Adelaide Brighton Cement Limited, in the matter of Concrete Supply Pty Ltd v Concrete Supply Pty Ltd (Subject to Deed of Company Arrangement) (No 4)

[2019] FCA 1846

FEDERAL COURT OF AUSTRALIA

Adelaide Brighton Cement Limited, in the matter of Concrete Supply Pty Ltd v Concrete Supply Pty Ltd (Subject to Deed of Company Arrangement) (No 4) [2019] FCA 1846

File number:

SAD 12 of 2018

Judge:

BESANKO J

Date of judgment:

12 November 2019

Catchwords:

CONTRACTS — where the plaintiff seeks to recover monies said to be owed to it for cement supplied over a period of approximately nine years — whether the plaintiff agreed to provide the first defendant with a discount or rebate in relation to the supply of cement

ESTOPPEL — whether the plaintiff is estopped from denying that it agreed to provide the first defendant with a discount or rebate in relation to the supply of cement — whether the first defendant had a genuine belief that it was entitled to a discount or rebate

CONSUMER LAW — whether the first defendant engaged in misleading or deceptive conduct in contravention of s 18 of the Australian Consumer Law (Sch 2 of the Competition and Consumer Act 2010 (Cth)) — whether the fourth to sixth defendants were involved in conduct which contravened s 18 — whether the first defendant’s silence was misleading or deceptive — whether the plaintiff is taken to have been aware of the true level of indebtedness of the first defendant by reason of the knowledge or conduct of one of the plaintiff’s employees

EQUITY — whether the first defendant held cement which was received but not paid for, and income generated using that cement, on trust for the plaintiff — whether the first defendant committed a breach of trust or fiduciary duty for which it must account to the plaintiff — whether the fourth to sixth defendants procured or knowingly assisted or benefitted from that breach

CORPORATIONS — whether the first defendant failed to maintain adequate books and records in contravention of s 286 of the Corporations Act 2001 (Cth) — whether a severe absence of records is required to demonstrate a contravention of s 286 or whether the failure to record a major liability is sufficient

CORPORATIONS — where the first defendant is subject to a deed of company arrangement — application under s 445D the Corporations Act to set aside the DOCA — whether the investigations conducted by the second and third defendants were inadequate — whether the second and third defendants ought to have sought an extension of the convening period — whether the second and third defendant’s second report to creditors contained false or misleading statements and/or material omissions within the meaning of s 445D(1)(a), (b) and (c) of the Corporations Act — whether the Court should exercise its discretion to terminate the DOCA — whether it is in the public interest that a liquidator be appointed to the first defendant

CORPORATIONS — application under s 447A of the Corporations Act to terminate or set aside the DOCA — where the plaintiff alleges that the DOCA is an abuse of Pt 5.3A of the Corporations Act

CORPORATIONS — application under ss 75-42 and 90-15 of Sch 2 of the Corporations Act for an order that the resolution that the first defendant execute the proposed DOCA, passed on the casting vote of the second defendant, be set aside — application under ss 75-43 and 90-15 of Sch 2 of the Corporations Act for an order that the resolution that the first defendant be placed into liquidation, defeated on the casting vote of the second defendant, be taken to be passed — whether the second defendant’s exercise of the casting vote was unreasonable — whether the second defendant failed to have regard to a number of relevant considerations

Legislation:

Australian Consumer Law (Sch 2 to the Competition and Consumer Act 2010 (Cth)) ss 2, 18, 20, 236, 237

Competition and Consumer Act 2010 (Cth) ss 87CB, 87CC, 87CD, 87CE, 137B

Corporations Act 2001 (Cth) ss 180, 181, 182, 183, 286, 435A, 436E, 438, 438A, 438B, 438C, 438D, 439A, 444, 444E, 445D, 445H, 446AA, 447A, 491, 588E, 588FA, 588FB, 588FD, 588FDA, 588FG, 588G, 588H, 590, 596, 600B, 600C, 1307, 1308, 1309

Evidence Act 1995 (Cth) ss 79, 131, 135, 140

Income Tax Assessment Act 1936 (Cth) s 252

Trade Practices Act 1974 (Cth) s 52

Insolvency Practice Schedule (Corporations) 2016 (Sch 2 to the Corporations Act 2001 (Cth)) ss 75-42, 75‑43, 75‑45, 75-140, 75‑225, 90-15

Limitation of Actions Act 1936 (SA)

Cases cited:

Adelaide Brighton Cement Limited, in the matter of Concrete Supply Pty Ltd v Concrete Supply Pty Ltd (Subject to a Deed of Company Arrangement) [2018] FCA 315

Adelaide Brighton Cement Limited, in the matter of Concrete Supply Pty Ltd v Concrete Supply Pty Ltd (Subject to a Deed of Company Arrangement) (No 2) [2018] FCA 1003

Adelaide Brighton Cement Limited, in the matter of Concrete Supply Pty Ltd v Concrete Supply Pty Ltd (Subject to a Deed of Company Arrangement (No 3) [2018] FCA 1058

Adelaide Brighton Cement Ltd v Burgess [2018] SASC 134

AIC Retail Finance Ltd v Savill [1986] 2 NZLR 679

Ashbury v Reed [1961] WAR 49

Australasian Memory Pty Ltd v Brien [2000] HCA 30; (2000) 200 CLR 270

Australian and New Zealand Banking Group Limited v Richard Kay Liebmann [2010] NSWSC 545

Australian Competition and Consumer Commission v IMB Group Pty Ltd [2003] FCAFC 17

Australian Securities and Investments Commission v Edge [2007] VSC 170; (2007) 211 FLR 137

Australian Securities and Investments Commission v Hellicar [2012] HCA 17; (2012) 247 CLR 345

Banco de Portugal v Waterlow & Sons Ltd [1932] AC 452

Barnes v Addy (1874) 9 Ch App 244

Beach Petroleum NL v Johnson [1993] FCA 392; (1993) 43 FCR 1

Bidald Consulting v Miles Special Builders [2005] NSWSC 1235; (2005) 226 ALR 510

BHP v Robertson [2002] NSWSC 336

Blue Ring Pty Ltd v Landshore Pty Ltd (subject to a Deed of Company Arrangement) [2006] WASC 245

Borden (UK) Ltd v Scottish Timber Products Ltd [1981] 1 Ch 25

Briginshaw v Briginshaw (1938) 60 CLR 332

Brisconnections Management Company Limited, In the matter of Thames Blund Holdings Pty Ltd (In Liquidation) [2009] FCA 626; (2009) 72 ACSR 233

Britax Childcare Pty Ltd, in the matter of Infa Products Pty Ltd v Infa Products Pty Ltd (Administrators Appointed) [2016] FCA 848; (2016) 115 ACSR 322

Canadian Dredge and Dock Co Ltd et al v The Queen (1985) 19 DLR (4th) 314

Commercial Union v Beard [1999] NSWCA 422; (1999) 47 NSWLR 735

Commonwealth Bank of Australia v Fernandez [2010] FCA 1487; (2010) 81 ACSR 262

Commonwealth Bank of Australia v Mehta (1991) 23 NSWLR 84

Consul Developments Pty Ltd v DPC Estates Pty Ltd [1975] HCA 8; (1975) 132 CLR 373

Cresvale Far East Ltd (in liq) v Cresvale Securities Ltd  [2001] NSWSC 89; (2001) 37 ACSR 394

Deputy Commissioner of Taxation v Pddam Pty Ltd [1996] FCA 235; (1996) 19 ACSR 498

Deputy Commissioner of Taxation v Portinex Pty Ltd [2000] NSWSC 99; (2000) 156 FLR 453

DSG Holdings Australia Pty Ltd v Helenic Pty Ltd [2014] NSWCA 96; (2014) 86 NSWLR 293

Eco Heat (Vic) Pty Ltd v Syndicate Forty Four Pty Ltd (Subject to Deed of Company Arrangement) [2018] VSC 156

Farah Constructions Pty Ltd v Say-Dee Pty Ltd [2007] HCA 22; (2007) 230 CLR 89

Federal Commissioner of Taxation v Wellnora Pty Ltd [2007] FCA 1234; (2007) 163 FCR 232

Fisher v Devine Homes Pty Ltd; Allen v Harb [2011] NSWSC 8; (2011) 85 ACSR 512

Fowler v Midland Electric Corporation for Power Distribution Ltd [1917] 1 Ch 656

Giorgianni v R [1985] HCA 29; (1985) 156 CLR 473

Global Realty Development Corp v Dominion Wines Ltd (in liq) [2005] NSWSC 1221; (2005) 56 ACSR 474

Grimaldi v Chameleon Mining NL (No 2) [2012] FCAFC 6; (2012) 200 FCR 296

Grundt v Great Boulder Pty Gold Mines Ltd [1937] HCA 58; (1937) 59 CLR 641

In re Pantmaenog Timber Co Ltd [2003] UKHL 49; [2004] 1 AC 158

Hagenvale Pty Ltd v Depela Pty Ltd & Serrada Holdings Pty Ltd (1995) 17 ACSR 139

Henjo Investments Pty Ltd v Collins Marrickville Pty Ltd (No 1) [1988] FCA 40; (1988) 39 FCR 546

Henry v Hammond [1913] 2 KB 515

JA Pty Ltd v Jonco Holdings Pty Ltd [2000] NSWSC 147; (2000) 33 ACSR 691

J C Houghton & Co v Nothard Lowe & Wills Ltd [1928] AC 1

Jones v Dunkel [1959] HCA 8; (1959) 101 CLR 298

Keen Mar Corp Pty Ltd v Labrador Park Shopping Centre Pty Ltd [1989] FCA 54; (1988) ATPR 40-853

Kirwan v Cresvale Far East Ltd (in liq) & Ors [2002] NSWCA 395; (2002) 44 ACSR 21

Kuhl v Zurich Financial Services Australia Ltd [2011] HCA 11; (2011) 243 CLR 361

Linen House Pty Ltd v Rugs Galore Australia Pty Ltd [1999] VSC 126

Mediterranean Olives Financial Pty Ltd v Loaders Traders Pty Ltd (Subject to Deed of Company Arrangement) (No 2) [2011] FCA 178

Michael Wilson & Partners v Nicholls [2011] HCA 48; (2011) 244 CLR 427

Mighty River International Limited v Hughes [2018] HCA 38

Miller & Associates Insurance Broking Pty Ltd v BMW Australia Finance Ltd [2010] HCA 31; (2010) 241 CLR 357

Mondello Farms Pty Ltd v Annatom Pty Ltd (Subject to Deed of Company Arrangement [2007] SASC 296; (2007) 64 ACSR 91

Owen, in the matter of RiverCity Motorway Pty Ltd (Administrators Appointed) (Receivers and Managers Appointed) v Madden (No 5) [2013] FCA 1443

Phoenix Lacquers & Paints Pty Ltd v Free Wesleyan Church of Tonga in Australia Inc (admins apptd) [2012] NSWSC 214; (2012) 87 ACSR 658

Pilmer v Duke Group Ltd (In Liq) [2001] HCA 31; (2001) 207 CLR 165

Plumbers Supplies Co-operative Limited v Firedam Civil Engineering Pty Limited [2011] NSWSC 325

Re Allebart Pty Ltd (in liq) [1971] 1 NSWLR 24

Re Bartlett Researched Securities Pty Ltd (Administrator Appointed) (1994) 12 ACSR 70

Re Coalleen Pty Ltd (Administrator Appointed) [2000] 1 Qd R 245; (1999) 30 ACSR 200

Re Hampshire Land Co [1896] 2 Ch 743

Re Hayes; Estate Property Group Ltd [2007] FCA 935

Re Martco Engineering Pty Ltd (Administrator Appointed); Deputy Commissioner of Taxation v Martco Engineering Pty Ltd (1999) 32 ACSR 487

Re Recycling Holdings Pty Ltd [2015] NSWSC 1016; (2015) 107 ACSR 406

Re TEN Network [2017] NSWSC 1247

Rogers v Nationwide News Pty Ltd [2003] HCA 52; (2003) 216 CLR 327

Sidhu v Van Dyke [2014] HCA 19; (2014) 251 CLR 505

Southern Cross Interiors Pty Ltd v Commissioner of Taxation [2001] NSWSC 621; (2001) 53 NSWLR 213

The Bell Group Ltd (In Liq) v Westpac Banking Corporation Ltd (No 9) [2008] WASC 239; (2008) 39 WAR 1

Thompson v Palmer [1933] HCA 61; (1933) 49 CLR 507

TiVo, Inc v Vivo International Corporation Pty Ltd (subject to deed of company arrangement) [2014] FCA 789

Waltons Stores (Interstate) Ltd v Maher [1988] HCA 7; (1988) 164 CLR 387

Wardley Australia Ltd v Western Australia [1992] HCA 55; (1992) 175 CLR 514

Whitlam v Australian Securities and Investments Commission [2003] NSWCA 183; (2003) 57 NSWLR 559

Yeshiva Properties No 1 Pty Ltd v Marshall [2005] NSWCA 23; (2005) 219 ALR 112

Yorke v Lucas [1985] HCA 65; (1985) 158 CLR 661

Young v Sherman [2002] NSWSC 281; (2002) 170 FLR 86

Austin RP and Ramsay IM, Ford, Austin and Ramsay’sPrinciples of Corporations Law (LexisNexis, subscription service)

Dal Pont GE, Law of Agency (3rd ed, LexisNexis Butterworths, 2014)

Dates of hearing:

3–7, 10–14, 17–19 December 2018, 25–26 March 2019,
1–5 April 2019

Date of last submissions:

3 June 2019

Registry:

South Australia

Division:

General Division

National Practice Area:

Commercial and Corporations

Sub-area:

Corporations and Corporate Insolvency

Category:

Catchwords

Number of paragraphs:

1421

Counsel for the Plaintiff:

Mr M Livesey QC with Mr S Foreman

Solicitor for the Plaintiff:

Lipman Karas

Counsel for the First, Fourth, Fifth and Sixth Defendants

Mr T Duggan QC with Mr C McCarthy

Solicitor for the First, Fourth, Fifth and Sixth Defendants

Crawford Legal

Counsel for the Second and Third Defendants:

Mr M Douglas with Ms S Heidenreich

Solicitor for the Second and Third Defendants:

O’Loughlins Lawyers

ORDERS

SAD 12 of 2018

IN THE MATTER OF CONCRETE SUPPLY PTY LTD (SUBJECT TO DEED OF COMPANY ARRANGEMENT)

BETWEEN:

ADELAIDE BRIGHTON CEMENT LIMITED ACN 007 870 199

Plaintiff

AND:

CONCRETE SUPPLY PTY LTD (SUBJECT TO DEED OF COMPANY ARRANGEMENT) ACN 007 848 580

First Defendant

DOMINIC CHARLES CANTONE IN HIS CAPACITY AS ADMINISTRATOR OF CONCRETE SUPPLY PTY LTD (SUBJECT TO DEED OF COMPANY ARRANGEMENT)

Second Defendant

NICHOLAS DAVID COOPER IN HIS CAPACITY AS ADMINISTRATOR OF CONCRETE SUPPLY PTY LTD (SUBJECT TO DEED OF COMPANY ARRANGEMENT) (and others named in the Schedule)

Third Defendant

JUDGE:	BESANKO J
DATE OF ORDER:	12 November 2019

THE COURT ORDERS THAT:

1.The plaintiff file and serve draft minutes of order which reflect the conclusions expressed in these reasons and contain such other orders as it seeks on or before (a date to be fixed).

2.The proceeding be listed for the making of final orders on (a date to be fixed).

Note:   Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.

REASONS FOR JUDGMENT

INTRODUCTION	[1]
ABCL’S CLAIM IN DEBT	[25]
Mr Darryl Hughes	[25]
Mr Brad Lemmon	[113]
Mr Brian Morris	[157]
The March 2009 Statement of Account	[174]
The Audit Confirmation Letter	[181]
The March 2012 Statement of Account	[187]
The April 2012 Statement of Account	[196]
Concrete Supply’s Process or Method of Applying the Alleged Discount or Rebate	[207]
The Amount of the Alleged Discount or Rebate Taken	[215]
The Financial Position of Concrete Supply between 2009 and 2017 without the Alleged Discount or Rebate	[223]
The Income Tax and GST Implications of the Alleged Discount or Rebate and the Method of its Application by Concrete Supply	[226]
Mr Morris’ Opinion about the Alleged Discount or Rebate	[234]
The Reduction of the Mantina Earthmovers’ Debt	[235]
The Bulk Supply Agreement	[238]
An Agreement or an Estoppel with respect to the Alleged Discount or Rebate	[274]
Introduction	[274]
The Relevant Principles	[275]
Preliminary Matters and Approach to the Evidence	[279]
Tina	[291]
Rino	[305]
Jason	[380]
Ms Devika Senanayake	[450]
Ms Heather Booth	[478]
Mr Albert D’Alessandro	[498]
Mr Graham Tull	[542]
Conclusion	[569]
SECTION 286 OF THE CORPORATIONS ACT 2001 (CTH)	[570]
MISLEADING OR DECEPTIVE CONDUCT AND UNCONSCIONABLE CONDUCT	[574]
Introduction	[574]
ABCL’s Submissions in relation to the 2009 Misrepresentation Case	[578]
The Concrete Supply Defendants’ Submissions in relation to the 2009 Misrepresentation Case	[590]
Analysis of the 2009 Misrepresentation Case	[601]
ABCL’s Submissions in relation to the 2012 Misrepresentation Case	[608]
The Concrete Supply Defendants’ Submissions in relation to the 2012 Misrepresentation Case	[618]
Analysis of the 2012 Misrepresentation Case	[625]
BREACH OF TRUST OR FIDUCIARY DUTY	[701]
ABCL’S CHALLENGE TO THE DEED OF COMPANY ARRANGEMENT	[734]
A Brief Chronology of the Administration	[735]
The Second Report to Creditors and the Investigations Carried Out by the Administrators	[762]
The Second Meeting of Creditors	[792]
The Nature of the Claims made by ABCL	[806]
The Key Witnesses — Messrs Cantone, Cooper, Morris and Heard	[872]
Mr Dominic Cantone	[873]
Mr Nicholas Cooper	[906]
The Evidence of Mr Morris in relation to the Administration	[927]
Mr Andrew Heard	[951]
The Evidence of Trade Creditors and Employee Creditors	[993]
Trade Creditors	[994]
Mr Mark Landells	[995]
Mr David Kelly	[1006]
Ms Kylie King	[1025]
Mr Matthew Hughes	[1036]
Mr Hans Fischer	[1043]
Mr Kandiah Wijendra	[1053]
Mr Steven Goodfellow	[1063]
Mr Paul Cannata	[1071]
Mr Nick Formichella	[1085]
Mr Graham Tull	[1091]
Summary of the Evidence	[1098]
Employee Creditors	[1114]
Mr Mario Forte	[1115]
Mr Marcello Obbiettivo	[1126]
Mr Lance Gillies	[1133]
Ms Susan Daly	[1141]
Mr Antonio Silvestri	[1150]
Mr Clinton Stevenson	[1164]
Ms Gabriele Collins	[1169]
Mr Albert D’Alessandro	[1173]
Ms Devika Senanayake	[1180]
Ms Heather Booth	[1186]
Summary of the Evidence	[1191]
The Relevant Principles	[1195]
The Termination of the DOCA — s 445D of the Corporations Act	[1195]
The Termination or Setting Aside of the DOCA — s 447A of the Corporations Act	[1221]
The Exercise of the Casting Vote — s 75-42 of the IPS (Corporations)	[1222]
Extension of the Convening Period	[1234]
Analysis of the Issues	[1243]
The Investigations carried out by the Administrators	[1244]
ABCL’s Claim and the Alleged Discount or Rebate	[1244]
The Directors’ Assets	[1311]
The Recoverability of the Mantina Earthmovers’ Debt and the Transactions involving Mantina Earthmovers	[1329]
Subordination of Debt	[1341]
Sale of the Business as a Going Concern	[1347]
Ability to Pay and Mistake as to the Mantina Earthmovers’ Debt	[1351]
Other Matters	[1354]
Independence	[1363]
The Second Report to Creditors dated 11 December 2017	[1369]
The Discretion under s 445D of the Corporations Act	[1378]
The Casting Vote Exercised by Mr Cantone	[1399]
Conclusions	[1419]
CONCLUSIONS	[1420]
APPENDIX A

BESANKO J:

INTRODUCTION

1. The plaintiff in this proceeding is Adelaide Brighton Cement Limited (ABCL).  ABCL is a public company incorporated in Australia and it carries on business in South Australia of supplying cement and lime.  It is one of the subsidiaries of Adelaide Brighton Limited (ABL), which is listed on the Australian Securities Exchange (ASX).  There are a number of companies in the Adelaide Brighton Group.

2. There are six defendants to the proceeding.  The first defendant is Concrete Supply Pty Ltd (subject to Deed of Company Arrangement) (Concrete Supply).  As its name indicates, it is a private company and it carries on business in South Australia of supplying concrete.  It is currently the subject of a deed of company arrangement (DOCA).  There are two companies which are related to Concrete Supply and they are Mantina Earthmovers and Constructions Pty Ltd trading as Mantina Quarries (Mantina Earthmovers), and Mantina Investments Pty Ltd (Mantina Investments).  These three companies are the main operating companies in the Mantina Group.  The directors and shareholders of Mantina Earthmovers and of Mantina Investments are the same as the directors and shareholders of Concrete Supply.  The one exception is that Ms Patricia Pacillo, who is not a director of any of the three companies, has a small shareholding in Concrete Supply and Mantina Earthmovers.

3. The second and third defendants are Mr Dominic Charles Cantone and Mr Nicholas David Cooper respectively and, at all relevant times, they were registered liquidators and chartered accountants.  They are members of Worrells Solvency & Forensic Accountants (Worrells).  On 14 November 2017, the directors of Concrete Supply resolved to put the company into administration on the basis that, in the directors’ opinion, the company was insolvent, or was likely to become insolvent at some future time, and to appoint Messrs Cantone and Cooper as joint and several administrators of the company.  A DOCA was subsequently proposed by the directors of Concrete Supply and it was approved at a second meeting of creditors of the company on 19 December 2017.  Messrs Cantone and Cooper were appointed deed administrators.  For convenience, I will refer to them as the administrators.

4. The fourth defendant is Mr Pelegrino Obbiettivo.  He was referred to in the course of the evidence as Rino and for convenience, and without intending any disrespect, I will refer to him in that way.  His late father and his mother established the business of Concrete Supply in 1987.  At all material times, Rino was a director and shareholder of each operating company in the Mantina Group.

1. The fifth defendant is Mr Genesio Obbiettivo.  He was referred to in the course of evidence as Jason and for convenience, I will refer to him in that way.  He is Rino’s brother.  At all material times, Jason was a director and shareholder of each operating company in the Mantina Group.

2. The sixth defendant is Mrs Tina Obbiettivo.  For convenience, I will refer to her as Tina.  She and her late husband established Concrete Supply and she is the mother of Rino and Jason.  At all material times, Tina was a director and shareholder of each operating company in the Mantina Group.  As I will explain in due course, she played a part in the conduct of the business, but not a major part.

3. Where necessary, I will refer to Concrete Supply and Rino, Jason and Tina as the Concrete Supply defendants, and Rino, Jason and Tina as the directors.

4. Concrete Supply was incorporated on 18 October 1977 as Karkiwarri Pty Ltd.  The name of the company was changed to Concrete Supply on 26 April 1988.  The company commenced operating a concrete batching plant at 76 Research Road, Pooraka in the State of South Australia (the Pooraka property) in about 1987.  The Pooraka property is owned by Tina and she leases it to Concrete Supply.  Concrete Supply continues to operate a concrete plant at the Pooraka property.  It also operates concrete plants at a property at 216 East Terrace, Kapunda (the Kapunda property) and a property at Roadtrain Drive, Two Wells (the Two Wells property).  The concrete plant at the Two Wells property was established in about September 2017. 

5. Mantina Earthmovers (then known as Mantina Earthmovers Pty Ltd) was incorporated on 28 February 1977.  The company changed its name on 29 October 1982.  The Kapunda property comprises a hard rock quarry and other rural land.  Mantina Earthmovers operates the quarry.

6. Mantina Investments was incorporated on 10 August 2004.  It is the trustee of the Mantina Investments Unit Trust and it owns the Kapunda property and the Two Wells property. 

7. This proceeding was commenced by ABCL on 17 January 2018.  ABCL’s case is that between 1 August 2009 and 6 November 2017, it supplied cement to Concrete Supply to the value of $32,599,450.55, but that Concrete Supply has made payments to it of only $20,938,867.69 for the cement it supplied.  ABCL’s case is that the difference between these two amounts, together with an opening balance as at 30 July 2009 of $787,259.72, namely an amount of $12,477,842.58, is a debt due to ABCL by Concrete Supply.  Concrete Supply does not dispute part of this alleged debt, being an amount of $2,168,328.51.  The balance of the alleged debt is in dispute.

8. The fact that ABCL is seeking to recover monies said to be owed for cement supplied over a period of approximately nine years is but one of many unusual features in this case.

9. ABCL established the primary amounts of $32,599,450.55, $20,938,867.69 and $787,259.72 respectively and, by the end of the case, I did not understand those amounts to be in dispute.  In any event, as I will explain in due course, I am satisfied that the amounts are established by the evidence.  The Concrete Supply defendants’ case (putting it generally at this point) is that the difference between the amounts is not a debt due to ABCL because ABCL by its conduct gave substantial discounts or rebates to Concrete Supply in connection with its supply of cement to the company.

10. At the second meeting of creditors of Concrete Supply, ABCL’s alleged debt was admitted in the full amount for voting purposes.  Mr Cantone was the chairperson of the meeting.  The meeting considered alternative resolutions for the future of the company, namely, the execution of a DOCA proposed by the directors or a winding up.  A resolution was carried on the casting vote of Mr Cantone that the company execute the proposed DOCA and that was subsequently done.  ABCL seeks orders on various grounds that would see the DOCA terminated or set aside and Concrete Supply placed into liquidation.

11. In its Originating Process, ABCL sought the following relief:

    1.Pursuant to section 440D of the Corporations Act the plaintiff have leave to begin and proceed with this proceeding against the Company.

    2.Pursuant to section 75-42 of sch 2 of the Corporations Act that the resolution that the Company execute a deed of company arrangement, passed on the casting vote of second defendant, be set aside.

    3.In the alternative to paragraph 2, pursuant to section 90-15 of sch 2 of the Corporations Act setting aside the second defendant’s decision to exercise his casting vote in favour of the resolution that the Company execute the deed of company arrangement.

    4.In the further alternative to paragraph 2, pursuant to section 445D or 447A of the Corporations Act that the deed of company arrangement executed by the Company be terminated.

    5.Pursuant to section 75-43 or 90-15 of sch 2 of the Corporations Act that the proposed resolution that Company be wound up, defeated on the casting vote of the second defendant, be taken to have been passed and that Messrs Martin Lewis and David Kidman be appointed as joint liquidators.

    6.In the alternative to paragraph 5, pursuant to section 447A of the Corporations Act that the Company [be] wound up and Messrs Martin Lewis and David Kidman be appointed as joint liquidators.

    7.In the further alternative to paragraph 5, pursuant to section 90-15 of sch 2 of the Corporations Act that the second and third defendants be removed as external administrators of the Company and Messrs Martin Lewis and David Kidman be appointed as external administrators.

    8.Pursuant to section 483 of the Corporations Act, that the second to sixth defendants deliver, convey or surrender the Company’s books to the liquidators of the Company as soon as practicable.

    9.        A declaration that the Company owes the plaintiff $12,457,472.22;

    10.A declaration that the Company failed to maintain adequate books and records in contravention of section 286 of the Corporations Act.

    11.A declaration that the Company engaged in misleading or deceptive conduct or unconscionable conduct in contravention of sections 18 and 20 of the Australian Consumer Law or unconscionable conduct under the general law.

    12.A declaration that the fourth to sixth defendants were involved in conduct by the Company which contravened Chapter 2 of the Australian Consumer Law within the meaning of sections 2, 236 and 237 of the Australian Consumer Law.

    13.A declaration that the Company held cement which was received but not paid for, and any income generated using that cement, on trust for the plaintiff.

    14.A declaration that (a) the Company breached its fiduciary duty to the plaintiff by disposing of property held on trust for the plaintiff; and (ii) [sic] the fourth to sixth defendants procured or knowingly assisted or benefited from that breach of trust by the Company.

    15.      Damages.

    16.      Equitable compensation.

    17.      Interest.

    18.      Costs.

    19.      Such further or other order as the Court thinks fit.

12. ABCL required the leave of the Court to begin or proceed with the claims for relief described in paras 9, 10, 11, 13 and 14(a) above by reason of s 444E(3) of the Corporations Act 2001 (Cth) and, on 14 March 2018, I granted such leave, nunc pro tunc (Adelaide Brighton Cement Limited, in the matter of Concrete Supply Pty Ltd v Concrete Supply Pty Ltd (Subject to a Deed of Company Arrangement) [2018] FCA 315). One of the issues which I discussed in those reasons was the advantages and disadvantages of hearing and determining the issue of whether the DOCA should be set aside or terminated before considering other issues in the case and, in particular, ABCL’s claim in debt. In the result, I decided that a determination of all issues at the one time was the appropriate course (see the discussion in the reasons at [31]–[54]). The course of these proceedings has only confirmed in my mind that that was the appropriate course.

13. There have been a number of other interlocutory disputes in this proceeding, including an application for an order which varied the DOCA and an order that this proceeding proceed on pleadings (Adelaide Brighton Cement Limited, in the matter of Concrete Supply Pty Ltd v Concrete Supply Pty Ltd (Subject to a Deed of Company Arrangement) (No 2) [2018] FCA 1003) and applications for discovery (Adelaide Brighton Cement Limited, in the matter of Concrete Supply Pty Ltd v Concrete Supply Pty Ltd (Subject to a Deed of Company Arrangement (No 3) [2018] FCA 1058).

14. The Concrete Supply defendants had common representation in this proceeding and the second and third defendants had their own separate representation.

15. ABCL summarised the issues which are raised by their claims.  It is a useful broad and general summary.  However, it is only a summary and, as will become apparent, it does not encapsulate all of the issues and sub-issues which are raised.

16. First, is Concrete Supply indebted to ABCL in the amount of $12,457,472.22? If yes, has Concrete Supply in those circumstances failed to comply with s 286 of the Corporations Act, having regard to the fact that the books and records of Concrete Supply showed a liability by Concrete Supply to ABCL of only $2,168,328.51?

17. Secondly, are the directors of Concrete Supply also liable for the amount claimed against the company by reason of their participation in misleading or deceptive conduct by Concrete Supply and their participation in breach of fiduciary duty by Concrete Supply?

18. Thirdly, should the DOCA be terminated pursuant to s 445D of the Corporations Act and Concrete Supply placed into liquidation by reason of the facts (if the facts are established) that the investigations of the administrators and the Second Report to Creditors were deficient in various respects and Mr Cantone’s exercise of the casting vote at the second meeting of creditors cannot be sustained?

19. Finally, even if the administrators’ investigations and the Second Report to Creditors were not deficient, should the DOCA be brought to an end by an order under s 447A(2) of the Corporations Act because, on the circumstances now known to the Court, the DOCA is an abuse of Pt 5.3A or for other reason? The submission is that an order bringing the DOCA to an end is appropriate, having regard to the public interest and considerations relevant to commercial morality.

20. I will identify the witnesses as I address the issues which are raised and I will make findings with respect to their evidence. The standard of proof is the civil standard, namely, on the balance of probabilities. Some of the findings I am asked to make involve serious allegations of improper conduct and I must bear that in mind when deciding whether the finding should be made: s 140(2) of the Evidence Act 1995 (Cth); Briginshaw v Briginshaw (1938) 60 CLR 332 at 362 per Dixon J (as his Honour then was); Whitlam v Australian Securities and Investments Commission [2003] NSWCA 183; (2003) 57 NSWLR 559 at [115]–[121].

    ABCL’S CLAIM IN DEBT

    Mr Darryl Hughes

21. In October 2017, it came to the attention of ABCL that its books and records were not accurate and that Concrete Supply had underpaid for cement supplied to it by ABCL in an amount in excess of $10 million.  ABCL launched an investigation into the matter and a manager, Mr Darryl Hughes, was involved in the investigations.

22. Mr Hughes gave evidence before this Court.  He was an honest witness and I accept his evidence.  As I will explain, he identified certain false entries in the books and records of ABCL by a Ms Glenda Burgess.  Ms Burgess was a credit manager at ABCL’s office at Birkenhead.  She is not a party to this proceeding and did not give evidence in this proceeding.  She faces a civil claim by ABCL in the Supreme Court of South Australia.  That proceeding was stayed pending a criminal investigation (Adelaide Brighton Cement Ltd v Burgess [2018] SASC 134). I am mindful of these matters, but findings as to Mr Burgess’ conduct and its character are central to a number of issues in this case. The evidence before me does not reveal a motive for Ms Burgess making the false entries. ABCL said that it was not part of its case to prove collusion between Ms Burgess and Concrete Supply or that Concrete Supply procured her conduct.

23. During the course of this hearing, I was required to make various rulings.  Those rulings and my reasons for them are set out in Appendix A to these reasons.

24. The first ruling arose as a result of certain objections made by the Concrete Supply defendants to Mr Hughes’ affidavits.  The ruling is described in Appendix A and it led to the filing of a Reply and a Rejoinder.  I will refer to features of the Reply and Concrete Supply’s Rejoinder before addressing Mr Hughes’ evidence because those features will make clear the relevance of a number of matters which Mr Hughes’ evidence addressed.

25. In ABCL’s Reply, it denied that any knowledge of Ms Burgess was to be equated with “a conscious and deliberate decision by the plaintiff” or was otherwise the knowledge of ABCL, and it denied that Ms Burgess was authorised by ABCL to agree the lump sum deductions and the Recipient Created Tax Invoices (RCTIs) deductions, or that these were ever “agreed as between ABCL and Concrete Supply”.  ABCL alleged that conduct by Ms Burgess whereby ABCL stopped sending invoices and statements to Concrete Supply, or otherwise did not object to the lump sum deductions and the RCTI deductions, was not authorised by ABCL and was contrary to and not in the course of Ms Burgess’ ordinary duties.  ABCL further alleged in para 3 of the Reply that between 2009 and 2017, Ms Burgess engaged in the conduct described below without authority from ABCL and contrary to and not in accordance with her ordinary duties with ABCL and to the financial benefit of Concrete Supply and in fraud of ABCL:

    3.1allocated payments made by other customers against Concrete Supply’s account:

    3.2      transferred debt from Concrete Supply’s account to other customers’ accounts;

    3.3“refreshed” Concrete Supply’s debt by raising new debt to meet outstanding and overdue debt owed by Concrete Supply;

    3.4omitted to reveal the full extent of Concrete Supply’s debt in the reports which she prepared for the Board of ABCL;

    3.5failed to reveal Concrete Supply’s true indebtedness at the sales and marketing meetings which she attended;

    3.6deleted any reference to Concrete Supply from aged trial balances provided to ABCL’s auditors;

    3.7increased Concrete Supply’s credit limit; and

    3.8did not pursue payment of Concrete Supply’s true indebtedness in accordance with its actual credit limit and terms of trade.

26. Concrete Supply filed a Rejoinder to ABCL’s Reply in which it denied ABCL’s allegations.  It pleaded that the conduct of Ms Burgess, as referred to in para 3 of the Reply and set out above, was known, or ought to have been known, to other employees of ABCL based at its Birkenhead office.  The particulars of this allegation were that the other accounts receivable staff, the sales representatives and Ms Burgess’ supervisors also accessed customer accounts in which the alleged transactions occurred and, therefore, would have known, or ought to have known, of the unauthorised transactions and that the size and frequency of the transactions were such that other employees would have known of them.  Concrete Supply alleged that Ms Burgess did have authority, either actual authority or implied authority.  It further alleged that the absence of any controls and supervision of Ms Burgess by ABCL gave rise to an estoppel against ABCL from it now alleging that she did not have any authority.  Finally, Concrete Supply pleaded that further, and in any event, if the conduct of Ms Burgess was in fraud of ABCL, it was still attributable to ABCL because of the matters pleaded in the Rejoinder and because it was not a total fraud of ABCL and ABCL benefited from an ongoing trading relationship being maintained between it and Concrete Supply. 

27. I turn now to the evidence of Mr Hughes.

28. Prior to September 2018, Mr Hughes was the general manager of finance of ABL.  In that role, he was responsible for the corporate reporting of ABL and its subsidiaries, including ABCL.  Mr Hughes is employed by one of ABL’s subsidiaries, Adelaide Brighton Management Limited, which provides corporate management services to the Adelaide Brighton Group, including ABL and ABCL.  Mr Hughes commenced his role as general manager of finance in 2011 and he reported to Mr Michael Kelly, who was ABL’s chief financial officer.  Mr Hughes set out his responsibilities in more detail in his evidence-in-chief, but it is not necessary for me to describe those matters.  In September 2018, Mr Hughes became the acting chief financial officer of ABL and it was at about this time that Mr Michael Kelly left ABL. 

29. Mr Hughes is and has always been located in Sydney.  He has been a director of ABL since about 2012.  He was not personally involved in the Concrete Supply account and the trading relationship between ABCL and Concrete Supply.

30. ABCL met as a board to fulfil its statutory obligations, but where there was an issue of board significance in respect of Birkenhead, then a meeting of the board of ABL would be convened. 

31. ABCL’s financial records consist of entries in a “SAP” accounting software system and in supporting documentation.  Prior to 1 August 2009, ABCL’s financial records were contained in a programme known as “Protean”.

32. ABCL manufactures cement, lime and pre-packaged dry-blended products.  It operates two manufacturing plants in South Australia, one at Birkenhead and the other at Angaston.  The Adelaide Brighton Group has offices at Birkenhead where a number of staff are employed.

33. ABCL’s product can be purchased in bags, including “bulker” bags or it can be purchased in bulk and loaded directly into a tanker.  The product can be collected directly from ABCL’s plants or delivered by ABCL to customers. 

34. ABCL has a process for the purchase and delivery of bulk product from its plants which is largely automated.  Customers can send a purchase order to ABCL which sets out the type and volume of cement or lime required which is entered into ABCL’s Central Administration System (CAS) or, as is the case with most customers, they have a general purchase order which covers all deliveries to them.  Where a customer collects bulk cement using its own cement tankers, as was the case with Concrete Supply, the customer has an electronic card for each of its tankers.  The card is linked to CAS and it enables ABCL to identify both the customer and the order being fulfilled.  The tanker is weighed, both before and after loading, and the information is recorded in CAS which produces a delivery docket for the driver of the tanker.  Mr Hughes produced CAS records for deliveries to Concrete Supply between 1 August 2009 and 6 November 2017.

35. CAS sends information to the SAP system as to the following matters:

    (1)the date of supply;

    (2)the type and quantity of product supplied;

    (3)the customer being supplied;

    (4)the purchase order which the supply related to; and

    (5)the docket number.

36. The SAP system contains details of the terms of trade with each customer which, with the information received from CAS, is used to generate invoices and to record sales in ABCL’s general ledger and customer accounts.  ABCL invoices are a combination of information contained in CAS and information in the SAP system.

37. Although sales are automatically recorded in the SAP system, invoices in hard copy must be printed and then sent by post to the customer by a member of ABCL’s accounts receivable section.  Mr Hughes said that in the ordinary course, ABCL invoices are sent to customers by post or by email.  Mr Hughes is aware that that ordinary course was not followed with respect to Concrete Supply, at least for part of the relevant period.  Mr Hughes said that it was nevertheless possible for Concrete Supply to calculate the amount it owed to ABCL by referring to delivery dockets and letters from ABCL to Concrete Supply advising Concrete Supply of price increases for product.  As I will explain, that evidence is correct.

1. In the usual case, when a customer pays by cheque, the amount is deposited in ABCL’s bank account that day or the following day.  Upon receipt of the proceeds into the bank account, the payment is entered into the SAP system and allocated to the relevant customer’s account.  When a customer pays by an electronic funds transfer, the payment is entered in the SAP System and allocated to the relevant customer’s account at the time the payment appears in ABCL’s bank account.  Payments are all allocated against the invoices being paid which enables ABCL to track which invoices are outstanding and the age of the customer’s debt. 

2. Mr Hughes described his understanding, based on the books and records of ABCL, of the trading relationship between ABCL and Concrete Supply. 

3. ABCL commenced supplying cement and lime to Concrete Supply in 1988.  On or about 27 June 2008, ABCL and Concrete Supply entered into an agreement for the supply of cement by ABCL to Concrete Supply.  The agreement is entitled “Bulk Supply Agreement” and I will refer to it as the BSA.  Rino signed the BSA as the authorised officer of Concrete Supply and Jason signed as the witness to Rino’s signature.  The commencement date is specified in the BSA as “1 August 2008” and the term of the BSA is specified as “Minimum Term 3 years”.  Schedule 1 to the BSA sets out the price for the product by reference to the type of product and the ABCL plant from which the product is obtained.  It specifies an ABCL list price, a discount amount and then a price per tonne taking into account a discount.  Within that part of the BSA containing special conditions, there is a clause to the effect that ABCL may adjust the price on 60 days’ written notice to Concrete Supply.

4. Between 1 August 2008 and 6 November 2017, ABCL sent a number of letters or notices, or both, to Concrete Supply advising it of price increases.  These documents were referred to in the evidence as “the price increase letters” and I will use that description.  These price increase letters were produced by Mr Hughes.  As I will indicate later in these reasons, I find that these price increase letters were sent by ABCL and received by Concrete Supply.

5. According to ABCL’s books and records and information provided to Mr Hughes, ABCL provided the following discounts to Concrete Supply:

   (1)General Purpose (Normal Portland) cement – in 2007 a discount of $19.00 per tonne; in 2008 (i.e., at the time of the BSA) a discount of $20.00 per tonne; in late 2010 a discount of $25.00 per tonne; and

   (2)other discounts for other types of cement.

6. Mr Hughes produced a schedule showing the base price, the discount and the discounted price for the supply by ABCL of General Purpose (Normal Portland) cement to Concrete Supply.  It is as follows:

Period	Base Price (ex GST) ($/t)	Discount ($/t)	Discount Price (ex GST) ($/t)	Discount (%)
1 August 2008 to 30 September 2008	$193	$20	$173	10.4%
1 October 2008 to 31 March 2009	$199	$20	$179	10.1%
1 April 2009 to 31 March 2010	$213	$20	$193	9.4%
1 April 2010 to 31 October 2010	$213	$20	$193	9.4%
1 November 2010 to 31 December 2010	$219	$20	$199	9.1%
1 January 2011 to 31 March 2011	$219	$25	$194	11.4%
1 April 2011 to 31 March 2012	$225	$25	$200	11.1%
1 April 2012 to 16 December 2012	$231	$25	$206	10.8%
17 December 2012 to 31 March 2013	$231	$25	$206	10.8%
1 April 2013 to 31 March 2014	$237	$25	$212	10.5%
1 April 2014 to 31 March 2015	$237	$25	$212	10.5%
1 April 2015 to 31 March 2016	$243	$25	$218	10.3%
1 April 2016 to 30 September 2016	$248	$25	$223	10.1%
1 October 2016 to 31 March 2017	$258	$25	$233	9.7%
1 April 2017 to 6 November 2017	$268	$25	$243	9.3%

1. One slight qualification to the pricing structure is that from time to time ABCL was unable to supply product to a customer which that customer normally took, and in those circumstances, ABCL offered an alternative product at a price that was not dissimilar to the price of the product that the customer normally took.  In other words, a customer would receive a higher priced product at a price similar to the price of the product the customer would normally take.  From time to time, this occurred in the case of Concrete Supply. 

2. Mr Hughes set out his understanding of certain terms in the BSA.  Ultimately, those matters are matters for the Court and I do not need to refer to this evidence.

3. On 7 November 2017, ABCL changed the terms of trade such that Concrete Supply was required to pay for future supply prior to delivery.

4. The background to Mr Hughes’ investigation is that in early October 2017, Mr Hughes was told by Mr Martin Brydon, the chief executive officer of the Adelaide Brighton Group, that irregularities had been identified in ABCL’s accounts with respect to Concrete Supply.  Mr Bruce Shaddock, who was the divisional manager for cement and lime, had identified the irregularities and had advised Mr Brydon and Mr Brad Lemmon of their existence.  Mr Shaddock was based in Munster, south of Perth in Western Australia.  He did not give evidence at the trial.  Mr Lemmon did give evidence and I refer to his evidence below. 

5. Mr Hughes was informed that Mr Shaddock had identified irregularities while reviewing a customer account in the absence of Ms Burgess who was not available at that time.  Mr Shaddock had replaced Mr Claude Taeger as the divisional head of cement and lime.  Mr Hughes was instructed to investigate the irregularities. 

6. Mr Hughes said that between 3 October 2017 and early December 2017, he spent almost seven days a week reviewing and going through the transactions.

7. I have referred to the transfer from Protean to the SAP system.  At the time of the transfer, all unpaid invoices in Protean were transferred to the SAP system.  By reference to the unpaid invoices, there was an amount owing by Concrete Supply to ABCL of $787,259.72 as at 31 July 2009 in relation to product supplied, but not paid for, between April 2009 and July 2009.

8. One of the exercises Mr Hughes carried out in November 2017 in relation to the books and records of ABCL and the supply of bulk product to Concrete Supply between 1 August 2009 and 6 November 2017 was the transfer of entries relating to Concrete Supply from CAS and the SAP system respectively to Excel files so that the information could be produced to the Court and more easily understood.

9. The Excel file which contains entries from CAS relating to Concrete Supply consists of the date, product, quantity and purchase order for every collection of product by Concrete Supply from ABCL in the period 1 August 2009 to 6 November 2017.

10. The Excel file which contains entries from the SAP system consists of entries recording details of automated invoices (designated “RV” entries) and manual entries (designated in some other way) such as payments by Concrete Supply.  It was in relation to the manual entries that Mr Hughes discerned a number of entries which did not reflect dealings between ABCL and Concrete Supply and which he described as false entries.  Mr Hughes explained that in relation to RV entries, the SAP system takes a file from CAS overnight and processes that file.  The entry itself is done by a batch programme and there is no need for the accounts receivable staff to enter the document or the invoice.  Mr Hughes explained that batch programmes are able to be operated under a user ID and, therefore, track the user ID within the SAP system as the user running the programme, but that does not mean that that person physically entered invoices into the system one by one.  Mr Hughes explained that a ZV document is a payment process document, namely, a document recording a payment from a customer.  A person goes into the function within the SAP system that would allocate a payment to a customer and processes a payment to a customer’s account.  This process is what Mr Hughes refers to as a “manual entry”.  Mr Hughes explained that a manual entry, namely a payment, is a reduction in the customer’s account in the balance owing.  To see a positive amount is the reverse of what one would expect to see when a payment is made to a customer’s account or a payment is allocated to a customer’s account. 

11. At all events, from the information in the two Excel files, Mr Hughes was able to discern that ABCL sold Concrete Supply the following volumes of product:

Period	Tonnes	Total Sales
1 August to 31 December 2009	6,549.40	$1,343,609.21
1 January to 31 December 2010	15,984.85	$3,299,101.23
1 January to 31 December 2011	15,852.30	$3,355,131.73
1 January to 31 December 2012	13,038.95	$2,844,128.17
1 January to 31 December 2013	15,533.15	$3,444,507.97
1 January to 31 December 2014	16,417.05	$3,657,678.11
1 January to 31 December 2015	18,450.35	$4,204,627.56
1 January to 31 December 2016	20,519.00	$4,951,479.70
1 January to 6 November 2017	21,118.75	$5,499,186.87
Total	143,463.80	$32,599,450.55

1. I will return to Mr Hughes’ evidence with respect to the false entries after I have identified the difference between total sales to Concrete Supply by ABCL and total payments by Concrete Supply.  After the false entries are removed, the details of the actual payments made by Concrete Supply between 1 August 2009 and 6 November 2017 are as follows:

Period	Number of Payments	Amount
1 August to 31 December 2009	40	$1,028,791.42
1 January to 31 December 2010	86	$3,082,220.79
1 January to 31 December 2011	78	$2,848,820.07
1 January to 31 December 2012	48	$2,036,309.58
1 January to 31 December 2013	64	$2,121,799.49
1 January to 31 December 2014	77	$2,185,980.94
1 January to 31 December 2015	95	$2,537,955.95
1 January to 31 December 2016	92	$2,453,998.14
1 January to 6 November 2017	87	$2,642,991.31
Total	$20,938,867.69

1. The effect of this evidence, which I accept, is that, assuming the entries identified by Mr Hughes as false entries are properly so characterised and, leaving aside Concrete Supply’s argument that it is entitled to a discount or rebate, the true position is that, according to ABCL’s books and records, Concrete Supply has not paid for product received from ABCL in an amount of $12,447,842.58 comprised as follows:

   (1)the amount outstanding as at 1 August 2009 of $787,259.72; and

   (2)the amount of $11,660,582.86 being the difference between the amount of $32,599,450.55 and the amount of $20,938,867.69.

2. I turn now to the false entries detected by Mr Hughes.  As I have said, they relate to the manual entries in the SAP system.  Mr Hughes investigated 116 entries in the manual entries report which he had produced and examined the underlying journal entries.  He discovered that 115 of the 116 entries did not relate to trading between ABCL and Concrete Supply.  He described the matters to which these entries appeared to relate as follows:

   43.1     4 relate to payments made by other customers;

   43.25 relate to journal entries transferring indebtedness from Concrete Supply to other customers;

   43.357 relate to journal entries which record the payment of Concrete Supply’s debt by the creation of new credit;

   43.449 relate to journal entries which record the payment of Concrete Supply’s debt by a combination of the creation of new credit and the application of a legitimate payment; and

   43.5one entry (recording a payment in the amount of $108,814.57 on 26 October 2017) was genuine.

3. Mr Hughes also identified a further instance of a payment by another customer being allocated to Concrete Supply and a further 11 entries which relate to journal entries which record the payment of Concrete Supply’s debt by the creation of new credit.

4. The false or anomalous entries involved a user ID of one of ABCL’s accounts receivable staff, Ms Burgess. 

5. Ms Burgess was responsible for customer accounts, including the customer account of Concrete Supply.  Her duties included the following:  (1) sending invoices and monthly account statements to Concrete Supply; (2) taking action to ensure overdue accounts are paid; (3) dealing with any queries from Concrete Supply concerning invoices or statements; and (4) reporting to the executive management team on the level of indebtedness of Concrete Supply and other customers.  Ms Burgess reported directly to Mr Shaddock, and Mr Shaddock in turn reported to the executive general manager, Mr Lemmon.

6. Mr Hughes set about investigating the false entries with a particular emphasis on Ms Burgess.  A search of email records revealed that there was no correspondence between the accounts section of ABCL and Concrete Supply after 12 September 2012.  There was some correspondence regarding invoices and payments prior to this date.  Furthermore, Mr Hughes was not able to locate any invoices or statements from ABCL to Concrete Supply since 2012.  Other evidence in this case enables a more precise finding to be made, that is, that statements of account ceased after April 2012 and invoices after March 2013. 

7. Concrete Supply provided two RCTIs in October 2017 and at the time he swore his first affidavit on 16 January 2018, Mr Hughes had found one such invoice dated 10 June 2017 in Ms Burgess’ office.  Mr Hughes said that the practice of customers issuing RCTIs is not the norm for ABCL’s customers and ABCL had only one customer which did so.  Mr Hughes later clarified this when he said that he was aware of only a handful of customers on an RCTI arrangement.  Mr Hughes is not aware of any written agreement between ABCL and Concrete Supply whereby the latter is to provide RCTIs to the former.  Other evidence in the case establishes that from a time in 2013, Concrete Supply sent RCTIs with cheques to ABCL. 

8. Mr Hughes explained in his oral evidence-in-chief that since swearing his first affidavit, he had discovered that there were a number of RCTIs generated by Concrete Supply in Ms Burgess’ office and in cross‑examination, he said that he was prepared to accept that a number of RCTIs were sent to Ms Burgess by Concrete Supply.  Mr Hughes explained that it was not the RCTI that was processed into the SAP system, but rather the cheque payment itself.  Mr Hughes explained that RCTIs for ABCL’s customers were “exceptionally rare”.  ABCL has between 600 and 700 customers within the Cement and Lime Division, and (as I have said) Mr Hughes was aware of only a handful of customers on what he called an RCTI arrangement. 

9. The Goods and Services Tax Ruling 2000/10 relevant to the generation of RCTIs was tendered by ABCL as part of Mr Hughes’ evidence-in-chief.

10. Mr Hughes and a Mr Mark Tosolini, who is the group information technology manager at ABCL, investigated entries in the SAP system which had been identified as suspicious by forensic accountants (KPMG) engaged by ABCL.  The investigation revealed that numerous entries had been made using the user ID and work station of Ms Burgess which did not reflect legitimate entries and which resulted in ABCL’s accounts materially understating the indebtedness of Concrete Supply to ABCL.

11. Mr Hughes identified one of the suspicious transactions and he reviewed all user activity in the accounts receivable section of ABCL at the time of the transaction.  He found that all user IDs were active at their usual workstations, including Ms Burgess’ ID at her usual workstation.  Furthermore, the review showed that all other users were engaged in other work at their workstations.

12. In order to access the SAP system, a user needs to log in using a registered ID and password.  Each user ID has a set of “permissions” which define the level of access the user has within the SAP system, including the changes or entries that user may make.  Ms Burgess’ user ID was “GLENDAB”.  The accounts receivable section was based at the Birkenhead site and comprised Ms Burgess and three other employees.  The SAP system records “session information” each time a person logs into the system and that session information records when the user ID logged into the system and transactions, including reports, which were run during the session.  In addition, ABCL records the activities of users who are logged onto its network through a Wyse terminal.  That audit log records information, including the terminal from which the user accessed ABCL’s network, the applications run during the session and all websites visited during the session. 

13. Mr Hughes reviewed the SAP system security log and work time data for Ms Burgess and the other members of the accounts receivable section for the period from August 2009 to October 2017.  He drew the following conclusions from the review.  First, all false entries referred to in his evidence were made using Ms Burgess’ user ID, “GLENDAB” at a time when Ms Burgess was logged into the SAP system for an extended period of time.  Secondly, at the time the false entries were made, all other members of the accounts receivable section either did not log into the system for the entire day, or were logged into the system for an extended session.  Mr Hughes expresses the opinion (which I accept) that the SAP system security log and work time data was not consistent with a person logging into the system using Ms Burgess’ user ID, making a false entry and logging out again.  He said that the SAP system security log and work time data for Ms Burgess and the accounts receivable section runs to thousands of pages.

14. Under ABCL’s system, the only entries which should be made in a customer’s debtor account by a staff member in the accounts receivable section relate to records of invoices (automatically generated), records of payment by the customer and of credit notes.  They are the only legitimate entries.  In fact, there were numerous entries made using the user ID of Ms Burgess which did not fall into the above categories, but rather were false entries of the following types.

15. First, there were misallocations of payments whereby payments made by ABCL customers were allocated to the accounts of other customers in the absence of any evidence of instructions from the customer making the payment to do that.

16. Secondly, there were journal entries whereby indebtedness was transferred between customers in the absence of any authority from the affected customers to do that.

17. Thirdly, there were journal entries in ABCL’s accounts whereby an indebtedness was transferred to ABCL’s cash account at the end of certain months, which had the effect of disguising a customer’s accounts receivable balances.  The balance was then transferred back to the customer a short time later.

18. Finally, there were journal entries which purported to be payments of invoices, but which were not supported by any evidence of payment.  Instead what occurred was that the affected customer was extended new credit.  Mr Hughes explained that refreshing a debt means an entry which is posted which leaves the account balance at the same value as before the entry, but because of the entry itself, a debit and credit within the account, the credit would be applied to old debt which was past due, or past due and payable and the new entry, the debit that would result at the end of the process, would then have a due date which would reflect the actual date of the transaction.  The net result is that the balance does not change, but the age of the account is refreshed and brought more up to date.  Mr Hughes identified ZV transactions which apparently involved the refreshing of a debt.  Mr Hughes explained that refreshing a debt did not necessarily involve processing the entry against the oldest invoices.  It was up to the person who was engaged in the process to identify the relevant invoices. 

19. I referred earlier to entries in Concrete Supply’s debtor account involving transfers from other customer’s accounts and the misallocation of other customers’ payments.  These entries had a net effect of reducing the balance owing on Concrete Supply’s debtor account of $8,355,817.97 as follows:

Date	Amount	Description
31.12.2012	-$1,439,434.84	Transfer of debt to ABCL’s Northern Cement business unit
18.06.2013	$430,936.26 -$886,371.76	Misallocation of payment of $455,435.50 by BHP Billiton to Concrete Supply account and “refreshing” of $430,936.26 debt to pay $886,371.16 of Concrete Supply invoices.
30.09.14	-$776,139.28	Transfer of debt to BHP Billiton’s debtor account
30.06.15	-$1,113,032.64	Transfer of debt to Halliburton Australia’s debtor account
29.02.2016	-$895,711.32	Transfer of debt to Oz Minerals’ debtor account
27.04.2016	-$2,652.13 -$2,251,763.72	Misallocation of payment of $3,367,448.49 by Independent Cement and Lime to Concrete Supply and other customers
31.12.16	-$1,036,679.75	Transfer of debt to Jaffa Limestone and Kittle Group debtor accounts
30.01.2017	-$384,968.79	Misallocation of payment of $2,910,776.58 by Independent Cement and Lime to Concrete Supply
-$8,355,817.97

1. There were two other important matters Mr Hughes discovered as a result of his investigations.

2. First, the accounts receivable manager for each division was required at the end of each month to provide to senior management a schedule setting out the account balances of the largest debtors for their division.  The schedule for each division was then merged to produce a single report for ABL.  The report is then provided to the board of ABL so that it has information as to the financial position of the company.  Ms Burgess was responsible for providing the schedule for the Cement and Lime Division of ABL to Mr David Patterson who was the group credit manager for ABL.  Mr Patterson in turn provided it to the group accountant.  The group accountant collated the information into a performance report for the board and that report included a section on debtors.  The summary of debtors in fact showed the largest 21 debtors in respect of ABL’s Cement and Lime Division, although the obligation was to provide a list of the 10 largest debtors.  On 27 November 2017, Mr Hughes compared the debtor records in the SAP system with the summary of debtors for the period from October 2016 to September 2017.  That comparison revealed that Concrete Supply should have appeared on the summary of debtors for each month, but in fact only appeared on the summary of debtors for the month of February 2017.  By the time of the trial, he had updated this information to include the position between August 2009 when the SAP system was introduced, and September 2016.  A similar pattern of non‑reporting of information about Concrete Supply emerged and Mr Hughes said that Concrete Supply should have been on about 85% of the reports to management within that period. 

3. Secondly, each customer of ABCL who received cement on credit from ABCL has a credit limit.  Under the delegated authorities issued by ABCL only ABL’s chief executive officer and managing director had authority to approve credit limits over $1 million.  Mr Hughes’ examination of the books and records revealed the following:

   (1)Ms Burgess increased Concrete Supply’s credit limit from $400,000 to $1 million on 23 August 2010 without authorisation;

   (2)Ms Burgess increased Concrete Supply’s credit limit from $1.5 million to $3 million on 27 November 2014 without authorisation; and

   (3)even accepting the false entries, Concrete Supply was trading well above the recorded credit limit of $3 million (over $4 million) as at 25 October 2017.

4. Mr Hughes and another ABL representative interviewed Ms Burgess on 25 October 2017.  At that time, she was suspended from her duties and she subsequently provided medical certificates to the effect that she was unfit for work.  On 15 February 2018, Ms Burgess’ employment was terminated for serious and wilful misconduct.  Other employees of ABL or ABCL have spoken to Ms Burgess on other occasions.  Mr Hughes’ investigations did not reveal the reasons Ms Burgess made false entries in the records of ABCL.  Mr Hughes expressed the view that there were two alternatives.  First, although Ms Burgess did not intend to benefit Concrete Supply, she made entries over eight years which coincidentally benefited Concrete Supply.  Secondly, and in the alternative, Ms Burgess intended to benefit Concrete Supply for some undisclosed reason.  He considers it a “striking fact” that the benefit to Concrete Supply corresponded precisely with the quantum of invoices which Concrete Supply declined to pay on the basis of an alleged “discount” or “rebate” on certain invoiced amounts.

5. I discuss below the ABCL statement of account for March 2012 (the March 2012 Statement of Account) (at [187]–[195]).  Mr Hughes’ evidence establishes that the SAP system records of ABCL show the same outstanding balance of $2,045,377.11 as Concrete Supply’s books and records.  Mr Hughes produced the March 2012 Statement of Account for Concrete Supply available within the SAP system.  Mr Hughes has confirmed that the March 2012 Statement of Account sent by Ms Sandra Cook of ABCL to Ms Heather Booth of Concrete Supply with an email dated 26 April 2012 recorded an incorrect balance of $1,428,588.16, rather than the correct balance of $2,045,377.11.  The difference between the two amounts is that a debt of $622,196.38 and a credit entry of $5,407.43 have been removed.  Mr Hughes is not aware of how this could have been done.  He said that he had instructed ABCL’s IT team to investigate how the two entries might have been removed from Concrete Supply’s statement, either inadvertently or deliberately, but at the time of swearing his second affidavit, he had not been informed of how it could have happened.  He did not provide any information as to the results of this investigation in his oral evidence.

6. Mr Hughes reviewed the minutes of meetings of ABCL’s sales and marketing team at which Ms Burgess was present.  He noted that there was a standing item on the agenda for those meetings regarding the reporting of problem debtors.  The minutes do not record Ms Burgess ever disclosing that Concrete Supply was trading significantly outside of its terms of trade, both as regards its credit limit and the age of its debt.

7. Mr Hughes was cross-examined at some length.  The focus of the cross-examination was on exposing deficiencies in ABCL’s system in terms of checks that might have brought the false entries to light earlier and on circumstances suggesting that others at Birkenhead knew of the false entries.  Those matters are relevant to attribution and contributory negligence which I address later in these reasons.

8. Mr Hughes had dealings with ABCL employees at Birkenhead from 2008 onwards.  Mr Taeger, who was based at Birkenhead, was the most senior member of the cement and lime finance team.  Mr Hughes identified other members of the finance team at Birkenhead.  He said he did not have much interaction with the sales and marketing team.  His estimate of the number of employees located at Birkenhead between 2011 and 2014 was 50 to 60. 

9. Mr Hughes was taken to entries for 30 June 2011 in the Excel file he prepared and it was put to him that any person from the accounts receivable section at Birkenhead who looked at the information ought to have formed the view that the entries looked unusual.  Mr Hughes said that if a member of the accounts receivable staff at Birkenhead had looked at that level of detail and identified those particular transactions, they would have seen that they were out of scope with the other transactions within the account.  He said:

   So yes, they – that would have flagged it as being unusual.

10. Mr Hughes was asked the same question in relation to entries on 9 September 2011 and he gave a similar answer.  The entries would have been seen as vastly different to other transactions within the accounts and, therefore, identified as unusual.  The entries were different because they were of a very different quantum.  Furthermore, one of the entries, being an increase in a liability of $953,741.66, would have been seen as unusual.  Mr Hughes gave similar evidence with respect to entries on 10 October 2011 and other entries in 2011.

11. Mr Hughes said that from mid-2011 to November 2017, the persons from the accounts receivable section at Birkenhead who were accessing the SAP system records in relation to Concrete Supply were primarily Ms Burgess and Ms Cook.

12. By reference to a modified document prepared by the Concrete Supply defendants, Mr Hughes was able to identify uses of the Concrete Supply customer account information in the SAP system by Ms Cook.  In 2009, “DZ” was an early version of “ZV”, a customer payment.  Mr Hughes admitted that there was manual entries by Ms Cook.

13. Mr Hughes interviewed Ms Cook as part of his investigations.  Mr Hughes was accompanied by Ms Bronwyn Schoen, who is the general manager of HR Services.  A record of the interview is contained in the Court Book.  It seems that Ms Cook had on occasions made use of Ms Burgess’ ID and that that was contrary to ABCL’s IT policy.  Ms Cook did not give evidence and Mr Hughes was not aware of any reason Ms Cook could not have given evidence.

14. In 2009, Concrete Supply was purchasing cement from ABCL at a value of approximately $200,000 to $300,000 per month.  The same position applied in 2011.  Mr Hughes agreed that the customer balance records in the SAP system showed large amounts in June, September and October 2011 that appeared to be “out of kilter and irregular”.  He agreed that with its profile, Concrete Supply was not likely to have debits of $4 million in October 2011.  Mr Hughes agreed that the feature of debits and credits far exceeding the sales and purchases was something apparent from the years that followed, namely, from 2012 to 2017.  He agreed that there were “similar patterns” throughout that period.  Mr Hughes agreed that if a member of the accounts receivable section had seen those matters, then he or she would have seen those discrepancies. 

15. Mr Hughes was taken to a document entitled “Summary of Issues” prepared by Mr Matthew Beeby and Mr James Rivett of KPMG as part of KPMG’s investigation.  This document was prepared following an “initial review” of the accounts receivable of ABCL by internal auditors from KPMG.  The investigators identified dormant accounts as an issue.  The issue was that a dormant account, being an account that did not have trading activity, had balances outstanding within that account.  Mr Hughes discovered when examining the transactions in those accounts that they had been transferred in from other accounts within the accounts receivable system, that is, other customer accounts.  He agreed that there was no rational explanation as to why the dormant accounts would be involved in a way suggesting a recent trading history.  The second issue was identified as “Unusual entries in low value customers’ accounts”.  The issue here was that there were large entries in a customer’s account in circumstances where the customer was doing a small amount in terms of sales per year.  The third issue was unusual entries in the account of “Concrete Supply”, having regard to the profile of a company with sales of approximately $500,000 a month.  For example, there is a debit entry in September 2017 of $1.4 million approximately.  The fourth issue identified is “ICL’s payments used to offset other debtors’ balances”.  ICL (Independent Cement and Lime) is a joint venture in which Adelaide Brighton has a 50% share.  The other partner is the Barro Group which is a large shareholder within Adelaide Brighton.  Mr Hughes agreed that the investigation showed that debit balances or amounts due had been transferred into the ICL account and were sitting there as if it was an amount due from ICL.  The effect was to over inflate ICL’s indebtedness.  The final issue was “Payments outside of terms (by multiple months)”.  Mr Hughes was taken to a printout of the full debtors ledger for September 2017 and to five entries which had been flagged as unusual entries by KPMG.  Mr Hughes agreed that someone looking at the detailed records would have identified the unusual transactions.  Mr Hughes did not agree that Mr Taeger should have picked up the unusual transactions.  It was not his job to run through every single transaction that went through the debtors ledger.  The credit team were responsible for that area.  They were then to provide the information to Mr Taeger.  At the same time, Mr Hughes agreed that had Mr Taeger looked through the detail of the “individual customer account”, then the transactions in that account that were unusual would have flagged something was occurring within that account.

16. Mr Hughes said that on his analysis the “refreshing” conduct began in mid-2011 and he agreed that had anybody from ABCL in 2013 or in 2014 looked within the detail of a specific customer account and identified those transactions, they would have come across those transactions. 

17. Mr Hughes agreed that in December 2017, KPMG had identified 46 customers who had been affected by the irregular transactions.  The period was from 1 August 2009 to 2017, and although Mr Hughes could not remember the precise number of unusual transactions, there were a “substantial” number.  Mr Hughes said that he did not consider it implausible that the only person who knew about the irregular transactions at Birkenhead was Ms Burgess.  There were between 600 and 700 customers to manage.  As far as the credit or accounts receivable section was concerned, Ms Burgess took primary responsibility for the ledger, that is to say ABCL’s ledger, and whilst entries had been posted by others, they were of limited scope in terms of invoicing and processing payments.

18. It seems that by about February 2018, the number of customers affected by the unusual transactions had been identified as 59. 

19. In early January 2018, Mr Hughes went through the BHP Olympic Dam (BHP) ABCL account (3,036) and provided a report to Mr Michael Kelly.  He noted that the summary of the account for the period since 1 August 2009 revealed a shortfall in payments from BHP in most years, some $1.9 million over the time period.  Mr Hughes formed the opinion that there had been an irregularity at the time of the transfer from Protean to the SAP system.  There were short payments between what ABCL had invoiced BHP and had recorded in its system compared to what BHP had paid.  Mr Hughes agreed that the “investigation team” identified items such as re-aging, which disguised the lack of payment from a customer. 

20. BHP is a customer which generates RCTIs in relation to its purchases from ABCL and it is the second largest customer after Concrete Supply in terms of short payments.  In the case of BHP, the short payments total an amount of approximately $3.7 million.  Towards the end of January 2018, the investigation had identified 60 customers affected by the irregular transactions, and the total impact in terms of the profit and loss of ABCL was $17.1 million. 

21. Mr Hughes agreed that Concrete Supply would have been within the top 25 customers of the Cement and Lime Division.  Mr Patterson was the national credit manager and he was based in Sydney.  Mr Hughes is not aware of any reason why he could not give evidence in the proceeding.  Mr Hughes did not know what checks and balances Mr Patterson went through in reviewing the spreadsheet which showed the top 25 customers at that time.  He said it was not part of Mr Patterson’s role to check the amounts that appeared on the spreadsheet against the underlying amounts in the SAP system.  Mr Patterson’s role was to review the information in terms of credit exposure.  The credit managers were the people who were to compile the information from the SAP system and provide it to Mr Patterson as part of monthly reporting.  The main user ID of the file which was shared as between Mr Patterson and Ms Burgess was the user ID of Ms Burgess. 

22. Mr Hughes agreed that if Mr Taeger or Mr Shaddock had been aware of the amount that Concrete Supply “traded”, then they would have identified a credit limit of $3 million as unusual.  Unless a specific amount was drawn to Mr Taeger’s attention, Mr Hughes did not agree that Mr Taeger would have known how much Concrete Supply “traded”.  Ms Burgess did not have authority to increase the credit limit, but she did have the ability to record an increase in the credit limit approved by an unauthorised person. 

23. Mr Hughes agreed that during the period 2009 to 2017, KPMG did a series of internal audits.  He agreed that the investigation which he carried out identified a number of credit limit changes, such as the one involving Ms Burgess, that had resulted in adjusted credit limits outside the scope of delegated authorities. 

24. The documents indicate that KPMG expressed concern about ABCL’s credit policies in October 2010.  Mr Hughes was not aware of what was done in relation to credit policies between October 2010 and November 2017. 

25. KPMG conducted a complete review of the credit area and accounts receivable area in late 2017 and identified a number of issues and recommended remedial action. 

26. Mr Hughes is aware that under the BSA, the seller is obliged to prepare tax invoices.  He was unable to say who made the decision at ABCL or why the decision was made to stop sending tax invoices to Concrete Supply.

27. Mr Hughes agreed that he filed an affidavit in the civil proceeding ABCL has brought against Ms Burgess in the Supreme Court of South Australia.  In that connection, he was referred to a customer aging report which showed Concrete Supply’s debt to ABCL at 30 days at $1.99 million.  He agreed that given the values that are set out against that particular customer, the amount in the 30 days appeared unusual.  He agreed that it would appear to be the case that that came about as a result of the refreshing of debt.  Mr Hughes said it would be most unusual for a customer to go from $300,000 per month (the current amount shown in the report was $324,056.61) to $1.99 million in a single month.  Mr Hughes described an aged trial balance as a document used within the credit section to assess where particular customers are up to and which customers they needed to follow up for payment. 

28. Mr Hughes said in practice that Mr Patterson did not go into the SAP system, but rather received information from individual credit teams “in terms of managing those accounts which had been flagged by the individual credit teams”.

29. Mr Hughes agreed that various entries in the general ledger in relation to the Concrete Supply customer account were unusual because of the amounts involved.  He was taken to an entry of $1,648,296.49 for Concrete Supply which had been posted on 31 December 2015.  He was asked whether he agreed that if a person from the accounts receivable section at Birkenhead saw that he or she would recognise it as an unauthorised transaction.  He said that if such a person understood the value Concrete Supply would normally do, then an entry of that value “would have raised a flag”.  Mr Hughes agreed that there was a tendency for the transactions identified to appear at key times, including at the end of a financial reporting period.  Mr Hughes described what would appear on a customer’s monthly statement where a debt had been refreshed.  The invoices which had been selected (whether they be the oldest invoice or not) would be removed from the monthly statement and there would be a much larger lump sum value in the statement.  He did not agree that the customer would know and, in addition, anyone from the accounts receivable section at Birkenhead would know over time that the lump sum amounts were appearing on the monthly statements.  When asked whether the person processing a cheque received would be aware of the refreshing, Mr Hughes said the following:

    Depending upon the customer account, the screens that you go into when you allocate the invoice – or the payment, sorry, against invoices presents from the oldest invoice through to, at the top of the page and depending on the number of invoices that you have on the account outstanding, can run to many pages, inter-screen pages.  So if you’re allocating, and generally payments come in oldest – sorry – a customer paying oldest, you would allocate it to the first series of invoices that are on that screen and may not get to the screen in which that refreshing entry appears on.

    Mr Hughes could not say how often a person other than Ms Burgess would be involved in that process. 

1. In Bidald, Campbell J identified four matters relevant to the public interest and commercial morality as follows:  (1) the public policy in not allowing an insolvent company to continue to trade and in such a case, the onus may be on the proponents of the DOCA to establish that the company will be able to trade profitably in the future; (2) the reasons the company failed and may indeed have been insolvent for some time; (3) the public interest in the thorough examination of the directors’ conduct; and (4) the public interest in allowing bona fide claims for insolvent trading or breach of directors’ duties to be pursued.

2. I have found that the directors did not have a genuine belief that Concrete Supply was entitled to a discount or rebate. Concrete Supply may have been insolvent for a reasonably substantial period of time before the date of administration. The alleged discount or rebate had features which were unusual (i.e., no written or oral agreement), but the implementation of the alleged discount or rebate had features which were even more unusual, such as not being claimed at the time, but rather later in time, sometimes much later in time, and being claimed at times and in amounts which varied and were at the discretion of the purchaser. It is in the public interest and in the interests of commercial morality that these matters, claims against the directors and contraventions of the Corporations Act and income tax legislation, be investigated by an appropriate person and that person is a liquidator.

3. In my respectful opinion, the matters relevant to the discretion firmly favour an order under s 445(1) terminating the DOCA.

4. As I understood it, the Concrete Supply defendants contend that I should have regard to the effect liquidation will have on the employment of existing employees of Concrete Supply.  I am not sure the legislation empowers me to take this matter into account, but even if it does, it cannot outweigh the clear case otherwise established.

5. The DOCA should be terminated under s 445D(1) of the Corporations Act.

   The Casting Vote Exercised by Mr Cantone

6. The principles which govern the Court’s review of Mr Cantone’s exercise of the casting vote are set out above.

7. The minutes of the second meeting of creditors record the matters to which Mr Cantone had regard when exercising his casting vote in favour of the motion that the company execute the proposed DOCA.  The ARITA Code provides that if the casting vote is exercised, details and the reasons for how it was cast should be included in the minutes (cl 24.9).  The matters which the minutes of the meeting record are set out above (at [797]).

8. The matters which Mr Cantone said in his affidavit he considered when deciding to exercise his casting vote are also set out above (at [904]).  They are not exactly the same and in two respects the differences are material.  I will identify the two material differences as I proceed through my consideration of the relevant matters.

9. The first two matters may be considered together.  They are that a vote in favour of the proposed DOCA was expected to result in a higher return to creditors under the proposed DOCA compared to a liquidation of Concrete Supply, and a vote in favour of the proposed DOCA was consistent with the recommendation made by the administrators in the Second Report to Creditors.

10. The first reason focuses on the expected return to creditors under the alternative scenarios of a DOCA and of a liquidation.  This is essentially a reference to the dividend table in the Second Report to Creditors and a comparison between the range of 24.31 to 32.12 cents in the dollar under a DOCA, and a range of 10.29 to 18.29 cents in the dollar in a liquidation.  The return to creditors is a legitimate and relevant consideration.  However, as I have held, this analysis is flawed as it did not have a sufficient basis, and if it did not have a sufficient basis because the administrators’ investigations were inadequate in substantial respects (as I have found), then the administrators cannot rely on the analysis.  The administrators cannot, in effect, rely on the inadequacy of their own investigations.  The second reason of consistency with a recommendation that the company execute the proposed DOCA requires a consideration of the reasons the administrators made the recommendation they did.  Consistency is not in itself a reason.  The reasons the administrators gave for their recommendation in the Second Report to Creditors are as follows:

    (1)the dividend to unsecured creditors will be higher under the proposed DOCA than under a liquidation; and

    (2)the resolution of the company’s solvency and the opportunity for the continued operation of the company’s business, the ongoing employment of staff and a much faster return to creditors.

11. The matter in para (1) is the same as the first reason.  The matter in para (2) is picked up in the further matters identified in the minutes.  I will deal with them in that context.

12. The third reason identified in the minutes is said to be the general view of creditors of Concrete Supply being that 31 had voted in favour of accepting the DOCA and that only 8 had voted against.  A qualification is then added, “although the creditors voting against were a majority in terms of dollar value”.  With respect, I consider that this reason is erroneous.  It involves giving priority to the numerical majority in value.  It fails to take into account the fact that, although there is no presumption or rule that the wishes of the majority in value will prevail, the views of the majority in value are a factor to be taken into account and where the majority in value is overwhelming as it is in this case (93.65%), then it is an important factor to be taken into account.  There is no recognition in this reason by Mr Cantone of the significance of the overwhelming majority in value being opposed to the proposed DOCA.

13. What might be seen as the equivalent reasons in Mr Cantone’s affidavit are that the majority in number (being 31 to 8) voted in favour of accepting the DOCA and whilst the vast majority in value had opposed, most of that value was represented by ABCL’s debt.  Those reasons suffer from a similar flaw and an additional flaw that there would be no reason to discount the majority in value because most of the value resided in one creditor.

14. The fourth reason identified in the minutes is that the ATO voted in favour of the DOCA and it was a major creditor and is a regular attendee at creditors’ meetings.  Mr Cantone did not explain in his evidence the significance of the ATO being a regular attendee at creditors’ meetings.  The decision was Mr Cantone’s decision, not one to be made by reference to the views of an experienced creditor.  In any event, this reason is flawed because it may be reasonably inferred that the ATO relied on the contents of the Second Report to Creditors and that report was, for the reasons already given, flawed.  There is a further consideration in the case of the ATO.  Even considering the matter at a very basic level, it ought to have occurred to the administrators that there were likely to be GST and income tax issues if there was no discount or rebate and, because of Concrete Supply’s system of accounting for the alleged discount or rebate some considerable time after the purchase (often in the following financial year) there were likely to be issues, even if there was an alleged discount or rebate.  Those issues were likely to be of interest to the ATO.

15. There is a different slant on this reason in Mr Cantone’s affidavit.  Maxi-Tankers is also identified as the next major creditor, the ATO’s regular attendance at creditors’ meetings is not relied on and it is the attendance of the ATO at this meeting which is said to be significant.  As to this reason, I am disposed to think that I should rely on the way it is expressed in the minutes.  For completeness, and should it be appropriate to rely on the way the reason is expressed in Mr Cantone’s affidavit, I should say I would reject one of ABCL’s arguments with respect to Maxi-Tankers.  It was suggested that its vote should be discounted because it was always going to be paid in full.  It is by no means clear that Mr Cantone did know that and, in any event, even if he knew that Maxi-Tankers was likely to be paid in full, I was not referred to any principle which was to the effect that, in those circumstances, the value or weight to be attached to its vote should in some way be reduced or minimised.

16. The fifth reason identified in the minutes of a faster payment of a dividend under a DOCA than in a liquidation is a legitimate and relevant consideration.  It is illuminating to consider how Mr Cantone put the broad equivalent of this reason in his affidavit:

    126.6creditors would receive a faster dividend under the DOCA, while a liquidation was likely to be lengthy (I estimate at least 3 years) and involve protracted litigation prior to any dividend being paid;

17. I note the estimate in the dividend table in the Second Report to Creditors for the period of a liquidation is 1.5 to 2 years and there is no possible litigation referred to in the Second Report to Creditors that would arise in a liquidation, but not under a DOCA.  In other words, the ABCL claim adjudication arises under both outcomes.

18. The final reason identified in the minutes is that a DOCA would allow the ongoing trading of Concrete Supply, which includes the retention of approximately 30 staff and ongoing business for suppliers who were also creditors. I would not classify this as an irrelevant consideration, but, in terms of weight, it needs to be steadily borne in mind that the administrators’ opinion is to be directed to the course of action which “would be in the creditors’ interests” (see, for example, s 75-225(3) of the IPS (Corporations)).

19. In conclusion, I consider that Mr Cantone’s exercise of the casting vote was flawed by the consequences of an inadequate investigation, a report which was deficient in material respects, and by an error in his approach to the significance of the fact that an overwhelming majority in value opposed the company entering into the proposed DOCA.

20. As I have said in the discussion of the relevant principles, considerations of the public interest and commercial reality may also be relevant to a consideration of whether the resolution should be set aside. I would balance those matters and the countervailing considerations in the same way as I have in considering the exercise of the discretion under s 445D.

21. In view of these conclusions, there is no need for me to deal with other arguments advanced by ABCL.  Those arguments related, in one way or another, to the characteristics or circumstances of those creditors who voted in favour of the resolution that the company enter into the proposed DOCA.  It was not made clear in submissions whether ABCL submitted that the matters it identified were relevant considerations which Mr Cantone failed to take into account or whether they were matters relevant to the exercise of the discretion whether or not to set aside the resolution.  Nevertheless, I should identify the arguments and the reasons I am, in the main, disposed to reject them.

22. First, ABCL submits I should take into account that 11 of the 31 creditors who voted in favour of the proposed DOCA are continuing employees or directors of Concrete Supply who, if the company enters into the DOCA, will not have their debts compromised by the DOCA.  As an assertion of fact, that appears to be correct (DOCA cl 9.2 (continuing employees) and cl 9.3 (directors)), but it is not clear where the submission goes from there.  These persons take the risk that the company will be able to pay their entitlements in the future.

23. Secondly, ABCL submits that I should take into account the facts that some of the creditors who gave evidence:  (1) were unaware of the meeting; or (2) had not read the Second Report to Creditors and, in exercising their vote, only had in mind keeping their jobs which they would do under a DOCA; and (3) admitted that they might have voted differently had they known of potential contraventions and offences by Concrete Supply and its directors.  I do not think it appropriate for the Court to embark on the exercise this submission seems to entail.  Practically, it would be very difficult to do so.  In any event, the critical point is that the creditors were properly informed.  If one or more of them chooses to focus on only one consideration, then that is a matter for them.

24. Finally, ABCL submits that I should take into account the fact that directors and officers who stood to receive collateral benefits of the company entering into a DOCA voted in favour of the company entering into the DOCA.  I have said that I reject the submission insofar as it refers to officers.  That leaves one director, Jason, who voted in favour of the resolution.  Even if I take into account his interest in the DOCA proceeding, as one creditor that would not have a material bearing on the analysis.

25. Unless there is no need for an order, or to make an order would be inconsistent with the order I will make under s 445D(1), an order should be made setting aside the resolution of 19 December 2017 that the company enter into the DOCA.

    Conclusions

26. An order should be made under s 445D terminating the DOCA. In addition, and if necessary, an order should be made setting aside the resolution passed on the exercise of Mr Cantone’s casting vote on 19 December 2017.

    CONCLUSIONS

27. For these reasons, I have reached the following conclusions:

    (1)Concrete Supply is indebted to ABCL in the amount of $12,457,472.22.

    (2)Concrete Supply failed to keep written financial records which complied with s 286 of the Corporations Act.

    (3)The claim against the Concrete Supply defendants for misleading or deceptive conduct contrary to s 18 of the Australian Consumer Law must be dismissed.

    (4)The claim against the Concrete Supply defendants for breach of trust or fiduciary duty must be dismissed.

    (5)The Deed of Company Arrangement executed on 21 December 2017 must be terminated pursuant to s 445D of the Corporations Act.

    (6)The resolution passed at the second meeting of creditors of Concrete Supply held on 19 December 2017 that Concrete Supply enter into the proposed Deed of Company Arrangement should be set aside.

28. I will give ABCL a short period to bring in draft minutes of order containing the orders it seeks in light of these reasons.

I certify that the preceding one thousand four hundred and twenty-onel (1421) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Besanko.

Associate:       

Dated:       12 November 2019

APPENDIX A

1.        Ruling with respect to the Reply and the Rejoinder

Mr Darryl Hughes swore two affidavits in the proceeding.  The Concrete Supply defendants objected to certain paragraphs in Mr Hughes’ affidavits.  The principal ground of objection related to Mr Hughes’ first affidavit and it was that evidence given by Mr Hughes of an internal fraud within ABCL by Ms Glenda Burgess had not been pleaded by ABCL.  I heard argument on this objection and I ruled that ABCL’s case, with respect to Ms Burgess, needed to be pleaded by ABCL.  I indicated at the time of my ruling that there appeared to be good grounds for allowing ABCL to amend, even at a late stage, in light of the affidavits it had filed.  ABCL’s affidavits suggesting an internal fraud by Ms Burgess had been filed and served nearly 12 months before the commencement of the trial.  The company and its directors were clearly on notice of the case that ABCL advanced.  I subsequently granted ABCL leave to file a Reply. 

2.Ruling with respect to Mr Lemmon’s evidence concerning the WACC

I heard evidence on the issue from Mr Lemmon on the voir dire.  Mr Lemmon explained his calculations.  He described what he considered to be fixed costs and the costs of capital and the costs of a range of overheads.  He considered that fixed costs will be primarily the costs of labour maintenance and reliability.  Reliability costs are the costs associated with performing various shutdowns and ongoing repairs and maintenance to various pieces of equipment.  The primary element of variable costs are the costs of energy.  Corporate overheads are the costs of corporate functions, such as human resources, finance, health, safety and environmental professionals.  They are costs associated with the overall running of the business leading to the production of cement, but are not directly related to the actual production of the product.  Mr Lemmon said that as far as the costs of capital were concerned, the nature of the cement production business is that it is a capital intensive business and there is a significant amount of capital that is associated with establishing equipment and maintaining that and also for working capital for the ongoing operation.  He said the following:

The cost of that capital which is a function of debt and equity funding is required to understand the cost of providing that capital to the business. 

He explained how he arrived at his original percentage figure of 10%.  It is a “hurdle” cost used in the course of decision-making and he has since learned that the figure used by ABCL is lower.  It seems to me that, in those circumstances, it would not be correct for the Court to receive and act on this evidence when it is not the figure used by ABCL. 
After he had prepared his calculations based on 10%, Mr Lemmon made some further inquiries and spoke to Mr Hughes.  He was provided with a particular document which showed a lower figure for the WACC.  The document was from an investment house called Blackpeak Capital and Mr Lemmon said that his understanding was that it is considered a reliable tool.  He said that the lower percentage figure referred to in the Blackpeak Capital report was the figure actually used by ABCL.  Mr Lemmon also said that what had not been included in the figures that he had put forward was an appropriate proportion of ABCL’s share of ABL’s corporate overhead nationally (corporate finance, corporate legal, internal and external audit, Australian Stock Exchange costs and the like).  That was not done because he was not in a position to provide accurate numbers at that point in time.  He described the functions in more detail in his evidence.  Mr Lemmon also described how he calculated the figures in the document which was marked “Document B”. 
Mr Lemmon agreed that his Document B showed that ABCL made a profit from its trading with Concrete Supply even at the discounted price, save and except for the 2016 and 2017 years.  Counsel for the Concrete Supply defendants put to Mr Lemmon that if the matter was looked at over the entire period from 2012 to 2017, Adelaide Brighton made a profit in the order of $265,000.  That, in fact, is correct.  Mr Lemmon agreed in cross-examination that he received the Blackpeak Capital document from Mr Hughes.  He agreed that he is not an expert in determining the WACC, although he did say that he had economic training and a broad and good understanding of the various components and of the concept of the WACC and how it was used.  Mr Lemmon said that he did not know what was meant by the words “(illustrative only)” in the Blackpeak Capital document.  Mr Lemmon agreed that he had not used a weighted average cost of capital figure of the percentage he now uses in any source document or report prepared by his division. 
To recapitulate the major points, they are as follows:

(1)I would not receive the evidence of the figure of 10% for the cost of capital for the reasons I have given;

(2)Mr Lemmon was not aware of the lower figure in the Blackpeak Capital document.  He was told that by Mr Hughes who at the time Mr Lemmon was giving his evidence had completed his evidence;

(3)Although, as one would expect, Mr Lemmon had some knowledge of the concept of the cost of capital as a cost item, the opinion or statement as to the appropriate figure in this case was not his opinion or statement; and

(4)The Blackpeak Capital document did not contain a reasoned analysis of the subject such that the Court could be satisfied of the soundness of the opinion.  The document itself stated that reliance had been placed on, inter alia, independent experts’ reports and assessment by analysts.  It refers to some of the models in relation to capital asset pricing models as illustrative only.

I could not see a basis to receive the document and, even if there was, I reached the firm view that it should be excluded under s 135 of the Evidence Act because its probative value is substantially outweighed by the danger that it might be unfairly prejudicial to the Concrete Supply defendants, or misleading or confusing..

3.        The Telephone Conversation between Mr Lemmon and Mr D’Alessandro

Counsel for ABCL submitted that the evidence was admissible. His arguments were as follows. First, s 131(1) of the Evidence Act preserves the difference between statements of fact and statements made in the course of and for the purpose of negotiation. I accept that submission. Having regard to Mr Lemmon’s evidence, I do not consider that Mr D’Alessandro’s statements were made in connection with settlement negotiations. Secondly, counsel submitted that s 131(1) does not apply because the exception in s 131(2)(c) applies. Section 131(2)(c) provides that subsection (1) does not apply if the substance of the evidence has been partly disclosed with the express or implied consent of the persons in dispute and full disclosure of the evidence is reasonably necessary to enable a proper understanding of the other evidence that has already been adduced. In that connection, counsel referred to the affidavit of Mr D’Alessandro which had been filed by the respondents with a view to Mr D’Alessandro giving evidence at the trial. In particular, counsel referred to [97] and [98] wherein Mr D’Alessandro referred to raising the unusual nature of the rebate arrangement with the directors and the need for a “confidential letter”. He also referred to Rino and Jason’s response to the effect that Adelaide Brighton loved Concrete Supply. I also accept that submission. In the circumstances, the evidence from Mr Lemmon was admissible.

4.The Order in which the Defence Cases are Presented

There was a dispute between the parties as to which of the defendants should present their case first.  ABCL submitted that as the first defendant on the Court record, Concrete Supply should present its case first.  The administrators and the Concrete Supply defendants submitted that the administrators should present their case first followed by the Concrete Supply defendants because the reality was if Concrete Supply went first, then that would also involve the directors who are the third, fourth and fifth defendants, going first.  The submission was that serious allegations are made against the directors and they should not be required to go first.

I ruled in favour of the Concrete Supply defendants.  I do not have any doubt that if Concrete Supply was ordered to go first, then that would also entail the directors going first.  The directors faced personal claims of misleading or deceptive conduct and breach of trust and fiduciary duty and, although I did not consider the issue to be one of great significance overall, I concluded that they should have the benefit of hearing evidence that might be used against them before responding.

5.Application to Amend Statement of Claim

Approximately half way into the trial, ABCL applied to amend its Statement of Claim to add a further allegation to allegations of inadequate investigations by the administrators.  In para 44, ABCL set out acts that it claimed any reasonable insolvency practitioner would carry out upon being appointed administrator of Concrete Supply.  Those acts included whether, on the assumption that Concrete Supply was not entitled to the alleged discount or rebate, investigating whether the company had overpaid GST and income tax.  The allegation which ABCL sought to add was on the opposite assumption that Concrete supply was entitled to the alleged discount or rebate, whether Concrete Supply had underpaid GST and income tax.  In other words, the allegation ABCL sought to add was that any reasonable insolvency practitioner appointed the administrator of Concrete Supply would have undertaken an analysis on the assumption that Concrete Supply was entitled to the alleged discount or rebate of whether, in the circumstances, Concrete Supply had underpaid GST and income tax.

The background to the application to amend was as follows. In his second report, Mr Morris had carried out such an analysis and he reached the conclusion that on the relevant assumption that Concrete Supply had not accounted for GST and income tax and he provided figures in relation to the underpayments (at [227] above).

In his second report, Mr Heard responded to this section of Mr Morris’ report by expressing the opinion that an administrator would not be required to undertake such an analysis and he provided reasons for that opinion.

I ruled that leave to amend should be granted.

The natural reflex of what a reasonable insolvency practitioner would have done on the assumption that Concrete Supply was not entitled to the alleged discount or rebate is what investigations such a practitioner would have done on the opposite assumption and with knowledge, as the administrators had in this case, of Concrete Supply’s system of accounting.  The Concrete Supply defendants had the opportunity to respond to this case and had done so in Mr Heard’s second report.

SCHEDULE OF PARTIES

Defendants
Fourth Defendant:	PELEGRINO OBBIETTIVO
Fifth Defendant:	GENESIO OBBIETTIVO
Sixth Defendant:	TINA OBBIETTIVO