ASIC v Rich [2005] NSWSC 1170 | Case summary

5934/01 AUSTRALIAN SECURITIES AND INVESTMENTS COMMISSION V JOHN DAVID RICH & ORS JUDGMENT (Ex tempore; revised on 16 November 2005) 1 HIS HONOUR: ASIC proposes to read the affidavit of Mr Richard Francis Egerton Warburton made on 27 May 2002, which attaches a résumé and report. The defendants object to the third and fourth sentences of paragraph 20 of that report. 2 Paragraph 20 is part of the witness's report on topics (a), (b), (c), (d) and (i) of the schedule. Broadly speaking, those topics relate to: · the monitoring of management, the assessment of the financial position and performance of the company and the detection of material adverse developments in the company's financial position and performance; · ensuring that the directors are fully informed of material financial information; · ensuring that the directors are sufficiently informed as to the adequacy of the cash reserves, financial position and performance of the company and key events and transactions affecting financial position and performance; · establishing, maintaining and monitoring systems to ensure that the financial information received by the directors is accurate and reliable and that information flows properly from management to the board; and · ensuring that the cash reserves of the company are maintained at a level such as to enable the company to pay its debts as and when they fall due. 3 In addressing those matters, the witness first speaks about the position of the chairman of the company, and then respectively the position of the managing director and finance director. Paragraph 20 is directed to the managing director in respect of those topics. 4 In paragraph 19 the witness speaks of the primary responsibility of the managing director concerning paragraphs (a), (b), (c), (d) and (i) of the schedule. There is a statement, not objected to, that where a company is establishing a new business which is currently making losses, the company's solvency will depend on the board being in a position to discharge its responsibilities, based on accurate and reliable information as to the company's actual and forecast cash position. 5 Then in paragraph 20 the witness says that the managing director will be constantly involved in reviewing all aspects of the business and he will have a detailed understanding of the actual financial position and performance of the company. There follow the two sentences the subject of objection: "Where the company is establishing a new business which is making losses, the managing director will recognise the significance of the board being in a position to properly assess the cash position based on sufficiently detailed information. This will include, especially where the business is cash negative, an analysis of debtors and creditors including aged listings." 6 Then the witness proceeds to say that the managing director will ensure that cash flow forecasts are prepared and reviewed by the board at regular intervals and that the board is informed of any significant disparity between the actual cash position and the forecast position, and he will recognise the need for adequate accounting systems and management information systems, etc. Those statements are not objected to. 7 The basis of the objection to the third and fourth sentences of paragraph 20 is twofold: namely, admissibility under section 79 and discretionary exclusion under section 135 of the Evidence Act. 8 As to admissibility, the defendants submitted in DS94, paras 1 and 2, that Mr Warburton was not shown to be expressing an opinion wholly or substantially based on specialised knowledge, for two reasons. The first was that the matters on which the opinion was expressed were matters upon which the court would be able to form a correct judgment without expert assistance. But as I pointed out in ASIC v Vines (2003) 48 ACSR 291, at [56], the nature of the work of a senior executive in a substantial corporate group is, itself, a complex matter not readily understood without assistance. It seems to me that the experience gained by a person in Mr Warburton's position in a number of boards of large organisations is the kind of specialised knowledge likely to assist the court when it comes to make judgments about the duties of the defendants as joint managing director and finance director respectively of One.Tel. 9 Mr Warburton's evidence is not expressed specifically by reference to the One.Tel group, in contrast with the evidence of Mr Hogendijk and Mr de Vroome in the Vines case. The evidence they gave was specific evidence based upon a series of detailed assumptions, whereas Mr Warburton's evidence is expressed generally by reference to his assessment of the positions of managing director and finance director respectively (and, for that matter, chairman) of a corporate group and their responsibilities as a general matter. Nonetheless, it is, in my view, evidence based on specialised knowledge because he speaks with the experience that he identifies in the résumé set out in annexure A to his affidavit. 10 The second aspect of the submissions about specialised knowledge is to the effect that there is no reliable body of experience underlying the opinions expressed in the sentences objected to. But as noted at [55] of the Vines judgment, specialised knowledge can emerge out of a body of experience, accumulated by a witness working on the boards of commercial organisations over a substantial period of time, of a kind that would satisfy the requirement that there be a reliable body of such experience underlying the opinions expressed by the witness. 11 The defendants submitted, in para 3 of DS94, that Mr Warburton's experience does not extend to any experience in relation to the conduct of managing directors in new, loss-making or cash-negative publicly listed companies. So far as Mr Warburton's résumé is concerned, that seems to be correct, although there is an application before me, not yet dealt with, for leave to permit Mr Warburton to give some further relevant evidence of his experience. Even if that application is unsuccessful, it seems to me that the defendants' objection does not succeed. 12 Mr Warburton's experience is experience in a substantial number of large organisations. It is not open to the court to infer, at the point of assessing the admissibility of his evidence, that in none of those organisations did he ever have any experience with respect to the establishment of new, loss-making or cash-negative businesses within the established organisational frameworks of the boards on which he served. But even if he had in fact never had any such experience, his experience in serving on the boards of companies conducting established businesses would have given him expertise with respect to the management of a company, in terms of cash flow and solvency concerns, such as would suffice to enable him to express the kinds of general opinions given in the third and fourth sentences of paragraph 20 of his report: see ASIC v Vines paragraphs 61, 62 and 76. 13 Another objection raised by the defendants, in para 4 of DS94 is that Mr Warburton did not expose any reasoning process underlying the opinions he expressed. It seems to me, however, that there is a sufficient reasoning process disclosed in the report when read in light of the résumé. Mr Warburton has identified substantial experience on the boards of significant commercial organisations, and speaks from that experience, in a fairly general way, about the functions and responsibilities of chairmen, managing directors and finance directors. As I noted in ASIC v Vines, at [76], although an expert's opinions may not always be fully articulated, sometimes a linkage may be apparent from the nature of the specialised knowledge and the witness's experience. It seems to me that is the case here. 14 My conclusion is that the challenge to the third and fourth sentences of paragraph 20 of the report based on admissibility has not been made out. 15 So far as discretionary exclusion is concerned, the probative value to be attached to opinions expressed generally by reference to overall experience, rather than specifically on the basis of stated assumptions relevant to the instant case, is difficult to assess at the stage of deciding on the admissibility of evidence rather than after all of the evidence is in. It does seem to me, however, that there is a sufficient prospect that Mr Warburton's evidence will have some significant probative value (having regard to the experience he identifies in his résumé) that in performing the balancing exercise required by section 135 I should not discount probative value too heavily. 16 On the other hand, the discretionary criteria identified by section 135 do not seem to me to be strongly present here. I am certainly not satisfied that the probative value of Mr Warburton's evidence will be substantially outweighed by the danger that the evidence might cause or result in an undue waste of time (see DS94 para 5). The fact that Mr Warburton may have had limited or even no experience in respect of directorships dealing with businesses which are new, loss making and cash negative does not prevent him from bringing his experience as a company director, dealing with the management of cash flow and solvency issues, to bear in expressing views about the roles of the chairman, managing director and finance director. 17 The fact that the defendants have been prevented from issuing subpoenas to give them access to board papers that might enable them to test or assess the basis upon which the relevant opinions are expressed by Mr Warburton does not, it would seem to me, provide any basis for a conclusion about unfair prejudice. It was submitted orally, in effect, that if I were to grant the plaintiff's application for leave to allow Mr Warburton to give further evidence about his experience, the prospect of unfair prejudice - because of the absence of any ability properly to test that evidence - would be enhanced. But the argument assumes that the application for leave will be granted. 18 In the circumstances, I have decided that there is no basis here for the application of section 135. Therefore, the third and fourth sentences of paragraph 20 of the report will be allowed into evidence. Consequently, the whole of the report, which is an annexure to the affidavit, is now formally read.

ASIC v Rich

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