Australian Securities and Investments Commission v Rich

[2005] NSWSC 1022

CITATION:	ASIC v Rich [2005] NSWSC 1022 This decision has been amended. Please see the end of the judgment for a list of the amendments.
HEARING DATE(S):	26 September 2005
JUDGMENT DATE :	11 October 2005
JURISDICTION:	Equity
JUDGMENT OF:	Austin J
DECISION:	See under heading "Conclusions"

CATCHWORDS:	EVIDENCE - admissibility of documents and discretionary exclusion - creditor communications - application of exclusionary criteria enunciated in ASIC v Rich [2005] NSWSC 491 - no issue of general principle
LEGISLATION CITED:	Evidence Act 1995 (NSW), ss 135, 136
CASES CITED:	ASIC v Rich [2005] NSWSC 491
PARTIES:	Australian Securities and Investments Commission (P) John David Rich (D1) Mark Alan Silbermann (D4)
FILE NUMBER(S):	SC 5934/01
COUNSEL:	R B S Macfarlan QC with J P A Durack SC (P) D L Williams SC with M J Steele (D1, D4)
SOLICITORS:	Georgina Hayden, Solicitor for Australian Securities and Investments Commission (P) Joanne Kelly, Solicitor (D1, D4)

LOWER COURT JURISDICTION:

IN THE SUPREME COURT
OF NEW SOUTH WALES
EQUITY DIVISION

AUSTIN J

TUESDAY 11 OCTOBER 2005

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

JUDGMENT

1 HIS HONOUR: On 25 May 2005 I delivered a judgment (ASIC v Rich [2005] NSWSC 491) making rulings on the admissibility of "creditor communications" - that is, documents listed and summarised in AS 69 comprising communications between One.Tel and particular creditors about their claims. AS 69 was prepared by ASIC after I encouraged it to review the proposed tender of creditor communications and reduce the quantity of documents, so as to avoid the risk of multiple "mini-trials". AS 69 assembled the creditor communications in four categories: larger Australian creditors (23), larger overseas creditors (7), smaller Australian creditors (50) and smaller overseas creditors (9) - still a large amount of correspondence but closer to manageable proportions.

2 ASIC tendered the documents to show that One.Tel received threats to supply as a consequence of the deteriorating cash and creditor position of the Group and its failure to pay suppliers, and also received demands for payment from other creditors, with a view to supporting an inference that in the period from January to May 2001 One.Tel was unable to meet its obligations to its creditors (25 May judgment, at [2]). The tender was on the limited basis that they were to be used as evidence of the fact and nature of the communications but not of the truth of the matters asserted in them (T 4013).

3 I decided to admit into evidence, on the limited basis, the communications with larger Australian and overseas creditors, with the single exception of Singapore Telecom. The defendants urged me to reject on discretionary grounds certain documents identified in DS 68, relating to the Netherlands business, but I declined to do so. As to the small Australian and overseas creditors, the defendants conceded the admissibility of the communications relating to KPN, Star Telecom (including "Swiss Com") and Teleglobe (at T 4113). As to the remaining smaller creditors, I articulated some exclusionary criteria (25 May judgment, at [56]) to be applied, and encouraged the parties to do so, on the basis that they would draw to my attention any anomalies that arose. Subsequently ASIC produced a list (AS 75), a component of which was the smaller Australian and overseas creditors said by ASIC to be excluded by the criteria I had adopted in my judgment.

4 AS 75 has been revised and is now AS 91. It is a list of creditor communications in the Merged Tender Bundle and the Carter Exhibits that are not to be admitted into evidence. The list is subdivided into creditor communications not pressed by ASIC, and creditor communications excluded by the judgment of 25 May 2005. It appears from the lists that creditor communications in respect of 13 smaller Australian and overseas creditors were excluded by the judgment, and that substantial quantities of documents are not now pressed.

Smaller overseas creditors

5 At the hearing on 11 August 2005, senior counsel for the defendants informed me (T 5635) that he had nothing more to put before the court with respect to the smaller international creditors. Upon the application of the reasoning set out in my 25 May judgment, and specifically the application of the criteria articulated at [56], my decision is that there is no adequate basis for excluding any of the smaller international creditor communications listed in AS 69, other than the one (BMC Software) listed in AS 75. Consequently they are received in evidence, on the limited basis.

Smaller Australian creditors

6 Remaining for consideration are communications with those smaller Australian creditors still pressed by ASIC. The defendants have objected (in DS 70) to the communications with 12 creditors, namely: Alcatel, Kitson, Zali Steggall, On-line Trading Systems, Sapphire Technologies, Interspace Manufacturing, Melbourne IT, Perceptor, Link Communications, ECOM Computers, Michael Page, and Kay Marshall. Except for these 12, and the ones not pressed by ASIC as set out in AS 91 (and AS 88), the smaller Australian creditor communications listed in AS 69 are received in evidence, on the limited basis.

7 Argument about these 12 creditors was heard on 26 September 2005 (T 5746ff). The defendants submitted that, while the 12 sets of communications would not be excluded from evidence by the application of the exclusionary criteria stated at [56] of my 25 May judgment, it would be anomalous to allow them into evidence and they should therefore be excluded. Except for Alcatel, the debt claimed in each case is $50,000 or less, and the defendants submitted that the evidence would be of no more than slight probative value, outweighed by the danger of unfair prejudice, confusion and undue waste of time.

8 I dealt with this submission, to a degree, in my 25 May judgment (see, for example, the submissions set out at [26]). I held that there was sufficient substance in the defendants' submission to warrant the imposition of the exclusionary criteria that I articulated. I noted the argument advanced on behalf of ASIC that it wished to show that the creditor communications were a "mosaic", the cumulative effect of which was to provide evidence of the weak financial position of One.Tel (at [15]). I agreed with ASIC (at [61]) that evidence about how a debtor treats smaller creditors may be at least as significant, for the purpose of assessing its financial position, as evidence of its treatment of its major creditors, and therefore that creditor correspondence should not be excluded merely on the ground that the amount at stake was small. Essentially the defendants are now saying that the exclusionary criteria were not tight enough, and have let in some evidence which will have no practical utility.

9 I have reviewed the summaries of the disputed correspondence in AS 69 involving the 11 creditors other than Alcatel. I have decided that for the most part, the correspondence is relevant to ASIC's "mosaic" case, for it provides some evidence that smaller creditors were demanding payment of accounts that they alleged to be overdue (the evidence is not admitted to prove the fact of the debts). To exclude it pre-emptively would amount to preventing ASIC from presenting that case. There is a risk of undue waste of time but I think the process that has been followed has substantially reduced that risk by confining the classes of correspondence to a relatively manageable size. However, in two cases (Kitson and Interspace Manufacturing) the probative value of the evidence is so slight that it really would be a waste of the court's time to let it in and hear debate about it.

Kitson

10 The correspondence with Kitson begins with an internal One.Tel e-mail exchange on 18 April 2001 from which it emerges that payment of $30,397.37 would be made in the following week and was said to have been accounted for and to be awaiting a second signatory. There is another internal One.Tel e-mail on 19 April raising the question of payment of Kitson and another creditor, Michael Page. Then there is correspondence from Kitson to One.Tel on 30 April noting that the February invoice had been paid but the January invoice had been underpaid, and seeking payment of the shortfall, $2,383.17. There is an invoice from Kitson dated 31 April seeking payment of that amount. In my opinion evidence of that kind would be, at best, of only slight probative value. It is consistent with robust solvency coupled with respect for proper procedures and the withholding of a disputed amount. The amount at stake is extremely small. It would not be worth the court's time to hear evidence about it.

Interspace Manufacturing

11 For Interspace Manufacturing there is an internal One.Tel e-mail dated 10 May 2001 noting that the company had not been paid their March entitlements of about $16,000 and that they would not supply any more product until paid. It is then noted that the invoices amount to only $10,048.64 for March and there is a request for instructions. This material suggests there may have been some disagreement about the amount owing, which is not greatly overdue. It has little or no probative value and should be excluded.

Alcatel

12 Alcatel gives rise to special considerations. I was taken to particular evidence about the communications with that company (T 4069-4075) during the submissions leading to my 25 May judgment (see [23]). I decided, at that time, that it would be sufficient, having considered the Alcatel case and others, to set out my conclusions in general terms. Now the defendants have invited me to deal with Alcatel in more specific terms. It is appropriate to do so, in the context of seeking to determine whether Alcatel is a special case to be excluded notwithstanding that it has passed my exclusionary criteria. It is necessary to bear in mind that the communications, if admitted, will be admitted only on the limited basis.

13 What seems to emerge from the communications (although presumably other evidence would need to be heard for a complete picture to be presented) is that on 26 March 2001 Alcatel wrote to One.Tel dealing with an "agreement for deferral of certain payments on condition that One.Tel pays Alcatel $1.244 million on 1 April 2001". This conveyed an agreement between the parties representing commercial resolution of a dispute or disputes. The agreement contained detailed provisions as to the obligations of the parties (for example, it provided for Alcatel to establish a performance bond and authorised One.Tel to withhold $700,000 until the bond had been established). The correspondence made reference to a meeting on 23 March and a letter of that date, as well as previous correspondence, none of which has been tendered. An indication of the substance of at least part of the dispute may be found in the board papers for 24 November 2000 (MTB volume 1, page 131) where it was noted that One.Tel Next Generation had experienced outages due to irregular traffic patterns with the Alcatel switches, and was to be paid compensation.

14 On the application to tender the Alcatel correspondence, the defendants tendered some documents shedding further light on the nature and range of the disputes between the parties. What emerges is that the material that ASIC seeks to tender is far from being the whole story of the debtor/creditor relationship between One.Tel and Alcatel, and there appear to have been some fairly wide-ranging disputes, negotiations and a commercial outcome.

15 ASIC seeks to tender the deferred payments listing for April, in which Alcatel appears as a creditor deferred for $115,000. But there is other evidence (Carter Exhibits, volume H, tab 11, page 676) suggesting that the sum of $115,000 cleared One.Tel's bank account on 4 May 2001.

16 ASIC seeks to tender an e-mail from Michelle Walker to Ms Randall dated 2 May 2001 attaching a spreadsheet, said to show invoices for various months. But on inspection it appears that the spreadsheet contains forecasts or cashflow estimates as well as a list of invoices, and a projection of what was expected to become payable in the future in relation to that creditor. The document does not seem to be of any assistance to ASIC in making out the case for which creditor communications are said to be relevant, because it does not show when the invoices to which it refers were in fact payable.

17 The final document tendered by ASIC is a communication from Alcatel to One.Tel dated 17 May 2001, stating that Alcatel expected payment of $511,731.65 by 31 May to ensure a smooth end of month for all concerned, as Alcatel would not accept a repeat of the previous month. In the context of parties who had a history of disputation, that communication does not point to anything about One.Tel's financial position.

18 In light of these matters, ASIC's submission as to the significance of the Alcatel communications (T 5753-4) is speculative and unconvincing. ASIC submitted that the communication of 26 March showed that interest in the sum of $115,000 was deferred to 30 April, which was then deferred to May according to the April deferred payments listing, and that the reference, in the communication of 17 May, to a repeat of "last month" supported the evidence that there was a deferral to May of a payment due on 30 April. The evidence is indirect and is clearly only a small part of the story of this debtor/creditor relationship. In my judgment it would be unsafe to attach to the tendered evidence the significance that ASIC wishes to attribute to it.

19 Considering the Alcatel correspondence in the light of the defendants' detailed submissions, I have decided that the proper course is to exclude it under s 135. The probative value of the tendered evidence is, at most, slight because the evidence on the application indicates that the parties reached commercial resolution of a dispute or disputes, and the obligations of the parties were defined by their negotiated agreement. If the tendered evidence were received, I have no doubt that the defendants would delve into the One.Tel/Alcatel relationship and present other evidence, perhaps a great deal of other evidence, about the circumstances of the disagreements between the parties and the process of settlement. That would consume a considerable amount of the court's time, disproportionate to the slight or negligible probative value of the evidence tendered.

Other creditor communications

20 In DS 71, the defendants identified some creditor communications in the Merged Tender Bundle that had not been listed in AS 69, to which they objected. In AS 88 ASIC stated that it did not press some of the communications (namely MTB 0597, 0614, 1234 and 1458), but it pressed the others. The defendants withdrew their objection to MTB 1128-9 (T 5756.9-12).

21 The three documents remaining in dispute are MTB 1404, 1608 and 1680. There was contention between the parties as to whether these documents were "creditor communications" to which the exclusionary criteria stated at [56] of my 25 May judgment should be applied. My understanding is that certain tendered documents were identified as "creditor communications", to be treated separately from other documents, for two reasons. The first was that their contents would be inadmissible hearsay if they were tendered to prove the truth of the creditors' assertions of indebtedness. This problem was overcome by ASIC tendering these documents on the limited basis. The second reason was that the defendants wish to make a particular s 135 argument about them, along the lines that they had limited probative value and their tender would lead to extensive "mini-trials" disproportionate to the issues raised.

22 It seems to me that both these considerations apply to the documents MTB 1404, 1608 and 1680. Each of the documents contains or implies assertions of indebtedness to named entities (although the amounts are not quantified in MTB 1404). The hearsay element of the contents of the documents could be avoided by their tender on the limited basis. To enter into the question of indebtedness to each of the named entities would arguably involve a "mini-trial" and considerations of the kinds relevant to s 135. It is therefore appropriate to have regard to my exclusionary criteria for creditor communications, for the purpose of considering whether to receive the three documents into evidence.

23 MTB 1404 is an internal One.Tel e-mail dated 2 May 2001, in which Zena Aboulhaf asked Samantha Randall to make sure that certain agencies were paid on the following Thursday, listing four agencies and identifying their March or (in one case) February statement. This document does not contain any express or implied claim or demand for payment or give any other information that might indicate One.Tel's financial position or its relationship with its creditors. It falls foul of exclusionary criterion (3). It has no probative value and should be excluded.

24 MTB 1608 is an internal One.Tel e-mail dated 25 May 2001 in which Steve Gastelaars recorded that he had "changed the payment from the $481 K for the make good payment for the shortfall in February airtime", for two named entities. He said he had explained to key dealers that the February airtime make good payment would be combined with the March airtime payment which had been scheduled for 30 May. There is no express or implied claim or demand for payment and so the document falls foul of exclusionary criterion (3), and probably also criterion (2) having regard to the date of the e-mail. In my opinion nothing can be inferred from this document about the financial position of One.Tel or its relationship with creditors, and it was not suggested that there is other evidence bearing on the matter that would assist. Nor was it suggested that the tender of the document was for any purpose other than the purpose of showing demands for payment by creditors to support an inference that the company was unable to meet its obligations in the January/May 2001 period. It should be rejected.

25 MTB 1680 is an internal One.Tel e-mail dated 31 May 2001 by which Andy Chow told various people of the need to settle payment to various listed carriers before the following Saturday and sought authorisation to approve a payment transfer of HK$1,800,000 from a specified Hong Kong bank account. He noted that another fund transfer transaction for HK$2,200,000 had already been approved and that out of these transfers, there should be sufficient money to settle the outstanding payments listed. He said that the listed payments were already overdue.

26 In my opinion MTB 1680 does provide evidence of claims for overdue amounts payable to various creditors, mostly expressed in Hong Kong dollars. Although the e-mail is dated 31 May, outside the period specified by exclusionary criterion (2), it refers to amounts that were "already overdue". There is nothing in the document to indicate disputes as to the listed debts. The document is relevant to ASIC's case and the amounts involved are significant.

27 To the extent that the tender of MTB 1680 is made for the same purpose as the tender of the other creditor communications, the outcome is that the document is received in evidence on the limited basis (that is, to be used as evidence of the fact and nature of the (implied) communications between One.Tel and the creditors named in the document, but not the truth of the matters asserted about the alleged debts). However, senior counsel for ASIC informed the court (T 5756) that MTB 1680 had a relevance going beyond the creditor communication issue. He said it was a communication about One.Tel Hong Kong's financial position at the end of May, relevant to the question of the financial resources available to One.Tel at a crucial time. I accept this submission. To the extent that the tender is directed towards that part of ASIC's case, it seems to me that the document should be admitted without limitation. The net result is that MTB 1680 is received into evidence subject only to the limitation that the list of creditors and amounts in the second paragraph is not to be used as evidence to prove the existence and amount of debts owing to the entities in the list.

Conclusions

28 The creditor communications for the smaller overseas creditors, listed in AS 69, are received into evidence on the limited basis, except for those listed in AS 91 as not pressed by ASIC or as excluded by my 25 May judgment. The creditor communications for the smaller Australian creditors, as listed in AS 69, are received into evidence on the limited basis except for:

· those listed in AS 91 and AS 88 as not pressed by ASIC or excluded by my 25 May judgment, and

· Alcatel, Kitson and Interspace Manufacturing, for reasons given in this judgment.

29 As to the additional documents listed in DS 71:

· MTB 0597, 0614, 1234 and 1458 are not pressed by ASIC;

· MTB 1404 and 1608 are rejected;

· MTB 1128-9 and 1680 are received in evidence on the limited basis, although in the case of MTB 1680 the limit applies only to the second paragraph.

30 My understanding of the position is that, now that the rulings in this judgment have been made, it will be possible for ASIC to revise the draft order (AS 90) relating to the admission into evidence of the Merged Tender Bundle and the Carter Exhibits, with a view to presenting to the court an agreed form of order at an early date, so that the formal tender of the documents may be completed. I shall address the additional tender of MFI 151 in a separate judgment.

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13/10/2005 - Defendant's surname, 'Rich', inserted in citation in judgment - Paragraph(s) Judgment citation