Buzzle Operations Pty Ltd (in liq) v Apple Computer Australia Pty Ltd
[2010] NSWSC 233
•30 March 2010
Reported Decision:
77 ACSR 410
28 ACLC 10-010
4 BFRA 512
[2010] ALMD 4140
[2010] ALMD 4137
238 FLR 384
New South Wales
Supreme Court
CITATION: Buzzle Operations Pty Ltd (In Liq) v Apple Computer Australia Pty Ltd [2010] NSWSC 233 HEARING DATE(S): 27-30 April 2009; 1, 4-8 and 12-15 May 2009
JUDGMENT DATE :
30 March 2010JURISDICTION: Equity JUDGMENT OF: White J DECISION: 1. Direct entry of judgment for the defendants. 2. Order that the defendants’ cross-claim against Mr McComb (the second cross-defendant) be dismissed. 3. The exhibits may be returned after 28 days. CATCHWORDS: CORPORATIONS – merger and proposed float of plaintiff – defendant’s consent required and given for merger to proceed – plaintiff granted charge to defendant over plaintiff’s assets – failure of float and plaintiff’s business – receivers appointed to plaintiff – orders made for winding up of plaintiff and liquidator appointed – plaintiff incurred debts to defendant when plaintiff insolvent – debts remained unpaid at liquidation - CORPORATIONS – whether charge void under Corporations Law, s 267– charge not void – defendant not relevant person under s 267 – defendant not an officer of plaintiff – defendant did not make or participate in any decisions that affected the whole or substantial part of plaintiff’s business – defendant had capacity to affect significantly plaintiff’s financial standing but not involved in management of plaintiff’s business – defendant not associated with plaintiff – defendant not acting in concert with plaintiff in creation of charge – no trespass or conversion by receivers in taking possession of plaintiff’s assets and realising assets to pay debts - CORPORATIONS – whether payments made to defendant by plaintiff when insolvent were uncommercial transactions under Corporations Law, s 588FB – payments not uncommercial transactions – payments made for full consideration – defendant received benefits in good faith and without reasonable grounds to suspect plaintiff’s insolvency - CORPORATIONS – whether payments made to defendant by plaintiff when insolvent were unfair preferences under Corporations Law, s 588FE – whether payments by receiver to defendant to discharge debt were unfair preferences – whether defendant related entity of plaintiff – running account between plaintiff and defendant under s 588FA – payments not unfair preferences - CORPORATIONS – whether defendants contravened Corporations Law, s 588G due to plaintiff’s incurring debts when insolvent – determination of when plaintiff insolvent – determination of when defendants had reasonable grounds for suspecting plaintiff’s insolvency or when reasonable person in like position would have been aware of plaintiff’s insolvency - CORPORATIONS – whether s 588G applies to shadow directors – whether company can be a shadow director – defendants not plaintiff’s shadow directors – plaintiff did not establish that its directors were accustomed to act in accordance with defendants’ wishes or instructions – imposing conditions or terms in arm’s length commercial dealings or negotiations with which plaintiff felt obliged to comply not sufficient to make defendant shadow director – causal connection required between acts of directors and instructions or wishes of shadow director – whether plaintiff’s directors delegated their powers – no such delegation – directors collectively or governing majority in their exercise of powers of management must be accustomed to act on instructions or wishes of shadow director LEGISLATION CITED: Corporations Law
Corporations Act 2001 (Cth)
Corporate Law Economic Reform Program Act 1999 (Cth)
Acts Interpretation Act 1901 (Cth)
Companies Act 1980 (UK)
Company Directors Disqualification Act 1986 (UK)CATEGORY: Principal judgment CASES CITED: Apple Computer Australia Pty Ltd v Mekrizis [2003] NSWSC 126; (2003) 44 ACSR 518
Buzzle v Apple Computer [2007] NSWSC 930
Commissioner for Corporate Affairs v Bracht [1989] VR 821
Australian Securities and Investments Commission v Citigroup Global Markets Australia Pty Ltd (No. 4) (2007) 160 FCR 35
Adsteam Building Industries Pty Ltd v The Queensland Cement & Lime Co Ltd & Ors (No. 4) [1985] 1 Qd R 127; (1984) 2 ACLC 829
IPT Systems Ltd v MTIC Corporate Pty Ltd (2001) 19 ACLC 386
Bateman v Newhaven Park Stud Ltd (2004) 49 ACSR 597; (2004) 22 ACLC 943
Australian Innovation Ltd v Dean-Willcox & Ors (2001) 40 ACSR 521
Bank of Australasia v Hall (1907) 4 CLR 1514
Queensland Bacon Pty Ltd v Rees (1966) 115 CLR 266
Sandell v Porter (1966) 115 CLR 666
Hymix Concrete Pty Ltd v Garritty (1977) 13 ALR 321
Downey v Aira Pty Ltd (1996) 14 ACLC 1068
Re Newark Pty Ltd (in liq); Taylor v Carroll [1993] 1 Qd R 409
Standard Chartered Bank of Australia Limited v Antico (1995) 38 NSWLR 290
Ho v Akai Pty Ltd (in liq) [2006] FCAFC 159; (2006) 24 ACLC 1526
Australian Securities and Investments Commission v Edwards [2005] NSWSC 831; (2005) 34 ACSR 583
Kuwait Asia Bank EC v National Mutual Life Nominees Ltd [1991] 1 AC 187
Re Hydrodam (Corby) Ltd [1994] 2 BCLC 180
In re Bulawayo Market and Offices Co Ltd [1907] 2 Ch 458
Emanuel Management Pty Ltd (in liq) v Fosters’ Brewing Group Ltd & Ors [2003] QSC 205; 178 FLR 1
Beach Petroleum NL v Johnson (1993) 43 FCR 1
Australian Securities Commission v AS Nominees Ltd (1995) 133 ALR 1
Secretary of State for Trade and Industry v Deverell [2001] Ch 340
Ultraframe (UK) Ltd v Fielding & Ors [2005] EWHC 1638 (Ch)
Re Unisoft Group Ltd (No. 3) [1994] 1 BCLC 609
Tourprint International Pty Ltd (in Liq) v Bott [1999] NSWSC 581; (1999) 32 ACSR 201
Powell (as joint liquidators of Noelex Yachts Australia Pty Ltd (in liq)) v Fryer [2001] SASC 59; (2001) 37 ACSR 589TEXTS CITED: Audit Reform and Corporate Disclosure) Bill Commentary on the Draft Provisions – Corporate Law Economic Reform Program No. 9 (October 2003)
Corporations and Markets Advisory Committee, Personal Liability for Corporate Fault Discussion Paper (May 2005 at 74)
Sir P Millett “Shadow Directorship – a Real or Imagined Threat to Banks" (1991) 1 Insolvency PractitionerPARTIES: 1st Plaintiff: Buzzle Operations Pty Ltd (In Liq)
2nd Plaintiff: Andrew Hugh Jenner Wily
1st Defendant: Apple Computer Australia Pty Ltd
2nd Defendant: James LikidisFILE NUMBER(S): SC 2004/181828 COUNSEL: Plaintiffs: A J Meagher SC with L V Gyles SC and J Shepard
Defendants: B A J Coles QC with C R C Newlinds SC and R C A HigginsSOLICITORS: Plaintiffs: Piper Alderman
Defendants: Clayton Utz
IN THE SUPREME COURT
OF NEW SOUTH WALES
EQUITY DIVISION
WHITE J
Tuesday, 30 March 2010
2004/181828 Buzzle Operations Pty Ltd (In Liq) & Anor v Apple Computer Australia Pty Ltd & Ors
JUDGMENT
Introduction
1 HIS HONOUR: The first plaintiff (“Buzzle”) was incorporated on 3 July 2000. It acquired the stock and businesses of six retailers (called Apple Resellers) of Apple Computer products. The Apple Resellers took shares in Buzzle’s holding company, Buzzle Limited. They expected that the merged business would be more profitable than the sum of the individual businesses. They intended that a short time after Buzzle had established the merged business its holding company would be floated on the Australian Securities Exchange and shares would be issued to members of the public.
2 Each of the Apple Resellers had entered into Reseller Agreements with the first defendant (“Apple”) pursuant to which the Reseller purchased stock on credit. Each Apple Reseller had given a charge over its assets to Apple. As part of the merger, the Resellers transferred their stock, plant and equipment and the goodwill of their businesses to Buzzle. The stock transferred consisted partly of stock purchased from Apple and partly other stock. Each of the principals of the companies whose businesses were merged into Buzzle became a director of Buzzle. But there were few board meetings.
3 Apple’s consent was needed to the merger because Apple had a charge over the assets to be transferred to Buzzle. The Resellers were also dependent on Apple’s agreeing to enter into a Reseller Agreement with Buzzle. Apple consented to the merger. It entered into a Reseller Agreement with Buzzle pursuant to which it provided stock on credit. It took a charge over Buzzle’s assets.
4 The proposed float did not proceed. Buzzle’s business failed. Apple appointed receivers on 31 March 2001. On 28 November 2001 an application was filed for the winding-up of Buzzle. On 15 February 2002 an order was made for Buzzle to be wound up. The second plaintiff was appointed liquidator.
5 The plaintiffs contend that Apple was closely involved in the merger. The merger was implemented on 13 and 14 September 2000. The charge Buzzle gave Apple is dated 14 September 2000. The plaintiffs contend that the charge is void pursuant to s 267(1) of the Corporations Law. Section 267 provided:
(1) Where:“ Charges in favour of certain persons void in certain
cases
- (a) a company creates a charge on property of the company in favour of a person who is, or in favour of persons at least one of whom is, a relevant person in relation to the charge; and
(b) within 6 months after the creation of the charge, the chargee purports to take a step in the enforcement of the charge without the Court having, under subsection (3), given leave for the charge to be enforced;
(2) Without limiting the generality of subsection (1), a person who:the charge, and any powers purported to be conferred by an instrument creating or evidencing the charge, are, and shall be deemed always to have been, void.
- (a) appoints a receiver of property of a company under powers conferred by an instrument creating or evidencing a charge created by the company; or
(b) whether directly or by an agent, enters into possession or assumes control of property of a company for the purposes of enforcing a charge created by the company;
shall be taken, for the purposes of subsection (1), to take a step in the enforcement of the charge.
...
chargee , in relation to a charge, means:(7) In this section:
- (a) in any case—the holder, or all or any of the holders, of the charge; or
(b) in the case of a charge that is an agreement to give or execute a charge in favour of a person or persons, whether upon demand or otherwise—that person, or all or any of those persons.
relevant person , in relation to a charge created by a company, means:officer , in relation to a company, includes, in the case of a registered foreign company, a local agent of the foreign company.
receiver includes a receiver and manager.
- (a) a person who is at the time when the charge is created, or who has been at any time during the period of 6 months ending at that time, an officer of the company; or
(b) a person associated, in relation to the creation of the charge, with a person of a kind referred to in paragraph (a). ”
6 The plaintiffs contend that Apple was a “relevant person” within the meaning of the section. They contend that when the charge was created, Apple was an “officer” of Buzzle within the meaning of paras (b)(i) and (ii) of the definition of “officer” in s 9 of the Corporations Law. That is, the plaintiffs say that Apple was:
“ a person:
ii. who has the capacity to affect significantly the corporation’s financial standing. ”i. who makes, or participates in making, decisions that affect the whole or a substantial part, of the business of the corporation; or
7 The plaintiffs also contend that Apple was a person associated, in relation to the creation of the charge, with the directors of Buzzle, and for that reason also comes within the definition of “relevant person” in s 267.
8 The plaintiffs say that Apple took a step in enforcement of the charge less than six months after its creation by appointing KPMG as investigating accountants of Buzzle on 2 February 2001. Hence, the plaintiff says that at all times the debts owed by Buzzle to Apple were unsecured.
9 The consideration for the transfer of the stock, plant and equipment and businesses of each of the Resellers to Buzzle was the payment of cash and the issue of shares in Buzzle Limited, Buzzle’s holding company, which was the company whose shares were proposed to be listed on the stock exchange. The amount of cash to be paid depended upon valuations of each Reseller’s stock, plant and equipment. Buzzle was required to pay for stock acquired from each Reseller by no later than 31 October 2000. That obligation applied to all stock acquired by Buzzle. The remaining cash component of the consideration was deferred until the earlier of the float of Buzzle Limited on the stock exchange or on its directors forming the view on reasonable grounds that Buzzle had adequate cash flow to pay amounts owing to all vendors on a pro rata basis or in accordance with requirements of that vendor to pay its creditors (Merger Deeds clause 6.5). Buzzle also agreed with Apple for its benefit to repay all amounts owing by it to the vendors pursuant to clause 6.5(a) of the Merger Deed by 31 October 2000.
10 Apple issued invoices on 16 October 2000 to Buzzle for the value of the Apple stock which the Resellers had transferred to Buzzle. This value was established by valuations as part of the merger. Each Reseller was entitled to be paid by Buzzle by no later than 31 October 2000 for the value of the stock transferred to Buzzle. The value of Apple stock transferred by the Resellers to Buzzle was $6,298,139. Each of the Resellers was indebted to Apple for stock supplied to the Reseller. At the time of the merger, the Apple Resellers owed Apple $15,242,925. At the same time Apple debited Buzzle with $6,298,139, it credited the Resellers with their respective proportions of the value of the stock each had transferred to Buzzle. Thus the combined debts owed by the vendor Resellers to Apple were reduced to $8,944,786.
11 Between 3 October 2000 and 8 December 2000 Buzzle made four payments to Apple on behalf of the vendor Resellers. It paid $1,595,000 on 3 October 2000, $2,168,088.71 on 31 October 2000, $1,016,827.64 on 6 November 2000, and $108,623.55 on 8 December 2000. All of these amounts were credited by Apple to the vendor accounts. None was credited to Buzzle’s account with Apple. In other words, none of the payments reduced the debt payable by Buzzle to Apple for the Apple stock valued at $6,298,139. Nor were any of the payments credited against the cost of goods supplied by Apple to Buzzle after 13 September 2000. The liquidator contended that prior to the payment of 6 November 2000 all of the debts then due and payable by Buzzle to the vendors for non-Apple stock had been satisfied. He contended that the only outstanding debts owed by Buzzle to the vendors which might be satisfied by the payments made on 6 November 2000 and 8 December 2000 related to the value of the plant and equipment acquired by Buzzle from the vendors. But those debts would only be payable at the time of the float, or if the directors of Buzzle Limited formed the view on reasonable grounds that Buzzle had adequate cash flows to pay those amounts, or if the payments were needed by a vendor to pay its creditors. The plaintiffs say that the payments made on 6 November 2000 and 8 December 2000 by Buzzle to Apple did not discharge any debt then due and payable by Buzzle to the vendors.
12 The plaintiffs contend that as at 6 November 2000 and 8 December 2000 Buzzle was insolvent (within the meaning of s 95A of the Corporations Law) and that the payments on those dates were uncommercial transactions within the meaning of s 588FB of the Corporations Law. The liquidator seeks an order pursuant to s 588FF directing Apple to pay to Buzzle the amounts paid by it on 6 November 2000 and 8 December 2000.
13 Apple disputes that the transactions were uncommercial transactions. It also relies on s 588FG and says that it received the payments from Buzzle in good faith, it did not believe Buzzle to be insolvent, it had no reasonable grounds for suspecting that Buzzle was insolvent at the time or would become insolvent, and that a reasonable person in its circumstances would have had no grounds for so suspecting.
14 Apple’s standard credit terms were 45 days. Apple did not insist on payment of any of its invoices prior to 1 December 2000. The evidence did not establish how and when this arrangement was made, but it was common ground that such an arrangement had been made. The parties conducted themselves on the basis of such an arrangement. As at 30 November 2000 Buzzle owed Apple $23,965,078. This included the debt of $6,298,139 for Apple stock acquired by Buzzle from the Resellers. No payments had been made prior to this date and no debt to Apple had become due and payable. Apple calculated that the debt payable as at 1 December 2000 was $9,731,346.88. On 1 December 2000 Buzzle paid Apple $4,300,000. After that payment and after allowance for various credits (which probably included rebates) Apple calculated that as at 1 December 2000 it was owed by Buzzle $4,770,470.23 which was due and unpaid. On 8 December 2000 a further amount of $438,496.84 became payable. The next payment was not made until 15 January 2001 in an amount of $5 million. However, over $11 million had become due and payable by 5 January 2001.
15 The plaintiffs contend that by and from 1 January 2001 Apple and its finance director, Mr James Likidis (the second defendant), were “shadow directors” of Buzzle. That is, the plaintiffs allege that the directors of Buzzle were accustomed to act in accordance with the instructions or wishes of Apple and Mr Likidis, otherwise than by merely acting on advice given by them in the proper performance of functions attaching to their business relationship with the directors of Buzzle (para (b)(ii) of the definition of “director” in s 9). The plaintiffs allege that Buzzle was insolvent at all times after 1 January 2001. The plaintiffs allege that between 1 January 2001 and 30 March 2001 Buzzle incurred debts of $12,327,256 which remained outstanding when Buzzle’s liquidation commenced. Of this amount $5,776,048 was due to third party creditors, that is, to creditors other than Apple. The plaintiffs say that between January and March 2001 Buzzle incurred debts to Apple, which remained unpaid, of $6,551,208. The plaintiffs say that Apple and Mr Likidis contravened s 588G of the Corporations Law by failing to prevent Buzzle from incurring debts after 1 January 2001 when it was insolvent and seek declarations to that effect. The liquidator claims both amounts from Apple and Mr Likidis as compensation under s 588M.
16 Apple and Mr Likidis deny that either was a shadow director of Buzzle. If either was a shadow director of Buzzle, there is an issue as to whether Buzzle was insolvent for the whole of the period from 1 January 2001, and as to the time at which Apple and Mr Likidis became aware that there were grounds for suspecting that Buzzle was insolvent or a reasonable person in a like position would be so aware (ss 588G(1) and (2) and 588H(2)). Apple and Mr Likidis contend that Buzzle has not been shown to be insolvent prior to 16 February 2001 (T971).
17 There is also an issue as to the quantum of debts incurred by Buzzle during this period which were unpaid. The defendants contend that the liquidator did not prove what debts were incurred between 1 January and 31 March 2001. There is also an issue as to how payments are to be taken to have been appropriated, that is, whether to debts incurred in that period or to earlier debts.
18 Between 5 January 2001 and 30 March 2001 Buzzle made payments to Apple totalling $11,842,128. The plaintiffs claim that these payments were unfair preferences made when Buzzle was insolvent and seek to avoid these payments under s 588FF. The payments were made more than six months before the relation-back day of 28 November 2001. The plaintiffs rely upon s 588FE(4) pursuant to which an insolvent transaction is voidable if entered into with a related entity of the company within four years of the relation-back day. The plaintiffs contend that Apple was a related entity of Buzzle because it was a shadow director. As well as raising questions whether Buzzle was insolvent at the time and whether the payments were received by Apple in good faith when it had no reasonable grounds for suspecting that Buzzle was insolvent, this claim depends upon the plaintiffs establishing that the Apple debts paid during this period were wholly or partly unsecured. There is an issue as to whether from 9 February 2001 payments were made as cash on delivery of stock supplied so as not to be preferences, and if so, to what extent. There is also a question of whether there was a running account between Apple and Buzzle, and if so, the level of that account at its commencement and termination (s 588FA(3)).
19 The third and fourth defendants are the receivers appointed by Apple on 31 March 2001. They took possession of all of the company’s assets including its stock and plant and equipment which, in the receivers’ Report as to Affairs dated 30 May 2001 was valued at $6,655,000 as at the date of their appointment. The plaintiffs contend that as the charge was void, the receivers were trespassers. Buzzle sues in conversion for the value of the goods dealt with by the receivers in that sum. The receivers realised Buzzle’s property and after the expenses of the receivership, made payments to Apple as the secured creditor. The plaintiffs contend that the charge was void and that Apple’s debt was therefore unsecured. The receivers caused Buzzle to make payments of $5,250,000 to Apple after 28 May 2001, that is, within six months of the relation-back day, in reduction of Buzzle’s debt. The plaintiffs seek to avoid those payments as unfair preferences under s 588FF(2). This claim also depends upon the plaintiffs succeeding on their claim that the charge was void.
20 Apple lodged a proof of debt in the liquidation of Buzzle in the amount of $12,003,500. It pleads that that proof has not been adjudicated upon and it seeks to set off such sum as might be found to be owing to it by Buzzle against any amount for which Buzzle would otherwise be entitled to recover from it, other than compensation under s 588M for insolvent trading (T1016).
21 Apple and Mr Likidis also plead that if either of them is found by the Court to have been an officer at any time of Buzzle and either of them has a consequential liability to the plaintiffs, then they ought fairly to be excused from such liability pursuant to s 1318 of the Corporations Law.
22 Apple and Mr Likidis brought a cross-claim for contribution or indemnity against the directors of Buzzle. Apple had previously sued the directors on their guarantees and obtained judgment against them (Apple Computer Australia Pty Ltd v Mekrizis [2003] NSWSC 126; (2003) 44 ACSR 518). I was told that all but one of the directors who are cross-defendants to Apple’s cross-claim has been made bankrupt. The proceedings against them are stayed (Buzzle v Apple Computer [2007] NSWSC 930). There was no appearance for the other cross-defendant, Mr McComb.
23 It is convenient to deal with the issues in the following order:
- 1. Was Apple’s charge of 14 September 2000 void? That requires investigation of the events up to 14 September 2000 and the role played by Apple and its officers in relation to Buzzle’s affairs up to that time.
- 2. When did Buzzle first become insolvent within the meaning of s 95A of the Corporations Law ? In particular, was Buzzle insolvent as at 6 November 2000, 8 December 2000, and from 1 January 2001? All of the remaining claims depend upon Buzzle having been insolvent at the time the impugned payments were made or debts incurred.
- 3. When did Apple and Mr Likidis first become aware, or when would a reasonable person in their circumstances have become aware, that Buzzle was insolvent?
- 4. Were the payments of $1,016,827.64 on or about 6 November 2000 and $108,623.55 on 8 December 2000 uncommercial transactions? If so, are the defences in s 588FG made out?
- 5. Were Apple or Mr Likidis shadow directors of Buzzle at any time from 1 January 2001 to 31 March 2001, and if so, when? If so, are the defences to the insolvent trading claims made out?
- 6. What debts were incurred in that period which were unpaid at the date of liquidation for which Buzzle would be entitled to compensation under s 588M if the grounds under s 588G are established and defences under s 588H are not established?
- 7. Are the payments made by Buzzle to Apple between 5 January and 30 March 2001 recoverable as voidable unfair preferences paid to a related entity? Questions of appropriation of payments to debts arise both in relation to this claim and the insolvent trading claim.
24 Further issues concerning the unfair preference claim for payments made to Apple after 28 May 2001 and the claim for damages against the receivers for conversion of goods arise if the charge is void.
25 Questions of set-off and reasonable excuse, may arise depending upon the decisions on the earlier questions.
26 For the reasons which follow I have concluded that:
- 1. Apple was not an officer of Buzzle at 14 September 2000. Nor was it associated with the directors of Buzzle in relation to the creation of the charge. The charge is not void pursuant to s 267(1) of the Corporations Law .
- 2. Buzzle was insolvent from at least 6 November 2000.
27 It was not contended that at 6 November 2000 Apple suspected that Buzzle was insolvent or that a reasonable person in its position, would have so suspected. I have concluded that:
- 3. As at 8 December 2000 Apple did not suspect and did not have reasonable grounds for suspecting that Buzzle was insolvent. Nor did it suspect or have reasonable grounds for suspecting that Buzzle would become insolvent by making the payment of $108,623.55 made on that day on behalf of Mac’s Place. However, by the end of December 2000 and thereafter Apple had reasonable grounds to suspect that Buzzle was insolvent and did so suspect. Apple and Mr Likidis did not expect at any time from 1 January 2001 that Buzzle was solvent and would remain solvent if it incurred debts.
- 4. The payments of 6 November and 8 December 2000 were not uncommercial transactions. If they were, Apple has made good the defences under s 588FG(1).
- 5. Apple and Mr Likidis were not shadow directors of Buzzle.
- 6. Accordingly all of the plaintiffs’ claims fail.
Credit
28 Most of the relevant evidence is found in contemporaneous documents. There are some clashes in testimony, in particular between the testimony of Mr Likidis of Apple and Messrs Hartono, Mekrizis, Qureshi and Liu of Buzzle. I have not accepted all of Mr Likidis’ evidence. In some respects it was not consistent with contemporaneous documents or objective probabilities. But I regard Mr Likidis as a generally reliable witness. Given the lapse of time between the events of which he was speaking and the time he came to prepare his affidavit, there must have been some element of reconstruction in his memory. Nonetheless, he appeared to have a sound recollection of events. Where his evidence conflicted with Messrs Hartono, Liu, Qureshi or Mekrizis I generally prefer Mr Likidis’ testimony. However, I prefer the contemporaneous records and the objective probabilities to any of the oral or affidavit testimony.
29 So far as the plaintiffs’ witnesses were concerned, it is fair to say that there were difficulties with the testimony of all of the plaintiffs’ witnesses save for Mr Patterson, whose evidence was ultimately not significant to the resolution of any disputed issue. Many of the meetings between Buzzle’s promoters and executives were filmed for the purposes of a television documentary. The film is as noteworthy for what it does not say as for what it does. The complaints now made against Apple are not ventilated. I need not address the particular difficulties with each witness’ testimony. Those difficulties are referred to in the defendants‘ submissions. The plaintiffs’ counsel did not submit that where there was a conflict which could not be resolved by reference to the contemporaneous documents or the objective probabilities, the evidence of the plaintiffs’ witnesses should be preferred to that of Mr Likidis.
Background to the Merger
30 The idea of the merger was first mooted by Mr Craig Rispin, who worked as a contractor for Mr George Mekrizis. Mr Mekrizis was a director and principal shareholder of GM Computer Pty Ltd. Mr Mekrizis and GM Computer operated a successful business as an Apple Reseller. In early 2000 Mr Rispin proposed to Mr Mekrizis that the top seven authorised Apple Resellers in Australia merge their businesses. Apart from GM Computer, the other proposed participants in the merger were Choice Connections Australia Pty Ltd (“Choice Connections”), Mac’s Place Group Pty Ltd (“Mac’s Place”), Next Byte Pty Ltd (“Next Byte”) and related companies, Jetocopic Pty Ltd which traded as Manning Computer & Technology (“Manning Computer”), Designwyse Pty Ltd (“Designwyse”) and Status Graph Computer Solutions Pty Ltd (“Status Graph”) and a related company.
31 The first meeting of these proposed participants in the merger took place on 16 May 2000. It was attended by Mr Rispin and Mr Mekrizis from GM Computer, Mr Donald Hartono, the executive director of Choice Connections, Mr Scott Thompson, the director of Mac’s Place, Mr Crawford Giles and two other directors of Next Byte, Mr David Ford from Manning Computer, Mr and Mrs Kloester, directors of Designwyse, and Mr Lindsay McComb of Status Graph. No representative of Apple attended the meeting. Various benefits of a merger were identified by different participants. The advantages included reducing expenses through eliminating duplication of positions. Mr Thompson of Mac’s Place said that he and Mr Rispin had worked out that between the seven Resellers they employed 14 purchasing clerks. He suggested that about $1 million of overheads could be saved. Other perceived advantages were having a combined and more efficient marketing system and the ability to increase capital to open new stores and expand the business.
32 The participants discussed their respective roles. Mr Kloester of Designwyse pointed out that as they had all been running Apple businesses for many years they were experts in the area. Mr Mekrizis said that that was why they needed to be on the board of directors. Mr Giles of Next Byte also said that they would need to take executive roles. There was discussion about the need for a chief executive officer and a chief financial officer to run a company with annual revenue of perhaps $200 million.
33 At the conclusion of the meeting each of the Resellers signed an agreement called “Heads of Agreement” by which they agreed to co-operate in good faith to seek to achieve the objective of merging the businesses and to keep confidential the information each was to receive as to the affairs and financial information of the other and use it only for the purpose of the proposed merger (TB2/698). They agreed to contribute $275,000 in stated proportions to fund part of the costs of the merger transaction (Clause 5).
34 The meeting was a lengthy one. During the meeting a presentation was made by a merchant bank as to possible net profits of a merged entity and how the merged entity might be valued when its shares were initially offered to the public. A presentation was also made by Mr Stuart Bright and Mr Neil McDermott of Arthur Andersen Corporate Finance (“Arthur Andersen”). That firm was later retained to provide advice and assistance in relation to the merger. Towards the end of the meeting there was discussion as to how to sell the idea to Apple. Mr Rispin said:
- “ I already know what the strategy is guys. The strategy is to turn it into their idea. If Di Ryall [Apple’s Managing Director] can go to the president’s council with it, that it’s her idea that the Apple centres go public. ”
35 Apple did not participate in the initial proposal for the merger. Its consent and co-operation was needed if the merger were to go ahead. It held charges over the assets of the vendor Resellers which secured debts owed to it. The new company, the merged entity, would also need to enter into a Reseller Agreement with Apple to acquire the necessary stock on credit and to operate Apple branded stores.
36 After the meeting of 16 May 2000 the proposed participants in the merged entity held many meetings. Three types of meeting were held: Group Meetings, Value Allocation Meetings and Float Meetings. The Group Meetings were attended by representatives of all of the Resellers and by representatives from Arthur Andersen. The Float Meetings were established to oversee the proposed float of the new entity to be established. It was intended that the float would occur by about 13 September 2000. The Value Allocation Meetings were held to determine the value to be allocated to each of the Apple Resellers in the new entity. No representative of Apple attended these meetings of whatever type.
37 The participants arranged to hold a meeting with representatives of Apple in the week commencing 12 June 2000 to present the proposal to Apple. Minutes of a Group Meeting held on 2 June 2000 attended by representatives of each of the seven Resellers and also of Arthur Andersen records that:
“ SB (Stuart Bright of AA Corporate Finance) ... noted that the following key contributions would be sought from Apple:
* Consent
* Co-operation
* Changes to the 30-day notice period rule which may otherwise be a negative factor. ”* Strategic investment in new cos; and
38 The last dot point was a reference to the period of notice on which a Reseller Agreement could be terminated without cause. In Apple’s standard agreement the period was 30 days. It was thought that this lack of security might deter potential investors from subscribing for shares in Buzzle Limited.
39 It was resolved that Mr Crispin would develop the presentation to be made to Apple. The minutes record consideration of details of the merger such as the principles on which the valuation of the respective Resellers’ businesses would be made, estimates of revenue for the year ended 30 June 2000 of all of the Resellers (estimated to be approximately $170 million), the division of operational responsibilities for accounting/systems, human resources, logistics, sales and marketing as well as many other detailed issues (TB2/749-753). The minutes record that Mr Crawford Giles of Next Byte led a discussion on the organisational structure of the new company’s financial department. A preliminary financial department organisational chart was distributed to participants. The Resellers had eight different accounting systems. Mr Adam Steinhart of Next Byte led a discussion on the desirability of the new company using an accounting system called Navision. The minutes record that “the Apple centre representatives (with the exception of Robert Kloester) agreed that Navision should be used by new co and should be rolled out to non-users once the Heads of Agreement has been signed.”
40 The minutes of a Float Committee meeting held on 6 June 2000 record that Mr Scott Thompson presented an organisational chart for the sales division and made recommendations as to its structure, i.e. its division into geographical areas and specialist departments. He made recommendations as to which stores would require store managers, as distinct from technicians performing administration and store-keeper functions, to enable the sales team to focus on sales alone. Mr Giles presented a paper on the rollout of the Navision accounting system to the merged entity and noted that he intended to interview a potential candidate for the position of Management Accountant. It is clear that by this time detailed planning of the structure of the merged business was well underway. Apple had no input at this stage.
41 At a Value Allocation Meeting held on 9 June 2000 Mr Rispin went through some PowerPoint slides that he had prepared for presentation to Apple the following week (affidavit of Mr Hartono affirmed 7 December 2007, para 80; TB2/780). The PowerPoint presentation included that the seven Apple Resellers had agreed to merge and list on the Australian Stock Exchange and gave the reasons for the merger as being decreasing margins, increased costs of operation, lack of capital for expansion, difficulty in recruiting and retaining staff, and the principals looking for better return on investments. It appears from a draft prospectus (TB803-1) that it was hoped that by the end of 2000 a new company would be established with capital of $113 million: $55.5 million or 49.1 per cent from new shareholders, and $57.5 million or 50.9 per cent from existing shareholders, with the company having forecast revenue to 30 June 2001 of $166.7 million (TB2/803-11, 2/803-12).
42 The first meeting with Apple took place on 16 June 2000. It was attended by Messrs Rispin, Thompson, Mekrizis, Ford and Giles for the company yet to be incorporated, and by Mr Bright and Mr McDermott of Arthur Andersen. The persons attending for Apple were its Managing Director, Ms Diana Ryall, its Reseller Manager, Mr Kevin McElduff, its Finance Director, Mr Likidis, its then Marketing Director, Mr Bowley, its National Sales Manager for Education, Mr Bruce, and its in-house legal counsel, Ms Law. At that meeting, Arthur Andersen handed out a document entitled “Merger and Initial Public Offering of Apple Business”. The document stated that the owners of the seven businesses had agreed to merge, listed the reasons for the merger and the proposed listing, and identified benefits to Apple from the merger. The paper noted that the businesses had stores in 33 locations and represented over half the Apple Centres in Australia. The identified benefits of the merger included the raising of capital to fund future growth, the expansion of the distribution network, enhanced marketing, and a higher profile for Apple products. Apple was informed that the businesses had entered into an agreement to pursue the merger and that it was intended that the “merged entity” would progressively acquire each of the existing businesses between late July and September 2000. The listing on the stock exchange was planned for November 2000.
43 An issue was raised at the meeting as to whether Apple would take a shareholding in the new entity. Mr Hartono and Mr Mekrizis deposed that Mr Likidis said that Apple would want to have a shareholding in the new entity. Mr Likidis denied that he said words to that effect and I accept his denial. In any event, Apple did not ever take shares in Buzzle.
44 During the meeting issues were raised as to the reactions of other Apple Resellers to the merger, as the business after merger (as it was then proposed) would have 35 per cent of the market for the sale of Apple products. Mr Likidis expressed concern as to whether the new merged entity might diversify its business away from Apple products. He asked whether the new company would be prepared to make a commitment to Apple products and someone asked whether the new entity would agree to sell Apple products exclusively. Apple also expressed concern at the proposed speed of the merger.
45 The plaintiffs allege that Apple participated in the making of the decision that Buzzle would acquire the businesses of the vendor Resellers in part by Apple’s requiring Buzzle to address the concerns raised at the meeting of 16 June 2000 prior to Apple’s consenting to the acquisition of the vendor companies’ businesses by Buzzle.
46 Whilst it is true that Apple raised concerns about the proposal, and those concerns were ultimately addressed by Buzzle, Apple did not thereby participate as part of the management of Buzzle in the decision to acquire those businesses. That decision had already been made by the persons who were to become the directors of Buzzle. Apple’s “participation” was sought as a third party whose consent was required to the implementation of the decision. Apple and the promoters, and later directors, of Buzzle, dealt with each other at arm’s length in a commercial negotiation.
47 Mr Likidis prepared a note of the further information which he considered Apple needed to gain a better understanding of how the project would work. The information he sought included:
“ (a) proposal by the principals to minimise the risk to Apple in having such a large portion of its business concentrated in one business partner in New Co.
(c) 3-year business plan of New Co. detailing such things as:(b) what is proposed in respect of security to apple. Will this be in the form of a charge over the assets of the business etc. and is currently in place with each business.
- (i) revenue growth strategy e.g. new stores, marketing etc.
(iii) p & l 3 years outlook
(iv) cashflow forecasts
- (v) rationalisation of administration areas, the result in savings and cost to achieve this
(vii) timeline in completing this
(viii) timeline in going public ”.
48 On 21 June 2000 Mr Likidis and Ms Law attended a meeting with Mr Rispin, and Mr Bright and Mr Max of Arthur Andersen. They discussed extending the period for termination of a Reseller Agreement from the one month in the standard agreement. Mr Rispin proposed that a commitment to sell Apple products exclusively would be available if Apple committed to a longer term.
49 On 22 June 2000 Arthur Andersen wrote to Mr Likidis providing an interim response to the queries he had raised. They advised that “New Co is prepared to offer Apple the opportunity to subscribe for an equity interest in the company, which, if sufficiently large would also offer a board seat.” That offer was not taken up. Arthur Andersen stated that no changes to the security position were proposed prior to the initial public offering, except that “the existing principals’ exposure should be linked in some way to the ownership interests and should not increase in relation to the operations of the merged entity.” Arthur Andersen requested that all directors’ guarantees be released after the float. Arthur Andersen advised that detailed financial projections were being prepared with a target date of 11 July 2000.
50 There was later negotiation about these issues. Apple also saw advantages in the merger and proposed float. There was an obvious advantage to Apple in the expansion of the market for Apple products through a successful merger and float. A further advantage from Apple’s perspective of a successful merger and float was the repayment of the existing debts owed by the vendor Resellers to Apple.
51 At the meeting of 21 June 2000 Mr Bright of Arthur Andersen said that the new merged entity would be using the Navision system which Next Byte was already using. He advised that the idea was to add each entity onto the system one at a time before the next merging Reseller came in. Mr Likidis was aware that the Navision system had been successfully implemented by Next Byte and Mac’s Place. The other Resellers used other accounting systems.
52 On 30 June 2000 Ms Ryall wrote to Arthur Andersen and to each of the seven Resellers advising that, in principle, Apple was in favour of the proposed merger and listing, would work with “New Co” in connection with media activities about the proposed merger, and would enter into negotiations with New Co for a supply agreement. She advised that there were various terms of the proposed supply agreement yet to be negotiated including but not limited to determination of targets, the term of the agreement, securities required by Apple, and commitment by principals to New Co.
53 On 30 June 2000 Arthur Andersen said that to raise capital in an initial public offering there would need to be changes to the termination clauses contained in the existing Reseller Agreements so that the Agreement with New Co would not be terminable by either party without cause with only 30 days’ notice.
54 Buzzle was incorporated on 3 July 2000. Messrs Hartono, Giles, Mekrizis, Ford and Thompson were appointed as directors. On or about 4 July 2000 Mr Hartono discussed with Mr Giles the obtaining of a licence for Buzzle to use the Navision system which Next Byte was using. Mr Giles agreed that Next Byte would pay for the licence as long as it was treated as a loan and he could get the money back when he needed it. Mr Hartono agreed to this. The proposed merger was publicly announced on 5 July 2000. On about 10 July 2000 Next Byte paid Deloitte Touche Tohmatsu (“Deloitte”) $300,000 for Buzzle to be licensed to use the system. Buzzle became liable to repay that amount to Next Byte.
55 Apple was willing to modify the standard terms of its Reseller Agreements by providing a longer notice period for termination of the Reseller Agreement with Buzzle once the float occurred. In the interim it required that a new agreement be entered into with Buzzle on the same terms and conditions as its current agreements. On 6 July 2000 Mr Giles, with whom Mr Likidis was then dealing, confirmed that he was happy with that arrangement. As part of the merger process valuations were conducted on all of the Apple Resellers. This was necessary to determine their respective shareholdings in Buzzle Limited.
56 It was proposed that Buzzle commence trading in the week commencing Monday 24 July 2000 with the businesses of Next Byte and Mac’s Place being transferred to it at that time. They both used the Navision system and it was then proposed that other Resellers would progressively be added to the system and merge their businesses. However, shortly before 21 July 2000 in the process of valuing the Resellers a problem was identified. It was ascertained that Mac’s Place had a deficiency of net assets of about $1.1 million. Mr Giles told Apple there was “negative equity” in Mac’s Place and a bit of a hole in its accounts. Mr Shearer of Apple asked all other members of the proposed merger to supply copies of balance sheets and profit and loss statements so that Apple could assess the position of each member. At about this time Mr Likidis requested that someone do a due diligence on Mac’s Place. He also considered it necessary for Apple to review the financial status of all of the Resellers (T582).
57 Over the weekend of 22 and 23 July 2000 Mr Hartono of Choice Connections reached an agreement with Mr Thompson of Mac’s Place under which Choice Connections would acquire the latter’s business. Mr Hartono gave evidence that the agreement he reached with Mr Thompson was dictated by Mr Likidis. According to Mr Hartono, Mr Likidis said that the merger would not go ahead without Mac’s Place. Mr Hartono deposed that Mr Likidis said to him, Mr Hartono, that he would need to get someone to invest and directed that Choice Connections acquire the shares in Mac’s Place and not just acquire its assets. Mr Hartono said that he felt pressured by Mr Likidis but that he was used to what he called Mr Likidis’ heavy-handed tactics and felt he had no realistic choice if the proposed merger was to go ahead other than to purchase the business. He told Mr Likidis that Choice Connections would acquire Mac’s Place, and Mr Likidis said that Mr Thompson was to put up more security also.
58 Mr Likidis denies insisting that a deal be done. I accept that denial. I do not accept that the discussions were in the terms to which Mr Hartono deposed. Where their evidence conflicts I prefer the evidence of Mr Likidis to Mr Hartono on this topic.
59 The minutes of a Group Meeting held on 24 July 2000 record Mr Thompson’s advising that Mac’s Place had become a wholly owned subsidiary of Choice Connections, that Apple was satisfied with the security offered by Mac’s Place on the understanding that sufficient equity would be injected by Choice Connections. The minutes do not record Mr Hartono saying anything to the effect that Mr Likidis insisted that Choice Connections acquire the shares in Mac’s Place if Apple were to approve of the merger going ahead.
60 On 24 July 2000 Next Byte withdrew from the proposed merger. Mr Giles of Next Byte said that Next Byte had been unhappy with the valuations under which the share allocations to the Resellers were calculated. He said that Next Byte would continue to participate in the merger only if it received 26.5 per cent of the new company. At that time Next Byte would have been entitled to receive 18.2 per cent of the shares. The other Resellers, in particular Mr Mekrizis, did not agree to increasing the allocation to Next Byte. Before a final decision was made, Next Byte withdrew (exhibit 1, tab 35). On 27 July 2000 Mr Giles resigned as a director of Buzzle.
61 The plaintiffs plead that Apple participated in a decision made on or about 28 July 2000 to continue with the proposed merger after the withdrawal of Next Byte. The decision to withdraw was made by Next Byte, and by the other Resellers’ not accepting Next Byte’s ultimatum that it receive 26.5 per cent of the allocated shares if it were to participate in the merger. That decision was communicated to Mr Likidis on 24 July 2000.
62 Representatives of Buzzle then advised Mr Likidis that it was now proposed that all Resellers merge at once and that the merger be implemented within a month. Someone from Buzzle expressed the view recorded in a file note of Ms Law that “the person rolling last has most risk”. The decision to continue with the merger was made by the remaining Resellers, not by Apple.
63 On 24 July 2000 Mr Likidis wrote to Mr Bright of Arthur Andersen Corporate Finance and to each of the Resellers (including Next Byte). He advised that Apple did not consent to any proposed transfer of, or any other dealing outside the normal course of business with, the inventory, fixed assets or any other property the subject of charges given by Next Byte or Mac’s Place. He advised that prior to Apple’s considering releasing its security over any assets subject to its charges it would require, amongst other things, mortgages in favour of Apple over Mr Scott Thompson’s properties at Whitehorse Victoria and his wife’s residential property.
64 On the same day Mr Likidis wrote to Mr Hartono and Mr Thompson noting the proposal that Choice Connections would purchase the shares in Mac’s Place. He said that Apple would need certain information (which he specified) to consider whether it would consent to such a sale. This included the financial statements of Mac’s Place on which Choice Connections was relying and details of the proposed capital injection to Mac’s Place. On the same day Mr Likidis wrote to Mr Bright expressing concern at the withdrawal of Next Byte. He set out further information Apple required if the remaining Resellers intended to proceed with the merger. He said that Apple was reviewing the financial status of all the Resellers’ businesses and additional securities would be required if the liquid asset position of any existing Reseller was negative.
65 At this time Mr Likidis was dealing at arm’s length with the directors of Buzzle in seeking to secure and advance Apple’s interests.
66 On 28 July 2000 Mr Likidis met Mr Hartono and Mr Mekrizis. At that meeting Mr Likidis gave a PowerPoint presentation. He said that his concern was that the accounting system that had been chosen, Navision, might not work properly from day one. He put a “proposal for consideration” that the merger be delayed until March 2001. He said that he was concerned that because Mr Steinhart and Mr Giles of Next Byte had pulled out, the management ability of Buzzle was not as good as it would otherwise have been. He said “I believe you should delay the merger until the likely effects of the withdrawal of Mr Steinhart and Mr Giles become clearer”. In his PowerPoint presentation Mr Likidis wrote:
“ * no management capability in existing partners to execute merger successfully
* time to find this could be long
...
* system needs to be identified and implemented. ”
67 He proposed that there be a merger of Choice Connections, Mac’s Place and Computers Now and that otherwise, the merger should be deferred. (Computers Now was a Reseller that had been acquired by Mr Hartono.) Mr Likidis also proposed that GM Computers acquire Status Graph. This would reduce the number of groups to four to be merged at a later time.
68 Mr Likidis’ proposal was not accepted by the directors of Buzzle. At a group meeting held on 1 August 2000 Mr Stead of Deloitte presented a report on the integration of the Navision System. The minutes of the meeting (4/1197 at 1198) record that:
“ Deloitte is comfortable with the timetable for completion in the first week of September provided that the information requested from the principals is provided shortly ”.
The minutes record a number of things to be done so that the system would be ready by that time.
69 On 3 August 2000 Mr Likidis and Ms Law attended a meeting with Mr Max of Arthur Andersen. There was discussion about the implementation program for Navision. Apple was told that the merger partners wanted to “go live” on 4 September 2000. Mr Likidis accepted that from early or mid August he was not seeking to stand in the way of the merger going ahead on the basis that all of the businesses were merged at once (T588). He was assured that the merger could proceed on that basis. He received advice to that effect from the directors of Buzzle, from Deloitte and from a Mr Greg Lloyd who was Buzzle’s chief financial officer at the time. I refer below to Mr Lloyd’s appointment.
70 On 4 August 2000 a meeting was held between Mr Hartono, Mr Thompson, Mr Likidis and two other employees of Apple. It appears from notes of that meeting that it was then proposed that Choice Connections take over all of the assets and liabilities of Mac’s Place. There was then an anticipated shortfall of $1,750,000. The proposal then was that Choice Connections would pay $2,600,000 for goodwill and $400,000 for fixed assets (a total of $3,000,000). Creditors of Mac’s Place would be paid from the collection of debts and from the purchase price to be paid by Choice Connections.
71 Mr Hartono deposed that at the meeting on 4 August 2000 Mr Likidis again said that the only way the merger could go ahead would be if Choice Connections took over Mac’s Place and that Apple required that the acquisition occur immediately. Mr Likidis denied this and I accept his denial. Although Mr Hartono and other witnesses for the plaintiffs sought to give the impression that every step they took was dictated by Mr Likidis, it simply was not the case at this time that the Buzzle directors were falling in with Mr Likidis’ wishes. Only a week earlier they had rejected his proposal that a full merger be delayed and that a merger take place step by step so as gradually to integrate each business. The focus of the Resellers, including Mr Hartono, was on the prospect of making a large amount of money on the float of Buzzle Limited. The attraction to Mr Hartono in acquiring Mac’s Place, notwithstanding its deficiency in net assets, was the shareholding which would be allocated to Mac’s Place on the float. Mr Hartono said that he considered that Choice Connections had to do everything Apple said if the proposed merger was to proceed. I do not accept that evidence.
72 It was agreed at the meeting that a firm of accountants, Moore Stephens, would conduct due diligence and have full access to all documents and records of Mac’s Place. They provided their report to Mr Hartono on 18 August 2000. Their review of Mac’s Place revealed a deficiency in net assets of $3,017,000. Prior to this time Mr Hartono had had discussions with a family friend and business colleague, Mr Wing Liu, for Mr Liu and his company, and not Choice Connections, to acquire Mac’s Place. Mr Liu had informally indicated to Mr Hartono his interest in doing so. Upon receiving the due diligence report of Moore Stephens, Mr Liu was reluctant to proceed.
73 Between 19 and 21 August 2000 Mr Liu, Mr Hartono, Mr Thompson and Mr Likidis negotiated a new deal. Mr Likidis wished to avoid Apple’s having to enforce its security. This was partly because its security included Mr Thompson’s family home and other commercial properties he owned. I accept Mr Likidis’ evidence that he had a sound relationship with Mr Thompson, liked him, and did not want to enforce Apple’s rights against his home unless it was absolutely necessary. I also think that all parties wished to avoid the adverse publicity that would attend the appointment of a receiver to Mac’s Place. Such an appointment would have a negative impact on the market for Apple Computer products and could only harm the prospects of a successful float. Mr Likidis persuaded Mr Thompson to offer Mr Liu his two commercial properties which Mr Thompson said were valued at between about $800,000 and $900,000 to sweeten the deal. The transaction proceeded on this basis. Mr Liu’s company, Aircent Pty Limited (“Aircent”), paid $3 million to buy the assets of Mac’s Place and agreed to honour all of Mac’s Place’s debts and liabilities. Buzzle was to acquire from Aircent the business and assets which Aircent acquired from Mac’s Place. On the float of Buzzle Limited, Aircent was to be entitled to 18.5 per cent of the shares which was the allocation to Mac’s Place, although Mr Liu agreed that some of the shares would be transferred or allocated to Mr Thompson. Mr Thompson was to transfer his two investment properties to Mr Liu in return for the shares in Buzzle Limited. Choice Connections was to manage the business that Aircent acquired from Mac’s Place until the business was acquired by Buzzle. Aircent completed the purchase of the assets of Mac’s Place on 29 August 2000.
74 Apple required due diligence reports on each of the Resellers before releasing its charges over the Resellers’ assets. The due diligence reports were provided by Arthur Andersen. Apple had made its own assessment as a result of which it provided Buzzle with a credit limit of $20 million.
75 The minutes of a Group Meeting of 27 July 2000 record that a Mr Geoff Young of Status Graph had offered his assistance where required for the appointment of an interim chief financial officer or integration specialist. Mr Rispin noted that Mr Likidis wanted to meet the selected candidate prior to the appointment. The Group Meeting minutes of 9 August 2000 record that Mr Bright and Mr Hartono had met separately with Mr Lloyd. He was appointed by 15 August 2000. He was welcomed to his first Group Meeting on that day.
76 Apple received Arthur Andersen’s due diligence reviews of the Resellers by 31 August 2000. On that day Mr Likidis attended a meeting with Messrs Hart, Mekrizis, Liu, Kloester, Ford, McComb, Mr Bright (of Arthur Andersen), Mr Stead (by then employed by Deloitte), and Mr Greg Lloyd, the newly appointed chief financial officer of Buzzle. Mr Likidis deposed that during the meeting of 31 August 2000 he questioned Mr Stead in detail about the implementation of the Navision system and whether it would be operational from the commencement of the new business. He deposed that Mr Stead told him that the system was ready to go and would be fully operational on the first day of Buzzle’s business. I accept Mr Likidis’ evidence on this. It is objectively probable. Mr Likidis also deposed that he asked Mr Bright a number of questions concerning Buzzle’s working capital requirements and that Mr Bright said that Buzzle probably would not need any more funding as the float was to take place in November, but it had access to bank funding if needed. I accept Mr Likidis’ evidence about this. Mr Bright was not called. Mr Hartono did not recall the discussion but did not deny it. Neither Mr Mekrizis nor Mr Liu dealt with that evidence. None of the other attendees at the meeting was called. In fact Buzzle did not have any overdraft or other arrangements with a bank for the provision of funding.
77 Mr Likidis deposed that at the meeting all of the Resellers and their advisors were very frustrated at his continuing to ask questions about the capacity of Buzzle to pay its debts to Apple, and whether or not the Resellers were ready to go ahead with the merger. He deposed that Mr Lloyd said “Everyone in this room is ready to go. There is only one person in this room that is holding the merger up and that is you. Are you prepared to sign off or not?” Mr Likidis replied “I will only sign off when you guys convince me that it is ready to go.”
78 Although Mr Hartono denied this, I accept Mr Likidis’ evidence.
79 The participants broke into a series of smaller meetings where Mr Likidis met individually with the principals of Manning Computer, Status Graph, and with Mr Mekrizis, to discuss a negative net asset position of Manning Computer and Status Graph revealed by the due diligence reports. Mr Mekrizis agreed to provide third party security for those companies.
325 It suffices to say that whilst Apple and Mr Likidis took a proactive role in exploring the possibility of attracting third party investors, and in pursuing with the directors the proposal for de-merger, and whilst Apple wanted Buzzle to continue to trade whilst those possibilities were explored, no instruction or wish was given or expressed on which the directors collectively acted. Nor had the directors become accustomed to acting on Apple’s or Mr Likidis’ instructions or wishes.
326 Both parties relied upon a letter of 22 January 2001. Apple prepared the document and sent it to Mr Qureshi. Mr Qureshi delivered it to Mr Hartono and Mr Liu. They signed it and returned it to Mr Likidis. The letter was prepared by Apple’s legal department. It said:
- “ Dear Mr T Qureshi
- Re: Request for Assistance in Respect of Internal Re-Organisation
- We write further to our recent meetings and to confirm our understanding of the present position. In view of Buzzle’s status as a significant re-seller of Apple products in the Australian market, it has been agreed that Apple will provide Buzzle with advice and assistance in a proposed internal re-organization aimed at improving Buzzle’s commercial performance. In particular, Buzzle wishes to avail itself of Apple’s knowledge and experience, gained from its position as a subsidiary of a major international corporation, in order to help Buzzle to operate its business more efficiently and to maximise profitability.
- For the avoidance of doubt, and to define unambiguously the role that Apple intends to play, Apple wishes to set out the terms on which it offers such assistance.
- 1. Apple does not wish to become involved in any corporate decision making, either at managerial or directorship level. Whilst Apple is willing to share its expertise and offer practical guidance, it is the Buzzle directors who have the ultimate responsibility for all decisions and they are, of course, at liberty to adopt or reject any advice as they see fit. Accordingly, if Apple is invited to attend any meetings at which corporate decisions are made, for example, a director’s [sic] meeting it will only do so as an observer and/or adviser;
- 2. Buzzle will not represent to any third party that Apple’s assistance represents any involvement in the management of Buzzle’s business.
- Apple is conscious, that as Buzzle’s secured creditor, its interests may not always coincide with those of Buzzle. In the circumstances, Apple strongly recommends that Buzzle gives consideration to retaining professional accounting and/or financial advisors of its own to advise it on the re-organisation.
- Please arrange for two Buzzle Directors to countersign the bottom of this letter to indicate the Board’s acceptance of this document. In the meantime, we sincerely hope that Apple’s assistance will facilitate Buzzle’s commercial development and that our two companies will continue to work successfully together in the future.
- Yours sincerely
Apple Computer Australia Pty Limited
- Jim Likidis
Director of Finance & Business Operations ” (TB10/3347-3348)
327 In opening submissions the plaintiffs contended that by the end of January 2001 Apple was acutely aware that it had been engaged in the management and decision-making of Buzzle, and for that reason sought an acknowledgment from Buzzle that it was not doing so. The plaintiffs contended that the reason the acknowledgment was signed was not because it was correct, but because Apple required it to be signed.
328 Mr Liu deposed that he was in a state of shock when he read the letter, which to his mind did not reflect the extent of Apple’s and Mr Likidis’ control of and involvement in the affairs of Buzzle. He deposed that he signed it because he did not think he had any choice. Mr Hartono also deposed that he felt that he had no choice but to sign, given Buzzle’s financial circumstances. Mr Qureshi deposed that Mr Likidis said that the letter had to be signed if he, Mr Likidis, were to continue his involvement and that “If you do not sign this I will pull the plug. You will have no business.”
329 I do not accept that Mr Likidis said words to the effect “If you do not sign this I will pull the plug. You will have no business.”. He did say that if the letter was not signed, he would walk out. That may well have been understood by Buzzle’s executive as being likely to lead immediately to Apple’s exercising its rights as a secured creditor. In these circumstances, I do not consider the fact that Mr Hartono or Mr Liu signed the letter advances Apple’s position on the question whether Apple had by 22 January 2001 gone beyond acting as an adviser. But it must have been clear to Buzzle’s executives from 22 January 2001 that Apple was not purporting to give any direction to Buzzle’s directors with which the directors were expected to comply.
330 It may be noted that the plaintiffs did not allege that the signing of the letter of 22 January 2001 by Messrs Hartono and Liu was an instance of the directors of Buzzle, or some of them, acting in accordance with Apple’s instructions or wishes.
331 The plaintiffs stressed that Apple perceived it to be in its interests for Buzzle to continue to trade whilst Apple worked out what it wanted to do with Buzzle. It did not want winding-up proceedings to be commenced against Buzzle. The reason for this was that Buzzle was by far the largest Reseller and accounted for perhaps 30 per cent of its revenues. Apple faced substantial losses if Buzzle went into administration or receivership from the loss of sales and damage to Apple’s brand. But motive for Apple to give directions to Buzzle’s board, does not establish that Buzzle’s directors were accustomed to act in accordance with Apple’s wishes.
332 For these reasons I conclude that neither Apple nor Mr Likidis was a director of Buzzle within the meaning of para (b)(ii) of the definition of “director”.
Other Issues Do Not Arise
333 It follows from my conclusion that Apple was not a director of Buzzle that the plaintiffs are not entitled to recover as voidable preferences payments made to Apple between 5 January and 30 March 2001. That is because the payments were made more than six months before the commencement of Buzzle’s winding-up. For that claim to succeed the plaintiffs needed to establish that Apple was a related entity of Buzzle (s 588FE(4)), which it sought to do by establishing that Apple was a director of Buzzle. That contention fails. The plaintiffs also accepted that the claim would fail if the charge were valid as I have found it to be. It is not necessary therefore to deal with questions of allocation of payments to debts which would otherwise arise. It is sufficient to indicate that if my earlier conclusions were wrong, I would hold that there was clearly a running account between Apple and Buzzle. I would accept, as the plaintiffs contended, that the peak debt on the running balance account was a sum of $26,052,311 at 12 January 2001, and the debt had been reduced to $18,814,341 by 30 March 2001 representing a reduction of $6,237,970.
334 In light of my conclusion that Apple was not a shadow director, it is unnecessary to deal with other issues of quantum which would otherwise have arisen. It is sufficient to say the following in case my conclusion that Apple was not a shadow director is set aside on appeal. First, the defendants contended that the plaintiffs had not proved what debts had been incurred between 1 January and 31 March 2001. Both parties retained accountants to provide expert evidence as to accounting matters, and, in particular, in relation to the debts of Buzzle. The experts provided various reports. A joint report was prepared in accordance with directions of the court. The experts came to an agreement on matters including the dates and amounts of Buzzle debts and the ageing of those debts (Joint Expert Report dated 26 March 2009, para 9). They prepared a spreadsheet of such debts broken down by month and creditor.
335 The defendants contended that the report was prepared only for the purposes of issues of solvency and that in any event, the experts’ opinion was flawed. The defendants submitted that the experts proceeded on the assumption that debts were incurred at the time of invoice, whereas manifestly that was not so, and that some debts would have been incurred prior to the date of invoice. The defendants contended that the plaintiffs had not established what those debts were. However, the plaintiffs tendered the thousands of invoices which made up the debts claimed to have been incurred between 1 January 2001 and 30 March 2001. The defendants declined my invitation to identify any particular debts they might contend had not been incurred in that period.
336 If there were a real issue that some of the debts the plaintiffs claimed had been incurred between 1 January 2001 and 30 March 2001 had not been incurred in that period, notwithstanding the agreement of the experts to the contrary, it behoved the defendants to identify what those debts were. I would accept the plaintiffs’ submission as to the quantum of debts incurred in that period.
337 The amount recoverable as damages for insolvent trading is not the quantum of the debts incurred, but an amount equal to the amount of the loss or damage suffered by the creditors (s 588M). Those amounts are usually the same (Tourprint International Pty Ltd (in Liq) v Bott [1999] NSWSC 581; (1999) 32 ACSR 201 at [78]-[79]; Powell (as joint liquidators of Noelex Yachts Australia Pty Ltd (in liq)) v Fryer [2001] SASC 59; (2001) 37 ACSR 589 at [88]), although that is not always the case, for example, if a creditor does not receive a dividend in the liquidation because he or she fails to lodge a proof of debt. In the present case, had I found that Apple and Mr Likidis were directors of Buzzle, I would have accepted the plaintiffs’ submission that the amount of loss or damage recoverable by the liquidator as a debt due to the company, being the loss or damage suffered by creditors in relation to the company’s debt because of the company’s insolvency, is the amount of the debts incurred between 5 January and 30 March 2001, both to Apple and to other creditors, to the extent that those debts were unpaid, including the debts incurred to Apple which were unpaid after realisation of Apple’s security. (No defence of set-off was raised to the claim for damages for insolvent trading.)
338 There was a question as to how payments received after 9 February 201 should be allocated to prior debts. On 9 February 2001 Mr Likidis wrote to Mr Qureshi confirming new trading arrangements. Apple stipulated that future deliveries would be made on a cash-on-delivery basis and said it would release $1 in stock for every $1.20 paid to Apple, with 20 cents of every payment of $1.20 being applied to reduce Buzzle’s outstanding account with Apple. Buzzle agreed to that arrangement. The plaintiffs contended that the arrangement was not in fact implemented because Apple made what appeared to be random cash allocations which bore no relationship to the terms set out in the cash-on-delivery arrangement. Buzzle did not object to the terms proposed by Apple in its letter of 9 February 2001. By ordering further stock Buzzle is to be taken as having accepted those terms. It was not open to Apple to allocate payments made after 9 February differently. But the arrangement did not specify to which earlier debts the payments of 20 cents in $1.20 were to be allocated. In the absence of appropriation by Buzzle of those payments to particular debts, it was open to Apple to appropriate such payments to such earlier debts as it saw fit. In light of my conclusion that the defendants have no liability for the debts incurred by Buzzle after 1 January 2001, it is unnecessary to pursue further the questions of allocation of the payments after 15 February 2001 to prior debts.
339 It is unnecessary to deal with questions of set-off. It is also unnecessary to decide whether, if Apple or Mr Likidis were otherwise liable, they ought to be relieved from liability pursuant to s 1318.
Conclusions and Orders
340 For these reasons, all of the plaintiffs’ claims fail. I direct entry of judgment for the defendants. I order that the defendants’ cross-claim against Mr McComb (the second cross-defendant) be dismissed. The exhibits may be returned after 28 days. Prima facie, costs follow the event. I will hear the parties on costs in case the parties seek any particular order for costs.
Annexure A
Intercompany accounts as at 8 February 2001 - Restated
44
20
6