ASIC v Rich - [2006] NSWSC 712

No judgment structure available for this case.

CITATION: ASIC v Rich [2006] NSWSC 712

HEARING DATE(S): 28 & 29 June, 3-7 July 2006

JUDGMENT DATE :
14 July 2006

JURISDICTION: Equity

JUDGMENT OF: Austin J

DECISION: Objections overruled

CATCHWORDS: PRACTICE & PROCEDURE - pleading - whether cross-examination testing defendant's evidence amounted to a new, unpleaded case - probative value of challenged evidence - whether danger of unfair prejudice to defendants

LEGISLATION CITED: Evidence Act 1995 (NSW) s 135

CASES CITED: Banque Commerciale SA, en Liquidation v Akhil Holdings Ltd (1990) 169 CLR 279
Rich v ASIC (2004) 220 CLR 129

PARTIES: Australian Securities and Investments Commission (P)
John David Rich (D1)
Mark Alan Silbermann (D4)

FILE NUMBER(S): SC 5934/01

COUNSEL: R B S Macfarlan QC with J P A Durack SC (P)
D L Williams SC with M J Steele (D1, D4)

SOLICITORS: Georgina Hayden, Solicitor for Australian Securities and Investments Commission (P)
Thompson Eslick (D1, D4)

IN THE SUPREME COURT
OF NEW SOUTH WALES
EQUITY DIVISION

AUSTIN J

FRIDAY 14 JULY 2006

5934/01 AUSTRALIAN SECURITIES AND INVESTMENTS COMMISSION V JOHN DAVID RICH & ORS

JUDGMENT

1 HIS HONOUR: These reasons for judgment relate to an objection by Mr Williams SC, for the defendants, at T 11,423, to a question addressed by Mr Macfarlan QC for ASIC to the first defendant, Mr Rich, in cross-examination. Mr Williams SC also objected to the line of questioning of which the particular question formed part. I allowed the question, and the line of questioning of which it formed part. In response to my invitation, Mr Williams asked me to provide written reasons.

2 Subsequently there have been objections raising the same or similar issues on frequent occasions, which I shall identify by transcript references. Although I have made rulings without being asked to provide reasons (other than that the rulings were governed by the same general principles that I applied to the first matter), it seems to me appropriate to deal briefly with those other occasions so as to explain the principles which I have applied.

3 Each objection asserted that the line of questioning was outside ASIC's pleadings and amount to an attempt to establish a previously unpleaded case; and that the court should exclude the evidence given in response to the questions on the ground of unfair prejudice under s 135 of the Evidence Act 1995 (NSW).

4 To deal with the objections, I shall first consider ASIC's pleadings (and relevant parts of Mr Rich's Defence) in light of general principles, and make some observations about the kinds of matters that would and would not fall within the scope of ASIC's pleaded case. I shall then deal with each objection separately, identifying the line of questioning in a manner intended to reveal whether the evidence to be adduced by the questions is relevant to ASIC's pleaded case, and if so, its weight or probative value. I shall note the particular submissions made when the objection was taken, and briefly state the reasons for my rulings in light of the general principles I have identified.

Some relevant principles

5 Mr Williams contends, correctly, that it is for ASIC to state, by its pleadings, the case that his clients must meet. He relies on the well-known observations of Mason CJ and Gaudron J in Banque Commerciale SA, en Liquidation v Akhil Holdings Ltd (1990) 169 CLR 279. Their Honours said (at 286):

Gould and Birbeck and Bacon v Mount Oxide Mines Ltd (in liq)

6 The obligation on ASIC to set out its case against the defendants clearly in its pleadings is enhanced by the considerations that ASIC's case alleges serious contraventions of the law by the defendants, and that ASIC seeks relief which includes disqualification of the defendants from managing corporations, relief held by the High Court to be a form of penalty (Rich v ASIC (2004) 220 CLR 129).

7 The principles stated by Mason CJ and Gaudron J are of fundamental importance but there are some limiting principles, consistent with their Honours' observations, that need to be kept in mind in the present case.

8 First, the plaintiff is entitled to attack in cross-examination evidence going to matters raised in a defence, though not in the statement of claim. Take a hypothetical case where the plaintiff alleges that the defendant's business was in a poor financial condition in specified ways and that the defendant breached some duty by failing to disclose the true financial position. Suppose that the defence is that the plaintiff has overlooked a special bank account containing cash reserves which, if taken into account, show that the financial condition of the business is healthy. It would be ludicrous to expect the plaintiff's statement of claim to anticipate the defendant's contention and expressly negate it in the statement of claim. It is not a matter of requiring the plaintiff to inform the defendant of the case against him, because the matter of the bank account has been raised by the defendant in his defence. If, at the trial, the defendant adduces evidence about the special bank account and the plaintiff attacks that evidence in cross-examination, the plaintiff is not departing from his pleaded case, but is rather addressing an allegation raised and made relevant by the defence.

9 Secondly, where the defendant adduces evidence purporting to answer the plaintiff's pleaded case, the plaintiff is entitled to challenge that evidence in cross-examination even if particular parts of the cross-examination, viewed in isolation, might suggest a different, unpleaded case. Suppose, in our hypothetical example, the plaintiff challenges the defendant's evidence about the special bank account by seeking to have the defendant admit, in cross-examination, that the bank account in fact belonged to a different business operated by the defendant's wife, negligently treated by the defendant as an asset of his business. Viewed in isolation, the cross-examination might appear to be directed to showing that the defendant engaged in misleading conduct by representing that an asset of another business was an asset of his business. But when the context is understood, it can be seen that the cross-examination is permissible because it is directed against the defence to the pleaded case. On the other hand, it would not be permissible for the plaintiff, in final submissions, to rely on this evidence to make out a misleading conduct case that he had not pleaded (assuming no grant of leave to amend).

ASIC's pleadings

10 ASIC's Fifth Further Amended Statement of Claim ("Fifth FASC") sets out its case against the remaining two defendants for contraventions of s 180(1) of the Corporations Law. It is not appropriate to deal at length with the Fifth FASC, which is a complex pleading, for the purposes of this judgment. A brief summary of salient parts is sufficient.

11 The pleading alleges (para 11) that the financial position and performance of the One.Tel Group progressively deteriorated in the period from 1 January to 17 May 2001, as a result (according to para 12) of the circumstances particularised in the Schedule to the pleading. The Schedule to the pleading deals at length with ASIC's claims as to the true cash and creditors position of the Group in, respectively, January, February, March and April 2001 (paras S3-S38B), and the true debtors and EBITDA position of the Group (paras S39-S44C). The Schedule then alleges that the flash reports presented to the board, and the March board papers, were false and misleading (S44D-S51). The assertions in the Schedule relating to the financial position of the Group in January, February and April 2001, respectively, are described in the Fifth FASC as the January, February, March and April circumstances.

12 It is alleged against Mr Rich that, in contravention of s 180, during the period from 1 January to 17 May 2001 he:

13 The allegations of contravention against Mr Silbermann correspond with subparas (a)-(f) and (h) above (paras 31-35).

14 In his Defence, Mr Rich raises various matters of fact in answer to the allegations in the Schedule. For example, para S12 of the Schedule to ASIC's pleading alleges that the outflow of cash for the month of February 2001 was $26 million, notwithstanding forecasts of lower cash usage presented to the board in September and November 2000 and January 2001. In para S12 of his Defence, Mr Rich says that the actual cash usage of the Group in February 2001 differed from the forecasts primarily because of a number of matters including a then unidentified shortfall in billings as a result of deficiencies in the billing data received from by the Australian operations from Telstra and Optus, and he claims that the shortfall in billings was referred to in the March board papers and discussed at that meeting. He makes a similar point in his Defence para S26, in response to a similar pleading in the Schedule about available cash at the end of March; and in his Defence para S29A, in response to a similar pleading about cash for the quarter to March 2001. It is unnecessary for present purposes to refer separately to Mr Silbermann's Defence.

15 Additional contraventions of two kinds are pleaded against Mr Rich (though not against Mr Silbermann), relating to announcements to the market (paras 37, 39-48, and 50) and failure to inform the market of One.Tel's true circumstances (paras 52-53 and 55).

16 As to announcements to the market, ASIC contends that Mr Rich caused or permitted to be made, and did not subsequently correct or modify, two public statements by One.Tel about its financial position and performance. The first was the 27 February 2001 announcement, in which it was said that "One.Tel is focused and on track to becoming cash positive as forecast by June 2001". The second was the 4 April 2001 announcement, which contained the statements that "The Company … is tracking very well against forecasts that were initially made by management in August 2000. … [The Company] is fulfilling the promises made to our shareholders: to turn the business cash positive and have a cash balance of $75 million by [30 June 2001]". ASIC contends that there was no reasonable factual basis for making these statements, and that either Mr Rich was aware that this was so, or ought to have known by reason of his office as joint managing director, and therefore his conduct constituted contraventions of s 180.

17 As to failure to inform the market, ASIC alleges that a reasonable person occupying the office and having the responsibilities of Mr Rich and knowing the circumstances of the Group's financial position and performance set out in the Schedule, would have taken reasonable steps to ensure that One.Tel notified the ASX of the January circumstances shortly after the end of January, of the February circumstances during or shortly after the end of February, of the March circumstances during or shortly after the end of March, and of the April circumstances during or shortly after the end of April. ASIC alleges that Mr Rich failed to do so, in contravention of s 180.

18 For present purposes, it is important to note that the allegations against Mr Rich and Mr Silbermann summarised at (a) to (i) relate to the actual financial circumstances of the Group in January, February, March and April 2001, as pleaded in detail in the Schedule, and there is no allegation that any of these alleged contraventions relates to the making of forecasts without a proper basis for them. That is also true of the alleged contraventions relating to failure to inform the market of One.Tel's true circumstances (in paras 52 and 53) - these allegations relate to failing to inform the market of the January, February, March and April circumstances as pleaded in the Schedule.

19 However, the factual matters raised in Mr Rich's Defence, such as the matters relating to unbilled data, bear directly on ASIC's pleaded case with respect to the One.Tel's financial circumstances. Although a matter such as the existence of unbilled data may not contradict the specific pleadings about the actual deficiency of cash usage over cash inflows in the stated months, the existence of those potential receipts (if established) may arguably undermine ASIC's allegations of contravention based on those financial circumstances. In our hypothetical case, the defendant would have no duty to disclose the poor financial condition of the business if, all things considered (including the special bank account), the company's financial condition was not in fact poor.

20 While the allegations summarised at (a) to (i) above relate to existing financial circumstances rather than forecasts, ASIC's allegations about announcements to the market relate to forecasts. The 27 February 2001 announcement said that the company was on track to being in a cash positive position by June, as forecast, and the 4 April 2001 announcement said that the company was tracking well against forecasts and the business would turn cash positive and have a cash balance of $75 million by the end of June. The complaint is that there was no reasonable factual basis for making these forecasts to the market. However, the particulars of the allegations of lack of reasonable factual basis (paras 40, 42 and 46) simply refer to the Schedule, so ASIC's case is that the absence of a reasonable factual basis for the forecasts arises out of the actual financial circumstances particularised in the Schedule (rather than, say, the use of an inappropriate earnings multiplier in calculating forecasts).

21 It follows that ASIC would not succeed in proving its pleaded and particularised case about the announcements to the market if, at the end of the hearing, the court were to conclude that:

22 On the other hand, ASIC would succeed in this part of its case if the court's conclusions were that:

The defendants' objections during Mr Rich's cross-examination

23 In addition to the objection made at T 11,423, which has led me to prepare these reasons for judgment, the defendants objected to questions and lines of questioning on identical or similar "unpleaded case" and "unfair prejudice" grounds on 12 other occasions, which I shall identify by transcript references. I shall deal with each of these objections in turn.

T 11,423

24 In his affidavit, Mr Rich dealt with the Merrill Lynch conference of 4 April 2001, in connection with which the 4 April announcement was made to the market. He said (para 1310) that when he returned to the Sydney office from Europe on 2 April 2001, he reviewed a draft of the Merrill Lynch presentation. He said he reviewed the forecasts made in the draft document to the end of the financial year, and compared them with the forecasts contained in the March 2001 board papers, to satisfy himself that there was a reasonable margin between the forecasts for the end of year position in the board papers and those contained in the presentation. He also said (para [1297]) that at the date of the March board meeting and the date of the Merrill Lynch conference his state of mind was that the outlook for One.Tel was positive and that the business was "on track" to reach the market forecasts summarised in the March board papers.

25 As to the basis for the forecasts to the March board meeting, Mr Rich deposed to a telephone conversation he had with Mr Silbermann and Mr Hodgson when he was in London, on 26 March 2001, in which they told him they believed a substantial amount of billing data was stuck in the system and had not actually been billed, and that the total unbilled data could be as much as $40 million (para 1229). Mr Rich said (paras 1241-1248) he had another telephone conversation with Mr Silbermann and Mr Hodgson while he was in London, early in the week of 26 March 2001, lasting for over an hour, in which (he said) they "talked him through" the work they had done on financial forecasts for the remainder of the year to 30 June 2001. He said that by that date Mr Beck and the billing team had reported that they had found about $28 million of unbilled data, and that Mr Silbermann and Mr Hodgson had undertaken some detailed financial analysis to confirm how much more billing data was likely to be identified, and had concluded that another $12 million or more was likely to be found. He also said that their cash forecasts for the rest of the year effectively took up cash inflows of about $20 million to reflect expectations of additional buildings over April, May and June to reflect the billing of this additional data. Their forecasts also included, according to Mr Rich, an amount of cash inflows for additional collections, reflecting the re-presentation of direct debits dishonoured in March, increased resourcing in the collections area and the impact of a concerted effort to reduce outstanding subscriber debt, including outstanding debt in the CLEC area of the business.

26 Mr Williams SC made his objection on 28 June. During the course of cross-examination on that day, Mr Macfarlan QC asked questions about Mr Rich's telephone conversation with Mr Silbermann and Mr Hodgson in the week of 26 March 2001 (T 11,385). Then there was cross-examination directed towards testing the basis of the views of Mr Silbermann and Mr Hodgson by reference to documents including cashflow spreadsheet 2403C and the billing run information in spreadsheet 2403C Inflows No 3, and challenging the basis for Mr Rich's view about the existence of substantial unbilled data. Eventually Mr Macfarlan suggested to Mr Rich (T 11,421) that the projections that led to the figures presented to the board "had no reasonable basis at all" and were "completely matters of wishful thinking". Then he took Mr Rich to spreadsheets, apparently in order to show that the actual receipts in April and May were substantially lower than the board forecasts in March, and he suggested to Mr Rich that his experience at One.Tel in April and until 17 May when he left the company had demonstrated that the forecasts given to the board in March were completely unwarranted (T 11,422).

27 Shortly afterwards, Mr Williams made his objection (T 11,423-6). The particular question to which he raised objection at T 11,423 was:

"Q. You believed that those matters [the likely cashflow position of the remainder of the financial year, the end-of-year cash balance figure for the Group and the Australian contribution to the cashflow of the group for March, April, May and June 2001] would have similarly been regarded as of significance by members of the board of directors?"

28 Mr Williams contended that there was no allegation in ASIC's pleading that the defendants had caused misleading forecasts to be presented to the March board meeting or had failed to provide additional information to the board to prevent the forecasts from being misleading. He did not contend that the questions were irrelevant, but claimed that they constituted an attempt by ASIC to erect a new, unpleaded case. He invited the court to exercise its discretion to exclude the evidence adduced by the questions, under the Evidence Act 1995 (NSW), s 135. He stated that in the absence of any pleaded case containing such allegations, the defendants had made forensic decisions relating to the questions to be put to the witnesses called by ASIC, and he submitted that they would be unfairly prejudiced if additional allegations were permitted at this stage.

29 On this occasion, the submission that the defendants would suffer unfair prejudice if the line of questioning was allowed was not developed by specific reference to the transcript of cross-examination of ASIC's witnesses. However, when a similar line of questioning was objected to a little later, on 29 June, Mr Williams referred to the transcript of his cross-examination of Mr James Packer (T 11,502-3), and later he supplied more extensive written references to the transcript, marked as DS 103 and discussed below.

30 Mr Macfarlan submitted (T 11,424-5, T 11,432-7) that the line of questions was justified on three grounds.

31 First, he said that questions designed to show that the forecasts presented to the board were without foundation would shed light on the actual financial position of the company at the time of the March board meeting, and what Mr Rich knew or should have known about it. ASIC contends (T 11,432) that Mr Rich's adoption of forecasts that had no reasonable basis is an indicator of his knowledge of the desperate position of One.Tel; or an indicator that he should have known of that position if he did not in fact know, as he had the opportunity to discover the true position when he involved himself in the preparation of the forecasts.

32 Second, he referred to paras 37, 41-48 and 50 of the Fifth FASC, regarding the 27 February and 4 April announcements to the market, since they contained forecasts having no reasonable factual basis, as Mr Rich knew or ought to have known. Mr Macfarlan submitted that his questions related to that pleading. He drew attention to para 1310 of Mr Rich's affidavit (to the general effect that Mr Rich satisfied himself about the forecasts in the 4 April statement by comparing them with the March board papers). He also referred to Mr Rich's evidence in paras 1241-1248 about his long telephone conversation with Mr Silbermann and Mr Hodgson before the March board meeting and his belief about unbilled data and additional billings and collections.

33 On this point, Mr Williams pointed out that the particulars to paras 40, 42 and 46 (which allege that there was no reasonable factual basis for the public statements) merely say "see the Schedule". He emphasised that the Schedule makes allegations about the January, February, March and April circumstances, which are matters of fact at those times. He said (T 11,428) that there is no allegation about forecasts, and no allegation that the forecasts lacked a factual basis for some other reason (such as that the actuality turned out to be different from what was forecast).

34 Third, Mr Macfarlan submitted that his questions went to Mr Rich's credit (T 11,432); if so, they would be admissible, notwithstanding the credibility rule, because of s 103 of the Evidence Act, provided that the evidence has substantive probative value having regard to the matters identified in s 103(2).

35 I agreed with Mr Macfarlan's first two submissions as to the relevance of this line of questioning, and in the circumstances, it was unnecessary for me to make a ruling on credit alone. Relevance, per se, is not an issue but identifying the ways in which the evidence is relevant to ASIC's pleaded case is an important step towards deciding whether ASIC has embarked upon an unpleaded case.

36 Questions about the lack of any adequate basis for forecasts might well suggest, in isolation, the pursuit of an unpleaded case to the effect that the defendants breached their duty of care by causing the March board papers to contain unsupportable forecasts. But when the line of questioning is considered as a whole in the context of the pleadings, it can be seen that the questions relate to ASIC's pleaded case in two ways.

37 First, the questions relate to the contraventions pleaded against the defendants, concerning the Group's actual financial circumstances at the end of March 2001, and whether Mr Rich and Mr Silbermann knew or ought to have known of the true financial position set out in the Schedule. Establishing that there was no reasonable factual basis for the March forecasts would entail rejecting the claim that there was unbilled data of substantial value as at 30 March, a matter material to the Group's financial position at that time. If it could be shown that Mr Rich adopted unsupportable forecasts in late March 2001, that together with other evidence might (at least) lead to an inference, either that Mr Rich knew of the Group's actual deteriorating position and was putting forward unsupportable forecasts so as to mislead the board (Fifth FASC, para 22(a)); or that the ways in which the forecasts lacked a reasonable basis were readily discoverable by him and would, if discovered, make him realise the Group's deplorable financial position (Fifth FASC, para 22(c)).

38 Second, if Mr Rich's evidence were accepted, then arguably there would be a reasonable basis for the forecasts in the 4 April statement, to the extent that there was a reasonable basis for the forecasts in the March board papers. That has made it clearly relevant for ASIC to explore in cross-examination whether there was a reasonable basis for the forecasts that were made to the board in March, even though ASIC's pleaded allegations about the lack of a reasonable factual basis for the forecasts are particularised by reference to the actual financial circumstances pleaded in the Schedule. If ASIC were able to show that the forecasts in the March board papers had no reasonable basis, Mr Rich's defence to ASIC's case with respect to the 4 April statement would be destroyed, to the extent that his defence relied on the March forecasts to support the 4 April statement. Therefore the answers to questions on this subject would potentially have a significant probative value.

39 Those findings about relevance lead me to the conclusion that there is no substance in Mr Williams' submission that, in pursuing this line of questioning, ASIC is seeking to establish an unpleaded case.

40 In the absence of a grant of leave to amend, it will not be permissible for ASIC to use the evidence adduced in cross-examination for purposes outside its pleaded case. But it will be permissible for ASIC in final submissions to attack Mr Rich's defence to the pleaded case and his evidence in support of his defence. Once it is understood that ASIC's permissible use of the answers it receives in cross-examination will be limited to proving its pleaded case and challenging the defences and the evidence that the defendants have chosen to adduce to make out those defences, questions of danger of unfair prejudice tend to fall away. Specifically, in my view there is no danger of unfair prejudice, sufficient to warrant intervention under s 135, in permitting ASIC to pursue a line of questioning directed to showing that the forecasts presented to the board at the March board meeting had no reasonable basis, given the relevance of those questions to ASIC's pleaded case and the fact that Mr Rich's own evidence links the March forecasts to his defence to the pleaded case about the 4 April announcement.

41 Mr Williams did not precisely identify the evidence to which he referred when he objected to the "line of questioning", but I suggested (T 11,432) that the line of questioning began on T 11,421, and after he did not submit otherwise, I expressed my ruling in terms identifying that line of questioning (T 11,446).

T 11,485-9

42 Mr Macfarlan QC's line of questioning was about the alleged $40 million shortfall in billings and whether, if there was a shortfall, what was said to the directors at the March board meeting was accurate and complete. He referred to para 1283 of Mr Rich's affidavit, in which Mr Rich gave evidence of an exchange at the board meeting. According to Mr Rich, Mr Murdoch said, "If the $40 million doesn't get billed will cash bid $40 million lower?" He said Mr Beck or Mr Silbermann replied, "Yes". Mr Macfarlan suggested to Mr Rich that this statement was not made (T 11,485). Mr Rich was then asked whether he clarified the matter for the directors by pointing out that the statement referred not simply to the period to 30 June but to the period beyond it as well, and Mr Rich answered, "Not that I recall". Mr Macfarlan QC then asked:

"Well, that is the only way in which that statement would have been correct, isn't it?"

"Mr Rich, it wasn't made clear to the board, was it, that the $40 million unbilled data had been used in the preparation of the cashflow that led to the cashflow figures in the board paper?"

43 Mr Williams submitted these questions getting into another area of unpleaded allegation. He contended that the unfair prejudice involved in the second question was obvious and quite extreme, in circumstances where some directors had given evidence in ASIC's case about other aspects of the matter, but none of them had given evidence along the lines suggested in the question, and it was now too late for the defendants to cross-examine those directors as to whether they had been confused or misled about what they were told about this matter. He said that ASIC's witnesses accepted, at least in general terms, the evidence that Mr Rich gave about the subject matter, and it was unfair to subject Mr Rich to cross-examination that purported to suggest the contrary.

44 Mr Williams identified part of his cross-examination of Mr James Packer at T 9570.34ff, to demonstrate the unfair prejudice that would arise. Taking up an invitation by the court, he supplemented that reference with others, in a written submission marked DS 103.

45 In DS103 the defendants draw attention to aspects of the evidence of Mr James Packer, Mr Howell-Davies and Mr Lachlan Murdoch. Having considered those references to the evidence, I am satisfied that in the case of each of these witnesses, evidence was given in cross-examination (and in the case of Mr Packer, in chief) about what the board was told at the March meeting concerning the unbilled data. It would have been pertinent for cross-examining counsel to explore with each of them the matters raised at T 11,485 and T 11,488 (and also T 11,498 and T 11, 502, discussed below) to which objection was taken, if such matters had been raised by the witnesses in their evidence in chief, but it was not raised. For example, it would have been pertinent for those witnesses to give evidence as to whether they did or did not believe that the $40 million unbilled data had been used for the preparation of the cash flow figures in the March board papers.

46 Mr Macfarlan submitted that statements by Mr Rich and management to the March board meeting about the forecasts were very relevant to the question whether the board was apprised of the true financial position of the company, and if not, why it was not so apprised. He contended that the fact that forecasts were proffered which appeared, on their face, to justify the year-end targets tended to suggest that the financial position of the company up to March was as the board had been told, and therefore tended to obscure the board's knowledge of the true financial position. He pointed out that Mr Rich had dealt with the question of what the board was told about the matter in para 1283 of his affidavit, and submitted that he was entitled to challenge that evidence. There was no unfair prejudice because the defendants had proffered this evidence. He said that ASIC was not bound by Mr Packer's general evidence about this matter, especially given that Mr Packer qualified his answer (at T 9570.34) by the words "to the best of my recollection" and "roughly", and had said that some such statement was made around that time rather than particularly at the board meeting (T 11,503).

47 I agreed with Mr Macfarlan's submissions. My reasoning on these objections is the same as my reasoning with respect to T 11,423, subject to the qualification that the relevance of this line of questioning is somewhat difference to the relevance of the question at T 11,423. Here, the questions explored what was said to the board of the March meeting and thereby tested the state of understanding of the directors with respect to the alleged $40 million of unbilled data. If that matter were not properly explained to the board, then the inference would be available that the directors did not properly understand something that affected not only the basis for the forecasts but also the current financial position of the Group. That, in turn, would be relevant (at least) to whether the defendants contravened the Corporations Act by failing to take reasonable steps to ensure that the board was aware of the company's financial circumstances of that time (Fifth FASC, para 22(a)), and might contribute to a conclusion that they withheld information about the Group's financial position from the board (para 22(b)). The answers on these matters were potentially of significant probative value.

48 Although ASIC did not adduce evidence from Mr Packer, Mr Howell-Davies or Mr Murdoch that they misunderstood the significance of the alleged $40 million unbilled data in the manner suggested by Mr Macfarlan's questions, and so the defendants have not had the opportunity to test their understanding on those specific matters, Mr Rich himself raised the question of what was said to the board on this subject in his affidavit. In seeking to deal with that evidence, ASIC has not set out to establish an unpleaded case. Absent the grant of any leave to amend, ASIC will be limited to using the answers to its questions towards proof of its pleaded case. In the circumstances, there is no danger of unfair prejudice sufficient to warrant intervention under s 135.

T 11,498-500

49 Mr Macfarlan QC's cross-examination continued to raise questions about the alleged $40 million in unbilled data. He referred to the minutes of the March board meeting (MTB vol 1, p 329B), which said:

"Mr Beck reported that $40 million of revenue is to be collected from backbilling. This will be achieved through the additional capacity implemented."

"That would not have been a fair description of how the $40 million unbilled data came to be missed in billing, would it?"

50 Mr Williams SC objected, saying the objection was the same as he had raised previously. He added, however, that Mr Rich was being cross-examined on some handwritten notes of a third party who had not been called by ASIC, although he noted that the document was in evidence. He said this added to the unfairness of the procedure. Mr Macfarlan, in response, noted that Mr Rich had relied on Mr Hodgson's notes to support his evidence that the issue of collectability of the unbilled call data was discussed at the board meeting on 30 March 2001 (affidavit, para 518d).

51 I allowed the question and, shortly afterwards, the following question was asked:

"Was there any reference at the meeting to the increased February baseline referred to in the 2403C cashflow that I have referred you to?"

52 Once again I agreed with Mr Macfarlan's submissions. I regard my rulings on these questions as governed by my reasons with respect to T 11,485-9.

T 11,502

53 Mr Macfarlan QC cross-examined Mr Rich about cashflow spreadsheet 2403C. Mr Rich said (T 11,501) that it was a reasonable inference that the work reflected in that spreadsheet was the work used to build the cashflow that was discussed by him, Mr Silbermann and Mr Hodgson in their long telephone conversation prior to the March board meeting. Mr Macfarlan asked Mr Rich about the amount of $21 million entered in the spreadsheet in a line described as "Optus connection fees", and Mr Rich agreed that Mr Silbermann and Mr Hodgson had told him about parts of that matter. Mr Macfarlan asked him (T 11,502) whether he recounted to the board what he had been told on this subject by Mr Silbermann and Mr Hodgson. Mr Rich answered that the topics had been discussed, and then Mr Macfarlan asked:

"Mr Rich, the board was not given a fair description, I suggest to you, of the way in which the cashflow figures for the forthcoming months had been formulated? Do you agree with that?"

54 Mr Williams SC objected to that question, saying it was a similar objection to the earlier one. I allowed the question without further discussion.

55 I regard my ruling on this question as governed by my reasons with respect to T 11,423.

T 11,521

56 Mr Rich was cross-examined (T 11,516-22) about forecasts for the UK operations to June 2001, presented to the March board meeting. Mr Macfarlan QC referred Mr Rich to para 1262 of his affidavit, in which he deposed to a conversation with Mr James Packer on around 28 March, during which Mr Packer asked Mr Rich whether he could guarantee that EBITDA would be no lower in the UK, and Mr Rich replied:

"No. All I can tell you is what the UK team are telling me; they expect it to be 17 million pounds but it could be 14 million pounds."

57 Mr Macfarlan suggested to Mr Rich that a conversation in those terms did not occur, and that in fact Mr Rich had expressed confidence to Mr Packer that the UK would achieve 17 million pounds. Mr Rich disagreed. Mr Macfarlan referred to the presentation by Mr Weston on the UK operations at the March board meeting, and put it to Mr Rich that Mr Weston had told the board that the UK was on track to achieve 17 million pounds. Mr Rich said Mr Weston had qualified that statement, in the sense that he told the board what KPIs (key performance indicators) would need to be achieved in order to reach that figure.

58 Then (at T 11,520-1), the following questions and answers took place:

59 Mr Williams SC objected, saying that it was "the usual objection". I allowed the question. Again, I regard my ruling on this question as governed by my reasons with respect to T 11,423.

T 11,546

60 In his affidavit (paras 1233-5), Mr Rich gave evidence of a conversation he had with Mr Weston in which he told Mr Weston that his bonus would be increased to 150,000 pounds and the target of 17 million pounds EBITDA would be set, and Mr Weston agreed that this would satisfy him. Mr Rich then made some observations about evidence given by Mr Weston that he was "not clear" how One.Tel UK would get to 17 million pounds EBITDA in the year to June 2001. Mr Rich said, in effect, that everyone at his meetings in the UK knew what KPIs needed to be achieved and Mr Weston's attitude was that the figure was achievable though a lot of work would need to be done. By implication, the evidence about Mr Weston's acceptance of an increased bonus allied to the 17 million pounds target was given in support of this view.

61 Mr Macfarlan QC asked Mr Rich whether he offered the increased bonus to Mr Weston before the board meeting of 30 March and Mr Rich said he did, and then Mr Macfarlan asked:

"And you did not tell the board that you had done that, did you?"

62 Mr Rich answered that he did not tell the board as a whole but he had some recollection of telling individual board members, mentioning Mr Packer, Mr Howell-Davies, Ms Kekalainen-Torvinen, Mr Keeling and possibly Mr Silbermann.

63 Mr Macfarlan then asked:

"There is absolutely nothing in your affidavit to suggest that you told those persons about the bonus, is there?"

64 Mr Williams SC objected, saying the question showed how prejudicial the process had become. He submitted that there was no pleaded allegation about this matter and therefore no notice to the defendants of any issue about it. Mr Macfarlan said that the question went to Mr Rich's belief as to the financial position of the Group: if he was offering Mr Weston an increased bonus to achieve the EBITDA figure that Mr Weston described to the board as one which One.Tel was on track to achieve, but did not tell the board about the bonus, that evidence would give some material support to the view that Mr Rich did not in fact have a confident belief that 17 million pounds would be achieved. I allowed the question.

65 I regard my ruling on this question as governed by the reasoning applied at T 11,485-9.

T 11,653-4

66 Mr Rich was asked some questions about One.Tel BV's claim against KPN Telecom BV (T 11,633-6; T 11,650-4). He gave evidence that in the forecast figures for Europe contained in the March board papers, there was a forecast receipt in April 2001 of $8 million in respect of "KPN pre-selection claim", together with a note (MTB vol 1 p 236) that there was a possibility of non-receipt. It was put to Mr Rich, by reference to the relevant document (Carter Exhibits vol B p S60030), that in March 2001, his belief was that One.Tel had received legal advice that proceedings in Rotterdam concerning the claim would take at least 2 or 3 years before any ruling could be expected. Mr Rich disagreed, asserting he had received updated legal advice that, in light of recent cases and pressure from the regulator, it was likely that KPN would settle the claim in a much shorter period of time. He said that as at 30 March, he thought there was a 50% probability that the settlement would occur in April. Then the following exchange occurred (T 11,653):

67 Mr Williams SC objected, saying it was the same objection as previously made, about an unpleaded issue in relation to what occurred at the March board meeting. Mr Macfarlan QC said that according to Mr Rich's evidence, he relied for the purpose of the 4 April media release on cashflow figures in the March board papers, and he also made it clear that the cashflow figures in the March board papers included an assumption that the KPN claim would be settled as to $8 million in April. Mr Macfarlan QC submitted that it was permissible for him to deal with the KPN claim in the course of challenging Mr Rich's case that he had a reasonable basis for the 4 April media release. I ruled that the question be allowed.

68 I regard my ruling on this question as governed by my reasons with respect to T 11,423.

T 11,673

69 At T 11,669-71, Mr Rich was asked some further questions about the alleged unbilled data in the amount of $40 million. The questions explored what was said at the March board meeting on that subject. As mentioned above, Mr Rich gave evidence about the board discussion in para 1283 of his affidavit. During his cross-examination he said (T 11,671) that in giving evidence, he was recalling the Hodgson minutes. He was taken to those minutes (Cross examination Bundle, vol 1 p 3-34). One of the notes made by Mr Hodgson was that, in response to question by Mr Murdoch or Mr Packer as to whether One.Tel could expect to collect all of the $40 million, Mr Beck had answered affirmatively "because data not older than 3 months". Mr Rich was challenged on this point, and was taken to a page attached to Ms Ashley's e-mail dated 29 March (Cross-examination Bundle, vol 2 p 7-2). It was put to him that the data on this page was all older than 3 months and he agreed. Then Mr Macfarlan QC asked (T 11,672):

"It wasn't your belief at the board meeting that the data was all not older than 3 months, was it?"

70 Mr Williams SC objected, saying it was a similar objection in relation to an unpleaded issue about what was said to the board. Mr Macfarlan QC said the question went to the cashflow issues, in the same category as before (referring, presumably, to the matters canvassed at T 11,485-9), and was intimately tied up with the alleged unbilled data amounting to $40 million, included in the calculations which gave rise to the forecasts in the March board papers. He said what the board was told about the ability to collect this money would bear on the question whether, in fact, the money was collectable, a matter going to the financial position of the Australian operations. He submitted that a lack of frankness in describing the supposed $40 million misbilling and the way was handled in the cashflow forecasts were matters relevant to the question whether the unbilled data really did exist and whether, if it existed, it was likely to be able to be collected, and whether the defendants truly believed at 30 March (the date of the board meeting) and 4 April (the date of the press release) that this would occur. I ruled, without further discussion, that the question be allowed.

71 I agreed with Mr Macfarlan's submissions, and otherwise my reasons are as given in respect of T 11,485-9.

T 11,753

72 Mr Rich was asked some questions about an e-mail from Mr Werner in the UK to Mr Silbermann dated 26 March 2001 headed "Consolidated business final" (T 11,747-52), to which Mr Silbermann replied on 18 April. One of the pages attached to one or other (or both) of these e-mails (Cross-examination Bundle, vol 1 p 1168M), headed "Rest of year 2001", gave some cashflow figures for April, May and June 2001. It was put to Mr Rich that these figures were quite different from those given to the March board meeting. He was asked whether, as at 18 April or shortly afterwards, his view was that the prospective cashflow of the European operations for those three months was likely to be as stated at 1168M. It was suggested to him that the figures at 1168M indicated that a conversation with Mr Weston and Mr Werner to which Mr Rich had deposed in his affidavit did not occur. It was put to him that if the cashflow figures on that page for April, May and June represented Mr Werner's forecast at 19 April, Mr Rich would have concluded that the $75 million cash balance that had been forecast to the market in the 4 April media release was incapable of being achieved. Mr Rich gave answers resisting these various propositions.

73 Mr Williams SC objected (T 11,752), inviting Mr Macfarlan QC to confirm his assumption that this line of questions related to the forecast in the 4 April media release. Mr Macfarlan said that the questions when both to ASIC's pleaded case concerning the forecasts in the media release and its pleaded case concerning Mr Rich's knowledge of the actual financial position of One.Tel. Mr Williams SC objected (T 11,753) on the ground that the line of questioning did not go to any such pleaded issue. He said that Mr Werner had not said anything about the document in his evidence in chief. I allowed the question, without further discussion. My reasons for doing so are as stated at T 11,423.

T 11,775

74 Mr Rich was questioned about an e-mail he sent to Mr Lachlan Murdoch on 23 April 2001 (Cross-examination Bundle, vol 1 p 1216). In the e-mail Mr Rich said that $18.8 million of additional CDR had been found. He was asked where that figure came from, and whether the word "additional" was intended to suggest that the $18.8 million was additional to what had been referred to at the board meeting on 30 March. Then this question was put:

"Do you agree that in light of what had been said at the board meeting concerning $40 million backbilling, the statement '$18.8 million additional CDR has been found' in your e-mail of 23 April was liable to be understood as a reference to data additional to what had been referred to at the board meeting?"

75 Mr Williams SC objected (T 11,775), saying that Mr Murdoch had given evidence and had not suggested that he interpreted the e-mail in this fashion, and he queried whether the question related to any pleaded issue. Mr Macfarlan QC replied that the question went to credit, and I said I would allow it on that basis. That involves a finding, for the purposes of s 103 of the Evidence Act, that the evidence would have substantial probative value, having regard to the matters prescribed in s 103(2). The ruling does not depend on the principles discussed earlier in these reasons for judgment.

T 11,782

76 As noted under the heading, T 11,753, on 5 July 2006 Mr Macfarlan QC asked Mr Rich some questions about Mr Werner's e-mail of 26 March 2001 and Mr Silbermann's reply of 18 April 2001. There was some uncertainty in that evidence as to whether the figures which included the page at 1168M were attached to Mr Werner's or Mr Silbermann's e-mail. At T 11,781-2, Mr Macfarlan suggested to Mr Rich that Mr Werner sent the figures to Mr Silbermann, and Mr Silbermann sent them back to Mr Werner (in effect, by way of reply "with history"). He asked Mr Rich whether Mr Silbermann told him at some time in April 2001 that Mr Werner had been seeking confirmation that Mr Silbermann had received the e-mail of 26 March, and Mr Rich said he could not recall. Then Mr Macfarlan asked:

"Did Mr Silbermann say to you at some time in April that Mr Werner had expressed to him dissatisfaction that Mr Werner's figures as to the European accounts had not been used for the purposes of the March board papers?"

77 Mr Williams SC objected, on the ground that this matter was not put to Mr Werner. Mr Macfarlan said there was evidence before the court as to the difficulties in communication with Mr Werner and his unwillingness to swear an affidavit. In those circumstances, he submitted, the fact that Mr Werner had not dealt with this issue did not prevent ASIC from asking Mr Rich (and Mr Silbermann, if he gives evidence) questions about it. He said that the line of questioning goes to cashflow - to the question whether Mr Werner's cash forecast of late March had been reflected in the March board papers, and therefore the question whether the figures that found their way into the board papers were reliable. I allowed the question without further discussion. I agreed with Mr Macfarlan's submissions (which imply that the answer to the question potentially has significant probative value), and therefore that there was no danger of unfair prejudice warranty intervention under s 135.

T 11,796

78 After asking the questions about Mr Rich's e-mail statement to Mr Murdoch on 23 April that $18.8 million of additional CDRs had been found (discussed under T 11,775), Mr Macfarlan QC asked some questions about the actual amount of backbilling that had been achieved up to that date, and then he suggested to Mr Rich that the proportion of the $40 million backbilling referred to at the March meeting that was in fact billed at any time was significantly less than $10 million. Mr Rich replied:

"No, Mr Macfarlan, and I am very happy to explain where you can go and have a look to test what you are putting to me."

79 In cross-examination on the next day, Mr Macfarlan took Mr Rich back to that statement and asked him to identify the place or documents to which he was referring (T 11,794). Mr Rich identified some documents and after further questions, Mr Macfarlan asked him whether Mr Rich was suggesting that there was unbilled data that the administrators or liquidators had failed to bill. Mr Rich said (11,796) that that was a possibility, and then Mr Macfarlan asked:

"It wasn't suggested in the cross-examination of the administrators and liquidators by your counsel that there was any such unbilled data which they had failed to bill, was it?"

80 Mr Williams SC objected, saying there was no pleaded issue about this matter and if there had been, the cross-examination of the administrators and liquidators would have been different. Mr Macfarlan QC said that the question went to credit, and also the issue whether there was in fact any unbilled data, as Mr Rich had claimed. I allowed the question on the basis of its relevance, expressing doubt as to whether I would have permitted it solely on credit under s 103 of the Evidence Act. It is not necessary for me to add to the reasons I gave at the time, except to say that I do not see any real danger of unfair prejudice through this matter not having been raised before the cross-examination of the administrators and liquidators.

T 11,860

81 At T 11,859 Mr Rich was taken to the minutes of the board meeting of 17 May 2001 (Cross-examination Bundle, vol 2 p 16-2), where the minutes record Mr Rich as saying that $11 million was being withheld from Telstra on the roaming agreement as One.Tel had been overcharged by 25%. Mr Rich agreed that at the time, One.Tel was not paying well in excess of 25% of the amounts invoice by Telstra, and he was asked whether he told the board that this was the case. He gave an answer and then Mr Macfarlan QC said:

"You didn't tell the board that more than 25% was being withheld, did you?"

82 Mr Williams SC objected, asking whether the question related to credit or to some pleaded issue. Mr Macfarlan said the question went to One.Tel's financial position and whether it in fact had any basis for withholding an amount beyond 25%, or at all. He said the question also went to Mr Rich's credit. I allowed the question, on the basis that the objection fell within the principles upon which I had acted earlier. Although the question related to what the board was not told in the May meeting, the probative value of the answer would go to the financial position of the Group at earlier times, so far as the financial position was affected by treatment of the Telstra invoices. It was therefore related to ASIC's pleaded case, and there was no danger of unfair prejudice of a degree that would warrant intervention under s 135.

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Citations

Australian Securities and Investments Commission v Rich [2006] NSWSC 712

Most Recent Citation

Canturi Corporation Pty Limited v Gagner Pty Limited [2008] NSWDC 151

Cases Citing This Decision

2

Australian Securities and Investments Commission v Rich [2009] NSWSC 1229

Canturi Corporation Pty Limited v Gagner Pty Limited [2008] NSWDC 151

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3

Statutory Material Cited

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Banque Commerciale SA, En Liquidation v Akhil Holdings Ltd [1990] HCA 11

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CITATION:	ASIC v Rich [2006] NSWSC 712
HEARING DATE(S):	28 & 29 June, 3-7 July 2006
JUDGMENT DATE :	14 July 2006
JURISDICTION:	Equity
JUDGMENT OF:	Austin J
DECISION:	Objections overruled
CATCHWORDS:	PRACTICE & PROCEDURE - pleading - whether cross-examination testing defendant's evidence amounted to a new, unpleaded case - probative value of challenged evidence - whether danger of unfair prejudice to defendants
LEGISLATION CITED:	Evidence Act 1995 (NSW) s 135
CASES CITED:	Banque Commerciale SA, en Liquidation v Akhil Holdings Ltd (1990) 169 CLR 279 Rich v ASIC (2004) 220 CLR 129
PARTIES:	Australian Securities and Investments Commission (P) John David Rich (D1) Mark Alan Silbermann (D4)
FILE NUMBER(S):	SC 5934/01
COUNSEL:	R B S Macfarlan QC with J P A Durack SC (P) D L Williams SC with M J Steele (D1, D4)
SOLICITORS:	Georgina Hayden, Solicitor for Australian Securities and Investments Commission (P) Thompson Eslick (D1, D4)