[2003] NSWCA 131
Australia & New Zealand Banking Group Ltd v Westpac Banking Corporation (1988) 164 CLR 662
[1988] HCA 17
Australian Securities and Investments Commission v Adler (2002) 41 ACSR 72
[2002] NSWSC 171
Australian Securities and Investments Commission v Cassimatis (No 8) (2016) 336 ALR 209
[2016] FCA 1023
Australian Securities and Investments Commission v Healey (2011) 196 FCR 291
Source
Original judgment source is linked above.
Catchwords
[2003] NSWCA 131
Australia & New Zealand Banking Group Ltd v Westpac Banking Corporation (1988) 164 CLR 662[1988] HCA 17
Australian Securities and Investments Commission v Adler (2002) 41 ACSR 72[2002] NSWSC 171
Australian Securities and Investments Commission v Cassimatis (No 8) (2016) 336 ALR 209[2016] FCA 1023
Australian Securities and Investments Commission v Healey (2011) 196 FCR 291[2011] FCA 717
Australian Securities and Investments Commission v Maxwell (2006) 59 ACSR 373
[2006] NSWSC 1052
Australian Securities and Investments Commission v Rich (2009) 75 ACSR 1
[2009] NSWSC 1229
Bell Group Ltd (in liq) v Westpac Banking Corporation (No 9) (2008) 39 WAR 1
[2004] HCA 3
Pilmer v Duke Group Ltd (in liq) (2001) 207 CLR 165
[2001] HCA 31
Re CSR Ltd (2010) 183 FCR 358
[2010] FCAFC 34
Re Hallett's Estate (1880) 13 Ch D 696
Robinson v 470 St Kilda Road Pty Ltd (2018) 263 FCR 572
[2018] FCAFC 84
Rosenberg v Percival (2001) 205 CLR 434
[2012] HCA 18
Sidhu v Van Dyke (2014) 251 CLR 505
[2014] HCA 19
Smith v Noss [2006] NSWCA 37
Suttor v Gundowda Pty Ltd (1950) 81 CLR 418
[1950] HCA 35
Termite Resources NL (in liq) v Meadows (No 2) (2019) 370 ALR 191
[2007] NSWCA 75
Wambo Coal Pty Ltd v Sumiseki Materials Co Ltd (2014) 88 NSWLR 689
[2014] NSWCA 326
Westpac Banking Corporation v Jamieson [2016] 1 Qd R 495
[2015] QCA 50
Williams v Pisano (2015) 90 NSWLR 342
[2015] NSWCA 177
Woodhouse v Fitzgerald (2021) 104 NSWLR 475
[2021] NSWCA 54
Wormald v Maradaca Pty Ltd [2020] NSWCA 289
Wyzenbeek v Australasian Marine Imports Pty Ltd (in liq) (2019) 272 FCR 373
Judgment (7 paragraphs)
[1]
Background
NAB pleaded broad-ranging complaints of misrepresentation and misleading or deceptive conduct in relation to the Syndicated Facility Agreement entered into by DSH with HSBC and NAB on 22 June 2015. The claims pleaded by NAB in relation to Mr Potts fell into three categories, namely (i) representations made by Mr Potts at a meeting with NAB representatives on 28 April 2015; (ii) representations made on 5 May 2015 by the provision of management accounts to NAB; and (iii) representations as to DSH's high level of inventory at the start of 2015, made at a meeting on 6 May 2015 and addressed further in a telephone conversation on 11 or 12 May 2015. The judge rejected the claims in relation to the first two limbs, but upheld the claim in relation to the third limb, concluding:
"573 It follows that, in my opinion, Mr [Potts'] conduct at the meeting on 6 May 2015 or in his subsequent conversation with Mr Menzies was misleading and deceptive because it gave a misleading impression concerning the reasons for the build-up in stock in January 2015 and the appropriateness of the steps that DSH had taken to address the problem."
Ground 1 of Mr Potts' appeal challenged that finding.
The primary judge then turned to the question of reliance and concluded that NAB did rely upon Mr Potts' conduct:
"574 … However, as I have explained, NAB was concerned to understand what had caused the build-up in stock and wanted to be satisfied that DSH had taken appropriate steps to prevent it from happening again. Careful stock management was obviously important to the profitability and success of a business such as DSH's. NAB understood that and that explains why it paid considerable attention to the stock position in January 2015. It would not have given the issue the attention that it did if the way in which DSH managed its stock was not important to its decision. In my opinion, the likelihood is that if it had been told that one of the reasons for the build-up in stock was the emphasis on O&A rebates and that DSH had not taken steps to change its policies and procedures to deal with that problem, it would not have agreed to participate in the syndicate with HSBC."
Ground 2 of Mr Potts' appeal challenged the finding as to reliance.
A number of affirmative defences were pleaded by Mr Potts, but only one was pursued at trial both by Mr Abboud and Mr Potts, "namely, a proportionate liability defence that DSH and each other were concurrent wrongdoers": at [515]. All claims against Mr Abboud failed, but some claims against DSH were successful. On the basis that DSH's appeal failed, Mr Potts pursued the defence of apportionment, with DSH being the concurrent wrongdoer.
The primary judge said:
"586 I have also concluded that NAB's claim only succeeds against Mr Potts. Consequently, the question of apportionment does not arise."
The judge did not expressly address the claim for apportionment as between Mr Potts and DSH. It is possible that he simply assumed that only Mr Abboud was involved in Mr Potts' conduct (and then only in part of it) and that, unless Mr Abboud was a concurrent wrongdoer, there was no claim against DSH. As Mr Potts was acting as agent for the company, the company's concurrent liability, based on his wrongdoing, would only be vicarious. That basis of concurrent wrongdoing was, as will be explained, explicitly (and correctly) eschewed by Mr Potts. In any event, both parties assumed that this Court was able and required to determine apportionment on the appeal. There is no reason to doubt that proposition: it requires, however, attention to the manner in which Mr Potts pleaded his case that DSH was a concurrent wrongdoer, and to the findings of liability on the part of DSH. First, however, it is necessary to address the grounds relating to liability on the part of Mr Potts to NAB.
[2]
Ground 1: Liability - misleading or deceptive conduct
The misleading impression created by Mr Potts at the meeting with Mr Taylor and Mr Menzies on 6 May 2015, and during the telephone conversation with Mr Menzies on 11 or 12 May 2015, related to "the reasons for the stock build-up in January 2015 and the appropriateness of the steps that DSH had taken to address the problem", as identified in ground 1 of Mr Potts appeal. There were said to be three errors in reaching that conclusion, which were particularised as follows:
"(a) The primary judge erred in finding (at [571]) that Mr Potts failed to explain … that a contributing factor to DSH's being overstocked in January 2015 was that stock had been acquired in order to obtain O&A rebates;
(b) The primary judge erred in finding (at [570]) that it must have been evident to Mr Potts at the time … that DSH had a 'continuing problem', namely, that it was continuing to buy too much stock as a result of the emphasis on the collection of O&A rebates; and
(c) The primary judge erred in finding (at [572]) that:
(i) the only evidence that a weekly meeting had been implemented to review purchasing in order to prevent a recurrence of the problem of overstocking was the minutes of a single meeting on 20 April 2015; and
(ii) the meeting on 20 April 2015 (or the weekly meetings implemented with the buying team) was not a 'real step' in addressing the issue of overstocking."
There were, in effect, two limbs to ground 1(a). The first limb relied upon that which NAB pleaded had been conveyed at the meeting or in the telephone calls, namely that DSH's level of inventory at the start of the 2015 calendar year was the result of "(i) delayed shipments of private label stock which had arrived late and had not arrived in time for Christmas; (ii) a moderate level of opportunistic purchases to obtain rebates from suppliers".
As to the second limb, Mr Potts did not give evidence, but disputed that NAB's evidence supported a finding that he had used the word "moderate". The judge concluded that nothing turned on that question, but rather, "[t]he real question is whether the reasons Mr Potts gave for the high level of inventory gave a misleading picture of the true position": at [551]. The submission was that NAB understood that "the overstocking was not the result of a deliberate decision by management, but was caused by a 'misjudgement in over-ordering' stock": Potts' written submissions, par 21.
[3]
Legal principles
Principles relating to reliance have been addressed when considering the HSBC appeal: those principles need not be restated here. There is, however, a similarity with respect to the manner in which the primary judge dealt with direct evidence of reliance by officers of each bank. That is not to say that the factual issue was the same in each case, but rather that in neither case did he place weight upon their evidence.
In considering whether NAB relied on Mr Potts' conduct, the judge stated at the outset:
"574 … Ms Peter and Mr Taylor gave evidence of reliance which is couched in terms of NAB's pleaded case concerning the Rebate Maximisation Policy and its alleged consequences. That evidence is of no assistance."
The evidence was said not to be of assistance because it was formulated by reference to six factors (a)-(f) which were not made out in precisely the manner they were pleaded: [255]. Some points were not made at all: for example (d), which asserted that the rebates had not been properly accounted for in accordance with Australian accounting standards, was abandoned. Because there was no notice of contention seeking to rely upon that particular evidence of the officers, it is not necessary to revisit the basis of its rejection. However, Mr Potts submitted that once NAB's express evidence of reliance was rejected, it cannot succeed on its claim. To do otherwise, Mr Potts submitted, would be to repeat the error made by this Court and identified in Campbell v Backoffice Investments Pty Ltd (2009) 238 CLR 304; [2009] HCA 25 (Backoffice").
Mr Potts relied on the statement in Backoffice that where specific evidence of reliance is not accepted, "it was not open to the Court of Appeal to infer, from its own assessment of the materiality of the representation and its own assessment of whether the representation was calculated to induce entry into a contract" that the representee would not have proceeded: Backoffice at [147]. Although the submissions also placed reliance on the reasoning of Bell P (Bathurst CJ and Payne JA agreeing) in Wormald v Maradaca Pty Ltd [2020] NSWCA 289 at [143] the facts in that case were significantly different, the Court determining that the key representations relied on by the claimant had not been given, either directly or inferentially.
There are a number of responses to Mr Potts' submissions on reliance. First, it is necessary to note two matters, namely (i) what precisely the High Court stated in Backoffice and (ii) what precisely was the evidence the primary judge rejected.
[4]
Evidence of reliance
The second issue is to identify the evidence which the primary judge found to be of no assistance. He clearly did not reject all of the evidence of Ms Peter or Mr Taylor, much of which had been discussed in previous parts of the judgment. Rather, what he rejected was the usefulness of a statement in Ms Peter's affidavit (pars 47, 48) and a statement in Mr Taylor's affidavit (pars 52-54) which set out the pleaded case in seven particulars (a)-(g) and then expressed a view as to what course the witness would have taken had he or she been informed that "one or more of the following was the case with respect to DSH and its business". Other NAB witnesses gave similar evidence by reference to six or seven factors, including Mr Johnson and Mr Menzies.
In answering that question, Ms Peter blandly stated at par 48:
"If a credit memorandum [had been] presented to me containing this information, it is highly unlikely that I would have provided approval to proceed with the facility as DSH would have presented as an unacceptable credit risk, outside the risk appetite of the NAB."
Ms Peter also gave evidence as to her approach to the approval of the loan, including her assessment of the nature of the electronic retail industry, which dictated a conservative approach. She described the matters she had raised with Mr Johnson and Mr Menzies as matters of concern. She further explained the proposed conditions, with particular reference to liquidity/cash flow and inventory management systems. After reviewing the revised credit memorandum from Mr Menzies, she stated at par 35:
"The information contained in the revised credit memorandum about the high inventory levels was a significant concern to me when considering the proposal. I was satisfied, based on the information provided in the revised credit memorandum, that DSH management had confirmed that it was a one-off, non-recurring issue and that sufficient controls had been implemented to ensure that the matters giving rise to the high inventory levels would not occur again, including increased scrutiny by the CFO and the DSH board around purchasing decisions. A critical component to my decision was that DSH management stated that it did not need to discount or write-off any of the excess private label stock and that inventory levels were forecast to return to normal during 2015. …"
Ms Peter's view that it was "highly unlikely" that she would have approved the facility with DSH if any one of the seven issues had been identified in the credit memorandum was problematic, because at least one, par (d), related to the accounting standards and their application to rebates from suppliers, a matter which was abandoned, and a second, par (e), referred to inadequate systems for making provision for write-offs of obsolete inventory, another matter which was not ultimately established. However, three other matters were established and found by the judge to be of central importance to NAB's decision-making process. The first was the policy of maximising O&A rebates and the fact that the purchasing practice was a significant cause of DSH ordering excess inventory before Christmas 2014: pars (a) and (b). Similarly, the information that DSH had either requested suppliers to delay delivery or extend time for payment, because of cash flow problems: pars (c) and (g). The third matter was that DSH had exceeded its finance facility limits with Westpac on a number of occasions: par (f).
[5]
Ground 3: Proportionate liability defence
Each of the causes of action relied upon by the plaintiff was accompanied by a defence seeking apportionment of liability for economic loss. The relevant provisions were as follows: (i) Australian Consumer Law, s 18 and s 236 (liability to pay damages for misleading or deceptive conduct) and Competition and Consumer Act 2010 (Cth), s 87CB (proportionate liability defence); (ii) Corporations Act 2001 (Cth), s 1041H (liability for misleading or deceptive conduct) and s 1041L (proportionate liability defence); and (iii) Australian Securities and Investments Commission Act 2001 (Cth), s 12DA (liability for misleading or deceptive conduct) and s 12GP (proportionate liability defence). Each of these sets of provisions is in relevantly similar terms. Although there are differences as to the coverage, it was not in dispute that all three covered the conduct engaged in by Mr Potts in the present case. It is convenient to note that the proportionate liability provisions under Commonwealth laws mirror those under Pt 4 of the Civil Liability Act 2002 (NSW), which have been addressed in several cases.
It is sufficient for present purposes to set out s 87CB and related provisions in Pt VIA of the Competition and Consumer Act.
87CB Application of Part
(1) This Part applies to a claim (an apportionable claim) if the claim is a claim for damages made under section 236 of the Australian Consumer Law for:
(a) economic loss; or
(b) damage to property;
caused by conduct that was done in a contravention of section 18 of the Australian Consumer Law.
(2) For the purposes of this Part, there is a single apportionable claim in proceedings in respect of the same loss or damage even if the claim for the loss or damage is based on more than one cause of action (whether or not of the same or a different kind).
(3) In this Part, a concurrent wrongdoer, in relation to a claim, is a person who is one of 2 or more persons whose acts or omissions (or act or omission) caused, independently of each other or jointly, the damage or loss that is the subject of the claim.
(4) For the purposes of this Part, apportionable claims are limited to those claims specified in subsection (1).
(5) For the purposes of this Part, it does not matter that a concurrent wrongdoer is insolvent, is being wound up or has ceased to exist or died.
Because NAB's claim was a claim for damages for economic loss caused by conduct in contravention of s 18 of the Australian Consumer Law (for which damages were available under s 236) it was not in doubt that the claim was an "apportionable claim". The other party was said to be DSH. The operative provision reads as follows:
87CD Proportionate liability for apportionable claims
(1) In any proceedings involving an apportionable claim:
(a) the liability of a defendant who is a concurrent wrongdoer in relation to that claim is limited to an amount reflecting that proportion of the damage or loss claimed that the court considers just having regard to the extent of the defendant's responsibility for the damage or loss; and
(b) the court may give judgment against the defendant for not more than that amount.
[6]
Conclusion
For the foregoing reasons, the findings of the primary judge with respect to liability must be upheld. The failure of the judge to carry out an assessment of the proportionate liability defence may have been the result of a reasonable apprehension that the case could only be made good by reference to the wrongdoing of Mr Abboud, which was not established, or it may have been an inadvertent omission. In any event, the appeal must be dismissed. Mr Potts must pay NAB's costs of the appeal.
In this appeal the Court makes the following order:
1. Appeal dismissed.
2. The appellant is to pay the respondent's costs.
[7]
DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated.
Decision last updated: 26 August 2022
mpanies Code (NSW)
Competition and Consumer Act 2010 (Cth), Pt VIA, ss 87CB, 87CD, 87CF, 87CI, Sch 2 - Australian Consumer Law, ss 18, 236
Corporations Act 2001 (Cth), ss 9, 95A, 180, 254T, 254V, 256B, 257A, 260A, 1041H, 1041L, 1317H
Cases Cited: Adler v Australian Securities and Investments Commission (2003) 46 ACSR 504; [2003] NSWCA 131
Australia & New Zealand Banking Group Ltd v Westpac Banking Corporation (1988) 164 CLR 662; [1988] HCA 17
Australian Securities and Investments Commission v Adler (2002) 41 ACSR 72; [2002] NSWSC 171
Australian Securities and Investments Commission v Cassimatis (No 8) (2016) 336 ALR 209; [2016] FCA 1023
Australian Securities and Investments Commission v Healey (2011) 196 FCR 291; [2011] FCA 717
Australian Securities and Investments Commission v Maxwell (2006) 59 ACSR 373; [2006] NSWSC 1052
Australian Securities and Investments Commission v Rich (2009) 75 ACSR 1; [2009] NSWSC 1229
Bell Group Ltd (in liq) v Westpac Banking Corporation (No 9) (2008) 39 WAR 1; [2008] WASC 239
Berry v CCL Secure Pty Ltd (2020) 271 CLR 151; [2020] HCA 27
Brady (Inspector of Taxes) v Group Lotus Car Cos plc [1987] 2 All ER 674
Browne v Dunn (1893) 6 R. 67
Campbell v Backoffice Investments Pty Ltd (2009) 238 CLR 304; [2009] HCA 25
Caron and Seidlitz v Jahani and McInerney in their capacity as liquidators of Courtenay House Pty Ltd (in liq) & Courtenay House Capital Trading Group Pty Ltd (in liq) (No 2) (2020) 102 NSWLR 537; [2020] NSWCA 117
Cassimatis v Australian Securities and Investments Commission (2020) 275 FCR 533; [2020] FCAFC 52
Connective Services Pty Ltd v Slea Pty Ltd (2019) 267 CLR 461; [2019] HCA 33
Day v SAS Trustee Corporation [2021] NSWCA 71
Devaynes v Noble (1816) 35 ER 781
DSHE Holdings (Receivers & Managers Appointed) (In Liquidation) v Nicholas Abboud (No 3); National Australia Bank Limited v Nicholas Abboud (No 4) [2021] NSWSC 673
Gould v Vaggelas (1985) 157 CLR 215; [1985] HCA 75
Hadgelias Holdings Pty Ltd v Seirlis [2015] 1 Qd R 337; [2014] QCA 177
Hagan v Waterhouse (1991) 34 NSWLR 308
Hunt & Hunt Lawyers v Mitchell Morgan Nominees Pty Ltd (2013) 247 CLR 613; [2013] HCA 10
Lee v Lee (2019) 266 CLR 129; [2019] HCA 28
Lewis v Australian Capital Territory (2020) 271 CLR 192; [2020] HCA 26
Lord Buddha Pty Ltd (in liq) v Harpur (2013) 41 VR 159; [2013] VSCA 101
Marks v GIO Australia Holdings (1996) 196 CLR 494; [1998] HCA 69
Murphy v Overton Investments Pty Ltd (2004) 216 CLR 388; [2004] HCA 3
Pilmer v Duke Group Ltd (in liq) (2001) 207 CLR 165; [2001] HCA 31
Re CSR Ltd (2010) 183 FCR 358; [2010] FCAFC 34
Re Hallett's Estate (1880) 13 Ch D 696
Robinson v 470 St Kilda Road Pty Ltd (2018) 263 FCR 572; [2018] FCAFC 84
Rosenberg v Percival (2001) 205 CLR 434; [2001] HCA 18
Scalise v Bezzina [2003] NSWCA 362
Segenhoe Ltd v Akin (1990) 29 NSWLR 569
Shafron v Australian Securities and Investments Commission (2012) 247 CLR 465; [2012] HCA 18
Sidhu v Van Dyke (2014) 251 CLR 505; [2014] HCA 19
Smith v Noss [2006] NSWCA 37
Suttor v Gundowda Pty Ltd (1950) 81 CLR 418; [1950] HCA 35
Termite Resources NL (in liq) v Meadows (No 2) (2019) 370 ALR 191; [2019] FCA 354
Tomasetti v Brailey [2012] NSWCA 399
Trevor v Whitworth (1887) 12 App Cas 409
Vines v Australian Securities and Investments Commission (2007) 73 NSWLR 451; [2007] NSWCA 75
Wambo Coal Pty Ltd v Sumiseki Materials Co Ltd (2014) 88 NSWLR 689; [2014] NSWCA 326
Westpac Banking Corporation v Jamieson [2016] 1 Qd R 495; [2015] QCA 50
Williams v Pisano (2015) 90 NSWLR 342; [2015] NSWCA 177
Woodhouse v Fitzgerald (2021) 104 NSWLR 475; [2021] NSWCA 54
Wormald v Maradaca Pty Ltd [2020] NSWCA 289
Wyzenbeek v Australasian Marine Imports Pty Ltd (in liq) (2019) 272 FCR 373; [2019] FCAFC 167
Yebdoo v Holmewood [2021] NSWCA 119
Texts Cited: Commonwealth of Australia, Inquiry into the Law of Joint and Several Liability: Report of Stage 2 (1995)
Explanatory Memorandum, Corporations Amendment (Corporate Reporting Reform) Bill 2010 (Cth)
Yuen-Yee Cho and Vishaal Kishore, "The 'material prejudice' test and the financial assistance prohibition" (2004) 78 ALJ 194
Commonwealth House of Representatives, Parliamentary Debates (Hansard), 26 May 2010 at 4132
Category: Principal judgment
Parties: 2021/314709 (Company appeal)
DSHE Holdings Ltd (receivers and managers appointed) (in liq) (Appellant)
Michael Thomas Potts (First Respondent)
Nicholas Abboud (Second Respondent)
Solicitors:
Norton Rose Fulbright Australia (DSHE Holdings Ltd and National Australia Bank Ltd)
Hall & Wilcox Lawyers (Mr Potts and Mr Abboud in the Potts and HSBC appeals)
Clayton Utz (Mr Potts and Mr Abboud in the Company appeal)
File Number(s): 2021/314709; 2021/289674; 2021/311103
Publication restriction: Nil
Decision under appeal Court or tribunal: Supreme Court of New South Wales
Jurisdiction: Equity Division - Commercial List
Citation: [2021] NSWSC 673
Date of Decision: 11 June 2021
Before: Ball J
File Number(s): 2017/81927; 2017/81938
HEADNOTE
[This headnote is not to be read as part of the judgment]
These three appeals arise from events culminating in the collapse, in January 2016, of the retail business carried on under the name "Dick Smith". The company, Dick Smith Holdings Ltd ("DSH"), went into voluntary administration in January 2016 and into liquidation in July of the same year. A number of proceedings were brought, of which only two are presently relevant, namely (i) by National Australia Bank Ltd ("NAB") and HSBC Bank Australia Ltd ("HSBC") (jointly), and (ii) by the receivers appointed to DSH on behalf of the company. Mr Nicholas Abboud, the Managing Director and Chief Executive Officer of DSH, and Mr Michael Potts, the company's secretary, Chief Financial Officer and a director, were defendants to both proceedings. Six non-executive directors of DSH were also defendants to the proceeding brought by the company, unsuccessfully. All claims against Mr Abboud failed. The NAB's claim against Mr Potts succeeded. The trial of both proceedings was heard by Ball J in the Equity Division.
Three appeals arising from those proceedings were heard together. The first was brought by DSH against Messrs Abboud and Potts (2021/314709). The second was brought by HSBC against Messrs Abboud and Potts (2021/311103). The third was brought by Mr Potts against NAB (2021/289675). The company did not pursue its claims against the non-executive directors.
The Court (Leeming JA, Kirk JA and Basten AJA) delivered one joint judgment dealing with the three appeals in turn.
Company appeal: 2021/314709
DSH alleged, relevantly, that Messrs Potts and Abboud breached their duties under s 180 of the Corporations Act 2001 (Cth) by voting in favour of board decisions to declare an interim dividend of $16.555m in February 2015 and a final dividend of $11.826m in August 2015. It was said that DSH was having cash flow difficulties which would be exacerbated by payment of the dividends, and that Messrs Potts and Abboud failed to consider, with reasonable care and diligence or at all, whether the payment of the dividends would comply with s 254T of the Corporations Act and, in particular, whether the payment would materially prejudice DSH's ability to pay its creditors.
As regards the interim dividend, the primary judge held DSH had not established that either Mr Potts or Mr Abboud had contravened s 180. As regards the final dividend, his Honour held that DSH had established a contravention of s 180 by Mr Potts but not by Mr Abboud. However, the judge held that the company had not suffered loss as a result of Mr Potts' contravention.
The principal issues on appeal were as follows:
(i) Did the primary judge err in finding that Mr Potts contravened s 180 of by voting in favour of the decision to pay the final dividend, and did he err in finding that Mr Abboud did not do so?
(ii) Did the primary judge err in finding that neither Mr Potts nor Mr Abboud contravened s 180 by voting in favour of the resolution to pay the interim dividend?
(iii) To the extent that any contraventions are made out, did his Honour err in finding that they did not result in DSH suffering any damage for the purposes of s 1317H of the Corporations Act? The Court upheld the appeal in part, concluding that both Mr Potts and Mr Abboud had contravened s 180 with respect to the payment of the final dividend, and that they were liable to compensate the company for the amount of that payment, together with interest.
The Court upheld the appeal in part, as regards the final dividend.
As to issue (i):
(1) Section 254T(1)(c) of the Corporations Act provides that a company must not pay a dividend unless, amongst other things, the payment "does not materially prejudice the company's ability to pay its creditors". That encompasses not only prejudice to the company's ability to pay creditors per se but also its ability to pay debts as and when they fall due: at [80]-[99]. That a company had a practice of paying creditors late does not necessarily mean that s 254T would be contravened by the company paying a dividend, although it does serve to raise the question: at [101]-[102]. Material prejudice of the relevant kind might potentially be avoided by the company holding trading stock which could be sold, but the issue will turn on the facts: at [105]-[107].
(2) A contravention of directors' duties may be made out by reference to failing to take reasonable care to ensure that the company did not breach other legal norms. But merely because an action of a company is likely to breach, will breach, or does in fact breach some other legal norm does not necessarily establish a breach of the duties owed by the directors to the company. The converse is also true: just because an apprehended breach did not eventuate, it does not necessarily mean that a director complied with his or her duties: at [111]-[116].
Australian Securities and Investments Commission v Maxwell (2006) 59 ACSR 373; [2006] NSWSC 1052 at [104], [110]; Australian Securities and Investments Commission v Cassimatis (No 8) (2016) 336 ALR 209; [2016] FCA 1023 at [537], [540]; and Cassimatis v Australian Securities and Investments Commission (2020) 275 FCR 533; [2020] FCAFC 52 at [71]-[79], [179]-[184] and [458]-[466], applied.
(3) The primary judge did not err in finding that Mr Potts contravened his duty as a director under s 180 of the Corporations Act by voting in favour of payment of a final dividend in circumstances where the cash flow projection available at the time indicated that the company would have a cash shortfall of some $31 million at the time the dividend was to be paid, which shortfall was to be addressed by deferring the payment of creditors: at [147]-[149]. Reliance on industry practice with respect to late payment of trade creditors could not be an answer to an alleged failure properly to consider the distinct issue of whether payment of a dividend may contravene s 254T: at [151]-[154]. Mr Potts' argument that the shortfall could be explained by cash sources not taken into account by the primary judge was not made out: at [169]-[170] and [181].
(4) The primary erred in finding that Mr Abboud did not contravene s 180. Mr Abboud understood at the relevant time that DSH from time to time was not able to pay its creditors as and when they fell due: at [191]-[192]. In that context it is not a sufficient answer to the company's arguments with respect to s 254T to say that Mr Abboud was not aware of the detailed cash flow projections. He should have asked Mr Potts for more detailed information about the cash flow position before supporting the dividend recommendation, and in any event he failed properly to consider the possibility of contravention of s 254T by way of payment of the final dividend causing material prejudice to the company's ability to pay its creditors. He did not exercise the degree of care and diligence that a reasonable person in his position as a director and CEO would have exercised: at [211]-[212].
(5) Mr Abboud was sufficiently informed of and confronted with the company's case focused on s 254T: at [223].
Browne v Dunn (1893) 6 R 67; Scalise v Bezzina [2003] NSWCA 362, applied.
As to issue (ii):
(6) The primary judge did not err in finding that neither of Messrs Abboud and Potts contravened s 180 with respect to the payment of the interim dividend: at [238].
(7) At the relevant time DSH had fallen into the practice of regularly deferring payment of some of its creditors. However, the question posed by s 254T is whether the company's ability to pay is materially prejudiced by the payment of the dividend. The fact that the interests of creditors are being prejudiced by the actions of the company at the time of payment of the dividend does not, of itself, establish a contravention of the provision. The evidence did not establish that DSH's ability to pay its creditors was or would be compromised around the payment date: at [239]. That a decision was imprudent, or that there were problems in the management of the company, does not establish that the decision manifested a failure properly to consider s 254T issues, nor that payment of the dividend would materially prejudice the company's ability to pay its creditors: at [244].
As to issue (iii):
(8) The primary judge erred in finding that DSH suffered no damage for the purposes of s 1317H of the Corporations Act. DSH suffered damage by paying out money that would not otherwise have been paid but for the contraventions of s 180: at [270].
(9) Payment of a dividend can constitute damage suffered by the corporation, even though the payment benefits shareholders. The interests of the company and the shareholders are not identical: at [264]-[269].
Pilmer v Duke Group Ltd (in liq) (2001) 207 CLR 165; [2001] HCA 31 at [18] and [48]-[65]; Bell Group Ltd (in liq) v Westpac Banking Corporation (No 9) (2008) 39 WAR [2008] WASC 239 at [4395]; Australian Securities and Investments Commission v Cassimatis (No 8) at [515]-[517]; Segenhoe Ltd v Akin (1990) 29 NSWLR 569; [1990] Aust Torts Reports 81-033, applied.
(10) The onus was on DSH to establish that but for the contraventions of Messrs Abboud and Potts it would not have suffered the loss that it did. DSH discharged that onus: at [277], [284] and [295]-[296].
Berry v CCL Secure Pty Ltd (2020) 271 CLR 151; [2020] HCA 27 at [28] and [64]-[65]; Termite Resources NL (in liq) v Meadows (No 2) (2019) 370 ALR 191; [2019] FCA 354 at [732]; Brady (Inspector of Taxes) v Group Lotus Car Cos plc [1987] 2 All ER 674 at 686-687, applied.
HSBC appeal: 2021/311103
HSBC participated in a Syndicated Facility Agreement in June 2015, and in November 2015 entered into an Extension Agreement temporarily increasing the funds available to DSH from $60m to $80m. HSBC alleged at trial that its entry into each transaction was caused by the misleading and deceptive conduct of Messrs Abboud and Potts. The primary judge rejected the claim that there had been misleading or deceptive conduct prior to HSBC entering the Syndicated Facility Agreement, but found that Mr Potts had engaged in misleading or deceptive conduct prior to agreeing to extend the facility. However, the primary judge found that HSBC had not established either causation or loss, because HSBC had not shown what it would have done if it had been told that DHS was suffering from liquidity problems, and because in fact while most of the additional $20m was drawn down, it was also repaid.
The principal issues in this appeal were:
(i) whether the primary judge had erred in failing to find causation; and
(ii) whether the primary judge had erred in failing to find loss.
The Court dismissed the appeal.
As to issue (i):
(1) There is a distinction between a person who enters into contractual relations as a result of misleading and deceptive conduct, and a person who is already in contractual relations with a person who engaged in misleading and deceptive conduct which causes an alteration to those contractual relations. It was for HSBC to establish what it would have done, thereby establishing recoverable loss or damage. There was no error in the primary judge finding that HSBC has failed to do so: at [314]-[320].
Berry v CCL Secure Pty Ltd [2020] HCA 24; 94 ALJR 715 and Wyzenbeek v Australasian Marine Imports Pty Ltd (in liq) (2019) 272 FCR 373; [2019] FCAFC 167 considered.
As to issue (ii):
(2) The "rule" in Clayton's case did not produce the result that the repayments which occurred after the Extension Agreement was drawn down were to be attributed to monies lent under the Syndicated Facility, with the result that it could recover the funds lent under the Extension Agreement: at [335]-[341].
Potts appeal: 2021/289675
The primary judge found NAB alleged that it had been misled and deceived by Mr Potts, at a meeting on 6 May 2015 and in a telephone call a few days later, when it entered into the Syndicated Facility Agreement. The issue was what was said about the building up of stock in January 2015 and the steps taken by DSH to address the problem. The primary judge found in favour of NAB. Mr Potts appealed.
The principal issues in this appeal were:
(i) whether Mr Potts' conduct was misleading or deceptive;
(ii) whether Mr Potts' conduct had caused NAB to enter into the agreement; and
(iii) whether, if Mr Potts were liable, he could avail himself of a proportionate liability partial defence.
The Court dismissed the appeal.
As to issue (i):
(1) The primary judge did not err in finding that Mr Potts' conduct was misleading and deceptive. The evidence supported the findings that (i) Mr Potts knew the issue with pursuing O&A rebates; (ii) failed to raise the issue with the NAB representatives during the 6 May meeting and subsequent telephone calls and (iii) did not provide a sufficient explanation as to steps taken to address the problem: at [377]-[400].
As to issue (ii):
(2) The fact that the primary judge placed no weight on the generalised evidence of reliance by NAB officers did not prevent a finding based on the contemporaneous documents and the cross-examination that the conduct caused NAB to enter into the transaction. The contemporaneous evidence supported the finding that the NAB officers would have considered the information which Mr Potts withheld to be highly significant, and would have not agreed to participate in the syndicate with HSBC had it been disclosed: at [401]-[433].
Campbell v Backoffice Investments Pty Ltd (2009) 238 CLR 304; [2009] HCA 25; Rosenberg v Percival (2001) 205 CLR 434; [2001] HCA 18, considered.
As to issue (iii):
(3) A defence of proportionate liability is available where there is one or more legally actionable acts or omissions of two persons acting jointly which causes loss or damage, the subject of the claim: at [437].
Competition and Consumer Act 2010 (Cth), s 87CB, Sch 2 - Australian Consumer Law, ss 18, 236; Corporations Act 2001 (Cth), ss 1041H, 1041L; Australian Securities and Investments Commission Act 2001 (Cth), ss 12DA, 12GP.
Hunt & Hunt Lawyers v Mitchell Morgan Nominees Pty Ltd (2013) 247 CLR 613; [2013] HCA 10, followed.
(4) However, the only potential wrongdoer other than Mr Potts was DSH. A vicariously liable principal cannot be a concurrent wrongdoer under the relevant statutory regimes. Mr Potts did not establish that some acts and omissions attributable to DSH, other than his own acts vicariously attributable to DSH, led to DSH being a concurrent wrongdoer: at [444]-[449].
Competition and Consumer Act 2010 (Cth), ss 87CF, 87CI.
Williams v Pisano (2015) 90 NSWLR 342; [2015] NSWCA 177 applied.
Tomasetti v Brailey [2012] NSWCA 399; Robinson v 470 St Kilda Road Pty Ltd (2018) 263 FCR 572; [2018] FCAFC 84, doubted.
The construction of s 254T
At the relevant times s 254T provided as follows:
254T Circumstances in which a dividend may be paid
(1) A company must not pay a dividend unless:
(a) the company's assets exceed its liabilities immediately before the dividend is declared and the excess is sufficient for the payment of the dividend; and
(b) the payment of the dividend is fair and reasonable to the company's shareholders as a whole; and
(c) the payment of the dividend does not materially prejudice the company's ability to pay its creditors.
Note 1: As an example, the payment of a dividend would materially prejudice the company's ability to pay its creditors if the company would become insolvent as a result of the payment.
Note 2: For a director's duty to prevent insolvent trading on payment of dividends, see section 588G.
(2) Assets and liabilities are to be calculated for the purposes of this section in accordance with accounting standards in force at the relevant time (even if the standard does not otherwise apply to the financial year of some or all of the companies concerned).
The focus of the dispute was the third element of the prohibition, namely that "the payment of the dividend does not materially prejudice the company's ability to pay its creditors". Two principal questions of construction were suggested to arise. One is whether paragraph (c) is to be construed as if it included the words "as and when they fall due" (or, as it was put equivalently, "in full and on time"), as was submitted by DSH but disputed by the respondents. In fact, as shall be seen, this question does not involve reading in words but, rather, understanding what is conveyed by the notion of "prejudice" in the context of the subsection. The other question of construction concerned the company's "ability" to pay its creditors, and whether that was satisfied merely by the presence of trading stock which could be sold.
On the first issue, the difference between the parties was not as great as first appeared. There is good reason to be wary of reading words into text. That is especially so where, as the respondents to this appeal submitted, it is somewhat striking that the familiar words "as and when they fall due" are absent from s 254T(1)(c), in contrast to the definition of "solvency resolution" in s 9 and in the definition of solvency in s 95A. However, senior counsel for DSH also expressed the company's construction in terms of identifying what constitutes the "prejudice" to which the paragraph refers. So understood, that was not far-removed from the following submission put by senior counsel for Mr Potts (who took the lead role on this point for the respondents):
"the focus is on in the section ability to pay, not ability to pay on time. Clearly, if one cannot pay on time, that may be an issue, but in my submission that would be captured by materially prejudice. If the effect of the payment of the dividend was that some creditors would be paid one day late and then creditors would be paid on time. In my submission one wouldn't say there was a material prejudice to the ability to pay creditors.
… if there is a material delay in the company's ability, if there is a material impact on the company's ability to pay its creditors on time, then that would be a matter that would be arguably material prejudice."
The significance of s 254T to the alleged contraventions of s 180
Section 254T is not a civil penalty provision. The claim by DSH was not for a breach of s 254T per se, but rather that Messrs Potts and Abboud breached their duties as directors of the company under s 180 of the Corporations Act by voting in favour of payment of the dividends.
It is well-established that a contravention of directors' duties may be made out by failing to take reasonable care to ensure that the company did not breach other legal norms, whether within or outside the Corporations Act. Both sides referred to Cassimatis v Australian Securities and Investments Commission (2020) 275 FCR 533; [2020] FCAFC 52, in which a majority of the Full Court of the Federal Court upheld findings by Edelman J at first instance that directors of a financial services provider (Storm Financial) contravened s 180 by failing to exercise due care and diligence to ensure that the company avoided breaching legal requirements relating to the provision of financial advice.
It is necessary in such a case to keep in focus that the relevant contravention is of the director's duty owed to the company. Merely because an action of a company is likely to breach, will breach, or does in fact breach some other legal norm does not necessarily establish a breach of the duties owed by the directors to the company. Conversely, just because an apprehended breach did not in fact occur does not necessarily establish that there was no failure to comply with the duties of directors. Brereton J addressed the issue in Australian Securities and Investments Commission v Maxwell (2006) 59 ACSR 373; [2006] NSWSC 1052:
"[104] There are cases in which it will be a contravention of their duties, owed to the company, for directors to authorise or permit the company to commit contraventions of provisions of the Corporations Act. Relevant jeopardy to the interests of the company may be found in the actual or potential exposure of the company to civil penalties or other liability under the Act, and it may no doubt be a breach of a relevant duty for a director to embark on or authorise a course which attracts the risk of that exposure, at least if the risk is clear and the countervailing potential benefits insignificant. But it is a mistake to think that ss 180, 181 and 182 are concerned with any general obligation owed by directors at large to conduct the affairs of the company in accordance with law generally or the Corporations Act in particular; they are not. They are concerned with duties owed to the company. …
[110] Generally speaking, therefore, ss 180, 181 and 182 do not provide a backdoor method for visiting, on company directors, accessorial civil liability for contraventions of the Corporations Act in respect of which provision is not otherwise made. This is all the more so since the Corporations Act makes provision for the circumstances in which there is to be accessorial civil liability. Whether there were in this case breaches of the directors' duties - and, in particular, of their duty of care and diligence - depends upon an analysis of whether and to what extent the corporation's interests were jeopardised, and if they were, whether the risks obviously outweighed any potential countervailing benefits, and whether there were reasonable steps which could have been taken to avoid them."
The claimed significance of industry practice
It is convenient at this point to address an argument raised by the respondents, who sought to place some reliance on an industry practice of deferring payment of creditors. The primary judge referred to evidence to that effect at [483] when considering arguments relating to the interim dividend:
"The evidence is that that was common in the retail industry. Mr Tomlinson gave unchallenged evidence to that effect. His evidence was supported by a Discussion Paper 'Australian Prompt Payment Protocol' published by the Australian Government, Department of Industry, Innovation, Climate Change, Science, Research and Tertiary Education, which was tendered by the defendants. According to that discussion paper 'over 32 per cent of all business payments were made beyond the standard 30 day term' and the average for retail trade was 53.5 days."
However, his Honour did not attribute any particular weight to this evidence in his findings on s 180 with respect to either the interim or final dividend. He was correct not to do so.
As Edelman J explained in the passage from Australian Securities and Investments Commission v Cassimatis quoted above at [114], s 180 requires directors to take account of the interests of the corporation, including any threats to those interests. A failure to comply with legal obligations may give rise to a range of risks: reputational; litigious; regulatory; and the potential for undermining relationships with creditors or others. Such risks are likely to be amplified if the failure to comply is repeated. The fact that others in the relevant industry may be doing the same thing is not likely to remove these risks to the interests of the company. Of course, any alleged contravention of s 180 must be assessed in light of the particular facts of any case.
The respondents sought to rely upon views expressed by Austin J in Australian Securities and Investments Commission v Rich (2009) 75 ACSR 1; [2009] NSWSC 1229 that in a s 180 case involving a series of late payments "it would be possible to reach the conclusion that a defendant's conduct has been reasonable" (at [2498], see also [2715]), and his Honour made some mention of industry practice in this regard (at [2712]). These views simply manifest that the issue is fact-dependent. Here, DSH's practice of pushing out creditors clearly did potentially threaten detriment to the interests of the company. For example, as is discussed below, some suppliers withheld supply of further products until invoices were paid.
In any event, all that is beside the point, as reliance on industry practice with respect to late payment of trade creditors could not be an answer to an alleged failure properly to consider the distinct issue, raised here, of whether payment of a dividend may contravene s 254T. Payment of a dividend in contravention of that provision gave rise to distinct regulatory risks, together with the risks to relationships with current and future suppliers.
Whether this issue was fairly raised by DSH
Senior counsel for Mr Abboud sought to resist the case made on appeal on both pleading and procedural fairness grounds. The pleading argument focused on what Mr Abboud's representatives perceived to be a proposed contravention of s 180 not founded on a link to s 254T. We have identified at [126] the two limbs of the s 180 argument, as pleaded. The issues considered above fall within the second limb, and are indeed focussed on a link to s 254T.
The procedural fairness point was founded on the rule in Browne v Dunn. Senior counsel contended that the following four matters should have been, but were not, specifically put to Mr Abboud in cross-examination:
1. that he could not rely on the Cash Flow Statement in the board papers;
2. that, as a result, he should have sought to obtain the daily cash flow projection;
3. that the need to defer payment of creditors in order to pay the interim dividend in April 2015 should have led him to query if the same would happen again; and
4. that failure to do these things was a breach of the Board Charter.
Mr Abboud was asked in cross-examination whether he was aware of daily cash flow figures, indicating that he did not recall. He was asked more generally if he was receiving any cash flow figures other than those which were provided to the board; again, he could not recall. Beyond that, Mr Abboud was not asked about the specific matters identified by his counsel.
As Mason P explained in Scalise v Bezzina [2003] NSWCA 362 at [95]-[98], "[t]he rule [in Browne v Dunn] is rooted in considerations of fairness". Mason P observed that "[i]f the contending party keeps mum until after the close of the other party's case then the other party may unfairly have lost the opportunity to corroborate, elucidate or explain". He also explained that "[t]here is no unfairness in letting the sleeping dog lie … so long as the moving party has by pleadings or otherwise signalled the matter sought to the proved and led necessary evidence on the topic" (see also, more recently, Yebdoo v Holmewood [2021] NSWCA 119 at [57]; Day v SAS Trustee Corporation [2021] NSWCA 71 at [53]).
The issue is not, however, whether the four matters identified by Mr Abboud's counsel on appeal were squarely raised with him in cross-examination. The Board Charter is not a necessary part of DSH's case against Mr Abboud, and may be put to one side. The other three matters identified by Mr Abboud are more closely related to DSH's case, but those were not matters that needed to be put to him in precise terms. There was no challenge to the finding by the primary judge that the Cash Flow Statement in the board papers was accurate (albeit incomplete insofar as it did not disclose payments at the end of the calendar month), but DSH's point is that it was not sufficient given, especially, the payments at the end of each calendar month, of which Mr Abboud was aware.
Payment of a dividend as "damage"
The claim for damages was made under s 1317H(1) of the Corporations Act, which provides as follows:
1317H Compensation orders - corporation/scheme civil penalty provisions
Compensation for damage suffered
(1) A Court may order a person to compensate a corporation, registered scheme or notified foreign passport fund for damage suffered by the corporation, scheme or fund if:
(a) the person has contravened a corporation/scheme civil penalty provision in relation to the corporation, scheme or fund; and
(b) the damage resulted from the contravention.
The order must specify the amount of the compensation.
Section 180 is a "civil penalty provision".
The term "damage" is not defined, although subs (2) provides that it may include profits made by any person resulting from the contravention, and subs (3) indicates that it may include any diminution in value of property of a scheme or fund. Those provisions do not suggest a narrow approach was intended to be taken to the notion of "damage" in this section.
In Murphy v Overton Investments Pty Ltd (2004) 216 CLR 388; [2004] HCA 3 at [45] the High Court said that references in the Trade Practices Act 1974 (Cth) "to 'loss or damage' can be given no narrow meaning". And in Marks v GIO Australia Holdings (1996) 196 CLR 494; [1998] HCA 69, at [46], McHugh, Hayne and Callinan JJ stated that in misleading conduct claims the central notion is that "the plaintiff has sustained (or is likely to sustain) a prejudice or disadvantage as a result of altering his or her position under the inducement of the misleading conduct". There is no reason to doubt that similar principles apply as regards s 1317H.
The section requires that the damage "resulted from" the contravention. The parties accepted that "only the damage which as a matter of fact was caused by the contravention can be the subject of an order for compensation": Adler v Australian Securities and Investments Commission (2003) 46 ACSR 504; [2003] NSWCA 131 at [709]. That raises an issue of factual causation. It is not necessary to consider here what normative causal constraints may also apply.
DSH's damages claim was simple: it claimed the amount of the dividends that it had paid out. There was no claim for consequential loss. It was not argued, for example, that the payment of the dividends had tipped the company into insolvency such that there was some much greater liability.
The respondents argued that payment by a company of a dividend could not be "damage suffered by the corporation" within the meaning of s 1317H(1). That argument is rejected.
Declaring and paying the dividend caused prejudice or disadvantage to the company in that it had diminished its assets; it had less money. Of course, any payment - whether to shareholders by way of dividend, or to a creditor, or to others - means that the company will have less money. In general such payments would not reasonably be described as causing the company a disadvantage. There are few businesses which do not have to spend money in order to make money. But that is besides the point for current purposes. Here, the claim for damages under s 1317H is founded on a contravention of s 180 of the Corporations Act. It was the declaration of a dividend and the consequent payment out of money as a result of a breach of that statutory norm which means that the loss of money can be said to be a prejudice or disadvantage to the company. Mr Potts ignores that point in submitting that on DSH's arguments "it is difficult to see the basis on which directors of any company could declare a dividend, consistently with their duties".
The second reason of the primary judge - factual causation
The second reason of the primary judge raised an issue of factual causation. His Honour was not persuaded that but for any contraventions the dividend would not have been paid. He noted that the board had the options of delaying payment and it would have had sufficient cash to pay the dividend in December 2015, and another option would have been to require management to raise additional cash through the sale of stock to enable the dividend to be paid.
Both of those options would indeed have been available to the board. As for delaying the payment, as discussed above at [147(6)], the daily cash flow forecast at the time of the August 2015 board meeting projected that for the week ending on Friday 11 December 2015 the company's cash position would be negative $130.376m, thus within the $135m facility, then falling significantly the week after that to negative $105.927m. As for the ability to sell stock, his Honour at [500] had accepted the evidence of Mr Wavish that DSH "had the ability to raise additional cash by, for example, conducting a sale either generally or in one or more specific markets". Accepting that those options were available, the question remains whether or not the board would have taken them.
Senior counsel for Mr Abboud suggested that the company's pleaded causal pathway depended upon it showing that all directors had breached their duties. Yet, unsurprisingly, the pleading also encompassed the possibility that only some of the directors breached.
The relevant causal pathway that DSH was implicitly invoking was correctly identified by the primary judge at [505]:
"Although the plaintiffs do not deal specifically with the position if only one director is found to be in breach of s 180, their case must be that, if Mr Potts had complied with his duties, he would have told the other directors that the daily or weekly cash flow forecasts showed that DSH would exceed its facility limits for most of the period between September and December 2015 and that far from paying a dividend the company would need to take steps to raise additional cash to pay creditors. The result, the plaintiffs appear to submit, is that the dividend would not have been paid."
The onus was on DSH to establish that but for the contraventions it would not have suffered the loss that it did: see analogously Berry v CCL Secure Pty Ltd (2020) 271 CLR 151; [2020] HCA 27 at [28] and [64]-[65]; also note Termite Resources NL (in liq) v Meadows (No 2) (2019) 370 ALR 191; [2019] FCA 354 at [732]. That is a consequence of the general principle that those who claim must prove: see eg Brady (Inspector of Taxes) v Group Lotus Car Cos plc [1987] 2 All ER 674 at 686-687 per Browne-Wilkinson VC.
The evidence of Mr Byrne
The primary judge said at [582] that "no weight can be placed on Mr Byrne's evidence of reliance". This conclusion was challenged by HSBC. It was said that in circumstances where the cross-examiner chose not to confront Mr Byrne with the hypothesis that he was told about DSH's serious liquidity problems, it was inappropriate for his Honour to make the finding that he did, and further that the selective approach to cross-examination should have been disclosed in the reasons.
HSBC's submission cannot be accepted. It turns upon the form of Mr Byrne's evidence, accurately described by the primary judge as given in a "somewhat formulaic way". Mr Byrne was asked to assume that any one or more of four discrete circumstances was the fact. Those four circumstances were (a) ongoing cashflow difficulties unlikely to lessen after January 2016, (b) inadequate procedures, practices or systems to make provision for or write-off obsolete or near end-of-life inventory, (c) a real prospect of an imminent profit downgrade of $5m to $8m and (d) a real prospect that DSH would shortly announce a write-off of $60m of inventory. Mr Byrne then said "if I had been told of any of these matters then I would not have granted credit approval" and that instead he would have required that an independent external reviewer be given access to DSH's records and no credit approval would be granted unless that reviewer reported that DSH would be able to trade for a sufficient period to repay the whole of its debt to HSBC. Thus Mr Byrne's evidence was in a single sentence, framed in terms to suffice for all the ways in which HSBC alleged misleading and deceptive conduct.
Of course, when in fact DSH announced a profit downgrade (about a fortnight before the Extension Agreement was executed) that was not what occurred. Mr Byrne sought to explain this by saying that in his view, despite the Extension Agreement not having been executed, HSBC was "committed". His Honour acknowledged the force of that, and said that little could be inferred from this.
Contrary to HSBC's submission, Mr Byrne was confronted in the witness box with his failure to take the steps he said he would have taken when DSH's financial position became apparent. It was not separately put to him by counsel cross-examining him on behalf of Mr Potts that his evidence of reliance was false insofar as it extended to a misrepresentation as to DSH's ongoing cashflow difficulties, but given the way the evidence was adduced, it was not necessary to do so. It is to be borne in mind that in a single sentence, Mr Byrne was giving necessarily hypothetical evidence of what he would have done if he had been told of any one of four nominated circumstances, and what he would have done if he had been told that two of the nominated circumstances, or three of the nominated circumstances, or all four nominated circumstances were the fact. Further, the nominated circumstances were expressed at a high level of generality (thus, cashflow difficulties "unlikely" to lessen after January 2016 and a "real prospect" of an "imminent" profit downgrade). It was open to the primary judge to take a sanguine view of the value of evidence adduced at that level of generality, years after the event, and to prefer inferences based on what HSBC actually did as the company's parlous circumstances became known to it. In any event, it was put to him (by counsel cross-examining on behalf of Deloitte) that the entirety of his evidence was false. There was nothing missing from the cross-examination which stood in the way of the primary judge giving no weight to Mr Byrne's evidence, or requiring further explanation in his Honour's reasons.
Irrelevant to speculate what HSBC might have done?
Having put Mr Byrne's evidence to one side, the critical reasoning of the primary judge is at [583]-[584]:
"[583] … In my opinion, if Mr Potts had disclosed that the reason DSH wanted an increase in its facility was because it was facing serious liquidity problems, HSBC would not have entered into the Extension Agreement on the terms that it did. But it may well still have granted an extension on some terms. Support for that conclusion can be found in the reaction of the Banks when DSH announced that it was taking a provision of $60 million and Mr Potts asked for an extension of the temporary increase in the facility limit. The Banks did not refuse that extension. Instead, they placed tight restrictions on DSH and monitored DSH's financial position closely. It is true that by that stage the money had been advanced. It is one thing for a lender to agree to an extension of a loan already made. It is quite another for it to agree to lend additional money. Moreover, it is apparent from what happened when the Banks discovered that the Macquarie facility had been repaid on 31 December 2015 that they were willing to take a hard line. But by that stage, HSBC may well have thought that it had been seriously misled in relation to DSH's financial position, which helps to explain why it acted in the way that it did. And the fact that it was prepared to act somewhat precipitously at the end of December 2015 does not establish that it would have done so if DSH had disclosed the true reason it required the increase in the facility limit at the time the increase was requested. It is hard to believe that if HSBC was satisfied that DSH needed an additional $20 million to trade out of its difficulties it would not have advanced that sum on any terms when the Banks agreed to an extension of the facility once they knew the true position. Certainly, there is no evidence from HSBC which would explain why it would not have agreed to advance the money on some terms if it had known the true position. Indeed, an unsatisfactory aspect of Mr Byrne's evidence is that he says in a somewhat formulaic way that he would not have approved the increase if he had known certain things without saying what steps he would have taken and how those steps were consistent with HSBC's policies and procedures. Given the existing relationship between DSH and the Banks it is not plausible that Mr Byrne would simply have refused the increase and that that would have been the end of the matter.
[584] HSBC's case on reliance is that it would not have entered into the Extension Agreement at all. It does not advance an alternative case that it would have been prepared to enter into some other agreement that would have been more beneficial to it. It bears the onus of proof on reliance. I am not satisfied that it has discharged that onus."
Failure to find loss and damage (ground 2)
This ground does not affect the outcome of this appeal, just as it was not necessary to the decision of the primary judge. Nevertheless, it is appropriate to address it. Having found that Mr Potts' conduct did not cause HSBC to enter into the Extension Agreement, his Honour proceeded to find that HSBC's case in relation to the Extension Agreement would fail in any event because it had not proved that it had suffered any loss as a result of Mr Potts' misleading conduct.
The starting point is the extent of DSH's indebtedness to HSBC at the relevant times. Immediately after the additional $20m overdraft became available, DSH proceeded to draw it down, including some $15m on the following day. DSH's maximum indebtedness occurred on 22 October 2015, when its account was drawn down to $77,844,036.35. However, there were very substantial credits on 23 December 2015 (some $18.5m), leading a debit balance of $57,595,897.24. From and after 23 December 2015, the indebtedness never exceeded $60m.
If one were speaking colloquially or commercially, it would be natural to regard the short term overdraft facility for $20m, which was available between 15 November 2015 and 15 January 2016, as having been availed of in November and December, but repaid in full by 24 December 2015. And indeed that was the language used by HSBC and DSH at the time.
Even so, HSBC contended that it had suffered a loss following its entry into the Extension Agreement. The primary judge summarised at [609] the essential dispute between the parties at trial:
"Based on those facts, Mr Potts contends that HSBC suffered no loss as a consequence of executing the Extension Agreement because the amount the subject of the extension had been repaid at the time the receivers were appointed. HSBC, on the other hand, contends that it has still suffered a loss because the cash that DSH generated that was used to reduce the overdraft would have been used to reduce the overdraft as it existed before the extension was granted."
The dispositive reasoning was at [610]:
"I do not accept HSBC's submission. It assumes that if the extension had not been granted DSH would have been able to continue to trade and would have earned the same income and have continued to pay the same creditors as it did in the actual world. None of those assumptions is made out, and one or more of them is unlikely, since the logical consequence of those assumptions is that DSH did not need the extension to the overdraft at all. As Mr Potts submits, it is also difficult to see how the loss HSBC claims could be said to have been caused by Mr Potts's misleading conduct. It is HSBC's case that it was misled into entering into the Extension Agreement and advancing additional money under that agreement. Its loss was the payment of the additional money. That loss was extinguished when the money was repaid. The fact that in the counterfactual world DSH may have had an additional $20 million and that amount may have been used, or may have been available, to repay the amount due to HSBC under the Syndicated Facility does not mean that HSBC suffered a loss that resulted from entry into the Extension Agreement."
Remaining grounds in HSBC appeal - grounds 3, 8 and 9
Ground 3 challenged the dismissal of HSBC's case that it had entered into the Syndicated Facility by reason of Mr Potts' misleading and deceptive conduct at a meeting on 3 February 2015. Success on this ground would carry with it success in relation to the Extension Agreement, but counsel candidly and realistically acknowledged the difficulties which beset this ground, which was deferred in written and oral submissions so as to follow the grounds based on entering into the Extension Agreement.
Ground 8 challenged the failure to find that anything said or left unsaid by Messrs Abboud or Potts caused Mr Rogers on behalf of HSBC to approve the Syndicated Facility.
Ground 9 was consequential, namely, a challenge to the failure to find loss in entering into the Syndicated Facility. Mr Potts accepted that if grounds 3 and 8 were made out, HSBC's loss was $28,851,407.83 plus interest, but that his proportionate liability defence would arise. Grounds 4, 5, 6 and 7 were abandoned before or during the appeal.
Messrs Potts and Abboud attended the meeting on 3 February 2015, and spoke to a PowerPoint presentation which was in evidence. Mr Kowik of HSBC prepared a filenote, known internally as a "call report", either while the presentation was being made, or shortly thereafter. It too was in evidence. Also in attendance on behalf of HSBC were Mr David Katiforis and Mr Matthew Sargent.
DSH was seeking a "key banking partner" to "come to table" to supply a facility for working capital and overdraft. Mr Katiforis is recorded as saying that "HSBC offers unsecured and subordinated to WBC to support Supply Chain Solution". That appears to be a reference to funding to pay trade creditors, and perhaps also to assist DSH to pay its suppliers based in China, which was an advantage of which HSBC was conscious. (Mr Kowik's memorandum of the previous November had stated "Our competitive advantage is to leverage HSBC HK to present a Supply Chain Solution ('SCS') benefit to DSE's suppliers across the APAC region, which make up majority of their supplies and is a growth procurement market for them".)
The main theme of the presentation on 3 February was DSH's rapid and recent growth, which was said to warrant greater funding. The first PowerPoint slide included the words "New CEO, Nick Abboud commenced the turnaround lifting net profit from $6.7m in FY13 to $42.2m in FY14", and in a slide directed to the private label products, there was the statement "Strong improvement in gross margin on better sourcing and review of price points". Mr Kowick's filenote commences with the recent history of the company following its purchase by Anchorage, and continues:
"NA turnaround DSH from NPAT %6.7m FY13 to $42.2m FY14.
Keys turnaround strategy (1) centralise buying power; (2) cost control and commission base sales; (3) supply chain by using each store as warehouses (as compared to JB HiFi has centralise[d] warehouse in Melbourne)."
Neither the fact that there had been reference to purchases to obtain rebates, nor the fact that NAB was aware of overstocking is to the point. The reason the statements made at the meeting and on the telephone were misleading was that they failed to disclose that "a substantial cause of the high level of inventory was the emphasis DSH, and Mr Abboud in particular, placed on the collection of O&A rebates": at [559]. That was a regular practice and was not explained by reference to "opportunistic purchasing" at a particular time. The primary judge accepted that "the true position was that DSH acquired stock that it did not need in order to obtain O&A rebates; and it did that in order to increase its reported profits": at [571]. That was the situation which was not revealed by Mr Potts' statements to Mr Menzies and Mr Taylor. It was not knowledge of overstocking in November/December that was undisclosed; it was the overstocked position in January, following the Christmas sales, which led to concern on the part of NAB.
The judge dealt with the evidence in respect of that issue earlier in his judgment, partly in the following terms:
"219 According to Mr Taylor, either he or Mr Menzies asked why inventory went up in January 2015 rather than down.
220 According to Mr Taylor, Mr Potts replied in words to the following effect:
'We were overstocked after the November/December peak period because a big private label order the buyers had placed with a Hong Kong supplier before Christmas was delayed and did not arrive until late January. However, the good thing about this stock is that it all has good shelf life and will not be superseded. I am confident we can sell the extra stock during the year through normal sales without discounting.'"
The evidence then went on to consider reassurance given by Mr Potts in the following terms:
"221 Mr Menzies then asked what steps had been taken to prevent that happening again. According to Mr Taylor, Mr Potts replied that he had initiated weekly meetings with all the buyers at which he discussed their purchasing and checked that they were buying right stock at the right levels. He said that non-performing buyers had their OTB reduced.
222 According to Mr Taylor, either he or Mr Menzies also asked whether DSH had any way of tracking how inventory was performing. Mr Potts is said to have replied in words to the following effect:
'Our inventory management system tracks sales on a SKU [stock keeping unit] by SKU, store by store basis and reports on sales and inventory in real time. We can drill down into each SKU and see how it is selling in each store and how much stock we have on hand. This is used to plan inventory purchases and monitor SKU and store performance in real time.'"
The judge noted (at [231]) that, following his conversation with Mr Potts on 11 May, Mr Menzies updated his credit memorandum with the following statement:
"The borrower is seeking a two-bank structure with total limits at least $135M; however noted DSH's desire is to obtain facilities of $150M to match their seasonal cycle, namely peak period from October through to February, and provide flexibility for opportunistic trade purchasing."
The judgment continued:
"236 The final draft of the credit memorandum referred to the problem with the late delivery of private label stock in Christmas 2015. After setting out graphs of actual and projected inventory levels from July 2014, the memorandum stated:
• As illustrated in the graph above DSH was holding $335M stock in December 14 compared to forecast $288M in December 15. Inflated stock holdings of ~$47M was driven by overstocking of private label (discussed below).
• Furthermore, management made opportunistic purchasing during January/February 15 to hold an additional ~3 month[s'] stock, to avoid price increases that suppliers were implementing. This and the private label holding have driven the inflated debt requirement in May 15."
Mr Taylor gave evidence that the "principal or only reason" Mr Potts had given him for the overstocking in January 2015 was the late arrival of a shipment of private label stock. He did not recall any other reason being given: at [226].
The judge accepted Mr Taylor's recollection in the following passage:
"227 Mr Taylor's recollection is consistent with the extract from the version of the credit memorandum prepared by Mr Menzies after the meeting, which is quoted above. The file note itself is not as clear. It suggests that Mr Potts said that DSH was overstocked in November and December 2014 compared to June 2015 and remained overstocked in January 2015 because of the late arrival (in late January 2015) of a shipment of private label stock. However, the file note does not record Mr Potts giving any explanation of the position in November or December 2014. Mr Taylor and Mr Menzies were presumably aware of the stock position at the end of December 2014 and the reasons for it because they had read the broker reports including the one issued by Macquarie that gave an explanation for that position. Consequently, no further explanation was necessary. The issue that concerned NAB was why DSH remained overstocked in January 2015. I accept Mr Taylor's evidence that the principal reason Mr Potts gave for that was the delay in receiving a large shipment of private label stock."
In the absence of any contradictory evidence from Mr Potts, there was ample evidence to conclude, as the judge did, that the accounts given to Mr Taylor and Mr Menzies by Mr Potts simply did not reveal the level of overstocking which was resulting from the practice of over-purchasing to obtain O&A rebates. There is no substance in the challenge raised to that finding in ground 1(a).
The issue raised by ground 1(b) related to Mr Potts' statement as to the holding of buyers' meetings. This issue is directly related to the previous issue, dealing with opportunistic purchasing. Quite apart from wanting to understand the cause of the overstocking, NAB directed its enquiries to the proposed treatment for the problem. The judge's finding in that regard had two elements. The first was directed to the substance of the problem:
"572 The evidence is that Mr Potts told Mr Menzies that he had implemented a weekly meeting with the buying team to review purchasing in order to prevent a recurrence of the problem. … The impression that NAB would have obtained from Mr [Potts'] statement was that DSH had identified the reasons for the build-up in stock and taken appropriate steps to prevent it from recurring. However, the true position was that there was no real recognition of the fact that an important contributing factor to the problem was the fact that DSH, with the encouragement of Mr Abboud, was seeking to use O&A rebates to increase its reported profits and no real steps had been taken to prevent a recurrence of that problem. It is true, as I have said, that some of the events that support that conclusion occurred after the conversations between Mr Potts and Mr Menzies. But those events cannot be viewed in isolation. The problem had existed for a number of months. Both Mr Abboud and Mr Potts had been told about it by Mr Borg at least in late 2014. They had not taken any real steps to address the underlying problem of an over-emphasis on O&A rebates. The meeting on 20 April 2015 was not a turning point. If Mr Potts believed that it was, it is to be expected that he would give evidence to that effect."
The second part, omitted from that extract, related to the putative solution, namely the weekly buyers' meetings. The judge stated:
"The only evidence a weekly meeting was introduced is the minutes of the meeting on 20 April 2015 between Mr Abboud, Mr Potts and others to review the position of stock. That meeting was to be between Mr Abboud, Mr Potts, Mr Orrock and Mr Skellern. It is apparent from the minutes that the purpose of the meeting was to ensure that the new OTB target of $104M for May and June was met. It appears that that goal was short-lived since in late May Mr Abboud approved an increase in OTB of $12M which it appears was increased to $20M in June 2015."
Mr Potts submitted on appeal that that finding was erroneous.
The first basis of complaint with respect to that passage was that Mr Borg gave evidence that he believed there had been weekly meetings attended by Mr Potts, called "stock meetings", in April, May, June 2015. Mr Potts submitted that there were also documents that demonstrated that the 20 April meeting (for which there was a set of minutes) was "just the first of the series of meetings between Mr Potts and the buying team for the purpose of monitoring compliance with OTB budgets".
The documentary evidence was somewhat sparse: there was an invitation for a weekly stock meeting issued by Mr Potts on 27 April 2015. On the other hand, Mr Abboud's lengthy affidavit of 20 August 2019, under the heading "inventory management", had a separate heading for "buyers' meetings" which he stated were held "monthly and quarterly". He referred to a "buying team update" which was prepared ahead of each monthly meeting, noting that the May update recorded (par 183):
"(a) Requirements for OTB for May and June of $104M;
(b) Closing stock value at the end of June of $270M;
(c) O&A rebates of $11.73M for May and June; and
(d) Total sales of $589M and margin rate at 26%."
It is true that the primary judge did not identify all the references in the extensive evidence to weekly buyers' meetings. To the extent that the holding of such meetings was evidence of an intention to resolve the problem of over-purchasing to obtain O&A rebates, there was little support in that material for that purpose.
That led to the second complaint in Mr Potts' submissions as to the finding that steps had not been taken to prevent a recurrence of the problem. That was said to be supported by Mr Abboud's affidavit of 20 August 2019.
It was no doubt true that steps were taken in and around April 2015 to reduce the level of stock, primarily by limiting the OTB value, which reduced the buyers' spending budgets. However, the reduction achieved in April was whittled away by increases to the OTB in late May and June. As NAB submitted, the problem which needed to be addressed was the over-emphasis on purchasing to obtain O&A rebates. This issue has been extensively addressed in discussing the breaches of duty by Messrs Abboud and Potts under s 180 of the Corporations Act and need not be repeated here. Two passages in the primary judge's reasons suffice for present purposes.
Although Mr Potts did not give evidence, Mr Abboud was cross-examined on a detailed affidavit of 20 August 2019. It is helpful to note the judge's summary of that evidence because it explains a distinction which Mr Potts' submissions in this Court tended to elide. First, the summary of Mr Abboud's evidence:
"413 Mr Abboud gives detailed affidavit evidence of the steps he took to monitor margins and rebates, including O&A rebates. He also offers explanations of why he agreed to increases in OTB and examples of where he restricted OTB. He repeats the explanation of an increase in stock in January 2015 which was given in the HY15 Results Announcement - namely, the purchase of stock to provide inventory for new stores, an increase in the purchase of private label inventory, the purchase of stock to support increased sales in the second half of the year and the purchase of stock for the Christmas and January sales period. In relation to Mr Borg's email dated 19 December 2014, he says that each of the suppliers recorded in the email manufactured leading brands.
414 In my opinion, this evidence fails to address the real issue. By about October 2014, it had become apparent that the emphasis on O&A rebates was causing DSH to buy too much stock, particularly in certain categories. If Mr Abboud had acted with reasonable diligence and care he would have appreciated by no later than January 2015 that that was the case .…"
It is not necessary to set out the detailed explanation which follows in relation to Mr Abboud because, relevantly for present purposes, it was reiterated in relation to Mr Potts:
"415 Mr [Potts'] position is similar. Like Mr Abboud, he was aware by no later than December 2014 that the emphasis that DSH was placing on the collection of O&A rebates was causing it to buy too much stock. He was told as much by Mr Borg in December 2014. He was a senior person in the company who must have had personal knowledge of the steps that DSH was taking to increase its reported profits. Although many of the emails concerned with the effect that the emphasis on O&A rebates was having on the purchase of stock were not copied to him, it is not plausible that someone in his position would be oblivious to what was happening and to the fact that over a period of time Mr Borg had expressed concerns about the build-up of stock and the fact that it was being driven, at least in part, by the emphasis on O&A rebates. It was open to Mr Potts to explain in evidence why he did not accept Mr Borg's assessment. However, he chose not to give evidence. That Mr Potts appreciated that there was a problem with DSH's approach to O&A rebates is supported by his decision to retain Mr Holtzer in August 2015 to investigate the stock position and by his insertion in Mr Holtzer's September 2015 draft presentation of a bullet point saying 'Over reliance on O&A rebates leading to wrong pricing and purchasing decisions'. The closing written submissions made by Mr Abboud and Mr Potts say that precisely what Mr Potts meant by the insertion of this bullet point is unclear. I do not accept that submission. In my opinion, a fair interpretation of what happened is that Mr Potts wanted Mr Holtzer to make the point in his presentation that DSH had placed too much emphasis on the collection of O&A rebates and that had caused DSH to make the wrong pricing and purchasing decisions, including buying too much stock or too much stock falling into particular categories. Although Mr Potts made that comment in August 2015, the likelihood is that it reflected a view that he had held for some time. As I have said, it was open to Mr Potts to give evidence to explain his suggested change to the draft presentation or to explain when it first became apparent to him that the emphasis on O&A rebates was causing DSH to buy [too] much stock and too much stock in particular categories. The fact that he did not do so supports the inferences to be drawn from the documents. In any event, like Mr Abboud, Mr Potts had been told prior to January 2015 that DSH was overstocked and one of the major causes of that was the emphasis placed on O&A rebates. It was apparent by January 2015 if not before that DSH was overstocked. Any person in the position of Mr Potts would have appreciated that fact and the fact that a likely cause was the emphasis placed on the collection of O&A rebates."
Although not explicitly challenged, this reasoning was implicitly challenged by the second limb of Mr Potts' submissions in support of ground 1(b). Because that submission focused entirely on what steps may have been taken to reduce overstocking, it failed to address the absence of steps taken in relation to the underlying problem. Accordingly, the submission did not provide an answer to the finding of the primary judge.
The third submission by Mr Potts was, in substance, a reformulation of the second, his written submissions stating at par 33:
"Thirdly, his Honour erred in finding at [570] that it should have been 'evident' to Mr Potts in early May 2015 that DSH had a continuing problem with overstocking which had not been appropriately addressed. The only two matters that his Honour refers to in making this finding are that (a) in December 2014, Mr Borg told Mr Potts that the emphasis on O&A rebates was causing DSH to be overstocked (see [130]); and (b) in late May, after the May meeting with NAB and the May phone call with Mr Menzies, Mr Abboud increased the OTB for June 2015."
It is not possible to pigeonhole the reasons that the judge gave at [570], namely the two pieces of evidence identified in the submission, as the sole bases for his conclusion as to Mr Potts' state of knowledge in May 2015. As already noted, there is further discussion, part of which expressly contemplated the possibility that there was a single act or omission of two or more persons: see primary judgment at [415], at [395] above. In addition to that passage, there was an important aspect of retrospective reasoning upon which the judge relied to reveal the positions taken by Mr Potts in May 2015.
It may be added that the findings set out above in relation to the breaches of duty under s 180 of the Corporations Act were themselves the result of extensive discussion of the evidence, parts of which have been dealt with in considering the company's appeal. They need not be repeated here. The point is merely that there was ample basis in the evidence to support the finding by the primary judge that Mr Potts knew what the problem was with the pursuit of O&A rebates; the issue was not raised by him at the meeting on 6 May 2015 with the NAB representatives, nor in subsequent telephone calls, nor, accordingly, was any sufficient explanation given of steps taken to address the unidentified problem.
None of the three submissions relied upon as demonstrating error on the part of the primary judge in finding that Mr Potts engaged in misleading and deceptive conduct at the meeting with NAB on 6 May 2015 and during the telephone conversation with Mr Menzies a week later has been made good. Ground 1 is rejected.
As to the first, the full statement in the joint reasons in Backoffice read:
"147 What is important in the present case is that the evidence that was given by Mr Weeks about what he would have done if he had known more than he did was expressed in a way that distinguished between cases where knowledge of either of two matters would have meant he would not proceed and cases where he attached significance to knowledge of both of two matters. This being the only direct evidence on the subject it was not open to the Court of Appeal to infer, from its own assessment of the materiality of the representation and its own assessment of whether the representation was calculated to induce entry into a contract, that Mr Weeks would not have proceeded with the share purchase."
The case was one where the only evidence of reliance was as to what the representee had known was the falsity of both of two statements. There was no evidence as to what he would have done had he known the falsity of one, and only one was proved to be false. Further, given the reference to the Court of Appeal making its own assessment of the "materiality" of the representation and as to what the representee would have done, it is necessary to return to the beginning of the passage, at [142], to identify the difficulties with the reasoning of this Court. One problem was that the finding "carries within it a number of subsidiary questions, such as what is a 'material' representation, and when is a material representation 'calculated' to induce entry into a contract". The High Court further noted that the drawing of an inference cannot be undertaken without due regard to "all of the evidence that is adduced that bears upon the question being examined". That statement reflected established principle.
The general approach to questions of causation of this kind was discussed in Rosenberg v Percival (2001) 205 CLR 434; [2001] HCA 18, albeit in the case of an assessment of the effect of failure by a medical practitioner to advise a patient of risk, where the question was whether the patient would have proceeded with the operation if the risk had been disclosed. As McHugh J noted at [24], the common law test requires the court to ask "whether this patient would have undertaken the surgery". It is thus a "subjective" test, but McHugh J continued:
"25 It follows from the test being subjective that the tribunal of fact must always make a finding as to what this patient would have done if warned of the risk. In some cases where there is no direct evidence as to what the patient would have done, the judge may infer from the objective facts that the patient would not have undergone the procedure. In exceptional cases, the judge may even reject the patient's testimony as not credible and then infer from the objective facts that the patient would not have proceeded. The judge might find, for example, that the patient was a person whose general credibility was so poor that no reliance could be placed on that person's oral evidence. Yet, notwithstanding the rejection of the patient's oral testimony, the judge might infer that nevertheless this patient would not have undergone the procedure. That inference would ordinarily be based not only on the objective facts but also on the tribunal's assessment of the general character and personality of the patient."
The characterisation of the test as "subjective" should be understood as requiring a determination of the likely conduct of the particular plaintiff, but having regard to all of the evidence. A related issue arises where the question is whether a particular representation has induced the plaintiff to act in a particular way. In Sidhu v Van Dyke (2014) 251 CLR 505; [2014] HCA 19 French CJ, Kiefel, Bell and Keane JJ stated:
"64 The real question was as to the appropriate inference to be drawn from the whole of the evidence, including the answers elicited from the respondent in the course of cross‑examination. In that regard, as was said by Gummow, Hayne, Heydon and Kiefel JJ in Campbell v Backoffice Investments Pty Ltd, consideration of the application of the process of reasoning adumbrated by Wilson J in Gould v Vaggelas 'must always attend closely to all of the evidence that is adduced that bears upon the question being examined'." (Footnote omitted.)
There is no suggestion that some new approach had been adopted in Backoffice: rather, the question as to the likely conduct of the plaintiff in the counterfactual situation is always to be determined on the basis of the whole of the evidence, and will include an assessment of what is "material" or significant to the party concerned.
Where the party is a large institution, and where a particular decision will involve the input of a number of officers, there is less reason than in the case of an individual to place significant weight on the evidence of particular officers, especially where they have addressed issues which did not conform to the findings of the court. However, what the officers did provide, was a range of information as to what matters were material, or significant, for NAB. That leads directly to the second issue.
Mr Taylor noted in his affidavit at par 52 that he had been asked to assume the same seven factors and state what approach he would have taken to the decision whether to support the credit approval in May 2015. His response was more nuanced and less formulaic:
"53 As I have explained, an important focus for me during the process of gathering information about DSH and assessing whether to recommend the provision of facilities to DSH by NAB was on DSH's working capital requirements and how they were affected by the inventory issues. If any of this information [had been] provided to me, then I would have sought further explanations from Michael Potts and (given their nature) from Nick Abboud as well. With one exception, without clear explanations of the causes and how they had been remedied and would not occur again, I would not have been comfortable recommending a credit facility with DSH to Lewis Williams or Calvin Cordle, or thought it worthwhile seeking credit approval from NAB's credit team.
54 The exception is the policy of seeking to maximise certain types of rebates. I would have asked about the quantum of the rebates obtained and the regularity of obtaining those rebates, and only if I consider the quantum to be significant or the practice of obtaining those rebates to be irregular, then I would have asked further questions. I would also have given further consideration to whether I supported the credit paper and what further information I required before I decided whether to support the credit paper, if I knew that there was a practice of purchasing stock substantially for the purpose of obtaining rebates. Purchasing stock substantially for the purpose of obtaining rebates was at the time foreign to me."
Mr Johnson commenced his discussion of the counterfactual proposition with the following statement at par 33:
"My view in May 2015 was that the most significant area of concern with respect to the DSH business was the overstocked position it was in following the December 2014 Christmas period. Based on the explanations recorded in the credit memoranda, which I reviewed before granting joint approval for the facility on 20 May 2015, I was satisfied that the overstock position was being properly managed by DSH with additional controls in place together with statements by management that it would not result in any write-offs or need for discounting. These explanations, coupled with DSH's financial performance and projections, gave me comfort to conclude that the DSH business did not represent a credit risk which was outside the risk appetite of NAB and that DSH was a client to which it was appropriate to lend."
Mr Johnson set out six of the standard assumptions (a)-(f) and concluded at par 35:
"If a credit memorandum had been presented to me with respect to DSH which contained this information, then I likely would not have given credit approval. I consider that these matters are symptomatic of a retail business that has cash flow problems and is not being properly managed. This information also would have caused me to doubt the statements by DSH's management recorded in the credit memorandum that the excess stock position would not result in discounting or write-offs, and to question the motive for the opportunistic buying (which I understood was explained to NAB as resulting from a desire to avoid price rises)."
Mr Menzies addressed the preparation of the internal credit memorandum. After setting out his understanding of the various statements made by Mr Potts in the course of his meetings with him and by telephone, he noted the statement in his final version of the credit memorandum to the following effect, at par 32:
"Whilst there was a misjudgement in over-ordering private label stock last year, exacerbated by the delayed shipment, we are comfortable that no significant loss will occur as a result, and that new controls in the purchasing supply chain have been implemented."
At the trial, Ms Peter was cross-examined by counsel for Mr Abboud about the assumptions in pars (a)-(g) at some length: Tcpt, pp 896(1)-912(17). Although she accepted that in some circumstances she would have required further information to reach a firm conclusion, in other respects her answers provided material inconsistent with Mr Potts' submissions in this Court.
Ms Peter was taken to par (a) of the assumptions which read:
"A policy (that DSH had been pursuing since at least May 2014) of seeking to obtain and maximise certain types of rebates from suppliers had resulted in DSH management and buyers making purchasing decisions based on the rebates available from suppliers, rather than based on current or likely demand for the stock."
Ms Peter said that she understood the assumption to indicate that "the weighting was more to rebates" and that "the rebates were prioritised over the demand for the stock": Tcpt, p 903(7), (19). When pressed as to how she understood the word "rather" in assumption (a), she said it "indicates that the drivers of the decision were the availability of rebates rather than how quickly the stock could be liquidated". Although it was suggested to her that she was adding to the assumption "facts" which she regarded to be material, she stated that she was indicating her reading of the assumption: Tcpt, pp 903(40)-905(41).
Mr Johnson, in his affidavit, had not stated that any one of the assumptions would have been sufficient to withhold approval, a matter which was confirmed in cross-examination: Tcpt, pp 870(27)-871(26). Mr Johnson gave a reason for that:
"Q You are not expressing any opinion in paragraph 35, for example, if you found out about one of those matters?
A Correct.
Q It's got to be the combined effect of them?
A Yes and no. Like, in my affidavit I made those six comments, right, and I said I would likely not approve. They can be mitigated in the normal course of business. So it would be one or all, depending on the magnitude of those issues that were found out.
Q Well, sorry, I thought you told me all six were what you assumed were being asked to assume were true as the basis of your opinion; correct?
A Yes."
The cross-examination of Mr Taylor on this topic was limited. He was taken only to assumption (a), which was in the same terms as that set out above. The cross-examiner asked (Tcpt, p 824(40)):
"Q What I'm asking you about is whether the assumption that you made about maximising rebates, to your mind, involved the idea that the buyers were not purchasing stock which could be sold profitably or for which there was customer demand?
A That's, I think - as per this wording, yes, they were making decisions based on the rebate, that was the assumption, rather than on likely demand.
Q And making purchasing decisions to purchase product that they thought could not be sold profitably; is that what you thought the assumption required you to make?
A No, I thought it was as it's listed here, that it's based on the rebate rather than current or likely [demand]."
Mr Taylor was separately cross-examined by senior counsel for Mr Potts, including with respect to the assumptions (a)-(g). There were two limbs to the cross-examination. The first was that Mr Taylor was, as par 53 of his affidavit suggested, focused on the working capital requirements of DSH and how they were affected by inventory issues. He agreed with that: Tcpt, p 841(38)-(41). The cross-examination continued (Tcpt, p 842(32)):
"Q Presumably in your mind at the time you gave that evidence, prepared the affidavit, there was some level of materiality or significance that was behind the statement? You wouldn't have responded the same way, I suggest to you, to trivial amounts, as you would have responded to very significant amounts?
A Well, items such as not properly accounting for things - some of the items - I think that goes to - some of the items in (a) to (g) go to systems and processes in place or an approach taken by management, and I don't know that I would have applied a trivial versus significant lens to it. They might raise alarms just in the fact that they were existing.
Q You say that applies in respect of some of the matters in (a) to (g), but not others?
A Sorry, I'd have to go through them again. No, actually, on reflection, I think all of these, any of those - obviously I've already called out point (a) being the one that's perhaps subject to a threshold, but the other ones, I don't think they - I could consider a small amount trivial. I think any of these matters would lead me to ask more questions."
The cross-examiner then turned to an issue which had been raised with Mr Potts, namely the apparent overstocking in January 2015, which had raised a particular red flag with Mr Taylor, but had been addressed by Mr Potts and he considered to have been resolved. The cross-examiner then suggested there would have been a similar response in relation to the hypothetical issues: Tcpt, p 845(33):
"Q What I am putting to you, Mr Taylor, is that we have an example, a worked example from history, as to how, in May 2015, you were inclined to respond to a red flag in your consideration of the creditworthiness of Dick Smith. You understand that's what I've suggested to you?
A Yes.
Q Now what I'm suggesting to you is that in the hypothetical world, which you were asked to consider in paragraph 52, you accept, don't you, that the likelihood is you would have responded, back then, to any other red flag, such as those listed in (a) to (g), in the way you responded in history to the red flag which you observed - do you accept that?
A No, not necessarily. So the red flag in regards to the overstocking position, in my experience of retailers, is not normal, but it does happen from time to time, buying the wrong stock or too much of certain items of stock. Some of these other items, such as deferring delivery of goods and things like that, aren't, in my experience, normal practice so I might treat those ones - I would treat those ones differently.
Q The overstock you observed in January 2015 was capable, wasn't it, of indicating a very serious problem with Dick Smith's creditworthiness? It was capable of indicating such a problem, wasn't it, in your view at the time?
A It provided a flag to me that this is something I needed to find more information about and mitigate.
Q The answer you've just given, I suggest to you, about how you would have responded to these other red flags, is just a bit of optimistic use of the retrospectoscope by you, isn't it?
A No.
Q That's what you wish you would have done or how you would like to think you would have responded to those matters?
A No, that's not right.
…
Q I suggest to you what would have happened, had any of those matters been brought to your attention during May 2015, is that you would have asked Mr Potts about them, you would have listened to his explanation, and if it were a credible explanation you would have accepted it and included something to that effect in the credit memorandum that you sent up to your superiors at the bank?
A No."
Given that the list of assumptions were things which NAB said Mr Potts had not disclosed, there was a degree of awkwardness in the cross-examination as to what Mr Taylor would have done had they been disclosed. Nevertheless, the cross-examination did not appear to cast doubt on Mr Taylor's credit and the judge did not find that it did.
As counsel for Mr Potts pointed out on the appeal and, unsurprisingly, the primary judge accepted, buyers did not purchase stock for their O&A rebates in disregard of any question as to likely demand for the products. The judge stated:
"122 Although each of Messrs Borg, Freeman and Bonham [DSH employees] gave evidence of a policy of seeking to maximise O&A rebates, each of them accepted in cross-examination that that policy was not pursued at the price of buying stock that it was known could not be sold within a reasonable time for a reasonable margin."
The judge further noted (at [375]), that there were other key performance indicators which the buyers took into account and continued:
"376 On the other hand, I accept that buyers were encouraged to buy stock that they otherwise would not have in order to obtain O&A rebates. There is ample evidence that buyers were encouraged to give preference to suppliers who provided O&A rebates. They were given that encouragement by the introduction of targets in relation to O&A rebates. But I also accept that considerable pressure was put on, and inducements were given to, buyers to meet those targets."
In written submissions, counsel for Mr Potts asserted, with respect to the assumptions (a) to (g), that "none of those matters was made out on the evidence": written submissions, par 38. However, that conclusion depended, in relation to the O&A rebates, on a particular reading of the assumption.
Further, it was not correct to treat what may be described as a formulaic acceptance of pleaded assumptions as determinative of causation, or, if rejected, determinative of a failure to prove causation. Nor was the case to be determined by a semantic debate with the witnesses as to their understanding of the assumptions. However, to the extent that the key assumption was that relating to the O&A rebate policy, there was no reason to hold that the maximisation of rebates was to be pursued as the sole policy without any regard to consumer demand. Such an understanding would not be commercially realistic. It was not the understanding that the primary judge adopted. There was powerful evidence to support the judge's conclusion that "the likelihood is that if [NAB] had been told that one of the reasons for the build-up in stock was the emphasis on O&A rebates and that DSH had not taken steps to change its policies and procedures to deal with that problem, it would not have agreed to participate in the syndicate with HSBC": at [374]. That is an expression of causal connection between misleading and deceptive statements, found on the evidence to be highly significant to NAB, and NAB's likely response given disclosure of the true position, as found on the evidence.
By way of comparison with HSBC, the judge was entitled to take into account, as he did in dealing with the HSBC claim, that HSBC had pursued DSH, seeking to establish a banking relationship and leverage its Chinese connections to assist in dealing with suppliers. A separate factor was that HSBC had entered into the Extension Agreement, a fact which was patently relevant to an assessment of HSBC's likely attitude to a correction of misleading information. In assessing and reaching his own view about the extent to which NAB placed reliance on particular matters, the judge had before him not merely formulaic statements in the affidavits, but significant other evidence, including the cross-examination of Ms Peter, and Messrs Taylor, Menzies and Johnson. No error was established.
The challenge by way of ground 2 to the finding of "reliance" must be rejected.
For Mr Potts to be a "concurrent wrongdoer" for the purposes of this provision he needed to be one of two or more persons of the kind identified in s 87CB(3). The operation of that provision has given rise to some difficulties of construction. The first is whether there need be more than one act or omission. That there may be more than one act or omission is apparent from the use of the plural "acts or omissions". However, the provision also refers explicitly, in parenthesis, to the singular "act or omission". As explained by Emmett JA in Williams v Pisano (2015) 90 NSWLR 342; [2015] NSWCA 177 at [71], the words in parenthesis could cover a single act or omission on the part of two persons separately, although that construction is more than a little awkward. The syntax also requires consideration of the fact that the act or acts and omission or omissions can be causal factors independently of each other, or jointly. To treat the singular act or omission as operating "independently of each other" reinforces the awkwardness of speaking of an act of each of two persons. The difficulty is created by drafting which incorporates four sets of alternatives within a single sentence. However, relevantly for present purposes, one can disaggregate the sets to isolate a specific reading, being one act of two persons acting jointly which causes the loss or damage, the subject of the claim. Such a reading makes sense in ordinary parlance and in legal terms. It is difficult to understand why such a case should be excluded from the coverage of the provision, although it may be accepted that two acts, each involving legal liability on the part of separate persons, is likely to be the more common case. However, as Bell and Gageler JJ explained in Hunt & Hunt Lawyers v Mitchell Morgan Nominees Pty Ltd (2013) 247 CLR 613; [2013] HCA 10 at [91] the provision should be understood as referring to "one or more legally actionable acts or omissions". One act is sufficient, at least in the case of joint liability.
Liability can be characterised as joint or several, or both. Separately, it can be characterised as direct or vicarious. These different forms of characterisation will have different purposes. The statutory purpose of proportionate liability is to prevent a solvent concurrent wrongdoer being liable for the whole of the loss or damage suffered by the plaintiff in circumstances where there are one or more other concurrent wrongdoers who will escape liability because they are impecunious.
Some care must be taken when these provisions are applied to cases where a natural person and a corporate entity which is controlled by the natural person are each said to be concurrent wrongdoers. That was the case in Tomasetti v Brailey [2012] NSWCA 399 (where the acts of Mr Brailey were the corporate acts of his company) and in Robinson v 470 St Kilda Road Pty Ltd (2018) 263 FCR 572; [2018] FCAFC 84 (where the company had a sole director). There are statements in the former case at [154]-[156] that each of two concurrent wrongdoers may be 100% liable to a plaintiff. If so, that would be directly contrary to a principal objective of the regime. In the latter case, upon which Mr Potts relied, the question arose as to whether a company, with a sole director who was the alter ego of the company, could be a concurrent wrongdoer with the director. McKerracher and Markovic JJ reasoned:
"51 His Honour opined, and we agree, that, first, it cannot be said that the acts are independent because there is a single act carried out by the person which is also the act of the company. Secondly, it cannot be said that the acts 'jointly' caused the damage or loss. There is no capacity for joint conduct because there is only a single act, which makes it artificial to say that there are two acts of persons, one of the company and one of the director."
It is difficult to reconcile the rejection of a single act for which two wrongdoers are jointly liable with statutory language which expressly contemplates the possibility that there is a single act or omission of two or more persons. Further, it is important to bear in mind that, although perhaps obscurely worded, the legislation does not allow a vicariously liable principal to be a concurrent wrongdoer. That follows from two provisions. First, s 87CF, which confers on a defendant who is a concurrent wrongdoer immunity from claims for contribution or indemnity by any other wrongdoer. Secondly, s 87CI(a) provides that "[n]othing in this Part… prevents a person being held vicariously liable for a proportion of an apportionable claim for which another person is liable". These provisions would not work harmoniously if a defendant whose liability was purely vicarious could be a concurrent wrongdoer. That that was the intention of the provision appears from the report of Professor JLR Davis, upon which the proportionate liability defence in various statutes was based: Commonwealth of Australia, Inquiry into the Law of Joint and Several Liability: Report of Stage 2 (1995). Professor Davis recommended that the proposed scheme for proportionate liability should not apply to instances of vicarious liability, as noted in Woodhouse v Fitzgerald (2021) 104 NSWLR 475; [2021] NSWCA 54 at [101]. Emmett JA noted in Williams v Pisano, that that consideration would justify the result in Hadgelias Holdings Pty Ltd v Seirlis [2015] 1 Qd R 337; [2014] QCA 177 at [14], [21], which had inappropriately held there must be "distinct acts (or omissions) or sets of acts (or omissions) by different actors".
In the present case, the difficulty faced by Mr Potts was that he accepted he was not the alter ego of the company (in which case his acts would have been the acts of the company) (Tcpt, p 4270(1)); rather, the company may have been vicariously liable for his acts, but on that basis it would not have been a concurrent wrongdoer.
These issues may be put to one side, however, because Mr Potts accepted that he had to establish some act attributable to DSH, other than his own acts vicariously attributable to DSH, in order to establish that DSH was a concurrent wrongdoer. In that he was correct. Mr Potts relied upon both acts and omissions.
Mr Potts' pleading that the claims by the banks involved apportionable claims (Amended Commercial List Response, par 129) was correct. Without Mr Abboud's liability, the question was whether DSH was a concurrent wrongdoer. The primary matters relied upon in this regard were three statements said to constitute representations made by DSH in the Syndicated Facility Agreement executed on 22 June 2015. These were particularised as such in NAB's Third Amended Commercial List Statement. However, the fact that they were pleaded did not mean that they had been shown to be false, nor that NAB had relied upon them. The relevant representations, contained in Pt 7 of the Syndicated Facility Agreement, read as follows:
"21.1 Representations and warranties
Each Obligor [DSH] represents and warrants to each Finance Party, except as to matters disclosed by it to the Agent [NAB] and accepted by the Agent in writing, that:
…
(s) (full disclosure) it has, or persons acting under its instruction have, fully disclosed in writing to the Agent all documents and information known to it relating to it, its assets, the Finance Documents, and anything in connection with them which is reasonably considered by it to be material to the assessment of the nature and amount of risk undertaken by a Finance Party in entering into and performing the Finance Documents;
(t) (information accurate) all information (excluding financial projections, estimates and forecasts) provided by it or on its behalf to any Finance Party in connection with the Finance Documents is at the date of this document (or, if provided later, when provided) accurate in all material respects and not, by omission or otherwise, misleading in any material respect at the date provided (whether by its inclusion or by omission of other information);
(u) (financial projections, estimates and forecasts) all financial projections, estimates and forecasts provided by it or on its behalf to any Finance Party in connection with the Finance Documents have been prepared in good faith with due care and skill, are based on information known to it, and are subject only to reasonable assumptions and qualifications as are expressly made and assessed by reference to the date on which those financial projections, estimates or forecasts were provided." (Emphasis added.)
The passages emphasised are those forming the key to the representations.
There is no dispute that DSH made those written representations. Further, NAB pleaded that it had relied upon them: Third Amended Commercial List Statement, par 19. Mr Potts then submitted that the judge had made express findings to the effect that those representations were false and that NAB had relied upon them. However, what the primary judge upheld were NAB's claims with respect to Mr Potts' conduct, as set out above. Significantly, the primary judge did not uphold any claim with respect to the CEO, Mr Abboud. Further, the judge made no finding that, in the first part of 2015, the non-executive directors and the board generally, breached their duties. However, he treated the positions of Mr Abboud and Mr Potts differently: primary judgment at [409].
What was missing from this case was identification of facts which constituted breaches of the relevant representations. Thus, putting to one side information known to Mr Abboud and Mr Potts, there was no finding that DSH as an entity failed to disclose to NAB documents and information "reasonably considered by [DSH] to be material to the assessment of the nature and amount of risk undertaken by [NAB]". It was not submitted that Mr Potts had identified such documents or information in cross-examination of the company directors. With respect to subpar (t), there was no evidence that any of the directors (other than Mr Abboud and Mr Potts themselves) had reason to believe that the matters disclosed were otherwise than accurate in all material respects or were, by omission or otherwise, misleading. Nor was there any finding in respect of subpar (u) that the financial projections had not been prepared in good faith and with due care and skill, or that such inadequate financial projections were provided by DSH or on its behalf to NAB.
No doubt that affirmative case against DSH would have been forensically difficult for Mr Potts to run, given his position as the primary contact between NAB and DSH and the person responsible for identifying what material was and was not to be disclosed. It was one thing for him to eschew any claim that the liability of DSH turned on his conduct, but it was quite another to claim to have established that DSH had breached its duties with respect to the representations in the Syndicated Facility Agreement. In the event, that case against DSH was not made good. As NAB submitted, there were various documents prepared by other officers of DSH, including Ms Puja, which were supplied to NAB. However, Mr Potts eschewed any claim that any particular officer of DSH had failed in his or her duty.
In his written submissions in reply (par 26), Mr Potts asserted that "ground 3, which arises only if grounds 1 and 2 fail, accepts as its starting point the findings which are challenged by those other grounds". For reasons explained above, that is not so. It does not follow that "if Mr Potts is liable to NAB…, it must follow that DSH knew the 'true position' regarding its overstock position (namely, that it was overstocked as a result of pursuing O&A rebates …)".
Mr Potts also relied upon the fact that public explanations given by DSH for its stock position in early 2015 were incomplete and misleading. While it is true that officers at NAB, including Mr Menzies, read the public statements made by DSH, they found them inadequate to explain the overstocking problem. It was for that reason that they spoke to Mr Potts. Accordingly, far from relying on the public statements, NAB officers sought to go behind them. But it was Mr Potts who failed to disclose information which ought to have been disclosed. Those circumstances are inconsistent with the proposition that NAB relied upon the inadequate public statements. Indeed, they established the contrary.
Ground 3 must be rejected.
Thus Mr Potts accepted that the notion of "prejudice" could encompass late payment, but qualified by the notion of materiality. This approach was consistent with the primary judge's statement at [457] that the reduced ability referred to in the provision "includes a material increase in risk that the creditors will not be paid at all and a material delay in paying them when their debts are due" (see also [482] and [509]).
Consistently with these views, the type of prejudice identified in s 254T(1)(c) should be understood as encompassing not only payment to creditors per se, but also payment of debts as and when they fall due.
As a matter of grammar, the word "prejudice" is employed in the paragraph as a verb, which should be understood in its ordinary sense of affecting disadvantageously or detrimentally. Not paying creditors on time is, in general, a detriment to them.
More directly, in terms of the statutory text, a company's ability to pay its creditors may meaningfully be said to be prejudiced if payment of a dividend would detrimentally affect the company's capacity to pay its creditors in compliance with its legal obligations. As counsel for DSH put it, "an ability to pay always involves consideration of how much and when". Further, as DSH also submitted, it would be surprising were s 254T(1)(c) to be capable of being satisfied merely by a liquidator ultimately making a distribution paying creditors in full. There is thus a need for there to be some temporal restriction upon when the payment of a company's creditors is to occur. If the issue posed by paragraph (c) is not answered by the temporal qualification "in accordance with the time frame agreed between creditor and debtor", then it is difficult to see what alternative exists.
The first statutory note underneath s 254T(1) gives an example of material prejudice, namely that the company would become insolvent as a result of the payment. Solvency involves an ability to pay debts as and when they become due and payable, and the Act defines insolvency as being not solvent: s 95A. It is not necessary to seek to address here precisely how much an ability to pay on time feeds into solvency assessment. The note is, in any event, only one example. It suffices to say that the content of the note lends some support to the notion that prejudice can include having to delay payments.
Questions of coherence also inform the analysis. The day after a debt falls due the creditor has a cause of action upon which it can sue the company, and which would (in the absence of an arguable case for variation or estoppel) sustain a statutory demand. If common law and statute law is available to vindicate a creditor's entitlement to be paid in full and on time, why should s 254T be read so as to permit greater capacity to reduce the capital of the limited liability entity which incurs such debts?
Turning to contextual considerations, the current version of s 254T was introduced by the Corporations Amendment (Corporate Reporting Reform) Act 2010 (Cth). Previously, the provision had provided, simply, that "[a] dividend may only be paid out of profits of the company". This prohibition was of long provenance: see eg Wambo Coal Pty Ltd v Sumiseki Materials Co Ltd (2014) 88 NSWLR 689; [2014] NSWCA 326 at [56]-[59]. It manifested an aspect of the principle of capital maintenance, the basis of which was that people who deal with a limited liability company should be entitled to assume that, subject to capital being diminished in the course of trading, the company maintains the level of capital provided for in its constitution: see Trevor v Whitworth (1887) 12 App Cas 409 at 423-4. Minister Bowen stated in his second reading speech that the replacement of s 254T "relaxes the statutory requirement that companies may only pay dividends from profits, replacing the profits test with a more flexible solvency based requirement" (Hansard, House of Representatives, 26 May 2010 at 4132).
As to the three requirements in s 254T(1), the explanatory memorandum states the following, under the heading "Detailed explanation of new law":
"[3.8] The first limb of the new test establishes an important safeguard by requiring companies to have sufficient assets in excess of their liabilities in order to pay the dividend. This is similar to the balance sheet tests currently in operation in New Zealand and Canada.
[3.9] The second and third limbs of the new test align with the requirements imposed on companies in relation to conducting share capital reductions and share buy-backs under Part 2J of the Corporations Act.
[3.10] The new test is designed to ensure that creditors and shareholders who are not entitled to dividends are sufficiently protected."
The memorandum also stated at [10.60] that "[t]he proposed new safeguards will also significantly improve the existing safeguards contained in the Corporations Act". Presumably that statement was meant to reflect the fact that although the simple requirement that dividends only be paid from profits had been removed, three new requirements had been inserted.
Beyond what has just been quoted, the explanatory memorandum did not expand upon what s 254T(1)(c) was meant to encompass. As referred to in the memorandum, the notion was taken from provisions in Ch 2J of the Act. In particular, s 256B(1) provides that a company "may reduce its share capital" if, inter alia, the reduction "does not materially prejudice the company's ability to pay its creditors". Section 257A deals with when a company may buy back its own shares, and applies the same criterion. Section 260A regulates when a company may give a person financial assistance to acquire shares in the company, and the criteria include that giving the assistance "does not materially prejudice" the interests of the company or its shareholders or "the company's ability to pay its creditors". These provisions all involve inroads into the general principle of maintaining capital.
Re CSR Ltd (2010) 183 FCR 358; [2010] FCAFC 34 concerned a proposal by CSR to demerge its businesses by a scheme of arrangement. The proposal involved a reduction of share capital, such that s 256B applied. CSR had significant potential asbestos-related liabilities, which it had sought to quantify but which were inherently uncertain. Various parties opposed the proposed demerger on the basis that it could prejudice the asbestos claimants' prospects of recovery. The primary judge in that case refused to order a shareholders meeting to consider the scheme of arrangement on the basis that the Court would be obliged ultimately to reject the scheme. The Asbestos Injuries Compensation Fund put the argument that "a company's ability to pay its creditors is 'materially prejudiced' if the company is unable to pay its debts from its cash flow but is obliged to have recourse to the sale of its assets or to raise capital" (at [39]). The Full Court of the Federal Court rejected this argument insofar as it was said to be grounds for refusing to let the matter go to a shareholders meeting. Keane CJ and Jacobson J stated:
"[44] The contention put by the Fund that a company's ability to pay its creditors is materially prejudiced if it chooses to resort to asset sales rather than cash flow must be rejected. First, the text of s 256B(1)(b) draws no such distinction. Further, in discourse concerned with the ability of a company to pay its debts it is well settled that ability to pay one's debts is a matter of objective measure of capacity rather than a subjective question of choice and is to be determined by reference to all one's resources whether income or assets.
[45] In relation to the question of 'material prejudice' to a company's ability to pay its creditors, the text of the Act and the explanatory memorandum which accompanied the Bill which introduced s 256B into the Act are not particularly helpful. In cl 12.23 it said: 'Whether prejudice is 'material' will be a question of judgment to be determined in light of all relevant circumstances'. One is, we think, on safe ground, however, in treating 'material prejudice' to a company's ability to pay its creditors as relating to the creation of a material as opposed to theoretical increase, in the likelihood that the reduction in capital will result in a reduced ability to pay creditors." (Emphasis added.)
Although it is possible that the issue of delays in payments causing prejudice to creditors was implicit in the argument put by the Fund, the issue was not considered in the Full Court. The Court's acceptance that account can be taken of potential asset sales did not address the issue of delays. Where there is a long tail of liabilities, as in that case, the need to have recourse to asset sales in order to meet the liabilities may become apparent well in advance.
The quotation within [45] of the joint judgment was from the explanatory memorandum to the Company Law Review Bill 1997. The paragraph quoted from the memorandum goes on to identify potentially relevant circumstances as "including the particular characteristics of the company and the situation of the company's creditors". The situation of the company's creditors would include whether or not they were being paid on time.
The prohibition on providing financial assistance in s 260A was considered by the High Court in Connective Services Pty Ltd v Slea Pty Ltd (2019) 267 CLR 461; [2019] HCA 33. The Court stated at [26]:
"The issue of material prejudice to the interests of the company or its shareholders or creditors requires an assessment of and comparison between the position before the giving of the financial assistance and the position after it to see whether the company or its shareholders or its ability to pay its creditors is in a worse position. It does not assist to gloss the concept of material prejudice by the introduction of further concepts, which themselves require further explanation, such as whether there has been a diminution of the assets of the company …"
It might be argued against the position of the parties that to introduce notions of "as and when debts fall due" is to put a gloss on the statutory text. However, any such suggestion would fail to recognise that the issue is understanding what types of prejudice can be relevant in applying the test of material prejudice to the ability to pay creditors. The High Court's judgment does not suggest that a narrow approach should be taken to assessing that issue.
Consistently with the parties' submissions, in an earlier paper discussing the prohibition on financial assistance in s 260A the following was stated (Y Cho and V Kishore, "The 'material prejudice' test and the financial assistance prohibition" (2004) 78 ALJ 194, 201):
"On its wording, s 260A may be breached when the provision of financial assistance makes it difficult, to a materially prejudicial extent, for the company to pay its creditors. Thus, if the provision of financial assistance forces a company to extend payment deadlines and reorganise its financial affairs in order to pay its creditors, the provision may be contravened."
Taking account of textual and contextual considerations, along with the cases cited, the parties were correct to accept that the relevant prejudice extends to the company's ability to pay creditors as and when their claims fell due. However, it is important to understand that conclusion in the context of the other aspects of paragraph (c).
As noted, the thing that must be materially prejudiced under paragraph (c) is the company's ability to pay its creditors. The primary judge sometimes expressed the issue in terms of whether or not the payment of the dividends "materially prejudiced the interests of creditors" (eg [482], [486]). That phrase may have been employed by his Honour as a shorthand, but its use carries with it the danger of distracting from the statutory question. That question is not directly about the interests of the creditors, even if protecting those interests goes to the purpose of the requirement. Nor is the question whether or not creditors are actually prejudiced.
That a company had a practice of paying creditors late does not necessarily mean that s 254T would be contravened by the company paying a dividend, although it does serve to raise the question. As the High Court indicated in Connective Services at [26], quoted above, the appropriate focus is on a comparison of the position before and after the payment. The question posed by the provision is whether the company's ability to pay is materially prejudiced by the payment of the dividend. Ability, in the sense of capacity, is distinct from voluntary choice. A company may make a choice to pay creditors late. It may have an established habit of doing so. Similarly, a company may make a choice simply not to pay some creditors at all. Such behaviour may well point to circumstances of the company experiencing some degree of financial distress, in which case the s 254T issue may be starkly raised. But it does not necessarily do so. A company which regularly breaches its contractual obligations in pursuit of its own perceived short term self-interest might still have the ability to pay - in full and on time - regardless of whether or not a dividend is paid.
A company which pays a dividend in circumstances where it is regularly not paying creditors in full and on time may well be criticised. By definition it will be in breach of its contractual obligations. Other legal norms might also be contravened in such circumstances. But s 254T does not impose a requirement of commercial purity before a dividend may be paid; its focus is narrower than that. The explanatory memorandum for the 2010 change stated at [10.52] that the "objective is to ensure that companies have the ability to distribute dividends if they have the ability to do so without causing detriment to ongoing operation".
Next, as senior counsel for Mr Potts rightly emphasised, the prejudice to the company's ability to pay its creditors must be material. It is not just any prejudice to that ability which will meet this requirement. One must beware of putting a gloss on this notion. As the High Court stated in Connective Services at [27], drawing upon the explanatory memorandum for the 1997 Act which introduced the notion, "the question of material prejudice is fact-intensive", and not to be determined "by reference to arbitrary rules".
Counsel for DSH submitted that "it can't sensibly be supposed that that is a test which can be passed by leaving out of account some of the creditors". However, he also put that the "focus is always on the company and considering all its creditors. It's not a creditor by creditor question". There must be material prejudice to the company's ability to pay its creditors. That payment of a dividend may necessitate a delay in payment to one creditor does not of itself establish material prejudice to the company's ability to pay. The delay might be slight and/or the amount small, such that the delay could not be characterised as meeting the statutory test. On the other hand, if payment of the dividend could only occur if large payments (in the context of the company in question) due to be made to one particular creditor had to be delayed for some period, that could potentially be characterised as material prejudice to that company's ability to pay its creditors.
It is then necessary to turn to the second construction issue raised, namely whether a characterisation of material prejudice of the relevant kind could be avoided by the company holding trading stock which could be sold. As follows from the analysis above, the answer is that it may be. As Keane CJ and Jacobson J stated in Re CSR at [44], "ability to pay one's debts is a matter of objective measure of capacity rather than a subjective question of choice and to be determined by reference to all one's resources whether income or assets". But, again, statements of hard and fast rules should be avoided.
Put in practical terms in the context of dividends, if the company in question could readily sell trading stock (eg by discounting) in order to address any cash flow issues arising from the payment of the dividend, then it may well be that payment of the dividend could not be characterised as materially prejudicing the company's ability to pay its creditors as and when they fall due. On the other hand, if the stock or assets in question were of a kind that might be difficult to sell readily, the situation may be different. To pay out a dividend in such a case may well, in practical terms, materially prejudice the company's ability to pay its creditors (in full and on time). The issue turns on the facts.
In assessing those facts, some caution is warranted in accepting submissions that cash could be generated more or less readily by selling stock through having a sale. It is to be borne in mind that the core business of a retailer is selling trading stock, that a very familiar means of doing so is to have a sale, that many retailers (including DSH) were very familiar with sales promotions, that every product sold at a discount erodes the retailer's margins, and thus converting stock into cash by discounting comes at a cost to profitability. All these things will be second nature to experienced retailers such as DSH. In short, a submission that stock can be sold rapidly at a discount is more complicated than it might seem, because if there were an easy and relatively profitable way for DSH to reduce the high stock levels with which it had been burdened for many months, there is no reason to doubt that it would have done so.
A temporal issue arises with respect to applying s 254T. The prohibition applies to payment of the dividend. The asset test requirement stated in s 254T(1)(a) expressly refers to the position "immediately before the dividend is declared". Paragraph (c) does not identify a particular time, suggesting that the relevant time to be assessed is as at the date of payment. The matter is complicated by s 254V(1), which provides that a company "does not incur a debt merely by fixing the amount or time for payment of a dividend", and states that the debt "arises only when the time fixed for payment arrives and the decision to pay the dividend may be revoked at any time before then". However, pursuant to s 254V(2), if the company has a constitution and "it provides for the declaration of dividends", then "the company incurs a debt when the dividend is declared". By implication, in such circumstances the decision to pay a dividend cannot be revoked once declared.
Either way, in practical terms seeking to comply with the provision requires a company to look forward to the time of payment at the time of making the decision to declare a dividend. As the primary judge correctly stated at [455], "the directors must, consistently with their duties under s 180, consider what creditors the company is likely to have at the time of payment and whether the interests of those creditors will be materially prejudiced". For companies where the issue is not addressed in their constitution, there may be a need to keep the issue under review until the time of payment.
In summary, then, for the purposes of s 254T material prejudice can encompass a detrimental effect on the company's ability to pay the claims of its creditors as and when they fall due. The issue is directed to the ability of the company to pay its creditors. The payment must cause material prejudice to that ability; it is not the case that any prejudice to any creditor will necessarily suffice. That question raises an issue to be assessed on all the facts of the case.
At first instance in Australian Securities and Investments Commission v Cassimatis (No 8) (2016) 336 ALR 209; [2016] FCA 1023, Edelman J stated as follows, having referred to the passage from Maxwell:
"[537] In none of [certain cited] cases was there any submission, or any issue, about the meaning of the expression 'jeopardy to the interests of the corporation'. That expression appears to have been used as a shorthand way of explaining that when a court considers the duty of care and diligence it must do so in light of the interests of the corporation. Proceeding on the assumption, as I do in this case, that s 180(1) is concerned only with the interests of the corporation, then if the interests of the corporation are not threatened, nor the subject of any potential prejudice, there cannot be any breach. In other words, where the interests of the corporation are not in 'jeopardy' in this sense then there cannot be a breach. An act which does not foreseeably harm any of the interests of the corporation cannot be a breach of a duty of care and diligence to the corporation. …
[540] As I have explained, and as Brereton J recognises in this passage, the interests of the corporation include its compliance with the law. The 'relevant' jeopardy is the threat of damage to the interests of the corporation which include the risks of exposure to sanctions from breach of the law. The qualification at the end of the paragraph is important. The reference to 'at least' includes the obvious cases of contravention. At the other extreme, there are cases which can be easily excluded. For example, conduct by a director which subsequently causes a corporation to breach the law will not be a breach of a duty of care and diligence merely because it causes the corporation to breach the law if, at the time, no reasonable person holding the director's office with the director's responsibilities, acting reasonably, could ever have foreseen that the conduct would cause the corporation to breach the law."
These points were echoed by Thawley J at [458]-[466] on appeal in that matter; see also Greenwood J at [71]-[79] and [179]-[184].
The primary judge said here at [450] that, although the duty of directors under s 180 is owed to the corporation, it "cannot be the case that a director when considering whether to pay a dividend is entitled to ignore the requirements of [s 254T]". No party took issue with that statement.
As addressed above, s 254T looks forward to the time of payment of dividends. DSH's case was focused upon the participation of Messrs Potts and Abboud in the decisions to declare the dividends, which of necessity occurred prior to payment. In those circumstances, it was not required that DSH establish that the company did in fact breach s 254T when it paid out the interim and final dividends. Rather, it was necessary that it establish that as at the time of the relevant board meetings the likelihood of non-compliance with s 254T was such that, with all the circumstances taken into account, a director exercising powers as a director with the degree of care and diligence that a reasonable person would exercise in the position of the respondents would not have supported the resolutions to pay the dividends. Consideration of that issue must take account, of course, of the fact that the respondents held the positions of CFO and CEO at the time; they were not non-executive directors.
There was little disagreement between the parties as to the legal principles to apply in relation to s 180. Pursuant to s 180(1) of the Corporations Act, Messrs Potts and Abboud were obliged to exercise their powers and discharge their duties as such "with the degree of care and diligence that a reasonable person would exercise" if they (a) "were a director or officer of a corporation in the corporation's circumstances", and (b) "occupied the office held by, and had the same responsibilities within the corporation as, the director or officer".
It has been recognised that s 180 overlaps with principles of negligence at common law: Vines v Australian Securities and Investments Commission (2007) 73 NSWLR 451; [2007] NSWCA 75 at [137]-[151] per Spigelman CJ, Ipp JA agreeing at [805]. It is thus unsurprising that whether or not a director or officer has breached the duty depends very much on the particular facts of the case. So much is reinforced by the statutory reference to "the corporation's circumstances".
The statutory test itself requires that account be taken of the office and responsibilities of the person. The "responsibilities" referred to may be statutory, or specific responsibilities conferred in fact on the person or office in question: Shafron v Australian Securities and Investments Commission (2012) 247 CLR 465; [2012] HCA 18 at [18].
The parties cited the following statements by Middleton J in Australian Securities and Investments Commission v Healey (2011) 196 FCR 291; [2011] FCA 717 at [20]:
"Directors are entitled to delegate to others the preparation of books and accounts and the carrying on of the day-to-day affairs of the company. What each director is expected to do is to take a diligent and intelligent interest in the information available to him or her, to understand that information, and apply an inquiring mind to the responsibilities placed upon him or her."
DSH accepted that a director may delegate the carrying out of certain functions to others, and can in many cases "rely without verification on the judgment, information and advice of management and other officers appropriately so entrusted", subject to such reliance being reasonable in the circumstances: Australian Securities and Investments Commission v Adler (2002) 41 ACSR 72; [2002] NSWSC 171 at [372(10)] (Santow J).
These statements reproduced above were made as regards directors generally: see Vines v Australian Securities and Investments Commission at [730]-[731]. Much may turn on whether they also hold some office, such as being CEO or CFO; on whether some particular responsibilities have been placed upon them; and on what they actually did know or should have realised or queried. These matters serve to confirm the fact intensive nature of the assessment.
It was not a necessary part of that case that Mr Abboud should have obtained the actual daily cash flow projection spreadsheets themselves. They were not his document. Mr Abboud was asked whether he had access to the daily cash flow forecasts, and said he could not recall. In his affidavit, he had said that he did not have access to the daily cash flows. Nor was it necessary to take Mr Abboud specifically to the need to defer creditors in order to pay the interim dividend in April 2015. DSH's case was more general than that, based as it was on Mr Abboud's knowledge that deferral of suppliers at the end of each month was a general practice, undertaken for the reason that DSH otherwise was unable to pay its creditors on time. In other words, Mr Abboud knew the company had a cash flow problem.
As is implicit in what has been said in the previous two paragraphs, the issues posed by Mr Abboud's reliance on Browne v Dunn do not turn on the specific matters framed by Mr Abboud on appeal, but whether he was confronted in cross-examination with the essence of DSH's case against him, so that he had an opportunity to "corroborate, elucidate or explain" as Mason P put it in Scalise.
What was put to Mr Abboud in cross-examination may be summarised as follows.
1. Mr Abboud agreed that he knew that, in accordance with the company's usual practice, there would be a cash outflow at the end of the calendar month.
2. Mr Abboud was asked whether he knew how much the cash outflow would be, and said that he did not recall.
3. Mr Abboud agreed with the proposition that he knew that the company was not paying its creditors on time, and that that was a general practice at the time.
4. As summarised above, Mr Abboud accepted that he knew that the reason that the company was not paying its creditors on time when the interim dividend was paid was because it was unable to do so within the limits of its banking facilities.
DSH said that in those circumstances, in order to fulfil his obligations under s 180 and form a view that the final dividend did not contravene s 254T, it was necessary to do more than rely on the Cash Flow Statement. As much was expressly advanced in DSH's written opening at trial, in which DSH submitted:
"[189] … As occurred in February 2015, the Company's then current daily cashflow projection showed payment of the dividend, on 30 September 2015, was to be on a day on which the Company's expected debt exceeded its bank facility, this time by over $30 million.
[190] As with the Interim Dividend, the resolution to declare a 5c dividend occurred without any apparent discussion of:
a) Whether the payment of that dividend would comply with s 254T of the Corporations Act, or more broadly, whether or not the payment of that dividend might adversely affect the Company's capacity to pay creditors. There is no mention of this in the minutes of the meeting.
b) The Company's cash flow. Again, there is no mention of this issue in relation to the proposed dividend in the minutes.
[191] Again, if adequate attention had been paid to these issues the dividend would not have been paid. If any reasonable discussion or thought had been applied, the directors would quickly come to the conclusion that in circumstances where the Company was relying on borrowed funds to pay the dividends, and had recently failed to pay trade creditors in a timely way, and where the Company's own cashflow projection showed that it could not pay the dividend from even existing borrowings, it was not in the interests of the Company as a whole to pay the dividends - even if (somehow) they thought s 254T had been complied with.
[192] As with the Interim Dividend, the board's lack of attention to these key issues was a breach of their duties under s 180(1) of the Corporations Act.
[193] To the extent the directors formed a view that the dividend complied with s 254T and was in the best interests of the Company as a whole, these were not views that a reasonable director would have come reached, nor were they in any sense rational, and that the directors breached the duties for that reason."
The written and oral openings raised the key point that the daily cash flow document revealed a $30m exceedance of the bank facility on the date the dividend was due to be paid. Some notice was thus provided of the significance DSH attributed to the document. In any event, although that document is probably the single clearest indicator of the s 254T difficulties which attended the declaration of a final dividend, that fact did not mean that that daily cash flow document of itself was an indispensable part of DSH's case, nor that Mr Abboud needed to be confronted with it in cross-examination after he had first denied, and then said he could not recall, having access to it. What mattered was that the projection showed that there were already very large end of calendar month payments projected at the end of September. Mr Abboud well knew this, and it was squarely put to him.
In short, Mr Abboud was a CEO who was personally involved in deferring trade suppliers. He knew that the reason for deferring payment was that the company lacked the cash to pay them on time, and that some 50% of payments to creditors was made at month end. In those circumstances, he did not without more have a sound basis to vote in favour of the final dividend, and in doing so did not comply with s 180. Mr Abboud was sufficiently confronted with this in cross-examination.
For those reasons, ground 2 of the amended notice of appeal is made out.
No doubt, as Mr Potts submitted, one of the key reasons shareholders purchase shares in a company is to share, via dividends, in the profits of the company. He is also correct to submit that payment of a dividend is, at least generally, in the interests of recipient shareholders. But it does not follow, as he suggests, that these points mean that payment of a dividend cannot constitute damage suffered by the corporation.
Here, what was alleged was a breach of directors' duties under s 180, being duties owed to the company. The interests of the company and the shareholders cannot be treated as identical in the way suggested by Mr Potts. In Pilmer v Duke Group Ltd (in liq) (2001) 207 CLR 165; [2001] HCA 31, a majority of the High Court rejected a claim that a company suffered damage when new shares are issued, distinguishing that point from whether the shareholders were disadvantaged: see at [48]-[65]. As part of their reasoning, they explained as follows (at [18], citation omitted):
"It is of the first importance to keep at the forefront of consideration that the claim which was made is a claim by the company, not a claim by or on behalf of its shareholders. It may be readily accepted that directors and other officers of a company must act in the interests of the company as a whole and that this will usually require those persons to have close regard to how their actions will affect shareholders. It may also be readily accepted that shareholders, as a group, can be said to own the company. But the company is a separate legal entity and the question raised in this matter is what damage (if any) did it suffer by issuing new shares. The question is not whether shareholders in Kia Ora were adversely affected."
Here, the converse point arises. That the shareholders obtained a benefit from the issue of the dividend does not mean that the company did not suffer some prejudice or disadvantage.
Consistently with Pilmer, in Bell Group Ltd (in liq) v Westpac Banking Corporation (No 9) (2008) 39 WAR 1; [2008] WASC 239, at [4395], Owen J explained the following:
"It is, in my view, incorrect to read the phrases 'acting in the best interests of the company' and 'acting in the best interests of the shareholders' as if they meant exactly the same thing. To do so is to misconceive the true nature of the fiduciary relationship between a director and the company. And it ignores the range of other interests that might (again, depending on the circumstances of the company and the nature of the power to be exercised) legitimately be considered. On the other hand, it is almost axiomatic to say that the content of the duty may (and usually will) include a consideration of the interests of shareholders. But it does not follow that in determining the content of the duty to act in the interests of the company, the concerns of shareholders are the only ones to which attention need be directed or that the legitimate interests of other groups can safely be ignored."
This statement has been reiterated in a number of cases: see Australian Securities and Investments Commission v Cassimatis (No 8) at [515]-[517] per Edelman J, and authority there cited.
The basis of the contravention found against Messrs Potts and Abboud involved a failure properly to consider s 254T. That provision is a constraint on payment of dividends to shareholders. It requires that consideration be given to broader interests than those of shareholders, in particular those of creditors. As addressed above at [152]-[154], the company's interests are detrimentally affected by payment of a dividend in contravention of the provision, even if the interests of shareholders might not have been prejudiced. To say that the dividend payments were a benefit to shareholders does not establish that it did not result in damage to the company.
DSH placed some reliance upon Segenhoe Ltd v Akin (1990) 29 NSWLR 569, in which Giles J held an auditor liable in negligence to a company which had paid a dividend to its shareholders based upon erroneous accounts. The case does illustrate that payment of a dividend can constitute damage (there, at common law). In response, Mr Potts sought to emphasise that the liability found was not for the whole amount of the payment, but only for that portion of the dividend which had been paid out of capital rather than profits, in breach of the then requirement of the Companies (New South Wales) Code. That point merely serves to emphasise that close attention must be paid to the nature of the legal claim, and to the counterfactual issue of what would have occurred but for the breach of the relevant legal norm. In that case all that the company claimed was the amount paid out of capital, "being a sum which would not have been paid as dividend but for the error in the June accounts" (at 571).
DSH complained in its submissions that "his Honour required the Company to disprove every other counterfactual in which the final dividend might have been paid anyway". That complaint is unfounded. The primary judge's second reason is best understood as simply recording that he was not persuaded that the company had made out that but for the contravention the dividend would not have been paid.
DSH similarly sought to argue that once it had "established Mr Potts' breach of s 180 and the $11.826 million loss flowing from it, the evidentiary onus shifted to Mr Potts to break the causal connection between his contravention and the relevant damage". This is a problematic submission. The reference to establishing the "loss flowing" from the contravention implicitly accepts the point in issue, that is, that it did bear the onus of making out that but for the contravention the money would not have been paid. And the reference to an evidentiary onus was a distraction. The company had the legal burden of establishing its claim. This was not a case where the absence of evidence on the respondents' side of the ledger, or some applicable legal presumption, meant that some kind of evidential burden arose: cf eg Berry v CCL Secure Pty Ltd at [29], [39], [66].
The company claims the whole dividend payment. It did and does not make any lesser claim in the alternative. On the findings of breach made by the primary judge, it was for DSH to make out, on the balance of probabilities, that but for Mr Potts' contravention the whole dividend would not have been paid out. The question to be addressed was the necessarily hypothetical one of what would have happened if Messrs Potts and Abboud had not contravened s 180.
In asking that question it is necessary to start with the contravention alleged and found. No doubt the contravention could have been put in different ways, for example, that Mr Potts contravened his duties by proposing the dividend in the first place in the dividend discussion papers which he had prepared (see judgment at [162] and [497]). But the contravention put and found was voting in favour of the resolution to pay the dividend. The counterfactual question, thus, is what would have happened if each of Messrs Potts and Abboud had said at the board meeting words to the effect of "I cannot support this proposal". Undoubtedly each of them would have been asked to explain why, and it is to be presumed that in answering they would have acted lawfully, and thus given a truthful explanation: see Lewis v Australian Capital Territory (2020) 271 CLR 192; [2020] HCA 26 at [36] and [151]. In that way the cash flow issues of the company would have been revealed.
There is little direct evidence addressing what would then have occurred. Plainly, however, it would have been very significant that the two executive directors would have indicated that they did not support payment of the dividend. Mr Potts notes that three of the six board members who were present at the 17 August 2015 meeting gave evidence in the case: Mr Abboud, Mr Tomlinson (Chair of the FAC and chair of the meeting) and Mr Murray (the Chair of the company; he did not chair this particular meeting because he was present only by phone from England). Mr Potts criticises the company for not putting to these witnesses that if they had been shown the daily cash flow forecast they would not have voted in favour of a final dividend. The rule in Browne v Dunn does not serve to protect a different party to the witnesses not challenged. Moreover Messrs Potts and Abboud, like DSH, could have questioned them on the issue.
It is certainly possible that the board would still have decided to pay the full dividend. As recorded in the dividend discussion paper that we have quoted above at [138], the board had adopted a policy of a dividend payment ratio of 60-70% of NPAT. For a company with a record of paying a dividend, a decision not to do so might well have caused an adverse reaction on the share market of a kind to which directors of public companies tend to be adverse.
However, the more probable outcome would have been a decision by the board not to pay the dividend at all. It is necessary to recall the cash flow situation that the company faced on 17 August 2015. The projection was that as at the proposed date of payment, 30 September, the cash demands on the company would exceed available funds by some $31m. It may be that some additional amounts could have been brought to book in this regard, although there is some doubt about the extent to which that could properly be done, as discussed above at [166]-[167]. In any event, the shortfall was not minor. The dividend itself was a sum of just under $12m. Not paying the dividend was one significant way of seeking to bridge the gap.
It will be recalled that Mr Abboud gave evidence that he did not consider pushing out creditors in an amount of up to some $30m to be material. However, for the purposes of analysis here it is necessary to consider that the board would have acted lawfully, and thus would have sought to avoid contravening s 254T. In that context, the company's practice of pushing out creditors was not an available option for the purposes of the counterfactual assessment. That leaves the two postulated options of having a sale to generate cash or postponing the date of the payment of the dividend.
Mr Potts placed some reliance on the affidavit evidence of Mr Tomlinson, in which he said the following:
"I formed the view that cash flow was unlikely to be an issue for the reasons set out above, and therefore I did not consider there was any reason not to pay a dividend. I considered that, in these circumstances, as DSH had made a profit, DSH should declare a dividend consistently with shareholders' expectations unless there was a good reason not to do so. I recognised that in a publicly listed company it would be very difficult to step back from having paid a dividend in the prior year without a good reason. Shareholders have a legitimate expectation that the payment of dividends won't go backwards year on year, especially the sort of 'mum and dad investors' who held shares in DSH."
The last two sentences were admitted only as evidence of his subjective belief, but it is his beliefs that are relevant for current purposes. Mr Potts' senior counsel suggested that this showed that Mr Tomlinson was "looking for a means to declare a dividend if possible". This overstates his evidence. Mr Tomlinson clearly had that inclination, but he also gave evidence that he had taken steps to satisfy himself "that, from a cash flow perspective, the Final Dividend could be paid". He said he formed the view that "the quantum of the Final Dividend proposed would not put the company at risk of being unable to pay its creditors". And he said that he voted in favour of the dividend "having formed the view that, provided there was not any concern about DSH's cash flow and not any exceptional circumstances that meant DSH could not declare a dividend, the board should do so".
This evidence does not support the position of Mr Potts, for it suggests that if Mr Tomlinson had been told that there were concerns about cash flow, and the exceptional circumstance of there potentially being a $31m shortfall as at the date of payment, and the fact that creditors were being pushed out in order to allow the company to meet its obligations, he would not have supported paying a dividend. True, he might have supported paying it later, or selling stock to enable payment. But on balance his evidence manifests a degree of cautiousness which does not suggest to us that he would have favoured those options if he had been properly informed of the situation.
Mr Potts also sought to rely on the evidence of Mr Wavish, who had in fact been sent a daily cash flow forecast on 17 October 2014. That projected that the company would exceed the then limit of its Westpac facility for two periods in the first half of FY15. Mr Wavish said in cross-examination that his reaction on seeing it at the time was "that that looks quite handleable, so it wasn't an orange light for me". He added that the projected cash flow:
"only … went above by 15 million, which is, what, four days' sales. Retailers have lots of levers to pull to improve things. That looked fine."
In the context of the interim dividend he said:
"I said before that retailers have levers that they can pull. So if you get yourself into a corner, or you need a back-up, there are various things you can do to generate cash. You could have a special sale in New Zealand, without mucking up the Australian market. You could have a special sale in South Australia, which is a very price sensitive market and responds really well. The ability to raise $16 million, if you had to, from one of those sources or as a backup was pretty straightforward. The easiest tack, of course, is Apple, which is something you don't make money out of, but you ought to have, and it sits there and at that stage there would have been about - slightly more than $20 million of Apple merchandise that could be sold real quick, if you wanted money. So the availability of money wasn't the issue for the dividend."
Mr Wavish was an experienced retailer, and this evidence is entitled to some weight. But he resigned as a director in April 2015 (see judgment [4]). He was not at the board table when the decision came to be made about the final dividend. Someone else may have expressed similar views if the issue had been properly ventilated, but it would not have been him.
A guide to what would have occurred is what actually did occur when problems were brought to the attention of the non-executive directors. On 21 October 2015, as discussed above at [57]-[61], board approval was needed for the proposed $20m increase in the loan facility. A circulating resolution was proposed. Mr Tomlinson emailed Mr Murray expressing concern about the proposal, and noting that he had been told in the course of an employment interview that day that Dick Smith was difficult to deal with from a supplier's perspective and had been delaying payments, and that industry members were suggesting it had balance sheet weakness. He added that there were concerns amongst directors about cash flow and debt, and requested an informal board meeting. As explained above at [62]-[64], the board met on three consecutive days in late October. Mr Murray gave evidence that from this time "I became even more focussed on Dick Smith's sales results, and requested that Mr Abboud arrange for weekly cash flow information to be provided to the board".
There was a board meeting held on 29 November 2015, which resolved to take a $60m write-down on the inventory. Mr Murray's evidence was that at this time the board was receiving "a detailed weekly cash flow report from management, which was subsequently updated almost daily". He said that at that board meeting he asked management to consider the impact of DSH not paying an interim dividend for FY16 in future cash flow forecasts and analyses. Consistently with that request, the board papers for the board meeting of 7 December 2015 have a cash flow forecast which expressly assumed that no dividend would be paid in the second half of FY16.
True it is that the financial situation that the board faced in October to December 2015 was more dire than the projected situation in August 2015. Nevertheless, this evidence suggests that when the board learned of cash flow and other issues it was prepared to take significant action in response, including accepting a substantial write-down and giving consideration to not paying any dividend.
The cash flow difficulty disclosed by the daily projection as at 17 August 2015 was not minor. It would have been a rather bold decision to pay a final dividend of some $12m given the situation that should then have been disclosed. It is possible that it would have occurred. But taking account of the degree of caution manifest in the evidence of Mr Tomlinson and Mr Murray, and what actually occurred subsequently, we consider it unlikely that the board would have taken that bold decision.
For these reasons, we consider that his Honour erred in finding that DSH suffered no damage for the purposes of s 1317H. It suffered the damage it claimed, namely payment out of the final dividend. It is entitled to the order for compensation in that amount against each of Mr Potts and Mr Abboud which should have been entered after trial, together with interest. As to interest, it is entitled to pre-judgment interest in accordance with s 100 of the Civil Procedure Act 2005 (NSW) from 30 September 2015 until 7 October 2021 (being the date the final orders were made below). That amount should be calculated by the parties. The company's interest entitlements after that date are governed by s 101 of the Civil Procedure Act.
As regards the interim dividends, the principles we have outlined would apply equally if contraventions had been made out, but whether or not factual causation could be made out would require additional consideration. It is not practical or sensible to seek to consider what would have happened but for a contravention having concluded there was no contravention.
The real problems confronting HSBC's submissions on appeal seeking to resurrect Mr Byrne's evidence are twofold. First, Mr Byrne's evidence was too generalised. It sought to establish reliance on all aspects of HSBC's case, without descending to the details of any particular aspect of the misleading and deceptive conduct of which HSBC complained. Secondly, the finding that Mr Byrne's evidence was of no weight is one which is likely to have been affected by impressions about the credibility and reliability of the witness formed by the primary judge as a result of seeing and hearing him give evidence: cf Lee v Lee (2019) 266 CLR 129; [2019] HCA 28 at [55]. It is not open to this Court, which did not see Mr Byrne give evidence, to interfere.
At the forefront of HSBC's submissions was the proposition that once his Honour had found that "if Mr Potts had disclosed that the reason DSH wanted an increase in its facility was because it was facing serious liquidity problems, HSBC would not have entered into the Extension Agreement on the terms that it did", that should have been the end of the analysis, at least in the absence of a pleaded and demonstrated counterfactual case advanced by Mr Potts. HSBC said that "it was irrelevant whether HSBC might have entered into some other, hypothetical transaction". It was said that "it is not within the statutory purpose 'for a contravenor to be able to say that, despite having misled and deceived the representee, the latter is really no worse off because he would have suffered the same loss as that suffered by the misleading conduct in some other transaction that did not eventuate'", citing Wyzenbeek v Australasian Marine Imports Pty Ltd (in liq) (2019) 272 FCR 373; [2019] FCAFC 167 at [118]. The approach taken by the primary judge was said to require HSBC to disprove the possibility of an alternative transaction, in circumstances where this had not been pleaded or developed at trial by Mr Potts. In particular, HSBC relied on what had been said in Berry v CCL Secure Pty Ltd (2020) 271 CLR 151; [2020] HCA 27 at [72] by Gageler and Edelman JJ:
"a defendant resisting the statutory action should be expected to plead any different counterfactual on which that party might rely to deny the causal link. Unless and to the extent that the parties choose to depart from the pleadings in the way they go on to conduct the trial, choice between the competing pleaded counterfactuals on the balance of probabilities should then exhaust the fact-finding that is required to be undertaken by the court on the issue of causation." (Footnote omitted.)
There is no rule of law that requires the approach proposed by Gageler and Edelman JJ reproduced above to be adopted in every case of misleading and deceptive conduct. No such obligation is to be found in the reasons of the joint judgment of Bell, Keane and Nettle JJ, and nothing in the reasons of Gageler and Edelman JJ lends support to the proposition that they were enunciating a fixed rule to be applied invariably. In the present litigation, the circumstances leading up to the appointment of administrators to DSH were examined in detail. So too was the attitude of HSBC as it was confronted with information concerning the financial position of its customer DSH.
There is a distinction between a person who joins a partnership or buys a property as a result of misleading and deceptive conduct, and a person who is already in contractual relations with the person who engages in misleading and deceptive conduct which causes an alteration to those contractual relations. HSBC relied on cases such as Smith v Noss [2006] NSWCA 37, where misleading or deceptive conduct caused the plaintiff to enter the partnership. In such a case, it is natural to proceed on the basis that the consequence of the misleading or deceptive conduct was to bring the parties into contractual relations. But HSBC's case that it would not have executed the Extension Agreement was very different from a case such as Smith v Noss. Irrespective of any contravention of statute by Mr Potts, DSH (i) owed HSBC millions of dollars, (ii) needed more money, and (iii) was in contractual relations with a banker whose business it was to lend money.
HSBC sought to put these matters to one side in its submissions:
"What we, with respect, submit is that in light of the finding that HSBC would not have entered into the extension agreement on the terms that it did, that must necessarily recognise a causal connection between the decision to enter the agreement and advance funds pursuant to it, and the contravening conduct. That's how we put it at the level of principle, and it was not necessary for his Honour to go further."
We do not accept this. To label HSBC's case as a "no transaction" case and to put to one side the fact that the parties were already in contractual relations runs the risk of disregarding the reality of the situation, and conflating it with a true case of where parties were brought into contractual relations because of the contravening conduct.
HSBC placed reliance on the reasoning in Wyzenbeek, where it was said to be erroneous to have inquired into what the claimant would have done had, hypothetically, the defendant not engaged in misleading or deceptive conduct, and where a Full Court regarded aspects of the reasoning in Westpac Banking Corporation v Jamieson [2016] 1 Qd R 495; [2015] QCA 50 as plainly wrong. The passage from Wyzenbeek relied on, in its context, is at [89]-[90]:
"It is always open to a person who claims under s 82 of the TPA to have suffered loss or damage by a misleading representation made in contravention of s 52 to allege that, if aware of the true position, he, she or it would have either entered into a different transaction or not entered into any transaction at all. In a 'no transaction' case the claimant asserts that he, she or it would not have entered into the transaction and, so, should be granted relief on the basis of being restored to the position that would have existed if there had not been any transaction. In a 'different transaction' case, the claimant asserts that he, she or it would have acted differently, had the true position been revealed, and hypothesises on a factual scenario of what would have occurred on which basis the claimant seeks relief. Thus in a 'different transaction' case, the claimant is not seeking to be restored to his, her or its original position, but to a hypothetical one based on the postulated difference.
In essence, the primary judge's investigation of a counterfactual scenario eschewed the principle that a claimant is entitled to compensation or damages if he, she or it establishes on the applicable causation principles or test for the cause of action that the wrongdoer's act or omission caused the loss or damage claimed. Ordinarily, it is irrelevant to that inquiry to speculate about whether, hypothetically, had the wrongdoer not acted in breach of the legal norm giving rise to the cause of action, the claimant would have done something else, and the claimant also would have suffered some other loss."
It is tolerably plain that the Full Court was not addressing the intermediate case where the misleading or deceptive conduct caused a variation in the contractual relations between the parties between whom there was already an ongoing contractual relationship. In the present case, HSBC was already DSH's lender, and DSH had fully drawn down the facility. It therefore is not enough for HSBC to obtain relief under the statute merely to conclude that it would not have entered into the Extension Agreement on the terms that it did had the serious liquidity problems been disclosed. It was for HSBC to allege and prove what it would have done, thereby establishing recoverable loss or damage. To use the language in Wyzenbeek on which HSBC relied, HSBC's case was a "different transaction" case, not a "no transaction" case. It was not enough merely to say that Mr Potts' misleading and deceptive conduct had some causal impact upon HSBC. It was necessary for HSBC if it wished to recover damages or compensation to establish what "different transaction" it would have entered into.
To reiterate, HSBC's case was that Mr Potts' misleading and deceptive conduct caused it to enter into the Extension Agreement. But if HSBC had not entered into the Extension Agreement, it would still have had an existing customer to which it had already lent $60m and which wanted to borrow more from its banker which was, after all, in the business of lending money, and had been trying to secure DSH's business for at least a year. Nothing in Wyzenbeek should be understood as making it irrelevant to inquire what HSBC would have done in those circumstances with its existing client. That involves neither any endorsement of Wyzenbeek nor disapproval of its reasoning, but rather merely points out that the reasoning in Wyzenbeek was not directed to a case such as that brought by HSBC.
On appeal, and for the first time, HSBC said that its account with DSH was a running account, and that the ordinary rule in Clayton's case meant that the deposits into the account on 23 December 2015 were to be taken to have reduced the earlier advances by HSBC, and not the $20m later advanced under the Extension Agreement. Against this, Mr Potts said that HSBC ought not to be permitted to raise this submission, not raised at trial, maintaining that it would have affected the evidence adduced and the cross-examination. HSBC replied that Mr Potts first took any point based upon the reduction in the overdraft below $60m only when, on the 29th day of the trial, his case against HSBC was opened and said that the question was a pure question of law. Mr Potts rejoined that HSBC had not deigned to particularise any loss suffered as a result of the execution of the Extension Agreement.
The contemporaneous documents make it plain that both banker and customer regarded the $20m temporary overdraft facility as a short term separate facility. In point of law, it was effected by a formal agreement amending the Syndicated Facility. But that does not reflect any of the contemporaneous documents, including HSBC's evidence that it regarded itself as "committed" when approval had been communicated to DSH some four weeks earlier.
The so-called "rule" in Clayton's case was reproduced in the joint judgment in Australia & New Zealand Banking Group Ltd v Westpac Banking Corporation (1988) 164 CLR 662 at 676; [1988] HCA 17:
"Presumably, it is the sum first paid in, that is first drawn out. It is the first item on the debit side of the account, that is discharged, or reduced, by the first item on the credit side. The appropriation is made by the very act of setting the two items against each other. Upon that principle, all accounts current are settled, and particularly cash accounts. When there has been a continuation of dealings, in what way can it be ascertained whether the specific balance due on a given day has, or has not, been discharged, but by examining whether payments to the amount of that balance appear by the account to have been made? You are not to take the account backwards, and strike the balance at the head, instead of the foot, of it."
The "rule" is a presumption, rebuttable by contrary agreement or evidence sustaining a contrary intention. It is a rule which is used in a number of areas of the law in order to identify the relationship between credits and debits. It is not used invariably. It says little, if anything, concerning the relations between trustee and beneficiary, as Sir George Jessel MR intimated in Re Hallett's Estate (1880) 13 Ch D 696 at 728 and as Kearney J confirmed in Hagan v Waterhouse (1991) 34 NSWLR 308 at 358, for equity developed its own rules where there were ongoing deposits and withdrawals, including in cases where there were multiple depositors into the same account. The authorities are reviewed extensively in Caron and Seidlitz v Jahani and McInerney in their capacity as liquidators of Courtenay House Pty Ltd (in liq) & Courtenay House Capital Trading Group Pty Ltd (in liq) (No 2) (2020) 102 NSWLR 537; [2020] NSWCA 117.
The rule may be used in a range of circumstances where there is a running account between parties, and it is necessary to identify precisely when a particular debit is discharged by a particular credit. The purpose of HSBC's invocation of the rule in Clayton's case is quite different. HSBC submits that because the deposits into the account on 23 December 2015 are taken to have discharged the withdrawals from the initial $60m Syndicated Facility, it cannot be said that the Extension Agreement was repaid in full such that there was no loss. This is an innovative use of the rule, and one which is not sustained on the facts of this case.
There was only ever (relevantly) a single contract between HSBC and DSH. That permitted HSBC to run an overdraft of $60m, and was varied so as to extend the overdraft to $80m for the period from 15 November 2015 until 15 January 2016. There was not in point of law a separate "line" of credit as between banker and customer, to which any debit and any credit might be appropriated. There was at all times a running account with a single outstanding balance. Now true it is that the rule in Clayton's case permits a notional identification of earlier debts against the deposits made on 23 December 2015. However, the rule in Clayton's case does not speak to the issue now arising, which is whether the indebtedness which was discharged was indebtedness under the Syndicated Facility as opposed to the Extension Agreement. In truth, the latter was simply an amendment of the former and there was only ever a single contract governing the relations between banker and customer, namely the Syndicated Facility as amended from time to time. There was only ever indebtedness of DSH to HSBC which was created when further funds were drawn down following the amendment made by the Extension Agreement, and which was discharged when repayments were made on 23 December 2015.
HSBC's submissions based on Clayton's case distract from the nature of the case sought to be advanced. A lender does not necessarily suffer loss when a loan is agreed to. Nor does a lender necessarily suffer loss when a loan is drawn down. The promise to lend money, or the actual loan of money, is only a loss if and when the borrower fails to repay. The drawdown of a loan merely converts the lender's liquid asset (cash) into the debt owed by the customer. After all, a banker's core business is lending money.
HSBC's case is that it suffered loss when the funds lent after the Extension Agreement was executed were not repaid, such that it was left with a less valuable chose in action against DSH. But that case must have regard to the repayments which in fact occurred on 23 December 2015.
It is true that, in theory, it might be open to HSBC to say that Mr Potts' misleading and deceptive conduct caused it to enter into the Extension Agreement, and it otherwise would not have done so and would have still insisted upon DSH making substantial repayments of the existing $60m facility prior to 23 December 2015. If that were so, then it would have a substantial claim for damages and compensation. But no such case was advanced.
Further, it is plain from the above that these matters were affected by the way the case was run. It is not a pure legal point which can be run for the first time on appeal: Suttor v Gundowda Pty Ltd (1950) 81 CLR 418; [1950] HCA 35. There is force in HSBC's submission that Mr Potts should not have been permitted to advance the point for the first time on the 29th day of the trial, but he did so, without opposition, and indeed the Court was told that HSBC, without objection, thereafter tendered further documents in response. Perhaps had objection been taken, Mr Potts' submission might not have been permitted. It is not necessary to express a view on that (a point which was not the subject of argument) for it is plain that that the litigation did not extend to this point.
HSBC also advances other bases not propounded at trial in support of this ground, namely, a contractual right of appropriation, and a common law right of appropriation, but they rise no higher than what has already been said. None was advanced at trial, each might have been met by evidence, and none can be raised for the first time on appeal.
None of this casts doubt upon the reasoning of the primary judge at [610]. Ground 2 must be rejected.
It is plain from the call report, and from an email from HSBC on the evening of the day of the presentation wishing Messrs Abboud and Potts "[b]est of luck with the upcoming results presentation" that DSH told HSBC that it was shortly to release its half year financial results to the market. There is no reason to think that either Messrs Abboud or Potts told HSBC what those results were, and no submission was made to that effect.
Ground 3 was directed to what had been said about the "keys" to the remarkable turnaround of DSH's profit. The primary judge noted there was a dispute whether Mr Abboud had used the expression "centralise buying power", and did not resolve it, save to observe that nothing turned upon it: at [154]. (No criticism was directed to this approach.) HSBC submitted that statements to the effect that the "keys" to the rapid growth in profits were controlling costs and supply chain savings were misleading and deceptive in the absence of any disclosure that (a) profits had been increased by a policy of maximising O&A rebates which were accounted as profit immediately, (b) DSH was overstocked and had been since at least November 2014, substantially because of the focus on O&A rebates, (c) DSH was in a "tight financial position" and had difficulties paying its creditors on time, and (d) DSH had exceeded its facility limits with Westpac repeatedly over the previous months. HSBC said that Mr Abboud's conduct in making the statements was misleading and deceptive, as was Mr Potts' silence in letting them be made without qualification.
The primary judge observed at [155] that at the time of that meeting, DSH had spent almost all of its OTB budget for the month, that the supplier of Go Pro cameras had placed DSH on credit hold (thereby holding up the delivery of an order of some $1m) and Canon was demanding payments of overdue invoices until the end of December 2014 totalling some $3.9m and threatening to place its account on hold if payment was not made within seven days.
The primary judge rejected this aspect of HSBC's case as follows:
"534 In my opinion, these submissions cannot be accepted. A person in the position of the HSBC representatives who attended the meeting could not possibly have thought that Mr Abboud was giving or intending to give a complete account of all the steps that DSH had taken to bring about the improvement in reported NPAT. The meeting was an informal and introductory one. The slides presented by Mr Abboud and Mr Abboud's comments on them were pitched at a general level. Even someone with the most rudimentary understanding of a retail business would have appreciated that the profits that were achieved would have been the result of a large range of decisions concerning matters such as stock acquisition, pricing, and staffing. HSBC was a sophisticated financial institution which, no doubt, had considerable experience itself of the way in which a retail business operated. It is to be expected that it would ask questions about matters that were relevant to its assessment of whether to advance funds to DSH. It could not reasonably have been left with the impression that the only things that led to the increase in NPAT were the things referred to by Mr Abboud. At most, someone at the meeting would have understood that Mr Abboud was referring to some of the steps that DSH had taken to increase its profitability.
535 A number of the things said not to be disclosed are described by reference to practices that did not exist or misdescribe the correct position. According to the findings I have made, there was, for example, no Rebate Maximisation Policy of the type pleaded. Nor was there an error in the FY14 or HY15 accounts. There was nothing wrong with the Rebate Accounting Approach. There was a proper basis to pay the 2015 interim dividend. It could hardly be misleading to fail to disclose matters that were not correct.
536 Moreover, HSBC had conducted a detailed analysis of DSH's financial position and results in the November 2014 CARM. That CARM observed that "Inventory increased by A$85m to A$254m in FY14" and gave explanations for the increase. It also stated that "Trade and vendor receivables increased by A$36m to A$47m largely due to increased vendor rebates receivable' and that "Other receivables (vendor receivables) of A$37.7m relate primarily to marketing rebates due from vendors (or vendor funded promotional activity)". Later on, the CARM states:
Creditor turn was 86 days in FY14, up from 37 in FY13. The increased [sic] in suppliers term is mainly due to supplier renegotiation program FY13-FY14 implemented by the new management. This renegotiation program includes (1) increase in rebate and/or (2) extend payment terms. DSE management has confirmed that creditor turn of 80-90 days is considered sustainable;
And one of the points at the beginning of the CARM states:
10. Working capital is considered stable with stock turn targeted at 100 days. Credit days need to remain under review given the business strategy of extending creditor days to provide cash flow.
Against that background, it is to be expected that if HSBC wanted additional information in relation to those matters or an update on those figures, it would have asked. Given what it knew, it could not have thought that Mr Abboud had said all there was to say on the reasons for DSH's improvement in profitability.
537 The position is even clearer in the case of the statements made by Mr Potts. One of the purposes of the meeting was for DSH to tell HSBC about the facilities it was seeking. The fact that Mr Potts did that conveyed nothing about DSH's previous banking relationship or the payment of creditors. No one could have been led into error about those matters by a description of the facilities that DSH wanted. As I have said, HSBC was already aware that DSH had a 'strategy of extending creditor days to provide cash flow', which was something that needed 'to remain under review'. Knowing that, it is to be expected that if HSBC required further information in relation to creditors and DSH's relationship with Westpac, it would have asked."
HSBC relied on the proposition that a statement which is literally true may nonetheless be misleading or deceptive if the recipient would be misled into believing that the statement was complete.
HSBC submitted that it was not to the point to reason, as the primary judge reasoned, that HSBC could not have thought that Messrs Abboud and Potts were giving an account of all of the reasons for the profit turnaround, when what was represented was the "keys" to the company's improvement.
These grounds should be dismissed, substantially for the reasons given by the primary judge.
HSBC had already subjected DSH to intensive financial analysis, based on its published accounts and the analysis by brokers. This is best seen by the 26 (single-spaced) page internal memorandum prepared by Mr Kowik and others dated 5 November 2014. The analysis is detailed and sophisticated. Among other things, the document disclosed an awareness of a "substantial increase" in trade vendor receivables from $11m to $47m in FY14, and noted that "[t]he substantial increase was the result of a strategic focus on collecting vendor marketing rebates, as detailed in the Prospectus and estimated at A$23.6m".
There was no dispute that the meeting on 3 February 2015 was preliminary and introductory. The immediate context was that DSH was about to release its half-yearly results, in circumstances where its most recent publicly available results were from a period seven months earlier, and did not include the most profitable period of the year (Christmas). The hope was that HSBC would then submit an "indicative facility proposal", by 28 February.
Thus it was plain that there would shortly be a further release to market of detailed, up-to-date financial information which could supplement the analysis already undertaken, which was now based on data for the previous financial year. That is a very long time for a company which had only been listed in 2013 with a new mode of management and whose profits had jumped seven-fold in the last two financial years.
In those circumstances, there was no basis upon which HSBC could reasonably infer that what was said in the meeting constituted a complete account of the drivers of DSH's increased profitability.
It is not necessary to address additional points raised on appeal which were not relied on at trial, such as the disclaimers in the PowerPoint presentation or the warranties in the Syndicated Facility executed months later. Nor is it necessary to address the objections of HSBC to relying on those matters for the first time on appeal.
Turning to whether anything that had been said caused HSBC to enter into the Syndicated Facility, the primary judge found at [543]:
"… HSBC had detailed policies and procedures for assessing credit applications and that, in accordance with those policies and procedures, Mr Rogers was provided with detailed information and analysis in relation to DSH's business and its financial position. With some minor and irrelevant exceptions, there is no evidence that any of that information came from Mr Abboud or Mr Potts. As Mr Rogers said in cross-examination, he placed considerable reliance on DSH's audited financial statements and he expected that any issues relevant to his assessment of the credit application would be revealed by those. Where Mr Rogers required additional information or clarification, he asked Mr Kowik to obtain it. Mr Kowik obtained some of that information from Mr Potts. None of the information he obtained was misleading. It is not plausible that Mr Rogers relied on DSH to disclose information he had not asked for. It is even less plausible that he relied on Mr Abboud or Mr Potts to do so. Against that background, it is difficult to see how Mr Rogers relied on any conduct by Mr Abboud or Mr Potts in deciding to approve the loan to DSH."
Oral and written submissions on this ground were brief, and much that had been written was disavowed in address. In particular, any reliance on Mr Rogers' evidence was disavowed. Instead, it was put:
"My learned friend, Mr Smith, is right to note the fact that I no longer place reliance on Mr Rogers. What we have sought to do in our relevant disclosed paragraphs in our orange is identify the pleadings that we say were referrable to those particular matters, and also the findings of the judge that supports them."
HSBC pointed to the Gould v Vaggelas inference to the effect that it should be presumed that a representation calculated to induce entry into a contract had such an effect, and relied on the fact that notwithstanding an absence of direct evidence, causation might nonetheless be inferred: Lord Buddha Pty Ltd (in liq) v Harpur (2013) 41 VR 159; [2013] VSCA 101 at [159(7)].
This ground does not arise, but it may nonetheless be addressed concisely. Let it be assumed that, contrary to the above, Messrs Abboud and Potts conveyed that the turnaround in profits was attributable to controlling costs and improving supply chains, and that that was misleading, insofar as it omitted the strategy of maximising O&A rebates, DSH's overstocking and its ongoing cashflow problems. It is far from clear that the contravention caused HSBC to enter into the Syndicated Facility. First, the anticipated meeting on 28 February 2015 after the publication of the half-yearly profits did not occur. The fact that a decision was only made months later, after a separate period of analysis and requests for information from DSH, diminishes the effect of what was said on 3 February 2015. Secondly, the half-yearly profits disclosed that DSH's stock had increased by more than $80m, and that fact was noted in a later internal HSBC analysis in March. An increase in stock of $80m represents $80m in funds or payables which were not available to DSH, and thus an $80m worsening of cashflow. Thirdly, the hearing proceeded on the basis that the way in which DSH accounted for O&A rebates was compliant, and there is nothing to suggest that HSBC would have been interested in any more detailed analysis. All these matters indicate the difficulties confronting this ground, and explain why very little attention was given to it in the appeal.
It is unnecessary to say more, because this ground does not arise once ground 3 is rejected.