ASIC v Kobelt [2019] HCA 18: "Book Up" Credit System Found Not To Be Unconscionable

Thursday 13 June 2019 @ 1.33 p.m. | Corporate & Regulatory | Trade & Commerce

In Australian Securities and Investments Commission v Kobelt [2019] HCA 18 (12 June 2019) the High Court of Australia has, in a majority decision, dismissed an appeal from the Full Court of the Federal Court of Australia and has held that Mr Kobelt's (the respondent's) provision of  a "book-up" credit system did not contravene the prohibition on "unconscionable conduct" in the Australian Securities and Investments Commission Act 2001 (Cth) (the ASIC Act) section 12CB(1). 

Background Facts

Mr Kobelt (the respondent) ran a general store in Mintabie SA from the mid-1980s. The store was known as “Nobby’s Mintabie General Store” or “Nobby’s”. The town of Mintabie is in the north of SA, a distance of 1100 kilometers from Adelaide, in land excised by lease to the State Government of SA from the "Anangu Pitjantjatjara Yankunytjatjara" (the “APY”) Lands. Nobby’s store sold a range of goods including food, groceries and fuel. In addition, a significant part of Nobby’s business also came from the sale of second-hand cars, the average sale price of which being $5600, and so in general falling outside the State’s statutory duty to repair laws, having been driven for more than 200,000 kilometers. 

Most, if not all, of Nobby’s customers were indigenous persons (specifically Anangu), residing mainly in two remote communities northwest of Mintabie - Mimili and Indulkana, and these customers shared similar characteristics:

  • they were impoverished, 
  • they had low levels of financial literacy, most could not read nor add up, and 
  • at least half were financially dependent on social security payments as their main income. 

The respondent was aware of the vulnerable circumstances of his customers. 

The respondent had offered Nobby's customers credit since at least mid-2008, through a system known as “book-up”. Book-up was interest-free and operated in the same way to all purchases at Nobby’s other than with respect to second-hand cars which attracted an undisclosed and “very expensive” credit charge (as cars were sold at higher prices on credit than if purchased for cash). Book-up customers had to give the respondent a debit card (or “key card”) to their bank account into which their wages or Centrelink payments were received and their PIN, both of which were retained by the respondent.

The debit cards and PINs were used by the respondent to withdraw most if not all of the funds in the bank accounts of customers, usually on Centrelink payday and withdrawals were often made early or late in the day so that customers had very little opportunity to withdraw funds by other means such as internet or phone banking. Normally, the respondent took all of a customer’s bank balance and applied it in reduction of the customer’s debt - claiming that half of the amount withdrawn was notionally available for the customer to spend, although it remained in the respondent’s account at all times and was not held in trust for the customer. The customers, with some exceptions, got access to their money only by returning to Nobby’s to purchase goods (known as a “tying effect”) and even in this situation, the respondent exercised a high degree of control over how much and for what items a customer was able to withdraw funds. 

Rudimentary hand-written records were kept, which were found to be inadequate and often illegible. The arrangement referred to above was not recorded in writing, and no record was maintained showing the balance said to be available to each customer. There was no suggestion of dishonest record-keeping, or of undue pressure or influence exerted over customers. Evidence was produced that the Anangu found the book-up system to be attractive and that it was in demand, with a low level of complaints, and as well, two other stores in Mintabie offered book-up that was not materially different, including the handing over of debit cards and PINs.

The respondent withdrew substantial amounts through the book-up system - in the period between 1 July 2010 and 30 November 2012, withdrawing a total of just under $1 million from the accounts of some 85 customers to whom book-up had been provided for the purchase of second-hand cars.

Proceedings Initiated by ASIC

The appellant, the Australian and Securities Investment Commission (“ASIC”), brought proceedings against the respondent, alleging that the book-up system of conduct contravened the National Consumer Credit Protection Act 2009 (Cth) (“NCCPA”) section 29(1), and the ASIC Act section 12CB, which prohibits conduct which “is, in all the circumstances, unconscionable” in connection with the supply of financial services in trade and commerce. ASIC was successful before the primary judge, who ruled that the respondent had breached the relevant statutory provisions. The primary judge found that the respondent engaged in "conduct which involved forms of predation and exploitation of his customers". The primary judge imposed a penalty of $100,000 for the breach of the ASIC Act and a total of $67,500 in penalties for 55 contraventions of the NCCPA and ordered that the respondent pay the bulk of the appellant’s costs (see Australian Securities and Investments Commission v Kobelt [2016] FCA 1327 (9 November 2016) and Australian Securities and Investments Commission v Kobelt [2016] FCA 1561 (13 December 2016)). 

Appeal to the Full Federal Court

The respondent appealed to the Full Court of the Federal Court of Australia (‘the Full Court”) (see Kobelt v Australian Securities and Investments Commission [2018] FCAFC 18 (15 February 2018)) which allowed the respondent's appeal in relation to the ASIC Act section 12CB, but dismissed that part of the appeal which involved the NCCPA section 29(1). The Full Court essentially found that the respondent’s book-up system was not unconscionable in light of the historical and cultural norms and practices of the APY community and the customers’ voluntary usage of the system. 

Appeal to the High Court

ASIC appealed to the High Court of Australia Court (see [2018] HCATrans 153 (17 August 2018)) from that part of the Full Court’s judgment that related to the contraventions of section 12CB and the unconscionability provisions of the ASIC Act. In its appeal, ASIC argued that the the Full Federal Court’s reasoning accepts that there has been a lower standard of consumer protection set for remote indigenous consumers than for others in Australian society, notwithstanding that such consumers are a group who fall squarely within those the ASIC Act is designed to protect. ASIC's grounds for appeal include:

  • That the Full Court erred its construction of the ASIC Act sections 12CB and 12CC by failing to give due weight to the special disadvantage or vulnerability of the respondent’s customers and by giving undue weight to the customers’ voluntary entry into the book-up arrangement.
  • That the Full Court erred in overturning the primary judge’s findings about the respondent’s engaging in predation or exploitation.
  • That the Full Court erred by giving undue weight to the incidental "benefits" or "advantages" of the book-up system arising from relying upon historical and cultural norms and practices of the APY community so as to excuse what would otherwise be unconscionable conduct.

The High Court's Decision

The majority of the High Court  (Kiefel CJ, Bell, Keane and Gageler JJ)  found that, although the book-up system rendered the customers more vulnerable to exploitation, there was no feature of the respondent's conduct which exploited or otherwise took advantage of the Anangu customers' vulnerability. See Kiefel CJ and Bell J at paragraph [19]:

“. . . determinative of the appeal is the absence of unconscientious advantage obtained by Mr Kobelt from the supply of credit to his Anangu customers under his book-up system.” 

The basic elements of the book-up system were also understood and voluntarily accepted by the Anangu customers. The Anangu customers' acceptance of the terms on which book-up credit was supplied was not the product of their lack of financial literacy, but rather reflected aspects of Anangu culture not found in mainstream Australian society.  Kiefel CJ and Bell J at paragraph [115] wrote that the appellant's case:

“did not establish that the respondent exploited his customers' socio-economic vulnerability in order to extract financial advantage from them.”

The remaining three Judges (Nettle, Gordon and Edelman JJ) wrote dissenting opinions.  In a joint judgment, Nettle and Gordon JJ wrote [at 264]:

"there can be no doubt that the Anangu were at a material, relevant disadvantage to Mr Kobelt and that Mr Kobelt took unconscientious advantage of them by stipulating for the conditions he did notwithstanding that other, less onerous requirements would have been adequate to protect his legitimate interests"

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Australian Securities and Investments Commission v Kobelt [2019] HCA 18 (12 Jun 2019) and Short Particulars and Summary

Australian Securities & Investments Commission v Kobelt [2018] HCATrans 153 (17 August 2018)

Kobelt v Australian Securities and Investments Commission [2018] FCAFC 18 (15 February 2018)

Australian Securities and Investments Commission v Kobelt [2016] FCA 1561 (13 December 2016)

Australian Securities and Investments Commission v Kobelt [2016] FCA 1327 (9 November 2016)

19-136 MR High Court dismisses ASIC appeal in APY Lands book up case [ASIC Media Release 12 June 2019]

Store owner who ran controversial repayment system for Aboriginal locals has conviction thrown out (Elizabeth Byrne, ABC News, 12 June 2019)

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