Commerce Commission v Appenture Marketing Limited [2018] NZDC 3266 (2 February 2018)

Last Updated: 26 November 2018

IN THE DISTRICT COURT AT AUCKLAND

CRI-2016-004-012904

[2018] NZDC 3266

COMMERCE COMMISSION

Prosecutor v

APPENTURE MARKETING LIMITED Defendant

Hearing:	2 February 2018
Appearances:	K Muirhead for the Prosecutor No appearance by or for the Defendant
Judgment:	2 February 2018

NOTES OF JUDGE M-E SHARP ON SENTENCING

[1] Appenture Marketing Limited in liquidation appears for sentence on 24 charges under the Fair Trading Act 1986 (“FTA”) and the Credit Contracts and Consumer Finance Act 2003 (“CCCFA”). Those charges were formally proved by a decision of Judge Thorburn dated 17 October 2017 following the grant of consent by the High Court to continue with the prosecution after Appenture went into voluntary liquidation on 27 April 2017.

[2] The charges are representative and relate to 908 consumer credit contracts that Appenture entered into before it went into liquidation. The charges relate to the inadequate disclosure of key information in the contracts as well as misrepresentations about the creditors and debtors’ legal rights under the Credit Contracts and Consumer Finance Act and Consumer Guarantees Act 1993 (“CGA”).

COMMERCE COMMISSION v APPENTURE MARKETING LIMITED [2018] NZDC 3266 [2 February 2018]

[3] The 24 charges are as follows: Six charges of breaches of s 17 CCCFA for failing to disclose, to debtors, certain key information required under schedule 1 of that Act; maximum penalty $30,000 per charge, 18 charges for breaches of s 13(1) FTA by making false or misleading representations to consumers; maximum penalty

$600,000 per charge.

[4] The false or misleading representations related to; (1) the CGA guarantee regarding delivery of goods (six charges), (2) the CGA guarantee relating to goods matching their description (six charges), and (3) the amount recoverable by the creditor under the contract following repossession and sale of goods (six charges).

History

[5] Prior to its liquidation Appenture operated as a mobile trader in Auckland but active throughout the North Island in all of the low socioeconomic suburbs of various cities, for example, Flaxmere, Hastings, Manurewa, Ranui, Whakatane and Whangarei. It sold consumer goods such as electronics door to door on credit for much greater prices than the charges for those same items in mainstream stores.

[6] Because of what I would colloquially call a crackdown by the Commerce Commission on the disclosure practices within the mobile trader industry and widespread investigation of those practices Appenture came to light. It did not form part of the Commission’s initial mobile trader project but opened an investigation into the company in March 2006 as part of the second industrywide review of mobile traders to ensure that they were complying with their disclosure obligations.

[7] The company in liquidation is not represented today and does not appear. The liquidators are aware of this sentencing and did not wish to take any part.

[8] In summary, the Commission submits at 2.1 of its memorandum of submissions:

• (a) Both the FTA and CCCFA offending is serious in its own right due to the extent of the false and misleading representations about the

creditors and debtors’ legal rights and the extent of the disclosure failures. This is particularly so against a background of compliance advice having been provided extensively to the industry by the Commission.

(b) The appropriate starting point ranges are (1) misrepresentation charges under the FTA 100 to $120,000, (2) non-disclosure charges under CCCFA 50 to $60,000.

(c) The combined starting points reach a range of 150 to $180,000 but on the totality adjusted basis an appropriate global starting point is in the range of 130 to $160,000.

(d) Appenture is entitled to a discount in the region of five percent for co-operation.

(e) Applying those adjustments and discounts results in a fine ranging between 122 and $152,000.

[9] As the liquidation of Appenture remains in process and at the moment there are no assets to liquidate, naturally many of the orders that I will make will be, shall we say, pyric only because whilst they will have an impact by way of precedent within this industry, in reality it is most unlikely that those fines or any part of them that I impose will be met.

The defendant’s obligations in the statutory context

[10] For the sake of gravity and because the Commerce Commission’s submissions are so excellent, I do not propose to traverse these in any detail whatsoever but with thanks do rely on the memorandum that has been provided to me by the Commission dated 26 January 2018. In particular, I rely on and endorse paragraphs 3.1 to 3.13 of those submissions. Equally paragraph 4 of that memorandum, the conduct.

[11] The core aspects of the offending are that over the 11 months between 6 June 2015 and 30 April 2016 Appenture entered into 908 consumer credit contracts

described as rent to own agreements. They had a total value of $1, 852,556. Both sets of charges against Appenture relate to the quality of those rent to own agreement documents and/or representations made in them.

[12] Charges 1 to 6 relate to breaches of s 17 CCCFA because the rent to own agreement documents provided to the 908 debtors failed to disclosure the required information, specifically the documents failed to accurately state the correct initial unpaid balance by omitting to include an application booking fee charge of $40. They failed to accurately state the correct amount of the final payment and the correct number of payments required by failing to correctly include the application booking fee charge. They failed to state when the credit fees became payable under the contract and specifically failed to identify when the direct debit setup fee and weekly transaction fee became payable. They failed to state how the debtor could make a hardship application under s 55 CCCFA. They failed to state the frequency with which continuing disclosure statements would be provided to debtors. They failed to state Appenture’s registration number under the register of financial service providers or the name under which it was registered.

[13] The breaches of s 13(1) FTA, that is charges 7 to 24 are about the misrepresentation about customer’s right to cancel for delivery delay (charges 7 to 12). The representation to debtors that it would not be liable for any delay in the delivery of the goods to be supplied and the debtor would not be entitled to cancel the contract as a result of delay was false and misleading because of the guarantee under s 5(a) Consumer Guarantees Act, that goods will be received by the consumer at a time or within a period agreed between the supplier and the consumer or if no time period has been agreed, within a reasonable time.

[14] Failure to comply with the guarantee gives the consumer a right of redress against the supplier including the right to reject goods for failure of the substantial character and the right to damages. There was misrepresentation about creditors’ right to provide a substitute product (charges 13 to 18). The representations in that regard were false and/or misleading because under s 9 CGA where goods are supplied by description to a consumer there is a guarantee that they will correspond with the description. Breach of that gives the consumer a right of redress against the supplier

under part (2) CGA. There was misrepresentation about creditors’ right to charge interest following repossession and sale (charges 19 to 24).

[15] Under the contracts Appenture gave itself the right to repossess and sell the products that were the subject of the contract and specifically represented in relation to that right that any proceeds of sale would be applied to the outstanding amount owing under the agreement, and if the sale proceeds were less than the outstanding amount owing under the agreement the debtor would remain liable to Appenture for the outstanding amount together with default interest charges on the balance which would accrue from the date the outstanding amount became owing until the date it was paid, but that representation was false and/or misleading because under s 83ZM CCCFA if the net proceeds of sale are less than the amount required to settle the agreement as at the date of sale, the creditor is not entitled to recover more than the balance left after deducting those proceeds from that amount. So, a creditor cannot continue to charge interest post repossession and sale.

[16] I agree with the Crown. The most important purposes and principles of sentencing which apply to this case (from those set out in ss 7 and 9 Sentencing Act 2002) are the need to denounce and deter the offending, as well as to ensure parity with like cases.

[17] In this case, specific deterrence is unnecessary given that the company is in liquidation but general deterrence is vital. The sentencing in this case must have the effect of denouncing the conduct and penalising it in such a way that others in this industry will think twice before they offend against any of the statutes concerned.

[18] I accept without a doubt the statements that were made by my colleague Judge Aitken in the Commerce Commission v Bestdeals 4 You Ltd1 case when she said the creditor targeted, arguably, the most vulnerable members of our society, those who could not pay outright and to whom credit facilities were otherwise not extended. It is not an overstatement to observe. It provides the only opportunity to acquire goods and is likely often that these contracts are entered into or contemplated with unrealistic expectations as to ability to pay. The target group can be described as the precariat;

1 Commerce Commission v Bestdeals 4 You Ltd [2017] NZDC 3427

that group who live in precariously balanced circumstances and for whom a single event can tip their family into poverty and create significant stress. In other words, create a tipping point.

[19] This industry is notorious and this offender has behaved no differently from so many that have been the subject of Commerce Commission prosecutions which have been successfully brought and which the District Court has both heard and determined.

Aggravating features of the offending

[20] I agree again with the Commission in its counsel’s memorandum of submissions at paragraph 6, the extent of the offending is great, the s 17 failures were widespread, the s 13 FTA misrepresentations were similarly systemic, the debtors were misled as to their rights under the CGA and the CCCFA. The offending involved a high degree of carelessness. There was a significant lead in time for the Amendment Act coming into force, that is the CCCFA, in which the Commission was a leader in approaching this industry to advise them of their obligations of the changes to the legislation and of the requirements for them to make changes which meant that they would be in conformity with the coming into force of that Act.

[21] Similarly, the FTA offending involved actively misleading debtors as to legal rights. Appenture should have been fully familiar with all of these matters. It seems to me, from what I have read on this file, that Appenture was actually considerably more than just particularly careless, as it has been described in the Commission’s counsel’s memorandum, but in some instances, in fact probably the majority of the time there was significant or significantly greater criminality than the mere standard of carelessness would connote.

[22] The number of victims were significant, 908 debtors’ contracts over 11 months. The victims were particularly vulnerable which is a central feature of the mobile trader industry, as I have already said. The people who are approached by mobile traders are generally most in need of the protection of the CCCFA and the FTA. It is of paramount importance that every effort is taken to assist them to understand their statutory rights and their statutory obligations.

[23] There are no mitigating factors of the offending.

Starting points

[24] Again, I agree with the Commerce Commission. The two separate types of statutory offending are quite distinct. One relates to contract disclosure failures, the other active misrepresentations which I find to be significantly more wilful and intentional than negligent. I agree, therefore, that the starting point for each set of offending must be assessed distinctly before being considered on a totality basis at the end.

[25] The FTA charges do amount to the lead offending for the purposes of sentencing given the higher maximum penalty adopted by Parliament.

Starting point for FTA offending

[26] There is no tariff for this type of offending. The Commission has very helpfully provided a schedule of sentencing decisions involving mobile traders. Each of the cases is attached in full in the bundle of authorities filed with the submissions. I agree, not to appear completely sync authentic, with counsel for the Commission that the cases of the most assistance here are Commerce Commission v Budget Warehouse Ltd2, Commerce Commission v Smart Shop Ltd3, Commerce Commission v Ace Marketing Ltd4 and Commerce Commission v Wenatex New Zealand Ltd5.

[27] Of these Commerce Commission v Budget Warehouse Ltd gives the most assistance. In that case, Budget Warehouse Ltd was sentenced on nine charges of misleading representations under the FTA and nine for s 17 CCCFA disclosure failures over an 11 month period of offending affecting 817 contracts. In that case the Court found that the conduct involved a high degree of negligence and adopted a starting point of $90,000 for the FTA offending and a separate starting point of $90,000 for the CCCFA offending.

2 Commerce Commission v Budget Warehouse Ltd [2017] NZDC 14223

3 Commerce Commission v Smart Shop Ltd [2016] NZDC 19377

4 Commerce Commission v Ace Marketing Ltd [2016] NZDC 19165

5 Commerce Commission v Wenatex New Zealand Ltd District Court Auckland CRI-2011-004-002567, 7 September 2011

[28] In Commerce Commission v Smart Shop, there were 11 charges, three under the FTA and three under s 17 CCCFA. Amongst those 11 charges, the offending occurred over eight months. It affected 2415 contracts. The Court there imposed a starting point of $150,000 for the FTA charges and $70,000 for the CCCFA charges.

[29] In Commerce Commission v Ace Marketing Ltd, the Court sentenced on 28 charges which included 19 under s 13(1) FTA offending spanning 30 months and affecting 8102 contracts and the Court adopted a starting point on that offending of

$255,000.

[30] In Commerce Commission v Wenatex New Zealand Ltd, where the defendant faced 11 charges under s 13(1) FTA (under the previous maximum penalty of

$200,000) for offending over a 15 month period involving 638 contracts with consumers, the Court adopted a global starting point of $77,000.

Analysis of starting point for the FTA offending

[31] It is true that Appenture’s offending is most similar to Commerce Commission v Budget Warehouse Ltd, Commerce Commission v Smart Shop Ltd and Commerce Commission v Ace Marketing Ltd because the representations were similar, the degree of carelessness involved were similar and the offending was targeted at a very similar group of highly vulnerable victims. It has to be said, however, that mobile traders always prey on the vulnerable and the most dispossessed who reside in the lower socioeconomic (of our society).

[32] So, the time span and volume of contract in the present case is lower than in Commerce Commission v Smart Shop Ltd where $150,000 starting point was adopted and significantly lower than Commerce Commission v Ace Marketing Ltd where

$255,000 starting point was adopted. I agree though its offending was still significant, spanning 11 months and 908 contracts. Commerce Commission v Wenatex New Zealand Ltd involved fewer contracts and attracted a starting point of $77,000 although the previous maximum penalty applied in that case was $200,000.

[33] Had Appenture been sentenced under the old maximum penalty, the Commission submits and I agree that it would have attracted a penalty in the region of 50 to $60,000. So, after that analysis the Commission submits that the appropriate starting point for the FTA charges is between 100 and $120,000 recognising the similarity with Commerce Commission v Smart Shop Ltd and Commerce Commission v Ace Marketing Ltd while accounting for the greater extent of the offending and higher level of culpability, namely negligence which was found in those cases.

[34] I agree with the Commission the range that it suggests for this offending is an appropriate one. It was serious offending for all of the reasons given. I consider that on each charge the starting point should be $100,000. Of course, when I say on each charge, the principle of totality which will be adopted at the end of the analysis of starting points overall for all charges exercised will require that each charge have a concurrent penalty imposed.

Starting point for the CCCFA offending

[35] Again the most assistance comes from Commerce Commission v Budget Warehouse Ltd although Commerce Commission v Bestdeals 4 You Ltd, Commerce Commission v Zee Shop Ltd6 and Commerce Commission v Smart Shop Ltd are also relevant. In Commerce Commission v Budget Warehouse Ltd, there were nine charges under s 17 CCCFA. I repeat that offending occurred over 11 months and affected 817 contracts. The starting point for the CCCFA offending in that case was $90,000. In Commerce Commission v Budget Warehouse Ltd the extent of disclosure failures were more significant than in the present case but Commerce Commission v Budget Warehouse Ltd gives a good view of the seriousness with which the Courts have viewed this type of offending.

[36] In Commerce Commission v Bestdeals 4 You Ltd, there was s 17 CCCFA offending affecting 1307 contracts over 11 months and this offending attracted a starting point of $50,000. In Commerce Commission v Zee Shop Ltd there were three charges of breaches of s 32 CCCFA Act and four charges of breaches of s 17 for offending spanning seven months affecting 2540 contracts worth $761,801. The lead

6 Commerce Commission v Zee Shop Ltd [2017] NZDC 18181

offending was taken to be the s 32 charges and the Court adopted a starting point of

$100,000. The s 17 disclosure charges then attracted a starting point of $60,000.

[37] Commerce Commission v Smart Shop, as already been discussed, that is eight months of offending, 2415 contracts. In that case, the Court noted that the volume of contracts increased the negligence and the widespread failures seriously undermine the protection of consumers. The starting point there was $70,000 in the analysis of the appropriate starting point for CCCFA offending in this case.

[38] Appenture’s s 17 offending does most closely resemble the offending in

Commerce Commission v Bestdeals 4 You Ltd which attracted a starting point of

$50,000. In that the charge period is the same. The disclosure failures themselves are similar. Commerce Commission v Bestdeals 4 You Ltd involved seven s 17 failures and Appenture’s offending involved six with five of those failures being in respect of the same items. The number of contracts entered into by Appenture is slightly lower but still high. The total value of Appenture’s affected contracts was greater however.

[39] The Commerce Commission v Zee Shop Ltd offending is similar, greater number of contracts but actual value of contracts less. Now, the Commerce Commission submits that Appenture and Zeeshop are overall at a very similar level. The Commission submits after this analysis that a starting point of 50 to $60,000 is appropriate for this offending. I agree but at the lower end of that range and I propose a starting point for this bracket of charges of $50,000.

Adjustments for totality

[40] The global starting point of $150,000 as a combination of both the CCCFA and FTA starting points must be adjusted for totality to reflect the overall gravity of the offending and culpability of the defendant. The Commission submits a global starting point of 130 to $160,000. I consider that an appropriate adjustment for totality should bring the global starting point down to $120,000.

Personal aggravating and mitigating features

[41] There are no known aggravating features. The Commission acknowledges co-operation by the company Appenture and submits a five percent discount is appropriate to recognise that. There is nothing before me to indicate that that is either too high or too low as a discount and I am prepared, therefore, to accede to that suggestion.

Ancillary orders

[42] The Commission seeks ancillary orders. All of which are necessary. The Commission tells me that its application to continue proceedings against Appenture in liquidation was brought because of the importance of attempting to obtain refunds or credits for monies already paid to Appenture by debtors, precluded by the CCCFA. The submissions that the Commission made about these matters appear to have been accepted by Venning J in his decision to allow the prosecution to continue.

[43] The orders sought which I am happy to make are orders under ss 93 and 94 CCCFA Act that the creditor either refund all costs of borrowing incurred by those who entered into contracts with Appenture during the charge period or credit their account of each of the affected debtors with all costs of borrowing paid by the defendant whichever alternative fits the circumstances.

[44] In addition, an order which I make that those refunds or credits must be paid or applied prior to the sale of any of the loans captured by the charge period to any third party and an order that evidence of the refunds or credits be provided to the Commission and a report to be filed with the Court and served on the Commission within three months as well as an order in accordance with s 91(1) that the contracts are not to be enforced until the creditor has confirmed proper disclosures complete under s 17.

[45] I agree with the Commission that orders under s 94 is consistent with the defendant’s obligations under s 48 CCCFA Act and I note that similar orders were

made in Commerce Commission v Ace Marketing Ltd and Commerce Commission v Netfill International Ltd.

The liquidation position

[46] I have to have regard to the financial capacity of the offender. We are considering whether to impose a fine. This company at the moment it would appear has no resources. So, it may be that the fines that I intend to impose will never be met but I have already discussed the need for general deterrence of mobile traders in this industry and consider that is more important than the lack of financial capacity of the offender.

[47] My only concern here has been with the unpaid wages totalling $32,477.58 which the liquidator’s first report refers to as two preferential claims. I am advised by the Commission that the fines that I impose in this sentencing would rank above those claims filed for wages and GST. It has concerned me that possibly innocent former employees would, if there are any funds to be realised by the liquidators and these it would appear could only come from successful demands on shareholders’ current accounts, would go first to payment of the fines leaving aside those employees who are owed wages.

[48] But in the end, sorry as I might be for them given that they may never see the wages that they are owed, I have reached the conclusion that general deterrence in this particular industry which frankly is a scourge on the lower socioeconomic (of this country) is more important.

[49] I have no way of knowing nor does the Commission just exactly what the prospect of recovery from the shareholders’ overdrawn current account and from the possible breaches of director’s duties is. There is a second liquidation report but it is not at all helpful to the Court in terms of giving direction about the possibility of recovery timeframes, let alone quantum. Frankly, it may all be completely pie in the sky and it is not something that I think should worry about.

[50] Accordingly, from the global starting point of $120,000 there is a discount of five percent for the defendant’s co-operation with the investigation or $6,000, leaving fines to be imposed of $114,000. Obviously they will all be concurrent. So the maximum fine that will be imposed is of that sum, $114,000.

[51] In addition, I make the ancillary orders which I have already referred to earlier.

[52] Because the CCCFA charges or some of them carry lower maximum penalties, I am going to have to divide up the charges and impose different fines on each. But on the lead charges, which are misrepresentations under the FTA, the fines are of

$114,000.

[53] On all the CCCFA charges, the company is convicted and fined $47,500. All fines are concurrent.

[54] Ancillary orders in terms of paras (12.7) and (12.8) of the Commission’s memorandum of submissions on sentence.

M-E Sharp

District Court Judge