Corporations and officers can now be held responsible for predatory business models
5 mins reading time
“The buck stops with me.” A phrase often uttered by a corporate executive following an unfortunate and often public deception. At law though, it has historically been unclear who “the buck” stops with when it comes to corporate fraud.
Australian courts have long faced difficulties due to an inability to successfully pinpoint which individuals within a corporation were to blame for the conduct. The landmark case of Productivity Partners Pty Ltd (t/as Captain Cook College) v ACCC, however, attempts to clarify who the responsible parties are if a corporation has adopted a predatory business model.
Understanding corporate intentionality
Key to this new development is understanding the concept of corporate intentionality. The High Court of Australia (High Court) recently found that corporations think and act through systems, which may be constituted by a corporation’s practices and policies.
Endorsing the model of Professor Elise Bant described in ‘Systems Intentionality: Theory and Practice’, Justice Gordon stated that “a corporate system can be understood as a manifestation of corporate intentionality”. Therefore, if a corporation has adopted a predatory business model, which is only profitable by taking advantage of a certain class of vulnerable customers, then it is assumed that the corporation acted knowingly and with intent. As such, the corporation can be held directly responsible and penalised.
High Court decision extends risk to executives and corporations
In addition to the corporation being liable, the High Court’s decision has now determined that if a corporation is found to have acted unconscionably, any of its executives who had knowledge of the corporation’s systems can be also found to have acted unconscionably.
The above findings have now set new precedents which extend the risk corporations and executives face.
ACCC action for fraudulent behaviour
The Australian Competition and Consumer Commission (ACCC) has been taking legal action against Vocational Education and Training (VET) providers who have acted fraudulently. Most recently, the ACCC brought proceedings for unconscionable conduct breaching the Australian Consumer Law (ACL) against Productivity Partners Pty Ltd (t/as Captain Cook College) (Captain Cook College), its ultimate holding entity Site Group International Ltd (Site). Action was also taken against Blake Wills who was the Chief Operating Officer (COO) of Site and acting Chief Executive Officer of Captain Cook College during the period of November 2015 to January 2016.
What took place?
During the period of 7 September 2015 to September 2016, Captain Cook College engaged a third party to provide ‘course advisors’ (marketing and sales agents) who were paid commissions for recruiting students to enrol at the college. The commissions were earned once a student had successfully remained enrolled after the census date (the date upon which the college retained its profit from the Commonwealth’s VET FEE-Help funding scheme).
Capitan Cook College did not provide adequate training or supervision of these course advisors, who consequently obtained student enrolments by acting unethically, including by pressuring prospective students to enrol, making false or misleading statements, offering incentives (i.e. free laptops), and by completing documents on behalf of prospective students. As a result, Captain Cook College had enrolled a multitude of students who were misled, unsuitable or unable to undertake the course and repay the Commonwealth in line with the VET FEE-Help funding scheme.
Captain Cook College removes safeguard measures
Prior to the engagement of the third party, Captain Cook College had two safeguard measures in place to mitigate the risks regarding the enrolment of students who were unsuitable or enrolled unwittingly. However, once the third party had been engaged, the new course advisors made complaints regarding the safeguards and Captain Cook College decided to remove them. The safeguards were seen by the new course advisors to be “impediments” or “unnecessary barriers” to the enrolment of students past the census dates.
High Court holds college and COO to account
The High Court determined that the college acted unconscionably to increase profits by removing safeguard measures, which the college knew were effective in minimising the risk of students enrolling unwittingly or being unsuitable for enrolment.
Furthermore, the High Court determined that Blake Wills was involved in the unconscionable conduct of Captain Cook College through “his management and oversight of the College at all material times”. The court found that Blake Wills was a key driver of the financial changes to the college, was notified of the changes to the enrolment process, and subsequently oversaw the implementation of such changes. As such, both Blake Wills and Site (through Blake Wills’ conduct in his role as COO of Site during the impugned period) were knowingly concerned in, or a party to, the college’s unconscionable conduct and breach of the ACL.
How does the decision impact corporations and their officers?
The above findings made by the High Court have set the following new precedents when dealing with corporations.
- A corporation can be held directly responsible for any unconscionable conduct it has undertaken as a result of its systems, including its practices and policies, because the courts now deem a corporation’s systems prove its true knowledge and intentions.
- Officers of corporations face the risk of being held responsible for a corporation’s unconscionable conduct where the officer has been “knowingly concerned”. The officer need not know that the conduct in question is unconscionable, however if the officer is involved in the unconscionable conduct and has knowledge of the essential matters which form the conduct, the officer can now be penalised.
How can Macpherson Kelley help?
If you are a corporate officer, your risk has extended when it comes to the responsibility you hold for the oversight of business practices.
Any good business person knows that it pays to have a plan. Contact our experienced Corporate Team for assistance regarding your responsibilities as an officer or for a review of your corporation’s systems, practices and policies.
The information contained in this article is general in nature and cannot be relied on as legal advice nor does it create an engagement. Please contact one of our lawyers listed above for advice about your specific situation.
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Corporations and officers can now be held responsible for predatory business models
“The buck stops with me.” A phrase often uttered by a corporate executive following an unfortunate and often public deception. At law though, it has historically been unclear who “the buck” stops with when it comes to corporate fraud.
Australian courts have long faced difficulties due to an inability to successfully pinpoint which individuals within a corporation were to blame for the conduct. The landmark case of Productivity Partners Pty Ltd (t/as Captain Cook College) v ACCC, however, attempts to clarify who the responsible parties are if a corporation has adopted a predatory business model.
Understanding corporate intentionality
Key to this new development is understanding the concept of corporate intentionality. The High Court of Australia (High Court) recently found that corporations think and act through systems, which may be constituted by a corporation’s practices and policies.
Endorsing the model of Professor Elise Bant described in ‘Systems Intentionality: Theory and Practice’, Justice Gordon stated that “a corporate system can be understood as a manifestation of corporate intentionality”. Therefore, if a corporation has adopted a predatory business model, which is only profitable by taking advantage of a certain class of vulnerable customers, then it is assumed that the corporation acted knowingly and with intent. As such, the corporation can be held directly responsible and penalised.
High Court decision extends risk to executives and corporations
In addition to the corporation being liable, the High Court’s decision has now determined that if a corporation is found to have acted unconscionably, any of its executives who had knowledge of the corporation’s systems can be also found to have acted unconscionably.
The above findings have now set new precedents which extend the risk corporations and executives face.
ACCC action for fraudulent behaviour
The Australian Competition and Consumer Commission (ACCC) has been taking legal action against Vocational Education and Training (VET) providers who have acted fraudulently. Most recently, the ACCC brought proceedings for unconscionable conduct breaching the Australian Consumer Law (ACL) against Productivity Partners Pty Ltd (t/as Captain Cook College) (Captain Cook College), its ultimate holding entity Site Group International Ltd (Site). Action was also taken against Blake Wills who was the Chief Operating Officer (COO) of Site and acting Chief Executive Officer of Captain Cook College during the period of November 2015 to January 2016.
What took place?
During the period of 7 September 2015 to September 2016, Captain Cook College engaged a third party to provide ‘course advisors’ (marketing and sales agents) who were paid commissions for recruiting students to enrol at the college. The commissions were earned once a student had successfully remained enrolled after the census date (the date upon which the college retained its profit from the Commonwealth’s VET FEE-Help funding scheme).
Capitan Cook College did not provide adequate training or supervision of these course advisors, who consequently obtained student enrolments by acting unethically, including by pressuring prospective students to enrol, making false or misleading statements, offering incentives (i.e. free laptops), and by completing documents on behalf of prospective students. As a result, Captain Cook College had enrolled a multitude of students who were misled, unsuitable or unable to undertake the course and repay the Commonwealth in line with the VET FEE-Help funding scheme.
Captain Cook College removes safeguard measures
Prior to the engagement of the third party, Captain Cook College had two safeguard measures in place to mitigate the risks regarding the enrolment of students who were unsuitable or enrolled unwittingly. However, once the third party had been engaged, the new course advisors made complaints regarding the safeguards and Captain Cook College decided to remove them. The safeguards were seen by the new course advisors to be “impediments” or “unnecessary barriers” to the enrolment of students past the census dates.
High Court holds college and COO to account
The High Court determined that the college acted unconscionably to increase profits by removing safeguard measures, which the college knew were effective in minimising the risk of students enrolling unwittingly or being unsuitable for enrolment.
Furthermore, the High Court determined that Blake Wills was involved in the unconscionable conduct of Captain Cook College through “his management and oversight of the College at all material times”. The court found that Blake Wills was a key driver of the financial changes to the college, was notified of the changes to the enrolment process, and subsequently oversaw the implementation of such changes. As such, both Blake Wills and Site (through Blake Wills’ conduct in his role as COO of Site during the impugned period) were knowingly concerned in, or a party to, the college’s unconscionable conduct and breach of the ACL.
How does the decision impact corporations and their officers?
The above findings made by the High Court have set the following new precedents when dealing with corporations.
- A corporation can be held directly responsible for any unconscionable conduct it has undertaken as a result of its systems, including its practices and policies, because the courts now deem a corporation’s systems prove its true knowledge and intentions.
- Officers of corporations face the risk of being held responsible for a corporation’s unconscionable conduct where the officer has been “knowingly concerned”. The officer need not know that the conduct in question is unconscionable, however if the officer is involved in the unconscionable conduct and has knowledge of the essential matters which form the conduct, the officer can now be penalised.
How can Macpherson Kelley help?
If you are a corporate officer, your risk has extended when it comes to the responsibility you hold for the oversight of business practices.
Any good business person knows that it pays to have a plan. Contact our experienced Corporate Team for assistance regarding your responsibilities as an officer or for a review of your corporation’s systems, practices and policies.