"t _¢ NUL et. DIS LRIBULLU.. IN THE FEDERAL COURT OF AUSTRALIA ) ) WESTERN AUSTRALIA DISTRICT REGISTRY ) NO. WAG 64 of 1986 ) ) GENERAL DIVISION BETWEEN : TRADE PRACTICES COMMISSION Applicant AND: BRITISH BUILDING SOCIETY First Respondent AND: BONNEY NOMINEES PTY.LTD. Second Respondent AND: MICHAEL EDWIN BONNEY Third Respondent AND: ANDREW JOHN CAHILL Fourth Respondent AND: BUSINESS MEN'S ASSURANCE COMPANY OF AUSTRALIA LIMITED Fifth Respondent SPENDER J. = SPEND RECEIVED 21 SEPTEMBER, 1987. 22 0CT 1987 FEDERAL COURT OF AUSTRALIA PRINCIPAL REGISTRY British Building Society is a permanent building society incorporated in Western Australia under the Buildin Societies Act 1976 (W.A.). 2. It admits breaching the provisions of s.47(1) of the Trade Practices Act 1974, in connexion with a scheme called "Guaranteed Low Interest Home Loan". Bonney Nominees Pty.Ltd., ("Bonney Nominees"), the second respondent, was responsible for providing managerial and other staff, which it employed, to conduct the business of the British Building Society and to provide management services to 1t. The third respondent, Mr. Bonney, was the Secretary/General Manager of the British Building Society and was one of the two Directors and the Manager and Company Secretary of Bonney Nominees, which was a medium-sized private company which was the trustee of the Bonney Family Trust. The fifth respondent, Business Men's Assurance Company of Australia Limited, ('B.M.A.'), 1s incorporated in the Australian Capital Territory amd carries on business as, inter alia, a life aimsurance company. In 1984, 1t appointed Bonney Nominees its agent to solicit proposals for insurance policies and to be its Managing Agent in Western Australia. Mr. Bonney signed that agreement on behalf of Bonney Nominees and Andrew Cahill, the fourth respondent, was appointed the nominated representative of Bonney Nominees. Mr. Cahill was employed by Bonney Nominees and, in addition to his function as the nominated representative of that company for B.M.A., was the Marketing and Development Officer for the British Building Society. The second to fifth respondents admit that they were each a party to the contravention by the British Building Society of the third line forcing prohibition of 5.47 of the Trade Practices Act 1974. 3. Section 47(1) provides:- "Subject to this section, a corporation shall not, in trade or commerce, engage in the practice of exclusive dealing." Sub-section 6 provides:- "A corporation also engages in the practice of exclusive dealing if the corporation - (a) supplies, or offers to supply, goods or services; (b) supplies, or offers to supply, goods or services at a particular price; or (ec) gives or allows, or offers to give or allow, a discount, allowance, rebate or credit in relation to the supply or proposed supply of goods or services by the corporation, on the condition that the person to whom the corporation supplies or offers or proposes to supply the goods or services or, if that person is a body corporate, a body corporate related to that body corporate will acquire goods or services of a particular kind or description directly or indirectly from another person." The Trade Practices Commission, by an application filed on 23 June 1986 seeks orders pursuant to 5s. 76 and 77 of the Trade Practices Act 1974, that each of the respondents pay to the Commonwealth of Australia a pecuniary penalty in respect of the contraventions of the Act which the Commission alleges the respondents have committed. Each of the respondents filed a Defence to the Statement of Claim by the Commission in this matter but, well prior to any contested hearing, the Commission and the first three respondents agreed to a statement of facts which had the effect of admitting the contraventions alleged by the Commission and requiring the Court to be concerned solely with the imposition of the appropriate pecuniary penalty. Subsequently, the fourth and fifth respondents each adopted a similar position. That aspect of the history of the matter has to be borne in mind as a_ relevant factor in the assessment of penalty, as does the fact that each of the respondents has cooperated fully with the Commission and there has been full disclosure. The contravention of s.47 came about in this way. Mr. Cahill, who has had a long experience at senior managerial level in the life insurance industry, as well as experience with building societies, devised a scheme over a period of some twelve months in his capacity as the Marketing and Development Officer of the British Building Society. The scheme, the "Guaranteed Low Interest Home Loan", was a scheme whereby persons could obtain an ascertainable amount of loan from the British Building Society at a predictable rate of interest. It was a condition of participating in the scheme that the person take out life insurance cover with a specified company, namely the Business Men's Assurance Company of Australia Limited. Agents of B.M.A. in Western Australia would sell term life insurance policies which incorporated a savings plan whereby funds would be placed by the policy holders with the British Building Society. Mr. Cahill attended the Registrar of Building Societies and supplied a pro forma of a brochure advertising the scheme and was advised that the terms of the scheme met the requirements of the Building Societies Act. The brochure was also submitted to Fhe Western waintralia Deparrment of Consumer Affairs which, after suggqerted amendments were made, atlvised that the brochure was "in order" so far as that Department was concerned. On 19 February 1985, Mr. Bonney introduced thé scheme to the Roard of Directors of the British Building Society. The directors were given a copy of the brochure and Mr. Bonney explained that the scheme was one to facilitate the marketing of policies of insurance with B.M.A.. Agents of the fifth respondent would offer, as an incentive to effect the policy, a "savings plan", under which the policy holder would invest with the Society for about two years and, provided all other criteria were satisfied, the policy holder would become eligible for the low rate of interest Loan. The dtrectors were also informed that the brochure had been considered hy the Department of Consumer Affairs, who considered 1t ta be in order, and that approval had been obtained from the Registrar of Building Societies. Mr. Bonney told the directors of the building society that the brochure would be distributed and the scheme promoted by the agents of B.M.A. and not by the Society. The brochure in its amended form was subsequently printed and distributed. Central aspects of the marketing scheme were that the British Building Society guaranteed that the interest on home loans from the fund would not exceed 3% more than the rate paid / 6. on savings provided that the member had complied with the conditions set out in the brochure. It required that the member Save a minimum of $15.00 per week for two years with the Society, without withdrawal during the twelve months prior to applying for the loan. Part of the amount of $15.00 per week purchased a $50,000 annual renewable term life insurance with B.M.A.. Each applicant was required to complete a proposal for a life insurance policy with B.M.A., and one of the "seven simple rules" provided: - "In order to qualify as a borrower, you have to take advantage of the Life Insurance Policy (consumer index linked)." The building society agreed to pay for half the cost of the preparation and printing of the brochure. The building society did not display any of the brochures at ats office nor at branches. The scheme commenced 1n about March 1985 and continued until approximately April 1986. According to the detailed enquiries of the Commission, there were approximately 316 participants in the scheme who had contributed something of the order of $95,000. On 15 April 1986, Mr. Bonney told the directors of the British Building Society that, "due to adverse member response, the marketing of the scheme had been suspended". It was about this time that, as a result of complaints, the Trade Practices Commission, had commenced inquiries into the scheme. By letter of 2 May 1986, the building society notified each member of the scheme of its suspension and, in an attempt to 7. minimise any loss the participants may have suffered by virtue of their participation in the scheme, advised that it would pay retrospectively to those members who wished to retire from the scheme an increased rate of interest of 15.5% per annum on the minimum monthly balance on all funds deposited with the building society pursuant to the scheme. In the result, all participants have since elected to withdraw their funds, with that interest. It is accepted by the Commission that the building society relied upon the advice of Bonney Nominees and Mr. Bonney himself that the scheme was lawful; that there was never on the part of any of the respondents any wilful breach of the provisions of the Trade Practices Act; at all material times all respondents believed that there had been no breach of any relevant statutory provision. While Mr. Cahill devised the scheme and did a substantial amount of work in relation to it, including consulting with some relevant statutory agencies, he at all times acted with the knowledge and approval of his employer. Mr. Kenneth Drummond, a director of the _ fifth respondent, has sworn an affidavit deposing that in May 1984, at a time when Bonney Nominees was that company's managing agent in Perth, the British Building Society was contemplating a new savings and life insurance plan to be marketed direct to customers of the building society and to employees of Western Australian companies on a salary deduction basis, and that B.M.A. was asked to make a submission to the building society with a view to providing a low cost form of insurance anda simplified form of proposal for underwriting. He Says that the participation of B.M.A. in the scheme was handled by Head Office sales executives of the company as part of its normal business activities. Mr. Drummond says that "B.M.A. did not realise that the Loan provided under the Scheme was conditional on having life insurance cover with B.M.A.. B.M.A. considered it possible that some people would refuse the life imsurance offer, or would he refused cover as being unacceptable risks. H.M.A. did not expect all participants in the Scheme to have life cover." I find this difficult to accept, as the brochure on its face clearly indicates the obligatory nature of the life insurance cover requirement. Mr. Drummond gives a different figure for the number of participants. He says that between February 1985 and April 1986, when the scheme was in operation, approximately 266 people joined the scheme. B.M.A. received a letter dated 20 June 1986 from the Trade Practices Commission, advising of a possible contravention of the Act by reason of the participation of the company in the Guaranteed Low Interest Home Loan Scheme. B.M.A. circulated a notice in writing to all officers, "drawing attention to the need to be alert to any potential areas of concern with respect to the Trade Practices Act" and "a procedure for critically vetting ail brochures and other advertising material was also put in place immediately" and that employees had been made "fully aware of the requirements of the Trade Practices Act". t 9. The solicitors for B.M.A., in correspondence with the Trade Practices Commission, advised that out of 264 policies written, 260 were cancelled at various times early in 1986 but predominantly in April 1986. ¢ The evidence shows that it was an integral part of the Guaranteed Low Interest Home Loan Scheme that participants in the scheme were required to effect a life insurance cover with B.M.A., and that the second to fifth respondents were each a party to that contravention. I accept that the contravention was not deliberate and that all of the respondents acted in ignorance that the scheme was in contravention of s.47 of the Trade Practices Act 1974. The assessment of appropriate pecuniary penalties has to reflect the factual circumstances of the contravention, the relative degree of culpability of the various respondents in that contravention, as well as having regard to the individual circumstances, including the financial capacity, of each of the respondents. The Act absolutely prohibits third line forcing of~ the kind in this case. Pursuant to ss.76 and 77 of the Trade Practices Act 1974, the Court 15 empowered to order a person other than a body corporate to pay to the Commonwealth by way of pecuniary penalty a sum not exceeding $50,000 and, in the case of a body corporate, §250,000 in respect of each contravention of a 10. provision of Part IV of the Act. Section ¢7 is in Part IV. This range of penalties indicates that offenders of Part IV can be visited with condign punishment. Tt is clear therefore that the legislature views contraventions of Part IV of the Act very seriously. It seems to me that, judged against those provisions, pecuniary penalties of almost token amounts cannot be justified. As a consequence, conduct in breach of the Act requires the imposition of penalties which are calculated to leave no doubt that the commerce of this country must be conducted in conformity with the requirements of the Trade Practices Act. The first respondent 1s a small bu2lding society. It has total assets of the order of $20 million; the combined assets of Western Australian building societies are of the order of $2.7 billion. It has a nett statutory worth in the order of $400,000; in its last financial year, 1t had a surplus after income tax of approx.$112,000. In that period it paid management fees of approx.$160,000 to the second respondent, to whom it had entrusted the management of its business. Mr. Bonney was a man very experienced in the management of building societies, and enjoyed a high reputation. I accept that the building society took steps to mitigate any loss in prospect by participants in the scheme, that it in fact made no profit from the scheme, and that it did not itself market the scheme. Tt is not suggested that either the second or the third respondent is impecunious. Bonney Nominees Pty.Ltd. is a small 1l. private company whose directors are the third respondent and his wife. The evidence (from very impressive sources) establishes that Mr. Bonney, who is aged 44 years and married with two children, is a man of good character, has a very high reputation in business circles, and has been significantly invdlved in community concerns. It is right to say, however, that an affidavit of Kareen Sackville reveals that 1n1976 Mr. Bonney, as secretary of the British Building Society, applied for authorisation, in respect of the Society's fire and general insurance, that mortgagors to the Society insure with a panel of insurers approved by the Society's board and the Insurance Commissioner and who will offer concession agreements to the Society. That authorisation in respect of "tied" insurance arrangements was granted by the Commission on 22 December 1976. Kareen Sackville's affidavit also draws attention to the fact that Mr. Bonney, in his capacity as President of the Association of Cooperative Housing Societies in Western Australia, had discussions with Mr. Hollow of the Commission concerning the insurance requirements of those cooperative societies. While it was in connexion with cooperative building societies and not with the British Building Society, which is a permanent society, that these discussions concerning requirements that borrowers effect life insurance with an assurer of the borrower's choice took place, nonetheless there were discussions concerning the applicability of s.47(6) in the context of building societies at a time a few months before the introduction of the scheme involved in this present matter. 12. Businessmen, particularly at senior levels, who remain in ignorance of the requirements of the Trade Practices Act 1974, do so at their peril. The fourth respondent devised the scheme, which was devised and promoted with the knowledge and approval of his employer. He is aged 58 and has a long history of senior managerial positions. He also is a man of good character. The annual return for the financial year ended 30 June 1986 of Business Men's Assurance Company of Australia Limited undicates that it had a total nett income of approx. $11 million, investments of nearly $16 million, other assets of $10 million, total liabilities of $3.3 million, and policy holders' funds in excess of $20 million. As indicated, there are in this case substantial mitigating circumstances. I do not regard the respondents as equally culpable and their personal financial circumstances differ notably. I necessarily have had regard to these factors in determining the pecuniary penalty to impose against each respondent. I order that the first respondent pay to the Commonwealth of Australia a pecuniary penalty of $10,000 in respect of the contravention of s.47 of the Act set out in the agreed statement of facts. 13. Pursuant to s.77 of the Trade Practices Act 1974, judgment be entered for the applicant on behalf of the Commonwealth of Australia against the first respondent for the sum of $10,000. Ca I order that the second respondent pay to the Commonwealth of Australia a pecuniary penalty of $15,000 in respect of the contravention of s.47 of the Act set out in the agreed statement of facts. Pursuant to s.77 of the Trade Practices Act 1974, judgment be entered for the applicant on behalf of the Commonwealth of Australia against the second respondent for the sum of $15,000. I order that the third respondent Pay to the Commonwealth of Australia a pecuniary penalty of $3,000 in respect of the contravention of s.47 of the Act as set out in the agreed statement of facts. Pursuant to s.77 of the Trade Practices Act 1974, judgment be entered for the applicant on behalf of the Commonwealth of Australia against the third respondent for the sum of $3,000. I order that the fourth respondent pay to the Commonwealth of Australia a pecuniary penalty of $1,000 in respect of the contravention of 5.47 of the Act the subject of these proceedings. 14. Pursuant to 5.77 of the Trade Practices Act 1974, judgment be entered for the applicant on behalf of the Commonwealth of Australia against the fourth respondent for the sum of $1,000. I order that the fifth respondent pay to the Commonwealth of Australia a pecuniary penalty of $25,000 in respect of the contravention of s.47 of the Act the subject of these proceedings. Pursuant to s.77 of the Trade Practices Act 1974, judgment be entered for the applicant on behalf of the Commonwealth of Australia against the fifth respondent for the sum of $25,000. I order that the respondents pay the applicant's costs to be taxed 1f not agreed; and as to the first, second and third respondents as one set of costs and, as to the fourth respondent and the fifth respondent, as separate sets of costs. I further order that as between the respondents, the respondents be liable for the payment of the applicant's costs in the proportion of the Pecuniary penalties ordered against then. ' certify that this . , 4 proceding Pages are a truc copy of the reasons for judgment herein of HjsAlonour Mr. Justice Spender ; MaQuicdd a [ g l9 ] Associate Dated