FEDERAL COURT OF AUSTRALIA

Australian Competition and Consumer Commission v Morild Pty Ltd [2017] FCA 1308

ORDERS

THE COURT DECLARES THAT:

1.    The first respondent contravened cl 8(1) of Schedule 1 to the Franchising Code and thereby contravened s 51ACB of the Competition and Consumer Act 2010 (Cth) (CCA) by failing, between 1 January 2015 and at least 8 January 2016 (both dates inclusive), to create a franchise disclosure document concerning the Pastacup franchise system that disclosed that the relevant business experience of the first respondent's director, Mr Bernstein, included that he was previously a director of two companies who had acted as franchisors of the same franchise system and went into winding up by reason of insolvency.

2.    Between 18 March 2015 and 25 September 2015, the first respondent contravened cl 9(1) of the Franchising Code and thereby contravened s 51ACB of the CCA by giving a franchise disclosure document dated 18 November 2014 concerning the Pastacup franchise system to prospective franchisees which document did not disclose that the relevant business experience of the first respondent's director, Mr Bernstein, included that he was previously a director of two companies who had acted as franchisors of the same franchise system and went into winding up by reason of insolvency.

3.    Mr Bernstein was a person knowingly concerned:

(a)    within the meaning of s 75B(1)(c) of the CCA in the first respondent's contraventions of s 51ACB of the CCA referred to in paragraphs 1 and 2 above;

(b)    within the meaning of s 76(1)(e) of the CCA in the first respondent's contraventions of cl 8(1) and cl 9(1) of the Franchising Code referred to in paragraphs 1 and 2 above; and

(c)    within the meaning of s 80(1)(e) of the CCA in the first respondent's contraventions of s 51ACB of the CCA referred to in paragraphs 1 and 2 above.

THE COURT ORDERS THAT:

Injunctions

4.    The first respondent, until 6 December 2023, in any franchise disclosure document provided to a prospective franchisee, under the business experience of each officer of the first respondent who was as at 6 December 2013 an officer of SSP Holdings Pty Ltd, must include the following (with the officer's name to be inserted in the place of "[Name]"):

[Name] was an officer of SSP Holdings Pty Ltd, a previous franchisor of the Pastacup franchise system, which on 6 December 2013 resolved to be wound up voluntarily as it was unable to pay its debts as and when they fell due.

5.    The first respondent, until 21 October 2024, in any franchise disclosure document provided to a prospective franchisee, under the business experience of each officer of the first respondent who was as at 21 October 2014 an officer of Pastacup Australia Pty Ltd (ACN 150 392 340), to must include the following (with the officer's name to be inserted in the place of "[Name]"):

[Name] was an officer of Pastacup Australia Pty Ltd, a previous franchisor of the Pastacup franchise system, which on 21 October 2014 was ordered to be wound up in insolvency and was deregistered on 12 June 2016.

6.    Subject to paragraph 7 below, the second respondent must ensure that, until 21 October 2024, in any disclosure document provided to a prospective franchisee by a company of which he is an officer, the summary of the relevant business experience of the second respondent includes the following:

Stuart Ian Bernstein was a director of SSP Holdings Pty Ltd, a previous franchisor of the Pastacup franchise system, which on 6 December 2013 resolved to be wound up voluntarily as it was unable to pay its debts as and when they fell due. Also, Stuart Ian Bernstein was a director of Pastacup Australia, a previous franchisor of the Pastacup franchise system, which on 21 October 2014 was ordered to be wound up in insolvency and was deregistered on 12 June 2016.

7.    After 6 December 2023, the following words are not required to be included in the passage in quotation marks in paragraph 6 above:

Stuart Ian Bernstein was a director of SSP Holdings Pty Ltd, a previous franchisor of the Pastacup franchise system, which on 6 December 2013 resolved to be wound up voluntarily as it was unable to pay its debts as and when they fell due.

Pecuniary Penalties

8.    The first respondent pay to the Commonwealth of Australia a penalty of $100,000 with payment to be made in 24 monthly instalments, with the first payment occurring on the first day of the month following the date that this order is made and each subsequent next payment occurring on the first day of each subsequent month.

9.    The second respondent pay to the Commonwealth of Australia a penalty of $50,000 with payment to be made in 24 monthly instalments, with the first payment occurring on the first day of the month following the date on which the second respondent is discharged from bankruptcy and each subsequent next payment occurring on the first date of each subsequent month.

Costs

10.    The respondents must pay the applicant's costs, fixed at the sum of $12,000.

Note:    Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.

REASONS FOR JUDGMENT

MCKERRACHER J:

TABLE OF CONTENTS

INTRODUCTION

1    The proceeding raises the issue of accuracy of information, which franchisors are required to give to prospective franchisees as to the franchisors’ own commercial background and experience when negotiating a potential franchise. It concerns a breach of the mandatory franchising industry code, being a failure by the first respondent, Morild Pty Ltd, the current franchisor of a fast food restaurant franchise called "Pastacup", to set out in its disclosure document to prospective franchisees that its director, the second respondent, Mr Stuart Bernstein was previously a director of two predecessor companies who acted as franchisors of the same franchise system and had become insolvent.

AGREED FACTS

2    The Australian Competition and Consumer Commission (ACCC) and the respondents have agreed the following facts under s 191 of the Evidence Act 1995 (Cth).

The Pastacup franchise

3    "Pastacup" restaurants sells pasta dishes. There are currently 21 Pastacup franchises: 20 across Perth and regional Western Australia, and one in Wagga, New South Wales. Morild is the current franchisor of the Pastacup franchise and presently offers new franchises across Australia. Mr Bernstein co-founded the Pastacup franchise in 2008 and has been intimately involved in its promotion and management ever since. He is currently the Business Development Co-ordinator for the Pastacup franchise.

4    The intellectual property associated with the Pastacup franchise is owned by Pastacup International Pty Ltd and Pastacup International has granted a licence to Morild to use that intellectual property.

Previous Pastacup franchisor companies

5    Pastacup Australia Pty Ltd (ACN 127 162 289) (the first Pastacup Australia) was incorporated on 21 August 2007.

6    On 12 April 2011:

(a)    the first Pastacup Australia changed its name to SSP Holdings Pty Ltd; and

(b)    Pastacup Australia Pty Ltd (ACN 150 392 340) (Pastacup Australia) was incorporated.

7    On a date prior to 6 December 2013, Pastacup Australia began acting as the Pastacup franchisor in the place of SSP Holdings.

8    On 6 December 2013, SSP Holdings entered into a creditors' voluntary winding up, the company in general meeting having resolved that "it was unable to pay its debts as and when they fell due". Mr Bernstein signed the Form 205 notification of the SSP Holdings resolution, which was filed with the Australian Securities and Investments Commission (ASIC).

9    On 16 July 2014, the Deputy Commissioner of Taxation applied to this Court to have Pastacup Australia wound up in insolvency.

10    On 19 September 2014, the Pastacup franchisor role was transferred from Pastacup Australia to Morild. Mr Bernstein negotiated the transfer of the franchise to Morild.

11    On 22 September 2014, Pastacup Australia went into voluntary administration.

12    On 21 October 2014, this Court ordered Pastacup Australia be wound up in insolvency.

13    Pastacup Australia was deregistered on 12 June 2016.

The Pastacup group of companies

14    Mazik Pty Ltd was, at all material times, the ultimate holding company of Morild.

15    At all material times Pastacup International held all shares in SSP Holdings.

16    At all material times, the shares of Pastacup International have been held by:

(a)    Australian World Marketing Pty Ltd (ACN 009 041 543);

(b)    Hemsedal Pty Ltd (ACN 127 158 310); and

(c)    Trygve Pty Ltd (ACN 127 158 089).

17    Mazik became the sole shareholder of Trygve from on or around 27 January 2015.

18    On or around 27 January 2015, Mazik became the ultimate holding company of Pastacup Australia.

19    The following entities are, or were at material times, involved in the operation of the Pastacup franchise business (Pastacup Companies):

(a)    Mosse Pty Ltd (ACN 601 543 079), which operated Morild’s head office at 50A Angove St, North Perth WA 6006 until mid-2016;

(b)    Aosta Pty Ltd (ACN 613 116 242), which has provided management services to Morild since mid-2016;

(c)    Pastacup Group Pty Ltd (ACN 150 392 064), which ASIC records show is the parent company of Morild and was the parent company of Pastacup Australia until that company was deregistered on 12 June 2016;

(d)    Difoca Pty Ltd (formerly Pastacup WA Pty Ltd) (ACN 150 393 007) employs the staff who run the Pastacup franchisor operations;

(e)    Pastacup A&P Pty Ltd (ACN 601 754 554) operates the Pastacup franchise business marketing fund;

(f)    Pastacup Fitout Pty Ltd (ACN 150 392 680) performs the fit out of Pastacup franchise stores;

(g)    Arngrim Pty Ltd (ACN 167 088 226) has operated Pastacup stores from time to time;

(h)    Pastacup Leasing Pty Ltd (ACN 134 337 581); and

(i)    Pastacup Morley Pty Ltd (ACN 147 943 584); Pastacup Busselton Pty Ltd (ACN 162 924 147); Pastacup South Hedland Pty Ltd (ACN 167 340 507); Pastacup Beldon Pty Ltd (ACN 165 856 100); Pastacup Jindalee Pty Ltd (ACN 142 775 755); Pastacup (Haynes) Pty Ltd (ACN 154 918 359); Pastacup Belmont Pty Ltd (ACN 156 283 788); Pastacup Warwick Pty Ltd (ACN 151 587 450); Pastacup Warnbro Pty Ltd (ACN 169 751 482); Pastacup (Canning Vale) Pty Ltd (ACN 133 339 867); Pastacup Palmyra Pty Ltd (ACN 164 321 653) (together the Pastacup Lessee Companies) all held leases of premises and operated Pastacup stores from those premises.

Mr Bernstein’s involvement in Pastacup Companies

20    Mr Bernstein was a director and company secretary of various Pastacup Companies.

21    Mr Bernstein ceased to be a director of Morild on 19 May 2016, Pastacup International on 22 June 2016, Pastacup Group on 22 June 2016, SSP Holdings on 29 June 2016, Pastacup Australia on 12 June 2016, Mosse on 29 June 2016 and all other Pastacup Companies between 22 June 2016 and 29 June 2016.

22    On or around the date Mr Bernstein ceased holding office as a director of the various Pastacup franchise companies, in many instances Mr Laurence Bernstein (Mr Bernstein's brother), was appointed director.

23    Mr Bernstein held shares in Mazik at all relevant times since the date of its registration and was the sole shareholder from 27 January 2015 to 21 June 2016.

24    Mr Bernstein was the sole shareholder of Hemsedal at all relevant times until 21 June 2016.

25    On 21 June 2016:

(a)    Mr Bernstein transferred all his shares in Mazik to Mr Laurence Bernstein;

(b)    Mr Laurence Bernstein was appointed director of Hemsedal; and

(c)    Mr Bernstein transferred all his shares in Hemsedal to Mazik.

26    From the inception of the franchise on or around 21 August 2007 until on or about 19 May 2016, Mr Bernstein was responsible within the Pastacup Companies for:

(a)    meeting with prospective Pastacup franchisees;

(b)    providing prospective Pastacup franchisees with Pastacup disclosure documents and franchise agreements;

(c)    approving any new versions of Pastacup disclosure documents for Pastacup franchisees; and

(d)    executing Pastacup franchise agreements with new Pastacup franchisees on behalf of Morild.

27    After 21 June 2016, Mr Bernstein was still promoted on Pastacup’s website and in disclosure documents as being a co-founder of the Pastacup brand and its Business Development Coordinator. Further, the need to meet with Mr Bernstein is still described on the Pastacup Website as a stage in the process of applying for a Pastacup franchise.

Pastacup franchise licences

28    Pastacup International licence the Pastacup franchise intellectual property to each of the Pastacup franchisor companies (SSP Holdings, Pastacup Australia and Morild). These companies then sub-license the intellectual property to restaurant franchisees. In each of the head-licences Pastacup International retained a right to terminate the licence on the insolvency of the licensee, or if the licensee became an externally-administered body corporate. This permitted the transfer of the intellectual property in the "Pastacup" brand from SSP Holdings to Pastacup Australia, and Pastacup Australia to Morild on the insolvency of the predecessor company.

The respondents’ knowledge

29    From 6 December 2013 and 22 September 2014, Morild and Mr Bernstein were aware of the respective insolvencies of SSP Holdings and Pastacup Australia and Morild was aware of Mr Bernstein’s involvement as a director of SSP Holdings and Pastacup Australia.

Franchising Code requirements

30    Morild was required pursuant to Sch 1 of the Competition and Consumer (Industry Codes - Franchising) Regulation 2014 (Cth) (Franchising Code) to create and give to franchisees a disclosure document that, among other things, included a summary of the relevant business experience for the last 10 years of each officer of the franchisor, in order to help the prospective franchisee to make a reasonably informed decision about the franchise.

31    The scope of that requirement included an obligation to disclose:

(a)    Mr Bernstein’s directorship of Pastacup Australia and SSP Holdings;

(b)    Pastacup Australia and SSP Holdings were prior franchisor companies; and

(c)    those companies were wound up in insolvency.

The 2014 Disclosure Document

32    Once Morild became the Pastacup franchisor, it prepared a disclosure document dated 18 November 2014 (the 2014 Disclosure Document) which stated:

(a)    Mr Bernstein operated as part owner and director of cafes in North Perth for six years "following a 2 year stay in Sydney setting up and operating successful cafes, Piccolo Mono and Cafe Bondi". Prior to that, he was the owner and operator of various food outlets. He "holds a Bachelor of Commerce degree and is responsible for the Pastacup concept and became a director of Pastacup early in 2008"; and

(b)    the Pastacup brand was launched in March 2008. The concept of Pastacup was trialled and tested under another name for 3 years prior to the name change to Pastacup:

after careful consideration of the type of business the owners wanted to offer the public... Testing of recipes, customer feedback and kitchen operations had shown amazing results prompting management to open a Pastacup franchise pilot store. Using feedback and experience from the North Perth store, the brand was redefined in the development of the logo, the look and feel of the store, the culture and pricing strategies.

33    "Pastacup" and the "Franchisor" were defined in a note at the beginning of the 2014 Disclosure Document to mean Morild.

34    The 2014 Disclosure Document did not disclose the insolvency of the two predecessor Pastacup franchisors (SSP Holdings and Pastacup Australia) or Mr Bernstein's directorship of those companies.

35    Mr Bernstein signed the 2014 Disclosure Document as a director and officer of Morild.

The 2016 Disclosure Document

36    In early 2016, Morild commenced using a different Pastacup disclosure document dated 8 January 2016, which was again signed by Mr Bernstein as a director and officer of Morild (the 2016 Disclosure Document).

37    The 2016 Disclosure Document:

(a)    included the statements referred to in [32] above;

(b)    stated that Mr Bernstein was the founder of the Pastacup concept;

(c)    stated that: "[Mr Bernstein] has been working in the franchise system since its inception in 2008 and for the Franchisor since its incorporation in 2014" and "[t]he Franchisor was incorporated and acquired the Pastacup franchise system in 2014";

(d)    identified a list of "associates" of Morild which "have been externally-administered body corporates in the last 10 years", including within that list the two predecessor Pastacup franchisor companies: SSP Holdings and Pastacup Australia; and

(e)    stated that an administrator was appointed to SSP Holdings and Pastacup Australia.

38    Although the 2016 Disclosure Document disclosed that SSP Holdings and Pastacup Australia were externally administered bodies corporate as set out above, it did not:

(a)    identify SSP Holdings and Pastacup Australia as predecessor franchisors of the Pastacup franchise system;

(b)    refer to Mr Bernstein’s role as director of those companies; and

(c)    state that each of SSP Holdings and Pastacup were wound up by reason of insolvency.

The respondents’ breaches

39    Between 1 January 2015 and at least 8 January 2016, Morild failed to create a disclosure document concerning the Pastacup franchise system which disclosed a summary of the relevant business experience of Mr Bernstein, because each of the disclosure documents did not disclose that:

(a)    SSP Holdings and Pastacup Australia were franchisors of the Pastacup franchise before they became insolvent; and

(b)    Mr Bernstein was a director of those companies.

40    Between 18 March 2015 and 25 September 2015, Morild gave the 2014 Disclosure Document to nine prospective franchisees (detailed in table below), each of which subsequently entered into franchise agreements with Morild and became Pastacup franchisees (Prospective Franchisees).

41    At the date that the 2014 Disclosure Documents was given to the Prospective Franchisees, Mr Bernstein:

(a)    was a director of Morild; and

(b)    provided the 2014 Disclosure Document to the Prospective Franchisees.

42    The respondents admit:

(a)    Morild breached the Franchising Code by:

(i)    failing to create a complying disclosure document (cl 8(1)), and

(ii)    providing the non-complying 2014 Disclosure Document to the Prospective Franchisees during 2015 (cl 9(1)),

and thereby contravened s 51ACB of the Competition and Consumer Act 2010 (Cth) (CCA); and

(b)    by reason of Mr Bernstein's position, conduct and knowledge he was knowingly concerned in Morild's contraventions within the meaning of s 75B(1)(c) of the CCA.

Matters relevant to relief

43    The parties are also agreed that the following factors are relevant to the determination of relief in these proceedings:

(a)    the nature and extent of the contravening conduct;

(b)    the loss or damage suffered as a result of the conduct;

(c)    the circumstances in which the conduct took place;

(d)    whether the respondents have ever been found by a Court to have engaged in similar conduct;

(e)    the size and financial position of the respondents, and the deterrent effect of the penalty;

(f)    whether the conduct was deliberate and involved senior management;

(g)    whether the respondents have a culture of compliance; and

(h)    cooperation by the respondents.

Nature and extent of conduct

44    A significant financial commitment is required from Pastacup franchisees to operate a Pastacup franchise. The Pastacup franchise set-up costs, as provided in each of the 2014 and 2016 Disclosure Documents, include fees and expenses.

45    Various other fees and royalties are payable by Pastacup franchisees to the franchisor company during the operation of the franchise.

46    The conduct of the respondents in breaching the Franchising Code and contravening the CCA was repeated. It includes the following instances detailed in the table below:

(a)    seven acts of giving the 2014 Disclosure Document prior to 31 July 2015;

(b)    one act of giving the 2014 Disclosure Document after 31 July 2015; and

(c)    one act of creating a non-compliant disclosure document (the 2016 Disclosure Document).

47    The conduct continued until Morild created a new disclosure document on 5 December 2016. Before that time, Morild issued the non-compliant 2016 Disclosure Document to the prospective franchisees described in the table below. Some of these prospective franchisees subsequently entered into franchise agreements with Morild and became Pastacup franchisees, as identified by the reference to the relevant franchise store below.

Loss or damage suffered

48    By failing to disclose relevant business experience of Mr Bernstein, prospective franchisees lost, at least, the opportunity to make a fully informed decision as to whether to commit significant time, money and resources to a Pastacup franchise.

49    The intellectual property in the franchise is held by Pastacup International, and licenced to franchisors and then to franchisees.

50    As discussed, the licence between Pastacup International and the franchisor includes a term which allows Pastacup International to terminate the licence in circumstances where the franchisor becomes insolvent.

51    If that occurs, then the franchisees are left without use of the Pastacup intellectual property, which would cause them loss.

Circumstances in which the conduct took place

52    One reason for transferring the Pastacup franchisor role from Pastacup Australia to Morild was because Pastacup Australia’s insolvency could have an impact on existing franchisees.

53    When the 2014 Disclosure Document was provided to the Prospective Franchisees, a draft franchise agreement was also provided which included terms that required the franchisees:

(a)    and their directors and shareholders to warrant that:

(i)    an insolvency event (which included going into voluntary administration or liquidation) had not occurred to them; and

(ii)    they have disclosed all facts about themselves including their respective financial positions and past business history;

(b)    provide an indemnity for all losses/liabilities arising directly/indirectly from any of the above warranties being incomplete, inaccurate or misleading;

(c)    prevent an insolvency event from occurring; and

(d)    be in a position to provide to the franchisor a statement to the effect that it has reasonable grounds to believe that it can pay all of its debts as and when they fall due within 24 hours of a demand by the franchisor.

54    Pastacup Australia’s administrators’ report to creditors dated 20 October 2014:

(a)    estimated that its unsecured creditors would be of $2,006,176; and

(b)    noted that the reasons provided by the directors for that company’s failure was a lack of financial management, the failure of several franchised stores and poor record keeping. The administrators concurred with those views and added that the company also failed due to poor cash flow and trading losses and insufficient capital to provide for the initial set up costs.

55    Pastacup Australia’s voluntary liquidators report to creditors dated 20 November 2015 disclosed that the liquidators’ estimate of the claims made by unsecured creditors had increased to $2,430,441.

56    When SSP Holdings went into liquidation, its liquidators reported unsecured creditors of $1,667,238.

57    Mr Bernstein, as director of Pastacup Australia, was provided information on or around 10 September 2014 by the administrators of Pastacup Australia about the voluntary administration process. That information included the need for Mr Bernstein to provide information as to whether he had previously been an officer of a company that has been placed under external administration.

58    In December 2015, ACCC issued a ‘Section 155 Notice’ dated 15 December 2015 to Morild.

59    Pastacup Australia’s:

(a)    administrators reported concerns:

(i)    with the ‘business development’ and ‘marketing expenditures’ that appeared to be to the advantage of Morild rather than to Pastacup Australia; and

(ii)    about approximately $1.5 m worth of debts owed by various subsidiaries and franchisees that were written off by Pastacup Australia; and

(b)    liquidators reported their view that the directors of Morild, Pastacup International and Pastacup Australia acted with a conflict of interest in causing Pastacup International to terminate the licence for the use of the Pastacup Australia intellectual property with Pastacup Australia, and to grant a new licence to Morild. Mr Bernstein was a director of all three companies at the relevant time.

Previous contraventions

60    Neither Morild nor Mr Bernstein have previously been found by a Court to have contravened any provision of the Australian Consumer Law (ACL) or to have engaged in similar conduct to that described in these proceedings.

Size and financial position of the respondents and deterrent effect of the penalty

61    Mr Bernstein is an undischarged bankrupt.

62    Morild’s company tax returns for the financial years ending 30 June 2015 and 30 June 2016, and its financial statements for the five month period ended 30 November 2016 record:

(a)    gross income of $1,121,451 and net income of $29,371 for the financial year ending 30 June 2016;

(b)    gross income of $624,789 and net income of $18,505 for the financial year ending 30 June 2015; and

(c)    that as at 30 November 2016, it had:

(i)    net assets of $613,172 (of which $606,168 are unsecured loans including, $170,251 of loans to franchisees (NV23 Pty Ltd, Lalani Brothers Pty Ltd and Madkay) in the form of vendor finance);

(ii)    current assets of $606,168 all of which are the unsecured loans referred to above; and

(iii)    retained profits of $613,072.

63    A significant proportion of Morild’s annual expenses are paid to a related entity, Aosta, in return for management services.

64    With the consent of the receiver in bankruptcy, Mr Bernstein is paid a salary of $92,000 by Aosta to perform the role of Business Development Coordinator. His duties in that role consist of:

(a)    responding to new franchisee inquiries;

(b)    arranging training of new franchisees at head office;

(c)    researching new market opportunities;

(d)    researching new franchising partners and consultancies;

(e)    meeting with any new prospective partner/consultancy to develop a working relationship - any new partners are then to be approved by the management team;

(f)    networking within the franchising industry (attending seminars, conferences and events);

(g)    networking within the hospitality industry (attending seminars, conferences and events);

(h)    researching and finding potential sites (including initiating contact with lessors);

(i)    identifying suitable shop fitters and tradesmen;

(j)    following up on store builds;

(k)    meeting with any potential interested parties for any new markets;

(l)    finding suitable suppliers in new markets for store operation (including builds);

(m)    researching, trialling and presenting new technologies to management; and

(n)    fleshing out any out of date systems manuals and procedures where required.

65    The penalties agreed by the parties will have a significant effect in deterring similar conduct by others.

Involvement of senior management and whether the conduct was deliberate

66    Mr Bernstein was Morild’s senior manager:

(a)    at the time that the 2014 Disclosure Document was created, on 18 November 2014;

(b)    when the 2014 Disclosure Document was provided to each of the franchisees as detailed in the table above; and

(c)    at the time that the 2016 Disclosure Document was created.

67    Mr Bernstein signed the 2014 Disclosure Document as a director and officer of Morild.

68    Mr Bernstein signed the 2016 Disclosure Document as a director and officer of Morild.

69    Mr Bernstein did not disclose the insolvency of the two predecessor Pastacup franchisors (SSP Holdings and Pastacup Australia) or his directorship of those companies in the 2014 Disclosure Document and 2016 Disclosure Document. Mr Bernstein did disclose in the 2016 Disclosure Document at item 4 (as required) the fact that SSP Holdings and Pastacup Australia were associates of Morild and that they were externally-administered bodies corporate.

70    On around 15 December 2015, the Notice was issued to Morild seeking certain information and documents. The Notice described the matters being investigated by the ACCC which constituted or may constitute a contravention of the CCA.

71    The contravening conduct occurred from 18 November 2014. It continued throughout 2015 and 2016, as:

(a)    the non-complying 2014 Disclosure Document was given to Prospective Franchisees between 18 March 2015 to 25 September 2015;

(b)    the 2016 Disclosure Document did not disclose the insolvency of the two predecessor Pastacup franchisors (SSP Holdings and Pastacup Australia) or Mr Bernstein's directorship of those companies; and

(c)    the non-complying 2016 Disclosure Document was given to prospective franchisees from 1 March 2016 to 21 September 2016.

72    Further, while the precise reasons are unclear, it is apparent that the transfer of the franchises from SSP Holdings to Pastacup Australia and from Pastacup Australia to Morild occurred at a time when the predecessor franchisors were nearing insolvency.

Culture of compliance

73    During the relevant period Morild did not have any corporate and consumer law compliance training or policies in place. However, they would be prepared to put such compliance training and policies in place. Further, Mr Bernstein has attended various Franchising Council of Australia events related to franchising issues including compliance with the Franchising Code, such as the National Franchise Convention in approximately 2012 and the CEO Event in March 2016.

Cooperation

74    The respondents did not make any admissions that they had engaged in wrongdoing during the investigative phase. They did, however, voluntarily provide some information on a limited basis while the ACCC was investigating the breaches described above.

75    Since the commencement of these proceedings the respondents have worked with the ACCC to resolve these proceedings, including admitting the contraventions committed and agreeing to the penalties sought by the ACCC.

Appropriate relief

76    In those circumstances, the parties agree that the appropriate relief is as follows:

Declarations

(1)    A declaration that Morild contravened cl 8(1) of Sch 1 to the Franchising Code and thereby contravened s 51ACB of the CCA by failing, between 1 January 2015 and at least 8 January 2016 (both dates inclusive), to create a franchise disclosure document concerning the Pastacup franchise system that disclosed that the relevant business experience of Morild’s director, Mr Bernstein, included that he was previously a director of two companies who had acted as franchisors of the same franchise system and went into winding up by reason of insolvency.

(2)    A declaration that between 18 March 2015 and 25 September 2015, Morild contravened cl 9(1) of the Franchising Code and thereby contravened s 51ACB of the CCA by giving a franchise disclosure document dated 18 November 2014 concerning the Pastacup franchise system to prospective franchisees which document did not disclose that the relevant business experience of Morild’s director, Mr Bernstein, included that he was previously a director of two companies who had acted as franchisors of the same franchise system and went into winding up by reason of insolvency.

(3)    A declaration that Mr Bernstein was a person knowingly concerned:

(a)    within the meaning of s 75B(1)(c) of the CCA in Morild’s contraventions of s 51ACB of the CCA referred to in paragraphs (1) and (2) above;

(b)    within the meaning of s 76(1)(e) of the CCA in Morild’s contraventions of cl 8(1) and cl 9(1) of the Franchising Code referred to in paragraphs (1) and (2) above; and

(c)    within the meaning of s 80(1)(e) of the CCA in Morild’s contraventions of s 51ACB of the CCA referred to in paragraphs (1) and (2) above.

Injunctions

(4)    In the following paragraphs (5), (6) and (7) “officer” has the same meaning as in the Code.

(5)    An order requiring Morild, until 6 December 2023, in any franchise disclosure document provided to a prospective franchisee, under the business experience of each officer of Morild who was as at 6 December 2013 an officer of SSP Holdings, to include the following (with the officer’s name to be inserted in the place of “[Name]”):

[Name] was an officer of [SSP Holdings], a previous franchisor of the Pastacup franchise system, which on 6 December 2013 resolved to be wound up voluntarily as it was unable to pay its debts as and when they fell due.

(6)    An order requiring Morild, until 21 October 2024, in any franchise disclosure document provided to a prospective franchisee, under the business experience of each officer of Morild who was as at 21 October 2014 an officer of Pastacup Australia Pty Ltd (ACN 150 392 340), to include the following (with the officer’s name to be inserted in the place of “[Name]”):

[Name] was an officer of Pastacup Australia Pty Ltd, a previous franchisor of the Pastacup franchise system, which on 21 October 2014 was ordered to be wound up in insolvency and was deregistered on 12 June 2016.

(7)    Subject to paragraph (8) below, an order requiring Mr Bernstein to ensure that, until 21 October 2024, in any disclosure document provided to a prospective franchisee by a company of which he is an officer, the summary of the relevant business experience of Mr Bernstein include the following:

[Mr] Bernstein was a director of SSP Holdings, a previous franchisor of the Pastacup franchise system, which on 6 December 2013 resolved to be wound up voluntarily as it was unable to pay its debts as and when they fell due. Also, [Mr] Bernstein was a director of Pastacup Australia Pty Ltd, a previous franchisor of the Pastacup franchise system, which on 21 October 2014 was ordered to be wound up in insolvency and was deregistered on 12 June 2016.

(8)    After 6 December 2023, the following words are not required to be included in the passage in quotation marks in paragraph (7) above:

[Mr] Bernstein was a director of SSP Holdings, a previous franchisor of the Pastacup franchise system, which on 6 December 2013 resolved to be wound up voluntarily as it was unable to pay its debts as and when they fell due.

Pecuniary penalties

(9)    An order that Morild pay to the Commonwealth of Australia a penalty of $100,000 with payment to be made in 24 monthly instalments, with the first payment occurring on the first day of the month following the date that this order is made and each subsequent next payment occurring on the first day of each subsequent month.

(10)    An order that Mr Bernstein pay to the Commonwealth of Australia a penalty of $50,000 with payment to be made in 24 monthly instalments, with the first payment occurring on the first day of the month following the date on which Mr Bernstein is discharged from bankruptcy and each subsequent next payment occurring on the first date of each subsequent month.

Costs

(11)    The respondents pay the Applicant’s costs, fixed at the sum of $12,000.

CONSIDERATION

77    I should say at the outset that, while I am most grateful for them, I am a little concerned at the elaborate, learned and inevitably, costly submissions each party has presented in addition to the agreed facts. They have been of assistance as they do faithfully reflect the law and the facts. Further, I am mindful that this is the first franchising penalty case concerning the new Franchising Code that came into effect on 1 January 2015 and that franchising is widespread in Australia. For that reason I have set out the reasoning from the submissions in some detail. I would hope that by doing so on this occasion, I would not encourage a culture of ‘reinventing the wheel’ on all occasions. I am mindful also, as are the parties, that whatever agreement they may reach, it is for the Court to reach its own conclusion as to the appropriate disposition of the matter.

78    In essence the ACCC submits the following:

(1)    When deciding whether the orders jointly sought conform with legal principle, the Court is entitled to treat the consent of the respondents as "involving an admission of all facts necessary or appropriate to the granting of the relief sought” against them: Thomson Australian Holdings Pty Ltd v Trade Practices Commission (1981) 148 CLR 150 per Gibbs JC, Stephen, Mason and Wilson JJ (at 164).

(2)    In deciding whether to make consent orders proposed by the parties, the Court must be satisfied that it has the power to make the orders proposed and that the orders are appropriate: Australian Competition and Consumer Commission v Real Estate Institute of Western Australia Inc (1999) 161 ALR 79 (at [18]) (ACCC v REIWA); Australian Competition & Consumer Commission v Virgin Mobile Australia Pty Ltd (No 2) [2002] FCA 1548 per French J (as his Honour then was) (at [1]).

(3)    Once the Court is satisfied that the consent orders are within power and are appropriate, it should be slow to impede the final settlement of the matter. As Lee J stated in Australian Competition & Consumer Commission v Target Australia Pty Ltd (2001) ATPR 41-840 (at [24]):

… It is the Court's duty in receiving consent orders in any matter to scrutinise such orders as to their appropriateness. However, after being satisfied as to the appropriateness of the orders, the Court should be slow to impede final settlement of such matters, particularly those involving public interest considerations. Moreover, the public has an interest in the mutual resolution of litigation, and subject to the foregoing the Court should be careful not to refuse to make orders simply because the orders may have been different had it been the Court's task to formulate them.

(4)    There is a well-recognised public interest in the settlement of cases under the CCA, and its predecessor the Trade Practices Act 1974 (Cth) (TPA). As stated by Burchett and Kiefel JJ in NW Frozen Foods Pty Ltd v Australian Competition & Consumer Commission (1996) 71 FCR 285 (at 291):

There is an important public policy involved. When corporations acknowledge contraventions, very lengthy and complex litigation is frequently avoided, freeing the courts to deal with other matters, and investigating officers of the Australian Competition and Consumer Commission to turn to other areas of the economy that await their attention.

(5)    Further, in ACCC v REIWA, French J (as his Honour then was) noted (at [18]) that:

The court has a responsibility to be satisfied that what is proposed is not contrary to the public interest and is at least consistent with it... Consideration of the public interest, however, must also weigh the desirability of non-litigious resolution of enforcement proceedings.

The nature of the contraventions

79    In summary:

(a)    between 1 January 2015 and at least 8 January 2016, Morild failed to create a compliant disclosure document, contravening cl 8(1) of the Franchising Code; and

(b)    between 18 March 2015 and 25 September 2015, Morild failed to give a compliant disclosure document to the Prospective Franchisees, contravening cl 9(1) of the Franchising Code.

80    The failures were a failure to disclose in the disclosure documents given to the Prospective Franchisees that Mr Bernstein had been a director of two previous franchisors of the Pastacup franchise system which had both been wound up by reason of insolvency. That was "relevant business experience" of Mr Bernstein within the last 10 years, which the Franchising Code required to be disclosed.

81    Morild contravened s 51ACB of the CCA as a result of its contraventions of the Franchising Code.

82    Mr Bernstein's involvement in Morild's contraventions is admitted.

83    As a result of Mr Bernstein's direct involvement, he was knowingly concerned in Morild's contraventions within the meaning of ss 75B(1)(c), 76(1)(e) and 80(1)(e) of the CCA respectively.

Should there be declarations?

84    The Court has a wide discretionary power to make declarations under s 21 of the Federal Court of Australia Act 1976 (Cth) (FCAA): Forster v Jododex (1972) 127 CLR 421 per Gibbs J (at 437-438).

85    It is open to the Court to make declarations based on agreed facts and admissions, as distinct from evidence led in the usual manner. A statement of agreed facts may be relied on as evidence in support of a proposed declaration: Australian Competition and Consumer Commission v Dataline.Net.Au Pty Ltd (2006) 236 ALR 665 (at [57]-[59]), endorsed by the Full Court in Australian Competition and Consumer Commission v Dataline.Net.Au Pty Ltd (2007) 161 FCR 513 (at [91]-[92]).

86    In Forster v Jododex, Gibbs J (at 437-438) held that the following three threshold requirements should be satisfied before a declaration will be made:

(a)    the question must be a real and not a hypothetical or theoretical one;

(b)    the applicant must have a real interest in raising it; and

(c)    there must be a proper contradictor.

87    In this case:

(a)    the proposed declarations relate to conduct that contravenes s 51ACB of the CCA and the matters in issue have been identified and particularised by the parties with considered precision: see Australian Competition and Consumer Commission v MSY Technology Pty Ltd (2012) 201 FCR 378 (at [19]-[20]);

(b)    it is in the public interest for the ACCC to seek to have the declarations made, and for the declarations to be made (see Australian Competition & Consumer Commission v Midland Brick Co Pty Ltd (2004) 207 ALR 329 (at [20]-[22]); for further considerations and cases, see Australian Competition & Consumer Commission v Construction, Forestry, Mining and Energy Union [2007] ATPR 42-140 (at [6]) (ACCC v CFMEU)), as:

(i)    there is a significant legal controversy in this case, which is to be resolved;

(ii)    declaratory orders of the kind proposed are in the public interest because they make it plain that the conduct admitted by the respondents contravenes the CCA;

(iii)    the ACCC is the public regulator under the CCA and in this role it has a genuine interest in seeking the declaratory relief and having that relief granted by this Court; and

(c)    the respondents are proper potential contradictors because each is a person who contravened, or was knowingly involved in contraventions of, the CCA and, notwithstanding their consent, each has a genuine interest in resisting the granting of the declarations: Australian Competition & Consumer Commission v Sampson [2011] ATPR 42-374 (at [13]-[18]).

88    Having regard to the reasoning in ACCC v CFMEU (at [6]) the declarations sought in this proceeding are appropriate because they serve to:

(a)    record the Court's disapproval of the contravening conduct;

(b)    indicate the ACCC’s claim that Morild contravened the CCA and that Mr Bernstein was knowingly concerned in Morild's contraventions of the CCA;

(c)    assist the ACCC to carry out its duties under the CCA;

(d)    inform members of the public of Morild's contravening conduct; and

(e)    deter other persons and corporations from contravening the CCA.

89    In these circumstances it is appropriate for the Court to indicate its disapproval of the respondents' conduct by making the declarations sought.

90    The form of the proposed declarations achieves an adequate balance between the detail required to inform as to the nature of the contravening conduct and the brevity necessary to avoid the words becoming unwieldly and so diminishing the value of the order.

91    The proposed declarations include a description of the conduct which contravened the Franchising Code (and so the CCA). As such, the proposed declarations contain sufficient indication of how and why the conduct complained of is a contravention of the CCA: BMW Australia Ltd v Australian Competition & Consumer Commission (2004) 207 ALR 452 (at [35]), quoting the High Court in Rural Press Ltd v Australian Competition & Consumer Commission (2003) 216 CLR 53 per Gummow, Hayne and Heyden JJ ([89]-[90]). This is important for members of the public to understand the scope of the contravention and the sanction imposed.

Injunctive relief

92    The parties agree to the injunctions set out the Agreed Facts, which are recorded in the proposed orders. Each of the injunctions sought requires Morild and Mr Bernstein respectively to do specific things.

93    Section 80(1)(a)(ii) of the CCA empowers the Court to grant an injunction restraining Morild in such terms as it considers appropriate if it is satisfied that Morild has engaged in conduct that contravenes a provision of Div 2 or Div 5 of Pt IVB of the CCA. Section 51ACB is a provision of Div 2 of Pt IVB of the CCA.

94    Likewise, s 80(1)(e) of the CCA empowers the Court to grant an injunction restraining Mr Bernstein in such terms as it considers appropriate if it is satisfied that he was knowingly concerned in the contravention of a provision of Pt IVB Div 2 of the CCA. (As set out above, Mr Bernstein was knowingly concerned in Morild's contraventions of s 51ACB of the CCA.)

95    The terms of s 80 of the CCA are identical to those of s 80 of the TPA. As such, the authorities dealing with s 80 of the TPA provide guidance on the construction and application of s 80 of the CCA. In discussing s 80 of the TPA, Lockhart J (with whom French J, as his Honour then was, agreed), said in ICI Australia Operations Pty Ltd v Trade Practices Commission (1992) 38 FCR 248 (at 256):

In my opinion, subss (4) and (5) are designed to ensure that once the condition precedent to the exercise of injunctive relief has been satisfied (ie contraventions or proposed contraventions of Pt IV or V of the Act), the court should be given the widest possible injunctive powers, devoid of traditional constraints, though the power must be exercised judicially and sensibly.

96    The Court's discretion in formulating the terms of an injunction under s 80 of the TPA "is as wide as the phrase ‘as the court determines appropriate’": OD Transport Pty Ltd v Western Australian Government Railways Commission (1987) 13 FCR 500 per French J (at 508), also applied in Foster v Australian Competition and Consumer Commission (2006) 149 FCR 135 (at [32]).

97    The injunctive relief sought in this proceeding is within the Court's power and is appropriate. The relief:

(a)    is designed to ensure the respondents comply with the disclosure requirements under the Franchising Code;

(b)    is expressed in terms that are closely tied to the terms in which the respondents have admitted their contraventions of the CCA; and

(c)    arises in the circumstances of this proceeding, which has been appropriately issued in this Court.

98    Preferably an injunction should be limited by time, to provide "certainty for all parties and an incentive for the contravener to pay extra attention to compliance with the law'': Australian Competition and Consumer Commission v Mailpost Australia Ltd [2010] FCA 369 per Foster J (at [29]).

99    The proposed injunctions are appropriate to deter repetition of the contravening conduct. The terms of the proposed injunctions specifically require the respondents to include in future disclosure documents the information which the ACCC contends, and the respondents admit, should have been included in the 2014 Disclosure Document and the 2016 Disclosure Document. The injunctions are limited in time to a period of 10 years after the date of the relevant winding up of the Pastacup franchisor company in order to match the requirement in the Franchising Code that relevant business experience need only be disclosed by a franchisor to a potential franchisee for the previous 10 years.

100    An injunction must be specifically and clearly expressed, so that it is capable of being readily obeyed and does not require Court supervision: ACCC v REIWA (at [26]). It is submitted that the terms of the proposed injunctions are framed in accordance with the admitted contraventions and are appropriate to be made in these circumstances.

101    The following factors tell in favour of granting the injunctions sought:

(a)    they are sought by consent;

(b)    the contravening conduct occurred repeatedly in relation to the 2014 Disclosure Document, and then in a different manner in the 2016 Disclosure Document, and the respondents ought to be restrained from repeating the conduct;

(c)    the injunctions will have ongoing practical utility for future potential franchisees of the Pastacup franchise; and

(d)    the relevant conduct was not at the early stages of the Pastacup franchise business but well into the period of its operations through successive franchisor companies.

102    Granting the proposed injunctions has practical utility and serves the public interest because the injunctions appropriately reinforce the understanding in the public mind, and in the minds of current and potential franchisors, that considerable care needs to be taken to comply with the consumer laws so as not to put the public interest at risk: Breast Check Pty Ltd (No 2) [2014] FCA 1068 (at [44]).

Penalty

103    The parties ask the Court to impose the pecuniary penalties on Morild of $100,000 and a pecuniary penalty on Mr Bernstein of $50,000, each to be paid in instalments.

Power to order pecuniary penalties

104    Pursuant to s 76 of the CCA, the Court may impose a pecuniary penalty on a person who has contravened, or has been knowingly concerned in a contravention of, a civil penalty provision of an industry code: s 76(1)(a)(iv) and s 76(1)(e) of the CAA.

105    Each of cl 8(1) and cl 9(1) of the Franchising Code are civil penalty provisions of that code.

106    Under s 76(1) of the CCA, the Court may order the person to pay such pecuniary penalties in respect of "each act or omission" to which the section applies: ss 76(1), 76(1A)(ca) and 76(1B)(aaa) of the CAA.

Maximum penalties

107    Careful attention to statutory maximum penalties will almost always be required:

(a)    because the legislature has legislated for them;

(b)    because they invite comparison between the worst possible case and the case before the Court at the time; and

(c)    because they provide a yardstick when balanced with all of the other factors: Markarian v The Queen (2005) 228 CLR 357 (at [31]).

108    As detailed in the Agreed Facts, Morild contravened the penalty provisions and Mr Bernstein was knowingly concerned in such contraventions by:

(a)    at least one act of failing to create a disclosure document that complied with the requirements under cl 8(1) of the Franchising Code (ie, the 2014 Disclosure Document drafted on around 18 November 2014);

(b)    seven acts of giving the 2014 Disclosure Document to applicable Prospective Franchisees between 18 March 2015 and 31 July 2015, inclusive; and

(c)    two acts of giving the 2014 Disclosure Document to applicable Prospective Franchisees on 28 August 2015 and 25 September 2015.

109    The maximum penalty in respect of breaches of cl 8(1) and cl 9(1) of the Franchising Code is as follows for both corporations and natural persons:

(a)    between 1 August 2014 and 31 July 2015, inclusive: $51,000 per contravention; and

(b)    between 1 August 2015 and 25 September 2015, inclusive: $54,000 per contravention.

110    As such, the maximum penalty amounts to a total of $516,000 for each respondent, being:

(a)    $51,000 for at least one act of failing to create a disclosure document that complied with the requirements under cl 8(1) of the Franchising Code (ie, the 2014 Disclosure Document drafted on around 18 November 2014);

(b)    $357,000 for seven acts of giving the 2014 Disclosure Document to applicable Prospective Franchisees between 18 March 2015 and 24 July 2015, inclusive; and

(c)    $108,000 for two acts of giving the 2014 Disclosure Document to applicable Prospective Franchisees on 29 August 2015 and 25 September 2015.

Where penalties are sought by consent

111    As previously discussed, there is a well-recognised public interest in the settlement of cases under the CAA. As stated by Burchett and Kiefel JJ in NW Frozen Foods (at 291):

There is important public policy involved when corporations acknowledge contraventions, very lengthy and complex litigation is frequently avoided, freeing the Courts to deal with other matters, and investigating officers at the [ACCC] to turn to other areas of the economy that await their attention.

112    After citing numerous authorities that support such reasoning, Burchett and Kiefel JJ noted further (at 291):

In New Zealand Milk [Commerce Commission v New Zealand Milk Corporation Ltd [1994] 2 NZLR 730] at 733 Eichelbaum CJ and Greig J said that "in cases such as this it is strongly in the public interest that litigation should be brought to a conclusion, and if possible at an early date". They approved the general acceptance of a "negotiated settlement", reserving for further consideration only the case where a compromise was based, not on considerations bearing on the quantum of the penalty, but on doubts or difficulties attending the proof of the contravention.

113    The reasoning of Burchett and Kiefel JJ in NW Frozen Foods (at 291) was recently approved by the High Court in Commonwealth v Director, Fair Work Building Industry Inspectorate (2015) 258 CLR 482 (Cth v Director, Fair Work) when the High Court accepted agreed penalty submissions. There (at 46) French CJ, Kiefel, Bell, Nettle and Gordon JJ (with Gageler and Keane JJ agreeing on the following points at [68] and [79] respectively) agreed that:

(a)    there is important public policy involved in promoting predictability of outcome in civil penalty proceedings (at [46]);

(b)    the practice of receiving and accepting agreed penalty submissions (if appropriate) increases the predictability of outcome for regulators and wrongdoers and assists in avoiding lengthy and complex litigation thereby freeing the Court and the ACCC, as regulator, to deal with other matters; and

(c)    it is consistent with the purposes of civil penalty regimes, and the public interest, that the regulator take an active role in attempting to achieve the penalty it considers appropriate, so the regulator's submissions as to the terms and quantum of a civil penalty should be treated as a relevant consideration to determining the appropriate penalty (at [64]).

114    The High Court in Cth v Director, Fair Work also confirmed that separate submissions as to quantum of pecuniary penalty can be received in contested civil penalty proceedings, and held that:

(a)    it is to be expected that the regulator will be in a position to offer informed submissions as to the effects of contravention on the industry and the level of penalty necessary to achieve compliance (at [60]); and

(b)    the submissions of a regulator will be considered on their merits in the same way as the submissions of a respondent and subject to being supported by findings of fact based on evidence, agreement or concession (at [61]).

115    In NW Frozen Foods, Burchett and Kiefel JJ also held (at 291) that the key question for the Court when faced with an agreed penalty is whether it is "within the permissible range" in all the circumstances.

116    In setting penalties, courts have acknowledged that fixing the quantum is not an exact science, and that there will be a permissible range in which courts have acknowledged that a particular figure "cannot necessarily be said to be more appropriate than another": Cth v Director, Fair Work (at [47]). When assessing an agreed penalty, the Court must ensure that the penalty is within that permissible range. If it is, the Court should not depart from the agreed figure "merely because it might otherwise have been disposed to select some other figure": Cth v Director, Fair Work (at [47]) quoting NW Frozen Foods per Burchett and Kiefel JJ (at 291). Indeed, it is "highly desirable for the court to accept the parties' proposal and therefore impose the proposed penalty": Cth v Director, Fair Work (at [58]), affirming Trade Practices Commission v Allied Mills Industries Pty Ltd (1981) 60 FLR 38.

Relevant considerations in assessing penalties

117    While there is a difference in the assessment of criminal sentences and the imposition of a pecuniary penalty, the fixing of a pecuniary penalty may be likened to the instinctive synthesis involved in criminal sentencing: TPG Internet Pty Ltd v Australian Competition and Consumer Commission (2012) 210 FCR 277 (at [145]-[146]); Australian Competition and Consumer Commission v Australia and New Zealand Banking Group Limited (2016) 118 ACSR 124 (at [84]). As was described in Markarian (at [51]), instinctive synthesis is the:

method of sentencing by which the judge identifies all the factors that are relevant to the sentence, discusses their significance and then makes a value judgment as to what is the appropriate sentence given all the factors of the case.

118    In determining the appropriate pecuniary penalty, the CCA requires the Court to have regard to "all relevant matters", including:

(a)    the nature and extent of the act or omission and of any loss or damage suffered as a result of the act or omission;

(b)    the circumstances in which the act or omission took place; and

(c)    whether the person has previously been found by the Court in proceedings under Pt VI or Pt XIB of the CCA, to have engaged in any similar conduct: s 76(1) of the CAA.

119    The primary objective of a pecuniary penalty under section 76 of the CCA is deterrence, both general and specific: Cth v Director, Fair Work per French CJ, Kiefel, Bell, Nettle and Gordon JJ (at [55]).

120    In Singtel Optus Pty Ltd v Australian Competition and Consumer Commission (2012) 287 ALR 249 (at [62]), the Full Federal Court made clear the primacy of deterrence in setting a penalty under the TPA, saying that there may be room for debate as to the proper place of deterrence in the punishment of some kinds of offences such as crimes of passion, but in relation to offences of calculation by a corporation where the only punishment is a fine, the punishment must be fixed with a view to ensuring that the penalty is not such as to be regarded by that offender or others as an acceptable cost of doing business.

The totality principle/course of conduct

121    When imposing penalties for multiple contraventions, the totality principle requires that after the Court has fixed a penalty appropriate for each individual contravention, the Court is to consider whether the total of those penalties is appropriate for the total contravening conduct. Australian Ophthalmic Supplies Pty Ltd v McAlary-Smith (2008) 165 FCR 560 (at [96] and [97]).

122    However, where contraventions arise out of the same course of conduct or the one transaction, the Court may consider whether it is appropriate that a concurrent or single penalty should be imposed for the contraventions: Australian Competition and Consumer Commission v Telstra Corporation Limited (2010) 188 FCR 238 (at [231]-[234]); Construction, Forestry, Mining and Energy Union v Cahill (2010) 269 ALR 1 (CFMEU v Cahill) (at [41]-[42]).

123    Where there is sufficient interrelationship in the legal and factual elements of the acts or omissions constituting the contraventions, the Court may apply the course of conduct or one transaction principle: Australian Competition and Consumer Commission v Acquire Learning & Careers Pty Ltd [2017] FCA 602 (at [57]). The principle was explained in CFMEU v Cahill by Middleton and Gordon JJ (at [39] and [41]-[42]) in the following terms:

39    […] The principle recognises that where there is an interrelationship between the legal and factual elements of two or more offences for which an offender has been charged, care must be taken to ensure that the offender is not punished twice for what is essentially the same criminality. …

…

41    […] In other words, where two offences arise as a result of the same or related conduct that is not a disentitling factor to the application of the single course of conduct principle but a reason why a Court may have regard to that principle, as one of the applicable sentencing principles, to guide it in the exercise of the sentencing discretion. It is a tool of analysis which a Court is not compelled to utilise.

42    A Court is not compelled to utilise the principle because, as Owen JA said in Royer [2009] WASCA 139 at [28], "[d]iscretionary judgments require the weighing of elements, not the formulation of adjustable rules or benchmarks". The exercise of the sentencing discretion does not fall to be exercised in a vacuum. It is a matter of judgment to be exercised according to the facts of each case and having regard to conflicting sentencing objectives. …

(emphasis in original, citations omitted)

124    The course of conduct principle does not have paramountcy in the process of assessing an appropriate penalty, and it cannot of itself unduly fetter the proper application of the legislation or operate as a de facto limit on the penalty to be imposed for contraventions. Its application must be tailored to the circumstances: Australian Competition and Consumer Commission v Hillside (Australia New Media) Pty Ltd trading as Bet365 (No 2) [2016] FCA 698 (at [24]-[25]); Reckitt Benckiser (at [83]) and Acquire Learning (at [63]).

125    The respondents submit that in this case there was a sufficient interrelationship in the legal and factual elements of the acts constituting the handing of the 2014 Disclosure Document to multiple franchisees to warrant the application of the course of conduct principle with respect to the offence of contravening cl 9(1) of the Franchising Code. It is one of the factors to be taken into account in the exercise of the Court's sentencing discretion, the respondents submit, that while the act of giving the document to prospective franchisees amounted to a distinct contravention of cl 9(1), the fact that it was provided to nine franchisees may be seen a part of one course of conduct. Further, the fact that the conduct occurred over eight months, the document was given to different prospective franchisees and this is not a case where there are so many contraventions that there is no meaningful maximum penalty, does not rule out the application of the course of conduct principle.

126    However, as the applicant notes, in Australian Competition and Consumer Commission v Snowdale Holdings Pty Ltd (No 2) [2017] FCA 834 (at [43]), it was held that the course of conduct principle served no utility in the circumstances of that case, as:

(a)    the contravening conduct occurred over a period of two years and eight months; and

(b)    each contravening carton of eggs contained the false "free range" representation.

127    As a result, the Court considered that the distribution of each carton constituted a separate contravention of the ACL: Snowdale Holdings (No 2) (at [43]).

128    The ACCC submits, and I accept, that similarly, the contraventions in this case did not arise from the same course of conduct for the following reasons:

(a)    the disclosure document was given to different prospective franchisees who were considering entering into separate and distinct franchise agreements in separate places on separate occasions;

(b)    the contravening conduct occurred over at least eight months and each contravening disclosure document provided to the Prospective Franchisees was non-compliant;

(c)    this is not a case where, as in Singlet Optus, one advertisement was published widely and viewed by different people. Nor is this a case where, as in Snowdale Holding (No 2), the Court considered there to be no meaningful overall maximum penalty given the very large number of contraventions over a long period of time: Snowdale Holdings (No 2) (at [43]-[45]), quoting the Full Court in Australian Competition and Consumer Commission v Reckitt Benckiser (Australia) Pty Ltd (2016) 340 ALR 25 (at [157]-[158]); and

(d)    rather, these are disclosure documents provided to an identifiable number of individual franchisees on the precipice of making a significant investment. As such, the impact of the contraventions could vary widely between different potential franchisees.

129    Therefore, the appropriate approach in this circumstance is to calculate the appropriate penalty for each contravention and apply the totality principle.

Nature and extent of the act or omission and of any loss or damage caused and impact on the market and innocent third parties

130    Deciding to take a franchise is usually a significant decision for the franchisees. A significant financial commitment was and is required from Pastacup franchisees to setup and operate a Pastacup franchise.

131    Because of the significance of such decisions, the Franchising Code requires that a franchisor create and give to prospective franchisees a disclosure document that, amongst other things, includes a summary of the relevant business experience of the franchisor and each of its officers for the last 10 years. The purpose of the disclosure document is to help franchisees make a reasonably informed decision about the franchise.

132    In my view, Mr Bernstein's involvement in two predecessor franchisor companies which were wound up by reason of insolvency was “business experience” that would be relevant as it would help franchisees make a reasonably informed decision about the franchise.

133    The respondents failed to disclose this relevant business experience of Mr Bernstein as a director of predecessor Pastacup franchisors in the drafting and provision of the 2014 Disclosure Document to the nine Prospective Franchisees. The Prospective Franchisees subsequently entered into franchisee agreements with Morild without fully appreciating Mr Bernstein's relevant business experience.

134    Loss or damage can be of a non-pecuniary nature: ACCC v Coles Supermarkets Australia Pty Ltd (2015) 327 ALR 540. In Coles Supermarkets, Allsop CJ observed (at [57]) that the relevant loss or damage was the loss by consumers of an opportunity to make a different purchasing choice had they been provided with accurate information.

135    The Prospective Franchisees in Pastacup lost an opportunity to make a fully informed decision based on all relevant business experience of Mr Bernstein, which would have included accurate information about the two predecessor franchisor companies having been wound up by reason of insolvency.

136    The contraventions were reasonably serious because:

(a)    they affected the ability of innocent third parties, specifically the Prospective Franchisees, to make a reasonably informed decision when they expended significant time, money and resources required to set-up and operate a Pastacup franchise;

(b)    if Morild, like the two predecessor Pastacup franchisors before it, became insolvent and Pastacup International terminated its licence, then the franchisees could be left without the use of the Pastacup intellectual property and this would cause them loss;

(c)    the contravening conduct was repeated; and

(d)    given the possibility that the franchisees could be left without Pastacup's intellectual property if Morild became insolvent, it was important for Morild to inform prospective franchisees of the history of insolvency in the respondents' predecessor companies and Mr Bernstein's involvement with these companies.

137    I note, however, that there is no evidence to support the contention that there has been any impact on any potential franchisees who were provided with a disclosure document from Morild. There is no evidence any franchisee has complained about these matters or contends that they would not have entered any franchise agreement with Morild if the disclosures had been made.

Circumstances in which the act or omission took place

138    The relevant circumstances include:

(a)    the Prospective Franchisees (who were obviously innocent third parties) were provided with a draft franchise agreement by the respondents, along with the 2014 Disclosure Document, which required that the franchisees:

(i)    warrant that an “insolvency event” had not occurred to them;

(ii)    disclosed all facts about themselves including their respective financial positions and business experience;

(iii)    indemnify Morild for all loss or liability arising from any inaccuracy in those warranties;

(iv)    prevent an insolvency event occurring; and

(v)    be in a position to provide the franchisor a statement to the effect that they have reasonable grounds to believe it can pay all of its debts as and when they fall due within 24 hours of a demand by Morild;

(b)    the administrators' and liquidators' reports to creditors for the insolvencies of Pastacup predecessors, SSP Holdings and Pastacup Australia, estimated that:

(i)    in a December 2013 report, SSP Holdings owed unsecured creditors approximately $1.7 million;

(ii)    in an October 2014 report, Pastacup Australia owed unsecured creditors approximately $2 million; and

(iii)    in an updated November 2015 report, Pastacup Australia owed unsecured creditors approximately $2.4 million; and

(c)    in October 2014 and November 2015, Pastacup Australia's administrators and liquidators reported that:

(i)    Pastacup Australia's business development and marketing expenditures appeared to be to the advantage of Morild rather than Pastacup Australia;

(ii)    Pastacup Australia failed because of lack of financial management, the failure of several franchised stores, poor record keeping, poor cash flow and trading losses and insufficient capital to provide for the initial set up costs;

(iii)    Pastacup Australia wrote off approximately $1.5 million in debts owed to it by various subsidiaries and franchisees; and

(iv)    the directors of Morild, Pastacup Australia and Pastacup International (including Mr Bernstein) acted in conflict of interest when they terminated Pastacup Australia's intellectual property licence from Pastacup International and granted a new licence to Morild; and

(d)    the administrators of Pastacup Australia provided information to Mr Bernstein on or around 10 September 2014 which included the need for Mr Bernstein to provide information to them as to whether he had been an officer of a company under external administration.

139    In my assessment, while there is no evidence of wilful non-disclosure, the importance of the disclosure of Mr Bernstein's involvement in SSP Holdings and Pastacup Australia, which each became insolvent, should have been clear to a reasonable person in Mr Bernstein's position. Morild and Mr Bernstein were concerned to understand whether potential franchisees had been or were insolvent.

Any previous contraventions or similar conduct

140    Neither Morild nor Mr Bernstein have previously been found by the Court in proceedings under Pt VI or Pt XIB of the CCA, to have engaged in any similar conduct.

Involvement of senior management and whether the conduct was deliberate

141    As discussed, Mr Bernstein was Morild's senior manager and a director and officer of Morild at the time the 2014 Disclosure Document was created and provided to the Prospective Franchisees and signed the 2014 Disclosure Document as a director and officer of Morild.

Whether the conduct comprised isolated conduct or occurred over a period of time

142    The contravening conduct occurred from 18 November 2014 (the date of the 2014 Disclosure Document) and continued throughout 2015, as the 2014 Disclosure Document was given to the Prospective Franchisees between 18 March 2015 and 25 September 2015. The 2016 Disclosure Document created by Morild on 8 January 2016 also did not comply with the Franchising Code. That state of affairs continued until 5 December 2016.

Corporate culture

143    During the relevant period Morild did not have any corporate and consumer law compliance training or policies in place. However, Morild has indicated it would be prepared to put such compliance training and policies in place.

Size and financial position of the respondents, and the deterrent effect of the penalty

144    In summary:

(a)    Morild had gross income of $1,121,451 and net income of $18,505 for the financial year ending 30 June 2015 and gross income of $624,789 and net income of $29,371 for the financial year ending 30 June 2016;

(b)    a significant proportion of Morild's annual expenses are paid to a related entity, Aosta, in return for management services;

(c)    as at 30 November 2016, Morild had net assets of $613,172 and retained profits of $613,072; and

(d)    Mr Bernstein is an undischarged bankrupt, with an annual salary of $92,000 from Aosta (as consented to by the receiver in bankruptcy).

145    While capacity to pay any pecuniary penalty is a relevant factor, it must be balanced against the key consideration of general deterrence: Australian Competition & Consumer Commission v Leahy Petroleum Pty Ltd (No 3) (2005) 215 ALR 301 (at [87] and [99]-[100]).

146    The proposed pecuniary penalties will have a significant effect in deterring similar conduct. The penalties sought are arguably significantly less than the statutory maximum, and are sought to be made payable by instalments as a result of the financial position of the respondents.

Whether the company has improved or modified its compliance systems since the contraventions

147    In December 2015, by issuing the Notice, the ACCC put Morild on notice of its concerns about the lack of disclosure of Mr Bernstein's position as a director of the two insolvent predecessor Pastacup franchisors.

148    Following the Notice, in January 2016 Morild created the 2016 Disclosure Document.

149    Although the 2016 Disclosure Document disclosed that SSP Holdings and Pastacup Australia were externally administered bodies corporate, it did not:

(a)    identify SSP Holdings and Pastacup Australia as predecessor franchisors of the Pastacup franchise system;

(b)    refer to Mr Bernstein's role as director of those companies; and

(c)    state that each of SSP Holdings and Pastacup were wound up by reason of insolvency.

150    Morild provided the 2016 Disclosure Document to a number of prospective franchisees and eight prospective franchisees subsequently entered into franchise agreements with Morild.

151    On 5 December 2016, after commencement of these proceedings on 21 September 2016, Morild created a new disclosure document that disclosed the information referred to in [149] above.

Whether the respondents have cooperated with the ACCC

152    Since the commencement of these proceedings the respondents have worked with the ACCC to resolve these proceedings, including admitting the contraventions committed and agreeing to the penalties sought by the ACCC.

153    I also note, in mitigation, that the matters are not without complexity:

(a)    Annexure 1 of the Franchising Code sets out, with great specificity, the form and structure of disclosure documents to be provided to franchisees. Annexure 1 is extremely prescriptive. Item 3.1 of a disclosure document requires the disclosure of the "relevant business experience" of each officer of the franchisor. Prior to the amendments to the Franchising Code which commenced on 1 January 2015 (those amendments required the existing form of disclosure documents to be updated by franchisors by 31 October 2015: s 5 of the Franchising Regulation), there were no matters expressly listed as being required to be included in item 3.1. Since 31 October 2015 the only matters specifically listed as needing to be included are:

(i)    the officer's length of experience working in the franchise system; and

(ii)    the officer's length of experience working for the franchisor.

(b)    Under item 3.2 of any disclosure document, a franchisor is expressly required only to state its own relevant business experience, not the relevant business experience of its associates or predecessors. Details of bankruptcy and insolvency of a franchisor are required to be provided under item 4 of a disclosure document but it has only been required since the introduction of the amended Franchising Code on 1 January 2015. As noted, by s 5 of the Franchising Regulation, existing disclosure documents were required to be updated by 31 October 2015. Item 4 of the disclosure document also requires that the details of the insolvency of corporations associated with the franchisor are also disclosed. Further, the Franchising Code does not expressly state that the matters required to be set out under item 4 (such as insolvency) need to also be included under item 3 (relevant business experience). As noted, item 3 did not expressly require details of bankruptcy and insolvency.

(c)    Before 31 October 2015 (i.e. at the time that the 2014 Disclosure Document was created and the dates that the 2014 Disclosure Document was provided to prospective franchisees), item 4 only required details related to the franchisor, not its related or associated entities.

(d)    Although the 2016 Disclosure Document did not refer to the insolvency of the previous franchisor companies (which is not an express requirement), it did refer to the fact that those entities were externally administered body corporates. The combined effect of ss 9, 435C, 436A, 436B and 436C of the CAA is that an externally administered company will either have become insolvent or likely to become insolvent, except where the administrator is appointed by a creditor who is a secured party entitled to enforce a security interest. The respondents say that the inclusion of details regarding administration indicates that the respondents had no intention of concealing the insolvency of SSP Holdings or Pastacup Australia from franchisees or prospective franchisees.

(e)    The disclosure of the entities as being externally administered companies (which is factually correct and an option specifically referred to in the notes to item 4) might have been thought to be sufficient to satisfy the requirements of the Franchising Code. There is no express reference to a requirement to provide this information about insolvency of related entities or past directorships of those companies under item 3.

154    The matters set out above are not defences; rather, they are matters in mitigation.

155    I also note that Morild has now put in place a disclosure document that complies with the Franchising Code.

Size and financial position of the respondents

156    Mr Bernstein is an undischarged bankrupt. In light of his family circumstances, including the fact that his partner is also an undischarged bankrupt and he has 5 children, the trustee in bankruptcy has consented to him receiving a salary of $92,000. However, he will have no ability to pay additional monies towards any fine during the period of his bankruptcy. Section 58(3)(a) of the Bankruptcy Act 1966 (Cth) forbids a creditor from enforcing a remedy against a bankrupt in respect of a provable debt and s 60(1)(b) empowers the Court to stay any legal process in respect of a provable debt. However, as civil penalties are not provable in bankruptcy, there is no stay preventing a regulator from pursuing a bankrupt for a fine or penalty. As such, a bankrupt who is subject to a significant fine or penalty may be exposed to pressure from regulators which can include penal orders or seizure of property: see P Sise, "An Alternative Approach to the Treatment of Penalties and Fines in Bankruptcy" (2016) 16(2) QUT Law Review 82 (at 86).

157    Given the obligations on an undischarged bankrupt, courts may decline to impose fines on persons in those circumstances. In Australian Communications and Media Authority v FHT Travel Pty Ltd [2011] FCA 550, Dowsett J elected not to issue a fine against a bankrupt party as a matter of public policy. His Honour adopted the view that it is undesirable to impose a fine such that a party will come out of bankruptcy with a substantial debt. The orders prescribe that Mr Bernstein will pay the fine sought in instalments with the first instalment to commence after he is discharged from bankruptcy. As to Morild, its gross profit for the years ending 30 June 2015 and 30 June 2016 was $18,505 and $29,371, respectively. As such, the fine for Morild would represent between three and six years' profits for Morild.

158    Although Morild has, as of 30 November 2016, net assets of $613,172, the following context is relevant:

(a)    $606,168 of that sum is held in unsecured loans;

(b)    $381,945 is recorded as being owed by Aosta to Morild. This "loan" refers to prepaid management fees for services which have not yet been invoiced to Morild by Aosta. What is owed by Aosta to Morild, therefore, are management services rather than money. Consequently, Morild cannot draw upon this loan in order to pay any fine imposed by the Court; and

(c)    the bulk of the remaining loans ($170,251 as of 30 November 2016) are vendor finance loans to franchisees. That is, they are arms' length agreements with independent franchisees and are subject to repayment terms. These loans are not, therefore, assets that could be drawn upon in the short term by Morild to raise funds to pay fines.

159    Given Morild's financial position, the imposition of large fines could also have an unintended impact on franchisees. If Morild were to be forced into insolvency by the imposition of large fines, that could have a serious impact on the future viability of franchisees' businesses.

160    In light of these considerations, Morild will be permitted to pay the fine sought in instalments over the period of 24 months.

CONCLUSION

161    Orders are made in accordance with the agreed minute:

THE COURT DECLARES THAT:

(1)    Morild contravened cl 8(1) of Schedule 1 to the Franchising Code and thereby contravened s 51ACB of the Competition and Consumer Act 2010 (Cth) (CCA) by failing, between 1 January 2015 and at least 8 January 2016 (both dates inclusive), to create a franchise disclosure document concerning the Pastacup franchise system that disclosed that the relevant business experience of Morild's director, Mr Bernstein, included that he was previously a director of two companies who had acted as franchisors of the same franchise system and went into winding up by reason of insolvency.

(2)    Between 18 March 2015 and 25 September 2015, Morild contravened cl 9(1) of the Franchising Code and thereby contravened s 51ACB of the CCA by giving a franchise disclosure document dated 18 November 2014 concerning the Pastacup franchise system to prospective franchisees which document did not disclose that the relevant business experience of Morild's director, Mr Bernstein, included that he was previously a director of two companies who had acted as franchisors of the same franchise system and went into winding up by reason of insolvency.

(3)    Mr Bernstein was a person knowingly concerned:

(a)    within the meaning of s 75B(1)(c) of the CCA in Morild's contraventions of s 51ACB of the CCA referred to in paragraphs 1 and 2 above;

(b)    within the meaning of s 76(1)(e) of the CCA in Morild's contraventions of cl 8(1) and cl 9(1) of the Franchising Code referred to in paragraphs 1 and 2 above; and

(c)     within the meaning of s 80(1)(e) of the CCA in Morild's contraventions of s 51ACB of the CCA referred to in paragraphs 1 and 2 above.

THE COURT ORDERS THAT:

Injunctions

(4)    Morild, until 6 December 2023, in any franchise disclosure document provided to a prospective franchisee, under the business experience of each officer of Morild who was as at 6 December 2013 an officer of SSP Holdings, must include the following (with the officer's name to be inserted in the place of "[Name]"):

[Name] was an officer of [SSP Holdings], a previous franchisor of the Pastacup franchise system, which on 6 December 2013 resolved to be wound up voluntarily as it was unable to pay its debts as and when they fell due.

(5)    Morild, until 21 October 2024, in any franchise disclosure document provided to a prospective franchisee, under the business experience of each officer of Morild who was as at 21 October 2014 an officer of Pastacup Australia Pty Ltd (ACN 150 392 340), to must include the following (with the officer's name to be inserted in the place of "[Name]"):

[Name] was an officer of Pastacup Australia Pty Ltd, a previous franchisor of the Pastacup franchise system, which on 21 October 2014 was ordered to be wound up in insolvency and was deregistered on 12 June 2016.

(6)    Subject to paragraph 7 below, Mr Bernstein must ensure that, until 21 October 2024, in any disclosure document provided to a prospective franchisee by a company of which he is an officer, the summary of the relevant business experience of Mr Bernstein includes the following:

[Mr] Bernstein was a director of [SSP Holdings], a previous franchisor of the Pastacup franchise system, which on 6 December 2013 resolved to be wound up voluntarily as it was unable to pay its debts as and when they fell due. Also, [Mr] Bernstein was a director of Pastacup Australia, a previous franchisor of the Pastacup franchise system, which on 21 October 2014 was ordered to be wound up in insolvency and was deregistered on 12 June 2016.

(7)    After 6 December 2023, the following words are not required to be included in the passage in quotation marks in paragraph 6 above:

[Mr] Bernstein was a director of [SSP Holdings], a previous franchisor of the Pastacup franchise system, which on 6 December 2013 resolved to be wound up voluntarily as it was unable to pay its debts as and when they fell due.

Pecuniary Penalties

(8)    Morild must pay to the Commonwealth of Australia a penalty of $100,000 with payment to be made in 24 monthly instalments, with the first payment occurring on the first day of the month following the date that this order is made and each subsequent next payment occurring on the first day of each subsequent month.

(9)    Mr Bernstein must pay to the Commonwealth of Australia a penalty of $50,000 with payment to be made in 24 monthly instalments, with the first payment occurring on the first day of the month following the date on which Mr Bernstein is discharged from bankruptcy and each subsequent next payment occurring on the first date of each subsequent month.

Costs

(10)    The respondents must pay the applicant's costs, fixed at the sum of $12,000.

Associate:

Dated:    10 November 2017