T 11,423
24 In his affidavit, Mr Rich dealt with the Merrill Lynch conference of 4 April 2001, in connection with which the 4 April announcement was made to the market. He said (para 1310) that when he returned to the Sydney office from Europe on 2 April 2001, he reviewed a draft of the Merrill Lynch presentation. He said he reviewed the forecasts made in the draft document to the end of the financial year, and compared them with the forecasts contained in the March 2001 board papers, to satisfy himself that there was a reasonable margin between the forecasts for the end of year position in the board papers and those contained in the presentation. He also said (para [1297]) that at the date of the March board meeting and the date of the Merrill Lynch conference his state of mind was that the outlook for One.Tel was positive and that the business was "on track" to reach the market forecasts summarised in the March board papers.
25 As to the basis for the forecasts to the March board meeting, Mr Rich deposed to a telephone conversation he had with Mr Silbermann and Mr Hodgson when he was in London, on 26 March 2001, in which they told him they believed a substantial amount of billing data was stuck in the system and had not actually been billed, and that the total unbilled data could be as much as $40 million (para 1229). Mr Rich said (paras 1241-1248) he had another telephone conversation with Mr Silbermann and Mr Hodgson while he was in London, early in the week of 26 March 2001, lasting for over an hour, in which (he said) they "talked him through" the work they had done on financial forecasts for the remainder of the year to 30 June 2001. He said that by that date Mr Beck and the billing team had reported that they had found about $28 million of unbilled data, and that Mr Silbermann and Mr Hodgson had undertaken some detailed financial analysis to confirm how much more billing data was likely to be identified, and had concluded that another $12 million or more was likely to be found. He also said that their cash forecasts for the rest of the year effectively took up cash inflows of about $20 million to reflect expectations of additional buildings over April, May and June to reflect the billing of this additional data. Their forecasts also included, according to Mr Rich, an amount of cash inflows for additional collections, reflecting the re-presentation of direct debits dishonoured in March, increased resourcing in the collections area and the impact of a concerted effort to reduce outstanding subscriber debt, including outstanding debt in the CLEC area of the business.
26 Mr Williams SC made his objection on 28 June. During the course of cross-examination on that day, Mr Macfarlan QC asked questions about Mr Rich's telephone conversation with Mr Silbermann and Mr Hodgson in the week of 26 March 2001 (T 11,385). Then there was cross-examination directed towards testing the basis of the views of Mr Silbermann and Mr Hodgson by reference to documents including cashflow spreadsheet 2403C and the billing run information in spreadsheet 2403C Inflows No 3, and challenging the basis for Mr Rich's view about the existence of substantial unbilled data. Eventually Mr Macfarlan suggested to Mr Rich (T 11,421) that the projections that led to the figures presented to the board "had no reasonable basis at all" and were "completely matters of wishful thinking". Then he took Mr Rich to spreadsheets, apparently in order to show that the actual receipts in April and May were substantially lower than the board forecasts in March, and he suggested to Mr Rich that his experience at One.Tel in April and until 17 May when he left the company had demonstrated that the forecasts given to the board in March were completely unwarranted (T 11,422).
27 Shortly afterwards, Mr Williams made his objection (T 11,423-6). The particular question to which he raised objection at T 11,423 was:
"Q. You believed that those matters [the likely cashflow position of the remainder of the financial year, the end-of-year cash balance figure for the Group and the Australian contribution to the cashflow of the group for March, April, May and June 2001] would have similarly been regarded as of significance by members of the board of directors?"
Mr Macfarlan later explained (T 11,432) that if Mr Rich had answered that question in the affirmative, he would have put it to Mr Rich that this was a reason why he would need to take particular care in what he was doing concerning cashflow forecasts.
28 Mr Williams contended that there was no allegation in ASIC's pleading that the defendants had caused misleading forecasts to be presented to the March board meeting or had failed to provide additional information to the board to prevent the forecasts from being misleading. He did not contend that the questions were irrelevant, but claimed that they constituted an attempt by ASIC to erect a new, unpleaded case. He invited the court to exercise its discretion to exclude the evidence adduced by the questions, under the Evidence Act 1995 (NSW), s 135. He stated that in the absence of any pleaded case containing such allegations, the defendants had made forensic decisions relating to the questions to be put to the witnesses called by ASIC, and he submitted that they would be unfairly prejudiced if additional allegations were permitted at this stage.
29 On this occasion, the submission that the defendants would suffer unfair prejudice if the line of questioning was allowed was not developed by specific reference to the transcript of cross-examination of ASIC's witnesses. However, when a similar line of questioning was objected to a little later, on 29 June, Mr Williams referred to the transcript of his cross-examination of Mr James Packer (T 11,502-3), and later he supplied more extensive written references to the transcript, marked as DS 103 and discussed below.
30 Mr Macfarlan submitted (T 11,424-5, T 11,432-7) that the line of questions was justified on three grounds.
31 First, he said that questions designed to show that the forecasts presented to the board were without foundation would shed light on the actual financial position of the company at the time of the March board meeting, and what Mr Rich knew or should have known about it. ASIC contends (T 11,432) that Mr Rich's adoption of forecasts that had no reasonable basis is an indicator of his knowledge of the desperate position of One.Tel; or an indicator that he should have known of that position if he did not in fact know, as he had the opportunity to discover the true position when he involved himself in the preparation of the forecasts.
32 Second, he referred to paras 37, 41-48 and 50 of the Fifth FASC, regarding the 27 February and 4 April announcements to the market, since they contained forecasts having no reasonable factual basis, as Mr Rich knew or ought to have known. Mr Macfarlan submitted that his questions related to that pleading. He drew attention to para 1310 of Mr Rich's affidavit (to the general effect that Mr Rich satisfied himself about the forecasts in the 4 April statement by comparing them with the March board papers). He also referred to Mr Rich's evidence in paras 1241-1248 about his long telephone conversation with Mr Silbermann and Mr Hodgson before the March board meeting and his belief about unbilled data and additional billings and collections.
33 On this point, Mr Williams pointed out that the particulars to paras 40, 42 and 46 (which allege that there was no reasonable factual basis for the public statements) merely say "see the Schedule". He emphasised that the Schedule makes allegations about the January, February, March and April circumstances, which are matters of fact at those times. He said (T 11,428) that there is no allegation about forecasts, and no allegation that the forecasts lacked a factual basis for some other reason (such as that the actuality turned out to be different from what was forecast).
34 Third, Mr Macfarlan submitted that his questions went to Mr Rich's credit (T 11,432); if so, they would be admissible, notwithstanding the credibility rule, because of s 103 of the Evidence Act, provided that the evidence has substantive probative value having regard to the matters identified in s 103(2).
35 I agreed with Mr Macfarlan's first two submissions as to the relevance of this line of questioning, and in the circumstances, it was unnecessary for me to make a ruling on credit alone. Relevance, per se, is not an issue but identifying the ways in which the evidence is relevant to ASIC's pleaded case is an important step towards deciding whether ASIC has embarked upon an unpleaded case.
36 Questions about the lack of any adequate basis for forecasts might well suggest, in isolation, the pursuit of an unpleaded case to the effect that the defendants breached their duty of care by causing the March board papers to contain unsupportable forecasts. But when the line of questioning is considered as a whole in the context of the pleadings, it can be seen that the questions relate to ASIC's pleaded case in two ways.
37 First, the questions relate to the contraventions pleaded against the defendants, concerning the Group's actual financial circumstances at the end of March 2001, and whether Mr Rich and Mr Silbermann knew or ought to have known of the true financial position set out in the Schedule. Establishing that there was no reasonable factual basis for the March forecasts would entail rejecting the claim that there was unbilled data of substantial value as at 30 March, a matter material to the Group's financial position at that time. If it could be shown that Mr Rich adopted unsupportable forecasts in late March 2001, that together with other evidence might (at least) lead to an inference, either that Mr Rich knew of the Group's actual deteriorating position and was putting forward unsupportable forecasts so as to mislead the board (Fifth FASC, para 22(a)); or that the ways in which the forecasts lacked a reasonable basis were readily discoverable by him and would, if discovered, make him realise the Group's deplorable financial position (Fifth FASC, para 22(c)).
38 Second, if Mr Rich's evidence were accepted, then arguably there would be a reasonable basis for the forecasts in the 4 April statement, to the extent that there was a reasonable basis for the forecasts in the March board papers. That has made it clearly relevant for ASIC to explore in cross-examination whether there was a reasonable basis for the forecasts that were made to the board in March, even though ASIC's pleaded allegations about the lack of a reasonable factual basis for the forecasts are particularised by reference to the actual financial circumstances pleaded in the Schedule. If ASIC were able to show that the forecasts in the March board papers had no reasonable basis, Mr Rich's defence to ASIC's case with respect to the 4 April statement would be destroyed, to the extent that his defence relied on the March forecasts to support the 4 April statement. Therefore the answers to questions on this subject would potentially have a significant probative value.
39 Those findings about relevance lead me to the conclusion that there is no substance in Mr Williams' submission that, in pursuing this line of questioning, ASIC is seeking to establish an unpleaded case.
40 In the absence of a grant of leave to amend, it will not be permissible for ASIC to use the evidence adduced in cross-examination for purposes outside its pleaded case. But it will be permissible for ASIC in final submissions to attack Mr Rich's defence to the pleaded case and his evidence in support of his defence. Once it is understood that ASIC's permissible use of the answers it receives in cross-examination will be limited to proving its pleaded case and challenging the defences and the evidence that the defendants have chosen to adduce to make out those defences, questions of danger of unfair prejudice tend to fall away. Specifically, in my view there is no danger of unfair prejudice, sufficient to warrant intervention under s 135, in permitting ASIC to pursue a line of questioning directed to showing that the forecasts presented to the board at the March board meeting had no reasonable basis, given the relevance of those questions to ASIC's pleaded case and the fact that Mr Rich's own evidence links the March forecasts to his defence to the pleaded case about the 4 April announcement.
41 Mr Williams did not precisely identify the evidence to which he referred when he objected to the "line of questioning", but I suggested (T 11,432) that the line of questioning began on T 11,421, and after he did not submit otherwise, I expressed my ruling in terms identifying that line of questioning (T 11,446).