On the boil – Pastacup in hot water as the ACCC takes action for failure to disclose

Peter Stewart

Following the introduction of the Franchising Code of Conduct in January of last year, the ACCC has shown that it won’t hold back in enforcing requirements. 

In September, the ACCC announced that it had commenced proceedings in the Federal Court against Morild Pty Ltd and its former director, Stuart Bernstein. Morild Pty Ltd is the current franchisor of Pastacup, a Western Australia-based ready-to-eat pasta business. 

The ACCC alleges that Mr Bernstein’s directorship and management of two previous Pastacup franchisor companies which became insolvent should have been disclosed by the current franchisor, Morild Pty Ltd, as part of the mandatory disclosure documents. The Code requires that a franchisor’s disclosure document include whether the franchisor, a director of the franchisor, an associate of the franchisor and/or a director of an associate has been bankrupt, insolvent or externally-administered in Australia during the last 10 years.  

In its proceedings, the ACCC alleged that this constituted a failure to disclosure materially relevant facts, on the basis that a potential franchisee may be dissuaded if Mr Berstein’s previous history and relationship with the insolvent companies had been disclosed. ACCC Deputy Chair, Dr Michael Schaper, stated that potential franchisees needed to be able to “make informed business decisions on the basis of full and accurate disclosure by the franchisor.”  

Financial penalties of up to $54,000 against Morild Pty Ltd and Mr Bernstein have been sought by the ACCC, along with further relief including declarations, injunctions and costs. Dr Schaper commented that the ACCC was pleased that the revised Code provides it with the ability to be able to seek such penalties and that he hoped that this would “act as a significant deterrent to others.”  

Key points

While we continue to await the outcome of these particular proceedings, this matter highlights the importance of disclosure documents containing all necessary and materially relevant facts about the franchise, the franchisor and the franchisor’s associates.  

The ACCC appears to be focusing on compliance with the Code, and franchisors should pay particular attention to the information contained in their disclosure documents to ensure that they aren’t inadvertently (or otherwise) failing to disclose a materially relevant fact. As shown in this matter, the ACCC isn’t hesitant in pursuing action against a franchisor where they have breached the Code. 

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