ASIC v Rich [2005] NSWSC 935 | Case summary

5934/01 AUSTRALIAN SECURITIES AND INVESTMENTS COMMISSION V JOHN DAVID RICH & ORS JUDGMENT 1 HIS HONOUR: My judgment dated 8 July 2005 (ASIC v Rich [2005] NSWSC 650) was a "paragraph-by-paragraph" analysis of Mr Carter's principal forensic accounting report dated 31 May 2002. In AS 89 ASIC requested reconsideration of the rulings in my 8 July judgment rejecting the following parts of Mr Carter's principal report, dealing with the topic of reporting to the board of directors of One.Tel: (a) the first sentence of para 299 of the principal report, rejected in para 254 of the judgment - save for the words which were not pressed ("which was or should have been available to management"); (b) the whole of paras 303 and 304 of the principal report, rejected in paras 255-257 of the judgment - save for para 303(g)(i), the words "the collection of debtors" in para 383(h), and the balance of the sentence in para 303(k) after the words "delaying payments to creditors"; (c) paras 311 and 312 of the principal report, rejected in para 261 of the judgment - save for the second and third sentences of para 311(b), and the second sentence of each of paras 311(c), 311(f) and 311(h). 2 This material is part of Section 4 of the principal report, in which Mr Carter considered whether the information provided to the board of directors of One.Tel enabled the board to monitor management, properly assess the financial position and performance of the Group, and properly and promptly detect and assess any material adverse development affecting the financial position and performance of the Group (see principal report, para 291). First sentence of para 299 3 In paras 293-300 Mr Carter considered the sources of information reported to the board. In para 296 he expressed the opinion that the information provided to the board was not sufficient in terms of adequacy or accuracy to enable the board to monitor management, assess the financial position and performance, or detect and assess materially adverse developments. In para 297 he set out some categories of information that had not been disclosed to the board. In para 299 he provided a table setting out, in respect of some financial categories including "Cash and creditors", "Debtors" and "Earnings", lists of various kinds of information. For example, with respect to "Cash and creditors" the list is "available cash balance taking into account restrictions on cash such as pledges and unpresented cheques", "available cash balance compared to forecast", "overdue creditors", "liquidity and working capital", "net cashflow compared to forecast", "the extent of payments deferred", and "details of threats to supply and actual cessation of supply by creditors". In para 300 Mr Carter said that this information was indicative of the categories of information that the board required to monitor management and assess the financial position of the Group. 4 The material in paras 293-300 was allowed into evidence, except for the first sentence of para 293, footnote 161, para 298 and the first sentence of para 299. What remained was obviously sufficient to give the gist of Mr Carter's argument. 5 ASIC pressed the following words from the first sentence of para 299: "Further had the following information for the Australian and international operations … been provided to the board, the board would have been better able to assess the deteriorating financial position and performance of the Group". 6 In para 254 of the 8 July judgment I said that this assertion implied an assumption that information in the categories set out in the table in para 299 was not in fact provided to the board. Since ASIC had not asked me to allow paragraph 299 into evidence on the basis of such an assumption, I decided to reject the whole of the sentence. I noted that Mr Carter's opinion, that information in the stated categories is required by a board in order to perform its functions, had been conveyed in para 300, when read in conjunction with the table in para 299. 7 ASIC's contention is that I should to reverse my ruling as to the first sentence of para 299, other than the words it has not pressed. Paras 303 and 304 8 After having dealt with the sources of information reported to the board, in the manner outlined above, Mr Carter turned his attention in Subsection 4.1 of the principal report to "Adequacy of cash reserves within the Group", discussing information that the board had not received concerning the cash and creditors position. 9 He noted the information which, he said, had been provided to the board on certain matters (paras 301 and 302). Then he expressed the opinion that information as to the Group's cash and creditors position was inadequate, and that the reporting of the Group cash balance did not reveal important information which he listed in sub-paras 303(a)-(k). In para 304 he said that without detailed information as to the factors impacting on the reported cash balance and cashflow, and detailed information as to the extent of deterioration in the cash position, the board was not in a position to carry out certain specified functions. 10 I rejected the whole of the material in this Subsection, namely paras 301-304 of the principal report, giving my reasons in paras 255-257 of the judgment. At [255] of the judgment, while acknowledging that Mr Carter was in a position to give evidence by observation that the identified board materials did not contain the information listed in para 303, I noted that his assertion that the board did not receive the information listed in paragraph 303 was based on an assumption that the board did not receive any information other than the information provided with board papers and flash reports. It was also based on more specific assumptions, such as the assumption that the cash balance reported to the board did not take into account the amount of unpresented cheques, and the assumption that the $8 million "pledged" for international lease commitments should be taken out of available cash, and there was an assertion about deferral of creditor payments similar to the ones made earlier in the principal report, that I had rejected. 11 I concluded that the absence of any reasoning process or expressly articulated assumption about the board's sources of information was a substantial defect in Mr Carter's reasoning process and reduced the probative value of his opinion. I noted that ASIC did not submit that I should allow his opinion into evidence on the basis of such an assumption. I also found it probable that Mr Carter was able to move from a review of the board papers and flash reports to the position that the board did not have information of the specified categories because he received and used extraneous information, probably from Mr Holmes. Applying s 135, I found that there were dangers of unfair prejudice, confusion and undue waste of time, which outweighed the probative value of para 303. I therefore rejected para 303, and also paras 301 and 302, and the second sentence of the introductory box above para 301, which led up to para 303. 12 While I acknowledged that Mr Carter could give opinion evidence that if the board was not given certain categories of financial information it would not be able to discharge the functions specified in para 304, this was not what he purported to do in that paragraph. Instead, he purported to say that the One.Tel board was unable to assess specific things because of the absence of the information listed in para 303. Since his opinion was of that character, the rejection of para 304 was consequential upon the rejection of para 303. 13 ASIC's contention is that I should reverse that ruling and allow the whole of paras 303 and 304 into evidence, except for para 303(j), which was not pressed, and some parts of paras 303(g), 303(h) and 303(k), which it does not now press, presumably because of other rulings I made in my 8 July judgment. Paras 311 and 312 14 In Subsection 4.2 of the principal report, Mr Carter addressed "Actual compared to estimated financial position and performance", and under that heading he considered the adequacy and accuracy of information provided to the board with respect to debtors and earnings. Debtors were dealt with in paras 306-312. The structure of these paragraphs is similar to the structure of paras 301-304 dealing with cash and creditors. 15 First, Mr Carter identified the accounts receivable information that had been supplied to the board (paras 306-307). Then, in para 308, he expressed the opinion that the board papers contained progressively less information in relation to the balance of aged debtors and the provision for doubtful debts (rejected on the ground that the table in para 307 should be allowed to speak for itself), and he noted that no information in relation to debtors had been provided in the board papers of certain specified months (allowed). 16 In para 309 he said that no detailed information in relation to the ageing of creditors had been provided to the board after March 1999, and he expressed the opinion that this was important information that the board required. In para 310 he noted that the documents provided to the board did not adequately reveal the extent to which accounts receivable were under-provided. He elaborated by drawing attention to certain aspects of the March 2001 board papers. In sub-paras 311(a)-(i) he set out a list of information that would have assisted the board to assess the financial position with respect to debtors and the provision for doubtful debts. In para 312 he said that without detailed information as to the ageing and collectability of debtors and the adequacy of the provision for doubtful debts, the board was not in a position to discharge certain functions, which he specified in detail. 17 I rejected the whole of paras 309 to 312. I have not been asked to revise my rulings in respect of paras 309 and 310. My reasoning in respect of paras 311 and 312 was set out at [261] of the judgment. I said I rejected para 311 upon the same reasoning as I had rejected para 303. That is, that Mr Carter's assertion that the board did not receive the information listed in para 311 was based on an unstated assumption that the board did not receive any information other than the information provided with the board papers and flash reports. Additionally some of the asserted information in para 311 was based specifically on the collections profile summaries, about which I had made findings in my 7 March judgment. I said that once para 311 was rejected, para 312 was also to be rejected. 18 ASIC's contention is that I should reverse my ruling as to paras 311-312 and allow them into evidence, with the exception of certain specified parts, apparently selected (at least in part) so as to meet my point about the collections profile summaries. ASIC's grounds for seeking reconsideration 19 ASIC contended that the reasoning upon which I had relied to reject the first sentence of para 299 and paras 303, 304, 311 and 312 had omitted to take into account para 41 of the principal report, which stated: "References in this report to information received by the board are references to the information appearing in or referred to in the various documentary sources (board papers, flash reports, daily e-mails and board minutes) which are assumed, for the purposes of the report, to refer to the totality of information received by the board." 20 In DS 69, page 110, the defendants noted that the probative value of Mr Carter's evidence in Section 4 of his principal report was affected by the assumption made by Mr Carter in para 41, which they interpreted to mean that "no information was provided to directors other than board papers, flash reports and daily e-mails and that the entirety of the discussions at board meetings is reflected in the minutes". They submitted that the assumption, so expressed, was not reflective of reality, and that assertions premised on it were accordingly of little assistance to the court. 21 ASIC replied by submitting that this was not a matter affecting probative value for admissibility purposes, and would depend upon what emerges in the evidence at the trial (AS 79, page 49). Assessment of ASIC's application 22 The defendants submitted (DS 84) that the court should not permit the canvassing of its rulings because if it does so, the proceeding will be unduly prolonged. I disagree, having regard to the special circumstances of the present application. Here ASIC has drawn attention to a paragraph of Mr Carter's principal report not expressly mentioned in the judgment that might, on the basis of submissions that are not ex facie implausible, affect the rulings that I have made. It has identified submissions which might suggest common ground as to the relevance of the matter it has raised. I have therefore decided to reconsider the relevant parts of my judgment on the basis of the submissions I have received. But having done so, I have reached the conclusion that no change to my rulings is warranted. 23 Para 41 appears in Section 2 of the principal report, which is headed "Background", in a Subsection headed "Overview of information provided to the board". It seems intended to operate as a definitional provision, explaining the meaning of references in the report to "information received by the board". The words defined in para 41, "information received by the board", appear only infrequently in paras 290-312. There are references to information "provided" (paras 291, 293, 295, 297, 298, first sentence of 299, 301, 302, 305, 307, 308, 309), information "reported" (paras 290 292, 294, 297(c), 298, 299 under heading "Other", 311(g)), information "required" (paras 292, 300), and information that the documents did not adequately "reveal" (para 310; see also paras 311(b) and (c)). The only substantive paragraphs that refer to information "received" are sub-paras 306 and 311(i), although there is a reference to information which the board "did not receive" in the introductory box above para 301, and a reference to information which the board "received" in the introductory box above para 306. If Mr Carter had set out to make it unclear whether, in paras 290-312, he intended to invoke the definitional provision of para 41, he could hardly have done a better job. 24 This is not a purely technical point. The focus of Mr Carter's attention in the relevant parts of Section 4 appears to be the documentary sources of information reported to the board (see paras 293-300), that is the flash reports, board papers and e-mail sources of information, rather than oral reports to board meetings. When he complained that information "provided" to the board did not disclose certain things (paras 297), and that "reporting" to the board did not reveal certain things (para 303), and that information of certain kinds "would have assisted" the board (para 311), he seems in each case to have had in mind documentary information provided in advance of board meetings. It is true that the board papers included minutes of previous meetings, but as far as I can see, there is no analysis in the relevant parts of the principal report as to whether information deficiencies in documents for the previous month might have been addressed by oral presentations noted in the minutes. 25 In view of these matters, my opinion is that para 41 obscures rather than clarifies the unstated assumptions upon which Mr Carter proceeded in Section 4 of the principal report. In those circumstances the reasoning upon which I based the relevant rulings is reinforced rather than undermined by reference to para 41. 26 There is a further difficulty presented by ASIC's reliance on para 41, which also reduces the probative value of the contested paragraphs. There is an element of unreality in the assumption that the documents identified in para 41 encompass all the information presented to the board. Much of the evidence about what occurred at One.Tel's board meetings is still to be heard, but it is a plausible inference at this stage that the minutes do not record everything that was orally presented to the board - or even everything of significance to the issues addressed by Mr Carter in Section 4. Indeed, if one peruses the minutes of the board meetings, in the period from January to May 2001, it appears that they are summary descriptions, which do not purport to give anything approaching a full account of what was said. Thus, the "financial summary" presented to the board meeting of 25 January 2001 is summarised in the minutes in two short paragraphs, the minutes as a whole running to only 2 pages. The minutes of the meeting on 30 March 2001 run to 2 1/2 pages in which the "financial summary" is given in four short paragraphs, including statements such as "Mr Silbermann took the board through the financial tables". The minutes of the meeting on 17 May 2001 are, as one would expect having regard to what occurred, rather longer (6 pages), but again the financial presentations do not appear to be recorded in detail. At the meeting on 28 May 2001, the minutes of which run to 4 1/2 pages, there was a written report from Mr Miller and Mr Green and apparently succinct notes of remarks made at the meeting. 27 Finally, my rulings on the contested paragraphs were based, wholly or in part, upon considerations additional to the one attacked an ASIC's submission. As far as I can see, ASIC has avoided the additional consideration concerning paras 311 and 312 which I expressed in the second last sentence of [261] of my judgment, by choosing not to press certain parts of para 311, but it has not overcome the additional considerations concerning para 303 identified in the second last and last sentences at [255] (matters which affect only part of para 303), and in the third sentence of [256] (a matter going to the exercise of the overall discretion). As regards the first sentence of para 299 of Mr Carter's report, a relevant consideration is, as I said in the second last sentence of [254] of my judgment, that Mr Carter's opinion, that information in the stated categories is required by a board in order to perform its functions, is conveyed under the ruling that I made, without any implication of a "finding" by Mr Carter that information was not supplied in this case. Conclusion 28 For the reasons I have given, there is no proper basis for amending my rulings with respect to the first sentence of para 299, paras 303-304 or paras 311-312. Although it is strictly unnecessary for me to deal with other submissions, I note that the sake of clarity that I do not agree with the defendants' submission that Mr Carter lacked the specialised qualifications necessary to express the opinions he stated in Section 4 of his principal report, having regard to my view as to the scope of expertise of a forensic accountant explained in my judgment of 7 March 2005 ([2005] NSWSC 149, especially at [402]).

ASIC v Rich

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