The intersection of unconscionable conduct and fraud

We recently published an article about personal liability of directors and officers of a company for misrepresentations made in the course of their employment.

Australian courts are continuing to expand these concepts, in particular the accessorial liability of officers of educational institutions, for the unconscionable conduct of the institution itself, as recently examined by the High Court in Productivity Partners Pty Ltd v Australian Competition and Consumer Commission; Wills v Australian Competition and Consumer Commission [2024] HCA 27 (Productivity Partners v ACCC).

In this article, we take a closer look at the High Court’s decision regarding unconscionable conduct on a principal and accessorial basis with respect to Vocational Education and Training (VET) programmes offered with the support of Commonwealth loans. In this context, we also consider some implications for the expansion of these arguments towards the contention that fraudulent conduct may have been engaged in.

Key facts

• Productivity Partners Pty Ltd trading as Captain Cook College (College) was an educational institution providing online VET courses. Mr Wills was the COO of the College’s holding company and, between November 2015 and January 2016, the acting CEO of the College.

• The College claimed fees from the Commonwealth under the VET scheme which advanced the tuition costs of attendees to the College. The attendee then incurred a debt to the Commonwealth equal to the VET fees plus a loan fee of 20%.

• During the period from 7 September 2015 to 18 December 2015, the College changed its processes to remove two system controls which had previously mitigated the risk of unwitting or unsuitable persons becoming and remaining enrolled on the date the fees became claimable by the college from the Commonwealth.

• The College then claimed fees from the Commonwealth in respect of students who should never have been enrolled and would not have been had the controls remained in place. This in turn created a debt owing by those people to the Commonwealth in the amount of the fees paid to the College, plus 20%.

The ACCC brought proceedings alleging that the College engaged in a system of conduct which was, in all the circumstances, unconscionable in contravention of section 21 of the ACL which provides:

(1)   A person must not, in trade or commerce, in connection with:

(a)   the supply or possible supply of goods or services to a person; or

(b)   the acquisition or possible acquisition of goods or services from a person;

engage in conduct that is, in all the circumstances, unconscionable.

The ACCC further alleged that Mr Wills was knowingly concerned in the College’s contravention of section 21 of the ACL by operation of section 224(1)(e) of the ACL, which provides:

“(1) If a court is satisfied that a person: (…)

(e) has been in any way, directly or indirectly, knowingly concerned in, or party to, the contravention by a person of such a provision…

… the court may order the person to pay to the Commonwealth, State or Territory, as the case may be, such pecuniary penalty, in respect of each act or omission by the person to which this section applies, as the court determines to be appropriate.”

When first heard, the Federal Court found that the College had engaged in a system of conduct which was, in all the circumstances, unconscionable, and that Mr Wills was knowingly concerned in, and therefore also liable for, that unconscionable conduct.

On appeal, the majority of the Full Court of the Federal Court agreed with the primary judge, other than shortening the period in respect of which Mr Wills was knowingly concerned in the College’s conduct.

The College and Mr Wills appealed to the High Court.

High Court’s Findings

Ultimately, the High Court upheld the findings of the primary judge, and found that:

·       The College’s conduct in removing the two controls, constituted unconscionable conduct in contravention of section 21 of the Australian Consumer Law (ACL)[1]. The Court explained several reasons why the conduct was unconscionable[2], including that:

o     The College removed the controls specifically in order to reverse the trend of declining market share, knowing that there was a greater likelihood that unsuitable students would be enrolled and would progress to the census date without being withdrawn;

o     That is, the College undertook the changes with knowledge and understanding as to their predicted and subsequently realised effects;

o     Knowledge, intention and reasonable foreseeability of consequences are all relevant to the required evaluation of whether the conduct was, in all the circumstances, unconscionable.

·       Mr Wills was knowingly concerned in the College’s contravention of section 21 of the ACL, from 7 September 2015;

·       It is not necessary for relevant responsible officers to know that the impugned conduct was unconscionable for them to be knowingly concerned in the college’s contravention of section 21 of the ACL;[3]

·       To be knowingly concerned in the contravention, it is only necessary that the individual knew the essential matters which together made up the conduct, not that they knew the conduct was or could be characterised as unconscionable.[4]

Fraud within the Educational Sector

Productivity Partners v ACCC has opened the door to further action by courts in respect of conduct that could amount to fraud within educational institutions, particularly with respect to VET programmes offered with the support of Commonwealth loans.

Given the High Court’s decision to apply personal liability to the College’s relevant officer for unconscionable conduct of an institution, it is foreseeable that if an institution’s conduct was found to amount to fraud, relevant individuals could be held liable for that same fraudulent conduct, consistent with the reasoning in Productivity Partners v ACCC.

The Court rejected a submission by the College that its updated withdrawals policy was consistent with other VET providers, and rather, bluntly stated that “just because everyone is rorting a poorly designed and/or administered scheme does not mean that no one’s rorting is unconscionable.”[5]

Educational institutions should be on notice that a failure to maintain adequate system controls, or act with honesty and integrity more broadly with respect to Commonwealth loan programs, could amount to fraud, with penalties flowing accordingly.

As an example, a claim in fraudulent misrepresentation requires that there be:

1. a false statement of fact by one party, upon which another party relies to their detriment;

2. knowledge of the falsity, or reckless indifference as to the truth or falsity of the statement; and

3. loss and damage occasioned by the false statement.

Productivity Partners v ACCC has confirmed that relevant officers and directors of educational institutions can be knowingly concerned in the unconscionable conduct of an educational institution:

• if they knew the essential matters which together made up the conduct ultimately characterised as unconscionable; and

• despite the fact that they did not know at the time that the conduct itself was, or could be, characterised as unconscionable.

It is foreseeable that in the future, this could be extended to claims in fraudulent misrepresentation. If the educational institution makes a false statement of fact, upon which another party relies, and the officer or director has knowledge of that falsity or is recklessly indifferent to the truth or falsity of the statement, then that individual could be accessorily liable for the institution’s fraud.

For that reason, those individuals should maintain vigilance and exercise caution and independent judgement as to whether processes and controls, particularly with respect to revenue lines and loan schemes, are reasonable and appropriate for the circumstances and ensure as far as possible that exposure to possible claims of unconscionable conduct or other types of intentional wrongs are mitigated.

At Bartier Perry, our Organisational Fraud and Corruption group maintains a focus on these areas of law across several of our practice groups. Should you require assistance with any of the matters raised in this article, please don’t hesitate to contact the writers.

Authors: Gavin Stuart & Isabelle Stillman