Australian Securities and Investments Commission v Rich and Another

[2009] NSWSC 1229

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(Judgment by: Austin J (part 1))

Australian Securities and Investments Commission
vRich and Another

Court:

Judges:
Austin J (part 1)Austin J (part 2)
Austin J (part 3)

Subject References:
Directors
ASIC
Insolvency
Directors duties
Duty of care and diligence
Duty of skill
res ipsa loquitur
Business judgment rule
Civil proceedings
Onus and standard of proof
Regulator in civil penalty proceedings
Evidence
Browne v Dunn
Jones v Dunkel
Blatch v Arthur
(CTH) Corporations Act 2001 ss 5, 180, 206C, 1305, 1317G, 1317H, 1317L, 1399, 1400
(NSW) Civil Procedure Act 2005 ss 14, 56, 57, 58
(NSW) Corporations Law ss 232, 1317EA, 1317ED, 1317FA
(NSW) Evidence Act 1995 s 140
(CTH) Judiciary Act 1903 ss 55ZF, 55ZG, 55N

Legislative References:
Corporations Act 2001 - 5; 180; 206C; 1305; 1317G; 1317H; 1317L; 1399; 1400
Civil Procedure Act 2005 (NSW) - 14; 56; 57; 58
Corporations Law (NSW) - 232; 1317EA; 1317ED; 1317FA
Evidence Act 1995 (NSW) - 140
Judiciary Act 1903 - 55ZF; 55ZG; 55N

Case References:
ASIC v Doyle - (2001) 38 ACSR 606; [2001] WASC 187
ASIC v Loiterton - [2004] NSWSC 172
ASIC v Macdonald (No 11) - (2009) 256 ALR 199; 71 ACSR 368; [2009] NSWSC 287
ASIC v Maxwell - (2006) 59 ACSR 373; [2006] NSWSC 1052
ASIC v Plymin - (2003) 46 ACSR 126; 21 ACLC 700; [2003] VSC 123
ASIC v Rich - (2003) 44 ACSR 341; [2003] NSWSC 85
ASIC v Rich - (2005) 216 ALR 320; 53 ACSR 752; [2005] NSWSC 417
ASIC v Vines - (2005) 55 ACSR 617; [2005] NSWSC 738
Adler v ASIC - (2003) 46 ACSR 504; [2003] NSWCA 131
Adler v DPP - (2004) 51 ACSR 1; 185 FLR 443; [2004] NSWCCA 352
Anchor Products Ltd v Hedges - (1966) 115 CLR 493; [1967] ALR 421; [1966] HCA 70
Aon Risk Services Australia Ltd v Australian National University - (2009) 239 CLR 175; 258 ALR 14; [2009] HCA 27
Apollo Shower Screens Pty Ltd v Building & Construction Industry Long Service Payments Corp - (1985) 1 NSWLR 561
Applicant Veal of 2002 v Minister for Immigration and Multicultural and Indigenous Affairs - (2005) 225 CLR 88; 2 ALR 411; 87 ALD 512; [2005] HCA 72
Arnotts Ltd v Trade Practices Commission - (1990) 24 FCR 313
Australian Competition and Consumer Commission v Australian Safeway Shores Pty Ltd (No 2) - (2001) 119 FCR 1; [2001] FCA 1861
Australian Postal Commission v Hayes - (1989) 23 FCR 320; 87 ALR 283; 18 ALD 135
BHP Pty Co Ltd v Mason - (1996) 67 SASR 456
Bell Group Ltd (in liq) v Westpac Banking Corp (No 9) - (2008) 70 ACSR 1; [2008] WASC 239
Blair v Curran - (1939) 62 CLR 464
Blatch v Archer - (1774) 1 Cowp 63; 98 ER 969
Bright v Sampson and Duncan Enterprises Pty Ltd - (1985) 1 NSWLR 346
Briginshaw v Briginshaw - (1938) 60 CLR 336; [1938] ALR 334; [1938] HCA 34
Browne v Dunn - (1893) 6 R 67
Burke v LFOT Pty Ltd - (2002) 209 CLR 282; 187 ALR 612; [2002] HCA 17
Chappel v Hart - (1998) 195 CLR 232; 156 ALR 517; [1998] HCA 55
Chief Executive Officer of Customs v Labrador Liquor Wholesale Pty Ltd - (2003) 216 CLR 161; 201 ALR 1; [2003] HCA 49
Clayton Robard Management Ltd v Siu - (1988) 6 ACLC 57
Commercial Bank of Australia Ltd v Thomson - (1964) 81 WN (Pt 1) (NSW) 553
Commercial Union Assurance Co of Australia Ltd v Ferrcom Pty Ltd - (1991) 22 NSWLR 389
Commonwealth Bank of Australia v Friedrich - (1991) 5 ACSR 115
Cubillo v Commonwealth - (2000) 103 FCR 1; 174 ALR 97; [2000] FCA 1084
Customs and Excise Commissioners v A - [2003] Fam 55; [2003] 2 All ER 736
Daniels (formerly practising as Deloitte Haskins & Sells) v Anderson - (1995) 37 NSWLR 438; 16 ACSR 607
Darbyshire v Leigh - [1896] 1 QB 554
Darbyshire Re Rica Gold Washing Co - (1879) 11 Ch D 36
Dare v Pulham - (1982) 148 CLR 658; 44 ALR 117; [1982] HCA 70
Davy v Garrett - (1878) 7 Ch D 473
Dennis v Australian Broadcasting Corp - [2008] NSWCA 37
Digi-Tech (Australia) Ltd v Brand - (2004) 62 IPR 184; [2004] NSWCA 58
Drummoyne Municipal Council v Australian Broadcasting Corp - (1990) 21 NSWLR 135
Dyers v R - (2002) 210 CLR 285; 192 ALR 181; [2002] HCA 45
East-West Airlines (Operations) Ltd v Commonwealth - (1983) 49 ALR 323; 326 57 ALJR 783
Edingbay Pty Ltd v Horwath (Vic) Pty Ltd - [1999] VSC 317
Ellis v Grant - (1970) 91 WN (NSW) 920
Fabre v Arenales - (1992) 27 NSWLR 437
Florins v Bank of Victoria Ltd - (1891) 17 VLR 183
Gant v Hobbs - [1912] 1 Ch 717
Glover v Australian Ultra Concrete Floors - [2003] NSWCA 80
Greek Herald Pty Ltd v Nikolopoulos - (2002) 54 NSWLR 165; [2002] NSWCA 41
Grollo & Co Pty Ltd v Hammond - (1977) 16 ALR 123
Hampton Court Ltd v Crooks - (1957) 97 CLR 367
He Kaw Teh v R - (1985) 157 CLR 523; 60 ALR 449; [1985] HCA 43
Helton v Allen - (1940) 63 CLR 691; [1940] ALR 298; [1940] HCA 20
Hillier v Lucas - (2000) 81 SASR 451; [2000] SASC 331
Hksar v Lee Ming Tee - [2004] 1 HKLRD 513
Ho v Powell - (2001) 51 NSWLR 572; [2001] NSWCA 168
Ingot Capital Investments Pty Ltd v Macquarie Equity Capital Market Ltd - (2008) 252 ALR 659; 68 ACSR 595; [2008] NSWCA 206
Ivkovic v Australian Iron & Steel Ltd - [1963] SR (NSW) 598
JPQS Pty Ltd v Cosmarnan Constructions Pty Ltd - [2003] NSWCA 66
Jones v Dunkel - (1959) 101 CLR 298; [1959] ALR 367; [1959] HCA 8
Kingham v Cole - (2002) 118 FCR 289; 190 ALR 679; 76 ALD 389; [2002] FCA 45
Kioa v West - (1985) 159 CLR 550; 62 ALR 321; [1985] HCA 81
Kirby v Sanderson Motors Pty Ltd - (2001) 54 NSWLR 135; [2002] NSWCA 44
Liberato v R - (1985) 159 CLR 507
Manly Council v Byrne - [2004] NSWCA 123
McCormack v Gilchrist, Watt & Sanderson Pty Ltd - [1962] NSWR 462
Miller v Miller Auto Body Co Ltd - (1922) 39 WN (NSW) 201
Milliman v Rochester Railway Co - (1896) 39 NYS 274
Minister for Immigration & Multicultural Affairs v B - (2000) 105 FCR 304; [2000] FCA 930
National Australia Bank Ltd v Rusu - (1999) 47 NSWLR 309; [1999] NSWSC 539
National Companies and Securities Commission v News Corp Ltd - (1984) 156 CLR 296; 52 ALR 417; 8 ACLR 843; [1984] HCA 29
National Starch Co v Robert Harper & Co Pty Ltd - [1906] VLR 8; (1905) 11 ALR 335
Neat Holdings Pty Ltd v Karajan Holdings Pty Ltd - (1992) 110 ALR 449; 67 ALJR 170; [1992] HCA 66
New South Wales v Thomas - [2004] NSWCA 52
Nowlan v Marson Transport Pty Ltd - (2001) 53 NSWLR 116; 34 MVR 495; [2001] NSWCA 346
Pacific National (ACT) Ltd v Queensland Rail - (2005) 215 ALR 544; [2005] FCA 535
Palmer v Dolman - [2005] NSWCA 361
Patrick v Capital Finance Pty Ltd - [2003] FCA 206
Payne v Parker - [1976] 1 NSWLR 191
Philipps v Philipps - (1878) 4 QBD 127
Pilato v Metropolitan Water Sewerage & Drainage Board - (1959) 76 WN (NSW) 364
Queensland v JL Holdings Pty Ltd - (1997) 189 CLR 146; 141 ALR 353; [1997] HCA 1
Rich v ASIC - (2004) 220 CLR 129; 209 ALR 271; 50 ACSR 242; [2004] HCA 42
Rishmawi v Minister for Immigration and Multicultural Affairs - [1999] FCA 611
Rosenberg v Percival - (2001) 205 CLR 434; 178 ALR 577; [2001] HCA 18
Sali v SPC Ltd - (1993) 116 ALR 625; 67 ALJR 841; [1993] HCA 47
Scott v Handley - (1999) 58 ALD 373; [1999] FCA 404
Seven Network Ltd v News Ltd - [2007] FCA 1062
Shalhoub v Buchanan - [2004] NSWSC 99
Silvia v Cmr of Taxation - [2001] NSWSC 562
Smith v Samuels - (1976) 12 SASR 573
Spedding v Fitzpatrick - (1888) 38 Ch D 410
Vairy v Wyong Shire Council - (2005) 223 CLR 422; 221 ALR 711; [2005] HCA 62
Vines v ASIC - (2007) 62 ACSR 1; [2007] NSWCA 75
Vrisakis v Australian Securities Commission - (1993) 9 WAR 395; 11 ACSR 162
Watson v Foxman - (2000) 49 NSWLR 315
White v Overland - [2001] FCA 1333
Whitlam v ASIC - (2003) 57 NSWLR 559; 199 ALR 674; 46 ACSR 1; [2003] NSWCA 183
Williams v Keelty - (2001) 111 FCR 175; 184 ALR 411; 39 ACSR 127; [2001] FCA 1301
Zoia v Secretary, Dept of Education, Employment and Workplace Relations - [2009] FCA 661

Hearing date: September 2004 - August 2007
Judgment date: 18 November 2009

Sydney

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Judgment by:
Austin J (part 1)

1. Introduction

1.1 Nature of the proceedings

[1] These are civil penalty proceedings for breach of the statutory duty of care of company directors and officers. The proceedings were initially brought by the plaintiff against four defendants, arising out of the collapse in May 2001 of a large Australian listed company, One.Tel Ltd (One.Tel) and its local subsidiaries, and the collapse or on-sale of overseas subsidiaries. Orders have been made in respect of two of the defendants, Bradley Keeling and John Greaves, and the proceedings no longer continue against them. Australian Securities and Investments Commission (ASIC) seeks relief against John David (Jodee) Rich and Mark Silbermann, respectively the first and fourth defendants. Mr Rich was a director and joint chief executive of One.Tel at all relevant times up to 17 May 2001, and Mr Silbermann was finance director of One.Tel at all relevant times. For simplicity I shall refer to the plaintiff as "ASIC" (which occasionally fits better into the context than "plaintiff"), the first defendant as "Mr Rich", the fourth defendant as "Mr Silbermann", and Mr Rich and Mr Silbermann together as "the defendants".

[2] In the period from January to April 2001 there was one other executive director of One.Tel in addition to Messrs Rich, Keeling and Silbermann, namely Kevin Beck, and there were several non-executive directors: Mr Greaves (until his resignation in March 2001), Rodney Adler (until his resignation in April 2001), James Packer (Mr Packer Jnr), and Lachlan Murdoch (Mr Murdoch Jnr). Though a non-executive director, Mr Packer Jnr was substantially involved in the day-to-day affairs of One.Tel, as will be shown in these reasons for judgment. Two other directors were appointed in March 2001, namely Peter Howell-Davies and Pirjo Kekalainen-Torvinen. There were later changes to the board in May 2001, which will be detailed later.

[3] It is noteworthy that ASIC's proceedings were brought against the non-executive chairman and three of the four executive directors, and not against any of the other directors. Additionally, although it is alleged that the defendants did not disclose the true financial position of the company to the board, and that they knew or should have known the true position, it is not necessary for ASIC to prove that the defendants intentionally misled the board or withheld information from it, but only that they did so in breach of their duty of care and diligence. The underlying concept is a concept of executive directors carelessly failing to keep the board informed of the company's financial position. That leaves open the question, not before the court in the present proceedings, whether the other directors were careless in failing to find out.

[4] 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 components 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 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 also sought to show that the defendants were aware of the poor financial position of the group, or ought to have been, and failed to make proper disclosure to the board. The defendants vigorously challenged ASIC's case about the group's actual financial position, although they did not lead expert accounting evidence to show what the true financial position was. As I understand their submissions, they did not seek to argue that if the financial position of One.Tel was as alleged by ASIC, it was not incumbent upon them to be aware of it and to inform the board, or that the non-executive directors as a whole (with the exception of Mr Packer Jnr) were in fact aware of the true financial position as alleged by ASIC. The focus of the argument was on whether ASIC had proved its case as to the true financial position in the January-April 2001 period.

1.2 Organisation of the judgment

[5] Before commencing on the journey of fact-finding and responding to submissions, I must deal with some important legal issues that are to be resolved about some matters of pleading and evidence. The defendants have made some submissions, contested by ASIC, to the effect that a substantial part of ASIC's evidence and submissions are outside its pleaded case. That topic is addressed in Ch 2. They have also made submissions, likewise contested by ASIC, as to the approach that the court should take, as a matter of law, to certain matters that they describe as "recurring themes" in ASIC's case. These relate to the onus of proof and the standard of proof in these proceedings, the absence of witnesses who might have been able to assist the court on contested questions of fact, the significance of the defendants not putting certain matters to ASIC's witnesses, and questions of prosecutorial and procedural fairness. They are addressed in Ch 3 under the general heading "Evidence".

[6] The first chapter in which I shall make substantial findings of fact and deal with submissions is Ch 4, "Management, Directors, Financial Organisation and Share Price", which puts together several matters that might broadly be called "background", but which are nevertheless important and to be borne in mind at all times. They relate to One.Tel's management structure and management methods, the composition of One.Tel's board of directors, methods of communication between management and board, financial records, and movements in One.Tel's share price.

[7] Chapter 5 sets out my findings as to the credibility of witnesses, a matter much contested in the parties' submissions.

[8] My chronological findings of fact, in Chs 6-17, cover the period from One.Tel's commencement in 1995 to the appointment of voluntary administrators on 29 May 2001 and the aftermath of that event. I have tried to tell the story of One.Tel through these chapters, identifying evidentiary sources for everything I say. Where there is inconsistent evidence, I have noted it and dealt with the inconsistency when it arises in the narrative. Sometimes I attribute a matter of fact to some witness or other (for example, "Mr Rich said that"), without expressly saying whether I accept that evidence. Unless the context clearly indicates the contrary (and I hope there are no such occasions), where I make a statement of evidence attributed to some witness or some documentary source, without identifying any inconsistent evidence or expressly pronouncing a finding, I am to be taken to accept the evidence to which I have referred.

[9] There is a summary of the statement of claim and defences in Ch 2. At the centre of ASIC's allegations, in its pleading, the opening of its case and in its final submissions, are its contentions about the financial condition and performance of the One.Tel Group (especially in terms of cash, creditors, debtors and earnings) in each of the months of January, February, March and April 2001. The defendants disagree with ASIC's case on these matters, root and branch. The preponderance of evidence led by ASIC and by the defendants relates to the financial position of the group, and its main components, in each of those months.

[10] The defendants say that before making findings as to the financial position in those months, the court must reach an understanding of the businesses and background of One.Tel, and in particular the level of involvement in its affairs of Mr Packer Jnr and Mr Murdoch Jnr and their respective companies, which began well before January 2001. Those companies are, in the case of Mr Packer Jnr, Publishing and Broadcasting Ltd (PBL) and its major shareholder Consolidated Press Holdings Pty Ltd (CPH), and in the case of Mr Murdoch Jnr, News Corporation Ltd (News) and its Australian subsidiary, News Ltd. This is why, though the focus of attention is on the financial condition of One.Tel in the period from January to April 2001, my judgment considers the evidence of the group's circumstances, in the period from 1995 to 1999, in the year 2000, and then in each of January, February, March, April and May 2001. However, reflecting the central importance to ASIC's case of the financial position of the company at the end of January, February, March and April 2001, there is a separate chapter after the chronological narration of the events of each of those months, summarising the financial position of the company at the end of the month and accordingly making findings as to whether ASIC has proved its pleaded case as to that month (the summary chapters are Chs 9, 11, 13 and 15).

[11] There are some financial matters that are the best understood by considering the evidence across the whole period from January to May, rather than chronologically month-by-month. These are the evidentiary circumstances relating to individual creditors, the provision for doubtful debts, earnings and liquidity, as well as an assessment of the evidence of ASIC's forensic accounting expert, Paul Carter. Therefore, after dealing with the months up to May 2001, I shall consider the evidence about creditors, debts, earnings and liquidity respectively, in Chs 18, 19, 20 and 21, and the evidence of Mr Carter in Ch 22.

[12] As noted above, a characteristic of this case has been that both parties have supplied extensive written submissions, dealing in great detail with financial matters. My method of dealing with the submissions has been, broadly speaking, to organise my judgment to reflect the structure of ASIC's submissions in chief (ASIC's Principal Submissions or APS), and then to deal with the defendants' submissions (the defendants' Principal Submissions or DPS) and ASIC's submissions in reply (ASR), by working those submissions and my answers to them into the framework provided by the APS, with or without express reference to them. In the course of pursuing this endeavour, I have often recorded the relevant APS rather fully, partly so as to convey the content of the submission and my understanding of it before responding, and partly also, to be frank, so as to remind me of what the submission was if I had to return to my text later to deal with, or to review, the defendants' response and ASIC's reply, or to compare my findings there with findings elsewhere in the judgment. I have adopted a similar approach to the principal evidence: that is, to describe it in some detail so as to convey my understanding of it, and also to record it for further reference in the course of preparing this very long judgment, and minimise the need to return again and again to the documents.

[13] It would have been possible, at least on some occasions, to rewrite segments of the judgment more briefly after reaching my conclusions, so as to edit out some of the description of submissions and evidence, but in the interests of time I have decided not to do so. It would also have been possible, given more time, to remove elements of repetition that arise in the judgment from time to time, usually because the parties' submissions to which I am responding (especially the defendants' submissions) were sometimes repetitive, but again I have thought it better to publish the judgment as soon as my reasoning and conclusions were complete, without "polishing".

[14] I have done my best to record and deal with every one of ASIC's principal written submissions, unless the answer to the submission is obvious from other findings. I have not expressly addressed every written submission made by the defendants or ASIC in reply, nor every oral submission in final argument; specifically, I have not done so where I have formed the view that my reply to the submission in question is clearly implied from the findings or reasoning I have set out, or the submission is not material in the sense of being significant to "the decision-making process": Customs and Excise Commissioners v A [2003] Fam 55 ; [2003] 2 All ER 736 at [82]; Digi-Tech (Australia) Ltd v Brand (2004) 62 IPR 184 ; [2004] NSWCA 58 at [284]; Vines v ASIC (2007) 62 ACSR 1 ; [2007] NSWCA 75 (ASIC NSWCA 75). I have nevertheless read all the written submissions and the transcript of the final oral submissions, and I have done my best to give consideration to every submission.

[15] I have sometimes expressed my financial findings at a somewhat more specific level of rounding than used in ASIC's principal submissions. I have done so where there was a risk that if the numbers were rounded up too much, they might be confused with one another, or where it might be difficult to identify the source of a particular figure if it is rounded up. I have tried to use a level of precision that unambiguously correlates to the source for my finding, so that anyone who needs to check my finding can readily identify the figure in the source document. Unfortunately for the reader, that means that the text of the judgment is fairly heavy with numbers.

[16] After the factual findings have been made, the judgment turns to the law concerning the statutory duty of care and diligence under s 180(1) of the Corporations Act, and the "business judgment rule" in s 180(2): Ch 23. Then in Ch 24 the judgment deals with other matters, namely ASIC's claim that Mr Rich failed to ensure that One.Tel's chief financial officer was properly qualified, and its claim on behalf of One.Tel (in liq) for compensation. The final chapter states my conclusions: Ch 26.

[17] An important aspect of the structure of the judgment is that there are general conclusions reached, particularly in Chs 2, 3 and 23, that have application to my findings and conclusions on matters addressed in other parts of the judgment. This arises in three principal ways. First, responding to the very detailed submissions about matters of pleading in Ch 2, I have reached a series of conclusions at 2.3.6 as to whether particular allegations in ASIC's final submissions impermissibly relate to unpleaded or unparticularised allegations. As it happens, I have found against ASIC on the factual substance of each of those allegations, in the body of the judgment. The finding about the allegation in Ch 2 is to be regarded as an additional ground for rejecting it. I have not traced through all of those factual discussions to add a "reminder" that I have found for the defendants on the pleading issue as well. Second, in Ch 3 there is a discussion about some "critical documents" and "recurring themes", and various evidentiary issues. Having decided, in Ch 3, what the correct approach should be to those matters, I have tried to apply that approach consistently in the course of the judgment. I have generally not referred back to the evidentiary issues when making my factual findings, but it is to be taken that the findings have been made in light of the approach set out in Ch 3. Third, I have addressed the statutory duty of care and diligence and the "business judgment rule", in general terms, in Ch 23. In particular, I have formed a view about the business judgment rule which makes it relevant to some of the issues raised in ASIC's submissions.

I have expressly applied the business judgment rule in making findings on some matters, and where that has happened, the analysis contained in Ch 23 should be taken to the applicable.

[18] Thus, the judgment is organised under the following primary headings:

(1)

Introduction (the present chapter);

(2)

Pleadings;

(3)

Evidence;

(4)

Management, Directors, Financial Organisation and Share Price;

(5)

Witnesses;

(6)

The years 1995-1999;

(7)

The year 2000;

(8)

January 2001;

(9)

One.Tel's financial circumstances at the end of January 2001;

(10)

February 2001;

(11)

One.Tel's financial circumstances at the end of February 2001;

(12)

March 2001;

(13)

One.Tel's financial circumstances at the end of March 2001;

(14)

April 2001;

(15)

One.Tel's financial circumstances at the end of April 2001;

(16)

May 2001;

(17)

After May 2001;

(18)

Creditors;

(19)

Debtors;

(20)

Earnings;

(21)

Liquidity;

(22)

The evidence of Mr Carter;

(23)

The statutory duty of care and diligence and the business judgment defence;

(24)

Compensation;

(25)

Conclusions.

[19] The appendices to the judgment are a Dramatis Personae (App A), a Glossary of Terms (App B), and a Summary of Invoices (App C), each of which is to be treated as part of the judgment, and an Introduction to the Judgment (App D). The issuing of an introductory guide follows the practice adopted in two other recent long cases, namely Seven Network Ltd v News Ltd [2007] FCA 1062 per Sackville J and Bell Group Ltd (in liq) v Westpac Banking Corp (No 9) (2008) 70 ACSR 1 ; [2008] WASC 239 per Owen J. Appendix D is intended to assist understanding of my decision, but it is not in any way a summary statement of the conclusions I have reached or the reasons for those conclusions. Many components of my full reasoning have been excluded from the Introduction for reasons that do not always relate to their significance or materiality (for example, a great deal of material but very complex financial reasoning has been excluded simply because of its complexity). The only authoritative statement of my reasons for judgment is contained in the published reasons for judgment excluding App D. I have made the Introduction an appendix to the reasons for judgment, rather than a stand-alone document, simply to give it a convenient and accessible resting place, but it merely accompanies the judgment and is not part of it.

[20] I prepared this judgment, like all of my judgments, using voice recognition software. The system I employ is generally very accurate, but there are some characteristic voice recognition errors in transcribing simple words, which are very difficult to eliminate by proofreading. The judgment has been proofread before delivery, but I may go through it again later, and publish typographical and other minor corrections. I mention that because, after I delivered my judgment in another long case some years ago, I published a list of typographical corrections that was relied upon, unsuccessfully, for the purposes of an appeal, by counsel who may have been unfamiliar with the vagaries of voice recognition software: see ASIC NSWCA 75 at [28], per Spigelman CJ.

[21] I have from time to time referred to cases not cited in argument, usually because they were decided after the hearing ended. I have done so where the case elaborates or clarifies principles that were the subject of submissions, in a way that in my judgment has not required me to call for further submissions.

[22] There is a very large volume of documentary evidence in this case. I have allowed documents into evidence on the understanding, agreed by the parties, that I would not refer to them unless they were specifically identified in written or oral submissions.

1.3 A very large case

1.3.1 Some statistics

[23] The following statistics provided an indication of the volume of evidentiary material and submissions in this case:

1.3.2 Factors contributing to the length of this case

[24] I believe it is necessary, in such a long case, to give a brief account of what I perceive to be the reasons for the length of time from commencement of the proceedings until delivery of this judgment. The case became very long and difficult by virtue of the combined effect of various factors, which I shall explain. My attempt to encourage a mediated outcome by exercising the court's statutory power to direct mediation (ASIC v Rich [2005] NSWSC 489 (24 May 2005)) was unsuccessful.

[25] First, by far the single biggest contributing factor to the length of the hearing was the nature of the case that ASIC set out to prove. It endeavoured to prove that the defendants breached their statutory duty of care and diligence by failing to disclose to and withholding from the board the true financial position of the company and the group with respect to the months of January, February, March and April 2001. For that purpose it pleaded the true financial position in those months, in specific terms, in a schedule to its statement of claim. One.Tel was a large listed company with subsidiaries conducting several major businesses in Australia, and also substantial businesses in the UK, Hong Kong and four European countries. Although ASIC contended that Mr Rich caused false and misleading information to be provided in public announcements to the Australian Securities Exchange on 27 February and 4 April 2001, this was not a case confined to a relatively small number of allegedly misleading events including some misleading market announcements. The gist of the case was proof of the true financial circumstances of a large corporate group over a period of 4 months. It was therefore fundamentally different in its nature from, say, ASIC v Macdonald (No 11) (2009) 256 ALR 199 ; 71 ACSR 368 ; [2009] NSWSC 287 (Macdonald (No 11)).

[26] The size of ASIC's evidentiary case had consequences not only for the time needed to present the case in chief, but also for the time needed for the defendants to prepare their evidence in reply, which proved to be a huge amount of evidence, and then the time needed by the parties to prepare their lengthy written submissions. I shall return to those points when I deal with the consequences for the length of the trial that flowed from characterisation of these proceedings as penalty proceedings.

[27] Second, the scope of the evidence embraced by the plaintiff's case was expanded because of the nature of the defences. The defendants contended, correctly, that a great deal of evidence about the corporate governance of One.Tel, and about their dealings with individual directors, and about the way that it came to pass that the company was placed in voluntary administration, needed to be taken into account in assessing ASIC's case. Therefore in the nature of the case and the defences, this was destined to be a very large case. The pleaded causes of action, the evidentiary scope of the case and the defences that have been raised made it relevant to consider such matters as the development of One.Tel from its inception, the emerging relationship between the senior executives of the company and the Packer and Murdoch families, the extent to which PBL and News were aware of the micro-detail of the businesses and influenced business decisions, and the detailed financial management of One.Tel over time.

[28] Third, it was also evident from the outset that the defendants were determined to resist ASIC's case with great vigour. Challenges were made to many of the steps that ASIC took in preparing and presenting its case, often on quite difficult points that needed, in my view, to be addressed in written reasons for judgment. As the above table shows, I received 243 written submission documents during the course of the final hearing; and I delivered 67 interlocutory judgments warranting media neutral citation during and prior to the trial, and quite a few others that did not.

[29] Fourth, ASIC was not able to secure the presence in Australia of some of its important witnesses, and I therefore decided, on ASIC's application, it was necessary to hear part of the case in London: see ASIC v Rich (2004) 49 ACSR 578 ; [2004] NSWSC 467 (31 May 2004). Although according to my observation the parties prepared for and carried out the London hearing with great efficiency, and the court received excellent co-operation and assistance from the High Court of Justice in London, there was necessarily a significant disruption to the hearing both in the process of determining that the overseas hearing was necessary and in the execution of that decision.

[30] A large component of the evidence upon which ASIC wished to rely was obtained through the execution of search warrants at the premises of the company and some directors, in a process in which most or all of the electronic financial records of the company were downloaded or electronically copied. The financial files of any large company are likely to include quite a variety of documents, ranging from finalised financial statements to incomplete drafts and financial forecasts of various kinds, prepared on the basis of assumptions that are not necessarily fully set out. ASIC decided to engage a forensic accountant, Mr Carter, to review the financial material and prepare a report to be tendered at the trial. These matters led to two major difficulties at the hearing, one relating to the proper use of documents obtained on search warrant, and the other relating to the admissibility of Mr Carter's evidence.

[31] The first difficulty, the fifth of my reasons for the length of the hearing, arose out of the fact that the documents were first obtained through the execution of search warrants procured for the investigation of suspected criminal offences. The proceedings before me are civil proceedings, and so the issue arose, in the context of ASIC seeking to prove the provenance of its documentary evidence, as to whether documents first obtained for a criminal investigation could be used to prosecute civil litigation. There were also related but much more fact-intensive issues, emerging as the facts were revealed, as to whether ASIC had acted illegally or improperly in its use of the documents it had obtained, and whether in the factual circumstances ASIC had failed to establish that the documents should be admitted under s 138 of the Evidence Act 1995 (NSW). ASIC sought, and obtained, leave to adduce further evidence directed to these questions, and there was substantial cross-examination of ASIC's witnesses on these matters. There were frequent contests about the admissibility of tendered evidence, including issues about client legal privilege and waiver of privilege. I took the view that the search warrant issues were very important, and that there was no alternative but to follow this process through to its conclusion.

[32] The difficulty arising out of the search warrants was compounded by the fact that the true factual position was not laid on the table by ASIC, but instead it emerged only during the trial, through the administration of notices to produce and a substantial hearing on the voir dire, which took place during the time allotted for the trial. In my view ASIC should have realised prior to the hearing, especially in the light of Williams v Keelty (2001) 111 FCR 175 ; 184 ALR 411 ; 39 ACSR 127 ; [2001] FCA 1301, that the question whether the documents were available for use in civil proceedings was likely to be an issue that would have to be determined, and accordingly it should have brought the issue to the court at a directions hearing so that it could be resolved before the commencement of the trial. The matter was not resolved until I delivered a lengthy judgment (122 pages) on 16 February 2005 (ASIC v Rich (2005) 220 ALR 324 ; 52 ACSR 374 ; [2005] NSWSC 62 (ASIC NSWSC 62)), holding (broadly speaking) that ASIC's conduct had not been improper and unlawful, and that it was permissible for ASIC to use the documents obtained on search warrant for the purposes of these civil proceedings because the owner of the documents, One.Tel by its liquidators, consented to that use on 7 December 2001.

[33] Sixth, concurrently with the search warrant issues, some problems emerged about the admissibility of Mr Carter's expert forensic accounting evidence. The principal difficulty was that he had been retained by ASIC shortly after its investigation began, essentially to assist it to sift through the evidence and to develop recommendations for the commission as to the most appropriate proceedings. He prepared and presented a report for that purpose and was given unrestricted access to documents and persons, including former executive personnel at One.Tel. He was retained to prepare his forensic report for the court after he had submitted his previous report and ASIC had decided to embark on the present proceedings. It was not until his forensic report had reached the stage of a mature draft that someone at ASIC or in its legal team realised that it would not be possible for him to rely on all the sources of information that he had used for the earlier report: specifically, that he would not be able to rely on what he was told by former One.Tel personnel, because those individuals would not be called by ASIC to give evidence in the proceedings. The problem was not a problem about lack of independence, but rather about whether the court could be confident that Mr Carter's expert opinions in his forensic report were free of influence from the matters he had been told to exclude.

[34] As with the search warrant issues, ASIC did not advert to the issue prior to the commencement of the hearing so that it could be addressed before the hearing began. Consequently the issue arose in the context of ASIC seeking to read Mr Carter's evidence, and again there were notices to produce and the taking of evidence on the voir dire, using up valuable hearing time.

[35] I eventually addressed the factual and legal issues arising out of the tender of Mr Carter's reports in another long judgment (177 pages), ASIC v Rich (2005) 53 ACSR 110 ; [2005] NSWSC 149 (ASIC NSWSC 149) (7 March 2005). I held that the evidence was inadmissible, or should be excluded under s 135 of the Evidence Act. That decision was overturned on appeal: ASIC v Rich (2005) 218 ALR 764 ; 54 ACSR 326 ; [2005] NSWCA 152 (ASIC NSWSC 152) (20 May 2005). A consequence of the Court of Appeal's judgment was that it was necessary for me to consider Mr Carter's evidence on a paragraph-by-paragraph basis, in accordance with the principles enunciated on appeal. That exercise, which occupied the court for about 2 weeks, in addition to judgment writing time, led to my judgment of 8 July 2005 on the admissibility of Mr Carter's principal report (ASIC v Rich [2005] NSWSC 650 (ASIC NSWSC 650)) and, after the court's trip to England, my further judgments of 30 September 2005 and 11 October 2005 dealing with Mr Carter's other evidence (ASIC v Rich [2005] NSWSC 939 (ASIC NSWSC 939); ASIC v Rich [2005] NSWSC 999 (ASIC NSWSC 999)).

[36] The net result was that well over half of Mr Carter's evidence was rejected. That had consequences for the presentation of ASIC's case, because clearly ASIC was relying on Mr Carter's evidence to attribute significance to documentary evidence that might otherwise be ambiguous or difficult to understand, and further, ASIC's statement of claim was obviously framed with an eye to Mr Carter's evidence, some of which was replicated in the statement of claim and its schedule. ASIC attempted to overcome the rejection of part of Mr Carter's evidence by tendering a further expert forensic accountant's report. It applied for leave to tender the new report, by Mr Murray Smith, on 11 July 2005, the 93rd day of the hearing. After argument I rejected the tender for reasons delivered on 15 July 2005: ASIC v Rich [2005] NSWSC 706.

[37] Deprived of expert accounting evidence, ASIC then endeavoured to prove its case by other means, which included complex and detailed submissions about the meaning of the documents themselves, and the use of substantial and detailed tables of financial information, extracted from primary financial records such as daily cash flow spreadsheets, management accounts, trial balances and aged creditor reports, prepared by or on behalf of ASIC.

[38] Some of these tables were introduced during the cross-examination of the defendants and I decided as a matter of convenience to receive them as exhibits (the folder of tables became Ex 93), though when I had the chance to consider them properly I realised that they were in the nature of submission documents rather than evidence, as they were simply extracts from financial documents already in evidence, and they did not contain expressions of opinion. Additional tables of financial information, likewise extracted from primary evidence, were attached to ASIC's submissions in chief and its submissions in reply. The need to deal with this large volume of financial submission material added substantially to the length of cross-examination, particularly cross-examination of the two defendants, and it has also added substantially to my judgment-writing time.

[39] In addition to developing extensive financial submissions, ASIC sought to introduce, particularly in the cross-examination of the defendants, some factual allegations that were not expressly pleaded or particularised, and led to many objections by the defendants. The defendants contended that this was part of the attempt by ASIC to overcome the rejection of its expert accounting evidence. The matters included, for example: allegations of the significance of a reworking of the financial forecasts for the Australian "ex-Next Generation" operations which came to be referred to as the "January recut", allegations about the deferral of payment of UK creditors on the instructions of Mr Silbermann in February 2001, allegations about the level of debt to non-UK European creditors, allegations about the cash position in October and November 2000 and February 2001 on the basis of certain "Funding Requirement" documents, and allegations to the effect that the March 2001 board meeting was misled because financial forecasts were presented to it on the basis calculated in a spreadsheet, 2403C.xls, which contained some unjustified assumptions. For the most part, these matters were raised by ASIC during cross-examination of the defendants, after it had closed its case and the defendants had served their affidavits. After hearing argument on the matters when they were raised, and in particular inviting ASIC to state the relevance of the line of questioning, I made rulings on the question of admissibility on grounds of relevance and discretionary exclusion, generally allowing the line of questioning to continue over objections. At the defendants' request I gave reasons for some of these rulings: ASIC v Rich [2006] NSWSC 712 (ASIC NSWSC 712) (14 July 2006).

[40] The seventh in this list of causes for the length of the hearing is a difficulty that arose in assessing ASIC's very large documentary tender. While ASIC tendered a great deal of evidence about the provenance of the documents, it was for the most part evidence by employees or agents of ASIC, rather than One.Tel personnel, and was not evidence of the authenticity of the documents but only about their provenance in a more formal sense. The defendants submitted that authentication of the documents was a condition precedent to relevance and admissibility under the exception to the hearsay rule for business records, relying on National Australia Bank Ltd v Rusu (1999) 47 NSWLR 309 ; [1999] NSWSC 539. ASIC relied on the scope of the business records provisions of s 69 of the Evidence Act and also on the "prima facie evidence" rule concerning books kept by a body corporate, in s 1305 of the Corporations Act.

[41] Eventually the parties agreed that the way forward on these questions was to identify 10 categories of documents about which the court would make reasoned rulings, which could then be applied to the remainder of the tender. After extensive submissions, I delivered long reasons for judgment (169 pages) on the admissibility of these categories of documents on 5 May 2005 (ASIC v Rich (2005) 216 ALR 320 ; 53 ACSR 752 ; [2005] NSWSC 417 (ASIC NSWSC 417)), with a supplementary judgment dealing with additional categories of documents delivered on 18 May 2005 (ASIC v Rich (2005) 54 ACSR 28 ; [2005] NSWSC 471). My judgment had the effect of allowing large quantities of electronic and hardcopy documents into evidence without the kind of proof of authenticity that the defendants had demanded.

[42] The eighth reason for the length of the hearing relates to evidence about creditors. An important part of ASIC's pleaded case is to show that there were high levels of overdue and unpaid debts to creditors in the Australian and UK operations in the period from January to April 2001. Part of the evidence about that is aged creditor reports. But as the defences indicate, the defendants have contended that the formal credit terms on which One.Tel dealt with its major creditors, particularly carriers, were suspended and the creditors accepted payment at substantially later times, and moreover there were said to be significant disputes about the older debts, some credit notes, and some debts recorded that were no longer owing. To address those questions it was necessary to go to other more detailed evidence relating to individual creditors, and obviously evidentiary issues such as hearsay arose. There was a very great quantity of this evidence. When I looked at it in detail, it became evident that a significant amount of it would have only slight probative value, and so as a matter of case management, I encouraged ASIC to review the contents of the proposed tender. I was anxious to remove or reduce the risk of "mini-trials" about One.Tel's relationships with individual creditors.

[43] ASIC responded well to this, informing the court that it would limit the tender of creditor correspondence to lists of four categories of documents, relating to larger Australian creditors, smaller Australian creditors, larger overseas creditors, and smaller overseas creditors, and it produced a list of those documents which was marked AS 69 (subsequently revised). There were some 89 creditors listed in AS 69, including 22 larger Australian creditors and 8 larger overseas creditors. I delivered a judgment enunciating some exclusionary criteria that were intended to enable ASIC to cull the tender and confine it to documents that avoided the exclusionary principles (ASIC v Rich [2005] NSWSC 491 (ASIC NSWSC 491) (25 May 2005)) and there were some later supplementary rulings. Although the outcome was that the court had a manageable, though large, body of creditor evidence to deal with, the process of reaching that point took time.

[44] My ninth reason for the length of the hearing is one of the most important, eclipsed only by ASIC's decision to mount an extraordinarily large evidentiary case. It relates to the consequences for the trial of the High Court's decision in Rich v ASIC (2004) 220 CLR 129 ; 209 ALR 271 ; 50 ACSR 242 ; [2004] HCA 42 (Rich (2004)). This case held that the present proceedings, in which ASIC seeks not only a compensation order but also a banning order against the defendants, are proceedings for the imposition of a penalty, and so the defendants are protected by the penalty privilege (the effect of the decision was substantially reversed, but not so as to affect the present case, by the introduction of s 1349 by amendment to the Corporations Act in 2007).

[45] I do not wish to be understood as disagreeing with the High Court's decision in any way. But the consequences of the decision for ASIC's presentation of its case at the trial, and the court's management of the trial, and preparation of my judgment, were very difficult and added significantly to the length of the hearing and to the length of some periods of adjournment.

[46] One problem was that although the court and ASIC had the defendants' defences, they did not have anything that would indicate the nature or content of the defendants' evidentiary case. That meant, for example, that ASIC had been unable to prepare evidence to meet the defendants' evidence before the trial. When there were glimpses of what the defendants' evidentiary case might be, revealed during the course of cross-examination of ASIC's witnesses, ASIC had to consider whether its evidence was adequate to meet what was likely to come from the defendants. On a few occasions that consideration led it to seek leave to adduce further evidence: for example, ASIC v Rich [2005] NSWSC 1187 (23 November 2005) as to the evidence of Mr Jalland. On the whole I granted that leave if the circumstances indicated that ASIC could not reasonably have been expected to anticipate the line of evidence foreshadowed in cross-examination and should in fairness be allowed to deal with it.

[47] The defendants' reliance on the penalty privilege also seems to me to have affected the content of ASIC's evidence in reply, some of which might have been put on in chief, or at least made available to the defendants before the trial so they could prepare to deal with it then. Predictably, there was an issue, fully contested, as to whether ASIC should be allowed to present a case in reply, a matter that I dealt with in ASIC v Rich (2006) 235 ALR 587 ; 58 ACSR 414 ; [2006] NSWSC 826 (21 August 2006), allowing ASIC's case in reply to be presented. That did not consume any large amount of time, but in my view the proceedings could have been managed very much more efficiently if not subject to the penalty privilege and if, consequently, the defendants' evidence and ASIC's evidence in reply could have been served before the commencement of the hearing.

[48] The penalty privilege also led to some substantial gaps in the hearing timetable. Relying on the privilege, the defendants did not indicate whether they would go into evidence until after ASIC closed its case in chief. They then sought, and were granted, a substantial adjournment for the purpose of preparing their evidence. I decided that a substantial adjournment should be allowed after hearing submissions from senior counsel for the defendants concerning the amount of work that would need to be done. I took into account that the defendants were individuals with presumably limited resources, whose legal team had obviously been working very hard in cross-examining ASIC's witnesses. No doubt they had available for that purpose statements from their clients, but nevertheless converting those statements into affidavits in the proceedings, drafted to take into account the whole of ASIC's huge evidentiary case, was obviously going to involve a large amount of work for which time would be needed.

[49] When the defendants' affidavits appeared they were, perhaps predictably, very large. Mr Rich's affidavit ran to 1956 paragraphs and Mr Silbermann's to 1061 paragraphs. They were supported by 7 lever-arch folders of evidence referred to in the affidavits and another 17 volumes of the defendants' tender bundle. ASIC sought an adjournment to review the defendants' evidence, which was granted after full submissions were heard: ASIC v Rich [2006] NSWSC 266. That obviously involved some inconvenience to the court, but perhaps not a great deal, as I was freed up to attend to other work. The main inconvenience was to the parties, each of whom would have to wait longer for completion of the hearing and a decision. But in a sense both sides were benefiting, when they needed to benefit, from the adjournment process, and the need for adjournments was a consequence of the volume of material that both sides had put into the contest. In the result, ASIC closed its case on 9 February 2006 (T 10431), and the oral hearing of the defendants' case began on 13 June 2006 (T 10527), a gap of just over 4 months. The more usual practice in the Equity Division, in a case where there is no penalty privilege and affidavits are exchanged before the hearing, is for the defendants to go into evidence immediately after the plaintiff's case is closed, or perhaps after a short break, so it seems to me that this substantial gap was very much tied up with the penalty privilege.

[50] My tenth reason for the length of the hearing relates to written submissions. After completion of the defendants' evidence and the evidence in reply, another adjournment was necessary in order to permit the parties to prepare their final written submissions. Even in modern times there are substantial differences of opinion among judges as to the utility of written and oral submissions respectively (see, for example, J Gleeson SC, R Higgins, M H McHugh, M D Kirby and J D Heydon, Rediscovering Rhetoric: Law, Language and the Practice of Persuasion, Federation Press, New South Wales, 2008), and in particular the chapters by the Hon Michael McHugh and Heydon J). I personally have no aversion to written submissions, provided that they are concise and clinical. In the present proceedings, while I had the benefit of very accurate and rapidly available transcript, I was concerned that if the submissions were solely or mainly oral, a lot of time and energy would be taken up in my shuffling through innumerable lever-arch folders in court, a task that can be executed more efficiently in chambers with the help of an associate and a tipstaff/researcher. I was also concerned that it might be difficult to absorb large quantities of figures thrown at the judge across the bar table, and better to see them on the page before me. Given the nature of the case, it was hard to envisage that there would be much opportunity for counsel to demonstrate rhetorical skills. Therefore, consideration of the particular circumstances of this case pointed to having the bulk of the argument reduced to writing.

[51] I considered whether I should make an order limiting the length of written submissions but, again having regard to the nature of the case, I decided it would be unwise to do so. My main reason was that the case is factually large and difficult, and an arbitrary word limit might substantially interfere with the proper presentation of the affected party's case. Additionally I believed that I needed all the help I could get from submissions, given the financial subject matter of the evidence and the unusual way the case had been presented, because of the penalty privilege. However, as a quid pro quo for not imposing restrictions on written submissions, I imposed tight restrictions on oral argument, which was completed in just 5 hearing days.

[52] The written submissions in this case had a special characteristic that I should mention. On most of the occasions when a contentious topic was addressed, the submission about it was more detailed than previous submissions on the same topic. Time and again, the defendants' submissions accused ASIC of superficiality and sought to show that on close investigation, the facts did not accord with ASIC's "theory". The analogy of stripping the layers from an onion is sometimes used to describe an argument that develops from level to level, but it is not quite apt here because each level is more complex than the previous one. Perhaps a better analogy would be to cutting the top off a termites' nest.

[53] To take one of many examples, ASIC alleges that at the end of February 2001 the defendants caused a transfer of $26 million to be made from the UK to the Australian operations to pay pressing debts in Australia, leaving the UK operations with insufficient cash to pay their creditors. Mr Werner, the joint chief financial officer in the UK, gave evidence that Mr Silbermann instructed him not to pay creditors in February, so that enough cash would be built up in the UK to permit the transfer to be made. In its submissions in chief, ASIC pointed to several kinds of evidence showing that in February, cash did indeed accumulate and some creditors were not paid, and it prepared a table identified as Ex P93-708, which listed and gave particulars of individual carrier creditors that were not paid in February (the evidence is considered at 10.20). The defendants' response, in their written submissions, was to go through ASIC's list of unpaid creditors and explain, creditor by creditor by reference to other evidence, that in each case there were plausible reasons for non-payment of the creditor, and therefore an alternative to the theory that the creditors were not paid so as to create a fund to be transferred to Australia. In the case of one of the creditors (British Telecom, on its E1 account), the defendants prepared a table extracted from the ledger, intended to show that, contrary to ASIC's table, there was in fact no invoice that fell due in February. In its submissions in reply, ASIC referred to a series of BT invoices and said that the ledger showed some of these invoices were underpaid, and so there were balances overdue during February that were not paid. That raised the issue whether, in the case of each invoice, there was some matter of dispute that might have explained part payment. There is a risk, obviously, of becoming fascinated with the intricacy of the termite burrows and losing sight of the shape of the mound.

[54] When all the submissions were in, the defendants' submissions were about 2.5 times as long in page length as ASIC's submissions in chief and in reply, but that comparison is misleading because the defendants' submissions are much more self-contained than ASIC's. In the case of ASIC's submissions, it is necessary to refer to documentary evidence or transcript in order to assess most sentences and every paragraph. The judge is required to do much more work in order to process the submissions.

[55] In consequence of my decisions about submissions, the hearing of evidence having concluded on 21 September 2006, ASIC's written submissions were lodged on 10 November 2006, and after the defendants sought and obtained an extension of time (ASIC v Rich [2007] NSWSC 39 (6 February 2007)), their written submissions were finally completed in about March 2007 (submitted in several tranches), and ASIC's written submissions in reply were submitted on 10 June 2007. Oral supplementary submissions were heard on 6-8 August 2007 (defendants) and 20 and 21 August 2007 (ASIC).

[56] I turn to the length of time taken to prepare these reasons for judgment, especially as there is an indication in Aon Risk Services Australia Ltd v Australian National University (2009) 239 CLR 175 ; 258 ALR 14 ; [2009] HCA 27 at [152] (Aon Risk) per Heydon J, that an explanation is to be expected if judgment writing takes substantial time. The very long time that I have needed to complete this judgment has been applied to three main tasks. The first was to "tell the story" of this case on the basis of the affidavits, documents and oral evidence. Helpful though the written and oral submissions were on matters of contention, they did not assist me to construct the narrative, which proved to be a very large task. I found that the task was greatly magnified by the facts that the proceedings were subject to the penalty privilege and so the defendants' evidentiary case was not known to me until substantially after ASIC's case in chief was closed; ASIC's expert evidence was partly rejected but partly received, and the latter part needed to be integrated into the narrative and the financial findings; and important components of ASIC's case, also to be integrated into the narrative, were developed during cross-examination of the defendants. My second task was to take into account all the submissions, in circumstances where, particularly in the case of ASIC's submissions, there were constant cross-references to evidence, which needed to be checked. During the course of this judgment I shall have occasion to note what I consider to have been mistakes in the written submissions of both parties: specifically, there were at occasions when ASIC exaggerated the effect of evidence or misleadingly took passages of evidence out of context; and there were occasions when the defendants loosely misstated evidence. That is why I found it necessary to check the submissions carefully. The third task, really an aspect of the second, has been to satisfy myself that I have understood and properly accounted for the financial evidence comprising primary documents (such as the daily cash flow spreadsheets, management accounts, trial balances, aged creditors and debtors reports) and submission documents comprising or based on financial tables derived from that primary evidence (including Ex P93). I have had in mind the importance of making comprehensive findings of fact so as to assist the appellate process, since I take it that an appeal is likely.

[57] It is obviously desirable, if possible, for the judge who has heard such a long and complex case to be relieved of other work while the judgment is in preparation. Distraction from the main task has a compound effect, because it is necessary not only to take time out to hear the other cases that are assigned, and to prepare judgments in them, but then to spend time working back into the main case in order to reach the state of understanding of the evidence that one possessed before the distraction occurred. While every effort has been made by the court to relieve me of other commitments, it has been necessary for me to hear other cases and consequently prepare judgments, and attend to some other work of the court, with the consequence that I have been occupied with other matters for just under 6 months of the period after judgment was reserved, scattered over that period. That may be a relevant matter to be taken into account if ASIC successfully appeals from this judgment and it becomes necessary to fix a period for a banning order: see ASIC v Vines (2006) 58 ACSR 298 ; [2006] NSWSC 760 at [125] (ASIC NSWSC 760); the point was not addressed in the Court of Appeal: ASIC NSWCA 75Vines v ASIC (2007) 63 ACSR 505 ; [2007] NSWCA 126.

[58] Finally, I should note that, although this was a very long trial, for the reasons I have given, it was not one of those cases where it was necessary "to revisit interlocutory processes, vacate trial dates [except to a limited degree, in 2004, and for good reason], or adjourn trials either because of non-compliance with court timetables or ... because of a late and deliberate tactical change by one party in the direction of its conduct of the litigation": Aon Risk at [24] per French CJ. The step that would have added most to the length of the trial, as well as requiring a substantial adjournment, would have been to grant ASIC's application to tender the report of its substitute forensic accounting expert, Mr Smith, but as I have said, that application was rejected; as was ASIC's application to amend its pleading to introduce an allegation about non-UK European creditors. My perception, as the trial judge, is that unlike the Aon Risk case (at [4] per French CJ), the present case is not one where "an unduly permissive approach" has been taken to questions of amendment, new evidence, raising new claims and adjournment. However, I have tried to ensure that the process of managing the trial has been completely transparent, by publishing reasons for my decisions along the way, even on evidentiary points, and making the evidence and transcript and my interlocutory judgments available through the court registry and (in the case of the judgments) on the internet. I have done so in the hope that if any concerns are raised about the length of the hearing process in the public arena, those wishing to form judgments will first fully inform themselves by recourse to the transcript and my interlocutory judgments.

1.3.3 Some proposals for abbreviating final hearing time

[59] The sheer size of the case and the amount of time and cost involved in bringing it to trial and judgment raise many questions, including questions about the appropriateness of the use of the civil penalty provisions of the Corporations Act for such a massive case, and the efficacy of the court's procedures for dealing with such cases. Although such matters are irrelevant to my reasons for judgment and decision, I believe I should contribute some brief observations to the debate.

[60] In my view this was not a case where there would have been any gain derived from having more than one judge hear the case. The central and most time-consuming issues were about One.Tel's financial condition over time, and a proper understanding of those issues demanded knowledge of the nature of the businesses, how their financial condition had developed from earlier days and how it was judged by PBL/CPH to have declined by late May. In short, the factual financial issues were integrated and needed to be mastered by a single mind.

[61] On some occasions it is possible to achieve an efficient outcome by identifying a question for separate determination, on the basis that resolution of that question will be likely to resolve the proceedings. Given the emphasis placed today on the importance of reducing the time and cost of litigation, it might be argued that courts in the past have taken too rigid and negative an approach to their power to state questions for separate determination. However, whether that is right as a general proposition, the present case was simply not a case where any questions could be presented for separate determination so as to resolve the dispute between the parties, because the differences between the parties were multitudinous differences about the facts going to the main issue, One.Tel's financial condition in the period from January to April 2001.

[62] It may be that the courts should be given greater scope and greater encouragement to refer out questions of fact, especially where expertise (such as accounting expertise) is relevant and can be supplied by the referee. However, I am sceptical about whether any advantage would have been obtained in this case by referring questions about the financial condition of One.Tel to an expert referee for determination (I should add that no such procedure was advocated by either party). It seems to me that the difficulties encountered by the court during the trial would for the most part have been encountered by a referee charged with the determination of questions about One.Tel's financial condition, but the referee would lack the power to deal with those difficulties comprehensively, and so there might need to be applications to the court during the referee's hearing, delaying the outcome. Further, given intensity of the contest between the parties in this case, there would undoubtedly have been a substantial struggle before the court over the referee's report once it was delivered.

[63] Another idea for reducing time and cost is to impose strict time limits on the processes of adducing evidence, cross-examination and oral submissions respectively, and to limit the length of written submissions. The ever-present risk in that approach is that too strict a timetable will interfere with the fundamental right of a party to present his or her case to the court. In the present case, apart from the fact that the defendants were entitled to the benefit of the privilege against exposure to a penalty, they took it upon themselves to present a defence that involved careful dissection of financial materials and the development of some sophisticated financial arguments. My strong view is that in such a case it is highly undesirable to impose time restrictions, although as noted above, I did think it appropriate (given the nature of the subject matter) to direct the parties to make their final submissions in writing supplemented by only very limited oral argument.

[64] While, therefore, I am sceptical about the utility or fairness, in a complex civil penalty case such as the present one, of various techniques that have been suggested and sometimes employed for handling long trials, I believe the courts must do whatever they reasonably can to reverse the tendency of trials to burgeon beyond the realms of manageability. It may be that the High Court's reconsideration of the principles of case management in Aon Risk will strengthen the hand of trial judges to address such problems. Beyond that, I have two suggestions for the shortening of future ASIC civil penalty trials.

[65] First, there is a real question whether ASIC should ever bring civil proceedings seeking to prove so many things over such a period of time as in this case. A case might have been brought focusing attention on One.Tel's financial condition at a particular point in time, for example by invoking a cause of action based on the allegation that a particular One.Tel media release (for example, the ASX announcement of 4 April 2001) was misleading (compare Macdonald (No 11), cited above, which was that kind of case). I do not mean to express an opinion about the likely outcome of such a case, if ASIC had brought it, and I note that if such a case had been brought it might have been against a differently constituted group of defendants, perhaps the board as a whole. Rather my point is that such a case would have established much more limited boundaries of relevance and would have required an assessment of the group's financial position at the precise time of publication of the media statement. Instead, we have had a case which seeks to prove the financial condition of a large multinational corporate group with various businesses, some in start-up mode and some more established, over a period of 4 months, with a view to establishing not one but many breaches of the statutory duty of care and diligence. I wonder whether that is beyond the bounds of reasonable scope of civil litigation.

[66] Second, where there are fact-dependent issues about the admissibility of ASIC's evidence in a civil penalty case, it seems to me that ASIC should be proactive about the early identification of those issues. Being "proactive" involves drawing the attention of the court and the defendant to the issue well before the trial and addressing all of the relevant facts affirmatively by affidavit, rather than releasing the evidence only under compulsion. As I have explained, the progress of the hearing in the present case was interrupted by some questions of admissibility of evidence (namely the search warrant issues, the issues about admissibility of Mr Carter's evidence, and the issues about the documentary tender of business records) that would have been better determined at an earlier stage. It seems to me that in future ASIC should make every effort to identify such issues for the judge and the defendant at a pre-trial case management hearing so that the judge can give directions as to how best to resolve the issues. I estimate that if these matters had been resolved before the commencement of the hearing, the hearing time would have been reduced by about 3 months.

1.3.4 A fundamental principle is in issue

[67] The course of this trial raises a general question as to how far the court can and should go in abbreviating hearing time in a case which, as formulated and defended, is destined to cover huge and difficult evidentiary ground and to consume a large quantity of judicial resources. It seems to me that general issues about the allocation of judicial resources are not matters to be addressed by the trial judge, whose judicial duty is to hear and determine a case that has properly come before him or her, in accordance with established procedures. Manufacturing special procedures simply to deal with the length of the trial seems to me to raise a real risk of injustice, and so I have not done so. The fundamental principle to be observed by a judge who is required to manage and hear a long case, indeed any case, is to strive to do justice, procedural and substantive, between the parties according to law. It is a principle reflected in the judicial oath, to do right to all manner of people after the laws and usages of the State of New South Wales without fear or favour, affection or ill-will. It is a principle that extends to matters of case management.

[68] One part of the irreducible core of doing procedural justice according to law is (subject to some limitations, of course) to facilitate the plaintiff's presentation of the case it has chosen to bring to court, and to facilitate the defendant's answering of that case in court. It is not the judge's function to stand in the way of the plaintiff or the defendant presenting their respective cases. A judge who restricts the presentation of a case on the ground that the case is too long, or too detailed, or too complex, runs the risk that his or her ruling will be tantamount to shutting down that party's case. The same considerations apply to restricting cross-examination to such a degree that significant components of the evidence cannot be addressed by the cross-examiner.

[69] The hearing of this case was conducted on the assumption that the court was bound as to matters of case management by the decision of the High Court in Queensland v JL Holdings Pty Ltd (1997) 189 CLR 146 ; 141 ALR 353 ; [1997] HCA 1. In that case Dawson, Gaudron and McHugh JJ said (at CLR 154; ALR 357), in a much-quoted passage:

Case management is not an end in itself. It is an important and useful aid for ensuring the prompt and efficient disposal of litigation. But it ought always to be borne in mind, even in changing times, that the ultimate aim of a court is the attainment of justice and no principle of case management can be allowed to supplant that aim.

[70] Courts endeavouring to apply the JL Holdings decision have typically taken the view that, when granting leave to a party to take a procedural step such as the amendment of pleadings, the question of prejudice to another party should be addressed by an appropriate order for costs, and only where a costs order could not properly do justice would the application for leave be refused. As Dawson, Gaudron and McHugh JJ said in JL Holdings (at CLR 155; ALR 357):

Justice is the paramount consideration in determining an application such as the one in question [an application for further amendment of the defence]. Save in so far as costs may be awarded against the party seeking the amendment, such an application is not the occasion for the punishment of a party for its mistake or for its delay in making the application. Case management, involving as it does the efficiency of the procedures of the court, was in this case a relevant consideration. But it should not have been allowed to prevail over the injustice of shutting the applicants out from raising an arguable defence, and thus precluding the determination of an issue between the parties.

[71] A little earlier, their Honours had referred to Sali v SPC Ltd (1993) 116 ALR 625 ; 67 ALJR 841 ; [1993] HCA 47, and they had remarked that "nothing in that case suggests that those principles [of case management] might be employed, except perhaps in extreme circumstances, to shut a party out from litigating an issue which is fairly arguable".

[72] In recent times a question has arisen as to whether the Civil Procedure Act 2005 (NSW) has overridden or limited the application of the JL Holdings case as regards proceedings in this court. The Civil Procedure Act did not commence until 15 August 2005, almost a year after this case commenced, though 2 years before it ended. Section 56 is in part as follows:

(1)

The overriding purpose of this Act and of rules of court, in their application to civil proceedings, is to facilitate the just, quick and cheap resolution of the real issues in the proceedings.

(2)

The court must seek to give effect to the overriding purpose when it exercises any power given to it by this Act or by rules of court and when it interprets any provision of this Act or of any such rule.

[73] Section 57 says:

(1)

For the purpose of furthering the overriding purpose referred to in section 56(1), proceedings in any court are to be managed having regard to the following objects:

(a)

the just determination of the proceedings,

(b)

the efficient disposal of the business of the court,

(c)

the efficient use of available judicial and administrative resources,

(d)

the timely disposal of the proceedings, and all other proceedings in the court, at a cost affordable by the respective parties.

(2)

This Act and any rules of court are to be so construed and applied, and the practice and procedure of the courts are to be so regulated, as best to ensure the attainment of the objects referred to in subsection (1).

[74] Section 58 says:

(1)

In deciding:

(a)

whether to make any order or direction for the management of proceedings, including:

(i)

any order for the amendment of a document, and

(ii)

any order granting an adjournment or stay of proceedings, and

(iii)

any other order of procedural nature, and

(iv)

any direction under Division 2, and

(b)

the terms in which any such order or direction is to be made,

the court must seek to act in accordance with the dictates of justice.

(2)

For the purpose of determining what are the dictates of justice in a particular case, the court:

(a)

must have regard to the provisions of sections 56 and 57, and

(b)

may have regard to the following matters to the extent to which it considers them relevant:

(i)

the degree of difficulty or complexity to which the issues in the proceedings give rise,

(ii)

the degree of expedition with which the respective parties have approached the proceedings, including the degree to which they have been timely in their interlocutory activities,

(iii)

the degree to which any lack of expedition in approaching the proceedings has arisen from circumstances beyond the control of the respective parties,

(iv)

the degree to which the respective parties have fulfilled their duties under section 56(3),

(v)

the use that any party has made, or could have made, of any opportunity that has been available to the party in the course of the proceedings, whether under rules of court, the practice of the court or any direction of a procedural nature given in the proceedings,

(vi)

the degree of injustice that would be suffered by the respective parties as a consequence of any order or direction,

(vii)

such other matters as the court considers relevant in the circumstances of the case.

[75] The statutory duty imposed by s 56 is to pursue an overriding purpose containing three elements, relating to justice, speed, and cheapness or minimal expense. It seems to me, however, that two of these elements are relative concepts, while the third is an absolute. The hearing may be more or less speedy, and the case may be managed in a way that reduces costs to a greater or lesser degree, while still satisfying the statutory criteria. But the obligation to do justice is absolute; it is not to be apportioned on a sliding scale. It is unjust, not more or less unjust but simply unjust, to manage a case in a way that denies procedural or substantive fairness: say, by shutting a defendant out of presenting his or her case in answer to the plaintiff's allegations or by preventing the plaintiff from adequately cross-examining the defendants and their witnesses.

[76] When, therefore, the statute instructs the court to administer cases in a manner that is just, quick and cheap, in my view it is not the legislative intention that if a matter of case management will promote cheap and quick resolution, it can (or even must) be adopted although plainly unjust. Section 56, properly construed, must be taken to mean that the court is required to administer cases in a manner that promotes speedy and cheap resolution of the real dispute, provided always that what is done is just. The alternative interpretation, that justice, speed and cheapness are discretionary factors of more or less equal weight, to be juggled in case management, would amount to a statutory licence to judges to behave unjustly and inconsistently with their judicial oath, which is not an oath to do right to all manner of people so long as it is quick and cheap to do so.

[77] The correct interpretation of s 56(1) and (2) is unfortunately not assisted by ss 57 and 58. Section 57(1) says that proceedings are to be managed having regard to a series of objects of which the just determination of the proceedings is only one, and there is nothing to indicate whether that criterion is more weighty than the others. Section 58(1) provides that in case management the court must seek to act in accordance with the dictates of justice, a proposition which, if taken in isolation, would suggest that doing justice is pre-eminent over other considerations. But s 58(2) requires the court, for the purpose of determining what are the dictates of justice in a particular case, to have regard to a series of matters, including everything in ss 56 and 57. Thus, the dictates of justice are defined in terms of a list of factors in which pursuing the just determination of the proceedings is only one item. Given this curious structure, in my opinion nothing in ss 57 or 58 stands in the way of the proposition that under s 56(1) and (2), the court's duty is to facilitate the just resolution of the real issues in the proceedings, doing what it can to ensure that those issues are resolved quickly and cheaply.

[78] In Dennis v Australian Broadcasting Corp [2008] NSWCA 37 at [28]-[29], the Court of Appeal of New South Wales (Spigelman CJ, Basten and Campbell JJA) expressed the opinion, obiter, that s 56 has modified principles applied in JL Holdings, which must now be understood as operating subject to the statutory duty imposed on courts by s 56(2). If the interpretation of s 56 set out above is correct, justice remains the paramount consideration, just as the High Court said in JL Holdings. But s 56 requires the court to achieve a quick and cheap outcome provided that doing so is consistent with the demands of justice. Whereas in JL Holdings the High Court was comparing the demands of justice with considerations relating to case management generally, s 56 gives more focus to the court's task, and therefore requires the court to give careful consideration to questions of cost and speed, while in the end confirming that the fundamental objective is to achieve justice. I take it that this is the sense in which the Court of Appeal's observations are to be read.

[79] Part of the general approach to case management outlined in the JL Holdings case was abandoned by all judges except Heydon J in Aon Risk (5 August 2009). Heydon J took the more absolute approach that the JL Holdings case has ceased to be authority in all jurisdictions having rules of court such as those that were before the High Court (which were similar to the Civil Procedure Act and Rules of New South Wales).

[80] Two departures from JL Holdings by the majority judges in Aon Risk warrant special emphasis. First, in future, courts will not be quick to conclude that the prejudice suffered by the opponent, if an application for adjournment or amendment is granted, can be compensated by costs. In Aon Risk, French CJ criticised the trial judge and the Court of Appeal of the Supreme Court of the Australian Capital Territory because they "should have taken into account that, whatever costs are ordered, there is an irreparable element of unfair prejudice in unnecessarily delaying proceedings": at [5]. Gummow, Hayne, Crennan, Keifel and Bell JJ said "the modern view is that even an order for indemnity costs may not always undo the prejudice a party suffers by late amendment": at [99].

[81] Second, the proposition emerging from JL Holdings that a litigant ought not to be prevented by case management principles from litigating an issue that is fairly arguable, except in "extreme circumstances", is incorrect, because it does not pay sufficient regard to the fact that courts are concerned to do justice to all litigants and therefore they must have regard to the effect of their decisions on the opponent and other litigants. As the plurality said in Aon Risk (at [95]):

[95] To say that case management principles should only be applied "in extreme circumstances" to refuse an amendment implies that considerations such as delay and costs can never be as important as the raising of an arguable case; and it denies the wider effects of delay upon others.

[82] However, the changes in attitude that can be seen in Aon Risk to the adequacy of a costs order to address prejudice, and to the significance of principles of case management, do not qualify the proposition that the trial judge's fundamental responsibility is to do justice in the case he or she is hearing. Thus, French CJ observed that the Judicature Act Rules and their Australian offspring initially reflected the adversary system, which had subsequently been qualified "by changing practices in the courts directed to the reduction of costs and delay and the realisation that the courts are concerned not only with justice between the parties, which remains their priority, but also with the public interest in the proper and efficient use of public resources" (at [23]; emphasis supplied). Later he said (at [30]):

[30] It might be thought a truism that "case management principles" should not supplant the objective of doing justice between the parties according to law. Accepting that proposition, JL Holdings cannot be taken as authority for the view that waste of public resources and undue delay, with the concomitant strain and uncertainty imposed on litigants, should not be taken into account in the exercise of interlocutory discretions of the kind conferred by r 502 [which authorised the court to grant leave to amend]. Also to be considered is the potential for loss of public confidence in the legal system which arises where a court is seen to accede to applications made without adequate explanation or justification, whether they be for adjournment, for amendments giving rise to adjournment, or for vacation of fixed trial dates resulting in the resetting of interlocutory processes.

[83] To similar effect, the plurality said (at [98]):

[98] Of course, a just resolution of proceedings remains the paramount purpose of r 21 [a general rule of court which said the purpose of the rules was to facilitate the just resolution of the real issues in civil proceedings with minimum delay and expense]; but what is a "just resolution" is to be understood in light of the purposes and objectives stated. Speed and efficiency, in the sense of minimum delay and expense, are seen as essential to a just resolution of proceedings. This should not detract from a proper opportunity being given to the parties to plead their case, but it suggests that limits may be placed upon re-pleading, when delay and cost are taken into account. The Rule's reference to the need to minimise costs implies that an order for costs may not always provide sufficient compensation and therefore achieve a just resolution. It cannot therefore be said that the just resolution requires that a party be permitted to raise any arguable case at any point in the proceedings, on payment of costs.

[84] The decisions I have taken during the hearing in this case are consistent with the principles stated by the High Court in Aon Risk, bearing in mind the court's paramount duty, acknowledged in that case, to achieve a just resolution of the proceedings. In my view any further shaving of the hearing time, for example by imposing artificial limits on cross-examination and written submissions, or limiting the amount of preparation times for cross-examination and submissions, would have created a substantial risk that justice would not be done, given the complex and extensive nature of the evidence and the extent of the matters in issue between the parties. It has to be recognised, in my view, that however, hard the judge might try, consistently with his or her fundamental duty to do justice in the resolution of the proceedings, to bring about quick and cheap resolution of the matters in dispute, some cases are just very long and costly, the length and cost being contributed to by both sides, and they have to be seen through to their conclusion.

2. Pleadings

2.1 ASIC's pleaded case

[85] ASIC alleges a series of contraventions of s 180(1) of the Corporations Act (which replaced the identical provision of the Corporations Law shortly after the events in question, while preserving the substance of the Corporations Law provision), by each of Mr Rich and Mr Silbermann as directors and officers of One.Tel. To establish a contravention against, respectively, Mr Rich and Mr Silbermann, ASIC must prove:

•

that he was a director or other officer of One.Tel (identifying the office occupied by him);

•

the responsibilities attached to the office occupied by him;

•

One.Tel's relevant circumstances at the time of the alleged contravention;

•

that he exercised powers or discharged duties in that office;

•

that he did not do so with the degree of care and diligence that a reasonable person would have exercised as a director or officer of a corporation in One.Tel's circumstances (as proved), occupying the office (as proved) held by him, and having the same responsibilities within One.Tel (as proved) as he had at the time of the contravention.

[86] Since, to a large degree, ASIC's case is that the defendants failed to exercise due care and diligence with respect to keeping the board of directors of One.Tel informed of material information about the financial condition, performance and prospects of the One.Tel Group, it is pertinent for ASIC to identify, in its pleading, the material information allegedly not given to the board, and to address the question whether each defendant knew or should have known about that material information.

[87] ASIC's fifth further amended statement of claim (the statement of claim) approximately reflects these requirements, for it makes allegations about the following matters:

•

the offices occupied by the two defendants: paras 2 and 4;

•

the responsibilities of the two defendants as the holders of those offices: para 7 and Particulars 1-3 (Mr Rich); para 9 and Particulars 8-10 (Mr Silbermann);

•

the defendants' statutory duty under s 180(1): para 10;

•

One.Tel Ltd's circumstances: paras 11-12, and the Schedule and Annexures;

•

knowledge of those circumstances on the part of each defendant: paras 13-16 and Particulars 11-12;

•

the conduct of a reasonable director: paras 18-19;

•

contraventions by each of the defendants: paras 20-26, Particulars 14-22 (Mr Rich); paras 31-36, Particulars 28-33 (Mr Silbermann); paras 37, 39-48, 50, 52-53, 55, and Particulars 34-35 (Mr Rich).

2.1.1 The offices allegedly occupied by Mr Rich and Mr Silbermann

[88] The statement of claim alleges that Mr Rich was a founding director of One.Tel, having been appointed a director on 3 March 1995, and that he occupied the office of joint managing director from 3 March 1995 until 17 May 2001. These allegations are admitted by Mr Rich in his defence.

[89] The statement of claim alleges that Mr Silbermann was at all relevant times a director of One.Tel, having been appointed to that office on 30 July 1997, and that he occupied the office of finance director from 30 July 1997 until 29 May 2001. Mr Silbermann admits these allegations in his defence.

2.1.2 The alleged responsibilities of Mr Rich and Mr Silbermann

[90] The pleaded responsibilities of the defendants (paras 7 and 9) include responsibilities to take reasonable steps:

•

to monitor management, properly assess the financial position and performance of the group, and detect and assess material adverse developments affecting the group's financial position and performance;

•

to inform directors of material information and to inform them about certain material financial matters;

•

(for Mr Rich only) to ensure that proper systems were established, maintained and monitored to produce accurate and reliable financial information flowing from management to the board;

•

not to mislead the board or withhold material financial information from it;

•

to ensure that One.Tel complied with the continuous disclosure obligations of a listed company under the ASX Listing Rules and the Corporations Law;

•

to ensure that the group's cash reserves were maintained at a sufficient level.

[91] In addition, ASIC alleges that both defendants had a responsibility to make recommendations to the board as to the prudent management of the group, including recommendations as to its funding requirements, cessation of its business and/or the appointment of an administrator. It is contended that Mr Rich additionally had responsibilities to take reasonable steps to ensure that One.Tel employed a competent financial director, and not to mislead the ASX or the investing public about the affairs of the group and to ensure that public statements made on behalf of the company were not misleading.

[92] In the Particulars document (paras 1-3 and 8-9) it is said that ASIC relies on particular circumstances including the necessity to achieve a very significant turnaround in order to achieve budget earnings before interest, tax, depreciation and amortisation (EBITDA) and operating cash usage results at the end of June 2001 in circumstances of substantial deterioration in group cash usage and EBITDA for the 6 months to December 2000.

2.1.3 The defendants' statutory duty

[93] It is alleged that in discharge of their responsibilities as directors of One.Tel (as pleaded), the defendants were obliged by s 180(1) of the Corporations Law to act with the degree of care and diligence that reasonable persons would have exercised if they had been directors of One.Tel in the circumstances of One.Tel (as pleaded) and had occupied the respective offices and had the same responsibilities as those which the defendants respectively occupied and had (as pleaded): para 10. This is a case about breach of the statutory duty of care and diligence. It is not a case about contravention of provisions of corporations law about misleading statements to the market or misleading or deceptive conduct, except to the extent that misleading statements or misleading conduct provide evidence of breach of the duty of care and diligence.

2.1.4 One.Tel's alleged circumstances

[94] The statement of claim, and its schedule, deal at length with One.Tel's circumstances during the period from January to May 2001. The central allegation is that One.Tel's financial position and performance progressively deteriorated during that period, and consequently the company required a very substantial cash injection if it was to continue its existing operations. More specifically, ASIC claims that by 28 February, or alternatively 31 March, or alternatively 30 April, if the One.Tel Group was to continue its existing operations and meet current and reasonably foreseeable liabilities, it would need a cash injection to meet the cash requirements of the business in addition to cash for capital works relating to the construction of infrastructure for a mobile telecommunications network.

[95] It is alleged that as at 28 February, a cash injection of $270 million was needed on a group basis, rising to $287 million as at 31 March and $309 million as at 30 April. It is alleged that this financial position occurred as a result of circumstances particularised in the schedule to the statement of claim. The schedule deals in detail with what is said to be the true cash and creditors position in, respectively, January, February, March and April 2001, and the true debtors and EBITDA position. Then it is contended in the schedule that the flash reports, which were monthly summary financial reports supplied by One.Tel Management to the board, were false and misleading and that the March board papers were false and misleading.

[96] A great deal of the evidence and hearing time was concerned with the January, February, March and April circumstances. The financial position of One.Tel during the relevant period came to be treated by both parties as the key issue in the case (ASIC's pleading submissions, para 13; defendants' opening at T 10532-3, 10636). ASIC's submissions in chief dealt in detail with the financial circumstances of the company in each of those 4 months, seeking to establish that the company's financial circumstances were, or were at least as bad as, the pleaded circumstances for each of those months. ASIC took the approach that the financial position of One.Tel was the key issue in the proceedings because, if One.Tel's financial position was as ASIC submitted, there could not be any realistic doubt that the defendants either knew or should have known of it and that the board should have been informed of it: pleading submissions, para 14.

[97] Consistently with the central importance of the financial position of One.Tel in the period from January to April 2001, the statement of claim was drafted in a manner that made the January, February, March and April circumstances pivotal from a pleading point of view. In particular, the pleading about the knowledge of each of the defendants is expressed in terms of each of the January, February, March and April circumstances (paras 13-16), and the pleaded contraventions by the defendants include (as well as some more generally expressed contraventions, noted below) contraventions expressed in terms of failing to inform the board about, and withholding from, the board information relating to each of the January, February, March and April circumstances (paras 20-23, 31-34), and in the case of Mr Rich, failing to ensure that One.Tel notified the ASX of the January, February, March and April circumstances (paras 52-55).

[98] In the schedule, the January, February, March and April circumstances are pleaded with specificity. The January, February, March and April circumstances are defined in terms of the specified allegations of those respective months in the schedule. The schedule details, for each of those months:

•

the "true cash and creditors position" in dollar terms for the group (compared unfavourably with forecasts) and for the Australian and UK operations, as well as pleading other matters including a $26 million transfer from the UK to Australia at the end of February;

•

the "true debtors and EBITDA position" of the One.Tel Group, and the Australian operations, and the provision for doubtful debts at the end of each of the 4 months, and the effect on EBITDA losses of making what was alleged to be an inadequate provision, together with a comparison between the alleged actual EBITDA losses and EBITDA forecasts, and the February announcement to the market;

•

statements in the monthly flash reports in the period from January to April alleged to have misstated Group EBITDA performance;

•

statements in the March board papers said to be false and misleading.

[99] It will be appropriate to consider the detail of the schedule from time to time in the course of the judgment, and unnecessary to set it out fully now. It should be noted, however, that there are six annexures, comprising:

•

Annexure A -- a graph of One.Tel's Group cash balance on a daily basis from 1 January to 29 May 2001;

•

Annexure B -- a list of what are said to be significant trade creditor amounts "past due and owing" for the Australian operations and available cash balances from the end of January to the end of April;

•

Annexure C -- a summary of the Australian operations' alleged liquidity position;

•

Annexure D -- a list of matters described as threats to supply in the international operations, with an addendum;

•

Annexure E -- a comparison of EBITDA between flash reports, adjusted management accounts, budgets and market forecasts;

•

Annexure F -- a summary of the group's cash balance, cash and creditor position and EBITDA for the months of January to April, as alleged by ASIC.

2.1.5 Knowledge of the defendants

[100] ASIC alleges (paras 13-16) that the defendants knew or ought to have known of:

•

the January circumstances by or shortly after the end of January;

•

the February circumstances during or by or shortly after the end of February;

•

the March circumstances during or by or shortly after the end of March; and

•

the April circumstances during or by or shortly after the end of April.

[101] In the Particulars document it is alleged that if they did not know any one or more of the January, February, March or April circumstances, each of the defendants would have known of those circumstances if he had taken certain specified steps set out in the particulars to paras 20-25 and 31-35, respectively, of the statement of claim. These paragraphs set out in some detail the steps that, according to ASIC, each defendant should have taken, such as inspecting creditors ledgers and intranet cash balances, summary debtors ledgers, bank reconciliations, daily cash flow spreadsheets, the billing system, monthly management accounts and daily cash flow forecasts in the UK and European operations.

2.1.6 Conduct of a reasonable director

[102] ASIC alleges that a reasonable person occupying the same office and having the same responsibilities as either of the defendants would have known about the circumstances concerning the One.Tel Group's financial position set out in the schedule at about the time they occurred or commenced to occur: para 18. Having that knowledge, such a reasonable person would have promptly ensured that the board was aware of all those facts and matters, and on or after 28 February, would have immediately recommended to the board (if necessary at a specially convened board meeting) that the group cease trading or appoint an administrator unless the board was satisfied that cash injections totalling at least $270 million could be obtained as and when required prior to November 2001: para 19.

2.1.7 Contraventions alleged

[103] The pleaded contraventions of s 180(1) may be subdivided for convenience into three categories, described in approximate terms as follows:

•

alleged contraventions by each defendant related to their dealings with the board of directors: paras 20-24 and 26 and Particulars 14-18 (Mr Rich); paras 31-36 and Particulars 28-33 (Mr Silbermann);

•

in the case of Mr Rich, alleged failure to ensure that a properly qualified finance director was retained by the company: paras 25 and 26 and Particulars 20-22;

•

in the case of Mr Rich, alleged contraventions with respect to making misleading announcements to the market on 27 February and 4 April 2001, and with respect to failure to keep the market informed of the corporation's true circumstances: paras 37, 39-48, 50, 52-53, 55, and Particulars 34-35.

[104] ASIC's allegations in the first of these three categories are to the effect that each of Mr Rich and Mr Silbermann contravened s 180(1) in various ways related to their dealings with the board of directors. Contraventions in this category are alleged, first, by reference to the specific financial circumstances pleaded in the schedule, and second, by a series of broader allegations supplemented by particulars.

2.1.7.1 Alleged contraventions relating to the board, alleged by reference to the January, February, March and April circumstances

[105] As noted above, the schedule to the statement of claim makes detailed allegations about the true financial position and circumstances of the One.Tel Group, analysing the cash and creditors position as at the end of January, February, March and April 2001 and then dealing with the debtors and EBITDA position over that period. Then there are contraventions alleged against the respective defendants by reference to the January circumstances (paras 20 (Mr Rich) and 31 (Mr Silbermann)), the February circumstances (paras 21 (Mr Rich) and 32 (Mr Silbermann)), the March circumstances (paras 22 (Mr Rich) and 33 (Mr Silbermann)) and the April circumstances (paras 23 (Mr Rich) and 34 (Mr Silbermann)).

[106] Three contraventions are alleged against each defendant with respect to each month's circumstances, namely:

•

that the defendant failed to take reasonable steps promptly to ensure that the board was aware of that month's circumstances: subpara (a) of paras 20-23), and subpara (a) of paras 31-34 (Mr Silbermann);

•

that he withheld that month's circumstances (or, alternatively that month's circumstances to the extent they were known to him) from the board and thereby misled it: subpara (b) of paras 20-23 (Mr Rich), and subpara (b) of paras 31-34 (Mr Silbermann); and note the specific allegations in the schedule, paras S44D-S51, to the effect that certain flash reports and the March board papers were misleading;

•

alternatively (apparently, alternatively to both (1) and (2), each of which seems to assume knowledge), if the defendant did not know of any one or more of that month's circumstances, he failed to take reasonable steps promptly to apprise himself of those circumstances: subpara (c) of paras 20-23 and Particulars to those paragraphs (Mr Rich), and subpara (c) of paras 31-34 and Particulars to those paragraphs (Mr Silbermann).

[107] It is useful to identify these three alleged contraventions as "claim (a)" (non-disclosure to board), "claim (b)" (withholding information and misleading board) and "claim (c)" (failing to inquire).

[108] An additional contravention is alleged against each defendant with respect to the February, March and April circumstances but not the January circumstances, namely failure to recommend to the board that the group cease trading or appoint an administrator unless the board was satisfied that cash injections of a specified minimum amount could be obtained as and when required prior to the end of November 2001 (claim (d)), found in subpara (d) of paras 21-23 (Mr Rich), and subpara (d) of paras 32-34 (Mr Silbermann)).

2.1.7.2 alleged contraventions relating to the board not expressly related to the January, February, March and April circumstances

[109] Second, there is a series of broader allegations of contravention made against each defendant in paras 24 and 35 respectively, which are not expressed to depend on proving the January, February, March or April circumstances. They correspond with some of the pleaded responsibilities of the defendants, and are (approximately) that in the period between 1 January and 17 May 2001:

•

both defendants failed to take reasonable steps to monitor management, properly assess the financial position and performance of the group, and properly assess material adverse developments: "claim 24(a)", found in para 24(a) and Particulars para 19 (Mr Rich); para 35(a) and Particulars para 33 (Mr Silbermann);

•

both defendants failed to take reasonable steps to ensure that all material financial information was provided to the board to enable the board to discharge its responsibilities, including in particular information about the adequacy of cash reserves, the actual and not simply estimated financial position and performance of the business segments, and key events and transactions: "claim 24(b)", found in paras 24(b) and Particulars para 19 (Mr Rich); para 35(b) and Particulars para 33 (Mr Silbermann);

•

Mr Rich failed to take reasonable steps to ensure that systems were established, maintained and monitored which resulted in material financial information that was accurate and reliable flowing from management to the board so as to enable the board to discharge its responsibilities: "claim 24(c)", found in para 24(c) and Particulars para 19;

•

both defendants failed to take reasonable steps to ensure that if the group was to continue its existing operations, cash reserves were maintained at a level that would ensure that the companies in the group were able to pay their debts as and when they fell due: "claim 24(d)", found in paras 24(d) and Particulars para 19 (Mr Rich); para 35(c) and Particulars para 33 (Mr Silbermann).

[110] While the Particulars document provides some particulars of the pleaded allegations on these matters, it does not refer to ASIC's evidentiary case, but only specifies the steps that each defendant should, according to ASIC's pleading, have taken during the specified period. Therefore in respect of these allegations, there is no expressly pleaded or particularised factual matter that is said to have to have triggered the obligation to take the steps that ASIC says the defendant failed to take.

[111] However, according to the statement of claim (paras 26 and 36), the conduct of each defendant pleaded in claims 24(a), (b), (c) and (d) contravened s 180 in the circumstances described in certain specified paragraphs of the statement of claim, including para 12 which asserts that One.Tel's financial position occurred as a result of the circumstances particularised in the schedule, and also the paragraphs that allege that each defendant knew or ought to have known of the January, February, March and April circumstances as set out in the schedule. Consequently, proof of the pleaded contravention involves proof of the matters pleaded in the schedule.

2.1.7.3 Mr Rich's alleged contravention in failing to ensure that One.Tel employed a properly qualified and experienced finance director

[112] As mentioned above, the statement of claim alleges that Mr Rich failed to take reasonable steps to ensure that One.Tel employed a finance director with the financial qualifications, skills and experience reasonably appropriate for a person occupying that position and having the responsibilities pleaded in the statement of claim: para 25 and Particulars 20-22. As with the para 24 claims, para 26 alleges that Mr Rich's conduct pleaded in para 25 constituted a contravention of s 180 in the circumstances described in various specified paragraphs, including para 12 and the paragraphs pleading that Mr Rich knew or ought to have known of the January, February, March and April circumstances. In this way, proving the matters alleged in the schedule is an element of proving the pleaded contravention.

2.1.7.4 Mr Rich's alleged contraventions with respect to disclosure to the market

[113] The statement of claim alleges (para 37) that Mr Rich, as joint managing director, caused or permitted to be made, and did not subsequently correct or modify, the following public statements by One.Tel about its financial position and performance:

(a)

27 February 2001 -- "One.Tel is focused and on track to becoming cash positive as forecast by June 2001";

(b)

4 April 2001 -- "The company ... is tracking very well against forecasts that were initially made by management in August 2000 ... [The company] is fulfilling the promises made to our shareholders: to turn the business cash positive and have a cash balance of $75 million by [30 June 2001]".

[114] The pleading asserts that there was no reasonable factual basis for saying at 27 February that One.Tel was on track to being in a position by June in which, as a result of normal trading operations, monthly group receipts would exceed monthly payments, or for saying on 4 April that the One.Tel Group would have a cash balance of $75 million by 30 June and was tracking very well against forecasts initially made by management in August 2000 (paras 40, 42 and 46), and that Mr Rich was aware of this or ought to have been aware (paras 43, 44, 47, 48). In giving particulars of the allegation that there was no reasonable factual basis for the specified statements in the public announcements, the statement of claim says "see the Schedule". Consequently proof of One.Tel's financial condition as asserted in the schedule is part of the proof of Mr Rich's pleaded contravention with respect to the February and April announcements.

[115] In addition to alleging contraventions arising from what was said to the market, the statement of claim alleges a contravention by Mr Rich arising out of his failure to take reasonable steps to ensure that One.Tel notified the ASX of the January, February, March and April circumstances: paras 52, 53 and 55. To establish this contravention it is necessary to prove the financial condition of One.Tel as set out in the schedule and that Mr Rich knew or ought to have known of those matters.

[116] Consequently, the establishment of the pleaded contraventions relating to misleading disclosure to the market in the February and April public announcements, and failure to make disclosure of the company's true financial condition to the market, requires proof of the matters alleged in the schedule.

2.1.8 Relief sought

[117] The statement of claim seeks orders under the civil penalty provisions of Pt 9.4B, namely declarations of contravention of s 180(1), disqualification orders and compensation orders, and also costs orders: paras 57, 1-16, 30-39. For the purpose of establishing a claim for compensation, the statement of claim makes contentions about the loss and damage suffered by One.Tel as a result of the contraventions (paras 58-59). An amount of compensation of up to $92 million is claimed.

2.1.9 ASIC's particulars document

[118] Two general points should be made about the Particulars document filed in support of the statement of claim, for the purpose of understanding ASIC's pleaded and particularised case. First, many of the particulars are given in abbreviated form by cross-references to other particulars. Thus, while extensive and specific particulars are given in respect of some of the claims made against Mr Rich and Mr Silbermann about the January circumstances (para 20, particularised in Particulars 14 and 15 (Mr Rich); para 31, particularised in Particulars 28 and 29 (Mr Silbermann)):

•

the particulars concerning the corresponding claims in respect of the February circumstances (Particulars 21 (Mr Rich) and Particulars 30 (Mr Silbermann)) are given in short form by means of an allegation that if the defendant was unaware of the February circumstances and therefore did not ensure that the board was aware and did not make the necessary recommendation, he should have taken but failed to take the steps set out in the particulars to para 20 (Mr Rich): para 31 in the case of Mr Silbermann;

•

the particulars of the claims in respect of the March and April circumstances merely repeat the particulars given for the February circumstances, save for the change of month: Particulars 17 and 18 (Mr Rich), and Particulars 31 and 32 (Mr Silbermann);

•

the particulars of the paras 24/35 claims (Particulars 19 (Mr Rich) and Particulars 33 (Mr Silbermann)) simply say that ASIC relies on the failure of the relevant defendant to take the steps set out in the particulars to paras 20-23 (Mr Rich)/paras 31-34 (Mr Silbermann).

[119] This "short-form" approach gives rise to some issues of interpretation of the particulars, especially with respect to the paras 24/35 claims.

[120] Particulars 14 (Mr Rich)/Particulars 28 (Mr Silbermann) give an extensive list of inspections and inquiries that the defendant should have made, if he was unaware of the relevant month's circumstances. Those particulars appear to be relevant to claim 24(b) (the claim that the defendant failed to take reasonable steps to ensure that all material financial information was provided to the board), but as a matter of interpretation of their language, the particulars probably do not relate to claims 24(a) (failure to monitor and assess the financial position), 24(c) (failure to establish and maintain systems for information flow) and 24(d) (failure to maintain cash reserves).

[121] It is not easy to see how Particulars 15 (Mr Rich)/Particulars 29 (Mr Silbermann) can be said to be particulars of any of the claims made in paras 24/35. The claims in paras 24/35 are about failure to monitor management and properly assess One.Tel's financial position and material adverse developments, failure to take reasonable steps to ensure that all material information was provided to the board, failure (in the case of Mr Rich only) to take reasonable steps to ensure that there were adequate systems for information flow, and failure to take reasonable steps to ensure the adequacy of cash reserves. Particulars 15/29 seem to be separate claims, partly cutting across the claims in paras 24/35 and partly independent assertions of failure to do things which, according to ASIC, should have been done.

[122] Second, it seems that the Particulars document does not give any particulars at all of claims (a), (b) and (d). Particulars 14/28 apply only if the defendant was unaware of the relevant month's circumstances, whereas claims (a) and (b) plead contraventions apparently on the assumption that the defendant was aware of the month's circumstances (the alternative, that the defendant was not aware but should have been, is addressed in claim (c)). Claim (d) is the claim that the defendant failed to recommend that the group cease trading or appoint an administrator, whereas the particulars to the paragraphs of the statement of claim that contain subpara (d) apply only if the defendant did not make the necessary recommendation to the board.

[123] Although in my view the Particulars document was open to criticism for lack of clarity on the matters I have addressed, it was not attacked on that basis during the hearing and in the circumstances the court's role is to make such sense of it as it can.

2.2 The defences

[124] As will be seen from the above summary, some of the claims made by ASIC are against both Mr Rich and Mr Silbermann, but a few of them are made against Mr Rich alone. The defences are in identical terms with respect to the common allegations, but of course there are additional matters addressed by Mr Rich's defence. For convenience I shall refer to Mr Rich's defence alone, but the points I make apply, mutatis mutandis, to Mr Silbermann's defence. What follows here is an account of salient points in the defence, but it is not intended to be comprehensive. My summary is confined to allegations in the defence about the defendant's responsibilities and about the financial circumstances pleaded by ASIC in the schedule. Other matters of defence are dealt with where they arise in the body of the judgment.

[125] I note that in addition to purporting to answer the particular allegations in the statement of claim, the defence pleads some matters that are evidently intended to attract the "business judgment defence" in s 180(2) and (3), and also to provide a foundation for the defendants to be excused under s 1318: para 61. I shall deal with these matters in Ch 23 of this judgment.

2.2.1 The alleged responsibilities

[126] Mr Rich does not admit that his responsibilities were as pleaded by ASIC. As to the provision of information to directors, he contends that the other directors were obliged and entitled to form and act on their own views as to the information that they required in order to fulfil their duties, and in fact they historically gave directions as to their information requirements. The experience of the other directors and their knowledge and understanding of the business and financial position of the company and the telecommunications industry generally were also said to be relevant to an understanding of Mr Rich's responsibility to provide information to directors: para 7.

[127] Schedule A to the defence deals in some detail with the knowledge and understanding of One.Tel's business and financial position and the telecommunications industry, of Mr Packer Jnr, Mr Greaves, Mr Murdoch Jnr, Mr Adler, Mr Howell-Davies and Ms Kekalainen-Torvinen. In the case of each of those directors Sch A sets out matters evidently designed to show their experience in the telecommunications industry and their close involvement in matters giving them knowledge of the One.Tel business and its financial position.

[128] In the case of Mr Packer Jnr, for example, Mr Rich refers to his involvement as a significant shareholder in One.Tel from around March 1995; his discussions and negotiations with prospective financiers, equity investors, potential strategic business partners, major suppliers, research analysts and government ministers and agencies; his involvement in the period from June 2000 to May 2001 in One.Tel's business planning processes both directly and through his representatives including Mr Kleemann; the monitoring of a One.Tel's financial position on his behalf by Messrs Kleemann, Miller and Green from October 2000 to May 2001; the almost daily contact he had from around September 2000 to May 2001 with One.Tel's senior management; and his participation from around October 2000 to May 2001 in numerous internal presentations and reviews by senior management of various aspects of the business, financial position and strategy of the group.

[129] In the case of Mr Murdoch Jnr, Mr Rich's defence asserts his involvement in discussions and negotiations with Sonera from around August 2000 about a prospective strategic investment in One.Tel, regular contact with senior management from early 1999, participation through his representatives Mr Hartigan and Mr Macourt in internal presentations and reviews by senior management of One.Tel about aspects of the business, financial position and strategy of the group, and the monitoring of the financial position and outlook of One.Tel on his behalf from October 2000 by Messrs Kleemann, Miller and Green.

[130] The defence also says that Mr Rich's responsibilities, so far as they related to the oversight of others, were to be understood having regard to the demands of the business and a sensible division of labour and responsibilities among senior managers, and his entitlement properly to delegate to other officers and rely on their integrity, skill and competence.

2.2.2 The defence to the schedule

[131] Schedule B to the defence is a detailed response to the schedule to the statement of claim. Without intending to be comprehensive, I shall note certain significant matters raised in the defence.

[132] As to the alleged systematic "management" of cash and creditors (S1):

(i)

the pattern of cash movements showing high cash at the end of the month was the normal pattern of receipts and payments for One.Tel;

(ii)

the directors were aware that month-end cash balances shown in the flash reports and the board papers were simple aggregations of the actual cash balances in group accounts at the relevant date.

[133] As to cash and creditors for January (S3-S7):

(i)

to the knowledge of directors, cash was not reported on a "cash available to pay creditors" basis, but simply as actual or anticipated aggregate cash balances in group bank accounts on the relevant date, and no director ever asked for "cash available to pay creditors" figures;

(ii)

to the knowledge of directors:

•

cash was managed on a group basis and deployed within the group as needed,

•

there were intercompany debts owing by non-Australian group companies, and

•

it was part of the business plan that any excess cash generated in the UK and the Australian fixed wire/service provider business was to be used to fund Next Generation until it became cash positive;

(iii)

as at 31 January 2001, the difference between actual and forecast group cash balances was primarily referable to timing differences in the receipt of expected billings as a result of disruption to the billing system of the Australian operations, disruptions that were referred to and discussed in the board meetings of September, November and January and referred to in the ASX release on 1 February 2001;

(iv)

as at 15 January 2001, and during February, One.Tel had arrangements or a practice in place with the ANZ Bank according to which balances in group accounts would be viewed by the bank on a consolidated basis, and customer receipts for the Australian operations would be deposited in a separate account which was cleared to zero on a nightly basis by transfer of funds to the main cheque account;

(v)

figures for "past due" trade creditors in Annex B to the schedule included amounts for creditors that were not in fact beyond normal payment terms, amounts subject to bona fide disputes, and amounts awaiting finalisation of agreed vendor financing arrangements (see below).

[134] This last point, which became important during the hearing, was elaborated more fully in para S5(c), which should be set out in full:

S5. The first defendant denies the allegation made in paragraph S5 and further ...:

(c)

Says, in relation to amounts for allegedly "overdue" creditors generally, that:

(i)

Until around April 2001, the international telephone carriers with whom the One.Tel Group did business, as a matter of long-established practice, did not insist on strict trading terms, but allowed up to 180 days for payment as the normal pattern of trading;

(ii)

Consistent with normal industry practice in the telecommunications industry at all material times, it was the practice of the One.Tel Group to withhold payment from telephone carriers with whom it did business in circumstances where there were billing or service disputes with those carriers, pending the resolution of those disputes and it was the practice of the carriers concerned to acquiesce in this by continuing to provide service notwithstanding the non-payment of the amounts withheld;

(iii)

It was the normal practice of the One.Tel Group to defer payment of suppliers until the proper supply of the goods or services in question was confirmed internally by the responsible manager;

(iv)

It was the normal practice of the One.Tel Group to defer payment of suppliers with whom there was a billing or service dispute pending resolution of that dispute;

(v)

It was the normal practice of the Australian operations of the One.Tel Group to monitor commissions payable to dealers for obtaining subscribers and conduct periodic reviews of the compliance by dealers with contractual guidelines for the payment of those commissions and to withhold payment of commissions in circumstances of non-compliance with those guidelines;

(vi)

The aforementioned practices were known to the directors of One.Tel Ltd.

[135] As to cash and creditors for February (S8-S24), the defence makes the same points, mutatis mutandis, as for January, and then addresses some additional matters. The defence says that the change in forecast cash usage for February from the September forecast to the January forecast was primarily a result of an unexpected increase in collections of trade debtors as a result of a catch up in billings that had been delayed by unexpected disruption to the billing system of the Australian operations in late 2000: S12(e).

[136] Actual cash usage in February was said (at S13(c); see also S17(d)) to have differed from the forecasts of September, November and January primarily as a result of:

(i)

timing differences in the receipt of expected billings as a result of disruption to the billing systems of the Australian operations during late 2000 and February 2001;

(ii)

a then unidentified shortfall in billings as a result of deficiencies in the billing data received by those operations from Telstra and Optus;

(iii)

the failure of the mediation device provided to One.Tel by Lucent; and

(iv)

the installation and integration into the billing systems and the network of the Australian operations of new hardware and software from around late 2000.

[137] The defence also challenges ASIC's pleading about the $26 million transfer at the end of February, not admitting that Mr Weston expressed concern about the transfer or that Mr Werner or Mr Boaden objected, and contending that the matter was not a material fact in relation to One.Tel's financial position in February: S21.

[138] As to cash and creditors for March (S25-S34), the defence again makes the same points, mutatis mutandis, as for January, and then addresses some additional matters. The difference between the actual group cash balance reported to the board at the March board meeting and the group cash balances which had been forecast in board papers in September, November and January was said (at S26(g); and see S29(f), S29A(c), S31(e), S32(e)) to be primarily referable, in substance, to the same matters as specified for February at S13(c), extracted above.

[139] As to cash and creditors for April (S34A-S38A), the defence again makes the same points, mutatis mutandis, as for January, and then addresses some additional matters. The defence claims (S36(g)) that as at 30 April 2001, the difference between the actual group cash balance reported to the board and the group cash balances which had been forecast in the board papers of September, November, January and March was primarily referable to:

(i)

Timing differences in the receipt of expected billings as a result of disruption to the billing systems of the Australian operations of the One.Tel group;

(ii)

Resultant disruptions to the timing of collection of trade debtors;

(iii)

Disruptions to billings and collections by the UK operations of the One.Tel Group flowing from the theft of certain computer components during April 2001;

(iv)

A shortfall in expected billings as a result of deficiencies in the billing data received by the Australian operations of the One.Tel Group from Telstra and Optus;

(v)

A shortfall in expected gross margins in the fixed wire business of the Australian operations of the One.Tel Group which was undetected until April 2001 as a result of deficiencies in billing data provided by Telstra and Optus, the failure of a mediation device provided to One.Tel by Lucent and the installation and integration into the billing systems of the Australian operations of the One.Tel Group of new hardware and software from around late 2000; and

(vi)

An unforeseen tightening of the credit terms on which European operations of the One.Tel Group had historically been doing business with telecommunications carriers in Europe.

[140] It will be seen that some of these matters correspond with the allegations in the defence for February (S13(c)), but (iii), the first part of (v), and (vi) are new for April, and the shortfall in (iv) is no longer "then undetected".

[141] In answer to ASIC's allegation in the statement of claim that at 30 April, One.Tel had insufficient cash to pay its creditors, the defence identifies at S38A(c)(iii) various resources said to be available to the company within the Australian operations at that time. One matter listed there, about which there was considerable evidence at the trial, is the negotiations with Optus for the sale of the One.Tel mobile subscribers, and another is the negotiations with Telstra for the sale of the local call fixed wire subscribers.

[142] As to EBITDA and debtors, the defence contains an extensive pleading about the adequacy of the provision for doubtful debts. This matter is dealt with in Ch 19, where the pleading is summarised and discussed.

[143] In answer to ASIC's allegation (S43) that from at least January 2001, the fixed wire/service provider business traded at an EBITDA loss (particularised in Annex E), the defence pleads that the documents from which the management accounts figures in Annex E were taken include draft management accounts for the fixed wire/service provider business, rather than final management accounts for that business, and further that no management accounts were prepared for the month of April prior to 17 May 2001 when Mr Rich left: S43.

[144] Another matter to be noted about EBITDA relates to Ms Ashley's margin analysis, about which there was a substantial amount of evidence at the trial. The defence asserts (S43(d); S44B(b); S44C(a)) that there was a shortfall in expected gross margins in the fixed wire business of the Australian operations that was undetected until April 2001 as a result of:

(i)

deficiencies in billing data provided by Telstra and Optus;

(ii)

the failure of a mediation device provided to One.Tel by Lucent; and

(iii)

the installation and integration into the billing systems of the Australian operations of the One.Tel Group of new hardware and software from around late 2000.

[145] Para S44A of the statement of claim asserts that the EBITDA Group losses as pleaded in the statement of claim did not take account of the cost of acquisition of customers of Next Generation (principally related to the cost of handsets) in an amount of approximately $30 million over the period from 1 January to 30 April, and says that those costs were capitalised and amortised over the life of the subscribers' contracts rather than being treated as a cost of sales and debited in full to the profit and loss account. The defence says (S44A) that the only material cost of acquisition of customers of the Next Generation business that was capitalised was the cost of handsets. The defence also admits that the policy of the group was to capitalise the costs of handsets and amortise them over the life of the subscriber contract rather than to treat them as costs of sales, but says that the policy was noted in the published financial statements for the year ended 30 June 2000, reviewed by ASIC in April 2000, reviewed by Ernst & Young in March 2000 and discussed at the board meeting on 26 May 2000.

[146] As to ASIC's allegations about misleading content of flash reports, the defence says that the flash reports did not purport to state "the actual EBITDA performance of the group", but in fact contained a forecast of the EBITDA performance of the group during the period to which they related, based on the available financial information at the date of preparation of the report, and this was understood by the directors: S44D(b). Again, it is contended that some of the figures used by ASIC were taken from draft management accounts for the fixed wire/service provider business rather than final management accounts, and (at S44D(e)):

To the knowledge of the directors, the management accounts were normally prepared at a later point in time than the flash reports, on the basis of different financial information, so that differences between the figures in the flash reports and those in the management accounts were a normal and expected incidence of the basis on which they were prepared.

[147] Paragraph S46 of the statement of claim alleges that the figures for the fixed wire/service provider business of the Australian operations were drawn from modified budget data and did not reflect the actual financial performance of that business unit. The defence admits that the figures for the fixed wire/service provider business unit were prepared in part on the basis of standard cost assumptions taken from the applicable budgets, but claims that those standard cost assumptions had been modified and verified over time by comparison with actual costs figures: S46(b) and (c).

2.3 Some issues of pleading

[148] The defendants frequently complained during the hearing that ASIC was departing from its pleaded case. Their basic contention was that, after the court ruled that a large portion of Mr Carter's principal report should be excluded from evidence, ASIC manufactured a fundamentally different case, and that whereas its case based on Mr Carter's evidence was pleaded, the new case was outside the pleadings. ASIC denied that its evidence departed from the pleaded case and confirmed that its case was as pleaded in the statement of claim.

[149] It is plain from my outline that the non-disclosure and withholding of information alleged against the defendants concerns information about the actual financial condition of the One.Tel Group and its component parts in the period from January to April 2001. The principal alleged wrongdoing is failing to inform the directors of the facts of the January, February, March and April circumstances. There is no allegation, for example, of failure to inform the board of some other fact not specified in the schedule, such as the level of non-UK European creditors. Nor is there an allegation that the defendants failed to inform the board about some critical but implausible assumptions they made for the purpose of their forecasts, such as (on ASIC's case) the assumptions that underlay the cash flow spreadsheet 2403C.xls, on which the forecasts for the March board were based. If failure to inform of these sorts of matters is an allegation of wrongdoing against the defendants, it is outside the pleading.

[150] On 28 June 2006 senior counsel for ASIC was cross-examining Mr Rich about the $40 million of unbilled call data referred to in the March board papers, and about the way the allegedly missing data had been taken into account in the spreadsheet 2403C.xls, upon the basis of which management's cash flow forecast to the end of June was presented to the board. It was put to Mr Rich that the board had been misled in various ways: see, for example, T 11488, 11498. Senior counsel for the defendants objected to such questions and to the line of questioning, not on the ground of relevance but on the ground that the court should exclude the evidence under s 135 of the Evidence Act. He submitted that to allow the line of questioning to which objection had been taken would unfairly prejudice the defendants. He said that, in circumstances where no such contentions had been pleaded or particularised by ASIC, and evidence had been adduced from some of ASIC's witnesses about this aspect of the board meeting without any suggestion being made by ASIC that it wished to contend that the board was in any way confused or misled about it, ASIC's witnesses had come and gone without the defendants being able to cross-examine them about ASIC's new allegations. In support of this submission, the defendants later provided a written submission, marked DS 103, referring to the evidence adduced in cross-examination of ASIC's witnesses in relation to the discussion at the March board meeting of management's report about the $40 million of unbilled data.

[151] I ruled against the objection and allowed the questions to continue, and the defendants asked me to provide reasons. By the time those reasons were prepared there had been 12 further objections, each on the ground that a line of questioning was outside ASIC's pleaded case, and all unsuccessful. The subjects of these lines of questioning included the $40 million of unbilled data and spreadsheet 2403C.xls, and also a miscellaneous group of topics about such things as the UK forecast EBITDA to June EBITDA, Mr Weston's bonus, One.Tel's claim against KPN in the Netherlands, and Mr Werner's email to Mr Silbermann of 26 March 2001 attaching cash flow figures. My published reasons for judgment (ASIC NSWSC 712 (14 July 2006)) dealt with all 13 rulings. Since that time there have been similar objections, also unsuccessful. On each occasion I invited senior counsel for ASIC to state the relevance of the line of questioning before I made my ruling.

[152] The matters of alleged fact that I addressed in my judgment of 14 July 2006 and in subsequent rulings disposing of the same objection have been allowed into evidence, and therefore the question of relevance for the purpose of s 56 of the Evidence Act and the question of discretionary exclusion under s 135 had been resolved. Once a matter has been received into evidence, it is evidence in the proceedings and therefore is available for all purposes, unless the court limits the use to be made of the evidence under s 136: Silvia v Cmr of Taxation [2001] NSWSC 562; ASIC v Vines (2003) 48 ACSR 282 ; [2003] NSWSC 995, especially at [22]; ASIC v MacDonald (2008) 68 ACSR 126 ; [2008] NSWSC 995. For example, any of the matters that I have received into evidence can be used in final submissions to challenge the credibility of a witness. But this is a proposition about the law of evidence, and it does not exclude the possibility that some other principle outside the law of evidence may limit the use to which the evidence may be put. Specifically, the cases do not establish that evidence, once admitted, may form part of a submission in support of an unpleaded case. Therefore, notwithstanding the rulings on admissibility that I made in the course of the hearing, it has been my expectation that in final submissions the defendants would raise again the question whether ASIC was seeking to present to the court a new case that was outside its pleading.

[153] ASIC's written submissions in chief (APS) did not purport to answer the objections that the defendants had raised during the hearing on this matter, and did not express tight correlations between submissions and pleaded allegations. In their written submissions in chief the defendants developed at length the assertion that ASIC's case was outside the pleaded statement of claim (see especially DPS118-149), but their submissions did not deal specifically and in a co-ordinated way, in a single place, with the various aspects of ASIC's evidentiary case that were said to amount, when put together, to a new case. The defendants also contended that ASIC's written submissions in chief were not clearly enough correlated to its pleaded allegations: DS139 and following. They submitted that it should not be up to the court or the defendants to comb their way through hundreds of pages of written submissions to try to identify where the pleaded allegations might have been dealt with: DS145.

[154] The issues raised by the defendants were important issues and I formed the view that I needed the assistance of additional submissions before I would be able to deal with them. I gave directions requiring the defendants to provide more specificity about the particular submissions said by them to be outside ASIC's pleaded case, and for ASIC to provide submissions in reply that would correlate the submissions challenged by the defendants to the pleaded statement of claim. The defendants then supplied a schedule of Unpleaded Allegations, which I marked as DS109. DS109 contains a table identifying 62 submissions by ASIC that are said to be matters that should have been but were not pleaded. ASIC responded by providing a lever-arch folder of "Pleading Submissions in Reply" (ASIC's pleading submissions) comprising written submissions addressing matters of principle and replying point by point to DS109, together with a schedule of cross-references from its submissions in chief to the statement of claim and a schedule of cross-references from the statement of claim to its submissions in chief.

[155] By the time the defendants' submissions in chief, DS109 and ASIC's pleading submissions were in, it was evident that adjudication of the issues would require as deep and detailed an understanding of the evidence as I could achieve, and it was also evident that nothing would be gained in terms of saving time and cost for the parties or the court by ruling on the pleading issues in advance of my final judgment. Consequently my decision and reasoning on the pleading issues are set out here, in the final judgment.

[156] In my view, ASIC's pleading submissions constitute a complete answer to the defendants' complaint that ASIC had not attempted to correlate its submissions to the statement of claim. ASIC supplied its schedules correlating the statement of claim to its submissions in chief on 26 March 2007, giving the defendants ample time to deal with that information in submissions (in particular, their oral submissions) before the case closed on 21 August 2007. But questions remain as to:

•

the correct principles to apply when an allegation is made that a model litigant such as ASIC has presented a civil penalty case that is outside its pleading and particulars;

•

whether, considered individually, any of the 62 matters specified in DS109 are outside the pleaded and particularised case; and

•

if so, whether the matters that are outside the pleaded and particularised case, considered together, amount to a new case that should have been but was not pleaded and particularised.

2.3.1 Some points of principle about pleading

[157] This case commenced in September 2004, before the commencement of the Civil Procedure Act and the Uniform Civil Procedure Rules (the UCPR), which began in August 2005, when the case was under way but certainly not completed. The effect of Sch 6, Pt 2, paras 5 and 10 is that the Act and the UCPR came to apply to the proceedings from the date of commencement of the legislation, effectively as if they had always applied. In any event, there is no substantial difference between the old Supreme Court Rules and the UCPR on matters of pleading in this court. For convenience I shall refer only to the relevant provisions of the UCPR.

[158] The following propositions seems to me to be uncontroversial:

(A)

As to pleadings:

(a)

a properly pleaded statement of claim performs the functions of briefly and explicitly stating the material factual allegations which support the claim (Ritchie's Uniform Civil Procedure NSW, LexisNexis looseleaf, [14.2.10]), thereby:

(i)

ensuring the basic requirement of procedural fairness that a party should have the opportunity of meeting the case against him or her: Banque Commerciale SA, En liquidation v Akhil Holdings Ltd (1990) 169 CLR 279 at 286 ; 92 ALR 53 at 58 ; [1990] HCA 11 (Banque Commerciale), per Mason CJ and Gaudron J; Dare v Pulham (1982) 148 CLR 658 ; 44 ALR 117 ; [1982] HCA 70, per Murphy, Brennan, Wilson, Deane and Dawson JJ; MacDonald v ASIC (2007) 65 ACSR 299 ; [2007] NSWCA 304 at [47] (MacDonald), per Mason P; Re Robinson's Settlement; Gant v Hobbs [1912] 1 Ch 717 at 728, per Buckley LJ;

(ii)

defining the issues for decision: Banque Commerciale, at CLR 286; ALR 58 per Mason CJ and Gaudron J; Nowlan v Marson Transport Pty Ltd (2001) 53 NSWLR 116 ; 34 MVR 495 ; [2001] NSWCA 346 (Nowlan); ASIC v Loiterton [2004] NSWSC 172 (Loiterton);

(iii)

enabling the court to ascertain the facts forming the ingredients of the cause of action that has been dealt with in the proceedings (so that, for example, the matters subject to an issue estoppel can be identified: Blair v Curran (1939) 62 CLR 464 at 531 ; [1939] HCA 23 (Blair) per Dixon J);

(b)

generally, relief is confined to that available on the pleadings, securing the basic requirement of procedural fairness, and accordingly a case may be decided on a basis different from that disclosed by the pleadings only if the parties have deliberately chosen some different basis for the determination of their respective rights and liabilities: Banque Commerciale at CLR 286-7; ALR 58-9 per Mason CJ and Gaudron J; Dare at CLR 664; ALR 121; New South Wales v Thomas [2004] NSWCA 52; Ingot Capital Investments Pty Ltd v Macquarie Equity Capital Market Ltd (2008) 252 ALR 659 ; 68 ACSR 595 ; [2008] NSWCA 206 at [424] (Ingot Capital) per Ipp JA, Giles and Hodgson JJA agreeing;

(c)

there can be no suggestion that the parties have chosen a different basis for determination of this case, for ASIC has consistently maintained that the statement of claim constitutes its pleaded case (see pleading submissions, para 11), and the defendants have vigorously objected whenever they have detected what they regard as departures from the pleaded case;

(d)

the statement of claim must contain only a summary of the material facts on which the party relies, and not the evidence by which those facts are to be proved, "material" meaning in this context material to the cause of action relied on: r 14.7 of the UCPR; Darbyshire v Leigh [1896] 1 QB 554; Darbyshire; Re Rica Gold Washing Co (1879) 11 Ch D 36 at 43, per Jessel MR; Kirby v Sanderson Motors Pty Ltd (2001) 54 NSWLR 135 ; [2002] NSWCA 44 at [20] (Kirby), per Hodgson JA (Mason P and Handley JA agreeing);

(e)

in a statement of claim, the plaintiff must plead specifically any matter that, if not pleaded specifically, may take the defendant by surprise, and that means that the material facts must be stated in such a way that the defendant can understand the materiality of the facts, that is how they are material to an asserted cause of action: r 14.14(1); Kirby at [20] per Hodgson JA (Mason P and Handley JA agreeing); as to the equivalent provision about pleading a defence, see Bright v Sampson and Duncan Enterprises Pty Ltd (1985) 1 NSWLR 346 at 350 per Kirby P and 353 per Samuels JA.

(B)

As to particulars:

(a)

the function of particulars is to define the scope of the evidence to be led at the trial, and to prevent surprise by giving the opposing parties sufficient information to enable them to know the nature of that evidence: Pilato v Metropolitan Water Sewerage & Drainage Board (1959) 76 WN (NSW) 364, at 365 per McClemens J; Spedding v Fitzpatrick (1888) 38 Ch D 410 at 413-14 per Cotton LJ; National Starch Co v Robert Harper & Co Pty Ltd [1906] VLR 8 at 12 ; (1905) 11 ALR 335 at 336 per Hodges J; Miller v Miller Auto Body Co Ltd (1922) 39 WN (NSW) 201 at 203 per James J; Grollo & Co Pty Ltd v Hammond (1977) 16 ALR 123 at 126 per Northrop J; Commercial Bank of Australia Ltd v Thomson (1964) 81 WN (Pt 1) (NSW) 553 at 557-8 per Walsh J (with whom Wallace J agreed); Ellis v Grant (1970) 91 WN (NSW) 920 per Meares J; Ritchie, op cit, at [15.1.10];

(b)

a pleading must give such particulars of any claim as are necessary to enable the defendant to identify the case that the pleading requires him or her to meet: r 15.1(1) of the UCPR;

(c)

the particulars to be given of a pleading that alleges negligence or breach of statutory duty (and hence, by analogy, a statutory cause of action under s 180 in civil penalty proceedings brought by ASIC) must state the facts and circumstances on which the party pleading relies as constituting the alleged negligent act or omission or the alleged breach of statutory duty, and must do so separately in respect of each alleged negligent act or omission or breach, though it is not necessary for the particulars to define the cause of action (r 15.5 of the UCPR; Anchor Products Ltd v Hedges (1966) 115 CLR 493 at 499 ; [1967] ALR 421 at 424 ; [1966] HCA 70 per Windeyer J; McCormack v Gilchrist, Watt & Sanderson Pty Ltd [1962] NSWR 462 at 464 the Richardson J; Ivkovic v Australian Iron & Steel Ltd [1963] SR (NSW) 598 per Sugerman, Manning and Else-Mitchell JJ; Ritchie, op cit at [15.5.5]).

[159] The rules of court regarding pleadings and particulars can be dispensed with by the court under s 14 of the Civil Procedure Act, if the court is "satisfied that it is appropriate to do so". Section 14 was used to grant partial dispensation from pleading requirements of the rules because of the defendant's penalty privilege, in MacDonald. More generally, departure from the pleaded issues has been said to be a matter for discretion of the trial judge (Ingot Capital, at [425] per Ipp JA), having regard to the interests of justice including, in particular, procedural fairness (Ingot Capital, at [359] per Ipp JA). The courts had power to grant a dispensation from compliance with strict pleading requirements well before the introduction of the Civil Procedure Act, and they exercised that power having regard to the justice of the particular case. As Collins MR said in Re Coles & Ravenshear [1907] 1 KB 1 at 4:

Although I agree that a court cannot conduct its business without a code of procedure, I think that the relation of rules of practice to the work of justice is intended to be that of handmaid rather than mistress and the court ought not to be so far bound and tied by rules, which are after all only intended as general rules of procedure, as to be compelled to do what will cause injustice in the particular case.

[160] For more modern Australian authority on the considerations of justice, see Hillier v Lucas (2000) 81 SASR 451 ; [2000] SASC 331 at [220]-[221] per Lander J, Duggan and Bleby JJ agreeing; Minister for Immigration & Multicultural Affairs v B (2000) 105 FCR 304 ; [2000] FCA 930 per Wilcox J; Rishmawi v Minister for Immigration and Multicultural Affairs [1999] FCA 611 per Kiefel J; Zoia v Secretary, Dept of Education, Employment and Workplace Relations [2009] FCA 661 per McKerracher J. It seems to me that in a case such as the present, when the issue is whether the court should dispense retrospectively with a failure by ASIC to comply with the rules (if such a failure is shown), that a crucial question will be whether the defendants have been significantly prejudiced by the non-compliance.

[161] The defendants did not submit that the statement of claim failed to comply with the requirements for pleading that I have set out above, but rather that its evidentiary case and submissions at the hearing have impermissibly strayed from the pleading and particulars, and to that extent its evidence should be excluded and its submissions disallowed. They do not make a submission about defective pleading, but about the undisciplined presentation of the pleaded case and the failure to give adequate particulars in compliance with r 15.1 of the UCPR. Principles about the purpose of pleadings and particulars are relevant to their argument because they show that pleadings and particulars are designed to permit the other party to be informed in a timely way of the case to be answered, and to avoid the element of surprise. The defendants submitted, in effect, that these objectives have not been achieved in the present case.

[162] The defendants referred to three matters that, they said, strengthen the argument for holding a plaintiff to its pleaded case (DPS [127]-[128]), relating to cases where:

•

the litigation is large and complex, with serious consequences for the defendants if the plaintiff succeeds, and the parties are required to incur very substantial costs, as in this case;

•

the plaintiff is a "model litigant", as ASIC is said to be; and

•

the courts have turned their face against any form of "trial by ambush".

[163] As to the size and complexity of litigation, in Edingbay Pty Ltd v Horwath (Vic) Pty Ltd [1999] VSC 317, Hansen J said (at [62]):

[62] The role and importance of the pleadings in identifying the issues which are in dispute and which require a determination is critical, and all the more so in massive litigation involving huge costs of the type which these parties have engaged in. It would conduce to mischief and possible scandal in my view if the true role of pleadings in the fair administration of justice was to be disregarded in circumstances such as the present.

[164] The kind of mischief that can arise in lengthy and complex commercial proceedings if the plaintiff is not held to its pleaded case was explained by Tamberlin J in Patrick v Capital Finance Pty Ltd [2003] FCA 206 at [10], as follows:

[10] The conduct of a lengthy complex commercial proceeding, such as the present, may, as the case is prepared and progresses, involve fine assessments as to what documentary or oral evidence ought to be adduced and as to whether or not to cross-examine a witness. If it is thought desirable to cross-examine, then decisions need to be made and instructions obtained as to the nature and extent of the cross-examination. In the effective presentation of a case, these matters are decided by the specific issues raised in the pleadings. If there are substantial variations in the issues raised, then the way in which the case is conducted may be significantly different. Often, but not always, at the close of proceedings, to permit significant amendments that raise issues which, practicably, cannot be effectively addressed, may cause substantial injustice to the other parties. This principle is of particular significance in the present case where the application to amend is sought at the close of evidence in circumstances where extensive amendments were permitted prior to and after the commencement of the hearing.

[165] Of course, in the present case there is no application by ASIC to amend its statement of claim; indeed, ASIC firmly asserts that its evidentiary case falls within the ambit of its pleaded case. But the mischief identified by Tamberlin J can arise where there is no application to amend, if the plaintiff seeks to adduce unexpected evidence or to make an unexpected argument outside its pleaded case after the defendants have set their strategy.

[166] As to the significance of the fact that ASIC as a government agency is expected to be a model litigant, in Scott v Handley (1999) 58 ALD 373 ; [1999] FCA 404 (Scott) the Full Federal Court (Spender, Finn and Weinberg JJ) noted that a respondent to the proceedings was an officer of the Commonwealth, and "as such he properly is to be expected to adhere to those standards of fair dealing in the conduct of litigation that courts in this country have come to expect -- and where there has been a lapse therefrom, to exact -- from the Commonwealth and from its officers and agencies". Their Honours later continued (at [45]):

[45] As with most broad generalisations, the burden of this fair dealing standard is best appreciated in its particular exemplifications in individual cases. The courts have, for example, spoken positively of a public body's obligation of "conscientious compliance with procedures designed to minimise cost and delay"...; and of assisting "the court to arrive at the proper and just result" ... And they have spoken, negatively, of not taking purely technical points of practice and procedure ...; of not unfairly impairing the other party's capacity to defend itself ...; and of not taking advantage of its own default ...

[167] As to concerns about "trial by ambush", the defendants do not contend that ASIC has deliberately concealed its true case or deliberately allowed the defendants to proceed in ignorance of it, but rather that it has not disclosed its true case in a timely fashion through its statement of claim and particulars, and consequently the defendants have been prejudiced because their conduct of the trial has been strictly on the basis of the pleaded case. They have referred to cases in which courts have expressed particular concern about the practice of "leaving footprints to be uncovered later in an attempt to say that a matter was always in issue": White v Overland [2001] FCA 1333 at [4] (White) per Allsop J; Pacific National (ACT) Ltd v Queensland Rail (2005) 215 ALR 544 ; [2005] FCA 535 at [47]-[49] (Pacific National) per Jacobson J; Nowlan at [28] per Heydon JA (with whom Mason P and Young CJ in Eq agreed). Concern about this practice extends to "footprints" in correspondence and also, as Jacobson J indicated in Pacific National at [49], the opening of the case. Presumably it also extends to interpretations of the evidence advanced in final submissions.

[168] In my view this is not case where ASIC can be fairly accused of "leaving footprints" to provide a foundation for subsequently contending that unpleaded matters are in fact in issue. As I have said, ASIC has always relied on the statement of claim as its pleaded case (subject to an application to amend with respect to non-UK European creditors, rejected in ASIC v Rich [2005] NSWSC 940), and the defendants have objected whenever they have detected what they regarded as deviation from the pleaded case. But the case law has a more general relevance: in civil penalty proceedings brought by a model litigant, the court should not allow the case to change shape during the trial without any proper reconsideration of the pleadings, if there is an identifiable risk of prejudice to the defendants in terms of having a fair opportunity to meet the case presented against them. In the words of Allsop J in White at [4]: "it should always be recognised that in the propounding of issues for trial the parties should take steps to ensure that all relevant parties to the dispute are cognisant of what the issues are".

[169] The correct approach to civil litigation is now a "cards on the table" approach and the "ambush theory of litigation" is dead, as Ipp JA said in Glover v Australian Ultra Concrete Floors [2003] NSWCA 80 at [60] (Glover), observations cited with approval by Jacobson J in Pacific National at [50], and by Bergin J in Loiterton at [39]; see also Nowlan at [21]-[32] (with which Mason P and Young CJ in Eq agreed). Loiterton deserves particular attention in the present case because it is a civil penalty case brought by ASIC, in which Bergin J referred to ASIC's duty of fairness to the defendants and the importance of ensuring that the prosecution case has clarity and is fair, all the more so because the proceedings are civil penalty proceedings: at [38]-[39].

[170] Consequently I accept the defendants' contention that their objection to ASIC's evidentiary case and final submissions is strengthened by the considerations that this is a particularly long and expensive hearing with serious consequences for them if ASIC succeeds, that ASIC is required to be a model litigant, and that they must be protected from "trial by ambush". I shall approach the more particular submissions of the parties with these matters in mind, though of course they do not dictate that the defendants' objections must succeed.

2.3.2 Evidentiary facts

[171] In answering the defendants' contention, ASIC submitted that the defendants had failed to take into account the well-recognised distinction between the material or primary facts that must be pleaded, and "evidentiary" facts that go to proving the primary facts and hence the pleading party's case, but are not, of themselves, facts to be pleaded: pleading submissions, [3]-[8]. According to ASIC, not only was it unnecessary for it to plead evidentiary facts, but if merely evidentiary facts had been pleaded, the pleading would have been embarrassing and the offending parts would have been liable to be struck out. Thus, in East-West Airlines (Operations) Ltd v Commonwealth (1983) 49 ALR 323 at 326 ; 57 ALJR 783 at 784, Dawson J struck out a substantial part of a statement of claim on the grounds that it pleaded immaterial facts that were at best merely evidentiary and at worst not relevant at all. The same approach can be seen in the earlier cases of Davy v Garrett (1878) 7 Ch D 473, especially at 483-5 per James LJ; Florins v Bank of Victoria Ltd (1891) 17 VLR 183, at 185 per Hodges J.

[172] The distinction between material or primary facts and evidentiary facts was explained by Lord Esher MR in Darbyshire at 557:

In the case of Philipps v Philipps (1878) 4 QBD 127 the distinction was pointed out between the material facts which it is necessary for a party to allege in pleading and to prove in order to support his case, which were called by Erle CJ allegata probanda, and the facts which are the evidence by which those material facts are to be proved ...

[173] The same distinction was taken up, in the different context of explaining the scope of issue estoppel, by Dixon J in Blair at 532, where his Honour distinguished between "evidentiary facts" and "ultimate facts which form the ingredients in the cause of action, that is, the title to the right established".

[174] Evidentiary facts, thus understood, are necessarily relevant facts for the purposes of admissibility. The evidence that is relevant in a proceeding, and therefore admissible, is evidence that, if it were accepted, could rationally affect (directly or indirectly) the assessment of the probability of the existence of a fact in issue in the proceeding: s 56 of the Evidence Act. The facts in issue are defined principally by the pleadings: see S Odgers, Uniform Evidence Law, 7th ed, Lawbook, New South Wales, 2006, at [1.3.80]. Therefore evidence that goes to proving, directly or indirectly, a material or primary fact that must be pleaded is necessarily relevant evidence for the purposes of admissibility, because the primary facts are necessarily facts in issue. Equally, evidence that goes to proving an evidentiary fact is also necessarily relevant evidence for the purposes of admissibility, for evidentiary facts are by definition matters that go to prove the primary facts and are therefore directly or indirectly relevant to a fact in issue.

[175] Consequently the distinction between primary or material facts and evidentiary facts is not a distinction going to relevance, but rather going to the principles that determine which matters of relevant evidence must be pleaded. Some of the submissions on the pleading issues seem to me to have mistakenly strayed into issues of relevance, disregarding this distinction.

[176] Ritchie, op cit at [14.7.10], gives some examples of the distinction between primary and evidentiary facts. One example is out of court admissions: the pleader should allege the fact that has been admitted, which is the primary fact, not the fact that the admission was made, which is a matter of evidence. Another example arises where a party is a trustee of property: Ritchie says it is generally sufficient to plead the allegation in those simple terms without setting out the facts that give rise to the trust, although particulars may be necessary.

[177] I accept ASIC's submission, to the extent that it justifies not pleading those matters challenged by the defendants that are properly characterised as evidentiary facts. It seems to me, however, that ASIC's submission would not exonerate it from providing timely particulars of matters which, though evidentiary facts, would constitute particulars that are necessary to enable the defendants to identify the case they are required to meet: r 15.1(1) of the UCPR. Nor does the distinction between primary and evidentiary facts help ASIC to rebut the defendants' complaint to the extent that it relates to ASIC's submissions, as opposed to matters of fact.

2.3.3 Permissible response to a matter raised by way of defence

[178] ASIC submitted that a plaintiff is entitled to attack in cross-examination evidence going to matters raised in a defence, by putting to the witness matters not pleaded in the statement of claim. I dealt with this proposition in my judgment of 14 July 2006 (ASIC NSWSC 712), at [8]-[9], as follows:

[8] First, the plaintiff is entitled to attack in cross-examination evidence going to matters raised in a defence, though [the matter put to the witness is] not [pleaded] in the statement of claim. Take a hypothetical case where the plaintiff alleges that the defendant's business was in a poor financial condition in specified ways and that the defendant breached some duty by failing to disclose the true financial position. Suppose that the defence is that the plaintiff has overlooked a special bank account containing cash reserves, which, if taken into account, show that the financial condition of the business is healthy. It would be ludicrous to expect the plaintiff's statement of claim to anticipate the defendant's contention and expressly negate it in the statement of claim. It is not a matter of requiring the plaintiff to inform the defendant of the case against him, because the matter of the bank account has been raised by the defendant in his defence. If, at the trial, the defendant adduces evidence about the special bank account and the plaintiff attacks that evidence in cross-examination, the plaintiff is not departing from his pleaded case, but is rather addressing an allegation raised and made relevant by the defence.

[9] Secondly, where the defendant adduces evidence purporting to answer the plaintiff's pleaded case, the plaintiff is entitled to challenge that evidence in cross-examination even if particular parts of the cross-examination, viewed in isolation, might suggest a different, unpleaded case. Suppose, in our hypothetical example, the plaintiff challenges the defendant's evidence about the special bank account by seeking to have the defendant admit, in cross-examination, that the bank account in fact belonged to a different business operated by the defendant's wife, negligently treated by the defendant as an asset of his business. Viewed in isolation, the cross-examination might appear to be directed to showing that the defendant engaged in misleading conduct by representing that an asset of another business was an asset of his business. But when the context is understood, it can be seen that the cross-examination is permissible because it is directed against the defence to the pleaded case. On the other hand, it would not be permissible for the plaintiff, in final submissions, to rely on this evidence to make out a misleading conduct case that he had not pleaded (assuming no grant of leave to amend).

[179] I do not resile from my judgment of 14 July 2006. There can be no obligation to plead such matters in the statement of claim, since they are made relevant to the proceedings by a document created after the statement of claim by the other side to the litigation. The obligation of a party to provide particulars relates to that party's pleading, and therefore there can be no obligation to give particulars of a matter that becomes relevant because of the pleading of another party.

[180] The question remains, whether there is any obligation for a plaintiff to give advance notice of a line of cross-examination of a defendant that is to be based on untendered documents relevant to a defence, having regard to the current "cards on the table" approach to litigation. If there is, then the plaintiff will be deprived of the opportunity to test the defendant's evidence and credit in the time-honoured way, by asking questions about the witness's recollection and then confronting him or her with documents contradicting that recollection.

[181] In my view, it is generally permissible for the plaintiff's counsel, without notice to the defendant, to raise unpleaded and unparticularised matters of fact in the course of cross-examining the defendant, where the matters raised are relevant to an issue put forward by way of defence. To take the example given in my judgment of 14 July 2006, once the defendant has pleaded the existence of the special bank account to answer the plaintiff's case that the defendant's business is in a poor financial condition, it is open to the plaintiff to cross-examine the defendant about matters of fact purporting to show that the special bank account belonged, say, to the defendant's wife, and that the defendant misleadingly represented it as an asset of his business. It is open to the plaintiff to tender such evidence, if the witness identifies it or its provenance is otherwise established, and to submit that the court should accept the tendered evidence, and consequently disregard the special bank account for the purpose of assessing the financial condition of the defendant's business, because it is not an asset of that business.

[182] I take this view because it seems to me to flow from the application, to proceedings in a court, of the rules of natural justice.

2.3.4 Requirements of procedural fairness as to cross-examination on unpleaded matters

[183] Generally speaking, the rules of natural justice recognise the entitlement of a party "to a fair opportunity to correct or contradict any relevant material prejudicial to them": Kioa v West (1985) 159 CLR 550 at 569 ; 62 ALR 321 at 334 ; [1985] HCA 81 (Kioa), per Gibbs CJ; at CLR 615; at ALR 369-70 per Brennan J. That proposition does not automatically require that every tribunal that is subject to the rules of natural justice must permit cross-examination. For example, in National Companies and Securities Commission v News Corp Ltd (1984) 156 CLR 296 ; 52 ALR 417 ; 8 ACLR 843 ; [1984] HCA 29 (News Corp), the commission was required by statute to observe the rules of natural justice, but the High Court did not require it to permit cross-examination by News of all witnesses. In the words of Gibbs CJ, the rules of natural justice did not require the commission to proceed as though it were conducting a trial: at CLR 314; ALR 431; ACLR 857. That suggests that a higher standard is required in the case of the trial.

[184] If the rules of natural justice do not necessarily require that cross-examination be permitted, then a fortiori they do not necessarily entitle a party to cross-examine on undisclosed documents. But as the News Corp case shows, the content of the rules of natural justice must be moulded to the circumstances, having regard to the nature of the jurisdiction or power exercised and the statutory provisions governing its exercise: see News Corp at CLR 311-2; ALR 427-8; ACLR 853-4, per Gibbs CJ; Kioa at CLR 582-5; ALR 344-7 per Mason J; Applicant Veal of 2002 v Minister for Immigration and Multicultural and Indigenous Affairs (2005) 225 CLR 88 ; 2 ALR 411 ; 87 ALD 512 ; [2005] HCA 72 at [26] per Gleeson CJ, Gummow, Kirby, Hayne and Heydon JJ. While natural justice does not require a body such as a corporations commission, in the course of conducting an investigation, to permit a witness to cross-examine other witnesses, compliance with the rules of natural justice in the case of a court conducting a hearing that will lead to the determination of legal rights and obligations demands a higher standard. In proceedings before this court, a party is usually entitled to cross-examine witnesses, a position confirmed by statute: s 27 of the Evidence Act.

[185] There is some authority to the effect that the unfettered ability to test the evidence of a witness in cross-examination is an ingredient of procedural fairness for the cross-examining party in court proceedings. In Australian Postal Commission v Hayes (1989) 23 FCR 320 ; 87 ALR 283 ; 18 ALD 135 (Australian Postal Commission), the defendant to a claim for employee compensation wished to screen and tender a film, allegedly portraying the employee's able-bodied activities following her injury, after the conclusion of the employee's evidence-in-chief, but the Administrative Appeals Tribunal directed the defendant to screen and tender the film at the commencement of the employee's evidence-in-chief. In overturning that direction on appeal, Wilcox J said

(at FCR 328; ALR 290; ALD 141):

It is the everyday experience of those who attend courts that cross-examination is at its most effective when the evidence of a witness is able to be confronted by documents. But, as with any other cross-examination, it is normally necessary for the cross-examiner first to have the witness commit himself or herself to a precise version of relevant matters; the process which the late Mr JW Smyth QC called "closing the gates": see Bar News, the journal of the New South Wales Bar Association, Autumn 1988, pp 12-13. It is important, in that process, that a mendacious witness not be aware of the material available to the cross-examiner to contradict the evidence under manufacture.

[186] In Kingham v Cole (2002) 118 FCR 289 ; 190 ALR 679 ; 76 ALD 389 ; [2002] FCA 45 (Kingham), one of the questions for the Federal Court was whether it was open to a royal commission to adopt a rule of practice requiring that a person wishing to cross-examine a witness should first provide a signed statement of evidence advancing material contrary to the evidence of that witness. It was not submitted that cross-examination, let alone an unrestricted right to cross-examine, is a necessary component of the rules of natural justice; rather the submission was that cross-examination may in some circumstances be comprehended by the rules of natural justice and where that is the case, it is unfair to take away or restrict that right: at [16]. Heerey J described Australian Postal Commission as "the high point of the authorities" cited in support of that submission at [23]. After quoting passages including the one set out above, he said (at [26]):

[26] Hayes appears to elevate a useful forensic technique to the status of a mandatory legal rule binding administrative decision-making. I would respectfully decline to follow it.

[187] The question to be determined in Kingham, and also in Hayes itself, was about the application of the rules of natural justice to a tribunal that was not a court. The quoted observations of Wilcox J were about the cross-examination in proceedings in a court, although he later commented that they were relevant both in adversarial proceedings and in proceedings that are inquisitorial in nature: at FCR 328; ALR 290; ALD 141. Heerey J held that those observations did not amount to a mandatory legal rule binding administrative decision-making. He did not disagree with the observations in their application to a court, as opposed to an administrative body, though he reduced the matter to "a useful forensic technique".

[188] It may be that cross-examination on undisclosed documents in proceedings before a court is not a right implied by the rules of natural justice, but is only a matter of forensic technique or practice. Section 26(b) of the Evidence Act suggests that there is no absolute right, because it confers on the court the power to make such orders as it considers just in relation to the production and use of documents and things in connection with the questioning of witnesses. Nevertheless it seems to me that if the cross-examiner is the plaintiff and the witness under cross-examination is the defendant, it is at the very least most unlikely that the court will intervene to require advanced disclosure of material that is to be the subject of cross-examination. In those circumstances, the observations of Wilcox J are significant because they emphasise that, even if it is only a forensic technique, cross-examination on undisclosed documents is a very commonly used technique; and further, that if the plaintiff is to have a fair opportunity to test the defendant's evidence, it is important that the witness is not be aware of the material available to the cross-examiner.

[189] Wilcox J wrote those observations at a time when there was probably a greater curial tolerance of trial by ambush than there is now. As I have noted, there has recently been a strong movement to a "cards on the table" approach to commercial litigation (for example, White; Glover; Pacific National and Nowlan, particularly the comprehensive observations of Heydon JA in the Nowlan case at [21]-[32]). Should his Honour's remarks be revised in view of the current attitude?

[190] Australian Postal Commission was followed, on very similar facts, in BHP Pty Co Ltd v Mason (1996) 67 SASR 456 (BHP). Debelle J expressly referred to some subsequent observations by Matthews J sitting in the Administrative Appeals Tribunal (Case Nos NT 94/281-291), which included the following:

This tribunal is bound by the decision in Hayes. However, I consider that case must be seen as the high point for a party who is seeking to have otherwise relevant documents withheld from disclosure to another party. Hayes was decided in 1989. The intervening years have seen increased openness in the litigation process, together with a move away from the traditional adversarial "ambush" method of conducting trials.

[191] Debelle J proceeded (at 464):

With respect, I do not think it is correct to say that the decision in Hayes must be seen as a high water mark or that non-production of the film is an "ambush method of conducting trials".

Later he said (at 464-5):

To state that the film will trap and expose an unwary witness is to assume the answer. It is not to be assumed that the film will necessarily expose falsehood; it might corroborate the witness. Further, the judicial officer is able to control proceedings to ensure that a witness is fairly cross-examined.

[192] Although Debelle J's observations were directed towards the specific question whether a compensation claimant should be allowed to inspect a film showing the claimant's mobility, before going into evidence, they seem to me to have a broader application. They reflect the view that cross-examining the defendant on undisclosed documents germane to the defence is not necessarily trial by ambush, because ambush usually involves deliberate concealment. If a defendant gives evidence inconsistent with documents, particularly documents he has been involved in creating, he is not ambushed, but has simply been detected in his untruthfulness: compare BHP at 464.

[193] While, therefore, the court has a discretion to intervene in cross-examination on grounds of fairness, it seems to me that it would not do so where the plaintiff is cross-examining a defendant about a matter raised by the defence, if the ground of intervention is simply that there was no advance notification of the line of questioning and associated documents. I have confined my analysis to the plaintiff's cross-examination of a defendant by way of challenging a defence. My observations may have application to a party's cross-examination of the opponent's witnesses more generally, but it is unnecessary to express a concluded view on the wider question.

[194] My conclusion is that ASIC had no obligation to give the defendants advance notice of any of the lines of questioning objected to, or the documents relating to the questioning, to the extent that those lines of questioning were justified by reference to matters raised in the defence.

[195] However, as I noted in my 14 July 2006 judgment, there is an important limitation on the use to which evidence adduced by such cross-examination can be put. If a line of cross-examination is outside the pleaded case, but relevant to challenging a defence, the evidence adduced by it cannot be used to raise an unpleaded case against the defendant. That proposition potentially has an important application in the present case.

2.3.5 Summary of key matters for consideration

[196] My analysis has proceeded on the basis that all of the matters of fact raised by ASIC in its submissions that are under challenge are admissible evidence on the ground of relevance, not to be excluded under s 135, that had in fact been admitted into evidence.

[197] In light of my analysis, the following steps need to be taken to answer the defendants' submission that ASIC has strayed outside the pleadings on 62 occasions:

(a)

Matter of fact or matter of submission

Is the impugned item a matter of fact, or a matter of submission about the facts, or partly a matter of fact and partly a submission?

(b)

Matter of fact

(i)

To the extent that the impugned item is a matter of fact, is the fact relevant to the statement of claim or to the defence?

(ii)

If it is relevant to the statement of claim, and is a primary or material fact, it should have been pleaded;

(iii)

If it is relevant to the statement of claim and is an evidentiary fact, it should not have been pleaded, but:

•

there is an issue as to whether it should have been included in the particulars of the statement of claim by virtue of r 15.1(1) of the UCPR; and

•

it cannot be used in submissions to support an unpleaded case;

(iv)

if it is relevant to the defence but not the statement of claim, it is not required to be pleaded or given in particulars of the pleading, and it is not required to be notified to the defendants before being used in cross-examination, but it cannot be used in submissions to support an unpleaded case;

(c)

Matter of submission

(i)

To the extent that the impugned item is a matter of submission, it is not a matter for the court to decide unless it goes to a pleaded issue, or an issue pleaded in the defence, or to the credibility of a witness.

[198] When working through the defendants' 62 particular allegations about ASIC's submissions in chief, I have tried to bear in mind the remarks of Giles JA in Adler v ASIC (2003) 46 ACSR 504 ; [2003] NSWCA 131 at [139] (Adler), to the effect that since pleadings are a foundation for procedural fairness, the question whether matters are within or outside the pleaded case "must have regard to the pleading as a whole, and should not be approached with undue pedantry". His Honour cited remarks by Mason P in Greek Herald Pty Ltd v Nikolopoulos (2002) 54 NSWLR 165 ; [2002] NSWCA 41 at [18], to the effect that pleadings serve the ends of justice and must not be permitted to assume an independent self-referential function, and that the pleadings are not a straitjacket, although the rules of procedural fairness placed limits upon the judge's capacity to enlarge the issues. I take this to mean that in assessing the defendants' complaints that the submissions go outside the pleadings, I should focus on substantive procedural fairness, as a matter of "practical justice rather than philology": Drummoyne Municipal Council v Australian Broadcasting Corp (1990) 21 NSWLR 135 at 137 per Gleeson CJ.

[199] From time to time in its pleading submissions, ASIC endeavours to justify challenged submissions in chief by saying that the matters raised go to the credit of either Mr Rich or Mr Silbermann or both. It seems to me that on each occasion, the submission in chief that is under challenge is not expressed as a submission about credit, and is either directed to evidentiary facts seeking to support the pleaded case (and therefore permissible), or else directed to establishing some unpleaded form of wrongdoing by either or both defendants which is outside the pleaded case and therefore not a matter arising for determination in these proceedings. My rulings, below, as to the submissions that go outside the pleaded case are not intended to exclude the possibility that certain matters could be put forward by ASIC on questions of credit, although they would have to be properly expressed as submissions going to the issue of credit. For example, a submission that Mr Rich misled the board at the March or 17 May meetings is not on its face a submission about his credit, but is rather a complaint of wrongdoing which, at least in certain contexts, has the flavour of an unpleaded case and is therefore impermissible. But it would be open to ASIC to submit that Mr Rich is not a witness whose evidence is to be believed, because he deliberately misled the board on a specified occasion.

[200] I deal separately with the credibility of witnesses in Ch 5, where I have responded to the submissions of the parties directed to the issue of credit. I have not endeavoured to reconstitute impermissible submissions which are outside the pleaded case as submissions about credit, simply because, in its pleading submissions, ASIC has sought to justify the challenged submission on the ground that it goes to credit. I have taken the view that if ASIC wanted to raise a matter going to the credit of a witness, it should have done so directly in its submissions about the witnesses, and was not entitled to expect the court to reconstitute, as a submission about credit, a submission that it has made about an alleged but unpleaded wrongdoing.

2.3.6 The 62 allegations said to be unpleaded allegations

[201] The table in DS109 purports to summarise each of ASIC's allegations which they claim to be unpleaded, supplying in each case reference to ASIC's and the defendants' submissions in chief. In its pleading submissions ASIC contended that some summaries in DS109 were inaccurate, and gave somewhat more precise summaries. I shall use ASIC's summaries.

2.3.6.1 Actual cash usage vs budget for H1 "not pointed out to the board" (APS [35]-[36]; DPS [479]-[482])

[202] This is a matter of evidentiary fact. I accept ASIC's submission that it goes to:

•

the pleaded allegations that Mr Rich and Mr Silbermann failed to take reasonable steps to ensure that the board was aware of the February circumstances and withheld the February circumstances from the board (SC 21(a) and (b), 32(a) and (b)), the relevant February circumstances being that the group cash usage from July 2000 to February 2001 excluding the Lucent repayment was $209 million compared with the September board forecasts of $156 million;

•

the pleaded allegation that Mr Rich and Mr Silbermann failed between January and May 2001 to take reasonable steps to ensure that all material financial information was provided to the board (SC 24(b) and 35(b)), and ASIC's contention in Particulars 15(a)(i) and the table in para 299 to Mr Carter's principal report of 31 May 2002 as to the steps that Mr Rich should have taken to ensure that he and the board adequately, properly and promptly addressed the soundness of the underlying position of the group;

•

paragraphs 20(i) and (ii) of the defence, denying failure to take reasonable steps in the period from January to May 2001 to ensure that the board were made aware of all material circumstances relating to the group's financial position and denying that any material circumstances in relation to the financial position were withheld from the board; and

•

the defendants' submissions as to the open provision of information to PBL and News (DPS 388(g), (x) and 4044-5).

[203] In my view the identified matter was not required to be given in particulars because it was not necessary to enable the defendants to identify the case that the statement of claim required them to meet: r 15.1(1) of theUCPR. In APS [35]-[36] there is nothing to indicate that ASIC was using the asserted matter otherwise than to support its pleaded case identified above.

2.3.6.2 The board "needed to know" how the company was tracking against the September budgets (APS [53]-[56]; [911]-[915]; [941]-[943]; DPS [498]-[509]; [3271])

[204] This is a submission rather than a matter of fact, and the issue for the court is whether the submission goes to a pleaded issue.

[205] The September budget/business plan is the subject of a number of direct references in the schedule to the statement claim: S 4(a), S 9(a), S 12(a), S 13, S 15(a), S 17(a), S 26(a), S 29(a), S 31, S 32, S 36(a), S 42(b), S 42(d), S 43, S 44, S 44B(a) and (c). ASIC contends that, when taken with the many paragraphs of the statement of claim referring to the schedule, these constitute allegations that the September budget/business plan was relevant in 2001 to the management and oversight of One.Tel's business. It also contends that the September budget figures are relevant to the issues concerning the 4 April announcement.

[206] I disagree. In my view, on a reasonable reading, the schedule refers to the September budget by way of history of the declining forecasts, in most cases referring to the revised figures subsequently given to the board, in November and January. The September budget figures have relevance to the 4 April announcement, because the announcement refers to forecasts initially made by management in August 2000, and it appears those forecasts came to be contained in the September business plan presented to the board at its meeting on 28 September 2000: SC 46. But this does not authorise an argument that the board needed to know and therefore be reminded of the September figures after they had been superseded. The idea that the board would or should have tracked the company's financial performance against budget figures that had been subsequently superseded, and consequently that the defendants were in breach of duty in not comparing current figures with those old outdated forecasts, is a new, unpleaded case.

[207] ASIC says that the September budget figures have a more general relevance as well, in that they identify the path that was contemplated in September 2000 to be taken in order to achieve the end of year targets which, if achieved, would have indicated the continuing short-term viability of the company. That is correct, but it does not justify the submission under consideration. ASIC says that the questions of whether the company was tracking well against those budget figures, and what the board knew about whether it was, are matters that relate directly to the company's financial position during the period in question in these proceedings and the board's knowledge of that position. I disagree with this, because the September budget figures were subsequently superseded, to the knowledge of the board.

[208] ASIC contends that a comparison of actual or newly forecast figures to the September budget figures would have been a meaningful measure of the company's performance as the financial year progressed, whereas a comparison between actual results and a budget constantly updated to take account of adverse (and other) events would be meaningless because the two would be close to being the same. But in circumstances where there were external developments after the adoption of the September business plan that changed the company's outlook, it was appropriate in my view for the board to revise the budget figures to take into account that change and to set new budgets accordingly; and having done so, it would be unnecessary for the directors to be reminded on subsequent occasions of the old superseded figures which had been set before the new developments occurred.

2.3.6.3 It was not made clear in the January board papers that the company was on the same track to the year end EBITDA result as had been presented to the board in September (APS [67]; DPS [483]-[487])

[209] See my discussion under the previous heading.

2.3.6.4 Reconsideration of the January recut (APS [73]-[93]; DPS [510]-[550])

[210] ASIC contended in its submissions in chief that the December revenue result and also the revenue figures for the combined months of November and December, and the figures for January, February and March when available, should have led to reconsideration and subsequent abandonment of the January recut. ASIC's submissions about the January recut are a combination of allegations of fact (generally to the effect that the actual position was considerably worse than the recut figures indicated) and submissions about what should have been done in light of the facts.

[211] In my view, to the extent that ASIC makes allegations of fact, it is asserting a combination of primary pleaded facts and evidentiary facts that did not require to be pleaded or particularised.

[212] The statement of claim asserts that the monthly flash reports in the period from January to April 2001 misstated the actual EBITDA performance of the group, and that they misleadingly said that the fixed wire/service provider business made trading profits when in fact it had made trading losses: schedule, paras S44D, S45. Then the statement claim says that the flash reports from January to April did not disclose that the figures reported for the Australian (ex-Next Generation) operations depended on "modified budget data" for the fixed wire/service provider business, which did not reflect the actual financial performance of that business: S46. ASIC submitted that the "modified budget data" referred to in that paragraph of the statement of claim were the figures in the January recut. That appears to be correct. Therefore a primary fact asserted in the pleading is that the January recut figures used for the purpose of flash reports did not reflect the actual financial performance of the fixed wire/service provider business. Assertions in ASIC's submissions in chief about the ways in which the January recut altered forecast figures and led to forecasts that were higher than what was actually achieved are assertions of evidentiary fact directed to making good the pleading.

[213] The submissions about the January recut relate to the pleading about the March board papers (schedule, paras S47-S50), which alleges that the March board papers drew on the flash reports and were misleading, inter alia, with respect to the EBITDA results for the fixed wire/service provider business. There is no doubt, in my view, that the contents of the January recut and their comparison with actual figures are matters properly within the scope of the pleading and, indeed, the defences: see 2 JDR 1104c; DPS 1346.

[214] It seems to me, however, that to the extent that ASIC's submissions in chief go beyond assertions of fact about the January recut and the actual figures, and make points about what the defendants should have done (that is, that they should have reconsidered and abandoned the January recut), they are submissions going beyond ASIC's pleaded case, and directed to a new unpleaded case about the defendants' duties concerning supervision of the work of other One.Tel executives and knowledge of the basis upon which that work was done. That opens up a range of evidentiary matters about which the defendants were entitled to be warned by proper pleading.

2.3.6.5 Statements in board papers in "adamant terms", made "without qualification" and in "dogmatic language" (APS [118]-[123]; DPS [590]-[599])

[215] ASIC's submissions on these matters are partly assertions about evidentiary fact (that is, what precisely did the defendants say in certain circumstances) and partly submissions interpreting or attributing significance to those facts. In my view those submissions are pertinent to ASIC's pleaded case, although occasionally they appear to me to be exaggerated, for reasons I shall explain in the body of the judgment. I agree with ASIC that the submissions go to whether the defendants failed to take reasonable steps to ensure that the board, including Mr Packer Jnr, were aware of the relevant month's circumstances and to ensure that all material financial information was provided to the board: SC 23, 24(b), 31-34 and 35(b). It is a matter of some significance to the pleaded case for the court to decide whether, in particular, Mr Rich made statements in emphatic and definite terms or in the qualified way he claims to have put them. For ASIC to address that matter does not, in my view, open up any unpleaded case.

2.3.6.6 Whether, by 9 February, One.Tel had a significant cash problem of which the directors should have been informed (APS [134], [136], [140]-[141]; DPS [619]-[639])

[216] These are statements of fact, and there is an issue as to whether they are primary or evidentiary facts. The statement of claim alleges that One.Tel had significant cash requirements at the end of February (para 11(a)) and that the defendants should have recommended immediate voluntary administration unless the board was satisfied that very large quantified cash injections could be obtained (paras 21(d), 22(d) and 23(d)). There are also pleadings about the January circumstances (schedule, paras S 3-7) and January and third-quarter EBITDA (schedule, S41(a), 42(d), S 43-4). But there is no specific contention about the cash position on or about 9 February.

[217] In its submissions in chief, ASIC dealt with some "Funding Requirement" documents including, in particular, a document providing figures as at 9 February 2001: APS [619] and following. ASIC sought to rely on the funding requirement document to support an argument that there was a sizeable variance between the February cash flow budget figures for the Australian operations presented in the January board papers and the revised forecast in the document, and hence that a "real cash problem" had been identified in the Australian operations in early February. No particulars had been given to forewarn the defendants of the reliance that would be placed on this evidence, the matter was not raised until the cross-examination of the defendants. The contention that the "Funding Requirement -- February" document revealed a cash problem was not used by Mr Carter as a basis for any such contention.

[218] Allegations about funding requirement as at 9 February might have been included in the schedule to become part of the primary facts upon which ASIC relies to prove its contraventions, but this did not occur. In the circumstances, those allegations can be treated as evidentiary fact going to prove the currently pleaded case, for the allegations can be made to relate to the pleaded financial position in January and at the end of February, and in the third quarter of 2000/2001. That leads to the question whether the finding requirements evidence was adequately particularised.

[219] I take the view that under r 15.1(1) of the UCPR, particulars of the funding requirement for February were necessary to enable the defendants to identify the case that the pleading required them to meet, and consequently particulars of the funding requirement for February should have been given. To the extent that the funding requirement evidence was a response by ASIC to the defences, which assert that the cash shortages in January and February were primarily referable to timing differences (defence, paras S 4(f) and S 9(g)), it was permissible for ASIC to introduce that evidence without addressing it in pleading and particulars or otherwise giving notice of it, according to the principles I have stated. However, in its submissions in chief ASIC did not use the funding requirement evidence merely to rebut the defence, but rather to establish the cash requirement as at 9 February, either in itself or as indicative of the position in January and at the end of February. It was evidence that should have been particularised.

[220] ASIC's use of the funding requirement evidence emerged only during cross-examination of the defendants and therefore was not addressed by them in their evidence in chief: DPS [623a]. I have looked carefully at the cross-examination on the subject and I have reached the conclusion, in retrospect, that it was unfair of ASIC to put this material to Mr Rich without notice. It was not his document and he should have been given the opportunity properly to review the document to assess what it was and what it signified, and to address the matter in his affidavit in a considered way. In my view the evidence comprising the funding requirement for February and the cross-examination of the defendants about it should be limited to assessing the validity of the defence and should not be received as proof of the financial position of the company on 9 February or in January or the end of February. A fortiori, the funding requirement for February cannot be used to support an unpleaded case to the effect that this evidence of itself imposed a disclosure obligation on the defendants to their board.

2.3.6.7 What information was conveyed to Mr Packer Jnr in February 2001 about the billing delays? (APS [145]-[147]; DPS [641]-[648])

[221] ASIC submitted that Mr Packer Jnr was not informed in February 2001 of the billing delays "in such a way as to convey to him that it was likely to have a significant negative impact on cash in February". This was in response to Mr Rich's evidence (1 JDR 1009-10) that he conveyed information concerning the billing delay and the impact it would have on cash to Mr Packer Jnr ASIC's submission was partly an allegation of evidentiary fact and partly a submission about what Mr Rich should have done. As evidentiary fact it went to issues in the statement of claim including paras 20(a) and (b) and 24(b), and in my view it was not required to be particularised specifically. As submission, it did not, in my view, seek to plead some additional duty outside the pleaded issues, but instead it went to the pleaded responsibilities and duties of Mr Rich to inform the board and not to withhold information from it.

2.3.6.8 The practice of deferring creditor payments and whether the board was told about it (APS [148]-[158]; DPS [649]-[730], [750]-[760], [770]-[778])

[222] In its submissions in chief ASIC asserts that the funding requirement for February document was indicative of a preparedness of One.Tel to defer payments to creditors, and that other evidence to that effect was to be found in the funding requirement documents for 5 October, 9 October and November, and the document "Cash estimate for Jodee for December" and some other documents, and Mr Rich's own evidence that it was One.Tel's practice to defer payments to creditors for a short period over month-end, though he could not recall the board ever being told about that practice: T 11000. ASIC's submissions are principally allegations of evidentiary fact.

[223] Paragraph S 1 of the schedule asserts that from late December 2000 there was a systematic process of "management" of cash and creditors, so that payments to creditors were selectively deferred, and consequently the month-end cash balances for January, February and March revealed in the flash reports and in board papers for the January and March meetings did not give a full and accurate view of the cash position of the group, and it asserts that one means by which payments to creditors were selectively deferred was by drawing cheques but delaying their release.

[224] Paragraph S 1 is part of the January, February, March and April circumstances and is accordingly one of the subjects of the allegations that the defendants failed to take reasonable steps promptly to ensure that the board was aware of certain matters: see, for example, SC 20(a). ASIC submitted that evidence, tending to show that the practice of management of creditors pre-dated late December 2000 without being conveyed to the board, was relevant to the probabilities of information being conveyed to the board about the practice in so far as it existed from late December 2000.

[225] The submissions to which objection is taken go to "management" of creditors for a period of time extending back to October 2000. That evidence is relevant to the financial position of the company in January and even later months, and if the defendants were aware of it and did not report it to the board, the evidence affects the probability that the defendants were aware of and failed to inform the board of the January-April circumstances as far as they related to management of creditors.

[226] In my view ASIC should have given particulars of that evidence under r 15.1(1) of the UCPR, to enable the defendants to identify the case that the pleading required them to meet and in particular, to bring home to them that there would be allegations about management of creditors going so far back as October, even if only to prove the case about conduct from late December onwards. I infer that allegations about management of creditors back to October 2000 would have given rise to some evidentiary issues that the pleading would not have caused the defendants to expect and to prepare for, in the absence of proper particulars. The significance that ASIC wished to place upon Funding requirement evidence was introduced in the cross-examination of Mr Rich, after ASIC had closed its pleaded case and the defendants had prepared and served their affidavits. As with the funding requirement for February, in my view the defendants were not given an adequate opportunity to deal with the funding requirement documents for earlier months.

[227] In its pleading submissions ASIC contended that the funding requirement evidence went to rebutting the defendants' assertion in the defence and in evidence that there was a "normal business practice" of payment of carriers outside contractual terms: see, for example, defence S 5(c). In my view, having regard to the principles I have explained, it is open to ASIC to use the evidence to that limited extent, but not to use it to show that there was practice of managing creditors at the times to which the funding requirements evidence related (5 and 9 October and November), or otherwise to establish the likelihood that creditors were managed from late December onwards.

2.3.6.9 Continuation of billing problems (APS [178]-[181]; DPS [798]-[805])

[228] ASIC contended that One.Tel's billing problems during February were "a continuation of billing problems that had plagued and continued to plague One.Tel". That is partly an allegation of evidentiary fact, and partly a submission on the evidence. In its pleading submissions ASIC said that its submissions in chief about the continuation of billing problems were in answer to the defence, which asserted that shortfalls of cash against budget were primarily referable to timing differences in respect of billings as a result of disruption to the billing systems: defence, S 4(f). In my view that is correct.

2.3.6.10 Source of end of February UK cash balance (APS [217]-[237], [272]; [773]-[783]; DPS [988]-[1122]; [3139]-[3155])

[229] ASIC's submissions were to the effect that the UK cash balance at the end of February 2001 was the result of a deliberate deferral of creditor payments for the purpose of building up cash, which occurred as a result of Mr Silbermann instructing Mr Werner, to the knowledge of Mr Rich, to defer payments to creditors in order to build up the UK bank balance. These submissions include allegations of fact and submissions about the consequences of those facts. They are important questions as to whether the facts alleged are primary facts or evidentiary facts, and whether the submissions raise an unpleaded case.

[230] The statement of claim did not make any such assertion. The pleading of the February circumstances in the schedule, S 10, asserted that One.Tel's Group cash and cash flow were achieved only after deferring the drawing of cheques to major creditors of the Australian operations, but there was no corresponding contention that a similar deferral occurred in the UK. There was an assertion at para S 11(b) that, as at 28 February, the amount owing by One.Tel UK to trade creditors was approximately $80.6 million of which approximately $56 million was overdue and at least $26.5 million had been outstanding for more than 90 days, but again no allegation of deferral of UK creditors. Most of the other allegations in the schedule about the February circumstances relate to the Australian operations, other than paras S 21-S 24, which deal with the transfer of the $26 million. ASIC there alleges that Mr Silbermann and Mr Rich procured the transfer over the concerns of Mr Weston and the objections of Mr Werner and Mr Boaden (S 21), and that as a result of that transfer the companies in the UK operations had an available cash balance of only about $11.5 million, which was insufficient to pay their debts including overdue creditors: S 24.

[231] In its pleading submissions, ASIC contended that its submissions in chief about deferral of UK creditors went to the following facts in issue:

(i)

the probability of UK officers expressing concerns about and objections to the $26 million transfer;

(ii)

the materiality of the $26 million transfer, which is one of the February circumstances;

(iii)

the allegation of the existence of a systematic process of management of cash and creditors in para S 1(a).

[232] I agree with point (i), in the sense that evidence about deferral of UK creditors is relevant to assessing the disputed evidence that Mr Weston had concerns about, and Mr Werner and Mr Boaden objected to, the $26 million transfer. I also agree with (ii), in the same sense. In assessing the admissibility of some evidence by Mr Carter about non-UK European creditors, I said (ASIC NSWSC 939 (30 September 2005), at [52]) that the evidence was relevant to ASIC's case as presently pleaded, in that such evidence would support ASIC's claim that the transfer of $26 million from the UK to Australia was a material event (a claim underlying paras S 21-S 24). The same reasoning applies to evidence about the deferral of UK creditors. I disagree with point (iii). Although the pleading about systematic management of cash and creditors in para S 1(a) is expressed in group terms, para S 1(b) refers only to the Australian operations, and the only express pleading in the February circumstances about the effect of deferring creditor payments, in para S 5, is confined to the Australian operations.

[233] Thus the allegations about deferral of UK creditors have some relevance to the statement of claim, in the two ways indicated, but the fact that a matter is relevant to the pleaded case does not ensure that reliance on it in submissions is within the pleaded case. Thus, in my judgment of 30 September 2005, which was dealing with admissibility on the ground of relevance rather than with the pleading issue, I held (at [54]) that the fact that there was no pleaded issue specifically as to the quantum of overdue non-UK European creditors did not render Mr Carter's evidence inadmissible on the ground of irrelevancy. The present issue is the pleading issue rather than the issue of relevance, and here the crucial question relates to how the relevant evidence is used. There is no pleaded allegation of systematic deferral of creditors in the UK operations. The pleaded case is, as I have said, that the UK operations were alleged to have trade creditors of approximately $80.6 million as at 28 February, and as a result of the transfer, the available cash balance in the UK fell to $11.5 million, which was insufficient to pay creditors: paras S 11(b), S 24.

[234] In my opinion ASIC's allegations about deferral of creditors in the UK, said to be on the instructions of Mr Silbermann and to the knowledge of Mr Rich, are primarily referable to a new, unpleaded case against the defendants. It seems to me that the factual assertions made by ASIC in the submissions in chief identified in the above heading are a mixture of allegations of primary fact in a new case designed to prove some currently unpleaded wrongdoing by the defendants, namely their causing the deliberate deferral of creditor payments in the UK operations in a manner that was calculated to mislead the board as to cash and cash flow, and allegations of evidentiary fact designed to support that case. In summary, the submissions about deferral of UK creditors are the making of that new case.

[235] ASIC submitted that evidence was led from the UK witnesses, and cross-examination of the defendants occurred, without any objections as to relevance being taken by the defendants. It seems to me that the issue here is not an issue of relevance of the evidence; it appears to me that the evidence is relevant at least to an assessment of the probability of the UK officers of One.Tel expressing concern about and objection to the transfer. The issue is whether the case developed and supported in final written submissions was outside the pleaded case. That issue was addressed at the appropriate time, namely in the defendants' submissions in chief, responding to ASIC's submissions in chief.

[236] To a degree, the defendants had notice of ASIC's allegations from the time when evidence was led from the UK witnesses, in particular from Mr Werner. He gave evidence, referring to Ex CE 9 0001, to the effect that the UK cash balance rose during the course of February by about $22 million because of delayed payments to creditors, in response to Mr Silbermann's request that payments be delayed so that cash flow targets for the European businesses could be met: UK T 1010. He also gave evidence of daily conversations he claimed to have had with Mr Silbermann in the period from mid-February to the end of February about (inter alia) the management of creditors and the need to hit certain cash targets: UK T 1011. That evidence was given well before the defendants completed and served their affidavits, and they had the opportunity to respond to it: see, in particular, Mr Silbermann's affidavit at MS 868-9.

[237] If the question were merely about failure to give particulars of the alleged facts about deferral of UK creditors, it might be appropriate to waive that failure on the ground that, the defendants having had the opportunity to respond, they had not been significantly prejudiced. But the problem here is not a failure to supply particulars. It is a failure to plead serious new allegations, the first indication of which came when Mr Werner gave his evidence-in-chief in London (not preceded by any affidavit), about a year after the final hearing began. The defendants were entitled to set their defensive strategy on the basis of ASIC's pleaded case. They were entitled to assume, in my view, that the serious allegations by ASIC about deliberate deferral by them of creditor payments were confined to the Australian operations. In all probability, that would have affected the way they prepared their cross-examination of ASIC's witnesses, including in particular Mr Boaden, Mr Weston and Mr Werner. Mr Werner's evidence came after the evidence of Mr Boaden and Mr Weston had been completed. In the circumstances the fact that the defendants were able to address that evidence in their affidavits is not a complete answer to the argument that they were prejudiced by ASIC's failure to plead such significant new matters.

2.3.6.11 The early February billing delay (APS [319]; DPS [1354]-[1355])

[238] ASIC claimed in its submissions in chief that the billing delay in late January/early February was not something that could be treated as an aberration, but rather it was symptomatic of underlying billing problems that continued unabated through the financial year. It submitted that the defendants had not sought to identify the cause of the delay and to demonstrate that the issue was dealt with in such a way as to ensure that similar delays would not occur again.

[239] My observations at 2.3.6.9 above are also applicable here.

2.3.6.12 Cash requirements -- $10 million owing to Lucent (APS [334]-[335]; DPS [1457]-[1464]; [1838]-[1849])

[240] ASIC submitted that the cash requirements of the group as at 28 February included an amount of $10 million for amounts owing to Lucent. This is clearly an allegation of evidentiary fact. The primary fact alleged at para 11(a) of the statement of claim is that Australian overdue creditors at 28 February 2001 stood at about $29 million. In its pleading submissions ASIC accepted that it was not entitled to have the court conclude that the quantum of Australian overdue creditors exceeded the amount pleaded. But it contended that ASIC is not restricted in the evidence that it can put to the court to demonstrate that the overdue creditors were at least of that magnitude.

[241] I agree with ASIC's submissions. There was no pleading, nor any particulars, that limited ASIC's ability to rely on amounts that were not in the aged creditors lists, and specifically nothing preventing it from advancing the evidentiary fact about the debts said to be owing to Lucent. I do not regard this evidentiary fact as one that had to be given in particulars in order to enable the defendants to identify the case that the pleading required them to meet. The case was clearly about (relevantly) the actual level of Australian "overdue" creditors. The matter has been explored in the evidence and I shall make some findings about it.

2.3.6.13 Cash requirements -- late posted invoices, incorrect ageing etc (APS [341]-[343]; [393a]; [1334]-[1335]; DPS [1465]-[1496]; [1832]-[1837]; [3289]; [3880])

[242] In its submissions in chief ASIC relied on evidence about delays in the posting of invoices, affecting the level of Australian "overdue" creditors as at 28 February and 30 April. In my view the submissions are allegations of evidentiary fact not requiring to be particularised, and relating to para 11(a) of the statement of claim. My reasoning is as stated at 2.3.6.12.

2.3.6.14 Cash requirements -- buffer (APS [394]; [935]; DPS [1850]-[1856]; [3297])

[243] ASIC's submissions in chief give a summary of the group financial position at 28 February and 31 March, contending that at the end of February the cash requirement to November 2001 was $270 million and by the end of March the cash requirement to November had become $276 million. In each case ASIC submits that the court should derive comfort in accepting ASIC's figures from the fact that the figures do not contain any provision for a buffer of at least $50 million, which (it submitted) was required to cover the mid-month low point in cash and other contingencies: see also APS [928].

[244] The assertion that cash figures projected to November were required to include a buffer of $50m is an assertion of evidentiary fact. It was not given in particulars and indeed, the statement of claim in para 11(a) implies that there is no buffer requirement, because it purports to give "particulars of cash requirements" without mentioning a buffer. In my view, however, it was not necessary for ASIC to give particulars of such a buffer requirement in order to enable the defendants to identify the case that the statement of claim would require them to meet as to the projected cash requirement to November. Certainly there were no particulars that limited ASIC's case in this regard, and the defendants' own evidence embraced the prudence of a "buffer" (1 JDR 275, 283, 2 JDR 1486b, 1538, 1621; MS 747), as did the PBL/CPH cash assessments in early May: Ex CD 15-6.

[245] As to whether the assertion of a buffer requirement falls outside the pleaded case, a buffer requirement would be relevant to the likely monthly cash usage from operations until 30 November 2001, because it would be necessary to put cash aside to build up a buffer during that period. It would also have some relevance to the question whether the media statement of 4 April 2001 to the effect that One.Tel was tracking well against its forecast was misleading.

[246] ASIC also submitted that a buffer would be relevant to allegations as to the size of the cash injection which the defendant should have, but failed to, recommend to the board: SC 19(b), 21(d), 22(d), 23(d), 32(d), 33(d) and 34(d). The difficulty with that submission is that para 11(a) implies, as I have said, that there is no such requirement.

[247] As I have said in a different context, the fact that a submitted matter is relevant to the pleaded case does not mean that the submitting party is using it for the purposes of the pleaded case. Here, however, the submission about a buffer is used to reinforce the pleaded cash requirement in para 11(a) of the statement of claim. The submission is that "the court should derive comfort" in accepting ASIC's submission about the cash requirement excluding a buffer, from the fact that the figures submitted do not include a buffer, and yet a buffer was undoubtedly necessary for proper conduct of the group's business: see APS [394], [935]. In my view the submission about the buffer is offered merely as reinforcement and does not involve embarking on any unpleaded case.

2.3.6.15 Cash requirements -- non-UK European creditors (APS [394]; [846]-[847]; [935]; DPS [1850]-[1856]; [3219]-[3221]; [3297])

[248] After presenting its summary of the cash requirement to November as at the end of February and the end of March, noted at 2.3.6.14, ASIC said that the court should take comfort not only from the fact that no provision was made for a buffer, but also from the fact that no provision was made for the payment of at least $15 million overdue to non-UK European creditors at the end of each of those months. The evidence for these debts is primarily Mr Werner's emails of 6 March and 18 May: APS [846)-[847]. ASIC's assertions of fact about non-UK European creditors are evidentiary facts when considered in light of the present pleading, coupled with submissions seeking to use those evidentiary facts for stated purposes.

[249] In ASIC NSWSC 939 (30 September 2005), I considered, inter alia, the admissibility of some evidence of Mr Carter about non-UK European creditors. One of the defendants' submissions was that there was no pleaded issue as to the quantum of overdue creditors other than in Australia and the United Kingdom, and therefore (by implication) that Mr Carter's evidence was irrelevant under ss 55 and 56 of the Evidence Act. There was a logical error in the defendants' submission, to the extent that it assumed or implied that if there was no pleaded issue as to the quantum of overdue non-UK European creditors, then necessarily evidence on that subject was inadmissible because it was irrelevant. But evidence about a matter that is not a pleaded issue may satisfy the test of relevance because, if accepted, it could rationally affect the assessment of the probability of the existence of some other fact in issue in the proceeding.

[250] In my 30 September 2005 judgment (at [52]-[54]) I held that Mr Carter's evidence was relevant evidence even though there was no pleaded issue as to the quantum of overdue non-UK European creditors. I found it was relevant in the following ways:

•

as to the pleading about the $26 million transfer: schedule, S 21-24;

•

as to the allegation in SC 11(a) about the cash requirement, because it went to the likely monthly cash usage from operations until November 2001 and tended to negate the possibility that other resources might be available to offset the financial requirements specified in that paragraph;

•

as to the allegations (SC 37-48) that there was no reasonable basis for the media statements of 27 February and 4 April to the effect that One.Tel was tracking well against its forecasts;

•

as to the issue raised by the defence concerning normal business terms in the European operations of One.Tel;

•

as to whether there was a sound basis for Mr Carter's assumption in his principal report that there was no material change in the net worth of the international operations between 28 February and 29 May.

[251] That seems to me to establish not only the relevance for the purposes of admissibility of ASIC's assertions about non-UK European creditors, but also that those assertions are evidentiary facts rather than primary or material facts. The remaining question is whether ASIC's submissions seek to use those assertions to support an unpleaded case. My conclusion on that question is the same as at 2.3.6.14, for the same reason. ASIC uses its assertion that there was at least $15 million owing to non-UK European creditors merely as a reinforcement of its submissions about the February and March cash requirements: APS [394], [935]. ASIC's point is that the cash requirements calculated in its submissions do not take into account amounts overdue to non-UK European creditors, and therefore the court should "derive comfort" in accepting ASIC's submission as to the cash requirement from this consideration, which suggests that the cash requirement was in fact larger (and therefore greater than pleaded).

2.3.6.16 The conduct of the defendants in relation to the cause of the billing run shortfall (APS [469]-[473]; DPS [2463]-[2466])

[252] In paras [469]-[473] of its submissions in chief, ASIC developed the idea that there were at least two possible causes for billing run totals being down as against forecasts, one being an error caused by over-estimating the amount of revenue that had been earned, and the other being that available data had not been billed because of some oversight or other error. ASIC criticised the defendants for accepting the latter as the cause when there was no proper basis to do so, and accordingly for advancing that cause in adamant terms when the matter was presented to the board, without any suggestion that the alternative and more obvious explanation was or might be applicable.

[253] These submissions are, primarily if not exclusively, submissions interpreting the causes of the billing run totals rather than allegations of primary or evidentiary facts. ASIC seeks to contend that the defendants gave the board an explanation of the phenomenon that was without foundation, and was at least reckless. In its pleading submissions, ASIC defends its submissions in chief by referring in particular to the second half of para [37] of my judgment 14 July 2006: ASIC NSWSC 712. I was dealing with the question whether Mr Macfarlan's cross-examination of Mr Rich, seeking to show that the figures presented to the March board had no reasonable basis, was outside the pleaded case. I said (at [37]):

[37] If it could be shown that Mr Rich adopted unsupportable forecasts in late March 2001, that together with other evidence might (at least) lead to an inference, either that Mr Rich knew of the Group's actual deteriorating position and was putting forward unsupportable forecasts so as to mislead the board (statement of claim, para 22(a)); or that the ways in which the forecasts lacked a reasonable basis were readily discoverable by him and would, if discovered, make him realise the Group's deplorable financial position (statement of claim, para 22(c)).

[254] I decided on that occasion to permit Mr Macfarlan's line of questioning about whether there is an adequate basis for the March board figures. The question that is now before me is a different question, namely whether ASIC is permitted to use the evidence it has adduced on this question in the manner set out in its submissions in chief. As I explained at [37] of my judgment of 14 July 2006, in the absence of any grant of leave to amend (and there is none), it would not be permissible for ASIC to use the evidence adduced in cross-examination for purposes outside its pleaded case. That, in my view, is what ASIC has attempted to do in its submissions in chief.

[255] The submissions in chief invite the court to subscribe to a line of reasoning leading to the conclusion that the defendants allowed forecasts to go forward to the board that were at least reckless, because they were without foundation, and the defendants knew this to be so or ought to have known that it was so. That, it seems to me, is an attempt to establish a new set of primary facts leading to a new count of breach of duty of care and diligence. ASIC seeks to use the evidence it has adduced about the basis for the March board forecasts not merely to support the conclusion that the group's actual financial position was deteriorating as pleaded and that Mr Rich knew or ought to have known this was so (the use contemplated in the extracted passage from my 14 July 2006 judgment) but to establish a new ground of complaint about reckless behaviour. That is outside the pleaded case.

2.3.6.17 Payment withheld from WorldCom without any proper excuse (APS [480]; [726]-[768]; DPS [2481]-[2482]; [3050]-[3138])

[256] ASIC's submissions in chief were to the effect that by the end of February, WorldCom had made it clear to One.Tel that it wanted to be paid $23.9 million, which had been invoiced and was outstanding, and One.Tel recognised internally that at least $13.4 million was "payable now" and only $2.2 million was disputed. ASIC submitted that Mr Rich and Mr Silbermann either knew or should have known at the end of February the substance of these facts. The assertion that payment of money due and owing was withheld from WorldCom without any proper excuse is principally an assertion of fact. The fact is not pleaded and in my view it is not a primary or material fact that needs to be pleaded. It is an evidentiary fact, which goes to prove various parts of the pleaded case.

[257] In particular, it is an evidentiary fact that is relevant to the amount of One.Tel's overdue creditors, particularly at the end of March 2001. ASIC pleaded at S 28(a) that the amount owed by companies within the UK operations of the group to trade creditors, then overdue, was about $82.2 million. At least part of the amount owing to WorldCom was owed by the UK operations. Additionally, the WorldCom evidence is relevant to answer the defendants' contention that various amounts included in the figures claimed by ASIC to represent overdue creditors of One.Tel "were justifiably disputed by One.Tel": DPS 3285(a)(iii).

[258] ASIC also contended that the WorldCom allegations relate to para S 1, which alleges that payments to creditors were selectively deferred. For reasons I have indicated at 2.3.6.8, in my view para S 1 does not plead creditor deferral in the UK. Nevertheless for the other reasons I have mentioned, my conclusion is that ASIC's submissions about the WorldCom debt are evidentiary facts going to its pleaded case. Although the amount is large, it was not necessary in my view to give particulars of the WorldCom evidence.

2.3.6.18 The cash flow forecasts presented to the board at its meeting on 30 March 2001 were totally without foundation (APS [488]-[656]; [821]-[826]; DPS [2491]-[2825]; [3205]-[3207])

[259] This is governed by my reasoning at 2.3.6.16, applying ASIC NSWSC 712 (14 July 2006). The identified submission is principally a submission inviting the court to draw conclusions about evidentiary facts concerning the spreadsheet 2403C.xls. It is not itself an assertion of a primary or evidentiary fact. The claim that the forecasts presented to the board at its March meeting were without foundation can be used as part of ASIC's attack on the defence, relating to the $40 million of unbilled data, and also to prove ASIC's pleaded case about the true financial position of One.Tel at the end of March and the defendants' knowledge of it, and whether there was a reasonable basis for the 4 April media release. But it cannot be used to support a case that the defendants were in breach of duty by giving a baseless and reckless forecast to the board.

2.3.6.19 There was no significant amount of data available to be backbilled (APS [488]-[509]; [1047]-[1093]; [1131]-[1135]; [1398]-[1415]; [1835]; DPS [2491]-[2567]; [3465]-[3528]; [3594]-[3596]; [4205]-[4227]; [5679])

[260] ASIC's submission in chief was that what should have been clear to the defendants in the latter part of March at least became clear to them in April, namely that there was no significant amount of data available to be backbilled. This submission is partly an allegation of evidentiary fact, not required to be particularised and therefore permissible. To the extent that the submission goes beyond the assertion of fact and contends that what the board was told at the March meeting was wrong and without foundation, the position is governed by my reasoning at 2.3.6.16. It is not permissible for ASIC to use the evidence about the alleged $40 million of backbilling to support a submission that the defendants breached their duty of care and diligence by making inaccurate statements to the March board about the $40 million of unbilled data. But the evidence concerning that issue can be used for the purposes of its pleaded case.

2.3.6.20 The board was deliberately misled in relation to the $40 million allegedly missing billing (APS [561]-[571]; DPS [2667]-[2684])

[261] See at 2.3.6.18 and 2.3.6.19.

2.3.6.21 The forecast billing run totals in 2403C.xls had no proper basis (APS [535]-[559]; [1013]-[1021]; [1042]-[1043]; DPS [2621]-[2666]; [3432]-[3447]; [3464])

[262] See 2.3.6.18 and 2.3.6.19.

2.3.6.22 The $21m Optus connection fee was a "balancing figure" designed to reconcile the forecasts to be provided to the March board meeting with those provided to the January board meeting (APS [576]-[607]; [1004]-[1012]; [1026]-[1041]; DPS [2687]-[2739]; [3207]; [3420]-[3431]; [3450]-[3463])

[263] See 2.3.6.18 and 2.3.6.19.

2.3.6.23 The $21m Optus connection fee was not referred to at the March board meeting (APS [581]; DPS [2696])

[264] That is an assertion of evidentiary fact, going to the pleaded case about the true financial position of One.Tel at the end of March and whether there was a reasonable basis for the 4 April media statement. In my view it was not necessary to be identified in particulars, to the extent that it was to be relied upon for those purposes. But the assertion that the board was not told about the $21 million fee cannot be used to support an unpleaded case to the effect that the board was misled by the defendants in the presentation of the forecasts based on the spreadsheet 2403C.xls, for reasons explained at 2.3.6.16 and 2.3.6.18.

2.3.6.24 It was not consistent with their duties for the defendants to present to the board a cash flow which made the assumption referred to in APS [599] (APS [599]; DPS [2733]-[2735])

[265] The assumption specified at APS [599] was that virtually all of the abnormal growth in over 90-day debt during the period from January to March would be recovered in April. This is a submission about that particular assumption in 2403C.xls, which directly asserts an unpleaded case about alleged duties of the defendants concerning forecasts to the March board. The submission is not relevant to ASIC's pleaded case.

2.3.6.25 What was put to the board about the $40m of unbilled call data was misleading (APS [608]-[613]; [959]-[966]; DPS [2740]-[2748]; [3354]-[3365])

[266] The submission is partly an assertion of evidentiary fact as to what the board was told, and to that extent it is permissible and need not have been given in particulars. It is partly a submission that what the board was told was misleading; a submission on its face directed to establishing an unpleaded case about misleading information allegedly given to the board.

2.3.6.26 Absence of disclosure of the bases upon which the March board meeting forecasts had been prepared (APS [614]-[617]; DPS [2749]-[2753])

[267] This is covered by 2.3.6.24 and 2.3.6.25. The submission is outside ASIC's pleaded case.

2.3.6.27 The April and May forecasts in 0304.amended suggested that the Australian operations were insolvent at least from 17 April 2001 (APS [647]; DPS [2825])

[268] The schedule to the statement of claim alleges that as at, respectively, 28 February, 31 March and 30 April 2001 the companies within the Australian operations of the group had insufficient cash to pay all the debts of those companies that were then overdue, and had insufficient cash and liquid assets to pay all the debts of those companies which had then been incurred: S 18-19, S 33-4, S 38A-B. Evidence that the Australian operations were insolvent from 17 April is an evidentiary fact going to those pleaded allegations. In my view it was not necessary for ASIC to give particulars of that evidence so as to identify the case that the pleading would require the defendants to meet.

2.3.6.28 Cash flow forecasts formulated by the European executives were ignored by Mr Rich and Mr Silbermann for no good reason and forecasts which did not have any proper basis were included in the board papers (APS [657]-[710]; [821]-[826]; DPS [90]; [2826]-[2920]; [3208])

[269] My reasoning on this subject is along the same lines as my reasoning with respect to the "misleading" forecasts presented to the March board on the basis of 2403C.xls (see ASIC NSWSC 712 (14 July 2006), at [72]-[73], where the ruling on admissibility adopts similar reasoning). ASIC's submissions in chief make assertions of fact about the cash flow forecasts of European executives, Mr Werner in particular, and the lack of reference to them in the March board papers, and then they make submissions generally to the effect that the March board was misled, as was the market in the 4 April announcement, because they were not told about these forecasts. To the extent that the evidentiary facts concerning Mr Werner's forecasts go to showing the actual financial position of One.Tel at the end of March and the defendants' knowledge of it, and the lack of any reasonable basis for the April market announcement, they are evidentiary facts tending to prove the pleaded case and they can be used for that purpose. In my view it was not necessary to specify them in particulars. However, those evidentiary facts cannot be called upon to prove an unpleaded case of wrongdoing by the defendants along the lines that they misled the board by not informing the directors of Mr Werner's forecasts.

2.3.6.29 Full disclosure of the way in which the board cash flow figures for Europe had been formulated needed to be made (APS [691]; DPS [2896])

[270] This is covered by 26.3.6.28.

2.3.6.30 Mr Silbermann's evidence in connection with a conversation of 9 April with Mr Werner, if accepted, would indicate a complete abrogation on his part of his duty to apprise himself of the financial position of the company (APS [705]; DPS [2909])

[271] Paragraph 24(a) alleges that Mr Rich failed to take reasonable steps to monitor management, properly to assess the financial position and performance of the group and material adverse developments; and para 24(b) alleges that he failed to take reasonable steps to ensure that all material financial information was provided to the board so that it could assess the adequacy of cash reserves, the actual financial position of the various business segments, and key events and transactions. There are similar allegations against Mr Silbermann in para 35(a) and (b). In the Particulars document, para 14(c) ASIC says that if Mr Rich was unaware of any one or more of the January circumstances, he should have done a number of things including making inquiries with various people. Mr Werner was added to the list of such people by a letter of particulars dated 25 May 2005. In my view ASIC's submission is within this pleaded case against Mr Silbermann, on the basis that when the submission refers to Mr Silbermann's duty to apprise himself of the financial position of the company, it is identifying the duty pleaded in para 35(a) and (b).

2.3.6.31 Mr Rich concealed doubts which had been expressed to him as to achievement of the £17 million EBITDA for the UK (APS [711]-[725]; DPS [2921]-[2955])

[272] Mr Rich gave evidence that on about 28 March 2001 he told Mr Packer Jnr that the UK team were telling him they expected EBITDA to June to be £17 million but that it could be £14 million: 2 JDR 1262; T 11520-1. It was put to Mr Rich in cross-examination that he did not convey that element of doubt to the March board meeting. In my 14 July 2006 judgment I ruled (at [56]-[59]) that the question should be allowed, for reasons similar to my reasoning about the relevance of questions concerning the forecast given to the March board meeting.

[273] In my view ASIC's assertions of fact that the UK team had doubts concerning the UK EBITDA forecast are evidentiary facts going to the question whether there was a reasonable basis for the 4 April forecast to the market. But those allegations of fact cannot be used to support an unpleaded case to the effect that Mr Rich breached his duty of care and diligence by failing to tell the March board, when Mr Weston told the board that the UK was on track to achieve £17 million, that the UK team had told him the figure could be £14 million.

[274] In its pleading submissions ASIC contended that the submissions in chief on this subject are relevant to a lack of frankness by Mr Rich in his dealings with the March board concerning an important aspect of the company's group forecasts, going to whether he believed there was a proper basis for the forecasts presented to the meeting. But the question whether there was a proper basis for the forecasts presented to the meeting is outside the pleaded case.

2.3.6.32 The WorldCom payment plan arrangements were breached and Mr Silbermann misled the board by not informing it of that matter (APS [769]-[772]; DPS [3131]-3135])

[275] These allegations are about events said to have occurred late in May, leading to Mr Silbermann's failure to inform the board on 29 May that the WorldCom payment plan arrangements had been breached. The allegations are of evidentiary facts which, in my opinion, go to rebutting the defendants' case about the reasons for One.Tel been placed into voluntary administration.

[276] The defendants indicated in their opening that what occurred in late May was not "based purely on objective business considerations": T 10621. They have sought to show that the financial information that the board had at the time when it made its decision on 29 May (in particular, the Ernst & Young report and the PBL list of creditors of 21 May) did not justify the course that was taken, and so in that way the correctness and reasonableness of the Ernst & Young and PBL reports were put in issue. These topics were therefore proper subjects of ASIC's submissions in chief.

[277] The PBL creditors list included WorldCom for a debt of $13 million with the description "payment plan". The defendants contended in their submissions in chief (DPS 4798(g)(i)) that the figure for WorldCom was "subject to an agreed payment schedule", and therefore presumably inappropriate to be included in the list. ASIC's answer to this is that the payment plan had been breached by One.Tel and could not reasonably be expected to provide protection to One.Tel against a demand for immediate payment: APS 769.

[278] In my opinion, consistently with the principles I have set out concerning permissible responses by a plaintiff to a defence, outside the plaintiff's pleaded case, ASIC's submissions on these matters should be received and assessed for their effect on the defendants' case.

2.3.6.33 The conduct of the European business on the basis that UK carrier debts would not be called on for long periods was wholly inappropriate (APS [868]; DPS [3243])

[279] According to the schedule (para S 11(b)), the amount "owed" by companies within the UK operations of the One.Tel Group to trade creditors was approximately $80.6 million, of which approximately $56 million was "overdue" and at least $26.5 million had been "outstanding" for more than 90 days (see also the similar pleadings at paras S 28(a) concerning the March circumstances and para S 38(a) concerning the April circumstances). Evidence about the contractual terms of trade, and also about the practices of the carrier creditors and hence "normal business terms", is relevant to assessing the amount "owing" and "overdue", and also the amount that One.Tel would be required to pay in any given month as a matter of business reality. Therefore that evidence goes to the pleaded February, March and April circumstances.

[280] However, to submit that it was "wholly inappropriate" for the defendants to conduct the European business on the basis that UK carrier debts would not be called up for long periods is to submit a duty different from those alleged on the basis of these February, March and April circumstances, and therefore to pursue an unpleaded case.

2.3.6.34 The board was not sufficiently informed of the basis of One.Tel's dealings with its European carrier creditors during 2001 (APS [889]-[893]; DPS [3023]-[3049])

[281] ASIC contends that these submissions are supported by reference to the statement of claim in paras 24(b)(i) and (iii) (Mr Rich) and 35(b)(i) and (iii) (Mr Silbermann). Those subparagraphs claim that each defendant failed to take reasonable steps to ensure that all material financial information was provided to the board, and in particular information revealing the adequacy of cash reserves within the group and key events and transactions affecting the group's financial position and performance. It seems to me that ASIC's submissions in chief on the subject are principally assertions of evidentiary fact that can be treated as going to those parts of the statement of claim.

[282] But in my view, to the extent that they are so characterised, they are evidentiary facts that should have been identified in particulars, so as to enable the defendants to identify the case that was being made against them under paras 24(b) and 35(b). I have reached this view because an allegation against the defendants that they did not keep the board apprised of the normal terms of doing business with the European carrier creditors would in all probability require the defendants to review a substantial body of evidentiary material concerning board meetings and communications with directors of various kinds. ASIC's failure to give proper particulars was therefore an omission to put the defendants on notice of the allegation in a timely fashion so that they could prepare their response.

[283] It seems to me that the absence of express particulars averting to this matter is not overcome by para 15 of the Particulars document, which is identified in ASIC's pleading submissions. Para 15 does not relate to paras 24 and 35 of the statement of claim, and in any event it makes no reference to One.Tel's terms of trade with the European carriers. ASIC also referred to the Addendum to the Particulars document, which sets out certain paragraphs of Mr Carter's principal report including paras 303(b), (e) and (k). But these matters do not refer to terms of trade with the European carriers, and although they referred to "WorldCom's threat", the language would not put the defendants on notice that it would be alleged against them that they failed to inform the board of the basis of One.Tel's dealings with the European carrier creditors.

2.3.6.35 The March board papers gave a misleadingly positive impression as to the group's earnings position, as did the draft "on track" press release attached to the board papers (APS [920]-[922]; DPS [3278]-[3279])

[284] In its submissions in chief (APS [920]-[92]) ASIC complained that the board's attention was not drawn in the March board papers, at the March board meeting or in the March flash report to the difference between the September budget figure and the current forecast year-end EBITDA, and that the comparison in the March board papers between the year-end EBITDA forecast and the market expectation gave a misleadingly positive impression of the group's earnings position, as did the draft "on track" press release attached to the board papers. These are submissions about the alleged facts rather than an assertion of primary or evidentiary facts, and the question therefore is whether they are outside the pleaded case.

[285] As far as failure to refer to the September budget is concerned, my reasoning at 2.3.6.2 is applicable here. Further, since ASIC's submissions in chief on the subject about forecast year-end figures rather than about the January, February, March or April circumstances, my reasoning at 2.3.6.18 applies in that respect. My conclusion is that the submissions are outside the pleaded case.

[286] In its pleading submissions ASIC contended that the submissions about the March board papers were relevant as rebuttal of Mr Rich's evidence (1 JDR 745-6) that it was usual practice for either Mr Keeling or Mr Rich to speak to the non-executive directors individually after the board papers were dispatched, to draw their attention to key issues and answer any questions they might have. It seems to me that submissions concerning the misleading nature of the board papers do not go to rebutting general evidence about the practice of having individual discussions with board members after the board papers were dispatched, so I reject the submission.

2.3.6.36 The defendants should have had Ms Ashley's analysis undertaken long before April 2001 (APS [966]; [1094]-[1130]; DPS [3366]; [3529]-[3593])

[287] In my view, ASIC's submission asserts duty, presumably an aspect of the duty of care and diligence, which is outside the pleaded case. The submission is relevant to paras S 44, S 44B(a) and S 44C, which relate to the contribution, to the actual EBITDA loss in the fixed wire/service provider business, of a change in sales composition causing a decrease in gross margin. But the pleading does not assert any duty to cause Ms Ashley's analysis to be undertaken at an earlier time.

2.3.6.37 Mr Rich misled the packers about a number of matters at the 12 April 2001 meeting (APS [973]-[979]; DPS [3389]-[3394])

[288] ASIC's contention that Mr Rich made misleading statements at the meeting in relation to the overdue creditor position is a corollary of its pleading of the actual financial position of the company, when it sets out the January, February, March and April circumstances in the schedule: for example, at S 37 and S 38. In my view it is permissible to articulate that corollary in submissions, as a matter of asserted evidentiary fact. As what was said at the meeting was obviously in issue and there was evidence about it from ASIC's witnesses, there was no need for particulars to be given. It would not be permissible for ASIC to seek to erect these submissions into a separate breach of duty by Mr Rich, but in my view that is not what the submissions seek to do.

2.3.6.38 Mr Rich should have disclosed to Mr Packer Jnr the outcome of his work on 1104jrmssh.xls (APS [992]; DPS [3411])

[289] As expressed at APS [992], the submission appears to assert an unpleaded duty on the part of Mr Rich to contact Mr Packer Jnr to inform him of the outcome of his work on the cash flow, because it was germane to topics they had been discussing. Therefore, it goes outside the pleaded case.

2.3.6.39 Non-disclosure to the board of the 1104jrmssh.xls cash flow for may (APS [1038]; DPS [3457])

[290] ASIC's submissions in chief were that in the spreadsheet 1104jrmssh.xls, cash flow and cash balance forecasts for May were achieved by incorporating assumptions as to $16 million to be received from Telstra in relation to roaming and $10 million received from Optus, both on 31 May. According to ASIC there was no reasonable basis for expecting either of those receipts. Without them, the forecast cash flow for May would have been down by $38.3 million on the March board papers forecast. ASIC then adds:

No disclosure was made to the board of this changed position.

[291] It seems to me that the last sentence implies the assertion of a duty on the part of the defendants to make that disclosure, at a time after the March board meeting. The pleadings allege that the March board papers were misleading in various respects, but they do not assert any duty and breach of duty in relation to non-disclosure of changed forecasts made about 6 weeks after the board meeting occurred. Therefore the last sentence is a submission outside the pleaded case.

2.3.6.40 One.Tel's CSPA dispute with Telstra was completely speculative, had no legal basis and was not bona fide (APS [1136]-[1167]; [1454]; DPS [3597]-[3636]; [4804])

[292] This is governed by my reasoning at 2.3.6.17, and is a submission asserting evidentiary facts and making submissions drawing conclusions from those facts, all within the pleaded case.

2.3.6.41 The statement made by Mr Rich at the 17 May board meeting concerning the bank balance was incorrect (APS [1166]; [1434]; DPS [3635]; [4256])

[293] ASIC submitted (APS [1166]) that Mr Rich said at the board meeting that One.Tel had $20 million in the bank, whereas in fact it only had $9 million at close on 17 May. Although that submission was somewhat out of place, in the context of submissions about One.Tel's position regarding Telstra, it was a submission going to the actual financial position of One.Tel at 17 May, and accordingly an allegation of evidentiary fact going to rebut the defendants' case about the reasons for One.Tel been placed into voluntary administration: see 2.3.6.32.

2.3.6.42 Mr Rich deliberately misled the board on 17 May concerning Telstra (APS [1167]; DPS [3636])

[294] The submissions criticise Mr Rich for making a statement to the board implying that Telstra would accept or acquiesce in withholding the payment due on 21 May, because of the "fixed wire claim". ASIC submitted that Telstra's most recent letter had made it clear that it would treat non-payment as a serious breach and was nowhere near being prepared to recognise One.Tel's foreshadowed damages claim. These are submissions of evidentiary fact. It seems to me that they are permissible, without particulars, because they support ASIC's case that by 17 May One.Tel's financial position was dire, and therefore they are evidence tending to rebut the defendants' case about the reasons for One.Tel being placed into voluntary administration: ee 2.3.6.32. It would not be permissible for ASIC to submit that Mr Rich's statement on this matter to the 17 May meeting was a breach of duty on his part, because that would be outside the pleaded case, but as I read the submissions that is not contended.

2.3.6.43 One.Tel's claim against Optus was not bona fide (APS [1168]-[1207]; [1416]-[1421]; [1454]; DPS [3637]-[3719]; [4228]-[4240]; [4804]; [5615])

[295] In my opinion ASIC's submissions about the claim against Optus are a combination of allegations of evidentiary fact and submissions drawing conclusions from those facts about the bona fides of the claim. They go to the amount of One.Tel's overdue creditors at the end of March and April and therefore to the March and April circumstances. They also go to answering the defence, to the extent that the defendants assert that amounts claimed by creditors including Optus were justifiably disputed by One.Tel. It would not be permissible for ASIC to seek to raise an unpleaded case about misleading conduct on the ground that the defendants had prosecuted a claim that was not bona fide, but as I read the submissions they do not purport to do so.

2.3.6.44 Mr Rich misled the board at its meeting of 17 May in relation to the Optus dispute (APS [1208]-[1209]; DPS [3720])

[296] In its submissions in chief, ASIC referred to Mr Rich telling the 17 May board meeting that One.Tel had withheld $10 million from Optus because it had not been receiving call records in respect of some tolling customers, and it submitted that this was far from being a fair and frank description of the status of the claim against Optus, and that Mr Rich should have disclosed consistently with the April reforecast that the claim could only be regarded as worth $1.7 million.

[297] To the extent that the submissions are assertions of evidentiary fact, they go to the financial position of One.Tel at 17 May, tending to support ASIC's claim that the financial position was dire and therefore rebutting the defendants' case about the reasons for One.Tel being placed in voluntary administration. It would not be permissible to raise a separate case of breach of duty against Mr Rich on the ground that he breached his duty by making statements to the 17 May board that were not fair and frank and were therefore misleading, but in my opinion ASIC is not seeking to do this at APS [1208]-[1209].

2.3.6.45 The roaming charges dispute has not been shown to be bona fide and the evidence of a bona fide dispute as to these charges is purely a matter of speculation (APS [1210]-[1229]; [1454]; DPS [3721]-[3761]; [4804])

[298] Submissions about the validity of the roaming charges dispute are permissible as assertions of evidentiary fact and submissions going to the pleaded case, for the reasons given at 2.3.6.17 and 2.3.6.43. It would not be permissible for ASIC to seek to establish an unpleaded case to the effect that the defendants engaged in misleading conduct by pursuing an unwarranted dispute with Telstra that was not bona fide, but in my view that is not what ASIC has purported to do.

2.3.6.46 Mr Rich misled the board at its meeting on 17 May in relation to the Telstra claim (APS [1225]; DPS [3721]; [3762])

[299] In its submissions in chief (APS [1225]), in the context of addressing the Telstra roaming charges dispute, ASIC submitted that it was misleading of Mr Rich to infer that the overcharging by 25% that he referred to would justify the withholding of $11 million, and also misleading or Mr Rich to fail to disclose Telstra's rejection of the dispute and his belief that if Telstra insisted on payment, One.Tel would have to pay.

[300] It seems to me that this submission seeks to raise an unpleaded case against Mr Rich for misleading the 17 May board. The submission does not go to the true position regarding the roaming dispute, and therefore does not go to the pleaded allegations about One.Tel's financial position in March and April or to answering the defendants' case, but is entirely directed to the separate matter of an alleged misleading statement to the board.

2.3.6.47 Mr Rich misled the board at its meeting of 17 May by "not disclosing" Telstra's rejection of the disputes (APS [1225]; DPS [3721]; [3762])

[301] This goes outside the pleaded case, for the reasons given at 2.3.6.46.

2.3.6.48 Mr Rich misled the board at its meeting of 17 May by not disclosing his belief that if Telstra insisted on payment, One.Tel would have to pay (APS [1225]; DPS [3721]; [3762])

[302] This goes outside the pleaded case, for the reasons given at 2.3.6.46.

2.3.6.49 No disclosure by Mr Silbermann in his email of 17 April of certain matters (APS [1233]; DPS [3766])

[303] In its submissions in chief, ASIC referred to an email by Mr Silbermann to Mr Packer and 17 May supplying EBITDA figures for the fourth quarter, and it submitted that there was no disclosure in that email of the severe problems that One.Tel was having with its creditors on a number of fronts, nor of the disastrous cash position suggested by the work that Mr Silbermann and Mr Rich had done on the cash flow on Easter Monday; nor did Mr Silbermann subsequently disclose to Mr Packer Jnr the adverse news as to European EBITDA for April contained in Mr Boaden's email of 19 April. These are submissions partly alleging evidentiary facts and partly inviting the court to make inferences and draw conclusions from alleged facts.

[304] In my opinion the submissions partly go to the pleaded case about the April circumstances. Where an email was sent to a director that did not disclose what ASIC contends to have been the true financial position, one would expect ASIC to criticise the email as inaccurate or incomplete, and submissions to that effect are clearly directed to the pleaded case. To the extent that the submissions imply that Mr Silbermann was under a duty to disclose matters that he did not disclose and was therefore in breach of duty, they go beyond the pleaded case.

2.3.6.50 No disclosure by Mr Silbermann to Mr Packer of information contained in Mr Boaden's email of 19 April (APS [1234]; DPS [3766])

[305] See my reasons at 2.3.6.49.

2.3.6.51 Late April global forecast (APS [1305]-[1314]; DPS [3847]-[3849])

[306] In its submissions in chief, ASIC attacks the content of the Global Forecast for April and May prepared in late April, provided to Mr Miller and Mr Green. It contends that the May forecast cash flow for the Australian operations should have provided for additional payments to Optus and Telstra of $36.85 million, and that the May forecast cash flow for the European operations reflected decisions to defer payment of creditors.

[307] These submissions go to the cash requirements for One.Tel at the end of April, pleaded in paras 11(a), 23(d) and 34(d). They are principally evidentiary facts directed to the pleaded case, not requiring to be included in particular is because they seek to rebut evidence that might otherwise appear to be inconsistent with the pleaded case.

2.3.6.52 From 4 May 2001 One.Tel Australia was in an overall cash deficit position without an approved overdraft (APS [1391]; [1486]; DPS [4200]; [4552])

[308] ASIC's submission is an allegation of evidentiary fact going to the cash requirements for the company as at 30 April, as pleaded in paras 11(a), 23(d) and 34(d) of the statement of claim, and not requiring to be included in particulars.

2.3.6.53 Statements to Mr Howell-Davies about a $40 million gap (APS [1401]; DPS [4205]-[4212])

[309] The thrust of ASIC's submissions in chief is that the court should conclude, after reviewing the contested evidence of what was said Mr Howell-Davies, that he was told that there was a $40 million revenue gap, not a $40 million billing gap. This is allegation of evidentiary fact going to the true financial position of the company at the end of March and April, as pleaded, and specifically whether there ever was $40 million of missing data. It cannot be used to support an unpleaded case to the effect that the board or Mr Howell-Davies was misled about this matter in breach of duty, but it seems to me that the submissions seek to use the evidence to draw conclusions about the actual financial position and therefore the pleaded case.

2.3.6.54 The WorldCom dispute was not bona fide (APS [1481]; [1454]; DPS [4550]; [4804]-[4805])

[310] This is a contention of evidentiary fact within ASIC's pleaded case, for reasons given at 2.3.6.17.

2.3.6.55 The 17 May board papers contained "significant misstatements and non-disclosures" (APS [1430]; DPS [4253]-[4254])

[311] At APS [1430] ASIC alleges that there were six "significant misstatements and non-disclosures" in the 17 May board papers.

[312] The first is that there was no disclosure that there had been no significant billing of the $40 million of supposed missing billing described in the March board meeting. The implied assertion that there had been no significant billing is an assertion of an evidentiary fact going to the pleaded case, but the implied assertion that there was a duty to make disclosure at the 17 May board meeting, and a breach of that duty, is the assertion of an unpleaded case.

[313] The second, third and fourth matters are that there was no disclosure of the overdue creditors position and the extensive deferral of creditor payments, the very large earnings shortfall against budget, and the inadequacy of the provision for doubtful debt and lack of appropriate monitoring of the adequacy of the provision. While there is a substratum of evidentiary fact related to the pleaded case, the principal thrust of these submissions is to assert a duty to make disclosure and breaches of that duty, and so the submissions are outside the pleaded case.

[314] The fifth matter is that the reference made to the "Telstra issues" implied that there was a basis for bona fide complaint against Telstra whereas in fact there was not. The thrust of this is to complain of breach of a disclosure duty, outside the pleaded case.

[315] The sixth matter is that the reference to "carriers in Europe changing usual trading terms" misstated dealings between One.Tel in each European carrier. While there is a substratum of evidentiary fact, again the principal thrust seems to be to allege a duty (this time not to mislead the board) and breach of that duty. That is outside the pleaded case.

2.3.6.56 Mr Silbermann's "gut feel" (APS [1455]; DPS [4806])

[316] ASIC's submission in chief (APS [1455]) is that at the end of May Mr Silbermann should have been applying himself assiduously to assisting the shareholders to understand what the true financial position of the company was, but he failed to do so. ASIC claimed that this was illustrated when Mr Silbermann was asked in cross-examination whether he investigated what was due or overdue in Europe at the end of May, and he replied by saying he had a "gut feel for what I thought was owing and disputed and what the usual business terms were": T 13814. This submission is an assertion about Mr Silbermann's duty to shareholders at the end of May and his failure to discharge it, and that is outside the pleaded case.

2.3.6.57 Mr Silbermann's failure to bring to the attention of the board the information contained in Mr Werner's email of 23 May (APS [1456]-[1457]; DPS [4806])

[317] At APS [1456] this alleged failure is said to be another illustration of Mr Silbermann's failure to perform his duty to creditors. It is outside the pleaded case.

2.3.6.58 Mr Rich not entitled to rely upon Ernst & Young's report of 21 February 2001 in relation to the provision for doubtful debts (APS [1610]-[1627]; DPS [5126]-[5145])

[318] The statement of claim alleges the inadequacy of the provision for doubtful debts: schedule, paras S 40-41. The defence (S 40(f)) and Mr Rich's affidavit (2 JDR 1254) rely on the Ernst & Young review closing report of 20 February 2001 to support the proposition that the provision was reasonable. The submissions at APS [1610]-[1627], directed to attacking the Ernst & Young report in various ways, relate to ASIC's pleaded case and respond to the defence.

2.3.6.59 What the board should have been told in March about management accounts and figures provided to the board (APS [1745]; DPS [5558]-[5560])

[319] At APS [1745] ASIC makes a number of submissions concerning Mr Silbermann's evidence that he was told by Mr Hodgson on 20 April that the management accounts for the fixed wire business had not been signed off for the first quarter. One of them is that the board was not told in the March board papers or at the March board meeting that there was any difficulty in preparing the usual management accounts, and that it should have been told that the management accounts for January and February had not been prepared in the usual fashion and that the figures the board was given were not derived from such accounts but were estimates.

[320] The statement of claim alleges that Mr Rich and Mr Silbermann respectively failed to take reasonable steps to ensure that all material financial information was provided to the board, including the actual, not simply estimated, financial position and performance of the various business segments of the group and key events and transactions affecting the financial position: paras 24(b) and 35(b). Paragraph 15(a) of the Particulars document refers to Mr Rich requiring that the board be promptly provided with monthly management accounts.

[321] In my opinion the submission relates directly to the pleaded case and does not stray outside it.

2.3.6.60 Mr Silbermann's involvement in the reforecast (APS [1773]; DPS [5605])

[322] In dealing with the fixed wire/service provider Reforecast prepared by Mr Hodgson in late April, ASIC submits (APS [1773]) that it is difficult to imagine that Mr Silbermann did not involve himself deeply in the preparation, or at least approval, of the Reforecast, given that it was to be provided to Mr Miller and Mr Green, that it related to a significant part of the overall businesses of One.Tel, and that Mr Silbermann was finance director of the company. The submission adds, "Certainly, he should have".

[323] Paragraph 35 noted (a) of the statement of claim pleads that Mr Silbermann failed to take reasonable steps to monitor management of the One.Tel Group or properly to assess One.Tel's financial position and performance, and that he failed properly and promptly to assess material adverse developments affecting its financial position and performance. In my opinion the submission, including the last sentence, goes to proving that allegation.

2.3.6.61 Whether events occurring in April were foreseeable (APS [1840]; DPS [5681])

[324] At 2 JDR 1681-1693 Mr Rich responded to Mr Carter's analysis of the reduction in the group's cash balance during the January to May period, identifying various reasons for the reduction and saying he believed at the time that the issues would be overcome and "caught up"; but during April there were adverse developments which prevented that from happening, including a change in attitude by WorldCom and the other European carriers and slower than expected processing and billing of the unbilled CDRs. Mr Rich's evidence is directed to answering ASIC's case by setting out a series of reasonable responses to the events that unfolded. It was permissible for ASIC to answer that evidence, and one of the ways it did so was to assert that the adverse developments in April were of a nature that should have been foreseen. It seems to me that this is not the assertion of a new case, but rather it is part of an answer to the defendants' case, and therefore the submission is permissible.

2.3.6.62 One.Tel's businesses were in a parlous state during 2001 (APS [1875]-[1908]; DPS [5803]-[5861])

[325] At APS [1875]-[1908] ASIC made some summary submissions addressing the state of each of One.Tel's main businesses during 2001. They are partly assertions of evidentiary fact and partly submissions about the facts. In my opinion the submissions go to proving the pleaded January, February, March and April circumstances, to the alleged contraventions in paras 24 and 35, the pleaded cash requirements in para 11(a) and the loss and damage allegations in paras 58-59 of the statement of claim. They do not assert a case outside the pleaded case.

2.3.7 Conclusions as to ASIC making submissions outside its pleaded case

[326] In the course of reviewing the 62 matters identified by the defendants in 2.3.6 above, I have identified quite a few occasions where, in my view, ASIC has made submissions that are outside its pleaded case. I have considered, in respect of each of these occasions, whether I should exercise my discretion to allow departure from the pleaded case, having regard to considerations of justice in the instant circumstances. On each of the occasions where I have found a transgression, I have reached the view that justice requires that ASIC be held to its pleaded case.

[327] Without attempting, in this summary of my conclusions, to be definitive of every consideration arising on each occasion, I have taken into account that ASIC has submitted that its case is as pleaded in the statement of claim, and it has sought to justify the challenged submissions by reference to that pleading without seeking amendment, and that the defendants have raised their objections to departures from the pleaded case in a timely and forceful manner, so as to indicate that they do not acquiesce in any departure whatever.

[328] On the occasions when I have found that ASIC has exceeded its pleaded case, the contention has raised, in my judgment, a serious matter affecting the reputations of the defendants and raising allegations of fact that the defendants would wish to answer if they had an adequate opportunity to do so. On some occasions the defendants had no notice that the impugned allegations would be made until after they filed their affidavits and were in cross-examination; on other occasions relevant evidentiary matters were raised in ASIC's case in chief (including the evidence given in London), but without any articulation of the full scope of the submissions that it would be made; and on a few occasions there appears to have been no notice of the allegation until the submissions in chief were served. I am not satisfied that, on any of the occasions in question, the defendants have had an adequate opportunity to respond. I have tried to take into account, in a practical way, how the defendants would have responded to the allegations if they had received them in a more timely manner, and I have concluded on each occasion that the response they would have made was significantly impeded by the lack of adequate notice of the kind they would have received had the allegation been pleaded.

[329] I have therefore decided, on each occasion, that the submissions going outside the pleading should not be permitted to extend ASIC's case. I have reached my conclusion without placing any emphasis on the fact that these are civil penalty proceedings in which the defendants have recourse to the penalty privilege. To the extent that such a matter is relevant, it would only reinforce my conclusion. In the circumstances, to the extent that the submissions go outside the pleaded case, they are not relevant to the matters I have to decide and I will not deal with them.

3. Issues about evidence

[330] The defendants have raised a number of issues of a preliminary kind, that I have grouped together loosely under the heading "Issues of Evidence". They are addressed by ASIC in its submissions in reply. They relate to the following matters, which I shall consider in turn:

•

"critical documents";

•

"recurring themes";

•

the onus of proof;

•

the standard of proof;

•

the rule in Blatch v Archer (1774) 1 Cowp 63 ; 98 ER 969 (Blatch);

•

the Jones v Dunkel (1959) 101 CLR 298 ; [1959] ALR 367 ; [1959] HCA 8 (Jones) inference;

•

the rule in Browne v Dunn (1893) 6 R 67 (Browne);

•

the alleged special duty of fairness of ASIC.

3.1 "Critical documents"

[331] During the course of opening ASIC's case on 8 September 2004, senior counsel for ASIC handed up a summary document headed "References to Some Significant One.Tel Records", which became AS 5. In that document ASIC referred to the following documents, with evidentiary references and references to its chronology:

Creditors

Australian Aged Creditors Report (28-2-01);

UK Aged Creditors Report (28-2-2001);

Deferred Payments Listings (9-1-01; 31-3-01; 30-4-01);

Debtors

Bill Runs Spreadsheet (actuals to 30-5-01)

Bill Run breakdown (sample)

Aust Collections Profile Summary (30-3-01)

Bell curve

Earnings

Daily Cashflow Spreadsheet (actuals to 30-5-01)

March Cashflow Forecast

April Cashflow Forecast

MS, SH instructions.

Billing

Ashley memorandum (29-3-01)

Butcher paper presentation re billing

Spreadsheet re Gross Margin

General

Budgets

Trial Balances

Management Accounts

Flash Reports

Board Papers

[332] The defendants said that AS 5 was ASIC's record of the principal documents and categories of documents upon which it relied for proof of its case as to the financial position of One.Tel: DPS [151]. In my view that is not an accurate description of AS 5. The document itself refers to "some" significant One.Tel records. When handing it up, senior counsel for ASIC described it as a short document that listed "some of the significant One.Tel records", and "an overview": T 171.

[333] In fact ASIC came to rely on many documents not included in the list, or only identified very broadly. To take just one example, the spreadsheet 2403C.xls came to be very important in cross-examination and submissions, as were the worksheets relating to the New Feb Baseline, but AS 5 gave no indication of the importance that would be attached to those documents, the only relevant reference being the general reference to March and April cash flow forecasts. Nevertheless, AS 5 certainly identified some of the significant documents upon which ASIC rested its case.

[334] The defendants have objected to the way ASIC used these documents in its opening, during the trial and in final submissions. In particular, the defendants objected that ASIC took the position that the documents proved themselves, and that inferences about what they were, how they were created, whether they were final versions, and their reliability, should be drawn by the court, mostly in the absence of any witness to explain them: DPS [152]. They submitted (DPS [155]) that the vast majority of documents which are critical to ASIC's case, although they have passed a low threshold for admissibility:

(a)

have been shown to be unreliable in proving what ASIC asserted;

(b)

have been shown to be documents about things different from what ASIC asserted;

(c)

are not capable of giving rise to the inferences that ASIC initially (and subsequently) suggested should be drawn from them;

(d)

remain of an unclear status; or

(e)

for other reasons do not support the ASIC case.

[335] The general proposition that ASIC has used its documentary evidence in an objectionable way, by seeking to persuade the court to draw inferences from unclear documents in the absence of explanation from witnesses, was taken up and developed in the defendants' submissions, under the heading "Recurring themes".

3.2 "Recurring themes"

[336] The defendants submitted that ASIC's case has a number of remarkable features to which they object: DPS [72]. It is not entirely clear from their submissions whether the "recurring themes" about which they speak are themes emerging from ASIC's case or themes that they develop in their submissions in answer to ASIC's case. I shall proceed on the basis that the recurring themes are themes developed by the defendants. They have to do with:

•

the risk that certain kinds of documents, which are susceptible to misunderstanding for one reason or another, will be misconstrued in the absence of proper explanation;

•

the absence of witnesses to explain those documents; and

•

the inherent improbability of ASIC's case about the defendants' failure to disclose to the board.

3.2.1 Documents susceptible to misunderstanding

[337] According to the defendants (DPS [237]), there are many examples where ASIC has tendered a document pursuant to the business records exception to the hearsay rule without any proper identification of what the document is: for example, who is its author, what level of seniority did its author have, what was its purpose, what assumptions were made in the course of its preparation, was its final or a draft, would its author have relied upon it without adjustment, was it a report of sufficient reliability to warrant placement before the board of directors? I agree with them that in respect of some documents, some or even all of these matters are unclear. The mere fact that documents have been held to be admissible as business records or under s 1305 does not ensure clarity on these matters.

[338] The differences in degree of reliability of business records were graphically described by Lockhart, Wilcox and Gummow JJ in Arnotts Ltd v Trade Practices Commission (1990) 24 FCR 313 at 356-7 ; 97 ALR 555 at 601 (Arnotts). Their Honours were dealing with a submission that, though various documents (the Weston documents) were admissible as business records, it was dangerous to give them any weight. They said:

The reliance which may properly be placed upon a document tendered under the circumstances we have described [as business records] must depend largely upon the nature of the document. On one extreme is a document whose nature and origin is apparent on its face and which deals entirely with matters of fact, for example, a factory's production records. Unless there is some reason to doubt the authenticity or accuracy of the document, it may be reasonable to place considerable weight upon the document, even though there is no witness who worked at the factory at the relevant time. By its very nature it is likely to be reliable. To disregard it, simply because of the absence of a witness, would be to spurn one of the major benefits of Part IIIA [of the Evidence Act 1905 (Cth), dealing with business records].

On the other extreme may be a document whose origin is proved, in the sense that it is shown to come from a particular organisation, but whose status is obscure. Beaumont J [at first instance] had this situation in mind when, in argument, he commented that some particular documents "could be a draft, they could be an interim report that was rejected by the board". It may be dangerous to give weight to a document of this nature -- for example, one containing plans for the future or comments about policy, as distinct from precise information -- without knowing its status and author.

The only Weston documents upon which Beaumont J placed reliance in his reasons were a letter written by the company secretary and the Weston Business Plan. There was no issue about the identity or status of the author of the first document, although there was some argument as to the inferences which should be drawn from its terms. As to the business plan, this is a lengthy document, obviously prepared at a senior level; but the identity of the author is not disclosed by either the evidence or the document itself. Although the document contains some factual information, about which one might have more confidence, the passages used by his Honour were comments containing subjective evaluations of the positions of market participants. Without knowledge of the identity of the author of the document, we would not place any significant weight upon these comments.

[339] I respectfully accept these observations, and I regard them as potentially applicable to many of the documents upon which ASIC has rested its case. While I accept that the weight to be given to the various documents tendered by ASIC needs to be considered on a case-by-case basis in relation to the particular documents or types of document in question (ASR [237-41]), nevertheless the Full Federal Court's observations suggest that no significant weight should be given to:

•

computer-generated records, if there is significant doubt about what inputs were made, what systems existed for the preparation of the documents and what data inputting process was adopted;

•

documents involving judgments, if there is significant doubt about who made the judgment, what level of seniority that person had, whether the author of the document regarded it as complete or a work in progress, and whether it was based on assumptions or "scenarios" that were not articulated;

•

analyses, if there is significant doubt about the source of the document, the methodology employed, whether the author regarded the source materials and methodology as sound or having some limitations, and if so, what those limitations were; and

•

reports, if there is significant doubt about the level of seniority of the personnel involved and how much time they had to prepare the report.

[340] ASIC submitted that to take such an approach would be to defeat the purpose of the business records provisions: ASR [241]. That would be so if, as the defendants' submissions seem to imply (DPS [241]), no weight should be given to such documents unless there is positive evidence about the listed matters. But I have reformulated the defendants' submissions so as not to insist on "knowledge" about the listed matters in every case. There will be some occasions where, for example, there is no reason for concern about inputs to computer-generated records, or where the authorship of a report or document involving a judgment can be inferred from the document and evidence of surrounding circumstances, or even where it is enough to infer that the document was prepared by someone of seniority. Nevertheless I agree with the defendants to the extent that the listed matters are matters to which the court should direct its attention, and where there is real doubt about them, the weight to be attached to the document will be substantially reduced.

[341] Correspondence is in a different position because it is often appropriate to make inferences from the face of the documents. In the Arnotts case the court noted that Beaumont J had placed reliance on a letter written by the company secretary and there was no issue about the identity or status of the author. Provided the correspondence makes clear who the author was, and there is evidence about the capacity and authority of that person, it is normally possible to reached conclusions about the significance of the document from the text itself. The defendants' submissions about correspondence (DPS [241]) were exaggerated, but I have adopted their submissions about computer-generated records, documents involving judgments, analyses and reports.

[342] The defendants are concerned about documents relied on by ASIC as "authoritative" in some way, which are not traditional business records like board papers or ledgers: DPS [73]. The documents to which they address "recurring themes" submissions at DPS [73]-[117] are said to have special characteristics, identified in the defendants' submissions (DPS [73]) as follows:

(i)

they often have the appearance of drafts or scenarios or rough working papers;

(ii)

they are contentious as to their nature, meaning and underlying methodology;

(iii)

they are not accompanied by any notes or other descriptive material indicating how they were prepared, for what purpose and on what basis;

(iv)

there is uncertainty as to what, if any, use was made of them internally at One.Tel;

(v)

ASIC has not called any witness to explain the documents.

[343] The defendants have developed these themes by referring to three examples of the kinds of documents they have in mind. I shall deal with these examples in turn.

3.2.1.1 Management accounts for the fixed wire/service provider business

[344] First, they referred to the management accounts for the fixed wire/service provider business: DPS [84]-[85]. The management accounts for January, February and March 2001 contained figures that are at odds with board papers and flash reports. The defendants' evidence is that the documents were drafts that were not completed due to difficulties in arriving at proper revenue accruals, because of the disruption to the billing system in early 2001. ASIC has not called any witness to attest to the status or reliability of the documents, but it asks the court to infer that they were final management accounts and therefore to conclude that the figures contained in the board papers were incorrect, evidently to the knowledge of all concerned.

[345] In my opinion, the defendants' submission is substantially correct. I consider the management accounts in detail in Ch 20, and there I reach the conclusion that ASIC has not shown that the documents it invites the court to treat as the January, February and March management accounts for the fixed wire/service provider business were final management accounts for that business. The status of the documents could have been clarified if evidence had been given by one of the company's finance executives responsible for the preparation of those accounts, such as Mr Holmes or Ms Nassif, but they were not called.

3.2.1.2 Profile summaries

[346] Second, they referred to collection profile summaries and profile summaries, and other documents relating to debtors and provisioning: DPS [86]-[89]. In my judgment on the admissibility of Mr Carter's evidence, ASIC NSWSC 149 (7 March 2005), at [85], I noted that the profile summary documents were in some respects not self-explanatory, and that Mr Carter interviewed Mr Basman, actively asking him questions, on 20 November 2001 in the course of preparing his report to assist ASIC to decide on the initiation of proceedings. The topics of the interview included credit checks and credit limits of customers, the process by which One.Tel checked adherence to credit limits, the percentage of collections of debts more than 90 days old and Mr Basman's belief as to the percentage of debts that was collectible. Mr Basman later provided a statement (ASIC NSWSC 149 at [147(p)]), and Ex D 22 indicates that Mr Basman gave further assistance to ASIC in April/May 2005, June 2005 and April 2006. Yet he was not called as a witness, and ASIC invited the court to draw conclusions from the documents without the benefit of the explanation that he could have provided. The defendants submitted that in some respects the profile summary documents remain obscure: DPS [94]. I agree with the defendants' submissions.

3.2.1.3 European Consolidated Accounts Wireline

[347] Third, the defendants referred to a spreadsheet headed "European Consolidated Accounts Wireline" which is Annex C to Mr Boaden's affidavit of 13 October 2004 (also at Exs CE S 7 0001 and JDR 4/1560), and is considered at 12.5.3 below. The document was prepared by Mr Werner late in March 2001 and purports to show cash usage for the consolidated European wireline businesses for April 2001 of $22,965,236, a figure out of line with the figures reported to the March board meeting, which showed cash generation of $5 million, $13 million and $17 million respectively for April, May and June. At APS [657]-[659], [661]-[666], ASIC relied on this document as evidence to show that the forecast cash flow figures in the March board papers for the international businesses for April, May and June 2001 did not have any proper basis: DPS [90]. Mr Rich said in cross-examination that the document was a draft and was incorrect: T11621. The defendants submitted that although the document was prepared by Mr Werner, he gave no evidence about it, and it was not suggested to any of Mr Weston, Mr Boaden and Mr Werner by ASIC when they gave oral evidence that the figures in the March board papers were wrong or without a proper basis. I agree with this submission.

3.2.2 The risk that in the absence of proper explanation, documents will be misconstrued

[348] The defendants identified some occasions when, they submitted, ASIC or others misunderstood documents. The submission was directed to showing the inherent danger of the court drawing inferences from financial documents without an explanation of what they are. Four examples were given.

3.2.2.1 ASIC's interpretation of "to-be-billed" reports

[349] First, reference was made to the "to-be-billed reports": DPS [92]. The defendants said that when ASIC opened its case, it treated the to-be-billed reports as a breakdown of the components of One.Tel's billing runs, and it invited the court to infer that they showed a very high proportion of "local calls", a matter which went to prove that the defendants should have known about the "traffic mix" issue in the Australian fixed wire business (an issue that emerged from the work of Ms Ashley in late April 2001), at a much earlier stage. In my view that is a correct summary account of the relevant points made in ASIC's opening address: see T 117, T 3568. I specifically asked senior counsel for ASIC at T 117 whether the to-be-billed report at Ex CE 4 0021 was a record of every single account that was billed in the relevant billing run and he answered in the affirmative.

[350] In her cross-examination 11 months later, Ms Ashley gave evidence that the to-be-billed reports were not reports of all of the calls to be billed in the relevant months, but instead they dealt only with calls, referable to the relevant month, that had at the time of the report been identified as not having been billed in that month; thus the reports were relevant to assisting the accruals process so as to arrive at a monthly revenue figure: T 5528. It follows from this evidence that the to-be-billed reports were not reports about the breakdown of the whole of each billing run into component parts, such as local calls.

[351] In its submissions in reply, ASIC resisted the claim that the to-be-billed reports had been misunderstood in the opening address. It referred to some evidence of Ms Ashley in re-examination, to the effect that the reason that the reports would be an unreliable tool to be used in margin analysis was that they only represented a portion of the month's billing, and the margin analysis should be done for the whole of each month. ASIC then submitted (ASR [92-3]) that the reports could be used to give an indication of the level of local calls, because Mr Rich gave some evidence having the effect that about half of the data referable to a month would be in the to-be-billed report for that month, and since each report identifies, by initials, the different types of calls and carriers, the percentage of local calls for the month could be calculated.

[352] In my view this submission misses the defendants' present point, which is that ASIC misinterpreted the reports in the opening address by treating them as breakdowns of each month's billings. I think that mistake is established. The argument seems to be that the reports could be used for margin analysis by treating them as relating to half of the relevant month's data, ascertaining the percentage of local calls for that half and then treating that percentage as the overall percentage of local calls to total billings for the month. But that argument makes various assumptions that are unproven. For example, it assumes that the proportion of calls to be billed that are local calls is the same as the proportion of local calls to total calls for the month. It may be that local calls are a higher, or a lower, proportion of unbilled and to be billed calls than the proportion of local calls bear to the total calls for the month. For example, if the defendants' evidence is accepted, Telstra was slow in supplying CDRs, and that may have meant that a disproportionately high number of local calls was unbilled and to be billed in a given month.

[353] In my opinion the defendants' submission is correct, and it indicates that ASIC fundamentally misconstrued this documentary evidence, the true significance of which had to be explained by a One.Tel officer who was aware of how the documents were used.

3.2.2.2 Mr Carter's interpretation of profile summaries

[354] Second, the defendants submitted that Mr Carter mistakenly construed the collection profile summaries and profile summaries that are in evidence: DPS [94]. This is a matter I considered at some length in my judgment on the admissibility of Mr Carter's evidence, ASIC NSWSC 149 (7 March 2005) at [227]-[236]. One of my conclusions was that in preparing the part of his principal report that dealt with alleged under-provisioning for doubtful debts (evidence that was rejected), Mr Carter assumed that documents entitled "profile summaries" were prepared on the same basis as, and were directly comparable to, documents entitled "collection profile summaries". I noted that there were at least three versions of the profile summary document as at 30 June 2000, each of which had different figures for "total" debtors, and that some of the summaries were described on their face as "drilldown reports" and others as "360 day reports", and that Mr Carter said in the witness box that he was unaware of those differences and could not provide explanations. The defendants submitted that Mr Carter fell into error by assuming that the various documents were comparable.

[355] My conclusion in the 7 March 2005 judgment (at [236]) was that Mr Carter was probably led to assume that the documents were comparable by information he was given in his discussions with Mr Basman, on which he had unconsciously relied in the course of writing his forensic report. Therefore, while this is an illustration of the utility of having someone explain such documents, it is probably not an example of simple misconstruction of documents.

3.2.2.3 ASIC's reliance on Australian aged creditors reports

[356] Third, the defendants referred to Australian aged creditors reports: DPS [95]. They submitted that although these documents have every appearance of being straightforward business records, they were exposed as unreliable by the evidence in cross-examination given by Ms Randall. Ms Randall was being asked about an entry on one of her deferred payments lists for Global.One, and she was taken to an Australian aged creditors report for 27 February 2001: Ex CE 6 0068. It was suggested that the aged creditors report showed that a credit note had not been applied to an invoice, and she said she never referred to this ledger because she was told by the accounts payable manager, when she first started at One.Tel, that it was not reliable because it contained anomalies, and she conceded that old amounts that had been disputed and were no longer payable still remained in the ledger without being purged: T 5209-10. I agree with defendants that this episode shows that the significance that one would attribute to documents on their face may well be different from the significance they actually were given by those who knew about them.

3.2.2.4 ASIC's treatment of figures for future periods as considered forecasts

[357] Fourth, the defendants questioned whether the court should infer that every document containing figures relating to future periods should be regarded as a considered and final forecast by some responsible manager as to what was actually expected to happen: DPS [96]. The defendants contended that in the absence of evidence from someone who prepared or used the document, the proposition that figures about a future period were a considered forecast could only be an assumption, as it is "a commonplace aspect of modern business practice (facilitated by the ready availability of spreadsheet programs allowing for the easy manipulation of assumptions in forecasting) for companies to prepare any number of documents which might appear to be "forecasts" but which in fact can be merely "drafts" or "scenarios" run on assumptions which may not at all represent the operator's view as to what is actually likely to happen": DPS [98]. This, they said, was especially likely in the case of documents forming part of the business planning process, where drafts often go through numerous iterations in which the underlying assumptions are debated and refined.

[358] They referred to some evidence which, they said, tended to show that One.Tel's business plans were no exception to this practice. Thus, in his affidavit Mr Silbermann said that One.Tel's business plans were designed to allow for easy adjustment to particular key business parameters and assumptions, which would then be automatically reflected in recalculations of the financial figures: MS 155. The defendants referred to some electronic documents, the titles of which suggested a process of iteration, such as "updated", "real thing", "uplift-final", and a document entitled "final" accompanied with a covering message saying "not yet finalised": DPS [101]. There is evidence that on 19 January, Mr Silbermann, Mr Packer Jnr and Mr Kleemann met to review "the most recent version" of the European business plans, and in the course of that meeting they made various "downside" changes to the key variables such as ARPU and subscriber numbers, in order to see what effect those changes made to the financial outcomes, including EBITDA and cash flow: MS 155; Mr Packer Jnr at T 9445, T 9446; Mr Kleemann at T 6221-2. It is not suggested that ASIC made the claim that the revised figures produced at that meeting were final figures, but the evidence does show that the process of adjusting inputs to ascertain how they would affect outputs was in place at One.Tel.

[359] That does tend to cast some doubt on whether certain financial documents containing projections should be regarded as final versions of considered forecasts, or merely drafts. I note in particular the various spreadsheets sent by email by Mr Werner to Mr Silbermann during 2001, on which ASIC placed substantial reliance in final submissions. In almost every case, the covering email gives no explanation of what the document is, why it is being sent or the basis upon which it was prepared. The evidence indicates that Mr Silbermann was in very frequent contact with Mr Werner (see, for example, the evidence of Mr Weston at UK T 832), and that opens up the real possibility that Mr Werner's spreadsheets may have been, at least on some occasions, merely part of a dialogue with Mr Silbermann rather than final figures: DPS [106]. For the most part Mr Werner has not given evidence clarifying the status of the documents, though Mr Silbermann and Mr Rich have done so. I shall assess that evidence when dealing with each of the documents, but I shall do so in the overall context provided by the defendants' present submission, which I accept.

3.2.3 The absence of witnesses to explain documents relied upon by ASIC

[360] In the "Recurring themes" part of their submissions, the defendants made submissions about the absence of witnesses to explain documents, the availability of such witnesses and the unfairness of ASIC inviting the court to draw inferences from documents when the true position could have been clarified if witnesses had been called. My understanding of these submissions is that they were intended to summarise a "theme" of the defendants' submissions as a whole, the substantive effect of which would be through the application of the principles in Blatch and Jones, considered below. As I understand the submissions, they are not intended to establish any other substantive consequence.

[361] Similar arguments were advanced to persuade the court to exclude or limit the use of ASIC's documentary evidence under ss 135 or 136 of the Evidence Act, but I declined to exclude or limit the evidence, although I warned that it would remain open to the defendants to attack the weight of the documentary evidence in final submissions, if the evidence at the trial did not overcome the difficulties that surrounded the documents: ASIC NSWSC 417 at [381]-[382].

[362] I shall deal with the relevant "Recurring themes" submissions and ASIC's responses here, but then I shall return to the significance of the absence of witnesses (or the absence of relevant questions to witnesses) when I come to deal with the application of the principles Blatch and Jones.

3.2.3.1 Documents in need of explanation

[363] Some of the documents identified in AS 5 have been addressed in the evidence of Ms Randall and Ms Ashley, including the "to-be-billed" reports, deferred payments listings and comparison.xls. There remain, however, some documents that on their face raise doubts about their authority, nature, meaning, purpose, methodology or the use made of them, for example:

•

the management accounts for January-March for the fixed wire/service provider business;

•

the profile summaries and collection profile summaries;

•

various documents containing forecasts including cash flow spreadsheets and the "Funding Requirement" documents; and

•

Mr Werner's European cash flow spreadsheets sent to Mr Silbermann (in this last case, not because of the absence of a witness but because the witness was not asked questions in chief about these documents).

[364] Nor is there any evidence from the One.Tel officers involved in the preparation of the board papers and flash reports to explain differences between the documents presented to the board and other documents such as management accounts, Australian cash flow spreadsheets, and Mr Werner's European spreadsheets. Three members of the senior management team in Europe gave evidence, namely Mr Weston, Mr Werner and Mr Boaden. They were the source of information about the UK and European businesses contained in the board papers and flash reports and each of them was well aware of what was contained in the March board papers in relation to the international businesses. It was not put to them that the information in the March board papers or any other board papers lacked a proper basis: DPS [77].

3.2.3.2 One.Tel personnel who might have given evidence

[365] The defendants submitted that according to the evidence, ASIC was extensively assisted in its investigation and in the preparation of its case for hearing by numerous members of One.Tel's senior and middle management: DPS [81]. This submission is expressed in general terms and does not identify the evidence to which it refers, but it seems likely that the defendants had in mind the evidence to which I referred in my judgment on the admissibility of documents, ASIC NSWSC 417 at [376]. That evidence indicates that ASIC was assisted by Mr Holmes, Ms Nassif and Mr Basman (as well as Ms Ashley, who later gave evidence), and that they would have been available to give evidence if called. They presumably would have been able to shed light on at least some of the documents, including the fixed wire/service provider management accounts, profile summaries (in the case of Mr Basman), board papers and the PBL reports presented to the board on 28 May: DPS [82a].

3.2.3.3 ASIC's response

[366] ASIC's reply to the defendants' submissions on these matters (ASR [73-82]) seems to me curious and unconvincing. The curiosity is partly that ASIC has chosen to bring before the court a very large evidentiary case, and now it says that if it had brought forward all of the evidence that I might decide to be needed to support such a case, the impact on the length of the hearing would be extraordinary, and for that reason the court should not hold against it the absence of witnesses to explain its documents. An obvious way out of the dilemma, at an early stage, would have been to bring a more focused and less extensive case.

[367] ASIC appealed to s 56 of the Civil Procedure Act, to support the proposition that to call additional witnesses would conflict with the statutory direction as to the "just, quick and cheap resolution" of proceedings and the duty of the parties to assist in bringing about that resolution. But it cannot be just to put unclear documents into evidence and then urge the court to draw questionable inferences from them, in circumstances where the true significance of the documents could readily be cleared up by oral evidence. And given the amount of debate that is bound to surround the drawing of questionable inferences from ambiguous documents, it is unlikely to be quick and cheap to proceed in that way in the absence of simple clarification by witnesses.

[368] It is also curious that ASIC's submissions seem to downgrade the utility of oral as opposed to documentary evidence. Oral evidence, said ASIC, is dependent upon recollection, often generalised and conclusory. It cited the well-known observations of McLelland CJ in Eq in Watson v Foxman (2000) 49 NSWLR 315 at 318-9 (Watson) (considered below), about the fallibility of human memory, and similar observations by Ipp JA made extra-curially ("Problems with Fact Finding", (2006) 80 ALJ 667). It submitted that oral evidence is particularly unsatisfactory when the key issue is the financial position of a company in several months, involving details a witness would not be expected to reliably recall. It referred, by way of illustration of the weakness of oral evidence on financial matters, to the evidence of Nichola Thomas, who accepted that her honestly given recollection was wrong when a document contradicting it was put to her in cross-examination: para 3 of her affidavit, and her cross-examination at T 10072.

[369] If this submission simply means that clear documentary evidence of complex financial facts contained in the financial records of a company is to be preferred to oral evidence of recollection of those facts years afterwards, then it is undeniable. But that proposition is inapplicable where the document is ambiguous and of uncertain nature and status, and the evidence of the witness is not evidence of the contents of the document but evidence to explain what the document is, how it is used and whether it is a draft. It is not a matter of choosing between documentary and oral evidence, but of needing to have a witness give the court an assurance about the significance (or lack of significance) to be attributed to the document.

[370] ASIC has added up the occasions when the defendants say that a person should have been called by ASIC as a witness, and the total figure is 50, in addition to the 20 witnesses in fact called by ASIC in its case in chief. For reasons given during the course of this judgment, I am not persuaded that all of the people identified in the defendants' submissions and by ASIC at ASR [6358] should have been called by ASIC in support of its large evidentiary case. But for reasons given at 3.7 below, it does seem to me that oral evidence from some person or persons in the management or finance teams of One.Tel (perhaps Mr Holmes, Mr Barnes, Ms Nassif or Ms Joukhadar) was needed to explain the nature and status of the fixed wire/service provider management accounts on the relationship between board papers and flash reports and other documents including cash flow spreadsheets, and a person such as Mr Basman was needed to explain the profile summary documents and the process of provisioning for doubtful debts. Additionally it seems to me there is a gap in ASIC's evidence about May 2001 and in particular, the significance of the PBL report presented to the board on 28 May and the circumstances surrounding what appears to have been a substantial change in the Miller/Green analysis between about 8 May and 28 May, of a kind that required explanation from a witness such as Mr Miller, Mr Green or Mr Courtney.

[371] I have mentioned eight additional names but only three groups, and it may be that one witness would suffice from each group. The argument that the defendants' submissions would lead to an additional 50 witnesses takes the defendants' position to the extreme, and is a kind of in terrorem argument.

[372] ASIC submitted that it would have been open to the defendants themselves to call these witnesses, or in the alternative to make a request under s 167 of the Evidence Act for the calling by ASIC of the persons who were the authors of documents to give evidence. ASIC said this procedure would overcome such disadvantage as there might have been to the defendants in not being able to cross-examine witnesses who they themselves called. It suggested that the court should infer, in the absence of requests under s 167 (and bearing in mind that the section was utilised by the defendants in relation to the liquidators and the authors of the Ernst & Young report) that the defendants' Jones points do not arise out of any genuine concern that the specified persons were not called: ASR [244-257]. But in suggesting that the defendants should have been the moving party in bringing these witnesses to court, ASIC's submission overlooks the fact that ASIC bore the onus of proof, and the defendants' contention is that it has failed to discharge the onus of proof by tendering documents without proper explanation from witnesses who might have given an explanation and who might have been called by ASIC. It is beside the point to say that the defendants might themselves have called these witnesses.

3.2.3.4 General conclusion as to absence of witnesses

[373] I have reached the conclusion that the defendants' submissions are right in principle in their contention that ASIC should not have invited the court to reach conclusions by inference from contentious documents without seeking to lead evidence to explain them. That general conclusion has consequences in terms of the principles in Blatch and Jones, considered below, and is a matter to be addressed throughout these reasons for judgment.

3.2.3.5 Witnesses who gave evidence but were not asked about uncertain documents

[374] The defendants also complained that in some cases, ASIC called witnesses who were in a position to speak about documents that have subsequently been emphasised in ASIC's submissions, but it did not lead evidence from them to support the inferences that it now seeks to draw from the documents in submissions: DPS [83]. The defendants gave three examples of this, in addition to the matters noted at 3.2.1 above: DPS [83].

[375] First, the defendants noted that ASIC invites the court to make certain inferences from the documentary evidence about the relationship between One.Tel and WorldCom in the period from February to May 2001, without having led evidence from witnesses who could have given direct evidence. The inferences identified by the defendants are that One.Tel was withholding from WorldCom the payment of a large amount, acknowledged internally at One.Tel to be "payable now"; that WorldCom issued demands in April because One.Tel failed to make an agreed payment; and that One.Tel breached its agreement with WorldCom in late May. I accept that Mr Boaden was closely involved in the dealings with WorldCom, a matter plain from the documents tendered by ASIC and also confirmed by Mr Weston in his oral evidence (UK T 652, 653, 659-60, 673), and so Mr Boaden was in a position to give evidence about these matters. But he gave no evidence to support the inferences that ASIC asks the court to draw from the documentary evidence. The defendants also alleged that Mr Menozzi of WorldCom assisted ASIC in the preparation of a draft affidavit and was reportedly willing to come to Australia to give evidence, but was not called.

[376] I agree with the defendants that Mr Boaden might have been able to give some relevant evidence, but on the question of the One.Tel/WorldCom relationship it does seem to me appropriate for the court to make findings on the basis of the documentary evidence, which is reasonably straightforward. I do not regard the absence of evidence from Mr Boaden or Mr Menozzi as a flaw in ASIC's case or as a reason for not making the findings that the documents support. I shall return to the WorldCom evidence in the body of this judgment.

[377] Second, the defendants noted that ASIC has invited the court to infer that there never was $40 million of unbilled called data, and that no substantial quantity of such data was able to be identified, processed or billed during April or May 2001. The defendants complained that none of the many people who worked on the process of identifying the data, including Ms Joukhadar, Mr Beck, Mr Hodgson or any member of the billing team, has been called to give evidence. For reasons set out at 3.6 below, I think the absence of evidence from Mr Beck and Mr Hodgson is explicable and should not lead to a Jones inference, and as to Ms Joukhadar, I think a Jones inference should be made but it is not damaging to ASIC's case. I am not persuaded that any other member of the billing team was familiar with the process on a sufficiently comprehensive basis to have given useful evidence.

[378] Third, the defendants noted that ASIC asked the court to infer that Mr Miller and Mr Green, at the conclusion of their review in late April and early May 2001, did not understand the true financial position of One.Tel because they had been obstructed in getting to it by the defendants, and that they suddenly came to realise the truth after 18 May. I think this is something of a distortion of ASIC's submissions, which I deal with in detail later in these reasons for judgment. Be that as it may, the defendants pointed to evidence that Mr Miller and Mr Green were afforded open access to the financial records and management of One.Tel, and that they put the results of their investigations forward on 8 and 17 May without any qualification as to their understanding of the company's financial position, and they complained that neither Mr Miller nor Mr Green was called as a witness by ASIC. For reasons set out at 3.6 below, I have formed the view that the absence of any evidence from Mr Miller or Mr Green is a serious gap in ASIC's case, which has certain consequences for my assessment of the evidence.

[379] Once again, these matters have substantive consequences in terms of the principles in Blatch and Jones.

3.2.4 The inherent improbability of ASIC's case about the defendants' failure to disclose to the board

[380] The defendants submitted that company's board papers and flash reports are business records of a kind that should, at least prima facie, be accorded substantial authority. They said (DPS [75]) that the process of disclosure to the board in board papers, flash reports and otherwise involved almost the entire senior management and finance team of One.Tel, not merely the defendants. According to the defendants, ASIC's case implies the contention that there was a conspiracy between the defendants and almost all of the finance and management teams at One.Tel to mislead the board: see also DPS [108]. In this regard, there is evidence that on many occasions the figures that went into board papers and flash reports were arrived at by executives in the finance team, rather than by Mr Rich or Mr Silbermann personally (1 JDR 725; and the spreadsheet at Ex JDR 6/1967, which exposes file notes showing a variety of sources of figures).

[381] Further, the defendants submitted that, with the exception of Ms Randall, ASIC had called no finance or management witness to say that the information provided to the board in board papers and flash reports was known to the witness to be false. There was no evidence at all given by Mr Barnes or Mr Holmes or the company secretary and internal legal counsel, who were responsible for co-ordinating the figures in the board papers. The UK management witnesses (Mr Weston, Mr Werner and Mr Boaden), who were familiar with the contents of board papers including the March board papers, and had input into their preparation (see Mr Weston's evidence at UK T 794; UK T 727; and Ex D 29; Ex D 30; Ex D 70), said nothing at the time to suggest that the information contained in the board papers was wrong in any respect.

[382] In those circumstances the defendants submitted that the suggestion that board papers and flash reports contained false and misleading information was inherently improbable. It was inherently more likely, they said (DPS [113]), that the information in the board papers and flash reports was put forward by the finance and management teams as representing their honest view as to the financial position of the business, and contained financial figures that were diligently arrived at. Apparent inconsistencies between the board papers and flash reports, on the one hand, and other less authoritative documents relied upon by ASIC, were much more likely to have arisen because the finance and management teams did not consider those other documents to be accurate.

[383] I do not agree that ASIC's case implies a conspiracy among One.Tel management to mislead the board. It is not necessary for the purposes of its case for ASIC to allege a conspiracy involving the complicity of a large number of other One.Tel senior managers and employees, and it has not done so: ASR [108-117]. The case is brought as a case about breach of the defendants' statutory duty of care and diligence. The focus of attention has been the conduct by and omissions of the defendants. ASIC did not undertake to prove, where One.Tel executives other than the defendants prepared information for disclosure to the board that was objectively wrong or misleading or without reasonable basis, that the executives were deliberately attempting to mislead the board, but only that the defendants either themselves knew that the information was wrong, or else they should have been more careful and diligent in reviewing the information and satisfying themselves that it was appropriate to go forward to the board. According to ASIC's case on the second alternative, if the defendants had been more careful and diligent, they would have identified discrepancies between what was proposed to be reported to the board, and other financial documents of One.Tel. They would then have had to make an assessment of the true position, with the assistance of the management and finance teams.

[384] I do not accept the defendants' submission that ASIC's case is inherently improbable because ASIC relies on documents less authoritative than the board papers and flash reports. It seems to me that the court should approach the issue without any presumption, and should assess ASIC's individual allegations on their merits, weighing up all of the available evidence as to the reliability of the documents. I do agree, however, that it is often pertinent to that assessment to take into account that finance and management executives who were available to give evidence to support ASIC's case have not done so, and to apply Jones accordingly. I also agree that the court should be very cautious about relying on inferences from documents that are unexplained by the evidence of any witness.

[385] The defendants also contended that on ASIC's case, they were trying to conceal the true financial position of One.Tel for its directors and major shareholders in the period from January to April 2001: DPS [114]. That led the defendants to set out evidence intended to show that they gave those who legitimately sought information about the company free and open access to the company's financial records and its managers, and therefore that they were not engaged in concealment: DPS [116]. That evidence related to inquiries made by Mr Howell-Davies, Mr Kleemann, Mr Long, and Mr Miller and Mr Green.

[386] Mr Howell-Davies conducted "due diligence" of One.Tel in February/March 2001 before he accepted the offer of a board appointment. He was given free rein to speak to all of the managers of the European businesses: UK T 54. He made a number of unaccompanied visits to the UK and European businesses and found the managers to be very responsive to his requests for information: UK T 53. He spent considerable time with Mr Weston (for whom he was something of a mentor), during which Mr Weston answered his questions about One.Tel honestly and openly: UK T 73. He encountered no suggestion by anyone that One.Tel was having issues with creditors: UK T 58.

[387] Mr Kleemann agreed in cross-examination that when he was given his task, in late 2000, of reviewing and monitoring the One.Tel business, he was assured by Mr Rich that he could have free access to any staff members of One.Tel he wished to speak to, and that if he wanted any information he only had to ask: T 6056. His spoke to everyone to whom he wanted to speak, saw every document that he wanted to see, and looked at every part of the management information systems that he wanted to see: T 6057.

[388] Mr Long agreed in cross-examination that when Ernst & Young were appointed auditors, he had an initial meeting with Mr Rich, in which Mr Rich encouraged Ernst & Young to speak to whomever they wished. So far as Mr Long was concerned, during the course of the half-year review in January and February 2001, he had access to the staff of One.Tel to whom he needed to speak for the purposes of the review. He built up relationships in the review process and felt able to pick up the phone and speak directly to whomever he wished to speak at One.Tel: T 7183.

[389] Mr Rich gave evidence that when Mr Miller and Mr Green commenced their review, he told them that if they wanted any information all they had to do was to ask: 2 JDR 1146; see also MS 446. When Mr Miller and Mr Green visited the UK office they were given free and unrestricted access to whomever they wished to consult, according to Mr Weston, who said he gave them his realistic views about the likely future performance of the European businesses: UK T 722-7. Mr Boaden said he answered their questions with openness and honesty: T 5308-9.

[390] At one stage Mr Packer Jnr sought direct access to One.Tel's SAS system and did not obtain it, but it emerged that access was prevented because of a technical issue to do with the security firewalls in One.Tel and PBL's computer systems: T 9440-2. No other witness for ASIC gave evidence of any difficulty in obtaining access to One.Tel's information.

[391] I accept all of this evidence, and also the conclusion that the individuals I have named were given free and open access to the information they wished to have about One.Tel. It seems to me, however, that this evidence does not answer ASIC's case. It is a case about breach of the statutory duty of care and diligence. There are allegations about deliberate conduct on the defendants' part, to the effect that the defendants failed to provide information to the board and withheld information and so misled the board, but those allegations did not extend to withholding information from the people I have identified.

[392] In the result, I have not approached ASIC's evidence with any presumption or predisposition against ASIC's case, on the ground of inherent improbability. I have tried to assess the evidence step by step, on its merits, having regard to the onus of proof and the standard of proof.

3.3 The onus of proof -- legal principles

3.3.1 Some general principles

[393] The defendants provided the court with an elementary textbook exposition of the distinction between the legal and evidential burdens of proof (DPS [159]-[168]), which was not challenged by ASIC. It is unnecessary to deal with all of their submissions, but some generally pertinent points are:

•

the evidential burden is the obligation to show, if called upon to do so, that there is sufficient evidence to raise an issue as to the existence or non-existence of a fact in issue, due regard being given to the standard of proof demanded of the party under such obligation: J D Heydon, Cross on Evidence, Australian edn, Butterworths (looseleaf), at [7015];

•

where an accused person relies by way of defence upon an honest belief on reasonable grounds in the existence of a state of affairs which, had it existed, would have made the acts innocent, the accused person bears only an evidential burden: Heydon, at [7030], citing He Kaw Teh v R (1985) 157 CLR 523 ; 60 ALR 449 ; [1985] HCA 43;

•

the legal burden of proving all facts essential to its claim normally rests upon the plaintiff in a civil suit (Heydon, at [7060]); however, I note that there is an issue (discussed in Ch 23) as to who bears the onus of proving the presence or absence of the elements of the business judgment defence in s 180(2) of the Corporations Act; and

•

if the tribunal of fact prefers the plaintiff's evidence to the defendants' evidence on an issue, it must nevertheless consider whether the evidence proves the plaintiff's case to the applicable standard (adapting, to the civil context, observations in Liberato v R (1985) 159 CLR 507 at 515 ; 61 ALR 623 ; [1985] HCA 66, quoted in Heydon, at [7085]).

3.3.2 A company's books as prima facie evidence: s 1305

[394] There was some contention between the parties about the meaning of s 1305(1) of the Corporations Act: DPS [169]-[182]; compare ASR [169-77]-[173-6]. It provides that "a book kept by a body corporate under a requirement of this Act is admissible in evidence in any proceeding and is prima facie evidence of any matter stated or recorded in the book".

[395] The defendants referred to the definition of the words "prima facie" in the Macquarie Dictionary (2nd revised edn), as meaning "at first appearance; at first view, before investigation". They compared that with the definition of "prima facie evidence" as "evidence sufficient to establish a fact, or to raise a presumption of fact, unless rebutted". They submitted that the former meaning is the one intended in s 1305, and that the words "prima facie" are not used in the sense that, absent some satisfactory contrary evidence on the part of the defendants, the matters said to be recorded in the books have been conclusively proved.

[396] In my view the true meaning of the words "prima facie" lies between the alternatives identified in the defendants' submission. The statement in s 1305(1) that the company's books are prima facie evidence of a matter stated or recorded in them does more than merely to convey that they are the starting point to proof or a "first view". All other things being equal, the fact that a matter is stated in a book kept by a company is sufficient to prove that matter in civil proceedings. That does not reverse the onus of proof in the proceedings in any general way, but it means that the tendering of the book is evidence of the matter recorded in it, and that matter will be thereby proven unless other evidence convinces the tribunal of fact to the contrary, on the balance of probabilities.

[397] Section 1305(1) does not make the company's books conclusive evidence of the matters they contain, in the sense of requiring the tribunal of fact to make a finding in terms of the content of the books in the absence of proof to the contrary by the opposing party. The books are prima facie evidence of the matters stated in them, but the weight of that evidence is to be measured in accordance with the common sense of the tribunal of fact: S L Phipson, H Malek and J Auburn, Phipson on Evidence, 16th edn, Sweet & Maxwell, London, 2005, at [7-17]).

[398] In my view it would be open to the tribunal of fact to find that the prima facie evidence constituted by the company's books is outweighed by other evidence (including evidence adduced by the proponent of the books, even if the opponent does not give evidence about them); or by some quality or characteristic of the books themselves, even if there is no other evidence. In particular, if a book has the appearance of a draft or (being electronic) has a file title indicating that it is a draft, that alone may be sufficient (all other things being equal) for the tribunal of fact to reject the book as evidence of the matter stated in it, notwithstanding that the book is prima facie evidence of that matter; a fortiori if, in addition to having the appearance of a draft, the book contains inconsistencies or ambiguities or the matter otherwise demands explanation.

[399] My view as to the meaning of the subsection is consistent with the explanatory memorandum to the Companies Bill 1981, which introduced the provision. The explanatory memorandum, which I also quoted in my judgment on the admissibility of corporate records (ASIC NSWSC 417 at [225]), said:

[225] This is a new provision based on s-sec 156(3) of the Ontario Business Corporations Act. It is an evidentiary provision that is intended to expedite legal proceedings where books are to be introduced in evidence. This provision obviates the need to call witnesses to prove that books are books of the corporation when this fact is not in question or to prove transactions recorded in books when these matters are not in dispute.

[400] Therefore s 1305(1) allows a company's books to be introduced into evidence as they are, without any "authenticating" evidence by any witness, and allows the books to be relied upon to prove transactions recorded in them. But it does not elevate matters contained in the books to a plane of probative value that requires the court to disregard the context in which the matters relied on appear in the tendered document. If, for example, there is some doubt as to whether a particular transaction is "recorded" in a book because of some uncertainty about the status of the document or ambiguity about what it contains, s 1305(1) does not overcome the problem.

3.4 The standard of proof

3.4.1 Some general principles

[401] It is relevant to note that, as these are civil penalty proceedings in which ASIC seeks declarations of contravention, there is a statutory requirement for the court to apply the rules of evidence and procedure for civil matters. The current requirement is s 1317L of the Corporations Act 2001 (Cth), which commenced on 15 July 2001. In the period from 10 March 2000, the date of commencement of the relevant part of the Corporate Law Economic Reform Program Act 1999 (Cth), which amended the Corporations Law, up to the commencement of the Corporations Act, there was an equivalent provision in the Corporations Law. Prior to that time, there was a provision substantially to the same effect in s 1317ED(1) of the Corporations Law. Given that substantially the same provision applied when the acts complained of in these proceedings took place (January-May 2001), when these proceedings commenced (December 2001), and at all times thereafter, I need not delve into the complexities of transitional provisions.

[402] The rules of evidence for civil matters in this court are governed by the Evidence Act. Section 140 provides:

140(1) In a civil proceeding, the court must find the case of a party proved if it is satisfied that the case has been proved on the balance of probabilities.

(2)

Without limiting the matters that the court may take into account in deciding whether it is so satisfied, it is to take into account:

(a)

the nature of the cause of action or defence, and

(b)

the nature of the subject-matter of the proceedings, and

(c)

the gravity of the matters alleged.

[403] Subsection 140(2) reflects the observations of Dixon J in Briginshaw v Briginshaw (1938) 60 CLR 336 at 361-2 ; [1938] ALR 334 at 341-2 ; [1938] HCA 34 (Briginshaw), where his Honour said:

The truth is that, when the law requires the proof of any fact, the tribunal must feel an actual persuasion of its occurrence or existence before it can be found. It cannot be found as a result of a mechanical comparison of probabilities independently of any belief in its reality. No doubt an opinion that a state of facts exists may be held according to indefinite gradations of certainty; and this has led to attempts to define exactly the certainty required by the law for various purposes. Fortunately, however, at common law no third standard of persuasion was definitely developed. Except upon criminal issues to be proved by the prosecution, it is enough that the affirmative of an allegation is made out to the reasonable satisfaction of the tribunal. But reasonable satisfaction is not a state of mind that is attained or established independently of the nature and consequence of the fact or facts to be proved. The seriousness of an allegation made, the inherent unlikelihood of an occurrence of a given description, or the gravity of the consequences flowing from a particular finding, are considerations which must affect the answer to the question whether the issue has been proved to the reasonable satisfaction of the tribunal. In such matters "reasonable satisfaction" should not be produced by inexact proofs, indefinite testimony, or indirect inferences.

(See also Helton v Allen (1940) 63 CLR 691 at 712 ; [1940] ALR 298 at 303 ; [1940] HCA 20.)

[404] The standard of proof enunciated in s 140 and Briginshaw's case applies in civil penalty proceedings under the Corporations Act and its predecessor, the Corporations Law: Adler at [142]-[148]; Whitlam v ASIC (2003) 57 NSWLR 559 ; 199 ALR 674 ; 46 ACSR 1 ; [2003] NSWCA 183 at [117]-[119]; ASIC v Vines (2005) 55 ACSR 617 ; [2005] NSWSC 738 at [1105] (ASIC NSWSC 738) (on appeal, ASIC NSWCA 75). The definition of "civil proceeding" contained in the dictionary to the Evidence Act says it is simply a "proceeding other than a criminal proceeding". In other words, there is no distinction in the definition between ordinary inter partes civil proceedings and civil penalty proceedings brought pursuant to statute. I agree with ASIC (ASR [183-[190]) that civil penalty proceedings under the Corporations Law are distinguishable from Chief Executive Officer of Customs v Labrador Liquor Wholesale Pty Ltd (2003) 216 CLR 161 ; 201 ALR 1 ; [2003] HCA 49 (CEO Customs), where the main reason for the High Court's conclusion that the criminal standard of proof applied was that Customs sought a "conviction" of the defendant, and the conclusion may have been otherwise if different relief had been sought: see Hayne J at [135] and [138].

[405] In the ASIC NSWSC 738 case I referred (at [1106]-[1107]) to some further explication of the Briginshaw standard by Sir Anthony Mason NPJ, sitting as a member of the court of Final Appeal of Hong Kong in Hksar v Lee Ming Tee [2004] 1 HKLRD 513 (Hksar). I think some of the observations in that case are pertinent here, although some differences between that case and the present one need to be borne in mind. It seems to me that the following observations of Lord Nicholls of Birkenhead in Re H (Minors) (Sexual Abuse: Standard of Proof) [1996] AC 563 at 586 ; [1996] 1 All ER 1 at 16 (Re H), quoted with approval by Mason NPJ at [71], are applicable in the present circumstances:

When assessing the probabilities the court will have in mind as a factor, to whatever extent is appropriate in the particular case, that the more serious the allegation the less likely it is that the event occurred and, hence, the stronger should be the evidence before the court concludes that the allegation is established on the balance of probability.

[406] It is useful to complete the quotation of the observations of Lord Nicholls, who continued:

Fraud is usually less likely than negligence. Deliberate physical injury is usually less likely than accidental physical injury. A stepfather is usually less likely to have repeatedly raped and had non-consensual oral sex with his underage stepdaughter than on some occasion to have lost his temper and slapped her. Built into the preponderance of probability standard is a generous degree of flexibility in respect of the seriousness of the allegation. Although the result is much the same, this does not mean that where a serious allegation is in issue the standard of proof required is higher. It means only that the inherent probability or improbability of an event is itself a matter to be taken into account when weighing the probabilities and deciding whether, on balance, the event occurred. The more improbable the event, the stronger must be the evidence that it did occur before, on the balance of probability, its occurrence will be established.

[407] However, Mason NPJ's observation (at [72]), that "it was for the respondent to establish as a compelling inference that very senior officers of the SFC had deliberately and improperly terminated the investigation ... for the ulterior purpose alleged", seems to me to be confined to the nature of the case before him, in which the allegations against the appellants, though in civil proceedings, were essentially criminal in nature. In my view it would be setting the standard too high to say that, in Australian civil penalty proceedings for breach of the statutory duty of care and diligence of company directors and officers, the plaintiff's case must be proved by "compelling" inferences (although that is probably true in a case where the allegation is of a breach of the statutory duty of honesty -- as it was, against one of the defendants, in ASIC NSWSC 738).

[408] The observations of Lord Nicholls were revisited by the House of Lords in Re B (Children) (Care Proceedings: Standard of Proof) [2009] 1 AC 11 ; [2008] 3 WLR 1 ; [2008] UKHL 35. In particular, Lord Hoffmann (at [5]) distinguished between three kinds of cases in which observations are made that the standard of proof varies with the gravity of the misconduct alleged or the seriousness of the consequences for the person concerned. The first category is where the court has for some purpose classified proceedings as civil, but nevertheless has thought that because of the serious consequences of the proceedings, the criminal standard of proof or something like it should be applied. Australian civil penalty proceedings for breach of the statutory duty of care and diligence are not in this category, but arguably Hksar is an example of it. The third category is where judges are simply confused about whether they are talking about the standard of proof or about the role of inherent probabilities in deciding whether the burden of proving a fact to a given standard has been discharged. That could not be said of Dixon J in Briginshaw. That leaves the second category, "cases in which it has been observed that when some event is inherently improbable, strong evidence may be needed to persuade the tribunal that it more probably happened than not". Briginshaw is in this category, as are the quoted observations of Lord Nicholls in Re H.

[409] Lord Hoffmann approved of the observations of Lord Nicholls but he emphasised (at [15]) that Lord Nicholls was not laying down any rule of law. He continued:

[15] There is only one rule of law, namely that the occurrence of the fact in issue must be proved to have been more probable than not. Common sense, not law, requires that in deciding this question, regard should be had, to whatever extent appropriate, to inherent probabilities.

[410] It seems to me that these observations are in accordance with, and assist to clarify, the New South Wales law arising out of s 140 and Briginshaw and other Australian cases. Lord Nicholls' observations are in accordance with those of Mason CJ, Brennan, Deane and Gaudron JJ in Neat Holdings Pty Ltd v Karajan Holdings Pty Ltd (1992) 110 ALR 449 at 450 ; 67 ALJR 170 at 171 ; [1992] HCA 66 (Neat Holdings):

[T]he strength of the evidence necessary to establish a fact or facts on the balance of probabilities may vary according to the nature of what it is sought to prove. Thus, authoritative statements have often been made to the effect that clear or cogent or strict proof is necessary "where so serious a matter as fraud is to be found". Statements to that effect should not, however, be understood as directed to the standard of proof. Rather, they should be understood as merely reflecting a conventional perception that members of our society do not ordinarily engage in fraudulent or criminal conduct and a judicial approach that a court should not lightly make a finding that, on the balance of probabilities, a party to civil litigation has been guilty of such conduct.

[411] In ASIC NSWCA 75, Ipp JA (with whom Spigelman CJ agreed, at [539]) said that Briginshaw was of limited assistance in the case before him (at [809]), noting that nothing in Briginshaw detracted from the proposition that a serious allegation might be proved by "circumstantial evidentiary facts" and "inference and circumstance" (at [811]). He applied the quoted observations in Neat Holdings (at [812]), referring to his own earlier observations (with which Tobias and Basten JJA agreed) in Palmer v Dolman [2005] NSWCA 361 at [47], to the effect that there are "no hard and fast rules by which serious allegations might be proved from circumstantial evidence", and that the inquiry was, taking due account of what was said in Neat Holdings, whether the allegation had been proven on the balance of probabilities.

[412] The defendants sought to draw an analogy between the standard of proof in the present proceedings and the standard to be met in proceedings alleging contravention of Pt IV of the Trade Practices Act 1974 (Cth): DPS [186]-[189]. In proceedings of the latter kind Briginshaw is applied (see J D Heydon and B G Donald, Trade Practices Law, Law Book Co (looseleaf), Vol 2, at [18.250] and cases there cited). The defendants quoted from the judgment Goldberg J in Australian Competition and Consumer Commission v Australian Safeway Shores Pty Ltd (No 2) (2001) 119 FCR 1 ; [2001] FCA 1861 at [69]-[70]. It does not seem to me that the quoted passage says anything more than that, while the standard of proof is on the balance of probabilities, the strength of the evidence necessary to meet that standard may vary according to the nature of what it is being sought to prove. That is obvious. Nevertheless I agree with ASIC (ASR [183-190]) that Pt IV cases should be used with caution in other contexts. The commission can only bring civil penalty proceedings for contraventions of the anti-competition, price exploitation and tax provisions of the Act, provisions that were enacted as a means of prohibiting behaviour that may have a significant impact upon industries as a whole and perhaps upon the economic life of the nation, and some of which have a specific mental element: for example s 46. The commission cannot bring civil penalty proceedings for contravention of the consumer protection provisions of Pt V of the Act, which provide a more relevant comparison to a provision such as s 180 of the Corporations Act. Given the cases cited by the defendants to the effect that Pt IV contraventions, though not formally criminal, are to be construed in the same way as a statute creating a criminal offence (for example Trade Practices Commission v Legion Cabs (Trading) Co-operative Society Ltd (1978) 35 FLR 372 at 381 per Franki J), it may be that the Pt IV cases are in Lord Hoffmann's first category.

3.4.2 Application to the present case

[413] Applying these general principles to the present case, I turn first to the nature of the cause of action and the subject-matter of the proceedings: s 140(2)(a) and (b). These are civil penalty proceedings in which ASIC seeks disqualification orders and substantial compensation. Because disqualification orders are sought, the proceedings are penal for the purposes of the application of the penalty privilege: Rich (2004). But they are not criminal proceedings, and it would be contrary to the legislative intention underlying the civil penalty provisions to apply a de facto criminal standard of proof in such proceedings. This is because the civil penalty provisions of the Corporations Law were the outcome of recommendations by reformers who thought that directors and others who contravene the corporations legislation should not be branded as criminals unless they have acted dishonestly (as my co-author Professor Ford wrote in R P Austin, H A J Ford and I M Ramsay, Company Directors: Principles of Law and Corporate Governance, LexisNexis Butterworths, New South Wales, 2005, at [18.71], summarising relevant law reform material). What is required is to apply the civil standard of proof, not a de facto criminal standard, while taking into account the matters specified in s 140(2) and explained in the cases in assessing whether the court is satisfied that the standard has been met.

[414] As to the seriousness or gravity of the allegations made (s 140(2)(c)), the only contraventions alleged are contraventions of the statutory duty of care and diligence in s 180 of the Corporations Law. In ASIC NSWCA 75 it was held that the standard of care under s 180(1) is the same as in the tort of negligence: at [142] and [151] per Spigelman CJ, with whom Ipp JA agreed, at [805]; at [587] per Santow JA. However, the consequences of breach of the statutory standard may be different from and more serious than breach of the duty of care at common law. First, a declaration of contravention carries of itself a "significant sting", perhaps somewhat higher than a finding of breach of the common law duty: at [144], per Spigelman CJ. Second, a finding of contravention can have a significant effect on the reputation of the defendant, with considerable commercial consequences, though not qualitatively different from a finding of negligence in a professional negligence case: at [144]-[145] per Spigelman CJ. The making of any further order, such as a pecuniary penalty order or a disqualification order, requires the court to be satisfied of additional statutory criteria relating to the seriousness of the matter; and if made, a pecuniary penalty order or a disqualification order may have consequences as severe as any likely criminal sentence, save for a term of imprisonment: at [143], per Spigelman CJ.

[415] Here, ASIC seeks disqualification orders which have the level of seriousness identified by Spigelman CJ. Additionally, ASIC's central allegations, though allegations of contravention of the duty of care, are of a particularly serious kind, which seemed to me to raise the level of seriousness beyond what is implied in findings and disqualification orders based on a breach of duty of care of a more "ordinary" kind. The statement of claim alleges that the defendants failed to take reasonable steps to ensure that the board was aware of the true financial position of the company, and either withheld the true financial position from the board thereby misleading it or, if they did not know the true financial position, failed to take reasonable steps to apprise themselves of it. The statement of claim also alleges that Mr Rich caused or permitted announcements to be made to the ASX on 27 February and 4 April 2001 containing statements for which there was no reasonable factual basis, and that he either knew there was no reasonable factual basis for the statements or ought to have known. One of the alternatives pleaded against the defendants (and Mr Rich in relation to the market announcements) amounts to an allegation of intentional misleading conduct, even though the cause of action is for breach of the duty of care and diligence. That is a very serious allegation. In its submissions, ASIC has invited the court to make findings against the defendants that amount to findings of intentionally misleading conduct, amounting to dishonest conduct.

[416] While, therefore, the question is whether the court is reasonably satisfied that the facts in issue have been proved to the civil standard, it must have regard to the gravity of what is sought to be established, though not with the degree of certainty indispensable to criminal proceedings.

[417] That is the general approach to be taken. I have some observations to make about three applied matters, namely indirect inferences, conflicting evidence about conversations, and documentary evidence.

3.4.2.1 Indirect inferences

[418] The defendants' submitted that the court is not to make findings on the basis of "indirect inferences". That proposition is taken from Dixon J's judgment in Briginshaw. On the other hand, ASIC is entitled to establish even serious allegations of wrongdoing or misconduct by the defendants by "circumstantial evidentiary facts" or "inference and circumstance": ASIC NSWCA 75 at [811], per Ipp JA (with whom Spigelman CJ agreed, at [539]. Therefore a line has to be drawn, having regard to the gravity of the contravention and its inherent probability, to separate those cases where there are strong enough grounds for inference to satisfy the court that a serious contravention should be found, from cases where the inference that the court is asked to make is too indirect to warrant that conclusion.

3.4.2.2 Evidence about the meetings and conversations

[419] In my judgment at first instance ASIC NSWSC 738, at [1109]-[1111], I made some observations as to how the application of the standard of proof on the balance of probabilities, interpreted in Briginshaw, would apply to findings of fact about meetings and conversations where the testimony of witnesses was conflicting. The Court of Appeal did not deal in terms with this matter, but their Honours' observations about Briginshaw were, I think, consistent with what I said. Resolving to such conflicting evidence was a centrally important aspect of that case. ASIC submitted that in the present case, though there are some conflicts of evidence as to what was said, they are of subsidiary importance, and in some cases of little importance. I think that is generally true of ASIC's case, although it seems to me that findings of fact about what was said, particularly by the defendants to various directors, is of substantial importance to the defendants' case. But whether the conflicting evidence of conversations is central or subsidiary, it seems to me useful to consider how Briginshaw applies to resolving such conflicts.

[420] In ASIC NSWSC 738 I adopted some remarks of McLelland CJ in Eq in a misleading conduct case, Watson at 318-9. His Honour said:

Where the conduct is a speaking of words in the course of a conversation, it is necessary that the words spoken be proved with a degree of precision sufficient to enable the court to be reasonably satisfied that they were in fact misleading in the proved circumstances.

In many cases (but not all) the question whether the spoken words were misleading may depend upon what, if examined at the time, may have been seen to be relatively subtle nuances flowing from the use of one word, phrase or grammatical construction rather than another, or the presence or absence of some qualifying word or phrase, or condition.

[421] Although this is not a misleading conduct case, questions have arisen about whether financial information supplied by the defendants (particularly Mr Rich) to directors and shareholders (particularly Mr Packer Jnr and his father) was misleading. Sometimes the differences in evidence are subtle but substantial: for example, whether Mr Rich gave an absolute, unqualified assurance that the company would reach a certain target, or merely communicated a management forecast necessarily based on many assumptions and qualifications. It seems to me that the observations of McLelland CJ in Eq are applicable.

[422] Having drawn attention to the manner in which the question, whether spoken words were misleading, might depend upon relatively subtle nuances, his Honour continued:

Furthermore, human memory of what was said in a conversation is fallible for a variety of reasons, and ordinarily the degree of fallibility increases with the passage of time, particularly where disputes or litigation intervene, and the processes of memory are overlaid, often subconsciously, by perceptions of self-interest as well as conscious consideration of what should have been said or could have been said. All too often what is actually remembered is little more than an impression from which plausible details are then, again often subconsciously, constructed. All this is a matter of ordinary human experience. Each element of the cause of action must be proved to the reasonable satisfaction of the court, which means that the court "must feel and actual persuasion of its occurrence or existence".

[423] I have taken the view that it is appropriate to bear such matters in mind in evaluating the conflicting evidence of conversations and meetings in the present case. Sometimes I have been aided in reaching conclusions by evidence of surrounding circumstances or context, but on a few occasions there has been little more to assist me in choosing between conflicting versions of conversations than my overall assessment of the credibility of the witnesses, my assessment of the inherent plausibility of the respective versions of what was said, and the general approach that the court should take to such matters as explained by McLelland CJ in Eq. There is, of course, danger in making assessments on the basis of inherent plausibility alone, graphically illustrated by McClellan CJ at CL extra-curially in his "Maralinga" example, in "Who is telling the truth? Psychology, common sense and the law" (2006) 80 ALJ 655, 655-6, and by Ipp JA in his Governor-General example in "Problems with fact-finding" (2006) 80 ALJ 667, 674. But it seems to me that where the subject matter of the evidence is a conversation and there are two competing versions, inherent plausibility has some utility.

[424] In their written submissions the parties urged me to take into account some additional considerations when assessing conflicting evidence about conversations and meetings.

[425] First, the defendants advanced various considerations as to why, they said, the court should prefer their evidence to the evidence given by Mr Packer Jnr and Mr Murdoch Jnr: DPS [196] and following. Obviously the defendants had their own interests to protect in this litigation but, as they pointed out, the PBL and News witnesses also had a very significant interest in the outcome of the case and the court's findings along the way. Mr Packer Jnr and Mr Murdoch Jnr claimed that they had been "profoundly misled" (compare ASR [196] which does not quite meet the defendants' submission). I agree with the defendants that their desire to defend that position resonates through their evidence.

[426] The defendants submitted that from a very early stage they focused their minds on One.Tel's financial position in the period from January to May 2001 and the surrounding circumstances, because the events of May 2001 when the company collapsed were enormous events in their lives, and they were followed immediately by allegations of the most serious kind made against them by Mr Packer Jnr and Mr Murdoch Jnr, allegations with which they were in violent disagreement. Indeed they considered that there was a conspiracy between the Packer and Murdoch camps in connection with the rights issue. The court should infer, they said, that in these circumstances it stands to reason that they would preserve their memory of the events affecting One.Tel's demise.

[427] The defendants' affidavits were sworn on 27 March 2006. ASIC submitted (ASR [197]) that the substantial time sought and obtained by the defendants in early 2006 to prepare their affidavits (T 10451) should lead the court to conclude that the affidavits were to a very significant extent prepared on the basis of recollections 5 years after the events. However, there is some evidence that Mr Rich's statement was "well progressed" by September 2002 (Ex P24, Tab 12, para 103) and one can infer that the progress made in preparing his statement would partly have involved preparing his answers to the evidence of Mr Packer Jnr and Mr Murdoch Jnr, whose principal affidavits were sworn in May and June 2002, and presumably served shortly afterwards. In these circumstances, the fact that substantial additional time was needed to finalise the defendants' affidavits after the close of ASIC's case does not mean that the defendants' recollection of the conversations and meetings deposed to by Mr Packer Jnr and Mr Murdoch Jnr was recorded 5 years after the events. The affidavits, when they appeared, were comprehensive responses to ASIC's case in chief, not merely to the affidavits served before the hearing began. There were a few occasions, noted by ASIC at APS [2057] and [2066], where the fact that matters in Mr Rich's affidavit were not put to ASIC's witnesses suggests that the relevant parts of the affidavit were prepared after the cross-examination of those witnesses. But that does not establish that the bulk of the affidavit was prepared at that late stage.

[428] My overall conclusion is that in the circumstances described in their submissions, it is likely that the defendants' recollection of the key events, particularly of May 2001, is likely to have been quite sharp when they began to prepare their statements, and probably remained so. There was nothing in their evidence in cross-examination to suggest other than reasonably clear recollection of the events to which they deposed in their affidavits. My main concern about the evidence has not been lack of contemporaneity of recollection, but the effects of their obvious self-interest. It is "common for a witness' thoughts to bend in a direction that would be self-advantageous" (E Loftus and J Doyle, Eyewitness Testimony: Civil and Criminal (New York, 1987), p 83, cited by Justice McClellan in his article, "Who is telling the truth? Psychology, common sense and the law", above, at 665). Obviously concern about the distorting effect of self-interest must be heightened when the witness is a defendant, in proceedings which challenge his competence and reputation as a corporate executive. ASIC drew an analogy with patients in medical negligence cases, where it has been said that the tribunal of fact must be vigilant in accepting self-interested assertions: Chappel v Hart (1998) 195 CLR 232 ; 156 ALR 517 ; [1998] HCA 55 at [93]; Rosenberg v Percival (2001) 205 CLR 434 ; 178 ALR 577 ; [2001] HCA 18 at [155] and [221]. I have tried to bear these considerations in mind, and therefore to assess their evidence critically, but on many occasions (as this judgment shows) I have reached the conclusion that the internal logic of the defendants' evidence, particularly the evidence of Mr Rich, is compelling and consistent with external circumstances. Therefore for the most part is not been necessary for me to resolve conflicts of evidence as to meetings in conversations by reference to considerations of onus and standard of proof.

[429] Some considerations about the strength of recollection of two of ASIC's key witnesses, Mr Packer Jnr and Mr Murdoch Jnr, weigh against accepting their evidence. Mr Packer Jnr described the critical period between 18 and 25 May 2001 as being "very difficult for me to recall" (affidavit of 23 July 2004, para 21), even though that was the crucial period during which PBL and News withdrew their support for the rights issue and the company consequently was placed in voluntary administration. He agreed in cross-examination that after One.Tel went into administration, it was "in a general sense ... relatively fair" to say that he deliberately tried to forget the events that had occurred in the preceding 6 months (T 9684), although not long afterwards he prepared a document with Mr Elliott of counsel seeking to recount what he remembered of the relevant events, and he was examined by ASIC in September 2001 and by the liquidators of One.Tel in about May 2002: T 9684, 9918-9. It was evident from Mr Murdoch Jnr's evidence that his recollection had abandoned him on many matters.

[430] I shall return to the credibility of the defendants, Mr Packer Jnr and Mr Murdoch Jnr in detail in Ch 5. Here, it suffices to say that general considerations about the fallibility of human memory do not weigh against the evidence of the defendants, for the reasons I have given, although I have some concerns about the strength of recollection of Mr Packer Jnr and Mr Murdoch Jnr

[431] The defendants urged the court to be cautious about accepting the evidence of ASIC witnesses who had been interviewed by lawyers representing PBL, which was seeking to gain evidence to shore up its position and that of Mr Packer Jnr, some of whom were retained on paid consultancies. The defendants' submission was that, without any lack of propriety on the part of the lawyers involved, memories can readily be corrupted by the power of suggestion in such an interview and/or the desire to produce "facts" for the people conducting interviews or retaining them: DPS [2002]. They referred to observations of Justice Ipp in the extra curial writing to which I have referred ("Problems with fact-finding", above, at 668):

Many experiments have shown that information provided to witnesses after an event affects how they later remember it. Studies have shown that persons who fall prey to misleading information consciously remember witnessing things that they have not seen. They hold these false memories with great confidence.

[432] Similarly Justice McClellan ("Who is telling the truth? Psychology, common sense and the law", above, at 664, 665) said that "from a judicial perspective, it is particularly important to recognise the susceptibility of memory to suggestion", and later he remarked that "the most troubling aspect of memory -- be it a child's memory or an adult's -- may be its vulnerability to suggestion".

[433] I think those observations have a potential application to the evidence of ASIC witnesses who were interviewed by lawyers on behalf of PBL, and a fortiori, to those who received paid consultancies.

3.4.2.3 Evidence about documents

[434] Section 140 and the Briginshaw line of cases apply as much to documentary evidence as to oral evidence. On some occasions documents speak for themselves, but that is only when the tribunal of fact is able to proceed, by evidence or assumption, on a basis reflecting what the document is, how it was created and whether it was a final version. In my view, on the occasions when the court has some doubt, on the basis of the document itself or surrounding circumstances, about the weight to be given to a document because of concern about why it was created or how it was used, or about the ambiguity of its contents or whether it was a draft, and there is no witness giving evidence to remove that doubt, the court's caution about the weight to be given to the documents will be enhanced by the considerations enumerated in s 140(2).

[435] The fact that the court has held that the documents in question are admissible does not entail that they are to be given any particular weight in ASIC's case, as I made plain in my judgment on the admissibility of business records, ASIC NSWSC 417 at [122]-[147] and [381].

3.5 The principle in Blatch v Archer

[436] The defendants placed substantial reliance on what they called "the rule in Blatch v Archer ". Blatch was an action of debt against the Sheriff of Essex for the escape of a debtor called Moody. The Sheriff issued a warrant for Moody's arrest on the application of the plaintiff, to be executed by old Mr Fenton, the bailiff. In fact the arrest was carried out by Mr Fenton's son, and it was authorised and lawful only if old Mr Fenton was present at the time of the arrest. There was some evidence on this matter, but the plaintiff, who was asserting the lawfulness of the arrest, did not call young Mr Fenton, who could have cleared the matter up. In that context Lord Mansfield remarked that "it is certainly a maxim that all evidence is to be weighed according to the proof which was in the power of one side to have produced, and in the power of the other to have contradicted". However, he did not apply that principle against the plaintiff because he held that in the instant circumstances, it would have been improper to have called the son, for the action was in reality an action against his father, the bailiff.

[437] Lord Mansfield's principle has been accepted and applied in modern cases. For example, in Clayton Robard Management Ltd v Siu (1988) 6 ACLC 57 at 62, Kirby P considered what inferences should be drawn, if any, from the failure of the appellants to call evidence. He said:

In a rational procedure for the resolution of disputed issues of fact, it would not be unreasonable to expect a party in the best position to do so to place before the tribunal of fact the relevant evidence in its possession, at least so far as such evidence was relevant to the resolution of disputed questions.

Later his Honour referred (at 65) to the "overriding obligation, oft repeated, to consider and weigh the evidence at the end of the trial according to the respective powers of the parties to produce evidence", and he said that principle, which supplemented the processes of reasoning authorised in Jones, could be traced to Lord Mansfield's judgment in Blatch. He noted that it was endorsed by the High Court in Hampton Court Ltd v Crooks (1957) 97 CLR 367 at 371-2 ; 64 ALR (CN) 1201 ; [1957] HCA 28, and that it had been applied many times, citing Apollo Shower Screens Pty Ltd v Building & Construction Industry Long Service Payments Corp (1985) 1 NSWLR 561 at 565.

[438] The relationship between the principles enunciated in Blatch and Jones was further explained by Hodgson JA (with whom Beazley JA agreed) in Ho v Powell (2001) 51 NSWLR 572 ; [2001] NSWCA 168 (Ho). His Honour said (at [14]) that "in deciding facts according to the civil standard of proof, the court is dealing with two questions: not just what are the probabilities on the limited material which the court has, but also whether that limited material is an appropriate basis on which to reach a reasonable decision", and he referred to his extra-curial writing on the subject ("The Scales of Justice, Probability and Proof in Legal Fact-finding" (1995) 69 ALJ 731). He continued (at [15]-[16]):

[15] In considering the second question, it is important to have regard to the ability of parties, particularly parties bearing the onus of proof, to lead evidence on a particular matter, and the extent to which they have in fact done so: cf 69 ALJ at 732-733, 736, 740 ...

[16] The case of Jones v Dunkel (1959) 101 CLR 298 ; [1959] ALR 367 ; [1959] HCA 8 is a particular application of this principle. That case itself related to a situation where there was evidence supporting an inference against a party, and that party did not give or call evidence, which that party was plainly in a position to have given or called, in order to explain or contradict the material presented. In my opinion, a similar principle applies where a person bearing the onus of proof does not give or call evidence which that person is plainly in a position to give or call; and unless some explanation is given of this failure, the tribunal of fact is entitled to infer that this evidence would not have assisted that person's case: cf Commercial Union Assurance Co of Australia Ltd v Ferrcom Pty Ltd (1991) 22 NSWLR 389.

[439] Presumably Jones is a "particular application" of Blatch, in the sense that the reason why the court can be confident about drawing inferences against a party who has chosen not to give evidence is that it was within the power of the party to produce evidence on that matter. Blatch is a wider principle because it is also available against the person bearing the onus of proof, where that person does not adduce evidence that he or she was plainly in a position to adduce.

[440] There is another respect in which Jones is a particular application of Blatch, again indicating that the latter has a wider operation. Whereas Jones reinforces an inference drawn against the party who has not called evidence, to the effect that the evidence would not have assisted that party's case, Blatch leads either to the drawing of such an inference, or to some other assessment of the weight of evidence, unfavourable to the party against whom the principle is applied. In Shalhoub v Buchanan [2004] NSWSC 99 at [71], Campbell J explained the point as follows:

[71] Failure to call all those witnesses still has a consequence, even though I do not go through the process of drawing any Jones v Dunkel inferences concerning them. I would infer that Mr Shalhoub, Mr Atallah, one or more of the salespeople, and at least some of the other people who attended the auction, were available. I shall assume that all of these witnesses, apart from Mr Shalhoub, were available to be called by either party. Even making that assumption, failure of a party who bears an onus of proof to call an available witness who could cast light on some matter in dispute can be taken into account in deciding whether that onus is discharged, in circumstances where such evidence as has been called does not itself clearly discharge the onus. This is an application of Lord Mansfield's maxim ...

[441] The defendants have sought to invoke the principle in Blatch on many occasions, arguing in each case that ASIC might have called a witness who could have clarified an uncertain matter (especially as to the status and meaning of a document) but has not done so: generally, DPS [223]. ASIC made the general submission (ASR [218-223]) that the present case is far removed from cases such as Ho. Ho concerned a road accident in which there was a collision between the plaintiff cyclist and a car driven by the defendant. The defendant claimed that the plaintiff was guilty of contributory negligence. The claim failed. The court regarded it as significant that the defendant had not himself given evidence concerning the collision. ASIC submitted that in Ho, a non-documentary case, the defendant's evidence was central, whereas in the present case the evidence of the individuals identified by the defendants as potential witnesses was "relatively peripheral".

[442] In my view, while none of the individuals identified in the defendants' submissions was in so central a position as the defendant in Ho, it is wrong to say of any of them that their position and potential evidence was relatively peripheral. For example, Timothy Holmes was group financial controller of One.Tel Australia and was well placed to give evidence about the fixed wire/service provider management accounts and other financial documents concerning the Australian businesses, relating to subjects of central significance to ASIC's case. Mr Basman was collections manager at One.Tel Australia, and in a position to explain the profile summaries and give evidence about the process of provisioning for doubtful debts, matters which were again of very substantial importance in ASIC's case. Mr Miller and Mr Green were the authors of the PBL report presented to the board on 28 May as well as earlier reports, and were obviously well placed to give evidence about PBL's attitude to One.Tel in the period from late April to 29 May, a matter of some importance for ASIC's case. In my view the principle in Blatch is just as capable of applying to a documentary case where the documents need explanation by witnesses, as it is to a non-documentary case about a motor accident.

[443] The principle in Blatch requires the court to identify the power of the party to produce evidence. The defendants pointed out that as regards the power to produce evidence from a witness, ASIC is in a far superior position to most litigants, because of its power to administer examinations under s 19 of the ASIC Act, and to issue notices under s 1317R of the Corporations Act, as well as to issue subpoenas. In fact ASIC has obtained statements from many of the persons who, according to the defendants, should have been called to give evidence, and additionally it could have used its powers to call witnesses to contradict the defendants' evidence. Instead it has sought to rely on inferences from documents.

[444] ASIC submitted that there is an important contrast between the breadth of an investigation that ASIC conducts into suspected contraventions of the corporations legislation (which it described as "a roving investigation", and the way in which ASIC must conduct itself once it is a party to a judicial proceeding of a civil nature, at which time it must "focus on issues and the fairest and most efficient way of proving them": ASR [218-223]. I accept that there is such a distinction, but nevertheless it seems to me clear that it was in the power of ASIC to bring forward witnesses to clarify financial documents, debtor documents and PBL reports in the manner advocated by the defendants. As I shall note although when dealing with Jones, there is evidence of significant assistance to ASIC on the part of several potential witnesses, including Mr Holmes, Ms Nassif, Mr Basman, Mr Miller and Mr Green. There is nothing to suggest that ASIC could not have called any of these people, or Mr Barnes, Ms Joukhadar or Mr Courtney, as witnesses in its case in chief.

[445] ASIC also submitted that, as a result of the extensive discovery that has occurred in these proceedings, the defendants have obtained access to all of the possibly relevant available records of the company and all information acquired by ASIC in the course of its investigation, including transcripts of s 19 investigations: ASR [218-223]. They sought and were granted considerable time to examine and deal with that material. ASIC referred to what it called the "advantage" which the defendants had in having someone as knowledgeable about the company as Mr Rich working over the last 5 years on the defendants' defence of these proceedings. It referred to evidence given by the defendants' solicitor, Mr Johnston, by affidavit of 7 September 2002, as well as by Mr Rich himself (T 10788), dealing with how hard Mr Rich has worked on the matter. It referred to the assistance received by the defendants from former employees of One.Tel in preparing their defences, referring again to Mr Johnston's affidavit, as well as evidence from Mr Rich about the assistance he received from Mr Hodgson (T 10799-10800), and assistance the defendants received from accounting experts (T 10789-10795). In summary, ASIC submitted that the defendants have had the resources and expertise available to them to investigate thoroughly and argue every point capable of investigation and argument, and so there has been no inequality of position between the parties regarding their ability to conduct their cases, and every person who the defendants say ASIC should have called as an additional witness could have been called as easily by the defendants.

[446] I think those allegations (apart from the last one) are correct but beside the point. For the purposes of the principle in Blatch, ASIC had both the onus of proving its case and the power to call witnesses to overcome deficiencies about its documents, some of which were identified at a relatively early stage: see my judgment on the admissibility of documents, ASIC NSWSC 417. But it has not done so, preferring instead to submit that the court should draw inferences from the documents. The defendants had no onus or obligation to call evidence about ASIC's documents. I made it clear in my judgment (at [381]-[382]) that my ruling on the admissibility of ASIC's documents left open the possibility of the defendants challenging the probative value of the documents having regard to the difficulties with the documents that the judgment identified. It is hardly surprising that ASIC, not having called witnesses to clarify uncertain matters about the documents, encounters such a challenge now.

3.6 The Jones v Dunkel principle

[447] I received extensive submissions on Jones. Both parties wished to take advantage of the principle in respect of what they alleged to be failure on the part of the other party to call certain witnesses or to ask witnesses certain questions. It is not necessary, in these reasons for judgment, to survey the law generally, but there are some aspects of the principle that need to be addressed.

[448] Kitto J's formulation of the principle (Jones at CLR 308; ALR 372) was that evidence might be more readily accepted where it has been left uncontradicted, and that any inference favourable to the proponent, for which there was ground in the evidence, might be more confidently drawn when a person presumably able to put the true complexion on the facts relied on as the ground for the inference has not been called as a witness by the opponent, and the evidence provides no sufficient explanation of the absence of that witness: see also at CLR 312; ALR 374-5 per Menzies J, and CLR 320-1; ALR 380-1 per Windeyer J. The observations of Davies A-JA (dissenting on the facts) in Ho at [76], are a useful supplement:

[76] The rule permits evidence to be given greater weight and an inference or inferences to be more readily drawn when the other party who might have called evidence to the contrary has chosen not to do so. In Commonwealth v McLean (Court of Appeal, 31 December 1996, unreported), Handley JA and Beazley JA said: "... the rule typically applies to strengthen or weaken an inference otherwise available on the evidence for the benefit of the party not in default".

[449] There are three conditions for the application of the principle:

(a)

the missing witness would be expected to be called by one party rather than the other (which implies that the witness must be available to give evidence);

(b)

his evidence would elucidate a particular matter, which is a live matter at the trial; and

(c)

his absence is unexplained: Payne v Parker [1976] 1 NSWLR 191 at 201-2 (Payne) per Glass JA, dissenting; cited with approval by Campbell J, with whom Beazley JA and Pearlman A-JA agreed, in Manly Council v Byrne [2004] NSWCA 123 at [53] (Manly).

[450] Condition (a) is sometimes difficult to apply. Glass JA explained it as follows, at 201-2 (I omit the citation to authorities):

The first condition is also described as existing where it would be natural for one party to produce the witness ..., or the witness would be expected to be available to one party rather than the other ..., or where the circumstances excuse one party from calling the witness, but require the other party to call him ..., or where he might be regarded as in the camp of one party, so as to make it unrealistic for the other party to call him ..., or where the witness' knowledge may be regarded as the knowledge of one party rather than the other ..., or where his absence should be regarded as adverse to the case of one party rather than the other ... It has been observed that the higher the missing witness stands in the confidence of one party, the more reason there will be for thinking that his knowledge is available to that party rather than to his adversary ... If the witness is equally available to both parties, for example, a police officer, the condition, generally speaking, stands unsatisfied. There is, however, some judicial opinion that this is not necessarily so ... Evidence capable of satisfying this condition has been held to exist in relation to a party's foreman ...; his safety officer ...; his accountant ...; his treating doctor ...

[451] Where the principle applies, two different types of result might follow, according to Campbell J in Manly at [51]:

•

the tribunal of fact might infer that the evidence of the absent witness, if called, would not have assisted the party who failed to call that witness;

•

the tribunal of fact might draw with greater confidence any inference unfavourable to the party who failed to call the witness, if that witness seems to be in a position to cast light on whether that inference should properly be drawn.

[452] The principle applies both to failure to bring forward a witness and failure to tender a document or other evidence: Jones at CLR 320; ALR 380-1 per Windeyer J; Burke v LFOT Pty Ltd (2002) 209 CLR 282 ; 187 ALR 612 ; [2002] HCA 17 at [134].

[453] It also applies where a party fails to ask questions of a witness in chief on some topic, the most natural inference from that circumstance being that the party fears to do so: Commercial Union Assurance Co of Australia Ltd v Ferrcom Pty Ltd (1991) 22 NSWLR 389 at 418 per Handley JA. The latter proposition is emphasised in Cross on Evidence (Byrne and Heydon), at [1215]:

... the principles of Jones v Dunkel apply to the failure by a party to ask a witness called by that party questions in chief, at least where the most natural inference is that the party feared to do so [citing Commercial Union v Ferrcom, and other cases]. Indeed it has been said that the omission to ask questions of a friendly witness is more significant than the failure to call the witness, and that the presumption that the testimony would not have been favourable to the party's case is stronger than the presumption arising from the failure to call him [citing Milliman v Rochester Railway Co (1896) 39 NYS 274 at 276, approved in Commercial Union v Ferrcom at 419]. A fortiori, inferences are not to be drawn in favour of a party calling a witness who could have given direct evidence to that effect, but did not [citing cases including Commercial Union v Ferrcom]. The principle applies to a witness who, though called in the plaintiff's case in chief, is not called in the case in reply to deal with a fresh matter arising during the defendant's case [noting, inter alia, the division within the Court of Appeal in Payne v Parker].

[454] The principle in Jones does not apply where, in the circumstances, it is not reasonable to infer that the party against whom the inference is sought to be raised did not call the witness because of fear of what a witness might say. That proposition was explained by Mahoney JA (Priestley and Sheller JJA concurring), in Fabre v Arenales (1992) 27 NSWLR 437 at 449-50 ; 15 MVR 303 at 315:

The significance to be attributed to the fact that a witness did not give evidence will in the end depend on whether, in the circumstances, it is to be inferred that the reason why the witness was not called was because the party expected to call him feared to do so. But there are circumstances in which it has been recognised that such an inference is not available or, if available, is of little significance. The party may not be in a position to call the witness. He may not be sufficiently aware of what the witness would say to warrant the inference that, in the relevance sense, he feared to call him. The reason why the witness is not called may have no relevant relationship with the fact in issue: it may be related to, for example, the fact that the party simply does not know what the witness will say. A party is not, under pain of a detrimental inference, required to call a witness "blind".

... A Jones v Dunkel inference may not arise if, for example, the witness has a reason for not telling the truth or refusing to assist and the party who may well call him is aware of this. If the Government Insurance Office had been the party and Mr Arenales merely a witness, it is at least arguable that no inference would be drawn from the fact that he was not called for the defendant. If called he would have been asked in effect to admit a crime of some seriousness. If he did, he might be liable to reimburse the Government Insurance Office for or in respect of the amount recovered by the plaintiff. And, perhaps, it might be doubted that he would co-operate, by way of prior consultation, proof of evidence, or the like. It may be that his character or criminal record would affect these matters.

[455] Other circumstances where the court might decline to draw a Jones are where:

•

the missing witnesses are merely giving evidence which is comparatively unimportant, cumulative or inferior to that which has already been obtained: Cubillo v Commonwealth (2000) 103 FCR 1 ; 174 ALR 97 ; [2000] FCA 1084 at [360] (Cubillo), per O'Loughlin J; Manly at [60]-[66] per Campbell J;

•

the party against whom an inference is sought to be raised already has a strong case on other evidence to support a finding -- that is, the inference that the absent witness's evidence would not support the finding does not prevent the finding from being made on the basis of other evidence (Manly at [74] per Campbell J, citing JPQS Pty Ltd v Cosmarnan Constructions Pty Ltd [2003] NSWCA 66 at [24], per Meagher JA (with whom Beazley JA agreed, and Mason P substantially agreed).

[456] ASIC put forward the following additional proposition (APS 2111 (iv)): "where the party's case is essentially a documentary one such that oral supplementary or corroborative evidence would substantially add to the length of the trial", the principle in Jones will not apply: citing ASIC NSWSC 417 at [377]-[378]. My observations in that judgment were not intended to lay down some new exception to the principle in Jones, and in my view it is not a correct proposition, expressed in that way. If the case is a documentary one, then the strength of the case depends upon the documents, and supplementary or oral evidence is necessarily of lesser importance, and so a Jones inference is unlikely to be made having regard to the two principles stated in the preceding paragraph. But having now had the benefit of hearing the whole of the evidence, I am not persuaded either that ASIC's case is a strong one on the documents or that, having regard to the difficulties surrounding the documents, it is to be described as a case that is essentially documentary.

[457] ASIC submitted (APS [2101]) and the defendants agreed (DPS [236]) that the onus of establishing the unavailability of a witness, for the purposes of the principle in Jones, rests on the party against whom the principle would operate. The defendants cited a somewhat tentative statement to that effect in Cross on Evidence, above, at [1215], said to flow from the majority judgment in Smith v Samuels (1976) 12 SASR 573. It seems to me that the learned authors are correct.

[458] The defendants submitted (DPS [235]) that "the so-called desire to keep the trial within reasonable bounds does not mean that the principle ceases to exist", and they cited some observations by Callinan J in Dyers v R (2002) 210 CLR 285 ; 192 ALR 181 ; [2002] HCA 45 at [118] (Dyers). The passage relied upon does not support the submission. Callinan J was dealing with the obligation of the prosecution in a criminal trial to call material witnesses, and he said that "while counsel and judges should be vigilant to ensure that trials are not needlessly prolonged, "material" in this field of discourse should not be given any narrow meaning". Those observations do not have any application to civil proceedings.

[459] Finally, there was some contention in submissions as to whether Jones inferences can be drawn against defendants in civil penalty proceedings, such as the present proceedings, in which the defendants have the benefit of the penalty privilege. It is rarely permissible to direct the jury or make a comment about drawing a Jones inference from the absence of evidence by the accused or by witnesses called by the accused (Cross on Evidence, at [1220]), although it seems clear that if there is any scope for Jones inferences at all, it is very much narrower in a criminal trial than in a civil case. As to whether Jones inferences can be made against the prosecutor, the leading modern case is Dyers, above. In that case Gaudron and Hayne JJ (with whom Kirby J agreed) held that a direction should not generally be given to a jury to the effect that the prosecution would have been expected to call witnesses, unless it is shown that the failure to call the witness was in breach of the prosecutor's duty to call material witnesses: at [6] and [17]. The question addressed in submissions is whether the thinking underlying the criminal cases has any application to civil penalty proceedings in which the penalty privilege applies.

[460] The matter was addressed by the Court of Appeal in Adler at [652]-[661] per Giles JA, with whom Mason P and Beazley JA agreed. That was a case in which, inter alia, pecuniary penalty orders were made, and so the defendants were protected by the penalty privilege, even before the High Court held in Rich (2004) that the penalty privilege extended to civil penalty proceedings seeking disqualification orders. Giles JA considered whether the availability of the penalty privilege, which he recognised to be an extension of the privilege against self-incrimination, is inconsistent with the application of the Jones principle. He concluded (at [661]):

[661] In the end the argument must be that it would not be consistent with this stance against self-incrimination for an inference adverse to the person from whom a civil penalty is claimed to be drawn because of the failure of the person to give evidence. That reasoning did not find favour in RPS v R (2000) 199 CLR 620 ; 168 ALR 729 ; [2004] HCA 3], in which the "right to silence" was not thought to be a useful basis for reasoning: at [22]. To say that a person cannot be forced to give evidence against himself, by providing discovery or answering interrogatories or, in a criminal context, making a statement to the police, says little when it comes to the giving of evidence in the person's own case. In ordinary civil proceedings the defendant cannot be forced to give evidence in his own case. Civil penalty proceedings are no different in that respect. In my opinion it was open for Jones v Dunkel inferences to be drawn against Mr Adler, Adler Corporation and Mr Williams in these proceedings.

[461] In my opinion that reasoning, developed in a case to which the penalty privilege applied, is not affected by the High Court's decision in Rich, which recognised the availability of the penalty privilege in other circumstances: compare DPS [271]. I do not agree with the defendants that part of the reasoning in Adler depended upon a since discredited dichotomy between punitive and protective civil penalty orders. Adler was a case in which pecuniary penalties were sought and the penalty privilege clearly applied, even before the High Court held that the privilege was available in proceedings for a disqualification order. It is true that Giles JA referred (at [659]) to "a disqualification order made not punitively but protectively", but as McColl JA observed in Rich v ASIC (2003) 203 ALR 671 ; 48 ACSR 6 ; [2003] NSWCA 342 at [335] (Rich NSWCA 342), (on which the defendants mistakenly relied), that observation was not critical to the decision on the point under consideration in Adler.

[462] The Court of Appeal in Adler did not discuss Dyers when considering whether Jones inferences were available against the defendants in civil penalty proceedings, although they referred to the case later, when considering the argument that ASIC had a duty of "prosecutorial fairness": at [677]. The defendants contended (DPS [273]), without further elaboration, that the consideration by Gaudron and Hayne JJ in that case (at [7] and following) as to the three principal reasons for concluding that a Jones direction should not have been given against the accused made it questionable whether Jones inferences should, as a matter of principle, be available against defendants to civil penalty proceedings. But the reasoning of Gaudron and Hayne JJ was specifically directed towards the circumstances of a criminal trial: the first criticism of the trial judge was that the Jones direction did not give the jury sufficient assistance; the second was that any conclusion about who would be expected to call a person to give evidence must take into account the obligations of the prosecution; and the third related to a direction that the jury should not speculate about the evidence that might have been given by those who were not called. To extend that reasoning to civil penalty proceedings in which the defendant has the benefit of the penalty privilege, whether because a pecuniary penalty or a disqualification order is sought, would require the construction of a process of reasoning not presented in the judgments in Dyers and contrary to Adler.

[463] The application of Jones is reinforced by s 1317L of the Corporations Act, which requires the court to apply the rules of procedure and evidence applicable to civil proceedings. The principle in Jones is as much a part of the law of evidence applicable to civil proceedings as is the privilege against exposure to a civil penalty: see APS [2099]. My conclusion is that the principle in Jones is applicable against either party to civil penalty proceedings.

3.7 Application of Blatch v Archer and Jones v Dunkel to ASIC's omission to call witnesses and ask questions

[464] As previously noted, ASIC has extensive statutory powers to assist in gathering material for presentation in civil penalty proceedings, including its information-gathering powers in the ASIC Act, especially the power to examine persons (s 19) and the power to require production of documents (s 30 and following), and it also has the power to compel persons to assist under s 1317R of the Corporations Act. There is evidence that it has used these powers in the One.Tel investigation and the preparation of these proceedings. In the circumstances it was in the power of ASIC to have produced former One.Tel executives as witnesses to explain the uncertain documents that were part of its documentary tender.

[465] ASIC submitted that the fact that it had obtained information pursuant to s 19 examinations from a number of witnesses, some of whom were not called, is an irrelevant matter: APS [2113]. It contended that its regulatory functions to inquire into a corporate collapse of the magnitude of the One.Tel collapse might require it to engage in wide-ranging inquiries, conducted not for the predominant purpose of building a case against defendants but for the express purpose of investigating suspected contraventions of the corporations legislation. I accept that ASIC's powers of investigation are given for the purpose of investigating suspected contraventions and that it conducted investigations in the present case for that purpose. But the submission misses the point raised by the defendants, which is that because of those statutory powers ASIC was in a position to secure the co-operation of potential witnesses, and therefore (absent evidence to the contrary) the court should infer that it was able to bring to court the former One.Tel executives identified in the defendants' submissions.

[466] The defendants submitted that, while ASIC has called witnesses to give "incriminatory" evidence (for example Messrs Weston, Werner, Boaden and Thomas), it has consciously avoided calling witnesses "who could put to rest the contentious inferences which it asks the court to draw (for example Holmes and Nassif in relation to the financial position of One.Tel Australia and the so-called management accounts in particular, Basman in relation to debtors, Courtney, Miller and Green in relation to One.Tel's financial position post 17 May and the documents provided to the board on 17 and 28 May in particular)": DP [244].

In other parts of their submissions they mention Mr Barnes and Ms Joukhadar as possible witnesses on financial matters, in addition to or instead of Mr Holmes and Ms Nassif.

[467] They were particularly critical of two matters:

•

ASIC's omission to ask Ms Thomas, who was an accounts payable manager, any questions about creditors, in circumstances where ASIC has sought to establish by inference that there was a practice of managing and deferring creditors: DPS [249]; and

•

ASIC's omission to call any members of the Australian finance team (such as Mr Holmes, Mr Barnes, Ms Nassif and Ms Joukhadar), even though the financial position of the Australian fixed wire/service provider business was central to ASIC's case, and most of these individuals were demonstrated to be available, some having worked for the liquidator and some having co-operated with ASIC in the course of its investigations: DPS [250].

[468] According to the defendants, ASIC hinted at the proposition that it could not call certain other One.Tel executives as witnesses because they were "complicit" in putting false financial information before the board: DPS [78]. The defendants submitted (DPS [78]) that ASIC's submission implied that its case is really a case about deliberately and dishonestly misleading the board, rather than about placing information before the board that was honestly but carelessly prepared (DPS [78]). I do not agree with that submission. It seems to me that a former One.Tel executive might be reluctant to give evidence for fear of being seen as complicit in financial disclosure that was not fraudulent but culpably careless.

[469] In ASIC NSWSC 417, the defendants unsuccessfully argued that ASIC's documents should be excluded from the evidence on discretionary grounds. I expressed the obiter opinion (at [377]) that there was no occasion to make a Jones inference unfavourable to ASIC from its failure to call witnesses, in circumstances where the case was essentially a documentary case, ASIC wished to have the documents speak for themselves, and it plausibly submitted that oral supplementary evidence would add considerably to the length of the trial. Now that the trial is over, these matters have quite a different complexion. ASIC has presented its case as essentially a documentary case in final submissions, but the documents upon which it relies include some important documents that do not speak for themselves in any clear way, so that the absence of explanation by any witness is a serious impediment. In submissions on the admissibility of documentary evidence, ASIC contended that the former One.Tel executives who might have been called by ASIC to prove the documents were potentially hostile witnesses: the proceedings involved criticism of the accuracy and sufficiency of the financial information supplied to One.Tel's board of directors, and in those circumstances senior financial executives of One.Tel (such as Mr Holmes) or those associated with the provision for doubtful debts (such as Mr Basman) might fear that their conduct would be criticised, and that made them potentially hostile witnesses. ASIC said that the defendants were seeking to force it to call high-level employees of One.Tel with whom the defendants were closely associated for many years, who could be expected to be sympathetic to the defendants' interests. The fact that some of these individuals supplied information voluntarily to ASIC should not be treated as significant, in circumstances where ASIC have the power to force them to do so: see ASIC NSWSC 417 at [369]and [371].

[470] I held (at [378]) that ASIC's submissions on this matter were not supported by evidence, and that such evidence as was available suggested a willingness on the part of Mr Holmes and Mr Basman to co-operate with ASIC. I see no reason to vary that conclusion now. The evidence I considered in my earlier judgment indicates that Mr Holmes and Mr Basman would be expected to be called by ASIC in view of their record of assistance to ASIC, and it is likely that their evidence would elucidate particular matters: in the case of Mr Holmes the status of the fixed wire/service provider management accounts and the relationship between board papers and flash reports, on the one hand, and other documents such as Australian cash flow spreadsheets on the other; in the case of Mr Basman, the profile summaries and the process of provisioning for doubtful debts. It seems to me the reasoning applied to Mr Holmes also extends to Ms Nassif and Ms Joukhadar. Some matters of uncertainty about the PBL report considered at the 28 May board meeting, and more generally the thinking of Mr Miller and Mr Green concerning One.Tel's financial condition during the course of their work from late April until 28 May, could have been elucidated if Mr Miller or Mr Green, or perhaps Mr Courtney, had been called to give evidence, and they would be expected to be called by ASIC rather than the defendants. Therefore the first two of Glass JA's conditions for the application of Jones (Payne at 201-2) are satisfied.

[471] ASIC resisted the proposition that the "missing" witnesses would be expected to be called by it rather than the defendants, arguing that they were equally accessible to both parties and that the defendants had through discovery received ASIC's information about them: ASR [258-69]. ASIC made the following submission (APS [2114]):

Further, the information that it obtained pursuant to those examinations [s 19 examinations] and other inquiries was made available in response to discovery obligations and a series of notices to produce pre-trial (see, for example, Ex P7-170 and ASIC v Rich (2004) 50 ACSR 357 ; [2004] NSWSC 772). In other words, all documentary information (including s 19 transcript and statements) obtained or prepared by ASIC as part of its investigation, whether subsequently tendered or relied upon or not, were also in the defendants' possession [sic]. It was at all times open to the defendants to approach those examinees whose examinations or statements or draft statements or notes from interviews could conceivably assist with their defences, and call them to give evidence for the defendants themselves. The witnesses were equally available to ASIC and the defendants.

[472] This is not, in my view, an answer to the Jones submissions made by the defendants. Bearing in mind ASIC's onus of proof and its tender of documents needing explanation, it seems to me that if a potential witness has co-operated with ASIC by providing a statement or draft statement or attending a voluntary interview, or has voluntarily assisted the accountants engaged by ASIC in their investigations, that potential witness would be "expected to be called" by ASIC rather than the defendants for the purpose of Glass JA's first condition for the application of Jones (in Payne, noted above), even if some or all of the results of the co-operation have been provided to the defendants. That is particularly so if the co-operation with ASIC related to the particular matter to which a Jones inference is sought to be applied, and there is a reasonably strong likelihood that the witness's evidence would elucidate that matter.

[473] As to Glass JA's third condition, that the absence of the witness is unexplained, I have expressed the view that the onus of establishing the unavailability of a witness is borne by the party seeking to avoid the Jones inference. I have reached the view that ASIC has not discharged the onus in respect of evidence from one of the finance team (Mr Holmes, Mr Barnes, Ms Nassif or Ms Joukhadar), evidence from Mr Basman, and evidence from one of Mr Miller, Mr Green and Mr Courtney. In my judgment on the admissibility of documents (at [378]) I noted that there was another reason advanced by ASIC for not calling additional witnesses, namely ASIC's forensic decision to conduct its case in reliance on documents rather than oral evidence, so far as possible, in an attempt to keep the hearing within reasonable bounds. Again, now that the trial is over, I have a somewhat different perspective. It seems to me that the calling of an additional three witnesses, perhaps Mr Holmes, Mr Basman and Mr Miller or Mr Green, would have clarified ASIC's documents in important ways. For reasons given in my judgment on the admissibility of documents at [378], I do not accept the argument that there was no obligation to call those witnesses because they were in the defendants' "camp" or were otherwise potentially hostile to ASIC. While I accept that ASIC wanted to limit the evidentiary case within reasonable bounds, it did not hesitate to pursue Mr Werner's evidence notwithstanding his reluctance to testify, and it was prepared to extend its evidentiary case in other ways as well (such as by tendering the expert report of Mr Smith). In those circumstances there is ground for inferring that the witnesses who might have clarified the nature and status of key documents were not called for fear that they would be cross-examined at large and out of concern over what they would say.

[474] It therefore seems to me that the absence of One.Tel management witnesses:

(a)

to explain management accounts and the relationship between board papers and flash reports and other financial documents including cash flow spreadsheets; and

(b)

to explain the profile summaries and the process of provisioning for doubtful debts;

has the consequences:

(c)

under the principle of Blatch, that ASIC's failure to call those witnesses can be taken into account in deciding whether it has discharged its onus of proof with respect to the facts in issue to which the documents relate: see Shalhoub at [71], cited above; and

(d)

under the principle of Jones, that the court should infer that the evidence of the absent witnesses, if called, would not have assisted ASIC's case: Manly at [51], cited above.

[475] I have noted that Jones has a particularly strong application in a case where a party fails to ask questions of a witness called by that party. In my view that is the case with respect to ASIC's omission to ask:

•

Ms Thomas, who was the accounts payable manager at One.Tel, questions about management of creditors and deferral of payments of creditors over month-end; and

•

Mr Werner, joint chief financial officer of One.Tel Europe, questions about his cash flow spreadsheets of March, April and May 2001, which were at odds with information provided to the board.

In both cases it is appropriate for the court to infer that evidence the witness would have given, if asked, would not have assisted ASIC's case, and moreover, the absence of such questions enables the court to draw, with greater confidence, inferences based on other evidence and unfavourable to ASIC, though it is not permissible to draw inferences damaging to ASIC's case from the omission of those questions.

[476] ASIC submitted (ASR [258-69]) that it had no obligation to call further evidence that would only have served to prolong the trial, and indeed, for it to take such a course would put it in breach of its duty under s 56(3) of the Civil Procedure Act to assist the court in facilitating the "just, quick and cheap resolution of the real issues in the proceedings". But that submission was made on the premise that ASIC had been able to prove its case to the requisite standard by calling the evidence that it called. If that premise is not correct, then the submission falls to the ground.

3.8. Application of Jones v Dunkel to the defendants' failure to give evidence explaining documents and to call a forensic accounting expert

[477] ASIC invited the court to apply the Jones principle to the defendants' case in two respects.

[478] First (APS [2104]-[2105]), they pointed out that over the preceding 4 years the defendants had extensive assistance in relation to the proceedings from accounting experts, but no evidence from such a witness was called by them. ASIC submitted that the court should draw the inference that the defendants did not call such a witness because they feared to do so. The defendants strenuously opposed this submission: DPS [275]-[281].

[479] I disagree with ASIC's submissions, although I think the defendants' submissions are overstated: especially at DPS [278]. At the time of commencement of the hearing it was evident that ASIC intended to place great reliance on the expert accounting evidence of Mr Carter, who had prepared an extensive report with multi-volume exhibits, on the basis of a very large amount of work. I have no doubt that if Mr Carter's evidence had been received in full, the defendants would have tendered expert accounting evidence in response. But as I explained in Ch 1, substantially more than half of Mr Carter's evidence was excluded by evidentiary rulings, and a fair proportion of what remained was allowed into evidence only as assumption. The part of Mr Carter's evidence that survived was of very limited significance to ASIC's case, as demonstrated by the fact that ASIC's written submissions in chief place very little reliance on Mr Carter's evidence.

[480] In a case such as this, where the key issues are about financial facts, expert accounting evidence is somewhat different from other evidence, in that much of the accountant's work is available to be used in submissions and cross-examination, although not given in evidence. I have no doubt that many of ASIC's submissions, and lines of questioning in cross-examination, were moulded from or assisted by the work of Mr Carter and Mr Smith. Equally, I am confident that the defendants made considerable use of their accountant's work in their principal submissions and cross-examination. In the case of an expert accounting report, therefore, the party commissioning the report has a forensic choice to make as to whether to tender it or to use its contents in cross-examination and submissions. In circumstances where the bulk of the tendered accounting evidence against them was not received into evidence, I think the natural inference to draw from the defendants' decision not to tender accounting evidence is that their forensic choice was to use that evidence in other ways. There is no room for an inference that they feared what their accountant might say if he was called to give evidence.

[481] ASIC propounded a case that One.Tel was in a disastrous financial position during the period from January to April 2001. The defendants recognised in opening their case that the principal issue in the proceedings is the financial position of One.Tel: T 10532; T 10636. They had the benefit of substantial assistance in the proceedings from accounting experts. They have not called their accounting expert to give expert opinion evidence, and the only financial evidence given by them (apart from extensive documents and the limited evidence of Mr Maizels) was the evidence of Mr Rich and Mr Silbermann themselves, which they must have known might be given limited weight on financial issues because of their interest in the outcome of the proceedings. Do those facts alone warrant a Jones inference about their accounting expert, as ASIC claimed: ASR [275-81]? I think not. They were entitled to take the view that ASIC should be held to proof of its case. They have made an assessment of the strength of the accounting opinion evidence against them, and have decided they need not put forward expert accounting opinion evidence of their own, having regard to the limited extent to which such opinion evidence has been received in ASIC's case. Glass JA's third condition for the application of Jones is not satisfied.

[482] Second, ASIC sought to apply the Jones principle to the defendants' omission to call Mr Beck. There was evidence that Mr Beck has had a long association with Mr Rich, dating back to 1985 when Mr Beck joined Imagineering: 1 JDR 614. Mr Silbermann accepted that Mr Beck is a friend of his and they are in frequent contact: T 13778. Both defendants accepted that Mr Beck has provided assistance to them in relation to the proceedings: T 10801; T 13778.

[483] ASIC submitted (at APS [2108]) that Mr Beck would have been able to provide material evidence in relation to the following matters:

•

the alleged $40 million of unbilled data, including Mr Beck's alleged discovery of $28 million of this starter and communications between him and others concerning this issue: citing 2 JDR 1230, 1282, 1283, 1330, 1341, 1455; MS 323-8, 358, 372-6, 432, 441;

(1)

the claim against Telstra: 2 JDR 1430;

(2)

the damages claim against Lucent: 1 JDR 1095, 1097, 2 JDR 1491-2;

(3)

Mr Rich's alleged conversation with "Emma" from PwC about progress of the PwC review of One.Tel's billing system, which allegedly took place in the presence of Mr Beck: 2 JDR 1570;

(4)

the state of One.Tel's billing system, for which Mr Beck was responsible, and the work done by PwC in relation to it: 1 JDR 31, 458; 2 JDR 1283, 1298d, 1342, 1569 1691;

(5)

the need to make provision in the cash requirements for repayment to Toronto Dominion of $50 million, as Mr Beck was one of the executives responsible for One.Tel's relationship with Toronto Dominion: 2 JDR 1738a;

(6)

the prospects of additional financing being made available to One.Tel in May: T 12256; Ex MTB 1/331 (minutes of the 17 May board meeting, at which Mr Beck reported on attempts by executives to investigate alternatives for fund-raising); MS 548, 581;

(7)

the meeting between management and Ernst & Young on the evening of 28 May: MS 679-83;

(8)

aspects of what transpired at the board meetings on 17, 28 and 29 May: 2 JDR 1625-6; MS 573-6, 642, 647, 655, 721, 740, 756, 769.

[484] I agree with ASIC that Mr Beck may have been able to provide evidence on each of those matters. On the other hand, there was already evidence tendered by the defendants about those matters, as specified in respect of each of the above. While additional evidence from Mr Beck would not be merely cumulative evidence, to which the principle in Jones does not apply (see above, especially Cubillo at [360] per O'Loughlin J), it is not immediately obvious that any of the formulations of the first condition for the application of the principle given by Glass JA in Payne, above, is satisfied here. Not only have the defendants tendered extensive evidence given by themselves on the relevant subject matter, but in a substantial number of the cases identified by ASIC in the above list (all except the first three, in my opinion), it was not clear until the time of final submissions that the issue would become so controversial as to be assisted by a further witness.

[485] There is an additional matter that goes to explaining the absence of Mr Beck. He was an executive director of One.Tel. Even if the non-executive directors should not have been defendants, it is not entirely clear why Mr Beck was not joined as a defendant in the proceedings. He was involved at least to some degree in many of the matters that are the subject of pleaded allegations against the defendants, although the pleaded issues did not directly mention him. As the defendants said (DPS [282]), "it would have been somewhat remarkable, in a case where proceedings were brought against two executive directors for breaches of duty of care and diligence, for them to call a third director who the evidence would suggest was in no different position from them". In those circumstances the court cannot infer from evidence of earlier friendship and assistance that Mr Beck was in any sense aligned with the defendants and that he was a person that the defendants rather than ASIC would be expected to call. A witness with independent or separate interests to a party, which actually or may potentially conflict with the party's interests, is not in the latter's camp (Trevitt v NSW Tafe Commission [2001] NSWCA 363 at [45]; compare APS [2112]) and those same considerations undermine the proposition that the witness would be expected to be called by that party.

[486] In these circumstances I have reached the conclusion that no Jones inference should be drawn against the defendants through their omission to call Mr Beck.

[487] I note that ASIC has not invited the court to make a Jones inference in relation to Mr Hodgson, even though was evidence that Mr Rich developed a close working relationship with him at One.Tel, and that Mr Hodgson helped Mr Rich in relation to the proceedings for about 12-18 months after Mr Rich first received the Carter report: T 10799. This was because of evidence given by Mr Rich in re-examination, concerning Mr Hodgson's difficult employment circumstances, matters that were communicated to Mr Rich in late 2005: T 12861-4. There was some commercial confidentiality about Mr Hodgson's position, and in the circumstances I need not explore the matter further, except to say that Mr Hodgson was regarded by both parties as unavailable to give evidence.

3.9 The rule in Browne v Dunn

3.9.1 General principles

[488] In Allied Pastoral Holdings Pty Ltd v FCT [1983] 1 NSWLR 1 at 16 ; 44 ALR 607 at 623, Hunt J formulated the rule in Browne as follows:

It has in my experience always been a rule of professional practice that, unless notice has already clearly been given of the cross-examiner's intention to rely upon such matters, it is necessary to put to an opponent's witness in cross-examination the nature of the case upon which it is proposed to rely in contradiction of his evidence, particularly where that case relies upon inferences to be drawn from other evidence in the proceedings. Such a rule of practice is necessary both to give the witness the opportunity to deal with that other evidence, or the inferences to be drawn from it, and to allow the other party the opportunity to call evidence either to corroborate that explanation or to contradict the inferences sought to be drawn.

[489] Additionally, if the court is to be invited to disbelieve a witness, the grounds upon which the evidence is to be disbelieved should be put to the witness in cross-examination so that the witness may have the opportunity to offer an explanation: Cross on Evidence, above, at [17435]. The reason for the rule of practice is procedural fairness: it is unfair to a witness to deny the opportunity of making any explanation open to the witness if a later invitation to disbelieve or criticise the witness is to be made; and it is unfair to the party calling the witness if the opportunity for the witness to proffer an available explanation is denied: Cross on Evidence, at [17435]. The rule also assists the trial judge by bringing into direct opposition the evidence of the parties: Reid v Kerr (1974) 9 SASR 367 at 373-4 per Wells J.

[490] In MWJ v R (2005) 222 ALR 436 ; 80 ALJR 329 ; [2005] HCA 74 at [41], Gummow, Kirby and Callinan JJ held that the rule in Browne may be inapplicable in criminal proceedings. That raises the question whether the rule is applicable in civil penalty proceedings in cases where the defendants are protected by the penalty privilege, as in the present case [286]-[293]. Section 1317L of the Corporations Act, according to which the rules of evidence and procedure in civil proceedings are applicable in civil penalty proceedings, implies that Browne has application in a case such as the present. In my opinion, that conclusion is supported by the reasoning of the Court of Appeal in Adler. As previously noted, that was a case to which the penalty privilege applied, and nevertheless the Court of Appeal held that the principle in Jones was available against the defendants. In ASIC NSWCA 75, a case where pecuniary penalties were sought and the penalty privilege applied, the Court of Appeal assumed that the rule in Browne was applicable.

[491] The defendants relied on some observations by McColl JA in Rich NSWCA 342 at [379]. Her Honour's judgment was a dissenting judgment but the court Appeal's decision was reversed by the High Court on appeal. McColl JA referred to the statutory scheme of which the power to impose a disqualification order formed part, and she said:

[379] Although structured as a civil case both in terms of the procedures to be applied (s 1317L) and the onus of proof (s 1332), the proceedings are, in effect, brought by the State and "accuse" the defendant of a contravention of a public law -- just as, in the criminal context, the defendant is accused of a breach of statute. The civil penalty regime pivots around the declaration of contravention which operates in the same sense as a finding of guilt and leads, in turn, to the imposition of one or other of the available civil penalty orders. It is not a suit which is purely of a civil nature.

[492] Those remarks were of made to support the conclusion that a disqualification order imposes a penalty, and so the penalty privilege should be attracted to proceedings in which that relief is sought. In my opinion they do not provide a mandate to disregard the statutory direction in s 1317L that the civil rules of evidence are to be applied in civil penalty proceedings, a direction expressed in general terms that apply both to civil penalty proceedings where a penalty is sought and civil penalty proceedings where only compensation is sought.

[493] Nevertheless it seems to me that there is some significance in the fact that the defendants are protected by the penalty privilege, when it comes to the application of the rule in Browne to particular circumstances. I shall return to this point when I consider the application of the rule to the present case.

[494] The consequences of failure to comply with the rule in Browne were addressed by the learned authors of Cross on Evidence, at [17460]. The following consequences, not exhaustive, are pertinent to the present case:

•

if a witness is not cross-examined on a point, cross-examining counsel may be taken to accept it and may not be permitted to address in a fashion which asks the court not to accept it;

(1)

if a witness has not been cross-examined on a particular matter, that may be a very good reason for accepting that witness's evidence, particularly if it is uncontradicted by other evidence;

(2)

it would usually be unfair to reject evidence on which there has been no cross-examination where the rule in Browne has not been complied with and where the witness has not otherwise been given the opportunity to deal with the suggestion now made for the first time in final address;

(3)

where the party whose counsel has breached the rule in Browne subsequently calls evidence inconsistent with that of the earlier witness, the party may be exposed to comment that the inconsistent evidence is not in accordance with instructions to counsel and should be disbelieved as a recent invention, though caution should be exercised about drawing that inference: R v Manunta (1990) 54 SASR 17 at 23 (Manunta) the King CJ; approved in R v Birks (1990) 19 NSWLR 677 at 691 per Gleeson CJ.

[495] In the Manunta case, King CJ in make the following comments about proposition (d) above:

It is legitimate, of course, to draw appropriate conclusions from counsel's failure to put in cross-examination some matter to which his client or his witnesses subsequently deposed. It is a process of reasoning, however, which is fraught with peril and should therefore be used only with much caution and circumspection. There may be many explanations of the omission which do not reflect upon the credibility of the witnesses. Counsel may have misunderstood his instructions. The witnesses may not have been fully co-operative in providing statements. Forensic pressures may have resulted in looseness or inexactitude in the framing of questions. The matter might simply have been overlooked.

[496] ASIC noted some other explanations (ASR [299(e)]):

•

the matter might not have occurred to the accused or his counsel at that stage;

•

the accused may only have realised the matter when he himself was cross-examined.

[497] Of course, this is not an exhaustive list and the question must be assessed as a matter of the plausibility of the inference of "recent invention" in the instant circumstances.

[498] The rule in Browne is a rule of practice designed to achieve procedural fairness, and therefore when it is claimed that the rule has been departed from and that consequences should follow, the first consideration to be considered by the court is whether there has been some procedural fairness that needs to be addressed. That requires the assessment of "matters of fact and degree": ASIC NSWCA 75 at [62] per Spigelman CJ. The assessment may be affected by whether the matter not put to the witness was simply one of number of variables. In the ASIC NSWCA 75 case, Santow JA, dissenting (though not on this point), rejected a submission based on Browne in the context of a lengthy and complex trial, saying (at [409]):

[409] Procedural fairness did not require that the cross-examination put, in the alternative, that should the ASIC case be rejected in some respects, that the position had changed as at a particular date. There were number of variables, including factual disputes which needed to be resolved. A cross-examination which covered every possible contingency was not only impractical, any attempt to undertake such a task would have been oppressive.

3.9.2 The present case

[499] ASIC invoked the rule in Browne by submitting that, to the extent that evidence from witnesses for ASIC went unchallenged:

•

that evidence should be accepted: APS [2118], citing Knight v Maclean [2002] NSWCA 314 at [34]-[35]; or at least

•

the absence of a matter later deposed to by Mr Rich or Mr Silbermann being put to witnesses called by ASIC should be regarded as a significant factor in considering whether those matters truly did occur, as it should be assumed (having particular regards to the intense personal involvement of the defendants at the hearing) that counsel acted on the defendants' instructions in deciding what questions to ask.

[500] The observations of Spigelman CJ, cited above, suggest that it would not be wise for this court to accept the general proposition that Browne should be applied whenever the evidence of ASIC's witnesses was not challenged. Instead the correct approach is to consider each particular occasion upon which consequences are said to flow from failure to put a matter to a witness, so as to take into account matters of "fact and degree".

[501] There are, however, some general considerations that should influence those particular assessments, in my opinion. First, in this case the defendants had the benefit of the penalty privilege, and they made it clear that they would not announce any decision as to whether they would go into evidence until ASIC had closed its case in chief. It seems to me that that fact alone affects the application of the rule to this case. This was not a case in which the defendants were to be expected to have fully prepared their evidence before commencing to cross-examine the plaintiff's witnesses.

[502] Moreover, the presentation of ASIC's case in chief took very much longer than anticipated by ASIC at the commencement of the hearing. The hearing commenced on 6 September 2004 and ASIC's contemporary timetable was for its evidence to be completed by December 2004. ASIC did not close its case until 9 February 2006: T 10431. The extended length was for various reasons that I have canvassed in Ch 1, including the fact that additional witnesses were called, and the fact that some evidence was taken in London. It seems to me that the extended length of the plaintiff's case in chief, coupled with the very substantial size of the documentary tender, and the inconvenience of having to take evidence abroad, are factors tending to explain why Browne may not have been rigorously complied with on every occasion. These factors tend to undermine the inference that might have been readily drawn in a more straightforward case, that if a matter about which the defendants subsequently give evidence has not been put to the plaintiff's witnesses, then it is likely to have been a recent invention. They also tend to reduce the weight that might be given, in a simpler case, to the fact that the plaintiff's witness has not been challenged on a particular matter, when the whole of the evidence on that matter is assessed.

[503] There is another factor to be borne in mind when considering non-compliance with Browne. In this case ASIC has relied, to a very considerable extent, on "evidentiary facts" that are not pleaded. I have considered this phenomenon extensively in Ch 2. To a considerable degree, ASIC's reliance on evidentiary facts became evident only during its cross-examination of the defendants. It may well be unfair, depending on the precise circumstances, to attribute adverse consequences to the defendants' failure to put to ASIC's witnesses matters of which they gave evidence only in answer to cross-examination about unpleaded "evidentiary facts".

[504] Finally, it needs to be borne in mind that on some of the occasions about which ASIC makes Browne submissions, senior counsel for the defendants was evidently putting conversations to ASIC's witnesses about which their evidence in chief had been silent or very limited, not for the purpose of challenging their credibility but to put into evidence the general nature of the defendants' case DPS [301]; I do not regard the cross-examination Mr Packer Jnr as falling into this category, having regard to senior counsel for the defendants' statement of his objective at T 9401-2: see APS [2120]; AS [301]. I agree with the defendants that in these circumstances, it was not necessary for their counsel to put before the witnesses, explicitly, every word and every sentence of every conversation later to be adduced by the defendants, particularly where the witness was in disagreement with the thrust of a conversation being put to him or her. The observation of Santow JA in the Adler case (cited above) about the risk that over-scrupulous application of the rule in Browne might become oppressive, is particularly pertinent here.

[505] Having regard to all these circumstances, while the application of the rule in Browne requires assessment incident by incident, there are some features of this case that cause me to approach ASIC's individual Browne submissions with caution.

3.10 The alleged special duty of fairness of ASIC in conducting the proceedings

3.10.1 The defendants' claim

[506] The defendants made relatively lengthy submissions directed to establishing that ASIC is subject to a special duty of fairness in the conduct of civil penalty proceedings, at least in cases where the defendants are protected by the penalty privilege: DPS [302]-[345]. They said ASIC's duty is analogous to the duty of prosecutorial fairness in the criminal area: DPS [307]. They contended that ASIC had failed to discharge this duty in many ways detailed throughout the defendants' written submissions: DPS [343]. They offered a few examples of breach: DPS [342]. The principal remedy they sought to invoke was to have the court exclude and not entertain any allegations made by ASIC in their final submissions that exhibit its failure to discharge the duty of fairness: DPS [345].

[507] The defendants made similar submissions in the context of the admissibility of ASIC's documentary tender. I dealt with those submissions in my judgment, ASIC NSWSC 417 at [344]-[368]. The issue for consideration was not the same as the one before me now: there I was considering the admissibility of ASIC's documents and in particular, whether I should exclude documents on discretionary grounds under s 135 of the Evidence Act, or limit their use under s 136. I decided not to exercise the statutory discretions to exclude or limit the use of ASIC's documentary evidence. In the course of reaching that decision, I rejected the defendants' contention that ASIC is subject to a duty of fairness akin to prosecutorial fairness, on the ground that this proposition had been rejected by the Court of Appeal in Adler at [671]-[678] per Giles JA (with whom Mason P and Beazley JA agreed), as part of the ratio decidendi of its decision: ASIC NSWSC 417 at [358].

[508] My decision on that occasion does not resolve the issue presented to me now, which is about ASIC's conduct in the prosecution of the proceedings as a whole: DPS [337]-[338]. There is, however, an important issue as to whether I am bound by the Adler decision to reject the defendants' present submissions, just as I held myself bound to reject similar submissions in my earlier judgment. I shall consider that question below, at 3.10.6.

[509] In my earlier judgment (at [347]) I warned of the need to take care over what is meant by "prosecutorial fairness" in this context. Equally, it seems to me that it was important for the defendants, in making their final submissions, to articulate with clarity precisely what duty or duties they allege ASIC to be under, and to whom, and what constitutes breach. Regrettably, they have not satisfactorily done so. I agree with ASIC that the defendants' submissions on the subject were generally expressed in a high plane of abstraction, with variations from time to time in the language used to describe the duty: ASR [327]. Thus, the defendants' submissions speak of an obligation to "act fairly" (DPS [316]), "ethical obligations of fairness" (DPS [322]), and "usual obligations of utmost fairness" (DPS [332]). There is also a tendency in the submissions to blur the concepts of "prosecutorial fairness" and "procedural fairness", a blurring that is even evident in the heading of this part of the defendants' submissions, the heading being "Procedural and Prosecutorial Fairness".

[510] The defendants' failure to give a clear statement of ASIC's alleged duty is not fatal to their submission, but it has made the submission harder to assess.

3.10.2 ASIC's position

[511] ASIC denied that it was subject to any special duty of fairness of the kind alleged. It said (ASR [307,246]):

ASIC is obliged, as is any civil litigant, to act appropriately and fairly in the course of proceedings. ASIC denies that it has any duties over and above that of the ordinary civil litigant, including any duties analogous to those of prosecutorial fairness. ASIC also denies that its role is one of a "civil prosecutor".

In civil penalty proceedings under the Corporations Act, ASIC is not held to the requirements to which a prosecutor in criminal proceedings is subject ...

[512] ASIC said that its duty of fairness is owed to the court. Lawyers acting for a litigant also have duties of fairness: see DA Ipp, "Lawyers'duties to the court", (1998) 114 LQR 63.

[513] There is a question whether this approach is inconsistent with ASIC's approach in earlier civil penalty proceedings. In ASIC v Adler (2002) 41 ACSR 72 ; [2002] NSWSC 171 at [1] (ASIC NSWSC 171), the trial judge, Santow J, outlined the nature of the civil penalty proceedings before him and said:

[1] Though not therefore criminal proceedings it has been common ground that proceedings of this character invoke requirements for prosecutorial fairness and a standard of proof commensurate with the gravity of the allegations.

[514] On appeal, counsel for Mr Williams submitted that ASIC accepted that rules akin to prosecutorial fairness applied. ASIC said that at the trial it had not taken issue with some assertions made on a number of occasions on behalf of the defendants that the character of the proceedings invoked requirements for prosecutorial fairness, but it submitted that those assertions had not been made in a context requiring determination by the court as to whether the requirements for prosecutorial fairness applied in their full rigour. In the Court of Appeal, Giles JA (with whom Mason P and Beazley JA agreed) concluded that as the matter had not been shown to have been clear at the trial, ASIC could not be held to the requirements for criminal cases if not in law bound by them, and he went on to hold that the law did not impose the requirement of prosecutorial fairness on ASIC in civil penalty proceedings: Adler at [674]-[675]. However, he noted that ASIC accepted on appeal that it had to act fairly in the conduct of the proceedings. That, presumably, was a statement of the position that ASIC accepts in the present case. There is no inconsistency.

[515] In Loiterton at [38] Bergin J noted that ASIC accepted that it had a duty of fairness in civil penalty proceedings. Later (at [370]) she said the plaintiff accepted that "the proceedings attract an obligation of 'prosecutorial fairness' although the content of that obligation in civil penalty proceedings is submitted to be uncertain". Those were proceedings in which two of the three defendants were not legally represented and it does not appear that there was any contest about the content or nature of ASIC's duty. There was no determination of the question whether ASIC had such a duty, and the concession that it apparently made, in a different forensic context, does not affect the law.

3.10.3 Prosecutorial fairness in criminal proceedings

[516] Since the defendants claim that ASIC is under a duty analogous to the duty of prosecutorial fairness in criminal proceedings, it is appropriate to deal briefly with the content of that duty.

[517] The overriding duty of a prosecutor was explained by Deane J in Whitehorn v R (1983) 152 CLR 657 at 663-4 ; 49 ALR 448 at 452 ; [1983] HCA 42 (Whitehorn), as follows:

Prosecuting counsel in a criminal trial represents the State. The accused, the court and the community are entitled to expect that, in performing his function of presenting the case against an accused, he will act with fairness and detachment and always with the objectives of establishing the whole truth in accordance with the procedures and standards which the law requires to be observed and of helping to ensure that the accused's trial is fair one.

Dawson J observed in the same case (at CLR 675; ALR 461) that the function of the prosecutor "is ultimately to assist in the attainment of justice between the Crown and the accused".

[518] There are at least two reasons for the existence of the duty of prosecutorial fairness. The first is that the Crown is the guardian of public good, bringing penal proceedings not in its own private interest but in the public interest. Thus according to Sir W Holdsworth, A History of English Law, 4th edn, Methuen, London, 1936, Vol II, p 453:

... a private person cannot sue civilly unless he can show a special grievance, whereas the king can lay the charge generally; a suit by a private person sounds in damages, whereas a suit by the king ends in the punishment of the guilty party.

Similarly, in R v Lucas [1973] VR 693 at 705 (Lucas), Newton J and Norris AJ observed:

It is very well established that prosecuting counsel are ministers of justice, who ought not struggle for a conviction nor be betrayed by feelings of professional rivalry, and that it is their duty to assist the court in the attainment of the purpose of criminal prosecutions, namely, to make certain that justice is done as between the subject and the State.

[519] The second reason relates to the potential for oppression inherent in criminal proceedings, because of the imbalance of resources between the Crown and its subjects. That imbalance of resources is recognised in the case law, which has ameliorated it by the obligation on the part of the prosecution to make available material which may prove helpful to the defence: R v Reardon (No 2) (2004) 60 NSWLR 454 ; [2004] NSWCCA 197, per Hodgson JA at [46].

[520] Among the specific consequences of the Crown's duty to act fairly as prosecutor are the following:

•

"Witnesses essential to the unfolding of the narratives on which the prosecution is based must, of course, be called by the prosecution, whether in the result the effect of their testimony is for or against the prosecution": Seneviratne v R [1936] 3 All ER 36 at 49 (Privy Council), quoted with approval by Fullagar J in Ziems v Prothonotary (1957) 97 CLR 279 at 293 ; [1957] ALR 620 at 627-8 ; [1957] HCA 46; and see Whitehorn at CLR 663; ALR 451 per Deane J; at CLR 674; ALR 461 per Dawson J;

(1)

the prosecutor must "refrain from deciding whether to call a material witness by reference to tactical considerations" (Whitehorn at CLR 663; ALR 451 per Deane J), for as Smith ACJ observed in Lucas at 697, "The Crown's duty to act with fairness, and with the single aim of establishing the truth, denies to it the right to pick and choose as between independent and apparently credible witnesses for merely tactical reasons";

(2)

"it is the duty of prosecuting counsel not to try to shut out any evidence which the jury could reasonably regard as credible and which could be of importance to the accused's case": Lucas at 705 per Newton J and Norris AJ;

(3)

"The prosecution should present its case completely and not split its case by calling evidence in reply to the defence case where it could have anticipated that the defence would raise such an issue, or by introducing evidence during cross-examination in the defence case" (H T Gibbs, Halsbury's Laws of Australia, Butterworths, Sydney, at [130-13695]; Shaw v R (1952) 85 CLR 365 at 379-80 ; [1952] ALR 257 at 258-9 ; [1952] HCA 18 (Shaw) per Dixon, McTiernan, Webb and Kitto JJ; R v Chin (1985) 157 CLR 671 at 676 ; 59 ALR 1 at 5-6 ; [1985] HCA 35, per Gibbs CJ and Wilson J; at CLR 684; ALR 11-2 per Dawson J), for while the court possesses power to allow further evidence to be called, "it must be exercised according to rule and the rule is against reopening the Crown case unless the circumstances are most exceptional": Shaw at CLR 380; ALR 259-60 per Dixon, McTiernan, Webb and Kitto J.

[521] Failure by a prosecutor to fulfil these duties may amount to a denial of natural justice, and may result in a miscarriage of justice, rendering the judgment in the proceedings likely to be set aside on appeal: Clarkson v DPP [1990] VR 745 at 755 per Murphy J; R v Leyland Justices; Ex parte Hawthorn [1979] QB 283 ; [1979] 1 All ER 209. If an apparent failure of the prosecution's duty comes to the attention of the court, at common law the court has a responsibility to act to prevent any miscarriage of justice, though within the constraints of the adversarial nature of the proceedings. For example, if the court is concerned that the Crown is not intending to call a potential material witness, then at common law it may be obliged to inquire of the prosecutor as to the reasons for that course, and advise the prosecutor to do so; and if the witness is not called, the court may take the failure to call the witness into account in considering its judgment, and in exceptional cases, it can call witnesses itself: Whitehorn; R v Apostilides (1984) 154 CLR 563 ; 53 ALR 445 ; [1984] HCA 38.

3.10.4 Duty of fairness of Commonwealth agencies in civil proceedings

[522] In civil contexts the first reason for imposing a special standard of fairness on a prosecutor (namely that the Crown must pursue the public interest and make certain that justice is done) does not necessarily apply, but the second reason (the potential for oppression inherent in the imbalance of resources) invariably does. This has led to the articulation of a special duty of fairness, to which the Crown is subject in civil litigation.

[523] I referred at 2.3.1 to Scott at [45], where Spender, Finn and Weinberg JJ said that an officer of the Commonwealth, who was respondent to civil proceedings, was expected to adhere to the "standards of fair dealing in the conduct of litigation" that the courts expect from the Commonwealth and from its officers and agencies, and they referred to duties to comply conscientiously with procedures designed to minimise costs and delay, to assist the court to arrive at a proper and just result, and not to take purely technical points of practice and procedure or unfairly to impair the other party's capacity to defend itself. Those observations apply to ASIC as an agency of the Commonwealth. The idea that the Commonwealth and its agencies are under a special obligation to act fairly in civil litigation is not new: Melbourne Steamship Co Ltd v Moorehead (1912) 15 CLR 333 at 342 ; 18 ALR 533 at 536-7 ; [1912] HCA 69 per Griffith CJ.

[524] On the authority of Scott, it seems to me that, in its submissions in this case, ASIC has understated its duty of fairness in civil proceedings. It has a higher duty than the duty owed by every civil litigant to the court to act fairly and appropriately. The Commonwealth and its agencies, including ASIC, are held to a standard of fair dealing which is higher than the standard applicable to other litigants. Whether the duty is owed to the court or to the other party to the litigation, the other party can complain to the court at the hearing about non-compliance with the duty. Once the matter has been raised, the court has the power deal with it in the proceedings in an appropriate way, to ensure the just, quick and cheap resolution of the real issues. The court's determination may well operate for the benefit of the party who has complained.

[525] In the context of civil litigation, the Attorney-General of the Commonwealth has issued Legal Services Directions in accordance with s 55ZF of the Judiciary Act 1903 (Cth). The directions require the Commonwealth and its agencies to act in litigation as a "model litigant". The directions specify the nature of the obligation at some length. The specifications include such matters as keeping the cost of litigation to a minimum, for example by not requiring the other party to prove a matter that the Commonwealth or the agency knows to be true; not contesting liability if the Commonwealth or the agency knows the dispute is really about quantum; and not relying on technical defences unless the Commonwealth's or the agency's interests would be prejudiced by the failure to comply with a particular requirement. The notes to the policy say in part:

In essence, being a model litigant requires that the Commonwealth and its agencies, as parties to litigation, act with complete propriety, fairly and in accordance with the highest professional standards (part of Note 2);

The obligation to act as a model litigant may require more than merely acting honestly and in accordance with the law and court rules. It also goes beyond the requirement for lawyers to act in accordance with their ethical obligations (part of Note 3).

[526] ASIC is obliged by ss 55ZG(1)(a) and 55N(1)(d) to comply with Legal Services Directions. However, compliance with those directions is not enforceable except by, or upon the application of, the Attorney-General (s 55ZG(2)), and the issue of non-compliance with such a direction may not be raised in any proceeding except by, or on behalf of, the Commonwealth (s 55ZG(3)).

[527] Those restrictions prevent the defendants from raising the issue of non-compliance with the directions, as such, but it seems to me that the notion of Commonwealth agencies as "model litigants", the subject of the Legal Services Directions, is a notion that also underlies the special duty of fairness of Commonwealth agencies in civil litigation, as articulated in Scott and other cases. In principle, therefore, the directions can be referred to as an aid to understanding the content of the litigation duty, notwithstanding s 55ZG(2) and (3).

[528] That was probably the underlying process of reasoning that led the Administrative Appeals Tribunal to say, in Re Moline and Comcare (2003) 77 ALD 224 ; [2003] AATA 827 at [11], that notes 2 and 3 to the directions establish a standard of ethical fairness, requiring an emanation of the Commonwealth who is a respondent in a tribunal proceeding to assist the tribunal to make the correct or preferable decision, rather than to win at all costs, and to apprise the tribunal of any material of which it is aware favourable to the applicant's case though not known to the applicant's advisers. It is not necessary for me to determine whether those precise duties are owed by ASIC in civil proceedings, and I refer to the tribunal decision only to show how Legal Services Directions about the Commonwealth as a model litigant may assist in the determination of the content of the duty of fairness of a Commonwealth agency in litigation.

[529] In my judgment on the admissibility of ASIC's documentary tender, in the course of resisting the defendants' submission that ASIC had a duty akin to the duty of prosecutorial fairness, I accepted that "ASIC, charged with the general responsibility of acting in the public interest, must act fairly and with probity in pursuing relief in a civil penalty proceeding": ASIC NSWSC 417 at [347]. That is consistent with the notion of ASIC's duty as a Commonwealth agency and a model litigant, as generally expounded in such cases as Scott.

[530] My conclusion is that when it is a party, or intervenes, in civil proceedings, ASIC as an emanation of the Commonwealth has a duty of probity and fairness to act as a model litigant, which is higher than the duty of fairness owed to the court by civil litigants generally. That conclusion is generally reinforced by cases about the duty of fairness of the Commonwealth in commercial dealings (Hughes Aircraft Systems International v Airservices Australia (1997) 76 FCR 151 at 195-8 ; 146 ALR 1 at 40-2 per Finn J; SCI Operations Pty Ltd v Commonwealth (1996) 69 FCR 346 at 367-8 ; 139 ALR 595 at 612-14 per Beaumont and Einfeld JJ), but it seems to me that the litigation duty is a special and higher one. To that extent I agree with the defendants that ASIC has a special duty as a Commonwealth agency, in civil proceedings, to act in a manner so as to facilitate a fair trial (DPS [339]), though I do not accept their submission that the content of this duty is analogous to prosecutorial fairness, for reasons I shall explain. That involves considering whether the duty of fairness is raised to a higher level when the proceedings are civil penalty proceedings brought by ASIC, and in particular, where in those proceedings ASIC seeks the imposition of a penalty such as a disqualification.

3.10.5 ASIC's duty of fairness in civil penalty proceedings

[531] In its report, Principled Regulation: Federal Civil & Administrative Penalties in Australia, report No 65, The Commission, Sydney, 2002, at [2.47], the Australian Law Reform Commission observed:

Civil penalty proceedings have been described as a hybrid between the criminal and the civil law. They are clearly founded on the notion of preventing or punishing public harm. The contravention itself may be similar to a criminal offence (for example, breaches of a director's duties or publishing misleading material) and may involve the same or similar conduct, and the purpose of imposing the penalty may be to punish the offender, but the procedure by which the offender is sanctioned is based on civil court processes.

[532] There are some obvious and important differences between civil penalty proceedings and criminal proceedings. In a criminal trial the defendant is entitled to the presumption of innocence, the burden of proof is to a higher standard, and in criminal proceedings, depending on the penalty, the defendant may have had a right to trial by jury. In contrast, in civil penalty proceedings proof is on the balance of probabilities without any presumption of innocence, and the trial is by a judge alone. The criminal trial procedure and the rules of evidence are different from those applying in civil proceedings, and according to s 1317L the court is to apply the rules of evidence and procedure for civil matters when hearing civil penalty proceedings for a declaration of contravention or a pecuniary penalty order.

[533] The measure of similarity that civil penalty proceedings have to criminal proceedings arises from the fact that civil penalty proceedings are concerned with allegations of contravention of statute and the protagonists are a Commonwealth agency and individual subjects of the Crown. Successful prosecution of civil penalty proceedings leads to a determination of contravention of a public law, and may lead to a declaration of contravention which itself involves public opprobrium and condemnation, and the imposition of a penalty by way of pecuniary penalty or disqualification order. ASIC as plaintiff is acting as an agency of the Commonwealth and not as a private litigant, and like the prosecutor in criminal proceedings, is the guardian of the public interest with a responsibility to ensure that justice is done. There is the same kind of imbalance of power and resources that one finds in criminal prosecution, and in particular, in the preparation of its case, ASIC can take advantage of the very substantial investigatory powers that it has under the ASIC Act, as well as in voting the search warrant powers under the Crimes Act 1914 (Cth), and is right to require assistance under s 1317R.

[534] Having regard to these matters, the defendants submitted that in civil penalty proceedings which have the character of penal proceedings (that is, civil penalty proceedings where pecuniary penalties or disqualification orders are sought), ASIC is under ethical obligations of fairness that are significantly greater than those that apply to it in an ordinary civil proceeding: DPS [322]. This is because, they submitted (DPS [323]), the rationale for the duty of prosecutorial fairness is applicable to ASIC in civil penalty proceedings.

[535] I agree with the defendants that both limbs of the rationale for imposing a special duty of prosecutorial fairness in criminal proceedings, as outlined above, apply to ASIC in civil penalty proceedings: in summary, ASIC brings those proceedings in the public interest and there is an imbalance of resources between it and the defendants. If there were no statutory or case law impediment it might be open to me to conclude that, at least where the penalty privilege applies, ASIC was to be treated as occupying the same position, mutatis mutandis, as a criminal prosecutor, when it comes to obligations of fairness. But standing against the defendants' submission are s 1317L and the existing case law.

[536] The duty of prosecutorial fairness is part of the law of evidence and procedure in criminal matters. Section 1317L requires the court to apply the rules of evidence and procedure for civil matters. That seems to me to exclude the extension of prosecutorial fairness to civil penalty proceedings including, expressly, proceedings for a pecuniary penalty order. The significance of the express identification of proceedings for a pecuniary penalty order is that, even before Rich NSWCA 342 in the High Court, proceedings for a pecuniary penalty order were recognised as proceedings for the imposition of a penalty and therefore subject to the penalty privilege. The fact that proceedings for a disqualification order have come to be recognised as subject to the penalty privilege, by virtue of the High Court's decision, does not create a qualification or exception to s 1317L, because the section already had an express application to cases where the penalty privilege applies.

[537] The defendants sought to resist the application of s 1317L by arguing that prosecutorial fairness was something more than a principle relating to the rules of evidence and procedure. They referred to Kirby J's concurring judgment in CEO Customs. One of the questions in that case was whether the standard of proof in a prosecution for contravention of the Customs Act 1901 (Cth) was the civil or criminal standard, in circumstances where the Act said that the prosecution could be brought "in accordance with the usual practice and procedure of the court in civil cases". The provision under consideration in CEO Customs referred only to the usual practice and procedure in civil cases, and did not expressly mention the law of evidence, and the decision might well have been different if (like s 1317L) it had done so.

[538] It was held at the standard of proof was proof beyond reasonable doubt. Kirby J (at [78]) regarded the criminal standard of proof as conferring a "practical guarantee of fundamental rights" that as a "basic doctrine of the law", more than "a mere rule of evidence law applicable in proceedings", and consequently only clear legislative provisions could abrogate that right. The defendants submitted that the defendant's right to prosecutorial fairness is, like the right to be tried according to the criminal standard of proof, "an aspect of the defendant's elementary common law right to a fair trial": citing R v Ward [1993] 2 All ER 577 at 601 ; [1993] 1 WLR 619 at 645 (Ward) (approved by the House of Lords in R v Mills [1998] AC 382 at 399 ; [1997] 3 All ER 780 at 793).

[539] There are two problems with this submission. The first is that, in my respectful view, Kirby J was in error in denying that the criminal standard of proof is part of the law of evidence, at least in jurisdictions governed by the Evidence Acts of 1995. The principal cases to which Kirby J referred to support his reasoning, Goldberg v Ng (1995) 185 CLR 83 at 121 ; 132 ALR 57 at 84 ; [1995] HCA 39 per Gummow J (dissenting) and O'Reilly v State Bank of Victoria Commissioners (1983) 153 CLR 1 ; 44 ALR 27 ; [1983] HCA 47, were cases about legal professional privilege, which are distinguishable because legal professional privilege has been held to be a substantive right rather than a rule of evidence: Baker v Campbell (1983) 153 CLR 52 ; 49 ALR 385 ; [1983] HCA 39. The Evidence Acts prescribe the criminal and civil standards of proof as part of the law of evidence: ss 140 and 141. In CEO Customs, Hayne J recognised the statutory treatment of the standard of proof and observed: "Burden and standard of proof are commonly treated as aspects of the law of evidence": at [122].

[540] But even if the standard of proof, though prescribed by the Evidence Act, were not part of the law of evidence and therefore outside s 1317L, it could not be inferred that another set of principles which appear on their face to be principles about evidence and procedure, namely the principles about prosecutorial fairness, are also outside s 1317L. Although prosecutorial fairness is part of the defendant's elementary common law right to a fair trial, as the English Court of Appeal said in Ward, the duties flowing from prosecutorial fairness are manifested in matters of evidence and procedure such as those identified at 3.10.3 above (including the duties to call material witnesses and not to split the prosecution case). Conversely, it appears to be recognised that the entitlement of a party freely to decide which witnesses to call or not to call is a familiar incident of civil evidence and procedure: Cross on Evidence, above, at [17070]-[17080].

[541] As Hayne J observed, distinctions such as those between "civil" and "criminal" and between "substance" and "procedure" (and, I would add in the context of s 1317L, between "substance" and "evidence and procedure") are essentially unstable, and much terms on the purpose for drawing a distinction: at [121]. The purpose of considering whether prosecutorial fairness is part of the law of evidence and procedure under s 1317L, or a matter of substantive law, is to determine whether a duty of prosecutorial fairness that might otherwise be implied in civil penalty proceedings is excluded by statutory provision. In my opinion, to import to civil penalty proceedings the full range of procedural and evidentiary consequences of prosecutorial fairness would be to convert those proceedings into something akin to criminal proceedings, contrary to the intention underlying s 1317L.

3.10.6 The authorities on the duty of fairness in civil penalty proceedings

[542] I have referred to the statement by Santow J that it was "common ground" that proceedings of this kind invoke requirements of procedural fairness. Those remarks were referred to in ASIC v Plymin (2003) 46 ACSR 126 ; 21 ACLC 700 ; [2003] VSC 123 (Plymin), and it was submitted that the essentially criminal nature of the proceeding dictated that the principles of prosecutorial fairness should apply: at [544]. Mandie J responded (at [547]):

[547] Assuming without deciding that ASIC had a duty to act with prosecutorial fairness, or at least in analogous duty having regard to the nature of the proceeding, I am satisfied that ASIC did not act in breach of such a duty.

The question whether there was such a duty was left open.

[543] The Court of Appeal of New South Wales handed down its decision in the Adler case (Adler) after Plymin. One of the grounds of appeal was that the trial judge erred in not taking account of the unexplained failure of ASIC to call a particular witness, a failure that was alleged to amount to a breach of rules akin to the rules of prosecutorial fairness: at [671]. Giles JA (with whom Mason P and Beazley JA agreed) noted (at [677]) that in a criminal trial, the Crown prosecutor should call all available material witnesses, not because of a duty imposed by law but because this was part of the description of the functions of the Crown prosecutor, who represents the state and must act with fairness and detachment, with the objective of establishing the whole truth. He continued (at [678]):

[678] However, it has not been suggested that when the State engages in civil litigation as it frequently does, its representative's functions have a similar content, or that failure to call a material witness can lead to reversal of judgment in the State's favour because of miscarriage of justice. The concepts have been developed in the particular circumstances of criminal proceedings. By declaring that these proceedings are to be conducted as civil proceedings, the legislature has plainly declined to pick up the concepts. It was no doubt for this reason that Mr Williams' submissions were in terms of "rules akin to those of procedural fairness", but once it is recognised not only that the proceedings are not criminal proceedings, but also that they are by prescription civil proceedings, the basis for some analogous rules is hard to see. In my opinion, Mr Williams' submission in this respect should not be accepted.

[544] In my judgment on the admissibility of ASIC's documents, ASIC NSWSC 417, I set out the above passage and said (at [358]):

[358] This amounts to the considered rejection, by the Court of Appeal acting unanimously as part of the ratio of its decision, of the very argument advanced on behalf of the defendants in the present case, in its specific application to the question whether ASIC has a duty in civil proceedings to call a particular witness. The fact that Giles JA went on to determine that "even if rules analogous to the rules of procedural fairness applied" there was no unfairness or miscarriage of justice (at [681]), is beside the point. It would be incorrect to say that his Honour's decision that ASIC was not subject to any obligation of procedural fairness somehow turned on his finding that there was no unfairness in ASIC's conduct.

[545] The defendants advanced several reasons for not treating the Court of Appeal's decision in Adler as determining the question: DPS [328]. First, they said that Giles JA's rejection of the prosecutorial fairness submission was obiter dicta, as the judgment turned on his Honour's holding (at [681]) that even if rules analogous to the rules of prosecutorial fairness applied, there was no unfairness or miscarriage of justice in that case. I disagree with this submission. In my view the passage at [678] in his Honour's judgment, quoted above, was pivotal to the reasoning that led to rejection of the prosecutorial fairness submission. His statement, that "even if rules analogous to the rules of prosecutorial fairness applied" there was on the facts no unfairness or miscarriage of justice (at [681]), was presented in the nature of an additional reason for rejecting the submission. I adhere to the view I expressed in my earlier judgment: at [358]. I am bound to follow the Court of Appeal's unanimous decision.

[546] Second, the defendants said that the Court of Appeal judgment turned, at least in part, on the failure of the defendant to have raised the matter during the trial. It is true that this aspect was noted at [681], but in my view it was referred to as a subsidiary point and was directed to the question whether, if prosecutorial fairness applied, there was a duty to call the particular witness at the trial. It did not detract from the centrality of the reasoning at [678].

[547] Third, they submitted that the decision was confined to its particular facts. But what was said at [678] was not confined to the facts of the case, but instead it was a holding that the concepts of prosecutorial fairness were developed in the particular circumstances of criminal proceedings, and that the legislature had declined to pick up those concepts because it declared that civil penalty proceedings were to be conducted as civil proceedings: presumably, by s 1317L.

[548] Fourth, they submitted that the Court of Appeal's decision in Adler was made at a time when courts were treating civil penalty proceedings as protective rather than punitive, and "before their true character as proceedings in which the state accused a citizen of a public wrong was appreciated". It is true that Adler was decided before the High Court decided Rich. It is not true that at the time of the Court of Appeal's decision courts were treating civil penalty proceedings as protective. They were not protective to the extent that they were proceedings for pecuniary penalties, but until the High Court's decision in Rich was handed down, the prevailing view was that a disqualification order was protective rather than punitive. Adler itself was a case in which pecuniary penalties were sought and the penalty privilege applied.

[549] Fifth, the defendants urged the court to consider the substance of these proceedings rather than their form, and they submitted that in substance these are proceedings by the Crown against a subject for the infliction of a penalty, and so there is no reason, in principle or policy, why the usual obligations of utmost fairness ought not to apply: DPS [331]-[332]. But as ASIC said, that is an unwarranted invitation to the court to disregard authority: ASR [331-5].

[550] Sixth, the defendants contended that the decision in Adler has been overtaken by the later High Court decisions in Rich NSWCA 342 and CEO Customs.

[551] In my view the defendants' reliance on the High Court's decision in Rich NSWCA 342 is misplaced. In that case it was emphasised (at [19]-[20]) that s 1317L of the Corporations Act picks up the body of general law relating to privileges, including the penalty privilege. The penalty privilege is a rule of evidence, forming part of the rules relating to civil actions, not a substantive rule of law: at [24]; see also Daniels Corporation International Pty Ltd v ACCC (2002) 213 CLR 543 ; 192 ALR 561 ; 43 ACSR 189 ; [2002] HCA 49 at [31]. The court decided that because of the penalty privilege, the defendants were not obliged to give discovery or serve affidavit evidence before the close of ASIC's case, but that decision said nothing as to the question whether, contrary to the usual incidents of civil evidence and procedure, ASIC had a duty to call material witnesses: see ASR [329-30].

[552] In Adler v DPP (2004) 51 ACSR 1 ; 185 FLR 443 ; [2004] NSWCCA 352 (DPP), the question was whether an indictment for offences under the Corporations Act was an abuse of process because of exposure to double jeopardy, in light of the civil proceedings. Mason P (with whom Grove and Barr JJ agreed) noted without demur (at [32]) that Giles JA had rejected a submission that the principles of prosecutorial fairness had been carried into the civil proceedings, and he also noted that the High Court had refused special leave. Later he addressed the question whether the trial judge, James J, had been wrong in saying that the civil causes action and the criminal offences had different purposes, and he said (at [42]-[43]):

[42] The reasons of the High Court in Rich v ASIC cautioned strongly against drawing conclusions based upon strict and mutually exclusive dichotomies between protective (civil) and punitive (criminal) notions (see per Gleeson CJ, Gummow, Hayne, Callinan and Heydon JJ at [30]-[35] per McHugh J at [41], [56]-[58]). See also Chief Executive Officer of Customs v Labrador Liquor Wholesale Pty Ltd (2003) 216 CLR 161 ; [2003] HCA 49 at [14]). The context of Rich was different to the present, but the warning is apt, especially since the High Court has concluded that "civil penalty proceedings" that seek disqualification orders under the Corporations Act are to be characterised as "penal" for the purpose of determining whether the defendant can claim the privilege against exposure to penalties and forfeitures in response to an application for discovery. A fortiori, civil proceedings resulting in a penalty, as were the civil proceedings against the appellant. Some of the reasoning of Santow J referable to his final orders made reference to the public protective purpose of those orders (see eg, ASIC v Adler (No 5), at 105 [80]).

[43] But nothing in Rich casts any doubt on the civil nature of the proceedings brought against the appellant, as held by the Court of Appeal (with special leave to appeal been refused by the High Court). Nor is the correctness of the orders under appeal undermined by James J's observations relating to the purposes of the civil and criminal proceedings.

[553] I respectfully agree. My conclusion is that the High Court's decision in Rich NSWCA 342 does not detract from the Court of Appeal's decision in Adler that prosecutorial fairness does not apply in civil penalty proceedings.

[554] As to CEO Customs, the central submission by the defendants (DPS [329]) was that the reasoning of the High Court was inconsistent with the reasoning of Giles JA in Adler, because Giles JA had reasoned from characterising the proceedings as civil proceedings to the conclusion that prosecutorial fairness did not apply.

[555] Certainly the High Court rejected the idea that problems of this kind can be solved by a simple, once and for all classification containing only two classes, civil and criminal, or substantive and procedural: see Gummow J at [29]; Kirby J at [52], [64] and [66]-[67]; and Hayne J (with whom Gleeson CJ and McHugh J agreed) at [113]-[114]. Such distinctions are, in the words of Hayne J, "unstable", for proceedings may be classified one way for one purpose and another way for another purpose, and is wrong to assume that there are only two possibilities. Therefore it is essential to identify the purpose for which classification is sought.

[556] However, in my respectful opinion the reasoning of Giles JA in Adler is not at odds with the approach taken by the High Court. His Honour considered the nature and purpose of the requirement for a prosecutor to call available material witnesses (at [677]) and then he noted (at [678]) that requirement to call material witnesses had "developed in the particular circumstances of criminal proceedings" (emphasis supplied), and that the legislature had declined to pick up those concepts when it declared that civil penalty proceedings were to be conducted as civil proceedings (that is, I take it, when the legislature provided in s 1317L that the rules of evidence and procedure in civil matters were to apply in civil penalty proceedings). The reasoning is not simply that the duty to call material witnesses arises in criminal proceedings and not in civil proceedings, and therefore does not arise here. It is reasoning by reference to the nature of the development of the criminal rule and the legislative purpose underlying s 1317L. The Court of Criminal Appeal in DPP had no difficulty in reaffirming the Court of Appeal's decision in Adler after considering both Rich NSWCA 342 and CEO Customs, and manifestly on the basis that Giles JA's reasoning is quite consistent with the approach of the High Court.

[557] My conclusion is that I am bound by s 1317L and the Court of Appeal's judgment in Adler to reject the defendants' submissions on prosecutorial fairness.

3.10.7 The defendants' examples of alleged breach of duty

[558] The defendants made the general submission that in the many instances where, in their written submissions, they criticised ASIC in respect of unpleaded and unparticularised allegations, serious allegations made for the first time in submissions, and building a case from inference as to documents without calling witnesses, they were invoking ASIC's duty of fairness in civil penalty proceedings as well as other principles to do with unpleaded allegations, the Briginshaw standard of proof, Jones and Browne, all of which overlap with the duty of fairness submissions.

[559] Elsewhere in their submissions, the defendants submitted (DPS [244], [246]) that by calling witnesses to give "incriminatory" evidence but consciously avoiding the calling of witnesses whose evidence would be "exculpatory", ASIC has breached rules of procedural fairness that, they submitted, ought to be held applicable to civil prosecutors such as ASIC prosecuting civil penalty proceedings: compare Adler at [671]-[678]; ASIC NSWSC 417 at [358]-[359]. They said that, while well over 100 witnesses have been called by ASIC (including witnesses addressing only provenance and procedural matters), only four have been employees of One.Tel in Australia, namely Ms Randall and Ms Ashley, who gave evidence in chief, and Ms Thomas and Mr Spratt, who gave very limited evidence in reply: DPS [248].

[560] My general response is as follows. For the reasons given above, ASIC does have a special duty of fairness in all civil proceedings, including civil penalty proceedings, but it is not enhanced by considerations of prosecutorial fairness in civil penalty proceedings. As far as I can see, and the defendants' submissions do not persuade me to the contrary, ASIC's duty as a Commonwealth agency and model litigant, with respect to unpleaded and unparticularised allegations, serious allegations made for the first time in submissions, and building a case from inference as to documents without calling witnesses, does not lead to any consequences different from those that follow from treating submissions outside the pleaded case as not matters for decision, and applying the correct the onus and standard of proof and the principles in Jones and Browne in accordance with the authorities. Specifically, in the absence of any duty akin to prosecutorial fairness, I do not regard ASIC as under a duty in the civil proceedings to call any particular witnesses, although I can and shall apply Blatch and Jones where I consider them appropriate.

[561] The defendants offered four specific examples of cases where they say ASIC has failed to discharge its special duty of fairness.

[562] The first relates to ASIC's allegations about the spreadsheet 2403C.xls and misleading reporting to the March board, made without calling Mr Hodgson as a witness or asking any of the director witnesses about management's report to the March board and their understanding of management's forecasts. I note in passing that the absence of Mr Hodgson as a witness has been explained, and should be held against neither the defendants nor ASIC: see 3.6.3. As to whether this is an example of breach of a duty of fairness, my view is that the issue is adequately, and I think completely, dealt with by analysing (as I have in Ch 2) whether ASIC's allegations stray outside its pleaded case to the prejudice of the defendants. ASIC's duty as a model litigant in civil proceedings does not seem to me to have any greater consequences than the consequences flowing from the application of these other principles.

[563] The second example is what the defendants call reliance upon contentious management accounts without calling their authors and persons involved in their preparation, such as Mr Holmes and Ms Nassif. In my opinion this complaint is adequately addressed by the principles in Blatch and Jones, and ASIC's duty of fairness does not take the matter further.

[564] The third example is what the defendants call the "cynical approach to overseas creditors" demonstrated in an undated set of Observations to counsel: Ex DTB 10/3940. There, the instructing solicitor for ASIC reported that draft affidavits had been prepared for all major overseas creditors except Global Crossing, which had gone into bankruptcy in the United States. She said all of the creditors raised issues about debts classified as "past due", and that some of the debts, particularly those falling into the 120-day plus category, were legitimately disputed. She said all creditors conceded an apparent custom of delayed payment in the industry and at least one creditor acknowledged the tightening of the market in early April 2001. On the other hand, she noted that GTS actually threatened supply in late March and that it was possible there was further correspondence or real threats to supply from others in February and March, and by late April the creditor position overseas was very serious. She said it was clear from discussions with GTS that until April 2001, and perhaps later, most suppliers were driven by sales and revenue rather than upsetting clients by aggressively chasing debt, and that from April 2001, there was a dramatic drop in the Telco market on the NASDAQ and this apparently had an effect on suppliers' attitude to bad debt (a proposition supported by Ms Kekalainen-Torvinen).

[565] These propositions in the observations support the defendants' case that some of the older debt was legitimately disputed, that there was a custom of delayed payment in the industry, and that this changed dramatically in April 2001. The defendants refer to draft affidavits by Mr Menozzi of WorldCom (Ex DTB 15/6133), Mr Rigby of GTS (Ex DTB 14/5967) and Mr Bell of Optimal Communications (Ex P7 at 371), which also would provide a measure of support for their case, if completed and put into evidence. Presumably the "cynical approach" identified by the defendants has to do with the fact that this potential evidence was available to ASIC and was not called. The problem is in Blatch and Jones territory and I do not see that a duty to act as a model litigant in civil proceedings adds to the analysis.

[566] Fourth, the defendants referred to what they called the "tactical decision" by ASIC not to advance evidence of the $40 million missing billing but to wait until after the defendants had cross-examined. ASIC's contention that there never was any significant amount of unbilled data in existence as at the end of March 2001 first arose in the cross-examination of Mr Rich, and was not specifically pleaded. At 2.3.6.19 I have expressed the view that it was permissible for ASIC to cross-examine about whether there ever was a significant amount of data available to be backbilled, in support of its pleaded case, but ASIC could not make a new case about inaccurate statements to the March board based on this contention. The evidence cited in support of the defendants' submission (Ex P27/7.360-363) is an internal file note, apparently created in May 2002, relating to the $40 million of unbilled revenue, identifying five paragraphs of a draft report by Mr Carter and stating that the paragraphs had been removed from the report and were "to be dealt with in reply", and that Ms Ashley's affidavit should be signed up but not served. In the absence of any disclosed reasoning process as to why these decisions were taken, and having regard to the fact that cross-examination on this subject was permitted within the pleaded case, I would not conclude that the evidence reflects a "deliberate and cynical tactical decision" to keep for reply ASIC's evidence concerning the existence of $40 million of missing billing, in breach of its duty of fairness: compare DPS [3467] with ASR [3467].

[567] A serious failure to comply with the duty of prosecutorial fairness, if it applied, could amount to a miscarriage of justice vitiating the proceedings as a whole, as Mandie J noted in Plymin at [550]. The defendants did not contend that this consequence flowed from any of the particular breaches of the duty they purported to identify throughout their written submissions. Instead they submitted that if a breach of ASIC's duty of fairness in civil proceedings was found, the court should not entertain ASIC's allegations made in breach of the duty. That consequence also flows from ASIC's submissions straying outside its pleaded case, and it may flow from non-compliance with the rule in Browne. I have held that ASIC's duty in these proceedings is not akin to prosecutorial fairness, but it seems to me that the same consequence would flow from failure by ASIC to comply, in respect of a particular matter, with its duty of fairness as a model litigant in civil proceedings.

4. Management, directors, financial organisation and share price

[568] This part of the judgment brings together some miscellaneous factual matters that are pertinent but preliminary or background in nature. First there is evidence on a group of corporate governance topics concerning senior management personnel, management structure and supervision, management's use of key performance indicators as a management tool, the board structure and board members, both executive and non-executive, and management's methods of communication with the board. Then there is evidence about One.Tel's financial records and financial systems. Finally there is some evidence about One.Tel's share price at relevant times, given some prominence here because the evidence generally indicates that the share price was closely watched by management and the principal shareholders, whose attitudes and decisions were influenced by it.

4.1 Senior management personnel

[569] Mr Rich gave evidence describing the management personnel: 1 JDR 554-64. Mr Silbermann gave evidence about the finance personnel: MS 29-35. From March 1995 until 17 May 2001, the joint managing directors of the One.Tel Group were Mr Rich and Mr Keeling. Mr Silbermann was the group financial officer throughout the 2000/2001 financial year. Kevin Beck was also an executive director, and group chief operating officer.

[570] The organisational structure of the group was built around teams rather than formal departments, and was divided for management purposes into two economic zones: Europe (including the United Kingdom, France, Germany, the Netherlands and Switzerland) and Australia (including Hong Kong for management but not financial reporting purposes). According to Mr Silbermann, One.Tel had a flat management structure in which different teams of managers were assembled to work on projects or tasks as required: MS 31. This meant that on some specific projects, financial or operational, he was in regular contact with one of the financial officers of the UK business, while on others he was in direct contact with one of the joint chief executives in the UK and Australia: MS 31.

[571] The European zone was managed by joint chief executive officers, Chris Weston and Roland Cage. In the European zone there was a chief executive officer for each country other than the United Kingdom (the United Kingdom being managed by Mr Cage and Mr Weston directly), including Raymond Schrama (Netherlands) and Michel Rouilleault (France).

[572] There were two European chief financial officers, namely Christopher Werner and (from around late October 2000) Drew Boaden. Mr Boaden continued in his position until 5 September 2001. He said in his affidavit made on 28 June 2002, para 2, that he tendered his resignation to Mr Weston by letter dated 10 May 2001. In cross-examination he said that he did not provide a hard copy of the letter to Mr Weston but Mr Weston saw a soft copy of the letter: T 5331, 5334. Mr Weston said in his examination in chief that he saw the letter and that he persuaded Mr Boaden not to resign: UK T 405.

[573] Mr Rich gave evidence that during his visit to the London office in March 2001 he expressed dissatisfaction about Mr Boaden's performance to Mr Weston, and they agreed that Mr Boaden "probably wouldn't make it" and that Mr Weston would "finesse his departure": 2 JDR 1189-1190. Mr Rich said he was never informed by Mr Boaden or Mr Weston that Mr Boaden had tendered his resignation in May 2001: 2 JDR 1191.

[574] There is some tension between Mr Weston's evidence that in May 2001 he persuaded Mr Boaden to withdraw his resignation, and Mr Rich's evidence that during his visit to London in March it was arranged that Mr Weston would "finesse" Mr Boaden's departure. But the evidence is not inconsistent and I have no reason to reject any part of it. It appears that by May, Mr Boaden had persuaded Mr Weston that he was worth retaining.

[575] Reporting to Mr Werner and Mr Boaden were chief financial officers/financial controllers for each country, including:

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United Kingdom -- David Trendle;

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Netherlands -- Marc Bernard;

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France -- Francois-Xavier Meyer.

[576] In Australia, there were three business units, each of which had its own chief executive officer or joint chief executive officers, as follows:

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for the Next Generation business, David Wright and (from January 2001) Gerard Frack;

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for the fixed wire and service provider business, Steven Hodgson and George Savva, who were appointed joint CEOs for Australia in February 2000: Ex JDR 2/840;

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for the One.Net business, Matthew Lovegrove.

[577] There were chief financial officers reporting to these chief executive officers, as follows:

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for the Next Generation business, reporting to Mr Wright and Mr Frack, Carlos Perez and Stephen Moore;

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for the fixed wire and service provider business, reporting to Mr Hodgson and Mr Savva, David Barnes (who left in mid-February 2001) and then Rick Baumgartner (who started in early April 2001);

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for the One.Net business, reporting to Mr Lovegrove, Lawrence Corbett.

John Linton, who was head of the CLEC business unit, also reported to Mr Savva and Mr Hodgson. Mr Silbermann said there were more than 30 people who reported to Mr Barnes or Mr Perez: MS 32.

[578] Mr Rich gave evidence about the resignation of Mr Barnes: 1 JDR 1022-6. He gave notice in around December 2000 and told Mr Rich he was leaving for family reasons, because he had a sick child and wanted to work in a smaller company. He left on 12 February 2001. Korn Ferry were briefed to search for a replacement and in the interim, the principal responsibilities of Mr Barnes were assumed by a combination Mr Hodgson and Tim Holmes (a financial controller who had reported to Mr Barnes).

[579] As to co-ordinating the compilation of the board papers, Mr Rich told Mr Barnes to give responsibility for that work to Ms Parker and Ms Berggren. In around March 2001 Mr Baumgartner was hired to replace Mr Barnes. Mr Baumgartner resigned from the management consulting firm, McKinsey, to join One.Tel on around 9 April 2001.

[580] Mr Rich gave evidence to the effect that these senior managers were either executives who had been with One.Tel for some time or executives who had been recruited recently from other telecommunications companies with substantial experience in the industry: 1 JDR 561-3.

4.2 Management structure and supervision

[581] Below the CEO/CFO level, each business unit had team leaders for various aspects of the business, who reported to their CEOs. In Europe, there was generally a team unit for each of the following areas: marketing; carrier relations; information technology; billing; collections; human resources; and legal: 1 JDR 565. In Australia the structure was similar, though some of the functions were more centralised and covered all the Australian businesses. According to Mr Rich, local management teams were given substantial autonomy in respect of day-to-day operations, and were relied on to bring any issues to the attention of senior management, but certain activities were more centralised, including marketing and implementation of billing and customer service systems: 1 JDR 567. Executive managers made frequent use of voicemail to communicate with one another. One.Tel's voice mail system was an advanced system that allowed voicemails to be copied to numerous recipients and to be forwarded by the receiver to others. Staff were encouraged to raise issues with senior managers in "real time": 1 JDR 571.

4.2.1 Mr Rich's evidence about his methods of supervising management teams

[582] According to Mr Rich, the four executive directors, and specifically, Mr Rich himself, used the following strategies and techniques to supervise the business unit management teams (1 JDR 568-84):

(9) regular oral communication, face-to-face or by voice mail as issues arose (Mr Rich said he spoke to one of the CEOs of the major business units about two or three times a week, and from time to time sat in on meetings of heads of business units with their team leaders: 1 JDR 569, 572);

(11) copious use of One.Tel's global voicemail system for updates on specific inquiries;

(12) a culture in which issues were raised with senior managers in "real time";

(13) meetings with heads of business units and team leaders;

(14) visits to workplaces to discuss progress with staff personally;

(15) written reporting on performance against budget for the monthly flash reports and in the board papers (these were Mr Rich's "primary source of regular written information about the performance of the various business units": 1 JDR 574);

(16) Mr Rich, Mr Keeling and Mr Silbermann undertook regular "operational review tours" of the international businesses, having face-to-face meetings with senior management and team leaders approximately every 2 months: 1 JDR 575-6;

(17) detailed reviews of business plans for various business units, especially during March, April and May when the business units were reviewing their business plans for the following financial year: 1 JDR 577;

(18) meetings from time to time with managers who engaged in particular projects or initiatives, such as Project OPEX: 1 JDR 578;

(19) periodic meetings with senior managers of the various business units to review the summary pages of monthly management accounts for those business segments: 1 JDR 579;

(20) regular "diary check meetings", held in each One.Tel office (for example, in Sydney on Monday morning at 8 am), attended by all the senior managers and team leaders, at which matters of significance for each of the business units for the following week were summarised and discussed: 1 JDR 583;

(21) receipt of financial information provided by management accounts, flash reports and board papers;

(22) during 2001 there was also a daily voicemail giving the group cash balance at close of business on the previous day, a daily voicemail from the UK team providing the latest figures on tolling diallers, and during November and December 2000 and early 2001 a voice mail from the billing team supervisor on the progress of the billing catch up: 1 JDR 584.

[583] Mr Rich said he did not typically see trial balances, spreadsheets of workings for the flash reports, reports on ageing of debtors (including collection profile summaries and profile summaries), reports on ageing of creditors, to-be-billed reports, unpresented cheques listings, daily cash flow spreadsheets kept by the treasury area, the Lotus notes cash flow database, correspondence with creditors (unless he specifically asked to see it), or mid-month flash reports (which were prepared by the finance teams at mid-month to provide the business managers with an approximation of where they were likely to end the month): 1 JDR 585. He said that in respect of such matters, he relied on the fact that other responsible managers at One.Tel would be reviewing the documents regularly and would refer specific issues to him where appropriate: 1 JDR 586.

[584] Management accounts were prepared by the finance teams of each of the business units on a monthly basis, typically about 3 weeks after month-end, except at the year end and half-year, when they were often delayed for a few weeks because the finance team gave priority to the statutory reporting obligations. The management accounts were reviewed by the CEOs and CFOs of each business unit. They were then circulated to the executive directors, towards the end of the month, and were reviewed by the senior management team of the business unit and whichever executive director was available at the time: 1 JDR 580-2.

4.2.2 Mr Silbermann's evidence about his methods of supervising management teams

[585] Mr Silbermann also gave evidence about how he monitored the performance of the One.Tel businesses, including the finance function of those businesses: MS 36-86. He laid emphasis on the following matters:

(9) in April/May each year One.Tel engaged in the process of budgeting and planning for the upcoming financial year and beyond that year, by a "bottom up" process by which the managers of each business unit developed their own budgets and plans in great detail, including forecasts for each of the key performance indicators of the business, which would then feed into the financial models to produce forecast financial results: MS 36-7;

(11) the budgets and plans for business units were reviewed in detail by members of the senior management team, including Mr Rich, Mr Keeling, Mr Silbermann and Mr Beck: MS 38;

(12) subsequently, material developments in the business and competitive environment of business units led to the review and updating of plans and budgets, as and when required, and any such review and updating would go through a similar process of revision: MS 40;

(13) once individual business plans had reached an advanced stage, Mr Barnes and Mr Hodgson would produce a consolidated budget or plans for the One.Tel Group: MS 41;

(14) it was One.Tel's practice for at least one of the executive directors to participate in an "operational review" in Europe at least every 4-6 weeks, and for that purpose one and sometimes two of Mr Rich, Mr Keeling and Mr Silbermann would travel to the UK and European businesses with Mr Weston and/or Mr Cage (and often also Mr Werner), spending a day in each office and reviewing their operations with senior management and receiving presentations on overall performance, carriers, collections and marketing: MS 55;

(15) towards the end of each month, management accounts (assuming they were available) for each of the major businesses were reviewed with management of those businesses by whichever of the executive directors were in the relevant office at that time, the format being a "walk-through" of the management accounts with particular discussion of recent performance of the business in financial and operational terms and in terms of its KPIs: MS 57, 60;

(16) there were regular meetings at which senior managers of businesses gave presentations on particular projects (for example billing and collections with a focus on ongoing efforts to improve the quality of billing and timely collection of amounts to build, and a project designed to reduce operating expenditure known as "Project Opex"): MS 61-2;

(17) Mr Silbermann received the monthly flash reports and bi-monthly board papers.

[586] As to the reviews of monthly management accounts (para (vi) above), Mr Silbermann said that he attended most if not all of those reviews in respect of the international management accounts, and he recalled attending at least one such review in relation to Next Generation management accounts in late 2000 and another in around March 2001. But he did not recall attending any review of management accounts for the Australian fixed wire/service provider business during 2001. He said no final management accounts were available for review during that period because, as explained to him by Mr Hodgson, revenue accruals have not been completed: MS 58, 59.

[587] Mr Silbermann said he seldom, if ever, had recourse to One.Tel's ledgers, journals, trial balances or other primary or secondary accounting records: MS 78. Like Mr Rich, he gave evidence about some documents that were produced by One.Tel management that he did not regularly see at the time, though he had later seen them during preparation for these proceedings.

[588] First, there were mid-month flash reports prepared at the initiative of Mr Keeling, that were intended to provide an early estimate of where the end of month flash report was likely to come out, so as to give the management teams early warning of any development that might adversely affect the results for the month, so as to enable them to take quick remedial action. Mr Silbermann said he did not generally see those documents unless someone brought a document to his attention because of some issue they wanted him to know about: MS 64.

[589] Second, Mr Silbermann referred to the profile summaries and collection profile summaries that are in evidence, saying the only context in which he saw such reports was, occasionally, during updates by managers on the activities of the collections team, but he did not recall seeing such a report at all during 2001: MS 67. He said he did not personally monitor in detail the ageing of debtors on a weekly or monthly basis, because each business unit had both a collections manager and a CFO, and that was a task he understood was being performed by them on a regular basis; and in addition, in the case of Australia the collections area was overseen by Mr Hodgson: MS 68-9. Mr Silbermann said his personal involvement in questions relating to collections and debtors was limited to:

•

addressing specific issues as they arose and were moved up the line to him by the relevant CEO or CFO;

•

attending presentations on collections in the context of operational reviews in Europe or periodic update meetings in Australia; and

•

considering reports by the company's finance staff and the auditors on the adequacy of provisioning at half year and year end: MS 70.

He added that during 2000/2001, he tended to have more exposure to what was happening in collections and debtors in Europe than in Australia, consistent with the fact that he was much more intimately involved in One.Tel's European business operations during that time than in the Australian business operations: MS 71. The question of the adequacy of One.Tel's provisioning for doubtful debts, and issues about the roles of Mr Silbermann and Mr Rich in that process, are considered in detail in Ch 19 of this judgment.

[590] Third, Mr Silbermann referred to One.Tel's aged creditors reports. He said he did not see them in the normal course of his duties, since managing the payment of creditors was primarily the responsibility of the CFOs and CEOs of each business unit and the managers of the accounts payable groups in each country, and in the case of payments to carriers whose networks were used by One.Tel, also the carrier manager for each business: MS 72-3. He said his personal involvement in creditor issues and relationships was limited to addressing specific issues that were presented to him by the CEO or the CFO of one of the business units, issues that tended to arise principally in the context of disputes with larger creditors, and in particular, disputes with carriers: MS 74.

[591] Fourth, Mr Silbermann said he did not regularly see the daily cash flow summaries prepared by Mr Barnes, and after February 2001 by Ms Randall, until late April 2001, when the cash position at One.Tel became very tight and he became involved in closely monitoring cash flows on a more or less daily basis: MS 75. This evidence is considered in detail in Chs 12 and 14, dealing with March and April respectively. He said his understanding was that the forecast cash flow information in those spreadsheets was limited to the current month and was used for short-term cash flow management, and that until Mr Hodgson used a version of the daily cash flow spreadsheets to forecast cash flows for April, May and June for inclusion in the March board papers, the source of the monthly cash flow forecasts in the board papers was the business plans for the businesses rather than the daily cash flow spreadsheets: MS 76.

[592] Fifth, Mr Silbermann said the to-be-billed report was a report that was used as part of the accruals process to accrue, as part of revenue for a particular month, call charges relating to that month which had been billed at a later date (this is consistent with Mr Rich's much fuller evidence, considered in detail in Ch 20). Mr Silbermann said he was aware that those reports existed and in broad terms what they were, but they were not documents he typically saw in the course of carrying out his duties at One.Tel: MS 77.

4.3 Key performance indicators as a management tool

[593] According to Mr Rich, business planning in the One.Tel Group centred on estimates of key performance indicators, which were entered electronically, and fed through a model that produced forecasts of financial results: 1 JDR 294. In his affidavit, Mr Rich gave a detailed explanation of the principal KPIs that were used in the process: 1 JDR 303-40. They were: cost of acquisition (COA); average revenue per subscriber (ARPU); gross margin; subscriber numbers; churn; and operating expenditure (OPEX).

4.3.1 Cost of acquisition (COA)

[594] This was the dollar cost to One.Tel of signing up a new subscriber for its services. The COA included marketing costs and, in the case of the mobile businesses, handset subsidies and dealer commissions. It was a very important factor in the profitability of the One.Tel businesses, and One.Tel management were always very focused on it. Mr Rich explained that the cost of acquiring subscribers for a new telephony product was initially high but fell over time, as potential subscribers became more aware of the product, before rising again as the market for the product continued to develop and potential subscribers became jaded and complacent: 1 JDR 310. He described the period after initial introduction of the product and before complacency as the "sweet spot", and said that One.Tel's business strategy was to concentrate marketing efforts where the product was at or near the sweet spot.

4.3.2 Average revenue per subscriber (ARPU)

[595] Average revenue per subscriber was the average dollar amount of revenue received by One.Tel's businesses from their subscriber base: 1 JDR 319. It was difficult to improve ARPU simply by endeavouring to persuade customers to use their telephones more often. However, where it was necessary for the subscriber to dial an override code to access One.Tel services, ARPU could be substantially reduced by introducing and installing automatic preselection devices. Hence, in the United Kingdom it was found, during trials conducted in August/September 2000, that customers who had a "dialog box" installed which would automatically route all their national and international long-distance calls via One.Tel, would have an ARPU of approximately £17, whereas "override" customers had an ARPU of approximately £12: Ex MTB 1/11.

[596] Next Generation, being a newly constructed network using advanced technology, had a competitive advantage in the provision of additional services such as voice mail, SMS and information services. The provision of these "value-added services" was a significant element of the business plan for Next Generation. One.Tel offered packages of additional services under the label "Cool Services", which included facilities for instant reply to voice mail messages, speeding up the listening speed for voice mail, and sending voice mail replies.

4.3.3 Gross margin

[597] Gross margin is the margin between the revenue received from the customer for the provision of a service and the direct cost of providing the service. For One.Tel's fixed wire and service provider businesses, gross margin was influenced by carrier tariff charges, the accuracy of carrier billing, and the efficiency of One.Tel's billing system and collections. In the Next Generation business, gross margin was influenced by the state of completeness of the network (One.Tel's gross margin on calls on its own network was higher than the gross margin on the calls of customers who "roamed" onto another carrier's network). Gross margin was also influenced by whether the number of subscribers was sufficient to achieve economies of scale. It was influenced by the rates charged by Telstra for roaming on its network, and by interconnect rates charged by another carrier when a Next Generation subscriber placed a call to a subscriber on the other carrier's network.

4.3.4 Subscriber numbers

[598] It was important to build up subscriber numbers to achieve critical mass in terms of revenue and coverage of fixed costs. But One.Tel's business strategy did not treat subscriber numbers as an end in themselves. Judgment needed to be exercised as to whether the cost of acquisition of subscribers was likely to increase or decrease over the short to medium term.

4.3.5 Churn

[599] Churn measured the extent to which existing One.Tel subscribers moved to other telephony companies. Churn was a significant factor in the Australian and UK fixed wire and service provider businesses, but was less important for Next Generation because its subscriber base was relatively new and subscribers were signed up under 1 or 2-year contracts. Each One.Tel business unit had a "retention" team and the company regarded its call centres as an important interface with customers to minimise churn. The company also had guidelines for collections teams, which limited the circumstances in which they could suspend service to a subscriber.

4.3.6 Operating expenditure (OPEX)

[600] The largest component of operating expenditure, excluding COA expenditure, was staff costs. During late 2000 and 2001, a team under the leadership of Mr Hodgson was engaged in an internal project called Project OPEX, the purpose of which was to identify and implement a range of measures to control and reduce operating costs: 1 JDR 336, 267-2.

4.4 Executive directors

4.4.1 Mr Rich and Mr Keeling

[601] Mr Rich was joint managing director of One.Tel, with Mr Keeling. They were the founders of the company and they remained in office until their resignations on 17 May 2001. The other executive directors were Mr Silbermann and Mr Beck. Mr Rich gave evidence about the relationship between each of the other executive directors and the One.Tel Group.

[602] According to Mr Rich, he and Mr Keeling shared responsibility for the day-to-day management of the operations of One.Tel, discharging the role of managing director more or less equally and interchangeably without seeking to "carve up" the role into areas of primary responsibility for each of them: 1 JDR 590. However, from early 2000 until about September 2000 Mr Rich was in Europe overseeing the expansion of the UK and European businesses, and so as a practical matter Mr Rich tended to focus primarily on the international businesses and Mr Keeling tendered a focus on the Australian businesses, although they remained in very regular contac: 1 JDR 591. Mr Rich said they communicated with one another very frequently, principally orally or by voice mail: 1 JDR 593. He said they had a good working relationship and he was unable to recall any occasion on which they had a protracted difference of views on a material issue: 1 JDR 594.

4.4.2 Mr Silbermann

[603] Mark Silbermann obtained university degrees in commerce and accountancy in South Africa, and worked for an accounting firm in that country for 4 years, moving to a London-based real estate and property development company in 1992, where until 1995 he occupied the position of finance director, though he was not a member of the board: MS 3-10.

[604] There is an issue in the evidence as to Mr Silbermann's professional qualifications. He gave evidence that he completed his articles and passed a qualifying examination in June 1991, thereupon becoming a qualified chartered accountant in South Africa: MS 4. He said that he was then entitled to become a member of the South African Institute of Chartered Accountants and intended to take up membership: MS 7. When he left South Africa to travel overseas in March 1992, he asked his father to attend to the formalities required for membership while he was away. He said that until about August 2001 he believed that his father had done so, but he then learned that when he told his father in November 1992 that he did not intend to return to South Africa, his father had assumed that he no longer wanted to become a member of the Institute and the application for membership was not pursued: MS 7.

[605] Therefore the One.Tel annual report for 2000 (Ex CE 5 0036), which says in Mr Silbermann's biography that he was a chartered accountant and a member of the Institute of Chartered Accountants of South Africa, is incorrect, but according to Mr Silbermann's evidence the inaccuracy is not substantial because of his entitlement to membership. He became a member of that Institute in February 2004: Ex MS 1/1.

[606] Mr Silbermann commenced work with One.Tel in 1996, as a financial controller. He was hired by Andrew Coulsen, One.Tel's chief financial officer at that time: MS 11. Later in 1996 Mr Silbermann took over as chief financial officer when Mr Coulsen left to move to another company: MS 13. Mr Rich gave evidence that the decision to appoint Mr Silbermann as chief financial officer was made by him and Mr Keeling, and that they discussed the matter with Mr Greaves and Mr Beck: 1 JDR 597. He said none of the people he spoke to expressed any concern or reservation about the appointment. Mr Rich gave evidence that he understood Mr Silbermann to be qualified as a chartered accountant in South Africa and that he had worked as the financial controller for a property development group in the United Kingdom: 1 JDR 598.

[607] After his appointment as chief financial officer, Mr Silbermann regularly attended board meetings and contributed to discussions at those meetings: MS 13; 1 JDR 600. Mr Silbermann said that either Mr Rich or Mr Keeling told him after he replaced Mr Coulson that he would not be put on the board until he had earned his "stripes": MS 13. He said that during 1996 and 1997 his principal focus as CFO was on building up One.Tel's finance team and financial systems as the business grew: MS 14.

[608] According to the evidence of Mr Silbermann, he became a member of the One.Tel board in July 1997, before the company was admitted to the official list of the Australian Stock Exchange: MS 16. But Mr Rich said that, although Mr Silbermann regularly attended board meetings and contributed to discussions in the period 1996-1998, it was not until about June 1999 that he asked to be appointed to the board: 1 JDR 601. Mr Keeling supported the idea, and Mr Rich spoke to Mr Greaves, Mr Adler and Mr Packer Jnr, none of whom expressed any reservation or concern: 1 JDR 601. The board resolved to appoint Mr Silbermann a director at its meeting on 30 July 1999: Ex JDR 2/854. I prefer Mr Rich's evidence as to when Mr Silbermann was appointed to the board, because it is supported by the board minutes of 30 July 1999.

[609] As finance director, Mr Silbermann had seven CFOs/financial controllers for the major business units reporting to him as well as to their respective CEOs: 1 JDR 603. He said that, beginning early in 1998, One.Tel began to expand its operations overseas and he was a member of the team formed internally to undertake due diligence on various potential expansion opportunities, and so he became increasingly involved in One.Tel's international activities, while Mr Hodgson played an increasingly active role in relation to overseeing the financial aspects of the Australian operations on a day-to-day basis: MS 18. Mr Silbermann said that when he was based in London, from January to November 2000, he was intimately involved in the development of the business plans for the UK and other European businesses for 2000/2001 and 2001/2002, especially during the period of April/May 2000, working with Mr Cage, Mr Weston, Mr Werner and the senior management teams of the European businesses: MS 42. He said he did not have nearly as active a role in the development of the business plans for 2000/2001 for the Australian businesses, including Next Generation, though he reviewed the final or almost final business plans with Mr Hodgson and the Next Generation team, while not participating in detailed development of the assumptions for those plans: MS 43. He said he was familiar to a reasonably detailed level with the plans that each business unit had for its business during 2000/2001, and what KPIs were going to have to be achieved in order to fulfil those plans: MS 44.

[610] Mr Silbermann said that he dealt regularly with Mr Hodgson and Mr Werner in relation to particular finance matters that they brought to his attention. His normal method of working with them was that they dealt in the first instance with finance-related issues that arose in their respective businesses, and they involved him only in those issues that, in their view, justified his attention for some reason: MS 46. He said that until he returned to Australia in November 2000, he typically spoke to Mr Hodgson by telephone once or twice a week, briefing Mr Hodgson on what was happening in the European businesses and receiving Mr Hodgson's account of developments in the Australian businesses, and discussing any issues that arose from those briefings: MS 47. Mr Silbermann said he also had very regular contact with Mr Rich, Mr Keeling and Mr Beck during that period: MS 47. He said he had daily contact with Mr Werner, Mr Weston and Mr Cage regarding current issues in the UK and European businesses: MS 48.

[611] He said that after he returned to Australia in November 2000, he spoke to Mr Hodgson at least two or three times a week, more often face-to-face than on the telephone, while continuing his regular contact with Mr Rich, Mr Keeling and Mr Beck and maintaining very regular telephone contract with Mr Cage and Mr Werner and (to a lesser extent) Mr Weston and Mr Boaden with respect to the European businesses: MS 49. He said he typically spoke to Mr Cage on the telephone about two or three times a week, and a couple of times a week to Mr Weston and Mr Werner: MS 50.

[612] Consistently with Mr Rich's evidence, Mr Silbermann said that One.Tel management made extensive use of voicemails (MS 51), and he said he would typically receive 30 or 40 voice mail messages each day, generally from Mr Rich, Mr Keeling, Mr Beck or the CEOs and CFOs of the various business units, sometimes by way of report and sometimes because they required some action. He confirmed that he received a daily voice mail report on the group cash balance during 2000/2001, which was copied to several other members of senior management: MS 53.

[613] Mr Rich gave additional evidence about Mr Silbermann's strengths and performance, no doubt because of ASIC's pleaded allegation that Mr Rich breached his duty of care and diligence by failing to take reasonable steps to ensure that One.Tel employed a competent chief financial officer. Mr Rich said that Mr Silbermann had very high energy and commitment, that he was reliable and meticulous at following through on tasks for which he was responsible, and that he was quick to understand new issues when confronted with them: 1 JDR 599. Mr Rich and Mr Keeling reviewed Mr Silbermann's performance annually as part of One.Tel's internal employee reviews, by a process that involved soliciting opinions on a confidential basis from senior and middle managers. Mr Rich said his recollection was that Mr Silbermann generally attracted strong views, and that some managers complained that he lacked patience, but Mr Rich did not recall any criticism about his professional competence or capacity to discharge his role as finance director: 1 JDR 604; MS 85. Mr Silbermann said he could not recall any concern being expressed to him at those reviews about his ability to discharge the duties of finance director at One.Tel: MS 86.

[614] Mr Rich said that at no time during Mr Silbermann's tenure as chief financial officer and finance director could he recall any of the directors of One.Tel, or any of the investment banks or stockbrokers with whom Mr Silbermann dealt, making adverse comment or complaint about him: 1 JDR 605, 610. On the contrary, Mr Rich gave evidence of his recollection of strongly favourable feedback about Mr Silbermann's performance from Mr Greaves and Mr Gilbert and from an external party: 1 JDR 606-9.

4.4.3 Proposal to replace Mr Silbermann as CFO

[615] In about July 2000 Mr Rich and Mr Keeling decided to recruit a new CFO, and to move Mr Silbermann to a chief operating officer role. It is worthwhile to set out the evidence about this process because it rebutts what might otherwise have appeared to be the implication that there was some dissatisfaction with Mr Silbermann as CFO, and it also shows the extent of involvement of Mr Packer Jnr in One.Tel's affairs.

[616] Mr Rich gave evidence explaining the background for the decision to move Mr Silbermann and recruit a new CFO. He said Mr Keeling expressed the view that although Mr Silbermann was very good at getting things done, One.Tel needed a CFO who had a higher profile, who was better known to institutional investors, and consequently Mr Silbermann should be moved to a chief operating officer role: 1 JDR 611. Mr Rich said that Mr Silbermann enthusiastically supported the idea: 1 JDR 612. Mr Silbermann's account of the reasons for the proposal was a little different. He said recruiting a finance director would allow him to "concentrate on the operational role in relation to Europe which had developed as a major area of focus" for him: MS 87. I accept the evidence of both defendants, as evidence of their separate receptions of the reasons for the proposal.

[617] Korn Ferry, a recruitment agency, was engaged for the recruitment task: as noted in the board papers for the meeting on 28 September 2000, Ex MTB 1/6; see also the November board papers at Ex MTB 1/132. Mr Silbermann said that during late 2000 and early 2001 he participated in a number of interviews of potential candidates (MS 90-1), but the position was not filled. Perhaps more interesting than the interview process was the fact that Mr Packer Jnr and PBL took an active and interventionist approach to filling the position.

[618] Thus, at his meeting with Mr Packer Snr and Mr Packer Jnr on 15 January 2001, Mr Rich reported that several people had been interviewed for the position of Group CFO, and he suggested that an approach be made to a person at Optus, but Mr Packer Jnr expressed reluctance to upset the Optus chief executive: 1 JDR 848-9. Mr Packer Jnr discussed several other candidates for the CFO position with Mr Rich, including a suggestion that a partner of Ernst & Young be seconded: 1 JDR 1035.

[619] Mr Rich said he had lunch with Mr Long of Ernst & Young early in March 2001 at Chifley Plaza, to discuss One.Tel's business with him in an informal setting. Mr Rich raised the possibility of Mr Long coming to One.Tel for 12 months on secondment as its Group CFO. Mr Long said he was flattered and would think about it but he did not think he would be able to do it. He said he would give thought to the possibility of some other partner of Ernst & Young being seconded, and consider whether there were other potential candidates in the industry. Mr Rich said he followed up on the matter with Mr Long in April, but Mr Long said he definitely could not do it himself and had not been able to come up with anyone suitable.

[620] Mr Rich gave evidence (1 JDR 919-21) that, after a meeting at One.Tel's offices on 19 January 2001 for the review of the business plans, attended by Mr Packer Jnr, Mr Kleemann and One.Tel executives, he had lunch with Mr Kleemann, Mr Silbermann and Mr Hodgson. After the lunch he had a brief discussion with Mr Kleemann in the street, in which he suggested to Mr Kleemann that he should come to One.Tel as CFO or on secondment. Mr Kleemann said he would enjoy doing so, but he did not think PBL would agree. Shortly afterwards Mr Rich telephoned Mr Packer Jnr and proposed that Mr Kleemann should come to work for One.Tel on a full-time basis as Group CFO, but Mr Packer Jnr was not keen on the idea and said that Mr Kleemann was needed at PBL. Mr Rich said he raised the matter again with Mr Packer Jnr and Mr Kleemann but was given a similarly discouraging response.

[621] Mr Rich said (1 JDR 1028-33) that his diary for January-February 2001 recorded interviews with three candidates for the position of group CFO, whom he named: 1 JDR 1028. He said that one of them, Nigel Morrison, had been suggested by Mr Packer Jnr Mr Rich interviewed Mr Morrison on 19 February 2001, and Mr Silbermann met him on 7 March 2001: MS 92. Subsequently Mr Packer Jnr enquired about how the interview went and asked to be kept informed, and in early April 2001 he told Mr Rich, "We want Nigel to be One.Tel's next CFO". Mr Rich then began the process of negotiating with Mr Morrison about his compensation package, but later in April Mr Packer Jnr told him not to worry about negotiating with Mr Morrison, because "Ashok will take care of it" (referring to Mr Jacob of PBL/CPH). Subsequently Mr Rich had a discussion with Mr Jacob and said to him that a suitable remuneration package would be in the range of $400,000-$500,000, but in early May 2001 Mr Jacobs told Mr Rich he had negotiated a package of about $1 million plus a large number of share options.

[622] Mr Rich said that he discussed Mr Morrison's candidature with Mr Murdoch Jnr in February or March, and also discussed with him a US candidate called Mr Tallent, who had been put forward by Korn Ferry: 1 JDR 1038. Clearly Mr Murdoch Jnr's level of involvement in the recruitment processes was not nearly as high as Mr Packer Jnr's.

[623] There was also a proposal by Mr Rich to Mr Packer Jnr early in March 2001 for Darren Miller to come to One.Tel on secondment for about 6 months. Mr Packer Jnr agreed and told Mr Rich to work it out with Mr Kleemann, but after Mr Rich spoke to Mr Kleemann nothing happened: 2 JDR 1128-30.

4.4.4 Proposal to recruit an Australian Group CEO

[624] Mr Rich gave evidence that in late February 2001 he interviewed a Mr Shore for the position of Australian Group CEO, and asked Mr Packer Jnr to interview him as well: 1 JDR 1028. Mr Packer Jnr also interviewed a US candidate, Mr Kimsey, for that position in around December 2000. Mr Packer Jnr and his father interviewed a Mr Zoi in late April 2001, and subsequently Mr Packer Jnr told Mr Rich that his father liked Mr Zoi and thought he should be running One.Tel, but Mr Zoi was ultimately not interested in progressing his candidature: 1 JDR 1036.

4.4.5 Mr Beck

[625] Kevin Beck had been company secretary with Mr Rich and Mr Keeling at Imagineering, and was a chartered accountant. He was appointed as operations director of the One.Tel Group in March 1995 and became a member of the board on 30 March 2000. His primary responsibilities were in the information technology and billing areas, and he was primarily responsible for negotiating the contracts with Lucent and the banking syndicate for the financing of the construction of the Next Generation network: 1 JDR 616.

4.5 Board composition

[626] Mr Rich described the early composition of the board in his affidavit, but it is unnecessary to deal with that evidence for present purposes: 1 JDR 617-18. It is the composition of the board in the 2000/2001 financial year that needs to be addressed here.

[627] As at the time of One.Tel's 2000 annual report (CE 5 0036-7), One.Tel's board of directors comprised Mr Greaves as non-executive chairman, four executive directors (Messrs Rich, Keeling, Silbermann and Beck) and four non-executive directors apart from Mr Greaves (Messrs Adler, Gilbert, Packer Jnr and Murdoch Jnr).

[628] Mr Greaves was a director and chairman of One.Tel from the inception of the company in March 1995. Initially he was nominated to the board by Optus, which had a substantial financial stake at that time. He resigned as a director at the end of December 1995 and was reappointed to the board on 25 July 1997, remaining a director and chairman of the company until 31 March 2001. Mr Adler, who had been a director from the outset in 1995, resigned from the board on 12 April 2001. Mr Gilbert was appointed a director on 12 April 1999, and he resigned on 13 November 2000. Mr Packer Jnr and Mr Murdoch Jnr were appointed to the board on 29 April 1999 and remained directors until the company went into administration on 29 May 2001.

[629] Two new non-executive directors, both resident overseas, were appointed on 30 March 2001, namely Peter Howell-Davies and Pirjo Kekalainen-Torvinen. When Mr Rich and Mr Keeling ceased to be directors on 17 May 2001, Peter Yates and Peter Macourt were appointed non-executive directors. The four new appointees remained on the board until the company went into administration.

[630] At its meeting on 7 October 1999, the board approved the establishment of three committees, namely the Finance & Audit Committee, the Appointments and Remuneration Committee and the Corporate Governance Committee. The members of all three committees were Mr Greaves and Mr Adler, until their respective departures in March and April 2001: CE 5 0046-7. The role of the Finance and Audit Committee included considering any significant accounting and reporting issues that arose during the year, including issues arising during the auditors' yearly and half yearly reviews: 1 JDR 625.

4.6 Non-executive directors

[631] Mr Rich gave evidence about each of the non-executive directors, and their relationship with the company: 1 JDR 617-94. The evidence indicates that Mr Packer Snr had a particular interest in board composition, and did not hesitate to express his views. His son was actively interested in board appointments.

4.6.1 Mr Greaves

[632] Mr Greaves was a qualified chartered accountant and had been the chief financial officer of Optus Communications from 1992 to 1996. Importantly for present purposes, he had both accounting skills to a professional level and substantial experience in the telecommunications industry. He left Optus in January 1996 to become the finance director of John Fairfax Holdings Ltd He typically visited One.Tel's offices at least once a fortnight, staying for anything from 15 minutes to an hour or so, discussing the businesses in terms of KPIs, developments in the relationships with News and PBL, and general developments in the industry: 1 JDR 623. He was especially interested in the company's relationship with News and PBL, progress with the Next Generation network, and media and analyst reports about the company: 1 JDR 628. He played the principal role in dealings between One.Tel and ASIC on corporate governance and accounting matters: 1 JDR 626. He had a voice mailbox in One.Tel's voicemail system and was often copied on internal voicemail messages by Mr Rich and other senior managers, and he used voicemail to seek and obtain information about the company: 1 JDR 627.

[633] In September or October 2000 Mr Greaves told Mr Rich he did not want to be on public company boards any more, and that he believed Mr Packer Jnr blamed him for the company's bad publicity over the large bonuses that the board had granted to Mr Rich and Mr Keeling. He expressed the desire to resign before the end of the year, but he eventually resigned at the March 2001 board meeting: 1 JDR 629-30. He maintained his level of involvement with the company until he resigned: 1 JDR 631.

4.6.2 Mr Adler

[634] Mr Adler spoke with Mr Rich about One.Tel every couple of weeks or so, and he occasionally visited One.Tel's offices, normally with a specific topic that he wanted to discuss, which was typically something to do with media or analyst reports or the share price: 1 JDR 634. According to Mr Rich, in late January 2001 Mr Packer Jnr told him that his father "want[ed] Rodney out". Mr Rich said he subsequently spoke to Mr Adler and told him he should maintain a low profile and should stand down as soon as some more non-executive directors had been recruited. Mr Rich said Mr Adler agreed to resign, and subsequently did so: 1 JDR 635-7.

4.6.3 Mr Gilbert

[635] Mr Gilbert was appointed to the board in April 1999, when Gilbert Global Capital invested US$30 million to acquire convertible notes issued by One.Tel. In late 2000 Mr Gilbert told Mr Rich that Gilbert Global would be selling down its investment in One.Tel as part of a global strategy to get out of the telco sector, and that therefore he would resign as director. He did so on 13 November 2000. Gilbert Global subsequently sold down its holding, into a falling market: 1 JDR 639-41.

4.6.4 Proposal to appoint Mr Hall

[636] Mr Rich gave evidence that during late 2000, he and Mr Packer Jnr had several discussions about finding replacements for Mr Gilbert and Mr Greaves, and that Mr Leigh Hall was approached as a possible non-executive director: 1 JDR 645; Ex MTB 1/320. Mr Rich put into evidence some email correspondence he had with Mr Murdoch Jnr, from which it appears that Mr Murdoch Jnr agreed to the appointment: Ex JDR 2/855-8. He said, however, that in November or December 2000 Mr Packer Jnr told him that his father did not want Mr Hall to sit on the board, and therefore the matter was not taken further: 1 JDR 647. Mr Rich said that he raised the matter personally with Mr Packer Snr at their meeting on 15 January 2001, expressing his disappointment. Mr Packer Jnr said he did not want to talk about the matter: 1 JDR 850.

4.6.5 Proposal to appoint Mr Pemberton

[637] Gary Pemberton is a well-known businessman who career included the positions of CEO of Brambles Ltd and chairman of Qantas. Mr Rich said he had lunch with Mr Pemberton and Mr Packer Jnr at Mr Packer Jnr's office in Park Street on about 22 January 2001: 1 JDR 922-6. He had previously raised with Mr Pemberton the possibility of Mr Pemberton succeeding Mr Greaves as chairman of One.Tel. During the lunch there was discussion about a market perception that One.Tel was using up its cash and would need further funding. Mr Packer Jnr said that the market was wrong, as the UK business was doing very well and would fund the growth of the Next Generation business. Mr Pemberton asked whether One.Tel had the continuing support of PBL and News, and Mr Packer Jnr said:

Absolutely! One.Tel has our full support.

[638] Mr Pemberton said he would think about the idea, but a few weeks later Mr Packer Jnr told Mr Rich he had spoken to Mr Pemberton, who said he was not interested in becoming involved in a public company board again.

4.6.6 Mr Packer Jnr

[639] Mr Packer Jnr's appointment to the board took affect on 29 April 1999, but there is evidence that he had a substantial involvement with One.Tel during the preceding years. That evidence is dealt with in Ch 6 of this judgment, dealing with the years from 1995 to 1999. By the year 2001, Mr Packer Jnr was chairman of PBL and joint chief executive officer of CPH, and he was also a director of other companies in which those companies had an interest. He does not appear to have had any experience in the telecommunications industry, other than the experience he gained through his association with One.Tel.

4.6.7 Mr Murdoch Jnr

[640] Mr Murdoch Jnr joined the board on 29 April 1999, when PBL and News made their major investments in One.Tel. He was at that time chairman and chief executive of News Ltd and a senior vice president of News Corporation. Mr Rich said he and Mr Keeling called Mr Murdoch Jnr every couple of weeks to give him an update on what was happening at One.Tel, speaking for generally 20 or 30 minutes: 1 JDR 649.

4.6.8 Mr Howell-Davies

[641] Mr Howell-Davies had had many years of experience in the telecommunications industry before he joined the One.Tel board, having previously been deputy chief executive of Hong Kong Telecom and chief executive officer of Mercury Communications (UK). He was chief executive of Optus Communications in Australia for a few months in 1997: 1 JDR 650; Ex MTB 1/279. Mr Rich met him in 1997 and kept in touch with him; indeed, he had discussions with Mr Howell-Davies in 1999 in which Mr Howell-Davies agreed to become the chairman of a UK subsidiary of One.Tel which at that stage was to be floated on the London Stock Exchange, and those discussions were revived in about September 2000 when the float process was reconsidered, but the proposal was not implemented: 1 JDR 653.

[642] Mr Rich gave evidence that in around December 2000 or January 2001, he discussed with Mr Keeling and Mr Packer Jnr the possibility of inviting Mr Howell-Davies to become a non-executive director: 1 JDR 656. He said Mr Packer Jnr told him he wanted to check Mr Howell-Davies out and ask his father about him, and he subsequently told Mr Rich that he agreed that Mr Howell-Davies should be invited to join the board: 1 JDR 657. Mr Rich said that Mr Murdoch Jnr told him in a telephone conversation in early February 2001 that he did not oppose the appointment of Mr Howell-Davies: 1 JDR 658.

[643] A matter of some significance is that, according to Mr Rich (1 JDR 660), Mr Howell-Davies stipulated that before joining the board, he wanted to be satisfied that the company had the full support of News and PBL as its major shareholders. Mr Rich said he put Mr Howell-Davies in contact with Mr Packer Jnr and Mr Murdoch Jnr He gave evidence that Mr Howell-Davies subsequently spoke to Mr Packer Jnr: 1 JDR 661.

[644] During February and early March 2001, Mr Howell-Davies undertook some due diligence on One.Tel, which involved him visiting the UK, Dutch and French offices to hear presentations on the businesses: 1 JDR 663. As a result of his investigations, Mr Howell-Davies sent an email to Mr Keeling on 12 March 2001 identifying concerns in relation to a number of matters, including "Implications of Dominant shareholders" and "Future strategy particularly re exit": Ex JDR 2/862. Mr Keeling replied on 15 March 2001, saying in relation to those matters, "Dominant Shareholders? Not sure what you are asking" and "Exit. Who? No major shareholder is planning an exit": Ex JDR 2/865. According to Mr Rich, he and Mr Keeling subsequently had a telephone conversation with Mr Howell-Davies, in which Mr Howell-Davies said he had heard a rumour that Mr Packer Snr wanted to get out of One.Tel. Mr Rich said he denied the rumour but invited Mr Howell-Davies to "speak to them directly": 1 JDR 665. Mr Howell-Davies also said he wanted to talk to Mr Greaves about why he was leaving, and he was subsequently supplied with Mr Greaves' contact numbers: 1 JDR 665-6.

4.6.9 Ms Kekalainen-Torvinen

[645] Ms Kekalainen-Torvinen had had over 17 years experience in the telecommunications industry before joining the board of One.Tel, and had recently retired from a position as a senior vice president at Sonera, Finland's leading telecommunications company: 1 JDR 667. Mr Rich said he met her in February 2000, when he was living in Europe, and later that year he had dealings with her when Sonera was contemplating a major investment in One.Tel in connection with what was called, at One.Tel, "Project Big Brother". Ms Kekalainen-Torvinen was the executive at Sonera with responsibility for overseeing that potential investment: 1 JDR 670. She visited One.Tel's offices in the United Kingdom and France with a due diligence team and met with Mr Rich and senior managers. She also visited the Australian operations of One.Tel.

[646] After the investment proposal was abandoned, Mr Rich stayed in touch with Ms Kekalainen-Torvinen and, according to his evidence, in January 2001 he discussed with Mr Keeling and Mr Packer Jnr the possibility of inviting her to join the board as a non-executive director: 1 JDR 673. They agreed, as did Mr Murdoch Jnr Mr Rich gave evidence that during February or March 2001 he had a conversation with Ms Kekalainen-Torvinen in which she expressed the opinion that the key to the future of One.Tel was that it should have the support of its major shareholders, and she asked about the commitment of the Packers and Murdochs to One.Tel. Mr Rich said he told her that he was confident of their support, but he suggested she speak to them directly, and he supplied her with contact numbers for Mr Packer Jnr and Mr Murdoch Jnr: 1 JDR 675.

4.7 Management communication with directors

[647] Mr Rich gave evidence of various ways in which, he said, senior managers (including himself) communicated with directors concerning the One.Tel businesses during 2000/2001. His evidence separately identified the following methods of communication: flash reports; board papers; communications with individual directors prior to each board meeting; board meetings; and adjustments to the format of board papers at the request of directors.

4.7.1 Flash reports

[648] "Flash" reports were prepared by the finance team for circulation to directors in the first few days following the end of each month. Their purpose was to give the directors an early "snapshot" of the monthly results for each of the major business units and the group as a whole. The introduction of the SAS financial management system in 1998 allowed for greater "real-time" access to information about the key performance indicators for the businesses: 1 JDR 724; as to the SAS system, see 4.8.1.

[649] From November 2000 onwards One.Tel's flash reports were in a standard format. There was a table setting out monthly and year-to-date figures as at month-end, compared to monthly, year-to-date and full-year budget figures. The figures were for revenue, gross margin, OPEX and EBITDA for both the Australian and the international operations as well as the group. The Australian figures for gross margin and EBITDA were broken down into the business units. After the table there were some bullet point comments. The flash reports are in evidence in the Carter Exhibits, behind Tab 18. The reports were dispatched to the directors about a week after the end of the month.

[650] The flash reports for January and February 2001 contained the group's actual cash balance (apparently the sum of the actual bank balances without any adjustment for unpresented cheques) within the commentary section, but the information contained in the table did not routinely include cash balances. The flash reports did not provide information with respect to outstanding creditors, outstanding debtors/trade receivables or the ageing of debtors.

[651] Mr Rich and Mr Silbermann gave evidence about the procedure for the preparation of monthly flash reports: 1 JDR 725; MS 185-9. Mr Rich said that figures were produced by the finance team for each business, and then assembled by Mr Barnes in Sydney (until February 2001, when he left, and thereafter by Mr Holmes). The figures were reviewed by Mr Silbermann, who also prepared a brief bullet point commentary on major developments, and that document was reviewed by Mr Rich and Mr Keeling before being sent to the directors.

[652] Mr Silbermann expanded on the process of preparation of flash reports. He said that in 2000/2001 the procedure for preparation of the flash reports was as follows:

•

at the end of each month, Mr Werner or Mr Boaden would finalise the figures for the European businesses with Mr Weston and Mr Cage and send them to Mr Silbermann, who would review them with Mr Werner and Mr Weston or Mr Cage, either face-to-face or on the telephone, and the figures would then be sent to Mr Barnes for inclusion in the report: MS 187a;

•

a day or so after the end of the month, Mr Silbermann would receive a draft of the flash report from Mr Hodgson or Mr Barnes, including the European figures that he had already reviewed and Australian figures taken by Mr Barnes from the finance teams of the Australian businesses, but no commentary: MS 187b;

•

Mr Silbermann would then review the Australian figures with Mr Hodgson and they would then settle an appropriate commentary to accompany those figures: MS 187c;

•

Mr Silbermann would write the commentary for the European figures: MS 187d;

•

Mr Silbermann said his focus in reviewing the numbers in the flash reports was on reporting gross margins, EBITDA, cash and subscribers: MS 187e;

•

once Mr Silbermann was happy with the draft, he circulated it to Mr Rich and Mr Keeling for their review and comments, and then the report was finalised and sent to the directors and Mr Hodgson, and at about that time Mr Silbermann would speak to Mr Weston and summarise the comments that had been included for the European businesses: MS 187f.

[653] Mr Rich and Mr Silbermann gave evidence as to the source of the financial figures in the flash reports: 1 JDR 726; MS 188. For the Australian and international businesses, the number of tolling subscribers was the current number taken from the SAS system. For the Australian fixed wire and Next Generation businesses and international businesses, ARPU for each product was obtained from the SAS system and was current to the date of the last CDR which had been processed by the billing system; but for the Australian service provider business, ARPU was derived from the most recent invoice from Optus, adjusted for any promotions which affected ARPU that month, since the call data were obtained via a direct feed from Optus. Revenue figures were derived by a calculation using subscriber numbers and ARPU. Gross margin was a figure calculated by the finance team, except in respect of the UK and possibly other international businesses, where it was obtained from a SAS system which included a "real-time" gross margin calculator. Year-to-date figures were calculated by adding up the monthly figures for each month to date, adjusted as necessary to take into account any variation between flash report figures and figures derived from final management accounts (although Mr Rich said he could not recall any occasion in which such an adjustment was material). As from January 2001 the flash reports included figures for "full-year market forecast", at the request of Mr Rich.

[654] Mr Silbermann made some comparisons between flash report figures and management accounts figures: MS 189. He said that in the first half of the 2000/2001 financial year, up to December, the EBITDA figures contained in the flash reports exceeded the EBITDA figures in the management accounts, because the flash reports took into account the claim that One.Tel had against Telstra in relation to local call charging, and in addition, the flash reports accrued income relating to the November 2000 billing shortfall. Mr Silbermann said those accruals were not taken up in the management accounts until December 2000, when $5.6 million was accrued for the local call dispute for the period from July to December 2000, and a $4 million revenue accrual was taken up for November 2000.

4.7.2 Board papers

[655] Mr Rich gave evidence about the preparation of the board papers: 1 JDR 728-42. Normal scheduled board meetings were held every 2 months. Board papers were prepared either by Shanti Berggren, One.Tel's internal legal counsel, or by one of the company secretaries, such as Alicia Parker or Steve Hodgson. About 2 weeks before the board meeting, the person preparing the board papers circulated a voicemail message to Mr Greaves, Mr Rich and other members of the senior management team, setting out a preliminary view as to the business developments and other matters to be mentioned in the executive summary section of the board papers or as special business. Responses to the voicemail were then reflected in a draft. Mr Rich would at this stage speak to Mr Packer Jnr and Mr Greaves, to ask them whether they thought there were any particular issues for inclusion.

[656] The board papers included succinct updates on progress of and major developments in each of the business units, by reference to KPIs, prepared by the managers of those units. The financial summary section of the board papers was prepared by the finance managers of each of the business units in a standard format. The January and March 2001 board papers contain cash flow forecast summaries on a monthly basis and a finance report comparing actual to budget figures for cash flow and EBITDA. There was also a balance sheet estimate. Board members were given information about the end-of-month cash balance as well as monthly cash usage. It appears, however, that the cash figures did not take into account unpresented cheques or any amounts unavailable for general operations.

[657] The draft board papers were circulated to Mr Rich and the other executive directors and senior managers for review and comment. In 2000/2001 the drafts went to Mr Rich, Mr Keeling, Mr Silbermann, Mr Beck, Mr Weston, Mr Cage, Mr Hodgson and Mr Barnes. From November 2000 they were also sent to Mr Kleemann. Sometimes a second draft was circulated. Mr Greaves would then review the board papers with Mr Silbermann shortly before their dispatch. Mr Rich said he did not always see the board papers in their final form before they were sent to directors. The board papers were sent to the directors 3 or 4 days before the meeting.

4.7.3 Board meetings

[658] The agenda for One.Tel board meetings was relatively standard, and regularly included consideration of: a financial executive summary; a cash flow forecast summary; a report on international operations; a report on the Next Generation business; a report on One.Tel's Australian fixed wire and service provider businesses, and other businesses such as One.Net; a finance report; and special business: 1 JDR 768. Board meetings usually lasted for 60-90 minute minutes: 1 JDR 770. Typically the directors worked through the board papers together, with Mr Rich, Mr Keeling, Mr Silbermann and Mr Beck (as appropriate) speaking to each section and answering questions. From time to time other members of senior management would attend to discuss particular developments in their areas.

[659] Minutes were taken by one of the company secretaries who attended, and within a week after the meeting they were written up and circulated to Mr Greaves. The minutes were circulated to the rest of the board with the papers for the next meeting. There was no prior circulation to any executive directors.

4.7.4 Format of board papers

[660] The original format of the board papers was set in 1995 by Mr Coulsen, who had worked for Mr Greaves at Optus and came to One.Tel as chief financial officer. The format was subsequently developed over time, with input from various members of senior management as well as the non-executive directors: 1 JDR 777. Thus, for example, from January 1999 the board papers included summary financial information by reference to such matters as EBITDA, revenue and OPEX for each business unit, rather than (as previously) a profit and loss statement for each business unit: 1 JDR 778. Mr Rich said he encouraged presentation of information in bullet point format and placed emphasis on being concise: 1 JDR 779.

[661] Mr Rich gave evidence that two changes were made at the request of non-executive directors: 1 JDR 781-4. One was that from early 1999 a group balance sheet prepared by the finance team was included for every board meeting, at the request of Mr Greaves. The other was that during the 28 July 2000 board meeting Mr Packer Jnr asked for month-to-month rolling cash flow summaries to be included in the board papers. This change was implemented in the board papers for the 28 September 2000 meeting. Mr Rich said that, except on those two occasions, he did not recall any of the non-executive directors asking for any change in the format of the board papers, or making any adverse comment about their format or the information customarily supplied: 1 JDR 785. He said that, on the contrary, Mr Greaves and Mr Packer Jnr made favourable comments on the format of the board papers: 1 JDR 786.

4.7.5 Communications with individual directors

[662] Mr Rich gave evidence that it was the usual practice, after the board papers had been dispatched and before the meeting, for him or Mr Keeling to speak to each non-executive director, drawing the director's attention to key issues and discussing those matters briefly: 1 JDR 744-5. In addition to board papers and flash reports, from time to time directors were sent faxes attaching copies of media releases and broker reports. In his evidence Mr Rich noted some additional patterns of communication with Mr Greaves, Mr Adler, Mr Packer Jnr and Mr Murdoch Jnr: 1 JDR 748-63.

[663] Mr Greaves received copies of voicemails relating to board papers and, from time to time, particular business issues. He reviewed the board papers with Mr Silbermann, as noted above, and while on the premises for that purpose he would sometimes come and talk to Mr Rich and Mr Keeling about the forthcoming board meeting.

[664] Mr Rich spoke to Mr Adler about the board papers prior to the board meeting, usually by telephone. Mr Adler would ask questions focused on larger business issues, including the relationship with News and PBL, share price movements and media or analyst reports.

[665] Mr Rich said he spoke to Mr Packer Jnr at least twice before any board meeting, first to seek his views as to the content of the board papers, and second after he had received and read the board papers, to discuss the issues they raised. Mr Rich said that sometimes these discussions with Mr Packer Jnr were by telephone, with Mr Packer Jnr on speakerphone with others such as, from time to time, Mr Packer Snr, Mr Falloon and Mr Jacob. Typically the discussion would last for about 30 minutes. Mr Packer Jnr sometimes made remarks indicating he had discussed matters raised in the board papers with Mr Kleemann, Mr Falloon or Mr Jacob. Importantly, Mr Rich said that from time to time he did not have sufficient information on hand to satisfy a query by Mr Packer Jnr and he would suggest that Mr Kleemann should follow the matter up with an appropriate person in the senior management team, who Mr Rich would designate: 1 JDR 757. Mr Rich said Mr Kleemann demonstrated a keen and detailed interest in One.Tel's business. Sometimes Mr Rich also received queries from Mr Falloon. From January 2001 Mr Packer Jnr received daily emails, as noted elsewhere.

[666] According to Mr Rich, Mr Murdoch Jnr was sometimes difficult to contact, and he and Mr Keeling were occasionally unable to review the board papers with him prior to the meeting. Mr Rich gave evidence that on some occasions he would mention to Mr Packer Jnr his difficulty in contacting Mr Murdoch Jnr to discuss board papers, and Mr Packer Jnr would tell him not to worry because he had already spoken to Mr Murdoch Jnr Sometimes, when Mr Rich was able to make contact, Mr Murdoch Jnr would say that he had already spoken to Mr Packer Jnr: 1 JDR 761.

[667] Mr Murdoch Jnr, like Mr Adler, focussed his attention on larger business issues, such as progress with the Next Generation network and the UK business, and opportunities for cross-marketing with the News Group.

[668] According to Mr Rich, Mr Murdoch Jnr was assisted by others in the News organisation, including Patrice Macree, who met regularly with the Next Generation team at One.Tel (including Steve Moore, David Wright and (later) Gerald Frack), after Mr Rich introduced them to him. Mr Rich said that from time to time during 2000 and 2001, Mr Murdoch Jnr made comments indicating he was getting regular information from Mr Macree about the Next Generation business, and complimenting One.Tel's Next Generation team: 1 JDR 763. Additionally, John Hartigan of News visited One.Tel on a least a couple of occasions during 2000/2001, according to Mr Rich, and was given a PowerPoint presentation and a tour of One.Tel's offices as well as being introduced to the senior management team. Mr Packer Jnr told Mr Rich in early 2000 that it was important for Mr Hartigan to be across the business because he was becoming an important person at News. Additionally, Peter Macourt of News Australia had regular contact with One.Tel through Mr Keeling, who was an old school friend of his. Mr Macourt attended a meeting at One.Tel's offices on 16 January 2001, referred to in Ch 8.

[669] Mr Silbermann also gave evidence about contact with non-executive directors outside board meetings. He said the only non-executive director with whom he tended to have regular contact was Mr Greaves. Mr Greaves' practice was to come to One.Tel a few days before each board meeting and go through the special business and summary portions of the board papers with Mr Keeling or Mr Rich, and go through the finance sections of the board papers with Mr Silbermann: MS 80. He said he was not involved in doing this with Mr Greaves while he was in Europe during 2000, but the practice resumed when he returned to Australia in November 2000, and he said he recalled going through the board papers with Mr Greaves for the meetings in November 2000, and in January and March 2001: MS 81. Additionally, he said, Mr Greaves would come into One.Tel's offices in Sydney every couple of weeks to catch up on what was going on, and would usually speak to him during those visits: MS 82.

[670] He said that at no stage during those discussions did Mr Greaves ever express any dissatisfaction with his performance of his role as an executive director of One.Tel, or indicate any concern about the finance function at One.Tel or the way in which board papers or flash reports were being put together. On the contrary, he said, Mr Greaves was often complimentary about his work: MS 83. He said that at one stage Mr Greaves asked for a balance sheet to be included in board papers, and at the board meeting in July 2000 Mr Packer asked for a rolling 24-month cash flow forecast to be included in board papers, and in both cases the requests were implemented in the next set of board papers: MS 84.

4.7.6 Daily e-mails

[671] As noted in Chs 8 and 10, from 31 January 2001, in response to a request by Mr Packer Jnr, One.Tel provided a daily email to Mr Packer Jnr's secretary, and Messrs Rich, Keeling, Silbermann and (from 6 February) Kleemann. The daily emails provided the total daily group cash balance and other daily performance indicators such as tolling statistics, ARPU and gross margin percentages. It appears that the cash figures were taken from the intranet without any adjustment to reflect unpresented cheques or any amount that was not available to be used in general operations.

4.8 One.Tel's financial records

[672] One.Tel maintained, in electronic form, various financial records for the Australian operations that have become important evidence in this case.

[673] As one would expect, One.Tel maintained a general ledger, recording all transactions, and creditors ledgers detailing outstanding creditors classified by the number of months overdue. It used a specially adapted version of the Adept financial system, together with a special financial reporting system called SAS, and had a separate billing system. Many financial records were stored electronically in the "I:drive" of One.Tel's computer system.

[674] I shall describe the Adept system and the I:drive, and also the "properties pages" of documents stored there, and then make some findings about the various kinds of documents that were stored, namely:

•

business plan summaries and budgets;

•

trial balances;

•

management accounts;

•

aged creditors reports;

•

Australian collections profile summaries;

•

intranet daily cash balances;

•

bank reconciliations;

•

daily cash flow spreadsheets;

•

unreleased/unpresented cheques listings;

•

deferred payment lists.

[675] My descriptions partly draw upon my judgment on the admissibility of documents, ASIC NSWSC 417 (my May judgment). Also relevant are my principal judgment on the admissibility of Mr Carter's evidence, ASIC NSWSC 149 (my March judgment) and my judgment on the paragraph-by-paragraph assessment of the admissibility of Mr Carter's evidence, ASIC NSWSC 650 (my July judgment).

4.8.1 The Adept financial system, SAS, the I:drive and properties pages

[676] Adrian Bannister, a witness for ASIC, described One.Tel's Australian computer system in his affidavit made on 28 April 2004. Mr Bannister was a senior database administrator at One.Tel during the period from September 1998 to October 2001, responsible for planning, installation and support of major internal computer systems. He said that One.Tel used the Adept accounting system for financial accounting, substantially customised for One.Tel's needs. It contained all ledgers (including the general ledger, debtors ledger and creditors ledger), and detailed financial data was summarised and then purged from the system during normal month-end processing.

[677] He gave evidence explaining how data could be accessed in Adept, by using a username and password recognised by the system, and he explained how to access the general ledger, an aged creditors report, an aged debtors report and a list of unreleased cheques.

[678] The Adept system produced the raw financial data from which management accounts and final audited accounts of One.Tel were compiled: 1 JDR 34-8. In 1998 the company installed a new financial management reporting system called SAS, which was a "data warehouse" deriving information from One.Tel's other reporting systems (including the Adept system and the billing system) so as to produce figures for various KPIs which were used by One.Tel's managers to operate and monitor the One.Tel businesses. Mr Rich said that there were sometimes "lags" in the information produced by the SAS system, and so the information produced by SAS had to be considered with knowledge of how up-to-date the base information was. It appears that the server for the SAS system was not retained by the liquidators and is no longer available.

[679] Mr Bannister explained that One.Tel used a separate disk drive on the file server to store administration and management files. The disk drive was referred to within the organisation as the I:/Drive or the data drive. Other evidence about the I:/Drive was provided by Graham Henley and Matthew Brotherson. Mr Henley is a forensic accounting expert who assisted the Australian Federal Police and ASIC in the execution of a search warrant at the premises of One.Tel on 1 June 2001. Mr Brotherson was a systems administrator employed by One.Tel. During the course of execution of the search warrant, Mr Henley and Mr Brotherson had a conversation in which Mr Brotherson told Mr Henley that the main network storage location was the I:drive, which was broken down into separate directories, and that the directories relevant to the execution of the search warrant were probably the finance, administration and corporate counsel directories. Mr Henley asked Mr Brotherson to print the screen that showed the I:drive directories, and he later copied the three directories to a hard drive.

[680] Gabriel Farago, a solicitor and director of Ferrier Hodgson, gave evidence that Ferrier Hodgson retained KPMG to assist with the extraction, analysis and preservation of the data contained on the various computer systems operated by the One.Tel Group. KPMG produced two reports, dated October 2001 and January 2002 respectively. In about October 2001, KPMG delivered to Ferrier Hodgson some semi-desktop computers containing the electronic data extracted and preserved by KPMG as explained in their reports. Mr Farago arranged for a complete copy of all the files located in the I:drive, which was part of the data KPMG had captured. He delivered to ASIC a hard drive containing a copy of the I:drive data, on 7 July 2003. This copy of the I:drive was referred to in submissions on admissibility as "the Ferriers I:drive".

[681] The finance directory of the I:drive contains nearly 25,000 files. Counsel demonstrated the operation of the I:drive in court. The finance directory is structured so that, once a finance spreadsheet is displayed, a figure appearing in a particular cell on the displayed page may be linked to another document, discovered by highlighting the cell. The structure makes it plausible to infer that a document identified in this way is some form of explanation of the figure highlighted (for example, a worksheet).

[682] The documents tendered by ASIC include "properties pages", about which there has been contention. In his affidavit made on 13 September 2004, Mr Bannister briefly explained properties pages. He said that Microsoft Windows automatically generates and updates "properties" information for computer files created using Windows applications such as Microsoft Excel and Microsoft Word (which were used by One.Tel staff). He continued:

The "properties" information includes time and date "stamps" which automatically record when a particular file is created, modified, accessed or printed by reference to the setting of the relevant computer's internal electronic clock. The date a file is "created" refers to the date that a file is saved under a particular name or the date that a particular file is copied. Thus the file properties may show that a file was "created" after it was "last modified". A user may view the "properties" of a file by navigating to a "properties" page for that file ...

[683] In the tendered documents ASIC usually include a printout of two properties pages, one being the "General" page and the other being the "Statistics" page. The copies of the properties pages provided by ASIC appear to be superimposed on the first page of the document to which they relate, and this makes it plausible to infer that the properties page relates to that document. But sometimes this correlation does not appear to be established, or the properties page is illegible.

[684] Mr Bannister's evidence indicates that one "navigates" from the file to the properties pages. I infer that if one carries out the navigation correctly, the properties pages that are reached are the properties pages for the file from which one launched the navigation.

[685] It seems to me that, although the significance of the "created" box, and in some cases, an "author" box, is problematic for reasons given, and the "modified" box is unhelpful to the extent that the author of the modifications and the nature and content of the modifications are not indicated by it, the "last saved by" box is of some utility for evidentiary purposes. I have taken it into account as an indication, in the absence of further evidence, of the date when the document was left in the form in which I have viewed it. Consequently the document must have been created on that day or an earlier day.

4.8.2 Business plan summaries and budgets

[686] The documents treated by Mr Carter as budgets for the group and separate business operations are behind Tab 1 in the Carter Exhibits. Although all of the documents behind Tab 1 seem to relate to business plans or budgets or forecasts of some kind in relation to the group or particular operations, they are in some ways a mixed bag of documents.

[687] Some of the documents have a rather irregular provenance. The documents at Ex CE 1 0009-1 0038 were located on the finance directory of the Ferriers I:drive. According to the Carter Exhibits index, their file path through the finance directory is through "Business Plans 01 and 02" to "Australian wireline and SP uplift-final.xls". The provenance of the business plan summaries at Ex CE 1 0001-1 0008 is less straightforward. Mr Farago of Ferrier Hodgson gave evidence, in his affidavit made on 3 May 2004, that the liquidators of One.Tel obtained these documents from Piper Alderman, solicitors acting to Mr Silbermann and Mr Beck, in August 2001. Piper Alderman invited the liquidators to inspect One.Tel documents held by them, and inspection took place on 14 August 2001. Mr Farago said the liquidators then requested a complete set of the documents inspected, and that was provided. Exhibited to Mr Farago's affidavit was a table listing One.Tel documents received and reviewed by Ferrier Hodgson. Pages 1 0001-1 0008 of the Carter Exhibits, also identified by their ASIC barcode numbers, appear in the list with a document location that identifies Piper Alderman. Mr Farago's evidence is that the documents so described were sourced from the documents provided by Piper Alderman to Ferrier Hodgson in August 2001. Copies of the documents at 1 0001-1 0008 were also produced to ASIC by Piper Alderman pursuant to a notice issued to Mr Silbermann under s 33 of the ASIC Law: see the affidavit of Kieran Breckenridge made on 22 March 2005.

[688] The documents entitled "business plan summaries" at Ex CE 1 0001-1 0004 appear, on their face, to be a summaries of various parts of a business plan as at September 2000 (bearing the date 27 September 2000), in respect of the 2001 and 2002 financial years. That, indeed, is the way they are described in the index to the Carter Exhibits. The first page is a summary page, giving forecast figures for each of the 2 financial years for the group, the Australian operations (ex-Next Generation), Next Generation, and Europe and Hong Kong. In each case the figures are for tolling customers, revenue, EBITDA, EBIT and cash (required)/generated. The second page breaks down those figures for the Australian (ex-Next Generation) operations by giving separate figures for the service provider, fixed wire, One.Net and One.Card businesses. The third and fourth pages constitute a summary cash flow spreadsheet, month-by-month for the 2 financial years, with separate lines for Australia, international, GSM (Next Generation) and total.

[689] The next group of documents (Ex CE 1 0005-1 0053) is assembled together behind the tab "Digital & fixed wire", and then there are separate tabs for documents thought to relate to One.Net, One.Card, Next Generation and the international businesses. As far as I can see, the "filing" of the documents in these categories is correct. It is sufficient for present purposes to describe what is behind the "digital and fixed wire" (in my terminology, "fixed wire/service provider") tab.

[690] At Ex CE 1 0005-1 0008 there are summary spreadsheet budgets, dated 21 September 2000, for each of the 2 financial years for the Australian (ex-Next Generation) operations, covering key drivers such as revenue, cost of acquisition, gross margin, operating expenses, doubtful debts, EBITDA, and then depreciation, amortisation and EBIT. At Ex CE 1 0009-1 0010 there is a spreadsheet budget giving similar key driver information for the Australian (ex-Next Generation) operations as a whole (including CLEC), forecast to June 2001 and apparently prepared early in January 2001, since the December figure is a flash figure and the January figure is a forecast.

[691] There is some evidence of a technical kind which indicates that the document at Ex CE 1 0009-6 1 0010 was used for the preparation of the March 2001 board papers and the March 2001 and January 2001 flash reports. The evidence is set out in my May judgment at [26]-[31]. I accept the evidence and the conclusion to which it points.

[692] There are some budget documents that make more detailed monthly forecasts to June 2001 in respect of key drivers such as revenue, costs of goods sold and gross margin for each of the Australian fixed wire business (Ex CE 1 0012-1 0022), the service provider business (Ex CE 1 0023-1 0032), and CLEC (Ex CE 1 0033-1 0038). The documents appear to have been prepared in November or December 2000.

[693] There is a document entitled "One.Tel Australia Revised Forecast 30 June 2001" (Ex CE 1 0040-1 0044) which seems to be a rather more recent document than the others, giving variances to existing business plans for the key drivers, EBITDA, EBIT and OPAT for the service provider and fixed wire businesses. A single page at Ex CE 10050 seems to be part of the document at Ex CE 1 0040-1 0044 because it has the same heading. The additional page compares actual with budget figures for the first half of the 2000/2001 financial year, and compares forecast with budget figures for the second half and for the full year.

[694] ASIC makes fairly frequent reference in final submissions to the September budgets and business plans, meaning to refer to the above documents. In my view the provenance of the documents is established, though in view of the evidence about that provenance, there remains some uncertainty about whether the documents in evidence are complete.

4.8.3 Trial balances

[695] The documents treated by Mr Carter as trial balances for the Australian and UK operations are behind Tab 2 of the Carter Exhibits. The evidence is sourced in the Ferrier's I:drive. The trial balances have presented some difficulty, because in some cases there are two documents with somewhat different figures identifying the same month. The evidence is summarised in detail in my May judgment: ASIC NSWSC 417 at [41]-[47]. For the most part, the use made of this evidence by ASIC avoids those difficulties.

4.8.4 Management accounts

[696] The documents treated by Mr Carter as management accounts' profit and loss sheets and operating expenses listings for the group and for each business unit are behind Tab 3 of the Carter Exhibits. Those documents gave information about revenue, costs of goods sold and contribution by product, and operating expenses including marketing expense and doubtful debt expense.

[697] Generally speaking, management accounts were prepared on a monthly basis at least 3 weeks after month-end, and were prepared based on the general ledger. However, it appears that the management accounts for the fixed wire/service provider business unit for January-March 2001 were not produced on a timely basis and may not have been finalised at all. Mr Carter said in his principal report (at PR 388) that the February 2001 management accounts were not finalised until early April, the March management accounts were not finalised until mid-May and the April management accounts were not finalised until after the group was placed into administration. The defendants contended that these management accounts were never finalised. I review this dispute in Ch 20.

4.8.5 Aged creditors reports

[698] Australian aged creditors reports were extracted from the creditors ledgers in the SAS system. The documents treated by Mr Carter as Australian aged creditors reports for the group are behind Tab 6 of the Carter Exhibits. There is an issue about the reliability of those reports, having regard to some evidence given by Ms Randall in cross-examination: see 3.2.2.3.

[699] Aged creditors reports were also tendered for the UK business, and in the Carter Exhibits, but no aged creditors reports were available for the continental European businesses.

4.8.6 Profile summaries

[700] Mr Carter has collected behind Tab 8 of the Carter Exhibits some documents entitled "collections profile summaries" or "profile summaries", which he has treated as in the nature of aged debtors ledgers for the Australian operations. I shall adopt a single description "profile summaries" for convenience. These documents have proved controversial in the proceedings, and so it is important to consider them carefully.

[701] Although there is no complete uniformity in format, typically the profile summaries in the Carter Exhibits are spreadsheets expressed to operate at a "base date". They are divided into columns depending upon the ageing of the debt (for example, over 90 days, over 120 days etc) as well as total debtors (total open). The information in those columns is presented in rows, which purport to provide a "profile" for certain subcategories of debtors: for example, "slow payer", "fraud", etc.

[702] As far as I can tell from the evidence, it appears that the profile summaries were located in One.Tel's SAS system, which is not in evidence in the proceedings. However, on the Ferriers I:drive there is a subfile called "SAS Help" which provides instructions for navigating through the SAS system into ledgers and profile summaries (see MTB 8/83-97, evidence which was served only after I had delivered my judgments on the admissibility of documents and Mr Carter's principal report). The help guidelines tell the reader how to gain access to information concerning One.Tel KPIs, including, in the collections area, "past profile summary reports", "profile summary differences" and "increases in > 90 day debt". The instructions say (MTB 8/87) that "past profile summary reports" will "show you the Profile Summary for the date you select" which is "the debt at this date". Navigating to "Profile summary differences" will show differences between past and present profile summaries, and "basically shows you how the debt has moved".

[703] It seems to me that the help guidelines provide some evidence that if a document purporting to be a profile summary was found on the SAS system by following the steps set out, it would provide information about One.Tel Australia's total debt for the selected date, and also information about the ageing of that debt (since the comparison of profile summary differences would show how the debt had "moved", presumably between ageing categories). The document that would be found by navigating to "increases in > 90 day debt" appears to be a different document, which gives information from a selected start date to a selected end date, apparently debtor by debtor: see Ex MTB 8/90. Documents of that kind are not in evidence.

[704] It is to be expected that a large company such as One.Tel would have an information system providing real-time or close to real-time information about total debtors, ageing, and increases in at least some ageing categories (such as over 90-day debt), and perhaps also information about risk profiles of debtors. When the company's auditors at the time, BDO Nelson Parkhill, made recommendations to change the method of provisioning for doubtful debt, they obviously, and apparently rightly, assumed that information about total debtors and ageing categories would be available: see Ex CED 3-68.

[705] Moreover, such information would have obvious utility for the proof of ASIC's case in the proceedings. In the nature of the telephony business, trade debtors are very numerous and usually owe only small amounts. Therefore the task of identifying from One.Tel's financial records the total amount of unpaid debts in each category of ageing, and working out the risk profile of the debtors, in the absence of a computer program generating such information on the system, would be enormous. If the profile summaries were not available, there would be effectively no reliable evidence of such matters in the present proceedings.

[706] A problem arises, however, because the SAS system was not in evidence and is apparently no longer available. The profile summaries upon which ASIC relies were sourced from various places. Pages 8 0001-8 0002 were found in the Ferriers I:drive. The Carter Exhibits index claims that the provenance of the documents at Exs 8 0007 and 8 0012 is through documents obtained by Ferrier Hodgson from Piper Alderman, by a process I have described in the discussion of business plans and budgets above. As to the remainder of the profile summary documents in the Carter Exhibits, Kim Morison, general counsel at Ernst & Young, provided an affidavit dated 25 March 2004 in which she identified various documents from the Carter Exhibits as forming part of the business records of Ernst & Young coming from identified sources, which she tabulated. The tabulated documents include the present ones.

[707] Additionally, Mr Allsopp, an ASIC solicitor, gave evidence of having located in the Ferriers I:drive a subfile called "Revised Debtors Summary 210501.xls" in which there is a document called "Collections Profile Summary -- Base Date: 18 May 2001", which has been received into evidence: Ex CRA 2/99. Mr Allsopp has also recovered from the Ferriers I:drive some internal One.Tel information that tends to explain some of the risk categories used in the profile summaries: affidavit of 31 March 2005 and Ex CRA 1/1-10. Some other profile summaries have been tendered in MTB 8 (for example, MTB 8/233, 8/41, 8/41A), and there are some in the defendants Tender Bundle, vol 9.

[708] I have decided, over objections, to admit these documents into evidence, but the question remains whether they should be given any weight. ASIC has not brought forward any witness to identify the tendered documents as profile summaries in final form used for the purposes stated in the help guidelines for the SAS system, or to explain the contents of any such document.

[709] The defendants have submitted that Mark Basman, collections manager at One.Tel Australia, provided assistance to ASIC and Mr Carter in various ways, including assistance with respect to the profile summaries, and was available to be called. They submitted that the court should take into account the absence of such explanatory evidence, for the purpose of applying the principle in Blatch (the principle is considered in Ch 3). In my opinion this is an appropriate occasion for applying that principle. It was within ASIC's power to call Mr Basman. While it was open to the defendants to call him or to require ASIC to do so (Evidence Act, s 167), it was ASIC who sought to tender documents that on their face needed some explanation, and ASIC who had obtained assistance from Mr Basman (albeit with compulsory powers available to be used if necessary) about matters within his responsibilities at One.Tel, including the profile summaries. It was therefore appropriate for ASIC rather than the defendants to fill a potential evidentiary gap in ASIC's case. While hearing Mr Basman's evidence would have added to the length of the trial, the additional length may not have been more than a few days, because Mr Basman's responsibilities at One.Tel were within a relatively narrow compass and so his cross-examination would not have ranged across the vast evidence of this case. The addition of a few days to the length of the trial is to be compared with the effect of leaving the court with so much uncertainty about the status and meaning of the documents, and also to be compared with the amount of time spent by the parties preparing, and by the court hearing and dealing with, submissions that are largely a consequence of the absence of any clear evidence from a witness explaining the documents.

[710] Having chosen not to call any witness to explain the profile summaries, ASIC now seeks to rely on them, particularly to prove its pleaded case about the inadequacy of the provision for doubtful debts. For that purpose, it invites the court to draw inferences from the documents themselves.

[711] ASIC relies on the profile summaries for two evidentiary purposes: first, to show the level of total debts and the level of debt in various ageing categories on the base dates of the profile summaries, and consequently to show movement in those levels over time; and second, to provide information about the risk profile in each category of aged debt, by having regard to the profile categories set out in the documents. These matters are considered in Ch 19. To deal with that part of ASIC's case, it is necessary to determine the evidentiary weight to be given to some but not all of the profile summaries that are before the court. That determination should take into account, in my view, the fact that ASIC did not call any witness, including Mr Basman, to explain the documents, and the consequences of that fact under the principle in Blatch, discussed in Ch 3. It should also take into account the onus and standard of proof discussed in Ch 3.

[712] ASIC's use of the profile summaries to prove categories of ageing is in two parts. First, ASIC seeks to prove the level of over 270-day debt at the end of January and the end of March, by relying on the profile summaries for 31 January at Ex CE 8 0007 and for 30 March at Ex CE 8 0013. It submits that an increased provision for doubtful debt should have been in place at all times from January to April 2001, having as one component a provision for 100% of the over 270-day debt. Consequently proof of the level of that debt in January and March is an important step in ASIC's case.

[713] Second, it then submits that an additional provision was needed of 10% of billings. In order to demonstrate that 10% is the correct figure, ASIC seeks to prove the extent to which current debtors in a particular month continued to be outstanding after the passage of time. For that purpose it relies on a number of profile summaries in addition to the January and March documents: for example, it submits that the over 270-day debt at 30 March 2001 is the residue of the current debtors as at 30 June 2000 remaining uncollected on 30 March. The percentage that the uncollected 270-day debt bears to the current debtors is 12.51%. For this part of its argument it relies on the January and March profile summaries, a collections profile summary of 31 May 2001 (Ex MTB 8/41), and also some older profile summaries (31 May 2000, Exs 8 0001 and MTB 8/165; 30 June 2000, Exs MTB 8/233 and 8/168; and 31 October 2000, Ex MTB 8/41A), for the purpose of ascertaining how much of the debt that was current 210 or 270 or 300 days earlier remained outstanding in January or March 2001.

[714] In its pleading submissions, ASIC abandoned its allegations about debtors and ageing of debtors for February and April. It seeks to prove only its pleaded allegations about the total debtors and aged categories (over 90 days, over 180 days and over 330 days) for December 2000, and January and March 2001, and for those figures it relies on the profile summaries at Exs CE 8 0004 (December), CE 8 0007 (January) and CE 8 0013 (March).

[715] As to proving risk profiles, ASIC wishes to argue that One.Tel's customer base for Australian fixed wire telephony was of poor quality. It seeks to establish this by, inter alia, deducing a risk profile from the profile summary as at 31 January 2001: Ex CE 8 0007. It claims that all of the profile categories in that profile summary, except for a few, identify high or unacceptable risk. On that basis, it contends that about 26% of the current debts in the profile summary were doubtful debts.

[716] To assess ASIC's submissions as to the ageing of debtor and the risk profile of the debtor population, it is necessary to determine whether the profile summaries that I have identified prove the matters for which ASIC relies upon them. ASIC submitted that the court should consider only the weight of the documents upon which it wishes to rely, rather than the profile summaries as a whole, even where there are other profile summaries bearing the same date and containing different figures (ASR [5323-5356]):

The fact that there may be other documents relating to the same dates prepared on different bases which are unknown or that there may be aspects of the material in the documents upon which ASIC relies ... which are not explained by the evidence, does not deprive the documents of utility, because what is sought to be drawn from the documents by ASIC as to the ageing and risk categories of the debtors is clearly indicated by the documents.

[717] In my opinion, this approach is not entirely correct. While it is unnecessary to make any determinations about documents not relied on, a proper determination of the weight to be afforded to the profile summaries on which ASIC does rely requires some consideration of the tendered profile summaries as a class, to see whether they have any characteristics that make them altogether unreliable.

[718] Some of the profile summaries are entitled "collections profile summary" and some merely "profile summary". Some have the subheading "360 day report" and others the subheading "drilldown report". There is no explanation in the evidence of whether a "collections" profile summary is different from a mere "profile summary", or any explanation of a 360-day report or a drilldown report and how they differ. These differences and the absence of explanation raise a question as to just what the tendered profile summaries are saying, and a question as to whether one document can safely be compared with others. They also raise a question as to whether the tendered documents are the final profile summaries that would have been located through interrogation of the SAS system, or merely drafts or documents prepared for some special purpose.

[719] The defendants have prepared a useful summary of tendered documents relating to the quantum and ageing of trade creditors (DPS [5321], though it is to be noted that the figures for the drilldown and 360-day reports for 30 April have been incorrectly transposed). If one compares the drilldown reports and 360-day reports for the 3 months where figures of both kinds are available (March, April and May 2001), it appears that the total debtors are about $8 million higher in each drilldown report than in the 360-day report for the same day. The figures in the various ageing categories are correspondingly different: for example, the over 90-day figures in the drilldown reports are about $6 million higher than in the 360-day reports. It is not clear whether those differences are inherent in the methods of calculation of drilldown and 360-day reports respectively, or are merely coincidences in the 3 months for which the figures are available.

[720] In circumstances where ASIC wishes to prove, by relying on profile summaries, that over 270 days debtors increased by $10 million from $43.7 million in January to $53.7 million in March, as a foundation for arguments about inadequate provisioning, an error of some millions of dollars would be highly significant. And yet if the January "profile summary", on which ASIC relies, which is not designated as either a drilldown or 360-day report, were in fact a 360-day report, which ASIC seeks to compare with the "collections profile summary -- drilldown report" for 30 March, the comparison is misconceived and generates the appearance of an increase of several million dollars which is simply false. The same problem arises with the other profile summary that ASIC uses in order to prove an increase in the ageing of debt, namely the profile summary at 3 January 2001, which is a "collections profile summary" but is not called either a drilldown or 360-day report.

[721] ASIC has endeavoured to overcome this problem by confining its attention to profile summaries whose total debtors are close to, or can be reconciled to, the trial balance trade debtors figure for the same day. Thus, the figure for total debtors in the profile summary for 31 October 2000 (Ex MTB 8/41A) is $87.5 million, which is within $700,000 of the trial balance (APS Sch 13); the figure for total debtors in the profile summary for 3 January 2001 (Ex CE 8 0004) is $144.4 million, which is close to the trial balance at 31 December 2000 of $144.6 million; for 31 January 2001, the figure in the profile summary (Ex CE 8 0007) is $152 million and the trial balance is $152.5 million; for 30 March 2001, the figure in the profile summary (Ex CE 8 0013) is $151.7 million, against a trial balance of $153.9 million at 31 March; and for 31 May 2001, the drilldown figure in the profile summary (Ex MTB 8/41) is $169.6 million as against the trial balance of $168.3 million.

[722] In their submissions the defendants placed great emphasis on the fact that, although in the cases I have just described the total debtors in the profile summaries are close to the trial balance figures, they are nevertheless different, their argument being that even small differences of amounts might suggest fundamentally different methods of preparation: DPS [5337] and following. I think this argument misses the point of ASIC's recourse to trial balance figures (see ASR [5337-8]), which is that if the total debtors figure in a profile summary is close to the total population of debtors of the Australian operations as stated in the trial balance, that is enough to show that the profile summary purports to deal with the whole of the Australian debtor population and not merely a subset. It seems to me that a minor difference between the trial balance figure and the total debtors figure in the profile summary is not an impediment to this argument.

[723] The inferences that ASIC seeks to draw are that, since the trial balance figures are reliable, a profile summary that contains a total debtors figure approximately the same as the trial balance can also be treated as reliable, and can be taken to cover the whole population of debtors of the Australian operations. The trouble with making those inferences is that the correspondence of total debtors figures between profile summary and trial balance may be merely a coincidence. The profile summary for 28 February (Ex CE 8 0012) has total debtors of $130.4 million compared with the trial balance for that day of $146.6 million (Ex CE 20059); and the profile summary for 30 April (Ex CE 80014) has total debtors of $160.5 million (drilldown) and $152.4 million (360 days), compared with the trial balance on 30 April of $146.5 million (Ex CE 20080). No explanation is offered for the large differences between the trial balance and profile summary figures in the case of February and April.

[724] ASIC seeks to avoid this difficulty by abandoning reliance on the February and April figures, but doing so does not overcome the problem that, in circumstances where:

•

the profile summaries that are in evidence have various titles and descriptions, which are unexplained;

•

two out of the five profile summaries with 2001 dates have total debtors figures way out of line with the relevant trial balances, and the variance is not explained;

•

the computer system that held the profile summaries in final form is not available, and the documents in evidence have come from various sources where they might have been saved for reasons unconnected with authoritative status (for example, a profile summary might have been saved in the I:drive or in hardcopy precisely because it was a draft upon which the person saving it intended to do more work);

doubt arises as to whether any of the profile summaries in evidence can be relied upon as accurate evidence of the ageing or risk profile of the Australian debtors.

[725] It might be thought that if the total debtors column in a profile summary corresponds with the trial balance for the same day, even if purely coincidentally, it can nevertheless be inferred that the break-up of total debtors into ageing bands can be accepted. But unless we know the difference between a drilldown under 360-day report and whether the profile summary is one or the other or some third category, we cannot make any confident assumptions about the criteria of classification that have been used.

[726] Several other matters add to that doubt. The profile categories are not uniform: for example the profile summaries for 31 October 2000 and 31 January 2001 include a profile called "Billing Problem" ($3.1 million as at 31 January), but the document at 30 March 2001 has no such profile, while on the other hand it has a profile called "CLEC" ($14.3 million), which does not appear in the other documents: see DPS [5325]. Some of the documents (for example, the 31 October profile summary) contain negative numbers, which are not explained: see DPS [5325].

[727] The profile summary for 31 October 2000 raises an additional concern because, though the total debtors in that document are close to the trial balance, it is described as a 360-day report, and as noted above, the total debtors for other 360-day reports tend to be around $8 million lower than the total debtors in the drilldown reports for the same day. There is therefore a real prospect of error if the aged creditors figures in the 31 October report are compared with the figures in drilldown reports, such as the 30 March drilldown report.

[728] These concerns are not only about whether a particular profile summary can be reliably interpreted; they are also about whether comparisons between profile summaries can be safely made. This is in circumstances where, as I have explained, ASIC's case depends upon making such comparisons: comparisons to ascertain the growth in 270-day debt, and comparisons to ascertain what percentage of current debtor and a particular date remains unpaid as another date. Such comparisons are valid only if it is more likely than not that the categories compared are the same.

[729] There are additional concerns when it comes to using the profile summaries as evidence of the risk profile of the debtors. Mr Rich gave evidence (1 JDR 545(b)) that the profiles set out in the profile summary were not "risk" profiles, but simply a categorisation of outstanding debtors in order to assign those debtors to an appropriate cycle of collections activity. ASIC claimed (ASR [5066(a)]) that Mr Rich's statement does not make sense in view of the existence of categories such as Fraud, Uncontactable, Written-Off and Bankrupt. But it seems to me that such categories might well be useful in a process of assigning problem debtors to the correct collection cycle; for example, in a case where it was thought that the debtor had been guilty of fraud or was bankrupt, a collections cycle involving such things as letters of demand would be pointless. I therefore disagree with ASIC and I accept Mr Rich's evidence.

[730] Mr Rich's evidence gives rise to a question about the correct interpretation of the profiles stated in the profile summaries. If they are for the purpose of determining the correct collections cycle, the quantity of debt in each category may say very little about risk of payment default. Further, a debtor once assigned to a category may remain there even if the risk profile changes, or be moved to another category even if the risk profile has remained the same, for pragmatic reasons.

[731] There are other difficulties about using the profile summaries as risk profiles. One is that there is only limited evidence about the meaning of the profile categories, found in the "recoverable debtors" documents (Ex MTB 8/205-6) and in Ex CRA 1 to Mr Allsopp's affidavit of 31 March 2005, especially at pp 1, 3 and 9. In considering the submission by ASIC that the profile summary of 31 January 2001 showed that 26% of total current debt was doubtful, I point out that several of the profile categories in that document are unexplained, and that in other cases the evidence available is insufficient to support ASIC's contention that the risk is high or unacceptable: see 19.6.3.2.

[732] In light of all these matters, I have reached the conclusion that the court should not conclude, to the applicable standard of proof, that the profile summaries upon which ASIC relies for 31 October 2000, 3 January 2001, 31 January 2001, 30 March 2001 or 31 May 2001 are:

•

final and authoritative statements of the distribution of total debtors of the Australian operations across ageing bands and into risk categories;

•

documents that may be safely compared with one another;

•

reliable evidence proving the ageing of debtors of the Australian operations;

•

reliable evidence proving the risk of payment default.

The profile summary for 30 June 2000 and the aged debtors summary for 31 May 2000 raise some different considerations, to which I now turn.

[733] The profile summary at 30 June 2000 (Ex MTB 8/233, one of four profile summaries as at that date, as noted below) gives a total debtors figure of $78.1 million, whereas the trial balance at that date (Ex CE 2 0015) gives a trade debtors balance of $86.1 million. However, there is a reconciliation in evidence, in the form of a document in the I:drive entitled "AR Reconciliation", apparently created in early August 2000: Ex MTB 8/167. The document reconciles the trial balance figure to an "Aged debtors report @ 30/6/00", showing a debtor balance in that document at precisely the same figure as appears in the "total open" column in Ex MTB 8/233. That seems to me sufficient evidence to identify Ex MTB 8/233 as the authentic profile summary at 30 June 2000. Given that identification, it is appropriate to infer that Ex MTB 8/233 is the document one would have discovered on the SAS system by following the help guidelines in the I:drive, if the exercise was carried out after 30 June 2000. It is therefore appropriate to make the additional inference, in accordance with the guidelines, that the aids to debt or categories in that document were in their final form and can be relied on. The reconciliation adjustments appear to have involved accruing some June billing revenue to July and bring into account some payments. As ASIC contended in APS Sch 14, the adjustments affect and the current debtors, and ASIC has taken them into account accordingly. My conclusion is that Ex MTB 8/233 can be relied on as evidence of the ageing of the debtor population of the Australian operations as at 30 June 2000, though for the reasons given above are not persuaded that it can be used to establish risk profiles.

[734] The only other aged debtors document relied upon by ASIC is Ex CE 8 0001, relating to 31 May 2001. It is not a profile summary and was not taken from the SAS system. It is called an "aged debtors summary" and it is quite different in format from the profile summaries. It gives figures that appear to be for current debtors and then debtors at 30-day intervals up to 330 days, for One.Tel, One.Net, One.Card and Wireline, and totals for each of those businesses, with a grand total of $74.168 million. The figure it contains for "Total", $74.17 million, is different from the trial balance figure at 31 May (Ex CE 2 0009) of $79.4 million. However, there is a reconciliation in the I:drive, which reconciles the Adept balance of $79.44 million (which is the trial balance) with an aged creditor report on balance which is precisely the same as in Ex CE 8 0001. The reconciliation is an adjustment of billing runs and payments as between May and June. It seems to me that this document does not share the problems found in the profile summaries, and I should accept it as a business record proving what it states.

4.8.7 Intranet cash balances

[735] One.Tel's "intranet" site (also referred to in submissions as the "Lotus Notes database") contained daily cash balances and total daily cash inflows and outflows for the Australian and international operations, although it did not separately disclose this information for the individual Australian business units and did not provide any prospective information. The intranet figures did not provide for unpresented cheques and did not identify any balances not available to meet general operational expenditure. Documents treated by Mr Carter as displaying daily intranet cash balances for the various components of the One.Tel Group, and for the group as a whole, are behind Tab 9 of the Carter Exhibits. In final submissions the intranet cash figures were generally accepted as correct and were not challenged.

4.8.8 Bank reconciliations

[736] One.Tel maintained bank reconciliations, which reconciled the cash balance as per the bank statement for a particular account with the cash balance as per the general ledger. The bank reconciliations set out, inter alia, an unpresented cheque listing. Documents treated by Mr Carter as general ledger bank reconciliations for specified One.Tel bank accounts for the Australian operations, in particular its principal operating account with ANZ Queensland, are behind Tab 10 of the Carter Exhibits. These documents were treated as accurate records in final submissions.

4.8.9 Daily cash flow spreadsheets

[737] Documents treated by Mr Carter as daily cash flow spreadsheets for the Australian operations are behind Tab 11 of the Carter Exhibits.

[738] The One.Tel Group had a system of recording, in daily cash flow spreadsheets, actual cash flows (based on debits and credits recorded on the bank statements) and revised forecasts based on expected receipts and payments. The spreadsheet for each day was saved to a file number on the finance directory of the I:drive, in the Treasury and cash flow subdirectories. The file number usually reflected the date and month on which the spreadsheet was prepared (for example, "2905.xls" was prepared on 29 May 2001): see Mr Carter's principal report, paras 142 and 143 and fn 74. Daily cash flow spreadsheets are behind Tab 11 in the Carter Exhibits. As Mr Carter said, typically forecast cash flows would take into account the expected timing of cash receipts during the month and the expected dates for payments to creditors.

[739] There is a great deal of evidence about these documents, including evidence of Mr Carter, Ms Randall and the defendants. Generally their provenance has been accepted, but there is much controversy about the accuracy of their contents, particularly those spreadsheets which reflected intervention from the defendants and other senior management, such as 2403C.xls and 1104jrmssh.xls.

4.8.10 Unreleased/unpresented cheques listings

[740] Documents treated by Mr Carter as unreleased cheques listings or in some cases unpresented cheques listings for the Australian operations are behind Tab 12 of the Carter Exhibits. They were treated as accurate records in final submissions.

4.8.11 Deferred payment lists

[741] Documents treated by Mr Carter as deferred payment lists in respect of the Australian operations are behind Tab 13 of the Carter Exhibits. These documents are very controversial and were the subject of much evidence from Ms Randall and the defendants.

4.8.12 One.Tel funding requirement spreadsheets

[742] There are four sets of a two-page document headed "One.Tel Funding Requirement as at 9 October 2000" at Ex MTB 2/539-546. The copy of the document at Ex 2/539-540 appears on its face to be the final version or a revised draft of the other three documents, which have handwriting on them and in some cases handwritten notes appear to have been taken into account in the first document.

[743] The first page of the document lists cash transfer requests and gives a movement analysis and a budget forecast comparison for October. According to the document, the October forecast for the Australian operations was that the cash flow would be about $8 million behind budget. Then there is a heading, "Action taken to achieve cash flow budget: -- for Australia subtotal", which lists the following items:

[744] There is a similar document headed "One.Tel Funding Requirement -- November as at 10 November 2000" at Ex MTB 2/564-5.

[745] Mr Silbermann referred to these documents in his affidavit: MS 1026-9. He said he had not seen the spreadsheets other than in course of preparation for the proceedings, and he did not recognise the handwriting on some of them. He explained that until about February 2001, One.Tel had most of its cash reserves in Australia held in an investment account with ANZ. He said that as the funds in the operating account were utilised, it was necessary from time to time (usually monthly) to transfer money from the investment account to the operating account. He said that when this was required, Mr Barnes would provide him with a form to sign to authorise the transfer of funds. He suggested that the spreadsheet might have been prepared in connection with that process.

[746] Mr Silbermann commented on two of the items under the heading "Action taken to achieve cash flow budget". As to "Vendor Financing", he explained that as part of its normal business activity One.Tel's policy was to look for vendor finance for any capital equipment purchases, but this was not in order "to achieve cash flow budget". As to the "Optus Cheque Swap deferral (due 31/10)", he said there was a long-standing practice between One.Tel and Optus of One.Tel making its monthly payment to Optus for carrier service (other than the digital service which was typically paid mid-month) in conjunction with the payment by Optus to One.Tel of the connection fees paid for connections of new service provider customers. He said the practice of swapping cheques between One.Tel and Optus typically occurred at the beginning of each month, and had nothing to do with achieving any cash flow "budget".

[747] Mr Silbermann did not explain the "Telstra Deferral" or the "Global One deferral", which might be taken to suggest, as early as October 2000, some deliberate process of deferral of due amounts beyond month-end in the fashion suggested by Mr Carter, and therefore to support ASIC's claim that there was a process of management of creditors and deferral of payments during 2001. But no-one has come forward on behalf of ASIC to identify the document in final form or to explain its contents or how and why it was used. It would be unsafe to treat the document as evidence of a process or policy of deferral of due payments to creditors.

4.9 One.Tel's listing and share price

4.9.1 Listing

[748] One.Tel was admitted to the official list of the Australian Stock Exchange in November 1997. The closing share price on the first day of trading (13 November 1997) was $2.05: CED 3-44.

4.9.2 Share price in 1998/99

[749] In the first year after listing, One.Tel's closing price was in the range of $1.70-$2.70, generally with an upward trend: CED 44 and following. There was a significant rise in the share price from November 1998 and by the end of the year 1998 the closing price was at about $5.80. The closing price reached $12.63 on 16 February 1999, shortly after the announcement of the PBL/CPH and News investments. The shares were suspended from trading during May 1999, apparently to allow for the adjustment produced by the capital reduction and bonus share issue described in Ch 6. At the time of suspension the closing price was $12. On 25 May 1999 trading resumed at $1.08, reflecting the reconstruction rather than any decline in market value. During the remainder of 1999 the closing price was in the range $0.97-$2.48, generally with an upward trend, especially in November/December. The share price appears to have peaked, after the capital restructuring, in late November 1999.

4.9.3 Share price in 2000/01

[750] Trading in One.Tel's shares opened at $2.38 on 4 January 2000 and on 30 June 2000 the closing price was $1.10. During that 6 months the highest closing price was $2.44 (on the first trading day in January 2000) and the trend was generally a gradual decline, though with quite a steep fall in April 2000 that coincided with the collapse of technology stocks on the NASDAQ market on Wall Street and elsewhere (commonly referred to as the "Tech Wreck") and a consequent general decline in the market including telecom stocks: Ex P7 489. By the end of April 2000, the closing price was $1.18, and that price was approximately maintained until September 2000, when it dipped below $1, and from September to December 2000 it generally declined so that by 29 December 2000 it was $0.46. While the decline in April 2000 is at least partly explicable by the general market circumstances that I have mentioned, it seems that the steady decline in the share price for the remainder of the year cannot be explained simply as the product of general market influences.

[751] In the period from 1 January to 16 May 2001 the closing price fluctuated from $0.475 at the beginning of the year, up to $0.59 in late January, thereafter declining so that by mid-March it fell below 40c before recovering a little in April and then falling back to 32c on 16 May. Messrs Rich and Keeling ceased to be directors on 17 May. Thereafter there was a further decline in the share price so that on the last trading day, 25 May 2001, the closing price was 16c.

[752] It is not easy to say precisely when the PBL/CPH and Dorigad investments in One.Tel went "under water", and indeed the early investments by Dorigad and CPH may have remained positive until quite late in One.Tel's lifetime as a listed and traded entity. But it appears that the substantial PBL and News investments of February 1999 were at a net price well above the market price from February 2001 onwards: in his evidence Mr Packer Jnr said the entry price for PBL was 60c per share after taking into account the pre-paid advertising arrangement: T 9152. The further PBL investment of May 2000, by the exercise of options over 140 million shares, was for a consideration of $1 plus the option consideration, so that part of the investment was under water from about September 2000. A Business Review Weekly article of 20 April 2001 claimed that PBL invested $354 million in the company (that is, the initial $215 million in February 1999 and the further $140 million in May 2000), and that by 20 April 2001 the investment was worth $207 million at current prices (Ex 5 JDR 1856; the valuation at current market price seems approximately right having regard to information in the 2000 Manual Report at Ex CE 5 0008).

5. Witnesses

[753] The parties made submissions about the evidence of many of the witnesses who gave oral testimony. Some but not all submissions went to credit. I shall deal with each of the witnesses about whom submissions were made, adopting the defendants' order of treatment:

•

5.1 Mr Packer Jnr

•

5.2 Mr Murdoch Jnr

•

5.3 Mr Jalland

•

5.4 Mr Yates

•

5.5 Mr Kleemann

•

5.6 The UK witnesses (Mr Boaden, Mr Werner, Mr Weston and Mr Howell-Davies)

•

5.7 Mr Carter

•

5.8 Mr Long

•

5.9 Ms Randall

and then:

•

5.10 Mr Maizels and Mr Harman

•

5.11 Other witnesses for the plaintiff (Mr Adams, Ms Ashley, Mr Butcher, Mr Hockings, Ms McMahen, Mr Pryke, Mr Robertson, Messrs Simmonds and Shear, Messrs Sherman and Walker, Mr Smith, Mr Spratt, Ms Thomas, Mr Warburton)

•

5.12 Mr Rich

•

5.13 Mr Silbermann

•

5.14 Witnesses who were not called

5.1 Mr Packer Jnr

5.1.1 General

[754] ASIC claimed in its submissions in chief that Mr Packer Jnr was an impressive witness, who gave his evidence "in a very thoughtful and intelligent manner and, where appropriate, firmly rejected suggestions made to him by the cross-examiner": APS [1996]. It said the court should accept Mr Packer Jnr's evidence in preference to the evidence of Mr Rich and Mr Silbermann where there is a conflict: APS [1998].

[755] The defendants launched a lengthy assault on Mr Packer's credibility and reliability (DPS [6057]-[6202]), designed to persuade the court that he was a witness with an agenda, a memory that could not be relied on, and an antipathy against Mr Rich; that he was not a witness of credit; and that his evidence should not be accepted unless corroborated by witnesses other than those associated with PBL/CPH: DPS [6202]. ASIC's response is at ASR [6057-77]-[6198-6201].

[756] Having considered these submissions, I have decided that I should not reach any general conclusion about Mr Packer Jnr's credibility and the reliability of his evidence. However, there are some matters of concern about his evidence, which have led me to conclude that I should be cautious about giving weight to it in the face of other evidence. I shall assess each conflict between his evidence and the evidence of the defendants on its merits, though in the light of the reasons for caution that I shall identify. That involves rejecting what I regard as the extreme positions taken by both parties, while nevertheless giving some credence to some matters raised by the defendants.

[757] I do not agree with ASIC that Mr Packer Jnr was an impressive witness. In my view, his evidence gave rise to some problems, which I have grouped below at 5.1.2 and 5.1.3. Essentially Mr Packer Jnr appeared to misunderstand the purpose of cross-examination, and treated it as an opportunity to attempt to "put his side of the story" by argumentative and non-responsive answers, and even occasionally evasive answers; and that was coupled with an inability to recollect important matters, raising a question about the reliability of his evidence on the matters that he did claim to recollect. But I do not accept the defendants' submissions to the effect that Mr Packer Jnr deliberately sought to implement an "agenda" or "strategy" in his evidence (if this means anything more than attempting to "put his side of the story"), or had an "unholy alliance" with ASIC (5.1.4), or that his answers were consciously or unconsciously distorted by his self-interest (5.1.5), or affected by the "looming presence" of his father: 5.1.6.

5.1.2 Mr Packer Jnr's attempt to "put his side of the story"

[758] Mr Packer Jnr's evidence was coloured by a misunderstanding of the function of cross-examination. He was asked about a document prepared by Mr Miller and Mr Green. Cross-examination proceeded (T 9721):

Q -- What Miller and Green document are you talking about?

A -- The one I took with me to Cannes that Mr Rich said to me was overly conservative.

Q -- You are very anxious to add that last bit, aren't you?

A -- I'm just trying to give people an accurate representation of the facts, Mr Williams.

Q -- What do you think your role is here, Mr Packer?

A -- To put my side of the story.

[759] Of course, Mr Packer Jnr was given the opportunity to put "his side of the story" in his evidence in chief, which is normally given by affidavit in proceedings in the Equity Division of this court. The idea that he was in the witness box, answering questions in cross-examination, for the purpose of putting his side of the story, led him to give some answers that were argumentative, non-responsive, or otherwise unhelpful. He from time to time endeavoured to convert his answers into advocacy for his point of view. Occasionally his answers appeared on their face to be evasive, though I have not concluded that he had any intention to mislead the court. His misconceived approach to cross-examination was also reflected occasionally in aggressive and even angry answers, on one occasion (on Friday 9 December 2005) accompanied by his banging his hand on the desk in front of him.

5.1.2.1 Non-responsive answers

[760] On a substantial number of occasions, Mr Packer Jnr's misunderstanding of the role of cross-examination led him to seek to add material to his answers, apparently to make a point, notwithstanding rulings from the bench. For example:

•

he was asked a series of questions about his knowledge that local calls were being sold at a loss, and he sought to make the point that the board had been led to expect that the product overall would be profitable: T 9127-143;

•

after answering a question about whether he paid attention to the break-up of figures in September board papers, he added "and I would have paid even more attention to the next page of the board pack": T 9274.

Many other examples could be given, but I think the frequency of non-responsive answers is best demonstrated by noting that, contrary to my usual practice when hearing cross-examination, I judged it necessary to intervene on several occasions, either at the invitation of counsel or on my own initiative, to instruct the witness to confine his answers to the questions asked: T 9144; T 9282; T 9531; T 9591.

5.1.2.2 Evidence that appears on its face to be evasive

[761] I shall give two examples of what appears on its face to be evasive evidence. The first example relates to counsel's attempt to have the witness admit that his father was not happy with Mr Kleemann in April 2001 (T 9605):

Q -- Mr Rich said, "Why can't you send in Geoff Kleemann? He's the one we've just spent six months with and he really understands the business". Do you remember him saying words to that effect?

A -- No.

Q -- And you said, I suggest, "No, Dad's annoyed with Kleemann", didn't you?

A -- I can't recall.

Q -- It was the case, wasn't it, that at this stage your father was annoyed with Geoff Kleemann?

A -- I think towards the end of April when it became apparent that we were going to send in a team, my father wanted, and I wanted, fresh eyes.

Q -- Your father expressed to you the view that he was unhappy with Geoff Kleemann in relation to One.Tel, didn't he?

A -- I can recall my father's view being that fresh eyes should go in there to look at the issue.

Q -- Your father was unhappy with Geoff Kleemann and his performance of his monitoring role on One.Tel by this time, wasn't he?

A -- I think it's fair to say that he wasn't -- he didn't think it had been Mr Kleemann's finest work.

Q -- And he expressed himself in no uncertain terms about that, didn't he?

A -- When you say "no uncertain terms"--

Q -- You understand what that means, don't you?

A -- I can't recall him expressing it in terms -- in theatrical terms the way you're describing.

Q -- Did he say words to the effect that "Kleemann's fucked up"?

A -- I can't recall.

Q -- Something to that effect?

A -- Possibly.

[762] Another example of what appears on its face to be evasive evidence relates to the question whether he discussed the January and March board papers with Mr Kleemann. He was asked whether he and Mr Kleemann discussed the January and March board papers before each of those meetings, and he said "in all probability we would have": T 9317. A little later the following cross-examination occurred (T 9319-21):

Q -- As a result of the matters that you have set out in para 27 of your 2002 affidavit, wasn't it the case that you wanted to go through the board papers for January and March 2001 carefully with Mr Kleemann?

A -- I can't recall if I went through the board papers with Mr Kleemann.

Q -- It is likely you did, isn't it?

A -- Not necessarily.

HIS HONOUR: I'm a bit puzzled in view of earlier evidence. I will just turn up the reference to it -- T 9317, about halfway down, "Didn't you and he discuss ...".

MR WILLIAMS: Q -- The question at that part of the transcript was as follows:

Q -- Didn't you and he discuss the January and March board papers before each of those meetings?

A -- I believe we -- in all probability we would have.

That was an honest and accurate answer, wasn't it?

A -- I believe so, yes.

Q -- The last piece of evidence I will just read to you:

Q -- As a result of the matters that you have set out in para 27 of your 2002 affidavit, wasn't it the case that you wanted to go through the board papers for January and March 2001 carefully with Mr Kleemann?

A -- I can't recall if I went through the board papers with Mr Kleemann.

Q -- It is likely you did, isn't it?

A -- Not necessarily.

Do you detect any inconsistency between that and the earlier evidence that you have said is honest and accurate?

A -- By "not necessarily" I'm implying that it is not 100% sure that I went through that -- through the board packs with Mr Kleemann. I think it's -- I have no specific recollection. I don't go through all of our board packs with Mr Kleemann. I'm happy to accept that it's possible, even likely, that I did, but I do not accept ...

HIS HONOUR: Q -- Your evidence is "We probably would have".

A -- We probably would have.

MR WILLIAMS: Q -- Do you want to change that evidence now?

A -- Excuse me for being slow. I, with the greatest of respect to the court, don't see that those two pieces of evidence are necessarily contradictory.

[763] I am conscious of the risk of unfairness to a witness in taking passages in cross-examination out of context and focusing attention on them. A witness who is cross-examined quite aggressively for many days might occasionally give evidence appearing to be (but not in fact) evasive, simply because of temporary uncertainty as to where the aggressive cross-examination is leading. But I think these two examples are not of that kind, as the thrust of the cross-examination was reasonably clear from the outset. Moreover, they are not the only illustrations: other examples of what I regard as evidence on its face evasive are given by the defendants at DPS [6109], [6110] and [6111]. I do not find that in any of these cases the witness had a deliberate intention to mislead, or to suppress the truth. Rather, it seems to me that he attempted to avoid giving direct answers because of his perception that his role in cross-examination was to put his side of the case, and therefore to spar with counsel when dealing with matters that did not help his case.

[764] The defendants were also critical of Mr Packer Jnr's evidence about whether his father was resistant to investing in One.Tel or had in fact taken an interest in the company from as early as 1995 (DPS [6119]-[6126]), and also about whether Mr Packer Jnr himself had obtained any profit through the Dorigad investment in One.Tel by virtue of the return of capital that occurred at the time of the PBL and News investment in One.Tel (DPS [6178]-[6190]). That evidence, considered in Ch 6, was confusing and unsatisfactory, but in my opinion it does not indicate anything about the reliability of the evidence of this witness on other matters. The defendants were not required to serve their affidavits prior to the close of ASIC's case (well after Mr Packer Jnr had given evidence), and they did not do so. It was obvious that the witness did not expect counsel's questions about early investments in One.Tel, Dorigad and Mr Onisforou, and had not prepared the subject matter. I formed the view that his very uncertain evidence about his father's position, and about the financial aspects of the transactions generally, was related to lack of notice of this line of questioning and the complexity of the structured investments that were apparently at stake.

5.1.2.3 Was Mr Packer Jnr pursuing "an agenda"?

[765] The defendants submitted, as I have said, that Mr Packer Jnr was a witness with an agenda: DPS [6057]. According to their submissions, his agenda was one of self-interest and self-protection: to protect his own reputation, to protect himself and PBL from regulator scrutiny, to blame Mr Rich and Mr Silbermann for all that had occurred in relation to One.Tel, and to portray himself as an innocent victim: DPS [6058]. They said that when it suited his interests to do so, Mr Packer Jnr constructed evidence from a close study of contemporaneous documents (DPS [6059]), whereas when recollection might not suit his interests, he answered the cross-examiner by saying he could not recall. They claimed that Mr Packer Jnr and his advisers developed a strategy to this effect, so as to defend his position that he was "profoundly misled", notwithstanding his intimate involvement with the company over a period of years: DPS [6061].

[766] The defendants identified the following features of Mr Packer Jnr's evidence in cross-examination, in order to show how he was pursuing an agenda (DPS [6093]):

•

he was concerned to downplay his participation in management decisions and to rebut any suggestion by the cross-examiner that he or PBL had been "involved" in the affairs of One.Tel in any controlling or directing capacity: for example, T 9427, T 9435;

(1)

he sought to emphasise that Mr Rich had always been "confident" or "adamant" about achieving the company's forecasts, and he resisted any suggestion that Mr Rich's statements contained any qualifications: T 94501, T 9507, T 9542, T 9280;

(2)

he sought to downplay the role and influence of his father in the events relating to One.Tel.

[767] The defendants' submissions under the heading "Downplaying knowledge of and involvement with One.Tel" (DPS [6131]-[6177]) were mostly directed to establishing the true extent of Mr Packer Jnr's participation in One.Tel management matters, and on the whole these submissions referred to Mr Packer Jnr's answers in cross-examination as supporting that presentation, and did not attack his evidence. I consider the evidence concerning the extent of Mr Packer Jnr's involvement in One.Tel whenever it arises in my chronological account. For example, the early involvement is in Ch 6. Generally speaking, I accept the defendants' account.

[768] ASIC drew attention to the fact that the defendants did not suggest in submissions, and did not suggest in cross-examination of Mr Packer Jnr, that his knowledge about One.Tel extended at relevant times to any of the adverse financial matters pleaded in the statement of claim: ASR [6137-77]. That is hardly surprising, given that the defendants dispute the pleaded financial circumstances. ASIC said it is difficult to know what the relevance of the examination of Mr Packer Jnr's involvement in One.Tel before September/October 2000 might be. It seems to me, however, that one matter of relevance is that the extent of Mr Packer Jnr's involvement in One.Tel, as an experienced businessman with assistance from Mr Kleemann and others at PBL, tends to raise a question as to whether the financial circumstances of One.Tel were as bad as pleaded; another matter of relevance is that the extent of Mr Packer Jnr's involvement tends to undermine his evidence that he was asking very naive questions of Mr Rich in 2001, such as questions about what he needed to know to monitor the business properly, what its key drivers were, and whether there were any disclosure issues in relation to the cash forecast.

[769] The defendants relied on Mr Packer Jnr's evidence about these questions as examples of "downgrading" his role at One.Tel: DPS [6172]-[6173]. Mr Packer Jnr's evidence was that he asked Mr Rich on 19 January 2001 to tell him what the key drivers of the business were, and what he needed to know in order to monitor the business properly. That evidence is dealt with in Ch 7 (January 2001), where I conclude that I should reject Mr Packer Jnr's evidence on that matter in favour of the evidence of Mr Rich. Further, Mr Packer Jnr gave evidence about his discussions with Mr Rich at Elliston on 28-29 April, in his affidavit of 23 July 2004, para 17. He said he asked Mr Rich whether One.Tel had any disclosure issues in relation to the market forecast for cash at 30 June, and Mr Rich replied in the negative. That evidence is considered in Ch 14 (April 2001), where once again I reject Mr Packer Jnr's evidence in favour of the evidence of Mr Rich. However, my findings are an assessment on the balance of probabilities of what occurred on those occasions. They do not depend upon accepting the defendants' submissions that Mr Packer Jnr's evidence was driven by an agenda.

[770] In my opinion the defendants' assertions about the Packer interests having a strategy, reflected in Mr Packer Jnr's answers in cross-examination, are not supported by the cross-examination itself, and are not substantiated by other evidence. I shall return to this point at 5.1.4 and 5.1.5. Nevertheless it seems to me that Mr Packer Jnr's misconceived approach to cross-examination has affected his oral evidence as a whole and generally lessened the weight that the court should attribute to it.

5.1.3 Difficulties of recollection

[771] On many occasions during his 9 days in the witness box, Mr Packer Jnr responded to questions in cross-examination with answers to the effect that he could not recall, or did not remember, or had no recollection. The defendants said that this occurred on 1517 occasions (an average of 168 per day), deriving that figure from a computer search of the transcript identifying the use of such expressions: DPS [6055]. The figure is probably larger: my tipstaff/researcher did a similar search and found 1951 questions in cross-examination to which Mr Packer Jnr replied "I can't recall".

[772] The evidence in the proceedings does not provide any general basis for rejecting his claims that he did not recall the matters put to him. If, however, he was unable to recall pertinent matters as frequently as he said, then the implication may well be that his ability to recall, in December 2005, events that occurred during 2001 that were of some significance to his financial and personal well-being at the time was decidedly poor. That implication, if drawn, would have a general effect on the weight that should be given to his evidence purporting to recollect events that occurred in 2001.

[773] It is true, as ASIC submitted, that some of the propositions put to Mr Packer Jnr in cross-examination were based on assertions by Mr Rich or Mr Silbermann as to matters that occurred or things that were said; the fact that Mr Packer Jnr could not recall those matters does not point to his having a poor memory, for it is equally consistent with the conclusion that the matters asserted by the defendants did not occur: ASR [6054-6]. But in my view a substantial proportion of the matters that Mr Packer Jnr said he could not recall were matters of some significance. Further, on some occasions Mr Packer Jnr gave evidence in chief professing recollection of part of a conversation but was unable to remember whether other things were said on that occasion.

[774] I agree with the defendants (DPS [6079]) that the following are examples of matters of some significance that Mr Packer Jnr professed not to recall:

•

the receipt by his company, Dorigad, of $23 million or any other substantial amount as a result of One.Tel's capital reduction;

•

his discussion with Mr Howell-Davies for the latter became a director: T 9492;

•

the fact that Mr Kleemann broke his ankle in April and was on crutches after Easter 2001: T 9594-5, T 9610;

•

the fact that he received a presentation in mid-February from Tony Worthington of ABN Amro in which there was discussion about floating a European business: T 9689-90.

[775] Likewise, he said he could not recall whether he knew anything about the Telstra roaming dispute or a dispute with Optus by early May, he could not recall discussing those disputes with Mr Rich prior to mid-May, and he could not recall Mr Rich telling him in early May that the European carriers were reining in their credit terms: T 9720-1. He said that all he could recollect about the meeting with his father and Mr Rich on 15 January 2001, "as I sit here today", was that Mr Rich "expressed supreme confidence": T 9395. He could not recall whether Mr Kleemann and Mr Jacob were present during parts of the meeting (T 9409), or how long the meeting was (T 9388), or even whether it was a long meeting (T 9409). On the other hand, he firmly denied that his father had said at the meeting that he wanted his son and Mr Kleemann to monitor the business on a daily basis and receive daily reports, particularly in relation to cash, and that the suggestion that such a thing was said was "an invention" (T 9395), notwithstanding that daily reports were subsequently generated.

[776] The defendants also referred to occasions when Mr Packer Jnr relied on his preparation for the trial to give evidence about a matter, sometimes admitting that he did not have a specific recollection "as I sit here today", and at other times saying the evidence was "to the best of my recollection" after reviewing relevant papers: DPS [6081], [6082], [6084]. I do not regard those as examples of failure of memory but only as attempts to reinforce his evidence by deposing to his substantial preparation.

[777] I have a particular concern about Mr Packer Jnr's limited recollection of the events in the period from 18 to 28 May. In his affidavit of 23 July 2004, para 21, he said that the events between 18 and 25 May were very difficult for him to recall, because he was in a state of shock and utter disbelief about what he was being told about the financial position of One.Tel, and he was extremely confused and distressed. In his November 2005 affidavit, para 1, he said he recalled the meeting with his father, Mr Jacob and Mr Yates towards the end of the week commencing 21 May, during which Mr Jacob expressed the opinion that it would take at least $300 million get the company to a point where it would reach break even. The meeting probably took place on the afternoon or evening of 25 May (the evidence is considered in Ch 16). He also gave evidence in para 3 of that affidavit of a meeting with Mr Murdoch Jnr and others at his home on 27 May. But he gave only very brief evidence about what was said on that occasion. He said he recalled there was a meeting later that day at the PBL/CPH offices to discuss the arrangements for the board meeting on the following day, and he believed he may have attended for a short time, but he did not have any clear recollection of the details of what was said.

[778] The vagueness of this evidence is striking. In cross-examination he said that in "a general sense" it was "relatively fair" to say that after One.Tel went into administration he deliberately tried to forget about the events that had occurred in the preceding 6 months (T 9684), and that he had "blanked out" at least some of the things that had occurred during the week of 18 May (T 9717). His evidence on those matters raises a real question of the accuracy of his evidence about the period from 18 to 28 May, and also, in my opinion, about the strength of his recollection of anything that occurred in 2001.

[779] As noted below, Mr Murdoch Jnr responded with comparable frequency to the cross-examiner's questions by saying that he could not recall. But the implication to be drawn from his inability to recollect is less damaging than in the case of Mr Packer Jnr. This is because the evidence shows that on the whole, Mr Murdoch Jnr operated at a distance from One.Tel, both physically and in terms of engagement. His answers are open to the alternative inference that, rather than having a poor capacity to recollect, Mr Murdoch Jnr did not remember matters concerning One.Tel because he never reached the level of understanding of the company's financial circumstances and affairs that would cause him to remember several years afterwards. On the other hand, the evidence demonstrates that Mr Packer Jnr was very closely involved in keeping abreast of the affairs of One.Tel, and on some occasions he participated directly in business decisions and events.

[780] Recollecting conversations or documents or financial figures more than 4 years after the events is difficult for any witness. Inability to recollect is normal: ASR [6054-6]. The difficulty of recollecting is enhanced by the pressure of cross-examination in a courtroom environment, and in Mr Packer Jnr's case, the further pressure no doubt generated by the media's interest in his appearance in court. Sometimes the only honest answer to a question, and therefore the correct answer, is to say "I can't recall", even if the answer seems on its face unlikely or there might be every prospect of recalling in less stressed circumstances. However, making all due allowance for those considerations, the frequency of Mr Packer Jnr's "can't recall" answers to questions about the financial position of One.Tel and his dealings with the defendants at least raises a question, in my view, about the reliability of his recollection of those matters as a whole.

[781] The "I can't recall" answers have another obvious consequence for my assessment of the evidence. If witness A, a credible witness, gives evidence of his recollection of a conversation he had with witness B, and B gives evidence that he cannot recall the conversation, then, all other things being equal, the court is likely to find that the conversation occurred. That has a potential application to the occasions when Mr Rich has given unequivocal evidence about a conversation with Mr Packer Jnr, and Mr Packer Jnr has said that he could not recall -- though I have tried to be careful about whether, on the instant occasion, all other things were indeed equal.

5.1.4 The defendants' allegations about the PBL "strategy" and its assistance to ASIC

[782] The defendants submitted that there has been an "unholy alliance" between ASIC on the one hand and Mr Packer Jnr and the PBL interests on the other: DPS [6069]. That alliance arose, they said, because the interests of PBL and Mr Packer Jnr, which were to support their public position that Mr Packer Jnr had been "profoundly misled" about the financial position of One.Tel and to blame Mr Rich because of Mr Packer Jnr's alleged personal bitterness towards him, were in alignment with ASIC's need to secure Mr Packer Jnr's assistance to facilitate its case. They said that the strategy of Mr Packer Jnr and PBL/CPH was to deflect ASIC from looking closely at their actions, to focus attention on Mr Rich and Mr Silbermann and to portray themselves as innocent victims. They claimed that ASIC had been initially interested in Mr Packer Jnr's role in the termination of the rights issue (the consolidation report, Ex P 27, p 2), but that issue was pragmatically put to one side when it became clear that ASIC would need to rely on Mr Packer Jnr as witness, and then a blind eye was turned to Mr Packer Jnr's deficiencies in his conduct as a director: DPS [6075].

[783] Allegations of such kinds need to be supported by evidence. They cannot be inferred simply from Mr Packer Jnr's demeanour in the witness box. The evidence to support the allegations is, in my view, very thin.

[784] First, there is evidence indicating that Mr Packer Jnr and PBL have very actively assisted ASIC to make out a case against Mr Rich and Mr Silbermann. James Elliott of counsel was retained on behalf of the PBL and CPH within days of One.Tel being placed into voluntary administration: T 10122. He and solicitors from Minter Ellison were sent overseas in July 2001, on the instructions of PBL, to gather witness statements, at least some of which were provided to ASIC to assist in its case and without any claim to privilege: Mr Jalland, T 10210-2. Mr Boaden, Mr Werner and Ms Randall were engaged and paid by PBL as consultants in relation to One.Tel work. Mr Elliott and Minter Ellison collected a substantial quantity of documents from the UK and continental European countries and provided at least some of those documents to ASIC, without claim to privilege: T 10213. Mr Elliott, on behalf of PBL, purchased Mr Boaden's laptop computer, to give PBL access to business records of One.Tel UK: T 10213-4, 10356. It was put to Mr Packer Jnr in cross-examination that PBL/CPH had spent many millions of dollars gathering material to assist ASIC will in its case, and he said he was unsure, but "quite possibly".

[785] During the hearing Mr Elliott was in court on most days, and another firm of lawyers, Atanaskovic Hartnell, was retained by PBL to assist in the management of the litigation: T 10121. Mr Jalland, giving evidence on 6 February 2006, said it was a "fair proposition" that Atanaskovic Hartnell had rendered bills in excess of $1 million, and Mr Elliott had rendered bills in excess of $1 million as well: T 10122.

[786] The evidence of the extent to which PBL/CPH assisted ASIC does demonstrate a concern on the part of PBL/CPH, and probably also Mr Packer Jnr personally, but it may have been no more than a concern to ensure that the true facts were discovered and were available to form the basis for ASIC's decisions. The assistance does not prove a strategy on the part of PBL/CPH to focus attention on Mr Rich and Mr Silbermann and away from Mr Packer Jnr and themselves, or a pragmatic decision by ASIC to turn a blind eye to Mr Packer Jnr's deficiencies.

[787] The defendants also point to some evidence that on 27 August 2002 PBL's solicitors, Atanaskovic Hartnell, wrote to the solicitors for the liquidators in connection with their investigation of withdrawal of the rights issue proposal, in a letter stating that in the absence of their receiving certain assurances from the liquidators, PBL would consider itself at liberty to take proceedings against the liquidators to have them removed: T 9887-8; T 9898-9. The defendants sought to characterise that letter as a threat to the liquidators not to investigate the events surrounding termination of the rights issue: DPS [6074].

[788] They also referred to evidence by Mr Jalland that PBL paid for Mr Long's legal representation at the liquidators' examinations and retaining Mr Elliott to represent him: T 10275. That, said the defendants, reflected an attempt by PBL and CPH to keep Mr Long's interests closely associated with their interests: DPS [6074].

[789] It seems to me that the evidence about the Atanaskovic Hartnell letter and Mr Jalland's evidence about Mr Long fall very well short of supporting the defendants' theory about the strategies and attitudes of PBL/CPH, Mr Packer Jnr and ASIC. My conclusion is that the defendants' allegations on this matter lack a sufficient evidentiary foundation.

5.1.5 Mr Packer Jnr's "self-interest" as a witness

[790] The defendants submitted that Mr Packer Jnr's evidence was motivated and guided by self-interest: DPS [6076]. They said the One.Tel liquidation reflected adversely on his business ability and judgment, and potentially exposed him to criticism and civil penalty action, and so he sought to deflect that criticism to Mr Rich and Mr Silbermann and his evidence was tainted by that desire.

[791] It seems to me plain that One.Tel's failure reflected adversely on Mr Packer Jnr's business judgment and potentially exposed him to criticism and litigation. As I have said, he set out to put his side of the story in the witness box, which led him to make unresponsive answers in cross-examination. But I am not persuaded that his evidence was consciously, or even unconsciously, distorted by an attempt to deflect criticism to Mr Rich and Mr Silbermann.

[792] For example, one of the matters the defendants complain about (DPS [6095]-[6096]) relates to pre-paid advertising. Mr Packer Jnr resisted the proposition put to him in cross-examination that in January 2001, One.Tel was proposing to save cash by increasing the usage of pre-paid marketing. He said his recollection, from what he had read in preparation for the hearing, was that One.Tel had decided to increase the usage of prepaid marketing because News told the company, "You can use it or lose it". He was referred to the January board papers in which there was an item, "Prepaid marketing for discussion", referring to a proposal "to save $18.5m in cash in calendar year 2001 by increasing usage of prepaid marketing", and then he accepted the proposition that had been put to him: T 9433-4. I do not regard this as an example of evidence being distorted by self-interest. There might have been some advantage for Mr Packer Jnr in resisting the proposition that One.Tel was seeking to save cash as early as January 2001 by using the prepaid marketing arrangements it had with PBL and News, but there is nothing in the evidence to suggest other than that Mr Packer Jnr had a genuine recollection of having read something about the attitude of News, when preparing to give evidence. It is just a case of giving evidence shown to be wrong.

[793] Another matter to which the defendants referred related to whether, at a meeting on 15 January 2001, Mr Packer Snr insisted on One.Tel increasing the use of prepaid advertising. Mr Packer Jnr's evidence in cross-examination (T 9485-8, T 9511-7) is not particularly clear. My understanding of his point is that his father would not have required One.Tel to use up the prepaid advertising, because at the time PBL was considering whether to roll over the prepaid advertising arrangement, and in those circumstances there would have been an inconsistency in Mr Packer Snr demanding that the prepaid advertising be used immediately. He was shown a letter dated 25 August 2000 indicating that PBL had agreed at that time to extend the period during which prepaid advertising could be used. Mr Packer Jnr was not prepared to acknowledge that this evidence removed the inconsistency to which he had referred, but in the end he was reduced to saying that such an inconsistency would arise if PBL approached One.Tel to rescind the extension agreement. Again, I do not detect in this evidence anything other than the advancing of a reason why the cross-examiner's suggestion was unlikely to be correct, and then having that reason demolished in cross-examination. It is a case of giving incorrect evidence, but nothing about it indicates a deliberate attempt to pursue self-interest -- not even the witness's dogged perseverance after his answer was shown to be incorrect, which seemed to me just an attempt to save face after giving incorrect evidence. Indeed, on this occasion, the original explanation advanced by Mr Packer Jnr was obviously a case of thinking on one's feet: see T 9485, "Just thinking out loud".

[794] The defendants' placed some emphasis on Mr Packer Jnr's evidence about his requests for access to live information from One.Tel's systems. In his affidavit of 18 June 2002, para 27ff, he requested access to One.Tel's intranet page and Mr Rich refused, and he persisted and Mr Rich eventually agreed to tailor a daily report. I agree with the defendants that the affidavit creates the impression that when Mr Packer Jnr sought access to One.Tel's systems he was fobbed off by Mr Rich. In Mr Packer Jnr's cross-examination it was put to him that eventually Mr Rich agreed to try to arrange for Mr Packer Jnr to have access to the SAS system, and that some technical staff from One.Tel came to PBL's office to seek to install an appropriate link, and Mr Packer Jnr replied that he could not recall: T 9441-2. Then the following occurred (T 9442):

Q -- And the attempt, I suggest, of the technical staff to give you access to the SAS system was unsuccessful because of a problem with a firewall; that's right, isn't it?

A -- I've got a vague recollection of something like that being said.

Q -- And subsequently, Mr Rich explained to you that it wasn't going to be possible for your PC to look into One.Tel's firewall and thereafter it was agreed that you'd get a daily e-mail. Is that a fair summary of it?

A -- I believe that's fair.

[795] ASIC submitted that the last answer was unclear because the question was a double question: ASR [6127-29]. I disagree. It seems to me reasonably plain that the witness was agreeing to both parts of the question, and was therefore giving evidence that Mr Rich told him that a link between Mr Packer Jnr's PC and One.Tel's SAS system would not be possible because of the firewall. That being so, the affidavit created a misleading impression. But it seems to me at least as likely that the omission to refer to the firewall problem in the affidavit was a defect of recollection, as that it was referable to some conscious or unconscious attempt to protect himself by shifting blame to Mr Rich.

[796] Some other examples are given by the defendants (DPS [6100]-[6104]) but it seems to me the same analysis applies to them. They are examples of Mr Packer Jnr giving what appears to be incorrect evidence, but on the face of the transcript there is nothing to suggest that the answers were consciously or unconsciously guided by self-interest.

5.1.6 The "looming presence" of Mr Packer Snr

[797] The defendants claimed that the relationship between father and son was a "significant factor hovering over the evidence" of Mr Packer Jnr: DPS [6067]; DPS [6191]-[6197]. There is some evidence, mostly given by Mr Rich but nevertheless evidence that I accept (for reasons I shall give when I reach it chronologically), that Mr Packer Jnr was delighted with the initial success of his investment in One.Tel and pleased about the effect it had on his relationship with his father. There is also evidence that Mr Packer Snr became concerned about PBL's investment in One.Tel, when the share price fell after the "tech wreck" and the ensuing collapse in telco stocks on NASDAQ and other exchanges. My chronological account of events at One.Tel in 2000 and from January to May 2001 shows that Mr Packer Snr increasingly intervened in the management of PBL's investment in the company, even from his hospital bed in February 2001 and certainly afterwards. Indeed he increasingly intervened in the management of PBL generally. There is evidence that Mr Packer Jnr resented his father's return to power in the business affairs of PBL and the consequent reduction of his own influence. The defendants submitted that in his evidence in cross-examination, Mr Packer Jnr sought to downplay his father's influence: DPS [6068].

[798] Mr Packer Jnr gave evidence that on the weekend of 25-27 May 2001, by which time no-one within PBL/CPH believed that a rights issue of $132 million would be enough for One.Tel, his father was "very sweet" to him, and asked him what he wanted to do and said words to the effect that he would support his son. Mr Packer Jnr said it was a very emotional time and his father was very good, and he told his father that he did not want to increase the size of the rights issue: T 9854. He accepted, however, that prior to 17 May his father had said he was not prepared to go ahead with the rights issue unless somebody could tell him with assurance that $132 million would be definitely enough: T 9854-6. ASIC submitted that this evidence was inconsistent with the defendants' submissions (ASR [6067]), but I disagree. Evidence that Mr Packer Snr was very sweet to his son on the weekend of 25-27 May is consistent with evidence that Mr Packer Jnr resented the return of his father to prominence in PBL, and the consequent reduction of his influence.

[799] I find this submission difficult to assess, because there were some aspects of Mr Packer Jnr's evidence that gave me concern that his answers might have been affected by his father's influence. For example, he very frequently replied "I can't recall" when questions were asked about what his father said or did, which might have put his father in an unfavourable light. But his answers in cross-examination did not at any stage indicate, unambiguously, that he was being evasive because of his father's influence, and none of the other evidence provides a sufficient ground to accept the defendants' submission. I have decided to reject the defendants' submission, and exclude the allegation of influence by Mr Packer Snr from my assessment of the credibility of Mr Packer Jnr's evidence.

5.2 Mr Murdoch Jnr

[800] ASIC submitted that Mr Murdoch Jnr was an impressive witness, whose evidence was not successfully attacked by the defendants: APS [1991]. ASIC conceded that there were many matters about which Mr Murdoch Jnr did not have any recollection, but claimed that was hardly surprising as his involvement with the company had been limited, and many of the questions in cross-examination were about detailed matters occurring more than 4 years earlier which he would have had no reason to recall. On the other hand, the defendants submitted (DPS [6203]) that the "dominant impression" from Mr Murdoch Jnr's evidence was that he could barely remember anything.

[801] My view is that there was a significant problem of lack of recollection in Mr Murdoch Jnr's evidence, which undermined its credibility. He answered "I can't recall", or similar words, in response to 881 questions, a higher daily rate than Mr Packer Jnr This was despite having spent several days preparing to give evidence.

[802] It was not just that he could not recall matters of detail. He recalled very little, even on substantial matters such as what occurred at board meetings. Thus, in his affidavit of 24 May 2002, paras 6-11, he gave evidence of his recollection of events that, he said, occurred at the January board meeting. But in his affidavit of 16 November 2005 he said he was in doubt as to whether he attended that meeting. As the defendants pointed out (DPS [6205]), his evidence in his earlier affidavit as to what happened at the meeting, purportedly based on his recollection, ceased to be credible once he said that he could not remember whether he was there: T 8632, T 8676-80.

[803] His evidence about the March board meeting was unimpressive. In his affidavit of 24 May 2002, para 17, he expressed his recollection that at the meeting Mr Rich gave a brief summary of the company's financial position, and Mr Silbermann then took the meeting through the cash flow on a month-by-month basis. He did not refer to Mr Keeling. In oral evidence he said that he could remember only that Mr Rich opened the meeting and passed it over to another executive who did the majority of the presentation, but he was uncertain as to who that was: T 8743. Later he said (T 8747-8):

I honestly can't remember today which elements of the -- of the board papers the various executives spoke to, with the exception of a memory of I think Mr Beck talking about billing issues.

Later he said he recalled Mr Keeling doing the majority of talking at the meeting: T 8748. He said he believed Mr Weston spoke at the meeting, but he had no specific recollection of what he spoke about: T 8748-9.

[804] When asked whether he remembered anything at all about the March board meeting, he said (T 8638):

I apologise for my hazy memory, but I remember in this board meeting quite a detailed conversation over billing. Billing was, again, an issue in the business and I believe Mr Beck spent a lot of time talking about that and Mr Rich over the telephone. There was a conversation about the cash flow and the $91 million versus $71 million cash balance that was against the public expectations, and I remember Mr Rich was sort of summarising the board meeting to the effect that billing issues have been resolved and that sort of thing. Again, I apologise for my memory being hazy.

[805] His evidence about the board meetings on 17 May (T 8791-801, T 8855-6, T 8887), 28 May (T 8819-27) and 29 May (T 8831-2, T 8844-9, T 8857-82) was also quite hazy and unspecific. It was put to him (T 8879-80) that he recalled very few specifics of what occurred in any board meeting and he said, "I think that's fair to say, yes; specifics, yes".

[806] In their written submissions, the defendants presented a list of 22 events about which Mr Murdoch Jnr's recollection was poor or non-existent. The list included the February 1999 meeting in New York at which the decision for News and PBL to invest in One.Tel occurred, the meeting with PBL representatives on 27 May 2001, and the management presentation on 28 May 2001 -- important events in the history of One.Tel. That led the defendants to submit that the explanation for his lack of ability to remember most things about One.Tel was that he was not greatly interested in it. While the investment was a sizeable investment in dollar terms, it was far from significant for News Corp, according to the defendants: DPS [6215].

[807] I do not agree that the picture emerging from the evidence is of a director who was not interested in the business and affairs of the company. I agree with ASIC that Mr Murdoch Jnr sought to perform his role as a non-executive director by reading board papers, attending board meetings and having limited communications outside board meetings: ASR [62157]. However, I accept the defendants' submission that Mr Murdoch Jnr regarded One.Tel as an investment brought to News by PBL, and he regarded PBL as the "lead investor": T 8818. The original investment had been Mr Packer Jnr's idea, and Mr Packer Jnr had successfully proposed the investment to the Murdochs in New York: T 8560-1. News Ltd agreed to invest without any formal investment proposal or due diligence (T 8558, T 8560), although Mr Macourt had gathered some forecasts or business plans from One.Tel (T 8573). Mr Packer Jnr had put forward Mr Kleemann as the person who would monitor the investment: T 8598, T 8692, T 8605-6. News received copies of Mr Kleemann's reports: T 8599. Mr Murdoch Jnr expected to be told if there was a problem: T 8602.

[808] Mr Murdoch Jnr's attitude, that PBL was the lead investor and that PBL was monitoring the investment, tends to explain why he was not closely involved in the affairs of One.Tel, and consequently why he had difficulty recollecting very much about the company. That means, of course, that his evidence about specific events should not be given any great weight, particularly when it conflicts with the evidence of others who had greater reason to recall the events sharply. But I do not accept the defendants' submission that in giving his evidence, Mr Murdoch Jnr showed an interest in protecting his position and deflecting criticism from himself as a director: DPS [6218]. The principal evidence upon which the defendants rely in support of that submission (T 8818-9) seems to me to have been simply a case of Mr Murdoch Jnr seeking to describe the approach taken by News Corporation, namely that it took comfort in having PBL as the lead investor close to the business, and then in answer to counsel's question, distinguishing between the News Corporation position and his own position as a director of One.Tel.

[809] The defendants referred to some evidence given by Mr Murdoch Jnr about his communications with Mr Rich, saying that it "spoke volumes about his attitude to and interest in One.Tel as well as being damaging to his credit": DPS [6222]. One matter was Mr Rich's email to Mr Murdoch Jnr of 7 February 2001, in which Mr Rich expressed the desire for a "chat", which would include an update regarding board composition, the board meeting, connections, year-end forecast and "life". Mr Murdoch Jnr's cross-examination about this email (T 8716-9) established that he did not recall anything about it, but does not seem to me to reflect on his credit.

[810] The other matter related to some more informative and important emails sent by Mr Rich to Mr Murdoch Jnr on 23 and 28 April 2001, considered at 14.32. In summary, Mr Rich's evidence was that he sent the emails to Mr Murdoch Jnr's email address on those days, and he tried to speak to Mr Murdoch Jnr on the telephone on a number of occasions during that period, leaving messages. He eventually managed to speak with Mr Murdoch Jnr on 3 May, by which time Mr Murdoch Jnr had already spoken to Mr Packer Jnr In his affidavit of 23 July 2004, para 10, Mr Murdoch Jnr said:

I do not have an actual recollection of reading these three documents [in fact, there were only two]. It is possible that I did so but have now forgotten, although in relation to the second and third documents [the e-mail of 28 April] I can say that I did not read them before I spoke to James Packer on 1 May.

In cross-examination he said he had been travelling and sometimes was difficult to check his e-mails (T 8647), and that he did not believe he had read the e-mail of 28 April (T 8648) and he could not recall any telephone call with Mr Rich at about 2 May.

[811] In my view the cross-examination Mr Murdoch Jnr did not provide a basis for rejecting his evidence on these matters. It appears that on 28 April, the day on which the second email was transmitted to him, Mr Murdoch Jnr sent an email to Mr Keeling (T 8765-8) (but that does not establish that he opened and read the email from Mr Rich on that day). Mr Rich's telephone records establish that he did make a call to Mr Murdoch Jnr on 3 May but it appears that Mr Murdoch Jnr had no recollection of it: T 8668-9.

[812] That Mr Murdoch Jnr received an email from Mr Rich that he did not immediately open and read is consistent with his overall attitude to the One.Tel investment, referred to above, but in my view does not establish total lack of interest in the company. His evidence was only that he did not recall reading the emails, and that he did not read the email of 28 April in the few days between 28 April and 1 May. That evidence is consistent with the proposition that he read the email of 28 April after 1 May, and it seems to me likely that he did. It was a communication from the managing director of a company of which he was a director, and while he may have not attended to it while travelling, I would on this evidence not impute to him the lack of attention to his duty that would be implied from a finding that he did not read it at all.

[813] The defendants contended that the contents of the emails of 23 and 28 April did not sit well with Mr Murdoch Jnr's evidence in his affidavit of 24 May 2002 (para 20) that he had been surprised at the matters raised with him by Mr Packer Jnr in their telephone conversation on 1 May. According to the defendants' submission, Mr Murdoch Jnr maintained that he had not read the email of 28 April before speaking to Mr Packer Jnr "in an attempt to distance himself from it because of the perception that its contents were contrary to his affidavit": DPS [6230]. I do not accept this submission. He appears to me to have genuinely recollected a feeling of surprise at what he was told by Mr Packer Jnr, indicating that he must not have absorbed the contents of the email of 28 May prior to that conversation.

[814] I do not draw any adverse conclusion as to Mr Murdoch Jnr's credit and I reject the submission of the defendants (DPS [6232]) that his evidence ought not to be accepted unless corroborated by someone other than Mr Packer Jnr My view is simply that Mr Murdoch Jnr's evidence should be treated with caution because of his poor recollection, though on some issues it can be accepted, including the question whether he read the email of 28th of April before speaking to Mr Packer Jnr.

5.3 Mr Jalland

[815] Guy Jalland was a senior executive employed by CPH, who had been trained as a lawyer and later became group general counsel and company secretary of PBL: Mr Jalland's affidavit of 10 November 2005, paras 1-4. He was called as a witness by ASIC in response to questions that had arisen as to the delivery of the Ernst & Young report of 28 May 2001. ASIC submitted that he did so in an entirely satisfactory manner: APS [2006].

[816] The defendants submitted that Mr Jalland had an obvious interest in the litigation, for he performed the role of managing the interests of PBL, CPH and Mr Packer Jnr in the litigation process: DPS [6233], [6253]. He also had a close involvement in aspects of the rights issue, the bridging loan, and some of the events of 28 and 29 May. They contended that significant parts of his evidence should not be accepted.

[817] There is some evidence about Mr Jalland's management of the interests of PBL/CPH/Mr Packer Jnr in respect of the litigation. He agreed that until it became evident that he would be a witness, he had an intimate involvement in the case (T 10119-20), and read the daily transcript of the case (T 10119) as well as daily or almost daily reports from Mr Elliott of counsel (T 10123). Mr Elliott had been retained within days of One.Tel being placed in administration (T 10122), originally by Minter Ellison and then subsequently directly by PBL/CPH (T 10122). Mr Elliott had the use of an office at PBL until the end of 2005: T 10123.

[818] In mid-2002, the liquidators of One.Tel were contemplating an investigation of the circumstances in which the proposed rights issue and bridging loan arrangements did not proceed: T 10127. Mr Jalland gave instructions to several firms of solicitors on behalf of PBL, CPH, Mr Packer Jnr and Mr Yates (T 10127), including Atanaskovic Hartnell. Atanaskovic Hartnell wrote a series of letters to the liquidators, seeking to dissuade them from investigating the rights issue and the bridging loan, which contained some threats: Ex DTB 8/3078-100. The defendants criticised Mr Jalland's denial in cross-examination that he retained Atanaskovic Hartnell to send those letters (T 10127), in circumstances where he was the person who gave factual instructions in relation to the letters (T 10128). I would not draw an adverse inference as to Mr Jalland's credit from his evidence on this matter, because it seems to me plausible that, though he had a role in retaining the solicitors, he did not specifically approve the text of the letters.

[819] Nor would I make an adverse inference concerning Mr Jalland's evidence about the special purpose liquidator: see DPS [6238]. When a special purpose liquidator was appointed in 2003 and he set about investigating the events concerning the rights issue by issuing examination summonses, Mr Jalland instructed Atanaskovic Hartnell to make an application for the summonses to PBL and CPH officers to be set aside: T 10147-8; also T 10344. Mr Jalland denied that his purpose in doing so was to prevent PBL or CPH officers from being examined about the rights issue and the bridging loan, saying instead that he regarded it as in PBL and CPH's interests that their executives not have their time spent on this issue. That evidence seems to me to be plausible.

[820] The defendants also criticised Mr Jalland's evidence about his perception of CPH and PBL's interests in the present proceedings: DPS [6239]. In order to assess this submission, I have considered Mr Jalland's evidence on this subject at T 10127, T 10218, and T 10208-17, and DPS [6239]-[6241]. It suffices to say that in my view he did not give contradictory evidence adversely affecting his credit, but instead he gave unclear evidence and that his eventual position, clarified in cross-examination and perhaps also clarified in his own mind by the cross-examination, was that it was in the interests of CPH and PBL for the defendants to lose this case, though it was not specifically in the interests of those companies for ASIC to succeed.

[821] The defendants were critical of some evidence of Mr Jalland about the effect of the directors' decision (that is, the decision not to proceed with the rights issue) on the potential liability of PBL and CBH concerning the rights issue and bridging loan: DPS [6245]-[6247]. They described his evidence as "somewhat incredible". Ironically, the defendants' submission on this issue is similar to ASIC's submissions critical of many aspects of Mr Rich's evidence: what the submitting party complains of as evasive or inconsistent evidence turns out, on investigation, to be a case of imprecise questioning met by precise answers.

[822] Mr Jalland's evidence of which the defendants complain on this matter was in three parts. First, at T 10271:

Q -- You believed it was in PBL and CPH's interest at the time for the directors of One.Tel to resolve not to proceed with the rights issue, didn't you?

A -- That's not correct.

Q -- You believed as at 28 and 29 May 2001 that if the directors of One.Tel resolved not to proceed with the rights issue, then PBL and CPH could have no liability under the underwriting arrangements; that's right, isn't it?

A -- That's not correct.

[823] Second, at T 10272:

Q -- You believed that if the rights issue wasn't to proceed then PBL and CPH would have no liability as underwriters, didn't you?

A -- I believed that would have been a consequence, correct.

[824] Third, at T 10273:

Q -- At least by the evening of 27 May 2001, you believed that if the directors of One.Tel resolved not to proceed with the rights issue then PBL and CPH would be unlikely to have any liability as underwriters, didn't you?

A -- I appreciated that that would be the case, correct.

[825] Those extracts are only part of Mr Jalland's evidence on this topic. A review of his evidence as a whole indicates that the questions he was being asked assumed that there was or could be a liability under the underwriting arrangements, but Mr Jalland did not believe at the time that there was even arguably such a liability: T 10272, T 10285, T 10335-6, T 10341, T 10366-7, T 10369-70. Once Mr Jalland's evidence is assessed by reference to his basic belief on the subject, it is plain that his evidence is a consistent set of answers questions that, for him, did not really arise.

[826] The defendants made submissions about the extent of involvement of Mr Jalland in the events of 17-29 May 2001 including his involvement in:

•

the underwriting arrangements: DPS [4330];

•

the bridging loan: DPS [4345] and following;

•

the meeting on 25 May: DPS [4400] and following;

•

the board meeting on 28 May: DPS [4527] and following;

•

other events on 28 and 29 May: DPS [4581] and following;

•

the board meeting of 29 May: DPS [4639] and following.

[827] The evidence shows that Mr Jalland was closely involved in the arrangements for the rights issue and bridging loan and subsequent events including the withdrawal of the proposed underwriters, the preparation of Ernst & Young's 28 May report and the board decisions on 28 and 29 May. My view of his evidence is that he sought to present a certain view as to the facts and the legal effect of the facts, particularly in his evidence as to whether there was ever a binding agreement for a bridging loan, and I have decided not to accept some of his evidence, but I have not formed an overall adverse view about his credit.

5.4 Mr Yates

[828] Mr Yates became a non-executive director of One.Tel on 17 May 2001, at which time he was the chief executive officer of PBL. He was appointed chairman of the meetings of the board of One.Tel held on 28 and 29 May 2001: affidavit made on 27 September 2005, paras 1-5. Consequently, as the defendants submitted (DPS [6255]), Mr Yates was at the heart of the events from 17-29 May 2001.

[829] ASIC called Mr Yates as a witness to explain some matters relating to the alternative strategy proposed by One.Tel's management at the end of May, that had been raised in the cross-examination of Mr Howell-Davies. It submitted that Mr Yates gave his evidence in a credible fashion and that his evidence should be accepted: APS [1967].

[830] The defendants submitted that Mr Yates revealed himself as a witness of little credit: DPS [6254]. They were particularly critical of his evidence in connection with the underwriting agreement (DPS [4335] and following), and his evidence concerning the meetings on 27 May (DPS [4489] and following), contending in particular that the evidence he gave about what occurred on the evening of 27 May was evasive and unsatisfactory: DPS [4513]-[4519]. They criticised Mr Yates' account of the meeting on 29 May concerning the management presentation: DPS [4566] and following. They claimed that Mr Yates' account of the numbers reported to the board did not work: DPS [4577]. They alleged that Mr Yates acted to prevent the Ernst & Young report of 28 May being distributed until the last minute and they criticised his evidence on that subject: DPS [4619] and following. They criticised his evidence of his involvement at the board meeting on 29 May: DPS [4639]. They claimed he lied to the board about the position regarding Lucent when he adjourned the 29 May meeting until 6 pm DPS [4672]-[4682]. They contended that he had a conflict of interest at the board meeting on 29 May, about which he gave unsatisfactory evidence: DPS [4648] and following.

[831] I do not accept these criticisms of Mr Yates. My findings about the events in which he was involved are set out in Ch 16. My observation of Mr Yates was that he gave the impression of not being fully prepared to give evidence, but I did not form the view that his evidence was motivated by self-interest and the desire to protect PBL/CPH's interests, as submitted by the defendants: DPS [6267].

5.5 Mr Kleemann

[832] Geoffrey Kleemann was chief financial officer of PBL: affidavit of 26 July 2004, para 1. He carried out several reviews of One.Tel in the period from 1999 to 2001, including a detailed review in December 2000 and January 2001, and he closely monitored the company's financial position from late 2000 until April 2001. ASIC submitted that he gave evidence as to the role he had performed in a clear and credible manner.

[833] There are many aspects of Mr Kleemann's evidence that I found to be satisfactory. But there were five topics on which I found his evidence problematic. They are identified by the defendants in their submissions, DPS [6268]-[6289]. I agree with the defendants that the cumulative effect of these matters is that it is necessary to treat Mr Kleemann's evidence with caution and circumspection as to matters touching on the interests of PBL and CPH: DPS [62 90].

[834] The first area of concern relates to his involvement in the affairs of One.Tel before October 2000. His affidavit of 26 July 2004, paras 1-3, gives the impression that his work on One.Tel's business models, key drivers, assumptions and forecasts first occurred as a result of an instruction received in October 2000. In fact, as identified in Ch 6, Mr Kleemann was involved with One.Tel in 1999 and had a continuing involvement from that time. He said in cross-examination that his involvement before October 2000 was very limited: T 5861, T 5869. But it included conducting a review of One.Tel's management accounts in September and October 1999 with Mr Miller (T 5866-7, T 5978, T 5997; Ex DTB 2/479, 2/487, 2/495, 2/750), and another review of One.Tel's Australian and international business plans in around May-June 2000 with Mr Miller, which he said he could not recall (T 5867; but see T 6017; Ex DTB 3/868, 3/906, 3/918, 3/920). He received copies of One.Tel's flash reports from about mid-1999 onwards (T 5866; and note the documents in Ex DTB Vols 2, 3 and 4 which appear to have been copied to Mr Kleemann). The May/June 2000 review was not, he said, as detailed as the review he undertook later in 2000, but he accepted that it involved him in various kinds of work which, considered together, appear to be substantial: the details and references are set out in DPS [4087b].

[835] ASIC submitted (ASR [6269-77]) that Mr Kleemann's involvement with One.Tel prior to October 2000 was not of any apparent relevance to any issue in the proceedings. But it was some significance to the defendants' case that PBL had been actively involved in monitoring the One.Tel business earlier than October 2000, and in any event, there needed to be some reference to the earlier work to prevent the evidence about the work that began in late 2000 from creating a misleading impression. He seemed to me to be endeavouring, in cross-examination, to minimise a role that was really quite a significant one.

[836] The second area of concern is that he appears to have understated the amount of work he did on One.Tel in the period from October 2000 to mid-April 2001. In para 5 of his affidavit of 26 July 2004, he estimated the time he spent at One.Tel's offices at about 50 hours between October 2000 and 29 May 2001. In para 6 he estimated that the total amount of time he spent in the period from early January to Easter 2001 on matters concerning the affairs of One.Tel was about 30 hours, of which 15 hours were spent in the One.Tel offices, and he said that during that period he reviewed the documents described in Sch 1 to his affidavit and attended the meeting identified in that schedule. But in cross-examination he was taken through other aspects of his involvement with One.Tel (T 6047-61), which are summarised conveniently in the defendants' submissions: DPS [4088]-[4123]. For example, he discussed One.Tel's business plans for 2000/2001 and 2001/2002 with management with a "particular focus" on "cash flow utilisation/generation with emphasis on ensuring cash reserves are sufficient to carry the business through to cash flow positive" (Ex DTB 4/1198); and during November and December 2000 he met with members of One.Tel's management team including Mr Barnes, Mr Hodgson, Mr Savva, Mr Wright, Mr Frack, Mr Perez, Mr Weston, Mr Boaden and Mr Werner (1 JDR 257). An indication of the extent of his work can be seen from his annotations on contemporaneous documents, summarised at DPS [4103]. He eventually accepted that he spent considerable extra time in his review and monitoring role away from the offices of One.Tel: T 6047-8. The defendants submitted, plausibly, that Sch 1 understated the work he had done: DPS [6283].

[837] The third area of concern relates to his extraordinary claim to be unable to remember events in the period from 17 May onwards. He said in cross-examination that he had "strong recollections up to 8 May", but "barely any recollection of anything to do with One.Tel thereafter": T 6252. He had "barely any recollection" of the board meetings 28 and 29 May, which he attended: T 6341-2, T 6248. He attended a meeting for about an hour in the late afternoon of Sunday 27 May at PBL's Park Street offices, which he recalled he was asked to attend by Mr Packer Jnr's secretary, but he had no recollection of who was there: T 6248-51, T 6342. He said he could not remember anything that was discussed at the meeting, and therefore could not say whether there was any discussion about the underwriting agreement: T 6342, T 6413.

[838] Mr Kleemann's explanation for his inability to recollect events after 8 May appears to have been related to the fact that Mr Packer Snr was unhappy with his performance in relation to One.Tel; the fact that PBL/CPH made subsequent decisions without involving him in their discussions (T 6341-2); the fact that on Sunday 27 May he had been out all day and did not really want to attend the meeting, and he said he did not participate and he did not take anything in; likewise the fact that though he was physically present at the board meetings he did not participate (T 6141-2). It seems to me inherently implausible that Mr Kleemann, having been so much involved in the affairs of One.Tel until 8 May, would have been able to shut out of his mind everything that he witnessed after that date. No doubt his recollection had become hazy due to the passage of time, and I accept that as he had ceased to be personally involved in decision-making at PBL/CPH he would not have thought it necessary to focus on the detailed discussions at the meeting as he attended. But, having so much knowledge about One.Tel, he could hardly have failed to absorb the points being made about its revised financial position at the meetings of 27, 28 and 29 May, or, indeed, to have formed a view about the revised opinions. He seemed to me to be seeking to avoid a situation in which he would have to give the court a personal opinion held by him that was at variance with the revised PBL/CPH view.

[839] The fourth area of concern relates to Mr Packer Jnr's request for direct access to One.Tel's computer system. I have accepted the defendants' submission that, on the evidence, it appears that Mr Packer Jnr's request was denied because it was discovered that there were technical obstacles presented by the firewalls at PBS and One.Tel: see 8.9. Mr Kleemann's account of this matter, in paras 9-11 of his affidavit of 26 July 2004, was misleading since, though it was quite general, it conveyed the impression that Mr Rich declined access on the ground that "the systems are complex and it would be difficult for anyone outside One.Tel to fully understand the information they were receiving", rather than on the true ground that the firewalls in the respective computer systems were an obstacle and the information could be supplied in another way.

[840] The fifth area of concern relates to Mr Kleemann's evidence of his change of heart about One.Tel at the meeting at his house on 6 May 2001: see 16.6.3. Mr Kleemann claimed (para 21 of his affidavit) that he reacted to an email from Mr Silbermann of 5 May 2001 by saying that he could have no confidence in the new figures, which were about a "new business" rather than the continuation of a "tried and true existing business". For reasons given at 16.6.3, I find that evidence implausible.

5.6 The UK witnesses (Mr Boaden, Mr Werner, Mr Weston and Mr Howell-Davies)

[841] The principal submissions of the parties concerning the evidence of Mr Werner, Mr Weston and Mr Boaden were made in the context of the $26 million transfer from the UK to Australia at the end of February 2001. I have therefore dealt with those witnesses in Ch 10. The evidence of Mr Werner, Mr Weston and Mr Boaden as to the $26 million transfer is reviewed at 10.19.6, 10.19.7 and 10.19.8 respectively. ASIC's submissions about that evidence are at 10.19.11, and the defendants' submissions are at 10.19.12. The defendants' submissions seek to impugn their evidence and challenge their credibility by raising questions about self-interest, collaboration, confusion of events, ill will, and the consultancies Mr Boaden and Mr Werner had with the Packer interests. My assessment of the evidence of Mr Werner, Mr Weston and Mr Boaden in light of those submissions is at 10.19.15.

[842] ASIC submitted that Mr Howell-Davies was an impressive witness, impartial and credible, and with a vast amount of experience of the telecommunications industry through holding senior executive positions: APS [1934]. The defendants did not challenge Mr Howell-Davies as to credit, or even make submissions about his evidence in the segment of their submissions dealing with witnesses, although they made some submissions about his evidence in the body of their submissions. In particular, there are some issues about Mr Howell-Davies' evidence about his email of 13 May (considered at 16.13.4) and about his account of the events in late May 2001. Generally my view is that Mr Howell-Davies was a reliable and helpful witness, but I have not always accepted his evidence, where it was contradicted, for reasons specific to the occasion. My only general observation about his evidence is that his recollection was affected by the passage of time, as one would expect.

5.7 Mr Carter

[843] Mr Carter was ASIC's expert accounting witness. ASIC submitted (APS [1985]) that his manner in the witness box was very good, that he dealt with some vigorous attacks by the cross-examiner on limited aspects of his evidence with patience and objectivity, and where appropriate he made concessions in response to the attacks: APS [1985].

[844] The defendants observed that, had it not been for the rejection of large parts of Mr Carter's principal report, and of subsequent reports by him, they would have regarded it as necessary to make a substantial submission as to Mr Carter's credit: DPS [6299]. However, they found it no longer necessary to do so, given that most of his remaining evidence had been truncated so as to remove almost all material containing an element of judgment (DPS [6300]), and given also that there was little in ASIC's submissions that relied upon Mr Carter's evidence, other than his evidence concerning loss (DPS [6301]). Nevertheless, in so far as his remaining evidence involved the exercise of judgment, they submitted that his approach was influenced by matters extraneous to his reports (in particular, statements by people who were not called to give evidence) and also by demonstrated lack of objectivity on his part.

[845] In reply, ASIC pointed out that substantial expert evidence from Mr Carter was admitted by the court, as listed in ASR [6299-302]. It conceded, however, that only limited aspects of Mr Carter's remaining evidence involved any significant element of opinion, and therefore the evidence that Mr Carter gave could almost all be shown to be correct by reference to the documents that are in evidence. That, presumably, was an explanation for ASIC placing greater reliance in final submissions on its own tables and financial calculations than on relevant parts of Mr Carter's reports. Nevertheless, ASIC submitted, the court should derive comfort from the fact that Mr Carter's experience and expertise were applied to extracting, collating and summarising the material in question.

[846] I do not accept the defendants' submission as to Mr Carter's credit. My view is that, generally speaking, the weight to be given to Mr Carter's remaining evidence depends upon the reliability of his evidentiary sources. Thus, figures sourced in Australia aged creditors reports and the Australian fixed wire/service provider "management accounts" for January-April 2001 are not reliable figures. An area where Mr Carter's financial accounting expertise comes to the fore is in his calculation of loss, addressed in Ch 22.

5.8 Mr Long

[847] Mr Long was the senior person involved in the preparation of the Ernst & Young report of 28 May 2001, and was responsible for most of the drafting of the report. ASIC submitted that his demeanour in the witness box was impressive and inspired confidence in the correctness of the views he had expressed in that report: APS [1971].

[848] The defendants' attack on Mr Long's evidence was made on the foundation that Mr Long has had a longstanding and close relationship with the Packer companies. Evidence in support of that proposition is summarised at DPS [4825]-[4830]. For example, an indicator of the close relationship was that Mr Long was represented in the liquidator's hearings by Minter Ellison and Mr Elliott, paid for by PBL/CPH: Mr Jalland at T 10122.

[849] At 16.33 I consider evidence concerning Mr Long's meeting with PBL/CPH executives and Mr Howell-Davies on the evening of 27 May, and his note of the discussion, which contains the words "extract from underwriting". That, said the defendants, was a telling indicium of the relationship between Mr Long and PBL/CPH and the way in which it was likely to have influenced his actions and his writing of the Ernst & Young report: DPS [6305].

[850] Mr Long's note seems on its face to envisage a course of action, the objective of which would be to extract PBL/CPH from the underwriting, and that the Ernst & Young report would be part of the strategy for achieving that objective. At 16.33 I reject Mr Long's attempt to explain away the significance of the words "extract from underwriting". But I accept his evidence that the meeting contemplated that he would conduct a review, as a result which he would represent that the $132 million proposed fundraising would not be enough only if that were the case (T 7244), though he acknowledged there might have been an expectation on the part of the PBL representatives that his conclusion as to the sufficiency of the $132 million would be the same as theirs (T 7251).

[851] Given these findings, I am not persuaded that Mr Long's relationship with PBL/CPH was likely to have influenced the content of his report. Mr Long is a very experienced accountant, and there was nothing in the evidence to indicate that he would act otherwise than in accordance with the standards of his profession, which would require him to bring independent judgment to bear on the assessment he would be instructed to undertake in preparing the Ernst & Young report.

[852] The defendants attacked Mr Long's evidence on the ground that on the evening of 27 May, he had told Mr Yates, before beginning to prepare the Ernst & Young report, that the Miller/Green methodology used to demonstrate that $132 million would not be enough was "robust". The defendants submitted that the fact that Mr Long was prepared to venture such a view, based on nothing more than some summary information from PBL/CPH representatives, spoke loudly of the extent to which he had already been "conditioned" to the view that PBL/CPH wanted him to reach: DPS [4836]. The defendants' submission assumes that Mr Long made the statement to Mr Yates that the methodology was robust; my conclusion at 16.33 is that on balance, in view of his own evidence, he probably did not.

[853] Mr Long said in his evidence in chief (T 7130) he had a discussion with Messrs Silbermann, Beck, Hodgson and Savvas on 28 May, which led him to believe that their position (as recorded in Mr Jalland's note) was that they did not dispute his view about creditors in any material way, but they disputed his view about the monthly cash burn rate as they "baulked" at the high end but were "almost comfortable" at the low end.

[854] In cross-examination he agreed that his evidence was meant to suggest that management did not dispute that the creditors listed on the Miller/Green schedule were overdue, and he also agreed that management was disputing that some of the items on the list were overdue: T 7138. When asked to explain the discrepancy, he said his intention was to convey something comparable to what he said in the Ernst & Young report to the board: T 7138. Presumably he meant that management agreed with the list of creditors and amounts in the Miller/Green schedule but they also wanted to assert that there was a log of disputes or claims, as set out in the report. I do not regard Mr Long's evidence on this point as undermining his general credibility as a witness. The position is that the note was expressed too categorically but the substance of what Mr Long told Mr Jalland was that management did not disagree with what was then the proposed text of the report as to overdue creditors.

[855] The defendants also raised the issue of distribution of the Ernst & Young report: DPS [6311]-[6312]; DPS [4824] and following. When challenged as to why he followed Mr Jalland's instruction not to distribute his report before the board meeting on 29 May, Mr Long gave a series of inconsistent versions of his understanding of Mr Jalland's position. At one stage he agreed that Mr Jalland worked for CPH/PBL and did not have anything to do with the board of One.Tel (T 7229), but later he said he understood Mr Jalland was acting under instructions from the One.Tel board in the supervision of Mr Long's work (T 7231), and then later he said he understood Mr Jalland to be representing the directors of One.Tel who were the PBL-representative directors (T 7235), and later still he said that he understood Mr Jalland to be representing the chairman of the board (T 7236). I have rejected these various explanations, and I have found that Mr Jalland was at relevant times acting as an employee of CPH and representing the interests of CPH/PBL, and that Mr Long was aware of this. I have found that in giving his evidence Mr Long was searching, unsuccessfully, for a satisfactory explanation of his conduct in implementing Mr Jalland's instruction, that would avoid the implication that he was preferring the interests of CPH/PBL to the interests of the One.Tel directors as a whole. That part of his evidence was unimpressive, but I do not regard it as reflecting on his overall credit.

[856] I do not agree with the defendants that Mr Long's evidence should be treated with great caution, particularly where uncorroborated by anyone other than a PBL interested witness: DPS [6314]. I found him to be a generally satisfactory witness and I did not detect any indication that his evidence was affected by a conflict of interest.

5.9 Ms Randall

[857] ASIC invited the court to find that Ms Randall was a credible witness whose evidence was consistent with the documentary evidence. ASIC submitted (APS [1909]) that it was unsurprising that by the time she came to be cross-examined in July 2005, her recollection of some of the details of the events she described had faded, but as she indicated in her evidence, her recollection would have been better at the time when she swore her main affidavit in June 2002: T 5052-3, T 5190. It contended that her evidence deserved to be given considerable weight because of her close involvement in the events she described, the absence of any reason for her evidence to be partial, and the relative freshness in her mind of the events deposed to at the time when she swore her main affidavit: APS [1910].

[858] The defendants submitted that Ms Randall was demonstrably wrong in so many parts of her evidence that her evidence as a whole should not be accepted: DPS [6321]. They made submissions attacking her evidence and at times her credit in the course of their submissions about the month of March, and I have dealt with those submissions and ASIC's responses in Ch 14. For reasons to do with plausibility and external evidence, rather than credit, I have agreed with the defendants about their principal factual challenges to her evidence. My reasons for doing so set out in Ch 14, but I note here that they have to do with general plausibility and compatibility with contemporary documents and other evidence, rather than any finding adverse to her credit.

[859] The defendants submitted (DPS [6321]) that Ms Randall exhibited antipathy towards Mr Silbermann. She gave evidence that professionally she did not get along with Mr Silbermann (T 5195) and there was an occasion when she was reprimanded by him in front of others, but she said she was neither embarrassed nor angry about this and that she and Mr Silbermann had agreed to disagree (T 5195). I agree with ASIC (APS [1918]) that this evidence provides an insubstantial basis for any suggestion of partiality.

[860] The defendants also submitted that Ms Randall exhibited a dogged determination to persist with evidence that was obviously wrong. I observed some occasions when this appeared to me to be correct. For example, her evidence was that she had not carried over the forecast billing run totals from 2403C.xls into the April forecast in 0304 amended.xls (T 5053), even when she was referred to cell note of her own recording that she had done so (T 5053-7), and ultimately only conceded that it was "possible" (T 5057). ASIC submitted (ASR [2606(c)]) that Ms Randall's answers began by her saying that she did not specifically recall doing so (T 5053) and she conceded that if there was a match between 2403C.xls and a cell note, that would indicate that she did indeed incorporate in 0304 amended the inflows in 2403C.xls (T 5054). Nevertheless it does seem to me that there was a certain dogged determination to persist shown by her in her evidence on the subject, when considered as a whole. That suggests a willingness to maintain a view in spite of evidence to the contrary.

[861] Another example related to her evidence about percentage increases in billing run totals. She insisted that Mr Hodgson had suggested in late February that she increase each billing run total by 10% (T 4668) and said that she had done so by copying the formula and multiplying it by 1.1 (T 4668) on a regular basis (T 4669). That proposition was demonstrated to be incorrect in subsequent cross-examination (T 4703-12), when it became evident that there had been no 10% increase in month-to-month billings put into the cash flow spreadsheets in late February 2001. Ultimately (with evident reluctance) she conceded that Ms Randall was wrong about that matter: T 4714-22.

5.10 Mr Maizels and Mr Harman

[862]

[863] ASIC made extensive submissions about the evidence of Mr Maizels and Mr Harman, which were more about the substance of the evidence that about issues of credit or general plausibility: APS [2021]-[2052]. The defendants replied at DPS [6322]-[6355]: and see ASR [6322-55]-[6355]. These submissions are addressed at 20.5.12.

5.11 Other witnesses for the plaintiff

[864] ASIC made submissions in chief supporting the evidence of its other witnesses:

•

Ms Ashley (a financial analyst at One.Tel who carried out the margin analysis);

•

the accountants Mr Simmonds and Mr Shear;

•

the liquidators Mr Walker and Mr Sherman;

•

Mr Warburton who gave expert evidence about the duties of directors;

•

Mr Butcher of Lucent;

•

Ms Thomas (the accounts payable -- team leader), ASIC conceding in its submissions (APS [2003]) that her recollection had been faulty on one occasion although she was doing her level best to recall the position correctly;

•

Mr Robertson and Mr Adams of Optus;

•

Mr Hockings and Ms McMahen of PwC;

•

Mr Spratt, who was responsible for monitoring margins and traffic mix in the fixed wire business;

•

Mr Pryke of Lucent; and

•

Mr Smith, who gave expert accounting evidence.

[865] The defendants did not make submissions challenging the credit of these witnesses. Indeed, they paid compliments to Ms Ashley and Mr Simmonds who, they said, gave their evidence openly and intelligently and without any trace of agenda, bias, ill-will or preconception (DPS [6048]), although they did not necessarily accept everything those witnesses said (DPS [6049]).

[866] I have considered and made findings about the evidence of these witnesses when it arises in the course of the judgment, without forming any adverse view as to their credit.

5.12 Mr Rich

[867] ASIC submitted that Mr Rich's credit was severely damaged by a very significant quantity of matters that emerged from his evidence, and as a result, it should be found that evidence given by him should not be accepted unless adverse to his interests and corroborated by evidence other than from Mr Silbermann: APS [2053]. It claimed that Mr Rich was prepared to say whatever he perceived would advance his case, regardless of the truthfulness or frankness of what he was saying: APS [2054.

[868] The defendants' response (DPS [6356]) was to provide a table of cross-references between ASIC's criticisms of Mr Rich and the defendants' submissions on that part of Mr Rich's evidence, which I have considered in this context and in the course of my judgment.

[869] ASIC subdivided its attack on Mr Rich's credibility into a number of categories:

•

untenable assertions relating to major aspects of One.Tel's financial position;

•

aspects of his evidence damaging to his credit and dealt with in the body of ASIC's submissions; and

•

additional aspects arising from his evidence and damaging to his credit.

5.12.1 Untenable assertions relating to major aspects of One.Tel's financial position

[870] ASIC was critical of the following assertions by Mr Rich (at APS [2055]):

•

the $26 million transfer was not unusual;

•

the only times there was any deliberate delay in payment of creditors outside the normal course of dealing (apart from over half-year and year-end) was in late April and early May when cash was tight;

•

the financial position and prospects of One.Tel were improving during 2001;

•

at the end of April and in early May the company was paying its creditors on time, bearing in mind disputes, usual business terms, the WorldCom payment plan and the BT offset;

•

One.Tel was "absolutely not" desperate for money on 4 May 2001; and

•

rather than the flash report figures for the Australian fixed wire/service provider business being wildly wrong, it was more likely that the revenue figures in the draft management accounts were far too low.

[871] ASIC claimed that its submissions demonstrated that each of those assertions by Mr Rich was untenable. I do not agree, for the reasons given extensively in this judgment.

5.12.2 Aspects of Mr Rich's evidence damaging to his credit and dealt with in the body of ASIC's submissions

[872] ASIC prepared a table at APS [2057], setting out some 85 items of evidence upon which it contended, in identified parts of its principal submissions, that Mr Rich's evidence was damaging to his credit. For each item there is a summary statement of ASIC's objection: for example, "evasive", "misleading statement", "new assertion/inconsistent with documents". I have dealt with most of these matters in the body of my judgment, and I have considered them again for the purpose of assessing ASIC's submissions as to credit. For reasons given when the matters arise in the judgment, and by the application of the general observations made below, I do not accept that Mr Rich's evidence on these matters has been damaging to his credit.

5.12.3 Additional aspects arising from Mr Rich's evidence and damaging to his credit

[873] In addition to the "new assertions" listed in the table at APS [2057], ASIC identified at APS [2058] five matters deposed to by Mr Rich but not put to ASIC's witnesses in cross-examination. I have considered these matters in their respective contexts and have reached the same conclusion in each case. In my view Mr Rich's evidence of each of these matters is to be assessed in its context and having regard to other evidence on the subject, but without any disposition to reject it simply because the matter was not put to ASIC's relevant witness in cross-examination. In each case that conclusion is an application of the observations made at 5.12.4.

[874] At APS [2059] ASIC listed seven occasions not otherwise referred to in its submissions, upon which, it submitted, Mr Rich took issue with a proposition in his affidavit. I have considered these items but they do not, in my view, require an adverse assessment of Mr Rich's credit.

[875] In some cases Mr Rich appears simply to have forgotten, in the witness box, a matter to which he had deposed. For example, he gave evidence at 1 JDR 876 of a telephone conversation with Mr Adler, who called him from Colorado to say that a press release should be made, but in the witness box (as I sit here today) he said he had some recollection of the conversation around that time but he could not recall what was said: T 10914. When shown his affidavit he said "I now have some recollection of those words": T 10915. Similarly, he said in cross-examination that he did not know whether, by the end of April, there was something like 70,000-100,000 fixed wire customers who spent less than $20 per month (T 11930-1), but he had said this in para 1567b of his affidavit. What he was unsure about in the witness box was whether the figure referred to override customers, and he said he would need to look at some documents to understand what he had been referring to in his affidavit. I do not regard those lapses of recollection as affecting his credit, particularly since his memory was remarkable on many matters.

[876] On other occasions identified by ASIC, the apparent discrepancy between oral and written evidence was explained by differences of language between the affidavit and the question put in cross-examination, or by the respective contexts. This was the case on the question whether One.Tel withheld payments to Lucent in late 2000/early 2001 as a result of the disputes summarised in One.Tel's letter of 27 February: compare 1 JDR 1092-3 with T 11153-4. In his affidavit, Mr Rich said that One.Tel's disputes with Lucent as they existed in late February 2001 were summarised in the letter of 27 February, and that "as a result of those disputes" One.Tel had withheld payment. In cross-examination he was referred to the letter of 27 February and he said he had some recollection of it, but added that he was "trying to recall whether the letter specifically referred to the liquidated damages that Lucent owed us of $5 million". When, subsequently, he was asked whether One.Tel had withheld payment as a result of the disputes summarised in the letter, he answered "No, and in answering that I'm not classifying the liquidated damages owing to us as a dispute". In other words his position in the witness box seems to have been that payment was not withheld because of the disputes that would lead to unliquidated damages, leaving open the possibility that payment was withheld because of the liquidated damages. When he was referred to his affidavit and asked whether his earlier answer had been consistent with it, he said "I think it depends on what we mean by 'those disputes'".

[877] Similarly, in his affidavit 1 JDR 574 he said he relied on flash reports and board papers "which were my primary source of regular written information about the performance of the various business units". In cross-examination (T 12173) it was put to him that the flash reports and board papers were his primary source of regular information about the performance of the various business units and he answered "not exclusively" although they were "a primary source". To assess this evidence, para 574 of the affidavit needs to be seen in its context, which was Mr Rich's explanation of how the oversight of the business unit management teams by the executive directors, including himself, was achieved: 1 JDR 568. He mentioned, first, oral communications, and he mentioned the flash reports and board papers as his second means of oversight, then moving on to talk about operational review tours. Thus, although he described the flash reports and board papers as his "primary source" of regular written communication, clearly they were only part of the oversight process.

[878] The questions in cross-examination on this subject followed a somewhat tense exchange, at the end of which Mr Rich complained that senior counsel for ASIC had unfairly put to him only part of the sentence at para 568 of his affidavit, the omitted part making it clear that his oversight of the business units was given effect by a combination of matters of which the information in the flash reports and board papers was only one aspect: T 12173. In that context, when he was asked whether the flash reports and board papers were his primary source of regular written information about the performance of the business units, he answered "not exclusively" for the obvious purpose of emphasising that his oversight of the business units had other components to it, and in that context the flash reports and board papers were "a" primary source. When he was referred to para 574 and asked whether he would now agree that they were his primary source, he said, "in the sense that 'primary' means a first look or most timely look, yes", and when asked whether he was resiling from his affidavit he said that para 574 was among many paragraphs where he was intending to describe how he managed the business: T 12174.

[879] The alleged discrepancy relating to the importance of future cash flows to the purchaser of a business is instructive, because it shows how submissions critical of Mr Rich's evidence has tendered to arise out of a failure on the part of ASIC to understand it. At para 1806 of his affidavit, Mr Rich referred to Mr Carter's views as to the matters that would typically be considered by a potential purchaser of a business. He continued, in the second, third and fourth sentences of that paragraph:

In my experience in business, the most important matter which would typically be considered is the likely future cash flows of the business and the risks associated with those expected cash flows being actually realised. In the context of the telecommunications industry, in my experience, an important factor in assessing likely future cash flows and valuing a telecommunications business are subscriber numbers. This is because subscribers are costly to obtain and, once acquired, form a base from which future cash flows can reasonably be expected.

[880] In cross-examination, he agreed that likely future cash flows would be "one of the things" that he would consider if he were buying a business, and he would also consider both upside and downside risks associated with realising the cash flow: T 12278. Then the second sentence of para 1806 was put to him, and he answered, "I wouldn't put it like that, no". When his attention was drawn to his affidavit, he immediately referred to the third sentence of para 1806, and in further cross-examination he denied that his oral and written evidence were inconsistent, and insisted that the second sentence of para 1806 was to be read in the context of the rest of the paragraph:

The second sentence sits amongst a paragraph that talks about my overall views of valuation, and in that sense qualifies it.

I think Mr Rich's explanation was satisfactory and his evidence was consistent. Surprisingly, senior counsel for ASIC put it to him that his explanation was "ludicrous": T 12281.

[881] ASIC compared Mr Rich's evidence in cross-examination, that he did not recall saying to Mr Packer Snr on 15 January that One.Tel would be crazy not to continue making Next Generation connections as fast as it reasonably could (T 11677), with his statement to that effect at 1 JDR 839. What actually happened was that Mr Rich was being cross-examined about what Mr Packer Snr said at the meeting of 12 April 2001. In that context, he was asked some questions about the view he eventually formed after the meeting, and he agreed that he decided that Next Generation connections should be reduced. He was then asked whether he said at the meeting that it would be crazy to slow down connections, and he said "without seeing the context, I'm not sure as I sit here now". Later he gave evidence to the effect that he came to recollect his statement to the meeting only after he was first asked about it (though before he was referred to his affidavit). It seems to me that a fair reading of his evidence at T 11677-8 confirms that that is what happened. It was a temporary failure of memory, but in a context of questions about his later attitude.

[882] ASIC's submissions drew attention to an alleged inconsistency between Mr Rich's oral evidence at T 11850 and para S36(g)(v) of the defence. In the defence, Mr Rich said that as at 30 April 2001, the difference between the actual group cash balance reported to the board and the group cash balances that had been forecast in the September, November, January and March board papers was primarily referable to a number of matters, one of which was:

(23)

a shortfall in expected gross margins in the fixed wire business of the Australian operations of the One.Tel Group which was undetected until April 2001 as a result of deficiencies in billing data provided by Telstra and Optus, the failure of a mediation device provided to One.Tel by Lucent and the installation and integration into the billing systems of the Australian operations of the One.Tel Group of new hardware and software from around late 2000.

[883] In cross-examination Mr Rich rejected the proposition that the shortfall in expected gross margins for the Australian fixed wire business was one of the primary reasons for One.Tel being below its forecast cash in May: T 11850. He said the shortfall in expected gross margins affected the cash balance against forecast only in a small way: T 11851-2. But again, context explains what might otherwise appear to be a discrepancy. On this occasion the context of the cross-examination was that Mr Rich was being asked about Ms Ashley's analysis in comparison.xls. When it was put to him that a shortfall in expected gross margins was one of the primary reasons for One.Tel being below its May cash forecast he said "no", because (T 11852):

What I understood you to be meaning was the gross margin shortfall that was identified in comparison.xls and I would not agree that that number would be considered as primary. That is what I had in mind when I answered your question.

[884] ASIC submitted (APS [2060]) that Mr Rich probably had a greater appreciation of the workings of some important documents than he professed to have. Three instances were put forward, relating to daily cash flow spreadsheets, management accounts and the April reforecast. Having reviewed Mr Rich's evidence cited by ASIC, I find myself persuaded that in each case he was right to take a cautious view about the documents and to express some doubt about how they worked. His cautious approach compared favourably with the approach taken by ASIC to those and other documents in submissions, seeking to attribute meanings to them that were far from obvious on the face of the documents and that did not take proper account of their complexity and the complexity of the operations underlying them.

[885] ASIC put forward (APS [2061]) what it called some additional illustrations of the disparity between Mr Rich's remarkably detailed recollection of events professed in his affidavit, and his recollection as revealed by his oral evidence. Seven matters were identified. Having considered those matters in light of ASIC's submissions, I am reasonably sure that on each occasion, the explanation for the lack of recollection was that he was in the witness box under pressure without an opportunity to consult documents, whereas he was able to prepare his affidavit in less stressful circumstances with every opportunity to consult the documentary sources. For example, it seems to me close to ridiculous for ASIC to complain that Mr Rich "prevaricated" about whether Mr Murdoch Jnr was at the January board meeting (T 10947-8), a matter that could readily be checked by consulting the minutes, but the sort of thing that a witness might have difficulty recollecting in the witness box without the aid of documents. There are further comments on the disparities between Mr Rich's oral and written evidence in my general observations below.

[886] Finally, ASIC complained (APS [2062]) about what it called the inconsistency between the 16 January announcement and One.Tel's letter to Lucent of 27 February, both of which were approved by Mr Rich: 1 JDR 874-81, 1 JDR 1092. Partly, ASIC appears to be complaining that in the announcement of 16 January (Ex CED 1-633) it was said that "the build of the One.Tel Next Generation GSM 1800 Network is running to schedule with the build of phase 1 to be completed during the first half of 2001". In the letter to Lucent of 27 February 2001 (Ex CED 17-1) it is said that all networks were late and that Sydney was currently 35 weeks late. That certainly seems to be a discrepancy, but it is not part of ASIC's pleaded case against the defendants and it may be that there is some explanation: for example, it is not clear whether the "schedule" referred to in the announcement corresponded with the contract completion times which were the subject of complaint in the letter. The statement by Mr Rich in cross-examination, referred to in ASIC's submission, that "we were trying to paint the worst possible picture in the letter to Lucent" (T 10882) seems to me to relate to the other claims in the letter, such as claims about "continuing and consistent failures" of the Lucent mediation device, "substantial overcharging in invoicing" and "poor workmanship and quality control".

5.12.4 General observations about Mr Rich's evidence

[887] It was obvious to any observer of the proceedings that Mr Rich applied himself to his defence with enormous industry and determination. He was present on almost every hearing day of the long trial, assiduously taking notes on a laptop computer. He deposed to an extremely long affidavit, which closely addressed the details of this complex financial case. His affidavit comprises 1956 paragraphs presented in 511 pages, directly supported by six lever-arch folders of exhibits comprising 1250 pages, in addition to the defendants' 17 volume tender bundle. He was in the witness box for 25 days.

[888] Mr Rich demonstrated that he was a very well prepared witness, knowledgeable about the subject matter of his evidence. It goes without saying that he was an interested witness -- indeed, he was fighting for his commercial survival. The evidence of a defendant in such a position must be assessed with caution, but the court is not required to disbelieve it.

[889] Realising that I would in due course be required to rule on his credit, I tried to be particularly attentive to Mr Rich's oral evidence. He was cross-examined at very great length about almost every aspect of the case, including some matters that ASIC raised for the first time in his cross-examination. He was required to concentrate intensely on the matters put to him, week after week. He was called on to explain document after document. Time and again, senior counsel for ASIC put before him financial tables (the Ex P93 tables, in particular) that he had not had the opportunity to consider and reflect upon.

[890] Throughout the lengthy and arduous cross-examination, he responded to questions thoughtfully and clearly, sometimes even perceptively. According to my observation, he did his best to answer the questions that were put to him to the extent of his knowledge, regardless of the measure of financial complexity involved and whether he had been given any notice of the subject matter. When the question related to something that was the responsibility of some other executive officer of One.Tel, such as Mr Hodgson or Mr Beck, Mr Rich made it plain that that was so, but then was prepared to assist by offering plausible explanations.

[891] It is somewhat unsettling that ASIC's assessment of Mr Rich as a witness, reflected in its submissions, is so sharply at odds with my own assessment. But its critique of Mr Rich is, unfortunately, consistent with the general tendency of its submissions to exaggerate its case.

[892] I have some general observations to make about the challenges made by ASIC to Mr Rich's evidence. The first is the obvious one that it is inevitable, when a witness is cross-examined over a long period of time about a vast array of detailed financial matters, that there will be some inconsistencies in the oral evidence and between the oral evidence and the affidavit. Some allowance has to be made for this. He faced intense cross-examination on subject after subject, many of them of a technical financial kind, from highly experienced and well-prepared senior counsel. It seems to me only natural that from time to time his recollection in the witness box would be less strong than his recollection at the time of preparing his affidavit, when he had time to reflect and access to a multitude of documents that might refresh his memory.

[893] Second, according to my observation, Mr Rich's objective in the witness box was to understand precisely what the cross-examiner was asking him and to answer that precise question. I would applaud rather than criticise him for that. As I have explained throughout these reasons for judgment, time and again what ASIC complained of as evasive answers were, upon close examination, examples of Mr Rich's concern to understand precisely what was being asked, particularly where there was an element of ambiguity in the question, and to answer exactly that question.

[894] Third, especially where the subject matter is a large amount of financial material, there is bound to be a measure of contrast between the detailed evidence in the affidavit and the degree of recollection the witness is able to achieve in the witness box. I tried to be particularly attentive to this during the course of Mr Rich's cross-examination. I reached the conclusion that, while from time to time his recollection of events in the witness box was less specific (even on occasion, much less specific) than the evidence in his affidavit, this happened remarkably infrequently bearing in mind the length of the cross-examination and the detailed nature of the subject matter; and when it did it was explicable by the circumstances, including on each occasion the difficulty of recollecting matters of detail under the pressure arising from the courtroom environment. At no stage did I have the sense that Mr Rich was not genuinely attempting to recollect the matter that was the subject of counsel's question. Having presided over trials in the Equity Division for over 11 years, my comparative assessment of Mr Rich's evidence in cross-examination is that he was one of the best prepared party/witnesses that I heard in that time, with a very good level of recollection of detailed facts in the witness box.

5.12.5 Recent invention?

[895] Finally, I note that on quite a few occasions a component of ASIC's complaint about Mr Rich's evidence is that the evidence he gave in his affidavit or in the witness box was not put to the relevant ASIC witness in cross-examination, and therefore the court should infer that Mr Rich's evidence was a recent invention. It is often appropriate for a court to make that inference, provided that in the circumstances the making of the inference is reasonable. In the present case, there are several reasons for doubting whether that is so.

[896] First, it is relevant that this was a very long trial with an enormous amount of documentary and other evidence. That fact meant that there was a very large amount of material that the defendants would need to put to ASIC's witnesses in the course of their cross-examination. Given the scope of the exercise, it would be potentially harsh to disbelieve their evidence on every matter that they omitted to put to ASIC's witnesses, simply because of that omission.

[897] Second, the defendants had the protection of the penalty privilege, which meant that they were not required to decide whether to go into evidence until ASIC closed its case. Ideally, perhaps, defendants should put as much time into preparing for the cross-examination of the plaintiff's witnesses as they do to preparing their affidavits, but human nature being what it is, it seems to me probable that the writing of affidavits will be a more thorough exercise than preparing for cross-examination of the opponent's witnesses, if in the circumstances the two tasks are to be performed separately. The task of making a sworn statement to be read in open court is likely to focus the mind more sharply than merely preparing questions for cross-examination. Therefore it seems to me not surprising, in the context of the penalty privilege and the fact that the defendants did not announce their intention to go into evidence until well after ASIC's main witnesses had been cross-examined, that additional matters were recollected or discovered from documents that had not been put to the witnesses. The inference that those matters were recent inventions can only be weak, at best, and those circumstances.

[898] Third, special circumstances affected the evidence taken in London. The court was operating under a tight timetable without recourse to the full range of evidentiary and other resources available in Sydney. That created an additional risk of unfairness in holding it against the defendants that they did not put some matters to ASIC's London witnesses.

[899] Finally the nature of the evidence in this case is relevant to the question whether the inference should be drawn. The evidence was mostly financial evidence of a very detailed kind, and evidence about conversations on financial subjects. Even in such a case, the inference can be drawn where the matter raised is of such central importance that it obviously ought to have been put to the opponent's witness; but the inference is far less compelling, and perhaps not even available, when the question relates to one of many conversations about detailed financial matters, such as the occasions listed at APS [2058].

[900] Therefore the approach that I have taken on the question whether to infer "recent invention" is to consider, in the instant circumstances and in view of the matters I have just mentioned, whether failure to put the matter to ASIC's witness is a factor of any substance in my assessment of the evidence, without any predisposition to disbelieve the evidence simply because it was not put to the witness.

[901] My overall conclusion as to Mr Rich's evidence is that ASIC's attack on his credit has failed. Therefore I have approached his evidence without any disposition to believe or disbelieve it. I have endeavoured to assess his evidence on its merits in the circumstances, having regard to other evidence on the subject, bearing in mind Mr Rich's obvious self-interest but also taking into account my assessment of the evidence of the witnesses with whom his evidence is in conflict. That process has generally led to my accepting Mr Rich's evidence, but I have done so for reasons specific to the circumstances, including my assessment of the plausibility of his account of events compared with conflicting accounts.

5.13 Mr Silbermann

[902] As with Mr Rich, ASIC submitted that Mr Silbermann's credit was severely damaged by a very significant quantity of matters emerging from his evidence: APS [2063]. As a result, it submitted, the court should find that evidence given by Mr Silbermann should not be accepted unless adverse to his interests in the proceedings or corroborated by evidence other than from Mr Rich. It claimed, as with Mr Rich, that the matters identified in submissions had revealed that Mr Silbermann was prepared to say whatever he perceived would advance his case regardless of the truthfulness or frankness of what he was saying: APS [2064].

[903] As with Mr Rich, the defendants' response (DPS [6357]) was to provide a table of cross-references between ASIC's criticisms of Mr Silbermann and the defendants' submissions on that part of Mr Silbermann's evidence, which I have considered in this context and in the course of my judgment.

[904] ASIC subdivided its attack on Mr Silbermann's credibility into a number of categories:

•

untenable assertions relating to major aspects of One.Tel's financial position; and

•

aspects of his evidence damaging to his credit and dealt with in the body of ASIC's submission.

5.13.1 Untenable assertions relating to major aspects of One.Tel's financial position

[905] ASIC criticised Mr Silbermann (APS [2065]) on the ground that he had not, himself or by any expert, advanced any positive case as to the true financial position of One.Tel in 2001 concerning its cash and creditors, cash flow and earnings positions, and yet he made the following assertions:

•

the $26 million transfer was part of the usual management of cash by One.Tel on a group basis;

•

One.Tel Australia had ample money in March, and it was not until around Easter 2001 that One.Tel's cash position became very tight; and

•

the deferral of creditors other than in accordance with normal practices of One.Tel did not occur until after 23 April 2001.

[906] ASIC claimed that its submissions had demonstrated that each of those assertions by Mr Silbermann was untenable. I do not agree, for the reasons given extensively in this judgment.

5.13.2 Aspects of Mr Silbermann's evidence damaging to his credit and dealt with in the body of ASIC's submissions

[907] As with Mr Rich, ASIC prepared a table at APS [2066], setting out some 58 items of evidence upon which it contended, in identified parts of its principal submissions, that Mr Silbermann's evidence was damaging to his credit. For each item in the table there is a summary statement of ASIC's objection: for example, "unsupportable", "inconsistent", "new assertion", "contradiction". I have dealt with most of these matters in the body of my judgment, and I have considered them again for the purpose of assessing ASIC's submissions as to credit. For reasons given when the matters arise in the judgment, and by the application of the general observations made below, I do not accept that Mr Silbermann's evidence on these matters has been damaging to his credit.

5.13.3 General observations about Mr Silbermann's evidence

[908] Mr Silbermann was not as impressive a witness as Mr Rich. There are some inconsistencies and mistakes (see, for example, 14.27.3) and evident lapses of memory in his evidence. There was even a measure of prevarication, in his evidence about One.Tel's dispute with One.Fone: see 19.5.4; MS 316; T 13749; APS [1604]. But I have not formed an adverse view as to his credit.

[909] His affidavit comprises 1061 paragraphs presented in 234 pages, directly supported by a lever-arch folder of exhibits, in addition to the defendants' 17 volume tender bundle. He was in the witness box for 12 days.

[910] As with Mr Rich, it goes without saying that Mr Silbermann was an interested witness, fighting for his commercial survival, and so his evidence must be assessed with caution. His answers in cross-examination showed that he had made substantial efforts by way of preparation, compared with the ordinary run of witnesses in commercial matters in this court, but as I have said, he was nevertheless sometimes confused and his evidence was not always consistent.

[911] As with Mr Rich, I paid close attention to Mr Silbermann's oral evidence on matters that might go to credit. Mr Silbermann, like Mr Rich, was cross-examined at great length and was required to concentrate intensely on the matters put to him over a lengthy period of questioning. His demeanour was somewhat more circumspect than Mr Rich's, though I formed the impression that he was trying to answer the questions that were put to him to the extent of his knowledge. The cross-examination included putting to him some of the Ex P93 tables -- although at least on some of the occasions when those tables were put to Mr Rich, Mr Silbermann was in court and might perhaps have had the chance to give some thought to the issues raised by the tables before he was questioned about them.

[912] The general observations I made about ASIC's challenges to Mr Rich's evidence are applicable to Mr Silbermann as well. Thus:

•

an allowance should be made for inevitable inconsistencies of evidence, and weaknesses of recollection, when a witness is cross-examined over a prolonged period of time about a vast array of detailed financial matters;

•

Mr Silbermann endeavoured in the witness box to answer precisely the questions that were put to him, although he did occasionally add unresponsive supplements to his answers;

•

his recollection of some events in the witness box was less specific than the evidence in his affidavit, though my impression was that he was genuinely attempting to recollect the matter that was a subject of counsel's question.

[913] My observations at 5.12.5, as to whether evidence by Mr Rich should be regarded as recent invention if it was not put to ASIC's witnesses in cross-examination, are equally applicable to the evidence of Mr Silbermann.

5.14 Witnesses who were not called

[914] The defendants submitted that it was important, in assessing the evidence of the witnesses called by ASIC, to consider the large number of potential witnesses who would have been able to give evidence as to matters at issue in the proceedings and who assisted ASIC in its investigation and in the preparation of its case, both in chief and in reply. They presented a table at DPS [6358] summarising references in the evidence to potential witnesses and the assistance they gave to ASIC. The table identified 17 former One.Tel employees, and others associated with PBL/CPH, and individuals associated with accountants, lawyers, and creditors. Treating the companies listed without the name of an individual as, in each case, a single potential witness, and treating overseas creditors as confined to the three specifically named, the list contains 40 names. ASIC identified other names mentioned by the defendants elsewhere in their submissions as persons who should have been called to give evidence, bringing the list to 50 people: ASR [6358].

[915] If a case had been made out to the effect that, for the proper proof of ASIC's case, it should have called an additional 50 witnesses, the point would have reinforced the proposition asserted at the beginning of these reasons for judgment (1.3.2), namely that ASIC has endeavoured to prove a case that was simply too large to be managed in adversary litigation of this kind. However, I am not persuaded that an additional 50 witnesses, or anything like that number, should have been called by ASIC in order to prove its pleaded case. In oral submissions (T 14963-4) senior counsel for the defendants informed the court that the defendants did not assert that all 50 additional witnesses should have been called, but only Mr Basman, Mr Holmes or Ms Nassif, and Mr Miller or Mr Green. For reasons given in Ch 3 and at various places in the narrative part of this judgment, I think it is correct that the court would have been assisted by hearing from those witnesses.

[Chapter 6 (paragraphs [916]-[1003]) are not reproduced. It sets out a background of the early years of One.Tel's existence following its formation in 1995, up until 1999. The chapter is summarised at [7416]-[7418].]

[Chapter 7 (paragraphs [1004]-[1206]) is not reproduced. It reviews the business operations of One.Tel during 2000. The chapter is summarised at [7419]-[7422].]

[ASIC's pleaded case required the court to "walk through" One.Tel's affairs from January 2001 onwards. The judgment reviews the evidence relating to One.Tel's affairs on a month-by-month basis. The relevant evidence relating to January 2001 is set out in detail in Chapter 8 (paragraphs [1207]-[1631]), which is not reproduced. The chapter is summarised at [7423]-[7439]. The conclusions on this evidence and ASIC's pleaded case are set out in Chapter 9.]