Officers who involve themselves in a corporation’s unconscionable conduct are also liable, as a recent High Court decision explains.
Australian consumer law prohibits business conduct that is unconscionable. The recent High Court decision in Productivity Partners Pty Ltd (trading as Captain Cook College) v Australian Competition and Consumer Commission [2024] HCA 27 shows how a corporation can be found, through its systems and processes, to have breached the legal standard. And it confirms the basis on which an individual officer can be held accountable as a person “involved” in that corporate wrongdoing.
The case concerned Captain Cook College, a private vocational education and training (VET) provider, owned by Site Group International Ltd. Captain Cook generated income from student fees. At the time, fees for an online course at Captain Cook were between $13,000–$20,000. Like other VET providers, Captain Cook routinely used marketing and sales agents, paid on commission, to recruit students to enrol in their courses.
In 2012, the Commonwealth changed the eligibility rules for the loan scheme that financed payment of VET fees. The intention was to improve access to VET among traditionally disadvantaged groups. Under the loan scheme, VET fees were paid directly to the provider, with the student repaying the Commonwealth 120 per cent of the loan amount once their taxable income reached a specified amount. Fees were paid to the VET provider if the student was enrolled on the “census date”, usually a few weeks after the relevant course commenced. Once the fees were paid, the student incurred a debt to the Commonwealth, whether or not they successfully completed the course.
The moral hazard in the loan scheme, as identified by the Court, was that the VET provider received the benefit but did not bear the cost of enrolling students, who did not have a proper understanding of the financial obligations they were incurring or a realistic capacity to complete the course in which they had enrolled.
Two known risks existed in the private VET business model. Agents, incentivised by commission, might engage in unethical or careless conduct in recruiting students. Secondly, students could be enrolled who lacked sufficient language, literacy or numeracy skills, or technology access and skills to undertake online courses. Prior to September 2015, Captain Cook had procedures to guard against those risks, including contacting the student directly (without the agent present) to confirm their understanding of enrolment and its financial implications, and automatically unenrolling any student with whom they had been unable to make contact by the census date. This resulted in an attrition rate of about 50 per cent by census date, with Captain Cook not entitled to VET fees and their agents not receiving a commission for students who withdrew or were unenrolled by that date.
This attrition ate into Captain Cook’s profitability and agents’ commissions, and the number of students being directed to Captain Cook by the agents fell. Driven by “sales and marketing objectives”, college management decided in September 2015 to dismantle the procedures. Positive effects on its financial performance were “dramatic and rapid”. In the 10 months before the change, Captain Cook’s VET fee revenue from students who didn’t complete their course (93.2 per cent of students) was about $7m. In the three months after the change, revenue from students who didn’t complete (99.7 per cent) was over $50m.
The ACCC case
The flaws in the VET fee funding scheme were well understood in September 2015, and the subject of a Senate inquiry that reported in November 2015. The ACCC commenced proceedings against several VET providers and agents. In November 2018, it launched its action against Captain Cook, alleging it had engaged in unconscionable conduct in dismantling the protective enrolment procedures. It also claimed former CEOs Ian Cook and Blake Wills, and its listed parent company, were involved in that contravention. Cook settled with the ACCC in 2020, but proceedings against the college and Wills went to the High Court.
The High Court’s decision provides useful guidance on unconscionability, which Justice James Edelman rightly describes as a broad or open- textured provision. The statutory prohibition on unconscionable conduct states that it is “capable of applying to a system of conduct or pattern of behaviour”. The Court rejected the argument that conduct could not be found to be unconscionable unless the ACCC could show that Captain Cook intended the risks in its business model, including misconduct by the sales agents, should materialise. In her judgment, Justice Michelle Gordon observed that, “systems are objectively designed to achieve certain ends; they are hence revealing of, and give effect to, corporate intention. Here, the college’s system was designed (or rather a system of controls was dismantled) to achieve a particular end — removing controls on the enrolment of unwitting or unsuitable students in order to reduce the attrition rate of students prior to the census and thereby increase revenue. Having designed the system in such a way, and foreseen the ‘inevitable consequence’ of its actions, it may be inferred that the college ‘mean[t] to produce’ that end. It did.”
The Court was also asked whether Wills, and through him the parent company, were involved in Captain Cook’s contravention. If they were, they were liable on the same basis as the college itself. Involvement liability, including for contraventions of civil penalty provisions, arises under most Commonwealth business statutes. Consistent with existing authority, the High Court’s decision confirmed that, to be liable, an accessory must intentionally participate in conduct implicating or involving them in the primary contravention. That is, they must have assented to, or become associated with, the conduct that amounts to the primary contravention. They must also have knowledge of the essential facts constituting the contravention. That is, they must know all the facts and circumstances that made what was done unconscionable. But this doesn’t mean they must “recognise” the conduct as unconscionable, or know or intend what was done would breach the law. The ACCC did not have to show that they knew the conduct was exploitative or otherwise had the character that made it against conscience.
The defective design of the VET fee loan scheme created the conditions for unprincipled and opportunistic behaviour by agents and providers in the VET sector, including Captain Cook. The Commonwealth wore the cost, cancelling more than $2.8b in loans to 152,800 students by 2021. But the successful ACCC action is important guidance for corporations or officers tempted to engage in sharp practice in similar settings.
This article first appeared under the headline ‘Unconscionable Conduct’ in the December 2024/January 2025 issue of Company Director magazine.
Dr Pamela Hanrahan is an Emerita Professor of the University of NSW and a consultant at Johnson Winter Slattery.
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