APPENDIX D AN INTRODUCTION TO THE JUDGMENT In today's judgment the court has held that the plaintiff, ASIC, has failed to prove its case that either of the defendants, Mr Rich and Mr Silbermann, contravened s 180 Corporations Act, which lays down the statutory duty of care and diligence for company directors and officers. The judgment, running to over 3,000 pages, depends on a series of detailed factual findings about the financial circumstances of the One.Tel Group over the period from January to May 2001. The findings respond to 18 volumes (over 4,000 pages) of written submission documents, as well as oral submissions, relating to a vast quantity of evidence received by the court in a hearing spread over approximately three years. This is a case where the outcome is determined by a detailed understanding of the facts. In those circumstances, a meaningful and accurate summary would be very difficult, and is not attempted here. Instead, this Appendix to the judgment seeks to introduce the reader to some issues addressed in the 25 chapters. Given that objective, this introduction is merely intended to give some signposts to provide a path through the judgment. Chapter 1 - Introduction It is recommended that a reader seeking to understand the judgment should read Chapter 1 in full. There is a brief description of the proceedings at the beginning of Ch 1. They are civil penalty proceedings for a breach of the statutory duty of care and diligence of company directors and officers, arising out of the collapse in May 2001 of a large Australian listed company, One.Tel, and its local subsidiaries, and the collapse or on-sale of overseas subsidiaries. The proceedings were initially brought against four defendants, but orders have been made in respect of two of them, and the remaining defendants are the first defendant, Mr Rich (who was joint chief executive), and the fourth defendant, Mr Silbermann (who was finance director). The remaining two defendants are referred to together as "the defendants", and the plaintiff is referred to as "ASIC". In ASIC's statement of claim and at the hearing, both parties placed the weight of emphasis on the issue of the actual financial position of the One.Tel Group during each of the months of January, February, March and April, and to a lesser extent May, 2001. ASIC sought to show, as the central component of its case, that the financial position of the Group and the Australian and international businesses within it, in terms of cash, cash flow, creditors, debtors, earnings (EBITDA) and liquidity, was much worse in each of those months than the information provided to the board of directors revealed, and that forecasts of those matters provided to the board, particularly for the period to June 2001, had no proper basis. They contended, amongst other things, that the defendants were aware of the poor financial position 1 of the Group, or ought to have been, and failed to make proper disclosure to the board. Some issues arising out of the size of the case are discussed at 1.3. Statistics are given at 1.3.1, including 232 hearing days (including 9 days in the UK), 16,642 transcript pages, 67 published interlocutory judgments and 4,384 pages of final written submissions (including 202 pages of financial tables). There is a discussion of the factors contributing to the length of the case at 1.3.2, including: the scope of the evidentiary case that ASIC set out to prove; the nature of the defences; the vigour with which the defendants resisted ASIC's case; the need to travel abroad to hear some of the evidence; problems arising from the fact that many documents were first obtained through the execution of search warrants issued in the investigation of suspected criminal offences, then sought to be used in civil proceedings; difficulties about the admissibility of the evidence of ASIC's forensic accounting expert, Mr Carter, because he had prepared an earlier report for ASIC with access to information that he was later told to exclude for the purposes of his forensic report; subsequent attempts by ASIC to prove its financial case by other means, especially the preparation of its own financial tables and the introduction of some new material during the cross-examination of the defendants; difficulties arising out of the tender of documents without supporting evidence from any person as to what they were and what they meant; difficulties posed by the volume of evidence concerning One.Tel's dealings with creditors; the consequences of the decision by the High Court of Australia, shortly before the trial began, that the defendants were protected by penalty privilege, and were therefore not required to give discovery or provide their evidence to ASIC until after ASIC had closed its case, leading to various applications by ASIC for leave to adduce further evidence, some successful and some unsuccessful; the tendency of both parties to seek to support their respective cases by detailed financial argument in final written submissions, leading to submission documents that were not only long but dense. At 1.3.4 the judgment makes the point that, although the court is obliged to facilitate the just, quick and cheap resolution of the real issues in proceedings, there are some cases that are just very large and costly, and where the judge’s primary duty is to see the case through to its conclusion. Chapter 2 - Pleadings This chapter first gives a detailed account of the allegations made by ASIC against the defendants in its statement of claim (2.1), and then gives an account of the Defences (2.2). It will be seen that much attention is given in these documents to the Schedule to the statement of claim, which makes detailed allegations about the true financial position of One.Tel in the period from January to April 2001. 2 The defendants submitted that large portions of ASIC's final submissions strayed outside its pleaded case, and since the defendants had not had a proper opportunity to deal with them, it would be unfair for the court to entertain them (2.3). Some relevant legal principles are considered at 2.3.1-2.3.5. Those principles are applied to resolve the defendants' challenges to some 62 particular allegations made by ASIC in final submissions. Findings are recorded on each occasion. On some occasions the court has found that ASIC has exceeded its pleaded case in final submissions, raising serious matters affecting the reputations of the defendants and allegations of facts that they would have wished to answer if they had been given an adequate opportunity to do so. Chapter 3 - Issues about Evidence In their written submissions, the defendants identified some "critical documents" upon which ASIC's case turned, and some "recurring themes" that they developed extensively in their submissions in answer to ASIC's case. Their recurring themes were that the documents relied upon by ASIC were susceptible to misunderstanding, and ASIC did not call witnesses who could have given evidence to explain what the documents were, whether they were in final form, and what they said (at 3.1, 3.2). By and large, the court has accepted the defendants' submissions (at 3.1, 3.2). The contentious documents include the management accounts for the Australian fixed wire/service provider business for January-April 2001, "profile summaries" of debtors, and Australian aged creditors reports extracted from the creditors ledger. In their final oral submissions, the defendants described these three categories of documents as the "three pillars" of ASIC's case (T 14952). For reasons given in the body of the judgment, the court has found that there are some problems about the evidence concerning these documents, that have made them unreliable to prove the matters that ASIC alleges. There is a discussion of the legal principles concerning the onus of proof in civil cases, the evidentiary status of a company's business records, and the standard of proof in civil penalty cases (3.3 and 3.4). This includes consideration of the status, in civil penalty proceedings, of the "Briginshaw" standard of proof. Then there is consideration of some evidentiary rules as to the circumstances in which the court, when it comes to weigh up the evidence presented at a hearing, will take into account the power of the respective parties to produce other and better evidence (3.5). A particular application of this is the rule saying that if a party has not called evidence of a particular kind, the court may infer that the evidence would not have assisted that party's case (3.6). The court has applied these principles in the present case, in circumstances where ASIC has not called a witness to explain management accounts and profile summaries (3.7). Another evidentiary rule is the rule of practice that if a party wishes to invite the court to disbelieve a witness, the grounds on which the evidence is to be disbelieve should be put to the witness in cross-examination so that the witness has the opportunity to offer an explanation (3.9). That rule is explored and considered in its application to the present case. The defendants made lengthy submissions directed to establishing that ASIC is subject to a special duty of fairness in the conduct of civil penalty proceedings, 3 analogous to the duty of prosecutorial fairness in the criminal area, and that it had failed to discharge the duty (3.10). ASIC denied that it was subject to any special duty of fairness of the kind alleged. The court has decided, following precedent in the Court of Appeal, that ASIC is not subject to any special duty of fairness in civil penalty proceedings of a kind that might lead to a miscarriage of justice, although as a Commonwealth agency it is expected to act as a "model litigant" in civil proceedings. Chapter 4 - Management, Directors, Financial Organisation and Share Price This chapter makes findings on some matters that provide a backdrop for the narrative account: senior management personnel (4.1); management structure and the defendants' methods of supervising management teams (4.2); key performance indicators (eg, cost of acquisition (COA), average revenue per subscriber (ARPU), gross margin, subscriber numbers, churn and operating expenditure (OPEX) (4.3); the executive directors and their backgrounds (4.4); board composition (4.5); non-executive directors (4.6); management communication with directors, including board papers, flash reports and daily e-mails (4.7); One.Tel's financial records (including the Adept financial system, the SAS, the I:drive, and various categories of documents that figure in the evidence) (4.8). A matter worth particularly noting is the discussion of profile summaries at 4.8.6, where a finding is made that these documents are not reliable evidence to prove either the ageing of debtors of the Australian operations or the risk of payment default. There is some information at 4.9 about the movement of One.Tel's share price in the period from 1998 to May 2001. It seems likely that management and the board of One.Tel paid close attention to share price movements. Chapter 5 - Witnesses In this chapter the court responds to the submissions of the parties about the plausibility and reliability of the evidence of witnesses, including submissions about their credit. The court has not accepted the defendants' attack on the credit of Mr Packer Jnr, but there were some problems with his evidence. He misconceived his role in crossexamination, which he apparently regarded as an opportunity to put his side of the story rather than to answer the cross-examiner's questions. The extent of his inability to recollect relevant events, both generally and in particular relating to the period from 18 to 28 May, weakened his evidence (5.1). 4 Likewise there were some difficulties with the evidence of Mr Murdoch Jnr, relating to his very poor recollection of events, but no adverse conclusion was drawn as to credit (5.2). In the case of most other witnesses for ASIC, except for Mr Kleemann, the court has not accepted submissions going to credit and has taken the view that where the evidence of these witnesses conflicts with other evidence, it should make findings by weighing up all of relevant evidence and the context, without any general disposition to believe or disbelieve the evidence of the witness. There were some problems with Mr Kleemann's evidence (5.5), relating to his understatement of his role in reviewing the One.Tel business, both before and after October 2000, his lack of recollection of events in the period from 17 May onwards, his misleading account of the circumstances in which Mr Packer Jnr's request for a direct link to One.Tel's computer system was found not to be feasible, and the circumstances leading to his change of heart on about 6 May 2001 concerning his assessment of the One.Tel business. As to the UK witnesses, Mr Howell-Davies was generally a reliable and helpful witness and there was no submission attacking his credit (5.6). Mr Weston seemed to have poor recollection of even important events, but the court has not made an adverse finding as to credit (10.19.15.3). Mr Werner's evidence was found to be unsatisfactory in various ways, particularly for vagueness, inconsistencies and implausibility, although no adverse finding has been made concerning his credit (10.19.15.2). Mr Boaden was found to be a thoroughly unreliable witness, who gave implausible evidence. The court concluded that his evidence should not be accepted unless corroborated or uncontroversial (10.19.15.6). ASIC claimed that the credit of Mr Rich and Mr Silbermann had been severely damaged by a very significant quantity of matters that emerged from their evidence. As a result, ASIC submitted, their evidence should not be accepted unless adverse to their interests and corroborated by evidence other than from their co-defendant. ASIC claimed that they were prepared to say whatever they perceived would advance their case, regardless of the truthfulness and frankness of what they were saying. These submissions have been firmly rejected by the court, which has formed the view that the evidence of Mr Rich and Mr Silbermann should be assessed in its context without any disposition to believe or disbelieve it (5.12 and 5.13). The court noted that they were interested witnesses, fighting for their commercial survival, but that did not mean that the court was required to disbelieve them. The court found that Mr Rich had demonstrated that he was a very well-prepared witness, knowledgeable about the subject matter of his evidence, who responded to questions thoughtfully and clearly, sometimes even perceptively. This was notwithstanding the arduous circumstances of his cross-examination, extending over 25 days. His objective in the witness box was to understand precisely what the cross-examiner was asking him and to answer that precise question, an approach which is to be applauded rather than criticised. What ASIC claimed to be evasive answers were, upon close examination, examples of this concern to understand the question and answer it precisely. While at times his recollection of events was less specific than the evidence in his affidavit, this happened remarkably infrequently 5 bearing in mind the length of the cross-examination and the detailed nature of the subject matter. Mr Silbermann was not as impressive a witness as Mr Rich, and there were some inconsistencies and mistakes in his evidence, apparent lapses of memory, and even a measure of prevarication. Nevertheless the court formed the impression that he was trying to answer the questions that were put to him to the extent of his knowledge (though sometimes a little circumspectly), and like Mr Rich, he endeavoured to answer precisely the questions that were put to him. Chapter 6 - The Years 1995 to 1999 Evidence relating to the early years of One.Tel, including the major investment in the company by PBL and News, are set out in Ch 6. Apart from providing information going to an understanding of the businesses of the Group, and to their rapid rate of expansion, this evidence provides information about the extent of Mr Packer Jnr's involvement in One.Tel from the earliest times. The key business developments in that period are summarised in dot points at 6.1.2. They include the early substantial investment by interests associated with Mr Packer Jnr, One.Tel's business association with Optus, the admission of One.Tel to the official list of the Australian Stock Exchange in November 1997, One.Tel's success in an early Australian spectrum auction, its entry into the Australian fixed wire business, the development of the Next Generation strategy, and the investment by PBL and News in February 1999. That investment is further considered at 6.2.2. The extent of Mr Packer Jnr's participation in One.Tel's business activities during the period is addressed at 6.1.3. A description of the businesses in 1999 is given that 6.2. The roles of Mr Packer Jnr and Mr Murdoch Jnr during 1999, and the contribution by Mr Kleemann, are addressed at 6.2.3. Chapter 7 -The Year 2000 This was the calendar year leading up to the months that have been the focus of attention in this case. There were some important events in that year, which had an impact on those months, and additionally the developments in the year 2000 contribute to an understanding of the businesses and to the role of Mr Packer Jnr. Amongst the important events of 2000 were the following positive developments: PBL and News made further investments in One.Tel by the exercise of options in May 2000 (7.2); the arrangements between One.Tel, PBL and News included crosspromotional and joint marketing activities, including prepaid advertising; One.Tel was successful in a major Australian spectrum auction in January 2000 (7.2); One.Tel made an arrangement with Lucent to fund the cost of providing handsets to Next Generation subscribers (7.5, where there are some detailed findings relevant to the company's cash position in later months); and the rollout of the Next Generation network began pursuant to contracts One.Tel had entered into with Lucent Technologies in 1999. 6 There were also some negative developments: One.Tel's share price more than halved in calendar 2000, under the influence of external factors such as the tech wreck, but also scepticism in the investment community as to One.Tel's prospects (4.9); One.Tel withdrew from a European spectrum auction when the price exceeded its budget and funding (7.3); One.Tel's initial success in acquiring local call subscribers through the introduction of its switch product (7.12) led to aggressive competition from other telcos; a series of billing problems emerged, substantially affecting revenue (7.13), together with associated difficulties in collections (8.3); there were delays in the Next Generation rollout in Brisbane, Adelaide and Melbourne; the third-party marketing agency called Axxess adopted unacceptable tactics to acquire subscribers, leading to complaints to the ACCC and a negotiated outcome in December 2000; and the UK government delayed in the introduction of preselection, leading to One.Tel UK introducing "diallers" for its subscribers in the second half of 2000. Other matters to be noted are as follows: One.Tel developed its 2000/2001 business plans and they were presented to the board in September 2000 (7.16, where a detailed account is given); Ernst & Young were appointed auditors by the annual general meeting in November 2000 (7.7); there was an important briefing of Mr Murdoch Snr in October 2000 (7.8); Mr Kleemann undertook some major reviews of One.Tel beginning in October 2000 (7.9, 7.18, which gives detailed information about these reviews); the annual general meeting was held on 13 November 2000, providing a useful snapshot of One.Tel's businesses as summarised in some detail at 7.11. Chapter 8 - January 2001 At the beginning of January 2001, One.Tel was half way through a financial year in which its business strategy envisaged very significant financial progress, particularly with respect to Next Generation (8.1.1) and the international businesses (8.1.2). The company's business plans, placed before the board of directors in September 2000, had been revised, in ways identified at 8.1.5, but still they were very ambitious. They provided for massive improvements in earnings and cash flow in the ensuing months. Most of the businesses in the Group were start-up businesses that needed to attain critical mass in terms of subscriber numbers and ARPU before turning cash and earnings positive, and the strategic plan was that the established businesses would fund those businesses to get them over that hurdle. The business risks inherent in the business plans were recognised by management, Mr Kleemann and Mr Packer Jnr (8.1.6), and by the directors (8.1.7). The company had the support of PBL and News (8.1.10). Mr Kleemann's reviews, completed in 7 December/January, generally supported the conclusion that the businesses were "on track" under their business plans (8.1.11). The difficulties with the billings system experienced in October/November 2000 led to a concerted effort for a billing catch-up, which was evidently achieved by midJanuary (8.2). There was a review of collections practices and procedures in Australia, following the difficulty experienced with Axxess, and plans were made to transfer staff from the call centre to the collections team when the billing catch-up had been achieved, so as to improve collections (8.3). The idea was conceived to appoint a third party provider of call centre resources called Vectus, which was subsequently appointed in February to focus on collections for customers between 30 and 60 days, in order to leave the One.Tel collection staff free to pursue collections of over 90 days, though Vectus was not able to commence operations until April. These developments were reported to the March board meeting (8.3). Mr Rich and Mr Packer Jnr had various discussions about the business in January, including a discussion at Mr Rich's holiday home on 3 January (8.6), a review of the business plans with Mr Kleemann shortly after 15 January (8.10), and further communications almost every workday (8.11). There is inconsistent evidence about what was said on these occasions, but generally the court has preferred the evidence of Mr Rich. Mr Rich gave a briefing to Mr Packer Snr and Mr Packer Jnr on 15 January, evidently suggested by Mr Packer Jnr so as to address his father's concerns about One.Tel's cash position. The meeting was important, inter alia, because it led to the initiation of daily e-mails from One.Tel to Mr Packer Jnr, Mr Kleemann and others (8.7). Mr Rich was aggressively questioned by Mr Packer Snr as to whether the ambitious budgets would be achieved, and Mr Packer Snr told him he had to reduce cash usage. After that meeting there were further meetings with Mr Murdoch Jnr and Mr Macourt and Mr Hartigan of News on 16 January (8.8), and the content of the daily e-mail reports was formulated with the assistance of Mr Kleemann (8.9). One.Tel made a market announcement on 16 January 2001, at the suggestion of Mr Packer Jnr, which said that One.Tel's business was tracking very well and it did not need to raise cash (8.12). There was a Macquarie Research Equities report that reviewed One.Tel in positive terms (8.13). The business plans were further revised in January, in the manner described in 8.4. In particular, in about the third week of January, Mr Hodgson and Mr Barnes prepared a "recut" of the fixed wire/service provider budget, according to which the originally budgeted EBITDA and cash flow figures would be achieved through lower acquisition costs, increased promotional activity, increases in margins and lower operating expenses (8.4.3). ASIC was critical of the January budget recut, claiming there was a significant revenue shortfall in December 2000 that was not reflected in the recut, and that the recut was not adjusted to take that shortfall into account when the half-yearly figures became available. Instead, ASIC said, the recut was inappropriately used as the basis for the January, February, March and April flash reports, and the March board papers, without regard to the true position. 8 Those submissions are considered at length in 8.18. The analysis at 8.18.1 leads to the conclusion (at 8.18.1.6) that there was a substantial variance between the recut and the December management accounts, though a substantial portion of the variance was explicable in some ways. As to whether the recut should have taken account of that variance when the figures became available, the conclusion is reached (8.18.2.1) that ASIC has not shown that the variance in December revenue should have led to a reconsideration of the January budget recut figures, for the detailed reasons there set out. ASIC was critical of the defendants on the ground that the recut figures, which were essentially forecasts, were treated as actual figures for the purposes of flash reports (8.18.3). That submission is subjected to a detailed technical analysis at 8.18.3.18.18.3.3, and is rejected. At 8.18.5 the court accepts the defendants' submission that there were witnesses who might have been called by ASIC to explain discrepancies between draft management accounts, flash reports and board papers, including Mr Barnes and Mr Holmes, and the absence of that evidence was to be taken into account in assessing whether ASIC had proved its assertions about the January budget recut. Details of One.Tel's January board meeting are given at 8.14. The board received revised forecast figures but they were still very positive. Management's explanation of the difference between first and second half cash flows is considered at 8.14.12. There are also some observations about the tone and style of the board papers at 8.14.15, where the "bullet point" presentation and clipped summary language are noted. There is consideration of what was disclosed to directors before and during the meeting at 8.14.16 and 8.14.17. One.Tel made a presentation of its preliminary half yearly results to the media and investment analysts on 1 February 2001. There is an account of the circumstances of preparation of that presentation, and its content, at 8.15. At 8.16 the judgment sets out a summary of One.Tel's financial position as at 31 January, as disclosed to the board and the market. ASIC's submissions drew attention to the difference between the Group cash balance of $335 million at 30 June 2000 and the cash figure at 31 December 2000, which was $101 million according to the January board papers. The explanation for that difference is considered at 8.17. The point is made that the sheer fact that in the January board papers management's forecasts for second-half EBITDA were very substantially better than the first half was not, in itself, reason for rejecting management 's forecasts. Very substantial improvements had been built into the September budget figures as accepted by the board, and amended to January. As Mr Packer Jnr said in evidence, by January 2001 One.Tel was at a critical stage in its history, and by February "the rubber was hitting the road and it wasn't time for talk; it was time for results". The directors needed to consider whether, in light of the estimated half-year results, there was any basis for revising the reasoning that had led them to adopt the ambitious budget of September, revised in January, and whether that reasoning continued to be soundly based. 9 At 8.17.2 the point is made that it is inaccurate to say, as ASIC, did, that there needed to be "a major turnaround in performance" in the 6 months to June 2001 if One.Tel was to survive. The correct proposition was that the company needed to achieve its budget. Throughout its submissions, ASIC compared estimated or actual figures for cash flow and EBITDA with One.Tel's September 2000 budget and business plans. At 8.17.7, the court considers whether it is appropriate to refer, as ASIC has, to superseded business plans in order to track performance against budget. The conclusion is reached that as a general proposition, actual results should be assessed by reference to revised business plans, not the original, superseded business plans. At 8.17.9 that there is consideration of the question whether One.Tel's billing delays were an adequate explanation of its January cash usage shortfall. Chapter 9 - One.Tel's Financial Circumstances at the End of January 2001 This short chapter considers whether ASIC has proven its pleaded case concerning the financial circumstances of the company as at the end of January. Particular attention is given to the "true" cash and creditors and debtors position. The statement of claim alleges that the Group cash available to pay creditors was $71 million, but the evidence points to a figure of at least $81 million. It alleges that the cash available in the Australian operations to pay creditors was about $22 million, but the evidence suggests the figure was about $37 million. ASIC alleges overdue Australian creditors of $24 million but that figure fails to make adjustment for terms of trade or disputes, and so the court concludes that it would be unsafe to rely on that figure. Similar difficulties arise with respect to the alleged amount of $49.7 million said to be overdue in the UK. In the result, ASIC has not made out its pleaded case in relation to any of the matters constituting the true cash and creditors position for January 2001. The position regarding debtors is considered in Ch 19 and the position regarding EBITDA is considered in Ch 20, where conclusions are drawn contrary to ASIC's submissions. Chapter 10 - February 2001 Amongst the important matters affecting February 2001, were: the half-yearly results; the billing delay in the first two weeks of February; the February Funding Requirement; the transfer of $26 million from the UK to Australia at the end of the month, and the evidence leading up to that transfer; dealings with creditors in the UK after the $26 million transfer, and alleged "management" of creditors; the ASX announcement and media release on the final half-year results on 27 February 2001; and communication between Mr Rich and Mr Packer Jnr, and the "hospital meeting" on 15 February. 10 The early part of Chapter 10 considers the half-yearly results to December 2000. Ernst & Young produced their Review Closing Report concerning those results, containing a form of "negative assurance" (10.5). On the same day that the company released its preliminary half-yearly results, 1 February, Mr Rich and Mr Silbermann made a presentation on those results to investment analysts (10.2). The presentation made forecasts of Group cash usage for the financial year to June 2001 of $189 million, a Group cash balance at 30 June 2001 of $75 million, and a Group EBITDA loss for the financial year to June 2001 of $91 million. Those figures were considerably more conservative than the figures given to the January board meeting. There was substantial evidence about a billing delay in February, which appears to have had some serious effects on cash flow. It appears that the billing system was down for a couple of days towards the end of January because of a problem with database corruption in the system. An internal quality assurance program had identified some minor errors in customer bills, and the ACCC had raised a number of customer complaints with Mr Rich and Mr Packer Jnr when they visited the Commission in Canberra on 31 January. Mr Rich and Mr Beck accordingly decided to keep the system down for a while so that these problems could be sorted out. In fact, the system was down for about two weeks. The matters dealt with at 10.6. ASIC sought to rely on the series of documents dealing with the "Funding Requirement", and the defendants strenuously objected. Generally ASIC sought to use these documents to show that there was a sizeable variance in cash flow between them and the January board papers. There is a detailed technical analysis of the documents and submissions at 10.7, which concludes that the documents do not prove the matters for which ASIC relied on them. Relying on the “Funding Requirement’ documents and other evidence, ASIC alleged that there was evidence that One.Tel was deferring payments to creditors in the period from October 2000 to February 2001. The allegation is considered at 10.8, in considerable detail. The court's general conclusion is that in the absence of an explanation of these documents from a witness, it would be unsafe to assume that they identified any actual deferrals of payments otherwise than in the ordinary course of business. Beginning at 10.10, the discussion in Chr 10 reviews evidence as to what appears to have been the deteriorating cash position in the Australian operations, no doubt contributed to by the billing delay, and the need to address that cash problem by transferring funds from the UK. Eventually $26 million was transferred from the UK to Australia at the end of February. There is an important issue as to whether that transfer was pre-planned by Mr Silbermann before he travelled to the UK on 19 February, or (as the defendants said) the decision to make the transfer was made no earlier than 27 February. There is consideration of the evidence of Ms Randall concerning her daily cash flow spreadsheets and a discussion with Mr Hodgson on 20 February about "managing" creditors, at 10.10, 10.11 and 10.12. Her cash flow spreadsheet 2002.xls, which appeared to show a weakening cash position in the Australian operations, is considered at 10.12. 11 There is evidence concerning Mr Silbermann's visit to the European businesses in February 2001, at 10.17. Mr Silbermann sent some e-mails to Mr Rich and others on 22 February from the London office, dealing with a forecast variance in EBITDA versus budget. The e-mails also addressed One.Tel's claim against British Telecom for a "dialler rebate" to compensate for additional costs incurred as a result of BT's delay in introducing preselection. The dialler rebate became an important matter in later months, as explained that 18.11.1. Mr Silbermann's e-mail to Mr Rich and others of 21 February, "Europe Cash", is considered at 10.17.4. ASIC submitted that the e-mail was sent by Mr Silbermann to enable consideration to be given to the transfer of funds from the UK to Australia, but the court's conclusion at 10.17.4 is that there was no specific proposal to transfer a quantified amount from the UK to Australia until 27 February, and nothing in the email of 21 February or the surrounding circumstances would justify the conclusion that it was prepared for the purposes of a cash transfer from the UK to Australia. The defendants' evidence about the $26 million cash transfer was that it was not an unusual matter, and was to be understood in the context that cash was managed by One.Tel on a Group basis and the UK entity was substantially indebted to the parent entity on intercompany loan. That led ASIC to suggest, inaccurately, that the defendants were claiming that the Australian cash balance was not a matter of interest and concern to them, but as the court observes at 10.17.4.3, the evidence did not contain any suggestion that the performance of the Australian operations in terms of cash flow was a matter of no interest to the defendants or that they saw no need to monitor Australian cash flow. ASIC invited the court to make a series of findings about the $26 million transfer, set out at 10.18. ASIC claimed, amongst other things, that: the defendants formed the view by mid-February that the Australian operations were likely to require a cash transfer from the UK; Mr Silbermann gave instructions to Mr Werner to defer payment to UK creditors in order to build up the UK bank balance to permit the transfer, and Mr Rich was aware of this; the need to ensure that cash transfer occurred was one of the reasons for Mr Silbermann's trip to the UK; and the defendants knew that senior European executives objected to the transfer and that it would be prejudicial to the UK operations. The exploration of the evidence concerning these allegations takes up a large part of Ch 10 of the judgment (see 10.18, 10.19). That part of the judgment involves consideration of two important e-mails sent by Mr Hodgson to Mr Silbermann on 27 February, and consideration of the conflicting evidence of the UK witnesses, Mr Werner Mr Weston and Mr Boaden, on the one hand, and Mr Silbermann and Mr Rich on the other hand. That leads to findings about the reliability of the evidence of those witnesses and their credit, as noted in Ch 5. The court's conclusions are expressed at 10.19.17, by reference to ASIC's allegations. The overall conclusion is that ASIC's allegations have not been proven. A matter on which there was considerable evidence was whether the UK cash balance rose during February, because of delayed payments to creditors. If it did, 12 then that would corroborate Mr Werner's claim that he was told by Mr Silbermann to delay payments to creditors in order to hit certain cash flow targets for the European businesses. The evidence on that matter is considered in 10.20. The court concludes that there does seem to have been a reduction in creditor payments in the UK operations in February, and a consequent build-up of UK cash, but that happened by virtue of non-payments to a small number of large creditors, principally BT and WorldCom but also GTS and Cable & Wireless. Evidence is reviewed which suggests that there were reasons for those non-payments, not related to any desire to build up February cash to permit a transfer (10.20.1.8). In order to assess whether the transfer of the $26 million at the end of February prejudiced the European operations, it is necessary to identify the quantum of overdue European creditors in that month. That issue is addressed in 10.21. The evidence referred to by the defendants singled out a small number of large creditors and identified substantial evidence of disputes, and in the case of one of them (BT Carrier), a cross-claim. There was also evidence that as a matter of practice, carrier creditors provided a "commercial indulgence" to telecommunications companies by not requiring payment on strict contract terms. The overall conclusion is that the evidence referred to by the defendants is an obstacle to concluding that the transfer prejudiced the ability of the UK operations to pay creditors. At 10.22 the court considers ASIC's claim that the transfer of $26 million was a highly unusual event, and the defendants' evidence that the transfer was merely an instance of the management of cash on a Group basis. In circumstances where the UK operations were indebted to the parent for $80 million on intercompany loan, the court's conclusion is to accept the defendants' evidence on this matter. The question of disclosure of the $26 million to the board and individual directors is addressed at 10.23. On the evidence that the court has accepted, the $26 million transfer was an intra-group transaction in circumstances where the transferring entity was indebted to the parent entity for substantially more than the amount transferred, and cash was managed on a Group basis. Further, the cash was needed in the Australian operations because of the billing delay for the first two weeks of February, and also because One.Tel was required to make a substantial payment to Lucent as a result of a negotiated resolution of disputes reached on 27 February. Both problems were short-term problems in the sense that a billing catch-up was under way to make up for the delay, and the Lucent payment could be substantially recouped out of the funding arrangements, as in fact happened. In those circumstances, if Mr Rich had disclosed the transfer to Mr Packer Jnr, he would have been unlikely to have treated it as a matter of any significance. The defendants acknowledge that cash became tight in the second half of April and from that time there was a need to "manage" creditors in the sense of matching outflows with inflows to keep bank accounts in balance, but they denied that there was any such problem in March or early April. ASIC relied on some evidence of "management" of UK creditors after the $26 million transfer, and pointed to a series of e-mails sent by Mr Werner to Mr Silbermann in March and April, said to be prepared for the purposes of that exercise (10.25 and 10.26). There is a conflict between the evidence of Mr Weston and Mr Werner, on the one hand, and Mr Silbermann on the other, as to whether the process of "managing" creditors by 13 choosing not to pay some of them until after the end of the month, began in March shortly after the $26 million cash transfer, or substantially later, in mid-April. The court concludes at the end of 10.25 that it has not been shown that any documents, of a kind that might be used for the purpose of conducting detailed creditors discussions, were in existence before 24 April, suggesting that Mr Weston and Mr Werner were wrong to say that the process of managing creditors in dealing with creditors complaints began as early as March. One.Tel released its half-yearly results to the Australian Stock Exchange, accompanied by a media release, on 27 February 2001. The media release was in positive terms, as regards revenues, cash and subscriber numbers. As to cash, it said that "One.Tel is focused and on track to become cash positive as forecast by June 2001". ASIC compared the positive tone of the media release with Mr Hodgson's "heads up" e-mail of the same date, which presented a more gloomy picture. These matters are considered at 10.27. The court concludes that on the same day as the media release, but later, Mr Hodgson informed Mr Silbermann in his e-mail that there was a variance of $37 million between the January board and actual February cash flow, because of delayed billing runs and an unbudgeted $5 million payment to Lucent, and that the March forecast would be only slightly better than the board forecast because of an unbudgeted $10 million payment to Lucent, though he was still working on the March inflows. Mr Hodgson continued to work on the March figures after the e-mail, and by about 1 March he had revised the March cash flow forecast and was predicting a billing catch-up of just under $20 million. Moreover, while there were two Lucent unbudgeted payments amounting to $15 million, the European and Hong Kong results in February exceeded budget by $13 million, principally because of vendor financing receipts and a favourable movement in the currency exchange rate. In those circumstances, Mr Hodgson's e-mail of 27 February was not necessarily incompatible with the "on track" statement in the media release. ASIC's pleaded allegations about the media release are not about the general air of exuberance conveyed by the document. The pleading hinges on a particular construction of the "on track" statement, namely that it told the market that One.Tel would become cash positive on a month-by-month basis in June 2001. That is an odd construction of the statement, because monthly cash flow figures were not released to the market, which generally received only six-monthly results. The monthly cash flow forecasts given to the January board contemplated that after June, there would be two negative months, namely July and August, so if the "on track" statement meant that there would be positive cash flow each month after June, there was no reasonable basis for it in light of the board figures. But the January board figures forecast positive cash generation over the six-month period to December 2001, and so if the "on track" statement was about becoming cash positive over the periods for which figures were released to the market, it would be supported by the January board figures. The reasons for the court preferring the latter construction are given at 10.27.4, and the factual basis for the statement, as construed, is explored at 10.27.6. Communications between Mr Rich and Mr Packer Jnr during February 2001, on a daily basis, are reviewed at 10.28, where findings are made about conflicting 14 evidence. The meeting of the defendants with Mr Packer Snr by his hospital bed on 15 February is considered at 10.29, where challenges to Mr Rich's evidence are considered. Chapter 11 - One.Tel's Financial Circumstances at the End of February 2001 This chapter contains some important findings that are relevant to the financial circumstances of the company at the end of March and April, as well as February. One such matter is the significance of daily cash flows spreadsheets, considered at 11.1.1. The court finds that until March 2001, senior management including the defendants relied on the business plans/budgets, as updated by the business units, for the purpose of cash flow forecasting. The position changed in March, when it became plain that because of the impact of the billing delay in February and other matters, the business plans for the Australian operations would not be an adequate foundation for forecasting, and so Mr Hodgson had recourse to a cash flow spreadsheet for the purpose of preparing forecasts for the March board papers. The court makes some findings about February cash flow at 11.1.6, noting the variance from the September budgets, which had been superseded in some ways. ASIC's allegations about Australian and UK overdue creditors at 28 February are considered in detail at 11.2. The proper treatment of unpresented and unreleased cheques is considered at 11.2.3. The question whether month-end aged creditors should be adjusted for late posted invoices, and if so whether the amount of late posted invoices could be reliably calculated, is considered at 11.2.4, the main conclusion being that ASIC's attempt to quantify late posted invoices was unsuccessful. At 11.2.5 the reliability of the Australian aged creditors reports is considered in detail. After an examination of some serious problems including errors in due dates and lack of reconciliation of the creditors ledger, as well as problems about usual business terms and disputed debts, the conclusion is reached that the Australian aged creditors reports were unreliable in ways that overstated the amounts of due and overdue creditors, for various stated reasons (11.2.5.8). The defendants' attack on the reliability of the UK creditors reports was less successful, although some errors in due dates were exposed and the impact of foreign exchange movements was occasionally material, and amounts "overdue" were affected by the existence of extended terms and the level of disputes (11.4). ASIC's claim that delayed payment of carrier invoices made One.Tel "vulnerable to a change in attitude of creditors" is considered at 11.4.1.2, where the general conclusion is that the assessment of a company's vulnerability to a change of creditor attitudes, when it chooses for commercial reasons to take advantage of extended credit, is a matter best left to the business judgment of the executives concerned, provided that the elements of s 180(2) are present. The court's summary of its conclusions regarding creditors is given at 11.4.4. The court's findings as to cash usage and creditors are set out at 11.5. Earnings are dealt with in Ch 20, and doubtful debts in Ch 19. 15 At 11.6 the court considers ASIC's submission that the company's cash requirement at 28 February, to cover the period of nine months to November 2001, was $270 million. Each component of ASIC's calculations was challenged by the defendants. The court makes rulings on those matters at 11.6.1-11.6.7. An important part of those findings relates to monthly cash usage, which ASIC had estimated at $20 million per month (11.6.5). The court reviews the evidence as to appropriate figures and prefers a range constituted by the management and adjusted figures in the Miller/Green draft report of 8 May 2001. In the result, the court's finding as to the Group cash requirement from February to November 2001 is in the range from cash generation of $16.8 million to cash usage of $57.9 million, plus an unknown amount for Australian overdue creditors, not exceeding $29 million. This is much less than ASIC's figure, and so ASIC has not proven its case. The question of the board's knowledge of the cash, cash flow, and earnings and doubtful debts position is considered at 11.7. That has to be assessed in light of the court's rejection of ASIC's claim that the cash requirement to November was $270 million. The grounds for concluding that the board was provided with adequate knowledge of these matters are there set out. Chapter 12 - March 2001 The first part of Ch 12 deals with Ms Randall's daily cash flow spreadsheets up to 1203.xls, and the circumstances affecting preparation of that spreadsheet, which showed a considerable improvement in cash flow compared with her earlier work (12.1). After reviewing the changes produced by 1203.xls, the court concludes that ASIC has not shown that the revision of figures was the result of a deliberate process of deferral of creditors of the Australian operations. There is an issue as to whether Mr Silbermann was responsible for the changes made in 1203.xls, but he gave evidence that he was not, which the court has accepted (12.1.2.4). Then there is consideration of the conflicting evidence of Ms Randall and Mr Silbermann as to the monitoring of daily cash flow (12.2) by daily cash flow spreadsheets, cash flow variance reports and deferred payments listings. Ms Randall's evidence was broadly along the lines that she acted under instructions from Mr Silbermann to manage creditors and to defer creditor payments, matters that Mr Silbermann denied. After a detailed review of the conflicting evidence and the submissions of the parties, the court concludes (at 12.2.8.5) that the defendants partially succeeded in contending that amounts "deferred" according to the March and April deferred payments listings were not in fact presently due and owing on the dates from which they were moved. Moreover, the deferrals recorded in the listings were for the most part the product of particular spreadsheet revisions (1203.xls, 3003.xls and 0304 amended.xls) rather than a day-to-day process of deferrals under Mr Silbermann's instructions, as alleged by Ms Randall. It is not established that Mr Silbermann had any involvement in the deferrals affected by 1203.xls and 3003.xls, and in the case of at least five of the six deferrals under the heading "Include after amended" in the April deferred payments listing, where he did have an involvement, there were legitimate business reasons for deferring the payments. Mr Silbermann left a voicemail message on 20 March 2001, in which he referred to the month-end cash balance for Australia being "whittled down" every day and then 16 "we just manage a few more creditors and spread cash flow out a bit" to make sure that the month-end number is achieved. There were extensive submissions about this voicemail, which are addressed at 12.6. After considering those submissions, the court concludes at 12.6.2.2 that Mr Silbermann was speaking of a process of "smoothing out" end of month variances by delaying payments to a few creditors for a few days over month-end, rather than the much larger-scale and longer-term deferrals of creditors alleged by ASIC. Mr Keeling also left a voicemail message on 20 March, in which he referred to an "overhang" which was about to come crumbling down if in fact WorldCom “wanted their $16 million”. The submissions on this voicemail (considered at 12.6.3) are mainly about whether the "overhang" to which he referred was a general overhang of debts to European carriers, or was specifically a reference to WorldCom. The court has preferred the latter construction. One of the major issues considered in Ch 12 relates to the spreadsheet 2403C.xls. It was created in the fourth week of March and was used for the purpose of forecasts in the March board papers. It contained a very significant uplift in forecast inflows for April, May and June. The submissions delved into the components of the forecasts and the working papers lying behind the spreadsheet. The matter is considered at length in the judgment at 12.7. Essentially the court concludes that ASIC has not demonstrated that the principal adjustments to inflows made by 2403C.xls were without proper foundation. There were three principal adjustments. The first was an adjustment to "normalise" the February baseline (12.7.4), by adding to the February figures an adjustment to reflect billings that should have been made in February but were not, and a mathematical adjustment to normalise the figures to a 30.5 day month. The second adjustment was to add $19.55 million to each of the April and May billing totals, to reflect the $40 million of unbilled data allegedly discovered by Mr Beck shortly before the March board meeting and reported to the board. The third adjustment was to add $21 million to April inflows from operations to reflect forecast receipts from three sources. The first source was re-presentation of direct debit dishonours in March, which had resulted from the shortened billing cycles that had been adopted for the billing catch-up after the February delay in billings. The second source of adjustment was a forecast increase in collection of CLEC debt. The third source was to reflect forecast additional cash inflows through collection initiatives and resources that were being deployed in April and May. ASIC sought to establish that none of these adjustments had any proper foundation, but after examining the detailed evidence the court has reached the conclusion that ASIC failed to destroy the defendants' explanations for the various items of adjustment (12.7.10). Another substantial issue in March related to forecast European cash flows (12.9). ASIC claimed that there was a "wealth of evidence" that in late March the relevant European executives were forecasting European cash flow for April, May and June that was considerably worse than the figures presented to the March board meeting. The so-called wealth of evidence appears to be a series of European officers' forecasts, in the draft European business plans, and several e-mails from Mr Werner. Essentially the defendants' evidence was that the figures being generated by the European officers postulated full creditor payment in April, producing negative 17 cash flow in that month, and that, according to the defendants, was a proposal to be further discussed. The court accepts the defendants' evidence (12.9.3, 12.9.4). The board meeting held on 30 March 2001 is discussed at 12.10, where detail is provided of the presentations and discussion. As to the statement by Mr Beck to the board that management had estimated there was $40 million of call data that had not been billed, the issue of the $40 million of missing call data is considered in detail at 20.5. Chapter 13- One.Tel's Financial Circumstances at the End of March 2001 The court's consideration of the financial circumstances of One.Tel at the end of March follows on from the reasoning adopted in respect of February. ASIC claimed that the cash requirement to November 2001, considered as at 31 March, was $276 million, an increase of $6 million over the February requirement even though the March requirement was for only eight months (13.5.5). Applying the reasoning adopted for February, the court concludes that the cash forecast to November was in a range from cash generation of $1.1 million to cash usage of $73.6 million, plus an unknown amount for Australian overdue creditors not exceeding $41 million (13.5.6). Even if high end of cash usage in that range is adopted, and the full amount of ASIC's estimate for Australian creditors is used, the cash requirement is still less than $132 million, the amount of the proposed rights issue. The court's conclusions as to the board's knowledge (13.5.7) are similar to its conclusions in respect of February. Chapter 14 - April 2001 Chapter 14 begins by reviewing One.Tel's declining cash balance in April, and noting some of the reasons for the decline. There is an issue as to when Mr Rich came to develop concerns about the cash position, addressed at 14.1.3. At 14.2, consideration is given to the Merrill Lynch presentation and the media release of 4 April 2001, in which Mr Rich was quoted as saying that "the Company is on track to a positive cash position by 30 June 2001, as forecast", and that it was "tracking very well against forecasts that were initially made by management in August 2000". There is an issue as to whether the latter statement refers to internal forecasts made in the September business plans, or forecasts made to the market in an announcement on 11 September. The court concludes at 14.2.1 that the media release was probably referring to the forecast made to the market on 11 September, and subsequently refreshed. Mr Rich gave evidence as to his justifications for the April announcement at 14.2.3. At 14.5 there is a discussion of the computer theft that occurred in One.Tel's UK premises, and the impact of that event on the company's cash flow. At 14.6 there is an account of the efforts made by One.Tel management to find missing data, and the progress of PricewaterhouseCoopers' revenue assurance work during April. At 14.7 there is an account of the state of collections during April and the problems of direct debit dishonours and CLEC debt. At 14.8 there is an 18 account of discussions with Optus about a proposal to sell the service provider subscriber base. There was an important meeting between Mr Rich and Mr Packer Snr and others on 12 April, which is dealt with at 14.10, in which Mr Packer Snr insisted in graphic language that One.Tel should stop making connections. Mr Rich subsequently investigated the effect on cash usage of a reduction in Next Generation connections (14.11). The question whether there were changes in the carrier market in late March and early April which led to a tightening in carrier credit terms in Europe from about midApril is considered at 14.12, and also at 13.3.5. Mr Rich had dinner with Mr Packer Jnr on Easter Sunday evening, 15 April 2001 and they had a discussion in which Mr Packer Jnr expressed his frustration at his father's return to control of the Packer companies (14.15). They discussed the cash position and agreed that the cash buffer was too tight, and they considered ways of addressing the problem. On Easter Monday, 16 April, Mr Rich, Mr Silbermann and Mr Hodgson met at One.Tel's meeting room to review cash flows for the rest of April and to a lesser extent, May. The product of their work was the daily cash flow spreadsheet 1104jrmssh.xls. That work is considered extensively at 14.16. There are issues about the relationship between that spreadsheet and 2403C.xls, which are explored at 14.16.6.1. It appears, contrary to ASIC's submissions, that the $21 million April inflow in 2403C.xls was to a degree distributed over other lines in 1104jrmssh.xls and did not simply disappear. Mr Rich was called to a meeting with Mr Packer Snr on 19 April at which Mr Packer Snr expressed his concern that One.Tel would run out of cash (14.23). The growing concern in PBL/CPH about One.Tel's cash position evidently led to the engagement of Mr Miller of PBL and Mr Green of CPH to conduct a review, which they began on about 20 April (see 14.21). Mr Miller was briefed on billing issues on 19 April, together with Mr Kleemann (14.22). There is evidence about the Australian part of the Miller/Green review at 14.26, from which it appears that the review was thoroughly conducted without any impediment on the part of One.Tel management. Mr Hodgson was required to complete some EBITDA numbers for the purposes of the review, and he did so in the April reforecast which is considered at 20.4 (and see 14.28). Ms Ashley, an accountant who worked on the billing team at One.Tel, carried out some work referred to in the evidence as a margin analysis, commencing on about 5 April after a meeting with Mr Rich. There is inconsistent evidence as to precisely when the meeting occurred (14.27.4) and why the margin analysis was undertaken (14.27.5). The work that she carried out, summarised in a document known as comparison.xls, appeared to show a significant shortfall against budget in the fixed wire business for January and February, because the "call mix" between low margin local calls and higher margin long-distance calls was different from the call mix that had been forecast (14.27.8, 14.27.9). 19 There are issues in the evidence about whether the analysis was correct (14.27.10, 14.27.14) and whether the results could be explained (14.27.11). Mr Rich's response to her work was to have some doubts about the analysis but to recognise that steps would immediately need to be taken to address the imbalance in call mix, and so various ideas were developed (14.27.12). ASIC claimed that Mr Rich and Mr Silbermann should have established a better monitoring system for margin and should have undertaken the margin analysis earlier, but the evidence has led the court to find that there was a system in place in which Mr Spratt had the responsibility of considering margins and traffic mix and drawing attention to issues (14.27.13.1). ASIC claimed that there were indicators of a margin problem at an earlier stage (14.27.13.3). The court's conclusion is that while a management accounts analysis might have been undertaken that would have revealed some deterioration in the call mix, it has not been shown that in the circumstances existing in early March or before that time, such an analysis should have been undertaken. Some reasons why the shortfall in expected gross margins for the fixed wire business was not detected until April 2001 are put forward in the Defences, para S 36(g(v), considered at 14.27.16. Mr Silbermann began monitoring and managing cash flows closely from about 23 April, according to his evidence, but Ms Randall said that this activity began much earlier. The court has concluded (14.29.1) that the process began after the spreadsheet 1104jrmssh.xls was prepared and carrier creditors tightened their payment terms in the UK and Europe, and therefore Mr Silbermann's evidence is preferred on that point. As part of the process of monitoring cash flow, a summary daily Group cash flow forecast for April and May, which is called "the Global Forecast" in the judgment, was prepared and kept up to date. ASIC's criticisms of that document are dealt with at 14.29.3. On 21 and 23 April Mr Packer Jnr and Mr Rich had discussions about the prospect of a capital raising supported by PBL and News. There is some inconsistency in their evidence, which is addressed at 14.30. It appears that the idea of a cash injection from PBL and News was developed rapidly after it was discussed by them. Mr Rich endeavoured to discuss the issues with Mr Murdoch Jnr, with limited success (14.32). He was able to have a telephone conference with Mr Keeling and Mr Howell-Davies on 26 or 27 April. Mr Rich and Mr Keeling met at Mr Kleemann's home on Saturday 28 August to discuss preliminary figures that Mr Miller had put together for the Australian businesses, and Mr Miller attended. Mr Miller and Mr Green left for London on 29 April, where they interviewed UK executives and reviewed the businesses. Therefore by the end of April, active proposals were being developed for a capital injection by PBL and News, and Mr Miller and Mr Green were well under way in the review of One.Tel's Australian and international businesses. Chapter 15- One.Tel's Financial Circumstances at the End of April 2001 As with March, the court's consideration of the financial circumstances of One.Tel at the end of April follows on from the reasoning adopted in respect of February. ASIC 20 claimed that the cash requirement to November 2001, considered as at 30 April, was $310 million, an increase of $40 million over the February requirement even though the April requirement was for only seven months (13.5.5). Applying the reasoning adopted for February, the court concludes that the cash requirement to November was in a range from zero to cash usage of $75 million, plus an unknown amount for Australian overdue creditors not exceeding $66 million (15.6). If the high end of cash usage in that range is adopted, and the full amount of ASIC's estimate for Australian creditors is used, the cash requirement is only $9 million more than the contemplated cash injection of $132 million. The court's conclusions as to the board's knowledge (15.7) are similar to its conclusions in respect of February. Chapter 16 - May 2001 May started badly for One.Tel for various reasons, the predominant one being that the Group cash balance at the end of April had fallen well below the figure forecast in the March board papers, and was putting at risk the market forecast of a cash balance of $75 million as at 30 June. There was growing concern at PBL/CPH and on the part of Mr Packer Jnr about One.Tel's cash position. There were various reasons for the cash decline, some of which suggested that the cash problem was at least partly a matter of timing. Nevertheless, the poor cash result strengthened Mr Packer Snr's concern that One.Tel was going to run out of cash (16.1). Concerns were evident in Mr Rich's discussions with Mr Packer Jnr in early May (16.5). In one of those discussions the possibility of a bridging facility was raised to assist One.Tel until the proposed rights issue could be put in place, and on another occasion Mr Packer Jnr told Mr Rich, "You guys may have to go". In the first few days of May, after Mr Hodgson had completed his revised forecast for the Australian fixed wire/service provider business, he turned his attention to preparing a revised business plan for that business (16.6.1). Mr Miller and Mr Green wanted revised management figures for the purposes of their review. A draft plan was sent to Mr Miller, providing for forecast EBITDA for that business for the year to June 2001 of only $20.26 million, compared with the March board papers where the forecast was $52.19 million. Mr Kleemann noticed the lower EBITDA figure and he called Mr Silbermann, who told him the document was a draft that should not have been sent out. Mr Rich told Mr Packer Jnr that the document should not have been sent out and was an incorrect draft. He also telephoned Mr Kleemann and they agreed to meet on Sunday 6 May at Mr Kleemann's house. The revised draft business plan was circulated on 5 May, the EBITDA figure to June 2002 having become $44.94 million (16.6.2). At the meeting at Mr Kleemann's house there was a discussion about various management initiatives that had apparently been reflected in the revised forecast. Mr Kleemann's evidence was that up until the meeting of 6 May, he thought One.Tel's business was viable notwithstanding its cash difficulties, which he regarded as a timing issue caused by billing problems. But he said that at this meeting, he lost confidence in the integrity of the information previously provided to him by One.Tel. He claimed to have said that he could not have any confidence in the new figures, which were all about a new business rather than the continuation of a tried and true existing business. Mr Rich 21 and Mr Silbermann denied that Mr Kleemann said any such thing. The court has decided to prefer their evidence to Mr Kleemann's on this matter, for reasons explained at 16.6.3. Mr Miller and Mr Green had prepared a draft report by about 8 May, referred to in the judgment as "the PBL Adjustments spreadsheets". The documents presented management figures and, additionally, PBL adjusted figures, which were substantially lower. Details are given at 16.10. Mr Rich and Mr Silbermann were critical of the PBL adjustments (16.10.3). ASIC made submissions designed to show that there were difficulties in the path of the Miller/Green investigation that had the effect that their figures were not based on full information and, though substantially lower than management's figures, were nevertheless too high (16.10.4.1). The court has not accepted ASIC's submissions, for the reasons there given. The PBL Adjustments spreadsheets were eventually presented to the board on 17 May, with an annexure to the board papers described as "One.Tel's notes to PBL Adjustments", which were handwritten notes (16.10.5). Subsequent events up to the 17 May board meeting can only be briefly noted in this introduction: Mr Rich, Mr Keeling and Mr Silbermann met to discuss the PBL Adjustments with Mr Miller and Mr Green but they made very little progress (16.11); Mr Rich had a telephone discussion with Mr Howell-Davies and Ms Kekalainen-Torvinen on 11 May to update them on the PBL cash review, and there appears to have been a failure of communication about a "$40 million gap in revenues" (16.13), and subsequently a note was provided to Mr Howell-Davies dated 14 May which made some contentious allegations about the causes of One.Tel's difficulties (16.13.3); Mr Murdoch Snr, Mr Murdoch Jnr and Mr Packer Jnr met in Cannes on 9 May and Mr Packer Jnr said the position was worse than PBL had thought, but there was no underlying problem with the business, and they discussed an underwritten rights issue for $130 million on the basis that Mr Rich and Mr Keeling would have to go (16.14); Mr Rich met with Mr Packer Jnr on Monday 14 May and Mr Packer Jnr said, "Rupert wants you and Brad out and we’ll put in $132 million in a 5 cents rights issue, one for one" (16.17). There is detailed evidence about the preparation of a draft underwriting agreement and other preparations for the board meeting of 17 May (16.18, 16.19). The events of the board meeting of 17 May are set out in detail at 16.21. They relate to the proposed rights issue and bridging loan, the resignation of Mr Rich and Mr Keeling, and other matters. Press releases were made after the meeting (16.23). The management of One.Tel effectively changed hands after the 17 May board meeting, as particularised at 16.24. Mr Miller and Mr Green, together with Mr Courtney, prepared a draft document "Major Items Beyond Normal Credit Terms", which was contentious (16.25). 22 Mr Weston made a presentation to the due diligence committee for the rights issue, at which he gave a European overview in which he effectively abandoned the forecasts that he had presented to the March board meeting (16.26). The period from 18 to 25 May was a difficult one for Mr Packer Jnr, as he recounted in his evidence (16.27). Evidence of various conversations in that period is given, including a meeting at Mr Murdoch Jnr's home on Sunday 27 May attended by Mr Packer Jnr and executives of PBL and News (16.31). It was obviously a very difficult meeting for Mr Packer Jnr. Mr Long of Ernst & Young attended a meeting on the evening of 27 May, at which there was discussion about what the board would do and he made a note that included the words "extract from underwriting" (16.33). The contents of the Miller/Green schedules presented to the board on 28 May are reviewed at 16.36. They were generally substantially lower and more pessimistic figures than the draft of 8 May. The board meeting on 28 May is considered at 16.37. The board approved a trading halt and took advice from Mr Sherman about the company's proposed course of action, which included the commissioning of Ernst & Young to review the Miller/Green schedules. With the assistance of Mr Howell-Davies, One.Tel's management developed an "alternative strategy" position, which is described at 16.38, and they had a meeting with Ernst & Young and Mr Green about it. The Alternative Strategy document was agreed by about 11 a.m. on 29 May, and One.Tel's management including Mr Silbermann presented it to a meeting attended by Mr Yates, Mr Murdoch Jnr, Mr Packer Jnr and others. There are some conflicting accounts of that meeting but it does appear that the Alternative Strategy was not received well (16.38.5). Ernst & Young completed their Financial Position Review Report on 29 May. There is some curious evidence about how the report was made available to directors, noted that 16.39.6 and 16.39.9. The contents of the report are reviewed at 16.39.7. One.Tel made an approach to Lucent late in May to explore the possibility of funding by Lucent, considered at 16.40 and 16.41. It was unsuccessful. The board meeting on the afternoon of 29 May is considered at 16.41. It led to a resolution that the company not proceed with the rights issue, followed by a resolution for the company to go into voluntary administration. Chapter 17 - After May 2001 This is a brief summary of events after the appointment of the voluntary administrators, taken mainly from their reports in that capacity and as liquidators. Chapter 18 - Creditors Chapter 18 begins in 18.1 with an analysis of ASIC's pleaded allegations about creditors and the Defences, and the evidence of Mr Rich and Mr Silbermann in 23 response to ASIC's allegations of management and deferral creditors (18.1.6). Then there is an explanation of the court's rulings on evidence concerning creditors (18.2). At the hearing ASIC wished to tender a large volume of evidence comprising communications between One.Tel and creditors, in order to prove that the creditors position was deteriorating over the period from January to April 2001, that One.Tel embarked on a systematic process of management of cash and creditors, and that the court should infer that One.Tel was unable to meet its obligations to creditors. ASIC also wished to prove that during this time One.Tel was failing to pay suppliers and was receiving threats to supply as well as demands for payment. The creditor correspondence that was eventually tendered was a more limited tender in response to objections from the defendants and rulings from the court. Correspondence from creditors was received subject to a limitation order to the effect that the documents were not evidence of the truth of the assertions in them. It became necessary for the court to examine the contents of the creditor correspondence to see whether each item of correspondence supported ASIC's allegations. ASIC produced a summary of the tendered correspondence which came to be numbered AS 69, which provided some guidance through the creditor evidence (18.3). Chapter 18 contains a full analysis of the creditor evidence. Major issues arose in the case as to the disputes that One.Tel had with Telstra (18.4), Optus (18.5) and Lucent (18.6). ASIC sought to establish that One.Tel's asserted disputes were not bona fide. It has failed to do so, for reasons given in those discussions. The main issue regarding Toronto Dominion was whether there was a likelihood that One.Tel would breach the EBITDA covenant in its loan facility agreement and if it did, whether Toronto Dominion would be likely to call up its loan (see 18.7). At 18.8 the "larger Australian" creditor correspondence is reviewed, and at 18.9 the "smaller Australian" creditor correspondence is considered. The conclusions drawn at 18.10 include the proposition that ASIC's evidence is unsatisfactory and it would be unsafe to draw any of the general inferences that it seeks to draw from that evidence. Larger overseas creditors are considered at 18.11. They include BT and also the major carrier creditors such as WorldCom, Global Crossing and RSL COM. The correspondence reflected a pattern of trading of One.Tel with its European carrier creditors in which there was a substantial history of invoicing disputes, often found to be justified, and complaints by One.Tel that insufficient information was provided by the carrier to enable it to process and verify invoices. That situation, combined with the commercial reality of strong competition amongst carriers for the business of second and third tier telcos such as One.Tel, led to a degree of liberality in theapproach of carriers to insistence on strict contract terms, at least until mid-April 2001. The evidence indicates that on a few occasions the carrier's accounts department was pressing for payment while the marketing department was seeking to do more business with One.Tel. Generally the correspondence did not support 24 the inferences ASIC sought to draw. The evidence concerning smaller overseas carriers was unsatisfactory as specified at 18.12.10. Chapter 19 - Debtors and Provisioning Chapter 19 begins by analysing ASIC's pleading concerning debtors and provisioning (19.1), and then reviews the provisioning process at One.Tel (19.3), notes the opinions of One.Tel's auditors (19.4), and considers Ernst & Young's Financial Position Review Report of 28 May together with Mr Basman's assessment for that purpose. It then addresses ASIC submissions to the effect that, due to various factors, the provision for doubtful debts was vastly inadequate (19.6), and the consideration of the matter at the March board meeting (19.8). The court does not accept ASIC's submissions and reaches the conclusion (19.13.5) that ASIC has failed to prove its pleaded allegations. An important part of that conclusion is the court's view that the profile summaries upon which ASIC relies are an unreliable source of information (4.8.6). As observed at 19.2.1, on the face of it ASIC's case against the defendants alleging inadequate provisioning seems implausible, not because of the assertion that the provision for doubtful debts appeared to be inadequate, but because of the claim that the alleged inadequacy of the provision reflected a breach of duty by these particular defendants. One.Tel had a system for provisioning for doubtful debts formulated by an experienced industry executive, administered by members of the Australian finance team ultimately reporting to Mr Hodgson, reviewed yearly and half-yearly by One.Tel's auditors and (from October 1999) the board's Finance and Audit Committee of which the defendants were not members. Additionally, the provision was substantially increased in the year 2000, and reviewed without increase at the instigation Mr Rich in March 2001. Chapter 20 - Earnings and Other Financial Issues Ch 20 begins by addressing the pleadings concerning EBITDA (20.1) and then deals with January-April EBITDA according to the evidence (20.2). At 20.3 there is a lengthy investigation of management accounts, dealing with their nature and scope (20.3.3), One.Tel's management accounts (20.3.4), and One.Tel's practices for the accrual of revenue (and in particular the "to be billed" reports) (20.3.5). The question whether a reliable "to be billed" report was necessary for the accrual of revenues in One.Tel's management accounts for the fixed wire/service provider business is considered (20.3.7). The court gives an affirmative answer to that question, as a practical matter. There is a comparison between management accounts and other financial performance indicators used by One.Tel's management (20.3.9). The important issue of whether the January-March fixed wire/service provider management accounts relied upon by ASIC in the proceedings were merely incomplete drafts, is considered at 20.3.10, and the conclusion is reached that they were incomplete and unreliable. At 20.3.12 the status of the April management accounts is investigated, and the conclusion is reached that the April management 25 accounts for the fixed wire/service provider business were not reliable because reliable "to be billed" reports were needed and were evidently not available. The evidence as to One.Tel's normal practices for review of management accounts, and the steps taken by the defendants to procure their preparation and review in 2001, is considered at 20.3.13-20.3.18. The court reaches the conclusion that it has not been established that urgent completion of the management accounts was a priority task of management in responding to the company's cash problem. Chapter 20 then deals (at 20.4) with Mr Hodgson's April reforecast, prepared so that completed EBITDA figures for January, February and March for the fixed wire/service provider business could be provided to Mr Miller and Mr Green for their review. ASIC mounted an elaborate argument, considered at 20.4.1-20.4.10, to show that the April reforecast confirmed the accuracy of the management accounts for January and February, and that the reforecast figures for March and following months should not be treated as significant, while the revenue figures for the April reforecast closely aligned with the revenue figures of the fixed wire/service provider business shown in the management accounts. The court's conclusions, unfavourable to ASIC's contentions, are expressed at 20.4.10. Next, Ch 20 explores the evidence concerning the claim to $40 million worth of unbilled data (20.5). It looks at the way the idea emerged (20.5.1), and considers the evidence as to whether Mr Beck really did make an initial discovery of $28 million worth of data as was said (20.5.2). After reviewing other evidence which is fairly inconclusive, Ch 20 focuses attention on expert evidence given by Andrew Maizels, a computer programmer engaged by Mr Rich, supplemented by the evidence of Toby Harman, a computer programmer engaged by ASIC. The conclusion reached by the court (20.5.11) is that while Mr Maizels' evidence does not conclusively identify a foundation for the claim made to the March board meeting that management had identified $40 million of unbilled data, it does show a possible and plausible foundation for a substantial amount of unbilled data fitting the description, that is data relating to March calls that, according to the evidence of Mr Maizels, was received before the date of the March billing run but not billed until later or at all. Consequently ASIC has not established that the claim to $40 million of unbilled data was without foundation. Finally, Ch 20 deals with Next Generation costs of acquisition (20.6). ASIC's pleaded allegation is that the EBITDA losses of the One.Tel Group and Next Generation did not take account of the costs of acquisition of customers of Next Generation in an amount of approximately $30 million over the period from 1 January to 30 April 2001, because the costs were capitalised and amortised over the life of the subscribers' contracts rather than being treated as costs of sales and debited in full to the profit and loss account. The evidence indicates that for the year ended June 2000, the company adopted a new policy with respect to certain costs associated with subscriber acquisitions, which was to write off the costs as incurred rather than deferring and amortising them. However, the handset subsidy provided to new subscribers was to be treated differently, and deferred and amortised. The court concludes that, to the extent that ASIC's pleading is referring to the handset subsidy rather than the other costs of 26 acquisition of subscribers, it is correct that the handset subsidy continued to be amortised rather than treated as a cost of sales, but that was in accordance with the company's announced policy, appearing in the notes to the 1999/2000 financial statements which must been approved by the One.Tel board. Chapter 21 - Liquidity Mr Carter gave evidence that in analysing the cash and creditor position of a corporate group, it is important to consider the overall liquidity of the group taking into account not only the cash balance, but also other assets such as trade debtors and accrued income, and operational liabilities including not only overdue and current creditors but also accrued liabilities (21.1). ASIC adopted Mr Carter's liquidity analysis but it substituted for his tables, which were partly held to be inadmissible, some tables it developed in submissions. There is a detailed discussion of ASIC's liquidity analysis in Ch 21 on a line by line basis, but the court has found that the analysis fails at a fundamental level. One.Tel's liquidity was measured and managed on a Group basis that included the international operations. To seek to establish that One.Tel's liquidity declined drastically from December 2000 to May 2001 by measuring only Australian operations is, according to the court, like trying to establish that the available water supply in the Sydney basin is diminishing by proving declining water levels in every dam except the Warragamba (1.6). Chapter 22 - Mr Carter's Evidence Paul Carter, ASIC's principal forensic accounting expert, gave a large quantity of evidence. While much of it was ruled inadmissible for reasons briefly explained in Chs 1 and 22, nevertheless a substantial quantity of his evidence remained. Although ASIC made little reference to Mr Carter's evidence in final written submissions, it invited the court to derive comfort from his evidence as confirmation of its submissions. Accordingly the court has undertaken an analysis of Mr Carter's evidence in Ch 22. Mr Carter's work is the foundation for ASIC's submissions on liquidity (22.2.4 and Ch 21) and its compensation claim (22.7, the analysis of reduction in net worth). Other matters of significance for the remainder of the judgment are the treatment of the $8 million pledge at 22.2.1.1, unpresented cheques at 22.2.2.2, the Toronto Dominion loan at 22.5.1 and the Lucent lease payment at 22.5.2. There is consideration of whether the intranet cash balances were adjusted before they were presented to the board in board papers, at 22.2.2.4. Many other aspects of Mr Carter's analysis are probably superseded having regard to ASIC's submissions: for example, his analysis of unreleased cheques at 22.2.6.2, in light of the treatment of unpresented and unreleased cheques at 11.2.3. Chapter 23 - Duty of Care and Diligence and the Business Judgment Rule Chapter 23 deals with the content of the statutory duty of care and diligence and the business judgment rule, found in s 180 of the Corporations Act. The court provides a 27 summary statement of legal propositions about the statutory duty of care and diligence at 23.3, relating the statutory duty to the common law duty and addressing the question whether there is an objective standard of skill. The standard of care required of executive officers is addressed at 23.4. Expert opinion evidence on the role and responsibilities of the managing director and the finance director, given by Roderick Cameron and Richard Warburton, is reviewed at 23.5. Some questions relating to a finding of breach of the statutory duty, particularly the principles enunciated in Wyong Shire Council v Shirt, are considered at 23.6. ASIC's submission that the principle of res ipsa loquitur can be applied in its favour in this case is considered and rejected at 23.7. The statutory business judgment rule is found in s 180(2) and (3). The question who bears the onus of proving the ingredients of s 180(2) is addressed at 23.8.2, and the meaning of each of the elements of 180(2) is considered at 23.8.3. The meaning of the concept of "rational belief" in s 180(2)(d) is considered, and the court adopts the view that establishing a "rational belief" does not require proof that the belief is objectively reasonable. Chapter 24 - Other Matters Ch 24 addresses two matters, ASIC's claim about the replacement of Mr Silbermann as finance director, and its compensation claim. ASIC's statement of claim alleges that Mr Rich failed to take reasonable steps to ensure that One.Tel employed a finance director with the qualifications, skills and experience reasonably appropriate for a person occupying that position and having the relevant responsibilities. It relied on some evidence given by Mr Rich that he and Mr Keeling had a conversation in July 2000, in which they agreed that One.Tel should seek a chief financial officer better known to the institutions than Mr Silbermann. But the evidence did not suggest any concern about Mr Silbermann's conpetence: indeed, Mr Keeling said Mr Silbermann was very good at getting things done. ASIC also relied on some assertions in the particulars to its statement of claim, which are set out at 24.1. The court has found that none of those matters has been made out on the evidence, and consequently ASIC must fail. As to ASIC's compensation claim, the issue of compensation does not arise as the court has not found any contravention. However, some principles are addressed concerning the requirements to establish a claim for compensation under statute. For the assessment of the quantum of One.Tel's loss, ASIC relied on the evidence of Mr Carter, who set out procedures for the calculation of the reduction in net worth of One.Tel that occurred when the company remained in operation after the end of February, March and April respectively. Mr Carter's reasoning is considered at 22.7. The defendants' extensive submissions about the compensation claim are briefly summarised. The court's conclusion is that, since the questions of causation and quantum of recovery are closely connected to the nature and scope of the proven contraventions that are to be the foundation of the compensation order, the court is unable make any useful observations about the parties' submissions on the subject. 28 Chapter 25 - Conclusions The court's conclusions at 25.1, which are brief, should be read in full. ASIC has failed to prove its pleaded case against either of the defendants. Its contentions had a superficial appeal, but time and again they were shown to be unpersuasive when the underlying financial details were investigated. ASIC relied on various categories of documents, some of which were obscure and needed to be supported by evidence of a person involved in creating or using them, but such evidence was not forthcoming. In cases where documents were explained by a witness, the defendants were able to advance alternative plausible explanations for what had occurred, and weighing up all the evidence, the court has concluded that ASIC has not dislodged those alternative explanations. ASIC has also made some submissions that are outside its pleading. That provides an additional ground for not accepting the relevant submission. The judgment is a determination, between the parties, that the plaintiff, ASIC, has not proved its pleaded allegations. The proceedings are not a Royal Commission to investigate what caused the spectacular collapse of One.Tel in May 2001 and who was to blame. Consequently, many questions are left unanswered, including the question whether One.Tel would have been able to survive if PBL/CPH and News had maintained their support for it and proceeded with the proposed rights issue in May 2001. Ch 25 also addresses the question of costs. The court's provisional view is that it should order ASIC to pay the defendants' costs on the usual party and party basis, as agreed or assessed. But a procedure is to be set up to enable either party to make an application seeking a different costs outcome, such as an order excluding some parts of the proceedings from the operation of the general costs order, or an order that all or part of the costs be assessed on the indemnity basis. Indemnity costs are awarded where there is a "relevant delinquency", as noted in the case law. There is a risk that an application by the defendants for indemnity costs might become a major supplementary trial, canvassing ASIC's conduct of the proceedings. The court wishes to avoid that outcome, having regard to the preliminary view it has taken and also the fact that over the course of the trial, there has been ample opportunity to observe the conduct of the parties. 29