On the 12 June 2019, the High Court of Australia handed down its decision in the matter of the Australian Securities and Investment Commission v Kobalt. The case concerned whether the provision of ‘book-up’ credit to customers of the general store in a remote Aboriginal community amounted to unconscionable conduct.
Unconscionable conduct is prohibited under Section 12CB(1) of the Australian Securities and Investment Commission Act 2001. The High Court ruled that the respondent’s use of the ‘book-up’ credit system did not amount to unconscionable conduct.
What is the ‘book-up’ system?
‘Book-up’ is an arrangement whereby customers in remote communities obtain credit from storekeepers. The customer provides the storekeeper with the keycard to the account into which their wages or Centrelink benefit is paid and authorises the withdrawal of funds to cover purchases made in between paydays. It is a system which has developed and evolved over decades, in response to the widespread receipt of social security benefits by Aboriginal people.
In 2002, ASIC commissioned a report into the practise, which found it to be a convenient way of managing money for customers lacking financial skills or subject to cultural pressure to share resources.
What is unconscionable conduct?
Section 12CB of the ASIC Act provides that ‘A person must not, in trade or commerce, in connection with:
(a) the supply or possible supply of financial services to a person (other than a listed public company); or
(b) the acquisition or possible acquisition of financial services from a person (other than a listed public company);
engage in conduct that is, in all the circumstances, unconscionable.
Section 12CC of the Act states that in assessing whether a party has acted unconscionably, the court must have regard to the relative bargaining positions of the parties and whether the service recipient:
- Was required to comply with conditions that were not reasonably necessary;
- Was able to understand documents relating to the services;
- Was subjected to any undue influence, pressure or unfair tactics;
- Could have obtained alternative financial services;
- Was able to negotiate the terms and conditions of the agreement.
ASIC brought proceedings against storeowner Mr Kobelt in the Federal Court. It argued that Mr Kobelt’s supply of credit to Anungu customers under the ‘book-up’ system was unconscionable.
ASIC pleaded a system case, arguing Mr Kobelt’s conduct was unconscionable in respect of his customers as a whole as well as in respect of four specified customers. The judge at first instance found that Mr Kobelt’s conduct had been unconscionable. It found that he had provided a credit system, which though it provided some benefits, took advantage of the customers’ poverty and lack of financial skills and tied them in dependency to his store.
Mr Kobelt appealed to the Full Court of the Federal Court, which upheld his appeal. The Full Court found that although Mr Kobelt’s customers were vulnerable, his dealings with them did not amount to unconscionable conduct. The court found Mr Kobelt’s customers had a basic understanding of the book-up system and voluntarily entered into the agreement. It found that he did not act dishonestly.
ASIC then appealed to the High Court against the Full Court’s decision.
ASIC’s argument on appeal
Unconscionable conduct essentially means conduct that is against conscience. Conduct that is in good conscience is honest conduct, conduct that is free of trickery and fairness when dealing with customers. Conduct in good conscience also involves the protection of vulnerable individuals who might be taken advantage of by predators.
ASIC argued that it was the vulnerability of Mr Kobelt’s customers that led them to willingly enter into the book-up system against their interests and that the Full Court had wrongly treated these factors as excusing what would otherwise be found to be unconscionable conduct.
The High Court’s decision
The High Court dismissed ASIC’s appeal, with four judges finding that Mr Kobelt’s conduct was not unconscionable. The remaining three judges dissented. Crucial to the court’s decision was the finding that Mr Kobelt did not obtain any unconscientious advantage from his conduct.
The High Court heard that Mr Kobelt had operated Nobby’s general store in Mintabie, South Australia. Nobby’s sold groceries, fuel and second-hand cars. The majority of his customers were Anangu persons who were characterised by their poverty and low levels of literacy and numeracy, meaning they lacked financial literacy.
Mt Kobelt offered a book-up system of credit. As part of the book-up system, Mr Kobelt would withdraw all or most of the contents of a customer’s bank account on the day a payment was received. He would do so first thing in the morning in order to prevent the customer from using any of their money. He had no way of checking the balance of account and withdrawals were made by trial and error.
The court heard that there was no application process for the book-up system, which operated informally. Funds withdrawn were applied roughly half in payment for items already taken and half in anticipation of future purchases. Mr Kobelt did not make enquiries as to customers’ ability to repay. and had only ever refused to extend the book-up credit system to 12 – 15 customers. However, his customers could frustrate the book-up system by canceling their keycard and some had done so. In most such cases, Mr Kobelt had not pursued debt recovery.
In spite of the vulnerable nature of Mr Kobelt’s customers, the High Court found by a majority that Mr Kobelt did not act unconscionably. In their joint judgement, judges Bell and Kiefel said:
“… 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 difficulty with ASIC’s system case of statutory unconscionability lies in identifying any advantage that Mr Kobelt obtained from the supply of book-up credit that can fairly be said to be against conscience.”
Judge Keane found that ASIC:
“…did not establish that the respondent exploited his customers’ socio-economic vulnerability in order to extract financial advantage from them.”
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