Q. But at board level, they participated didn't they?
A. Yes, but they often didn't even attend meetings because they felt that they couldn't contribute to them. McComb would be a good example of that. "
274 The fact that Mr Liu as chief financial officer and Mr Hartono as the former managing director, dealt more with Mr Qureshi than did the other directors does not mean that the other directors delegated their powers to a subset of the board.
275 As previously noted, no evidence was adduced from the remaining three directors, Messrs McComb, Ford and Kloester. Had there been an informal delegation of the directors' functions to the executive team, I would expect evidence to that effect to be led from the other directors. There was no explanation for the plaintiffs not having called the other directors, except that they contended that the other directors had delegated their powers to Messrs Hartono, Liu and Mekrizis, a contention I reject.
276 For these reasons I do not accept that the question whether the directors of Buzzle were accustomed to act in accordance with the instructions or wishes of Apple or Mr Likidis is to be answered by asking whether Messrs Hartono, Liu and Mekrizis were so accustomed. I should note that because it was not contended that Mr Qureshi was a de facto director, no issue was raised (and no submissions were made) as to whether Mr Qureshi was so accustomed.
277 The question then is whether a governing majority of Buzzle's board was accustomed to act on the instructions or wishes of Apple or Mr Likidis.
The Pleaded Case
278 Paragraphs 37 and 37A of the second further amended statement of claim allege that by reason of numerous matters enumerated in those paragraphs, Apple was a director of Buzzle by the end of December 2000 within the definition of "director" in sub-para (b)(ii) in s 9 of the Corporations Law. Paragraph 37B alleges that by reason of further enumerated matters Buzzle had become a director within the meaning of sub-para (b)(ii) by the end of January 2001. Paragraph 37C alleges a further matter by reason of which Apple is said to be a director of Buzzle by the end of February 2001. The same particulars to those paragraphs are relied on to allege that Mr Likidis was a director of Buzzle from at least December 2000, January 2001 and February 2001. The plaintiffs allege that Apple is vicariously liable for Mr Likidis' conduct with respect to his actions in his role as director of Buzzle.
279 In final submissions, counsel for the plaintiffs identified a number of matters in respect of which it was alleged the Buzzle board acted in accordance with the wishes and instructions of Apple which were not pleaded. Notably, the plaintiffs contended that Buzzle acted on Apple's instructions in seeking to identify and approach third party investors with a view to recapitalising or restructuring business, and acted on Apple's instructions in seeking to pursue a proposal for de-merger, and in the meantime continued to trade and incur debt. These are not matters by reason of which the plaintiffs alleged that the directors of Buzzle were accustomed to act on Apple's instructions. That is to say, the plaintiffs rely upon earlier conduct of the directors of Buzzle to establish that Buzzle had become accustomed to act on Apple's or Mr Likidis' instructions or wishes. If the earlier contentions are not made good, the plaintiffs do not establish that the directors were accustomed to act on Apple's instructions or wishes by establishing that the directors acted on Apple's instructions or wishes on the later matters.
280 A number of the instructions and wishes of Apple on which it is said that the directors of Buzzle acted up to November and December 2000 have already been addressed. I will deal with them seriatim. The first alleged instruction is said to have been given by Mr Likidis on 28 June 2000 before Buzzle was incorporated, namely that Buzzle only sell Apple products to the exclusion of any other computer hardware, software or accessories. Negotiations on what non-Apple products Buzzle could sell did not constitute the giving of an instruction, or the expression of a wish, as to how the directors of Buzzle should act in that capacity. It was no more than a third party seeking to negotiate the terms of a contract. There was only hearsay evidence that Apple had expressed such a wish. If it did, the wish was not agreed to because the Reseller Agreement was not on those terms.
281 Secondly, the plaintiffs allege that Apple instructed the directors of Buzzle to appoint an accountant to conduct due diligence of each of the proposed vendor companies and to provide copies of the due diligence reports and profit and loss statements for each of the proposed vendor companies to Apple, and that the appointed directors followed those instructions and caused Buzzle to appoint an accountant to perform due diligence and provide reports to Apple. I have dealt with this allegation in the context of the contention that Apple was an officer of Buzzle as at 13 September 2000 (para [103] above). Mr Bright of Arthur Andersen recommended that such due diligence be carried out in respect of each vendor company. No evidence was led that the directors of Buzzle agreed to such a course because of any statement made by Mr Likidis or Apple. Any such requirement was part of a commercial negotiation at arm's length and was not an instruction or wish as to how the directors of Buzzle, in their capacity as directors of Buzzle, should act in the management of Buzzle's affairs.
282 Thirdly, the plaintiffs say that in late July 2000 Apple instructed Buzzle's directors to arrange a due diligence report on Mac's Place following Apple's being informed that Mac's Place had negative assets of approximately $3 million. It is said that Buzzle's directors followed Apple's instructions by arranging for Moore Stephens to prepare a report. There is some confusion here. Mr Likidis requested that a due diligence review be conducted on Mac's Place after he was told by Mr Giles that it had a bit of a hole in its accounts. (See para [56] above.) The deficiency was then thought to be about $1.1 million. I accept Mr Likidis' evidence that he had no involvement in the appointment of Moore Stephens. Had the alleged instruction been given, it was not an instruction to the directors of Buzzle as to how they should act in that capacity in relation to the management of Buzzle's affairs.
283 Fourthly, the plaintiffs allege that Apple instructed Buzzle's directors that Mac's Place must be included in the business to be acquired by Buzzle and that an investor injecting capital into Mac's Place was necessary prior to the merger. It is alleged that the directors of Buzzle followed that instruction. Again, the alleged instruction was not an instruction to the directors of Buzzle as to how they should act in that capacity in managing the affairs of Buzzle. I have dealt with this matter at paras [56]-[59], [70]-[73] and [95]-[99] above. I do not accept that such an instruction was given. Even if it were given, it would not be an instruction as to how Buzzle's directors should act in their capacity as directors of Buzzle in the management of Buzzle's affairs.
284 Fifthly, the plaintiffs alleged that Apple instructed Buzzle's directors that the proposed merger of the vendors' companies' businesses into a single entity was only to proceed if the acquisition of Mac's Place occurred on terms specified by Apple. The plaintiffs allege that Buzzle's directors followed that instruction and caused Buzzle to document the proposed acquisition on terms dictated by Apple. I have dealt with this allegation at paras [95]-[99] above. I do not accept that such an instruction was given. Even if it were, it was not an instruction as to how Buzzle's directors should act in their capacity as directors of Buzzle in relation to the management of the affairs of Buzzle.
285 Sixthly, the plaintiffs allege that Apple gave instructions as to how Aircent should acquire the business of Mac's Place and that Buzzle should purchase Aircent's stock at the merger and procure an allocation of shares in Buzzle Limited to Mr Liu. They allege that Apple gave instructions that Buzzle require Choice Connections to manage the business that Aircent was to acquire from Mac's Place until the business was acquired by Buzzle. They allege that Buzzle's directors followed Apple's instructions and caused their advisors to prepare an asset sale agreement with terms in accordance with Apple's instructions, which was later executed. I have dealt with these allegations at paras [95]-[99] above. I do not accept that in acquiring the assets and business of Aircent, Buzzle acted in accordance with the instructions or wishes of Apple. Buzzle always proposed to acquire the assets and business of Mac's Place which Aircent acquired. If the alleged instructions were given they were not instructions to Buzzle's directors as to how they should act in the management of Buzzle's affairs.
286 Seventhly, the plaintiffs allege that Apple instructed Buzzle's directors in relation to which businesses Buzzle should acquire for the purposes of the proposed merger, as it instructed the Buzzle directors to no longer acquire Mac's Place and to acquire Aircent. It is alleged that Buzzle's directors acted in accordance with those instructions. This is a re-statement of the earlier allegation. Buzzle's directors had already proposed to acquire the business and assets of Mac's Place. I do not accept that the alleged instruction was given. Even if it were given, it was not an instruction as to how the directors of Buzzle should act in that capacity but was a negotiation of commercial terms between parties at arm's length.
287 Eighthly, it is alleged that Apple instructed Buzzle's directors to procure an allocation of shares to Aircent and Mr Thompson and that Buzzle's directors acted in accordance with those instructions and wishes and caused Buzzle's advisors to allocate shares in Buzzle Limited accordingly. I do not accept that such an instruction took place. The allocation of shares to Aircent and Mr Thompson was the result of a commercial negotiation, not as the result of an instruction by Apple on which the directors of Buzzle acted.
288 Ninthly, the plaintiffs allege that Apple instructed the proposed directors of Buzzle that Buzzle provide security to Apple over its assets for the debts owed by the vendor companies to Apple and Buzzle's directors followed Apple's instructions and wishes and provided that security.
289 There is no evidence that any such instruction was given. If it were, it was not complied with. Buzzle's charge secured the obligations of Buzzle and Buzzle Limited to Apple. It did not secure the obligations of the vendor Resellers to Apple.
290 Tenthly, the plaintiffs allege that Apple instructed Buzzle's directors to pay the consideration for the purchase by Buzzle of the businesses of the vendor companies directly to Apple and the directors of Buzzle followed Apple's instructions and wishes. I have addressed this issue at paras [107]-[115] above. No instruction was given by Apple to Buzzle's directors as to how they should act as directors of Buzzle in relation to this matter.
291 Eleventhly, the plaintiffs allege that Apple instructed Buzzle's directors to make an announcement in respect of the proposed merger to the vendor companies' staff and that the directors followed those instructions and wishes and caused Buzzle to circulate an announcement in the terms Apple instructed. The instruction is said to have been given in an email from Mr Likidis to Mr Hartono and Mr Thompson dated 9 August 2000. Mr Likidis deposed that the draft announcement had been prepared by Mr Thompson. I accept that evidence. Mr Thompson did not give evidence. No instruction was given by Apple or Mr Likidis to the directors of Buzzle in relation to this matter. As the defendants submit, the terms on which the announcement of the proposed merger would be made is a trivial matter.
292 Twelfthly, the plaintiffs allege that Apple instructed Buzzle's directors in relation to what future indebtedness it could occur and how it should apply its future cash flows. They allege that Apple instructed Buzzle's directors to cause Buzzle to enter into the Payments Deed which restricted its ability to deal with its future cash flow. The plaintiffs allege that Buzzle's directors followed Apple's instructions and caused Buzzle to execute the Payments Deed which provided in effect that Buzzle would apply its future cash flow as approved by Apple. That was not the effect of the Payments Deed. In any event, no instruction was given by Apple to the directors of Buzle as to how they should act in their capacity as directors in the management of Buzzle's affairs. The terms of the Payments Deed were a matter of commercial negotiation between parties at arm's length. It was open to the directors of Buzzle to agree or not to agree to the terms of the Payments Deed.
293 Thirteenthly, the plaintiffs allege that Apple instructed Buzzle's directors to make payments to the vendors on 3, 27 and 31 October 2000. It is said that Buzzle's directors followed those instructions in causing Buzzle to make the payments to the vendors. The plaintiffs allege that Mr Likidis instructed Mr Hartono to make a payment on 3 October 2000 and that Mr Kidd instructed Mr Hartono and Mr Patterson to make payments on 17 and 31 October 2000.
294 The vendors did not cause Buzzle to make payments on their behalf because of instructions given to them by Apple. The vendors, Buzzle and Apple anticipated that Buzzle would make payments on their behalf to Apple. That was because Buzzle owed those moneys to the vendors. It made no difference whether Buzzle paid the vendors directly and the vendors passed the money on to Apple, or whether, on the vendors' behalf, Buzzle paid the money to Apple. Buzzle's directors were not acting on Apple's instructions because Buzzle made part-payment of its debts to the vendors by making payments towards debts the vendors owed to Apple. Mr Kidd gave no such instructions. He merely provided information as to the quantum of the debts owed by the vendors to Apple which would be reduced by Buzzle's payment.
295 Fourteenthly, the plaintiffs alleged that Buzzle's directors followed the instructions and wishes of Apple by following Apple's instruction that Buzzle purchase the stock of the vendor companies at cost price and assume a direct obligation to pay Apple in respect of that part of the consideration to be paid by the vendor companies. The obligation of Buzzle to purchase the stock of the vendor companies was assumed by it under the terms of the Merger Deeds which Buzzle entered into with the vendor companies. As indicated earlier in these reasons at paras [107]-[115] the vendors, Apple and Buzzle agreed that the debt owed by Buzzle to the vendors for the Apple stock it purchased from the vendors would become a debt that Buzzle owed to Apple at Mr Hartono's request. This was not the result of Buzzle's directors acting on Apple's instructions. The arrangement was to Buzzle's advantage because Apple did not insist on payment of the debt until 1 December 2000, whereas the debt would have been payable to the vendors by 31 October 2000. It made no difference to Buzzle to whom it owed the debt for the Apple stock it acquired from the vendors. The only difference the arrangement made to Buzzle was that Apple did not require payment by 31 October 2000.
296 Fifteenthly, the plaintiffs allege that Apple instructed Buzzle's directors "in respect of the development of financial reports", and the directors followed those instructions by causing Buzzle to develop financial reports in accordance with Apple's instructions and wishes. The instruction is said to have been given to Mr Patterson who conveyed the instruction to Messrs Liu and Hartono, and they caused Buzzle to proceed to develop the financial reports. The plaintiffs do not allege who gave the instruction to Mr Patterson, nor identify any particular instruction in their submissions. In his affidavit Mr Patterson referred to an email he received from Mr Kidd on 22 December 2000 confirming actions he described as "required to be taken by Buzzle by 2 January 2001, namely the generation of ..." financial reports. This is dealt with below at paras [298] and [299] and following. The email recorded what had been agreed between the parties. Any instruction to Mr Patterson for the development of financial reports was not an instruction to the directors of Buzzle as to how they should act in that capacity. Nor was it considered by a majority of directors. Moreover, Buzzle did not follow Apple's instructions to develop and provide financial reports. Because of the deficiencies in the Navision system, or in Buzzle's deployment of that system, it was unable to do so. Further, the alleged instruction did not cause Buzzle to endeavour to provide financial reports. It had been attempting to do so from the outset.
297 Sixteenthly, the plaintiffs allege that by the end of December 2000 Buzzle's directors had become accustomed to act on the instructions or wishes of Apple because Apple instructed them to pay moneys to Apple and Buzzle followed those instructions and wishes and caused Buzzle to pay moneys to Apple in respect of the vendors' debts. The plaintiffs allege that those instructions were given by Mr Kidd to Mr Hartono on or around 12 December 2000, and this caused Buzzle to pay $4,300,000 in respect of the vendor debts. However, Buzzle made its last payment in respect of the vendors' debts on 8 December 2000. The payment of $4,300,000 was made by Buzzle to Apple on 1 December 2000 in respect of debts which Buzzle owed Apple on its own account, not in respect of debts owed by the vendors to Apple. A creditor cannot be a shadow director of its debtor because it demands payments of debts owed to it and gets paid, or in Apple's case, paid in part.
298 Seventeenthly, the plaintiffs allege that at a meeting on 22 December 2000 Mr Likidis and Mr Kidd instructed Mr Qureshi and Mr Patterson that the directors should prepare financial reports "upon specified bases by specified times", including profit and loss statements, balance sheets, revenue and expense projections, cash flow budgets, inventory reports, and aged debtors reports including analysis. It is also alleged that at the same meeting Mr Likidis and Mr Kidd instructed Mr Qureshi and Mr Patterson that the directors of Buzzle should prepare a plan for collection of Buzzle's accounts receivables and to employ resources for debt collection, that they should ensure that responsibility for review of Buzzle's collections of its accounts receivables would be undertaken by Mr Likidis, and that the directors should ensure that all payments to creditors were controlled or authorised by Mr Liu. The plaintiffs allege that Buzzle's directors followed those instructions.
299 This allegation picks up an email Mr Kidd sent to Mr Patterson and Mr Liu on 22 December 2000 recording matters agreed between Messrs Liu, Patterson, Likidis and Kidd on that day. Mr Kidd recorded that Messrs Patterson and Liu had agreed that by 2 January 2001 they would provide:
" - Balance Sheet and Profit & Loss Statements for the Group.
- Bank Reconciliation.
- Forecast Plan going forward to June '01.
- Debtors list, broken down into sections showing accounts over $50K, $25K to below $50K, $10K to below $25K and other.
- Inventory report showing Apple stock items, Units held, Values, Weekly Sale Numbers per item.
- Up date on Collections of outstanding Debtors.
You will also need to work on the Cash Flow statement, which Jim will send through to you.
We are here to provide any assistance we can, please contact me at any time. " (TB9/3061)
300 Mr Liu also confirmed the results of the meeting of 22 December 2000. He sent an email to Mr Likidis as follows:
" Dear Jim,
Further to our meeting with you, Steve Kidd, Paul and myself this morning, I would like to summarize the meeting and following items required by 2/1/2001:-
1. Buzzle will prepare Profit and Losses Statement, Balance Sheet for the period ending December 31, 2000 with all adjustments.
Adjustments include acquisition of six businesses, goodwill and consolidation of accounts kept for stores located at Sussex St, Clarence St and Dandenong based on legacy system. Reconciliation of cash at bank and all accounts.
2. Preparation of Revenue and Expenses Projection for the period ending June 30, 2001 including all sale budget and fixed overheads.
3. Preparation of Cash flow Projection including assumptions set for cash/account sales and collection cycle.
4. Inventory Report Summary on all key Apple Products on hand with Sale Forecast and Week Cover to be provided next week.
5. Buzzle will provide you a 'Date of Completion' from Deloitte for transferring all data across from legacy system to Navision.
All Buzzle stores will be on Navision System from 1.1.2001. Navision training will be provided particularly to Sussex Street and Dandenong Stores.
6. Age Debtor with required analysis and Creditor Balance and Trial Balance.
7. Buzzle's Plan and Human Resources on Debtor Collection and review of our progress from today.
8. Payment List Control - all payment will be controlled and authorized by Wing Liu in Buzzle as advised. All third party creditor will be properly managed.
9. An extension of our Apple payment date to be agreed upon based on review of the above items on 2/1/2001.
Thank you for your support. " (TB9/3062)
301 Apple was entitled to the information it sought under its Reseller Agreement. By asking for that information it was not giving instructions or expressing wishes as to how the directors of Buzzle should act as directors in the management of the affairs of Buzzle. Mr Likidis and Mr Kidd were asserting rights of Apple. Even if they sought information to which Apple did not have a contractual right, they were still asserting Apple's position rather than giving instructions to the directors of Buzzle as to how the directors should act in that capacity. The fact that Mr Liu and Mr Patterson agreed to provide the information requested did not mean that the directors of Buzzle acted in accordance with Apple's instructions or wishes. Far from it. Although Mr Liu and Mr Patterson agreed to provide the requested information and attempted to provide it, Buzzle was unable to provide the financial reports Apple sought. Whilst steps were taken in relation to the collection of debts as required by Apple, this was not the result of Buzzle's board acting on Apple's instructions. Buzzle's executives were attempting to generate financial reports and collect debts irrespective of Apple's demands.
302 The plaintiffs pleaded that on 22 December 2000 Mr Likidis and Mr Kidd instructed Mr Qureshi and Mr Patterson that all creditor payments be controlled and authorised by Mr Liu. There was no evidence of such an instruction. Even had such an instruction been given, it was not an instruction given to the directors of Buzzle or acted on by them.
303 Accordingly, I do not accept that by 31 December 2000 Buzzle's directors were accustomed to act on the instructions or wishes of Apple or Mr Likidis. Looking at the picture in broad terms, the vendor Resellers had merged their business in a way contrary to that advised by Mr Likidis. There had been little contact between Mr Likidis and Buzzle prior to December 2000. After Buzzle defaulted in its debts to Apple on 1 December 2000 Apple moved to protect its position by putting increasing pressure on Buzzle to provide it with financial information about Buzzle's trading position and to cause Buzzle to collect the debts owed to it. This is far removed from Apple's then being a shadow director.
304 The plaintiffs' final submissions did not focus on their pleadings. They rather focused on actions taken by Buzzle between January and March 2001. These actions, it was said, were taken by the directors of Buzzle in conformity with Apple's instructions. The plaintiffs submitted that:
" 165. From at least 1 January 2001 Apple communicated to the directors of Buzzle:
165.1 that they should take corrective actions in relation to the finance, business operations and administration function of Buzzle's business and specifically with respect to the organisation, staffing and managing of those areas and that this should be overseen and monitored by Apple (and specifically Mr Likidis);
165.2 that they should address Buzzle's funding and working capital requirements;
165.3 that each of the matters should be addressed with the assistance of Apple (and specifically Mr Likidis) and that action in respect of them should be completed by 31 March 2001;
165.4 that Buzzle should continue to trade and to monitor its cash position paying third party creditors who were suppliers of goods or services used or required in that ongoing business (as well as other creditors who might seek to wind Buzzle up) and that this process should be monitored by Apple (and specifically Mr Likidis).
166. In the period from January to March 2001 as the Buzzle board acted upon the wishes and instructions of Apple, other more specific matters concerning its business operations and functions and its working capital requirements were the subject of Apple's instructions or wishes. Specifically, they were:
166.1 that Buzzle and Apple co-operate in dealing with Deloitte to proceed with a program to fix the Navision information system;
166.2 that Buzzle and Apple co-operate in seeking to identify and approach third party investors with a view to recapitalising or restructuring Buzzle so as to enable the business to survive in one form or another;
166.3 that Buzzle pursue with Apple a proposal to demerge the existing Buzzle businesses by the sale of all or parts of that business to the original resellers or companies associated with the principals of those resellers;
166.4 that Buzzle continue to trade on the basis described above until Apple worked out what it might do in the interests of Apple and its retail supply channel in Australia. "
305 If Buzzle's board did act in accordance with the wishes and instructions of Apple after 1 January 2001 in the ways for which the plaintiffs contend, it would not follow that by those times the directors of Buzzle were accustomed so to act. It is necessary to remain with the plaintiffs' pleading as to how they contended that the directors of Buzzle were accustomed to act on Apple's instructions or wishes. The plaintiffs alleged that by the end of January 2001 the directors of Buzzle were accustomed to act on the instructions or wishes of Apple by reason of the matters earlier pleaded (with which I have dealt) and by reason of the following further matters, namely that whilst Mr Likidis maintained an office at Buzzle's premises, Apple, through Mr Likidis, instructed Buzzle's directors to:
" (1) provide intensive user training for Navision to key staff;
(2) undertake a review of the current skills that exist in its finance, administration and business operations areas for the purposes of establishing an area to support the business and identify any recruitment needs;
(3) undertake a review of business processes in respect of transactional processing and implement any improvements required;
(4) monitor its cash flow daily and prepare weekly forecasts;
(5) investigate raising further capital;
(6) determine the resources required for collecting accounts receivable and engage further contractors to perform reconciliations of accounts receivable; and
(7) proceed to engage Deloitte to develop its computerised accounting systems and the directors of Buzzle and employees caused Buzzle to negotiate a further contract with Deloitte;
and the Appointed Directors followed the instructions and wishes and caused Buzzle [to] carry out the instructions and wishes of Apple. " (Second further amended statement of claim, para 37B(b))
306 The plaintiffs alleged that the directors followed those instructions and caused Buzzle to implement them.
307 Mr Likidis did not give instructions to all of the directors of Buzzle in respect of any of the above matters. That is not fatal to the plaintiffs' case. Whilst a governing majority of the directors must act in accordance with a person's wishes or instructions for that person to be a shadow director, the instruction or wish need not be communicated directly by that person to all or a governing majority of the directors. It would be enough if the instructions or wishes were passed on and acted on with sufficient frequency that the directors had become accustomed so to act. But in this case neither all nor a majority of the directors of Buzzle acted in accordance with the alleged instructions.
308 The instructions are alleged to have been given by Mr Likidis to Mr Qureshi on 2 and 4 January 2001 when Mr Likidis was occupying an office at Buzzle's premises. On 2 January 2001 a meeting was held at Buzzle's Melbourne office between Messrs Likidis, Kidd and Liu. Mr Likidis reported to Mr Oppenheimer as follows:
" Peter,
As promised below is an update following the meeting with Buzzle on 1/2 and a further meeting held with the AET [Apple Executive Team] 1/4.
The financials promised to be tabled 1/2 were not delivered.
I am estimating that they are probably 4 weeks away from preparing accounts that we can place some reliance on.
Reasons for this are as follows:
- Systems
- People
- Processes
relating to the Finance, Administration and Business Operations areas.
Systems (Navision)
The system issues that the company has experienced in the past 4 months have mainly been resolved.
What is now needed is extensive training to be undertaken for all users of the system.
This will commence early next week.
People
This area is of great concern and a lot of work has to be done here. A proper organization structure needs to be developed and good people with the good leadership skills are required.
Processes
This area is in great need for development with very little processes are in place [sic] to produce management information to give visibility into the running of the company.
Corrective Actions to be taken
a) Navision to undertake intensive user training of key staff. This will commence on Tuesday 1/9. This will continue as new people come on board to take on key positions in Finance.
b) A review of the current skills that exist in the Finance, Administration and Business Operations areas will be undertaken. An organization will be then be [sic] set up in these areas to support the needs of the business and key people will be engaged to perform key functions where this is required.
c) Processes are to be reviewed and actions taken to make improvements in order that transactional processing is efficiently undertaken.
d) Cash flow is to be monitored daily and a forecast is to be prepared weekly.
In using this tool we will quickly obtain an understanding of the company's ability to meet its debts and particularly the repayment of the Apple debt outstanding.
e) Further security is to be requested from the directors in the way of property.
f) The directors are discussing the possibility of a further cash infusion into the company. We will know the outcome of this next week.
g) Contractors are currently being interviewed to commence as soon as possible to perform reconciliations etc.
[h] The collection process and resource required to collect outstanding accounts will be determined on Tuesday 1/9.
[i] A minimum payment of $5m to be paid by 1/15.
My aim is to have the balance of the O/S in December of $11m i.e. $6M by the end of 1 st . week February.
[j] I will personally monitor and drive the above actions and plan to allocate 2 days a week to this effort, commencing next Tuesday 9/1. I feel that this is the only way I can have some confidence that the above actions will be followed effectively.
My objective is to have all the above completed by the end of Qtr. 2.
Your feedback on the above would be very appreciated. " (TB9/3231-3232)
309 Mr Likidis said that he overstated his intentions in order to impress a superior. I do not think he did overstate his intentions. But it does not follow that because Mr Likidis devoted time to "personally drive" the matters set out in his email of 4 January that the directors of Buzzle became accustomed to act on his or Apple's wishes.
310 On 4 January 2001 Mr Oppenheimer wrote to Mr Likidis and said that he agreed with Mr Likidis' spending two days a week at Buzzle's offices to ensure that positive steps were taken. He said that Apple needed to err on the side of over-supporting Buzzle with people and that Mr Likidis should be lining up outside resources that "we in part manage" to supplement on the collections and accounting clean-up. The plaintiffs submitted that Mr Oppenheimer's email was consistent with a plan of action by Apple to take control of rectifying Buzzle's problems by imposing its will on the directors of Buzzle as to corrective measures that Apple considered fit. However, nothing was addressed to the directors of Buzzle collectively. A better characterisation of Mr Oppenheimer's email is that he agreed with Mr Likidis' proposal to provide support for the actions which Buzzle's executive had agreed with Mr Likidis they would undertake.
311 On 5 January 2001 Mr Liu forwarded to Mr Likidis an email he had sent on 3 January 2001 to Mr Qureshi, Mr Hartono and Mr Mekrizis setting out the scope of work required on the preparation of financial statements and the preparation of an internal audit.
312 Mr Likidis attended Buzzle's Melbourne office on 9 and 10 January 2001. On 10 January he reported to Mr Tidwell and Mr Oppenheimer on a presentation he made on the need to take corrective actions. He said that he discovered to his amazement (and the amazement of management) that the reason for the ageing of debtors was that no collection calls were being made in West Melbourne on debtors. He described the process of employing staff including a payables supervisor and payables clerk and said that he had interviewed and appointed a national credit manager. He described other steps being taken including training for the Navision system, the appointment of additional staff to collect accounts and the appointment of others to work on various accounting matters.
313 Mr Likidis' presentation on 10 January was made to about seven of Buzzle's management including Mr Liu and possibly Mr Hartono. It was not made to all or a majority of the directors collectively or individually. There is no evidence that all or a majority of the board acted on what Mr Likidis proposed. The presentation was headed "Buzzle Finance Admin. & Business Operations: Corrective Actions Recommended for Consideration by Buzzle Management." This description reflects the caution which Apple and Mr Likidis then had about the possibility of becoming a shadow or de facto director. Mr Likidis was well aware of the risks entailed in engaging too closely in the management of Buzzle's affairs. His presentation included recommendations for the centralisation of financing responsibilities in the West Melbourne office of Buzzle, the transition of all the former Resellers to the Navision system and identifying and resolving system issues. He identified the need to complete various reconciliations.
314 On 17 January 2001 Mr Likidis made a further Powerpoint presentation at Buzzle's Melbourne office. The presentation stated Apple's concern that Buzzle was then trading although insolvent. It was owed $27 million as at 15 January and was paid only $5 million and that $22 million was overdue. He noted that there were still no financial statements available five months after the company had been incorporated. In a slide headed "Suggested Corrective Actions" Mr Likidis recommended:
" Clearly identify system issues and resolve
Reduce operating expenses
Identify inefficiencies in current processes and introduce improvements
Develop an organization structure that functionally will support the company
Improve communications in the company " (TB9/3300)
315 Mr Likidis recommended that matters for immediate action were:
" Set up an effecting F&A and Bus.Ops. Organisation
Implement system training
Produce financials to end December
Cash Flow to be monitored daily
Forecasts to be prepared weekly
Collection process reviewed and adequate resource put in a place to collect old accounts. " (TB9/3302)
316 Mr Hanlon commenced as Buzzle's financial controller on or about 15 January 2001. Mr Likidis participated in the interview for his position and approved his appointment. The plaintiffs submitted that the fact that Mr Likidis participated in interviews with potential accounting staff confirmed that Buzzle's directors were following his instructions in relation to the recruitment of accounting staff. The appointment of accounting staff was not a matter which was considered by Buzzle's board or a majority of directors. Nor did the plaintiffs plead that Mr Likidis' approval of Mr Hanlon's (or anyone else's) appointment was an instance in which Buzzle's directors acted in accordance with Apple's instructions or wishes.
317 Mr Hanlon worked closely with Mr Likidis. Mr Qureshi told Mr Hanlon that he should do anything Mr Likidis asked. This does not mean that Mr Likidis expressed instructions or wishes on which Buzzle's directors became accustomed to act.
318 Mr Hanlon sent regular emails to Mr Likidis reporting on the progress of collection of debtors and implementation of the Navision system. The plaintiffs submitted that this showed that Apple had communicated to Buzzle's directors what corrective action should be taken in relation to the finance, business and administration functions of Buzzle's business, and specifically with respect to the organisation staffing and management of those areas. They submitted that Buzzle's directors acted in accordance with those instructions or wishes. However, the evidence does not show that Buzzle's directors acted in accordance with those instructions or wishes. There is evidence that Mr Qureshi, Mr Liu, Mr Hanlon and other employees of Buzzle sought to implement Apple's recommendations. But that is different.
319 The plaintiffs also submitted that Apple expressed the wish that Buzzle should continue to trade until it worked out what it wanted to do with Buzzle. From about mid-January Mr Likidis received regular reports from Mr Hanlon on overdue creditors and whether there was any threat of legal action against Buzzle. Mr Likidis gave evidence in cross-examination that he encouraged Mr Hanlon and Buzzle to pay major third party suppliers, although Mr Likidis said he never gave any direct instruction to that effect. On occasion Mr Likidis gave instructions to Mr Hanlon in relation to payments to be made to creditors (e.g. TB13/4276; T574). Mr Likidis accepted that he encouraged Mr Hanlon to pay major suppliers to minimise the risk that third party creditors would take steps to wind up Buzzle (T575). However, the plaintiffs did not plead that Apple or Mr Likidis gave an instruction or expressed a wish that Buzzle should selectively pay its creditors so as to continue to trade although insolvent, and that the directors of Buzzle acted in accordance with such an instruction or wish. Nor is there any evidence that all or the majority of the directors of Buzzle considered any such instruction or wish. Mr Qureshi accepted that Buzzle's directors decided some time in January that it was appropriate for Buzzle to continue to trade and that Mr Likidis had nothing to do with that decision.
320 As referred to at para [305] of these reasons, the plaintiffs allege that Apple, through Mr Likidis, instructed Buzzle's directors to investigate raising further capital. Mr Likidis was told on 4 January 2001 that the directors were discussing the possibility of a further cash infusion into the company. Apple's wish was not that the directors simply investigate the possibility of injecting cash into the company. Apple wished that further capital be injected either by the directors or by a third party investor or investors. It gave no instruction to the directors to that effect. In any event, no such capital was provided.
321 The plaintiffs also allege that Mr Likidis instructed Mr Qureshi on 2 and 4 January 2001 to engage Deloitte to develop Buzzle's computerised accounting systems and the directors of Buzzle and the employees of Buzzle caused Buzzle to negotiate a further contract with Deloitte. Mr Qureshi did not give evidence about such an instruction having been given at that time.
322 The plaintiffs also allege that by the end of February 2001, Apple had instructed the directors of Buzzle to instruct Deloitte jointly with Apple in respect of the correction, revision and development of its computerised accounting system and the directors caused Buzzle to engage Deloitte jointly with Apple in respect of the correction, revision and development of Navision.
323 In final submissions, the plaintiffs said that in late January and early February 2001 that Apple communicated to Messrs Liu and Hartono that they co-operate with Apple in dealing with Deloitte to proceed with a program to fix the Navision System. The problems with the Navision system were manifest at all times. Mr Likidis referred to the need to correct the system in his Powerpoint presentations on 10 and 17 January 2001. The plaintiffs submitted that by 29 January 2001 Buzzle had followed Apple's instructions to identify the "Navision system issues" and had begun to develop a plan to resolve them. Buzzle's identification of the "issues" with the Navision system did not result from instructions given by Apple. It was something that Buzzle was working on as best as it could from the outset. On 29 January 2001 Mr Qureshi gave a presentation to Mr Oppenheimer and other representatives of Apple. Mr Qureshi identified one of the ways in which Apple could help Buzzle was by contributing to the cost of fixing the Navision system. On 13 February 2001 Deloitte provided a proposal for fixing the Navision system (TB11/3581). The estimated cost was over half a million dollars. Buzzle did not have this money. Mr Likidis said that matters had reached an impasse. Mr Liu, the financial director, wanted to abandon the Navision system. Mr Qureshi wanted to sue Deloitte. Deloitte was not prepared to do further work unless agreement was reached on costs. It claimed to be owed outstanding costs. Correction of the Navision system was essential before any external investor could be persuaded to invest. Mr Likidis was instrumental in negotiating a deal whereby Apple, Buzzle and Deloitte agreed to share equally the costs of the work required to fix the system. Such a discussion took place on 1 February 2001 (TB11/3496). The plaintiffs submitted that Mr Likidis took the running on rectifying the Navision problems and those in control of Buzzle agreed to the course being taken by Mr Likidis. I agree that Mr Likidis took the running on endeavouring to resolve the problems with the Navision system and that the management of Buzzle agreed to his doing so. However, this was not a matter which was submitted to the board of Buzzle. Mr Likidis' involvement in negotiating a deal with Deloitte to fix the Navision system did not involve his giving any instruction or expressing any wish to the directors of Buzzle about that matter.
324 The plaintiffs also submitted that Apple gave instructions to Buzzle's board upon which the board acted in seeking to identify and approach third party investors with a review to recapitalising or restructuring Buzzle so as to enable the business to survive, in pursuing a proposal to de-merge the existing Buzzle businesses by the sale of all or parts of that business to the original Resellers or companies associated with the principals of the Resellers, and by Buzzle continuing to trade until Apple worked out what it might do in the interests of Apple and its retail supply channel in Australia. Apart from the allegation that on 2 and 4 January 2001 Mr Likidis instructed Mr Qureshi to investigate the raising of further capital, dealt with in para [320] above, the plaintiffs did not plead any of these contentions. Although Mr Likidis was cross-examined in relation to these matters without objection, it is not open to the plaintiffs to rely upon these matters. The plaintiffs were afforded considerable latitude in the presentation of their case. They were permitted to rely upon very late affidavits of Mr Liu and Mr Qureshi. There was good reason for the late service of the affidavits, but that does not detract from the fact that the defendants had to meet the plaintiffs' case on the run. Had the plaintiffs sought leave to amend to plead these additional matters, and had objection been taken, it is unlikely that the amendments would have been allowed. In fact, the plaintiffs did not seek leave to amend and in closing submissions the defendants took the ground, as they were entitled to do, that they would deal only with the case as pleaded.
325 It suffices to say that whilst Apple and Mr Likidis took a proactive role in exploring the possibility of attracting third party investors, and in pursuing with the directors the proposal for de-merger, and whilst Apple wanted Buzzle to continue to trade whilst those possibilities were explored, no instruction or wish was given or expressed on which the directors collectively acted. Nor had the directors become accustomed to acting on Apple's or Mr Likidis' instructions or wishes.
326 Both parties relied upon a letter of 22 January 2001. Apple prepared the document and sent it to Mr Qureshi. Mr Qureshi delivered it to Mr Hartono and Mr Liu. They signed it and returned it to Mr Likidis. The letter was prepared by Apple's legal department. It said:
" Dear Mr T Qureshi
Re: Request for Assistance in Respect of Internal Re-Organisation
We write further to our recent meetings and to confirm our understanding of the present position. In view of Buzzle's status as a significant re-seller of Apple products in the Australian market, it has been agreed that Apple will provide Buzzle with advice and assistance in a proposed internal re-organization aimed at improving Buzzle's commercial performance. In particular, Buzzle wishes to avail itself of Apple's knowledge and experience, gained from its position as a subsidiary of a major international corporation, in order to help Buzzle to operate its business more efficiently and to maximise profitability.
For the avoidance of doubt, and to define unambiguously the role that Apple intends to play, Apple wishes to set out the terms on which it offers such assistance.
1. Apple does not wish to become involved in any corporate decision making, either at managerial or directorship level. Whilst Apple is willing to share its expertise and offer practical guidance, it is the Buzzle directors who have the ultimate responsibility for all decisions and they are, of course, at liberty to adopt or reject any advice as they see fit. Accordingly, if Apple is invited to attend any meetings at which corporate decisions are made, for example, a director's [sic] meeting it will only do so as an observer and/or adviser;
2. Buzzle will not represent to any third party that Apple's assistance represents any involvement in the management of Buzzle's business.
Apple is conscious, that as Buzzle's secured creditor, its interests may not always coincide with those of Buzzle. In the circumstances, Apple strongly recommends that Buzzle gives consideration to retaining professional accounting and/or financial advisors of its own to advise it on the re-organisation.
Please arrange for two Buzzle Directors to countersign the bottom of this letter to indicate the Board's acceptance of this document. In the meantime, we sincerely hope that Apple's assistance will facilitate Buzzle's commercial development and that our two companies will continue to work successfully together in the future.
Yours sincerely
Apple Computer Australia Pty Limited
Jim Likidis
Director of Finance & Business Operations " (TB10/3347-3348)
327 In opening submissions the plaintiffs contended that by the end of January 2001 Apple was acutely aware that it had been engaged in the management and decision-making of Buzzle, and for that reason sought an acknowledgment from Buzzle that it was not doing so. The plaintiffs contended that the reason the acknowledgment was signed was not because it was correct, but because Apple required it to be signed.
328 Mr Liu deposed that he was in a state of shock when he read the letter, which to his mind did not reflect the extent of Apple's and Mr Likidis' control of and involvement in the affairs of Buzzle. He deposed that he signed it because he did not think he had any choice. Mr Hartono also deposed that he felt that he had no choice but to sign, given Buzzle's financial circumstances. Mr Qureshi deposed that Mr Likidis said that the letter had to be signed if he, Mr Likidis, were to continue his involvement and that "If you do not sign this I will pull the plug. You will have no business."
329 I do not accept that Mr Likidis said words to the effect "If you do not sign this I will pull the plug. You will have no business.". He did say that if the letter was not signed, he would walk out. That may well have been understood by Buzzle's executive as being likely to lead immediately to Apple's exercising its rights as a secured creditor. In these circumstances, I do not consider the fact that Mr Hartono or Mr Liu signed the letter advances Apple's position on the question whether Apple had by 22 January 2001 gone beyond acting as an adviser. But it must have been clear to Buzzle's executives from 22 January 2001 that Apple was not purporting to give any direction to Buzzle's directors with which the directors were expected to comply.
330 It may be noted that the plaintiffs did not allege that the signing of the letter of 22 January 2001 by Messrs Hartono and Liu was an instance of the directors of Buzzle, or some of them, acting in accordance with Apple's instructions or wishes.
331 The plaintiffs stressed that Apple perceived it to be in its interests for Buzzle to continue to trade whilst Apple worked out what it wanted to do with Buzzle. It did not want winding-up proceedings to be commenced against Buzzle. The reason for this was that Buzzle was by far the largest Reseller and accounted for perhaps 30 per cent of its revenues. Apple faced substantial losses if Buzzle went into administration or receivership from the loss of sales and damage to Apple's brand. But motive for Apple to give directions to Buzzle's board, does not establish that Buzzle's directors were accustomed to act in accordance with Apple's wishes.
332 For these reasons I conclude that neither Apple nor Mr Likidis was a director of Buzzle within the meaning of para (b)(ii) of the definition of "director".
Other Issues Do Not Arise
333 It follows from my conclusion that Apple was not a director of Buzzle that the plaintiffs are not entitled to recover as voidable preferences payments made to Apple between 5 January and 30 March 2001. That is because the payments were made more than six months before the commencement of Buzzle's winding-up. For that claim to succeed the plaintiffs needed to establish that Apple was a related entity of Buzzle (s 588FE(4)), which it sought to do by establishing that Apple was a director of Buzzle. That contention fails. The plaintiffs also accepted that the claim would fail if the charge were valid as I have found it to be. It is not necessary therefore to deal with questions of allocation of payments to debts which would otherwise arise. It is sufficient to indicate that if my earlier conclusions were wrong, I would hold that there was clearly a running account between Apple and Buzzle. I would accept, as the plaintiffs contended, that the peak debt on the running balance account was a sum of $26,052,311 at 12 January 2001, and the debt had been reduced to $18,814,341 by 30 March 2001 representing a reduction of $6,237,970.
334 In light of my conclusion that Apple was not a shadow director, it is unnecessary to deal with other issues of quantum which would otherwise have arisen. It is sufficient to say the following in case my conclusion that Apple was not a shadow director is set aside on appeal. First, the defendants contended that the plaintiffs had not proved what debts had been incurred between 1 January and 31 March 2001. Both parties retained accountants to provide expert evidence as to accounting matters, and, in particular, in relation to the debts of Buzzle. The experts provided various reports. A joint report was prepared in accordance with directions of the court. The experts came to an agreement on matters including the dates and amounts of Buzzle debts and the ageing of those debts (Joint Expert Report dated 26 March 2009, para 9). They prepared a spreadsheet of such debts broken down by month and creditor.
335 The defendants contended that the report was prepared only for the purposes of issues of solvency and that in any event, the experts' opinion was flawed. The defendants submitted that the experts proceeded on the assumption that debts were incurred at the time of invoice, whereas manifestly that was not so, and that some debts would have been incurred prior to the date of invoice. The defendants contended that the plaintiffs had not established what those debts were. However, the plaintiffs tendered the thousands of invoices which made up the debts claimed to have been incurred between 1 January 2001 and 30 March 2001. The defendants declined my invitation to identify any particular debts they might contend had not been incurred in that period.
336 If there were a real issue that some of the debts the plaintiffs claimed had been incurred between 1 January 2001 and 30 March 2001 had not been incurred in that period, notwithstanding the agreement of the experts to the contrary, it behoved the defendants to identify what those debts were. I would accept the plaintiffs' submission as to the quantum of debts incurred in that period.
337 The amount recoverable as damages for insolvent trading is not the quantum of the debts incurred, but an amount equal to the amount of the loss or damage suffered by the creditors (s 588M). Those amounts are usually the same (Tourprint International Pty Ltd (in Liq) v Bott [1999] NSWSC 581; (1999) 32 ACSR 201 at [78]-[79]; Powell (as joint liquidators of Noelex Yachts Australia Pty Ltd (in liq)) v Fryer [2001] SASC 59; (2001) 37 ACSR 589 at [88]), although that is not always the case, for example, if a creditor does not receive a dividend in the liquidation because he or she fails to lodge a proof of debt. In the present case, had I found that Apple and Mr Likidis were directors of Buzzle, I would have accepted the plaintiffs' submission that the amount of loss or damage recoverable by the liquidator as a debt due to the company, being the loss or damage suffered by creditors in relation to the company's debt because of the company's insolvency, is the amount of the debts incurred between 5 January and 30 March 2001, both to Apple and to other creditors, to the extent that those debts were unpaid, including the debts incurred to Apple which were unpaid after realisation of Apple's security. (No defence of set-off was raised to the claim for damages for insolvent trading.)
338 There was a question as to how payments received after 9 February 201 should be allocated to prior debts. On 9 February 2001 Mr Likidis wrote to Mr Qureshi confirming new trading arrangements. Apple stipulated that future deliveries would be made on a cash-on-delivery basis and said it would release $1 in stock for every $1.20 paid to Apple, with 20 cents of every payment of $1.20 being applied to reduce Buzzle's outstanding account with Apple. Buzzle agreed to that arrangement. The plaintiffs contended that the arrangement was not in fact implemented because Apple made what appeared to be random cash allocations which bore no relationship to the terms set out in the cash-on-delivery arrangement. Buzzle did not object to the terms proposed by Apple in its letter of 9 February 2001. By ordering further stock Buzzle is to be taken as having accepted those terms. It was not open to Apple to allocate payments made after 9 February differently. But the arrangement did not specify to which earlier debts the payments of 20 cents in $1.20 were to be allocated. In the absence of appropriation by Buzzle of those payments to particular debts, it was open to Apple to appropriate such payments to such earlier debts as it saw fit. In light of my conclusion that the defendants have no liability for the debts incurred by Buzzle after 1 January 2001, it is unnecessary to pursue further the questions of allocation of the payments after 15 February 2001 to prior debts.
339 It is unnecessary to deal with questions of set-off. It is also unnecessary to decide whether, if Apple or Mr Likidis were otherwise liable, they ought to be relieved from liability pursuant to s 1318.
Conclusions and Orders
340 For these reasons, all of the plaintiffs' claims fail. I direct entry of judgment for the defendants. I order that the defendants' cross-claim against Mr McComb (the second cross-defendant) be dismissed. The exhibits may be returned after 28 days. Prima facie, costs follow the event. I will hear the parties on costs in case the parties seek any particular order for costs.
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Annexure A