumulate 208 speeding violations with 5km grace calculated in and a maximum of 139km/h, with speed consistently more than 10km/h over 60km/h off road limit, see attached your DBR. These excessive speeding violations are clear negligence and serious breaches of our contract, showing continuous disregard for the property and the law.”
The author was a fictitious person who signed off as “Christine Burgess | Fleet Administration | Australian 4WD Hire”.
The Court found that:
- 31 of the customers had received an email which contained intimidating or threatening language, claiming ‘misleadingly and in bad faith’ that the driver had incurred large numbers of ‘speeding violations’ or other ‘Prohibited Operations’ evidenced by a GPS data provider installed in each vehicle, and that at least $500 of their security bond would be retained for ‘excessive vehicle wear and tear’ irrespective of whether the vehicle had been damaged.
- 25 of the customers had received an email to advise a deduction from the security bond for an alleged ‘Prohibited Operation’ such as ‘excessive wear and tear’ or ‘night driving’, irrespective of whether there had been any damage done to the vehicle.
- 18 of the customers had received an email containing intimidatory, intemperate and threatening language, sent in order to deter and discourage the consumer from raising legitimate concerns about A4WD’s Driver Behaviour Report or disputing the alleged ‘Prohibited Operation’ when using the hire vehicle.
- 3 of the customers had received an email falsely alleging that the police had issued speeding fines while the customer was driving the hired vehicle.
‘The main vice in the conduct was intimidation for profit’. The ‘profit’ was the retention of between $1,500 and $5,000 of the security bond.
3. Unfair Contract Terms (s 24)
The Court declared that under s 250 of the ACL three contract terms were void pursuant to s 23 of the ACL because they were unfair terms within the meaning of s 24 of the ACL. The hiring contract was a standard form consumer contract. The terms were:
- The GPS Provisions: That A4WD could use the global positioning system (GPS) tracking data on the vehicle to monitor how, when and how fast it was being driven; use the GPS data to determine a Prohibited Operation (such as driving at night outside of built up areas, above the speed limit or when visibility was poor such as in fog or heavy rain) and issue a Driver Behaviour Report; an acknowledgement by the customer that excessive wear and tear would likely cause damage to the vehicle; and an authority to deduct from the security bond compensation for deemed Driver Behaviour Damage in the amount of $500 per incident without any link between the Prohibited Operation and the alleged damage.
- The Insurance Discretion Clause: That at A4WD’s sole discretion, it could hold the customer liable to pay for either the repair costs or the replacement value or the finance contract payout, even where the vehicle was insured for the damage.
- The Non-Disparagement Clause: That customers were required to act at all times in A4WD’s best interests and not defame r denigrate the company, during and after the vehicle hire, which was entirely in A4WD’s favour when it was not necessary to protect its legitimate interests which were that the customer look after the vehicle, and was therefore unfair.
The involvement of the directors
After making declarations of contraventions of the Australian Consumer Law, the Court declared that the two directors ‘each of whom caused the company to engage’ in the misleading, deceptive and false conduct ‘were each knowingly concerned in and a party to, the contraventions’ of s 18, s 21 and s 29(1)(e) by A4WD within the meaning of s 224(1)(e) of the ACL.
The reasons why the Court found that Ms Kosukhina and Mr Roesch, as directors of the company were ‘jointly and severally responsible for the actions of A4WD’ and were personally liable to compensate consumers, pay the financial penalties and be disqualified as directors were:
- Mr Roesch was the director of A4WD until October 2015. He was declared bankrupt in 2016. Ms Kosukhina was a director of A4WD from September 2015. After Mr Roesch resigned, she was the sole director.
- They signed off on the responses to the ACCC’s s 155 notice, Mr Roesch as Fleet Manager, Ms Kosukhina as director.
- The A4WD organisational diagram prepared in 2019 showed that corporate responsibility at A4WD was primarily with Ms Kosukhina, and secondarily with Mr Roesch to whom the ‘complaints department’ reported.
- Mr Roesch and Ms Kosukhina were the owners and operators of all website content, insurance policies and were responsible for setting, managing and enforcing all company policies including responsibility for the policy about insurance claims.
- Mr Roesch was responsible for, and had direct knowledge of the Insurance Discretion Clause, the GPS Provisions and the Non-Disparagement Clause because he was responsible for authorising the terms and conditions.
- All decisions regarding damages claims and complaints were overseen by Ms Kosukhina, who was therefore knowingly concerned in the company’s reliance upon the GPS Provisions.
- The emails constituting the unconscionable conduct were either sent by Mr Roesch or Ms Kosukhina or sent with their approval.
- Mr Roesch and Ms Kosukhina were married, and the business was a ‘family-owned and operated business’. Each of them were aware of, and are likely to have engaged in the unconscionable conduct. The organisational chart showed three other employees.
Ms Kosukhina’s bankruptcy
Even bankruptcy does not prevent the court from making orders against directors. The Court addressed the two complications arising from Ms Kosukhina’s bankruptcy in this way:
- Did the ACCC require leave to proceed?
The ACCC argued it did not require leave to proceed because the remedies it sought of pecuniary penalties, non-party consumer redress and orders for costs of the proceedings were covered by s 82(3) of the Bankruptcy Act 1966 (Cth) which provides that penalties or fines imposed by a court in respect of an ‘offence against a law’ are not provable in bankruptcy.
The Court agreed, saying that the monetary remedies were ‘neither debts or liabilities to which Ms Kosukhina was subject at the time of her bankruptcy, nor debts or liabilities to which she may become subject before her discharge by reason of an obligation incurred before the date of the bankruptcy’, because the monetary remedies required the exercise of the court’s discretion. Therefore s 58(3) of the Bankruptcy Act 1966 (Cth) which states that the leave of the court is needed before taking any fresh step in respect of a provable debt does not apply because they were not provable debts.
- The effect of the bankruptcy on the penalty order
The penalty order against Ms Kosukhina was carefully crafted. It was “to become payable only after the payment of the non-party consumer redress and only on the last day of the month following the month in which [she] is discharged from bankruptcy”.
The compensation order was not made subject to discharge from discharge from bankruptcy because if payment is not made within 21 days, they are liable to imprisonment or other punishment.
Contraventions of the Australian Consumer Law by a company in which the directors are knowingly concerned in the contraventions may lead to personal liability in the forms of compensation orders, penalties and an order for payment of legal costs of the proceeding.
Liquidation of the company and bankruptcy of the director provides no protection against personal liability under the Australian Consumer Law.
4WD Hire Company Gives Consumers Rough Ride
The Australian car hire market has 1,797 operators and is expected to reach revenues of $3.6 billion in the next five years. The Queensland market, where Australian 4WD Hire (‘A4WD’) operated, represents 22% of the total car hire market.
During the period 2015 – 2020, the Australian car hire market experienced stalling growth, falling profit margins and increased competition from car hire aggregator websites, and the increasing popularity of low-price car sharing networks. The average profit margin for the industry was approximately 14% and declining.
The drive to squeeze additional profit from every customer interaction was imperative for the industry participants to survive. However this should not be achieved at the expense of the customer by engaging in unconscionable conduct, making false and misleading claims, administering unfair contracts and using threatening language in customer communications sent by fictitious employees.
Squeezing additional revenue and profit margin from customers by withholding between $1,500 and $5,000 of their security bond was no doubt a profitable exercise, but one that would inevitably come unstuck as customers complained, including publishing scathing reviews on online customer review sites such as TripAdvisor. One customer complaint on Trip Advisor generated 237 replies. Many of those posting on TripAdvisor were also angry Australian 4WD Hire customers who had experienced similar underhanded treatment.
The lesson is clear. Engaging in unconscionable conduct in an attempt to add revenue and increase profit will make you a target for the ACCC and may result in prosecution and a substantial fine and personal exposure for the directors.