LINFOX TRANSPORT (AUST) PTY LTD v ARTHUR YATES & CO LTD

IN THE SUPREME COURT OF NEW SOUTH WALES EQUITY LAW DIVISION

50125/00 LINFOX TRANSPORT (AUST) PTY LTD v ARTHUR YATES & CO LTD

JUDGMENT 1 His Honour: Through Mr Humphreys Yates has sought to tender a series of documents, each of which is entitled, "Monthly sales report", there being one for each of the months June 1999 to November 1999. I understand that it might turn out to be the case that these reports of Mr Humphreys will, in time, turn out to be relevantly indistinguishable from the reports of others, so that what I say now might be of assistance in ruling upon the reports of others holding generally similar positions to that held by Mr Humphreys, who was the sales manager for the Western Australian branch of Yates.

2 In his monthly sales reports, Mr Humphreys, in essence, reported to his superior, Mr Trevarthen. For the moment, I am dealing only with whether the reports themselves are admissible under the provisions of section 1305 of the Corporations Act, and not with any question whether any passage within any of those reports is admissible under section 69 of the Evidence Act. Section 1305 of the Corporations Act makes a book kept by a body corporate under the requirement of the Act admissible in evidence in any proceedings and provides that the book is prima facie evidence of any matter stated or recorded in it. Subsection (2) provides: A book purporting to be a book kept by a body corporate is, unless the contrary is proved, taken to be a book kept as mentioned in subsection (1).

3 Section 1305 of the Corporations Act has the effect that, for the purposes of the questions now under consideration, one needs to consider whether the monthly sales reports were books kept by Yates under a requirement of the Corporations Law as the Law stood in 1999. Section 9 of the Corporations Act, like section 9 of the Corporations Law, defines "books". Nothing seems to me to turn upon those definitions. On any view, the books were a record of information. 4 Section 286(1) of the Law in its 1999 form provided that a company must keep financial records that: (a) correctly record and explain its transactions and financial position and performance; and (b) would enable true and fair financial statements to be prepared and audited.

5 The section went on to require that these records be retained for seven years after the completion of the transactions covered by the records.

6 Yates submitted that the reports were financial records kept pursuant to requirements of this section or, alternatively, that within the meaning of section 1305(2) of the Corporations Act they were documents purporting to be books kept by it as mentioned in section 1305(1) and that the contrary had not been proved.

7 The first question that arises is whether the monthly sales reports are "financial records". Earlier decisions have concerned other legislation differently worded. In Manning v Cory [1974] WAR 60, Burt J, as he then was, was dealing with an appeal against the conviction of company officers from the failure of the company to comply with the provisions of section 161 of the Companies Act 1961 of Western Australia, which required there to be kept such books as were necessary "to exhibit and explain the transactions and financial position of the trade or business of a company". At 62 to 63 his Honour said: The evident policy of that requirement is that the accounts should disclose or exhibit the financial position of the company at all times and at any time. They must be such as to enable one to say at any point of time where, in a financial sense, the company is, and it is not enough that they be such as to enable a competent accountant by producing a set of accounts long after the happening of the events to which they, ie the cheque butts, receipts and so on relate, to say where it has been and to establish the fact that it is then insolvent and unable to carry on. The whole policy of the section is to prevent this from happening, that is to say to prevent its officer from flying the company blind and upon its crash, and without having any information capable of sustaining the opinion, from then saying that he thought that he had more altitude.

8 Van Reesema v Flavel [1989] 7 ACLC 972 also concerned an appeal against conviction of a company officer arising from the failure of the company to comply with the generally similar obligation imposed by section 267(1)(a) of the Companies (South Australia) Code which used the expression: ...such accounting records as correctly record and explain the transactions of the company ... and the financial position of the company.

9 The company had kept certain records and the question arose whether the records that were kept were sufficient in the circumstances. At 977 O'Loughlin J held that the word "such" in the expression quoted meant "appropriate"; that is, records that were appropriate to the circumstances of the company.

10 On further appeal, reported at 10 ACLC 291, King CJ, with whom Bollen and Prior JJ agreed, quoted from the judgment of Burt J in Manning v Cory which I have quoted, and then at 295 his Honour said: There was evidence from the liquidator, who is a qualified accountant, and from a company investigator with the Corporate Affairs Commission, who is also a qualified accountant, that the minimum of books of account required for the purposes contemplated by the section, would be a general ledger and journal. I think that this is plainly correct. Transactions to which I have referred could only be explained by appropriate journal entries with clearly explanatory narratives. The financial position of the company could only be recorded and explained by the keeping of a ledger organising entries regarding these transactions into proper accounts. These were clearly minimum requirements also to enable the accounts of the company to be audited and to enable a profit and loss account and balance sheet to be prepared. The fact that the source materials were retained and that accounts could be written up from those source materials does not discharge the company's obligation. In my opinion, the journal entries and the balance sheet and profit and loss account written up after liquidation, do not fulfil the company's obligation. The obligation is to keep accounting records, and that, as Burt J points out in Manning v Cory, implies that they should be kept on a regular basis so as to disclose the financial position of the company "at all times and at any time". It may be, as the liquidator conceded in his evidence, that in some companies with a small number of transactions, it might be sufficient to have the organised accounts written up at the end of the financial year. That was not, however, what occurred in this company. There was no ledger or journal throughout the life of the company right up until liquidation. There was no pretence by the appellant that it was otherwise. His contention to the liquidator was that there were no transactions requiring books of accounts. Thus throughout the period specified in the complaint there was no ledger and no journal. The obligation imposed by section 267(1) is not discharged by bringing into existence after the liquidation entries purporting to record transactions occurring in the life of a company.

11 Caratti v The Queen [2000] 22 WAR 527 is factually closer to the present case. A company officer had been convicted on a charge of conspiring with others to defraud the Commonwealth. At trial the Crown tendered records described as farm books and they were admitted over objection pursuant to provisions of section 1305 of the Corporations Law, which might be described as the predecessor of 1305 of the Corporations Act. At paragraphs 130 to 131 Malcolm CJ, with whom Kennedy and Anderson JJ agreed, said: The farm books were documents of Robinswood, which was the operating company for the Caratti farming business. Although Sergio was a director of Robinswood only from December 1990 to June 1991, the appellant's evidence was that while he was alive he controlled all aspects of the various entities and their businesses, including Robinswood. The farm books contained monthly wages and fuel analyses. These were Robinswood expenses and payments and were prepared by the in-house accountants and staff in the course of their employment and on the instructions of Sergio (who was the directing mind and will of the company), to show in summary form those aspects of Robinswood's financial affairs. In that way the books were documents purporting to be books kept by Robinswood.

Their purpose was precisely that referred to by Burt J in Manning v Cory as disclosing (at least with respect to wages and fuel expenses) the financial position of a company from time to time. Clearly, the farm books were "accounting records" as defined in section 9 of the Corporations Law and were "kept" by Robinswood under a requirement of that law that is, for the purposes of section 289(1)(a). In my view, the "working papers and other documents" referred to in section 289(1)(b) could not be documents of "prime entry". The definition is inclusive. The farm books were accounting records within any ordinary meaning of the term. They were also working papers or other documents necessary to explain the methods and calculations by which Robinswood accounts were made up.

12 In the present case the evidence, that is the evidence to date, shows that Yates maintained a computer system and that the computer system was so programmed that on a daily basis it provided sales figures for the Western Australian branch arranged in various categories. At the end of each month the computer provided monthly totals arranged as desired in appropriate categories. Mr Humphreys' secretary took these monthly figures and copied them on to a new document following a standard format entitled, "Monthly sales report". She then printed out this document which, at that stage, contained blank spaces where Mr Humphreys was able, or expected, to insert comments. He provided these comments in manuscript to his secretary and then prepared another document incorporating them. This document was forwarded, I understand, in hard form to Mr Trevarthen at Yates' head office in Sydney.

13 As I said a moment ago, the reports followed a standard format. Each report set out a mass of figures of a financial nature arranged in various ways. For example, if one looks at the June sales report, one starts with a graph demonstrating actual sales figures against budgeted sales figures and a comparison of the year then in progress, 1999, with the previous year. There are then columns of figures arranged into various categories followed by comments. If one moves on to the second page and succeeding pages, one finds that the figures on page 1 are then analysed in more detail.

14 Altogether, there are some eight pages to the June report. Fundamentally it might be described as setting out a large number of figures and there are then provided comments by Mr Humphreys upon those figures. It seems that the general purpose of the comments was to explain what were described as variances, either between actual sales figures and budgeted figures, or between the present year and the previous year. The comments relate to a variety of matters such as seasonal conditions producing fluctuation in the sales of garden products, changes in business practices of Yates, the activities of competitors and, generally speaking, other matters which at least in the mind of Mr Humphreys ought to be reported to his superior, Mr Trevarthen, so that Mr Trevarthen would be able to see what it was that had been happening in the month in question in terms of sales made by the Western Australian branch.

15 At this stage, there is no dispute about the figures reproduced in each of the monthly reports, rather, the debate relates to the comments made by Mr Humphreys. Section 9 of the Corporations Law in its 1999 form defined "financial records" as including: (a) invoices, receipts, orders for the payment of money, bills of exchange, cheques, promissory notes and vouchers; and (b) documents of prime entry; and (c) working papers and other documents needed to explain: (i) The methods by which financial statements are made up; and (ii) Adjustments to be made in preparing financial statements.

16 Prior to 1 July 1998, the Corporations Law used the expression "accounting records", but that expression was then replaced by the new expression "financial records", the definition of which I have just read.

17 So far as I can tell, that amendment was made with a view to making the obligation a more generally expressed one. The old expression, "accounting records", was defined as including: (a) invoices, receipts, orders for the payment of money, bills of exchange, cheques, promissory notes, vouchers and other documents of prime entry, and; (b) such working papers and other documents as are necessary to explain the methods and calculations by which accounts are made up.

18 Linfox submitted, amongst other things, that if, as is now established to be the fact, Yates kept the relevant sales records in its computer system, it is difficult, if not impossible, to conclude that the presentation of the same figures by Mr Humphreys to Mr Trevarthen in the hard copy format of the monthly sales reports can be fitted into the terms of section 286(1). Mr Trevarthen had only to manipulate the computer available to him to obtain the information. I do not accept this proposition.

19 A company may well choose to keep financial records in more than one set of documents. It seems to be generally accepted that how a company keeps its records is a matter for it, so long as it does what the statute requires. It seems to me that if Yates chose to have its sales records kept in computer form, and chose also to have persons such as Mr Humphreys prepare hard copy documents to repeat that information but in a different format, and to routinely submit reports in that different format containing that information as well as other information, these circumstances by themselves would not mean that the monthly sales reports should be regarded as outside the formula contained in section 1305; that is, financial records kept under a requirement of the legislation. This is no more than one of the circumstances to be examined.

20 Then, Linfox submitted that the evidence showed that the purpose of creating the monthly sales reports of Mr Humphreys was to enable him to insert subjective comments so that the monthly sales reports ceased for that reason to be able to be described as "financial records" required to be kept by the statute.

21 I do not accept that it is accurate to describe the comments of Mr Humphreys as subjective. At least so far as the evidence so far before me shows, they were, for all practical purposes, the reports of Mr Humphreys to Mr Trevarthen, Mr Humphreys' superior, explaining the circumstances that Mr Humphreys thought ought to be explained, for example, circumstances about which Mr Humphreys felt informed but which Mr Trevarthen, in Sydney, would not otherwise know about.

22 From the perspective of the superiors of Mr Humphreys, that is Mr Trevarthen, and Mr Trevarthen's superiors, the comments probably bore the hallmarks of objectivity rather than subjectivity. They were contemporary explanations given on a routine basis by the Western Australian sales manager explaining to his superiors in Sydney events that had occurred in Western Australia where an explanation was required or was appropriate. No doubt it goes without saying that the comments might or might not have been accurate, but that is another question.

23 The reports were part of a series presented as statements of fact. It does not seem to me to be significant in this context that a lawyer would categorise some of the information conveyed by Mr Humphreys' comments as being in the nature of hearsay, or that at times he was expressing what a lawyer would describe as opinions. It does not seem apt in this context to draw a lawyerly distinction between the way a witness might or might not be permitted to give opinion evidence in court with the way in which a company officer routinely reports to his superiors.

24 The company, with its headquarters in Sydney, had to somehow inform itself what was happening so far as concerned sales effected through its Western Australian branch and this is the method it chose. Nor do I accept the submission made that the making of the comments, and the incorporation of the comments into the monthly reports so that the monthly reports did not consist merely of a presentation of figures meant that the reports should be regarded as having been prepared for the purpose of forwarding the comments on to Mr Trevarthen.

25 I think it quite probable that the comments constituted a significant part of the totality of the matters which together constituted the purpose or group of purposes for which the reports were prepared, although at least on the evidence so far I doubt that one can put it higher than that. But, once again, this seems to be just one of the matters to be considered.

26 I come to the question whether the reports were financial records in a general sense or, in terms of the ordinary meaning of those words, taking them to be outside the clauses, outside the terms of clauses (a), (b), or (c) of the definition of "financial records". I do not think that the monthly reports can be put within the framework of any of clauses (a), (b), and (c), rather it seems to me the question is whether they constitute financial records in a more general sense, or within the ordinary meaning of those words. It will be remembered that the definition of "financial records" is an inclusive one.

27 It seems to me that the records can be, and should be so described. They were records, or books, containing financial information; that is, raw figures coupled with comments or explanations by the state sales manager to his superior, Mr Trevarthen, and to the extent that Mr Trevarthen conveyed those comments on to his superiors, comments and explanations by Mr Humphreys to Mr Trevarthen's superiors explaining such matters as why particular sales figures, in a given month, were higher or lower than might otherwise have been expected. The reports were delivered on a monthly basis as part of a routine system of recording information of a financial nature. It seems quite natural that a large corporation such as Yates would see a need to keep itself informed about matters of this kind at various branches. It is perhaps fortuitous that the branch which comes up for consideration first is the Western Australian branch and the company's headquarters were in Sydney, but that circumstance does serve to throw the problem up rather more starkly than might otherwise have been the case.

28 To go back to some of the detail of the monthly sales reports of Mr Humphreys, one sees comments concerning particular products and concerning particular lines of products; one sees comments about circumstances affecting various large customers of Yates, about changes effected by the practices of Yates itself changing, for example, cross-docking arrangements; one sees particular comments as to why, on the report of Mr Humphreys, circumstances such as weather variations explained why sales of particular products and groups of products were higher or lower than expected and so on.

29 As a matter of ordinary language, they answer the description of financial records; they were records and they dealt with financial questions and they constituted the reports of the relevant officer of Yates to his superior explaining why the unexpected had occurred.

30 The next question to be resolved is whether the records were, in fact, kept. In the past there has been a difference of judicial opinion as to what that expression meant. That debate is not relitigated in this case. Rather, the questions debated in this case were whether the financial records were kept in fact, or whether the presumption contained in section 1305(2) applies.

31 Starting with the latter question, the law was fairly recently reviewed by Blow J in The Queen v Turner Number 17 [2002] TasSC 18. If the question arose I would follow and respectfully adopt what his Honour said as to the effect of section 1305(2). In particular, I agree with what his Honour said about the need to construe provisions such as 1305 facilitatively. I agree that the words of subsection (2) should be given a wide interpretation. His Honour said at the end of paragraph 25: If the Act requires a document to be kept, and it is kept, I therefore think it should prima facie be regarded as kept under a requirement of the Act, even if no-one meant to keep it, and even if no-one adverted to any requirement of the Act.

32 The factual difficulty from Yates' perspective, so far as concerns the monthly sales reports of Mr Humphreys, is that the records were not kept; that is to say, there was no plan or instruction that they be kept. Hard copies were prepared in Western Australia. Mr Humphreys described a procedure whereby the originals having been sent to the head office of the company in Sydney, copies were kept for a time in a place in Western Australia described as "archives", and some time later removed to a second place. No-one seems to have set out to keep the records in Western Australia. It just happened that they were, that some of them, but not all of them, were retained presumably because someone, perhaps Mr Humphreys' secretary, perhaps other persons in a broadly speaking similar position, kept them as a matter of general tidiness and general record keeping. It seems that none of the monthly sales reports were retained in the company's head office in Sydney.

33 In those circumstances, Linfox submits that the presumption established by section 1305(2) does not prevail because the contrary has been proved; that is, that the monthly sales reports, treating them as books, were not kept by Yates.

34 There is, I think, another aspect of the matter which needs to be considered. So far as I can tell, at least from the evidence so far before me, nobody at Yates gave any thought, one way or another, to whether there was a requirement under the relevant legislation to treat the monthly sales reports as records which should be kept pursuant to the provisions of section 286(2). Accepting as I do the thrust of the judgment of Blow J, I do not think that matters. 35 Nor, it seems to me in the end, does it matter that the records were not, in fact, kept after a certain time. They were kept for a time but not for seven years. They were misplaced in some way because nobody directed his or her mind to the need to keep them.

36 Blow J quoted with evident approval from the judgment of Finkelstein J in Valoutin v Ferst [1998] 154 ALR 119 concerning the way in which across virtually the whole of the Commonwealth world the old rules about proving transactions of the kind generally under consideration here have been repealed by various parliaments. It seems to me that this is entirely correct and that one must approach legislation like this in a facilitative way.

37 I therefore hold that the records constituted by the monthly sales reports of Mr Humphreys are admissible under the provisions of section 1305 of the Corporations Act. If there are particular expressions in any individual documents which might be the subject of separate objection I will consider those objections separately.

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