Australian Securities and Investments Commission v Plymin (No 1)

[2003] VSC 123

IN THE SUPREME COURT OF VICTORIA Not Restricted

AT MELBOURNE

COMMERCIAL AND EQUITY DIVISION

CORPORATIONS LIST

No. 7748 of 2000

AUSTRALIAN SECURITIES AND INVESTMENTS COMMISSION	Plaintiff
V
BERNARD HENRY PLYMIN	First Defendant
JOHN DORMAN ELLIOTT	Second Defendant
WILLIAM MAXWELL HARRISON	Third Defendant

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JUDGE:	Mandie J
WHERE HELD:	Melbourne
DATE OF HEARING:	19–23, 26–30 August, 2–6, 9, 11–13, 17–20, 25–27 September, 7, 9, 14–16, 23–25, 28, 31 October, 4, 6–7, 13–14 November 2002
DATE OF JUDGMENT:	5 May 2003
CASE MAY BE CITED AS:	ASIC v Plymin, Elliott & Harrison
MEDIUM NEUTRAL CITATION:	[2003] VSC 123

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CORPORATIONS - civil proceeding by ASIC against directors for contraventions of insolvent trading provisions of corporations legislation - whether companies insolvent - whether directors aware of reasonable grounds for suspecting insolvency - what debts were incurred and what resulting loss and damage was suffered by creditors

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APPEARANCES:	Counsel	Solicitors
For the Plaintiff	Mr N Young QC with Mr P Clarke SC, Mr P Crutchfield and Mr E Heerey	ASIC
First Defendant	In Person
For the Second Defendant	Mr M D Wyles with Mr R Heath	Tress Cocks Maddox
For the Third Defendant	Mr O P Holdenson QC (on 7 and 9 October), Mr L Glick SC, Mr A Young and Mr M Robins (on 2 September)	Phillips Fox

CONTENTS

I. Introduction..................................................................................................................................... 1

II. The Facts......................................................................................................................................... 6

(a) The Water Wheel Group........................................................................................................ 6

(b) September 1998........................................................................................................................ 9

(c) October 1998........................................................................................................................... 10

(d) December 1998....................................................................................................................... 10

(e) January 1999........................................................................................................................... 11

(f) February 1999......................................................................................................................... 11

(g) March 1999............................................................................................................................. 15

(h) April 1999............................................................................................................................... 22

(i) May 1999.................................................................................................................................. 36

(j) June 1999.................................................................................................................................. 41

(k) July 1999.................................................................................................................................. 45

(l) August 1999............................................................................................................................. 54

(m) September 1999..................................................................................................................... 64

(n) October 1999.......................................................................................................................... 74

(o) November 1999...................................................................................................................... 86

(p) December 1999....................................................................................................................... 98

(q) January and February 2000................................................................................................ 101

III. Applicable provisions of the Corporations Law............................................................... 105

IV. ASIC’s power to bring this proceeding............................................................................... 116

V. Standard of proof...................................................................................................................... 123

VI. Insolvency................................................................................................................................. 128

(a) Insolvency – the law............................................................................................................ 128

(b) Insolvency – the facts.......................................................................................................... 133

(c) Humphris’ written report................................................................................................... 138

(d) Cross examination of Humphris....................................................................................... 141

(e) Evidence of Maxsted........................................................................................................... 144

(f) Submissions on behalf of the second defendant (Elliott) in relation to insolvency... 144

(g) Submissions on behalf of the first defendant (Plymin) in relation to insolvency...... 145

(h) Deemed insolvency............................................................................................................. 146

VII. The director’s duty to prevent insolvent trading............................................................. 147

VIII. Awareness of reasonable grounds for suspecting insolvency.................................... 151

(a) The law.................................................................................................................................. 151

(b) Was the second defendant (Elliott) aware of reasonable grounds for suspecting insolvency................................................................................................................................................ 154

(c) Was the first defendant (Plymin) aware of reasonable grounds for suspecting insolvency 162

IX. Issues relating to debts incurred........................................................................................... 166

(a) Various debts of Mills and Holdings................................................................................ 166

(b) Were certain debts incurred at date of contract or at date of delivery of goods or provision of services?................................................................................................................................ 179

(c) Other debts of Holdings..................................................................................................... 192

X. Other submissions and defences of defendants................................................................. 202

(a) “Unsworn statement” of first defendant......................................................................... 202

(b) Prosecutorial fairness.......................................................................................................... 202

(c) Jones v Dunkel..................................................................................................................... 205

(d) Sections 588H(2) and (3)..................................................................................................... 206

(e) Admission in evidence of letters from ASIC................................................................... 209

(f) Section 1317JA...................................................................................................................... 211

XI. Conclusions............................................................................................................................... 212

HIS HONOUR:

I.         Introduction

1. This is a civil penalty proceeding brought by the plaintiff, Australian Securities and Investments Commission, against three company directors in relation to alleged insolvent trading by two companies, Water Wheel Mills Pty Ltd and Water Wheel Holdings Limited.  At all relevant times the defendant Plymin was the Managing Director, the defendant Harrison was the Chairman of the Board of Directors and the defendant Elliott was a non-executive director of the companies.

1. Administrators were appointed to the companies by their directors on 17 February 2000.  The case is concerned with insolvent trading alleged to have commenced on or about 14 September 1999 and the evidence in the case primarily dealt with events occurring in 1999.

1. Plymin defended this proceeding in person but did not give evidence. Harrison admitted “liability” in the course of the trial and took no further part in it; the question of any orders as against him has been deferred.  Elliott was represented by Counsel in his defence and gave sworn evidence.

1. It will be convenient to refer to the persons involved in this proceeding by the abbreviations which follow.  I mean no disrespect to the defendants, witnesses or other persons where I refer to them by their surname and without any title of Mr. or Mrs. etc, an expedient adopted simply for convenience and ease of reference.

Parties
ASIC	Plaintiff, Australian Securities and Investments Commission
Plymin	First Defendant, Bernard Henry Plymin, Managing Director of Water Wheel
Elliott	Second Defendant, John Dorman Elliott, non-executive director of Water Wheel
Harrison	Third Defendant, William Maxwell Harrison, Chairman of directors of Water Wheel
Others
Albright & Wilson	Albright & Wilson Australia Pty Ltd, chemical company
Allen	Nicholas John Allen, Senior Credit Specialist with AWB
ANZ Bank	Australia and New Zealand Banking Group Limited
APT	Australian Product Traders Pty Ltd
ARH	Australian Rice Holdings Pty Ltd
ASX	Australian Stock Exchange
Atcheson	Douglas John Atcheson, Manager, Group Credit Management section of ANZ Bank
AWB	AWB Limited, company associated with the Australian Wheat Board
Brooke	Nicholas Brooke, partner of PWC, joint and several administrator of Water Wheel
Brown	Trevor Brown, partner at Deloittes
Calvert-Jones	John Anthony Calvert-Jones, former director of Water Wheel
Carnie	Kenneth Carnie, director of Water Wheel
Chiswell	Bob Chiswell, employee of Water Wheel
Daly	Christopher Thomas Daly, partner of PWC, investigating accountant appointed by the ANZ Bank and joint and several administrator of Water Wheel
Deloittes	Deloitte Touche Tohmatsu
Derrick & Son	Derrick & Son (Grain) Pty Ltd, grain traders and grain merchants
Di Lorenzo	Lupangelo Di Lorenzo, former Senior Manager, Finance, at Vicgrain
Edwards	Mark Edwards, ANZ Bank Manager
Friswell	Jeff Friswell, employee of Water Wheel
Fung	Michael Fung, Manager employed by PWC
GHE	Geoffrey Hughes (Export) Pty Ltd, a company exporting rice and grain
Goldsworthy	Douglas Charles Goldsworthy, office manager of Tristate
Goosens	Andre Goosens, employee of Water Wheel
Graham	Mark Sydney Graham, accountant of Derrick & Son
Hannagan Bushnell	Hannagan Bushnell, PR Consultants employed by Water Wheel
Hodges	Graham Hodges, ANZ Bank’s State Manager for Business Banking
Holdings	Water Wheel Holdings Limited
HPW	Hall, Puddy & Wales, Water Wheel’s auditors
Humphris	Michael James Humphris, expert accounting witness for Elliott
Jeffries	Peter Gregory Jeffries, General Manager, Marketing, NSWGB
John Gross	John Gross, former director of Water Wheel
Kippax	Leila Grace Kippax, certified practising accountant for Grainco, successor to NSWGB
KPMG	KPMG Corporate Finance
Lawrence	Graham Maxwell Lawrence, former Chief Executive Officer, NSWGB
Lee	Robert Stephen Lee, former Senior Manager, Marketing and Business at Vicgrain
Mark Gross	Mark Gross, employee of KPMG Corporate Finance and consultant to Water Wheel
Maxsted	Lindsay Phillip Maxsted, expert accounting witness for the plaintiff
Meyer	Ken Cornelius Meyer, National Credit Manager, Albright & Wilson
Mills	Water Wheel Mills Pty Ltd
Montesano	Frank Montesano, employee of HPW, audit manager
Mullen	Andrew Glenn Mullen, manufacturing manager at Bridgewater mill
Nankervis	Stephen John Nankervis, financial controller of Water Wheel from 1 February 1999 to 19 April 1999
NCC	National Competition Council
Neil	Jan Gilman Neil, Managing Director of the Neil’s group of companies
Neil’s Transport	The Neil’s group of companies, including but not limited to Neil’s Transport Pty Ltd
Nicholls	Sharon Nicholls, employee of Water Wheel
NSWGB	New South Wales Grains Board
Patel	Mahesh Patel, accountant employed by Satake
Pawlowicz	Christopher Pawlowicz, former employee of Swire Shipping Agencies
Pereira	Paul Francis Pereira, grain buyer for Tristate working in Deniliquin
Pivot	Pivot Limited, fertiliser company
Polzella	Anthony Polzella, employee of Water Wheel
Pope Packaging	OE & DR Pope Pty Ltd trading as Pope Packaging
Powercor	Powercor Australia Ltd, electricity company
Preston	William George Preston, director of Derrick & Son
Purtill Bros	Purtills Nominees Pty Ltd, trading as Purtill Bros, a bus and transport company
PWC	PricewaterhouseCoopers
RiceGrowers	RiceGrowers Co-operative Limited, rice marketing company for the NSW Rice Marketing Board
Rosedale	Charles Rosedale, partner at Clayton Utz and legal advisor to Water Wheel
Satake	Satake Australia Pty Ltd
Snape	Allan Snape, consultant to Water Wheel, director of ARH and associated with Elliott
Spargo	Josephine Spargo, accounts payable officer employed by Water Wheel from October 1999
Stankovich	Ross Harris Stankovich, Manager in ANZ Bank Corporate Banking Department
State Street Bank	State Street Australia Ltd
Swire	Swire Shipping Agencies, a division of John Swire & Sons Pty Ltd, a shipping company
Traill	Phillip Rex Traill, purchasing officer for Tristate (Bridgewater stockfeed mill)
Tristate	Tristate Commodities, grain merchant business owned by Mills
Tucker	Gary Ronald Tucker, certified practising accountant for NSWGB
Vicgrain	Vicgrain Ltd, bulk grain handling service provider
Wales	Geoffrey Charles Wales, partner at HPW, audit partner
Water Wheel	Mills and/or Holdings
Wilson	David Christopher Wilson, financial controller of Water Wheel from 9 August 1999 to 16 February 2000

1. ASIC alleges that each of Holdings and Mills was insolvent on and after 14 September 1999, or alternatively on and after 3 October 1999, and that each of the defendant directors contravened s.588G of the Corporations Law of Victoria (“the Corporations Law” or “the Law”) with respect to the insolvent trading of Mills and Holdings on and after the date of their insolvency.

1. ASIC says that by virtue of the transitional provisions of the Corporations Act 2001 (Clth) (“the Act”) (ss.1382 and 1401) when read with s.1473 of the Law as in force immediately before the introduction of the Act, the pre-13 March 2000 provisions of the Law continue to apply to this proceeding and are to be treated as if they were part of the Act[1].

   [1]see Shum Yip Properties Development Ltd v Chatswood Investment and Development Co Pty Ltd (2002) 40 ACSR 619 at 621-623.

1. By its amended Originating Process dated 27 November 2000, ASIC seeks the following relief:

· A declaration pursuant to s.1317EA(2) of the Law that each of the defendants has contravened s.588G of the Law with respect to the insolvent trading of each of Mills and Holdings on or after 14 September 1999, alternatively, on or after 3 October 1999.

· An order pursuant to s.588J of the Law that each of the defendants pay compensation to each of Mills and Holdings equal to the loss or damage suffered by their respective creditors as a result of the contravention of s.588G.

·     An order pursuant to s.1317EA(3)(a) of the Law prohibiting each of the defendants from managing a corporation for such period as the Court deems appropriate.

· An order pursuant to s.1317EA(3)(b) of the Law that each of the defendants pay to the Commonwealth a pecuniary penalty of up to $200,000 for each contravention of s.588G.

1. In support of its case the Plaintiff provided evidence, both oral and by way of a very large number of affidavits and documentary exhibits, broadly from the following sources:

·     creditors;

·     former Water Wheel officers, employees, auditors and consultants;

·     Water Wheel’s administrators and investigating accountants appointed by the ANZ Bank;

·     a variety of other sources including expert opinion and material relating to funding, sale and other options available to Water Wheel.

II.       The facts

(a)       The Water Wheel Group

1. Mills was incorporated on 14 June 1888 as Water Wheel Flour Mills Pty Ltd. and was  the trading entity of the Group.  Holdings was the parent company of the Group.  It was listed on the ASX in 1960.  Other entities in the Group were dormant.  Holdings was a pure holding company.  It did not have any trade receivables or cashflow in its own right or any bank account.  Holdings’ solvency depended on the solvency of Mills.  To the extent that it, rather than Mills, incurred any debts, its solvency depended entirely on financial support from Mills.  As the parties did throughout the trial, it will be convenient in this judgment to use the term Water Wheel as covering either or both of Mills and Holdings.

1. The share structure of Holdings is as follows: 6,079,723 fully paid ordinary shares on issue; 22,500 fully paid ordinary employee shares; and 750,000 10% Cumulative Converting Non-Redeemable Participating Preference Shares held by ARH.  Elliott is a director of ARH and these preference shares are described in the 3 December 1998 Annual Report dated 3 June 1999 as being “indirectly held” by Elliott.

1. At the time of the appointment of the Administrators the directors of Holdings were Plymin (since May 1997),[2] Elliott (since May 1997),[3] Harrison (since October 1987);[4] and Carnie (since 29 September 1999) and the directors of Mills were Harrison, Plymin and Elliott.  Calvert-Jones had resigned as a director of Holdings on 19 April 1999 and John Gross had resigned as a director of Holdings and Mills on 30 July 1999.

   [2]As at 3 June 1999 Plymin “directly” held 1,700 fully paid ordinary shares and 125,000 options over unissued fully paid ordinary shares

   [3]As at 3 June 1999 Elliott “indirectly held” 711,820 fully paid ordinary shares (through ARH) amounting to 11.71% of the issued shares and 750,000 preference shares

   [4]As at 3 June 1999 Harrison “directly” held 69,483 and “indirectly held” 103,189 fully paid ordinary shares in Holdings .

1. The main business of Water Wheel was the procurement and milling of wheat and paddy rice and the distribution of the resulting products which included flour, stockfeed and rice.  The business activities of Water Wheel were conducted by Mills, which also owned the assets and employed the staff.  These activities were carried on at its mill at Bridgewater on the Loddon River in Victoria and also at Mitiamo, 50 km from Bridgewater.  Water Wheel’s head office was at 364 Albert Street, Melbourne

1. Water Wheel entered the rice industry in 1997.  A rice mill was purchased and installed at Bridgewater at a cost of about $3M.  The mill had a capacity of 48,000 tonnes per annum (based on 95% efficiency, 24 hours, 6 days per week, 50 weeks per year).  I note that during the 1998 financial year, Water Wheel undertook a rights issue and private placement, options were exercised and partly paid shares were called up.  These actions raised $5.045M.  According to the 1998 Annual Report, this enabled the stockfeed plant to be rebuilt (at a cost of $4M), a rice flour mill to be purchased and the wheat flour mill to be upgraded.  Drying and storage facilities were purchased by Water Wheel and they were located at Mitiamo on premises owned by Vicgrain.  The relationship between Vicgrain and Water Wheel was governed by an agreement dated 23 December 1997.  Under this agreement, Vicgrain met the costs of providing a wet rice storage facility, a dried rice storage shed and the installation of aeration units required for dried rice storage.  These costs were repayable by Water Wheel by 40 quarterly instalments of $36,600 (being principal and interest) and payable from 1 August 1997 to 1 May 2007.[5]  In addition, Water Wheel was liable to pay certain other amounts for a licence fee and for operating charges for services provided by Vicgrain.

   [5]In fact, the last payment made by Water Wheel under this agreement was made on 29 November 1999, leaving an amount outstanding to Vicgrain of approximately $750,000.

1. Water Wheel’s rice milling capacity exceeded its drying and storage capacity, but capital works to increase the drying and storage capacity had been initiated or were being planned.  1998 was the first full year of rice production for Water Wheel and it was looking to expand rice operations during 1999.  In the 1999 year, Water Wheel generated revenue of approximately $12.5M from its flour business, approximately $9M revenue from rice and $5.7M from its stockfeed business.  Water Wheel also engaged in low margin rice tolling on behalf of RiceGrowers.

1. Due to the vesting provisions in the Marketing of Primary Products Act 1983 (NSW), all rice grown in New South Wales (where most of Australia’s rice is grown) vests in the Rice Marketing Board.  In turn, the Rice Marketing Board has vested the power to process and market the NSW rice crop in RiceGrowers.  As a result of Water Wheel’s inability to secure a sufficient supply of rice, Water Wheel’s rice mill operated at about 40% of its capacity.

1. On 21 March 1997 Mills entered into an agreement with APT, a company associated with Elliott and of which he was a director, for supply of rice produced by Elliott.  The agreement also provided for payment to APT of a maximum fee of $250,000 per annum for technical and support services.  The last such fee became due and payable within 7 days of 30 June 1999.

1. In order to conduct its operations, Water Wheel needed to purchase large quantities of wheat and paddy rice and this depended on seasonal availability.  To finance the purchases, Mills entered into “off-balance sheet” arrangements with financiers: Derrick & Son in respect of rice, and NSWGB in respect of wheat. 

1. By a deed made 15 June 1999 between Derrick & Son and Water Wheel (Holdings and Mills) the parties arranged for the financing of a maximum of 20,000 tonnes of rice comprising grain sourced from the 1998 and 1999 harvests.  The agreement applied to all transactions between 1 May 1999 and 30 April 2000.  There was a prior agreement dated 10 December 1997 along the same lines covering earlier harvests.

1. The agreement with Derrick & Son operated as follows:

·     “Sourced grain” was defined as paddy rice sourced and purchased by Mills off-farm and stored in approved storage facilities owned by Vicgrain (at Mitiamo).

·     Derrick & Son and Mills would enter into back-to-back sale and re-purchase contracts in relation to sourced grain purchased by Mills under nominated contracts.  Mills would sell the paddy rice to Derrick & Son which would transfer the original purchase price into Mills’ bank account and obtain title to the rice.

·     Interest was payable by Mills at a specified rate on moneys so advanced by Derrick & Son.

·     Mills was to advise Derrick & Son of tonnage drawn down from time to time for milling, whereupon Derrick & Son would issue invoices to Mills that were payable within 30 days of receipt.  Derrick & Son therefore relied on Mills to advise it of tonnage drawn down and used in production.

·     All financed grain had to be delivered to Mills by the agreed expiry date (in this case 30 April 2000).  Derrick & Son was entitled to invoice Mills for any grain remaining undelivered on 30 April 2000 and such invoice was due and payable on or before 31 May 2000.

1. There was an agreement with NSWGB relating to approximately 50,000 metric tonnes of grain covering the 1997/98 wheat season.  The agreement operated in a similar fashion to the agreement with Derrick & Son, except that the wheat was stored in silos at Bridgewater controlled by Water Wheel.  The agreement provided for Holdings to pay for all grain the subject of the agreement by 30 November 1998.

1. Until it ceased trading with Water Wheel in or around 15 October 1999, Neil’s Transport transported all of Water Wheel’s products from the Bridgewater mill to customers, and to Neil’s Transport’s rented warehouse in Melbourne for storage and packing for export.  In or about August 1997, Neil on behalf of Neil’s Transport reached an agreement with Plymin on behalf of Water Wheel that, inter alia, Neil’s Transport would provide transportation services to Water Wheel and would be paid within 30 days of receipt of an end-of-month statement, and that in the event of any non-payment, Neil’s Transport was entitled to claim a lien in respect of any good stored by it for and on behalf of Water Wheel. 

1. The principal relevant facts, but by no means every pertinent fact contained in the large volume of evidence, are set out, so far as practicable, in chronological order below.  Where appropriate, the evidence of key witnesses is expressly dealt with.

(b)      September 1998

1. AWB is Australia’s main national and international grains marketing organisation, marketing predominantly wheat.  AWB had a longstanding commercial relationship with Water Wheel and its standard terms of trade with Water Wheel were payment within 30 days from the Saturday of the week of delivery.  In late September 1998 Water Wheel was indebted to AWB in the sum of $339,000 of which $158,000 was overdue (dating back to 24 August 1998).  Water Wheel had advised AWB that it was sending a cheque but it was not received.  Water Wheel’s then financial controller, Terry Crowe, informed AWB that Water Wheel was not mailing any cheques “as they were restructuring their finances”.  Mr Aucher, AWB’s manager of trade finance, told Crowe that until the funds were received, Water Wheel’s credit limit ($400,000) was suspended and there would be no further deliveries. 

(c)       October 1998

1. By letter dated 6 October 1998, AWB requested Water Wheel to pay the sum of $102,844.43 (all overdue for payment, and some of it 30 days overdue).  The letter sought immediate payment “to ensure that deliveries are not suspended”. 

1. A meeting of the Board of Directors of Water Wheel was held on 12 October 1998. Harrison, Plymin, Elliott, Crowe and John Gross were present at the meeting.  The Board resolved that the following financial information was required for future Board meetings:

·     Identification of Profit Improvement Programs

·     Cashflow and Working Capital Usage

·     Sales Volume Variances by Division

·     Program to reduce Inventory

·     Profit & Loss Statement by Division

·     Revised Sales Budgets excluding Budgeted Internal Sales

(d)      December 1998

1. In December 1998, when carrying out the audit of the accounts for the financial year ended 3 December 1998, the auditors sighted a trial balance as at 31 October 1998 prepared by management.  This trial balance suggested that a profit would be made for the 11 months to 31 October 1998 of approximately $1M.

(e)       January 1999

1. On 15 January 1999 Crowe ceased to be the Company Secretary and financial controller of Water Wheel.

1. Under a June 1998 finance (or purchase and resale) transaction between NSWGB and Water Wheel, grain to the value of $569,607 was financed by NSWGB.  The final date for payment in full by Water Wheel, irrespective of delivery of the grain, was 30 November 1998.  The said sum of $569,607 plus certain other costs resulted in a total liability of $571,452.73.  This sum was invoiced by NSWGB to Water Wheel on or about 31 January 1999.  Although NSWGB did not press Water Wheel for payment of this amount prior to October 1999, the sum was in fact due and payable from 30 November 1998 onwards and was never paid.

(f)       February 1999

1. On 1 February 1999, Nankervis was appointed as General Manager, Finance and Administration, of Water Wheel. 

1. At all relevant times, HPW, a firm of chartered accountants, were the auditors of Water Wheel.  The auditors were required to produce audited financial accounts for Holdings and Mills, and audited consolidated accounts as required by law.  Wales was the partner responsible for the audit, and Montesano, who had been continuously involved with the audit of Water Wheel for a number of years, was responsible for the day to day activities in auditing Water Wheel.  HPW commenced the audit of Water Wheel’s consolidated financial accounts for the financial year ended 3 December 1998 in early December 1998.  In early February 1999, it became obvious to Montesano that the result for the financial year to 3 December 1998 was likely to be a substantial loss.  He then spoke with Harrison and asked him what he thought the financial result for the year would be.  Harrison said that he thought Water Wheel had made a profit of approximately $1M.  Montesano said that the likely result was going to be a large loss.  Harrison said that he would talk to Plymin.

1. Shortly before 9 February 1999, Harrison contacted Brown of Deloittes and requested a meeting which was held on that day or shortly thereafter.  Harrison told Brown that the year end accounting records of Water Wheel had revealed a “significant” loss for the six months to 3 December 1998.  After the meeting with Harrison, Brown had discussions both with Harrison and with Plymin in which it was agreed that Deloittes would assist Water Wheel to ascertain the cause of the loss reported in the accounts. 

1. Montesano and Wales attended a meeting with Plymin, Harrison, and Nankervis at Water Wheel’s head office on 12 February 1999 where the results of the audit and the preliminary audited consolidated accounts were discussed.  Montesano and Wales informed the others that the result of the audit was that Water Wheel was going to make a loss in the region of $1.5M.  Plymin said that he was incredulous about the result and that he had doubts over the accuracy of the figures.  Montesano and Wales explained that it was the increased expenditure on overheads which was the major contribution to the large loss.  At the meeting, they went over the accounts in detail with the others and showed them a rough working sheet which disclosed that overheads had increased significantly in the second half of the financial year.  Plymin said to Montesano and Wales that he did not agree with the accounts but he did not say in what way he considered them to be inaccurate.  Plymin said that the increased overheads were justified because Water Wheel had experienced an increase in sales.  Montesano and Wales said that the reason that the management accounts to 31 October 1998 were disclosing a profit was principally due to major oversights in the recording of wheat and rice costs.  Montesano told Plymin that once grain sales were excluded [ie, because they were low profit], sales had not increased sufficiently to cover the increase in overheads.  Plymin said that something must be wrong with the sales figure. 

1. A Board meeting was held at Water Wheel’s head office on 16 February 1999.  The directors present were Harrison, Elliott and Plymin.  Also in attendance were Rosedale and Nankervis.  Calvert-Jones was not in attendance.[6]  The minutes of the meeting record that the audit had recently exposed significant discrepancies between the monthly accounts and the statutory accounts and that it was decided that, due to the magnitude of the discrepancies, the ASX should be advised that it was inappropriate for Water Wheel to lodge annual accounts until further investigative work was undertaken and that Deloittes were to be appointed to lead this investigation.  In evidence, Elliott recalled that he was expecting a profit of around $890,000, but the Board was told that the draft accounts showed a loss in the order of $1.5M for the year ended 3 December 1998.[7]  Elliott testified that he demanded a full explanation, and that Plymin told them that over $1M, maybe up to $1.8M, of sales had not been recorded from the general ledger into the sales ledger.  Elliott was not sure whether Plymin had made that statement at that meeting or later; however, he testified that the directors’ consensus was that the loss figure was wrong, and that sales had not been recorded.  The missing sales were said to be in relation to flour.  In cross-examination, Elliott agreed that $1.2M of missing flour sales would be about 100 deliveries (about 200,000 tonnes of flour).  Elliott said that the directors were also told that the new computer system was not recording the sales.  The information was being “lost down the wire” from Bridgewater to head office, where the invoices were sent out.  Elliott testified that the directors considered that there were only two possibilities: either the sales had not been invoiced, or someone had stolen the flour.  The directors were told that Deloittes had been engaged to investigate.  Elliott said in evidence that he did not make any enquiries of the auditors, a matter which he left to Harrison and Plymin – he added that he did not have any great faith in the auditors. 

   [6]The Board minutes incorrectly record that Calvert-Jones was in attendance.

   [7]Water Wheel’s financial year ended on 3 December.

1. Wales and Montesano (the auditors) attended at Water Wheel’s office for the 16 February Board meeting and waited outside the Boardroom.  During the Board meeting, Harrison came outside and told Wales and Montesano that the directors were not comfortable with the accounts and had resolved to defer lodgement of them, knowing that this would lead to the shares in Holdings being suspended from trading on the ASX.

1. After the results were presented to the Board on 16 February 1999, Harrison wrote to the ASX a letter of the same date as follows:

“The Board of Water Wheel advised it has determined it is inappropriate to lodge with ASX today, its accounts for the year ended 3 December 1998, due to material anomalies identified in the year end accounts.

These anomalies have been identified during the commissioning of a new computer system installed to ensure the Company is Year 2000 compliant.

The Board of Water Wheel has appointed Deloitte Touche Tohmatsu to assist in addressing the situation.

The Company will keep the market informed as to progress in resolving the anomalies, so that the accounts can be finalised and lodged with ASX at the earliest opportunity.”

1. As far as the evidence shows, neither the directors nor the auditors nor anyone else had at that stage “identified” any “material anomalies” and the reference to their identification during the commissioning of a new computer system is puzzling.  Elliott had a copy of this letter, which he produced to ASIC in the course of its investigations.

1. Trading in the listed shares in Holdings was suspended as from the commencement of trading on 17 February 1999 and was not reinstated until 11 June 1999, following lodgement of the preliminary final report for the period ended 3 December 1998.

1. Shortly after the announcement of the suspension of trading in shares in Holdings, Lawrence of NSWGB had a conversation with Elliott, in which Elliott informed Lawrence that Water Wheel had not lost any money, that there was a computer problem in that invoices issued at the mill were not being received via the computer link to head office, and therefore sales were not being invoiced, and that most of the money would be recouped.  Clearly Elliott, knowing that NSWGB was an important financier of Water Wheel, was concerned to keep NSWGB informed and reassured.

1. Under a finance (or purchase and resale) transaction between NSWGB and Water Wheel in October 1998, grain to the value of $719,659.80 was financed by NSWGB.  Most of this grain was delivered to Water Wheel by 6 November 1998 and all of it was delivered to Water Wheel by 2 December 1998.  The full amount was invoiced to Water Wheel on or about 25 February 1999.  Even on the view of the evidence best for the defendants, most of this amount was never paid.  The evidence shows that the said sum of $719,659.80 had been entered by NSWGB in a general ledger account, which also covered numerous ordinary trading transactions.  Due to a number of payments or offsets in that general ledger account, a balance of $623,441 was due and payable (among other debts due to NSWGB) and was never paid.

1. On 6 January 1999, following the delivery of 9.214 tonnes of paddy rice by RiceGrowers to Mills, RiceGrowers had invoiced Mills by two invoices for the sums of $1,126,623.15 (invoice 90036375) and $1,242,270.19 (invoice 90036376).  The agreed trading terms with RiceGrowers were payment within 14 days of delivery.  Invoice 90036375 was paid on 22 January 1999.  Invoice 90036376 was part paid by instalments on 2 February ($500,000), 5 February ($200,000) and 10 February ($242,270.19).  On 26 February 1999 RiceGrowers' credit officer retained the services of a debt collection agency to recover the outstanding balance of $300,000.  On 2 March 1999 a further payment of $100,000 was made.  On or about 30 March 1999, following action by the debt collector, payment of $50,000 was made.  Payment of the final outstanding amount of $150,000 was made on 3 May 1999.

1. By letter dated 26 February 1999, AWB again wrote to Water Wheel complaining of late payments.  The sum of $104,930.74 was overdue for payment, and AWB indicated that Water Wheel’s credit limit might be reduced or withdrawn.

(g)      March 1999

1. The amount requested by AWB remained unpaid and by letter to Water Wheel dated 10 March 1999, marked for the attention of Harrison, AWB said, inter alia:

“It has been brought to my attention that your recent payment record has been somewhat tardy with the AWB’s invoices being paid every 45 days on average based on the payment of the last 20 invoices.

As you are no doubt aware, the AWB’s standard trading terms are strictly payable 30 days from the week end of delivery.

…

I advise that unless the sum of $104,930.74 is paid […] by 17 March 1999, I have been instructed to issue legal proceedings for recovery of the same without notice.  …”

1. Shortly after 10 March 1999, AWB decided that Water Wheel’s credit limit was to be deactivated and that all future grain sales would be on a cash with order basis.  The outstanding sum was paid by Water Wheel on or about 17 March 1999.

1. On 9 March 1999, Harrison advised the ASX that Water Wheel should be in a position to lodge its annual accounts by 16 March 1999.

1. The Board of Directors of Water Wheel met on 12 March 1999.  Present at the meeting were Harrison, Elliott, Plymin and John Gross.  In attendance were Nankervis and Mark Gross.  Calvert-Jones was not in attendance.  The minutes record that Plymin outlined the results of the investigations into the “discrepancies” in the 1998 Annual Statutory Accounts.  The minutes further record that Brown of Deloittes was invited to present his view on the investigations and his view is summarised as being that “[w]hile a number of possibilities had been eliminated, there were no satisfactory explanations for the apparent discrepancies”.  At that stage, Brown did not express any opinion to the Board as to the reasons for the loss.  John Gross recommended (according to the minutes) that the company, with the help of Deloittes, undertake further investigation.

1. Presumably the “discrepancies” referred to in these minutes are the same things described earlier as “anomalies”, but again, as far as the evidence goes, the discrepancies cannot be identified unless it is simply a reference to the discrepancy between the large loss reported by the auditors and the large profit expected by the directors. 

1. At the meeting on 12 March 1999, Nankervis informed the Board “of the Group’s tightening liquidity, the increased legal recourse suppliers were taking to recover debts and the difficulty being experienced in paying debts when they fell due”, which Nankervis said to the Board raised concerns that Water Wheel might be insolvent.  One or more of the directors made statements to Nankervis which were to the effect that the Board were aware of the situation, they better appreciated the nature of the grain industry than he did, but they acknowledged that there was a “funding issue” to be dealt with and were considering options to address it, ranging from a proposed equity injection, additional debt finance, or selling parts of the business. 

1. At the meeting on 12 March 1999, Mark Gross[8] presented to the Board a memorandum of that date entitled “Rice Expansion”.  In the memorandum he noted that the expected results for 1998 [ie, the large loss] were most likely going to have a material impact on the future fundraising capabilities of the company [ie, set them back] and hence materially influence any proposed rice expansion [ie, make it more difficult to finance any proposed rice expansion].  The memorandum sought to address only the immediate issues facing Water Wheel for the 1999 harvest.  The memorandum noted that a total of 8,500 tonnes of Victorian grain was expected in the 1999 harvest, all of which was expected to be purchased by Water Wheel; that there had been no public announcement as to the form or timing of the proposed deregulation of the rice industry; and that Water Wheel’s offer to purchase 35,000 tonnes of dried paddy from RiceGrowers had not been accepted.  The memorandum went on to assess that if Water Wheel was restricted to Victorian rice purchases, and taking into account that Water Wheel had committed capital expenditure of $900,000 for the upgrade of Mitiamo facilities, “[a]n annual negative cashflow of approximately $670,000 would be anticipated”.  The memorandum went on to consider the commercial and legal implications of an attempt to break RiceGrowers’ legal monopoly in NSW (should RiceGrowers not reach agreement with Water Wheel for the sale of grain).  The memorandum noted that Water Wheel’s existing rice infrastructure had a relatively high fixed cost and therefore all incremental tonnage was beneficial. 

   [8]In the middle of February 1999, a paper by Mark Gross containing an interesting review of the world rice industry and of Water Wheel’s rice operations was circulated to all directors.  The paper is undated but on 5 February 1999 Plymin sent a memorandum to the other Board members attaching a letter from the Office of the Federal Treasurer and noting that “the Rice Strategy Paper will be circulated next week”.  Plymin’s note records his conversation with an Alistair Davey of the Federal Treasurer’s Office who told Plymin that deregulation would take many months and “not before the end of the year”.  Gross’s paper noted (at p 23) that “Depending on the form of deregulation of the rice industry, Water Wheel’s export opportunities might be limited” and that “Upon deregulation other competitors may enter the market”.

1. After attending the Water Wheel Board meeting on 12 March, Brown and a team from Deloittes attended at Water Wheel’s mill at Bridgewater on Saturday 13 March 1999.  Deloittes’ investigations discovered that:

·     the Water Wheel computer system reported that all orders input into the system (other than current orders) had been invoiced;

·     an analysis of wheat purchases, and gross margins on wheat sales, disclosed that Water Wheel’s gross margin had suffered a significant deterioration;

·     an analysis of Water Wheel’s operating expenditure for the 6 months to 3 December 1998 revealed that Water Wheel’s expenses had increased by approximately $1.2 million in the period.

1. In the week after he returned from Bridgewater, Brown had a meeting with Plymin. During this meeting, he explained to Plymin that Deloittes’ review of sales invoicing procedures at the mill did not reveal any major weaknesses.  Brown also showed Plymin the analysis of additional expenditure of $1.2M in the second half of the financial year compared with the first half of the financial year.  Plymin did not disagree but stated that Water Wheel had achieved a greater volume of sales than that being shown in the draft accounts.  Plymin said that his view was based on calculations that he had done, using his own understanding of costs and the volume of wheat purchased and processed.

1. Brown decided to do further work to find out if Plymin’s belief could be supported by delivery and invoice records.  Plymin had told him that all transport was carried out using Neil’s Transport.  Deloittes obtained all Neil’s Transport invoices from the mill, which recorded Water Wheel’s delivery docket numbers and randomly selected items to confirm that selected items were recorded in the computer system as sales.  A number of test checks were performed and none revealed any unrecorded sales.

1. On 16 March 1999, Harrison informed the ASX that Water Wheel would not be lodging its annual accounts by March 16, 1999, as previously advised, but would do so “at the earliest opportunity”.  He also advised the ASX that the review of the annual accounts by Deloittes, who had been appointed to “investigate anomalies identified in the annual accounts during the commissioning of a new computer system to ensure that the Company is Year 2000 compliant”, was continuing.

1. In as early as October 1998,[9] the Water Wheel Board had set out the form of information which it required for future Board meetings, including monthly cashflow statements and profit and loss statements in relation to each division of Water Wheel’s business, viz. flour, stockfeed and rice.  Elliott testified that by March 1999, the Board was still not being supplied with such statements.  Elliott said that by March 1999, the directors had not been given any progressive trading results for the period beyond 3 December 1998.  He agreed that the provision of accurate, informative and timely management accounts and proper cashflow statements were “standard things that you would expect” and that it was important for the directors to know whether the company was making continuing losses from December 1998 to March 1999, but he said that he considered that the “un-invoiced sales problem” was more important, and the critical matter to resolve first.  He did not explain why both matters could not have been dealt with at the same time.

   [9]See para [25].

1. On or about 16 March 1999, HPW issued an “audit management letter” to the directors of Water Wheel.  The letter, according to Wales, outlined matters identified during the course of the 1998 year audit which, whilst not serious enough to warrant qualification of the accounts, were serious enough to bring to the Board’s attention.  On or about 16 March 1999, Wales visited Harrison at his office and handed to him a copy of the audit management letter.  It was also handed or posted to Plymin.  Neither Elliott nor Calvert-Jones had any recollection of seeing the audit management letter or of hearing about it.  It would seem that neither Harrison nor Plymin took any steps to supply the other directors with a copy of the audit management letter or to advise them of its existence.  The audit management letter, which was 28 pages long, set out the auditors’ belief that there were a number of areas that needed “urgent attention to enable an acceptable standard of internal control and reporting systems to be put in place”.  The letter raised issues in respect of Water Wheel’s internal controls and accounting procedures.

1. The covering letter dated 16 March 1999 addressed to the directors of Water Wheel, which accompanied the audit management letter, offered to discuss in greater detail the matters reported if the directors so required and sought “your written response to these matters so as to assist us to plan future audits”.  However, Harrison and Plymin did not invite Wales to discuss the matters raised with them nor was any written response to the audit management letter received by HPW.  According to Wales, he did not receive either a written or “any meaningful oral response” to the audit management letter.

1. On 18 March 1999, a meeting of the Board of Directors was held at Elliott’s office which was situated at Level 1, 411 Collins Street Melbourne.  Present at the meeting were Harrison, Plymin, Elliott and Calvert-Jones.  Nankervis was also in attendance.  The minutes record that the meeting was informed as to the progress of “the investigation” with the loss now approximately $800,000 compared to the February situation of $2,400,000.[10]  I note that by this stage, the auditors had completed their audit of the 3 December 1998 full year accounts.  The audited loss for the year was $878,889.  The Board papers for this meeting included an Appendix 4B report for the period ended 3 December 1998 showing an operating loss of $879,000.  The minutes went on to record that a profit report by major product groups was presented to the meeting and that this report isolated the flour section as the area generating the loss.

   [10]It is unclear where the latter figure comes from, or whether it is simply a mistake, as the auditor advised in February that a loss in the region of $1.5M had been made.

1. On 23 March 1999, there was a meeting of the Board of Water Wheel at which were present Harrison, Plymin, Elliott, Calvert-Jones and John Gross, and in attendance was Nankervis.  The minutes record that the meeting was informed (presumably by Plymin) as to the results of the continuing investigation into the “discrepancies” in the 1998 Annual Accounts and that, although no further adjustments had been recorded, “both stock discrepancies and inaccurate reconciliations have been identified”.  The Board resolved to continue to employ Deloittes to manage the investigation and to appoint “a special investigator to review securing procedures at the mill”.  The directors were presented with a summary of the audited results for the year ended 3 December 1998.  Nankervis testified that the directors discussed the large losses incurred by Water Wheel in the previous financial year and the possibility of stock having been stolen or deliveries not recorded rather than there being errors in the financial accounts.  The Board resolved to apply for an extension of time for the holding of the Annual General Meeting and for the lodgement of the 1998 Annual Accounts.

1. On 31 March 1999 Plymin informed the ASX by letter that Water Wheel had sought and received an extension from ASIC of the deadline for financial reporting until 3 May 1999, and an extension of the deadline by which Water Wheel had to hold its Annual General Meeting from 3 May 1999 to no later than 3 June 1999.  The letter went on to state that “the extensions were required to ensure that a full and thorough investigation of anomalies identified in the 1998 year-end accounts could be completed” and that the anomalies had now been identified “as relating to volume discrepancies between flour production and sales“.  As far as the evidence goes, there does not appear to have been any basis for stating that any so-called anomalies had been identified as relating to “volume discrepancies” between flour production and sales – certainly I am satisfied that Deloittes had reached no such conclusion.  Nor, by this time, did the auditors consider that there were any anomalies or discrepancies requiring explanation. 

1. In or about March 1999, Neil of Neil’s Transport complained on the telephone to Plymin about how slow Water Wheel was in paying invoices.  Plymin told Neil that he was working on the basis that Neil’s Transport was undertaking about $200,000 worth of work per month for Water Wheel and he was treating all accounts as being 60 day accounts so that at any one time Water Wheel would owe Neil’s Transport about $400,000.  In fact, during the period that Neil’s Transport was trading with Water Wheel, it was rare that invoices would be paid by Water Wheel within 75 days, and it was not unusual for the debt outstanding by Water Wheel to Neil’s Transport to be $500,000 or more. 

(h)      April 1999

1. Nankervis testified, and I accept, that during March and April 1999, many trade creditors of Water Wheel were demanding immediate action on their overdue accounts and that in order to have the cash to meet such demands, he and Plymin and other employees were trying all means possible to achieve speedy debt collection.  Nankervis said that, during his time with Water Wheel, he had discussions on a regular basis with Plymin regarding liquidity.  He would receive telephone calls from a number of creditors each day seeking payment, and would speak to Plymin almost daily about which of the creditors were to be paid and as to the source of funds for such payments.  Nankervis prepared, at the request of Plymin, a daily summary of the cash position of Water Wheel.  At or about the start of April 1999, Nankervis prepared a table summarising instalment payments agreed by Water Wheel with some of its creditors and showing payment commitments taking priority over the next few weeks.  A typical table is in evidence, showing instalment promises made to some 14 creditors totalling $1,127,218 and providing for payment by instalments on one or more of the following dates: 14 May, 21 May, 28 May and 4 June. 

1. Nankervis also testified that Powercor, Water Wheel’s electricity supplier, had in March or early April 1999 threatened to stop supply unless a large debt was paid within two hours.  That debt was paid but it is convenient to note here that the evidence shows that Water Wheel’s account with Powercor was consistently in debit and overdue for payment from July 1999 onwards.  The overall pattern shown by the account is that payments of $12,000 to $15,000 were made by Water Wheel at approximately monthly intervals, that the amount due to Powercor between 20 July 1999 and 1 October 1999 was never lower than $30,822.41 and that in the period from 18 October 1999 to 22 November 1999 it was never lower than $43,690.51.  After November 1999, the outstanding account at all times exceeded $100,000.  I specifically note that on 24 September 1999, after payment of the sum of $15,000, the balance of account due was $44,617.35, representing the August electricity account and half of the July electricity account. 

1. By mid-March 1999 (or at the latest by April 1999) Nankervis had found that Water Wheel was under “continual pressure from creditors to pay accounts” and had ascertained that Water Wheel “would need at least $2M to relieve the pressure from the cashflow point of view.”  Nankervis had also ascertained that “creditors between 90 and 100 days were running at around one million dollars.”  His $2M estimate was derived by Nankervis from three components: cheques drawn up and held by Water Wheel “in drawers” ($0.5M), creditors between 90 and 100 days ($1M) and 4-5 months old purchases by other creditors as yet unrecorded (mainly NSWGB) ($0.5M).  The cheques held in drawers represented debts treated in the Water Wheel accounting system as paid but for which there were no funds available, from bank overdraft or otherwise, to honour the cheques.[11] 

   [11]Compare the similar facts in Lee Kong v Pilkington (Aust.) Limited (1997) 25 ACSR 103.

1. By 12 April 1999, Nankervis’ concerns about the continued financial viability of Water Wheel had increased.  He was also concerned about his own legal position as the General Manager, Finance and Administration.  Indeed on 9 April 1999, Nankervis had written to his solicitor, Mr Peter Kennedy of Madgwicks, stating inter alia:

“The company is making losses that they were not previously aware of.

The company has a severe cashflow shortage.  It appears to be unable to meet is [sic] obligations when they fall due within normal trading terms:

Trade creditors are on average 90 – 120 days trading terms.  This situation appears to have been in existence for at least the last 6 – 12 months and getting worse.

As Creditors place the company on Stop Credit, the situation gets worse.

The company is currently suspected [sic] from trading on the ASX & has deferred its AGM.  This causes shareholder concerns and heightens creditor fears…

…In my view the company is trading dangerously close to insolvency.”

“I receive a number of calls from irate creditors and concerned shareholders on a daily basis”

1. A Board meeting was held on 12 April 1999 at which were present Harrison, Plymin, Elliott, Calvert-Jones and John Gross, and Nankervis was in attendance for part of the meeting. 

1. Mark Gross provided a further memorandum entitled “Rice Expansion” (dated 30 March 1999) to the Board at this 12 April meeting.  The memorandum stated:

“1.Further to the Directors meeting on Friday 12 March, [Water Wheel] have been informed by VicGrain that they are not prepared to provide off balance sheet finance for rice paddy purchases.  In addition, [Derrick & Son] and [NSWGB] the current providers of off-balance sheet finance have for both rice and wheat purchases respectively have also advised that any expansion or even an extension of existing facilities beyond 30 June 1999 is unlikely.

2.Victorian paddy for the 1999 harvest is estimated to cost $2.8 million and current off balance sheet funding is $4.1 million.  Of this approximately $2.5 million is paddy and $1.6 million is wheat.  Based on our preliminary numbers we estimate a cashflow deficit for grain funding of $3.7 million by June 1999.

3.In addition [NSWGB] has refused to re-finance a further $0.8 million in wheat purchases for [Water Wheel] and a further $1.2 million in cash is required to bring existing creditors in line with agreed trading terms.

4.As a result [Water Wheel] needs approximately $5.7 million in working capital.  Furthermore [Water Wheel] has planned capital expenditure (including rice, flour packing line) of $3.8 million of which $0.9 million, for the Mitiamo expansion has already been committed.

5.As a result we believe [Water Wheel] may need to raise approximately $6.5 million in new equity and additional $3.0 million in debt facilities.

6.It is important to note that these are preliminary numbers only.  A 1999 or 2000 budget has not been fully developed and more work is required to determine the exact future funding requirements of [Water Wheel].

7.This memo seeks to inform Directors that additional equity will most likely be required and give the lengthy equity raising process recommend that the equity raising process be initiated as soon as possible.”

[emphases added]

1. A copy of the Gross memorandum was produced to ASIC from the possession of Elliott and Elliott testified that he had read the document prior to the Board meeting.  Elliott said that management (ie, Plymin) had agreed with the statement in the memorandum that “a further $1.2M in cash is required to bring existing creditors in line with agreed trading terms”.  When cross-examined about the statement that Water Wheel needed approximately $5.7M in working capital, I thought that Elliott was evasive about Water Wheel’s need for working capital and was reluctant to concede that the directors had decided to find additional funding in order to bring existing trade creditors into line.  However, Elliott acknowledged in his evidence that it was critical for Water Wheel to obtain rice supplies from RiceGrowers in NSW and to do so quickly. 

1. A copy of the Gross memorandum was also produced to ASIC by Calvert-Jones, which bore the following notation in Calvert-Jones’ handwriting:

“Issues  Raise only enough to keep the business going.  We are in survival mode.”

1. The 12 April meeting commenced by Plymin giving the directors a report on the activities of the company and during that early part of the meeting, Calvert-Jones asked whether Water Wheel was solvent and received an answer from Plymin in the affirmative.  Elliott recalled that Calvert-Jones also voiced a concern that the directors had not yet seen any current results from the first three months of 1999. 

1. I interpolate that on the morning of the Board meeting Nankervis had obtained oral advice from his solicitor in response to his above letter, and arrived late for work to discover that a Board meeting was in progress, and that he was required to attend, which he did at about 10:30 am.  Nankervis took handwritten notes during the meeting which he typed up shortly after the meeting. 

1. After Nankervis’ arrival, financial matters affecting the company were discussed in more detail.  Nankervis provided the directors with figures relating to debtors and creditors (which were recorded by Calvert-Jones in his notebook).  Nankervis told the Board in substance that Water Wheel could not meet creditors on reasonably accepted credit terms, that nine legal demands from creditors had been received from creditors over the past few weeks and that Water Wheel needed $2M of funds to keep the business going.  The directors discussed the issue of a possible capital raising by Water Wheel and the difficulty of raising further equity created by the poor financial results.  The Board resolved to defer capital expenditure proposals.  According to Nankervis’ notes, which I accept to be accurate, the deferral was in substance expressed to be “while [Water Wheel] was experiencing financial liquidity problems”.  The topic of Water Wheel’s superannuation payments for its employees was also raised (see below).

1. During the meeting, Plymin advised the Board that there was a likelihood that Derrick & Son and NSWGB would not provide funding for the new season (the year commencing May 1999).  I interpolate that Nankervis testified that the likely non-renewal of such funding had been communicated to Nankervis by his counterparts at Derrick & Son and NSWGB on a number of occasions during telephone conversations concerning moneys owed to them by Water Wheel which were overdue.  Plymin went on to say in substance that the he had had discussions with the ANZ Bank and with GE Capital with a view to them replacing the previous financiers, but it was unlikely that either of them were prepared to do so.  Elliott undertook to investigate possible funding arrangements with a finance provider, Prime Mortgage. 

1. Nankervis testified, and I accept, that during the meeting he was asked by Calvert-Jones about the “liquidity status” of Water Wheel and that he replied that Water Wheel had a shortfall in liquidity of a minimum of $2M.  Calvert-Jones confirmed Nankervis’ evidence to this effect.  Nankervis went on to say in substance that Water Wheel was not able to pay creditors within normally accepted trading terms, and uttered words to the effect that initial legal advice indicated that this constituted trading while insolvent.  Calvert-Jones also asked whether Water Wheel’s superannuation contributions for employees were up to date, and Nankervis replied that Water Wheel was three months behind in paying those contributions. 

1. Calvert-Jones, had come to Australia in 1965 and worked as a stockbroker.  He became the chairman and chief executive of an American owned stockbroking and investment banking company (Prudential Bache Securities) which was involved in all aspects of financial markets, with offices around Australia and in other parts of the world.  He was with that company for 28 years.  He was a director of Cochlear Limited from December 1995 to late 1999.  He had been a director of a number of other public companies.  Calvert-Jones came to the meeting with handwritten notes containing a number of questions, which read, inter alia, as follows (the italicised parts are those added by Calvert-Jones during the meeting):

“1.  What are the issues we have to have an answer to by end of meeting?  Off bal sheet financing – capital needed – final ¼ results – cash flow – announcement to ASX update – how long can we keep operating?  Are we solvent?

…

4.  What is the basic amount we need to survive?  2 million

Cashflow requirements for 12 months – critical.

Capital requirements   Do we have a starting point?

…

6.  Do we have confidence in management? Stephen [Nankervis] etc.

…

What is my duty to the [shareholders] as a whole?

…

10. Ÿ Can the Company meet its commitments?

Ÿ Other outstanding accounts?  Behind?  CR $1 mil 90 days + YES See notebook

…

12. Are superannuation contributions – up to date?  Stephen [Nankervis] - 3 months behind

…

17. What other information should we have before us?

18. Current operating issues.

not enough rice

\ can we earn a profit this year?”

1. Calvert-Jones testified that between 3 December 1998 and 12 April 1999 the Board had not been provided with any progressive trading results, whether monthly or quarterly, so he did not know whether the Group was trading profitably or at a loss during the first 4 months of the 1998-1999 year.  Calvert-Jones, in addition to the notes on his memorandum referred to above, wrote in his notebook during the meeting, inter alia, as follows:

“…2/  Are we solvent?             Yes

…

[Here there are notes relating to the amounts and aging of debtors and creditors – followed by:]

\need $2 mil of funds

What we have lost…

Stephen [Nankervis]: ‘Cannot meet CRs on reasonably accepted credit terms’

NB St [Nankervis] definitely edgy. Body language…

9 legal demands from creditors over past few weeks.

…

Superfund payments

Company may be behind by 3 months.

This will be checked.

…

Key issues

Don’t know where we are financially.  Solvency?

Unlikely to subscribe to new issue

Management ??

I don’t know about the insolvency situation

Low business controls.  Management and information services still being installed.

long term                before fixed

Concerns can’t be satisfied…

Key issues

ŸIn view of Finance Manager “the Company cannot meet its creditors on reasonably accepted credit terms.”

Ÿ        Nine legal demands from creditors over past few weeks

Ÿ        In my view doubtful that Debtors numbers are correct

ŸNo figures since January for a public Company            Where are we financially??

Ÿ        Not comfortable that the Banks really know where we are.

ŸConcern our management’s ability to see the company through this phase

Ÿ        3 months behind in super payments

Ÿ        We will not meet our rice targets

ŸFearful that Deryk [sic] & Son + NSW Grain will not continue off b/s funding

ŸLast Board meeting we are promised cash flows for 12 months plus annual prelim profit – none available…

ŸSFA [Sea First Australia, Calvert-Jones’s family company] will not be subscribing to the any new issue

ŸLow business Controls.  Management and information services still be installed.  In view of Stephen.  Long term before fixed.

ŸIn summary I do not have confidence that the Company can meet its obligations

Decision to resign now while there is still hope that the Company can survive.  Wait until confronted by results -.-

Ÿ        I am will be personally vulnerable if I stay.

Been very loose financially.”

1. The minutes of the Board meeting of 12 April 1999 record that the rice strategy paper was presented to the meeting, “[t]he key elements being the small tonnage available would only contribute approx. $250,000”.  The minutes further record under the topic “Off-Balance Sheet Funding” that the meeting was informed “as to the status of both the rice and wheat facilities” and that the “rice facility expires at the end of April”, and that the Board instructed Elliott and Plymin to negotiate an extension of the rice facility.  Under the topic of “Cash Flow”, the minutes record that “the Board was informed as to the daily cash position of [Water Wheel] and although the seasonal influences had contributed to tightness in liquidity, [Water Wheel] was continuing to trade in a solvent manner”.  The minutes go on to note that Plymin was instructed to negotiate a review of facilities with the ANZ Bank and to investigate alternatives to the off-balance sheet funding arrangements. 

1. By letter dated 14 April 1999, Calvert-Jones tendered his resignation as a director.  His letter of resignation gave no reason for resigning.  Elliott testified that he did not see Calvert-Jones’ resignation as a warning sign that Water Wheel was heading towards insolvency. 

1. On 19 April, Nankervis tendered his resignation, to take effect on 30 April 1999.  His letter of resignation, addressed to the Board of Directors and dated 16 April 1999, was tabled at a Board meeting on 19 April 1999.  In his letter he stated as follows:

”It appears that the company is unable to meet its obligations when they fall due within normal trading terms as indicated by a high and permanent proportion of creditors remaining in the 90 – 120 day trading terms…

I have kept the Managing Director informed on…material facts as they have unfolded on a daily basis.  These circumstances portray a very bleak view of the long-term viability of the organization and raise concerns of the company trading while insolent [sic].  A concern that I expressed at the March 12^th Board meeting.  These concerns have prompted me to obtain legal clarification on what constitutes “the ability to meet obligations when they fall due.”

Legal advice sought has confirmed that the present circumstances in which the company is trading would be viewed by the courts are [sic] trading while insolvent.  This places the management of the organization in a position of being personally liable in the event that the company was to be liquidated.  No comfort can be taken from the fact that the company has Directors & Officers Indemnity Insurance.  Trading while insolvent is a criminal offence and will not be covered by such a policy.

When again asked for my opinion at the board meeting held on Monday (12^th April 1999), regarding the status of the company’s trading ability, I informed the board that the status had not changed, and that legal advice indicated that the company would be regarded as trading while insolvent.  This position cannot be rectified without an immediate injection of funds. I question the ability of the organisation to continue trading until the proposed AGM on 3^rd June 1999, where the company will be seeking approval for an equity raising…

It appears that the company is unable to meet its obligations when they fall due within normal trading terms as indicated by a high and permanent proportion of creditors remaining in the 90-120 day trading terms…continual telephone calls from irate suppliers demanding long outstanding accounts to be settled”.

1. The Board of Water Wheel met on 19 April 1999.  The directors present were Harrison, Plymin and John Gross, and an apology was received from Elliott.  Also in attendance at the meeting were Nankervis, Rosedale and Brown.  Letters of resignation from Calvert-Jones and Nankervis were tabled and accepted.  Nankervis attended parts of the meeting and gave the Board a summary of his reasons for resigning, as outlined in his letter.  He was asked to leave the meeting for a short period, and when he returned he was informed that his resignation had been accepted.  He was then asked how long it would take to provide the Board with the first 4 months trading results for the year commencing 4 December 1998.  He advised it would take only a few hours.  He left and returned about 2½ hours later with the requested trading results, which took the form of a balance sheet and profit and loss statement produced by the computer accounting system.  They showed trading losses of the order of $500,000 per month, i.e. a loss of approximately $2M from the 4 months trading to 3 April 1999.  Concerns were expressed by members of the Board about the poor trading results.  The Board resolved to convene a further meeting the next day to discuss the trading results.

1. By letter dated 19 April 1999, Plymin informed the ASX that Water Wheel had accepted the resignation of Calvert-Jones as a director but made no reference to the acceptance of Nankervis’ resignation as General Manager, Finance and Administration.

1. The Board met again on the following day (20 April 1999).  Present were Harrison, Plymin, Elliott and John Gross, and Rosedale and Brown were in attendance.  Nankervis attended for part of the meeting.  The minutes record that current cash position (as provided by Nankervis) was as follows:

·     Collectible debtors $6,600,000

·     Payable creditors $6,300,000

·     Net off-balance sheet funding $3,200,000 (supported by wheat and rice stocks)

·     Current stocks $4,100,000 (excluding those funded off-balance sheet)

1. In addition to this summary cash position, the Board was presented with a balance sheet and profit and loss statement for the 4 months to the end of March 1999.

1. Nankervis was asked at the Board meeting why “he” (Water Wheel) was not able to pay debts as and when they fell due, given that debtors appeared to outweigh creditors.  He replied in substance as follows:

“The debtors are only 0-30 days old, whereas our creditors are up to 120 days old.  This difference in timing causes cash flow problems.  It is not sufficient in assessing whether the company is solvent to simply compare the figures for total debtors and total creditors.  It is also necessary to inquire into the maturity of the respective amounts.”

1. At the 20 April meeting the Board instructed management to implement a cost reduction program and a profit improvement program, to prepare a detailed full year forecast of cash flow and profit and to identify assets that could be sold.  The minutes go on to state that:

“Following a review of all current assets and liabilities, the Board is of the opinion that the Company is in a solvent position.  Management is to continually review and monitor the current assets and advise the Board if there is a material variance to this position.”

1. Nankervis was not asked to stay at the meeting for any length of time but no view about solvency was expressed while he was present.

1. Brown of Deloittes also attended the 20 April Board meeting.  Brown advised the Board (including all three defendants) that Deloittes had not been able to discover any unrecorded sales but he probably also said that it was not possible to conclude definitively that no sales were omitted because of the state of the computer accounting system.  Elliott testified that he could not recall what Brown said at this meeting, but that “he hadn’t found the solution to the problem, I agree with that”.  I accept Brown’s evidence, and I am satisfied that Elliott learned from Brown’s statement at the meeting that no evidence of un-invoiced sales had been discovered, albeit that Brown did not definitively exclude that possibility.  When Elliott was asked in cross-examination whether he knew that the auditors were saying that there was nothing to support the idea that there were un-invoiced or unrecorded sales, he gave an unresponsive answer and added “I must admit I was getting more and more annoyed with them all because nobody seemed to be coming up with any rational explanation”.  I am satisfied that Elliott knew that neither Brown nor the auditors had found any evidence for the existence of un-invoiced sales and certainly none of the order of $1.2M. 

1. The Board meeting ran from 9.00am until close to lunch time. Elliott recalled that the directors were shown results indicating losses for the first three months of 1999 in the order of $500,000 per month. In response to a question in cross-examination as to whether these losses must have been a serious concern, Elliott answered that the same problem of un-invoiced sales might have been continuing into 1999. During the meeting, Brown was asked to arrange for an insolvency expert from Deloittes to attend the meeting to advise the Board. Brown left the meeting and by telephone arranged for Mr Wallace-Smith of Deloittes to attend. When he arrived, Mr Wallace-Smith addressed the Board on the general concept of solvency, and the operation of the voluntary administration provisions of the Corporations Law. The evidence does not disclose the details of what was said by Mr Wallace-Smith. Elliott said that Harrison organised the attendance of Wallace-Smith and that he (Elliott) was not at this stage concerned about the solvency of Water Wheel. It is very hard to accept that the directors, including Elliott, could not have been concerned about the solvency of Water Wheel, having regard to the report of continuing losses and the request for Mr Wallace-Smith to advise the Board on the concept of solvency and the operation of voluntary administrations.

1. Deloittes took no further steps in relation to the December 1998 accounts.  It is convenient to note here that Water Wheel failed to pay to Deloittes a total debt of $62,791.57[12] of which a substantial part related to the investigations concerning the “missing sales”. 

   [12]The relevant invoices bear dates from 30 March 1999 to 2 June 1999.

1. On 22 April 1999, Allen of AWB again found it necessary to write to Water Wheel requesting that an outstanding sum of $130,964.87 be paid.  This amount related to four deliveries of grain that were made prior to AWB’s decision to deactivate Mills’ credit facility[13], but were invoiced after that time.  The amount was not paid by Mills until 5 May 1999.

   [13]See above para [43].

1. On 23 April 1999, Plymin wrote a memorandum to Edwards of the ANZ Bank.  The memorandum stated, under the heading “Overview”, that Water Wheel was seeking to obtain an additional $2.9M in “seasonal finance facilities” and that the funds were required to purchase paddy rice from Victorian growers and “meet existing unsecured trading creditors of the company”, that the company was “in advanced discussions to sell its stockfeed business” and that the company was continuing to reduce staff and maximise “operating efficiencies to bring the business back into profitability”.  Under the heading “Cash Requirements”, the memorandum stated that Water Wheel required $2.9M to acquire this years’ Victorian rice crop and “to bring existing trade creditors in line with agreed trading terms”.  The memorandum explained that $1.9M was required to complete the purchase of the rice crop and $1M represented the approximate amount of “outstanding creditors, over 90 days”. The memorandum stated:

“18.WWH has made an unexpected loss of $800,000 for the 12 month period ending 3 December 1998.  Management, the auditors and the independent advisers are still confused as to why the loss has occurred.  Investigations continue.

19.Trading for the first four months to the end of March is good in terms of sales but our liquidity position is outlined above.”

20.To address the current issues facing the company, management has instituted a profit improvement program, which among other things includes staff reduction of approximately 14 staff.  Management is confident that with the additional facilities the company will be able to meet its future obligations and trade profitably or at least breakeven as assumed in our forecasts above.”

1. The memorandum concluded by saying that in order to negotiate the highest price for the stockfeed business Water Wheel needed to be in a position of financial strength and “to this end the company needs to bring its creditors back into trading terms and needs the support of ANZ to do so”. Apparently, the ANZ Bank required further information from Water Wheel, but it ultimately did not agree to Water Wheel’s request for additional finance.

1. A copy of the Plymin memorandum was produced by Elliott to ASIC in the course of its investigation.  When asked about this memorandum in cross-examination, Elliott emphasised the reference in it to funding the rice crop and sought to avoid the point that the money was also required to meet existing unsecured trade creditors.  Elliott said that he was aware at the time of the fact stated in the memorandum that Water Wheel had outstanding creditors, over 90 days, of approximately $1M.  Elliott commented that the creditors included his company, and he was not concerned.  Elliott tended to be evasive concerning the Board’s discussion about the need for additional equity, saying in effect that Mark Gross was interested in that as a financial consultant and broker, but that the directors were more interested in finalising the previous year’s accounts. 

1. The Board met again on 26 April 1999 and the directors present were Harrison, Plymin and Elliott.  Plymin informed the others that the ANZ Bank had been asked for $2.9M “to replace the rice off-balance sheet funding” and that further information was required by the Bank before approval would be given.  The “daily cash position” was noted in the minutes as follows:

- Collectible debtors $6,340,669

- Payable creditors    $6,066,163

- Surplus                   $   274,506

There was no reference to the age of the debtors or the creditors.

1. At the 26 April meeting Elliott informed the Board as to his negotiations with RiceGrowers regarding additional supplies of paddy rice.

1. On 30 April  1999, Water Wheel sought and received from ASIC a further extension of the deadline for financial reporting and the holding of the Annual General Meeting to no later than 30 July 1999.

(i)       May 1999

1. The next Board meeting took place on 3 May 1999 and present were Harrison, Plymin, Elliott, and John Gross.  The minutes recorded that Plymin informed the meeting that the investigation had revealed that the shortfall appeared to be non-invoiced product and that investigations were to continue to check source documentation in order to identify products and customers.  The minutes also show that Plymin informed the meeting that:

(a)the excess of debtors over creditors was $148,500;

(b)Communicat had been engaged to install a digital line between Bridgewater and Melbourne;

(c)Derrick & Son had agreed to finance all Victorian rice purchases under a new funding contract commencing May 1999 and ending on 30 April 2000;

(d)discussions with the ANZ Bank about all facility requirements were continuing.

1. On 5 May 1999, Harrison stated to both shareholders and to the ASX, in relation to “accounting discrepancies” in connection with the 1998 year end accounts:

“Water Wheel Holdings Limited wishes to advise shareholders that it has made significant progress in resolving the accounting discrepancies that came to light in preparation of the 1998 year-end accounts.

Company staff assisted by consulting firm Deloitte Touche Tohmatsu have identified the problem which led to the delay in publishing the accounts as one involving electronic data systems.  Investigations of product costing and security arrangements have eliminated other areas of potential concern.

The extensive investigation has narrowed the cause to the communications link between the mill site at Bridgewater and Head Office in Melbourne.  Data has been lost through interruptions to the link and consequently certain invoices have not been raised.  These discrepancies surfaced during the audit program in February and identified in late April 1999. 

1. Further, in my opinion, whatever might be the position in criminal proceedings, in a proceeding governed by the rules of evidence and procedure in civil matters, there was no obligation upon ASIC to call Harrison, Plymin or Carnie, or any other persons as witnesses.  In any event, the second defendant would have been well aware of the matters as to which the other directors might give evidence and, in the case of Harrison and Plymin, they were co-defendants in the proceeding.  I perceive no unfairness resulting from ASIC’s failure to call the other directors. 

1. Presumably it would not be the case that any breach, however trivial, of the alleged duty to act with prosecutorial fairness would amount to a miscarriage of justice or vitiate the proceeding in such a way as to call for a new trial or the dismissal of the proceeding.  The second defendant’s submissions did not seek to elucidate how any and what breach of the alleged duty had resulted in such a miscarriage of justice, or had such a vitiating effect. 

(c)       Jones v Dunkel[84]

[84](1959) 101 CLR 298.

1. It was submitted on behalf of the second defendant that the failure by ASIC to call any of the directors, Harrison, Plymin, Carnie and John Gross, in circumstances where ASIC had conducted examinations of each of them, should give rise to an inference not simply that those persons would not have given evidence that assisted ASIC in making out its case against Elliott, but rather an inference that their evidence would have harmed ASIC’s case. 

1. I do not think that ASIC ought reasonably to have been expected to call these directors.  Harrison and Plymin were co-defendants.  All of the directors were, if anything, in the camp of the defendants, and they were certainly not in ASIC’s camp.  In addition, each of them would have been entitled to rely on their privilege against self-incrimination and against self-exposure to a penalty.  Nor am I able to identify the particular facts and matters in respect of which it might be said that their evidence would not have assisted ASIC, let alone would have harmed ASIC’s case.  The second defendant seemed to be submitting that the issue in respect of which inferences should not be drawn against Elliott as a result of the failure to call these directors was the issue of Elliott’s awareness of reasonable grounds for suspecting insolvency.  The evidence in relation to that issue was for the most part uncontradicted evidence as to what was known by Elliott or learned by him as a result of his attendance at Board or other meetings.  The second defendant did not identify precisely what inferences ought not to be drawn as a result of the “failure” to call these directors.  I note that it was submitted in this regard on behalf of the second defendant that the evidence adduced by ASIC in its case against Elliott failed to give rise to a reasonable and definite inference that Elliott suspected Water Wheel to be insolvent.  That submission is beside the point, because it was not part of ASIC’s case that Elliott had any such suspicion, as opposed to awareness of reasonable grounds for suspecting. 

1. I therefore reject the submission that there should be an inference that any evidence from these directors would have harmed, or would not have assisted, ASIC’s case.

(d)      Sections 588H(2) and (3)

1. Section 588H(2) provides, so far as relevant, that it is a defence if it is proved that, at the time when the debt was incurred, the director has reasonable grounds to expect, and did expect, that the company was solvent at that time. 

1. Section 588H(3) provides, so far as material, that it is a defence if it is proved that, at the time when the debt was incurred, the director:

“(a)had reasonable grounds to believe, and did believe:

(i)that a competent and reliable person (“the other person”) was responsible for providing to the [director] adequate information about whether the company was solvent; and

(ii)that the other person was fulfilling that responsibility; and

(b)expected on the basis of information provided to the [director] by the other person, that the company was solvent at that time…”

1. Neither the first defendant by his defence dated 11 November 2002 nor the second defendant by his amended defence dated 7 October 2002 relied upon the defence contained in s.588H(2).  Nor was this defence referred to in written submissions.  In any event, in my opinion, the defence is not made out because it was not proved that any time during the relevant period that either Plymin or Elliott had reasonable grounds to expect that Water Wheel was solvent.  No doubt it is possible to have a case where a director is aware of reasonable grounds to “suspect” insolvency, but nevertheless has reasonable grounds to “expect” solvency, although such a case would perhaps be unusual.  However, in the present case, it is difficult to identify any reasonable grounds upon which a director might have expected that Water Wheel was solvent during the relevant period and neither the first defendant nor Counsel for the second defendant made any attempt to identify any such grounds. 

1. In paragraph 6 of the second defendant’s said amended defence, it is alleged that at all material times prior to 15 February 2000, Elliott, as he was entitled to do, relied upon information provided to him by the management of Water Wheel (namely Plymin and others), and upon such reports, financial analyses etc. as were provided to him for the purposes of his attendance at Board meetings which information at no time put him on notice that Water Wheel was insolvent or that there were reasonable grounds for suspecting that Water Wheel was insolvent.  Paragraph 6A of the amended defence goes on to allege that at all material times prior to 15 February 2000, Elliott had reason to believe, and did believe, that Plymin either directly or indirectly was responsible for providing to him adequate information about whether the Group was solvent and that Plymin was fulfilling that responsibility and that Elliott expected, on the basis of the information provided to him by or via Plymin, that Water Wheel was solvent and would remain solvent. 

1. Apart from containing a denial that there were reasonable grounds for suspecting that Water Wheel was insolvent, the above paragraphs of the amended defence appear to raise the defence provided for by s.588H(3).  The same paragraphs are repeated, where appropriate, in other parts of the amended defence. 

1. I am not satisfied that Elliott had reasonable grounds to believe that Plymin, or management generally, was fulfilling the responsibility of providing adequate information to him about whether Water Wheel was solvent.  On the contrary, I am satisfied that Elliott did not have any reasonable grounds to so believe and that such information as was provided to him was not adequate enough to provide such reasonable grounds.  For example, Elliott admitted that by late July 1999, he had concerns about the reliability and quality of the financial information being provided to him as a director, and that the form of financial reporting which the Board had asked for in October 1998 was still not forthcoming, and that the Board was not being provided with up to date information about the trading performance and financial position of Water Wheel.[85]

   [85]See too paras [149] and [158] above.

1. Further, I am not satisfied that Elliott, an experienced businessman and company director, who showed himself in the witness box to be a very intelligent and astute individual, did not know at all relevant times that he could and should have obtained from management on a regular basis a list of debtors and creditors by age and amount (including the age and amount of off-balance sheet finance), regular profit and loss and cashflow statements and reports on negotiations (if any) with creditors whose debts were outside trading terms.  I am therefore not satisfied that at any relevant time Elliott believed that Plymin and management generally were competent and reliable persons who were fulfilling the responsibility to provide him with adequate information about whether the company was solvent.  Indeed, having seen and heard Elliott give evidence, I consider that Elliott turned a blind eye to the details of Water Wheel’s liquidity crisis in the hope that “something would turn up” to rescue the company and his own associated financial interests.  In any event, I consider that the evidence negatives the existence of reasonable grounds for Elliott to believe that Plymin was a competent and reliable person within the meaning of s.588H(3).  For example, as already mentioned, Plymin continued to fail to comply with the requirements for financial information laid down by the Board in its meeting of 12 October 1998.  I would also refer to the acquiescence by Plymin in Water Wheel making persistent and often public references to the so-called problem of “un-invoiced sales”, in circumstances where Deloittes and the auditors had been unable to find any evidence to support the existence of un-invoiced sales.  This conduct is suggestive of a person lacking reliability, if not competence.  The provision by Plymin of totally inadequate information to the Board after the receipt of queries from ASIC concerning the solvency of Water Wheel is further suggestive of a person lacking both competence and reliability. 

1. Another element which must be proved in the defence under s.588H(3) (and also in the defence under s.588H(2)) is that the director at the relevant times in fact “expected”[86] that the company was solvent. 

   [86]The word “expect” “requires no substitute to explain it”, but “a measure of confidence is built in”: see Commonwealth Bank of Australia v Friedrich (1991) 5 ACSR 115, 126–7 per Tadgell J; see too Powell v Fryer (2001) 37 ACSR 589, 603.

1. On the whole of the evidence, and notwithstanding Elliott’s assertions in his testimony of his confidence and lack of any concern as to Water Wheel’s financial position and his evidence as to his shock when the true position became undeniable, I am not satisfied that any time on and after 14 September 1999 Elliott expected that, by continuing to trade, Water Wheel was or would be able to pay its debts as and when they fell due. 

1. Turning to the first defendant (Plymin), in paragraph 6 of his defence dated 11 November 2002 (and incorporated by reference in paragraphs 8, 15, 17, 24, 26, 35, 37 and 39 thereof), it is alleged that:

“… at all material times prior to the 17 February 2000 I relied upon information provided to him by the senior financial staff of Holdings and Mills (namely the Financial Controller Wilson) whose responsibility it was to produce monthly management accounts and cashflow forecasts as required.  I refer to the fourth affidavit of David Wilson sworn on the 24 June 2002 and in particular paragraph 9 in which he states that his responsibilities as Financial Controller included the production of monthly management accounts, cashflow projections, budgets and controlling the cashflow of the business.  Furthermore during the period June 1999 to February 2000, PricewaterhouseCoopers (“PWC”) was contracted by the company’s banker’s (“ANZ”) to work with the company to monitor its performance.  At no stage within this period did PWC advise myself or any member of staff or management that the company may have been trading while insolvent.

Furthermore, immediately Wilson and the Auditors (“Hall Puddy and Wales”) had completed the 1999 statutory accounts revealing a consolidated loss of approx $6.8m for the Group, I supported the Board resolution to voluntary administrators.”

1. There is no direct evidence of Plymin’s beliefs or state of mind as alleged at the relevant times.  It is sufficient to say that I am not at all satisfied that at any relevant time Plymin expected, on the basis of information provided to him or otherwise, that Water Wheel was solvent. 

(e)       Admission in evidence of letters from ASIC

1. It was submitted by the second defendant that two letters from ASIC to the Board of Water Wheel should not have been admitted in evidence.  The first letter was the letter to the Board of Directors of Water Wheel dated 16 September 1999, which, among other things, expressed ASIC’s concern about the solvency of Water Wheel and sought advice as to whether Water Wheel was able to pay all its debts as and when they came due.  The second letter was the letter to the Board of Directors of Water Wheel dated 21 October 1999, again expressing concern about the solvency of Water Wheel and seeking advice as to whether Water Wheel was able to pay all its debts as and when they came due.  The basis of the objection was that the admission of the letters was improper or unfair and would materially prejudice the second defendant in obtaining a fair trial, because, in effect the letters were “manipulative” and designed to trap the directors into an awareness of grounds for suspecting insolvency without any warning from ASIC.  The discretion to exclude the material was said to derive from a Bunning v Cross discretion.[87]  I reject this submission for a number of reasons.  First, at the time when these letters were admitted into evidence as part of Exhibit 62 on 19 September 2002, no objection was taken to their admission on these or any other grounds.  Secondly, I do not accept that there was anything manipulative or in the nature of a trap involved in ASIC expressing its concern as to the solvency of Water Wheel to the directors of Water Wheel.  One would have thought that ASIC was doing them a service by putting them on notice to make careful inquiry as to the financial condition of Water Wheel.  Finally, I do not think that the letters add to any evidence of awareness of reasonable grounds for suspecting insolvency.  They simply form part of the circumstances in which the directors were carrying out their duties and no doubt, given the source of the letters, put them on notice of a matter about which they should have been very concerned in any event.  A reasonable director, one would have thought, would have been alerted to an important concern and acted accordingly.

   [87]The cases cited were Ridgeway v R (1995) 184 CLR 19, 36-37; Employment Advocate v Williamson (2001) 111 FCR 20; Southern Equities v Bond (2001) 78 SASR 554s.

(f)       Section 1317JA

1. Section 1317JA(2) empowers the Court to relieve a director either wholly or partly from a liability to which he would otherwise be subject, or that might otherwise be imposed on him, because of the contravention of a civil penalty provision if it appears to the Court that:

“(a)the person has acted honestly; and

(b)having regard to all of the circumstances of the case…the person ought fairly to be excused for the contravention.”

1. I suggested to the parties, and it was agreed, that it was appropriate to defer argument about the application of this section until after the Court had decided whether any contravention or contraventions had been established, and the nature thereof.

1. Conclusions

1. In summary, the Court finds as follows:

(a)The Water Wheel companies, Mills and Holdings, were each insolvent at all times on and between 14 September 1999 and 17 February 2000 (“the relevant period”);

(b)The said Water Wheel companies each incurred various debts during the relevant period (as found above);

(c)The defendants Plymin and Elliott were each directors of the said Water Wheel companies throughout the relevant period and thus were directors when each of the said debts was incurred;

(d)Throughout the relevant period, there were reasonable grounds for suspecting that each of the said Water Wheel companies was insolvent and thus such reasonable grounds existed when each of the said debts was incurred;

(e)The defendants Plymin and Elliott each failed to prevent the said Water Wheel companies from incurring each of the said debts;

(f)The defendants Plymin and Elliott were each aware throughout the said period, and thus at the time that each of the said debts was incurred, of reasonable grounds for suspecting that the Water Wheel company incurring the said debt was insolvent;

(g)At the time of each of the said debts being incurred, a reasonable person in a like position to that of Plymin, in a company in the circumstances of the Water Wheel company incurring that debt, would have been aware of reasonable grounds for suspecting that that company was insolvent;

(h)At the time of each of the said debts being incurred, a reasonable person in a like position to that of Elliott, in a company in the circumstances of the Water Wheel company incurring that debt, would have been aware of reasonable grounds for suspecting that that company was insolvent.

1. Accordingly, Plymin and Elliott have each contravened a civil penalty provision, namely s.588G of the Law, on each occasion when each of the said debts was incurred. The defendants Plymin and Elliott have failed to establish any of the defences provided for by s.588H.

1. Submissions remain to be heard under s.1317JA(2) of the Law concerning whether the Court should relieve the defendants Plymin or Elliott either wholly or partly from any liability to which they or either of them might otherwise be subject, or that might otherwise be imposed on them, because of the contraventions. 

1. The Court is also satisfied that the debts incurred by each of the said Water Wheel companies throughout the relevant period were wholly unsecured and that the persons to whom the debts are owed have suffered loss and damage in relation to such debt because of the insolvency of the relevant Water Wheel company.  Submissions remain to be heard whether, in those circumstances, the Court should order the defendants Plymin and Elliott or either of them to pay to the relevant Water Wheel company compensation equal to the amount of such loss or damage, pursuant to s.588J(1) of the Law. 

1. Part 9.4B of the Law provides for further civil consequences of the said contraventions of s.588G. Declarations will be made, if appropriate, as to relevant contraventions pursuant to s.1317EA(2) of the Law.

1. Submissions will be heard as to whether the Court should make orders pursuant to s.1317EA(3) of the Law, if the defendants are not otherwise relieved from liability, prohibiting the defendants Plymin and Elliott or either of them from managing a corporation for any specified period, and/or requiring the defendants Plymin and Elliott or either of them to pay to the Commonwealth any, and if so, what, pecuniary penalty.

1. In addition to the remaining matters referred to above, submissions will also be heard from the third defendant, Harrison, and as to costs.  A date will need to be fixed for the purpose of a preliminary discussion as to the outstanding matters, giving any further necessary directions and fixing a date in the near future for the final disposition of all such outstanding matters. 

(4) The Court is not to make an order under paragraph (3)(a) if it is satisfied that, despite the contravention, the person is a fit and proper person to manage a corporation.

(5) The Court is not to make an order under paragraph (3)(b) unless it is satisfied that the contravention is a serious one.

(6) The Court is not to make an order under paragraph (3)(b) if it is satisfied that an Australian court has ordered the person to pay damages in the nature of punitive damages because of the act or omission constituting the contravention.

(7) Section 91A defines what, for the purposes of this section, constitutes managing a corporation.”
“Section 1317EG
  Where the Court makes under paragraph 1317EA(3)(b) an order that a person pay a pecuniary penalty:

(a) the penalty is payable to the Commission on the Commonwealth's behalf; and

(b) the Commission or the Commonwealth may enforce the order as if it were a judgment of the Court.”