ASIC v Rich [2005] NSWSC 999 | Case summary

Paras 13-25 8 The material remaining in contention is in paras 13, 14(c), 15(c) (save for the last sentence), 16(a), 18(a) and (b), 24 and 25(a). They appear in the report under the heading "Summary and conclusions". 9 Para 13 is a statement of Mr Carter's general opinion that between January and May 2001 the financial position and performance of the Group progressively deteriorated. In my opinion that general statement, which appears to be a summary conclusion based upon the more specific matters identified in paras 14, 15 and 16, cannot stand, because some of the foundation for it in the subsequent paragraphs has been removed by my rulings. ASIC relied (AS 95, para DS1) on my 8 July judgment, at [230], where I ruled that Mr Carter's statement in para 236 of his report, that there were three primary reasons for progressive deterioration in the Group's financial performance, was based on a much more detailed analysis that included para 236, and I decided that in the particular context, while some of the supporting analysis had been rejected, what remained was sufficient to show that "in some respects at least" the Group's financial performance deteriorated. The point is that what was allowed in para 236 was qualified by the rulings I had made, whereas the statement in para 13 is in terms unqualified and cannot be permitted in that form. 10 Para 14(c) asserted that during the January/May period, the Group failed to pay an increasing balance of overdue creditors, so that overdue creditors of the Group increased from $74 million at 31 January to $137 million at 30 April (excluding international operations other than the UK). ASIC contended (AS 95, para DS1) that this statement is supported by paras 74, 89 and 99 of the report, which have been allowed. Certainly it can be drawn from those paragraphs that Australian and international "overdue" creditors grew from $74 million in January to $137 million at the end of April. But it must be remembered that the word "overdue" was used by Mr Carter as meaning only that the amounts had passed the due dates for payment (para 73 and footnote 34). To move from figures about debts "overdue" in that sense to an assertion that One.Tel was "failing to pay" an increasing balance of overdue creditors involves rejecting or disregarding explanations for non-payment such as disputes or the issue of credit notes. These are matters important to the defendants' case. No adequate reasoning process is given for the shift from "overdue" to "failing to pay". In my opinion the correct course is to reject para 14(c). 11 Para 15(c) (disregarding the last sentence) asserted that during the January/May period the Group had materially less cash available at each month end than had been projected; as at 30 April, uncommitted cash in hand of $21 million, rather than $106 million contained in the September 2000 forecast or $88 million in the January 2001 forecast. I rejected para 47(c), which is in identical terms, having regard to my rejection of paras 54 and 234: see 8 July judgment, at [21], [49] and [226]. Para 15(c) is therefore rejected. 12 Para 16(a) presented a table about the Group's cash position after allowing for overdue creditors, which was said to illustrate one of the key characteristics of the deterioration of the Group's financial position and performance. The table is identical to the table in para 99, except that the footnotes are omitted. In dealing with para 99, I held in my 8 July judgment that the figures for available cash balances presented in the table were Group intranet figures after deductions for pledged amounts and unpresented cheques, and therefore that the table contained or implied an assumption about the appropriateness of deducting the pledged amount of $8 million (at [105]-[106]). I decided to allow para 99, subject to an order under s 136 of the Evidence Act to the effect that the implied assertion as to the appropriateness of deducting the pledged amount was received only as an assumption for the purposes of the expression of Mr Carter's expert opinions, and not as proof of the matter asserted (at [12] and [105]). The same ruling is applicable to para 16(a). The omission of the footnotes is immaterial, given that para 16(a) is part of a summary and the footnotes have been allowed in para 99. The introductory words of para 16, as applied to subparagraph (a), are a permissible expression of Mr Carter's expert opinion. 13 Para 18 appears under the heading, "What were the reasons for that state of affairs?" The state of affairs appears to be that the Group required, in Mr Carter's opinion, a cash injection of $270 million as at 28 February 2001 to meet current and reasonably foreseeable liabilities, and by 31 March the amount had risen to $287 million. In para 18 Mr Carter said that the cash deficiency position of the Group arose from its progressively deteriorating financial position, to which three causes contributed, which he set out in subparagraphs (a), (b) and (c). In para 236, the relevant part of which I have allowed, Mr Carter said there were three primary reasons for the progressive deterioration of the Group's financial performance, and then he set out three sub-paragraphs identical with the sub-paragraphs of para 18. 14 The defendants objected to the use of the words "its progressively deteriorating financial position" in para 18, but those words have been allowed in para 236. I rejected the words in the third sentence of para 236, but that was because they were part of a chain of reasoning which asserted that the board had decided to place the Group into administration in May 2001 because of its cash deficiency, a matter upon which Mr Carter could not give expert opinion evidence. I regarded it as permissible for Mr Carter to give expert evidence that there were three primary reasons for the progressive deterioration in the Group's financial performance (see [229]-[231]). In these circumstances, the reference to the "progressively deteriorating financial position" is allowed, as are subparagraphs (a) and (b). 15 The defendants objected (DS 86, para 9) to the words "(before appropriate allowance for doubtful debts)" in para 18(a), because they referred to Mr Carter's conclusions in section 3.1.2 of the report, which I rejected. In my opinion the quoted words do not necessarily refer to that particular material, and there is no proper reason for rejecting such general words, which were allowed in para 236. 16 The result is that the whole of paras 18(a) and (b) are allowed. 17 I turn, finally, to paras 24 and 25(a). In my 8 July judgment at [252]-[254] I held, in effect, that it was permissible for Mr Carter to look at the flash reports and board papers and say that they did not disclose certain information, as he did at para 297 of the report. That was evidence of observation. But it was not permissible for him to make a "finding" that certain information had not in fact been provided to the board (as he purported to do in the first four lines of para 299). He might have been able to make an assumption that certain information was not provided, but it was not submitted that the relevant material should be treated as an assumption and it did not have the appearance of an assumption. It was permissible for Mr Carter to give evidence that certain categories of information were required by the board to perform their functions, as he did in the table in para 299 and in para 300, provided he did not assert or imply that these categories of information were not provided. 18 In para 24 Mr Carter expressed the opinion that the information provided to the board was insufficient to enable 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 its financial position and performance. This appears to imply a "finding" about the totality of the information provided to the board, and on the principles adopted in my 8 July judgment para 24 is therefore rejected. 19 In para 25, Mr Carter said that those deficiencies included a number of things which he listed. The first matter listed, in subparagraph (a), was information available to management, which indicated (he said) that the Group was experiencing serious cash difficulties, that were not disclosed to the board. He said that, in particular, the board was provided with no information concerning substantial growth in overdue trade creditors, and the extent to which the Group was effectively running out of cash. Once again, this implies a "finding" that the board was not provided with any information of the kind stipulated. Para 25(a) is therefore rejected. 20 In reaching my conclusion to reject paras 24 and 25(a), I have not disregarded the "definitional" provision in para 41 of the principal report. As I explained in my judgment on ASIC's application for revision of my 8 July judgment (ASIC v Rich [2005] NSWSC 935), the reasoning upon which I based my rulings on paras 297-300, and now my rulings on paras 24 and 25(a), is reinforced rather than undermined by reference to para 41. Affidavit of 23 July 2004 21 ASIC has pressed paras 8 and 10-12 (AS 87). The defendants do not object to paras 10-12 (DS 84, para 38), which are therefore taken to be read. But they object to para 8. 22 In para 8, Mr Carter referred to para 315 of his principal report, which was part of his discussion of discrepancies in reported earnings between flash reports and management accounts. He noted that according to details in the I:drive, the file for the January 2001 management accounts was last modified on 11 April 2001. He said that all but three insignificant individual general ledger account reconciliations were last modified by 22 March, and asserted that the preparation of the reconciliations is the last substantive step for the finalisation of the management accounts. 23 Both ASIC (AS 87, para DS37) and defendants (DS 84, para 37) relied on the reasons given at [391] to [396] of the 5 May judgment, ASIC to say that para 8 should be received and the defendants to say that it should be rejected. My 5 May judgment was delivered before the Court of Appeal reversed my ruling on the general inadmissibility of Mr Carter's principal report, and so the application of my reasoning to the present circumstances is not straightforward. 24 To the extent that, in para 8, Mr Carter gave evidence by observation as to the "last modified" dates in computer records, he was giving evidence of observation which is admissible (5 May judgment, at [395]). His opinion that the three ledger reconciliations that were last modified at other times were "insignificant" is a permissible expression of expert opinion by a forensic accountant and should be allowed on that basis (5 May judgment, at [393]). His statement that the preparation of the reconciliations was the last substantive step for the finalisation of the management accounts, which I have construed as a statement about One.Tel's management accounts rather than about the general practice of preparation of management accounts (5 May judgment, at [394]), should be rejected. Its probative value is substantially outweighed by the danger of unfair prejudice to the defendants and also confusion and undue waste of time, having regard to my view (at [394]) that Mr Carter's opinion on this matter is likely to have been influenced by his and his staff's discussions with personnel from One.Tel (see, mutatis mutandis, the reasoning process more fully elaborated in my 8 July judgment at [37]-[44]). Affidavit of 22 October 2004 25 ASIC has pressed paras 2 and 4-6 (AS 87). The defendants do not object (DS 84, para 43). Therefore this material is taken to be read. Affidavit of 2 November 2004 26 ASIC has pressed the whole of this affidavit except for para 10 (AS 87). The defendants' response is that the material pressed by ASIC is relevant only to Mr Carter's credibility and is therefore inadmissible under s 102 of the Evidence Act (DS 84, para 44; DS 86, para 26). ASIC's submission (AS 95, para DS44) is that the evidence in this affidavit does not go only to Mr Carter's credibility, and is relevant to the question whether the court ultimately finds that his evidence is based on his specialised knowledge as required by s 79, because evidence concerning his independence, objectivity and experience would increase the probability that this would be so. 27 In my opinion Mr Carter's statements are inadmissible under s 102 to the extent that they are mere assertions of independence and objectivity. The whole of para 3, the fifth and sixth sentences of para 4 (from "I gave my opinions independently" to "any former director of One.Tel"), and the first sentence of para 6, are in this category. I agree with the defendants that s 102 reflects the view that the proper forum for assessing such matters is cross-examination rather than evidence in chief. 28 But Mr Carter's statements are admissible to the extent that they give an account of his relationship with ASIC and with members of his staff, and of his thought processes. These matters are relevant to the weight to be accorded to the part of evidence of Mr Carter that I have found to be admissible. The weight of that evidence will be affected by the extent to which it may have been influenced by undisclosed and unproven statements supplied to him or his staff by executive officers of One.Tel. Mr Carter's affidavit of 2 November 2004 is relevant to that issue. In reaching this conclusion I do not accept ASIC's general submission that evidence of independence, objectivity and experience increases the probability that the expert's evidence is based on his specialised knowledge as required by s 79. Affidavit and report of 29 November 2004 29 ASIC has pressed the whole of this affidavit (which is merely formal and not itself in contest), and certain parts of the report (AS 87). There is no dispute as to para 4 of the report (DS 84, para 47), which is accordingly taken to be read. Para 11 is substantially the same in content as para 6 of the affidavit of 2 November 2004. It is relevant to Mr Carter's thought processes in preparing his November report and consequently the circumstances of the preparation of his principal report of 31 May 2002, matters which will go to the weight of Mr Carter's expert opinion evidence. 30 That leaves for consideration certain parts of paras 2 and 3 of the report. In AS 87 ASIC said: "The following parts of the accompanying report are pressed: 2, as ruled upon in 5/5/05 Judgment (see paragraph 397 to 417), but pressing certain parts previously rejected, namely: · the words 'and the basis for my selection of one particular trial balance for the purpose of the Report' (in 2nd sentence of 1st paragraph on page 4); · 'And based on this analysis it was decided to rely upon the trial balance obtained from Ferrier's' (in 1st sentence of the 1st paragraph on page 5); · 'In my opinion the difference between the trial balance profit and loss amounts in the management accounts is insignificant' (second sentence in the second paragraph on page 5). 3, as previously ruled upon in the 5 May 2005 Judgment (paragraphs 418 and 419) but with the addition of the first sentence and the opening words of the second sentence 'I say this because', which are now pressed." 31 In DS 84, para 46, the defendants objected to the final paragraph (on page 5) and in particular, the words "with an apology for sending the incorrect file on 8 January 2002", on the ground of hearsay. ASIC's response was that it did not press the particular words objected to. Thus there is no dispute between the parties as to the defendants' objection in para 46. 32 That leaves the objection raised by the defendants in para 45 of DS 84. They said that the parts of the paragraphs (presumably paras 2 and 3) pressed by ASIC have already been subject to rulings by the court, and they embraced the reasons given for those rulings and repeated the submissions they made on that occasion. 33 In my judgment of 5 May 2005 ([2005] NSWSC 417), at [397]-[417], I dealt in detail with para 2 of Mr Carter's report dated 29 November 2004. That judgment was delivered on the premise that the principal report by Mr Carter had been wholly excluded from evidence, an outcome that was reversed by the judgment of the Court of Appeal, leading to the paragraph-by-paragraph rulings on the principal report made in my judgment of 8 July 2005. I am now asked to consider the admissibility of para 2 of the 29 November report in light of those matters. 34 In my opinion the following parts of para 2 are admissible on the ground that the reasoning I employed in my 5 May judgment continues to be applicable: · the first two paras on page 2, and the table on pages 2-3 (see [404]-[405]); · the whole of page 4 (see [406]), but excluding the statement in the table "This trial balance was originally received by ASIC from Ferriers in hardcopy format in December 2001" (see [409]), and also excluding the words in the last para of page 4 "which appears to be a correction of a negative inventory balance for the One.Card entry as at March" (see [407]); · Attachment 2, except for the words "which appears to be a correction of a negative inventory balance for the One.Card entry as at March" (see [408]); · Attachment 3 (see [411]-[413]). 35 The second sentence of the second paragraph on page 5 is rejected for the reasons given at [414], which continue to be applicable. As previously mentioned, the words in the last subparagraph of para 2, "with an apology for sending the incorrect file on 8 January 2002", are not pressed by ASIC (see [415]). 36 However, now that the principal report is partly in evidence, material in the 29 November report that I excluded on the ground that it was irrelevant due to the inadmissibility of the principal report (see [410]) is now rendered relevant and admissible. That material is: · the words in lines 3-4 of page 2, "the basis for my selection of one particular trial balance for the purposes of the report"; · the words in lines 3-5 of page 4, "and the basis the my selection of one particular trial balance for the purposes of the report"; · the words in lines 2-3 of page 5, "and based on this analysis it was decided to rely upon the trial balance obtained from Ferriers"; · the words in the second last and last sentences of the last sub-paragraph on page 5, "has been relied upon and"; · the last sentence in Attachment 2, under the heading "Conclusion"; · the four references in Appendix 3 to Appendix I of the principal report. 37 Para 3 of the 29 November report is a justification by Mr Carter for his statement in Appendix B of his principal report that the trial balance at 20063-71 relates to 31 March 2001 rather than 31 December 2000 as is printed on the worksheet detailing the property pages. In my 5 May judgment I rejected the first sentence and the words "I say this because" in the second sentence but I allowed the remainder of para 3 on the ground that it was evidence of observation by Mr Carter. It now seems to me that the whole of para 3 should be allowed as a statement by him of an opinion about the date of the identified trial balance based on the reasoning that it sets out. As the reasoning on its face supports the conclusion, I would not be justified in excluding it on the ground of extraneous influences, having regard to the Court of Appeal's judgment. Affidavit and report of 21 December 2004 38 ASIC has pressed the whole of the affidavit (which is formal and non-controversial, although Exhibit PRC-2 which is referred to in para 3 is the subject of objection) and the following paragraphs of the accompanying report: · 1-3; · 5 and 1st sentence of 6; · 13, 14(a), 14(b), 15, "as ruled upon in 5/5/05 Judgment (see paragraphs 420 to 426)"; · 16, but only on the corrections to paras 40, 108, 244 and Appendix O, paragraph 16(a). 39 In DS 84, paras 49-52, the defendants objected to part of para 3, para 5, and the first sentence of para 6 together with Exhibit PRC-2. They also objected to paras 13-15. They did not object to para 16, to the extent pressed by ASIC (DS 84, para 53) and therefore that material is taken to be read. 40 The objection to para 3 is only to the words "This is consistent with my observation at paragraph 7 of my affidavit of 14 April 2004, that". The objection is on the basis that the defendants objected to para 7 of the 14 April affidavit. I have held ([2005] NSWSC 939 at [48]) that para 7 of the 14 April affidavit is rejected. The quoted words from para 3 of the 21 December report are rejected for the same reason. 41 In para 5 Mr Carter noted that on 7 December 2004 he was provided with a listing of the amounts admitted, as payable to creditors, by the One.Tel liquidators. Exhibited to the affidavit accompanying his December report was a spreadsheet concerning creditors, provided to him by the One.Tel liquidators (Exhibit PRC-2). Mr Carter noted that the total amount of debts and claims in the "admitted creditors" list was much higher than the total of the aged creditors listing as at 29 May 2001 and he then set out to reconcile the two numbers. He said his work was incomplete, but observed that the larger differences appeared to be explained by a number of matters that he listed. In the first sentence of para 6 he said that some of the identified differences implied that One.Tel appeared to have owed more money to its creditors at 29 May than Mr Carter had taken into account in the analysis in his principal report. 42 The defendants submitted (DS 84, para 50b) that there was no pleaded issue to which this evidence would relate. I agree with ASIC, however, that this evidence is relevant to the issue in the proceedings as to the quantum of the creditors of One.Tel when the administration commenced (AS 95, para DS50). The defendants also drew attention to Mr Carter's statement that his work was incomplete, and contended that the assertions made by Mr Carter were bad in form because he had made no attempt to identify the amounts to which he had referred only in a summary way. I agree with ASIC that these matters are not grounds for rejecting the evidence, but go only to weight. 43 Finally, the defendants submitted (DS 84, para 50d) that this material would introduce forensic issues as to the composition of the claims of the "admitted creditors" (a list covering 58 pages of close type), and allied matters, which would be of marginal if any relevance to the issues. If the evidence were admitted, they said, the pursuit of these matters would be likely to result in much time being wasted in a forensic inquiry which would ultimately be unlikely to assist the court. In my opinion there is real substance in this submission. Any meaningful inferences to be drawn from the comparison between the liquidators' list of admitted creditors and the aged creditors report would require not only a detailed comparative assessment by the witness but also substantial efforts of assimilation by the defendants, and would in all probability lead to fairly extensive cross-examination. When one bears in mind the differences in criteria likely to have been used by the liquidators for the purposes of admitting creditors in the liquidation, and by those responsible for preparing aged debtors reports, there would only be, in my view, a dim prospect that any proposition of general utility would emerge from the process. In other words, in all probability the probative value of this evidence, when the differences between the two lists are explored, would be seen to be slight or non-existent. Mr Carter is scheduled to return to give further evidence for six days (after a much longer cross-examination last year), in a timetable which will have ASIC complete its evidence just before the Christmas vacation. In the interests of other litigants as well as the parties, it is very important to avoid any unproductive use of the court's time. There is a real danger, at this stage in a very long trial, that cross-examination of Mr Carter on these matters would consume a large amount of time, not provided for in the schedule. There is also a real danger that the outcome would be confusing or misleading. I think this is the very kind of case contemplated by the second and third criteria mentioned in s 135 of the Evidence Act. The appropriate course is to exercise the discretion and exclude the evidence comprising para 5 and the first sentence of para 6 of the 21 December report, and Exhibit PRC-2. 44 In paras 13-15 Mr Carter responded to a submission made on behalf of the defendants (DS 39, para 21), in which it was contended that the management accounts for certain unspecified months were not final, complete or accurate, but were recognised and dealt with by management at the time as significantly understating actual EBITDA, by reason of the disruption which One.Tel was experiencing in 2001 to its billings. Mr Carter set out that submission in para 13 of his December report, and in para 14(a) and (b) he made the point that a billing problem should not lead to an understatement of actual EBITDA, because proper accounting processes would include accrual of income earned but not yet billed. In para 14(c) (which is not pressed) Mr Carter referred to some directories on the I:drive which indicated to him that entries had been made of the type that he would expect to be created to recognise revenue earned but not billed. In para 15 Mr Carter said that "accordingly" he did not understand the assertion that management accounts would significantly understate actual EBITDA. 45 In my 5 May judgment (at [420]-[426]) I held that para 14(c) should be rejected because it appeared from the evidence that it was an exercise open to extraneous influence, but the remainder of paras 13-15 should be allowed on the basis that they were an expression of Mr Carter's expert opinion as an accountant about proper and usual accounting treatment of earned but unbilled income in a telecommunications company such as One.Tel. The defendants submitted (DS 84, para 51) that this material is argumentative and assumes the role of counsel rather than expert witness. I disagree. Although Mr Carter's opinion was expressed in rebuttal of a submission by counsel for the defendants, it is an opinion based on Mr Carter's expertise drawing attention to, in effect, something he considered to be an accounting error in the submission. In my opinion, therefore, paras 13 and 14(a) and (b) are admissible. However, para 15, which expressed a conclusion based upon all three sub-paragraphs of para 14, only two of which are now pressed, cannot be allowed. What remains is an expression of Mr Carter's expert opinion about proper accounting processes for the accrual of income earned but not yet billed, which (in the absence of para 14(c)) is not in terms specifically applied to the accounts of One.Tel. Mr Carter's draft correcting report in AS 93 46 The defendants do not object to this (DS 84, para 54). Conclusions 47 As I understand the position, my rulings in this judgment complete the assessment of the admissibility of the entire body of Mr Carter's evidence.

ASIC v Rich

At a glance

Court

Decision date

Before

Catchwords

Source

Catchwords

Judgment (12 paragraphs)

Parties

Legislation Cited (1)

Cases Cited (4)

Cited By (2)