Key points for why this phoenix won't rise from its ashes after $438m in penalties were imposed for unconscionable conduct and misleading representations

On 28 July 2023, the Federal Court of Australia ordered record-breaking penalties totalling $438 million against Phoenix Institute of Australia Pty Ltd (Phoenix) and Community Training Initiatives Pty Ltd (CTI) (both subject to Deeds of Company Arrangement) for engaging in unconscionable conduct and making misleading representations (ACCC v Phoenix Institute of Australia Pty Ltd (Subject to Deed of Company Arrangement) (No 3) [2023] FCA 859).

Phoenix was a registered training organisation (RTO) approved to offer Vocational Education Training (VET) FEE-HELP loans. CTI was the marketing arm for various RTOs owned by Phoenix’s parent company Australian Careers Network Limited, including Phoenix. Phoenix and CTI’s conduct was described by the Court as “ruthless”, “born out of sheer avariciousness”, “grossly exploitative”, “lacking in dignity” and in “callous disregard… for the interests of many thousands of consumers”.

Phoenix and CTI entered administration soon after proceedings were commenced. While both opposed a number of interlocutory applications, ultimately, they filed submitting appearances and so did not contest the relief sought by the ACCC but equally, did not make any admissions.  

In this update we cover:

• the key reasons for the record-breaking penalty, including the Court’s findings that the most appropriate factors to determine the appropriateness of the penalty in this case were the gross benefits received by Phoenix (in the form of substantial payments from the Commonwealth) and the losses incurred by enrolled students;
• the impact of the liquidation of the companies, the lack of cooperation and the redress paid to enrolled students by the Commonwealth on the Court’s determination of the appropriateness of the penalties;
• that the overarching objective of the penalties ordered was to achieve general deterrence given specific deterrence was not possible as the penalties are unlikely to ever be paid due to the companies being in liquidation; and
• the potential implications of this case for the quantum of penalties in the future, particularly now the maximum penalties for Australian Consumer Law (ACL) contraventions are at least almost fiftyfold the previous maximum penalties that applied to the conduct in this case and the very recent High Court decision in The King v Jacobs Group (Australia) Pty Ltd formerly known as Sinclair Knight Merz [2023] HCA 23 (King v Jacobs Group).

Findings on liability

In August 2021, the Federal Court found that Phoenix and CTI had had engaged in unconscionable conduct in contravention of section 21 of the ACL in connection with the supply of VET courses to consumers, (ACCC v Phoenix Institute of Australia (Subject to Deed of Company Arrangement) [2021] FCA 956).

In its scathing liability judgment, the Court found that Phoenix and CTI had acted unconscionably and misled students into thinking the vocational courses they were enrolling in were free and they would receive free laptops, which was not the case. Phoenix received more than $106 million in Commonwealth funding under the VET FEE-HELP scheme and had claimed a further $250 million for students enrolled in its courses between January and November 2015 which the Court found was exploited for massive financial gain.  

The Court found that the vast majority of students had no reasonable prospects of completing the courses. Only nine of Phoenix’s 11,393 students completed one course and none completed two courses. Phoenix was found to have failed to properly assess language, literacy, numeracy, and computer skills of its many vulnerable and disadvantaged students to determine if they were suitable for the courses. Each of the students carried substantial debts, with total debts exceeding $428 million. 

The Court concluded that the conduct of Phoenix and CTI was “grossly exploitative and at times dishonest, and … lacking in any respect for the dignity and autonomy of the vulnerable consumers who were targeted”.

The case is one of a number of court actions the ACCC has taken in recent years involving serious conduct on the part of education providers relating to the VET-FEE HELP scheme. This includes action against Captain Cook Colleges where recently on appeal the Full Federal Court, in an equally scathing judgment, upheld the trial judge’s finding that Captain Cook College had engaged in unconscionable conduct and made false or misleading representations when enrolling students in VET programs under government-supported student loan programs.

Conduct on an extraordinary scale means penalties on an extraordinary scale

The ACCC sought penalties against each of Phoenix and CTI for two unconscionable systems (the ‘Phoenix Marketing System’ and the ‘Phoenix Enrolment System’), each described as systemic unconscionability “on an extraordinary scale”. The ACCC submitted that this was a case of unconscionability “of the gravest kind” with no mitigating factors, which warranted the highest penalties to have ever been imposed under the former penalties regime to achieve general deterrence. The ACCC submitted that penalties should be ordered in the range of $330 million to $400 million against Phoenix and $29 million to $35 million against CTI.

In considering the principles governing the imposition of pecuniary penalties under the ACL, the Court found that:

• separate penalties: it was appropriate that each of Phoenix and CTI should be separately penalised, despite them both being part of the same corporate group. This was because each of Phoenix and CTI performed distinct roles in the overall scheme and it was only through the distinct actions that the two unconscionable systems operated, there were separate contraventions in relation to each and every enrolled diploma student for both systems and it was a deliberate choice for the entities to be structured in that way;
• general deterrence: while there was no role for specific deterrence (given Phoenix and CTI are now in liquidation), general deterrence considerations continued to apply despite there being no prospect of Phoenix and CTI paying the penalties (consistent with earlier decisions of the Court where respondents were in liquidation) and to send a message deterring the exploitation and profiteering of a government program involving large government expenditure directed toward achieving important social purposes;
• theoretical maximum not meaningful: the theoretical maximum penalties in relation to Phoenix and CTI’s contraventions of s 21 of the ACL exceeded $25 billion each. Note these maximums were determined under a previous ACL penalty regime where $1.1 million was the maximum penalty for corporations for each contravention. The Court considered this maximum was not meaningful and vastly exceeded what was needed for deterrence. Rather, the assessment for an appropriate range was best assessed by reference to other factors, including:
  • the payments made by the Commonwealth to Phoenix totalling $106 million;
  • the gross benefits to Phoenix totally approximately $360 million; and
  • the losses to enrolled consumers, including total debts exceeding $428 million;
• number of contraventions: it was appropriate to characterise the unconscionable conduct as four courses of conduct as follows:
  • the 11,363 contraventions of section 21 of the ACL by each respondent relating to the Phoenix Marketing System constituted one course of conduct for each of Phoenix and CTI;
  • the 11,363 contraventions of section 21 of the ACL relating to the Phoenix Enrolment System constituted another course of conduct for each of Phoenix and CTI.

Importantly however, the Court emphasised that applying the course of conduct principle in this way did not ‘convert’ the many separate contraventions into one contravention for each course of conduct. 

The Court also considered that separate penalties should be levied for specific conduct in respect of four individual consumers.

• compensation orders had no impact on penalty: while orders were also made by the Court requiring the Respondents to compensate the Commonwealth, these orders had no relevance to the assessment of the appropriate penalty, because in reality neither Phoenix nor CTI could pay any compensation.

In assessing the appropriateness of the penalty against the relevant penalty factors, the Court’s findings included the following:  

• losses substantial:
  • the loss to the Commonwealth was substantial ($106 million), none of which is likely to be recovered;
  • the economic loss and damage suffered by enrolled consumers was large, with Phoenix charging $18,000 to $21,000 for each course (with most students enrolled in two diplomas and “set up to fail” effectively doubling the debt) – while these debts have been redressed by the Commonwealth to remedy the loss, it did not mitigate against the penalties that would otherwise be imposed; and
  • the enrolled consumers also suffered significant non-economic loss including high pressure sales tactics, stress from the debt and a lost opportunity to undertake study elsewhere impacted their skills, qualifications and employment prospects;
• deliberateness, no culture of compliance and senior management involvement: the deliberateness of the conduct, senior management involvement, and the fact that Phoenix and CTI had a corporate culture that was the antithesis of a culture that was conducive to compliance with the ACL; and
• lack of cooperation and putting the ACCC to full proof: the lack of any cooperation with the ACCC, including by resisting and then unsuccessfully appealing the ACCC’s application for leave of the Court to continue the proceedings after the companies went into administration, protracted pleadings disputes and then after 4 years after the proceedings being commenced filing a submitting appearance, yet making no admissions which therefore put the ACCC to full proof of its case.

Justice Perry aptly concluded her reasons with the following:

“Finally, it is to be hoped that this phoenix does not rise from its ashes”.

Impact of Phoenix’s record-breaking ACL penalties

Reflecting on the penalty judgment, ACCC Chair Gina Cass-Gottlieb said:

“The size of penalty reflects the total financial benefit obtained as well as the further amount claimed by Phoenix from the Commonwealth, involving hundreds of millions of taxpayers’ dollars. This record penalty should send a strong deterrence message to all businesses that rorting government funded schemes by taking advantage of vulnerable consumers is unacceptable and will attract very substantial penalties to remove any financial incentive for such conduct”

It should therefore be expected that the ACCC will continue to seek penalties that ensure respondents do not retain any financial gain from conduct that contravenes the ACL to ensure that penalties are not just seen as the ‘cost of doing business’, particularly in extremely serious cases like this where the benefits obtained by the respondents were substantial.

It is also important to note that the applicable maximum penalty per contravention that applied to the conduct in this case was $1.1 million, much lower than the current penalties regime, where the maximum penalty per contravention is almost fiftyfold. For conduct engaged in on or after 10 November 2022, the maximum penalty per contravention for corporations is the greater of:

1. $50 million;
2. if the Court can determine the benefit obtained that is "reasonably attributable" to the conduct, 3 times that value; or
3. if the Court cannot determine the benefit, 30% of the corporation's adjusted turnover during the breach turnover period. 

In theory, if the current penalty regime had applied to the relevant conduct in Phoenix, the maximum penalty would have been vastly higher (based on the benefits obtained from the conduct) and the penalty ordered could also have been significantly higher. However, on the facts, given that the Court found the actual (lower) theoretical maximum was not meaningful and that the appropriate penalty was determined by reference to the substantial financial gain to Phoenix and losses incurred by students, a higher maximum would be unlikely to have had any practical impact on the quantum ordered here. 

However, this decision demonstrates that the trend of the ACCC seeking higher penalties, and the Courts willingness to order such penalties, is only continuing. This, coupled with the new higher maximum penalties and the combined effect of two recent High Court decisions – King v Jacobs Group in early August 2023 and Australian Building and Construction Commissioner v Pattinson & Anor [2022] HCA 13 (Pattinson) in 2022 – may well have significant implications for the level of penalties for future cases:

• King v Jacobs Group considered the relevant approach to assessing the “value of the benefit” for the purposes of the maximum penalty for conspiring to bribe officials under s 70.2(5) of the Criminal Code (Cth). The High Court found the relevant approach is to assess the ‘gross’ value of the benefit as opposed to the ‘net’ value of the benefit. Given that substantially similar language is used in the ACL civil penalty provisions, this decision may well be applied in future ACL civil cases.
• In Pattinson, in reinstating an order made the trial judge imposing the maximum penalty on respondents for contraventions of the Fair Work Act 2009 (Cth), the plurality held that a civil penalty does not need to be proportionate to the seriousness of the conduct and the maximum penalty need not be reserved for the most serious conduct. Rather, the penalty must be no more than what might be reasonably necessary to deter further contraventions (which may well be the maximum).