South Sydney District Rugby League Football Club Ltd v News Ltd [2000] FCA 1541 | Case summary

[6] … IMPORTANT NOTE NRL reserves the right to verify the validity or appropriateness of any information submitted to it as part of, or in connection with, the Admission Criteria. The final decision on the application of the criteria rests with NRL. NRL may obtain an independent opinion, at its cost, on any aspect of the information supplied as part of the Admission Criteria, or the application of the Admission Criteria: [emphasis added]. 1 OVERVIEW 1.1 Basic Criteria Clubs should demonstrate the ability to meet Basic Criteria. If Clubs currently do not meet the Basic Criteria, they must indicate a plan to achieve the necessary improvements to do so. The Basic Criteria consists of four parts: … (c) Solvency Each Club must, in the opinion of NRL, be solvent. … 1.2 Qualifying Criteria Brisbane, Auckland and Newcastle (each a "Qualifying Club") are to be measured against Qualifying Criteria. If these are satisfied, each Qualifying Club will be granted a 7-year licence (1999-2005). 1.3 Selection Criteria This section of the criteria outlines the mechanism to differentiate between Clubs, other than a Qualifying Club and merged entities that are approved by NRL. This is intended to provide an objective basis for ranking Clubs, though a calculation of measurable criteria, appropriately weighted. Those Clubs that are selected for admission in 2000 will be granted a licence for a minimum of 5 years." 536 The Basic Criteria's solvency requirement was in the following terms: "A.3 Solvency (a) Each Club must, in the opinion of NRL, be solvent. This will be determined by a review of the following: (i) Balance sheet as at 31 October 1998; (ii) Balance sheet as at 30 April 1999; (iii) Balance sheet as at 31 October 1999; and (iv) Profit and Loss Account for the year ending 31 October 1998; (v) forecast profit and loss account for the year ending 31 October 1999 (to be provided by 31 July 1999); and (vi) five-year Business Plan. (b) Whether or not a Club is solvent will be determined based on meeting the following requirements: (i) there are sufficient current assets at 31 October 1998 (cash at bank, cash on hand, trade debtors, loans receivable, grants receivable within the next 12 months) to make good current liabilities on their due dates (trade creditors, accruals, loans payable within the next 12 months). Current liabilities includes commitments to pay an external party or contingent liabilities being a liability to incur a payment to an external party should certain events occur within the next 12 months. In determining current assets, any guarantee provided to a Club by a third party to underwrite certain liabilities, will be treated as a current asset, but only to the extent that the third party can prove that it has the capacity to meet the guarantee and to the extent that the guarantee is legally binding. (ii) Five-year Business Plans should show sustainable operating cashflows sufficient to indicate an ability to repay any long term liabilities or commitments as and when they fall due. A long term liability is a requirement to pay an external party, where that requirement falls due in a period greater than 12 months from the date of the balance sheet. Liabilities will include commitments to third parties and contingent liabilities. In determining an ability to repay any long term liabilities, any guarantee provided to a Club by a third party to underwrite certain liabilities will be taken into account, but only to the extent that the third party can prove that it has the capacity to meet the guarantee and to the extent that the guarantee is legally binding. (c) Where a Club is a merged entity of two or more existing clubs, the merged entity must satisfy the solvency requirements." 537 In the "General Chronology" I set out the introduction to, and the principal provisions of, the Selection Criteria. I will not repeat them here. 538 (2) NRL prepared a document entitled "NRL Admission Criteria Process" with an accompanying "Information Booklet". It was dated 21 April 1999 and was distributed to the CEOs of the NRL clubs either on that date or shortly thereafter. Its opening paragraphs were as follows: "INTRODUCTION Under the terms of the National Rugby League (NRL) Merger Agreement, the NRL competition will consist of no more than 14 teams in 2000 and beyond. The NRL has prepared an Information Booklet for the clubs participating in the 1999 competition which provides the following: . The Admission Criteria Timetable . The Basic Criteria Spreadsheet . The Selection Criteria Spreadsheet OBJECTIVES The 14 teams that will be selected to participate in the Year 2000 NRL competition, will be determined by the NRL by application of the Admission Criteria. A timetable has been prepared which specifies dates by which the NRL and the clubs must perform various tasks to assist in the application of the Admission Criteria in October 1999. There are two key objectives in devising the process detailed in the Information Booklet. These are: . It is critical that all clubs understand all sections of the Admission Criteria and particularly when the requirements must be met; and . Discussion of the process by which information is collected, verified and analysed will clarify any uncertainty which may exist. PROCESS The cornerstone of the Admission Criteria process is the provision of timely information in respect of the Basic and Selection Criteria Spreadsheets. It is important to recognise that the NRL will only use the data provided in the spreadsheets contained in the Information Booklet for the purposes of selecting the 14 teams to participate in the 2000 competition. The spreadsheets provide the templates for clubs to simply "plug" in data and information. It is acceptable to attach additional information. All information is to be returned by the date specified in the Timetable. Clubs are encouraged to respond fully. Throughout the process the NRL welcomes inquiries which will assist the clubs in meeting their requirements. A project team has been appointed to facilitate the clarification process. The team members are: Neil Whittaker - Chief Executive Officer David Gallop - Legal Affairs Manager Mark Powell - Business Manager Edwin Farish - Financial Controller The NRL intends utilising the services of an external consultant (at its cost) to assist with the verification process. Clubs will be notified of the appointment and the NRL will seek co-operation in the scheduling of club visits and interviews." 539 (3) The minutes of the meeting of CEOs of the NRL clubs on 22 April 1999 recorded: "No 18 NRL Legal Affairs Manager, David Gallop provided an update of Club Agreements and advised that the NRL had a commitment to apply the criteria to select the 14 teams from season 2000." 540 (4) On 17 May 1999, the firm of chartered accountants, Ernst & Young, was awarded the tender to assist NRL in the Admission Criteria process. A partner of the firm, Mr Richard Fisher, performed a number of services for NRL. He attended by invitation most of the meetings of the committee established to conduct the admission process - the Admission Criteria Committee ("the ACC") - and provided advice and recommendation on (inter alia) the meaning and application of the solvency criterion. The ACC, I would note, was established for the following purposes: "(a) ensure that the Admission Criteria have been and are applied in accordance with their terms, fairly, reasonably and consistently; (b) ensure that a clear documentary trail is established to provide evidence of the decisions made by the Committee, and the reasons for those decisions; and (c) report and make recommendations to the chief executive officer of the NRL ('CEO') in relation to the Admission Criteria." 541 Mr Fisher indicated both in his affidavit and in cross-examination that sentences in para (b) of the solvency criterion were difficult to understand in terms of normal solvency criteria; he recommended to NRL management after discussions about the paragraph, that it not be applied according to its terms; he advised that as the criterion required that every club must in the opinion of the NRL be solvent, this should be determined by reference to its definition in the Corporations Law and accounting standards and the normal procedures for testing solvency; he advised management that para (b) was inappropriate and, particularly in relation to para (b)(ii), was impossible to apply, the latter seemingly because every single club would have to redefine its liabilities to accommodate "long term liabilities" and all their information would have to be resubmitted in order to consider the para (b)(ii) issue; but he could not recall any formal resolution of the ACC accepting his recommendation. In re-examination by Mr Meagher SC, he said that the test actually applied was stricter than that in the solvency criterion in that, for its purposes, solvency was required to be applied as at 31 October 1998 whereas he considered all information available up to 1 October 1999. 542 (5) In his affidavit Mr Farish, who was a member of the ACC, drew attention to the minutes of the first meeting of that committee which stated: "BASIC CRITERIA The Committee noted that 'solvency' in the context of SOLVENCY the Basic Criteria involved consideration of whether: (a) a club had sufficient current assets as at 31 October 1998 to make good current liabilities on their due dates; and (b) the club's five year business plan adequately demonstrates sustainable operating cashflows sufficient to indicate an ability to repay any long term liabilities or commitments as and when they fall due. Therefore, to assess 'solvency', the NRL needs to consider both the financial statements and business plans of clubs. RESOLVED that the NRL will be assisted by Ernst & Young when determining the 'solvency' of clubs for the purposes of the Basic Criteria." Mr Farish went on to say he could not recall a single occasion when the ACC, having received advice or guidance from Ernst & Young, made decisions contrary to that advice or guidance. 543 In cross-examination in the interlocutory proceeding before Hely J on para (b)(ii) of the solvency criterion (it related to what the five year business plan should show), Mr Farish said: "To the extent that you were considering future solvency beyond 1 October 1999 which was the date you took for solvency, was it not? --- Yes, 1 October. To the extent that you looked to future solvency of the applicant clubs beyond 1 October 1999 what use, if any, did you make of the 5-year profit and loss budgets that were forward by each club? --- Is this commercially or for the criteria? For purposes of the criteria? --- It was not a major factor. Was it a factor at all? - No." These answers were the subject of extended cross-examination in this proceeding. He said that the evidence quoted above was unclear; the five year business plans were reviewed by the ACC for the purposes of para (b)(ii) of the solvency criterion; there was a lot of discussion as to what the definition entailed but an "absolute clear resolution" was not arrived at; he had discussions with Mr Jourdain who was "close to it"; and while Mr Fisher gave an opinion to the ACC on the application of the solvency criterion, he did not believe that he advised the committee not to apply the criteria according to its terms although he had reservations about it and he advised that the para (b)(i) and (b)(ii) tests would be difficult to apply. 544 (6) Of the club responses to the draft criteria document, only three clubs adverted to the definition of solvency. Penrith asked "[w]hat does 'solvent' mean". Balmain made the general comment that solvency "[n]eeds a clear definition and requires a framework that does not allow manipulation of facts and figures". And Canterbury provided several drafting suggestions (one of which appears to have been adopted) and proposed that in the criteria document it "should be clearly stated that the solvency requirements are to be determined in accordance with Australian Accounting Standards". The Boundaries Committee in its report on the draft criteria suggested that the requirements as to guarantees were "onerous" and the expression "should certain events occur" was uncertain, but otherwise did not comment adversely on the solvency criterion.

South Sydney District Rugby League Football Club Ltd v News Ltd

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