A declaration of contravention is conclusive evidence of the matters referred to in subsection 1317E(2).
6 The declarations and orders sought include the following paragraphs to make it clear that they do not affect the position of other defendants to the proceedings:
"The Court makes the following declarations and orders noting:
(a) that they are intended to be operative only between the plaintiff and the third defendant and are not intended to be binding on or in any way affect any other defendant in the proceedings;
(b) that in particular the declarations concerning the conduct that constituted the contraventions of the Corporations Law are not binding upon or conclusive evidence of facts against any other defendant in the proceedings."
7 In ASIC v Rich & Ors (No. 2) (2003) 21 ACLC 672; 44 ACSR 682 Bryson J made declarations pursuant to s 1317E in relation to the conduct of Mr Keeling, a joint managing director of One.Tel. At para 18 His Honour said of s 1317F that:
"The only matter which could be conclusively established is matter mentioned in terms in subs 1317E(2), such as matter relating to conduct of Mr Keeling which constituted a contravention. The proposed declarations contain statements of circumstances of Mr Keeling's conduct, as is indispensably necessary to identify the conduct. I do not think that it would be correct, or that it would be reasonably arguable that circumstances so referred to would be conclusively established for the purposes of establishing the circumstances of anyone else's conduct."
8 Hence the declarations which I am asked to make will not affect the position of the first and fourth defendants. However the extent to which s 1317F makes declarations about the third defendant's conduct conclusive in respect of other proceedings where his conduct is in issue, is a matter to which I will return.
9 I deal first with the declarations sought pursuant to s 1317E. Two things can be noted at once. First, that before a declaration can be made I must be satisfied that the third defendant has contravened s 180(1). Secondly, if I am so satisfied, I have no discretion to refuse to make the declaration.
10 As a general principle a Court does not make declarations on matters relating to public rights, or rights analogous thereto, by consent or on admissions, but only if it is satisfied by evidence. (Williams v Powell [1894] WN (Eng) 141; Gramophone Co Ltd v Magazine Holder Co (1911) 28 RPC 221 at 225-227; Termijtelen v Van Arkel [1974] 1 NSWLR 525; Wallersteiner v Moir [1974] 3 All ER 217; Metzger v Department of Health and Social Security [1977] 3 All ER 444 at 451; BMI Limited v Federated Clerks Union of Australia (1983) 51 ALR 401; Young, Declaratory Orders, 2 ed para 601).
11 Having regard to s 1317F, and the disqualification order which might be made consequent upon the declaration under s 1317E, the present case involves public or other analogous rights.
12 One of the reasons the Court may decline to make declarations by consent is the absence of a contradictor. However because s 1317E provides that the Court must make a declaration if satisfied that the person has contravened a civil penalty provision, the absence of a contradictor is only relevant if it means that the Court does not reach a state of satisfaction on the materials presented.
13 The materials presented in this case included an Enforceable Undertaking given by the third defendant to the plaintiff and accepted by it pursuant to s 93AA of the Australian Securities and Investments Commission Act. It also included a Statement of Agreed Facts which contained admissions by the third defendant of particular duties he owed in the circumstances, and of breaches of those duties. The statement also contained admissions by the plaintiff that as a non-executive director the third defendant relied on financial information provided to him by the executive directors and officers of the company and that based on that information the third defendant believed the financial position of the company to be secure when he resigned on 30 March 2001.
14 One.Tel's annual report to 30 June 2000 and reports by liquidators to creditors of One.Tel Limited and its subsidiaries were tendered. The plaintiff also read affidavits by two experienced public company directors about the roles ordinarily performed by chairmen of listed public companies in Australia with particular reference to their ensuring that boards were kept fully informed of material financial information. The plaintiff also tendered reports of a chartered accountant, Mr Carter, who specialises in what is called forensic accounting. He described the financial position of the One.Tel Group, the financial information available to management and that provided to the Board. There was no objection to the admissibility of any of this evidence.
15 Although a declaration cannot be made under s 1317E unless the court is satisfied that the contravention has occurred, the material which may produce that satisfaction may include a statement of agreed facts and admissions by the parties. That was the course taken in ASIC v Rich & Ors (No. 2) at [2] and [10]. It is consistent with the course adopted by Austin J in Dean-Willcocks Pty Ltd v Commissioner of Taxation (No. 2) (2004) 49 ACSR 325; 22 ACLC 1034. As Austin J observed in the latter case (at 331, [28]):
"A court is never bound by admissions made inter parties or in the pleadings: Termijtelen v Van Arkel [1974] 1 NSWLR 525. It may decline to act on admissions if, for example, they are made so as to attract a jurisdiction that is not naturally present. However, in most cases it is appropriate to allow and even encourage parties to simplify litigation by making admissions so as to achieve the just, quick and cheap resolution of their dispute. …"
16 The evidence and admissions established the following matters. One.Tel commenced business in May 1995 as an Optus GSM service provider in Australia. The third defendant was the non-executive chairman of One.Tel from that time until 31 December 1995 and from 25 July 1997 until his resignation on 30 March 2001. He was also chairman of the finance and audit committee from at least 1 July 2000 until 30 March 2001. He is a chartered accountant. From May 1992 to January 1996 he was the chief financial officer of Optus. From January 1996 to 30 June 1999 he was the finance director of John Fairfax Holdings Ltd.
17 One.Tel Limited was listed on the ASX in November 1997. By the time administrators were appointed on 29 May 2001 it had operations in Australia, the United Kingdom, France, Germany, Switzerland, the Netherlands, Hong Kong and Singapore. As at 31 December 2000 the One.Tel Group had 2.4 million customers worldwide. The Group employed 3,000 employees.
18 Its business expanded rapidly. By 29 May 2001 its business included the re-selling of Optus mobile phone services, the re-selling of Telstra fixed wire local and long distance and international calls, the re-selling of Telstra internet services, the sale of pre-paid phone cards for long distance calls, and the provision of mobile phone services using the group's own network.
19 The 2000 Annual Report records that in twelve months to August 2000 the number of customers increased from 642,000 to 2 million. Staff numbers doubled over that period. It signed contracts in 1999 for the rollout of a national mobile phone network. Those contracts were worth over $1.1 billion.
20 In the twelve months to 30 June 2000 One.Tel raised $818.5 million through the issue of shares and borrowed $139.8 million. Its payments to suppliers and employees over that period exceeded receipts from customers by over $170 million. It spent $525.6 million on the purchase of licences and $87.5 on plant and equipment. At 30 June 2000 it held cash or cash equivalents of $335.7 million. Unsurprisingly, given the rapid expansion of its business, it had a great appetite for cash.
21 The evidence before me, which was not tested by cross-examination, established that as at 28 February 2001 there was a deficiency in net liquidity of $24.5 million which increased to $98.7 million at the time the administrators were appointed. More relevantly for present purposes, there was a liquidity surplus of $44.8 million at 31 December 2000 but a deficiency in net liquidity of $22.4 million as at 31 March 2001.
22 Mr Carter's reports established a progressive deterioration of the financial position of the Group between 1 January and 17 May 2001, including trading losses of $83.6 million in the first four months of 2001. His evidence also established that substantially more cash was expended in the operations over that period than had been forecasted or budgeted.
23 Mr Carter's report, which again I emphasise was admitted without objection and was not the subject to cross-examination, established that the information supplied to the Board was deficient.
24 His report stated:
"25. In my opinion these deficiencies included:
(a) information available to management, that indicated the Group was experiencing serious cash difficulties, that was not disclosed to the Board. 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
(b) the Board was not informed of the cause and true extent of material difficulties in the collectability of debtors. Those difficulties meant that the Group's losses were understated and expected cash collections overstated
(c) there were differences between the earnings information available to management, and the earnings information provided to the Board. In my opinion, the Board was not advised of the extent of the losses the Group was actually incurring. …
(d) there were a number of key events and transactions which were not made known, or fully and accurately made known, to the Board.
25 The problem was not that the systems for recording financial information were inadequate. The problem was that although important information was available, that which was actually provided to the Board was limited and inaccurate. This was demonstrated in two particular respects: the statement of cash balances and the omission of data on the aging of debtors.
26 The Board received monthly reports called "Flash Reports" shortly after each month end and Board papers before each Board meeting. There was no Flash Report for the month of December 2000, but Flash Reports for January, February and March were sent to directors on 7 February, 5 March and 3 April respectively. Board papers were provided for meetings held on 25 January 2001 and 30 March 2001. These Board papers were tendered.
27 The Flash Reports provided detailed month and year-to-date results compared to forecasts in relation to the number of subscribers, revenue, gross margin, operating costs, EBITDA, cash balance, and a brief explanation for variances between actual and forecast results. The Board papers contained operational and financial data which usually included a comparison of actual to forecast results for a month, quarter, half-year of full-year as applicable, in generally the same areas (although with some variations).
28 The Flash Report for January 2001 reported a Group cash balance as at 31 January 2001 of $86 million. This was the cash in the bank account. What was not disclosed was that cheques totalling $7 million had been drawn, but not handed over until after month end so that the creditors' payments were overdue. Another $8 million had been pledged to secure international lease liabilities and was not available for payment of other obligations. This was not disclosed in the information provided to the Board. Nor did that information disclose that there were overdue Australian creditors of about $24.4 million as at 31 January 2001.
29 It is unnecessary in these reasons to detail all the evidence in relation to what was not disclosed or was inaccurately stated in the reports to the Board. The problems of reporting to Board members continued to at least the end of March 2001. The deficiencies are summarised over three pages in paragraph 303 of Mr Carter's report, exhibit C. Matters not reported or not accurately reported included:
"(a) the available cash balance, including the cash pledged and the amount of un-presented cheques, so that the Board was not in a position to assess the cash available to pay outstanding liabilities
(b) the extent to which creditor payments were deferred thereby resulting in an impression that the Group had higher cash balances and lower cash usage than it would with payment of overdue creditors. Further the deferral of payments resulted in a more favourable comparison against forecast than would otherwise have been the case
(c) cash balances were not reported by individual operations resulting in the cash balance deficiency in the Australian operations at the end of February 2001 and again in April 2001 not being disclosed
(d) there was a transfer of $26 million from the UK operations to the Australian operations on 28 February 2001, which resulted in the UK operations having insufficient cash to pay overdue trade creditors
(e) aging creditors including comparisons to prior periods to enable the Board to assess the Group's immediate (and increasing) cash requirements and the extent of pending cash position deficiencies
(f) details of the Australian liquidity position which would have revealed that the Australian operations had insufficient cash and liquid assets to pay debts that had been incurred."
30 The second principal deficiency was in the reporting of the delay in collecting debts. This had obvious implications not only for the reliability of reported earnings but for the reliability of forecasted cash balances. The information provided to non-executive directors did not include a detailed aging of the debtors' balance or information upon which an assessment could be made of the adequacy of the provision for doubtful debts. The 30 March 2001 Board papers reported that the amount of debtors outstanding over 90 days was $84 million and that the provision against bad and doubtful debts of $54 million had been made, which was stated to be adequate. At that time Australian debtors totalled $152 million of which $84 million was greater than 90 days. Of these $61 million was greater than 180 days and $48 million was greater than 330 days. The provision of $54 million for bad and doubtful debts was insufficient to cover even Australian debtors greater than 180 days. Without the additional aging information the Board would not have been able to consider the adequacy of the provision.
31 It was Mr Carter's opinion that without detailed information of the factors affecting the reported cash balance, cash flow and the deterioration in the cash position, including information as to the aging and collectability of debtors and the adequacy of the provision for doubtful debts, the Board was not in a position to monitor management, or properly assess the financial position and performance of the Group, or properly and promptly detect and assess any material adverse development affecting its financial position and performance.
32 Monthly management accounts were not finalised until after the Flash Reports were provided to the Board. Nonetheless there were startling discrepancies between the Flash Reports for month end and the management accounts. The Flash Reports were not revised once the management accounts were available so that the Board was not made aware of the discrepancies. For the months of January and February 2001 the EBITDA loss reported to the Board was $7,693,000 and $3,664,000 respectively, whereas management accounts disclosed losses of $20,869,000 and $16,000,032 respectively.
33 I have not dealt with all of the evidence in relation to the deficiencies of information supplied to the Board. What I have described is sufficient for the purposes of dealing with the present application.
34 It is not suggested that the third defendant was aware of any of these discrepancies or of the deficiencies in the information he and the Board received. He admits that he did not take reasonable steps to ensure that the information provided to the Board was accurate and adequate, and that by omission he breached his duty under s 180(1) of the Corporations Law to exercise his powers and discharge his duties with the degree of care and diligence that a reasonable person would exercise if he or she were a director in the corporation's circumstances and occupied the office held by, and had the same responsibilities in the corporation as, the third defendant.
35 The 1998 final report of the UK Hampel Committee on Corporate Governance stated:
"3.4 The effectiveness of a board (including in particular the role played by the non-executive directors) is dependent to a substantial extent on the form, timing and quality of the information which it receives. Reliance purely on what is volunteered by management is unlikely to be enough in all circumstances and further enquiries may be necessary if the particular director is to fulfil his or her duties properly. Management has an obligation to ensure an appropriate supply of information. In addition, we endorse Cadbury's view (Report 4.8) that the chairman has a particular responsibility to ensure that all directors are properly briefed on issues arising at board meetings."
36 In ASIC v Rich (2003) 174 FLR 128; 44 ACSR 341; 21 ACLC 450, Austin J held that it was reasonably arguable that the third defendant had the responsibilities pleaded in paragraph 9 of the Statement of Claim and as set out in paragraphs 14 and 15 of the judgment. In reaching that conclusion his Honour carefully reviewed the authorities, the literature and expert evidence which was also adduced before me as to the responsibilities ordinarily undertaken by chairmen of public listed companies in Australia. The third defendant has admitted that he had responsibilities: