The Australian Consumer Law scheduled to the federal Competition and Consumer Act applies to corporations engaged in trade or commerce.
The Australian Consumer Law (Queensland) adopts the federal Act and applies it to non-corporations engaged in trade or commerce by operation of the state’s Fair Trading Act. Similar laws in other states likewise apply the federal Act.
What hasn’t been adopted in Queensland and other states are the various qualifications that apply to the federal ACL that are buried in the Competition and Consumer Act.
The significance of absence of CCA qualifiers was recently demonstrated in a dispute relating to a business interest sale where it was alleged that individuals had engaged in misleading and deceptive conduct.
Zhiren Li and Baotong Liu signed up in September 2016 for the purchase an interest in Forever Exotic – an online and pop-up retailer of natural skin, health and home products including a large variety of Himalayan salt lamps – from Zoe Mikkelsen.
Ms Liu had been attracted to the business because the salt lamps her daughter Scarlett had acquired from it proved successful in treating her hay fever symptoms.
Mikkelsen’s husband Jan proposed the incorporation of a business of the same name with Li and Liu being issued 36 of the 100 shares in the company in exchange for $630,000.
That share issue valued the business at $1.75 mil.
Jan Mikkelsen claimed – according to the buyers – that the business had consistently achieved a net profit margin of approximately 30% and that for FY 2016, profit was approximately $400,000.
A “profit and loss cash statement” said to contain “unadulterated figures from last year” and showing a net profit of $392k on revenue of $1.4 mil was provided by Jan to Scarlett who passed it on to the buyers.
Li and Liu inked the share sale agreement Scarlett translated for them without seeking independent accounting advice.
They also contributed $60,000 by way of working capital to help fund a proposed expansion into Asia.
The business did not perform as the buyers claim they were led to believe it would.
They sued the Mikkelsens for having engaged in conduct that was misleading or deceptive, or was likely to mislead or deceive in trade or commerce and alternatively, for negligent misstatement.
The Mikkelsens defended the claims on the basis that several other financial documents – depicting lower turnover and profit – had been produced to the buyers before they signed up to the deal.
BAS statements for example showed turnover reduced by 50% and profit reduced by about 25%.
Business Valuation Specialist, Victoria Wheeler assessed the actual FY 2016 net profit of the business at just $23,000, 4.61% of turnover and testified that in most prior years it had sustained a loss.
Jan Mikkelsen argued that another $100,000 of cash sales not recorded on their “official books” should be added to those figures.
The trial judge accepted the plaintiff’s account of the profit percent representations they had relied on that had been made by Jan and that the actuals were far lower.
He also ruled that although Mr Mikkelsen was not himself or herself engaged in trade or commerce, the statements in the financial documents he provided were made “in trade or commerce” because they were designed to encourage others to invest in the trading entity.
The trial judge concluded that the buyers would not have proceeded with the investment had the defendants not made the representations and ordered Zoe Mikkelsen pay compensation pursuant to ACL s 236.
The sum they were directed to repay was the $630,000.00 purchase price discounted by 15% by reason of s137B of the CCA to account for their contributory negligence in having failed to engage an expert accountant for due diligence.
The defendants must refund the sum of $535,500.00 (plus interest) to the plaintiffs with costs.
Both parties appealed.
The Victorian Court of Appeal rejected the Mikkelsens’ arguments that the buyer had not relied on the inflated and erroneous profit representations.
It upheld the buyers’ contention that the case should have been decided under the Australian Consumer Law (Vic) because the parties who engaged in the misleading and deceptive conduct – Mr and Mrs Mikkelsen – were natural persons.
It followed that CCA 137B could not apply because there no equivalent in state ACL Acts.
Thus the contributory negligence deduction to the s 236 damages was reversed and the Mikkelsens were ordered to pay the buyers the total $630,00 investment.
Mikkelsen v Li [2023] VSCA 255 Ferguson CJ, Beach and McLeish JJA, 26 October 2023
