Other evidence relevant to s 28(3)
65I turn to the third and fourth categories of evidence just referred to.
66Once Mr Magee had set out in his statement his conclusions on and reactions to the payment plans that in fact had been made between Optus and BXP, Optus put on evidence, from Mr McQuade and another manager, Mr Stephen Naven.
67Mr Naven was at the relevant time general manager, credit management, for the Optus group. His functions included the provision of "credit management analysis, reporting and oversight to the Optus group executive... ".
68What he was asked to assume, and what he sought to do, is set out in paras 7 to 9 of his affidavit sworn 21 May 2010:
7. I have been asked to assume that in August 2007, the plaintiffs had disclosed to Atradius that:
(a) BXP had consistently paid invoices after the due date;
(b) PPS had placed BXP on 'payment plans' in November 2005, August 2006 and February 2007.
8. I understand that Atradius contends that if that information had been disclosed to it, Atradius would have advised the plaintiffs that it would not have been prepared to enter into the contract of insurance unless it was satisfied that there were reasons to explain why PPS had put BXP on a payment plan that were unconnected with the financial position of BXP. If that decision had been communicated to Mr McQuade, in accordance with our normal operating procedures and communication channels I would have expected him to advise me of it and seek my assistance with preparing a response.
9. Set out below is the analysis I believe I would have prepared on the credit-worthiness of BXP, had I been asked to prepare one for use in negotiations with Atradius in August 2007.
69Mr Naven prepared a credit analysis relating to BXP in August 2006, and another in July 2007. Thus, as one might expect, a hypothetical further analysis that he might have prepared in August 2007, in an attempt to deal with Atradius' concerns, "would have covered the same points" as did his analysis of July 2007, but "in more detail in order to justify my conclusion that BXP would be able to meet its debts to the Optus group in the short to medium term" (affidavit, para 12).
70Mr Naven referred to and in some detail analysed the material that he thought he would have consulted to carry out the hypothetical exercise and reached the following conclusion (at para 38):
38. Overall, my assessment of BXP in August 2007 would have been that it was a low risk of becoming insolvent in the short to medium term. The objective financial data showed an overall trend of improvement. Although the delays in payment and the imposition of payment plans give off a first impression of a company suffering from a cash flow problem, my assessment would have been that these 'problems' were a direct product of PPS insisting on payment within 21 days, when the likelihood is that many of BXP's debtors would be paying on 30 day terms.
71I will refer to Mr Naven's evidence of what he would have done and disclosed as "the Naven material".
72Mr Magee replied to this evidence, and the further evidence of Mr McQuade set out at [75], [76] below, in a statement dated 7 April 2011 (verified at trial). At para 38 of that statement, he summarised his reaction as follows:
38. If, prior to the time the Policy was issued, I had been provided with the Naven Analysis and the McQuade Analysis, this would not have persuaded me to approve the Policy. The main reasons for this are:
(a) if I become aware that a potential insured has entered into payment plans with a buyer, in my judgment as a credit underwriter, this is a clear indicator that a company is experiencing financial difficulties. If I had been told that Prepaid had entered into payment plans, in order to approve a limit for a policy covering Bill Express debt, I would have required strong, concrete evidence that the payment plans were not the result of financial difficulties in Bill Express;
(b) on the basis of the Naven and McQuade Analyses, I would not have been confident that the payment plans and late payments weer unconnected with the financial position of Bill Express; and
(c) I would have remained extremely concerned about the fact that Prepaid had agreed payment plans with Bill Express and that Bill Express had to borrow money to finance those payment plans.
73Mr Magee explained his concerns in more detail in paras 40 and 41. He then summarised his thought processes at para 42 as follows:
42. I would have regarded Bill Express as a risk that should not be underwritten because there was an unacceptably high risk of a loss under the Policy which covered both protracted delay in paying debts and insolvency.
74I accept Mr Magee's evidence.
75Mr McQuade set out his concerns as to BXP at para 64 of his affidavit:
64. At the time of applying for the policy, my concern (which I thought was shared by the other key managers) about BXP was based on a number of factors. First and foremost, it was the amount involved. The Optus Group was invoicing BXP over $5 million a week. Once a payment was overdue by 1 day (ie 22 days since invoice), BXP would have a total debt to Optus of over $20 million (ie $15 million from the previous 3 weeks plus $5 million for the current week). If BXP did get into solvency trouble, the debt would get out of control very quickly because at any time BXP held a substantial quantity of PINs on consignment. Secondly, BXP did not have a substantial asset base and what it did have was secured in favour of its financiers. BXP could not offer security. Thirdly, because BXP did not have a substantial asset base and because the Optus Group was unsecured, our recovery would be limited if BXP went into insolvency.
76Mr McQuade also dealt, although briefly, with what he would have told Atradius if "asked... to explain my views about BXP's credit-worthiness" at para 66:
66. If I had been asked by Atradius to explain my views about BXP's credit-worthiness, I would not have confirmed myself to pointing out that BXP had regularly paid after the due date (see paragraph 53 above) or that I had concerns about BXP's access to working capital. A proper analysis of BXP is more sophisticated than that. In addition to the matters I have referred to above, I would have pointed out that:
(a) although BXP regularly paid a few days after the due date, it always paid in the end;
(b) BXP was likely to be viable in the short to medium term because all the major Australian telecos depended on BXP and Epay to distribute their products. Withdrawing support to BXP would result in disruption to the telcos' revenue stream;
(c) BXP's cash flow problems were in part the consequence of its rapid and successful growth. The longer BXP continued to trade, the more likely it was that its cash flow position would improve, because its non-recurrent capital costs should reduce over time;
(d) BXP had taken steps to address the cash flow shortages by seeking and obtaining funding from financiers;
(e) BXP had a valuable supply network for e-Vouchers, which included major retailers such as Coles.
77As Meagher JA said at [92], "Mr McQuade's hypothetical participation in the provision of further information [would have been] peripheral at best". I do not think that Mr McQuade's views add anything of substance to the Naven material. Accordingly, in what follows, I focus on the Naven material and Mr Magee's reaction to it.
78Although Ms Shaw's position is of less significance, her view, based on the material that Mr Naven and Mr McQuade said they would have furnished, was that it would not have led her to change her decision to recommend that Atradius not proceed with the policy. She said that she would not issue the policy unless she obtained express instructions to do so from both Ms Johnson and Mr Magee. She commented that she regarded the matters in issue as being primarily questions of credit analysis, and thus, ultimately, for Mr Magee to decide (affidavit sworn 6 May 2011, para 50). I accept that evidence.
79Mr Magee was cross-examined on his evidence. Much of the cross-examination consisted of putting to him what further inquiries and assessments he might have caused to be undertaken. As Meagher JA said at [87], the cross-examination "did not directly challenge Mr Magee's evidence that the analyses of Mr Naven and Mr McQuade would not have persuaded him to approve the policy. Instead it was suggested that he would have taken into account the views of others".
80I set out that passage of Mr Magee's cross-examination (T273.45-275.26):
Q. You were heavily dependant upon the technical skills of your team to analyse the current information, being the accounts, plus any further information which might arise before the risk actually incepted?
A. Yes.
Q. You were not going to second guess the decision of the Australian Local Credit Committee?
A. That is true.
Q. And, indeed, you considered them much better placed to assess this risk than you, given their knowledge of the local conditions?
A. Yes.
Q. And had any adverse information needed to be looked at after 26 July, the people you would have expected to do the task would have included Mr Athaide?
A. Yes.
Q. Mr Choo, as the buyer/owner?
A. Yes.
Q. And the Local Credit Committee?
A. And, also, Joanne Shaw as well, as the special product underwriter.
Q. And, possibly, people in Cardiff as well?
A. Yes.
Q. And what would have occurred in that situation is, some form of analysis or written report would have been provided to you for your consideration?
A. Yes.
Q. And if the Local Credit Committee of Australia remained comfortable with the risk in the light of any further information, that would have been a very significant factor in your thinking?
A. Yes.
Q. Indeed, because you were not in the business of second guessing them, if they looked at the further adverse information and maintained the overall limit, most probably, you would have kept your decision intact as well?
A. Yes.
Q. Now, could you go to your statement of April 2011? You give some evidence from paragraph 33 and following about how you might have responded if certain additional information had been placed before you?
A. Yes.
Q. Would you accept that, as a procedural matter, if additional information had arisen after 26 July, the steps that you would have expected to be taken would be these. First of all, Mr Athaide would need to redo his assessment of the buyer and tell you whether he maintained his positive recommendation?
A. Yes.
Q. Secondly, it would have become even more important to ensure that the submission you were asking him for was actually done, as opposed to forgotten in the paperwork?
A. Yes.
Q. Thirdly, you would have wanted Mr Choo, as the buyer/owner, to update his analysis of the buyer?
A. Yes.
Q. And you would have been particularly interested in whether his risk rating of 6 out of 10 remained, or moved in an unfavourable, or favourable direction?
A. I would be more interested if it moved unfavourable?
Q. I'm sorry?
A. I would be more interested if it was an unfavourable move.
Q. Yes. 5 or 4 wouldn't matter, but 7 would start to be trouble you?
A. Yes.
Q. If Mr Choo remained, essentially, intact around the 6 level, that would have given you considerable comfort in maintaining the decision you had made?
A. Yes.
Q. If he was in the 7 or 8, you would have needed to look more closely at his further work?
A. Yes.
Q. And given the matter had gone to the Australian local credit committee, you would have been very interested to see what view they had formed?
A. Additional material, yes.
81Mr Magee was then shown a document which he was asked to assume was "a summary of the payment plans... an accurate summary of the information which [he] didn't have at the time" (T275.32-.35). It was not common ground that the document did in fact have the character ascribed to it. (One reason why that is so appears from the re-examination to which I refer at [88] to [90] below.) The document was admitted into evidence on the limited basis that it would help to explain this passage of Mr Magee's cross-examination.
82The cross-examiner sought to lead Mr Magee to the conclusion that, had he been given the information comprised in that document and had it been investigated, it might have caused him to form "a substantially different view that there is a significant risk of [BXP] deteriorating during the course of [the] policy period" (T278.45-.49). Mr Magee said that there were two questions, of which this was only one (T278.50-279.11):
A. No, there are two questions; that is one of them. My first question, as I said, would be, is this the insured we want to insure, is this the insured we want to take as a customer because the basis of our underwriting for Bill Express rested heavily on the performance between and the close relationship between Optus and Bill Express and given the size of Optus to Bill Express and Bill Express' desire to it needs Optus to provide the PINS, you would expect Optus to have the upper hand. This is not something I would expect Optus to enter into. You would have to talk to Optus to find out, did they put the customer on stop shipment. Did they put Bill Express on stop shipment. What did they do to get their PINS out into the market and was there an adverse public outcry when you go to a petrol station and how they dealt with that. This would have started with Optus first.
83In case it is not clear, "the insured" is Optus. Plainly enough, Mr Magee was referring to the requirements set out at para 46 of his first statement (see at [57(3)] above).
84That reading of Mr Magee's evidence is confirmed by the following passage (T279.27-.38, in answer to my questions):
Q. Have I understood you correctly, Mr Magee, the creditworthiness of the buyer, Bill Express, is one matter of concern?
A. Yes.
Q. And the efficiency of the insured, Optus, as a creditor chasing up its accounts and so on is another matter of concern?
A. Yes.
Q. And that even if, on ultimate analysis, the information doesn't detract from the assessment of the buyer, nonetheless, if it shows that the creditor was lax in its credit management policies, that would be a separate cause for concern?
A. Yes.
85There was some challenge to the last answer. I do not think that it showed that Mr Magee's concerns, as to Optus' credit management policies, would have been alleviated (T279.42-280.34):
Q. On that separate matter, that would be for investigation and one available conclusion would be that the November exercise involved the creditor properly identifying that the matter had gotten beyond the 21 days and taking steps to ensure that the debtor came back within the 21 days within a relatively modest period and that would be evidence of proper control by the creditor over the relationship, it would be a positive, I put it to you?
A. I think
Q. Will you accept that or not?
A. Not on the point you have got [sic] raised. There is the middle point, which is the BXP promise to pay five million by 20 December, that gives me cause for concern because of the overdue 3.9 million, which is over 7 days. So for what we believe Bill Express to be, a cash generative company, that 3.9 million might be a blip and you would expect it within the next week. Then to say it comes to 22 November, doesn't give you the credit, that Optus actually have the muscle and power to control the suppliers, which is a concern.
Q. Well, these are matters of circumstance and degree; would you accept?
A. Yes.
Q. It would be relevant to know if, in that intervening period between November and December, each of the other payments was made on the 21 days, as it was required?
A. Yes.
Q. And that would be a positive factor if, in essence, the deal was, we will be holding you to the 21 days for each of our weekly settlements and we are giving you, perhaps, a degree of indulgence in giving you till December for the 3.9 million, but we will require by then that everything be brought back to 21 days?
A. I am assuming here this 5 million by the 20th would have been one of their weekly payments and not a separate payment plan, is that the right subject?
HIS HONOUR
Q. A moment ago in an answer I thought I heard you say 22 November. Did you mean, referring to paragraph 3, 22 December?
A. 22 December. Sorry, your Honour. So it is this five million that would cause me some concern because if the 3.9 million was overdue and they gave them until 22 December to pay it, that is a long time, but you might have a reasonable explanation for that, but it is the five million in the middle which implies that there is not one overdue, there is going to be multiple overdues during this period, then you have to question what their process is internally.
86Mr Magee was asked about inquiries that he might have caused to be made, and meetings conducted, in an attempt to understand the financial position of BXP. It was then put to him that, making certain assumptions as to BXP's payment history, the information that would come out was "broadly consistent with what he knew in fact". I will not set out the question, because without the underlying document it is rather hard to follow. But Mr Magee's answer (T286.2-.6) is instructive, because it reinforces what I regard as the significance, to his thinking, of what he had said at para 46(c) of his first statement:
A. I would say this gives me greater concern of Optus as the insured as opposed to Bill Express, the buyer. If Optus as predominant party in this wanted to reduce its terms with Bill Express and couldn't do, that would imply to me there is something wrong at the Optus level. To make that decision and then not to enforce it, is not a good sign for credit management.
87The further cross-examination of Mr Magee on this point did not take up, let alone challenge in any direct way, his comment that "it is not a good sign for credit management".
88In re-examination, Mr Magee was asked to read an email of 20 December 2006. That email had been referred to in para 9 of the "payment plans" document shown to Mr Magee, on which he had been cross-examined (see at [81] above). The summary of the email given in that document said merely that it was "a list of requirements to reduce BXP's indebtedness", and that Optus required three payments of $3 million to be made by 1 March, 1 April and 1 May 2007 "by way of additional security", in addition to the usual weekly payments.
89In addition to the summary that Mr Magee had been given, the email stated (after setting out the required additional payments):
If any of these [additional 3 x $3 million] payments are [sic] not made by the due dates [sic], then the following actions will be triggered:
(1) 30 days notification of a Margin reduction of .25% will be given. If payment is not received within this 30 day period then:
(2) the Margin reduction will be enacted, and a Letter of Demand issued. If the payment is not received within 30 days of the Letter of Demand being issued, then
(3) [Optus] will review supply of products to [BXP] with the most likely outcome being [Optus] will cease supply of Products.
90Mr Magee gave the following evidence (T300.11-.30):
Q. Can I ask you to assume that in addition to what you have been asked to assume in paragraph 9 you actually had all of the information set out in the email?
A. Yes.
Q. And can you also assume that at some stage the first two steps in the action plan referred to at the very bottom of the fax were actually implemented, that is there was a margin reduction and there was a letter of demand issued?
A. Yes.
Q. If you add those assumptions to the ones you made when Mr Gleeson was asking you questions, does it change any of your answers?
A. I think it's more likely we would not have spoken to Optus, we would not have taken this policy on.
Q. Why do you say that?
A. Having read this email it is clear that this is a debt, this is a company where Optus has severe concerns about, it's trying everything it can to manage its relationship and it's not working and so the credit insurance is its fall back and that's not the type of policy we would write or a type of risk we would take on.
91Ms Johnson said that if she had been given the additional information, she would have sought Mr Magee's comments. However, she said, from her perspective, the Naven material would not have her to conclude that the policy should be approved. In cross-examination, she accepted that if Mr Magee had reviewed the material and expressed a favourable view on it, then (T205.6-.7):
Depending what other information was available to me. If that was the only information, I would probably accept Mark's point of view.
92There is nothing in Mr Magee's evidence in chief or in cross-examination to support the conclusion that he might have expressed to Ms Johnson the favourable views that were put to her, and in respect of which she gave that qualified concession.