DSHE Holdings Ltd (Receivers and Managers) (in liq) v Potts; HSBC Bank Ltd v Abboud; Potts v National Australia Bank Ltd

[2022] NSWCA 165

Court of Appeal

Supreme Court

New South Wales

Medium Neutral Citation:

DSHE Holdings Ltd (Receivers and Managers) (in liq) v Potts; HSBC Bank Ltd v Abboud; Potts v National Australia Bank Ltd [2022] NSWCA 165

Hearing dates:

30-31 May and 1-3 June 2022

Date of orders:

26 August 2022

Decision date:

26 August 2022

Before:

Leeming JA; Kirk JA; Basten AJA

Decision:

In matter 2021/314709 (Company appeal):

(1)    Appeal allowed in part.

(2)    Set aside order 7 made on 7 October 2021 and the orders made on 11 February 2020 insofar as they apply to the costs of Messrs Potts and Abboud being paid by DSH in proceeding 2017/81927.

(3)    In lieu thereof, judgment against each of the first respondent (Mr Potts) and the second respondent (Mr Abboud) in the amount of $11,826,000, to take effect from 7 October 2021.

(4)    The appeal is otherwise dismissed, with no order as to costs, with the intent that the parties bear their own costs of the appeal.

(5)    The parties are directed to provide within 14 days written submissions of no more than 5 pages, along with any evidence in support of those submissions, addressing the issues of the costs of the trial and the interest payable. Any submissions (of no more than 3 pages) and evidence in reply is to be provided within a further 7 days after that, with a view to all outstanding issues being determined on the papers.

In matter 2021/311103 (HSBC appeal):

(1)   Appeal dismissed.

(2)   The appellant is to pay the respondents’ costs.

In matter 2021/289675 (Potts appeal):

(1)   Appeal dismissed.

(2)   The appellant is to pay the respondent’s costs.

Catchwords:

CORPORATIONS — Directors and officers — Directors’ duties — Duty of care and diligence — Whether directors breached s 180 of the Corporations Act 2001 (Cth) by voting in favour of the payment of dividends — Where an alleged contravention of s 254T was significant to the alleged contravention of s 180

CORPORATIONS — Statutory construction — Construction of s 254T(1)(c) of the Corporations Act — Whether “prejudice” to a company’s ability to pay its creditors includes prejudice to the company’s ability to pay the claims of its creditors as and when they fall due — Whether “ability to pay” encompasses the presence of trading stock which could be sold

CORPORATIONS — Damages — Whether payment of a dividend can constitute “damage” under s 1317H(1) of the Corporations Act in circumstances where there has been a breach of a statutory norm

WORDS AND PHRASES — “materially prejudice” — “ability to pay” — “damage” — Corporations Act, ss 254T(1)(c),1317H(1)

CORPORATIONS — Capital raising — Application for loan facility — Misleading or deceptive conduct — Failure to disclose practice of over-purchasing to obtain O&A rebates — Failure to disclose actions taken to address overstocking — Significance attached to undisclosed information determined by all evidence

CORPORATIONS — Proportionate liability — One act of two persons acting jointly causing loss or damage — Where officer is agent of company — Vicariously liable principal not concurrent wrongdoer — No acts or omissions independently attributable to company

Legislation Cited:

Australian Consumer Law, ss 18, 236

Australian Securities and Investments Commission Act 2001 (Cth), ss 12DA, 12GP

Civil Liability Act 2002 (NSW), Pt 4, s 34

Civil Procedure Act 2005 (NSW), ss 100, 101

Companies Code (NSW)

Competition and Consumer Act 2010 (Cth), Pt VIA, ss 87CB, 87CD, 87CF, 87CI, Sch 2 – Australian Consumer Law, ss 18, 236

Corporations Act 2001 (Cth), ss 9, 95A, 180, 254T, 254V, 256B, 257A, 260A, 1041H, 1041L, 1317H

Cases Cited:

Adler v Australian Securities and Investments Commission (2003) 46 ACSR 504; [2003] NSWCA 131

Australia & New Zealand Banking Group Ltd v Westpac Banking Corporation (1988) 164 CLR 662; [1988] HCA 17

Australian Securities and Investments Commission v Adler (2002) 41 ACSR 72; [2002] NSWSC 171

Australian Securities and Investments Commission v Cassimatis (No 8) (2016) 336 ALR 209; [2016] FCA 1023

Australian Securities and Investments Commission v Healey (2011) 196 FCR 291; [2011] FCA 717

Australian Securities and Investments Commission v Maxwell (2006) 59 ACSR 373; [2006] NSWSC 1052

Australian Securities and Investments Commission v Rich (2009) 75 ACSR 1; [2009] NSWSC 1229

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

Berry v CCL Secure Pty Ltd (2020) 271 CLR 151; [2020] HCA 27

Brady (Inspector of Taxes) v Group Lotus Car Cos plc [1987] 2 All ER 674

Browne v Dunn (1893) 6 R. 67

Campbell v Backoffice Investments Pty Ltd (2009) 238 CLR 304; [2009] HCA 25

Caron and Seidlitz v Jahani and McInerney in their capacity as liquidators of Courtenay House Pty Ltd (in liq) & Courtenay House Capital Trading Group Pty Ltd (in liq) (No 2) (2020) 102 NSWLR 537; [2020] NSWCA 117

Cassimatis v Australian Securities and Investments Commission (2020) 275 FCR 533; [2020] FCAFC 52

Connective Services Pty Ltd v Slea Pty Ltd (2019) 267 CLR 461; [2019] HCA 33

Day v SAS Trustee Corporation [2021] NSWCA 71

Devaynes v Noble (1816) 35 ER 781

DSHE Holdings (Receivers & Managers Appointed) (In Liquidation) v Nicholas Abboud (No 3); National Australia Bank Limited v Nicholas Abboud (No 4) [2021] NSWSC 673

Gould v Vaggelas (1985) 157 CLR 215; [1985] HCA 75

Hadgelias Holdings Pty Ltd v Seirlis [2015] 1 Qd R 337; [2014] QCA 177

Hagan v Waterhouse (1991) 34 NSWLR 308

Hunt & Hunt Lawyers v Mitchell Morgan Nominees Pty Ltd (2013) 247 CLR 613; [2013] HCA 10

Lee v Lee (2019) 266 CLR 129; [2019] HCA 28

Lewis v Australian Capital Territory (2020) 271 CLR 192; [2020] HCA 26

Lord Buddha Pty Ltd (in liq) v Harpur (2013) 41 VR 159; [2013] VSCA 101

Marks v GIO Australia Holdings (1996) 196 CLR 494; [1998] HCA 69

Murphy v Overton Investments Pty Ltd (2004) 216 CLR 388; [2004] HCA 3

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

Re CSR Ltd (2010) 183 FCR 358; [2010] FCAFC 34

Re Hallett’s Estate (1880) 13 Ch D 696

Robinson v 470 St Kilda Road Pty Ltd (2018) 263 FCR 572; [2018] FCAFC 84

Rosenberg v Percival (2001) 205 CLR 434; [2001] HCA 18

Scalise v Bezzina [2003] NSWCA 362

Segenhoe Ltd v Akin (1990) 29 NSWLR 569

Shafron v Australian Securities and Investments Commission (2012) 247 CLR 465; [2012] HCA 18

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

Smith v Noss [2006] NSWCA 37

Suttor v Gundowda Pty Ltd (1950) 81 CLR 418; [1950] HCA 35

Termite Resources NL (in liq) v Meadows (No 2) (2019) 370 ALR 191; [2019] FCA 354

Tomasetti v Brailey [2012] NSWCA 399

Trevor v Whitworth (1887) 12 App Cas 409

Vines v Australian Securities and Investments Commission (2007) 73 NSWLR 451; [2007] NSWCA 75

Wambo Coal Pty Ltd v Sumiseki Materials Co Ltd (2014) 88 NSWLR 689; [2014] NSWCA 326

Westpac Banking Corporation v Jamieson [2016] 1 Qd R 495; [2015] QCA 50

Williams v Pisano (2015) 90 NSWLR 342; [2015] NSWCA 177

Woodhouse v Fitzgerald (2021) 104 NSWLR 475; [2021] NSWCA 54

Wormald v Maradaca Pty Ltd [2020] NSWCA 289

Wyzenbeek v Australasian Marine Imports Pty Ltd (in liq) (2019) 272 FCR 373; [2019] FCAFC 167

Yebdoo v Holmewood [2021] NSWCA 119

Texts Cited:

Commonwealth of Australia, Inquiry into the Law of Joint and Several Liability: Report of Stage 2 (1995)

Explanatory Memorandum, Corporations Amendment (Corporate Reporting Reform) Bill 2010 (Cth)

Yuen-Yee Cho and Vishaal Kishore, “The ‘material prejudice’ test and the financial assistance prohibition” (2004) 78 ALJ 194

Commonwealth House of Representatives, Parliamentary Debates (Hansard), 26 May 2010 at 4132

Category:

Principal judgment

Parties:

2021/314709 (Company appeal)
DSHE Holdings Ltd (receivers and managers appointed) (in liq) (Appellant)
Michael Thomas Potts (First Respondent)
Nicholas Abboud (Second Respondent)

2021/311103 (HSBC appeal)
HSBC Bank Australia Ltd (Appellant)
Nicholas Abboud (First respondent)
Michael Thomas Potts (Second respondent)

2021/289675 (Potts appeal)
Michael Thomas Potts (Appellant)
National Australia Bank Ltd (Respondent)

Representation:

Counsel:
B Walker SC, J Arnott SC and C Winnett (DSHE Holdings Ltd and National Australia Bank Ltd)
S Nixon SC, M Ellicott and A Zheng (Mr Potts)
R Smith SC and S Puttick (Mr Abboud)
D Thomas SC and B Michael (HSBC Bank Australia Ltd)

Solicitors:
Norton Rose Fulbright Australia (DSHE Holdings Ltd and National Australia Bank Ltd)
Hall & Wilcox Lawyers (Mr Potts and Mr Abboud in the Potts and HSBC appeals)
Clayton Utz (Mr Potts and Mr Abboud in the Company appeal)

File Number(s):

2021/314709; 2021/289674; 2021/311103

Publication restriction:

Nil

 Decision under appeal 

Court or tribunal:

Supreme Court of New South Wales

Jurisdiction:

Equity Division – Commercial List

Citation:

[2021] NSWSC 673

Date of Decision:

11 June 2021

Before:

Ball J

File Number(s):

2017/81927; 2017/81938

HEADNOTE

[This headnote is not to be read as part of the judgment]

These three appeals arise from events culminating in the collapse, in January 2016, of the retail business carried on under the name “Dick Smith”. The company, Dick Smith Holdings Ltd (“DSH”), went into voluntary administration in January 2016 and into liquidation in July of the same year. A number of proceedings were brought, of which only two are presently relevant, namely (i) by National Australia Bank Ltd (“NAB”) and HSBC Bank Australia Ltd (“HSBC”) (jointly), and (ii) by the receivers appointed to DSH on behalf of the company. Mr Nicholas Abboud, the Managing Director and Chief Executive Officer of DSH, and Mr Michael Potts, the company’s secretary, Chief Financial Officer and a director, were defendants to both proceedings. Six non-executive directors of DSH were also defendants to the proceeding brought by the company, unsuccessfully. All claims against Mr Abboud failed. The NAB’s claim against Mr Potts succeeded. The trial of both proceedings was heard by Ball J in the Equity Division.

Three appeals arising from those proceedings were heard together. The first was brought by DSH against Messrs Abboud and Potts (2021/314709). The second was brought by HSBC against Messrs Abboud and Potts (2021/311103). The third was brought by Mr Potts against NAB (2021/289675). The company did not pursue its claims against the non-executive directors.

The Court (Leeming JA, Kirk JA and Basten AJA) delivered one joint judgment dealing with the three appeals in turn.

Company appeal: 2021/314709

DSH alleged, relevantly, that Messrs Potts and Abboud breached their duties under s 180 of the Corporations Act 2001 (Cth) by voting in favour of board decisions to declare an interim dividend of $16.555m in February 2015 and a final dividend of $11.826m in August 2015. It was said that DSH was having cash flow difficulties which would be exacerbated by payment of the dividends, and that Messrs Potts and Abboud failed to consider, with reasonable care and diligence or at all, whether the payment of the dividends would comply with s 254T of the Corporations Act and, in particular, whether the payment would materially prejudice DSH’s ability to pay its creditors.

As regards the interim dividend, the primary judge held DSH had not established that either Mr Potts or Mr Abboud had contravened s 180. As regards the final dividend, his Honour held that DSH had established a contravention of s 180 by Mr Potts but not by Mr Abboud. However, the judge held that the company had not suffered loss as a result of Mr Potts’ contravention.

The principal issues on appeal were as follows:

1. Did the primary judge err in finding that Mr Potts contravened s 180 of by voting in favour of the decision to pay the final dividend, and did he err in finding that Mr Abboud did not do so?

2. Did the primary judge err in finding that neither Mr Potts nor Mr Abboud contravened s 180 by voting in favour of the resolution to pay the interim dividend?

3. To the extent that any contraventions are made out, did his Honour err in finding that they did not result in DSH suffering any damage for the purposes of s 1317H of the Corporations Act? The Court upheld the appeal in part, concluding that both Mr Potts and Mr Abboud had contravened s 180 with respect to the payment of the final dividend, and that they were liable to compensate the company for the amount of that payment, together with interest.

The Court upheld the appeal in part, as regards the final dividend.

As to issue (i):

1. Section 254T(1)(c) of the Corporations Act provides that a company must not pay a dividend unless, amongst other things, the payment “does not materially prejudice the company’s ability to pay its creditors”. That encompasses not only prejudice to the company’s ability to pay creditors per se but also its ability to pay debts as and when they fall due: at [80]-[99]. That a company had a practice of paying creditors late does not necessarily mean that s 254T would be contravened by the company paying a dividend, although it does serve to raise the question: at [101]-[102]. Material prejudice of the relevant kind might potentially be avoided by the company holding trading stock which could be sold, but the issue will turn on the facts: at [105]-[107].

2. A contravention of directors’ duties may be made out by reference to failing to take reasonable care to ensure that the company did not breach other legal norms. But merely because an action of a company is likely to breach, will breach, or does in fact breach some other legal norm does not necessarily establish a breach of the duties owed by the directors to the company. The converse is also true: just because an apprehended breach did not eventuate, it does not necessarily mean that a director complied with his or her duties: at [111]-[116].

   Australian Securities and Investments Commission v Maxwell (2006) 59 ACSR 373; [2006] NSWSC 1052 at [104], [110]; Australian Securities and Investments Commission v Cassimatis (No 8) (2016) 336 ALR 209; [2016] FCA 1023 at [537], [540]; and Cassimatis v Australian Securities and Investments Commission (2020) 275 FCR 533; [2020] FCAFC 52 at [71]-[79], [179]-[184] and [458]-[466], applied.

3. The primary judge did not err in finding that Mr Potts contravened his duty as a director under s 180 of the Corporations Act by voting in favour of payment of a final dividend in circumstances where the cash flow projection available at the time indicated that the company would have a cash shortfall of some $31 million at the time the dividend was to be paid, which shortfall was to be addressed by deferring the payment of creditors: at [147]-[149]. Reliance on industry practice with respect to late payment of trade creditors could not be an answer to an alleged failure properly to consider the distinct issue of whether payment of a dividend may contravene s 254T: at [151]-[154]. Mr Potts’ argument that the shortfall could be explained by cash sources not taken into account by the primary judge was not made out: at [169]-[170] and [181].

4. The primary erred in finding that Mr Abboud did not contravene s 180. Mr Abboud understood at the relevant time that DSH from time to time was not able to pay its creditors as and when they fell due: at [191]-[192]. In that context it is not a sufficient answer to the company’s arguments with respect to s 254T to say that Mr Abboud was not aware of the detailed cash flow projections. He should have asked Mr Potts for more detailed information about the cash flow position before supporting the dividend recommendation, and in any event he failed properly to consider the possibility of contravention of s 254T by way of payment of the final dividend causing material prejudice to the company’s ability to pay its creditors. He did not exercise the degree of care and diligence that a reasonable person in his position as a director and CEO would have exercised: at [211]-[212].

5. Mr Abboud was sufficiently informed of and confronted with the company’s case focused on s 254T: at [223].

   Browne v Dunn (1893) 6 R 67; Scalise v Bezzina [2003] NSWCA 362, applied.

As to issue (ii):

1. The primary judge did not err in finding that neither of Messrs Abboud and Potts contravened s 180 with respect to the payment of the interim dividend: at [238].

2. At the relevant time DSH had fallen into the practice of regularly deferring payment of some of its creditors. However, the question posed by s 254T is whether the company’s ability to pay is materially prejudiced by the payment of the dividend. The fact that the interests of creditors are being prejudiced by the actions of the company at the time of payment of the dividend does not, of itself, establish a contravention of the provision. The evidence did not establish that DSH’s ability to pay its creditors was or would be compromised around the payment date: at [239]. That a decision was imprudent, or that there were problems in the management of the company, does not establish that the decision manifested a failure properly to consider s 254T issues, nor that payment of the dividend would materially prejudice the company’s ability to pay its creditors: at [244].

As to issue (iii):

1. The primary judge erred in finding that DSH suffered no damage for the purposes of s 1317H of the Corporations Act. DSH suffered damage by paying out money that would not otherwise have been paid but for the contraventions of s 180: at [270].

2. Payment of a dividend can constitute damage suffered by the corporation, even though the payment benefits shareholders. The interests of the company and the shareholders are not identical: at [264]-[269].

   Pilmer v Duke Group Ltd (in liq) (2001) 207 CLR 165; [2001] HCA 31 at [18] and [48]-[65]; Bell Group Ltd (in liq) v Westpac Banking Corporation (No 9) (2008) 39 WAR [2008] WASC 239 at [4395]; Australian Securities and Investments Commission v Cassimatis (No 8) at [515]-[517]; Segenhoe Ltd v Akin (1990) 29 NSWLR 569; [1990] Aust Torts Reports 81-033, applied.

3. The onus was on DSH to establish that but for the contraventions of Messrs Abboud and Potts it would not have suffered the loss that it did. DSH discharged that onus: at [277], [284] and [295]-[296].

   Berry v CCL Secure Pty Ltd (2020) 271 CLR 151; [2020] HCA 27 at [28] and [64]-[65]; Termite Resources NL (in liq) v Meadows (No 2) (2019) 370 ALR 191; [2019] FCA 354 at [732]; Brady (Inspector of Taxes) v Group Lotus Car Cos plc [1987] 2 All ER 674 at 686–687, applied.

HSBC appeal: 2021/311103

HSBC participated in a Syndicated Facility Agreement in June 2015, and in November 2015 entered into an Extension Agreement temporarily increasing the funds available to DSH from $60m to $80m. HSBC alleged at trial that its entry into each transaction was caused by the misleading and deceptive conduct of Messrs Abboud and Potts. The primary judge rejected the claim that there had been misleading or deceptive conduct prior to HSBC entering the Syndicated Facility Agreement, but found that Mr Potts had engaged in misleading or deceptive conduct prior to agreeing to extend the facility. However, the primary judge found that HSBC had not established either causation or loss, because HSBC had not shown what it would have done if it had been told that DHS was suffering from liquidity problems, and because in fact while most of the additional $20m was drawn down, it was also repaid.

The principal issues in this appeal were:

1. whether the primary judge had erred in failing to find causation; and

2. whether the primary judge had erred in failing to find loss.

The Court dismissed the appeal.

As to issue (i):

1. There is a distinction between a person who enters into contractual relations as a result of misleading and deceptive conduct, and a person who is already in contractual relations with a person who engaged in misleading and deceptive conduct which causes an alteration to those contractual relations. It was for HSBC to establish what it would have done, thereby establishing recoverable loss or damage. There was no error in the primary judge finding that HSBC has failed to do so: at [314]-[320].

   Berry v CCL Secure Pty Ltd [2020] HCA 24; 94 ALJR 715 and Wyzenbeek v Australasian Marine Imports Pty Ltd (in liq) (2019) 272 FCR 373; [2019] FCAFC 167 considered.

As to issue (ii):

1. The “rule” in Clayton’s case did not produce the result that the repayments which occurred after the Extension Agreement was drawn down were to be attributed to monies lent under the Syndicated Facility, with the result that it could recover the funds lent under the Extension Agreement: at [335]-[341].

Potts appeal: 2021/289675

The primary judge found NAB alleged that it had been misled and deceived by Mr Potts, at a meeting on 6 May 2015 and in a telephone call a few days later, when it entered into the Syndicated Facility Agreement. The issue was what was said about the building up of stock in January 2015 and the steps taken by DSH to address the problem. The primary judge found in favour of NAB. Mr Potts appealed.

The principal issues in this appeal were:

1. whether Mr Potts' conduct was misleading or deceptive;

2. whether Mr Potts' conduct had caused NAB to enter into the agreement; and

3. whether, if Mr Potts were liable, he could avail himself of a proportionate liability partial defence.

The Court dismissed the appeal.

As to issue (i):

1. The primary judge did not err in finding that Mr Potts’ conduct was misleading and deceptive. The evidence supported the findings that (i) Mr Potts knew the issue with pursuing O&A rebates; (ii) failed to raise the issue with the NAB representatives during the 6 May meeting and subsequent telephone calls and (iii) did not provide a sufficient explanation as to steps taken to address the problem: at [377]-[400].

As to issue (ii):

1. The fact that the primary judge placed no weight on the generalised evidence of reliance by NAB officers did not prevent a finding based on the contemporaneous documents and the cross-examination that the conduct caused NAB to enter into the transaction. The contemporaneous evidence supported the finding that the NAB officers would have considered the information which Mr Potts withheld to be highly significant, and would have not agreed to participate in the syndicate with HSBC had it been disclosed: at [401]-[433].

   Campbell v Backoffice Investments Pty Ltd (2009) 238 CLR 304; [2009] HCA 25; Rosenberg v Percival (2001) 205 CLR 434; [2001] HCA 18, considered.

As to issue (iii):

1. A defence of proportionate liability is available where there is one or more legally actionable acts or omissions of two persons acting jointly which causes loss or damage, the subject of the claim: at [437].

   Competition and Consumer Act 2010 (Cth), s 87CB, Sch 2 – Australian Consumer Law, ss 18, 236; Corporations Act 2001 (Cth), ss 1041H, 1041L; Australian Securities and Investments Commission Act 2001 (Cth), ss 12DA, 12GP.

   Hunt & Hunt Lawyers v Mitchell Morgan Nominees Pty Ltd (2013) 247 CLR 613; [2013] HCA 10, followed.

2. However, the only potential wrongdoer other than Mr Potts was DSH. A vicariously liable principal cannot be a concurrent wrongdoer under the relevant statutory regimes. Mr Potts did not establish that some acts and omissions attributable to DSH, other than his own acts vicariously attributable to DSH, led to DSH being a concurrent wrongdoer: at [444]-[449].

   Competition and Consumer Act 2010 (Cth), ss 87CF, 87CI.

   Williams v Pisano (2015) 90 NSWLR 342; [2015] NSWCA 177 applied.

   Tomasetti v Brailey [2012] NSWCA 399; Robinson v 470 St Kilda Road Pty Ltd (2018) 263 FCR 572; [2018] FCAFC 84, doubted.

Judgment

1. THE COURT: These three appeals arise from events culminating in the collapse, in January 2016, of the retail business carried on under the name “Dick Smith”. The company, Dick Smith Holdings Ltd, was floated on the Australian Securities Exchange in late-2013, and is now known as DSHE Holdings Ltd (receivers and managers appointed) (in liq) (DSH). The appeals have been brought from orders made in two proceedings following a trial in the Corporations List lasting some 57 days, mostly in September to December 2020 and February 2021 (the trial commenced in March 2020 but was delayed for six months, following the outbreak of the COVID-19 pandemic). The proceedings were brought by National Australia Bank Ltd (NAB) and HSBC Bank Australia Ltd (HSBC) (jointly), and by the receivers appointed to DSH. Mr Nicholas Abboud, the Managing Director and Chief Executive Officer of DSH, and Mr Michael Potts, the company’s secretary, Chief Financial Officer and also a director, were defendants to both proceedings. Six non-executive directors of DSH were also defendants to the proceeding brought by the company.

2. Three representative proceedings brought on behalf of DSH shareholders were also heard concurrently, but settled during the course of the hearing, as did a claim against the company’s auditors.

3. HSBC and NAB sued Messrs Abboud and Potts in respect of misleading and deceptive conduct said to have induced the banks to enter into a Syndicated Facility Agreement in June 2015 and, in HSBC’s case, a related Extension Agreement entered into in November 2015. DSH sued Messrs Abboud and Potts and the non-executive directors for breaches of the duty of care they owed under s 180(1) of the Corporations Act 2001 (Cth) and the general law by deciding to declare an interim dividend of $16.555m in February 2015 and a final dividend of $11.826m in August 2015. A further alleged breach was the failure to cause DSH to implement adequate procedures, practices or systems to manage the risks created by the adoption of a scheme to maximise rebates offered by suppliers, particularly “O&A rebates”, which were payments separate from ordinary trading terms, often agreed to informally at the time a purchase order was placed, and which were often associated with superseded or slow-moving stock. “O&A” is an abbreviation of “Over and Above”, reflecting the fact that the rebate was agreed to separately from the ordinary terms of trade with that supplier. As will be seen, O&A rebates had a direct and significant impact on profit, because they were recognised as revenue immediately (ie before the stock was sold).

4. The primary judge delivered a substantial judgment of 613 paragraphs in June 2021: DSHE Holdings (Receivers & Managers Appointed) (In Liquidation) v Nicholas Abboud (No 3); National Australia Bank Limited v Nicholas Abboud (No 4) [2021] NSWSC 673. Very broadly speaking, his Honour found in favour of NAB but not HSBC, and he dismissed DSH’s claims against Messrs Abboud and Potts. The issues on the three appeals heard over five days in this Court are considerably narrower. These reasons take the following course:

1. Part A provides an uncontroversial factual overview of the events in question, drawn very substantially from unchallenged findings by the primary judge at [1]-[337], and with a focus upon the events between February and November 2015.

2. Part B addresses the appeal brought by DSH against Messrs Potts and Abboud.

3. Part C addresses HSBC’s appeal against Messrs Abboud and Potts.

4. Part D addresses Mr Potts’ appeal against NAB.

5. We have concluded that DSH’s appeal against Messrs Potts and Abboud should be allowed in part, in that both men are liable to compensate DSH for breach of the duties they owed in deciding to declare a final dividend in August 2015, but otherwise dismissed. We have also concluded that each of the appeals brought by HSBC and Mr Potts should be dismissed.

6. A more detailed outline of the balance of these reasons is as follows.

HEADING	PARAGRAPH
PART A: FACTUAL BACKGROUND	[7]
The listing of DSH on the ASX	[7]
Emphasis on maximising O&A rebates	[10]
Overstock position and delays paying suppliers	[20]
The interim dividend	[27]
The Syndicated Facility with NAB and HSBC	[32]
Inventory and O&A rebates between March and June 2015	[47]
Final dividend declared	[51]
Extension Agreement and profit downgrade	[57]
The appointment of administrators, receivers and liquidators	[66]
PART B: DSH’S APPEAL AGAINST MESSRS POTTS AND ABBOUD	[74]
The construction of s 254T	[80]
The significance of s 254T to the alleged contraventions of s 180	[111]
Did Messrs Potts and Abboud contravene s 180 with respect to the final dividend?	[124]
The alleged contraventions and the primary judge’s decision	[126]
The board papers and the company’s projected cash flow position as at 17 August 2015	[137]
The claimed significance of industry practice	[150]
Mr Potts’ contention that the daily cash forecast did not reveal the true picture	[155]
The position of Mr Abboud	[183]
What Mr Abboud knew	[186]
What Mr Abboud ought to have done, on the evidence before the Court	[196]
Whether this issue was fairly raised by DSH	[213]
Did Messrs Potts and Abboud contravene s 180 with respect to the interim dividend?	[225]
The primary judge’s decision	[226]
The company’s arguments on appeal	[230]
Did the primary judge err in finding contraventions as regards the O&A rebates?	[248]
What if any damages are payable?	[252]
Payment of a dividend as “damage”	[255]
The first and third reasons of the primary judge	[270]
The second reason of the primary judge – factual causation	[273]
Conclusion on the DSH appeal	[298]
PART C: HSBC’S APPEAL	[302]
Causation	[305]
The evidence of Mr Byrne	[306]
Irrelevant to speculate what HSBC might have done?	[311]
The objective evidence bearing upon HSBC’s decision to extend its overdraft	[320]
Failure to find loss and damage (ground 2)	[327]
Grounds 3, 8 and 9: Remaining grounds in the HSBC appeal	[344]
Conclusion	[367]
PART D: MR POTTS’ APPEAL	[370]
Background	[371]
Ground 1: Liability – misleading or deceptive conduct	[377]
Ground 2: Reliance	[401]
Legal Principles	[401]
Evidence of reliance	[412]
Ground 3: Proportionate liability defence	[434]
Conclusion	[450]

PART A: FACTUAL BACKGROUND

The listing of DSH on the ASX

7. On 26 September 2012, all of the issued shares in DSE Holdings Pty Ltd (DSE), the then holding company of the Dick Smith group, were acquired by Dick Smith Sub-Holdings Pty Ltd which had been established for that purpose and which was owned as to 98% by Anchorage Capital Partners Limited, a private equity firm. As part of its planning for the acquisition of the Dick Smith business, Anchorage put together a management team with the assistance of Mr William Wavish, who had been engaged by Anchorage as a consultant to assist with the acquisition. Whilst in a previous role, Mr Wavish had met Mr Nicholas Abboud and a number of other senior executives who were offered positions at Dick Smith following its acquisition by Anchorage. Those executives included Mr John Skellern, Mr Neil Merola, Mr George Papacosta, and Mr Mark Scott.

8. Mr Wavish believed that DSE’s financial performance had been poor. It was his experience that supplier support, particularly in the form of rebates, was an important source of revenue for retailers as it enabled them to increase profitability and price their products competitively. According to Mr Wavish, prior to the acquisition, he together with Mr Phillip Cave, the Managing Director of Anchorage, and Mr Abboud decided that if they were successful in their bid for DSE, increasing supplier support (including maximising rebates) should form a key part of their overall strategy to improve DSE’s profitability.

9. For the purposes of the float on the ASX, a new company, DSH, was incorporated on 25 October 2013. Following the float on 4 December 2013, Mr Michael Potts, who had joined DSE on 18 September 2013, became CFO and company secretary, and Mr Wavish became a non-executive director. A series of weekly management meetings was introduced, including a buyer/planner meeting at which the results of the previous week were discussed. The board of DSH met monthly, except in the months of December, January and September, and the directors were provided with board papers primarily prepared by Mr Potts and Mr Abboud, with the assistance of management. DSH retained Deloitte to audit and review its financial statements, a key focus of which was the accounting for and collection of rebates.

Emphasis on maximising O&A rebates

10. In the first half of (calendar) 2014, DSH began to place greater emphasis on obtaining O&A rebates, for which Mr Skellern was delegated responsibility. He introduced regular “O&A meetings” attended by himself, buyers, merchandising managers, and the head of buying, at which targets were set for O&A rebates and buyers were encouraged to meet those targets. From April 2014, buyers were required to complete tracking sheets showing O&A rebates and other support received against all orders. Mr Skellern’s approval was required before an order could be placed with a supplier and often his approval was conditional on obtaining O&A rebates from that supplier.

11. In order to meet the budgeted EBITDA for the year, Messrs Abboud, Potts and Skellern developed a plan in April 2014 which involved reducing the marketing expenses for the remainder of FY14 from $9.7m to $7.6m and increasing the target for O&A rebates from $10.2m to $17.2m. In order to achieve that increase, Mr Abboud approved an increase in “open to buy” (OTB), the available budget for each buyer that identified the value of stock that the buyer was authorised to buy, by $20m and subsequently $23m. Later in the financial year, the budget for O&A rebates for May and June 2014 was increased. Mr Abboud conceded in cross-examination that “the increase in the over and above rebate collect would be achieved, at least in part, by $20m extra OTB”, although he said that the release of a further $3m in OTB was because “a lot of our regional stores didn’t have enough stock to get the sales, and we were about to go into the June tax time period”.

12. In order to increase the level of O&A rebates, some buyers suggested on occasions that suppliers increase the price of their products and provide the difference in the form of O&A rebates. Evidence was given that the amounts raised by that practice were sometimes referred to within DSH as a “fighting fund”. How widespread that practice was, however, is unclear, and there was no evidence that the board, including Mr Abboud and Mr Potts, were aware of it.

13. On 26 May 2014, there was a board meeting to approve the budget for the 2014/15 financial year (FY15) attended by Messrs Abboud, Potts, Cave, Wavish, Ishak and Ms Raine. The budget forecast that DSH would earn $32.8m in O&A rebates and $29.2m in advertising subsidy (Ad Sub) rebates, with a gross marketing spend of $45m. It also forecast net profit of $47.3m and projected that inventory would be worth $226m at 28 June 2015 and that net end of financial month debt would peak in March 2015 at $55m.

14. Mr Abboud accepted in cross-examination that in around June 2014, approximately $17m of O&A rebates were transferred to gross profit. In the middle of June 2014, Mr Abboud agreed to the release of a further $5m in OTB to generate $250,000 in Ad Sub and $500,000 in O&A rebates as part of a strategy to obtain an additional $2m in gross profit in order to meet the projections contained in the prospectus for the float.

15. Evidence was also given that DSH bought stock in June 2014 that it did not need in order to generate additional gross profits through O&A rebates. Documents distributed to the Finance and Audit Committee (FAC) by Mr Potts on 11 July 2014 indicated that receivables had increased from an amount of $10.4m shown in the prospectus to $48.7m and that inventory had increased from $168.5m to $252m. Mr Potts’ commentary explained that the increase in inventory was “due to stock for new stores and David Jones ($35m), a lift in stock levels to a more normalised level ($30m) and additional stock purchased in June to ensure a strong start to FYI5 ($20m)”.

16. The FAC met on 12 August 2014 to consider the FY14 accounts. On the same day, Mr Murray and Mr Potts were appointed directors of DSH. The accounts were approved at a board meeting held on 18 August 2014, and it appears to have been accepted by the board that the increase in inventory levels reflected the opening of new stores during the year and a healthier stock position, as well as an increase in the quality and ageing of inventory.

17. The emphasis placed on collecting O&A rebates continued throughout FY15. Evidence was given that Mr Skellern typically required purchase orders to include a minimum of 10% in O&A rebates before they would be approved. At the request of Mr Abboud, OTB started to be allocated to categories in which the supplier paid more O&A rebates, so that in the case of categories where the supplier paid low or no O&A rebates, the business retained less stock (measured in terms of “weeks covered”) but in the case of categories where the supplier paid higher O&A rebates the business worked to higher weeks covered. By 23 October 2014, DSH had a spreadsheet in place which listed the O&A targets for each buyer and the “OTB Overspend Required” in order for the buyer to meet that target.

18. In about September or October 2014, Mr Abboud introduced a system requiring private label suppliers to provide O&A rebates paid by the suppliers in exchange for an agreement by Dick Smith to increase the price it paid for their stock. That is to say, the price was increased and a rebate recorded for the difference, such that DSH’s profits increased but there was no change in the amount of money paid. Mr Abboud said that it was part of a strategy to expand the range of private label inventory and sales. By 28 December 2014 (the last day of the financial half year), a total of $6.9m of profit was recognised in the form of O&A rebates in respect of private label stock.

19. It was also in around late October 2014 that Mr Michael Sullivan, General Manager – Procurement & Strategic Buying Operations, emailed buyers regarding the reporting of O&A rebates in the context of the upcoming yearly review. The email said that buyers should “[r]eference all O&A claims as promotional support or promotional activity”. The primary judge considered it plain that this instruction was given to provide support for DSH’s practice of taking O&A rebates immediately to profit. A similar instruction was given to buyers in January 2015, which specified that “the wording must not relate to an order and such”.

Overstock position and delays paying suppliers

20. Throughout FY15, Mr Christopher Borg began to express concern about DSH becoming overstocked. Mr Borg had joined Dick Smith in March 2013 as the Merchandise Planning Manager, with his title later changed to “General Manager – Planning”. On 19 November 2014 he emailed Messrs Orrock and Skellern saying, “As you know, we have over-ordered for the quarter and our closing stock is at risk”. Mr Borg put forward a proposal to move or cancel some purchase orders to deal with the problem. He noted in subsequent emails that a “significant amount” of purchase orders had been raised that quarter “to deliver our sales budget and drive the Ad sub and O&A [rebates]”. On 19 December 2014 there were almost $20m of purchase orders due between 29 and 31 December; Mr Borg noted that this was done “to maximise Dec O&A”, but requested that the payment terms be pushed out. The excessive stock position was compounded by delays in delivering containers of private label stock from China in time for the Christmas trading period.

21. DSH began increasingly to delay paying some suppliers, pushing out in the order of $20m to $30m at any one time. Mr Abboud accepted in cross-examination that this was because DSH could not pay the creditors on the day their debts fell due. Some extensions were agreed with suppliers, and some were not. As explained further below, there was an extensive effort at trial to attempt to quantify this, but the primary judge accepted the criticisms made of the attempt, such that there is no clear evidence of precisely how many suppliers agreed to delayed payment, how many acquiesced in a delay, and how many actively indicated their absence of consent and who took further steps (including placing further orders by DSH on hold) until they were paid. Every supplier over the period seems eventually to have been paid, albeit that some were paid some weeks later than the contractual terms required.

20. Many trade suppliers were on trading terms requiring payment at the end of the month which was one or two or three months after the stock was delivered. The consequence was that while the retail stores would generate revenue throughout the month, there would be a spike in payments falling due at the end of each calendar month.

21. Further, DSH reported in terms of “financial months”, which ended on the last Sunday before the end of the calendar month (if the last day of the calendar month was a Sunday, the financial month ended the previous Sunday). The fact that revenue and expenses were reported in financial months, but there was a sharp spike in payments due at the end of the calendar month, meant that cashflow for a financial month would omit the outflows which would occur a few days later, at the end of the calendar month. As will be seen below, this is significant to the finding of breach made against Mr Potts in relation to the final dividend, and the appeal against Mr Abboud on the same topic.

22. On 8 January 2015, Mr Borg informed Messrs Abboud and Potts that the current stock on hand was worth $356m, a substantial increase from the end of the previous financial year, and above forecast. The stock on hand covered some 19.14 weeks of sales across all categories, against an agreed position of 13.2 weeks. In the “Home Solutions” group, all categories were more than 100% overstocked. There was also said to be over $100m in stock on order (including some orders which had been pushed out from December).

23. The following day, Mr Potts emailed Mr Abboud with a list of “key priorities” to deal with the inventory position, which included preparing “a list of suppliers … to push out in February and March” and modelling by Mr Borg of the “impact of $50m (?) clearance activity to reduce stock and increase cash”. Another item was to meet with HSBC, ANZ, CBA and NAB prior to meeting with Westpac in February, at which time an increase in DSH’s facility with Westpac was to be requested, upon which part of HSBC’s appeal turns and which is addressed in more detail below.

24. The following week, Mr Borg sent Messrs Abboud, Potts and Skellern an analysis showing that if OTB was reduced to target a closing inventory position of $260m to $270m, then it was likely that DSH would fall $14.9m behind its target profit projections. That analysis assumed an “Extra Private label uplift” of 20%, adding $4.6m to profits. A revised analysis suggested that the shortfall in O&A rebates could be overcome by moving $8m of purchases away from Apple to “Ad sub and O&A attracting vendors” and acquiring $40m of extra stock to deliver an extra $6m of Ad Sub and O&A rebates. It is unclear what in fact occurred. However, DSH’s accounts disclosed that in fact a total of $16.697m was booked to private label O&A in January to June 2015, and the inventory was reduced to $293.044m by the end of FY15.

The interim dividend

27. At a meeting on 12 February 2015 attended by Messrs Wavish, Ishak, Abboud, Potts and Ms Raine, the FAC considered a report prepared by Deloitte in connection with its review of the half year accounts (HY15). That report identified increases in O&A rebates for HY15 and noted that while there were still “internal control deficiencies in the accrual process for O&A Rebates”, there had been a “significant improvement in the quality of information and supporting evidence for rebates accrued”. In relation to inventory, the report stated that “[i]nventory balances have increased from FY14 as a result of additional stores open at 28 December 2014 and increased buying activity in the period”.

28. At the same meeting, the FAC considered a short dividend discussion paper prepared by Mr Potts which recommended an interim dividend of 7 cents per share, which represented a payout ratio of 65.7% and a total dividend of $16.555m, to be paid on 30 April 2015. According to the paper, “[t]his timing reflect[ed] the Company’s operational cash flow requirements and ha[d] been factored into the weekly cash flow forecast”. The FAC accepted the recommendation.

29. It is not clear which cash flow forecast formed the basis of the recommendations in the paper, although a daily and weekly forecast from about 9 February 2015 predicted that on several occasions before the dividend was due to be paid, DSH would exceed the limit of the facility it had with Westpac at the time.

30. The DSH board meeting on 16 February 2015 was the first meeting since November 2014. Present were Messrs Cave, Wavish, Ishak, Murray, Abboud, Potts, Orrock and Ms Raine. Board papers circulated prior to the meeting included a trading update that stated that there had been an “[i]nventory increase in line with seasonal requirements for Christmas trade”. Sales for January 2015 were well ahead of budget, attributable to a sale on Apple products at a 10% discount, but the net inventory figure for January was well above the November 2014 forecast, and net profits after tax for the month were approximately 17.7% below budget. Mr Murray gave evidence that Mr Abboud and Mr Orrock were questioned at that meeting by the non-executive directors about the reasons for the unexpected build-up in inventory between November 2014 and January 2015 and how management intended to sell down that inventory.

31. By reference to the dividend discussion paper prepared by Mr Potts, the board declared the payment of an interim dividend which was subsequently paid on 30 April 2015. Evidence was given that the payment of the interim dividend required the deferral of payment of some of DSH’s creditors.

The Syndicated Facility with NAB and HSBC

32. On 3 February 2015, two weeks prior to the board meeting at which the interim dividend was declared, Messrs Potts and Abboud attended a meeting with representatives from HSBC, Messrs Kowik, Katiforis and Sargent, to discuss the direction of the DSH business and what HSBC could offer DSH. This followed a number of discussions prior to February 2015 about HSBC providing one or more facilities to DSH. In particular, in connection with a $10m supply chain facility not taken up at the time, Mr Kowik had prepared a credit application, known within HSBC as a “Credit Analysis & Risk Management” document (CARM).

33. At the time of the float, DSH had had a finance facility with GE Commercial Corporation (Australia) Pty Ltd. In March 2014, Mr Potts took steps to replace that facility with one on more favourable terms, and on 26 June 2014, DSH entered into a facility agreement with Westpac. The agreement included working capital facilities of $27m and $25m and an overdraft facility of $30m. At about the same time, DSH entered into an extended vendor financing arrangement with Macquarie Bank with a $15m limit. The limit on the Westpac overdraft facility was increased to $45m from 24 October 2014, and then to $50m from 30 January 2015 to 30 April 2015 (there was also a short term extension for the Christmas period). DSH exceeded each of the approved limits on a number of occasions during that time. The non-executive directors were not informed of the increases in the overdraft limit. The overdraft facility with Westpac was due to expire in June 2015.

34. That was the background against which the 3 February 2015 meeting with HSBC occurred. Messrs Abboud and Potts took three HSBC representatives, Messrs Kowik, Katiforis and Sargent, through a PowerPoint presentation on DSH’s history, the terms of its current facility with Westpac and its plans, indicating that there had been strong improvements in gross margin and that net profit had increased from FY13 to FY14.

35. During the meeting, Mr Katiforis suggested that DSH obtain its replacement facility from a syndicate of at least two banks and suggested that security could be provided through a security trust deed mechanism. Around the time of the meeting, DSH was in a tight financial position and was experiencing difficulties in paying a number of creditors.

36. Following the meeting, Mr Kowik prepared a CARM for a $50m overdraft facility for DSH. The CARM was dated 5 March and submitted for assessment on 18 March 2015. The credit application was assessed by Mr Gregory Rogers, the Senior Manager, Wholesale & Market Risk, at HSBC. The treatment of Mr Rogers’ evidence by the primary judge formed a central part of this aspect of HSBC’s appeal.

37. The CARM contained general statements relating to DSH’s financial position, inventory and trade payables, notably:

1. DSH paid suppliers once a month on the 30^th day of the month, whereas it collected sales on a daily basis.

2. DSH normally settled its suppliers during the first five days of the next month after delivery. This pattern was said to be consistent with DSH’s financial reporting which indicated relative cash rich positions at month’s end.

3. DSH’s inventory had increased by $85m in FY14, with stock turnover at 101 days in FY14, up from 85 days in FY13. This increase was said to have been due to (i) a net increase of 54 stores, (ii) normalisation of stock levels following the clearance of obsolete stock that occurred in FY13, (iii) private label stock in transit, and (iv) an expected strong start to FY15.

The primary judge noted at [184] that much of the information of this nature had been lifted from the earlier CARM prepared in respect of the $10m supply chain facility, although it was unclear where the information in that CARM had come from.

38. On 19 March 2015, Mr Rogers emailed Mr Kowik a number of questions about the information in the CARM, including as to stock turnover and obsolescence and a periodic “clean down” (ie repayment in full) of the facility. Mr Kowik replied that a clean down of the overdraft facility would be required once during each half of the year for not less than three consecutive days, which he believed would be effective as the overdraft was expected to be used only for working capital, and that “[t]here is no obsolescence stock [sic] anymore under the new management”. Mr Rogers approved the facility on 20 March 2015.

39. Following that approval, several additional CARMs were submitted seeking variations to the facility, including one which explained that DSH was looking for a total on balance sheet borrowings of $130m using a two bank structure, with HSBC providing an overdraft facility of $60m. Mr Rogers approved this revised CARM conditionally “for the same reasons as the original approval”.

40. At the board meeting on 20 April 2015, by which time Mr Tomlinson had been appointed as a director of DSH, the board, on Mr Potts’ recommendation, authorised a competitive tender between Westpac, ANZ, the CBA, HSBC and NAB for a facility of $135m to replace DSH’s facility with Westpac. At that same meeting, Mr Tomlinson raised the issue of DSH’s cash position; the cash flow statement showed that cash was negative $101m, more than the $82m limit of the Westpac facility. Mr Potts explained that he had arranged an extension to the Westpac overdraft facility to a maximum of $50m.

41. There followed discussion of the fact that the board had not been informed of the extension, despite the fact that board approval was required to a change in existing debt facilities.

42. On 28 April 2015, Messrs Potts and Abboud met with NAB representatives, giving a PowerPoint presentation substantially the same as the one provided to HSBC, on the background to DSH’s business and the current facilities with Westpac. One NAB representative, Mr Tim Cohen, prepared a file note of the meeting (referred to as a “Call Report”). Little turned on what was said at this meeting, save that Mr Abboud accepted that he did not recall anything being said about the practice of increasing the price of private label stock to obtain O&A rebates, nor was there any mention of DSH delaying paying creditors.

43. Mr Cohen directed the proposed tender to Mr Paul Taylor, who was assisted by Mr Alan Menzies, each in NAB’s Client Fulfilment Team, to prepare the relevant credit application and associated documents for approval by, inter alios, Ms Karen Peter, Head of Credit – Property, Consumer, Telecommunications, Media and Entertainment. Messrs Taylor and Menzies undertook financial modelling for that purpose, based upon publicly available accounts for DSH and broker reports. Mr Potts also provided them with DSH’s monthly financial information for FY15 and the forecast numbers for FY16. The primary judge records that Messrs Taylor and Menzies noticed that the monthly figures revealed that DSH’s inventory peaked in January 2015, contrary to their expectations that inventory would fall following the Christmas trading period.

44. It was against that background that Messrs Cohen, Taylor and Menzies attended a meeting with Mr Potts on 6 May 2015 to discuss the management accounts. Mr Menzies made a file note of what occurred at the meeting. Mr Menzies (by reference to his file note) and Mr Taylor gave evidence that the principal reason Mr Potts gave when asked why DSH was overstocked in January 2015 was the late arrival of a shipment of private label stock from Hong Kong. The primary judge accepted that evidence, the detail of which is central to the challenge in the Potts appeal.

45. Following the meeting on 6 May, Mr Menzies circulated drafts of the credit memorandum within NAB, based upon which he received comments and questions. He then had a telephone conversation with Mr Potts on 11 or 12 May. Mr Menzies gave evidence that in that conversation Mr Potts explained that the projections for 2016 which he had provided to Mr Menzies showed only a small increase in sales because they excluded commercial sales, which had been included in the data for 2015. Mr Menzies largely rewrote the clause in the credit memorandum entitled “Working Capital and Facility Requirements” and recirculated the draft memorandum on the evening of 12 May. The memorandum was submitted for approval in substantially the same terms on 15 May. The memorandum sought approval for 50% participation in a two bank structure, with proposed facilities of up to $150m to allow for DSH’s seasonal peak. Information in sections of the memorandum bearing upon DSH’s inventory levels was said to have come from Mr Menzies’ discussions with Mr Potts, which are also relevant to the Potts appeal. The memorandum was approved on 20 May 2015, again subject to conditions which included a clean down of the facilities every six months.

46. Ultimately, on 22 June 2015, NAB and HSBC entered into the Syndicated Facility and associated agreements with DSH and its related bodies corporate. The Syndicated Facility contemplated, for NAB, working capital advances of $35m and $40m for specified purposes, and for HSBC, a single overdraft facility in the amount of $60m. The primary judge summarised the evidence of the credit approvers for NAB (Mr Johnson and Ms Peter) and HSBC (Mr Rogers) at [255]-[256], to the effect that they likely would not have given credit approval had they been informed that, inter alia:

1. By reason of its emphasis upon rebate maximisation, DSH management made purchasing decisions based on the rebates available from suppliers, rather than based on current or likely demand for the stock, and these purchasing practices were the real reason why DSH had ordered significant additional inventory before Christmas 2014;

2. DSH had requested that certain suppliers defer delivery of goods ordered before Christmas 2014 to January 2015 or later because DSH had insufficient funds to pay for that inventory; and

3. DSH did not have in place adequate procedures, practices or systems to detect, value or, where necessary, provision for or write-off obsolete or near end-of-life inventory.

Inventory and O&A rebates between March and June 2015

47. At the board meeting on 17 March 2015, a presentation was given on vendor rebate processes, following a request Mr Murray had made to Mr Abboud. Mr Murray had made the request because he was conscious of the significance of O&A rebates to DSH’s profits and was conscious that they were in the discretion of suppliers. The presentation noted deficiencies in DSH’s systems for collection and timely and accurate reporting of O&A rebates, but there was apparently no discussion of the accounting treatment of O&A rebates or of the payment of O&A rebates on private label stock through a process of increasing the price of the stock.

48. In April 2015, Mr Tomlinson was appointed a director of DSH and chairman of the FAC. On 20 April 2015, in addition to the board meeting (at which the competitive tender for the banking facility had been authorised and the negotiation by Mr Potts of the extension to the Westpac facility without board approval had been discovered), there was a meeting between Messrs Abboud, Potts, Borg, Skellern and others to review the stock position. The minutes from that meeting recorded that the stock position would be reviewed weekly. On 22 April, Mr Tomlinson emailed the chair of the board’s remuneration committee, raising concerns that the remuneration of management was encouraging risky behaviour, and on 27 April he emailed Mr Potts asking whether negative $91m cash flow at the end of March was normal and seasonal. Mr Potts replied that it was not. He noted that:

“stock peaked in January (not November) and February was still higher than November. Higher levels of stock purchases in December and January to drive sales growth has caused the negative OCF to end March as stock has been paid for, but not sold.”

49. As has been noted, the interim dividend declared on 16 February 2015 was paid on 30 April 2015. At the board meeting in May, Mr Tomlinson had noticed that the level of inventory had not decreased as had been forecast. He gave evidence that Mr Potts said that management was making “deliberate decisions in building inventory” to take advantage of the high exchange rate, to implement the strategies of investing in private label inventory and building DSH’s appliances business, and to support new store growth. Mr Tomlinson said that he and other directors expressed concern about the how these strategies were impacting DSH’s balance sheet and inventory levels. At the board meeting on 16 June 2015 (at which the Syndicated Facility was approved), a “KPI Summary” included in the board papers indicated that DSH’s net debt as at the end of May 2015 was $104.7m and the forecast net debt position at the end of the financial year was $40.1m. It also indicated that days covered ranged from approximately 90 to 120 days during the financial year, had remained above 110 days since October 2014 and were still at 110 days at the time the board papers were prepared, although they had declined from a peak in about early February 2015 and were forecast to decline again slightly in June. Mr Murray said he sought assurances at that meeting from management that they believed that Dick Smith would achieve the forecast inventory figure of $275m.

50. In the lead up to the end of the FY15, DSH continued with its strategy of seeking to improve its financial results by maximising O&A rebates. An additional $20m in OTB was released during this time and the merchandise managers, Mr Borg and Mr Orrock, received daily updates of the amount of O&A rebates obtained from the use of the additional OTB.

Final dividend declared

51. DSH’s daily cash flow as at 26 June 2015 forecast that the net cash position would be in excess of its new facilities at the end of the financial year. The forecast suggested, however, that the cash position would improve substantially after that date. Papers prepared for a board meeting on 20 July 2015 recorded that net debt at the end of FY15 was $41m against a forecast of $40.4m and that inventory days covered was slightly above 110 days.

52. On each of 28 and 30 July 2015, Mr Borg sent emails to Mr Abboud, with copies to Mr Orrock and Mr Potts, seeking a meeting to discuss stock. He stated in his emails that the overstocking of certain accessories meant that OTB was being squeezed for other categories which were understocked, and outlined the categories driving the overstocks. It was around this time that Mr Potts engaged Mr Mike Holtzer, a consultant who had worked with DSH in the past, to develop and implement a system for recording and tracking vendor rebates, and to investigate the size of the problem with DSH’s inventory position. Mr Holtzer engaged Mr Andrew Powell of Agile Commerce Consulting Pty Ltd to assist him with that task.

51. The FAC met on 11 August 2015. Presented at the meeting were DSH’s accounts for FY15 as well as a report dated 6 August 2015 from Deloitte. In relation to inventory obsolescence, the report repeated much of what was said at the time of the half yearly review. It pointed out that the provision for obsolete stock had reduced by $3.2m from the previous year and explained that management had adopted a new methodology for calculating the provision which had been further refined in FY15. There was also a discussion at the FAC of a final dividend, although it appears that no paper was presented to the committee on the payment of the dividend and there is little evidence of what was discussed.

52. The daily cash flow forecast for the period starting 17 August 2015 showed that from the week starting 31 August 2015, DSH would exceed its facilities limit of $135m on multiple occasions up until mid-December 2016, and that cash at the end of FY16 would be negative $85.29m. This forecast may be contrasted with the one produced at the end of FY15, which suggested that DSH would not exceed its facility limit during the forecast period. It may also be contrasted with the cashflow position contained in the board papers, which reported in terms of financial months and did not show the end of month payments out (there were other differences too, which will be addressed in detail in Part B below).

53. Mr Tomlinson gave evidence that by this time, he had formed the view that Mr Abboud was overly optimistic and that Mr Potts was out of his depth.

54. Nonetheless, at the board meeting on 17 August 2015, attended by all the directors, DSH’s FY15 financial statements were approved, which were published and lodged with the ASX on the same day, as was the final dividend of 5 cents per share with a total value of $11.826m, to be paid on 30 September 2015.

Extension Agreement and profit downgrade

57. On 2 September 2015 Mr Potts foreshadowed, and on 13 October requested, a temporary increase in DSH’s overdraft facility with HSBC. In an email following the second conversation, the increase was described as “Boxing Day financing”. On 14 October, Mr Kowik submitted a CARM in respect of the increase for approval by Mr Allan Byrne, Senior Manager, Wholesale Risk at HSBC. Approval was sought for a temporary increase to the existing overdraft by $20m for the period 15 November 2015 to 15 January 2016 “to fund increased inventory required for anticipated Boxing Day sales”. After 15 January 2016, the limit would “revert back to the original $60m facility limit”.

58. Mr Kowik was asked to clarify whether the increase was a normal seasonal requirement which had been a feature since DSH was floated in 2013. He confirmed that “the seasonal requirement started in Dec14 with $20m” and there was no earlier seasonal requirement, as “in 2013 they were trying to re-shape their inventory”. Mr Byrne approved the increase later that day, 20 October 2015, commenting:

“As stated in the last approval, the company is displaying sound and improving financial trends. I would ask the covering team to carefully monitor the group's stock levels and continually have discussions regarding obsolete stock levels - in my mind this is currently the key risk in terms of general liquidity and profitability/margins. Any sudden drop in share price should also be investigated and reported to risk promptly.”

59. Mr Byrne gave evidence that had he been told, inter alia, that the increase was in fact sought to fund DSH’s ongoing cash flow difficulties or that DSH’s practices with respect to obsolete stock were inadequate, he would not have granted credit approval absent a favourable report by an independent external reviewer.

60. There was evidence that, in September and October 2015, restrictions were placed on DSH’s ability to buy stock that it needed because of its deteriorating financial position. According to Mr Borg, the Sydney International Airport store did not have the stock it needed and “OTB was not available to buy the product required until the next month”. DSH was seeking to delay payment of as many creditors as possible, including by seeking payment extensions from a number of private label suppliers.

61. Board approval of the $20m facility increase was still required. On 21 October, the day after HSBC approved the credit application, Mr Ishak and Ms Raine were asked to sign a circular resolution approving the increase. They declined to do so and Mr Tomlinson asked Mr Murray to convene an informal meeting of the board to discuss DSH’s cash/debt position ahead of the AGM. Mr Murray replied:

“You should update Nick tomorrow and beware of him gilding the lily. We have all heard about the promises to reduce inventory and now we find ourselves approving an emergency debt line, suppliers in full knowledge of our credit squeeze and procurement driven by O&A not buying the right stuff. It’s time to face the music.”

Visits to several Dick Smith stores confirmed the seriousness of the inventory and overstock issues.

62. The board met on three consecutive days in late October. On the 26^th, there was a discussion of cash flow requirements up to Christmas 2015. Mr Abboud advised that trading in October 2015 was likely to be significantly below budget. Mr Potts also presented on the accounting treatment of O&A.

63. On the 27^th, Messrs Abboud and Potts advised the board that the October month trading shortfall to budget was approximately $5m net profit after tax (NPAT). They presented the outcomes of management’s scenario analysis that indicated a revised likely NPAT range for FY16 of $37m to $43m, but indicated that the range did not include any clearance of over-stocked inventory, nor the impact of any adjustment to O&A accounting treatment. This followed a presentation on the same day, given by Messrs Holtzer and Powell to Mr Potts, according to which DSH held $120m of problem inventory and an appropriate impairment liability was $63,877,544. Mr Potts told Messrs Holtzer and Powell that their analysis would not be believed and instructed them to get a second opinion from Mr Borg.

64. On the 28^th, Messrs Abboud and Potts presented revised financial forecasts. They told the board that “the drivers of the result include[d] lower sales and adverse gross margin” and that “November had commenced trading consistent with October, with a commensurate concern regarding Christmas trading”. Again, these forecasts did not incorporate any impact of accelerated clearance of approximately $56m of over-stock inventory or changes to O&A accounting treatment. The board resolved that a detailed inventory analysis be presented at the November 2015 meeting, and approved the issue of a trading update which indicated that NPAT could be $5m to $8m below previous guidance of $45m and $48m. Mr Abboud gave evidence that the poor trading performance in October 2015 and the forecast poor performance for the rest of the year was largely due to a decline in sales, particularly in the Office group which made up 42% of Dick Smith’s sales in FY15. The decline was said largely to have been due to the launch of Windows 10 by Microsoft, which adversely impacted computer sales globally.

65. Also on 28 October, Mr Kowik sent Mr Byrne a CARM in relation to the profit downgrade DSH had announced that day. Mr Byrne said that he regarded the profit downgrade as “quite a cause for alarm”, but that by that stage he believed that HSBC was committed to providing the increase in the overdraft facility. HSBC entered into the Extension Agreement with DSH on 16 November 2015, by which it agreed to increase the total commitment provided by HSBC from $60m to $80m. The money was advanced that day.

The appointment of administrators, receivers and liquidators

66. On the basis of instructions given to them by Mr Potts, Messrs Holtzer and Powell continued to work on the inventory issue with Mr Borg. Dividing stock into six categories, the first five of which were classified as “problem stock”, each of the three applied a different methodology to calculate the value of the problem inventory and the corresponding value of the impairment to DSH in selling that stock. The results were diverse. Mr Borg calculated an impairment of $19.8m in the value of problem inventory of $189m, Mr Holtzer calculated an impairment of $58m, and Mr Powell an impairment of $65.8m.

67. Although it was submitted by Mr Abboud and Mr Potts at first instance that Mr Holtzer and Mr Powell had an interest in calculating higher levels of impairment in order to secure themselves additional work from DSH, the primary judge acknowledged that nothing turned on the issue. Messrs Holtzer and Powell were not called as expert witnesses, and their evidence was only admitted as evidence of their subjective understanding or belief, and not as evidence as to the truth of any fact or opinion asserted. Their evidence helps to explain the circumstances in which the board took the decisions it did. It is not evidence that the impairments they identified were correct.

68. At a board meeting on 24 November 2015, the board requested an updated inventory analysis highlighting excess inventory and plans to reduce it. In advance of a further board meeting on 27 November 2015, Mr Potts gave Mr Abboud a summary of how the impairment was calculated based on the work done by Messrs Holtzer and Powell, and a document outlining a way forward. Both of those documents were provided to the board, which requested a further analysis of inventory, cash flow and debt implications and asked that a solicitor from MinterEllison attend further discussions. At a meeting on 29 November 2015, the board resolved to take a $60m non-cash impairment. Of that decision Mr Murray and Mr Tomlinson both gave evidence that the board had been placed in a difficult position and that it did not have adequate time to consider the information it had been given. The impairment was announced to the market at the opening of the ASX on 30 November 2015.

69. Following the announcement to the ASX, the board met again on 7 December 2015. At that meeting Mr Potts advised the board that discussions with NAB and HSBC were ongoing and that management was accessing options to increase the available capacity within the banking facility. The board requested that management formally request an extension of the $20m temporary facility, recognising, based on the information provided by Mr Potts, that it was unlikely the request would be granted.

70. Further negotiations with the banks led to an agreement by the banks to extend the overdraft facility on a number of conditions, including that no draws on the overdraft facility would be used to repay or reduce debt owed to creditors including Macquarie Bank. Mr Abboud did not believe that the varied arrangements prevented DSH from using those funds to repay Macquarie prior to the commencement of the extended facility period (a view shared by Mr Murray) and on 24 December 2015, DSH drew down the HSBC overdraft facility to pay $9.961m to Macquarie. On 30 December 2015, it drew down a further $1.195m to pay Macquarie.

71. On 31 December 2015, NAB wrote to DSH notifying that it had breached the terms of the Syndicated Facility by making the payments to Macquarie and requiring the breach to be remedied within 10 business days. Unable to remedy the alleged breach or reach agreement with the banks to waive it or to accept DSH’s interpretation of the condition in question, on 4 January 2016, the board resolved to put DSH and its subsidiaries into voluntary administration. Following that resolution, the banks appointed the receivers.

72. The receivers elected to continue to trade with a view to selling the business in mid-March. However, in a report dated 14 January 2016, they observed that the business was in a “very distressed state” and that a series of problems had led to large declines in sales, rendering continued trading unsustainable. On 24 February 2016 the receivers decided to close the business, and appointed Hilco Merchant Australia Pty Ltd to close the stores and sell the remaining stock.

73. The most recent report of the receivers in evidence at first instance was Update No 25 dated 7 November 2018. The report estimated that there would be a deficit of between $72.70m and $75.52m in the return to the banks. Earlier reports indicated that the receivers had funded a number of preference claims brought by the liquidator, including a preference claim against Macquarie, which was settled for $6.5m.

PART B: DSH’S APPEAL AGAINST MESSRS POTTS AND ABBOUD

74. As noted above, DSH sued Messrs Potts and Abboud, along with the non-executive directors, for breach of s 180 of the Corporations Act in voting as directors (and CFO and CEO respectively) in favour of the board resolutions to pay each of the interim dividend and the final dividend with respect to FY15, along with their alleged failures to cause the company to implement adequate procedures relating to the O&A rebates.

75. With respect to the claim for the interim dividend the primary judge held DSH had not established that either of Messrs Potts or Abboud had contravened s 180. As regards the final dividend, his Honour held that DSH had established a contravention of s 180 by Mr Potts but not by Mr Abboud. However, he held that the company had not made out that it had suffered any damage as a result of Mr Potts’ contravention.

76. So far as DSH’s claims rested on the O&A rebates, the primary judge held that Mr Abboud breached s 180 because from about January 2015 there was “mounting evidence that there were problems with the approach DSH was taking to the acquisition of stock”, and that Mr Abboud should have ensured that a review was undertaken “to determine the categories of stock where DSH had too much stock and those where it did not and would have put in place a system designed to ensure that buyers bought stock falling into the latter category”: [414]. He reached a similar conclusion as regards Mr Potts: [415]-[416]. However, his Honour found that DSH’s evidence did not establish what, if any, loss the company suffered as a result. DSH has not appealed from this finding. However, to some extent the findings of breach on this issue echo in the arguments raised by both sides as regards the dividends.

77. DSH appeals against the decision of the primary judge on three grounds relating to the two dividend payments, which are numbered 1, 2 and 4 in the amended notice of appeal (ANA). Ground 3 related to claims made against the non-executive directors, but the appeal against those directors was withdrawn. DSH seeks that Messrs Potts and Abboud pay damages representing the full amounts that the company paid out in the final and interim dividends, along with interest from the date the money was paid out. Messrs Potts and Abboud filed a joint notice of contention (NOC).

78. The issues that are raised by the parties are as follows:

1. Did the primary judge err in finding that Mr Potts contravened s 180 of the Corporations Act by voting in favour of the decision to pay the final dividend, and did he err in finding that Mr Abboud did not do so (NOC grounds 1 and 2; ANA grounds 2(a)-(b))?

2. Did the primary judge err in finding that neither Mr Potts nor Mr Abboud contravened s 180 by voting in favour of the resolution to pay the interim dividend (ANA, grounds 4(a)-(b))?

3. To the extent that any contraventions are made out, did his Honour err in finding that any such breach did not result in DSH suffering any damage for the purposes of s 1317H of the Corporations Act (ANA, grounds 1, 2(c) and 4(c))?

79. These issues shall be addressed in turn. Before doing so, however, it is necessary to consider the construction of s 254T of the Corporations Act, which is central to DSH’s arguments on contravention, and then the potential relevance of that provision to an allegation of contravention of s 180.

The construction of s 254T

80. At the relevant times s 254T provided as follows:

254T   Circumstances in which a dividend may be paid

(1)   A company must not pay a dividend unless:

(a)   the company’s assets exceed its liabilities immediately before the dividend is declared and the excess is sufficient for the payment of the dividend; and

(b)   the payment of the dividend is fair and reasonable to the company’s shareholders as a whole; and

(c)   the payment of the dividend does not materially prejudice the company’s ability to pay its creditors.

Note 1: As an example, the payment of a dividend would materially prejudice the company’s ability to pay its creditors if the company would become insolvent as a result of the payment.

Note 2: For a director’s duty to prevent insolvent trading on payment of dividends, see section 588G.

(2)   Assets and liabilities are to be calculated for the purposes of this section in accordance with accounting standards in force at the relevant time (even if the standard does not otherwise apply to the financial year of some or all of the companies concerned).

81. The focus of the dispute was the third element of the prohibition, namely that “the payment of the dividend does not materially prejudice the company’s ability to pay its creditors”. Two principal questions of construction were suggested to arise. One is whether paragraph (c) is to be construed as if it included the words “as and when they fall due” (or, as it was put equivalently, “in full and on time”), as was submitted by DSH but disputed by the respondents. In fact, as shall be seen, this question does not involve reading in words but, rather, understanding what is conveyed by the notion of “prejudice” in the context of the subsection. The other question of construction concerned the company’s “ability” to pay its creditors, and whether that was satisfied merely by the presence of trading stock which could be sold.

82. On the first issue, the difference between the parties was not as great as first appeared. There is good reason to be wary of reading words into text. That is especially so where, as the respondents to this appeal submitted, it is somewhat striking that the familiar words “as and when they fall due” are absent from s 254T(1)(c), in contrast to the definition of “solvency resolution” in s 9 and in the definition of solvency in s 95A. However, senior counsel for DSH also expressed the company’s construction in terms of identifying what constitutes the “prejudice” to which the paragraph refers. So understood, that was not far-removed from the following submission put by senior counsel for Mr Potts (who took the lead role on this point for the respondents):

“the focus is on in the section ability to pay, not ability to pay on time. Clearly, if one cannot pay on time, that may be an issue, but in my submission that would be captured by materially prejudice. If the effect of the payment of the dividend was that some creditors would be paid one day late and then creditors would be paid on time. In my submission one wouldn't say there was a material prejudice to the ability to pay creditors.

… if there is a material delay in the company’s ability, if there is a material impact on the company's ability to pay its creditors on time, then that would be a matter that would be arguably material prejudice.”

83. Thus Mr Potts accepted that the notion of “prejudice” could encompass late payment, but qualified by the notion of materiality. This approach was consistent with the primary judge’s statement at [457] that the reduced ability referred to in the provision “includes a material increase in risk that the creditors will not be paid at all and a material delay in paying them when their debts are due” (see also [482] and [509]).

84. Consistently with these views, the type of prejudice identified in s 254T(1)(c) should be understood as encompassing not only payment to creditors per se, but also payment of debts as and when they fall due.

85. As a matter of grammar, the word “prejudice” is employed in the paragraph as a verb, which should be understood in its ordinary sense of affecting disadvantageously or detrimentally. Not paying creditors on time is, in general, a detriment to them.

409. The characterisation of the test as “subjective” should be understood as requiring a determination of the likely conduct of the particular plaintiff, but having regard to all of the evidence. A related issue arises where the question is whether a particular representation has induced the plaintiff to act in a particular way. In Sidhu v Van Dyke (2014) 251 CLR 505; [2014] HCA 19 French CJ, Kiefel, Bell and Keane JJ stated:

“64   The real question was as to the appropriate inference to be drawn from the whole of the evidence, including the answers elicited from the respondent in the course of cross‑examination. In that regard, as was said by Gummow, Hayne, Heydon and Kiefel JJ in Campbell v Backoffice Investments Pty Ltd, consideration of the application of the process of reasoning adumbrated by Wilson J in Gould v Vaggelas ‘must always attend closely to all of the evidence that is adduced that bears upon the question being examined’.” (Footnote omitted.)

410. There is no suggestion that some new approach had been adopted in Backoffice: rather, the question as to the likely conduct of the plaintiff in the counterfactual situation is always to be determined on the basis of the whole of the evidence, and will include an assessment of what is “material” or significant to the party concerned.

411. Where the party is a large institution, and where a particular decision will involve the input of a number of officers, there is less reason than in the case of an individual to place significant weight on the evidence of particular officers, especially where they have addressed issues which did not conform to the findings of the court. However, what the officers did provide, was a range of information as to what matters were material, or significant, for NAB. That leads directly to the second issue.

Evidence of reliance

412. The second issue is to identify the evidence which the primary judge found to be of no assistance. He clearly did not reject all of the evidence of Ms Peter or Mr Taylor, much of which had been discussed in previous parts of the judgment. Rather, what he rejected was the usefulness of a statement in Ms Peter’s affidavit (pars 47, 48) and a statement in Mr Taylor’s affidavit (pars 52-54) which set out the pleaded case in seven particulars (a)-(g) and then expressed a view as to what course the witness would have taken had he or she been informed that “one or more of the following was the case with respect to DSH and its business”. Other NAB witnesses gave similar evidence by reference to six or seven factors, including Mr Johnson and Mr Menzies.

413. In answering that question, Ms Peter blandly stated at par 48:

“If a credit memorandum [had been] presented to me containing this information, it is highly unlikely that I would have provided approval to proceed with the facility as DSH would have presented as an unacceptable credit risk, outside the risk appetite of the NAB.”

414. Ms Peter also gave evidence as to her approach to the approval of the loan, including her assessment of the nature of the electronic retail industry, which dictated a conservative approach. She described the matters she had raised with Mr Johnson and Mr Menzies as matters of concern. She further explained the proposed conditions, with particular reference to liquidity/cash flow and inventory management systems. After reviewing the revised credit memorandum from Mr Menzies, she stated at par 35:

“The information contained in the revised credit memorandum about the high inventory levels was a significant concern to me when considering the proposal. I was satisfied, based on the information provided in the revised credit memorandum, that DSH management had confirmed that it was a one-off, non-recurring issue and that sufficient controls had been implemented to ensure that the matters giving rise to the high inventory levels would not occur again, including increased scrutiny by the CFO and the DSH board around purchasing decisions. A critical component to my decision was that DSH management stated that it did not need to discount or write-off any of the excess private label stock and that inventory levels were forecast to return to normal during 2015. …”

415. Ms Peter’s view that it was “highly unlikely” that she would have approved the facility with DSH if any one of the seven issues had been identified in the credit memorandum was problematic, because at least one, par (d), related to the accounting standards and their application to rebates from suppliers, a matter which was abandoned, and a second, par (e), referred to inadequate systems for making provision for write-offs of obsolete inventory, another matter which was not ultimately established. However, three other matters were established and found by the judge to be of central importance to NAB’s decision-making process. The first was the policy of maximising O&A rebates and the fact that the purchasing practice was a significant cause of DSH ordering excess inventory before Christmas 2014: pars (a) and (b). Similarly, the information that DSH had either requested suppliers to delay delivery or extend time for payment, because of cash flow problems: pars (c) and (g). The third matter was that DSH had exceeded its finance facility limits with Westpac on a number of occasions: par (f).

416. Mr Taylor noted in his affidavit at par 52 that he had been asked to assume the same seven factors and state what approach he would have taken to the decision whether to support the credit approval in May 2015. His response was more nuanced and less formulaic:

“53   As I have explained, an important focus for me during the process of gathering information about DSH and assessing whether to recommend the provision of facilities to DSH by NAB was on DSH’s working capital requirements and how they were affected by the inventory issues. If any of this information [had been] provided to me, then I would have sought further explanations from Michael Potts and (given their nature) from Nick Abboud as well. With one exception, without clear explanations of the causes and how they had been remedied and would not occur again, I would not have been comfortable recommending a credit facility with DSH to Lewis Williams or Calvin Cordle, or thought it worthwhile seeking credit approval from NAB’s credit team.

54   The exception is the policy of seeking to maximise certain types of rebates. I would have asked about the quantum of the rebates obtained and the regularity of obtaining those rebates, and only if I consider the quantum to be significant or the practice of obtaining those rebates to be irregular, then I would have asked further questions. I would also have given further consideration to whether I supported the credit paper and what further information I required before I decided whether to support the credit paper, if I knew that there was a practice of purchasing stock substantially for the purpose of obtaining rebates. Purchasing stock substantially for the purpose of obtaining rebates was at the time foreign to me.”

417. Mr Johnson commenced his discussion of the counterfactual proposition with the following statement at par 33:

“My view in May 2015 was that the most significant area of concern with respect to the DSH business was the overstocked position it was in following the December 2014 Christmas period. Based on the explanations recorded in the credit memoranda, which I reviewed before granting joint approval for the facility on 20 May 2015, I was satisfied that the overstock position was being properly managed by DSH with additional controls in place together with statements by management that it would not result in any write-offs or need for discounting. These explanations, coupled with DSH's financial performance and projections, gave me comfort to conclude that the DSH business did not represent a credit risk which was outside the risk appetite of NAB and that DSH was a client to which it was appropriate to lend.”

418. Mr Johnson set out six of the standard assumptions (a)-(f) and concluded at par 35:

“If a credit memorandum had been presented to me with respect to DSH which contained this information, then I likely would not have given credit approval. I consider that these matters are symptomatic of a retail business that has cash flow problems and is not being properly managed. This information also would have caused me to doubt the statements by DSH's management recorded in the credit memorandum that the excess stock position would not result in discounting or write-offs, and to question the motive for the opportunistic buying (which I understood was explained to NAB as resulting from a desire to avoid price rises).”

419. Mr Menzies addressed the preparation of the internal credit memorandum. After setting out his understanding of the various statements made by Mr Potts in the course of his meetings with him and by telephone, he noted the statement in his final version of the credit memorandum to the following effect, at par 32:

“Whilst there was a misjudgement in over-ordering private label stock last year, exacerbated by the delayed shipment, we are comfortable that no significant loss will occur as a result, and that new controls in the purchasing supply chain have been implemented.”

420. At the trial, Ms Peter was cross-examined by counsel for Mr Abboud about the assumptions in pars (a)-(g) at some length: Tcpt, pp 896(1)-912(17). Although she accepted that in some circumstances she would have required further information to reach a firm conclusion, in other respects her answers provided material inconsistent with Mr Potts’ submissions in this Court.

421. Ms Peter was taken to par (a) of the assumptions which read:

“A policy (that DSH had been pursuing since at least May 2014) of seeking to obtain and maximise certain types of rebates from suppliers had resulted in DSH management and buyers making purchasing decisions based on the rebates available from suppliers, rather than based on current or likely demand for the stock.”

422. Ms Peter said that she understood the assumption to indicate that “the weighting was more to rebates” and that “the rebates were prioritised over the demand for the stock”: Tcpt, p 903(7), (19). When pressed as to how she understood the word “rather” in assumption (a), she said it “indicates that the drivers of the decision were the availability of rebates rather than how quickly the stock could be liquidated”. Although it was suggested to her that she was adding to the assumption “facts” which she regarded to be material, she stated that she was indicating her reading of the assumption: Tcpt, pp 903(40)-905(41).

423. Mr Johnson, in his affidavit, had not stated that any one of the assumptions would have been sufficient to withhold approval, a matter which was confirmed in cross-examination: Tcpt, pp 870(27)-871(26). Mr Johnson gave a reason for that:

“Q   You are not expressing any opinion in paragraph 35, for example, if you found out about one of those matters?

A   Correct.

Q   It’s got to be the combined effect of them?

A   Yes and no. Like, in my affidavit I made those six comments, right, and I said I would likely not approve. They can be mitigated in the normal course of business. So it would be one or all, depending on the magnitude of those issues that were found out.

Q   Well, sorry, I thought you told me all six were what you assumed were being asked to assume were true as the basis of your opinion; correct?

A   Yes.”

424. The cross-examination of Mr Taylor on this topic was limited. He was taken only to assumption (a), which was in the same terms as that set out above. The cross-examiner asked (Tcpt, p 824(40)):

“Q   What I’m asking you about is whether the assumption that you made about maximising rebates, to your mind, involved the idea that the buyers were not purchasing stock which could be sold profitably or for which there was customer demand?

A   That’s, I think – as per this wording, yes, they were making decisions based on the rebate, that was the assumption, rather than on likely demand.

Q   And making purchasing decisions to purchase product that they thought could not be sold profitably; is that what you thought the assumption required you to make?

A   No, I thought it was as it’s listed here, that it’s based on the rebate rather than current or likely [demand].”

425. Mr Taylor was separately cross-examined by senior counsel for Mr Potts, including with respect to the assumptions (a)-(g). There were two limbs to the cross-examination. The first was that Mr Taylor was, as par 53 of his affidavit suggested, focused on the working capital requirements of DSH and how they were affected by inventory issues. He agreed with that: Tcpt, p 841(38)-(41). The cross-examination continued (Tcpt, p 842(32)):

“Q   Presumably in your mind at the time you gave that evidence, prepared the affidavit, there was some level of materiality or significance that was behind the statement? You wouldn’t have responded the same way, I suggest to you, to trivial amounts, as you would have responded to very significant amounts?

A   Well, items such as not properly accounting for things – some of the items – I think that goes to – some of the items in (a) to (g) go to systems and processes in place or an approach taken by management, and I don’t know that I would have applied a trivial versus significant lens to it. They might raise alarms just in the fact that they were existing.

Q   You say that applies in respect of some of the matters in (a) to (g), but not others?

A   Sorry, I’d have to go through them again. No, actually, on reflection, I think all of these, any of those – obviously I’ve already called out point (a) being the one that’s perhaps subject to a threshold, but the other ones, I don’t think they – I could consider a small amount trivial. I think any of these matters would lead me to ask more questions.”

426. The cross-examiner then turned to an issue which had been raised with Mr Potts, namely the apparent overstocking in January 2015, which had raised a particular red flag with Mr Taylor, but had been addressed by Mr Potts and he considered to have been resolved. The cross-examiner then suggested there would have been a similar response in relation to the hypothetical issues: Tcpt, p 845(33):

“Q   What I am putting to you, Mr Taylor, is that we have an example, a worked example from history, as to how, in May 2015, you were inclined to respond to a red flag in your consideration of the creditworthiness of Dick Smith. You understand that’s what I’ve suggested to you?

A   Yes.

Q   Now what I’m suggesting to you is that in the hypothetical world, which you were asked to consider in paragraph 52, you accept, don’t you, that the likelihood is you would have responded, back then, to any other red flag, such as those listed in (a) to (g), in the way you responded in history to the red flag which you observed – do you accept that?

A   No, not necessarily. So the red flag in regards to the overstocking position, in my experience of retailers, is not normal, but it does happen from time to time, buying the wrong stock or too much of certain items of stock. Some of these other items, such as deferring delivery of goods and things like that, aren’t, in my experience, normal practice so I might treat those ones – I would treat those ones differently.

Q   The overstock you observed in January 2015 was capable, wasn’t it, of indicating a very serious problem with Dick Smith’s creditworthiness? It was capable of indicating such a problem, wasn’t it, in your view at the time?

A   It provided a flag to me that this is something I needed to find more information about and mitigate.

Q   The answer you’ve just given, I suggest to you, about how you would have responded to these other red flags, is just a bit of optimistic use of the retrospectoscope by you, isn’t it?

A   No.

Q   That’s what you wish you would have done or how you would like to think you would have responded to those matters?

A   No, that’s not right.

…

Q   I suggest to you what would have happened, had any of those matters been brought to your attention during May 2015, is that you would have asked Mr Potts about them, you would have listened to his explanation, and if it were a credible explanation you would have accepted it and included something to that effect in the credit memorandum that you sent up to your superiors at the bank?

A   No.”

427. Given that the list of assumptions were things which NAB said Mr Potts had not disclosed, there was a degree of awkwardness in the cross-examination as to what Mr Taylor would have done had they been disclosed. Nevertheless, the cross-examination did not appear to cast doubt on Mr Taylor’s credit and the judge did not find that it did.

428. As counsel for Mr Potts pointed out on the appeal and, unsurprisingly, the primary judge accepted, buyers did not purchase stock for their O&A rebates in disregard of any question as to likely demand for the products. The judge stated:

“122   Although each of Messrs Borg, Freeman and Bonham [DSH employees] gave evidence of a policy of seeking to maximise O&A rebates, each of them accepted in cross-examination that that policy was not pursued at the price of buying stock that it was known could not be sold within a reasonable time for a reasonable margin.”

429. The judge further noted (at [375]), that there were other key performance indicators which the buyers took into account and continued:

“376   On the other hand, I accept that buyers were encouraged to buy stock that they otherwise would not have in order to obtain O&A rebates. There is ample evidence that buyers were encouraged to give preference to suppliers who provided O&A rebates. They were given that encouragement by the introduction of targets in relation to O&A rebates. But I also accept that considerable pressure was put on, and inducements were given to, buyers to meet those targets.”

430. In written submissions, counsel for Mr Potts asserted, with respect to the assumptions (a) to (g), that “none of those matters was made out on the evidence”: written submissions, par 38. However, that conclusion depended, in relation to the O&A rebates, on a particular reading of the assumption.

431. Further, it was not correct to treat what may be described as a formulaic acceptance of pleaded assumptions as determinative of causation, or, if rejected, determinative of a failure to prove causation. Nor was the case to be determined by a semantic debate with the witnesses as to their understanding of the assumptions. However, to the extent that the key assumption was that relating to the O&A rebate policy, there was no reason to hold that the maximisation of rebates was to be pursued as the sole policy without any regard to consumer demand. Such an understanding would not be commercially realistic. It was not the understanding that the primary judge adopted. There was powerful evidence to support the judge’s conclusion that “the likelihood is that if [NAB] had been told that one of the reasons for the build-up in stock was the emphasis on O&A rebates and that DSH had not taken steps to change its policies and procedures to deal with that problem, it would not have agreed to participate in the syndicate with HSBC”: at [374]. That is an expression of causal connection between misleading and deceptive statements, found on the evidence to be highly significant to NAB, and NAB’s likely response given disclosure of the true position, as found on the evidence.

432. By way of comparison with HSBC, the judge was entitled to take into account, as he did in dealing with the HSBC claim, that HSBC had pursued DSH, seeking to establish a banking relationship and leverage its Chinese connections to assist in dealing with suppliers. A separate factor was that HSBC had entered into the Extension Agreement, a fact which was patently relevant to an assessment of HSBC’s likely attitude to a correction of misleading information. In assessing and reaching his own view about the extent to which NAB placed reliance on particular matters, the judge had before him not merely formulaic statements in the affidavits, but significant other evidence, including the cross-examination of Ms Peter, and Messrs Taylor, Menzies and Johnson. No error was established.

430. The challenge by way of ground 2 to the finding of “reliance” must be rejected.

Ground 3: Proportionate liability defence

434. Each of the causes of action relied upon by the plaintiff was accompanied by a defence seeking apportionment of liability for economic loss. The relevant provisions were as follows: (i) Australian Consumer Law, s 18 and s 236 (liability to pay damages for misleading or deceptive conduct) and Competition and Consumer Act 2010 (Cth), s 87CB (proportionate liability defence); (ii) Corporations Act 2001 (Cth), s 1041H (liability for misleading or deceptive conduct) and s 1041L (proportionate liability defence); and (iii) Australian Securities and Investments Commission Act 2001 (Cth), s 12DA (liability for misleading or deceptive conduct) and s 12GP (proportionate liability defence). Each of these sets of provisions is in relevantly similar terms. Although there are differences as to the coverage, it was not in dispute that all three covered the conduct engaged in by Mr Potts in the present case. It is convenient to note that the proportionate liability provisions under Commonwealth laws mirror those under Pt 4 of the Civil Liability Act 2002 (NSW), which have been addressed in several cases.

435. It is sufficient for present purposes to set out s 87CB and related provisions in Pt VIA of the Competition and Consumer Act.

87CB    Application of Part

(1)   This Part applies to a claim (an apportionable claim) if the claim is a claim for damages made under section 236 of the Australian Consumer Law for:

(a)   economic loss; or

(b)   damage to property;

caused by conduct that was done in a contravention of section 18 of the Australian Consumer Law.

(2)   For the purposes of this Part, there is a single apportionable claim in proceedings in respect of the same loss or damage even if the claim for the loss or damage is based on more than one cause of action (whether or not of the same or a different kind).

(3)   In this Part, a concurrent wrongdoer, in relation to a claim, is a person who is one of 2 or more persons whose acts or omissions (or act or omission) caused, independently of each other or jointly, the damage or loss that is the subject of the claim.

(4)   For the purposes of this Part, apportionable claims are limited to those claims specified in subsection (1).

(5)   For the purposes of this Part, it does not matter that a concurrent wrongdoer is insolvent, is being wound up or has ceased to exist or died.

436. Because NAB’s claim was a claim for damages for economic loss caused by conduct in contravention of s 18 of the Australian Consumer Law (for which damages were available under s 236) it was not in doubt that the claim was an “apportionable claim”. The other party was said to be DSH. The operative provision reads as follows:

87CD    Proportionate liability for apportionable claims

(1)   In any proceedings involving an apportionable claim:

(a)   the liability of a defendant who is a concurrent wrongdoer in relation to that claim is limited to an amount reflecting that proportion of the damage or loss claimed that the court considers just having regard to the extent of the defendant’s responsibility for the damage or loss; and

(b)   the court may give judgment against the defendant for not more than that amount.

437. For Mr Potts to be a “concurrent wrongdoer” for the purposes of this provision he needed to be one of two or more persons of the kind identified in s 87CB(3). The operation of that provision has given rise to some difficulties of construction. The first is whether there need be more than one act or omission. That there may be more than one act or omission is apparent from the use of the plural “acts or omissions”. However, the provision also refers explicitly, in parenthesis, to the singular “act or omission”. As explained by Emmett JA in Williams v Pisano (2015) 90 NSWLR 342; [2015] NSWCA 177 at [71], the words in parenthesis could cover a single act or omission on the part of two persons separately, although that construction is more than a little awkward. The syntax also requires consideration of the fact that the act or acts and omission or omissions can be causal factors independently of each other, or jointly. To treat the singular act or omission as operating “independently of each other” reinforces the awkwardness of speaking of an act of each of two persons. The difficulty is created by drafting which incorporates four sets of alternatives within a single sentence. However, relevantly for present purposes, one can disaggregate the sets to isolate a specific reading, being one act of two persons acting jointly which causes the loss or damage, the subject of the claim. Such a reading makes sense in ordinary parlance and in legal terms. It is difficult to understand why such a case should be excluded from the coverage of the provision, although it may be accepted that two acts, each involving legal liability on the part of separate persons, is likely to be the more common case. However, as Bell and Gageler JJ explained in Hunt & Hunt Lawyers v Mitchell Morgan Nominees Pty Ltd (2013) 247 CLR 613; [2013] HCA 10 at [91] the provision should be understood as referring to “one or more legally actionable acts or omissions”. One act is sufficient, at least in the case of joint liability.

438. Liability can be characterised as joint or several, or both. Separately, it can be characterised as direct or vicarious. These different forms of characterisation will have different purposes. The statutory purpose of proportionate liability is to prevent a solvent concurrent wrongdoer being liable for the whole of the loss or damage suffered by the plaintiff in circumstances where there are one or more other concurrent wrongdoers who will escape liability because they are impecunious.

439. Some care must be taken when these provisions are applied to cases where a natural person and a corporate entity which is controlled by the natural person are each said to be concurrent wrongdoers. That was the case in Tomasetti v Brailey [2012] NSWCA 399 (where the acts of Mr Brailey were the corporate acts of his company) and in Robinson v 470 St Kilda Road Pty Ltd (2018) 263 FCR 572; [2018] FCAFC 84 (where the company had a sole director). There are statements in the former case at [154]-[156] that each of two concurrent wrongdoers may be 100% liable to a plaintiff. If so, that would be directly contrary to a principal objective of the regime. In the latter case, upon which Mr Potts relied, the question arose as to whether a company, with a sole director who was the alter ego of the company, could be a concurrent wrongdoer with the director. McKerracher and Markovic JJ reasoned:

“51   His Honour opined, and we agree, that, first, it cannot be said that the acts are independent because there is a single act carried out by the person which is also the act of the company. Secondly, it cannot be said that the acts ‘jointly’ caused the damage or loss. There is no capacity for joint conduct because there is only a single act, which makes it artificial to say that there are two acts of persons, one of the company and one of the director.”

440. It is difficult to reconcile the rejection of a single act for which two wrongdoers are jointly liable with statutory language which expressly contemplates the possibility that there is a single act or omission of two or more persons. Further, it is important to bear in mind that, although perhaps obscurely worded, the legislation does not allow a vicariously liable principal to be a concurrent wrongdoer. That follows from two provisions. First, s 87CF, which confers on a defendant who is a concurrent wrongdoer immunity from claims for contribution or indemnity by any other wrongdoer. Secondly, s 87CI(a) provides that “[n]othing in this Part… prevents a person being held vicariously liable for a proportion of an apportionable claim for which another person is liable”. These provisions would not work harmoniously if a defendant whose liability was purely vicarious could be a concurrent wrongdoer. That that was the intention of the provision appears from the report of Professor JLR Davis, upon which the proportionate liability defence in various statutes was based: Commonwealth of Australia, Inquiry into the Law of Joint and Several Liability: Report of Stage 2 (1995). Professor Davis recommended that the proposed scheme for proportionate liability should not apply to instances of vicarious liability, as noted in Woodhouse v Fitzgerald (2021) 104 NSWLR 475; [2021] NSWCA 54 at [101]. Emmett JA noted in Williams v Pisano, that that consideration would justify the result in Hadgelias Holdings Pty Ltd v Seirlis [2015] 1 Qd R 337; [2014] QCA 177 at [14], [21], which had inappropriately held there must be “distinct acts (or omissions) or sets of acts (or omissions) by different actors”.

441. In the present case, the difficulty faced by Mr Potts was that he accepted he was not the alter ego of the company (in which case his acts would have been the acts of the company) (Tcpt, p 4270(1)); rather, the company may have been vicariously liable for his acts, but on that basis it would not have been a concurrent wrongdoer.

442. These issues may be put to one side, however, because Mr Potts accepted that he had to establish some act attributable to DSH, other than his own acts vicariously attributable to DSH, in order to establish that DSH was a concurrent wrongdoer. In that he was correct. Mr Potts relied upon both acts and omissions.

443. Mr Potts’ pleading that the claims by the banks involved apportionable claims (Amended Commercial List Response, par 129) was correct. Without Mr Abboud’s liability, the question was whether DSH was a concurrent wrongdoer. The primary matters relied upon in this regard were three statements said to constitute representations made by DSH in the Syndicated Facility Agreement executed on 22 June 2015. These were particularised as such in NAB’s Third Amended Commercial List Statement. However, the fact that they were pleaded did not mean that they had been shown to be false, nor that NAB had relied upon them. The relevant representations, contained in Pt 7 of the Syndicated Facility Agreement, read as follows:

“21.1   Representations and warranties

Each Obligor [DSH] represents and warrants to each Finance Party, except as to matters disclosed by it to the Agent [NAB] and accepted by the Agent in writing, that:

…

(s)   (full disclosure) it has, or persons acting under its instruction have, fully disclosed in writing to the Agent all documents and information known to it relating to it, its assets, the Finance Documents, and anything in connection with them which is reasonably considered by it to be material to the assessment of the nature and amount of risk undertaken by a Finance Party in entering into and performing the Finance Documents;

(t)   (information accurate) all information (excluding financial projections, estimates and forecasts) provided by it or on its behalf to any Finance Party in connection with the Finance Documents is at the date of this document (or, if provided later, when provided) accurate in all material respects and not, by omission or otherwise, misleading in any material respect at the date provided (whether by its inclusion or by omission of other information);

(u)   (financial projections, estimates and forecasts) all financial projections, estimates and forecasts provided by it or on its behalf to any Finance Party in connection with the Finance Documents have been prepared in good faith with due care and skill, are based on information known to it, and are subject only to reasonable assumptions and qualifications as are expressly made and assessed by reference to the date on which those financial projections, estimates or forecasts were provided.” (Emphasis added.)

The passages emphasised are those forming the key to the representations.

444. There is no dispute that DSH made those written representations. Further, NAB pleaded that it had relied upon them: Third Amended Commercial List Statement, par 19. Mr Potts then submitted that the judge had made express findings to the effect that those representations were false and that NAB had relied upon them. However, what the primary judge upheld were NAB’s claims with respect to Mr Potts’ conduct, as set out above. Significantly, the primary judge did not uphold any claim with respect to the CEO, Mr Abboud. Further, the judge made no finding that, in the first part of 2015, the non-executive directors and the board generally, breached their duties. However, he treated the positions of Mr Abboud and Mr Potts differently: primary judgment at [409].

445. What was missing from this case was identification of facts which constituted breaches of the relevant representations. Thus, putting to one side information known to Mr Abboud and Mr Potts, there was no finding that DSH as an entity failed to disclose to NAB documents and information “reasonably considered by [DSH] to be material to the assessment of the nature and amount of risk undertaken by [NAB]”. It was not submitted that Mr Potts had identified such documents or information in cross-examination of the company directors. With respect to subpar (t), there was no evidence that any of the directors (other than Mr Abboud and Mr Potts themselves) had reason to believe that the matters disclosed were otherwise than accurate in all material respects or were, by omission or otherwise, misleading. Nor was there any finding in respect of subpar (u) that the financial projections had not been prepared in good faith and with due care and skill, or that such inadequate financial projections were provided by DSH or on its behalf to NAB.

446. No doubt that affirmative case against DSH would have been forensically difficult for Mr Potts to run, given his position as the primary contact between NAB and DSH and the person responsible for identifying what material was and was not to be disclosed. It was one thing for him to eschew any claim that the liability of DSH turned on his conduct, but it was quite another to claim to have established that DSH had breached its duties with respect to the representations in the Syndicated Facility Agreement. In the event, that case against DSH was not made good. As NAB submitted, there were various documents prepared by other officers of DSH, including Ms Puja, which were supplied to NAB. However, Mr Potts eschewed any claim that any particular officer of DSH had failed in his or her duty.

447. In his written submissions in reply (par 26), Mr Potts asserted that “ground 3, which arises only if grounds 1 and 2 fail, accepts as its starting point the findings which are challenged by those other grounds”. For reasons explained above, that is not so. It does not follow that “if Mr Potts is liable to NAB…, it must follow that DSH knew the ‘true position’ regarding its overstock position (namely, that it was overstocked as a result of pursuing O&A rebates …)”.

448. Mr Potts also relied upon the fact that public explanations given by DSH for its stock position in early 2015 were incomplete and misleading. While it is true that officers at NAB, including Mr Menzies, read the public statements made by DSH, they found them inadequate to explain the overstocking problem. It was for that reason that they spoke to Mr Potts. Accordingly, far from relying on the public statements, NAB officers sought to go behind them. But it was Mr Potts who failed to disclose information which ought to have been disclosed. Those circumstances are inconsistent with the proposition that NAB relied upon the inadequate public statements. Indeed, they established the contrary.

449. Ground 3 must be rejected.

Conclusion

450. For the foregoing reasons, the findings of the primary judge with respect to liability must be upheld. The failure of the judge to carry out an assessment of the proportionate liability defence may have been the result of a reasonable apprehension that the case could only be made good by reference to the wrongdoing of Mr Abboud, which was not established, or it may have been an inadvertent omission. In any event, the appeal must be dismissed. Mr Potts must pay NAB’s costs of the appeal.

451. In this appeal the Court makes the following order:

1. Appeal dismissed.

2. The appellant is to pay the respondent’s costs.

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Decision last updated: 26 August 2022