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When are company
directors personally liable under the Australian Consumer
Law?
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) [2021] 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.
Conclusions
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.
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