Legal database - View: Cases: Australian Securities and Investments Commission v Rich

Australian Securities and Investments Commission v Rich and Another
[2009] NSWSC 1229

(Decision by: Austin J (part 2))

Australian Securities and Investments Commission
vRich and Another

Court:

NSW Supreme 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

Decision by:
Austin J (part 2)

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

9.1 ASIC's pleaded case as at the end of January

[1632] ASIC pleads that by or shortly after 31 January 2001, each defendant knew or ought to have known of the January circumstances. The January circumstances are pleaded in the schedule, paras S1-S7 and S39-S52. The relevant topics are:

•: ASIC's allegation of systematic "management" of cash and creditors: para S1;
•: the $8 million pledge: para S2;
•: the true cash and creditors position as at 31 January 2001: paras S3-S7;
•: the true debtors and EBITDA position as at 31 January 2001: paras S39-S44C;
•: ASIC's allegation that the flash reports were false and misleading: paras S44D-46A;
•: ASIC's allegation that the March board papers were false and misleading: para S47-S51.

[1633] In Pt 3 of its pleading submissions, ASIC identified as the parts of its written submissions in chief that are said to support pleaded allegations. I rely on that schedule for the purpose of making findings about the January circumstances at ASIC's pleaded allegations relating to January.

[1634] I shall deal with the first three of these six matters here, namely systematic "management" of cash and creditors, the $8 million pledge, and the true cash and creditors position as at 31 January 2001. As to the remaining three matters (true debtors and EBITDA position, misleading flash reports and misleading March board papers), in the interests of clarity of exposition I will deal with the debtors and EBITDA positions across the whole period from January to April 2001 in chapters addressing debtors (Ch 19) and earnings (Ch 20), and I shall express my conclusions as to the pleaded allegations relating to those matters at the end of the respective chapters. My conclusions, for the reasons given at length in those chapters, are that ASIC has not proven its pleaded case with respect to debtors or earnings for any of the months from January to April 2001.

9.2 Systematic "management" of cash and creditors

[1635] No January submissions are identified as supporting para S1 of the schedule. Annexure A to the Schedule, which takes figures from the intranet, indicates that One.Tel's available cash rose sharply to $86 million in late January. But the submissions do not refer to any specific evidence about management of that cash figure at the end of January; in particular, by drawing cheques and delaying their release. There is evidence from the defendants, referred to in Ch 10, to the effect that an increase in cash at month-end was a natural consequence of receipt and payment patterns. My conclusion is that the allegations in para S1 are not proven in relation to January.

9.3 The $8 million pledge

[1636] In final submissions ASIC conceded that the evidence does not establish the existence of the $8 million pledge prior to the end of April: APS [396]; see also 22.2.2.1. This allegation is not proved in relation to January.

9.4 The true cash and creditors position as at 31 January 2001

[1637] Paragraph S3(a) alleges that as at 31 January 2001, the cash available within the group to pay creditors was approximately $71 million. This is calculated by taking the group intranet balance at 31 January, $86 million, and deducting $8 million for the "pledge" and $7 million for "unpresented cheques". The pledge should not be deducted, as ASIC concedes. In its pleading submissions ASIC contends that the correct figure is $79 million.

[1638] I accept that the group cash balance at 31 January was $86 million, as shown in the intranet, but the evidence does not support the contention that there were unpresented/unreleased cheques of $7 million at that time. In the pleading submissions ASIC relies for that contention on Mr Carter's principal report, especially App O para 99, footnote 3. I consider this matter fully at 22.2.2.2, where I conclude that the value of unpresented cheques at 31 January has not been shown to be more than $4.66 million. That means that, to the nearest million, the group cash available to pay creditors at 31 January was $81 million. The January board papers estimated end-of-January cash at $85 million. That figure did not purport to deduct unpresented cheques, as board members should have realised, in my view. The board was not misled by the January cash figure in the board papers. Likewise, the January flash report sent to the directors on about 7 February 2001 reported a group cash balance as at 31 January of $86 million, which was the intranet figure. The report did not purport to make any deduction for unpresented cheques.

[1639] In para S3(b) it is alleged that the cash available within the Australian operations to pay creditors was approximately $22 million, after deducting $7 million for unpresented cheques. According to the intranet, Australian cash stood at $41.4 million at 31 January: Ex CE 9 0011. The $22 million figure has evidently been taken from para 74 of Mr Carter's principal report. It appears from App O to his report that Mr Carter took the figure of $22 million from the trial balance as at 31 January. In note (1) to App O, he drew attention to the large discrepancy between the trial balance figure, which is net of unpresented cheques, and the intranet figure, which is very similar to a daily cash flow spreadsheet to which he referred. He suggested that the difference of $19 million might partially be explained by unpresented cheques, but his figure for unpresented cheques was only $7 million. My finding on the evidence, however, is that no greater an amount than $4.66 million has been proven: see also 11.2.3. He said in his note that he was unable to explain the remaining difference between the trial balance and the intranet. I consider this issue at 22.2.3.1, where I reach the conclusion that the intranet figure is to be preferred. On that basis, the "available" cash in the Australian operations at the end of January was about $37 million ($41.4 million less $4.66 million).

[1640] In its pleading submissions ASIC purported to support para S3(b) only by referring to APS [74], which is a submission about the January board forecast cash generation in the fixed wire/service provider business over the period from January to June, a submission that is not relevant to proving the actual cash balance at the end of January. My conclusion is that the "available" Australian cash balance was about $37 million. That implies that if ASIC's allegation about the level of "overdue" creditors, considered below, were correct, there would still be a net positive cash balance of $13 million in the Australian operations at the end of January.

[1641] Paragraph S4 recites the September forecast of January group cash, $123 million, the November forecast of January group cash, $100 million, and the flash report of January group cash, $86 million. That paragraph is admitted by the defendants.

[1642] Paragraph S5 alleges that the pleaded group and Australian cash balances at 31 January were achieved only after deferring the drawing of cheques to major creditors within the Australian operations (as opposed to delaying the release of cheques, which I have found not proven for January). It claims that the total amount "overdue" in the Australian operations as at 31 January was about $24 million. This allegation is supported by Annex B to the Schedule, which individually lists trade creditors "past due" for more than $1 million and then gives the total Australian trade creditors "past due" at $24.42 million.

[1643] In its pleading submissions, ASIC relies on the table in para 99 of Mr Carter's principal report, which in turn relies on the Australian aged creditors reports. As to the unreliability of the Australian aged creditors reports, see 11.2.5. The same figure of $24 million also appears in the table at para 74 Mr Carter's report, which I have considered in detail at 22.2.3.1. As I pointed out there, Mr Carter has taken the "total open" position in the aged creditors report for the end of January (Ex CE 6 0064), and has identified "overdue" creditors as at the end of January by deducting the amount due after 31 January from the total open position. This does not take into account the defendants' evidence about usual terms of trade, or make any allowance for the possibility of disputed claims. As I pointed out in my detailed discussion, some $19.109 million of the $24 million identified by Mr Carter was due by 3 October 2000 and therefore outstanding for more than 120 days, suggesting a measure of probability of some disputes, or even the possibility, urged by the defendants, that some of the claims were no longer payable but had not been purged from the ledger. I conclude my consideration by holding that it would be unsafe for the court to infer from Mr Carter's figures that One.Tel's Australian operations had insufficient funds to pay overdue creditors at the end of January 2001. Implied in that is the finding that it would be unsafe to hold that there were overdue creditors of $24 million at that time.

[1644] Paragraph S6(a) alleges that the amount owed to trade creditors by the Australian operations on 31 January, but not then overdue, was about $22.3 million, and that the companies in the Australian operations had incurred additional current liabilities of about $74.6 million. The figure of $22.3 million is supported by Annex B to the schedule, and appears to be derived from para 76 of Mr Carter's principal report, which sources that figure in the aged creditors report as at 31 January. The figure is correct: see 22.2.3.1. The figure for additional current liabilities also comes from para 76 of Mr Carter's report. In a footnote to that paragraph, Mr Carter refers to additional accrued liabilities which are said to include a Telstra accrual of $21.1 million, mobile digital usage accrual of $9 million, GST accrual of $7.2 million and digital access COGS accrual of $8.5 million. Given that the pleading submissions refer only to para 76, and Mr Carter has given no evidentiary reference there, I am unable to make a finding in ASIC's favour on the question of accrued liabilities. I do not propose to sift through trial balances, management accounts and other evidence to try to find something to support ASIC's case, when ASIC has not bothered to document it.

[1645] Paragraph S6(b) alleges that the amount owing by the UK operations to trade creditors at 31 January was about $61.7 million, of which approximately $49.7 million was overdue and at least $21.6 million had been outstanding for more than 90 days. The pleading submissions identify para 91 of Mr Carter's principal report as the source of this information. The figures are correctly taken from the table at para 91, the source of which is the UK creditors ledger at Ex CE 6 0346. At 22.2.3.2 I consider evidence given on behalf of the defendants concerning terms of payment to carrier creditors and disputes. I note that almost half of the debt to 31 January is over 120 days, raising a degree of probability of disputes, and I refer to the evidence of Mr Silbermann as to the extent of those disputes. My conclusion is that, at any rate as to the January figures, ASIC has not shown that the UK operations were having any difficulty in paying creditors when required.

[1646] Paragraph S7 alleges that on 15 January 2001 the main operating account of the Australian operations exceeded its gross overdraft limit of $10 million. In its pleading submissions ASIC relies on the bank reconciliation for the main ANZ Brisbane account on that day (Ex CE 10 0005), which shows a bank balance of negative $13.31 million. I consider this question in detail at 22.2.2.6, where I note that, according to the intranet figures for that day (Ex CE 9 0013), the closing balance in Australia was $27,836,423, implying that if the ANZ Queensland account was in debit there must have been credit balances on deposit elsewhere. I conclude that while it appears that the gross overdraft limit was exceeded for the ANZ Queensland account, the Australian operations were substantially cash positive at close of business on that day, and so it may well have been that the "nil overall" arrangement with ANZ was not exceeded and/or that set-off arrangements were applicable (depending upon where the remainder of the funds were placed). Consequently it has not been proven that One.Tel was in breach of its overall arrangements with the ANZ on that day.

[1647] In the result, ASIC has not made out its pleaded case on any of the matters that constitute "the true cash and creditors position -- January 2001" pleaded at paras S3-S7. Nor has it proven its pleaded allegations regarding debtors, for reasons given in Ch 19, and EBITDA, for reasons given in Ch 20.

9.5 Conclusion as to ASIC's January case

[1648] ASIC has failed to prove any substantial component of the January circumstances, which are pivotal to its pleading. Not having proven the "true" financial circumstances in any pleaded respect, it is not in a position to prove that either defendant failed to take reasonable steps promptly to ensure that the board was aware of those alleged circumstances, or withheld or misled the board with respect to them, or failed to take reasonable steps to apprise himself of those alleged circumstances: statement of claim, paras 20, 31). Nor can ASIC establish any of the broader contraventions pleaded against the defendants, respectively, in paras 24 and 35 of the statement of claim, because according to paras 26 and 36 respectively, the conduct of each defendant is alleged to constitute a contravention of s 180 in the circumstances described in various 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, circumstances that ASIC has failed to prove in respect of January.

[1649] Given the state of the evidence, it is not necessary for me to consider whether ASIC has made out a case that is outside its pleading. However, for the reasons given in Ch 2, it would not be permissible for the court to find contraventions of s 180 by virtue of the defendants' conduct or failure to act in respect of the fixed wire/service provider January budget, if (contrary to my findings) ASIC's allegations about that matter had been made out.

[Chapter 10 (paragraphs [1650]-[2428]) is not reproduced. It sets out the evidence relating to February 2001. The chapter is summarised at [7442]-[7462]. The court's analysis of One.Tel's financial circumstances in February 2001 is set out in Chapter 11.]

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

[2429] The events of February 2001 are considered in Ch 10. In the present Chapter, consideration is given to the financial position of One.Tel at the end of February, by reference to the cash position, Australian overdue creditors, UK and European overdue creditors, and One.Tel's cash requirement. February EBITDA is dealt with in Ch 20. Extensive submissions have been received from the parties on these matters.

11.1 Cash position

[2430] ASIC sought to establish the cash position of One.Tel at the end of February 2001 by looking at the results for the first half-year, compared with the September 2000 budget, then examining January and February cash usage, and then the March cash forecast. However, before dealing with the submissions on those matters, a preliminary question about the evidentiary status of the daily cash flow spreadsheets needs to be addressed.

11.1.1 Relevance of daily cash flow spreadsheets

[2431] As a preliminary matter, it is necessary to consider the extent to which the daily cash flow spreadsheets that are in evidence for the Australian operations were reliable records of actual and forecast cash flow on a daily basis, and whether they were and should have been documents taken into account by One.Tel's senior management for the purpose of measuring business performance and managing the cash flow of the Australian operations. The daily cash flow spreadsheets were prepared by Ms Randall, who said in her affidavit that she updated them on a daily basis: affidavit of 6 June 2002, paras 4(a), 7.

[2432] ASIC's thesis about the daily cash flow spreadsheets is in four parts:

•: it was essential for management carefully to monitor the actual and prospective cash holdings of the group, including the Australian operations, and for the board to be apprised of cash flow forecasts in at least a summary form: APS [329];
(1): the defendants (and presumably other One.Tel management) needed to ensure that up-to-date and detailed cash flow records and forecasts were kept for those two purposes (that is, monitoring cash and reporting to the board);
(2): as there is no suggestion in the evidence that there were any detailed cash flow records and forecasts kept for the Australian operations other than the daily cash flow spreadsheets prepared by Ms Randall, those spreadsheets were the documents relied upon by the defendants and other One.Tel management for monitoring and reporting purposes in the Australian businesses;
(3): the defendants were in breach of their duties to the extent that they did not have regard to the information and forecasts in the daily cash flow spreadsheets, or at least ensure that the effect of the spreadsheets was conveyed to them: APS [330].

[2433] I do not understand the defendants to have disagreed with propositions (a) and (b). They strongly disagreed with proposition (c), and, of course, proposition (d). They claimed that in fact:

•: the daily cash flow spreadsheets were not the only, or even the principal, source of forecast cash flow information for Australia used by management: DPS [1385];
•: generally speaking, the daily cash flow spreadsheets were not forecasting tools used by anyone in the business other than Ms Randall, who used them for the limited purpose of day-to-day management of One.Tel's bank accounts (in particular, to decide how much cash should be kept on deposit and how much should be in One.Tel's operating account on a daily basis): DPS [1386a];
•: the only occasions on which daily cash flow spreadsheets were used by senior management were Mr Hodgson's use of 2403C.xls for preparation of the Australian forecasts for the March board papers, the use of a daily cash flow spreadsheet by Mr Hodgson, Mr Silbermann and Mr Rich on 17 April (1104jrmssh.xls), and the use of the spreadsheets by Mr Silbermann for cash management in late April and May when cash was very tight;
•: the forecasting tools used by the operational and senior management of One.Tel Australia were the business plans, which were regularly reviewed by the managers of each of the individual businesses and were reported on the board papers: DPS [1386b];
•: the company's business plans were prepared in a rigorous "bottom up" process during April and May each year and then kept under review and updated from time to time by the managers of the businesses, to reflect changes in the business and the market: DPS [1387], referring to 1 JDR [289]-[364] and MS [36]-[44].

[2434] ASIC has challenged the propositions that the daily cash flow spreadsheets were used only for management of bank accounts, and that the business plans were senior management's forecasting tool. So there are questions of fact to resolve on those two matters.

[2435] Mr Silbermann's evidence about the daily cash flow spreadsheets (MS [75]-[76], [807]) was as follows:

•

Ms Randall used them in her job but she did not distribute them and, generally speaking, they were not used by anyone else;

•

he did not regularly see the daily cash flow spreadsheets until late April 2001, when the cash position at One.Tel had become very tight and he was involved in closely monitoring cash flows on a more or less daily basis;

•

the forecasting information contained in the spreadsheets was limited to the current month and was used for short-term cash flow management;

•

the source for monthly cash flow forecasts in the board papers was the business plans for the businesses, rather than the daily cash flow spreadsheets;

•

the only occasions on which the spreadsheets were used by any manager at One.Tel were as follows:

(24) Mr Hodgson used a version of the spreadsheet to forecast cash flows for April, May and June for inclusion in the March board papers (referring, presumably, to the spreadsheet 2403C.xls);

(25) on Saturday April 2001 Mr Rich, Mr Hodgson and Mr Silbermann used the spreadsheet as a starting point for a review of cash flows for April and May (presumably 1104jrmssh.xls); and

(a)
in late April and early May, Mr Silbermann used daily cash flow spreadsheets to manage the cash position from day to day.

[2436] Likewise, Mr Rich said that the daily cash flow spreadsheets were not documents he ever had recourse to in the normal course of his duties, and that the cash flow forecasts that he saw and relied on were those contained in the business plans for the various business units, together with the cash flow forecast summary included in the board papers from September 2000 onwards: 2 JDR 1668.

[2437] There is some support for the defendants' evidence in the cross-examination of Ms Randall. She said (T 4879-80) that the numbers in the daily cash flow spreadsheets were for the current month plus one month out, they never "drove" the board paper result, and they were prepared for day-to-day cash management and liquidity management. Similarly, Ernst & Young said in their draft long form report prepared in late 2000 (Ex DTB 7/2889) that the daily cash flow forecasts were prepared for a month in advance, with the forecast finalised in the last week of the prior month, and that one of the main objectives of the forecast was to predict when withdrawals from the investment account would be required. Ernst & Young also summarised One.Tel's cash forecasting in the course of a cash management review conducted during 2000: see Mr Long's evidence at T 7154, and Ex DTB 9/3596. They said the forecast in the daily cash flow spreadsheet was prepared "to ensure that adequate funds are kept in the cheque account to meet operational needs", by predicting when withdrawals from the investment account would be required. They noted that Mr Barnes and Mr Hodgson reviewed the forecast (this was before Ms Randall arrived in February 2001), but they said the review was not a detailed review. They said that the cash flow in the business plans, which were updated approximately every three months, was not linked to the daily cash flow spreadsheet.

[2438] However, there is some evidence that the daily cash flow spreadsheets were used by senior management on other occasions. Mr Hodgson used a daily cash flow spreadsheet when he prepared his "heads up" email of 27 February 2001: see 10.27.2. Ms Randall's claim in her affidavit (para 20), that she and Mr Silbermann spoke on a daily basis about the daily cash flow spreadsheet from early March, is considered in Ch 12, in which I also consider the evidence about the circumstances in which Mr Silbermann gave her a handwritten note of instructions (Ex CED 6-12) by recourse to a daily cash flow spreadsheet, leading to the preparation of 0304 amended.xls. It seems to me that these further instances of senior management using daily cash flow spreadsheets do not undermine the thrust of the defendants' evidence, which is that the spreadsheets were primarily used for short-term cash and liquidity management rather than for management and board forecasting purposes, and were only exceptionally used by senior management.

[2439] ASIC attacked the defendants' claim that the business plans were the principal cash forecasting tool for senior management: ASR [1387]. ASIC referred to evidence by Mr Rich that the business plans were formulated on an annual basis, and were reviewed after about six months, or more frequently if there were significant developments in the business: 1 JDR 289. Mr Rich identified some changes to the 2000/2001 business plans occurring as a result of some specific events (for example, 1 JDR 348, 363), but as ASIC observed, Mr Rich did not suggest that a six-monthly review of the business plans had been undertaken before he left One.Tel on 17 May 2001. On the other hand the budgets/business plans were revised and updated for the purposes of the January board papers and so there were reasonably current forecasts available to the defendants, reflecting the views of the managers of the business units, in late January.

[2440] ASIC submitted that business plans developed on an annual basis are a wholly inadequate means of discerning a company's actual financial position on a month-by-month basis: ASR [1387]. This, it said, was particularly so in the case of One.Tel, in light of the company's rapidly diminishing cash reserves. Additionally, it said, the huge departures of the company's performance from its budgets and business plans during the first half of the financial year, and in succeeding months, accentuated the lack of utility of the business plans for this purpose.

[2441] Disregarding the hyperbole of the submission, it seems to me that senior management's actions in March 2001 are generally consistent with the submission, and also with the defendants' submissions. The position seems to have been that until March 2001, senior management, including the defendants, relied on the business plan/budgets, as updated by the business units, for the purpose of cash flow forecasting. Note, incidentally, that there is no suggestion of using the business plans to monitor actual cash, information about which was available from other sources including the intranet. However, the position changed in March, when it became plain that the business plans for the Australian ex-Next Generation operations would not be an adequate foundation for forecasting, because of the impact of the billing delay in February, difficulties with collections, and the Lucent payments in February and March. Forecasts were needed for the March board papers, taking account of these atypical developments, and in those circumstances Mr Hodgson, the senior executive in charge of the Australian ex-Next Generation operations, used a spreadsheet created for a different purpose as a foundation for forecasts of cash flow in the period from April to June. That must have signified that, at least as far as the Australian ex-Next Generation operations were concerned, the business plans were no longer useful for the purpose of forecasting to the end of the financial year, at any rate until they were reviewed.

11.1.2 Variances from cash flow budgets in the December half-year, and January and February

[2442] At the meeting at the offices of News Ltd with Mr Murdoch Snr, Mr Murdoch Jnr, Mr Packer Jnr and others on 19 October 2000 (see 7.8), Mr Rich said that One.Tel expected cash usage in 2000/2001 to be about $155 million (1 JDR 240), and that the group cash balance at 30 June 2001 was expected to be $115 million (1 JDR 242). Someone from News said that One.Tel's targets looked aggressive and Mr Rich said he responded, "our targets are aggressive but I think they are achievable": 1 JDR 243. The defendants submitted (DPS [1318]) that Mr Rich had in mind subscriber acquisition targets rather than cash flow when he described the targets as "aggressive", but Mr Rich's own evidence was not qualified in that way. The cash usage and cash flow targets in the January board papers were very similar: the cash balance at 30 June was forecast to be $114.25 million and cash usage for the full year was forecast at $152.636 million: Ex MTB 1/188.

[2443] ASIC submitted that if the targets were aggressive in October 2000, they should have been considered all the more aggressive when the results for the half year became known in January 2001: APS [311]. It submitted (APS [309]) that the cash usage of the group in the first half of the financial year was about $47 million more than had been budgeted for in the September board papers. ASIC said it was clear by January 2001 that, whether or not the year-end targets were still achievable, One.Tel was not on the track that had been marked out in September for the achievement of those targets: APS [312]. ASIC submitted that the cash usage for the first half-year was $179 million.

[2444] I deal with ASIC's calculations at 8.17.5-8.17.7. My conclusions are that:

•: the operational cash usage for that half-year was $168 million, not $179 million; and
•: the excess of operational cash usage over budget in the half-year to December 2000 was about $17 million rather than $47 million.

[2445] ASIC has reached the figure of $179 million for cash usage for the half-year by taking the figure contained in the January board papers, $171 million, and increasing it by $8 million on the ground that the announcement to the market 1 February gave the cash usage at $179 million. My finding is that it is inappropriate to make the adjustment upwards to the market announcement (8.17.6), and I have preferred to take the actual cash usage figure from the March rather than the January board papers, $168 million rather than $171 million, on the ground that at the time of the January board papers the half-year review was still being completed and therefore the March board papers are likely to be more accurate. ASIC has compared the actual half-year cash usage with the September budget, but for the reasons I give at 8.17.7, that is inappropriate and the revised budget figure taken from the January board papers, $151 million, should be used. Therefore the excess over budget for the half-year is 168 - 151 = $17 million.

[2446] According to the March board papers (Ex MTB 1/235), actual group cash usage was $14 million for January and $26 million for February, a monthly average of $20 million over those two months (APS [313]). The January board papers had forecast group cash usage of $16 million in January and $3 million in February (Ex MTB 1/191), and so the actual results for January and February were $21 million worse than the forecast in late January.

[2447] According to the March board papers, group cash usage for the 8 months to the end of February was $209 million (in rounded figures, 168+14+26). ASIC compared that figure with the forecast in the September board papers of group cash usage for the year to June 2001 of $155 million (Ex MTB 1/3; the figure is in fact $154 million, not $155 million as claimed by ASIC). According to the correct figures in the March board papers, after only eight months the company was $55 million in excess of the yearly group cash usage forecast in the September board papers. A more useful and accurate observation is that after the eight months from July to February, group cash usage exceeded the revised budget in the January board papers by $38 million ($17 million for the half-year, plus $21 million for January and February).

[2448] The defendants criticised ASIC for seeking to draw the inference that One.Tel was significantly "off track" to its year-end forecast result merely on the ground that there was a substantial shortfall in cash flow against the September budget in the first half-year and in the eight months to February 2001. The defendants' point was that conclusions should not be drawn from the sheer size of the budget shortfall in cash flow, without carefully considering the precise circumstances which gave rise to the variation in budget and forming a view as to whether they arose from fundamental variances in operating performance of the businesses or from what were essentially short-term fluctuations in the timing of cash receipts or payments: DPS [1321]. In principle, the defendants' submission is undoubtedly correct.

[2449] The question is whether there are explanations for One.Tel burning cash at a higher rate than budgeted (on my figures in a group excess of $38 million; on ASIC's figures a group excess of $68 million plus further adjustments noted at 11.1.3). ASIC's figures for January and February are correct as they are taken from the January and March board papers, and so the excess to be explained for those two months is $21 million, but the correct cash usage for the half-year is $17 million rather than $47 million.

[2450] To answer that question, the defendants made submissions about the international businesses, Next Generation, and Australia (ex-Next Generation). Their submissions give figures that are evidently based on the assumption, contrary to their submission, that it is relevant to compare actual cash flow with the September forecast.

[2451] As to the international businesses, they prepared a table (DPS [1322]) comparing forecast and actual monthly cash flow for the international operations, as stated in the September, November, January and March board papers, for each month from July 2000 to February 2001 inclusive. The table shows that over that period, the September board papers forecast a cash outflow of $44 million and the March board papers stated the cash outflow (no longer forecast cash flow) to be a cash outflow of $40 million. Those figures indicate that if there was a very large group cash flow shortfall over the eight months from July to February inclusive, as ASIC claimed, it was not contributed to by the international operations. ASIC tried to explain away the good February result (cash inflow of $8 million, according to the March board papers, against a September forecast for February of a cash inflow of $3 million) by contending that the good February figures included foreign exchange gains and asset financing: ASR [1322]; APS [251]-[252]. But as the defendants pointed out, it is not clear whether future asset financing, a normal incident of the way One.Tel conducted its business in the UK, was budgeted for in the September figures. On the whole, I agree with the defendants that, when one considers the cash flow figures for the international businesses in late 2000 and up to February 2001, there was nothing that ought to have provoked any special concern on the part of management or the board that the figures materially reduced the likelihood of those businesses or the group meeting their year-end cash flow budgets: DPS [1326].

[2452] As to Next Generation, the defendants prepared an equivalent table to the one they had prepared for the international businesses: DPS [1329]). The Next Generation cash flow figures for the months of July, August and September 2000 were closely comparable in the September, November, January and March board papers, but the cash usage forecast in September for the months from October to February was $34 million less than the actual figures in the March board papers.

[2453] The defendants offered a partial explanation for the excess of cash usage over budget by referring to the board's decision at its September meeting to approve additional spending of $22 million on Next Generation subscriber acquisition, in order to acquire 60,000 more customers over the ensuing three months. The September board papers (Ex MTB 1/13) explained that the promotional expenditure would have a negative cash impact on the first half-year of $22 million, but the new subscribers would contribute revenue of $20 million in the second half-year. According to the defendants, that explained a "large part" of the variance of $34 million: DPS [1332]. But ASIC challenged the defendants' assumption that the $22 million was in fact spent: ASR [1328-1337].

[2454] Mr Rich gave evidence to the effect that in December 2000, there was a high level of marketing activity by Hutchison and Vodafone in the mobile telephony market, so One.Tel did not spend as much as planned on marketing in that month, with the result that fewer subscribers were signed up in December that had been budgeted. The November board papers reflected the approval of the promotional expenditure by forecasting a 51,000 increase in customers to 127,858 by the end of December. In fact, however, on 31 December 2000 the total number of subscribers was only 102,141, and so only 25,000 of the 60,000 new subscribers who were to be acquired by the promotional expenditure were in fact acquired. ASIC invited the court to infer from these facts that nowhere near the full $22 million had been expended prior to 31 December 2000, and consequently that the promotional expenditure was not a "large part" of the variance of $34 million.

[2455] It seems to me more likely than not that One.Tel management, having received board approval for increased expenditure of $22 million over three months to promote customer acquisitions, would have reasonably promptly committed to an expenditure program for the whole amount. The subsequent cutting back of expenditure to which Mr Rich referred probably meant that less than the whole $22 million of extra expenditure was in fact spent up to the end of December 2000, but just how much less than $22 million is not clear. The fact that only 25,000 of the 60,000 anticipated customers were acquired may only mean that the marketing program was not as successful as hoped, and does not necessarily indicate that the money was not spent. My conclusion is that the promotional expenditure was probably largely but not entirely spent by the end of December.

[2456] The defendants noted that part of the $34 million variance related to the month of February, for which the September board papers had forecast a cash outflow of $13 million, while the March board papers reported a cash outflow of $27 million. That, according to the defendants, is explained by the shortfall in collections in February as a result of the two week billing delay in late January and early February. They said that by mid-March, those billings had been largely caught up (citing 1 JDR 1016) and were expected to be collected during March and April, so there was no reason for management or the board to consider that variance as anything other than a short-term issue (DPS [1335]).

[2457] In the result, the defendants have identified two partial explanations for the $34 million variance from the September budget in Next Generation cash flow, which together explain most of the variance, and possibly even all of it. In light of those matters, there was nothing in the variance figures to the end of February to indicate that the business was materially less likely to meet its year-end cash flow budgets (adjusted for the additional promotional expenditure) than it had been in late 2000: DPS [1336].

[2458] The defendants prepared an equivalent table for the Australian (ex-Next Generation) operations: DPS [1338]. It shows that the September, November, January and March board papers gave identical figures for July and August, but there was a variance of $21 million between the September board papers, which forecast a cash inflow of $14 million for the period from September to February, and the March board papers, which forecast a cash outflow of $7 million for the same period. What is evident from the table is that there were two main components of the total variance, a marked variance from the September forecast of $21 million in November and a further variance of $8 million in February.

[2459] The defendants submitted that the large November variance was explained in the November board papers (Ex MTB 1/128) as leading to an increase of $17 million in cash usage for October and November due to delays in billing runs, expected to be caught up by late December with the majority of the cash flow being restored by February. The defendants said the billing catch-up was not completed until early January, and it was reported to the January board (Ex MTB 1/194) that "bills are now being issued on time and previous delays have now been brought up to date". The defendants' table shows a cash inflow in December and January totalling $10 million, compared with the original forecast in the September board papers of a cash inflow of $3 million for those two months. The board papers explained that a component of the backbilling was to be billed in January and February. Reflecting that expectation, the forecast for February in the January board papers was increased from a cash inflow of $1 million forecast in September to a cash inflow of $13 million.

[2460] In fact there was a cash outflow of $7 million in February, a variance of $8 million to the September forecast and of $20 million to the January forecast. That, said the defendants (DPS [1343]), was because of the billing delay in late January and early February. Since those billings had been largely caught up by mid-March (1 JDR 1016) and were expected to be collected during March and April, there was, according to the defendants, no reason for management or the board to consider that variance as anything other than a short-term issue.

[2461] Obviously the billing delays in November and February meant that One.Tel was no longer "on the track which had been mapped out for the achievement of" its year-end targets, to use ASIC's words: ASR [1347-53]. The principal question is whether the problems that had taken it off track were more than timing issues, and therefore would be likely to prevent it from achieving its targets. In this respect, ASIC contended that the 11 defendants' submissions failed to deal with the magnitude of the variance to budgeted usage as at February. On the defendants' own figures presented in their tables (prepared on the assumption that it was appropriate to compare actual figures to the September budget), the variance in monthly cash flow from July 2000 to February 2001 between the September 2000 forecasts and the March board papers was $37 million for Next Generation and $21 million for the Australian (ex-Next Generation) operations, a total of $58 million, reduced to $54 million by a slightly better than budgeted result for the international operations. But the components of explanation relied upon by the defendants would account for most of that variance, provided that the billing delays (in particular, February billing delay) had the substantial effect on cash flow for which the defendants contended. That question is addressed below.

11.1.3 Factors exacerbating the cash flow variance

[2462] ASIC made submissions designed to show that the true cash position was in fact worse at the end of February than the March board papers showed, relying on three matters:

•: creditor deferrals;
•: arrangements for financing receipts;
•: the billing catch-up in January 2001.

11.1.3.1 Creditor deferrals

[2463] ASIC submitted (APS [314]) that cash burn for January and February would have been $61 million rather than the $40 million stated in the March board papers, if the figures had been adjusted to take into account creditor payments deferred in Australia and the UK. As to Australia, ASIC relied on Mr Hodgson's email of 27 February 2001 (Ex CED 1-775), in which he explained to Mr Silbermann the need for a $26 million cash transfer. In that email Mr Hodgson identified "Carriers (deferred from Feb)" of $12 million including $4 million for Telstra. ASIC said that if the Telstra payment were excluded, then there were $8 million of Australian creditor payments deferred at the end of February. But the discussion of the Optus non-GSM monthly payments at 10.19.2 shows that from September 2000, One.Tel had adopted the practice of making those payments at the beginning of the month and so, in accordance with that practice, payments to Optus of about $7.2 million, mostly formally due on 28 February, were paid on 1 March. In the circumstances I would not adjust the cash flow variance by reference to the Australian creditor figures.

[2464] As to the UK, ASIC claimed that deferrals at the end of February amounted to about £5 million or $13 million. As explained in 10.20.1, a number of carrier creditors were unpaid in February, including BT and WorldCom, and the total amount was in the order of $13 million, but there were plausible reasons for non-payment. To the extent that those reasons related to disputes and set-off, there would need to be a discount against that figure if it is to be taken into account in assessing the "true" available cash at the end of February. Probably an amount between $5 and $10 million should be added to the variance to take into account the underpayment of European creditors in February. That would have reduced the group cash balance at the end of February from $64 million as disclosed in the March board papers (Ex MTB 1/235) to $54-59 million.

11.1.3.2 Arrangements for financing receipts

[2465] It appears from the Carrier Presentation made by One.Tel UK on 5 June 2001 (Ex CED 4-235 at 4-46) that in February 2001 the UK business received a net cash inflow from finance lease receipts less finance lease repayments of £ 2.78 million (approximately $7.23 million, at an exchange rate of 2.6; ASIC's figures incorrectly disregard finance lease repayments). ASIC submitted that this funding should not be treated as part of ordinary cash flow from operations: APS [315]. ASIC referred to the description of these receipts in the March board papers (Ex MTB 1/236), namely "assets from previous year vendor financed in the current year", and noted that at the 17 May board meeting Mr Beck said there was no further funding possible in this area (Ex MTB 1/331).

[2466] I agree with ASIC that receipts from refinancing acquisitions of assets made in previous years by putting them into finance leases should not be treated as operating cash flow for the purposes of calculating the company's cash position. But if those receipts are excluded, then caution has to be exercised in comparing the resulting figures with budget figures, which may have included the anticipated finance lease receipts. In view of that risk, I would not make an adjustment to the variance figures to remove financing receipts. An additional reason to support this conclusion is that in at least some cases, the financing receipts were part of the capital equipment deal, and so in those cases it would be wrong to include the capital expenditure in the calculation of cash flow without including the financing receipt, which was an important component of the transaction: DPS [1352].

11.1.3.3 January billing catch-up

[2467] As noted earlier (at 7.13), One.Tel's billing was disrupted for various reasons in late 2000, and the January board papers said that a billing catch-up in Australia would produce cash flows of $35 million (Ex MTB 1/187). ASIC submitted that the actual cash usage for January and February, $40 million, was particularly poor compared with the September forecast of cash usage of $23 million for those two months, in light of the anticipated receipts from the billing catch-up: APS [316]. The cash usage forecast in the September board papers could not have anticipated the subsequent billing delays and catch-up and so it could not have factored into the budget the anticipated additional receipts in February. But the January cash flow, considered separately from the February cash flow, was substantially better than the September board forecast, indicating that substantial additional cash was coming into the company through the catch-up after the November disruptions. I would not see these considerations as worsening the cash flow variance.

11.1.4 Effect of February billing delay on February cash flow

[2468] In the result, ASIC's contention (adjusted to reflect the correct figures) was that by the end of February 2001, group cash usage had exceeded the September budget for the full 2000/2001 year by $76 million ($55 million plus $8 million plus $13 million). I do not regard it as useful to compare the actual figures for the 8 months from July to February with the September forecast for the full year, and in any event I do not accept ASIC's figures for the reasons I have given. On my figures (assuming, contrary to my view, that there is utility in the comparison), the group variance between the September board forecast for the full year and the actual figures in the March board papers for the eight months from July to February inclusive, adjusted for underpayment of UK creditors in February, was $59-64 million. A more meaningful comparison is between the actual group cash usage for the eight months from July to February taken from the March board papers (168+14+26, rounded to $209 million) with the budget figures given in the January board papers (151+16+3 = $170 million), an excess of $39 million, the majority of which is in February.

[2469] The defendants pointed to the February billing delay in the Australian operations as an explanation for the poor group cash flow result in February, but ASIC submitted that the impact of the suspension of billing for 2 weeks in late January to mid-February was only in the order of $16 million: APS [127]-[132]; [318]. In my view, the evidence shows that the actual shortfall in February cash caused by the billing delay was in the order of $25 million. The February shortfall is considered at 10.19.2, and the March catch-up is at 10.27.2.

[2470] ASIC also submitted that the billing delay from late January to mid-February could not be treated as an aberration: but instead it was symptomatic of underlying billing problems that had occurred from at least mid-2000 and continued unabated through the financial year: APS [319]; [178]-[181]. It noted (APS [319]) that the defendants had not sought to identify the cause of delay and demonstrate that the issue had been dealt with in such a way as to ensure that a similar delay would not occur again. The latter part of the submission is not pleaded and in any event, both parts of the submissions seem to me to be incorrect on the evidence. Mr Rich explained how the causes of the delay were addressed in February (1 JDR 1005, 1010), and Mr Kleemann did not raise any concerns when he was briefed on what had been done in relation to billing delays (1 JDR 1015).

[2471] ASIC submitted that if the February cash problem was merely a timing problem, as the defendants suggested (1 JDR 1711d; MS 939-940c), there should have been a discernible catch-up of cash in following months (APS [320]). In the September board papers (Ex MTB 1/4) the forecast group cash usage was $9 million in February, $2 million from March and $6 million for April. According to the March board papers, the actual group cash usage in February was $26 million, the estimated group cash usage for March was $3 million and the forecast group cash usage rate for April was $8 million. Thus, said ASIC, after the February billing delay occurred and had been rectified, One.Tel management were not forecasting improved results in March and April reflecting the catch-up of billings, and in fact the March board figures for March and April were marginally worse than the September figures for those months. ASIC contended that this was an indication that the billing delay in February was symptomatic of an underlying billing problem.

[2472] I find it surprising, and somewhat troubling, that ASIC chose to support a point about March billings in the Australian operations by recourse to group figures, no doubt fully aware that the group figures would be influenced by international results that would have nothing to do with the billing catch-up in Australia (compare ASR [1356], which does not allay my concern). There was a more obvious source of information about actual March billings in the Australian operations, namely the spreadsheet 2905.xls, upon which ASIC has relied to support many other submissions. That showed that the Australian inflows from trade debt in January were $68.3 million, falling to $46.7 million in February but rising again to $79.1 million in March. The fall from January to February was about $22 million and if January was a "normal" month, the increased billings in March over what would be normal were about $11 million. I have explored the March billings more fully at 10.27.2.3, where I conclude that about $19.7 million of the March billings was attributable to the catch-up after the February billing delay.

11.1.5 March cash outflows forecast

[2473] ASIC submitted (APS [323]) that in formulating his two emails of 27 February 2001, Mr Hodgson was working from the daily cash flow spreadsheet of the previous day, that is 2602.xls. This seems to me to be likely, since the figures given in the "heads up" email for the February actual inflows and outflows and the March forecast inflows corresponded with the spreadsheet figures (in the case of the February outflows, the figure given by Mr Hodgson, $79 million, was the total of the operating outflows of $54.2 million, computer capital expenses of $1.28 million and GSM expenses of $23.6 million stated in the spreadsheet). However, the forecast outflows for March, given at $70 million in the email, do not coincide with those in 2602.xls. In the spreadsheet, the figures were total operating outflows of $74.1 million, computer capital expenses $1.2 million and GSM expenses of $27.3 million, a total of $102.6 million.

[2474] ASIC suggested (APS [323]) that the variance between the spreadsheet and email might be explained by the fact, stated by Mr Hodgson in the email, that he was "still working on March" or that he already had in mind substantial deferrals of payments to creditors. The defendants responded at length to ASIC's suggestion: DPS [1357]-[1383]. In the present context, what is at stake is whether, as at the end of February, forecast outflows in March were, or were near to, $70 million or $102.6 million, and if the figure was in the vicinity of $70 million, whether it was achieved by a large deferral of payments to creditors. The defendants made two principal submissions:

•: the outflows figures in the spreadsheet being used by Mr Hodgson, 2602.xls, were carried over without substantial change from 2002.xls, prepared by Ms Randall, which was wrong and unreliable;
•: the outflows figures were not revised by Ms Randall until 1203.xls, and in that spreadsheet the total figure is $72.1 million, close to Mr Hodgson's forecast in his email.

I take it that the defendants invite the court to draw the conclusions that at the end of February the correct forecast for March was a net cash inflow of $7 million from the Australian operations (including Next Generation), and that this figure did not involve any significant deferral of payments to creditors.

[2475] In my opinion it is correct to say that the outflows figures for March were put into the daily cash flow spreadsheet in the spreadsheet at 20 February, in which the total outflows from operations, computer capital expenses and GSM expenses were $94.5 million. Given the history of variations to the outflow figures, my view is that nothing useful would be achieved by pronouncing upon the veracity of 2002.xls in light of the defendants' cross-examination of Ms Randall: compare DPS [1361]-[1362]. It is worth noting, however, that 2002.xls made provision for paying the Optus non-GSM accounts, totalling a little over $10 million, twice: cells EI 46-54 and FD 46-54. Although the due date of most of those accounts was the last day of the month, One.Tel had adopted the practice of paying the accounts at the beginning of the following month and, in my view, there was no justification for including the second payment in the March cash flow, given that it was not going to be made until April. The mistake was corrected in the spreadsheet 2102.xls and does not appear in the later spreadsheets, including 2602.xls.

[2476] It is not correct to say that the outflows figures in 2002.xls remained substantially unrevised until 1203.xls. The outflows figure was reduced by about $12 million in 2102.xls and then in 2602.xls, the spreadsheet that Mr Hodgson had available to him for his emails, the figure went up to $102.6 million because of substantial increases in both outflows from operations and GSM expenses. The figures were adjusted in 2702.xls and 0103.xls but the totals were about the same as in 2602.xls. There were further revisions in 0503.xls and 0803.xls, in which outflows from operations remained around $65 million but GSM expenses fell by about $12 million, so total outflows dropped to about $88 million. In 0903a.xls the March outflows from operations fell by over $4 million and the GSM expenses fell by about $6 million, so that the total outflows for March became $76.8 million. Then in 1203.xls, outflows were revised to $72.1 million, largely because of a reduction of outflows from operations from $61.7 million to $55.6 million.

[2477] It appears from this outline of fluctuations that the forecast March outflows reached a high point in 2602.xls, especially bearing in mind that the double counting of the Optus non-GSM payment had been removed, and therefore the outgoings figures seemed on their face anomalous. Mr Hodgson may well have realised this from his detailed knowledge of what lay behind the numbers, and therefore may have chosen not to rely on 2602.xls for outflows. Whether he meant to convey, in his email, that he was still working on the outflows as well as the inflows does not matter. The more important point is that he evidently decided not to rely on the outgoings figures in the spreadsheet he had before him, and so he must have applied his own knowledge of the business to work out the outflows number in the email. That is consistent with the proposition that he decided to defer creditor payments, but it may be explained by mere overstatement of the outflows figures due to some misunderstanding by the person who prepared the spreadsheet (Ms Randall) of when and in what amounts payments were actually due.

[2478] This interpretation of events is supported by some evidence of Ms Randall. She confirmed that when she was working on 2602.xls, she had been at One.Tel for less than 2 weeks (T 4658), had never before worked in the telecommunications industry (T 4658), and at that stage there were "many entries" with terminology foreign to her (T 4661). She agreed that she was still feeling her way around the One.Tel organisation, in terms of trying to work out who worked where and who she would need to speak to: T 4732. She said her March forecast was very much a "work in progress" which she worked on over the succeeding weeks "to refine and to adjust": T 4768. Those limitations, presumably known to Mr Hodgson, may well have assisted him to conclude that the outflows in 2602.xls were unreliable for some reason.

[2479] There does seem to have been some significant attention paid to the outflows from operations in the time between preparation of 0903a.xls and 1203.xls. The evidence needs to be assessed in light of Ms Randall's evidence about the Deferred Payment Listings. Ms Randall gave evidence, considered in Ch 12, that in early March Mr Silbermann told her to take certain creditors out of the cash flow and record them separately, because they were to be managed: affidavit of 6 June 2002, para 15. Ex SJR 4 is the "Deferred Payments Listing" she prepared for March.

[2480] Ms Randall also gave evidence that on about 11 or 12 March 2001, some time after her conversation with Mr Silbermann about taking creditors out of the cash flow and managing them, he asked her to begin to prepare a daily cash flow variance report (affidavit of 6 June 2002, para 19), she decided to update the daily cash flow forecast for the rest of March to make it as accurate as possible (T 4787; 4816, 4827, 4829). She said with that objective in mind, she talked to people who were responsible for the forecast payments and then adjusted her forecasts to reflect what she had been told as to the likely payments for March: T 4817. She was taken to various changes in forecast payments that were made in 1203.xls, and in each case she said it was possible that the information leading to the change came from the person responsible for the payments internally, or even in some cases that this was probable: T 4817-4830, T 4863.

[2481] In cross-examination Ms Randall was not referred to the fact that many of the removals from payment in March were entries contained on her March Deferred Payments Listing. If this had been pointed out to her, she may well have said that in respect of each of the creditors on that list, the change to the spreadsheet was made on Mr Silbermann's instructions rather than by talking to the person responsible for payments internally. That, after all, was what she said in her affidavit. In the circumstances I do not place reliance on her evidence that she sourced the changes to the spreadsheet in conversations with the people responsible for payment.

[2482] The defendants have prepared a table (DPS [1371]), which lists 25 outflows, mainly payments to carrier creditors, where there is a variance between 0903a.xls and 1203.xls. In eight cases the variance is an increase in the forecast payment, the total increase being $3.66 million. In the remaining 17 cases the variance is a decrease, sometimes to zero but sometimes merely to a lower amount, the total decrease being $7.63 million.

[2483] The creditors mentioned in that document are almost the same as the list of creditors in the Deferred Payments Listing for March. ASIC has prepared a table (reply Sch 1) which reproduces the Deferred Payment Listing for March and traces the figures to the cash flow spreadsheets 0903a.xls and 1204.xls. I have reviewed that table by reference to the spreadsheets and I have found it to be correct. There is a reasonably high degree of consistency between Ms Randall's list and the deferrals of payments forecast to be paid in March in 0903a.xls and deferred to April in 1203.xls. The figures for the creditors do not entirely correspond, but in some cases one can clearly see on the spreadsheet a creditor appearing for a substantial amount in 0903a.xls and not appearing at all in March in 1203.xls. The total of the reduced items listed in the defendants' table is, as I have said, $7.63 million, whereas the total on the Deferred Payments Listing is $10.67 million.

[2484] In the circumstances I do not accept the defendants' submission that the changes made to reduce outflows from operations in 1203.xls occurred because Ms Randall wanted to make the spreadsheet accurate and therefore spoke to those responsible for payment internally and adjusted the spreadsheet according to what they told her. I think the changes to the spreadsheet in 1203.xls support Ms Randall's evidence that she was deferring payments to certain creditors from March to April, acting on instructions. Therefore recourse to 1203.xls does not help the defendants to show that there was no element of deferral of creditors in Mr Hodgson's estimate of outflows of $70 million in his "heads up" email. In my view it is an open question whether Mr Hodgson made a large reduction to the outflows figure in 2602.xls because he planned to defer payment of substantial amounts owing to creditors or because he identified some large mistakes in the spreadsheet.

11.1.6 Summary conclusions as to February cash flow

[2485] According to the March board papers (Ex MTB 1/235), actual group cash usage was $14 million for January and $26 million for February. The January board papers had forecast group cash usage of $16 million in January and $3 million in February (Ex MTB 1/191), and so the actual results for January and February were $21 million worse than the forecast in late January.

[2486] According to the March board papers, group cash usage for the eight months to the end of February was $209 million. The forecast in the September board papers of group cash usage for the year to June 2001 was $154 million: Ex MTB 1/3. After only eight months the company was $55 million in excess of the yearly group cash usage forecast in the September board papers. Adjusted for underpayment of UK creditors in February, the variance from the September forecast was $59-64 million. But the comparison with the September budget is not useful because the budget had been revised several times. A more appropriate comparison is between the actual group cash usage for the eight months to the end of February of $209 million and the revised budget figures in the January board papers of $170 million, still a substantial variance of $39 million, to which may be added underpayment of UK creditors in February, bringing a figure to $44-$49 million.

[2487] Part of the explanation for the variance from the September forecast was the board's approval in September of promotional expenditure of $22 million, most though probably not all of which was in fact spent by the end of December. Another part of the explanation is the billing delay in late January and the first half of February, which on my calculations reduced the February figure by about $25 million. There is still a variance from the September forecast over the eight months from July to February in the order of $10 million plus creditor deferral in Europe of another $5-10 million, but the figures are nowhere near as alarming as portrayed in ASIC's submissions, and in any event the September forecast had been revised in the meantime and on the revised figures, almost all of the variance is explained by the defendants' evidence.

11.2 Australian overdue creditors at 28 February

[2488] The Australian and UK overdue creditors position at the end of February has been the subject of a very large quantity of submissions. Evidence and submissions relating to creditor communications are dealt with in Ch 18. Submissions relating to the level of overdue creditors in any month are dealt with in the findings as to the financial position in that month.

[2489] Unfortunately ASIC and the defendants have organised their submissions about the level of overdue creditors differently, so I have had to adopt my own system of organising the evidence, submissions and findings. Some of the submissions about the level of overdue creditors relate specifically to February or some other month, but many of them relate to general questions such as the overall reliability of aged creditors reports. Some of the submissions that are directed specifically to Australian and UK and other European overdue creditors overlap, and there are some general themes, especially in the defendants' submissions.

[2490] I have therefore decided to consider, first, Australian overdue creditors, a topic that will require me to investigate the reliability of the Australian creditors ledgers and aged creditors reports; second, UK and other European overdue creditors, including consideration of the reliability of the UK creditors ledgers and aged creditors reports; and third, some considerations relating to overdue creditors generally, concerning usual business terms of payment, administrative delays and disputes. That will put me in a position to make findings as to whether ASIC has proved its case about the level of overdue Australian and European creditors in each of the months of January-April 2001.

[2491] ASIC's submissions on the Australian overdue creditors seek to establish the general level of overdue creditors according to aged creditors reports, and then to argue that the position was in fact worse because of the Lucent payment, unpresented cheques, and late posted invoices. These matters are considered at 11.2.1-11.2.4. The defendants make submissions on two fronts. First, they question the reliability of the aged creditors reports and the creditors ledgers from which they were extracted, on grounds relating to incorrect ageing of creditors, late posted credit notes, missing payments, and lack of reconciliation of the creditors ledgers to creditors statements. These issues are considered at 11.2.5. Second, they argue that even if the aged creditors reports are accepted as generally reliable, they do not signify the disastrous position for which ASIC contended, and they are largely explicable in terms of disputes with Telstra and Optus. Submissions on that matter are considered at 11.2.6-11.2.9.

11.2.1 Australian overdue creditors at 28 February according to the aged creditors reports

[2492] As part of its pleaded allegations as to "the true cash and creditors position" as at the end of February 2001, ASIC pleaded that One.Tel's end-of-February Group cash result was only achieved after deferring the drawing of cheques to major creditors, as a result of which the total amount outstanding on overdue debts owing by One.Tel's Australian operations was about $29.3 million: statement of claim, para S10.

[2493] In its written submissions ASIC relied on figures for Australian overdue creditors taken from Mr Carter's principal report, at PR 99, which in turn were taken from the aged creditors reports in the Carter Exhibits (the Australian aged creditors report at 27 February 2001 is at Ex CE 6 0143). Those figures were that Australian overdue creditors stood at $24 million at the end of January, $29 million at 27 February (the creditors ledger for 28 February was not available to Mr Carter), $50 million at the end of March, $54 million at the end of April and $77 million on 29 May. Mr Carter's figures for January, February, March and April correspond with the total amounts for those months alleged, in the schedule to the statement of claim, to be outstanding in the Australian operations: paras S5, S10, S27 and S37.

[2494] As I have said, Mr Carter relied on the Australian aged creditors reports. One.Tel's Australian creditors ledgers were maintained on its Adept accounting system. Senior counsel for the defendants told the court that the creditors ledgers of One.Tel comprised approximately 11,000 pages: T 10575. Australian aged creditors reports were reports that could be generated from the creditors ledgers, and subsequently accessed, by navigating through the Adept main menu screen to a report menu in the manner described in the affidavit of Adrian Bannister made on 28 April 2004, paras 31, 32: see also the evidence of Ms Thomas, T 10075. Thus, those reports were computer-generated summaries as at particular dates, extracted from the larger acounting record composed of the creditors ledgers. Aged creditors reports were run off as part of the month-end process by the accounts payable team, according to Mr Rich: T 10853. Once generated, the reports were kept in the "Finance/Accounts Payable/Aged Creditor Reports" section of the I:drive.

[2495] In form, an aged creditors report was a list of outstanding creditors in alphabetical order, setting out for each creditor all open (unpaid) invoices by invoice date, due date, invoice amount, amount outstanding per invoice, and the total amount outstanding (total open) for the creditor. The amount outstanding for each invoice was allocated to ageing bands. For example, in the aged creditors report at 27 February 2001 (Ex CE 6 0068-0143) the ageing bands were "Due After 27/02/01", "Due by 27/02/01 [0 days]", "Due by 28/01/01 [30 days]", "Due by 29/12/00 [60 days]", "Due by 29/11/00 [90 days]" and "Due by 30/10/00 [120 days]".

11.2.1.1 A duty of care case, not an insolvent trading case

[2496] In respect of each of February, March and April, the schedule to the statement of claim alleges that the companies within the Australian operations had insufficient cash to pay all overdue creditors, and that they had insufficient cash and liquid assets to pay all debts: paras S18, S19, S33, S34, S38A, S38B. Those pleadings evoke a central ingredient of an insolvent trading case under Pt 5.7B, Div 3 of Corporations Law. However, there is no pleaded cause of action based on insolvent trading provisions of the Corporations Law, but only a cause of action for breach of the statutory duty of care and diligence in s 180.

[2497] It is important to bear this in mind, because there are some matters relevant to s 180 which would not be relevant to an insolvent trading case. In an insolvent trading case, the general proposition is that, for the purpose of assessing the company's solvency under s 95A, a contractual debt is payable at the time stipulated for payment in the contract, unless there is evidence showing an express or implied agreement for extensions of time between the parties: Southern Cross Interiors Pty Ltd (in liq) v DCT (2001) 53 NSWLR 213 ; 188 ALR 114 ; 39 ACSR 305 ; [2001] NSWSC 621 at [54] per Palmer J; cited with approval in Plymin and in Emmanuel Management Pty Ltd v Foster's Brewing Group Ltd (2003) 178 FLR 1 ; [2003] QSC 205. The existence of a series of late payments is not sufficient, by itself, to change the payment date stipulated in the contract, in the absence of evidence of some agreement, understanding or acquiescence on the part of the creditor to the effect that the legal payment date has been extended: Re Kerisbeck Pty Ltd (1992) 10 ACLC 619.

[2498] In a duty of care case, if the court finds that there has been a series of late payments of a creditor's account, the evidence as a whole might support the conclusion that a reasonable person in the position of a defendant would expect the payment practice to continue and would act accordingly. In my view, it would be possible to reach the conclusion that a defendant's conduct has been reasonable, even if the facts would not justify a finding of consent to or acquiescence in late payment on the part of the creditor -- for example, if the evidence shows that the late payments have been systematic and the practice has been long-standing, and is in accordance with industry practice.

11.2.1.2 Mr Rich's evidence as to his knowledge and belief concerning Australian aged creditors

[2499] Mr Rich dealt with the table at PR 99 in his affidavit, at 2 JDR 1694-9. He said that until late April 2001 (when he became aware that payments to creditors in Australia were being carefully managed by Mr Silbermann in the context of One.Tel's tight cash position), he was not aware of creditors being paid outside One.Tel's normal payment practices (including its normal practices in relation to disputes). He said he would have expected to have been made aware of any change in normal practices.

[2500] Mr Rich said he was aware that there were disputes between the Australian operations and carriers and Lucent, and he said that based on what he knew, he would not have been surprised that there was an increase in amounts notionally "overdue" in the period up to late April as a result of those disputes. He referred to the Next Generation team refusing to pay operations and maintenance invoices from Lucent because of overcharging and double charging, which led to Lucent agreeing to defer further invoices until after 30 June 2001. He also noted that during April the fixed wire/service provider business was withholding a payment to Optus to crystallise a dispute as to whether Optus was providing One.Tel with complete CDRs, and Next Generation was withholding payment from Telstra on roaming invoices because of a dispute about the accuracy of the invoices.

[2501] The credibility of Mr Rich's evidence as to his state of knowledge and belief concerning aged creditors depends upon the evidence of One.Tel's disputes with Lucent, Telstra and Optus, and also the evidence as to usual business terms and disputes with creditors generally. Since I accept the defendants' evidence on these matters for the detailed reasons I shall explain, I accept Mr Rich's evidence about his state of knowledge and belief at relevant times.

11.2.1.3 ASIC's onus of proof

[2502] ASIC submitted that, while the overdue creditors figures were not accepted by the defendants, the defendants did not advance any lower figure as the true overdue creditors position: APS [333]. That was true at the time of ASIC's principal submissions, but subsequently the defendants have submitted tables indicating, in effect, what the true overdue creditors position would be if certain assumptions were made about the 0-30-day debt and the over 120-day debt: DPS [1800]-[1810], considered at 18.4.4. More importantly, the defendants' case is that the aged creditors reports contain serious flaws that they have not been able to quantify precisely, and in any event, they point out that ASIC bears the onus of proving its pleaded case. The Australian aged creditors reports are business records and books of the company, which are therefore prima facie evidence of their contents under s 1305 of the Corporations Act. But if the defendants are able to point to evidence which undermines the prima facie evidentiary status of the aged creditors reports, then it is ASIC's task to prove its case having regard to the evidence as a whole, on the balance of probabilities: see 3.3 and 3.4.

[2503] ASIC also submitted (at APS [333]) that it would be consistent with the defendants' evidence about non-payment of creditors by their contractually due dates that there were very substantial overdue creditors at month-end in January, February, March and April (referring to 2 JDR 1640-1660; MS 799-803). I agree with that submission, provided that "overdue" is taken to mean unpaid after the contractual due dates, leaving open the question whether the invoices might not have been due according to usual practice, or disputed. Of course, that qualification destroys the force of ASIC's submission.

11.2.2 The lucent payment

[2504] ASIC's submissions under this heading were designed to add $10 million to the overdue Australian creditors at 28 February 2001, by reason of One.Tel's settlement with Lucent on 27 February 2001, under which One.Tel became obliged to pay Lucent $10 million. I do not accept this adjustment, for the reasons that follow.

[2505] The evidence concerning the agreed payment arrangements negotiated between One.Tel and Lucent at the end of February 2001 is considered at 18.6. As Mr Hodgson's "heads up" email of 27 February 2001 (Ex CE 1-774) makes clear, the payment of $10 million to Lucent, which was part of the negotiated outcome, was an unbudgeted payment for One.Tel, and therefore did not appear in the aged creditors list on 27 February, upon which Mr Carter relied for his end-of-February figure of $29 million. ASIC therefore submitted (APS [334]) that $10 million should be added to the $29 million figure to reflect the arrangement with Lucent.

[2506] ASIC accepted that "the limits of adversity" they could allege in final submissions in relation to the financial position of One.Tel were the pleaded financial allegations in the statement of claim, and therefore that it was not able to rely on any amount of Australian overdue creditors at the end of February beyond the $29.3 million alleged in para S10: APS [335]. However, it insisted that, as the $29.3 million figure arising out of the aged creditors report was not accepted by the defendants, it was entitled to refer to evidence indicating that there was other overdue debt not in the aged creditors list, as evidence supporting its submission that the court should find that there was at least $29.3 million in overdue creditors of the Australian operations at the end of February: APS [335]. The defendants contended that ASIC's attempt to add the Lucent payment to overdue creditors was not part of its pleaded case: DPS [1458]. In my view ASIC's assertion is of an evidentiary fact in going to the question whether, as pleaded, the overdue creditors at 28 February were about $29 million. ASIC is not restricted to proving the pleaded allegation by relying solely on the aged creditors reports, but is entitled to point to other evidence of One.Tel's indebtedness to creditors: see ASR [1458-62]; further, see 2.3.6.12.

[2507] The evidence I have considered at 18.6 shows that on about 27 February 2001, One.Tel and Lucent reached an agreement under which, inter alia, One.Tel would pay Lucent $10 million. But the agreement was not documented until 1 March, which suggests that there was no expectation that the $10 million would be paid before the end of February. Even if there were, I would hesitate to describe the $10 million as "overdue" on 28 February, when the negotiations reached a result only on 27 February. And to do so might be misleading in another way, because (as the defendants pointed out (DPS [1463bi]), under the settlement One.Tel received value (in particular, equipment credits of $7.6 million) which would have to be brought to account at the same time as the payment obligation, and there is no indication that it was brought to account in February in any way. In all the circumstances, I think it would be misleading to add the Lucent $10 million to overdue creditors on 28 February.

[2508] There is an additional submission from the defendants at DPS [1463c]-[1463d], to the effect that the payment of the $10 million to Lucent, which was paid on 2 March, gave rise to a right to be reimbursed as to $9 million under the Lucent facility. There is evidence showing that there was a drawdown of about $9 million by One.Tel from the Lucent facility on 18 or 19 March 2001. That is shown in the cell note in relation to the receipt in 2905.xls, which refers to a "cash injection from bank facility for O & M payments made", and a note in the March board papers (Ex MTB 1/244) in relation to drawdowns under the facility, which lists a drawdown of $9 million on 18 March for "Equipment and Operations/Maintenance". The drawdown notice for that amount (Ex D27) records the purpose of a drawdown as:

Reimbursement to One.Tel Ltd for payment of O & M to Lucent during provisional acceptance and prior to final acceptance and other network expenses (Invoices attached).

[2509] That evidence suggests that there was a reimbursement of certain expenses of One.Tel by drawdown of $9 million from the Lucent facility, but it does not necessarily match the reimbursement to the $10 million negotiated settlement. The defendants endeavour to achieve this matching by relying on two pieces of evidence.

[2510] One is Lucent's letter to One.Tel dated 6 February 2001 (Ex JDR 4/1513), which claimed that One.Tel owed Lucent over $23 million, plus a further amount in US dollars, and annexed lists of invoices to establish that claim. The defendants' argument seems to be that if an invoice is in the lists attached to that letter, it can be taken to have been covered by the negotiated settlement and the payment of $10 million.

[2511] The second piece of evidence is an internal One.Tel email from Lisa Gray to Mr Perez dated 14 March 2001 (Ex D28), which attaches a breakdown of the drawdown amount (totalling $9,003,648.56) into 13 specified invoice amounts. Twelve of the 13 invoices can be identified in the annexures to Lucent's letter of 6 February. That means, according to the defendants' submission, that those 12 invoices can be taken to have been covered by the $10 million payment and reimbursed by drawdown from the facility. In my view, this inference is not available, because the $10 million payment was in settlement of a larger amount across a large number of invoices. But even if the inference can be made, there was one large invoice, for $4.98 million, included in the drawdown list sent by Ms Gray to Mr Perez but not referred to in Lucent's letter of 6 February, and therefore presumably not part of the $10 million settlement. Consequently, even if every step in the defendants' reasoning were accepted, the most that could be said would be that out of the drawdown of $9 million, about $4.02 million was reimbursement to One.Tel from the Lucent facility of part of its payment of $10 million, so the net outgoing by One.Tel was about $6 million (this conclusion accords with ASR [1463(c),(d)], as amended by ASIC's email of 3 August 2007).

[2512] My conclusion is that there is no justification for ASIC to add the $10 million payable to Lucent to the "overdue" creditors at the end of February 2001, quite apart from the defendants' contention that most of that amount was reimbursed out of the Lucent facility during March.

11.2.3 Unpresented, unreleased, stale and cancelled cheques

11.2.3.1 Unpresented cheques and unreleased cheques

[2513] I shall use the expression "unpresented cheque" to refer to a cheque that had been drawn, entered in the creditors ledger, signed and dispatched to the creditor, but not paid by One.Tel's bank. I shall use the expression "unreleased cheque" to refer to a cheque that had been drawn and entered on the creditors ledger, which might or might not have been signed, but which had not been dispatched to the creditor and was retained by One.Tel.

[2514] That sharp distinction between unpresented and unreleased cheques is not always reflected in the evidence and submissions, no doubt partly because in the general ledger reconciliations to which I shall refer, "unpresented cheques" included unreleased cheques as well as unpresented cheques, for the good reason that in both categories the cheques had been entered in the creditors ledger and therefore needed to be taken into account for the purpose of reconciliation. I note that in making this distinction between unpresented and unreleased cheques, I do not mean to imply any view as to whether it is ever appropriate to draw a cheque and enter it in the creditors ledger, with the deliberate intention of not releasing the cheque to the creditor.

11.2.3.2 Ledger adjusted when cheque was drawn

[2515] According to the evidence of Ms Randall, One.Tel's practice was that as soon as a cheque was drawn in relation to a creditor, regardless of whether the cheque was promptly released to the creditor, the creditors ledger was automatically debited by that amount in relation to the creditor, thereby indicating on the creditors ledger that the creditor had been paid on the date that the cheque was drawn: affidavit of 6 June 2002, para 35. Thus, the creditors ledger was debited both in respect of unpresented cheques and unreleased cheques.

[2516] Mr Silbermann agreed that under the procedure followed by One.Tel, the drawing of a cheque in favour of a creditor would result in an automatic reduction in what the ledger showed as owing to the creditor: T 13282. It was put to Mr Rich that when a cheque was drawn in favour of a creditor of One.Tel to pay a debt owing to the creditor, the amount of the cheque was posted to the creditors ledger automatically to reduce the amount shown as owing to that creditor, and Mr Rich replied that he did not know the time at which the posting occurred and that it probably did not happen automatically: T 11304. However he did not claim that the debiting of the creditors ledger was deferred until the cheque was dispatched or presented for payment, and therefore there is no inconsistency between his evidence and the evidence of Ms Randall on this matter: DPS [1774]. My conclusion is that, whether or not there was some manual intervention in the process of posting the amount of the cheque to the ledger (a matter I need not resolve), the debiting of the ledger happened at the time of or soon after the drawing of the cheque and was not delayed until the signing of the cheque or dispatch of the cheque to the creditor or presentation of the cheque by the creditor for payment.

[2517] In the result, the amount of a cheque drawn on the last day of the month would be debited to the creditors ledger in respect of that day, and would therefore not appear in the aged creditors report generated at the end of the month. But if it had not been dispatched to the creditor, or the creditor had received the cheque but had not presented it for payment on that day, One.Tel's bank account and hence the cash balance in the intranet cash balance for the end of the month would not have been reduced by the amount of the cheque. Likewise it appears that the amount of a cheque received by One.Tel from a debtor in payment of its account might be credited to the debtor's ledger before being reflected in One.Tel's bank balance.

[2518] It appears that the end-of-month cash figures supplied by One.Tel management in board papers and flash reports were the "raw" group cash figures without any adjustment for unpresented or unreleased cheques. The defendants claimed that there was no evidence to establish that this was so (DPS [1724]), but ASIC was able to match figures contained in board papers and flash reports with the intranet cash figures, at ASR [1724].

11.2.3.3 Methods of taking account of unpresented cheques

[2519] ASIC submitted that a proper assessment of One.Tel's financial position at the end of each month requires either that the cash balance be notionally reduced to take into account unpresented and unreleased cheques, or that the amount owing to creditors be notionally increased by the amount of those cheques: APS [827]; ASR [1727]. ASIC adopted the former method at APS [934A], but it submitted that the latter method could have been taken with equal validity: ASR [1727]. For convenience I will refer to the first kind of calculation as the calculation of "true cash", and the second kind of calculation as the calculation of "available cash".

[2520] It seems to me that the calculation of true cash, by notionally deducting unpresented cheques from the company's cash balance, is a first step to be taken in the assessment of the company's financial position. The true cash figure should then be further adjusted by deducting due and overdue creditors, to ascertain available cash. Seeing the process as a two-step process will avoid the risk of double-counting of unpresented cheques, for strictly speaking they should be deducted to ascertain true cash, and then they are not to be notionally added to the due and overdue creditors because that would involve double-counting. I have referred specifically to "unpresented cheques" because theoretically, unreleased cheques do not deplete the company's true cash, as the company retains control over them. Unreleased cheques are to be added to due and overdue creditors, because the cheques had been entered into the creditors ledger and so the payees of those cheques have been excluded from the end-of-month aged creditors report.

[2521] ASIC's submissions about the amount of unpresented and unreleased cheques and Ex P93-716, considered below, are directed to ascertaining available cash, rather than true cash. For the purpose of calculating available cash at the end of the month, there must be added to the amount of due and overdue creditors, as per the aged creditors report, all cheques that have been drawn and entered in the creditors ledger, but not paid at or before month-end. A proper calculation would be, as I have said, a two-stage process in which true cash is first calculated by deducting unpresented cheques from the cash balance, and then available cash is calculated by deducting total creditors (including the amount of unreleased cheques) from true cash. But in the alternative, one can calculate available cash directly, by adding all unpresented and all unreleased cheques to the total due and overdue creditors taken from the aged creditors report, and then deducting that total figure from the "raw" intranet cash balance (or, perhaps more simply, deducting from the intranet cash balance the amounts of unpresented cheques, unreleased cheques, and total creditors taken from the aged creditors report). The criterion that determines whether a cheque should be deducted from the cash balance is whether the amount of the cheque has been entered in the creditors ledger.

[2522] The defendants made lengthy submissions (DPS [1721]-[1789]) which rested on the proposition that it would be inappropriate to deduct, from the month-end cash balance, cheques that were cancelled, cheques that were stale, and cheques that had been drawn but not yet signed and released to the payee (DPS [1753]), because "there is no logical reason why moneys represented by such cheques should be considered as "unavailable to pay creditors" at the relevant date" (DPS [1753]). I have formed the opinion that in various ways, the defendants' submissions overlook the distinction between true cash and available cash, as I shall explain.

11.2.3.4 Unreleased cheques

[2523] There is no "logical reason" why unreleased cheques should be deducted from the cash balance for the purpose of ascertaining true cash, because the company retains control over whether the cheque will deplete cash (as it has not released the cheque). But when it comes to calculating available cash, it is essential to deduct the amount of both unreleased and unpresented cheques from the raw cash balance, together with total creditors taken from the aged creditors report. This is because both unreleased and unpresented cheques have been entered in the creditors ledger and therefore the amounts of the cheques are not included in the aged creditors report, and yet the payees of the cheques are unpaid creditors whose debts are presumably due or overdue (otherwise the cheques would not have been drawn). Given that the point of the exercise is to calculate available cash rather than true cash, the defendants' submissions at DPS [1768]-[1772] are beside the point.

[2524] As explained at 22.2.2.2, there are two potential sources of information about unpresented and unreleased cheques in the evidence, namely the "unreleased cheques spreadsheets" and the general ledger reconciliations to One.Tel's ANZ Queensland bank account. Apparently complete copies of these documents are available for January and February 2001, but only the first pages of the general ledger reconciliations at the end of March and April are available, and in March and April the "unreleased cheques spreadsheets" appear to have transmogrified into "unpresented cheques spreadsheets" which arguably measure something different from the earlier documents.

[2525] The defendants sought to identify unreleased as opposed to unpresented cheques in January and February by cross-matching the cheque numbers in the spreadsheets with the cheque numbers in the list of cheques attached to the January and February general ledger reconciliations: DPS [1776]-[1777]. This produced lengthy tables purporting to show that the total amount of unreleased cheques at 31 January was $2,768,113 (compared with total unpresented cheques in the general ledger reconciliation of $4.66 million) and the total amount of unreleased cheques at 28 February was $9,342,843 (compared with total unpresented cheques in the general ledger reconciliation of $10.53 million). I note in passing that the high figure at the end of February appears to be largely due to the cheques in favour of Optus for about $7.2 million that were not paid until 1 March, after the $26 million funds transfer from the UK, as explained below. The balance of the unreleased cheques in February, which was still very high, and the high January figure, may have been the product of gross inefficiencies in One.Tel's cheque signing procedures, of which there is some evidence noted by the defendants at DPS [1783] and also considered below.

[2526] Consistently with their general assertion that unreleased cheques should not be deducted from the cash balance, the defendants contended that the amount of unreleased cheques should be deducted from the figures in the general ledger reconciliation for each of those months. That would reduce the figures drastically, making the adjustment for "unpresented cheques" almost insignificant. However, I reject the defendants' submissions, primarily because they are misconceived. Having regard to the evidence considered at 11.2.3.2, I proceed on the basis that all of the unreleased cheques listed in the defendants' tables were debited to the creditors ledgers. Therefore, on the analysis that I favour, both the unreleased cheques and the released but unpresented cheques are to be added to total creditors taken from the aged creditors report, and then that total is to be deducted from the cash balance in order to arrive at available cash. In other words, unreleased and unpresented cheques are to be treated in the same way for the purposes of the calculation of available cash.

[2527] Moreover, it appears to me unlikely that the authors of the unreleased cheques spreadsheets prepared them with the strict concept of unreleased as opposed to unpresented cheques at front of mind. If they did, one would have expected that the "unpresented cheques" in the general ledger reconciliations, which included unreleased cheques, would always exceed the total amounts in the spreadsheets. However in January, the figure for total unreleased cheques in the spreadsheet is higher by about $2.9 million than the figure for unpresented cheques in the general ledger reconciliation (as considered more fully below). In those circumstances it would be unwarranted to conclude that the "total unreleased" figure in the January and February spreadsheets is really "unreleased cheques" as I have defined them, and nothing else.

[2528] As to March and April, where the evidence is incomplete, the defendants contended, somewhat heroically, that all of the amounts for "unpresented cheques" listed in the general ledger reconciliation documents for those two months are to be treated as unreleased cheques, because in those two months the totals in the general ledger reconciliations for unpresented cheques are precisely the same as the "total unpresented" figures in the spreadsheets: DPS [1778]. I do not accept this submission. As I have said, the spreadsheets appear to have changed their character between February and March, ceasing to be "unreleased cheques spreadsheets" and becoming "unpresented cheques spreadsheets". In the general ledger reconciliations, "unpresented cheques" covers both unpresented cheques in my sense and unreleased cheques. Those facts lead to the inference that the total figures in the spreadsheets and in the general ledger reconciliation for March and April represent both unpresented and unreleased cheques, as do the figures in the general ledger reconciliations for January and February. Consequently there are no reliable figures in March and April for unreleased cheques. In any event, it is misconceived to distinguish between unreleased and unpresented cheques when calculating available cash.

11.2.3.5 "Stale" cheques

[2529] The defendants identified as "stale cheques" all cheques released to the payee before the end of September 2000 that were unpresented throughout early 2001: DPS [1763]. They submitted that the amount of stale cheques was about $500,000 at the end of January and February and $200,000 at the end of March and April: DPS [1767]. They contended that the cheques were unlikely to be able to be presented for payment and their deduction from the amount of "available" cash would not be justified: DPS [1764], [1766]. Once again, it may be that stale cheques can be disregarded for the purpose of ascertaining true cash. But when it comes to calculating available cash, stale cheques have been entered in the creditors ledger and therefore excluded from the aged creditors report, and they must be added back unless it is appropriate for some reason, such as the expiration of a limitation period, to cancel the cheque and remove the debt from the ledger.

11.2.3.6 Cancelled cheques

[2530] Exhibit P93-730 is a list of cancelled cheques amounting to $1.51 million at 31 January, $0.975 million at 27 February, $0.439 million at 31 March and $10.95 million at 2 May. The exhibit defines "cancelled cheques" as cheques recorded in Adept and cancelled in a later period. Therefore it does not include cheques drawn and cancelled in the same month. The exhibit also sets out a summary of the adjustments for cancelled cheques, from which it appears that the list includes the cheque for Optus GSM due in mid-April, which was drawn on 17 April for the amount of $9,668,647.33, and cancelled on 3 May. There are some aspects of Ex P93-730 that are unsatisfactory (for example, the calculation for late posted invoices, considered at 11.2.4). But I see no difficulty with the methodology or calculations for cancelled cheques.

[2531] The defendants have produced different figures: $1.26 million at 31 January, $1.02 million at 28 February and $9.8 million at 30 April: DPS [1757]-[1761]. Their calculations are not made clear in their submissions, and so I am not able to reconcile their figures with ASIC's figures. That probably does not matter, because the figures are broadly comparable. A partial explanation for the difference in figures in February appears to be that the defendants have included a cheque dated 28 February, but all cheques bearing that date were excluded from ASIC's analysis because the aged creditor report was dated 27 February: ASR [1757-8].

[2532] If a cheque is drawn and entered in the creditors ledger in a particular month, and then cancelled in the same month, that process will not affect either the end-of-month cash balance or the amount of total creditors in the aged creditors report at the end of the month. Therefore no adjustment is necessary, for the purpose of calculating available cash. If a cheque is drawn and entered in the creditors ledger in a particular month, and then cancelled in the next month, before presentation, there will be no effect on the cash balance at any time, but the amount of due and overdue creditors at the end of the first month, taken from the aged creditors report, will be understated by the amount of the cheque, because it has been entered in the creditors ledger. If available cash has been properly calculated at the end of the first month, by subtracting from the cash balance the total figure calculated by adding up unpresented and unreleased cheques and total creditors as per the aged creditors report, then the subsequent cancellation does not affect the available cash figure.

[2533] ASIC's submissions (ASR [1755-62]) reach the same conclusion as I have reached, but I think its reasoning is not quite correct. It says that an adjustment needs to be made when the cheque is cancelled, to add the amount of the cancelled cheque to the figure for total creditors in the aged creditors report. Then it says that the unpresented cheques added to total creditors at month-end should not include the amount of the cancelled cheque, because an appropriate adjustment has already been made. I think the correct position is that an adjustment should be made to the total creditors figure taken from the aged creditors report, by adding all unpresented and unreleased cheques at month-end, whether or not those cheques are subsequently cancelled. The subsequent cancellation of the cheque merely confirms that the creditor is unpaid.

11.2.3.7 Unpresented deposits

[2534] Just as it is appropriate to reduce the cash balance by the amount of unpresented and unreleased cheques for the purpose of calculating available cash, so also it is appropriate to increase the cash balance by the amount of unpresented deposits. In this context an unpresented deposit is a receipt by One.Tel prior to the end of the month, which has not at month-end been credited to the company's bank account.

[2535] In its table in Ex P93-716, ASIC set out the amounts which it conceded to be unpresented deposits for the months from January to April, taken from general ledger reconciliations: $60,108 at 31 January, $40,464 at 28 February, $256,952 at 31 March and $7534 at 30 April. These figures are in fact described in the reconciliation as "unreconciled items", and in the 31 January and 28 February reconciliations, where reasonably full information has been provided in the evidence, they are broken down into transactions some of which are described as "unknown transaction". The defendants submitted that in light of this description, the figures for unreconciled items could not be described as "unpresented deposits": DPS [1794]-[1795]. However, the figures adopted by ASIC were all treated in the reconciliation process as items to be deducted from the balance in the general ledger so as to reconcile it with the closing bank balance, as one would do in the case of unpresented deposits. It therefore seems to me appropriate to accept ASIC's concession that they should be treated as unpresented deposits.

[2536] Apart from complaining about the inadequate description of the unreconciled items, the defendants' principal point was that ASIC's figures do not take into account the probability that the closing cash balance at the end of the month would not include deposits banked by the company on the last day of the month, because those deposits would only be processed and credited to the account on the following business day: DPS [1796]. Therefore, said the defendants, the court should treat as "unpresented deposits" all deposits made on the last business day of the month; that is, the inflows from operations on the last day of the month according to the spreadsheet 2905.xls. On the defendants' approach, the "unpresented deposits" were $3.2 million on 31 January, $2.6 million on 28 February, $4.6 million on 30 March and $5.5 million on 30 April.

[2537] There is no evidence to indicate whether deposits made to One.Tel's ANZ Queensland bank account on the last business day of any month were credited to the account in that month or in the following month. However, ASIC submitted that the defendants were wrong to say that deposits made on the last business day of the month would only be processed and credited to the account on the following business day, as a matter of general banking practice. They asserted (ASR [1790-7]) that deposits lodged with an Australian bank are shown in bank statements as received on the date of lodgement, because they are processed through the clearing house on that evening.

[2538] That is approximately the effect of G A Weaver and C R Craigie, The Law relating to Banker and Customer in Australia, looseleaf edition, Law Book Company, Sydney, Vol 2, para 9.1630, upon which ASIC relied. According to the learned authors, cheques are recorded in customers' accounts under the date on which they are received in the paying bank's computer centre, the recording being made during that night. In the normal course, the bank that receives the deposited cheque transmits the relevant particulars to the paying bank on the date of the deposit of the cheque, and so the recording takes place on the evening of the date of lodgement of the deposit. One.Tel's daily intranet cash balance as at the end of the month, based on bank balances, would therefore have been likely to include deposits made on the last day of the month. The fact that credits shown in the bank statement may not have been available to be drawn against for a period of time, until clearance, is not of relevance to this point.

[2539] It seems to me, having regard to Weaver and Craigie's analysis, that receipts deposited into One.Tel's bank on the last business day of the month were likely to have been processed and to have contributed to the cash balance at the end of the month, and should not therefore be treated as unpresented deposits at the end of the month. ASIC submitted that in all probability, the only items qualifying for treatment as unpresented deposits would have been receipts coming to One.Tel before the end of the month that it had not banked at month-end. As ASIC observed (ASR [1790-7]), in light of One.Tel's cash position one would expect that deposits would be banked daily, and so the amount of such unpresented deposits would be small.

[2540] My conclusions are that I should accept ASIC's concession that the figures described as such in Ex P93-716 were unpresented deposits, and that no greater amounts are indicated by the evidence.

11.2.3.8 Ex P93-716

[2541] The critically important question for present purposes is, what was the amount of unpresented and unreleased cheques at the end of the months of January, February, March and April? Ex P93-716 is a table prepared by ASIC headed "General Ledger Reconciliation -- ANZ Queensland Chq Account". It is in three parts. First, it displays, for the end of the months of January, February, March and April, the amount of cash as per One.Tel's ANZ Queensland bank statement, then adjusted by the amount of unpresented cheques and unpresented deposits, giving a net total for each month. Information about the level of unpresented cheques and unpresented deposits was taken from general ledger reconciliations in which unpresented cheques and deposits were brought into account as part of the reconciliation process (January: Ex CE 12 0046; February: Ex CE 12 0099; March: Ex CE 12 0117; April: Ex CE 12 0129). In the general ledger reconciliations, "unpresented cheques" included unreleased cheques. The second part of the table is a note concerning the figure for unpresented cheques at the end of March, which takes into account Ms Randall's evidence and Ex SJR 18 concerning unpresented Optus cheques at the end of March for the total amount of $6,899,676.91, matched to the spreadsheet 2905.xls. The third part is a list of cheques drawn on 28 February 2001 taken from the general ledger reconciliation for February, totalling $5,671,440.23. This information was provided because the general ledger reconciliation for February was dated 28 February whereas the aged creditors report was dated 27 February. Obviously cheques drawn on 28 February should not be added to the aged creditors report prepared on the previous day.

[2542] Exhibit 93-716 asserts that the net Australian cash position after adjustments for unpresented (and unreleased) cheques and unpresented deposits was a deficit in each of the 4 months, namely $2.37 million on 31 January, $19.4 million on 28 February, $1.57 million on 31 March and $13.08 million on 30 April. Unpresented and unreleased cheques were $4.66 million at the end of January, $10.53 million at the end of February, $9.86 million at the end of March (comprising the Optus cheques for $6.9 million, about which there is a special note, and other unpresented and unreleased cheques at $2.96 million), and $13.1 million at the end of April. Unpresented deposits were for quite small amounts, as noted at 11.2.3.7.

11.2.3.9 January figure

[2543] Exhibit P93-716 prefers the general ledger reconciliation figure of $4.66 million to the unreleased cheques spreadsheet figure of $7.55 million. At 22.2.2.2, I note two differences between the two documents. One is that the unreleased cheques spreadsheet included some old cheques amounting to about $100,000 that were not in the reconciliation document, and the other is that some Optus cheques for about $2.4 million, which were cancelled in the same month, were treated as unreleased cheques in the spreadsheet but were excluded from the figures in the reconciliation document. In light of those matters, I conclude that the general ledger reconciliation is the more reliable document for ascertaining the amount of unpresented cheques at the end of January.

[2544] In its final written submissions, ASIC relied on the general ledger reconciliations rather than the unreleased cheques spreadsheets, as expressed in the table at Ex P93-716. It submitted (ASR [1738-42]) that the two sources of evidence deal with different matters: the spreadsheets deal with the question whether cheques have been released to creditors; and the general ledger reconciliation deals with the question whether cheques have been presented for payment, irrespective of whether they have been released to creditors. It said there was no reason why the general ledger reconciliation, being a business record, should not be relied on in relation to the topic with which it deals.

[2545] However, doubt arises because, since the general ledger reconciliation deals with unreleased as well as unpresented cheques, while the spreadsheet deals only with unreleased cheques, then the general ledger reconciliation should give a total amount higher than the "total unreleased" amount, but for January 2001 that is not so. ASIC's submission therefore appears to be somewhat superficial. However, it seems to me that ASIC was justified in using the general ledger reconciliation rather than the spreadsheet for January, for the more detailed reasons summarised above and presented more fully at 22.2.2.2.

[2546] Consequently I accept that the correct figure for unpresented cheques in the month to 31 January 2001 is $4,660,187. The correct figure for unpresented deposits is $60,108.

11.2.3.10 February figure

[2547] The general ledger reconciliation figure at 28 February 2001 is $10.53 million: Ex CE 12 0099. But ASIC made some downward revisions to that figure, evidently for the purpose of calculating a net amount to be added to the figure for due and overdue creditors taken from the aged creditors report at 27 February 2001.

[2548] Because the unreleased cheques spreadsheet available in the evidence is as at 28 February (Ex CE 12 0099) while the aged creditors report showed due and overdue creditors at 27 February (Ex CE 6 0068), cheques drawn on 28 February (the cheques listed in the third part of Ex P93-716) should be disregarded when adjusting the aged creditors list for unpresented cheques (APS [338]). The amount of unpresented cheques as at 27 February was therefore approximately $4.82 million (10.49 less 5.67).

[2549] ASIC also submitted (APS [338]) that the amount of cheques that were drawn in or prior to February and then cancelled after the end of February should be deducted, the amount of which at the end of February was $0.975 million according to Ex 93-730. In effect, ASIC removed the cancelled cheques from the amount of unpresented cheques, only to add them in as a separate category.

I think it is clear that at 27 February, the cheques subsequently cancelled were unpresented cheques, which should therefore be part of the total unpresented and unreleased cheques, to be added to total creditors taken from the aged creditors report to produce a grand total figure which is then to be deducted from the cash balance in order to ascertain available cash.

[2550] On ASIC's reasoning, the net amount of unpresented and unreleased cheques at 27 February, to be added to due and overdue creditors, was about $3.85 million. Consequently, in ASIC's submission, the true level of unpaid creditors due by 27 February was about $3.85 million more than the amount of due and overdue Australian creditors shown on the February aged creditors report (the total amount at Ex CE 6 0143 is $29.27 million). Once again the "limits of adversity" concept means that ASIC's submission must be understood as contending that by virtue of the net amount of unpresented and unreleased cheques, the amount overdue to creditors of the Australian operations was at least the sum of $29.27 million shown on the aged creditors ledger as due by 27 February.

[2551] ASIC claimed that the evidence of Ms Randall and Ms Thomas supported its submission that approximately $4 million should be added to the amount of overdue creditors of the Australian operations as at 27 February. Ms Randall's evidence was to the effect that in the period from 14 February to mid-March 2001 it was the practice of the accounts payable department of One.Tel to leave piles of drawn but unsigned cheques on Mr Hodgson's desk for signature, and it was common practice for accounts payable staff to call on Mr Hodgson at his desk and inquire about unsigned cheques: affidavit of 6 June 2002, para 29. Ms Thomas annexed to her affidavit sworn on 15 December 2005 an internal Ernst & Young memorandum from Mr Sallway to Mr Shear headed "Work Done on 23 May 2001", in which (inter alia) Mr Sallway reported on a discussion he had with Ms Thomas. Mr Sallway said Ms Thomas identified some major problems, including that there were unpresented cheques totalling about $5 million, most of which were "lying around awaiting signature" (obviously she had in mind unreleased cheques, to use the terminology I have adopted).

[2552] In my opinion the evidence of Ms Randall and Ms Thomas on these matters is not helpful on the present question, because Ms Randall's evidence is about the process of signing cheques and merely confirms that there were cheques awaiting signature by Mr Hodgson on any given day from mid-February to mid-March, without any indication of the amounts of the cheques. Ms Thomas' evidence relates to the position in the second half of May and cannot be taken to shed light on the position at the end of February.

[2553] ASIC's figure for the amount of unpresented and unreleased cheques at the end of February depends, indirectly via Ex 93-716, on the veracity of the general ledger reconciliation for February in the Carter Exhibits. The unreleased cheques spreadsheet for 28 February states the "total unreleased" figure of $8.033 million (Ex CE 12 0097), compared with the figure for unpresented cheques in the general ledger reconciliation, $10.53 million. In my analysis at 22.2.2.2, I give reasons for preferring the general ledger reconciliation figure to the spreadsheet figure.

[2554] Consequently I find that the total amount of unpresented and unreleased cheques at 27 February 2001 stood at $4.82 million. I note that this figure includes Optus cheques for about $7.2 million that were presented for payment on 1 March after a funds transfer of $26 million was received from the UK business. The figure also includes cheques for $975,000 that were subsequently cancelled. I would leave these as part of the unpresented and unreleased cheques, rather than deducting them from that figure and then adding them back as a separate category. The correct figure for unreleased deposits, as per Ex P93-716, is $40,464.

11.2.3.11 March figure

[2555] The general ledger reconciliation for 31 March shows unpresented cheques of $2.96 million: Ex CE 12 0117. The figure shown in the spreadsheet is the same: Ex CE 12 0115. In my analysis at 22.2.2.2, I noted some unsatisfactory aspects of the documents but I concluded that the unpresented cheques figure at 31 March was probably $2.96 million, as stated in both documents.

[2556] In Ex P93-716 ASIC proposed an adjustment to that figure, by adding the amount of five Optus cheques drawn at the end of March, which were presented for payment on 3 April 2001, for the total amount of $6,899,676.91. They are considered at 18.5.7, where I review evidence to the effect that Mr Silbermann arranged with Optus that on Friday 30 March One.Tel and Optus would exchange One.Tel's cheques in favour of Optus for non-GSM payments and Optus' commission cheque in favour of One.Tel. Mr Silbermann cost the One.Tel cheques to be post-dated to 31 March.

[2557] These five cheques appear in the unpresented cheques spreadsheet for the end of March without any amounts entered. The defendants submitted that it was unlikely that the cheques would have been debited to the creditors ledger before the end of March (DPS [1789]), but in my view the evidence identified by ASIC at APS [832] shows that the cheques were entered in the creditors ledger in March. Therefore, since the amounts of the cheques were recorded as paid in the creditors ledger, those amounts did not appear as overdue in the aged creditors list at 31 March. For some reason they were not recorded as unpresented cheques in the general ledger reconciliation -- perhaps because the amounts were not listed in the unpresented cheques spreadsheet. Nevertheless they clearly were unpresented cheques at the end of March, according to the evidence to which I have referred at 18.5.7, and ASIC was right to add the total amount of the cheques to the unpresented cheques shown in the general ledger reconciliation: compare DPS [1746], [1785]-[1789].

[2558] The defendants contended (DPS [1788]) that a cheque released to the payee on the last day of the month is practically equivalent to an EFT payment made in the first few days of the following month, and they said no one would suggest it was appropriate to deduct an EFT payment made early in the following month in order to arrive at available cash at the end of the previous month. But this overlooks the point that the cheques drawn on about 30 March and post-dated to 31 March were entered in the creditors ledger in March, and therefore the amount represented by the cheques was excluded from total due and overdue creditors in the aged creditors report at 31 March. That would not have happened, of course, if an EFT payment had been made on any day in April.

[2559] Consequently the total figure for unpresented and unreleased cheques at 31 March is $9.86 million. The correct figure for unpresented deposits, as per Ex P93-716, is $256,952.

11.2.3.12 April figure

[2560] According to the general ledger reconciliation for 30 April, the amount of unpresented cheques was $13.1 million: Ex CE 12 0129. The same figure is given in the unpresented cheques spreadsheet: Ex CE 12 0127. Only the first page of the general ledger reconciliation for April is in evidence, and so the list of unpresented cheques normally attached to the reconciliation is not available, but the unpresented cheques spreadsheet to the end of April contains a list of cheques. That list includes the cheque for $9.85 million for the Optus GSM invoice due in mid-April, drawn on 17 April but cancelled on 3 May: Ex CE 12 0126. I therefore infer that the total amount of unpresented cheques at the end of April, $13.1 million, included this cheque for $9.85 million.

[2561] The cheque for $9.85 million was drawn to pay two invoices recorded in Adept account 124 (Optus Communications), the relevant invoice numbers being 21/337363 (Ex CED 22-3) and 21/362865 (Ex CED 22-4). The debts were recorded as paid in the ledger and therefore did not appear in the aged creditors list as overdue to Optus as at 30 April 2001.

[2562] In my view the correct way to deal with that cheque is to treat it as part of the unpresented and unreleased cheques as at 30 April, as its subsequent cancellation merely confirms that Optus should be treated as an overdue creditor for that amount, notwithstanding that it does not appear in the aged creditors report. In the circumstances I conclude that the figure in the spreadsheet and the general ledger reconciliation, $13.1 million, is the correct figure as at 30 April for unpresented and unreleased cheques. The correct figure for unpresented deposits, as per Ex P93-716, is $7534.

11.2.4 Late posted invoices

[2563] ASIC submitted that large adjustments were needed to the month-end aged creditors reports, to increase the amount of creditors because of the late posting of invoices. It contended that on this ground, the 31 January aged creditors report should be increased by $12.19 million, the 27 February report by $8.83 million, the 31 March report by $7.38 million, and the 2 May report by $10.54 million. I do not agree with these adjustments, for the reasons that follow. Essentially there were two kinds of reasons advanced to support this category of adjustments: general evidence about One.Tel staff not posting invoices to the ledger, which I shall consider first; and a calculation of the amount of late posted invoices made by reference to aged creditors reports and the Adept ledger, presented in a table prepared by ASIC and marked Ex P93-730.

11.2.4.1 General evidence about unposted invoices

[2564] At APS [341] ASIC identified, by reference, what it referred to as "much evidence in the proceedings of delays in the posting of invoices". It is necessary to consider the evidence of Ms Randall, Mr Carter and Ms Thomas, Mr Silbermann's voicemail of 17 April 2001, and some evidence given by the defendants' solicitor, Mr Johnston. I shall do so below. Overall, I am not persuaded that the evidence identified by ASIC lives up to this description, as it is for the most part non-specific and does not shed much light on the position at the end of February or any other month.

[2565] Ms Randall's evidence at T 4253-5 and Ex P31, a re-capitulation of her unsworn affidavit at MFI 77, does not appear to me to relate to late posted invoices. In the cited transcript reference, T 5262, she was asked why she changed her forecast of an amount payable to Optus on 4 April and she gave an answer which suggested that the Optus invoice, dated 7 February 2001, might not have been posted to the creditors ledger until 4 April. But then she immediately gave another explanation for her spreadsheet entry on 4 April, which was that she obtained information about the true amount owing to Optus from a summary spreadsheet, and she said she did not look at the creditors ledger at all.

[2566] Mr Carter said in cross-examination, without further elaboration, that there were invoices that were not entered into the system on a timely basis, such that the totals for ageing of creditors at any one given time were likely to be understated: T 7966, 8516. In his affidavit and report dated 21 December 2004, para 3, he gave evidence to the effect that there were various inconsistencies in aged creditors listings and in particular, some amounts shown as overdue (for example 60 days) in one particular month do not appear in the corresponding earlier month's column (for example 30 days) in the previous month's listing. Attachment A to his report gives examples of such creditor discrepancies, but it seems to me that none of them is a late posting that was omitted from the February aged creditors report (the first seven examples relate to invoices appearing in the February report but not in the January report and the last three relate to invoices appearing in the April report but not the March report).

[2567] Nichola Thomas, accounts payable team leader at One.Tel, circulated an internal memorandum within One.Tel on about 27 April 2001 proposing changes intended to streamline One.Tel's accounts system: Ex CRA 2, p 18, exhibited to the affidavit of Mr Allsopp made on 4 July 2005. One of the proposed changes was that the accounts payable department would circulate to the relevant business unit twice weekly a folder of invoices relating to that business unit, which were to be coded and returned within two working days, whereupon the invoices would be entered into the system and the invoice register would be updated. The implication appears to be that there was some inefficiency in the process of entering invoices into the system that needed to be addressed.

[2568] Ms Thomas also described her work at One.Tel after the commencement of voluntary administration. She explained that the company was no longer trading but it continued in limited operation for the purpose of collecting money. She said she had to go through every person's drawers on every floor of One.Tel's offices to find invoices (T 10087), and where staff had started to throw things out, she had to climb into wheelie-bins to pull out invoices (T 10096). Again she gave no specific examples.

[2569] In Mr Silbermann's voicemail for Mr Keeling dated 17 April 2001 he referred to "invoices not been posted to the creditor system until they are approved": Ex CED 1-1161. Mr Keeling left a voicemail in reply on the same day (Ex CED 1167) in which he said "there's this procedure that we have here ah of not actually recording umm in accounts payable umm any debts ah well due umm unless they've been approved" and he said he would "really like to umm understand a little bit more of that and I'm sure you would too". No particulars were given. Both defendants gave evidence on the subject, considered in Ch 14. My conclusion is that it has not been shown that the "procedure" described by Mr Keeling extended over any significant range of invoices.

[2570] ASIC submitted (APS [343]) that the defendants' then solicitor, Mr Johnston, recognised the relevance of late posted invoices in his affidavit of 7 September 2002 (Ex P24, tab 12, para 31), which refers to detailed work being done on behalf of the defendants in going behind creditor's ledgers and reports and reviewing the posting records of invoices, with a detailed analysis of a very large number of credit notes and the accuracy of the allocation process over a lengthy period. ASIC invited the court to infer that this work was in fact done but did not produce a result that would have assisted the defendants' case. It seems to me that any such inference is rebutted by Ex 93-730, which shows that, indeed, there was a very substantial amount in late posted credit notes, particularly at 31 January 2001: $9.32 million.

[2571] In my opinion, this evidence suggests that there were some examples of invoices not been posted when received, but instead being saved up and posted at some later time, either because of inefficiency or because there was some process of checking or review of the invoices that was to be undertaken before they were entered into the ledger. It appears from the evidence of Ms Thomas that, by late April, there was a perception that the procedures for posting invoices to the ledger could be improved and moves were initiated to do so. It also appears from her evidence that the system may have broken down quite badly after the appointment of the administrators, when One.Tel personnel threw some invoices away which had to be recovered. But there is no quantification of the problem in any of this evidence, and therefore it is not possible to deduce from it any proposition about the extent to which the aged creditors reports understated the amount overdue debt.

11.2.4.2 Late posted invoices according to Ex P93-730

[2572] ASIC sought to quantify the late posted invoices by carrying out its own calculations. It prepared a table, "Summary of Adjustments to Aged Creditor Listings" (Ex 93-730), which summarised the adjustments to the aged creditors reports for which it contended. The net adjustments calculated in the table would increase the balance outstanding at 31 January by $4.21 million, at 27 February by $2.32 million, and at 2 May by $11.57 million; while they would reduce the balance outstanding at 31 March by $8.77 million and at 31 May by $1.64 million. The net adjustments were achieved by bringing together positive and negative adjustments in eight categories, namely:

(c)

late posted invoices;

(d)

incorrect ageing;

(i): "C/N [credit note] ageing";
(ii): cancelled cheques;
(iii): late posted credit notes;
(iv): missing payment;
: overpayment/open credit; and
(v): future dated invoice.

[2573] I have already considered the figures on cancelled cheques: 11.2.3. I shall consider the biggest category of adjustments, namely adjustments for late posted invoices, under the present heading. Items 2, 5 and 6 would lead to adjustments reducing the amount of aged creditors, and so they are considered as part of the defendants' attack on the reliability of the aged creditors reports at 11.2.5. Items 3, 7 and 8 are for immaterial amounts and will not be separately considered.

[2574] The figures for the total amount of late posted invoices ($12.19 million at 31 January; $8.83 million at 27 February; $7.38 million at 31 March; and $10.54 million at 2 May) are set out in Ex P93-730 itself, but the underlying calculations are not in the exhibit. They are to be found in ASIC's working papers, which have become reply Sch 30 to ASIC's submissions in reply.

[2575] Reply Sch 30 is a dense 32 page table which sets out, in respect of each monthly period for which figures are given in the exhibit, an alphabetical list of creditors, identifying open invoices for each creditor, showing for each invoice an item date, a due date (and in some cases an amended due date), the total amount owing on the invoice, ageing bands, and an allocated category for the invoice (late posted invoices are Category 1, and the other categories relate to other matters covered by the exhibit, such as late posted credit notes).

[2576] Like the other ASIC tables that I have grouped together in Ex P93, Ex P93-730 presents calculations made by ASIC that are extracted from documents in evidence. As explained elsewhere, I have taken the general view that the Ex P93 tables are really submissions about the evidence, to be assessed and evaluated as such. Generally speaking, the tables in Ex P93 clearly identify the sources of the figures, and make simple calculations that the court can readily check if it needs to do so. But as I shall explain, there are some special features about Ex P93-730 that have led me to take a different view on this occasion.

[2577] The defendants submitted (DPS [1465]-[1490]) that ASIC should have presented evidence to prove the amount of late posted invoices in each relevant month, by having someone (for example, the person who superintended the making of the calculations) prepare a report explaining the methodology that was adopted and the assumptions that were made, and annexing the calculations in the working papers. This would have enabled the defendants to consider and respond to the matter in a timely fashion, and would also have enabled them to cross-examine the author of the report to test the methodology and assumptions. If ASIC had followed this course, the defendants would have had time not only to check ASIC's work but also to adduce evidence to respond to it. They submitted that they have been prejudiced by ASIC introducing the table no earlier than during the cross-examination of Mr Rich, after ASIC had closed its evidentiary case and the defendants had filed their affidavits responding to ASIC's case, and had tendered their documentary materials.

[2578] I have decided to accept the defendants' submission that the calculation of late posted invoices should have been by a report tendered in evidence, though I have reached that result for reasons that are not quite the same as those advanced by the defendants. Essentially, three considerations have drawn me to this conclusion, relating to ASIC's methodology, the nature of the calculations, and unfairness in an evidentiary sense.

[2579] As to methodology, Ex P93-730 contains a series of "definitions", the relevant one being:

Late posted invoices: Invoices recorded in Adept in a particular month but omitted from the same month-end aged creditor report and appear to have been entered in Adept after the aged creditor report was printed.

[2580] One can understand how ASIC would have applied this definition in a simple case. ASIC would have compared individual open invoices "recorded" in the Adept ledger in the month in question (say, February) with the aged creditors report for the end of that month, so as to ascertain whether those invoices appeared in the aged creditors report. If they did not, they were treated as late posted. All invoices were tallied up, and the totals were presented in the table as the amount of the late posted invoices for that month, to be added to "overdue creditors".

[2581] It seems to me there are at least two problems with this definition and the methodology it reflects. The first is that it does not explain what is meant by "recorded in Adept". Since the objective of the exercise is to identify invoices that were not included in the end-of-month aged creditors report but were nevertheless overdue at month-end, one would expect that invoices would be selected by reference to their due dates being in the month in question. But it is far from clear from the working papers and the definition itself that this was the approach taken. The wording of the definition is more apt to refer to the invoice date (item date). The explanation of the methodology presented in the exhibit and the working papers is inadequate in this respect.

[2582] The second problem with the methodology is that the definition does not seem to have been applied in some of the work that was actually done. For example, in the working papers for January 2001, a substantial number of invoices have an item date and a due date which are both well before January 2001. It is not clear in what sense those earlier invoices can be said to have been "recorded in Adept in a particular month but omitted from the same month-end aged creditor report". They seem to have been recorded in Adept (whether recording refers to the item date or the due date or something else) in an earlier month than the month of the aged creditor report. What criteria were used to select these invoices? Was it just that the invoices remained open at the end of January? If so, what steps were taken to ensure that such invoices were identified systematically and completely? Again, the explanation of the methodology is inadequate.

[2583] It seems to me very likely that such uncertainties about the methodology would have been addressed if ASIC had tendered a report by the supervisor of this work, of the kind envisaged by the defendants' submissions. In my view the court needed to have the assistance that would be given by evidence of this kind, if it were to make any finding based on the exhibit.

[2584] The second matter that leads me to reject Ex P93-730 as a reliable statement of late posted invoices relates to the nature and scope of the calculations made in the working papers. Reply Sch 30 is, as I have said, a set of tables comprising 32 pages of densely packed information. Assuming that the numbering in the far left column is correct, the working papers to deal with 3734 separate invoices which it appears that over half are in Category 1 (late posted invoices). To check all of those invoices to see that ASIC has correctly identified, entered, tallied and classified them (were it necessary to do so) would be an enormous task well beyond the resources of the court.

[2585] I was surprised to see ASIC's submission that, though the court should assume that the calculations are correct unless the defendants point to specific errors and should therefore not have to go to the trouble of checking them, nevertheless the court "is able to do so if it wishes": ASR [1488-1490]. It is unreasonable and unacceptable for a litigant to construct submissions that would put the court in the position of potentially having to check thousands of invoice entries in order to assess whether the submission is valid.

[2586] My understanding of the defendants' position is that they do not concede the accuracy of ASIC's calculation of late posted invoices in any respect, though they have not identified any errors of calculation (as opposed to errors or potential errors involved in treating invoices as overdue when, according to the defendants, they are not). I do not see any proper basis for dealing with the table on the basis that it is treated as correct except to the extent that the defendants have identified errors, in circumstances where no ASIC witness comes forward to the court to take responsibility for the calculations and explain how they were done.

[2587] ASIC has invited the court to receive the calculation of late posted invoices in Ex 393-730 as a submission, not requiring to be proved as evidence. In my opinion it is a characteristic of a submission in final argument that the propositions asserted in the submission are placed before the court for assessment and evaluation. There is no foundation for the court to assume that a submission put by a plaintiff is correct unless challenged. That is an appropriate way to treat evidence in some circumstances, but it is in the nature of a submission that it has to be considered in its own right. A corollary is that, to be an acceptable submission, a proposition put before the court must be capable of assessment and evaluation by the court, whether or not it is challenged. In my opinion the calculation of late posted invoices is too lengthy and complex a process for the figures to be received as a submission. This would be so even if, contrary to the case, the methodology were crystal clear. The calculations, methodology and assumptions should have been proved by evidence, so as to give the court a proper basis for understanding the figures and to put it in the position that it could accept the evidence unless it was effectively challenged.

[2588] The third matter that leads me to reject the exhibit as a reliable statement of late posted invoices relates to what I have called, somewhat loosely, "unfairness in an evidentiary sense". The problem arises in the following way.

[2589] The Australian creditors ledgers are in evidence, but they constitute a massive body of material. The defendants cannot have been expected to select and deal with the particular ledger items prior to ASIC identifying those items as matters of significance. What ASIC did by purporting to identify late posted invoices was to select, out of that large body of material, and to focus attention on, roughly 2000 individual invoices. It did so during the cross-examination of Mr Rich on 6 July 2006 (Day 173), well after it had closed its case and the defendants had served their affidavits and presented their evidence to the court. If a particular invoice was recorded in the ledger with a due date in, say, February, but did not appear as an open invoice in the aged creditors report of 27 February, it must have been posted to the ledger after that report was generated, because the aged creditors reports were computer-generated from the information in the ledger. The invoice was, therefore, late posted. According to ASIC's case, the identified invoice fell due for payment on the date specified in the ledger, and was therefore overdue by the end of the month. To prove the due date of the invoice, ASIC has the benefit of the statutory proposition, found in s 1305 of the Corporations Act, that the ledger, being part of the books of the company, is prima facie evidence of the truth of its contents, including in this case the accuracy of the stated due date.

[2590] What has happened, therefore, is that by preparing calculations which the court is asked to treat as submissions, ASIC has focused attention on particular documentary evidence and has taken advantage of its prima facie evidentiary status, without having to adduce any further evidence and after the defendants' evidence has been presented. The only obvious way, and perhaps the only way, that the defendants can challenge ASIC's calculations, assuming they are mathematically accurate, is to submit that for one reason or another, the due dates recorded in the ledger are not the actual due dates for payment of those invoices. The reasons that the defendants might advance to support that proposition must necessarily be reasons based on evidence, rather than merely submissions, because the defendants must overcome the presumption that the due dates stated in the ledger are prima facie correct. And although there might possibly be some "generic" evidence that would serve to rebut the evidentiary presumption for a subgroup of invoices, the greater likelihood is that the evidentiary reversal of the prima facie presumption would need to be undertaken invoice by invoice, at least until there were enough examples to create a general doubt about the accuracy of the ledger. In summary, if ASIC were to be permitted to rely upon its calculation of late posted invoices as a submission, the defendants would be in the position of not being able to fight submission by submission; because of the prima facie evidentiary rule, they would have to fight submission by evidence, probably of a very detailed kind, and it is a too late to adduce any such evidence.

[2591] Reflection on what the defendants would have to do to prepare and execute a challenge to ASIC's calculations shows just how significant their prejudice would be. The defendants suggested that if an invoice has been late posted, the following possible explanations are to be considered (DPS [1472c] and [1487]):

•: the invoice was originally issued in one amount, disputed, and then re-issued in another amount but with the same invoice date and therefore (on its face but not in fact) the same due date;
•: the invoice was issued with a date representing the date the goods and services were provided (presumably, an earlier date than the date of issue of the invoice);
•: the invoice was held by the person at One.Tel responsible for authorising its payment while queries were raised about it or that person satisfied themselves that the item in question (for example, computer equipment) had been fully installed and was functioning properly;
•: the operator who posted the invoice to the ledger entered an invoice date earlier than the true one;
•: the operator who entered payment on the ledger entered a payment date later than the true one;
•: the creditor delayed the dispatch of the invoice.

If an invoice falls within one of these descriptions, it is assumed to have been posted in a timely fashion, with a real due date at the expiration of the contractual payment period calculated from the time of posting to the ledger, rather than from the earlier date that is on the invoice.

[2592] It seems to me plausible that there may be some invoices wrongly treated by ASIC as late posted and overdue at month-end, because they fall into one of these categories. Whether there are many, or only a few, or no, instances of invoices in these categories is a question of evidence. If there is evidence to show that some material group of invoices falls within one or more of the categories, then the prima facie effect of the statement of due date in the ledger is removed.

[2593] In their written submissions (DPS [1474]-[1487]), the defendants presented three cases gleaned from a "cursory consideration" of ASIC's working papers, while complaining that they had not been given time to review the working papers thoroughly:

•: an invoice said to be dated 10 August 2000, not appearing in the aged creditors report at 31 January 2001, but transmitted to One.Tel by facsimile only on 15 February 2001 (Adept Business Systems);
•: an invoice said to be dated 7 September 2000 but not in the aged creditors report at 31 January 2001, but curiously recorded as "closed" in the creditors ledger with no details of payment, for which there is evidence (Ex MTB 3/884) indicating that the invoice was held up because of queries by a One.Tel manager, and was therefore not received by the accounts payable department until mid-March (Cellnet Telecommunications);
•: an invoice for a large amount ($1.3 million), said to be rendered on 18 October 2000 with terms of payment of 7 days, but not in the aged creditors report at 31 January 2001, surrounded in the ledger by seven invoices that were paid very promptly and earlier than the due date, and with no evidence of complaint by the creditor (Comverse Network Systems).

[2594] There is room for contention as to whether these examples undermine the due dates in the ledger, as ASIC's submissions in reply confirmed: ASR [1475], [1476-82], [1487]. The defendants complained that ASIC introduced Ex P93-730 very late in the hearing, and they said they had not had an adequate opportunity to undertake detailed work. They said (DPS [1473]) the work they would wish to undertake would include:

•: detailed checking of the working papers, both as to what has been included and what may have been omitted;
•: considering and checking the impact on the ASIC analysis of changing the parameters used by ASIC in its preparation; and
•: considering and analysing at least the most substantial of the allegedly late posted invoices, in order to explore whether additional evidence might need to be adduced about the circumstances in which those particular invoices may have come to be late posted.

They drew attention to the amount of work that would be involved, noting that the working papers for January contained a list running to 9 pages with 31 separate creditors on the first page, and that in the case of some invoices the original invoice and correspondence about it might be available: see DPS [1489]. They said it was entirely conceivable that, if they had been given the opportunity to consider a written report concerning the preparation of the figures, and to cross-examine the witness, and to make proper inquiries in a timely fashion and adduce evidence, information would have been brought to light that would either call into question the analysis in potentially important respects, or at the very least, put the late posted invoices into a context that would materially affect the way the court would assess their relevance: DPS [1488].

[2595] ASIC invited the court to conclude, apparently as a finding of fact, that the work it did to calculate late posted invoices was also done by the defendants, and in fact done by them many years ago, because in 2002 they pressed for the opportunity to do detailed work "going behind the creditors ledgers and reports and reviewing the posting of records and invoices", and they had ample time to do so in the period from 2002 until the hearing commenced in September 2004: ASR [1468-1470]. Such a finding would not be justified upon the evidence before me. Moreover, the fact that the defendants did similar work on the same question (if it were true) would be no answer to their submission that, having been presented with ASIC's detailed work, they should be given adequate opportunity to deal with ASIC's calculations and conclusions.

[2596] For these reasons, my conclusion is that the court should not rely on Ex P93-730 and the working papers in reply Sch 30 to prove the quantum of late posted invoices in the period from January to May 2001. That leaves the general evidence considered at 11.2.4.1, which does not support any quantification of the amount of late posted invoices in any month.

11.2.5 Reliability of Australian aged creditors reports

[2597] ASIC's pleaded creditor figures are sourced in the aged creditors reports, and so if those reports are found to be unreliable, this part of the case will fail. The defendants made extensive submissions designed to show that neither the Australian nor the UK aged creditors reports can be relied on as a source of information about due and overdue creditors: DPS [1406]-[1529].

[2598] ASIC submitted, correctly, that the aged creditors reports are business records and therefore they are evidence of what their contents assert: APS [344]. Additionally, under s 1305(1) of the Corporations Act, the creditors ledgers kept electronically in the Adept system and the aged creditors reports that were generated and kept in the I:drive are, in each case, books kept by a body corporate under a requirement of the Act (ASIC NSWSC 417), and therefore prima facie evidence of any matter stated or recorded in them. It has not been suggested that the aged creditors reports that have been tendered in hardcopy did not accurately reflect what was in the creditors ledgers.

[2599] ASIC submitted that in these circumstances the aged creditors reports should be regarded as basic accounting records of the company to which recourse can conveniently be had to ascertain the creditor position of the company at different dates: APS [346]. It said that the presumption under s 1305 had only been displaced to a limited extent, in relation to the matters dealt with in Ex P93-730: ASR [1499].

[2600] It submitted that if the records of the company were found to be deficient in fundamental matters such as identifying, quantifying and giving due dates for payment of its creditors, the defendants would have been in contravention of the Corporations Act in not ensuring that proper records were created and maintained. That, of course, would be the assertion of an unpleaded case, except that ASIC sought to treat the submission as going to the allegations in the statement of claim that the defendants failed to take reasonable steps properly to assess the financial position and performance of the group (paras 24(a) and 35(a)), and in the case of Mr Rich, failed to take reasonable steps to ensure that systems were established, maintained and monitored that resulted in material financial information, which was accurate and reliable, flowing from management to the board (para 24(c)). ASIC referred to the particulars to the statement of claim, which assert that Mr Rich should have inspected lists of overdue creditors: para 14(b)(ii). However, that assertion is not given as particulars of para 24/35, and it seems to me that failure to maintain accurate creditors ledgers is not, on a fair reading of the pleadings and particulars, part of ASIC's pleaded case. I am reasonably sure that if the defendants knew that they were required to answer an allegation that they had failed to discharge their duty to maintain accurate creditors ledgers, they would have had evidence to adduce, including further evidence about the organisational structure of One.Tel Australia. The evidence as it stands is enough, in my view, to indicate that the preparation and maintenance of the creditors ledgers and the program for generating aged creditors reports were properly delegated to more junior personnel, probably in the accounts payable department under the general supervision of Mr Hodgson, and that the defendants had no reason to believe, at the relevant times, that data was being entered inaccurately or late.

11.2.5.1 ASIC's submission based upon One.Tel's adoption of financial statements for the half-year to December 2000

[2601] ASIC made a detailed submission to show that the Australian aged creditors report at 31 December 2000 reconciled to the first half results released to the ASX: APS [347]-[349]. I accept that submission, on balance. I have restructured ASIC's argument so as to present my understanding of it:

•: the aged creditors report at 31 December 2000 showed Australian due and overdue creditors of $60,029,215.18: Ex CE 6 0406;
•: One.Tel's App 4B statement released to the ASX for the June/December half-year showed total group payables of $321.6 million (Ex CE 5 0069, item 4.18), but it does not break that figure down into its component parts;
•: the 4B statement was based on One.Tel's statutory half-yearly accounts (CE 5 0088), which provide a breakdown of total payables;
•: in the statutory accounts there are "Trade Creditors and Accruals" of $318.81 million, an amount that is nearly equivalent to the 4B statement's figure for total group payables, after adjustment by adding $1.485 million for "Provision for Optus Clawback" and $1.307 million for "Interco's" in respect of current liabilities in the statutory accounts;
•: there is a breakdown of Trade Creditors and Accruals in the statutory accounts into various business units of One.Tel, including "One.Tel incl Digital", which is effectively the Australian operations including Next Generation;
•: the amount of Trade Creditors and Accruals in that category in the statutory accounts is $129.664 million;
•: the breakdown of the amount of $129.664 million can be found in the trial balance for One.Tel Australia as at 31 December 2000 (Ex CE 5 0172), and the court should infer that the trial balance was used the purpose of preparing the statutory accounts;
•: in the trial balance, all creditors and accrual entries in respect of category "16.Cred" in the "One.Tel" column (that is, the Australian operations) add up to $129,663,822.60, approximately the same figure as for Trade Creditors and Accruals for the Australian operations in the statutory accounts;
•: one of the "16.Cred" items in the trial balance is "Trade Creditors" (account No 4100, Ex CE 5 0172) in the sum of $59,764,374 86, which is very close to the figure in the 31 December aged creditors report;
•: therefore the court should infer that One.Tel incorporated the figure in the aged creditors report into its statutory accounts and 4B statement, thereby confirming that figure to be correct.

[2602] ASIC then submitted that the level of Australian aged creditors in the 31 December aged creditors report should be taken to be correct, because it was reflected in One.Tel's published results, and therefore One.Tel had impliedly acknowledged the reliability of the figures: APS [352]. It seems to me the correct position is that the final announcement of the half-year results and the accompanying App 4B statement are prima facie evidence under s 1305 of the matters they contain, including the information in the 4B statement concerning total group payables, which included figures for Australian creditors corresponding with the aged creditors report of 31 December. Additionally, the fact that the figures in the 4B statement have been explicitly endorsed by the company in a public release tends to strengthen the statutory prima facie outcome, and conversely increase the onus borne by a party who wishes to challenge the accuracy of the contents of the document.

[2603] ASIC then contended (APS [353]) that the figures in the 27 February aged creditors report for over 60-day debt must be taken to be correct unless the contrary is shown, because debts outstanding for more than 60 days must have been due before the end of December and therefore should have been included in the 31 December aged creditors report and in the figures for the half yearly accounts and the 4B statement. It seems to me that this assertion is inconsistent with Ex P93-730: see DPS [1506].

[2604] It submitted (APS [354]) that since this conclusion was the proper one to draw in respect of over 60-day debt, the same conclusion should be drawn in respect of the remainder of the due and past due debt recorded in the 27 February aged creditors report, because "nothing has appeared from the evidence to suggest that anything changed between the end of December and the end of February so far as a recording of creditors was concerned".

[2605] I find that last step to be unpersuasive. The 27 February aged creditors report is prima facie evidence of the whole of its contents and so the court is required to accept the figures in the report for due and past due to creditors unless the evidence persuades it to the contrary. The fact that the figure for over 60-day debt was adopted by the company for the purposes of its half-yearly reporting strengthens the evidentiary presumption in the case of that part of the 27 February report, but in my view it does not strengthen the remainder of the report, which nevertheless has the benefit of s 1305.

11.2.5.2 The defendants' attack on the Australian aged creditors reports

[2606] The defendants' criticism related to:

•: Ms Randall's evidence about the reliability of the reports;
•: errors in "due dates" in the Australian ledger;
•: errors through late posting of credit notes;
•: missing payments;
•: lack of reconciliation and "purging" of the Australian creditors ledger;
•: usual business terms departing from contractual terms;
•: administrative delays;
•: disputed debts.

[2607] I shall consider the first five of these matters in the next paragraphs of this judgment: 11.2.5.3-11.2.5.7. I shall address the last three matters after considering the UK aged creditors reports, as they are issues relating to both the Australian and UK reports: they are at 11.4.

11.2.5.3 Ms Randall's evidence about the reliability of Australian aged creditors reports

[2608] Ms Randall gave evidence that, prior to 17 May 2001, she did not use the creditors ledger or the aged creditors reports in preparing her daily cash flow spreadsheets: T 4757-8. She said this was "based on discussions with various contracts that were responsible for those creditors" (T 4758), and that her belief on 20 February, after discussions she had with the relevant contacts who were responsible for the creditors ledger, was that it was unreliable (T 4758). She said this was the case for various reasons, one of which was that "there were invoices on there that were being disputed": T 4759. She said she was told by the accounts payable manager on 20 February that she should not rely on the information in the aged creditors report as a proper statement of what was due and payable to the various creditors: T 4760. Therefore instead of using aged creditors reports for the purpose of forecasting, she spoke to "relevant contacts": T 4760. In re-examination she added that the aged creditors reports overstated creditor amounts, and there were credit notes that were not taken up: T 5263.

[2609] The defendants relied on this evidence to indicate the general unreliability of the creditors ledger and aged creditors reports. It seems to me, however, that the evidence is of more limited effect. Ms Randall was saying that the creditors ledger and the aged creditors reports were not a reliable basis for her cash flow spreadsheets. But her cash flow spreadsheets were designed to forecast cash inflows and outflows for the ensuing month, and therefore it was necessary for the person preparing them to know whether a debt, recorded in the creditors ledger as due for payment at a certain time, was in fact likely to be paid at that time. The creditors ledger and aged creditors reports did not provide that information, but only the amount and date of the invoice and the recorded due dates for payment. It would be necessary to speak to someone involved in managing the creditor relationship to find out if the money would in fact be paid out at that time: see ASR [1424-7].

11.2.5.4 Incorrect entry of due dates

[2610] According to Mr Carter's evidence (PR 99), based relevantly on Australian aged creditors reports, creditors due or past due amounted in round terms to $29 million on 27 February, and to $50 million on 31 March. That suggests a movement in Australian overdue creditors of $21 million over the month of March.

[2611] Mr Rich responded to these figures in his affidavit (2 JDR 1698b) by saying that $8.5 million of that movement was attributable to One.Tel not paying two disputed invoices from Telstra for roaming charges: this issue is considered at 18.4. He also said that $9.9 million was attributable to the entry in the Adept ledger of an invoice from Optus rendered on 2 March 2001 with an incorrect due date of 2 March, so that the amount became immediately "overdue" notwithstanding that normal payment terms as per the ledger were 45 days and so the correct date should have been 15 April: citing Ex JDR 6/1946A. Mr Rich is clearly right on this. The mistake was conceded by Mr Carter in cross-examination: T 8083-6. Therefore the amount of creditors due and past due as per the 31 March aged creditors report needs to be reduced by $9.93 million, as ASIC conceded: APS [835]-[836].

[2612] Some other examples of incorrect due dates were raised with Mr Carter in his cross-examination. One example was that there were five invoices from Prolec rendered in early March 2001, which were entered into the ledger with a "due date" identical to the invoice date, when in fact (according to the defendants' submission) the terms of trade between One.Tel and Prolec were 30 days. Therefore the invoices were shown as "overdue" at 31 March when in fact they had not become due and payable by that time, as Mr Carter accepted: T 8064-74. Another example related to Tech Pacific, which rendered three invoices totalling $215,600 in early March, entered in the ledger with "due dates" identical to the invoice dates, when in fact the terms of trade were 30 days (according to the defendants' submission); again, invoices appeared to be "overdue" at the end of March when in fact they had not become due and payable: see Mr Carter at T 8074-9. A further example related to Telstra, in respect of two invoices entered with an identical "due date" and invoice date (one for $693,359.22 dated 13 March 2001, and the other for $157,579.12 dated 10 April 2001), when in fact the terms of trade were 30 days, according to the defendants' submission: see Mr Carter at T 8080-2.

[2613] Mr Carter said he had reviewed documents around June 2005, which showed that on some occasions, the invoice dates and the due dates were identical, and on some occasions the invoice dates entered in the ledger were different from the dates of the invoices that he had: T 8023. He said he had noted "numerous occasions" when the invoice date and the due date were identical and were followed almost immediately by payment of the invoice, suggesting that the invoice was given the date of its entry into the system: T 8024. However, he reached the conclusion that the issue of the same invoice and due date was not material to anything in his report: T 8026. After the above examples were brought to his attention, it was put to him that the aged creditors report could not be accepted at face value as a reliable document recording One.Tel's overdue creditors, and he answered, "On the face of it, as I said, without further deliberation that appears to be the case": T 8087. However, in re-examination he said that errors arising from the same invoice and due date counterbalanced the understatement of amounts overdue resulting from late posted invoices (T 8516), and he gave evidence to the effect that the aged creditors reports, while not reliable for all purposes, were "appropriately reliable" for the purpose for which he had used them (T 8518-9).

[2614] Mr Rich was cross-examined about email communications between QM and One.Tel (Ex MTB 3/852), the gist of the cross-examination being that this correspondence indicated that, as at March 2001, One.Tel was not paying one of its "critical suppliers" (T 11334-9). But it appears from the ledger (Ex DTB 12/4959) that the "overdue" invoices, amounting to approximately $138,000, were paid by a credit note for $69,219.26 dated 28 February 2001, and payment of $68,787.17 on 30 March. That suggests that there was a dispute about the invoices, which was resolved by the issue of a credit note for about half the invoice amount, and payment of the balance.

[2615] The email correspondence also suggests that the ledger entry, showing the invoices as payable 14 days after invoice date, was wrong, and that the correct terms of payment were 30 days after invoice. ASIC submitted (ASR [1434]) that an assertion in an email from a QM representative was less reliable evidence of the contractual date than the ledger, but in view of the evidence of incorrect ledger entries, an email indicating that a QM representative had turned his mind to the question of the correct due date seems to me to outweigh the prima facie evidence in the ledger.

[2616] ASIC submitted that the only material error identified by the defendants concerned the Optus invoice: APS [366]; ASR [1429-38], [1493]. The other errors set out above raise a question as to whether the frequency of errors might have made the ledgers and aged creditors reports unreliable, even if individual errors were of relatively small amounts. The defendants contended (DPS [1436]) that there was "a systemic failure of the ledgers to accurately record the "due dates" of invoiced payments", but that would seem on its face to be an overstatement of the effect of identified errors. The question is whether the evidence of mistakes is sufficient to displace the prima facie status of the aged creditors reports as business records and under s 1305 of the Corporations Act.

[2617] An adjustment to remove the effect of incorrect ageing from aged creditors reports would reduce the total amount of overdue debt at month-end, because the adjustment would alter the due dates so that some amounts shown as overdue in the aged creditors report would come to be shown as not yet owing, and other amounts would come to be shown as not yet overdue. As ASIC said (ASR [1429-38]), the Australian ledgers and aged creditors reports are in evidence and so the necessary adjustments for errors are (at least theoretically) capable of calculation. ASIC endeavoured to make such calculations in Ex P93-730. It submitted (APS [368]) that Ex P93-730 shows that errors in the entry of due dates (line 17, "Incorrect ageing"), accounted for only a small amount. The figures were about $91,000 for January, $1.54 million for February, about $1.11 million for March excluding the Optus invoice, and about $81,000 for April. According to the table, incorrect ageing was more than offset by the net impact of late posted invoices (considered at 11.2.4.2) and late posted credit notes (considered at 11.2.5.5). Thus, the February figure for incorrect ageing is $1.54 million, whereas the figure for late posted invoices was an understatement of the amount of aged creditors by $8.83 million, and late posted credit notes resulted in the overstatement of the amount of aged creditors by $5.94 million. Consequently the total amount of late posted invoices was said to exceed the incorrect ageing and late posted credit notes adjustments taken together, by $1.35 million.

[2618] The defendants attacked the incorrect ageing analysis in Ex P93-730 on several grounds. First, similarly to their challenge to the late posted invoices calculation, they contended that the exhibit should be rejected as an attempt by ASIC to adduce unsworn evidence: DPS [1438a]. Second, they criticised the exhibit on the ground that it was unduly restricted in the scope, as it was confined to cases where the invoice date and the due date were the same, and failed to consider cases where the due date was later than the invoice date but nevertheless wrong: DPS [1438b].

[2619] As to the first criticism, Ex P93-730 defines "incorrect ageing" as follows:

Incorrect ageing: The due date of the invoice is incorrectly recorded in Adept/Aged creditor reports. These invoices were identified based on the invoice date being the same as the due date. Where possible the correct due date was identified from the physical invoice. If no physical invoice existed, the due date was calculated with reference to terms of payment of older invoices recorded in Adept. If no pattern was discernible, the payments terms were assumed to be 30 days from the invoice date recorded in Adept.

[2620] Working papers for calculating the incorrect ageing figures are in reply Sch 30, which I described when discussing late posted invoices. Additionally, reply Sch 26 is a table that has extracted from reply Sch 30 the incorrectly aged invoices that have reduced the "due now" ageing category. These are apparently invoices where the mistake in the due date has been with respect to the current month. According to my count, there are exactly 100 invoices listed. There is a column in reply Sch 26 indicating whether an invoice was in evidence. It shows that the invoice was located in only three cases, so in 97 of the 100 invoices it was assumed that the terms of payment were 30 days.

[2621] I have a concern about the methodology of ASIC's work on incorrect ageing. It is not clear to me whether ASIC identified cases where the invoice date was the same as the due date from perusing aged creditors reports, or from perusing the Adept ledger. If the former, it would be possible for the aged creditors reports for the months in question to have been reviewed fully. The reports give the item date and the due date. They are not so long that the task would be unachievable. For example, the hardcopy printout of the aged creditors report at 27 February 2001 is 75 pages. But the definition of "incorrect ageing" also refers to the Adept ledger. One wonders just what checking was done of the Adept ledger, and why.

[2622] In reply Sch 30 there is a puzzling relationship between late lodged invoices and incorrect ageing of invoices. The definition of "incorrect ageing" suggests that the criterion of selection was that the invoice date and the due date were the same. But there appear to be many examples in reply Sch 30 of cases where the item date and the due date are the same and yet the invoice is treated as a late lodged invoice. There is some logic in doing so: if the invoice is in the ledger but not in the aged creditors report for that month, then it is late lodged whether or not the invoice date and the due date are the same. But one would have thought that there needs to be a second level of consideration, to see whether the invoice, having been put into the late lodged basket, and therefore "overdue" at the end of the month, needs to be taken out again on the ground that at the end of the month, it was not due for payment at all, because of incorrect entry of the due date. I have identified in reply Sch 30 some invoices with the same item date and due date, which have been treated as late lodged presumably because they are not in the aged creditors report, but I have not been able to work out from the materials whether that the second level of calculation was then applied.

[2623] As with the "late lodged" methodology, the court needed to have a witness give evidence explaining the methodology and assumptions underlying the work that was done, so that an assessment could be made as to how reliable the outcome was. That would have put the defendants in the position of being able to respond to the calculations, by cross-examination and evidence.

[2624] To those difficulties I would add the defendants' second submission, noted above. There is substantial evidence of incorrect though different due dates affecting the UK ledger (see 11.3.1), but the only example taken from the Australian ledger and identified in the defendants' submissions was with respect to QM. However, to the extent that there may have been cases where the due date stated in the ledger was, say, 7 days and the correct due date was 30 days, there is the prospect of substantial distortion of the "due now" figures by the inclusion of invoices that were not really due at all. One simply does not know how big a problem that was in the Australian context, and ASIC's analysis of the aged creditors reports and the ledger, compared with invoice evidence, does not appear to have addressed this question.

[2625] All these considerations, put together, amount to a major concern about the accuracy of the Australian aged creditors reports. Apart from the large mistake regarding Optus, it appears from Ex P93-730 that there were at least 100 invoices having the same due date and invoice date, but there may have been many more if invoices counted as late posted invoices (there were over 2000 of them) were not then considered for incorrect ageing. Add to that the unknown quantity of invoices posted with an incorrect due date that was not the same as the invoice date, which were not counted by ASIC in Ex P93-730 -- a phenomenon that in the UK affected all the major carriers, as explained at 11.3, and therefore might also have been substantial in Australia.

[2626] In the result, there is one clearly established and very large example of incorrect ageing, in the $9.9 million Optus invoice the due date of which was wrongly given by the ledger in March rather than April. ASIC accepts in Ex P93-730 that there were other cases of incorrect ageing, though its methodology is not properly explained and seems too narrow, and so its figures may not be complete. But as ASIC's reliance on Ex P93-730 constitutes an admission that there was incorrect ageing to the extent stated in the exhibit, the correct conclusion seems to be that the incorrect ageing was at least as stated in Ex P93-730 and was probably higher by an amount not quantified by the evidence. That creates a serious concern about the reliability of the Australian aged creditors reports.

11.2.5.5 Late posted credit notes according to Ex P93-730

[2627] According to Ex P93-730, there were late posted credit notes amounting to $9.33 million at 31 January, $5.94 million at 27 February, $3.92 million at 31 March, and $3.28 million at 2 May. The relevant definition in the exhibit was as follows:

Late posted credit notes: Credit notes recorded in Adept in a particular month but omitted from the same month-end aged creditor report and appear to have been entered in adept after the age creditor report was printed.

[2628] The definition is very similar to the definition used for late posted invoices, except that here, of course, the invoices falling within the definition reduce the end of month figure for aged creditors, rather than increasing it. There are problems with the court accepting these figures as definitive, almost identical with the problems relating to late posted invoices, except that the number of invoices involved is substantially smaller and therefore the task of analysing them is not quite so large (but still too large for the court to be expected to carry it out). However, in this case ASIC has put forward the results of its calculations in the exhibit, and therefore can be taken to have admitted those figures. The defendants do not accept that the calculations are definitive but only because in their view the true figures are larger. It therefore seems to me to be open to the court to conclude that the figures for late posted credit notes were at least as high as presented in Ex P93-730, but because of the difficulties arising through the presentation of the figures as submissions rather than evidence, the correct figures may be higher.

11.2.5.6 Missing payments according to Ex 93-730

[2629] Exhibit P93-730 has a category called "Missing payment", which reduces the end-of-month balance of aged creditors by about $71,000 at 31 January, no adjustment at 27 February, $1.60 million at 31 March and $6.55 million at 2 May. The relevant definition in the exhibit is as follows:

Missing payment: Cheques recorded in Adept in a particular month but omitted from the same month-end aged creditor report and appear to have been entered in Adept after the aged creditor report was printed.

[2630] It is possible to identify a small number of individual items in this category listed in reply Sch 30. For example, the amount of $1.60 million in March relates to a single item, and the amount of $6.55 million at 2 May is composed of five Telstra invoices including a single invoice for $4.64 million. Whether or not there has been adequate methodology employed to identify all cases, at least these cases have been identified and can be taken into account. Therefore it seems to me that Ex P93-730 and reply Sch 30 direct attention to evidence showing that the end of month aged creditor balances are overstated by the amounts identified.

[2631] Since it has been possible to quantify the missing payments, this item does not undermine the reliability of the credit notes, as adjusted to take it into account.

11.2.5.7 Australian ledger not reconciled and "purged" for some time

[2632] Mr Rich gave evidence that during his visit to London in March 2001, Mr Cage and Mr Weston briefed him at his request with a detailed review of creditors, by reference to an aged creditors report. He said that as they went through the report, he noticed that there was a large number of smaller creditors overdue from more than 180 days, and in answer to a query by him, Mr Weston or Mr Cage said those amounts were probably not payable at all, as the ledger had not been reconciled and purged for some time: 2 JDR 1183.

[2633] Mr Rich said that after that discussion he left a voicemail message for Mr Hodgson in Australia, asking him to ensure that the Australian creditors ledger was reviewed in the same way to reconcile it and purge old debts that should be written off, and Mr Hodgson responded in a manner that acknowledged the need to do so: 2 JDR 1184.

[2634] That appears to be confirmed, in general terms, in a file note by Andrew Sallway of Ernst & Young, relating to the due diligence work carried out for the proposed rights issue, headed "Work Done on 23 May 2001". Mr Sallway reported on his meeting with Nichola Thomas of One.Tel. He said that "a reconciliation of the creditors ledger to creditors' statements has never been done", and that "as a result there are CONSIDERABLE (question dollars) creditors recorded but not necessarily payable" (Annex A to Ms Thomas' affidavit of 15 December 2005).

[2635] A later Ernst & Young document entitled "One.Tel Current State Assessment" dated 25 May 2001 (Ex DTB 9/3661) also noted that "creditors statement reconciliations have not been performed" and that management would attempt to reconcile all major suppliers at 30 April 2001. Similarly BDO Nelson Parkhill noted, in their report to the Finance and Audit committee dated 19 July 2000 (Ex DTB 9/3768) that creditors reconciliations did not appear to have been performed on a regular basis, and that this might lead to the misstatement of the creditors balance in the accounts.

[2636] Ms Thomas gave affidavit evidence to the effect that the observation in Mr Sallway's file note was not something she would have told him, because while she was at One.Tel, "it was the practice for the creditors ledger to be reconciled by a member of my team to creditors' statements on a weekly basis": affidavit of 15 December 2005, para 3. She said she did not believe the creditors ledger contained "creditors recorded but not necessarily payable" except in one respect, namely that on about 4 May some instances were detected of invoices directed to Next Generation being duplicated (that is, I take it, the same invoice being entered into Adept twice), leading to an email exchange between her and Mr Perez: affidavit, para 4 and Annex B.

[2637] However, in cross-examination she acknowledged that she spoke to someone at Ernst & Young shortly after 17 May (T 10066), and that their discussion included the work of the accounts payable section (T 10066). She initially denied telling Michael Eames of Ferrier Hodgson that statements were never reconciled to the creditor system, and maintained that creditor statements were kept (T 10069), but then she was shown her email of 28 August 2001 to Mr Eames (Ex DTB 10/3934), in which she said that "statements were never kept, as we didn't req to statements". She then acknowledged, in substance, that her recollection must have been mistaken: T 10070. ASIC accepted that Ms Thomas' evidence in chief was mistaken: T 10107.

[2638] ASIC submitted that the evidence of Mr Rich, and also Mr Sallway's memorandum, rose no higher than giving rise to a possibility that a reconciliation of the ledger to creditors statements would lead to the purging of old debt: APS [362]. But Mr Sallway's memorandum did rather more than raise the possibility, for he said there were "CONSIDERABLE" creditors recorded but not necessarily payable, and queried the dollar amount, presumably on the basis that it could not be quantified until a reconciliation was carried out.

[2639] ASIC submitted (APS [363]) that the defendants' cross-examination of Ms Thomas on the subject did not seek to suggest there was anything more than a possibility that debts might be recorded in the ledger that were not payable because of the absence of reconciliation to creditors statements, and in any event Ms Thomas did not accept that there was such a possibility (T 10073, 10079). Her evidence in her affidavit (para 4) was that she did not believe the ledger contained creditors who were not necessarily payable, except in one limited respect. But it seems to me that her evidence on these matters was necessarily connected with her belief, expressed in para 3 of her affidavit, that there was a practice of reconciling the creditors ledger to creditors statements on a weekly basis, evidence she abandoned when she was shown her email saying the One.Tel "didn't req to statements". Her acceptance of that proposition seems to me to have removed the foundation for her belief that the ledger did not contain creditors who were no longer payable, and to make it probable that she did in fact tell Mr Sallway what he recorded in his memorandum. In light of her change of evidence and the statements in Mr Sallway's memorandum, and the acknowledged fact that she had spoken to him, I found her insistence on her belief that the ledger did not contain creditors no longer payable implausible: T 10075-6, 10090.

[2640] ASIC pointed out that the question of purging was not raised in the defences in response to ASIC's allegations as to the amount of overdue creditors, nor by Mr Silbermann at the end of May 2001 in answer to the PBL and Ernst & Young's figures about overdue creditors: APS [361]. However, as the defendants noted (DPS [1516]), in the defences they did not admit ASIC's pleaded figures for creditors "past due", and there was no specific pleading by ASIC that the aged creditors reports were a true and accurate statement of the quantum of overdue creditors at any point in time, so there was no allegation calling for a specific response in terms of the need to purge the register: compare ASR [1516(b) and (ii)].

[2641] Further, ASIC submitted that the question of purging was not raised by Mr Rich or Mr Silbermann when it was put to them in cross-examination that various aged creditors reports were correct: see T 11568, 12088, 13140, 13626. In fact what happened in the cross-examination of Mr Rich was that a figure was put to him for overdue Australian creditors at 31 March and he disagreed with it (T 11568), and a figure for overdue creditors at the end of April was put to him and he said there were some issues with that number (T 12088). As far as I can see, no question was put to Mr Rich which he would have been expected to answer by referring to the need to purge the ledger. In the case of Mr Silbermann, the cross-examiner's questions gave him a general opportunity to refer to the need to purge the ledger, as one of a number of factors leading him to doubt ledger figures, but in my view the questions were not specific enough that the absence of any reference to purging the ledger could fairly be given any significance. Thus, it was put to him that he knew at the end of February that there were overdue creditors in respect of the UK operations, and he said he did not, as he knew there were large amounts being disputed: T 13140. He gave evidence that he disagreed with the accuracy of the ageing in the ledger and whether it actually represented overdue creditors, as the ledger did not reflect usual business terms or disputes: T 13626.

[2642] Underlying its submissions about the defendants not pleading and not cross-examining on the point about lack of reconciliation of the ledger is ASIC's assertion that the defendants had been working on the question of reliability of the creditor's ledgers since 2002, and so the court should infer from their omission to raise the matter in their defences and cross-examination that there was nothing in the point: see, in particular, ASR [1516(b)(i)]. In circumstances where Ms Thomas' affidavit was not sworn until December 2005, I would not make that inference.

[2643] The defendants claimed that debts recorded in the creditors ledgers might be no longer payable for several reasons, including operator errors in the entry of data into the ledger, disputed amounts that had been resolved in favour of One.Tel but not yet removed from the ledger pending the issue or entry of a credit note, and disputed amounts that had been effectively abandoned or not pursued by the creditor: DPS [1508].

[2644] ASIC submitted (APS [356]) that there is no basis for concluding that a debt that is outstanding for a long period must have been forgone by the creditor. That appears to me to be strictly correct, but as a commercial matter a company that is reviewing its aged creditors report may well decide that it is appropriate to purge the creditors ledger of a debt even if it remains strictly due and it is not statute-barred, when the circumstances indicate that the creditor has probably abandoned it: an example might be where a small amount is recorded as past due for over 180 days, being an amount withheld from payment of an invoice for a larger amount, by a creditor that has substantial and continuing business dealings with the company and has never sought payment of the debt. ASIC's submission that prudent management would require liabilities to be taken into account in assessing the financial position of the company unless there was a binding abandonment of the debt or the statute of limitations had expired (APS [359]) is a little too extreme, though it does seem to me that prudent management would not purge a debt from the ledger except in a clear case. If it is clear that there is a group of debts recorded in the ledger that the company will never be required to pay, financial statements treating those debts as liabilities would be misleading.

[2645] In contrast, if the company systematically defers payment of a creditor for, say, 180 days as part of the normal pattern of trading, the creditor will expect payment at the end of that period and there is no case for removing the debt from the company's ledger simply because of the length of time between the invoice date and the creditor's requirement to be paid: compare APS [356]. This appears to have been the case with the One.Tel's carrier creditors (see defence para S5(c)(i); also the evidence of Ms Ashley at T 5472 regarding her carrier claims status report, Ex P35). ASIC pointed to various parts of the evidence showing that creditors might seek payment of old debts, and do so successfully: APS [357]. It is not necessary to go through these references because they merely confirm the point that I have made, namely that the appropriateness of purging old debt depends on the circumstances.

[2646] My conclusion is that One.Tel's Australian creditors ledger was not routinely reconciled to creditors statements, and in January-April 2001, it may not have been reconciled for some time. That would make it unreliable to some extent, particularly as regards very old debt.

11.2.5.8 Conclusion as to reliability of Australian aged creditors reports

[2647] I have reached the conclusion that the Australian aged creditors reports were unreliable in ways that overstated the amount of due and overdue creditors, because of:

•: errors in recording the due dates of invoices, affecting the figures for total due and overdue creditors, the overall effect being at least as large as stated in Ex P93-730, but probably higher by an unquantified amount: 11.2.5.4;
•: the late posting of credit notes, which had the effect that the credit appeared in the ledger but not in the end-of-month aged creditors report, the overall impact being at least as large as stated in Ex P93-730, but probably higher by an unquantified amount: 11.2.5.5;
•: failure for a substantial time to reconcile the creditor's ledgers with creditors statements and to purge the ledger of amounts no longer considered due: 11.2.5.7.

[2648] Although one of the problems about these issues is the lack of reliable quantification of their effect on the figures, it seems to me that the evidence about these three matters is sufficient to show that they would, in combination, reduce the figures for due and overdue creditors in the aged creditors reports for January-April by a substantial and material amount. The reliability of the aged creditors reports as an indicator of One.Tel's true creditors position is also affected by their failure to take into account One.Tel's normal terms of trading outside contractual terms, and the extent of disputes affecting creditors' invoices. These factors are considered at 11.4.

[2649] On the other hand, the late posting of invoices appears to have led to the figures in the aged creditors reports understating total creditors by some unquantified amount. As mentioned at 11.2.5.4, in re-examination Mr Carter said that the overstatement arising from the occasions when the ledger gave the same date for the invoice and the due date was counterbalanced by the understatement of amounts overdue resulting from late posted invoices (T 8516), and he said that the aged creditors reports, while not reliable for all purposes, were "appropriately reliable" for the purpose for which he had used them (T 8518-9). I find this evidence unconvincing, in the absence of some reliable quantification of the effects of the matters to which Mr Carter referred. We know that one single incorrect entry in the ledger of the same invoice and due date produced an overstatement of total creditors at the end of March by $9.9 million. As ASIC's attempt at quantification in Ex 93-730 has failed, we do not know how many other similar mistakes might have been made in the ledger, or for what amounts, and we do not know how widespread and material the phenomenon of late posting of invoices was, at least in the period before late April, after which that problem appears to have become widespread. I do not see how it can be said, in these circumstances, that one adjustment counterbalanced the other, in any quantitative sense.

11.2.6 The overall pattern of movements in creditors as per aged creditors reports

[2650] The defendants' primary submission, which I have generally accepted, is that ASIC has not made good its case in relation to the quantum of "overdue" creditors during 2001, because the aged creditors reports upon which it relies, and the creditors ledgers from which those reports were generated, are unreliable in material respects. They made additional submissions in order to demonstrate that, even if the aged creditors figures were taken to be correct, ASIC's treatment of "overdue" creditors was superficial and paid no regard to the actual circumstances of the overdue amounts: DPS [1530].

[2651] The defendants' starting point (DPS [1531]) was to present the following table to show the overall pattern of aged creditors in the Australian aged creditors reports:

Table 11.1: Defendants' summary of Australian aged creditors reports
	29 Dec 00 ($m)	31 Jan 01 ($m)	27 Feb 01 ($m)	31 Mar 01 ($m)	2 May 01 ($m)
NOT DUE	15.3	22.3	25.6	14.3	11.5
0	14.6	(0.6)	2.9	23.1	14.2
30	4.3	3.5	2.9	6.4	14.9
60	1.5	2.5	1.2	2.7	3.8
90	4.6	(0.1)	1.7	2.1	5.5
120	19.7	19.1	20.4	15.5	15.8
Total	60.0	46.8	54.9	64.1	65.8
Total "overdue "	44.7	24.5	29.3	49.8	54.3

[2652] Mr Carter's figures for Australian overdue creditors suggested a steady rise from January to May. However, in his affidavit, Mr Rich noted a sharp decline of over $20 million in "total overdue" between December and January, followed by the increase of $5 million from January to February, nearly $21 million from February to March, and $4 million from March to April, as shown in the defendants' table. The figure at 2 May is $9.6 million greater than the figure at 29 December, in contrast with the increase of almost $30 million if one excludes December and begins in January, as Mr Carter did. The defendants submitted that in view of the sharp decline between December and January, the increase in "overdue" creditors during February, March and April was to a large extent merely a return to the level of December: DPS [1533].

[2653] As ASIC pointed out (ASR [1533]), the drop between December and January is partly explained by One.Tel's practice of deferring some creditors over the reporting dates at half-year and year-end to maximise the cash on One.Tel's balance sheet. But the evidence does not reveal whether that practice would have produced anything like a variance between December and January of over $20 million. On balance, I think the defendants have a valid point when they place the increases in total overdue creditors from January to April in the context of a sharp decrease from December to January. However, there was still some increase over the December-April period, the size of which depends upon how much of the December creditors were deferred to January so as to maximise December cash.

[2654] The defendants sought to derive some support from the fact that Ernst & Young obtained and reviewed a copy of the December aged creditors report for the purposes of their half-year review (Mr Long, at T 7459), and they noted that there was no indication in their work that the quantum of creditors showing as "overdue" raised any concern on their part. Of course, Ernst & Young were doing only a limited half-year review, not an audit, and it was not a task of theirs at that stage to form a view about the prudence of the level of overdue debt; and there may have been some discussions with management about which Mr Simmonds, who was personally involved in the review, did not depose and was not asked in cross-examination: see ASR [1534]. However, one would have thought that if the level of overdue debt was a matter of such concern as ASIC now maintains, reasonable auditors in the shoes of Ernst & Young would have said something about it and would have recorded what they said and the replies they received, and so to that extent the defendants' point is valid.

[2655] In their submissions, the defendants drew attention to the proportion of "overdue" creditors that were over 120 days. They contended that this was a pointer to the facts, emerging from other evidence, that the ledger had not been reconciled to creditors statements for some time, there were substantial disputes, and there was no reason to suggest that any change had occurred in the way One.Tel dealt with creditors during 2001 compared with prior years: DPS [1532].

[2656] ASIC complained that the table, and the defendants' submissions about it, disregarded the fact that there was no ageing of credit notes. Credit notes always appeared in the first of the overdue categories, according to Mr Carter: T 7964. This made it appear that there were more creditors overdue by over 120 days, rather than some lesser period, than was truly the case: Mr Carter at T 7958-65, 8516, and note (1) to para 91 of his principal report.

[2657] ASIC's submission seems to be correct in principle, although (curiously) it would apply to the over 90-day debt as well as the over 120-day debt and therefore tend to undercut ASIC's pleading about the level of over 90-day debt. More importantly for present purposes, the submission does not assist the court to quantify the effect of the fact that credit notes were not aged. If one were to assume that all credit notes were late posted (that is, posted to the creditors ledger in respect of a particular month after the end of that month), and that Ex P93-730 had correctly identified all late posted credit notes, then the total amount of credit notes would be $9.33 million for January, $5.94 million for February (to 27 February), $3.92 million for March and $3.28 million for April (to 2 May). That suggests that the numbers involved are quite large. But it does not tell us what proportion of the credit notes entered into the ledger in respect of a particular month was truly referable to over 120-day debt. There is no evidentiary foundation for inferring that all or even the major part of the total credit notes for a month should be allocated to over 120-day debt.

[2658] If one were to assume, in addition to the other assumptions made above, that one-third of the total was to be allocated to over 120-day debt, then the impact of the credit note adjustments on the over 120-day debt in the defendants' table would range from about $1 million to $3 million per month. That would by no means destroy the defendants' point that there is a strikingly high figure for over 120-day debt in each month.

[2659] The lack of quantification of the effect of failing to allocate the credit notes to ageing bands tends to destroy ASIC's point, in circumstances where it bears the onus of proving its case, it has produced and relied on aged creditors reports which give high figures for the over 120-day debt, it now claims in submissions that the over 120-day debt is at too high a figure in its own evidence, but it is not able to say by how much the figure is too high.

[2660] ASIC also claimed that while there were many instances of One.Tel creditors not actively pursuing recovery of debts, with One.Tel taking advantage of the creditors' inactivity, this did not mean that the debts could be treated as payable on extended terms. It submitted that One.Tel was always vulnerable to a change of attitude on the part of the creditors: ASR [1532(b)]. The validity of that submission depends on an assessment of the evidence about disputes and usual business terms of payment, considered below at 11.4.1 and 11.4.3, and in Ch 18 with respect to certain specific disputes such as those with Telstra, Optus, Lucent and the UK carriers.

[2661] In summary, although some allowance must be made for the lack of ageing of credit notes and One.Tel's practice of deferring creditors over the half-year and year-end, the apparently alarming increase in overdue creditors from January to April (worse still in May) observed by Mr Carter is the product of his taking those months out of the context provided by comparing them with December 2000. When placed in that context, the level of overdue creditors in the period from December to April is not so alarming. Evidently it was not alarming enough to cause Ernst & Young, when they obtained the December aged creditors report, to record any documentary comment about the level of overdue creditors, even though the over 120 day creditors as at December were higher than in all subsequent months to April, except for February.

[2662] The defendants insisted that a proper understanding of the significance of the "gross" creditor figures for the financial position of One.Tel requires investigation of underlying facts, such as those relating to whether:

•: the "overdue" amounts were concentrated to a few creditors or spread across a range of the company's creditors;
•: the pattern of "overdue" amounts was consistent with historical pattern of trading; and
•: there were circumstances explaining why the amounts in question were apparently not been paid in accordance with strict contractual terms: DPS [1537].

[2663] They were critical of Mr Carter on the basis that he did not conduct any analysis attempting to identify the particular creditors who may have caused the apparent increases which he highlighted (T 8016), did not refer to disputes between One.Tel and its carrier creditors (T 7966), and did not explore whether the apparent increases were explicable on any basis other than inability to pay (T 8034-7) (DPS [1539]). Between the end of February and the end of March, there was an increase of £6.7 million in UK "overdue" creditors, and (as shown by the above table) a further $21 million in Australian "overdue" creditors. The defendants criticised Mr Carter for not identifying and investigating the fact that £4.5 million of the UK increase was attributable to One.Tel's dealings with a single creditor, British Telecom: T 8033-4. They also criticised him for failing to mention in his report that of the Australian increase, $9.9 million was due to a single Optus invoice which was in fact not "overdue" at all because it had the wrong "due dates" inserted into the ledger: see 11.3.1.2; Mr Carter at T 8083-6), and $8.4 million was due to showing that amount as "overdue" to Telstra (Mr Carter at T 8138).

[2664] The defendants made the more general submission that in the case of the Australian "overdue" creditors, an analysis of the underlying facts indicates that the explanation for month-to-month movements lies very largely in disputes with Telstra and Optus (considered at 11.2.7 and 11.2.8 respectively) -- although $9.9 million of the increase from February to March was not because of a dispute but because of an operator error in recording an Optus invoice in the ledger as due in March rather than mid-April.

[2665] They illustrated the importance of Telstra and Optus to the overall picture of Australian "overdue" creditors in the following table:

Table 11.2: defendants' comparison of movement in "overdue" creditors with movement in Telstra and Optus accounts
" Overdue "	29 Dec 00 ($m)	31 Jan 01 ($m)	27 Feb 01 ($m)	31 Mar 01 ($m)	2 May 01 ($m)
Total	44.7	24.5	29.3	49.8	54.3
Telstra	1.3	1.3	2.2	10.6	20.3
Optus digital	4.8	5.6	6.1	14.9	4.8
Other Optus	12.2	5.0	2.7	1.9	6.6
Total less Telstra/Optus	26.4	12.6	18.3	22.4	22.6

[2666] This table indicates that "overdue" creditors other than Telstra and Optus were relatively stable over the period from December to April. The December figure should be discounted to make allowance for One.Tel's practice of deferring creditors over the end of the half-year, though we do not know how big an adjustment to make for that factor; on the other hand, it needs to be taken into account that the Australian businesses, particularly Next Generation, were growing to such an extent that some growth in trade creditors over time would be expected (see Ernst & Young's draft Long Form report of late 2000, Ex DTB 7/2860). However, there were substantial increases in the amounts claimed and unpaid on the Telstra and Optus accounts in March, and a further increase in the case of Telstra in April. One needs to consider whether those increases suggested inability to pay or were explicable on some other basis.

11.2.7 Telstra amounts "overdue"

[2667] The principal cause of the increase in the Telstra account was the rendering by Telstra in February and March 2001 of very large invoices in respect of One.Tel customers roaming onto the Telstra network over the period from September 2000 to February 2001. As can be seen from discussion at 18.4, Telstra rendered several invoices in February, due in March, for a total amount of approximately $9 million, and then rendered another invoice in March, due in April, for about $11.4 million.

[2668] I have traced the evidence about One.Tel's dispute with Telstra over roaming charges at 18.4. Telstra did not invoice One.Tel for roaming charges until January/February 2001, and at that stage it rendered large accounts for periods going back to August 2000. One.Tel raised three issues, one of which (incorrect charges for SMS) was de minimis and appears to have been resolved.

One.Tel's complaint about missing originating CDRs led to correspondence and was evidently not satisfactorily resolved before the commencement of voluntary administration, but it does not appear to have been quantified in terms of a claim against Telstra, and was not mentioned by Mr Perez in his note to Ferrier Hodgson dated to July 2001, in which he summarised the roaming dispute: Ex DTB 13/5346. The issue that does seem to have generated a real dispute, which Mr Perez would quantify at about $4.6 million, was the issue about inaccurate call duration. I have concluded at 18.4 that by 21 May 2001, One.Tel had paid a substantial part of the roaming charges and the remaining debt was about $10.3 million, and so $5.7 million would be owing at that time if One.Tel's claim was fully recognised.

[2669] That analysis implies that the increase in the Telstra account was produced by an extraordinary sequence of Telstra invoices which One.Tel did not immediately pay, partly because Telstra did not supply sufficient information (regarding the complaint about "missing originating CDRs") and partly because there was a genuine dispute for a substantial amount concerning inaccurate call duration. By the second half of May, the total amount invoiced had been substantially reduced by payment, and technical investigations were continuing with respect to the inaccurate call duration issue. On the basis that the dispute was valid, the balance owing in the second half of May was about 45% less than Telstra claimed.

11.2.8 Optus amounts "overdue"

[2670] The above table shows that Optus digital debt rose dramatically from February to March, falling back in April. But the figures are misleading. As explained elsewhere, the aged creditors report at 31 March wrongly showed an Optus invoice dated 2 March 2001 for $9.93 million as overdue, because the invoice date had been entered as the due date as well. The aged creditors report at 2 May treated an amount of $9,846,830 as having been paid to Optus, but in fact the cheque for that amount had not been presented and was cancelled on 3 May: see 18.5.8. Notwithstanding these inaccuracies, it is nevertheless the case that the Optus GSM account increased very substantially because of the non-payment of the account for $9.93 million due on 15 April. As to the "other Optus" invoices, again the figures are somewhat misleading, this time because cheques for $6,899,677 were entered in the ledger on 30 March and were therefore reflected in the aged creditors report of 31 March, but not presented for payment until 3 April. If an adjustment is made for that matter, then there appears to have been an increase in "overdue" invoices from February to March, falling back at the end of April.

[2671] The main increase in the Optus accounts is in the GSM account in April. The evidence reviewed at 18.5.9 shows that One.Tel raised a dispute with Optus in relation to missing CDRs, by letter from Ms Ashley to Optus dated 16 March, and when there was no reply, Mr Hodgson wrote again on 19 April setting out in some detail a claim based upon missing Optus CDRs, which he quantified at $5.3 million. I have decided that this was a bona fide claim. The Optus GSM invoice for $9.93 million due on 15 April was not paid in April, originally because Mr Rich, Mr Silbermann Mr Hodgson decided, in the course of preparing 1104jrmssh.xls on 16 April, that cash would be tight in the remainder of April and should be conserved. But after Mr Hodgson's documentation of the missing CDRs claim on 19 April, it appears to have been decided that the dispute should be crystallised and commercial pressure applied to Optus by continuing to withhold payment of that invoice. In May, after further work had been done on the claim, the quantum was increased to over $9 million.

11.2.9 Conclusions as to the pattern of movements in creditors shown in aged creditors reports

[2672] The defendants have, in substance, made out their case that what appear to have been large increases in "overdue" Australian creditors in the period from January to April 2001 are very largely explained by recourse to a small number of disputed invoices for large amounts. Specifically, the Telstra roaming dispute and the Optus missing CDRs dispute explained the withholding of payments to those creditors in circumstances where, if One.Tel were to be wholly successful in the disputes, the amounts payable to those two creditors would be very substantially reduced. These considerations, when coupled with more general observations arising out of the high level of over 120-day debt, tend to rebut any inference that the rise in "overdue" Australian creditors in January-April 2001 suggested that One.Tel's financial position was desperate.

11.3 The UK and other European overdue creditors at 28 February

[2673] The statement of claim makes allegations about the amount owing by companies within the UK operations of the One.Tel Group to trade creditors, and also the amounts overdue and the amounts outstanding for more than 90 days. The allegations may be summarised as follows:

[2674] To make this case, ASIC relied in final submissions (APS [369]) on the table at PR 99 of Mr Carter's principal report. Mr Carter's figure for February, for example, was taken from an aged creditors report for the UK as at 28 February 2001, run on 8 March 2001: Ex CE 6 0351. He converted the figures in the aged creditors report to Australian dollars in App I-6 to his principal report. The figures, if accepted, prove ASIC's contention about the February creditor figure: para S11(b). That is also the case for the January, March and April figures.

11.3.1 Reliability of UK aged creditors reports

[2675] The defendants attacked the reliability of the UK aged creditors reports on three grounds: • some month-to-month movements were simply the result of exchange rate movements; • the figures are based on inaccurate due dates entered into the creditors ledgers; • the creditors ledgers were likely to contain amounts no longer payable, as they had not been reconciled to the records of creditors for some time.

11.3.1.1 Impact of foreign exchange movements

[2676] The table at 11.3 shows pounds sterling creditor figures as well as figures in Australian dollars. As previously noted, the conversions rely on the exchange rates set out in App I-6 to Mr Carter's principal report: see DPS [1408].

[2677] It will be seen from the table that there appears to be an increase in UK creditors between 28 February and 31 March of $26.8 million ($56 million in February to $82.2 million in March). However, it emerged in Mr Carter's cross-examination that about $9 million of the apparent increase arose because of a change in the exchange rate being used to convert the figures into Australian dollars: T 7928-7954. ASIC submitted (ASR [1410(a)]) that an increase in overdue liabilities as a result of a change in exchange rate could not be ignored, because a very substantial part of the money that should have been in the UK and denominated in UK currency had been transferred to Australia and converted into Australian currency. I agree that the movement in the exchange rate is not to be ignored, but ASIC was seeking to show that within the UK operations, where the currency is pounds sterling and no exchange rate issue arises about comparing one month's figures with another in local currency, there had been an increase in overdue debtors which amounted, when converted to Australian dollars, to $26.8 million. In fact the increase was, according to the pounds sterling version of ASIC's allegations, £6.9 million. A calculation that converts the February figure to Australian dollars using one exchange rate and converts the March figure to Australian dollars using another exchange rate distorts the comparison.

[2678] My conclusion is that the defendants have shown that when comparisons are made between monthly UK creditor figures, care has to be taken to avoid errors caused by fluctuating exchange rates. But that does not undermine the validity of the aged creditors reports, only a certain kind of use to which they might be put.

11.3.1.2 Errors in "due dates" in the UK ledger

[2679] In his oral evidence in re-examination (T 12830-12846) Mr Rich identified six cases in which (he said) the actual contractual due date was different from what was stated in the ledger. They are summarised, with references to the evidence, in the defendants' table at DPS 1413. The cases relate to Global Crossing, Cable & Wireless, BT Carrier, Energis, GTS and Colt. In two cases (Global Crossing and Energis), the due date as per the ledger was 7 days and according to Mr Rich, the correct due date was 30 days. In another two cases (Cable & Wireless and BT Carrier) the ledger date was 14 days and the correct date was said to be 30 days. For GTS the ledger date was 28 days and the correct date was said to be 30 days from receipt of CDRs. For Colt the ledger date was 21 days and the correct date was said to be 30 days.

[2680] It seems to me that if the ledger systematically records a shorter payment period for a particular creditor than was in fact the case, the total creditors figure is not affected because that depends on the invoice date rather than the due date for payment; but the effect of the mistake is to exaggerate the amount of "overdue" debt and the ageing of the debt at any particular time. Thus, part of the 0-30 days overdue category is in fact current and not overdue; and part of the 30-60 days category is in fact 0-30 days, and so on. Mr Carter's evidence was not inconsistent with these propositions, and while he did not expressly address them, he did say that the entry of an incorrect due date may cause aged creditors reports to be "unreliable": T 8021. Of course, incorrect due dates for a few creditors in a list of hundreds might be immaterial, but the six cases identified by the defendants are the accounts of One.Tel UK's main carrier creditors, and so the total amounts owing and amounts "overdue" to those creditors are clearly material. The question is whether using shorter payment periods than were in fact required has a material effect on the amounts due and overdue to each of these creditors.

[2681] ASIC has endeavoured to answer that question, partially, in reply Sch 3. The schedule identifies, for each of the six carrier creditors, invoices (presumably all of the invoices) from January to May 2001 that would have a due date in the same month as the invoice date if the ledger terms of payment were correct, but would have a due date in the following month if the defendants' alleged payment terms were correct. In the case of each of the invoices so described, ASIC has subtracted the invoice amount from the amount due at the end of the month according to that month's aged creditors report. These calculations have produced the following adjustments:

Table 11.3: ASIC's Pleaded UK Creditor Figures
	31 Jan		28 Feb		31 Mar		30 Apr
	$ m	£ m	$ m	£ m	$ m	£ m	$ m	£ m
Total creditors	61.7	23.6	80.6	30.8	--	--	--	--
Overdue	49.7	19.0	56.0	21.4	82.2	28.3	82.8	29.1
> 90 days	21.6	8.3	26.5	10.1	32.5	11.1	27.6	9.7

[2682] Except for February, the adjustments are quite large. It seems to me that ASIC's methodology is correct. It is unnecessary to go back further than January invoices with a ledger due date in January, because earlier invoices would be "overdue" by the end of January whether the terms of payment were 30 days or some shorter period. But ASIC's adjustment only relates to "overdue" creditors at each month-end (which I take to mean creditors whose contractual due dates for payment were at or prior to the end of the month -- "due and overdue" might be a better description). It does not adjust the over 90-day debt or any of the other ageing categories, and yet on the basis of my reasoning as set out above, those categories must also be wrong.

[2683] As I understand the submissions (ASR [1415]), ASIC's position is that no adjustments are needed because the payment terms according to the ledger are correct; but if, contrary to ASIC's view, it is found that the payment terms are incorrect as alleged by the defendants, then ASIC would revise its figures for overdue debtors by making the adjustments I have set out in the above table. The next question is whether the ledger payment terms are correct.

[2684] I have reviewed the evidence about contractual due dates elsewhere. Notwithstanding that the ledgers as business records are prima facie the evidence of the truth of their contents, I have reached the conclusion that the defendants' contentions are correct in all six cases (Global Crossing: 18.11.3; Cable & Wireless: 18.11.9; BT Carrier: 10.20.2.3; Energis: 18.12.1; GTS: 18.11.4; Colt: 18.11.2). Therefore the UK aged creditors reports are incorrect with respect to these carrier creditors. It appears that there are other miscellaneous errors in the aged creditors reports (for example, Mr Carter at T 8024), but I am not able to say whether they are material. It is the systematic errors in due dates for the UK carrier creditors that are plainly material and of concern.

[2685] ASIC complained that the defendants' submissions as to the "correct" due dates for payment of the debts owing to the six carriers were not advanced in the defences or in the affidavit evidence of Mr Rich and Mr Silbermann: ASR [1413]. That is correct, although there are some proposed adjustments DPS [1800])-[1810]. ASIC said that for the most part, the ledger errors were raised for the first time on the last day of Mr Rich's re-examination. It submitted that these matters should have been put to Mr Werner and Mr Boaden, because documents of those witnesses were tendered in support of ASIC's case and supported the due dates contended for by ASIC.

[2686] Both parties to this litigation have complained from time to time in their final submissions that their opponent has raised some matter belatedly, and after witnesses who might have been asked about it have come and gone. My general approach to those submissions, in a very long trial affected by the penalty privilege and mainly about the financial condition of a large corporate group as revealed in multitudinous documents, has been to permit submissions to be made about the documents at a late stage, provided that to do so does not give rise to a real and specific prejudice to the other party. I think the defendants' submissions about due dates for the carrier creditors should be permitted, notwithstanding that the matter was first raised near the end of the trial.

[2687] ASIC relied on two documents in support of the due dates for which it contended: ASR [1413]. The first was Mr Werner's "first" email of 6 March 2001, on the subject of "Carrier Liabilities" (Ex CED 1-813), discussed at 10.21.2. One of the attachments to Mr Werner's email was a table showing "Aged Liability for Carrier Services" in each European country including the United Kingdom, carrier by carrier, in categories of "Due Now", 30, 60, 90 and 120 days. In reply Sch 2, ASIC has made calculations for each of the carrier creditors identified by the defendants, which take particular invoices from the ledger and classify them in the ageing bands used by Mr Werner, on the assumption that the terms of payment were correctly stated in the ledger. For the most part ASIC's calculations produced figures identical to Mr Werner's, with a few differences noted in ASIC's table. The figures correspond closely enough to persuade me that Mr Werner's table was prepared on the basis of the payment terms alleged by ASIC for each creditor, that is, the terms reflected in the ledger. However, there is nothing in Mr Werner's email or its attachments to indicate that he directed his mind to the question whether the payment terms reflected in the ledger entries were accurate. He may well have simply assumed that the payment terms contained in the ledger were correct. I therefore do not regard Mr Werner's email of 6 March as contributing to the resolution of the evidentiary dispute.

[2688] The same is true of the other document relied upon by ASIC, an email from Mr Boaden to Mr Silbermann and others dated 1 May 2001, attaching and aged creditor report. Reply Sch 2 convinces me that Mr Boaden's figures were based on the due dates and terms found in the ledger, but there is nothing to indicate that Mr Boaden applied his mind to the question whether that ledger information was correct. Therefore Mr Boaden's email does not, in my view, take the matter further than the ledger itself.

[2689] In the result, I accept the defendants' submissions about the correct payment terms, and I accept ASIC's submission about the effect on overdue creditors of adjusting for those correct terms. The consequences of these findings are addressed at 11.3.1.4.

11.3.1.3 UK ledger not reconciled for some time

[2690] At 11.2.5.7, I referred to the meeting of Mr Rich, Mr Cage and Mr Weston in London in March 2001, when they briefed him with a detailed review of creditors by reference to an aged creditors report. Mr Rich gave evidence (2 JDR 1183) that they discussed the over 180 day creditors and either Mr Weston or Mr Cage said that those amounts were probably not payable at all, as the ledger had not been reconciled and purged for some time.

[2691] In his oral evidence, Mr Weston agreed that there had been some discussion about whether the amounts recorded in the over 180 days column were or were not payable, but he did not recall discussion about the ledger not having been reconciled: UK T 874. He agreed that a portion of the amounts of over 180-day debts that were listed in the report may have been referable to old disputed debts: UK T 875. At 13.3.3 I consider ASIC's submissions on the evidence of Mr Rich and Mr Weston on this subject, and I reach the conclusion that the evidence of Mr Rich is to be preferred.

[2692] The defendants offered some examples, taken from the aged creditors report as at 31 March 2001 (Ex CE 6 0352), of the sorts of entries that one might think were dubious (DPS [1420]). I will not set the examples out, but there are five examples, totalling almost £600,000, in each case of debts recorded as over 120 days with no other amounts owing on that account, suggesting that they were disputed amounts that may not be truly payable. The defendants also referred to a statement appearing in App 3 to BDO Nelson Parkhill's report to the Finance and Audit Committee for the year ended 30 June 2000 (Ex DTB 9/3768, at 3785), which said in relation to the UK ledgers that "creditors' reconciliations do not appear to be performed on a regular basis" and that "this may lead to the misstatement of the creditors balance within the accounts".

[2693] The evidence relied on by the defendants does tend to cast some doubt on the reliability of a very old debtor figures in the UK aged creditors reports, but it seems to me to be too indeterminate to overcome the proposition that the ledger is a business record that is prima facie evidence of the truth of its contents, including the amount of very old debt. Therefore in my opinion the defendants' attack on the UK ledger and aged creditors reports on the ground that the ledger had not been reconciled for some time has not succeeded.

11.3.1.4 Conclusion as to reliability of UK creditors ledgers and aged creditors reports

[2694] It seems to me that in consequence of my findings about the UK creditors ledgers, the most that the UK aged creditors reports would prove, if otherwise reliable, would be "overdue" creditors of £15.9 million ($41.6 million) at 31 January, £20.1 million ($52.5 million) at 28 February, £24 million ($70.2 million) at 31 March and £23.1 million ($65.8 million) at 30 April. About $9 million of the increase between February and March in Australian dollars is accounted for by a change in the exchange rate. ASIC has failed to prove the over 90 day creditor figures that it asserts in paras S6(b), S11(b), S28(a) and S38(a), since it relies on the aged creditors reports to do so, and they have been shown to be materially inaccurate with respect to the over 90 day category, in an unquantified amount. ASIC submitted (ASR [1415]) that the large adjustments necessary for incorrect due dates in March and April are not significant having regard to the extent of the cash requirements of One.Tel at those dates. That is a matter to be considered in the analysis of those months, in Chs 12 and 14.

11.3.2 Non-UK European creditors

[2695] The allegations in ASIC's statement of claim relate only to UK overdue creditors, not other European overdue creditors, however other European overdue creditors have some relevance to ASIC's pleaded case in the way that I explained in ASIC NSWSC 939 at [52]. To prove the level of non-UK European creditors as at 28 February, ASIC relied on Mr Werner's email to Mr Silbermann dated 6 March 2001 headed "Carrier Libilities" [sic], which purported to attach "our liabilities to our carriers" (Ex CED 1-810; see 10.21.2), and performed calculations set out at APS [371]. The attachment to that email showed figures for One.Tel's carrier liabilities, presumably as at 6 March, in local and Australian currency for each of Switzerland, France, UK, The Netherlands and Germany, divided into the bands of 0-30 days, 30-60 days, 60-90 days, 90-120 days, and over 120 days.

[2696] ASIC's calculations were as follows. The total liability to carrier creditors according to Mr Werner's email was $83.049 million of which $27.601 million was 0-30 days, and so the total carrier liability over 30 days was $55.448 million. The total liability to carriers in the UK was $54.357 million of which $13.999 million was 0-30 days, leaving a balance over 30 days of $40.358 million. Therefore the amount owing to non-UK carrier creditors over 30 days was 55.448-40.358 = $15.09 million.

[2697] Mr Werner sent another email on the same subject later on 6 March, containing figures somewhat different from the earlier email and presumably more refined: Ex CED 1-813. If one performs the same calculation on the figures in the second email that ASIC performed on the figures in the first, the amount owing to non-UK carrier creditors over 30 days is $19.493 million.

[2698] My conclusion is that One.Tel owed non-UK European creditors at least $15 million on 6 March, and I infer that an approximately comparable amount was owing at 28 February (indeed, the normal payment pattern of carrier payments shortly after the end of the month would suggest that the balance at 28 February may well have been higher).

11.4 Other matters going to reliability of overdue creditors figures

11.4.1 Usual business terms

[2699] An important component of the defendants' case about creditors is their assertion that creditors alleged by ASIC to be "past due" included amounts that were not in fact beyond their usual payment terms: see defences, para S5(b)(i). The defences alleged (para S5(c) (i)) that:

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.

The defendants claimed that this was because of the highly competitive environment for telecommunications carriers, particularly in Europe.

11.4.1.1 The evidence relied on by the defendants

[2700] In support of these assertions, the defendants relied on:

•: their own evidence;
•: evidence given by Mr Kleemann, Mr Weston and Mr Howell-Davies;
•: evidence in certain documents, namely Ernst & Young's draft Long Form report for the proposed UK listing, and reports by the investment analysts at Salomon Smith Barney and Fosters Stockbroking;
•: the payment pattern emerging from One.Tel UK's creditors ledgers for carrier creditors, including Colt UK, Global Crossing, GTS and WorldCom;
•: a similar payment pattern arising from the Australian creditors ledgers, including the ledger accounts for Roadhound and Optus; and
•: Ms Redfern's Observations to counsel after her visit to the UK to interview witnesses.

[2701] Mr Rich gave evidence (2 JDR 1641(a)-(c)) that One.Tel endeavoured, over time, to maintain business relations with its principal suppliers that permitted it to maximise the period for payment of goods and services, consistent with the maintenance of a reasonable business relationship. This, he said, maximised the amount of "working capital" that One.Tel was able to obtain from its suppliers. Consequently, in its normal practice, One.Tel did not necessarily pay its major carrier suppliers in strict accordance with their formal terms of trade, but sought to encourage relationships under which, as a practical matter, they accepted extended payment periods. He said that One.Tel's experience was that suppliers who operated in markets where there was real competition were generally prepared to accept extended payment terms in practice, without any damage to the business relationship between them and their customers. He contrasted One.Tel's experience with Telstra in the provision of the local call service, where there were few competitors and strict payment terms were required, with the provision of long-distance services, where the suppliers were prepared to tolerate longer payment terms in markets where there were a number of competitors.

[2702] There is further consideration of Mr Rich's and Mr Silbermann's evidence at 13.3.5, including an analysis of the different modes of expression they used.

[2703] Mr Rich and Mr Silbermann insisted in their evidence that the Australian and UK aged creditors reports were inaccurate, inter alia, because they assigned "overdue" status to creditors' claims on the basis of their contractual due dates, without taking into account the usual business terms of dealings between One.Tel and carriers. They claimed that according to the "normal pattern of trading", as a matter of long-established practice One.Tel paid invoices well outside strict trading terms, even up to 180 days: see Mr Rich at T 10843 (on the general question of the meaning of "overdue"), 11091 ("notionally" overdue), 11227, 11231 (also mentioning set-offs and payment plans), Mr Rich at 11233, 11280, 11567-8, at 12088-9; Mr Silbermann at T 13626.

[2704] Mr Kleemann agreed in cross-examination that it was not unusual for growing companies to use slow payment to creditors as a financing method: T 6423). He said this was "used a bit" and he accepted that it made good business sense as long as it did not affect the operations of the business: T 6423. In his December 2000 report on One.Tel's overseas operations (Ex DTB 4/1253), he referred to "massive overcapacity" in Europe and One.Tel's increasing "buying power", which was helping to "push down costs". In his oral evidence he said he learned from the UK management team that there was "considerable overcapacity" in Europe, with a large number of alternative suppliers of carrier services, among whom there was a significant and increasing amount of competition for One.Tel's business: T 6184.

[2705] Mr Weston and Mr Howell-Davies both gave evidence to the effect that international creditors used by One.Tel were competing for its business in an environment of significant oversupply of carrier capacity: Mr Weston, UK T 650; Mr Howell-Davies UK T 95. Mr Weston agreed that in this environment, the practice had grown up in 2000 and early 2001 between One.Tel and its carriers for the carriers to allow One.Tel "very extended credit terms": UK T 648. He accepted that the practice was commercially advantageous to One.Tel because it allowed it extra working capital: UK T 649. Mr Howell-Davies said this was the situation prevailing not just as regards One.Tel, but in the market generally: UK T 96. Mr Weston said that in early 2001, One.Tel was in the situation that carriers were used to being paid beyond strict contractual terms (UK T 635), and he said that "in some cases we were paying invoices up to and over 120 days late" (UK T 640).

[2706] In the draft Long Form report prepared in late 2000 for the purposes of a proposed UK listing of One.Tel, Ernst & Young noted management's comment that "competition in the UK wholesale market is fierce" and consequently price revisions from carriers were frequent, and that One.Tel was strengthening its negotiating position with increasing traffic: Ex DTB 7/2825. They referred to a "high level of creditor days at 30 June 2000", and observed that One.Tel appeared to be "stretching trade credit as a further method of financing its operating activities": Ex DTB 7/2845. There was no suggestion of criticism in that remark.

[2707] Investment analysts confirmed the competitive situation in Europe. A Salomon Smith Barney report on One.Tel in February 2001 noted that several competitors of One.Tel in Europe had made the mistake of building or buying transmission infrastructure, reinforcing a buyers' market for transmission: Ex DTB 8/3270. Fosters Stockbroking reported on One.Tel in March 2001, noting the excess network capacity in Europe, with carriers competing intensely for resellers, with over 20 fibre network providers across Europe: Ex DTB 8/3306.

[2708] The defendants extracted some figures from One.Tel UK's creditors ledger accounts for its carrier creditors, in the form of tables showing the pattern of payment. In each case the table identified invoices from June 2000 to early March 2001, stating the amount of the invoice and the number of days taken to pay it, noting that the historical pattern was for modest amounts to be withheld when the invoices were paid. In relation to Colt UK (DPS [1654]) the average invoice amount was £311,000 and the average payment period was 47 days. In the case of Global Crossing (DPS [1656]), the average invoice was for £1.2 million and the average payment period was 70 days (extended because one payment period was for 188 days and another was for 81 days, though even the shortest period was 45 days). In the case of GTS (DPS [1658]) the average invoice was for £502,000 and the average payment period was 73 days. In the case of WorldCom (DPS [1659]), the average invoice was for £604,000 and the average payment period was 188 days (in one case the payment period was 268 days).

[2709] The defendants' evidence did not extend to every carrier creditor. In particular, BT appears to have been in a somewhat different situation, as emerges from the UK creditors ledger: Ex CED 19-30--33. Mr Rich's evidence is that there was a change of payment practice in relation to BT as from February 2001, when One.Tel moved from making payment about 30 days after invoice to paying about 45 days after invoice: 2 JDR 1952(d).

[2710] As regards Australian creditors, the defendants submitted (DPS [1663]) that according to the Australian creditors ledgers, in the case of Roadhound, there was a consistent pattern of payment 40-60 days after invoice date, and in relation to the various Optus accounts, there were consistent payment patterns of around 50-60 days.

[2711] Ms Jan Redfern, then General Counsel of ASIC, interviewed executive officers of some of One.Tel's major overseas creditors in the UK in 2002 (Mr Rigby of GTS, Mr Menozzi of WorldCom, and Mr Bell of Optimal Communications), and prepared some Observations to counsel after her return: Ex DTB 10/3940. She noted an "apparent custom of delayed payment in the industry", and she added that "at least one creditor acknowledges the tightening of the market in early April 2001": Ex 10/394. However, this evidence was admitted subject to a limitation on use (AS 125; T 10773-8), which are prevented from being used to prove the truth of the assertions contained in it. ASIC did not call any of these creditor witnesses to give evidence, submitting that the evidence would not have added materially to the ambit of the documentary evidence and would be less reliable than the documents, while adding considerably to the expense of the hearing: ASR [1639(b)]. There are draft affidavits in evidence, but it is not obvious to me that, on the whole, they would have assisted the defendants, and it seems to me that ASIC had plausible reasons for deciding not to call these witnesses.

[2712] In my view, the evidence to which the defendants have referred shows that over a substantial period of time One.Tel adopted the practice of paying major carriers (including Colt, GTS, Global Crossing and WorldCom) well outside contractual payment terms. That appears to have been generally in accordance with industry practice, having regard to the oversupply of carrier capacity in Europe and hence the high level of competition between carriers. It is not established by the evidence that carrier creditors generally agreed to or acquiesced in One.Tel's practice, though the question whether there was consent or acquiescence in the case of a particular carrier can only be determined by close examination of the dealings between the company and that carrier. The defendants described the carriers' attitude as "commercial indulgence": DPS [1713b]. That is an acceptable term, in the sense that by and large, the carriers did not initiate proceedings or withdraw supply simply because of a pattern of late payment, but the "indulgence" does not seem to have amounted to consent to or acquiescence in the continuation of the pattern of late payment, as opposed to acceptance without demur of late payment on each particular occasion. That is consistent with the evidence indicating the somewhat difficult position in which the carriers were placed by oversupply in the European market and intense competition, exacerbated by their difficulties in supplying accurate and adequate CDRs to One.Tel, and widespread inaccuracies in carrier invoicing.

11.4.1.2 ASIC's submission about One.Tel's "vulnerability" to a change of attitude by creditors

[2713] ASIC did not directly challenge the defendants' claim that payment outside strict contractual terms was part of the "normal pattern of trading" of One.Tel with its carrier creditors. Rather, its principal submission (ASR [1638-9]) was that since the defendants did not claim that the "normal pattern of trading" gave rise to an extension of contractual terms or the generation of any other right to resist payment when called for, One.Tel was "vulnerable to a change in attitude of creditors", and so (they submitted) this "pattern" was of no significance (see also the defendants' submissions at DPS [3023]-[3049], and ASIC's reply at ASR [3023-49]-[3047-8]). There is further consideration of the "vulnerability submission" at 13.3.5.3, in response to ASR [889] and following.

[2714] ASIC's submission about "vulnerability" is not part of its pleaded case, which asserts breach of the statutory duty of care and diligence by reference to the January, February, March and April circumstances including the aged creditors position. But the defendants' response to ASIC's pleaded case includes the assertion that One.Tel's financial circumstances were not as pleaded by ASIC because, inter alia, apparently "overdue" creditors were being paid within the normal pattern of trading. It is permissible for ASIC to reply to that defence by asserting that in view of the company's vulnerability to a change of attitude by creditors, it was not consistent with the defendants' duty of care and diligence for them to rely on creditors continuing to respect the normal pattern of trading.

[2715] It seems to me that ASIC's submission on this matter is too absolute. If correct, it would make it difficult or impossible for a start-up or growing company to adopt the practice of using slow payment to creditors as a means of providing short-term working capital, a practice that Mr Kleemann said is "used to bit" and which was noted by Ernst & Young in their draft Long Form report without criticism. The issue is very much a commercial matter, depending upon industry circumstances and the particular business relationship between the company and its supplier. It is not for the court to make a judgment about the propriety of business people acting outside strict contractual terms.

[2716] The question posed by s 180(1) of the Corporations Act is whether the defendants have exercised the degree of care and diligence that a reasonable person would exercise with the same responsibilities in a corporation in the company's circumstances. That requires a consideration of all the circumstances, including commercial and practical considerations as well as contractual terms of trade. Depending on the circumstances, the company's vulnerability to a change of attitude by suppliers to extended credit terms may be reasonably judged to be quite remote. The matters bearing on that assessment would include the importance to the company's business of continued access to the goods and services provided by the supplier, the degree of risk of discontinuation of supply having regard to the supplier's competitive situation, the availability of alternative sources of supply, and the availability of alternative sources of short-term working capital so as to fund any reasonably foreseeable change of attitude by suppliers to the company's payment practice. Compliance with the statutory duty of care and diligence may critically depend upon whether the responsible officers have a reasonable and coherent risk management strategy in place to deal with threats to supply and to liquidity.

[2717] It would be wrong in principle for the court to apply the duty of care and diligence in such a way as to prevent directors and officers from exposing their company to a degree of "vulnerability" in any circumstances -- for example, by requiring adherence at all times to strict contractual terms or else an appropriate cash buffer to cover any change of attitude by creditors to extended terms. By doing so the court would be substituting its commercial judgment (or perhaps, in these circumstances, its uncommercial and trustee-like judgment) for the judgment of the business people responsible for managing the affairs of the corporation.

[2718] Managing a company's relationship with a supplier is quintessentially an occasion for making business judgments, that is, decisions to take or not to take action in respect of a matter relevant to the business operations of the company. There are many business judgments involved in managing the relationship, including questions such as how much business should be given to the supplier and whether to pay the supplier's invoices immediately or on contract terms or on a delayed basis. Those are decisions to which s 180(2) is capable of applying. As noted in Ch 23, there is room for debate as to whether the statutory business judgment rule provides protection in any circumstances that would otherwise amount to a breach of the statutory duty of care and diligence. It seems to me, however, that if ever there was an occasion for the application of the statutory business judgment rule, it would be to the business judgments involved in managing the company's relationship with a supplier. These are decisions of a commercial and practical kind that depend on an understanding of the whole relationship and how it fits in to the company's business, and they are not suitable for any kind of judicial review. Assuming that there is no issue about good faith, personal interest or lack of information, s 180(2) makes the protection afforded by the business judgment rule depend upon whether the director or officer rationally believed that the judgment was in the best interests of the corporation. That seems to me to be a desirable way for the court to approach questions of this kind.

[2719] In summary, my view is that, contrary to ASIC's submission, it is relevant to the assessment of its pleaded case that over time, One.Tel paid its carrier creditors outside contractual terms but in accordance with normal practice in the telecommunications industry, even if it cannot be shown that the creditors accepted or acquiesced in that practice. It is also relevant to consider whether, by doing so, the responsible officers at One.Tel made the company vulnerable to a change of attitude by creditors, such as would expose it to the risk of loss of supply and to a liquidity and even a solvency risk. It is relevant to assess the degree of vulnerability so created, having regard to all circumstances. It is also relevant to consider whether the decisions taken concerning payment of carrier creditors were business judgments which those responsible for them rationally believed to be in the best interests of the company.

[2720] The evidence on these matters is partly summarised above, but very largely as detailed in Ch 18. It seems to me that the evidence considered in Ch 18 of carrier creditors demanding payment while at the same time seeking to do further business with One.Tel is of particular significance, as is the evidence of the degree to which the carriers' billing systems were defective and made it difficult for them to provide accurate call data records. Additionally, there is the evidence of intense competition referred to above, and also evidence, considered particularly in Ch 16, of One.Tel having access to potential funding avenues from Toronto Dominion and equipment financing. My conclusion is that the degree of vulnerability of One.Tel to real damage if carrier creditors were to demand payment of outstanding invoices on strict contract terms was not high until about mid-April, when the attitudes of WorldCom and Global Crossing changed in the circumstances explored in Ch 14. If, contrary to my view, there was a measure of vulnerability in One.Tel continuing with its extended payment practices in January-April, nevertheless the evidence to which I have referred provided a basis for One.Tel's management, including the defendants, to rationally believe that the business judgments involved in continuing the practice were in the best interests of the company, while it expanded rapidly so as to achieve the "critical mass" necessary to become cash positive.

[2721] Since One.Tel's extended payment practices did not, according to my findings, produce any general alteration of the contractual terms of payment of carrier creditors, this part of the defendants' case does not undermine the reliability of the aged creditors reports or defeat ASIC's proof of the January-April circumstances. However, the presence of extended payment practices is relevant to my consideration of whether the defendants were in breach of their statutory duty of care and diligence having regard to the statutory business judgment rule. The defendants pleaded the statutory business judgment rule in para 61 of the defences.

11.4.2 Administrative delays

[2722] Mr Rich gave evidence about One.Tel's internal procedures for authorisation of payments to trade creditors: 2 JDR 1643-8. Invoices would be received either by the accounts payable department or the employee who had dealt with the supplier. The invoice would have to be authorised by the relevant manager for payment, and according to Mr Rich, that authorisation might be delayed if the manager had other priorities or there was some dispute with the supplier. Once authorised, the invoice was sent to accounts payable for payment. The accounts payable team would review the invoice and might raise a query. Otherwise the invoice would be cleared for payment by electronic funds transfer or the drawing of a cheque. Cheques were generally signed in weekly or fortnightly batches.

[2723] It is appropriate to put these procedures in the context of the size of the One.Tel business. Ms Thomas gave evidence that there were five full-time employees in the accounts payable area during 2001: affidavit of 15 December 2005, para 1. It appears from the evidence referred to in the defendants' submissions that One.Tel Australia customarily received about 4000-5000 invoices every month, as well as about 240 credit notes per month; in the month of March, for example, it made payments to creditors totalling $82.9 million and received credit notes totalling $24.8 million: DPS [1666].

[2724] The simple and obvious point the defendants make is that the court should not draw any particular conclusion about the financial position of One.Tel from the mere fact that there were amounts "overdue" between zero and 30 days in the aged creditors reports: DPS [1674]. They illustrated this point by reference to some particular examples involving Paradigm One and Prolec, to show how delays in particular instances were explicable by administrative procedures: DPS [1667]-[1670]. But as ASIC pointed out, the fact that the payment of some creditors might have been delayed for administrative reasons would not remove those creditors from the category of overdue creditors, or remove the need to assess sufficiency of available cash to pay them: ASR [1664-1670].

[2725] Mr Kleemann, Mr Long and Mr Carter gave some evidence on which the defendants relied (DPS [1665]), generally to the effect that it is not uncommon in a large company for administrative issues to delay payment until outside strict contract terms. It is unnecessary to reiterate that evidence. It is worth noting, however, that Mr Carter also said that the appropriate practice when an invoice is received is to record the invoice before it is distributed for authorisation, and he said that where companies do not do so they are not following "best practice": T 8072.

[2726] In their defences, para S5(b)(iii), the defendants alleged that ASIC's list of trade creditors "past due" included some amounts that were awaiting the finalisation of agreed vendor financing arrangements.

[2727] As to this, Mr Rich gave evidence (2 JDR 1659-60) that One.Tel often financed capital equipment purchases using vendor finance from such companies as Cisco and Compaq, or third-party equipment leasing finance (such as the dialler finance in the UK from Mantek). He said this sometimes involved a delay between One.Tel being invoiced for the equipment and the finalisation of the financing arrangements.

[2728] The defences, para S5(c)(iii), provided:

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.

[2729] Mr Rich explained (2 JDR 1644a and b) that One.Tel had some significant issues in the past with IT suppliers failing to perform services properly but nevertheless rendering invoices for payment. He said that in consequence, Mr Beck instructed the IT team not to approve invoices from third-party IT suppliers until they were completely satisfied that the services had been performed properly. Similarly, One.Tel generally resisted paying recruitment consultants until the recruited employee had joined the company and been with it for long enough for One.Tel to be satisfied that the recruitment was successful.

[2730] The defences, para S5(c)(v), provided:

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.

[2731] On this subject, Mr Rich gave evidence (2 JDR 1656-8) that One.Tel frequently found itself in a position in which it withheld payments to dealers who were signing up customers, in circumstances where the dealers had failed to follow credit procedures required by One.Tel. One.Tel's arrangements with dealers allowed it to "claw back" commission paid if its procedures were not followed by a dealer and it suffered losses as a result of customer delinquencies. He said there was an audit process for compliance with procedures, which was known internally as "Project Integrity". He noted that the enforcement of "clawback" arrangements was often a matter of considerable contention between One.Tel and some of its dealers, and he instanced in particular a large dealer called One.Fone, with which One.Tel had a vehement dispute when it withheld commission payments.

[2732] It seems to me that the defendants have made out the parts of their defences to which I have referred under this heading, but the matter is of very little consequence, except as regards dealer disputes, where there appear to have been good reasons for withholding payment, and withholding of payments to IT suppliers and recruitment agencies, where the evidence suggests that there was acquiescence by the creditor. Administrative procedures or particular checking practices do not constitute any general justification for late payment, as it is up to the debtor company to be organised well enough to meet the agreed payment terms. I do not accept the defendants' suggestion (DPS [1677]) that there is any warrant for disregarding or discounting the category of overdue creditors from zero to 30 days because of the possibility of administrative delays.

11.4.3 Disputes

[2733] ASIC's pleaded allegations about creditors did not take into account that some creditors listed in aged creditors reports were in dispute with One.Tel concerning the amounts that they claimed.

[2734] In the defences, the defendants alleged that ASIC's figures for creditors "past due" included amounts which were the subject of bona fide disputes with the creditors: para S5(b). The defences continued, in para S5(c):

(1): 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; ...
(2): 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 ...

[2735] Apart from the evidence about specific disputes that I deal with in the narrative account and in Ch 18, the defendants put forward some evidence to support its general claim about the existence of disputes with creditors, particularly carriers.

11.4.3.1 General evidence about carrier disputes

[2736] Mr Rich gave evidence that One.Tel from time to time deliberately withheld payment to suppliers, where it had a dispute about invoicing or service matters: 2 JDR 1649-1655. He said money was withheld either because the amount was disputed, or in order to crystallise resolution of the dispute by getting the supplier's attention. He drew attention to the duality of the relationship between One.Tel and the carriers, which were both suppliers and competitors, and he said this led to a degree of robustness in dealings. He said One.Tel's experience over time was that the billing systems of the telecommunications suppliers were inaccurate, with the result that it was frequently overcharged for services. He claimed that One.Tel's historical experience was that diligent checking of carrier invoices resulted, on average, in an effective saving of the amount payable of up to 4-5% of the invoiced amount. Consequently, each business unit had a team who were responsible for checking invoices received from carriers, in terms of time and tariff. If the team discovered any anomaly in the charges being made, they would dispute the relevant amount and apply for a credit, and the disputed amount would usually be withheld from payment.

[2737] In addition to disputes concerning overcharging, One.Tel from time to time had disputes with suppliers on the ground that they were not providing satisfactory levels of service, leading to One.Tel claiming damages for lost custom and seeking to remedy service failures. He said sometimes One.Tel withheld payment to crystallise the resolution of such a dispute, and he gave as an example One.Net's difficulties with AAPT/Sat Tel in June 1999 and March/April 2001. He said the withholding of payments in this way was a common occurrence in the telecommunications industry, and only rarely resulted in legal proceedings or the withdrawal of service. He said that typically the withholding of payment crystallised the dispute and led to its ultimate resolution, without damaging the longer term relationship between the company and the carrier.

[2738] One.Tel had a process verifying invoices of carriers, which required the carrier to provide detailed CDRs supporting the invoice. The process was described by Ernst & Young in its draft Long Form report prepared in late 2000 for the purposes of a proposed UK listing (Ex DTB 7/2883) as follows:

The carriers send a purchase invoice and a Customer Data Record (CPR), which contains information about all calls made through their network detailing start time, end time, date, callers number, number called, rate used and charge for each call.

The CDR is electronically downloaded onto One.Tel's computer system. The One.Tel system (One.Recon) re-calculates the cost of the call based on the rates agreed between the carrier and the company. One.Recon also matches each call on the CDR with the relevant customer call on One.Tel's system to ensure all calls are legitimate and belong to One.Tel customers. The carrier team checks all calculations. Any discrepancies are queried with the carrier. To date there is a number of disputes outstanding with the company's main carriers. As at 30 June 2000, a total of A$12 million was in dispute with various carriers.

[2739] Ms Ashley described the setting up and management of the process of investigating and dealing with carrier claim disputes in Australia, as well as the recording and updating of records of disputes. There were some large disputes that were not her responsibility to review, such as the Telstra roaming issues and the Telstra damages claim: T 5466. Her calculations were made available to One.Tel's auditors and management, and ASIC invited the court to infer that they were the source of the figures for claims found in One.Tel's records and recognised by Mr Carter (para 101 of his principal report), and for which credit has been given in ASIC's month-end summaries of cash requirements in its principles submissions. That is probably correct, though it is not clear from the evidence just how much of the total carrier claims were excluded from her review, and in any event it only related to Australia.

[2740] The practice of withholding payment of invoices where there is a dispute with the supplier is not an unusual business practice, according to the evidence (Mr Kleemann at T 6423-4; Mr Packer Jnr at T 9823), although it may be less common to withhold payment of the entire amount when the disputed amount is only a proportion of the invoice. The practice of withholding payment was evidently more common in the telecommunications industry than elsewhere, because there appears to have been a particularly high level of invoice and service disputes. Mr Long gave evidence that, based on his experience in auditing companies in the telecommunications industry, withholding payment to carriers of disputed amounts was a common industry practice: T 7153. Indeed, in some cases there appear to have been contractual entitlements to withhold payment of the disputed amount (though not, it seems, the whole amount of the invoice unless the whole amount was disputed). For example, in the carriage service provided resale supply agreement between Telstra and One.Tel dated 20 October 1999, cl 8.3 permitted One.Tel to withhold payment where the Billing Disputes Procedure provides that payment need not be made pending resolution of a Billing Dispute (Ex P88, tab 1); and the agreement between One.Tel and Optus dated 17 December 1997, cl 12.7A provided that in the event of a dispute in relation to which the Service Provider had given notice to Optus, the Servers Provider was permitted to withhold an amount equivalent to the items in the Optus invoice in dispute until such time as that dispute was resolved.

[2741] The defendants cross-examined Mr Long about another telecommunications company that he audited, Macquarie Corporate Telecommunications. He agreed that this company had significant disputes with its carriers: T 7153. Indeed, the 2000 Annual Report for Macquarie Corporate Telecommunications (Ex DTB 9/3386) said (at p 35) that the company was currently disputing charges levied by three of its suppliers totalling $19.1 million. The annual report said that the disputes were on grounds of incorrect billing, including whether invoiced services were not in fact provided, and on the ground that the services supplied were not in accordance with agreed criteria. The defendants noted (DPS [1691]) that Macquarie Corporate Telecommunications had total trade creditors at 30 June 2000 of $27 million, and so the disputed amount of $19 million was "a very material amount" for that company, as Mr Long agreed (T 7392). Mr Long said that disputes of a significant amount between carriers and companies like Macquarie were, in his experience, quite a common situation at that time: T 7393. He said his experience was that information billed by Telstra was "not generally always agreed by suppliers" (T 7393) and Optus had similar issues with its billing system, which were "notorious knowledge in the industry at that time" (T 7394).

[2742] Mr Long said it was "well known in the industry" that AAPT had a significant claim against Telstra or Optus: T 7188. The defendants referred to AAPT's 1999 and 2000 Annual Reports (Exs DTB 17/253, tab 22; DTB 17/317, tab 23), which contained reports on that company's disputes with Telstra and went on to say that "due to the nature of the telecommunications industry, there are number of ongoing disputes in respect of charges by telecommunications suppliers".

[2743] Mr Carter acknowledged in cross-examination that it was notorious in 2001 that the carriers in the industry had problems with accurate billing to their customers, and that disputes between companies such as One.Tel and its carriers were frequent in the industry (T 7971-2), although he could not quantify the disputes and had proceeded on the assumption that what was in the provision for carrier claims was an accurate representation of what One.Tel expected it would recover (T 7911, 7975).

[2744] This evidence generally supports the proposition that it was likely that One.Tel's disputes against carriers would have a reasonable foundation. But it does not serve to quantify the level of disputes. There is nothing to indicate that the proportion of disputed amounts to total overdue creditors at One.Tel was anything like the 19:27 ratio that apparently existed at Macquarie. The defendants submitted that "a significant but indeterminate portion" of the amounts shown in the aged creditors reports as overdue was in fact not payable: DPS [1682]. However, they also conceded that by and large, disputes led to the withholding of "modest amounts" from payment: DPS [1655], [1657]. And Ernst & Young's draft Long Form report, upon which the defendants rely in other respects, said (p 8) that One.Tel's management had indicated that they generally had "few material disputes with their carriers". That suggests that in the normal run of carrier invoices, the disputed amount on each occasion was relatively small, although delay in resolution of the disputes may have meant that the total amount in dispute accumulated over time.

11.4.3.2 Evidence about carrier disputes in the UK

[2745] In the United Kingdom, as in Australia, One.Tel had a process by which it would "wash" CDR information obtained from carriers against One.Tel's own call records, to identify differences in value and volume and to ascertain whether it was being correctly charged: Mr Boaden at T 5392-3; Mr Weston at UK T 636. In the UK, the process was called "One.Rec".

[2746] There is some evidence going to quantification of the total amount in dispute between One.Tel and its carriers. As at 23 November 2000, the process applied to the period up to August 2000 had produced total claims against carriers of £4.6 million, of which at that time credit notes had been received for £3.5 million: Ex DTB 6/2457; Mr Boaden at T 5395; Mr Weston at UK T 637.

[2747] Mr Weston's recollection was that the bills One.Tel was receiving from carriers were "notoriously inaccurate" and One.Tel would often find "huge errors" in them: UK T 637-8. Consequently One.Tel was "very careful about paying bills" from its carriers: Mr Weston, at UK T 638. Andrew Harris, a manager at One.Tel UK, had the job of identifying, raising and ultimately negotiating resolution of invoicing disputes with carriers: Mr Weston, at UK T 664, 703. One.Tel's practice was not to pay carriers until they had provided CDRs, which it had "washed" against its billing information: Mr Boaden, T 5396. If carriers were slow to supply CDRs or appropriate rate tables, there would be delays in resolving disputes with them: Mr Weston, UK T 704. Examples of these difficulties can be seen in my review of the creditor correspondence in Ch 18, for example in relation to Colt, GTS and WorldCom. There was particular evidence concerning WorldCom, indicating that its billing system was very poor (the evidence is summarised at DPS [1706], except that it misstates Mr Boaden's evidence: see ASR [1706(a)]).

[2748] The practice of One.Tel UK was to investigate the carrier invoice, a process that would delay payment of the invoice, particularly if inadequate CDRs were supplied (Mr Weston at UK T 640), and if a dispute was raised, One.Tel would withhold payment of the disputed amount (Mr Weston, UK T 642). Those disputed amounts accumulated over time until resolution was negotiated. That is a pattern that can be seen in the ledger accounts for major carrier creditors in the UK. The defendants referred to the ledger for WorldCom, which showed a pattern of withholding of disputed amounts and the periodic issuance of credit notes: DPS [1708]; Mr Weston at UK T 645-6. The carrier correspondence that I have reviewed in Ch 18 shows that the process of checking and verifying invoices caused a degree of frustration on both sides of the dealings, and sometimes tension between the credit department of the carrier and the sales and marketing department, who were keen to do more business with One.Tel: see also Mr Weston at UK T 650. Mr Weston said One.Tel was very good at checking the invoices and generally they would get a credit: UK T 705.

11.4.3.3 Absence of creditor witnesses

[2749] At 11.4.1, I referred to Ms Redfern, General Counsel of ASIC, who interviewed executive officers of some major overseas creditors at One.Tel in the UK in 2002. Draft affidavits were prepared for Mr Rigby of GTS, Mr Menozzi of WorldCom and Mr Bell of Optimal Communications. The affidavits were not sworn or filed and the witnesses were not called. A set of Observations to counsel by Ms Redfern concerning creditor witnesses was allowed into evidence, subject to a limitation of use order (as to the limitation, see ASR [1717(a)], with which I agree). In their submissions (DPS [1717a]) the defendants sought to use Ms Redfern's Observations to counsel to prove the content of statements made by the potential creditor witnesses to Ms Redfern, as opposed to the truth of those statements. I agree with ASIC that the limitation of use order which governs this evidence prevents it from being used to prove the truth of that matter: ASR [1717(a)].

[2750] As I noted at 11.4.1, ASIC did not call any of the creditor witnesses to give evidence. The defendants urged the court to draw adverse inferences from that fact. I have decided not to do so. ASIC submitted that the evidence would not have added materially to the ambit of the documentary evidence, and that it would be less reliable evidence than the documentary evidence about creditors; and further, to call such witnesses would have added significantly to the cost and length of the hearing: ASR [1639(b)], [17146]. Having reviewed the draft affidavits of the three potential witnesses, and the documentary evidence about creditors (to the extent that I have been referred to it), I agree with ASIC's assessment on this matter.

[2751] The defendants addressed quite lengthy submissions to the contents of the draft affidavits of Mr Rigby and Mr Menozzi, in an endeavour to persuade the court to infer that ASIC did not call these witnesses because their evidence would not have assisted its case. But apart from the more general reasons for not calling these witnesses, to which I have just referred, it seems to me that the evidence Mr Rigby and Mr Menozzi would have given if they had sworn affidavits in terms of the drafts would have been quite generalised, in comparison with the documentary evidence that is available, and many of the matters to which the defendants refer are primarily matters for documentary evidence. I agree with ASIC's submissions at ASR [1718(a)] and [1718(b)].

11.4.3.4 Conclusions as to disputes

[2752] The evidence (including the "carrier correspondence" evidence considered in detail in Ch 18) establishes that:

•: One.Tel Australia and One.Tel UK had similar systems of checking and verification of invoices against CDRs and rating tables which they required the carriers to supply;
•: carriers sometimes had difficulty in supplying information in the form One.Tel required for running its reconciliation program, and this would cause delays in payment;
•: carrier invoices were often inaccurate, a problem that was very common in the telecommunications industry;
•: One.Tel would raise disputes if its processes indicated overcharging or there was some service failure;
•: One.Tel would withhold payment of the disputed amount, and would sometimes withhold payment of the entire amount of the invoice in order to crystallise the dispute and obtain action from the carrier to resolve it;
•: in the UK, these procedures resulted in the issue by carriers of credit notes which added up to a substantial amount.

[2753] Consequently, as Mr Rich and Mr Silbermann insisted in their evidence, One.Tel's Australian and UK aged creditors reports were inaccurate to the extent that they did not make allowance for disputes over debts.

[2754] This is not to say, of course, that One.Tel's management (including the defendants) were entitled to assume that all carrier creditor disputes would be resolved in One.Tel's favour for the amounts to which the disputes related. ASIC referred (APS [1494]-[1496]) to the evidence of Mr Long and Mr Howell-Davies as to the imprudence of assuming that disputes would be resolved favourably to the company and consequently not having funds to meet overdue creditors that assumption proved to be incorrect. The question raised by the defences is whether officers in the position of the defendants in the company's circumstances could reasonably form a view as to the proper or overall rate of success of the company's disputes. It seems to me that a reasonable assessment could have been made on the basis of the facts at hand, by reviewing each of the main disputes ad hoc and then forming a view as to whether the more minor disputes were of a kind as to which historical experience could be relied on. If they did so, it would have been reasonable for them to proceed on the basis that the level of overdue creditors at the given time was reduced by that estimated amount.

[2755] Quantification of the amount of disputes is a difficult task in light of the evidence. In addition to the disputes for smaller amounts, the evidence for which is peppered through my account in Ch 18, there was the Telstra roaming dispute quantified at about $4.6 million (11.2.7 and 18.4) and the Optus missing CDRs dispute eventually quantified at about $9 million (11.2.8 and 18.5), and disputes with Lucent leading to settlement in late February but then further claims and disputes up to May and beyond (18.6). In the UK and Europe there were substantial disputes with carriers, summarised in Ch 18 and quantified in the period up to August 2000 at £4.6 million, as noted above. Further observations on quantification at 11.4.4.

11.4.4 Summary and conclusion -- creditors

[2756] The following propositions emerge from my analysis of Australian creditors in 11.2:

(4)

according to aged creditors reports, Australian due and overdue creditors stood at $24 million at 31 January, $29 million at 27 February, $50 million at 31 March and $54 million at 30 April: 11.2.1.1;

(5)

until late April, Mr Rich was not aware of creditors being paid outside One.Tel's normal payment practices: 11.2.1.2;

(6)

of the adjustments that ASIC sought to make to the creditor figures taken from the aged creditors reports:

(7)

no adjustment should be made to the February figure to take into account the Lucent settlement payment of $10 million: 11.2.2;

(8)

a net adjustment for unpresented and unreleased cheques and unpresented deposits should be made by adding $4.6 million to total creditors at 31 January (11.2.3.9), $4.8 million at 27 February (11.2.3.10), $9.6 million at 31 March (11.2.3.11) and $13.1 million at 30 April (11.2.3.12);

(9)

although there is some general evidence to suggest that some invoices were not posted to the ledger when received, but were saved up and posted at some later time, especially in late April and May, that evidence does not quantify the amount of late posted invoices and ASIC's attempt to do so in Ex P93-730 is unreliable, and so no adjustment should be made to take into account late posted invoices: 11.2.4.;

(10)

the Australian aged creditors reports were unreliable in ways that overstated the amount of due and overdue creditors, because of:

(a): substantial errors in recording the due dates of invoices, affecting the figures for total due and overdue creditors, the overall effect being at least as large as stated in Ex P93-730, but probably higher by an unquantified amount: 11.2.5.4;
(b): the late posting of credit notes, which had the effect that the credit appeared in the ledger but not in the end-of-month aged creditors report, the overall impact being at least as large as stated in Ex P93-730, but probably higher by an unquantified amount: 11.2.5.5;
(c): failure for a substantial time to reconcile the creditor's ledgers with creditors statements and to purge the ledger of amounts no longer considered due: 11.2.5.7;

(11)

if they had been accurate, it would be wrong to interpret the Australian aged creditors reports as showing a steady rise in overdue creditors from January to April, having regard to the sharp decline from December to January, and the fairly stable level of creditors over 120 days;

(12)

what appear to have been large increases in "overdue" Australian creditors in the period from January to April 2001 are substantially explained by recourse to a small number of disputed invoices for large amounts:

(a): large increases in the Telstra account from 27 February to 31 March and from 31 March to 2 May related primarily to Telstra's late invoicing of very large amounts for roaming charges, in respect of which One.Tel raised a bona fide dispute about inaccurate call duration, eventually quantified at $4.6 million, so that by 21 May, after One.Tel had paid a substantial part of the roaming charges, the remaining debt would be $5.7 million if One.Tel's claim were to be fully recognised: 11.2.7;
(b): although the figures for the Optus accounts are misleading for reasons given at 11.2.8, there was in fact a large increase in the total amount owing on the Optus GSM account from 31 March to 2 May because of non-payment of an Optus invoice for $9.9 million due in mid-April, but payment was withheld at the end of April to crystallise a bona fide dispute about missing Optus CDRs, and to apply commercial pressure on Optus to work to resolve it, the dispute being quantified on 19 April at $5.3 million and increased to over $9 million in May: 11.2.8.

(13)

the UK aged creditors reports were not generally unreliable, but the figures in the reports needed to be adjusted to take into account the impact of foreign exchange movements and errors in due dates, with the result that "overdue" UK creditors stood at £15.9 million ($41.6 million) at 31 January, £20.1 million ($52.5 million) at 28 February, £24 million ($70.2 million) at 31 March and £23.1 million ($65.8 million) at 30 April (about $9 million of the increase between February and March in Australian dollars is accounted for by a change in the exchange rate: 11.3.1;

(14)

non-UK European creditors over 30 days stood at about $19.5 million on 6 March 2001: 11.3.2;

(15)

One.Tel adopted the practice of paying carrier creditors well outside contractual terms, although the creditors did not agree to or generally acquiesce in that practice, there was a rational basis for belief, until about mid-April, that to adopt these payment practices was in the best interests of the company: 11.4.1;

(16)

there were substantial disputes between One.Tel and Telstra, One.Tel and Optus, and between One.Tel and its European carriers, as well as many other disputes for smaller amounts.

[2757] The defendants submitted that two kinds of adjustments should be made to the UK aged creditors figures in order to obtain a true perspective on One.Tel's financial position vis-a-vis its creditors: DPS [1800]-[1801]. First, they advocated that amounts "overdue" for 0-30 days should be deducted, on the basis that some of those amounts were to be expected in the case of a large company such as One.Tel because of normal, short-term administrative delays in payment, and in any event the 0-30 days category was likely to be significantly overstated by the impact of "due dates" errors in the ledger: DPS [1802].

[2758] It seems to me important to identify the 0-30 days category of creditors in making an overall assessment of the company's financial position with respect to its creditors, because they are, after all, only a little overdue and may be only a few days overdue before payment, and historically the figures indicate that a large portion of those creditors were in fact paid within the month. But in my view the weight to be accorded to that category of creditors is not increased by the consideration that some of the late payments might have been due to short-term administrative delays. I would not disregard the 0-30 days category completely but I agree that it is a less serious indication of financial difficulty than debts owing for longer periods.

[2759] Second, the defendants advocated that amounts "overdue" by 120 days or more should be deducted from total creditors on the basis that those amounts were likely to be in dispute: DPS [1830]. In my opinion, this submission has a degree of plausibility. ASIC's response to it (ASR [1803-5]) was that the unpaid amounts could be called in by the carriers because the carriers did not accept any contractually binding extensions to One.Tel's credit terms. But if an amount was withheld because it was genuinely disputed, there would in all probability be a contractual entitlement to withhold payment (if, for example, it was agreed between One.Tel and the carrier that the carrier would supply adequate CDRs, and it had failed to do so) or else One.Tel would have a cross-claim to the amount in dispute.

[2760] The figures show that a substantial quantity of over 120-day debt was characteristic of One.Tel's UK creditors ledger well before January 2001, and there is ample evidence of extensive and long-running disputes between One.Tel and its UK carrier creditors. It is plausible to say that at least a substantial component of the over 120-day debt was disputed. An adjustment would need to be made for late posted credit notes, if the practice in the UK was, like the Australian practice, to post them to the youngest category of creditors rather than to age them. But still the level of over 120-day debts for the major UK carrier accounts was substantial, particularly in comparison with other categories of ageing, and would presumably remain substantial even if a portion of unallocated credit notes were allocated to the over 120 days category.

[2761] The defendants prepared a table showing the amounts owing in January, February, March and April 2001 for each of One.Tel's seven UK carriers and also the BT E1 account, eliminating 0-30 and over 120-day debt: DPS [1804]. The total "overdue" debt according to Ex P93-708 for those eight accounts, disregarding payments, was £11.94 million at 31 January, £14.79 million at 28 February, £19.77 million at 31 March, and £17.09 at 30 April. After the defendants' adjustments, the figures were £3.5 million at 31 January, £5.5 million at 28 February, £4.9 million at 31 March and £7.5 million at 30 April. Obviously the 0-30 days and over 120-day debts together constitute a very substantial part of the total "overdue" debt. The defendants' table at DPS [1804] does not indicate the separate effect of deducting the over 120 days debt alone, but there is a table at DPS [1891] which shows the amounts of over 120-day debt for twelve UK carrier creditors for the months of January, February, March and April sourced in the UK aged creditors reports.

[2762] The defendants also prepared tables for October, November and December 2000, which purport to show invoices for the eight accounts that would be more than 30 days old but less than 120 days at the end of the month, but unpaid on that date: DPS [1807]-[1809]. The total figures are £7.3 million for October, £6.1 million November and £2.4 million for December. This analysis suggests that there was no unfavourable movement in "overdue" UK carrier debts in the 30-120-day band in the period from October 2000 to April 2001.

[2763] In my opinion, the UK creditors figures should not be adjusted by removing the 0-30-day debt, nor by removing the whole of the over 120-day debt. However, the evidence points to the conclusion that a substantial part of the over 120-day debt should be treated as subject to disputes. Using the table for the twelve UK carriers that appears at DPS [1891], the level of over 120-day debt, and therefore the maximum allowance to be made for UK carrier disputes, is £6.7 million ($17.5 million) for January, £7.4 million ($19.3 million) for February, £6.8 million ($17.8 million) for March and £5.9 million ($15.4 million) for April. There is no reason to infer that disputes in existence for several months in the UK were other than bona fide disputes, and the evidence surveyed in Ch 18 points to the contrary conclusion.

[2764] The court is not in a position to determine whether all or any of One.Tel's dispute claims were valid, but the presence of bona fide claims means, in my opinion, that ASIC has not proved that the claims would fail, and therefore it has not proved that the level of creditors should be assessed as if no claims had been made. The consequence is that the amount of proven debt owing to UK creditors needs to be reduced from the figures given in subpara (g) above by a substantial but unquantified amount reflecting disputes.

[2765] The defendants also prepared a table for "overdue" Australian creditors, showing the effect of removing less than 30 day and over 120 day creditors from the figures given in the aged creditors reports. The table is as follows:

Table 11.5: Defendants' adjustments to "overdue" Australian creditors
	29 Dec 00	31 Jan 01	27 Feb 01	31 Mar 01	2 May 01
Total "overdue "	44.7	24.5	29.3	49.8	54.3
< 30 days	14.6	(0.6)	2.9	23.1	14.2
> 120 days	19.7	19.1	20.4	15.5	15.8
Adjusted "overdue "	10.4	6.0	6.0	11.2	24.3

[2766] As with the UK figures, I would not remove the less than 30-day debt, but I would accept that a substantial part of the over 120-day debt (helpfully quantified in the Australian table) was subject to bona fide disputes, including the disputes with Telstra and Optus that I have dealt with at 11.2.7 and 11.2.8 respectively, subject to a further adjustment to reflect the lack of ageing of credit notes. This is another substantial and unqualified adjustment to be made to reduce the figures in the Australian aged creditors reports, in addition to the matters mentioned in my summary at subpara (d) above, adding to the uncertainty as to whether the Australian aged creditors reports of 31 January, 27 February, 31 March and 2 May 2001 were reliable. In my view the elements of uncertainty created by these factors are sufficient to reverse the effect of the prima facie evidence constituted by tender of the reports themselves, and therefore remove the evidentiary foundation for this part of ASIC's case.

11.5 Summary of ASIC's contentions as to the financial position at the end of February, and my findings

[2767] ASIC summarised the key matters in its submissions with respect to month-end cash usage, creditors and EBITDA in the following propositions:

(4)

Cash usage

(18): for the six months to 31 December 2000, the group cash usage was $47 million higher than in the September budget;
(19): January and February 2001 were $21 million behind even the forecast in the January 2001 board papers, made near the end of January, despite substantial creditor deferrals;

(5)

Creditors

(20): at the end of February, the group had many tens of millions of dollars in overdue creditors in Australia and overseas, with nowhere near enough cash to pay them;
(21): in Australia there was $29 million overdue, together with $10 million to be paid to Lucent;
(22): in the UK there was $56 million overdue, and at least another $15 million in respect of the rest of Europe;
(23): the group thus had about $110 million in overdue creditors at the end of February;

(6)

Earnings

(24)

the group's earnings for the first half of 2000/2001 were about $42 million down on the September budget;

(25)

the January earnings were $22.5 million down on the September budget and the February earnings were $19 million down on the September budget;

(b): year-to-date EBITDA to 28 February was a loss of $140.2 million compared with the September budget figure of a loss of $56.5 million.

[2768] In summary, my findings on these matters are as follows:

(c)

for the 6 months to 31 December 2000, group cash usage was $17 million higher than the revised budget in the January board papers: 8.17.5-8.17.7; 11.1.2;

(d)

January and February 2001 were $21 million behind the forecast in the January 2001 board papers, and UK creditors were underpaid by about $5-10 million: 11.1.2;

(i): ASIC has not shown that the group had insufficient cash to pay "overdue" creditors at the end of February 2001;
(ii): ASIC has not shown that Australian creditors stood at $29 million at the end of February, because the aged creditors reports upon which it has relied are unreliable (11.2.5; 11.4.4), and do not take into account substantial disputes (11.4.3, 11.4.4), although it is true that by virtue of a negotiated settlement reached on about 27 February and documented on 1 March, One.Tel became liable to pay Lucent $10 million, and it did so on 2 March (11.2.2);
(iii): according to the UK aged creditors report, adjusted for incorrect posting of due dates, there was $52.5 million "overdue" to UK creditors at the end of February (11.3.1.2), and there is evidence at least $15 million was owing to non-UK European creditors (11.3.2), but those figures do not take into account the high level of disputes that One.Tel had with UK and European carriers, which affected the amounts owing by a material but unquantified amount (11.4.3; 11.4.4);
(iv): Group earnings for the first half-year were about $42 million below the September budget, but there is a question as to the utility of comparing the figures to the September budget when it had been superseded: 11.5.1; and (ciii) the monthly EBITDA figures relied upon by ASIC are taken from management accounts, which include documents purporting to be management accounts for the Australian fixed wire/services provider business that have not been shown to be final documents, and therefore ASIC's figures cannot be accepted.

[2769] ASIC drew the following consequential conclusions from its submissions about the end-of-February financial position (APS [389]-[390]):

•: the turnaround contemplated by the September budget for the second half of the financial year was not anywhere near occurring, and the heightened turnaround required as a result of the poor first half-year result was nowhere near occurring;
•: in light of the failures of the group to achieve the expectations expressed by management to the Board in September and subsequently, no confidence could reasonably have been reposed in management projections as to future earnings of the company, and the only prudent approach that could be taken to the assessment of the group's cash and EBITDA position at the end of February (as in late May 2001 when Ernst & Young were requested to report) was to assume a continuation of significant cash outflows until near the end of the calendar year (as was said by Mr Long at T 7307 and 7488-9, and by Mr Howell-Davies at UK T 602, 593, 1114-5, with respect to the position in May).

Since ASIC has failed to establish the foundation for these submissions, the submissions cannot be accepted.

11.6 One.Tel's cash requirement at 28 February 2001

[2770] ASIC submitted (APS [393A]) that the One.Tel Group's cash requirement at the end of February, to cover the period of nine months to November 2001, was $270 million. That figure corresponds with the final figure for the February group cash requirement pleaded in the particulars to para 11(a) of the statement of claim, and is also the figure stated in paras 21(d) and 32(d), but the components of the calculation in the final submissions are different from the components of the calculation in para 11(a) of the pleading. The particulars of the cash requirement in the statement of claim were taken from para 234 of Mr Carter's principal report, which was held to be inadmissible, although part of that material, comprising the "available cash balance" and the Australian and UK overdue creditors as set out in para 99 of the report and again in para 16(a), was received into evidence subject to treating as an assumption the proposition that $8 million of cash was pledged and not freely available.

[2771] It is instructive to compare the composition of the cash requirement figure in the submissions and in the statement of claim:

Table 11.6: February Group Cash Requirement (ASIC submissions & pleading)
	ASIC submissions ($m)	statement of claim ($m)
Available cash balance	60	48
Aust overdue creditors	(29)	(29)
Late posted invoices (net)	(2)	--
Lucent	(10)	--
UK overdue creditors	(56)	(56)
Possible claims against suppliers	9	9
Monthly cash usage from operations at $20 million per month to 30 November	(180)	(180)
Toronto Dominion loan repayment	(50)	(50)
Lucent lease repayment	(12)	(12)
Cash requirement to November	(270)	(270)

11.6.1 Available cash balance

[2772] As explained at APS [395], the figure for the available cash balance in the submissions, $60 million, was taken from the intranet group cash balance at 28 February of $38.175 million (Ex CED 4-64), and then the $26 million transferred from the UK to Australia was added back into that figure because it had disappeared from the intranet balance temporarily, having been debited from the UK cash balance but not yet credited to the Australian cash. Then ASIC deducted the amount of $4 million for unpresented cheques: see 11.2.3.

[2773] The figure for the available cash balance in the statement of claim, $48 million, comes from Mr Carter's principal report. ASIC explained (APS [396]) that Mr Carter's figure is different from the figure in the submissions in two ways. First, the figure used by Mr Carter for unpresented cheques was $8 million. He took that figure from the "total unreleased" line in the unreleased cheques report to 27 February. On the other hand, in its submissions ASIC used the alternative source of information about unpresented cheques, namely the general ledger reconciliation with the ANZ bank account, where the figure for unpresented cheques was $10.53 million. However ASIC then made certain adjustments to that figure, considered above at 11.2.3, to produce an adjusted net figure for unpresented cheques of about $3.85 million. That figure was rounded up to $4 million (compared with $8 million used by Mr Carter) and deducted from the cash figure to produce the figure of $60 million for available cash.

[2774] The other difference between Mr Carter's figures and ASIC's submission is that Mr Carter deducted $8 million from the cash figure to produce "available cash", on the ground that $8 million was subject to a pledge and not available for general use. ASIC did not make that deduction because it has conceded that the evidence does not establish the existence of the $8 million "pledge" prior to the end of April: APS [396].

[2775] The defendants' objection to this line in the table is their objection to the additional $4 million for unpresented cheques: DPS [1826]-[1827]. I consider this matter at 11.2.3, my conclusion being in favour of ASIC, except that I would deal with cancelled cheques somewhat differently from ASIC's treatment, though with the same ultimate outcome. I would deduct a further $975,000 from the cash balance because of cancelled cheques. ASIC has removed that amount from the unpresented cheques and has added it back into overdue creditors. I would not add it to overdue creditors.

[2776] The result is that I accept ASIC's figure of $60 million for "Available cash balance", and would be prepared to make that figure $59 million.

11.6.2 Australian overdue creditors, late posted invoices and Lucent

[2777] The defendants' submissions about these lines in the table (DPS [1828]-[1849]) reiterate submissions considered at 11.2-11.4. My conclusions as to those items are that:

(4): ASIC has not proved that there were overdue Australian creditors of $29 million at the end of February 2001, for the reasons given at 11.2.5 and 11.4.3;
(6): I disagree with ASIC's deduction of $2 million net for late posted invoices, for reasons given at 11.2.4;
(11): I disagree with ASIC's deduction of $10 million for Lucent, for reasons given at 11.2.2.

11.6.3 UK overdue creditors, non-UK European creditors and the "buffer"

[2778] As to UK creditors, there was $52.5 million "overdue" at the end of February, according to the UK aged creditors report adjusted for incorrect posting of due dates (11.3.1.2), and there is evidence at least $15 million was owing to non-UK European creditors (11.3.2). But the amounts truly overdue were affected by the quantum of disputes, and the evidence shows there were substantial disputes between One.Tel and its UK and European carriers. The value of the disputes has not been satisfactorily quantified, but it would be plausible to regard the total amount in dispute in the UK as in the same order as the amount "overdue" for over 120 days according to the UK creditors ledger (an amount of $20.4 million at 27 February), perhaps reduced to take account of the fact (if it be so in the UK, as it was in Australia) that credit notes were not aged when they were posted to the ledger. Quantification is further addressed at 11.6.4. In summary, the value of disputes in the UK and Europe has not been quantified but clearly was substantial, and the figure of $52.5 million is a substantial overstatement of the amount overdue in the UK.

[2779] ASIC submitted that the court should derive "comfort" in reaching the conclusion that the total cash requirement at 27 February was at least $270 million from two facts. The first is that this amount does not contain any provision for the buffer that was necessary for the proper conduct of One.Tel's businesses: APS [394]. ASIC submitted that the necessary buffer was in the order of $50 million: APS [394], [928]. The second source of "comfort" (APS [394]) is that the $270 million does not include any provision for payment of non-UK European creditors, to which at least $15 million was overdue at the end of February.

[2780] The defendants' arguments against the "buffer" submissions (DPS [1850]-[1856]) are addressed at 2.3.6.14 and 2.3.6.15, where I conclude that it is permissible for ASIC to make these submissions in accordance with its pleaded case, and there is no unfairness to the defendants in its doing so.

[2781] It seems to me obvious, and not inconsistent with the defendants' own evidence as noted at 2.3.6.14, that in calculating cash requirements there should be some provision or buffer to deal with contingencies. The question of the amount of an appropriate buffer is to be determined by evidence. There is some evidence on this question in the Miller-Green draft figures of 8 May 2001 at Ex CED 15-6, where they calculate the cash requirement by adding $50 million as a "cash buffer for contingency".

[2782] It therefore seems to me that ASIC's submission, that the court can take some comfort or reassurance from the fact that the calculated cash requirement does not include a buffer (which might have been of the order of $50 million), has been made out. Equally the submission that comfort can be taken from the fact that nothing is included in ASIC's calculations to take into account at least $15 million of debt to non-UK European creditors. ASIC's principal difficulty is to make out the elements of the $270 million that it has in fact calculated and pleaded, and if it has not done that, no amount of "taking comfort" from the omission of other figures will assist it. Had it purported to include the omitted buffer and European creditor figures, then it would have encountered the difficulty of arguing an unpleaded case.

[2783] The remaining items in the table are not comprehensively addressed elsewhere in the judgment, and so they need to be fully considered here.

11.6.4 Possible claims against suppliers

[2784] ASIC explained (APS [397]) that it included $9 million for "possible claims against suppliers" as a concession to maintain consistency with the particulars to para 11(a) of the statement of claim. The figure has evidently been taken from the "Carrier Claims" line at para 101 of Mr Carter's principal report, derived from amounts accrued for carrier claims in the management accounts of the Australian operations, not dealing at all with UK claims. ASIC submitted that the approach of Mr Long and Mr Howell-Davies referred to at APS [1494]-[1496] in relation to the position at the end of May indicated that its provision for such claims reflected a very conservative approach.

[2785] The defendants submitted that the accruals figures taken by Mr Carter were not a complete reflection of all of One.Tel Australia's claims against its suppliers, and that a proper provision for claims on a group basis would be many millions of dollars more. They relied on the following (DPS [1859]-[1891]):

•: the evidence of Mr Rich and Mr Silbermann about the unreliability of management accounts accruals for claims between half-year and yearly reviews;
•: the KPI analysis tabs about claims in the draft management accounts for the fixed wire/service provider business, as revised by Mr Hodgson in FW S & P revised forecast monthly.xls;
•: the document called "Carrier Disputes.xls";
•: claims against Lucent identified in the March board papers;
•: Ernst & Young's report of 28 May 2001;
•: the Miller/Green forecasts;
•: miscellaneous evidence of UK claims.

[2786] I shall review each of these matters. My overall conclusion is that ASIC's provision of $9 million for claims is very much too low, though it is not possible to strike a figure for the correct amount.

11.6.4.1 Larger claims were only accrued at the end of half-year and yearly periods

[2787] In my opinion it is correct that the amounts accrued for carrier claims in the Australian management accounts cannot safely be relied upon as comprehensive. Mr Rich gave evidence that accruals for claims against carriers were reviewed in detail shortly before each reporting date: 2 JDR 1719. The amounts accrued for carrier claims in periods between reporting dates tended not to be a full reflection of claims that had arisen between the reporting dates; the figures tended to decline as claims that had been accrued were settled without new claims being accrued before the end of the period: 2 JDR 1719. He gave as an example One.Tel's $5.6 million claim against Telstra for local call charging, which related to the entire period from July to December 2000, but substantially all of it was taken up and accrued in the management accounts in December 2000, as part of the process of preparation of half-yearly accounts: 2 JDR or 1850. He claimed that deciding whether to take these claims up and for what amounts was a matter that involved considerable judgment on the part of the senior executive responsible for signing off on the management accounts, and the finance team of the business will often have only a peripheral knowledge of the status of the dispute: 2 JDR 1851. Mr Silbermann gave similar evidence: MS 946.

[2788] ASIC relied on the evidence of Ms Ashley (in her first affidavit, para 3), to the effect that she gave considerable and regular attention to the quantification of claims against carriers. But she agreed in her oral evidence that her review work did not extend to Telstra and Optus (T 5464, T 5466, T 5488, T 5590-5), presumably because of the element of judgment involved, and she did not deal with the UK carrier claims. Therefore her evidence is consistent with the evidence Mr Rich and Mr Silbermann to the effect that while accruals for claims were made in the course of each half-year period, the matters of judgment concerning claims accruals, with respect to the larger claims, were made only at the end of the period. It follows that the management accounts figures relied upon by Mr Carter for claims accruals in the period from January to May are not reliable because they did not incorporate an end-of-period review of the appropriate accruals for major claims.

11.6.4.2 KPI analysis tabs in draft management accounts and Mr Hodgson's review in FW S & P revised forecast monthly.xls

[2789] The KPI analysis tabs in the draft management accounts for the Australian fixed wire/service provider business to January, February and March contained references to potential accruals for disputes, which had not been taken up in the draft accounts but were flagged as "potential upside" for review by Mr Hodgson as part of the process of finalising the management accounts: see 2 JDR 1864-74. The defendants drew attention to four items: DPS [1865]. ASIC contended that there was no proper foundation for these accruals: APS [1795]-[1809]; ASR [1865(a)]-[1871-6].

[2790] I consider these four items elsewhere. In three cases relating to total accruals of $6.625 million in the period from January to June 2001, I reach the conclusion that ASIC has failed to show that the accrual was not justified. Those three items and references to my findings are as follows:

•: the accrual of $1.4 million over the period from January to June 2001 in relation to an "access fee dispute" with Optus, considered at 18.5.9 and 20.4.3;
•: the accrual of $1.725 million in relation to January and February 2001 for the Optus CDR claim, considered at 18.5.9 and 20.4.3; and
•: the accrual of $3.5 million in relation to the Telstra local call rebate dispute, considered at 18.4.2 and 20.4.4.

[2791] As to the accrual of $15 million over the period from January to June 2001 in relation to the "Telstra margin claim", my conclusion is that the evidence does not support the making of an accrual for that amount: 18.4.4 and 20.4.5.

11.6.4.3 "Carrier disputes.xls"

[2792] Exhibit P36 is a document evidently prepared as at 18 May 2001, which sets out the following One.Tel claims:

•: unmatched call claims and re-rated call claims against One.Tel's long-distance carriers totalling $3.8 million and $1.35 million respectively;
•: a claim against Global One in relation to a "frame relay" dispute totalling $1.4 million;
•: claims against Telstra of $12.2 million for roaming, $46.8 million for CSPA issues (presumably this is the Telstra damages claim) and $1.75 million for PSTN Interconnect;
•: a claim of $11.4 million against Optus in relation to the "minimum spend" dispute (this is presumably the whole of the Optus CDR claim including the "minimum spend" component).

[2793] It appears that Ms Ashley had some involvement in preparing the document, though she said she did not prepare the part that included the Telstra CSPA claim. I do not give any credence to the figure for the CSPA claim, and the other claims against Telstra and Optus have been fully discussed at 18.4 and 18.5 respectively. For present purposes, what is interesting about this document is that it identifies some other claims amounting to $6.55 million that might well have been considered for possible accrual, though as ASIC pointed out (ASR [1879]) the amount given for the claims appear to be gross amounts and One.Tel's policy would be to accrue only 50% of the claim. It appears that at least a substantial portion of the $6.55 million was not accrued in the carrier claims accrual account in the general ledger, for the May figure is only $2.4 million.

[2794] The defendants criticised Mr Carter for assuming that carrier claims were only $2.4 million and they referred to some evidence indicating that he was aware of higher claims estimates: DPS [1879]-[1880]. But Mr Carter made it clear that his figure was taken from One.Tel's financial records and in my view this was a proper approach.

11.6.4.4 Claims against Lucent

[2795] The March board papers indicated that One.Tel had hardware credits with Lucent amounting to $5.1 million, and additional damages claim for the delayed completion of the Melbourne network ($5.6 million), which had not been accrued at that date but were expected to be accrued in April, May and June 2001. If the full amounts were accrued, the total accruals from April to June would be $10.7 million, but consistently with its usual policy One.Tel would probably have accrued only half of the damages claim, so the total amount accrued would be $7.9 million.

11.6.4.5 Ernst & Young's report of 28 May 2001 and the Miller/Green forecasts

[2796] The Ernst & Young report of 28 May 2001 (Ex CED 15-4) identified disputes and claims totalling $32 million, comprising $7 million for Optus, $10 million for Telstra, $3 million for Telstra roaming and $12 million for Lucent liquidated damages. The report identified disputes and claims with WorldCom for $4 million and "other European" for $10 million, bringing the total amount of claims to $46 million. The file note prepared in connection with the report (Ex MTB 8/184) said "Discussed with Management the validity of amounts in dispute, all seem reasonable". However, in the report itself Ernst & Young said (Ex CED 15-8):

... the timing of the resolution of these disputes and the amount of cash that will flow on resolution is uncertain. It may not, therefore, be appropriate to deduct any amount for these disputes from the overdue creditors. However, accelerated resolution of the dispute may be one of the cash generation initiatives referred to in para 2.9.

[2797] In the spreadsheets attached to their draft report of 8 May 2001, Mr Miller and Mr Green set out cash and EBITDA figures supplied by management and then some "PBL adjustments" to those figures: Exs CED 15-73-15-139. The defendants relied on the following five accrual items:

(4): $15 million in May and June 2001 with respect to an "AAPT style" claim against Telstra, which was presumably the Telstra damages claim considered at 18.4.7, which Mr Miller and Mr Green adjusted to $7.5 million;
(5): $7 million withheld in May 2001 with respect to the Optus CDR claim (considered at 18.5.9), which Mr Miller and Mr Green reduced to $3.5 million;
(6): $12 million in July 2001 with respect to "one-off Lucent adjusts", which Mr Miller and Mr Green eliminated;
(11): an unspecified figure for "Lucent pt 1 damages" which was apparently included in the forecast figures for Next Generation for June 2001, which Mr Miller and Mr Green reduced by $5 million on the ground of "risk";
(12): $10.25 million for "dialler rebate" in the UK, forecast to be received in two equal tranches in October and November 2001, which Mr Miller and Mr Green retained.

[2798] On balance I have concluded that no accrual was justified for the Telstra damages claim, but an accrual has not been shown to be inappropriate for the Optus CDR claim. The total amount of the claim had risen to about $11.9 million by mid-May (see 18.5.9) and so the policy One.Tel would suggest accrual of half that amount, about $6 million.

[2799] As to Lucent, the defendants did not make any particular submission about the "one-off Lucent adjusts", but as to the "Lucent pt 1 damages" they submitted that the total forecast figure was $18.2 million, comprising $5 million for Lucent marketing contributions ($2.3 million in May and $2.7 million in June), plus $13.2 million in Lucent damages in June (Ex DTB 17/15, tab 9). That seems to be correct. ASIC submitted that there was no substance to the suggestion that there might be a liquidated claim for damages against Lucent (ASR [1884 (d)]), but I have rejected that submission at 18.6.6.2, where I conclude that there was a real prospect of further liquidated damages of some unquantified but substantial amount.

[2800] The BT dialler rebate is considered at 18.11.1. ASIC noted that the accrual of this item estimated the receipt in two tranches in October and December: ASR [1884(e)]. December is outside the period of six months cash requirements identified in ASIC's pleaded case, and even the October tranche could not have been regarded as an assured receipt. It seems to me, however, that the company had good prospects of recovering a substantial amount for the dialler rebate, and the accrual of $5.1 million in October was not unjustified.

11.6.4.6 Miscellaneous evidence of UK claims

[2801] ASIC's provision for carrier claims in para 11(a) of the statement of claim relates to the group generally, but the submissions supporting it draw on a figure of $9 million in fact derived from Australian figures taken from Mr Carter's work, which make no allowance for claims by One.Tel UK against its suppliers. Nevertheless the evidence indicates that at the end of February 2001, and at all other relevant times, the UK business had substantial and reasonably well-founded claims against its carrier suppliers: see 18.11.

[2802] The defendants relied, in particular, on the following matters (DPS [1889]), using a pound sterling to Australian dollars exchange rate of 2.843:

(4): at 30 April 2001, amounts claimed by carriers disputed by One.Tel UK totalled at least £3.99 million ($11.3 million) (Ex MTB 4/1354);
(5): One.Tel UK received credit notes from its carriers of £823,000 ($2.3 million) in February and £742,000 ($2.1 million) in March (referring to MFI 746, which is a summary of credit notes taken from the Adept ledger, the ledger being in evidence);
(6): One.Tel UK agreed in late April 2001 to pay WorldCom £4.7 million (Ex DTB 15/6125) in respect of claims by WorldCom for £6.2 million (Ex DTB 15/6067), an apparent compromise of £1.5 million ($4.3 million);
(11): One.Tel UK had a claim against BT for a dialler rebate, as a result of BT's delay in the introduction of preselection in the year 2000, which by May 2001 had accumulated to approximately £3.5 million ($10.25 million) and was forecast to be paid by BT by late 2001 (Ex DTB 5/1624).

[2803] As to (a), ASIC claimed (ASR [1889(a)] and APS [896]-[902]) that most of the disputed carrier invoices had to be paid eventually. However, the evidence summarised in Ex P93-708 shows that significant percentages of the total amount remained outstanding at the end of May for most carriers (with the exception BT).

[2804] As to (c), ASIC drew attention to some payments made by One.Tel to WorldCom totalling a little over £1 million (ASR [1889(b)(ii)]), which meant that the amount of the compromise was only about £0.5 million.

[2805] If one were to:

•: infer that in all probability, the disputes outstanding in the sum of $11.3 million at 30 April were also outstanding at 28 February;
•: add to that figure the sum of $2.1 million to recognise the dispute that was evidently outstanding at 28 February but resolved before 30 April by the issue of a credit note; and
•: add the amount conceded by WorldCom in its compromise with One.Tel in late April, £0.5 million ($1.4 million), using that figure to represent the proper disputed amount;

then the total amount in dispute at the end of February 2001 was $14.8 million, without taking into account the dialler rebate. That figure falls to $12.7 million at the end of March and $11.3 million at the end of April.

[2806] As to the dialler rebate, $10.25 million was paid in October and December: Ex DTB 5/1624. The defendants submitted that the payment should be accrued over the 6 months from January to June 2001 on the basis that the UK business plans assumed no dialler rebate at 2001/2002: Ex DTB 5/1604. ASIC did not make specific submissions about this accrual. It seems to me plausible, on the basis that the payment was in fact made and related to the dialler expenses incurred in 2000/2001, that an accrual for that amount should be made in the 2000/2001 year. The defendants proposed accrual was $1.7 million at 31 January and an additional $1.7 million for each subsequent month to June: that is, $3.4 million at 28 February, $5.1 million at 31 March, $6.8 million at 30 April and $8.5 million at 25 May. I have no reason to disagree with those figures and I accept them.

[2807] That means that the total UK disputed claims were at least $18.2 million ($14.8 million plus the dialler rebate at $3.4 million) at the end of February, $17.8 million at the end of March and $18.1 million at end of April. Those figures are roughly the sort of figures one would reach by treating all over 120 day carrier debts as disputed debts. The defendants' table at DPS [1891] shows the amounts of over 120-day debt for twelve UK carriers as at January, February, March and April 2001. The figures, converted to Australian dollars, are $17.5 million, $19.3 million, $17.8 million and $15.4 million respectively.

[2808] ASIC submitted that a provision of $9 million for claims against suppliers was very conservative because it assumed that all claims would be successful. Therefore, to the extent (if at all) that any allowance should be made in respect of UK claims against creditors, ASIC submitted that the allowance is amply covered by the figure of $9 million in the cash requirements table: ASR [1886-8]. But the accrued claims in the Australian management accounts were not reviewed except yearly and half-yearly, and Ms Ashley's contribution did not take into account at least one major claim, against Telstra. It is therefore to be doubted whether an accrual of $9 million would be sufficient to cover Australian disputes, let alone UK disputes, which the creditor correspondence as well as the above calculations indicate to be substantial: see 18.11.

[2809] ASIC also submitted (ASR [1891]) that to treat all over 120 day UK carrier debt as disputed debt would be inconsistent with the defendants' evidence that the attitude of the European carriers changed in April from allowing up to 180 days for payment as the normal pattern of trading, to requiring payment in 30 days. But the defendants' tables at DPS [1654], [1656], [1658] and [1659] indicate that although carriers may have been prepared to receive payment after extended periods, in fact in the case of Colt and GTS, payments were made on average 47 and 73 days respectively after invoicing, in the case of Global Crossing the average was 70 days but there was one invoice not paid for 188 days suggesting the probability of a dispute about it, and only in the case of WorldCom was the average over 120 days (it was 188 days) and in fact, as the creditor correspondence shows, there were substantial and continuing disputes with that carrier. As I understand the defendants' position, while carriers were prepared to wait for extended periods before payment, in fact a delay in payment for over 120 days generally signified the existence of a dispute.

11.6.4.7 Conclusions regarding adequacy of ASIC's provision for claims

[2810] I accept the defendants' submission that ASIC's allowance for "carrier claims" of only $9 million as at the end of February, and other relevant dates, is clearly inadequate: DPS [1892]. As to the Australian claims, the defendants prepared a table at DPS [1873] which took into account only the figures notionally accrued by Mr Hodgson in the April reforecast, the Lucent damages referred to in the March board papers, the amount for the Telstra roaming claim referred to in the Ernst & Young report. They did not purport to include other disputes identified in the Carrier Disputes documents, which amounted in total to $6.55 million, which I have noted at 11.6.4.3. Adopting the defendants' approach, but modifying their figures to reflect my findings, I have concluded that the evidence indicates at least the following amounts of claims:

Table 11.7: Findings as to Australian dispute claims ($m)
	31 Jan	28 Feb	31 Mar	30 Apr	29 May
Carter report	13.7	9.2	9.0	9.0	2.4
Access fee dispute	0.8	0.9	1.0	1.2	1.3
Optus CDR claim	0.4	1.3	1.7	1.7	1.7
Telstra local call claim	0.6	1.2	1.8	2.3	2.9
Lucent claims per Mar brd	--	--	--	2.8	2.8
Telstra roaming per E & Y	--	0.75	0.75	0.75	0.75
Total	15.5	13.35	14.25	17.75	11.85

[2811] As to the UK, my findings are that there were carrier claims of at least $18.2 million at the end of February, $17.8 million at the end of March and $18.1 million at the end of April. Therefore total carrier claims were at least $31.55 million at the end of February, $32.05 million at the end of March and $35.85 million at the end of April.

[2812] If the question were how much to accrue for claims not recognised by the creditors but bona fide, one would apply a conservative approach, perhaps discounting at least some of the claims by up to 50% (in accordance with One.Tel's policy, recorded in Ernst & Young's review closing report at Ex CED 4-144). But ASIC appears to have made the concession that the amount to be allowed in its calculation of the cash requirement should not be discounted in this way. Thus, it pointed out (ASR [1886-8]) that the amount of $9 million which it allowed for carrier claims was an amount derived from the Australian books and records in respect of possible claims against suppliers, and it said the crediting of it in the cash requirement was very conservative "because it assumes that all claims will be successful". Taking the same approach, the amount that should be credited for carrier claims is the full amount of the claims, which in February was $31.55 million.

11.6.5 Monthly cash requirement

[2813] ASIC's pleading and submissions allege that at the end of February, One.Tel required $20 million per month to cover its cash usage from operations until the end of November 2001, a total for the nine months of $180 million. It sought to prove that figure by relying on the following evidence:

•: the Ernst & Young financial position review report of 28 May 2001;
•: the PBL document, "Current Normalised Cashflows";
•: evidence about average cash collections over the months from October 2000 to April 2001 summarised in Ex P93-713;
•: evidence about average outflows for April to June summarised in Ex P93-732.

[2814] I shall consider the evidence in each of these categories. Then I shall consider some matters raised by the defendants. The defendants proferred an analysis of actual historical cash usage and forecast cash flow figures, for the Australian and UK operations respectively, to support their view that actual cash usage was much lower than $20 million per month, and responsible forecasts for the period from May to November were much lower than $180 million.

11.6.5.1 Ernst & Young's financial position review report of 28 May 2001

[2815] According to ASIC's submissions (APS [398]-[399]), the figure of $180 million or $20 per month cash usage in the period from March to November 2001 has evidentiary support in Ernst & Young's financial position review report of 28 May, which adopted a monthly cash usage figure of $20-25 million. Ernst & Young took the view that One.Tel would use cash at that rate until the end of November 2001. ASIC submitted that there was no basis in February for thinking that any lesser period would be applicable. It argued at APS [1458]-[1471] and [1500]-[1507] that this figure was very conservative. It claimed that even with deferrals of creditor payments, in the period up to May 2001 the monthly cash burn exceeded $20 million, and would have been considerably more if the need to pay creditors was properly taken into account.

[2816] The defendants submitted that Ernst & Young had merely assumed cash usage of $20-25 million a month until the end of November, rather than taking a view that this would be the cash burn rate: DPS [1896]-[1899]. I disagree with the defendants' interpretation of the Ernst & Young report. In my discussion of the report in Ch 16, I draw attention (at 16.29.8) to Ernst & Young's ambiguous use of the concept of an assumption. The critical passage for present purposes is para 2.6. It is a good example of this ambiguity.

[2817] One can see some true assumptions in that paragraph: the assumption that the ongoing operations in the UK and continental Europe would be self-sustaining, the assumption that the cash requirements for Hong Kong would not be material, and the assumption (for the purpose of forecasting the monthly run rate) that all out of terms creditors would be taken care of. Apart from those points, their disclosed reasoning process is as follows:

(16) they did not have time to establish a reliable basis to determine the "reasonability" of the monthly cash burn estimate made by CPH/PBL (whose view was that current normalised cash flows were in the range of $21.1 million to $36.6 million per month: Ex CED 15-23);

(v)
the current rate of cash burn implied a monthly rate in excess of $20-25 million, which was at the low end of the range set in the CPH/PBL document;

(vi)
it was reasonable to expect operating cash requirements of Next Generation to continue at their current high level for a few months and then to diminish by about August/September;

(vii)
but it was "prudent to assume" a monthly cash burn rate of $20-25 million for the next six months, on the reasonable expectation that this was the amount of time it would take to put in place initiatives to amend or curtail operations to enable them to become self-sustaining; on that basis, funding requirements for the next six months could reasonably be expected to be in the order of $120-150 million.

[2818] The "assumption" referred to in para (iv) is plainly not the same kind of assumption as, say, those made about Europe and Hong Kong. It is an "assumption" supported by a chain of argument designed to establish that it is correct, rather in the nature of an hypothesis advanced to be either verified or falsified, which is then verified by reasoning process. Consequently the matter assumed should be taken to be the view adopted by the authors of the report. As I read the report, Ernst & Young adopted a cash usage rate of $20-25 million per month for the six months to November in order to calculate the cash requirement for that period, and they did so having regard to the historical cash burn in the Australian operations, and their expectation, Judged by them to be reasonable, that cash usage by Next Generation would continue at least until August, and probably for the remainder of the six months while alternative strategies were put in place.

[2819] As the report is based upon a reasoning process rather than an assumption, the question for the court to consider is whether the reasoning process is sound and persuasive enough to satisfy, in conjunction with other evidence, the onus of proof that ASIC bears to establish the pleaded cash requirement. Senior counsel for the defendants attacked Ernst & Young's reasoning process in his cross-examination of Mr Long. In submissions, the defendants emphasised Mr Long's evidence that he "just assumed that the historical would continue at the same rate into the future": T 7332; see also T 7329, T 7271. But in my opinion that evidence was a reflection of the ambiguous use of language that was found in the report itself. Mr Long was not saying that he made a true assumption, but rather that he adopted a reasoning process according to which it was likely that historical cash usage would continue at least until August, and probably longer while alternative strategies were put in place. A more important part of cross examination related to that reasoning process.

[2820] Mr Long agreed that he had not been able, in the time available, to establish a reliable basis for forecasting future monthly cash usage (T 7328, also T 7252, T 7270), and said he was only reviewing the position "at a high level" (T 7332). That is important because it means the cash requirement figure of $20-25 million per month until November did not have the status of a forecast, properly considered and supported. The weight to be given to it in assessing the evidence is to be adjusted accordingly.

[2821] He supported his view that the historical cash usage rate would continue until November because alternative strategies would take time to implement, adding that his experience was that "you don't make changes overnight": T 7333-4, T 7498. As ASIC said (ASR [1903]), this was an exercise of professional judgment, bringing to bear 40 years of experience (T 7489). But he admitted he did not have any hard facts to support that judgment (T 7499, T 7502), that the businesses were in a growth phase (T 7270), and that the period of continuation of historical cash usage might in fact be less than 6 months (T 7331). He accepted that he did not have regard to trends in cash usage (T 7331), although he conceded that this might have been useful information.

[2822] Ernst & Young's view was in sharp contrast with the forecasts that had been made in the March board papers and the flash reports, and with the views expressed by management on 28 and 29 May, considered in Ch 16. As the defendants pointed out, there is no evidence to suggest that any of the executives at One.Tel regarded Ernst & Young's figures as a realistic assessment of actual likely cash usage of the business over the six months period: DPS [1900]. Mr Long's evidence did not adequately explain just why he so comprehensively disregarded management's opinions: T 7270, T 7472-3, T 7506. He was aware of management views that:

•: the historical rate of cash usage would not be a good indicator for the future because some abnormal matters had impacted on recent cash usage figures but would not do so going forward: T 7332, T 7317-8;
•: additional steps could be taken to reduce the related cash usage going forward (T 7333), particularly in relation to the Next Generation business (T 7312, T 7315);
•: there was a need to factor in the revenue growth that was occurring in the Next Generation business (T 7309), which would mean that future cash usage would be less than in the past (T 7311).

[2823] The report adopted a view that was inconsistent with these management perspectives, without directly addressing any of these issues. The question whether steps could be taken to reduce cash usage in the Next Generation business seems to me particularly important, and yet Mr Long's answers in cross-examination suggested a lack of detailed knowledge of such matters: in particular, he said he was not "privy" to knowledge about how much expenditure could be saved by reducing activity on marketing and dealer commissions: T 7498.

[2824] There was a basis for believing, in late May 2001, that the cash usage of the group for the ensuing six months would not approach Ernst & Young's $20-25 million estimate: see 11.6.5.3-11.6.5.7.

[2825] My conclusion about the Ernst & Young financial position review report of 28 May is that it is an unconvincing document of very limited utility, because of the "high-level" approach taken by Mr Long, and because it was prepared by people with limited knowledge of the One.Tel businesses, without regard to the views of those who knew the businesses thoroughly. I accept that Mr Long is a person of very considerable experience in the valuation and assessment of businesses, but his cross-examination suggested, in the ways detailed above, that he did not pay sufficient regard to the special features of One.Tel's position as a group developing several large start-up businesses that were endeavouring to achieve the critical mass that would make them cash flow positive on a relatively secure basis. There is a notable contrast between the assessments made by Mr Long and by Mr Kleemann before late April 2001: both were very experienced businessman but Mr Kleemann, having more time to do so, was able to take into account the special features of the One.Tel businesses and their industry, matters that Mr Long's "high-level" assessment did not seem to reach.

[2826] I have reached this conclusion upon the basis of my analysis of the report itself, and the evidence of Mr Long. The defendants also sought to draw support for their view from some evidence given by Mr Howell-Davies and Mr Packer Jnr I shall note this evidence, but I should say at once that I am not persuaded that either of these witnesses gave any support to the defendants' challenge to Ernst & Young's cash usage estimate.

[2827] Mr Howell-Davies spent much of the day on 28 May reviewing management's plans for the businesses in the context of their "alternative strategy". The defendants interpreted his evidence as supporting the view that Ernst & Young's figure was unreliable and contrary to what would actually be expected from the businesses: DPS [1901]. However, considering his evidence as a whole, I do not accept this interpretation. Mr Howell-Davies accepted that $20-25 million was inconsistent with management's forecasts for the next 6 months (UK T 605) but he did not personally espouse those forecasts. He recognised that Mr Long did not have a chance to look at cash usage in detail (UK T 608), that the figure adopted by Ernst & Young was not regarded as a likely outcome by either management or PBL and that the true cash usage would probably be different (UK T 607), and that the Ernst & Young figure was "simplistic" because it looked at a single monthly cash burn figure for the group while in fact the One.Tel businesses were at different growing stages with different cash requirements (UK T 607-8), but that evidence did not imply that he regarded the Ernst & Young figure as unreliable. He said that he "felt it would be less than what Mr Long had" (UK T 607, and see UK T 608), but he supported the resolution for the appointment of administrators on 29 May, which referred to the directors' opinion that the company was insolvent, and there is no suggestion in the minutes or notes of the 29 May board meeting (Ex MTB 1/351-356; Ex CED 16-74-16-108) to indicate that he took issue with Ernst & Young's advice in any way; and so it is hard to see that his opinion differed from Mr Long's opinion to any significant extent.

[2828] As the defendants pointed out, Mr Packer Jnr did give evidence that he believed that by the end of May that it did not make sense to estimate cash usage going forward in a growing business by extrapolating past cash usage into the future: T 9836; T 9863. However, that evidence was expressed as a general proposition and I did not take it to be critical of Ernst & Young's approach, which was an extrapolation for only a limited period of six months and was also supported by other reasoning. Mr Packer Jnr's own view was that the actual monthly cash burn was $35 million, a figure considerably in excess of the figure adopted by Ernst & Young: T 9865-6.

11.6.5.2 PBL's Current Normalised Cashflows for Australian operations

[2829] I describe this table, in its context, at 16.26.2.1. It appears on its face to have been prepared on 22 May 2001: Ex CED 15-23. It presents figures for inflows and outflows for the Australian (ex-Next Generation) operations and for Next Generation, being actual figures for April and actual or estimated figures for May. Then it presents "normalised month low" and "normalised month high" figures. The difference between the high and low figures is confined to the inflows, the normalised outflows being the same in the "low" and "high" columns.

[2830] For the Australian operations as a whole, the net normalised month low is a cash outflow of $36.6 million, and the net normalised month high is $21.2 million. ASIC contended, for reasons indicated above, that the actual experience for the period from October to April was close to the low figure and so the likely cash burn on a normalised basis was $36.6 million rather than $21.2 million (APS [1462]), and that a forecast of a monthly cash burn rate in excess of $30 million would have been well justified, even though the figure adopted by Ernst & Young in the 28 May report (Ex CED 15-19) was the more conservative figure of $20-25 million per month (APS [1470]).

[2831] On the face of the document, the normalised figures appear to be based on the April and May figures but they are adjusted, presumably by removing extraordinary items. The trouble is that the adjustments are not explained, and no witness has come forward to explain how the document was prepared. For example, the Australian (ex-Next Generation) inflows were stated to be $48 million for April and $50.6 million for May, then the normalised low figure was given as $42 million and the normalised high figure was $55 million. One wonders where the normalised figures came from. There are similar unexplained changes in the outflows: for example, the figure for computer expenses was $1.5 million for April and $2 million for May, and the normalised high and low figures were both $2.5 million.

[2832] Other evidence indicates that this document, and the others that were made available to the directors at their meeting on 28 May, were prepared by Mr Miller and Mr Green after some substantial work, including interviews with management in Australia and the UK. That would give the figures some credibility if one could be confident of just what they were purporting to achieve, and how. The absence of explanation seems to me to substantially undermine the weight to be given to the document.

[2833] Another weakness of the document as evidence supporting forecast cash outflows until November is that the document is on its face a normalisation of current (that is, April and May) cash flow rather than a forecast of future cash flow. That limitation was identified by Mr Yates, who, according to Mr Jalland's notes of the board meeting of 28 May (Ex P49), observed that "the board needs to consider not only the cash burn but also the forecasts in the UK business, in order to establish the true financial position".

[2834] The "normalised month low" figure of $36.6 million attracted some dissent at the board meeting of 28 May, when the schedules were presented. According to Mr Jalland's notes of the board meeting (Exs P49; CED 16-38):

•: Mr Silbermann's immediate reaction was that the figure was closer to $17 million than $36 million;
•: Mr Keeling expressed the opinion that collections per month of $60-65 million from the Australian business (excluding Next Generation) would be achieved, which would give rise to a burn rate of $3-5 million per month.

[2835] According to Mr Jalland's notes, Mr Yates proposed that Ernst & Young be asked to look at the burn rate because, he said, "we say it's $15 million to $25 million" and he noted that Mr Keeling said it was lower. The defendants sought to derive some support from this. Mr Jalland's note is confusing, but it appears that Mr Yates was referring to Mr Green's presentation at the meeting, which indicated a burn rate in the order of $17-36 million per month (Ex CED 16-39), and it seems to me very unlikely that Mr Yates was intending to disagree with Mr Green. Further, as ASIC pointed out (ASR [1917(a)]) it appears that Mr Jalland's notes mistakenly used the figure of $25 million when he should have referred to $35 million, as appears from Mr Pike's notes (Exs CED 16-51 and 16-52) and the minutes of the meeting at Ex CED 16-27.

[2836] Mr Jalland's notes of his discussion with Mr Long on the morning of 29 May (Ex DTB 6/2172) record the following:

Brian Long

-- work yesterday

(a)
does not dispute in any material

(a)
certainly not creditors.

(a)
dispute was monthly burn rate: baulked at the high end but almost comfortable at the low end.

There is some uncertainty about the meaning of the last part of this note. On its face, it seems to be recording Mr Long's view about the cash usage rate of 21.2-36.6 in the Current Normalised Cash Flows document. In that document the "low" end figure was an outflow of 36.6 and the "high" figure was an outflow of 21.2, but evidently the references to "high" and "low" were reversed in Mr Jalland's note, and therefore on its face the note seems to be saying that Mr Long was almost comfortable at an outflow of 21.2 but baulked at an outflow of 36.6. That is consistent with his evidence at T 7264, where he said he could not support the cash flow in the document because:

Miller/Green presented an analysis of potential future burn cash flow from number of different perspectives. I took all of those perspectives into account in the discussions with management in coming to my overall view.

On the other hand, in his evidence in chief he said that the reference in the notes to "baulked at the high end" was a reference to the views of One.Tel Management: T 7130. That seems to me to be unlikely, given the text of the note and Mr Long's later evidence in cross-examination. Mr Long also said that the figures were not "entirely accurate" because they presented a number of figures rather than a single figure: T 7252. On the whole, Mr Long's oral evidence seems to undermine and the statement in the report that the current cash burn rate was "in excess of approximately $20-25m": Ex CED 15-9.

[2837] ASIC raised a question as to the view of One.Tel management of the current cash burn rate in discussions on 29 May leading to the development of their alternative strategy document: APS [1471]. Reference was made to evidence given by Mr Silbermann of a meeting that he, Mr Hodgson and Mr Beck had with Mr Long and Mr Simmonds of Ernst & Young and Mr Green: MS 679ff. Mr Silbermann said that most of the meeting was taken up discussing what Mr Hodgson identified as factual errors on the "Current Normalised Cash Flows" page of the Miller/Green schedules. According to Mr Silbermann (MS 681), Mr Hodgson said there was no way that the normalised net cash flow would be negative $20-35 million going forward. Mr Silbermann said that he (Mr Silbermann) told the meeting that the recent cash burn had been around $20 million but would be a lot less in future because the billing and collections issues were timing issues that were being fixed. That suggests that in Mr Silbermann's view the current cash burn rate was $20 million per month. ASIC noted that senior counsel for the defendants put it to Mr Shear, during cross-examination about an Ernst & Young meeting with management on 28 May (apparently a different meeting), that management had agreed that the figure of $20-25 million was a reasonable approximation of the historical cash burn over the past six months: T 7682. ASIC also referred to the alternative strategy document which is discussed in Ch 16, where reference is made to "Current monthly rate -- agreed PBL/EY/OT Current Run Rate $(20-25m)": Ex CED 9-8.

[2838] In my view by the time the alternative strategy document was finalised, One.Tel management were probably prepared to concede an estimate of the current run rate at $20-25 million, the context being that they were endeavouring to negotiate an outcome that would save their company. Mr Silbermann may well have estimated a past run rate of $20 million during his discussion with Ernst & Young on the previous day. But it is reasonably clear from Mr Jalland's notes of the board meeting on 28 May that neither Mr Silbermann nor Mr Keeling accepted the PBL figures as an accurate account of current cash usage, and Mr Silbermann's evidence indicates that he rejected the view that the current cash usage would be an accurate indication of future cash usage. In the result, this evidence does not assist ASIC's case.

[2839] My conclusion is that the Current Normalised Cash Flows document is unreliable as an indicator of forecast monthly cash usage in the Australian operations in the period from May to November 2001.

[2840] At the bottom of the table the May forecast net outflow of $17.6 million was set against an opening cash balance of $6.5 million to produce a closing cash deficit of $11.1 million, and an "adjusted closing (draft 2 May incl some creditor catch-up)" of negative $21.5 million. The "adjusted end of June cash position (full creditor catch-up)" was shown as a deficit of $88.4 million, implying, as I understand it, that the Australian businesses would be short of cash to the tune of $88.4 million at the end of June if all due creditor accounts were paid. The source of the figures for these brief notes is not disclosed, and in the circumstances I am not able to place any reliance on them. It is therefore unnecessary for me to consider ASIC's submission (ASR [1910-3]) that no shareholder or unsecured external lender would have been prepared to put $88 million into the company simply to secure its survival until June, a submission that is in any event outside ASIC's pleaded case.

11.6.5.3 Australian average cash inflows from October to April, and EX P93-713

[2841] In Current Normalised Cash Flows document, the normalised low monthly inflow figure for the Australian (ex-Next Generation) operations was $42 million, and the low Next Generation airtime inflow figure was $8 million, producing a normalised low monthly inflow figure for the whole Australian operations of $50 million. ASIC invited the court (APS [1460]) to compare that figure with the actual average monthly cash collections in the recent past, summarised in Ex P93-713. The $50 million figure excluded Next Generation interconnect inflows normalised to $2.1-2.5 million. ASIC contended (APS [1463]) that the average interconnect revenue taken from 2905.xls in the period from February to May 2001 was approximately $2 million (as shown in Ex P93-763) and therefore the actual figures are closer to the low number than the high number in the Miller/Green document. That appears to be correct.

[2842] Exhibit P93-713 compares forecast and actual cash collections by month, taking the forecasts from various identified cash flow spreadsheets for the Australian operations and the "actual" figures from the spreadsheet 2905.xls. The "actual" figures are $48.3 million for October 2000, $49.26 million for November, $52.66 million for December, $63.69 million for January, $43.59 million for February, $67.46 million for March and $46.06 million for April. The average from October to April inclusive is about $53 million, and so the "actual" monthly inflows are not much different from the normalised low figure.

[2843] The normalised high monthly inflow is $55 million for the Australian (ex-Next Generation) operations and $10 million for Next Generation airtime, totalling $65 million. ASIC submitted (APS [1461]) that this was far higher than the average of the previous 7 months and therefore the "low" column was considerably more realistic than the "high" column, with the consequence that the current normalised monthly cash flow for the Australian operations is likely to be the figure in the "low" column: APS [1462].

[2844] The defendants made several criticisms of Ex P93-713. First, they criticised it on the ground that ASIC's figures did not compare "apples with apples": DPS [1923]-[1925]. Their complaint was that ASIC's figures excluded Optus connection fees. The true position seems to be that neither the $50 million figure of ASIC extracted from the Current Normalised Cash Flows document nor the $53 million figure which was the average of the monthly inflows in Ex P93-713 included the Next Generation interconnect inflows: see ASR [1923-5]. The defendants prepared a table in which the Optus connection fees were added to ASIC's figures in Ex P93-713 for the period from August 2000 to April 2001. The effect of adding those fees was that the average for the period from October to April was not $53 million as stated by ASIC (APS [1460]), but $55 million. That appears to be correct. It is to be compared with the Miller/Green normalised low figure of $52 million (including interconnect inflows).

[2845] Second, they submitted (DPS [1926]-[1928]) that ASIC's figures made no allowance for the disruption to billings and collections in late 2000 and 2001 namely:

•: billing delays in late 2000 as a result of GST implementation issues and then capacity issues: see 7.13;
•: the two-week delay to billings in late January and early February 2001: see 10.6; and
•: the database crash in late April, which delayed billings and disrupted collections: 2 JDR 1542, 1693b.

[2846] ASIC responded by seeking to show that these matters had short-term effects that would have been incorporated into the average figure: ASR [1926(8), (b) and (c)]. It seems to me that some allowance should have been made in the normalisation process for billing disruptions, even though for the most part there was a catch-up within the period over which ASIC's average figure was taken. In other words, there was a likelihood that a residual part of the delayed billing had not been recouped before the end of the period. But the evidence indicates that the residual part unrecouped by the end of April was probably small. The billing disruptions in the year 2000 were substantially recouped by the time of the January board meeting (Ex MTB 1/187,194), and Mr Rich said in evidence that only a small amount would remain to be collected after March (T 10957). According to the February flash report, most of the delayed billing in January/February was brought up to date by mid-March, with the receipts shortfall being recovered in March and April: Ex MTB 1/381B. The database corruption in April was said by Mr Rich to have occurred after about 19 April (2 JDR 1342), as is confirmed by the QM dates in Ex P69. Therefore it would not have had a large effect in April.

[2847] One would expect that a true process of normalisation would eliminate the effect of such disruptions, but failure to do so does not appear to have in itself rendered the figures inaccurate to any substantial degree. Mr Keeling's observation, when he saw the PBL document at the board meeting on 28 May, that if billing problems were rectified, monthly inflows should be in the order of $60-65 million excluding Next Generation, appears to have been unduly optimistic: Ex MTB 1/338.

[2848] Third, the defendants submitted (DPS [1929]-[1933]) that ASIC's figures made no allowance for the higher than normal direct debit dishonours in March and April 2001. These are considered at 14.7. The defendants asserted, relying on the spreadsheet 2905.xls, that over the period from August 2000 to February 2001, direct debit dishonours ran at approximately 4.4% of receipts from trade debtors, but in March some $11.83 million out of total receipts of $79.14 million were dishonoured, that is, a percentage figure of 14.9%. The figure in April was also higher than average, at 10%. The evidence of Mr Rich (2 JDR 1252, 1284, 1349) and Mr Silbermann (MS 338, 361) was to the effect that these higher than normal levels of dishonours were temporary, and were the consequence of the billing delays in February, and Mr Silbermann's evidence seems to be that the majority of the dishonours were re-presented in early April and met (MS 410). The defendants submitted that if one "normalised" by adjusting the actual level of dishonours in March and April to the average for the preceding seven months, then cash inflows (already adjusted to take into account Optus connection fees) would rise from $71.64 million to $79.99 million for March, and from $46.1 million to $48.95 million for April. On that basis, the average figure for the period from October 2000 to April 2001 inclusive would be $56.2 million, rather than the figure of $53 million calculated by ASIC.

[2849] ASIC submitted that if the majority of the direct debit dishonours were re-presented and met in early April, then their effect would have been taken into account in the April figures which were included in ASIC's average inflows calculation. That is correct, but the defendants' evidence was only that the majority of the dishonours were met on re-presentation in early April, and the April figures suggest that the phenomenon of direct debit dishonours was continuing in that month. Therefore it seems to me that an allowance should be made, as proposed by the defendants. On their calculations (at DPS [1932]-[1933]) the average monthly figure in the period from October to April rises to $56.2 million after taking into account direct debit dishonours (and also the Optus connection fees).

[2850] Fourth, the defendants submitted (DPS [1934]-[1939]) that ASIC's figures made no allowance for growth in the Next Generation business. Their point was that since the Next Generation business was growing rapidly in the period from October to April, with additional subscribers necessarily adding to billing and collections, an average of collections over that period would inevitably understate expected collections in the future. It was a point identified by Mr Silbermann when he saw the Current Normalised Cash Flows document for the first time at the 28 May board meeting, and said "the numbers presented do not take into account the growth in Next Gen or other potential improvements in the business".

[2851] Thus:

•: at the beginning of October 2000, Next Generation had only 31,500 subscribers, generating ARPU of $51 a month (Ex MTB 1/21), producing revenue of about $1.6 million per month (31,500 x 51);
•: by the end of March, Next Generation had 168,484 subscribers, ARPU was $66 per month (Ex MTB 1/260) and therefore monthly revenue was about $11.12 million;
•: by the end of April, according to the daily emails (Ex JDP 23), Next Generation had added a further 30,418 subscribers to reach total subscribers of 198,902, and so monthly revenue had risen to about $13.1 million.

In those circumstances a figure for average Australian inflows over a period going back to the beginning of October could not provide a reliable indicator of likely cash inflows in Australia during the period from March 2001 onwards. I agree.

[2852] ASIC's response was, in effect, to contend that the increasing revenue for Next Generation was outweighed by a dramatic decline in revenue for the fixed wire/service provider business, which it purported to display in reply Sch 4: see ASR [1937]. Reply Sch 4 sets out "actual" revenue figures for each month from October to April for the fixed wire/service provider business, One.Net and Next Generation. It is a summary of various P93 schedules, which purport to derive the "actual" revenue figures from management accounts. Next Generation revenue is shown as increasing from $3.2 million in October 2000 to $14.1 million in April 2001, while the revenue for the fixed wire/service provider business is shown as decreasing from $48.5 million in October 2000 to $31.6 million in April 2001. The figures for the fixed wire/service provider business rely on management accounts for January-April which, according to my findings, have not been shown to be final and reliable figures.

[2853] If one concentrates on the Next Generation figures in reply Sch 4, it appears that the normalised April/May inflows figure for Next Generation in the Miller/Green spreadsheet ($8 million low and $10 million high) is substantially too low, bearing in mind the rate of increase of inflows with the acquisition of new subscribers. One would expect the April inflows of $14.1 million to continue at least at that rate. It also evident from the Next Generation figures that an average going back to October 2000 would not be an accurate indication of future inflows.

[2854] My conclusion is that the historical cash inflows extracted by ASIC in Ex P93-713 do not supply a reliable basis for forecasting cash inflows in the Australian operations in the period from May to November 2001, and therefore cannot be used to support the normalised month low figure (or for that matter, the normalised month high figure) in the document Current Normalised Cash Flows. The evidence I have reviewed suggests that ASIC's average historical monthly cash inflows underestimate the inflows by at least $3 million per month taking into account direct debit dishonours plus a further $6-8 million per month to account for Next Generation growth. Hence the inflows figure should be at least about $62-64 million if based on historical average plus appropriate adjustments. If those inflow figures were used to adjust the Miller/Green document, normalised monthly low cash usage would go from $36 million to $27 million and the normalised high monthly cash usage would go from $21 million to $10 million, assuming (contrary to the analysis below) that the Miller/Green and outflows figures were correct.

11.6.5.4 Australian average cash outflows, and EX P93-732

[2855] As noted above, the outflows in the "low" and "high" normalised monthly columns are the same: $63.4 million for Australia (ex-Next Generation) and $25.3 million for Next Generation, a total of $88.7 million. ASIC submitted that these estimated outflows were conservative: APS [1465]. Referring to Ex P93-732, which summarises outflows according to various cash flow spreadsheets, ASIC noted that the estimated outflows for the three months from April to June were at an average of $87.1 million per month in 2403C.xls, $101.1 million per month in 0304 am.xls and $86.7 million per month in 1104jrmssh.xls. I take it that the court is invited to infer, in light of these forecasts, that the outflows would in fact be substantially higher than $88.7 million per month.

[2856] It is striking that ASIC sought to justify its view about current monthly inflows in April/May 2001 by presenting an historical table over the period from August 2000 to May 2001 (Ex P93-713), which showed the shortfall of "actual" inflows taken from 2905.xls against the current forecast for the relevant month; while it sought to justify its view about current monthly outflows in April/May 2001 by presenting a table of forecasts for the months of April, May and June 2001, without reference to "actual" historical figures for April and May or any other months.

[2857] The defendants extracted "actual" outflows data from 2905.xls for the period from August 2000 to February 2001, and produced a table showing that the average monthly total outflows were only $67.4 million: see DPS [1946]. ASIC submitted in reply that the defendants' table had failed to include certain items of outflow, and in reply Sch 5 it revised the defendants' figures accordingly. According to ASIC, the correct average, taking into account the additional items, is $71.7 million rather than $67.4 million. I take ASIC's figure to be correct.

[2858] The average monthly outflows (according to ASIC's figures) were affected by an atypically low figure of $46.9 million in September 2000 and an atypically high figure of $82.8 million in November 2000, but for the other five months total outflows were in the range $70.5-$78.2 million. This exercise suggests that the figure of $88.7 million is substantially higher than historical experience would indicate. No doubt Next Generation's outflows were increasing as it expanded, but the evidence does not point to a jump in average monthly outflows in the order of $20 million per month in the period from May to November over the period from August to February. I cannot see, in the evidence, any other reason for forecasting as at May a sharp increase in outflows going forward to November.

[2859] ASIC submitted that the deferrals that occurred in payment of creditors rendered the actual figures unhelpful: ASR [1946-7]. There was creditor deferral at year-end and half-year end into the ensuing month, according to the defendants' own evidence. If the historical figures had included June but not July, or December but not January, there would have been a distortion produced by the deferral. But the historical average monthly figure for the period from August to February does not suffer from that distortion, as both December and January are included and there is no June figure in the range. There would be a distortion in the average figure to the extent of any creditor deferral at the end of February, after adjusting for any creditor deferral from July into August. But even on ASIC's case, the creditor deferral at the end of February was nowhere nearly enough to bring the historical monthly average of $71.7 million over seven months up to the Miller/Green normalised monthly figure of $88.7 million; the difference over that period is $119 million. To the extent that at any time creditors were simply not paid, they appear in the "overdue creditors" lines in ASIC's calculation of the cash requirement.

[2860] My conclusion, therefore, is that with the benefit of hindsight, Ex P93-732 is not a reliable indicator of monthly total outflows in the period from May to November 2001. It also seems to me that the spreadsheet forecasts invoked in Ex P93-732 are not reliable forecasts of total outflows, at the time when they were made, even as far forward as June, let alone November. As to 2403C.xls, the forecast monthly outflows for April, May and June were distorted by an abnormally large figure for April so that, as the defendants pointed out (DPS [1943]), the average for May and June is only $78.8 million. As to 0304 amended.xls, the defendants submitted, correctly, that there is no basis for the court to find that the spreadsheet was a realistic attempt to forecast for any month other than April. In relation to April, there is an issue, discussed in Ch 14, as to whether the outflows amounts inserted by Ms Randall were not in fact to be paid in April, and were removed from the spreadsheet after she had discussions about them with Mr Silbermann, Mr Perez and Ms Ashley: see DPS [1944]. In relation to 1104jrmssh.xls, the evidence indicated in Ch 14 is that the document was an attempt to provide a forecast for April, and a rough forecast for May, without any attempt to forecast for June (see DPS [1945] and the evidentiary references there made).

[2861] ASIC submitted (APS [1469]) that another means of assessing the adequacy of the $88.3 million estimate would be by comparing it to Mr Silbermann's $93 million outflows figure (before the deferrals he provided for) in his handwritten note that he gave to Ms Randall (Ex CED 6-12). ASIC drew attention to Mr Silbermann's evidence in cross-examination, where he agreed that the $93 million figure in his handwritten note approximated to the $92 million outflows figure derived by taking the figures from the appropriate cells in the daily cash flow spreadsheet 0304.xls: T 13272. But in preparing the note Mr Silbermann was evidently taking the outflows figure in the spreadsheet as a given, and setting out some adjustments to be made. The note, in the circumstances that it was made, does not seem to me to imply that he gave any substantial consideration to the total outflows figure in the spreadsheet.

[2862] If the adjusted historical average of $71.7 million were used going forward, the Miller/Green normalised cash usage figures, with the inflows adjustments made above, would be further reduced: the low monthly cash usage would drop to $10 million and the high figure would become a monthly net cash inflow of $7 million. As noted above, a further adjustment would need to be made for those creditor deferral is having the effect of taking outflows out of the average figures for October-April, believe me as those deferrals were as high as, say, $30 million, the monthly figures would be affected by only about $4 million.

11.6.5.5 Actual historical group cash usage as per Miller/Green figures

[2863] The defendants made submissions (DPS [1950]-[1961]) drawing attention to the figures prepared by Mr Miller and Mr Green in their draft spreadsheets of 8 May 2001 (Ex CED 15-5ff). The Miller/Green figures for monthly net group cash usage were set out in their spreadsheet (Ex CED 15-8, under the heading "PBL/CPH Adjustments"), to which I have added some totals and averages:

Table 11.8: Monthly Net Group Cash Flow as per PBL Figures ($m)
	Jan 01	Feb 01	Mar 01	Apr 01	Mthly Average
Next Gen	(14.8)	(13.1)	(9.1)	(7.4)	(11.1)
Aust (ex Next Gen)	6.0	(7.0)	2.0	0.0	0.3
Total Australia	(8.8)	(20.1)	(7.1)	(7.4)	(10.9)
UK	(9.2)	17.7	5.8	(12.7)	0.4
Other International	4.0	(9.0)	1.0	(1.5)	(1.4)
Total International	(5.2)	8.7	6.8	(14.2)	(1.0)
Total Group	(13.9)	(11.4)	(0.3)	(21.6)	(11.8)

[2864] In the Miller/Green spreadsheets, the figures for January, February and March were described as "actual", while the Australian figures for April were forecasts and the International figures were flash figures. Although provision was made in the spreadsheet for PBL/CPH adjustments, in fact there were no adjustments to the figures for January-April.

[2865] ASIC submitted that Mr Miller and Mr Green worked on the basis of figures supplied by One.Tel, and it contended that the fact that the historical cash usage figures were so different from the actuality demonstrated how deficient their knowledge of the actual financial position of the company was, prior to Mr Rich's departure from the company on 17 May: APS [1259]; ASR [1950]. The reference to the discrepancy between their figures and "actuality" is to the difference between the total adjusted group net cash flow for January-April, according to their figures (an average of $11.8 million over the four months, taking the figures from the third last line at Ex CED 15-8) and Mr Silbermann's acceptance in May that the monthly net cash outflow for the group was $20-25 million. But as I have said, the evidence indicates that Mr Silbermann's initial response to the Miller/Green Current Normalised Cash Flows document at the board meeting on 28 May was to say (no doubt being aware of further developments after 8 May) that the figure was closer to $17 million, and his acceptance of $20 million and then $20-25 million was in the context of endeavouring to salvage the company by establishing an alternative strategy. ASIC cannot appeal to this evidence to establish the "true" cash usage rate.

[2866] As noted earlier, care must be taken in using historical figures to forecast future cash usage because the actual figures will have been affected by events that may not be repeated, and the future may be affected by events (including foreseeable events) that did not occur in the past. The defendants drew particular attention (DPS [1951]) to the adverse effect that the billing delays in late January and early February 2001 had on the Australian figures, and the adverse effect on international figures produced by the tightening of credit terms by some international carriers in April resulting in a net decrease in creditors in the UK in April of $20.3 million (Ex CED 15-1, in the line "Increase (decrease) in creditors").

[2867] At 11.6.5.3 I set out my reasons for concluding that the adverse effect of the January/February billing delays would have been almost spent by the end of April. I therefore doubt that the January/February billing delay would require any significant adjustment to the figures. Some adjustment may be needed, however, to take account of the continuing impact of direct debit dishonours at the end of April.

[2868] As to the decrease in UK creditors in April, ASIC noted correctly that the April figure of $20.3 million was a flash figure: ASR [1951(b)]; ASR [4881]). It contended that what actually occurred was a net decrease of total (as distinct from overdue) creditors of about £2.6 million ($10.2 million) from 31 March to 30 April: referring to App I-6 to Mr Carter's principal report. However, according to ASIC's submission, there was no net decrease in overdue creditors between 31 March and 30 April, according to Mr Carter's figures. If, however, UK overdue creditors were adjusted for the due dates for payment of carriers asserted by the defendants, there would be a small net decrease in UK overdue creditors of about £0.78 million (about $3 million), as shown in reply Sch 3, p 1. It seems to me that ASIC's calculations do not take into account the amount owed to creditors who were not "overdue" at 31 March and became overdue at 30 April. Since on ASIC's figures there was no net significant increase in overdue creditors from March to April, there must have been a reduction in existing overdue creditors in an amount about equivalent to the amount of creditors who became overdue creditors in April. In the circumstances it seems to me that the defendants' contention that an adjustment was needed to remove the effect of abnormally high creditor payment in the UK in April is made out, to the extent of $10.2 million plus $3 million, that is $13.2 million.

[2869] If the total group figures were adjusted to remove the $13.2 million effect of the decrease in UK creditors, there would be a substantial decline in cash usage from $13.9 million in January to $8.4 million in April, at a monthly average of $8.5 million, even without taking into account the effects of the January/February billing delays in Australia and the subsequent rise in direct debit dishonours. The figures do not support anything like a projected monthly cash usage rate as high as $20-25 million in the period from May to November 2001. They are much closer to the adjusted normalised monthly low figure that I calculated at the end of my analysis at 11.6.5.4.

[2870] In making their submissions the defendants relied on the Miller/Green figures for January-April, pointing out that even if (contrary to their contention) the April group figure of $21.6 million were not reduced, the monthly average net group cash flow would be $11.8 million (see the above table), indicating that ASIC's monthly cash usage figure is far too high. Although the figures in the Miller/Green spreadsheets are not fully explained, the 8 May draft is reasonably understandable on its face, in contrast with the later Current Normalised Cash Flows document, which is lacking in explanation. The figures were based on management input and substantial work including interviews with the management teams in Australia and the UK. They are likely to represent the views of the authors because they were released when the work was completed, presumably without any substantial opportunity for influence. They are fairly close to the adjusted low monthly figure based upon the historical average monthly inflows in Ex P93-713 and the adjusted outflows figures, considered above, and to the April/May normalised low monthly figures adjusted in the same way. All things considered, I agree with the defendants that the Miller/Green spreadsheet figures are a reasonably reliable indication of historical net monthly cash flow for January-April.

[2871] On that basis, the average net monthly group figure for January/April without adjustment for the abnormally high creditor payments in April is $11.8 million, and with the April adjustment proposed above the figure is $8.5 million. For the purpose of calculating the cash requirement from the end of February and from the end of March, actual figures for March and April can be used based on the Miller/Green spreadsheets. The March Group cash usage is $0.3 million and the April Group Usage is either $21.6 million or $8.4 million, depending upon whether an adjustment is made for the abnormal creditor payments in April.

11.6.5.6 Forecast Australian cash usage as per Miller/Green figures

[2872] In their spreadsheets bearing the date 8 May 2001, Mr Miller and Mr Green presented monthly cash flow forecasts for the group, Australia (ex-Next Generation), Next Generation, the UK and "other International" for each month to June 2002. The figures from July 2001 to June 2002 were taken from the business plan, while the figures for May and June were forecasts evidently supplied by management. However, in each case, there were "PBL/CPH Adjustments" that reduced forecast net cash inflows and increased forecast net cash outflows.

[2873] In their submissions (DPS [1953]-[1957]), the defendants prepared tables extracting the forecast figures for the Australian operations from June 2001 to December 2001, and showing the effect of the PBL/CPH adjustments. Their figures omit the month of May 2001. If that month is included and the month of December is excluded, so as to focus on the May-November period over which ASIC has calculated the cash requirement, it can be seen that management was forecasting, as at 17 May 2001 when the figures were presented to the board, that total Australian cash usage for the seven months from May to November would be $59 million for Next Generation but there would be positive cash flow of $24 million for the Australian (ex-Next Generation) operations, and hence net Australian cash usage of $35 million at an average of $5 million per month. Mr Miller and Mr Green were forecasting for those seven months that, after the PBL/CPH adjustments, total Australian cash usage would be about $92 million ($76 million for Next Generation and $16 million for the other Australian operations) at an average of $13.1 million per month.

[2874] The normalised monthly low cash usage figure for April/May in the Current Normalised Cash Flows document, adjusted in the manner I considered at 11.6.5.4, was cash usage of $10 million, which sits neatly in between the management and PBL/CPH monthly cash usage forecasts. Average monthly group cash usage from January to April, according to the Miller/Green figures, was $11.8 million if no adjustment was made to the abnormal April creditor payments and $8.5 million if the adjustment I propose at 11.6.5.5 were made. Though that is a group figure rather than an Australian figure, it is comparable to the Australian forecasts if one assumes that the international businesses were cash neutral: see 11.6.5.7.

[2875] As with the historical figures, the management forecasts and the Miller/Green revised forecasts are well below the monthly group cash usage figure of $20-25 million advocated by ASIC. ASIC submitted that both the forecasts and the revised forecasts are of no assistance because their foundation is a clearly erroneous set of historical figures: APS [1259]; ASR [1953-8]. I have dealt with, and rejected, this submission at 11.6.5.5. ASIC also submitted (ASR [1953-8]) that the management forecast for May was flawed, evidently on the assumption that the management figures came from the document referred to as the Global Forecast in Ex P91, which ASIC attacked at APS [1308]-[1311]. But in the Global Forecast the group cash flow for May was negative $0.75 million, comprising positive cash flow for Australia of $8.06 million and negative cash flow for Europe of $8.8 million; whereas the Miller/Green unadjusted figures for May were for cash usage of $14.2 million by Next Generation, cash inflow of $24 million for the Australian (ex-Next Generation) operations, cash usage of $4.6 million for the UK and cash usage of $0.4 million for other International, a total net cash inflow of $4.7 million: Ex CED 15-8. The figures do not seem to correspond, and so I infer that the management figures were not taken from the Global forecast.

[2876] In summary, ASIC has not destroyed the claim to credibility of the Miller/Green spreadsheets of 8 May 2001, as regards the forecasts for the Australian operations. There is a question whether management's forecasts are to be preferred to the adjusted forecast by Mr Miller and Mr Green, but whichever set of figures is taken, it is substantially lower than the group cash usage rate advocated by ASIC. I shall return to this question at 11.6.9, when explain my conclusions at a group level.

[2877] The defendants pointed out that the Miller/Green forecasts were prepared on a "business as usual" basis and did not take into account the prospect that management might make special efforts to reduce monthly cash usage during that period: DPS [1958]. They relied on some evidence given by Mr Rich that it would have been possible to reduce the cash usage of the business relatively quickly had it been felt necessary, for example by reducing dealer commissions and concentrating on connections made by One.Tel's internal team, a measure which, according to Mr Rich, could have produced cash savings of about $10 million per month: 1 JDR 842, 1132, 2 JDR 1383-6.

[2878] ASIC responded that Mr Rich's proposal was unrealistic, or at least too speculative to be relied on in assessing the cash requirement, for reasons put to Mr Rich in cross-examination: ASR [1959]. What was suggested to Mr Rich in cross-examination was that if $10 million were cut from the expenses of a business, it would be likely to have an impact on revenue: T 12265. Mr Rich disagreed, explaining that concentrating on making internal connections would not change the number of subscribers One.Tel already had, and he thought the company could still acquire about 10,000 customers internally per month and still have revenue growth, though the amount of revenue growth would not be as high as had been forecasted before the contemplated reduction in expenses was implemented: T 12265. Mr Rich said there would be very little by way of negative consequences to One.Tel in the short-term through reducing Next Generation's commission expenses: T 12266. In the longer term the saving of expenses in this way would delay the cash break-even point for the Next Generation business, but he denied this would prevent One.Tel from funding payments of interest and capital as they fell due: T 12267. He denied that a reduction in commissions would involve cancelling dealer contracts: T 12268. I see no reason for not accepting Mr Rich's evidence, and therefore ASIC has not shown that the proposed method of reduction would be unrealistic.

[2879] The defendants also referred to the alternative strategy document developed by management on 29 May (Ex PhD 14), which forecast that management could reduce the cash usage to the Next Generation business by $10 million within a month. Mr Howell-Davies described the proposal as getting "rid of dealers": UK T 1103. ASIC submitted that this would have involved a radical change to the way in which the Next Generation business had been conducted: ASR [1959]. It referred to some evidence given by Mr Long, to the effect that if you stop growing a new business, costs continue but the revenue stream slows down: T 7504. That may be true as a general proposition, but the idea that cash could be conserved by reducing connections efforts had been given some currency by Mr Packer Snr as early as February 2001 (see Ch 10), and seems to me to be plausible because, while the reduction in connections would curtail revenue growth, it would also substantially reduce expenditure for dealer commissions.

[2880] In summary, I agree with the defendants' submission that ASIC's cash requirement unrealistically assumed that the business would have continued to consume cash in violation of the company's business plans, without any corrective steps taken by management.

11.6.5.7 Actual historical and forecast cash usage for the UK and other international operations

[2881] The defendants (at DPS [1962]) derived the monthly historical cash usage for the international businesses (including Hong Kong) from the March board papers (Ex MTB 1/235) up to the month of March, and for April they relied upon the Miller/Green figures of 8 May 2001 (Ex CED 15-8). The Miller/Green figures for the earlier months were, though rounded, equivalent to the figures in the board papers. From those figures the following can be deduced:

•: net cash usage for the international businesses from July 2000 to April 2001 was $47 million at an average of $4.7 million per month;
•: net cash usage for the half-year from July 2000 to December 2000 was $43 million at an average of $7.2 million per month;
•: net cash inflows for the quarter from January to March 2001 was $10 million at an average of $3.3 million per month; and
•: net cash usage from January to April 2001 was $4 million at an average of $1 million per month.

[2882] The figures suggest marked improvement in cash flow in the third quarter of 2000/2001, falling back to net cash usage in April, because (according to the defendants) some UK carrier creditors tightened their payment terms. Taking into account the April figures, the international businesses were almost cash flow neutral from January to April. That seems to be broadly consistent with the assessment in the liquidators' report of 12 July 2001, to the effect that the UK business was "marginally cash flow positive" but the European subsidiaries were operating at a loss: Ex CE 22 0036.

[2883] The defendants referred to various forecasts, some including and some excluding Hong Kong (DPS [1965]-[1966]): namely the March board papers, the draft European business plan prepared by the European management team in late March, PBL's unadjusted figures and PBL's adjusted figures. There are some significant variances month by month, but the total figures for the seven months from June 2001 to December 2001, which the defendants tabulated at DPS [1966], were not hugely different (ranging from cash inflow of $57 million in the March board papers to cash inflow of $36 million in the PBL adjusted figures) and the average monthly cash inflow over the seven months ranged from $8 million in the board forecasts to $5 million in the adjusted PBL figures. The defendants stressed the evidence they gave about the rigorous process involved in developing the business plans: DPS [1967].

[2884] The defendants' table did not include figures for May 2001, which for the respective forecasts were a cash inflow of $13 million according to the March board papers, approximately break-even according to the draft European business plan, a cash outflow for UK and other international businesses of $5 million according to the management figures given to Miller/Green, and a cash outflow for the UK and other international businesses of $10 million according to the adjusted Miller/Green figures. If those figures are added to the June figures, then the respective forecasts for May/June 2001 were for cash inflows of $30 million, $33 million, $31 million and $12 million.

[2885] ASIC claimed that these forecasts were management-based and were far too optimistic: ASR [1962-8]. Apparently this submission was made on the principal basis that subsequently, even management conceded that cash flow in the international operations until the end of June 2001 would be approximately break-even: the evidence as summarised at APS [657]-[660] and [1500]-[1502]. I consider the evidence about European and Hong Kong cash at 12.9, in the context of ASIC's allegation that the defendants knowingly misled the March board meeting by presenting forecasts for European cash for April, May and June that were much higher than the figures they were being given by UK management and which they knew to be correct. My conclusions are that:

•: Hong Kong was not insignificant and, as at the end of March, could be expected to to generate cash inflow of about $4 million from April to June: 12.9.1.1;
•: the statement by Mr Keeling at the board meeting on 28 May and the figures in the alternative strategy document are to be understood in the changed context created by Mr Weston's downgrading of the UK figures in his presentation to the due diligence committee on 25 May and the Miller/Green downgraded figures presented to the board meeting on 28 May, and were in the nature of negotiating positions in an effort to save the company: 12.9.1.2;
•: the late March draft of the European business plans, and Mr Werner's emails of 25 March, 26 March and 9 April made provision for payment of all outstanding creditors in April, and therefore a large cash outflow in that month, but the forecasts for May and June were in the range from $32-39 million and therefore consistent with the forecasts for those two months in the March board papers, and the PBL adjusted and unadjusted figures: 12.9.2.1-12.9.2.4;
•: ASIC's submissions as to Mr Rich's view were based on a misreading of Mr Rich's evidence, which was that the international businesses would break even in their cash flow for the year to June 2001, not that they would have a break even cash flow for the last three months of the financial year: 12.9.3.

[2886] ASIC also submitted that the May UK EBITDA figure, forecast at $11.3 million in the Miller/Green spreadsheet, in fact turned out to be only $1.15 million: ASR [1962-8]. That submission does not affect the cash flow figures.

[2887] Consistently with my overall view of the comparative reliability of the various forecasts available in early May, it seems to me that either the management forecasts given to Mr Miller and Mr Green in early May, or Mr Miller and Mr Green's adjusted forecasts of 8 May (as opposed to the figures they presented to the board on 28 May) are the available forecasts most likely to be correct. On that basis the correct forecast European and Hong Kong cash flow from May to November 2001 was likely to be in the following range:

Table 11.9: Forecast Cash Flow for Europe and Hong Kong ($m)
	May	June	July	Aug	Sept	Oct	Nov	Total	Ave
PBL unadj	(5)	36	(24)	(8)	22	5	9	35	5
PBL adj	(10)	22	(21)	(3)	18	3	6	15	2

11.6.5.8 Mr Weston's forecasts to the due diligence committee on 25 May 2001

[2888] As explained at 16.20, a due diligence committee was formed for the purposes of the proposed rights issue after the 17 May board meeting, and Mr Weston gave a presentation to the committee, using PowerPoint slides which are in evidence: Ex P40-202. The figures he presented were significantly lower than current forecasts. For example, the changes had the effect of reducing:

•: forecast cash flow for the UK business for 2001/2002 from £32 million ($9.4 million @ 2.93) to £20.5 million ($60 million), a reduction of £11.5 million ($34 million);
•: forecast EBITDA for the UK business for 2001/2002 from £39 million ($140 million) to £22.9 million ($67 million), a reduction of £16.1 million.

[2889] Mr Weston said the reason for the major changes in assumptions in the figures he presented to the due diligence committee was that he wanted to give the committee "a realistic view of the business": UK T 905-6. He said the earlier figures were "aggressive": UK T 993.

[2890] ASIC submitted (ASR [1969-73]) that Mr Weston gave realistic figures only after Mr Rich left the company on 17 May, and until that time his statements about the company's prospects were intended to comply with what he considered to be the group position (citing UK T 746, as to what Mr Weston told analysts from Macquarie Research Equities in April 2001). Thus, Mr Rich said that in review meetings at the end of March with various managers, "the team in the UK was forecasting EBITDA after the year ending 30 June 2001 of around £17 million, with some downside risk to a level of £14 million" (2 JDR 1155), and that Mr Weston said he thought the UK could achieve £17 million "but it will need a lot of hard work to do it". Mr Weston himself said in re-examination that he was "not clear" how One.Tel UK would achieve £17 million EBITDA: UK T 976-7. Yet he made an unqualified statement to the March board meeting that the UK operations were "on track" to achieve £17 million EBITDA for the 2000/2001 year. After discussions with Mr Weston and other UK executives in which Mr Weston said he had endeavoured to give a "realistic view" of the business (UK T 724, 726) and had answered questions about the KPIs "openly and honestly" (UK T 868), Mr Miller and Mr Green prepared spreadsheets in which management's forecast of unadjusted cash flow for the UK for 2001/2002 was $101 million (Ex CE 15-6), $41 million higher than the figure Mr Weston presented to the due diligence committee on 25 May.

[2891] ASIC's submission about its own witness invites the court to accept that he deliberately made statements about the company's prospects that he knew to be false or misleading. It seems to me there is no good reason for reaching that conclusion, and it is better to infer that Mr Weston changed his mind at some time in May, evidently after Mr Rich departed, and took a more conservative view about the company's prospects than he had previously taken. The defendants submitted (DPS [1969]) that the evidence strongly suggested, notwithstanding Mr Weston's evidence to the contrary, that his projections were prepared on a "worst case" scenario in order to "condition" the expectations of PBL and News after Mr Rich left on 17 May 2001 to a level that the UK management considered could be readily achieved. I do not accept that he endeavoured to present a "worst-case scenario" to the due diligence committee, but it seems to me on balance that upon the departure of Mr Rich, and in circumstances where there was a formal process under way before the due diligence committee, he was concerned to condition the expectations of the company and its major investors as to what the UK company could comfortably achieve.

[2892] The defendants proffered a lengthy analysis of the specific changes made to the UK business plan in the figures Mr Weston presented to the due diligence committee on 25 May, namely:

•: a reduction in opening total subscribers;
•: a reduction in opening tolling dialler subscribers;
•: a reduction in new dialler additions during 2001/2002;
•: an increase in the COA assumption during 2001/2002.

[2893] The assumed opening UK tolling subscriber position at 1 July 2001 was reduced from 716,000 to 675,000, a reduction of 41,000 subscribers: evidence cited at DPS [1974]-[1988]. Actual subscribers as at 16 May 2001 stood at 682,000, and therefore Mr Weston's forecast for the due diligence committee was for a fall in subscriber numbers during May/June of 7000, although the business plan prepared three weeks earlier had been forecasting an increase in subscribers during May/June of 34,000: evidence cited at DPS [1975]. The defendants claimed that One.Tel UK's actual experience from the end of January until the end of April 2001 was that subscribers were added at a consistent rate of 10,000-15,000 per month: DPS [1976]. ASIC said those figures were an exaggeration, when compared to the figures given to the board in flash reports: ASR [1976, 1977(b)]. It prepared a schedule (reply Sch 6) extracted from those reports, purporting to show that the number of subscribers fell by 174 in January, and increased by 17,220 in February, 223 in March and 15,992 in April, an average monthly increase in subscribers from January to April 2001 of 8315. In fact the average from the end of January to April is 11,145, which shows that the defendants' statement was not an exaggeration. More importantly, ASIC's table does not destroy the defendants' point, which is that when subscriber numbers were substantially increasing in most months, it was very odd to revise the assumption to a substantial fall in subscriber numbers.

[2894] Mr Weston suggested in cross-examination (UK T 892) that the change in assumption might have had something to do with the amount being spent on marketing over that period or assumptions being made about competition in the market, and in re-examination he said he thought he recalled "from the documents yesterday" that the company "had not been spending as much on marketing": UK T 995. But the evidence referred to by the defendants at [1980]-[1988] shows that the average marketing payments per month in the UK were £476,000 in the period from July to December 2000 and £472,000 in the period from January to May 2001, and that during March and April 2001 the monthly average was £674, 000, and that marketing expenditure also rose over the months of February, March and April. The suggested explanation therefore seems to be wrong.

[2895] As ASIC observed (ASR [1974-2015]), the idea that subscriber numbers might go backwards was not at all out of the question, and this occurred, for example, in January 2001. But as far as I can see, the contemporary evidence did not justify a revision of the business plan forecast from an increase of 34,000 over May/June to a decrease of 7000 over that period. The fact that Mr Weston told the presentation to carriers on 5 June 2001 that there were "over 650,000 active customers" rather than a higher figure (Ex CED 4-28), when he had no incentive to dampen expectations, does not seem to me to answer the defendants' submission, because the announcement of the Australian administration and the company's financial difficulty presumably had an adverse effect on subscriber numbers.

[2896] According to the defendants, between the date of the business plan provided to Mr Miller and Mr Green by the UK management team at the beginning May and the revised business plan prepared 3 weeks later, the forecast figure for customers tolling using diallers at 30 June 2001 was reduced by 117,000, from 449,000 to 332,000: evidence cited at DPS [1989]. The actual position appears to have been, as at 16 May, that there were 317,000 such subscribers, and the budget was for 411,000 at the end of May. 460,000 diallers had been sent to customers and 380,000 were "plugged-in", and Mr Weston gave evidence that One.Tel had a good track record in converting plugged-in diallers to tolling diallers: UK T 896-7; DPS [1990]. Between the end of January and the end of April, the UK business had added an average of 55,920 tolling dialler customers per month: evidence cited at DPS [1992], [1997]. Mr Weston's explanation for the change was "to reflect the reality of the situation": UK T 897. But the revision seems conservative in light of the matters I have mentioned.

[2897] For the due diligence presentation the forecast addition of new tolling dialler subscribers during 2001/2002 was reduced from 20,000 per month to 11,000 per month: evidence cited at DPS [1996]. According to the defendants, new dialler additions during January to April averaged 55,920 per month, as already noted. When Mr Miller and Mr green discussed the risk factors in the business plan of Mr Weston at the beginning of May, a material "sensitivity" was identified with the possibility that gross activations during 2001/2002 might be down on forecast by about 25%; the due diligence presentation on 25 May implied the reduction in new dialler additions of almost 50%: DPS [1998].

[2898] In the due diligence presentation, Mr Weston increased the assumed cost of acquisition of new subscribers in 2001/2002 from £13 per subscriber to £17 per subscriber: DPS [2000]. The actual average COA from July 2000 to March 2001 was £13: DPS [2001]. In their file note of their discussions in the UK, Mr Miller and Mr Green noted that the COA had been averaging £13 per gross activation, without any suggestion that this figure might be at risk: Ex DTV 7/2668.

[2899] Determining the assumptions to be made for the purpose of forecasting business performance is a matter of business judgment, upon which the court would be reluctant to superimpose its own views. Here, however, Mr Weston's alterations of assumptions for the purposes of the due diligence presentation on 25 May was inconsistent with other management assessments. Mr Silbermann said that when he saw Mr Weston's presentation he was surprised by the sudden downward revision of the figures and he tried unsuccessfully to interject and query them: MS 624-6, 628. Mr Rich reviewed the assumptions underpinning Mr Weston's revised forecasts, for the purposes of his evidence, and pointed out that in every case the assumptions were substantially lower than in the business plans then existing, and based on his knowledge and experience of the business, they were materially worse than he expected the business to actually achieve: 2 JDR 1893. It seems to me that the evidence I have just considered supports the views of Mr Silbermann and Mr Rich, and that Mr Weston's evidence does not provide any justification for the very substantial downwards revision of the assumptions. On the contrary, the evidence supports the defendants' submission that Mr Weston adopted a deliberately "conservative" or "prudent" approach to forecasting for the due diligence committee, to ensure that the goals he was setting for UK management with PBL and News were readily achievable: DPS [2011]. That is consistent with Mr Rich's evidence of a telephone conversation he had with Mr Weston on 28 May in which, he said, Mr Weston told him that he had "been using the opportunity to reset PBL's expectations on the business plan": 2 JDR 1635. Mr Weston said he did not recall that conversation (UK T 911-2), and in those circumstances I accept Mr Rich's evidence.

[2900] In these circumstances I do not to rely on Mr Weston's revised figures presented to the due diligence committee, for the purpose of assessing the cash requirement in the period from May to November 2001.

[2901] The defendants claimed that even on the basis of Mr Weston's revised forecast presented to the due diligence committee, the forecast cash flows for the international businesses of One.Tel in 2001/2002 were not "break-even" as assumed by ASIC, but positive to the tune of $40 million, and they set out a table purporting to demonstrate that the total cash inflow during that year was forecast to be $40 million at a monthly average of $3.2 million: DPS [2015]. As ASIC pointed out (ASR [2015]), the relevant issue is as to One.Tel's cash needs in February-April 2001, which depends upon what its cash burn rate would be before it might be expected to turn cash flow positive, and therefore the focus of attention must be on the period up to November rather than the full year 2001/2002. But the defendants also provided a table, based on Mr Weston's figures of 25 May, forecasting cash flow from May to November, showing that according to those figures total group cash usage over that period was forecast at $14 million: DPS [2020]. I accept those figures as a correct extrapolation of Mr Weston's presentation, but my primary finding is that Mr Weston's revised figures should not be relied on for the purpose of calculating the cash requirement.

11.6.5.9 Conclusions as to monthly cash usage from operations

[2902] The Miller/Green figures were derived after management input and substantial work, and before there was much opportunity for the results to be influenced. They took into account management figures prepared in early May, which were the most current management views prior to the dramatic events that began on 17 May. The figures are generally consistent with the adjusted actual historical Australian cash inflows considered at 11.6.5.3, the April/June Australian cash outflows considered at 11.6.5.4 (and see 11.6.5.6), and they are the preferred forecast figures for the European and Hong Kong operations for the reasons given at 11.6.5.7. I therefore conclude that forecast figures for May-November in the range marked by the management figures given to Mr Miller and Mr Green and their adjusted forecasts of 8 May are probably the most reliable source of forecasts available on the evidence, as at early to mid-May.

[2903] The defendants relied on the management figures given to Mr Miller and Mr Green (DPS [2018]), according to which the net group cash flow from May to November 2001 would be zero. They pointed out that even if Mr Weston's revised figure presented to the due diligence committee on 25 May were used, the net group cash usage would be only $14 million. The defendants did not rely on the PBL/CPH adjusted forecasts, apparently because they regarded the adjustments as arbitrary: DPS [1956]. There is no evidence explaining the adjustments made by Mr Miller and Mr Green in their 8 May draft, but the spreadsheets on their face give indications of why the adjustments were made, in the descriptions of the adjustment lines (for example, "Additional lease payments", "Risk to Lucent pt 1 damages"). On the available evidence I am not able to reach the general conclusion that the adjusted figures are wrong, and it seems to me that if they are correct the defendants' case against ASIC's cash usage figures must succeed.

[2904] The following table shows the range of cash usage that I favour, for the purpose of calculating the cash required at the end of February:

Table 11.12: Actual and Forecast Group Cash Flow, March-November 01 ($m)
	March	April	May	June	July	Aug	Sept	Oct	Nov	Total	Ave
PBL unadj	(0.3)	(21.6)	4.7	36.3	(41.6)	(18.4)	17.3	(1.7)	2.6	(22.7)	(2.5)
PBL adj	(0.3)	(21.6)	(19.8)	11.8	(50.4)	(14.9)	10	(7.4)	(4.8)	(97.4)	(10.8)

[2905] Those figures imply group cash usage at least $82.6 million and up to $157.3 million below ASIC's projected cash usage. I have used the total net cash flow figures in constructing the "PBL unadj" line of this table, rather than total operating cash flow, because the PBL/CPH adjustments are made to the former rather than the latter, but the difference between total operating cash flow and total net cash flow is not significant enough to alter my conclusions (the total net operating cash outflow from March to November is $28.7 million and the monthly average is $3.2 million). On that basis, ASIC has not proved its case concerning operational cash usage.

[2906] It is important to note that the April Group figures include substantial outflows for payments of European creditors. According to the Miller/Green spreadsheets, the net cash flow for the Australian (ex-Next Generation) operations in April was zero and the net cash outflow in April for Next Generation was $7.39 million. The net cash outflow in the UK for April was $12.72 million and the net cash outflow for other international for April was $1.5 million. A line in the UK spreadsheet (Ex CED15-1) identifies a decrease in creditors of $20.27 million. That is roughly consistent with the figures in the draft European business plans of late March, and Mr Werner's emails of 25 and 26 March and 9 April, considered at 12.9.2.1-12.9.2.4, although the draft business plans and Mr Werner's figures were evidently confined to the European wireline businesses and did not include Hong Kong. The evidence explained in Ch 12 indicates that the high April outflow in the draft business plans and Mr Werner's emails occurred because Mr Werner made provision for payment of all UK carrier creditors in full in April, regardless of disputed amounts and payment terms. The figures accepted by Mr Miller and Mr Green indicate that this plan was substantially carried out, although I have explained at 11.6.5.5 that the correct net adjustment is probably closer to $13.2 million than $20.3 million.

[2907] The significance of this for present purposes is that if, as at the end of February, all UK carrier creditors were to be paid up in April and hence a cash outflow was to be produced for that month which figured in the calculation of the monthly cash burn rate for the purpose of working out the cash requirement, then the negative allowance for overdue UK creditors in the calculation of the cash requirement would need to be reduced to avoid double counting, while the positive allowance for One.Tel claims would also need to be reduced because after payment there would be fewer disputed claims. What this does, as far as I can see, is:

•: to reduce the UK overdue creditors line in the cash requirement table from $52.5 million to either $32.2 million or $39.2 million, depending upon whether the net reduction in UK creditors was the full amount provided for by Mr Miller and Mr Green ($20.3 million) or the revised figure I suggest at 11.6.5.5 ($13.2 million); and
•: to reduce the "Possible claims against suppliers" line in the cash requirement table from $31.5 million by the amount of the UK claims ($18.2 million) to $13.3 million (see the figures at 11.6.4.7) if one assumes that all UK carrier creditors were paid in full in April, or by some lower amount; and
•: that lower amount would be $11.8 million, leaving claims of $19.7 million, if one were to multiply the estimated value of the UK claims, $18.2 million, by the ratio that 13.2 bears to 20.3.

[2908] These are the figures used in my conclusions as to the February cash requirement, at 11.6.8.

11.6.6 Toronto Dominion loan

[2909] The question whether, in calculating One.Tel's cash requirement at the end of February, provision should be made for the Toronto Dominion loan to be repaid by no later than November, is addressed by ASIC at APS [1482]-[1485], [1497]-[1498], [1520]-[1523], the defendants at DPS [2023]-[2079], and by ASIC in reply at ASR [2023-2079]-[2061-2]. These submissions are considered at 18.7. For the reasons there given, my conclusion is that the cash requirement at the end of February 2001 should not have included provision for repayment of the Toronto Dominion loan.

11.6.7 Lucent lease repayment

[2910] The Lucent lease repayment is referred to in Ernst & Young's financial position review report of 28 May, which included "Lucent lease rentals $12m" in its list of major creditors either beyond current terms or soon-to-be beyond current terms: Ex CED 15-7. ASIC alleged that this amount was outstanding at the end of May, and that under the agreement that One.Tel had made with Lucent, it was to be paid immediately after 30 June 2001: APS [401]. ASIC's submission is developed at [1269]-[1272], the defendants' response is at DPS [2080]-[2089], and ASIC's reply is at ASR [2080-89]. The issue is considered at 18.6. For the reasons there given, my conclusion is that the Lucent lease repayment should not have been included in the cash requirement as at the end of February 2001.

11.6.8 Conclusions as to the cash requirement

[2911] The following table sets out ASIC's submissions and the court's findings as to the February Group cash requirement:

Table 11.13: February Group Cash Requirement (ASIC submissions & court's findings)
	ASIC submissions ($m)	Court's findings ($m)
Available cash balance	60	59
Aust overdue creditors	(29)	Not known
Late posted invoices (net)	(2)	--
Lucent	(10)	--
UK overdue creditors	(56)	(39.2) or (32.2)
Possible claims against suppliers	9	19.7 or 13.3
Monthly cash usage to 30 November	(180)	(22.7) or (97.4)
Toronto Dominion loan repayment	(50)	--
Lucent lease repayment	(12)	--
Cash requirement/surplus to November	(270)	Range from 16.8 or (57.9), also unknown Aust overdue creditors not > ($ 29 million)

ASIC has not proven its case.

11.7 Board's knowledge

[2912] ASIC submitted that the board was not properly informed of the components of One.Tel's poor financial position at the end of February, with respect to cash and cash flow, creditors, earnings and debtors. ASIC's submissions assume that the court has accepted its contentions as to the actual cash flow, creditors, earnings and debtors. As that is not the case, strictly speaking the question of the board's knowledge need not be dealt with. However, it seems to me appropriate to deal with the evidence and submissions, especially having regard to the possibility of an appeal.

11.7.1 Board's knowledge of cash and cash flow position

[2913] The February flash report of 5 March informed directors that the group's cash balance at the end of February was $64 million: Ex MTB 1/381B. ASIC complained (APS [404]) that the board was not informed that this figure required a notional reduction to take account of unpresented cheques.

[2914] The defendants submitted that the evidence had not established that the February flash report in fact made no allowance for unpresented cheques, and on the evidence it was equally possible that someone (probably Mr Holmes) gave consideration to unpresented cheques and adjusted figures accordingly: DPS [2093]. I disagree. It seems to me clear that the cash figure was the intranet cash balance of $38 million (Ex CED for-64), adjusted by adding back the $26 million transferred.

[2915] Neither the February flash report nor any other item of evidence to which I have been directed reveals any explanatory note or other explanation of the fact that the cash figure in the flash report had not been adjusted to take into account unpresented cheques. However, there is no evidence that any member of the board was in fact unaware that the flash reports cash figure made no allowance for unpresented cheques. ASIC referred to the general evidence given by Mr Packer Jnr, Mr Murdoch Jnr and Mr Howell-Davies to the effect that they were unaware of the February circumstances: see Mr Packer Jnr's affidavit of 18 June 2002 paras 97-102; Mr Murdoch Jnr's affidavit of 22 May 2002, paras 41-46 and Mr Howell-Davies' affidavit of 29 May 2001, paras 28-31. The February circumstances included the assertion in para S8 of the schedule to the statement claim that One.Tel's available cash was about $48 million after deducting (inter alia) approximately $8 million for unpresented cheques. ASIC's submission (ASR [2095-2100]) invited the court to infer from that evidence that these three directors were giving evidence that they were unaware that the cash balance in the flash report did not incorporate any adjustment for unpresented cheques. But it does not seem to me that the general evidence should be construed as extending to such a specific inference, and if clearer evidence to that effect had been given by them, I would have rejected it on the ground of gross implausibility.

[2916] In my view it is inconceivable that experienced business people such as the One.Tel directors would not have realised that the source of a cash balance figure that they received some 5 days after the date to which it related had not been adjusted to take into account unpresented cheques. That is an aspect of a basic understanding of the figures that management can reasonably expect competent directors to have. Indeed, in the case of One.Tel, management could reasonably expect directors to understand the basic operation of the accounting systems employed within the group, and specifically (relevantly to the present point) to have an understanding of how the intranet Lotus Notes cash recording system worked.

[2917] A competent director would realise that an end-of-month cash balance figure in a flash report was taken from the company's bank balance (indeed, from the intranet, in the case of a competent director of One.Tel) and that there would inevitably be unpresented cheques at that point in time. The director would therefore realise that if he or she wanted a precise figure for available cash, he or she would need to adjust the flash figure by an estimate of the amount of unpresented cheques (and the amount of unpresented deposits) based on experience of month-end results. Management could make those estimations for directors if they were asked to do so, but no such request was made by any director of One.Tel in respect of the February figures.

[2918] By disclosing the group cash balance based on One.Tel's intranet (with the $26 million added back to the 28 February figure), management were impliedly representing to the directors that the figure was useful for their purposes. That probably entailed an implied representation that the cash figure could be used by directors as an approximate estimation of available cash, and consequently a further implied representation that there was nothing unusual about the adjustments that would need to be made to the raw cash figure to take account of unpresented cheques and unpresented deposits.

[2919] If at month-end there were an exceptional amount in dispatched but unpresented cheques, or in drawn but undispatched and unpresented cheques, or both, by virtue of facts that management knew or should have known, then management would be duty-bound to rebut the implied representation by drawing the board's attention to that fact. But that was not the case with respect to the February flash report. ASIC's contention is that the amount of the adjustment required at the end of February for unpresented cheques net of unpresented deposits and other adjustments was $3.85 million, about 6% of the disclosed cash balance.

[2920] The flash reports did not contain cash flow figures as a matter of routine, but the February flash report not only identified the group cash balance at month-end but also gave a brief explanation, to the effect that the shortfall against the January forecast was due mainly to customer receipts being down as a result of the decision to defer bills by 2 weeks to ensure data completeness and quality, and it was said the billing would be back up to date by mid-March with the receipts shortfall being recovered in March and April: Ex MTB 1/381B. Except for the daily emails being sent to Mr Packer Jnr and others, there is nothing to indicate that any director asked for a report on February cash flow in the interval between receiving the February flash report and receiving the March board papers.

11.7.2 Board's knowledge of creditors position

[2921] ASIC submitted that the directors were not told of the existence of the overdue creditors: that is, presumably, the alleged $29 million of overdue creditors of the Australian operations and the alleged $56 million of overdue creditors of the UK operations, as at the end of February. There is further consideration of this question at 13.3.5.3, in response to ASR [889] and following.

[2922] ASIC relied on the evidence to which I have referred, given by Mr Packer Jnr, Mr Murdoch Jnr and Mr Howell-Davies, to the effect that they were not aware of the February circumstances. The February circumstances include fairly frequent references in the statement of claim and schedule to the creditors position. For example, para S10 alleges that the total amount overdue to creditors of the Australian operations at 28 February was about $29.3 million, and para S11(b) alleges that the amount overdue to creditors of the UK operations was approximately $56 million.

[2923] The defendants submitted (DPS [2103]) that such compendious evidence is unsatisfactory and would not stand as to prove that the directors were unaware of each and every individual fact referred to in the pleading. In my view that submission is correct as regards certain matters in the pleading, but the alleged amount of overdue creditors at the end of February is an obviously central aspect of ASIC's case. It seems to me that, whatever else the deponents intended to cover by their compendious statements, I should infer that they intended to imply that they were not aware (assuming it to be the case) that Australian and UK overdue creditors were at the levels alleged by ASIC to the end of February.

[2924] ASIC placed some reliance on the September board papers, which included the draft financial statements for the year ended 30 June 2000: APS [406]. In note 1 to the draft financial statements, One.Tel's statement of accounting policies, subpara (n) headed "Trade and Other Creditors" (Ex MTB 1/89), said:

These amounts represent unpaid liabilities for goods received and services provided to the company and the economic entity prior to the end of the financial year. The amounts are unsecured and are normally settled within 7 to 45 days.

If one assumes that the directors were aware of the statement, it would have created an expectation that trade creditors would normally continue to be paid within 45 days. But the word "normally" is of some significance. Carrier creditors were, according to the defendants' evidence, out of the ordinary because of the high level of disputes about their invoices and, particularly in the UK and continental Europe, their willingness to receive payment outside normal contract terms.

[2925] There is another aspect of the draft financial statements worthy of note. note 16 broke down the accounts payable line of the balance sheet into, inter alia, trade creditors on a consolidated basis of $135.4 million as against the 1999 figure of $53.1 million, and other creditors and accruals of $141.8 million as against $19.9 million in the previous year. In my view these parts of the draft financial statements told directors that the level of unpaid creditors had increased very substantially over the year to June 2000. That would in part reflect the growth of the Next Generation business, but if any directors had a concern that the growth in trade creditors was disproportionate to business growth, it was open to them to request further information.

[2926] The defendants submitted that:

(4): without specific disclosure, the directors of One.Tel, as experienced business people with knowledge of the industry, would have understood the key components of the so-called "overdue" creditors, comprising administrative delays, the industry practice of paying carriers outside contract terms, and the high level of disputes in the industry;
(5): there were disclosures to individual directors outside board meetings; and
(6): the directors could readily have made calculations that would tell them the position, using information provided in board papers.

[2927] As to (a), the defendants submitted that the directors would have been aware, as business people, that inevitably there would be a body of creditors at any point in time who would be beyond strict contractual terms simply as a result of the normal processes for authorising and processing payment in a large organisation such as One.Tel: DPS [2104]. It is unnecessary to review again the evidence presented to support this submission, which is considered at 11.4.2. I accept the defendants' general point, though administrative delays only tend to explain the level of creditors in the 0-30 days overdue category, and those are not likely to be the overdue creditors that would cause the directors concern.

[2928] The defendants submitted that the directors would also have been aware of One.Tel's systems for cross-checking invoices against its own records and disputing discrepancies, while withholding payment pending resolution of the dispute. Mr Kleemann acknowledged that such a practice "happens" at PBL (T 6243), and the inference to be drawn, according to the defendants, is that the directors would have expected a similar practice at One.Tel. In fact disputes with carriers were endemic in the telecommunications industry: see 11.4.3; Mr Weston at UK T 637-8; Mr Howell-Davies at UK T 103; Mr Long at T 7153; Mr Carter at T 7971. The defendants invited the court to infer that the directors were familiar with the high level of disputes in the industry, having regard to their industry knowledge and experience as well as their knowledge of One.Tel's businesses and the markets in which it operated. Reference was made to the experience of Mr Howell-Davies and Ms Kekalainen-Torvinen, and the fact that Mr Packer Jnr and Mr Murdoch Jnr were assisted by experienced finance and management professionals including Mr Kleemann: DPS [2105]. I accept this submission, although it does not entail that the directors were aware of the precise level of "overdue" creditors, and as appears from my analysis of disputes at 11.4.3, the amount "overdue" to UK creditors according to the ledger was higher than the amount that might reasonably be quantified as subject to bona fide disputes.

[2929] As to (b), the directors on the Finance and Audit Committee, Mr Greaves and Mr Adler, were specifically made aware of some aspects of disputes in Ernst & Young's review closing report for the half year to 31 December 2000 (Ex DTB 8/2997), which contained a discussion of claims by One.Tel against its carrier suppliers and Lucent, and a reference to One.Tel's system of verifying carrier invoice information. Mr Rich gave evidence, which I accept, that he spoke to Mr Packer Jnr in late February and Mr Packer Jnr said he would arrange for Mr Kleemann to speak to Mr Silbermann and review the Ernst & Young report with him: 1 JDR 1079; Mr Packer Jnr said he could not recall: T 9524. Mr Packer Jnr also said he probably would have wanted to discuss the Ernst & Young report with Mr Long in late February: T 9196.

[2930] Mr Rich gave evidence that to his knowledge "the board was well aware of the pattern of payments between One.Tel and its carriers in Europe", and that it was a topic that may have been discussed in board meetings in mid-2000 and January 2001: T 11243. That evidence seems to me too vague to be treated as significant. But Mr Rich also gave evidence that he recollected discussing extended payment terms in Europe, particularly from WorldCom, with Mr Packer Jnr, Mr Greaves, Mr Kleemann, Mr Murdoch Jnr and Mr Adler, and he said he discussed with Mr Kleemann how the European businesses were using this extended credit to assist funding their working capital: T 11272. That evidence seems to me to be plausible, in a context in which it was widely known that there was oversupply of carrier capacity and fierce competition among the carriers in Europe in 2000/2001, a matter noted by Mr Kleemann and his report on One.Tel's overseas operations (Ex DTB 4/1253; see also T 6184). As Mr Kleemann, Mr Howell-Davies, Mr Greaves and Ms Kekalainen-Torvinen had direct discussions with UK management in 2000 or 2001, it seems to me likely that the subject of carrier creditors and the industry attitudes to extended payment and disputes would have been matters that were addressed. Mr Howell-Davies acknowledged that in early 2001 he understood that European carriers were "allowing second and third tiers fair discretion in payment terms": UK T 96.

[2931] As to (c), the defendants submitted (DPS [2119]-[2121]) that it was open to the directors to obtain an approximate indication of the amount of time One.Tel was taking to pay its trade creditors by making a simple calculation of "creditor days" or "creditor turn". Mr Simmonds of Ernst & Young (T 7618) and Mr Kleemann (T 6139-42) both acknowledged that this was a "rule of thumb" method of obtaining that information. "Creditor days" is a measure of the number of days of cost of goods sold (COGS) (or revenue minus gross margin percentage) and operating expenses (OPEX) represented by creditors and accruals. The information necessary to make the calculation is available from the balance sheet, and was available, in the case of One.Tel, in the September 2000 and March 2001 balance sheets, as Mr Kleemann acknowledged. One takes trade creditors and accruals and divides that figure by the sum of monthly COGS and OPEX to ascertain the time in months within which the company is accustomed to pay its creditors, and then that can be converted into a number of days. The process is explained in the cross-examination of Mr Kleemann that T 6139-42.

[2932] Mr Kleemann was aware of the "creditor days" concept, but he said he did not recall it being used by directors "that often" often, and he did not use it in the case of One.Tel: see T 6493. However, Ernst & Young did a "creditor days" calculation in preparing the draft Long Form report that was intended to be used for the proposed UK flotation: Ex DTB 7/2845. It calculated creditor days at 61, and said:

Given the high level of creditor days at 30 June 2000, it would appear that One.Tel is stretching trade credit as a further method of financing its operating activities.

[2933] Mr Kleemann agreed in cross-examination that if the creditor days calculation had been done on the basis of the information contained in the balance sheet supplied with the September 2000 board papers, it would indicate that One.Tel was playing its creditors somewhere between 90 and 150 days from the incurring of the liability: T 6143. If the calculation were down on the basis of the information in the March board papers, it would indicate in rough terms that One.Tel was playing its creditors somewhere between 90 and 135 days from the incurring of the liability: T 6154.

[2934] Thus, in the defendants' submission the information was available on the board papers for directors to obtain a "rule of thumb" idea of the creditor position, had they wished to do so. ASIC presented a critique of the reliability of the "creditor days" calculation: ASR [2119-20]. I agree with ASIC that a difficulty with the calculation is that it uses the figure in the balance sheet for trade creditors and accruals, without knowledge of what is contained in the "accruals" part of the balance sheet item. For example if it includes capital expenses, which will not be taken up in either COGS or OPEX figures (Mr Kleemann at T 6492) the calculation will falsely inflate the creditor days. Setting aside capital expenses, the accruals are also likely to include estimates of amounts yet to be invoiced in respect of goods and services that have been received, and to that extent will not be an accurate indication of the time taken to pay after the invoices have been rendered. Nevertheless, both Mr Simmonds and Mr Kleemann accepted that the calculation was a method of estimating payment times, which Mr Kleemann accepted was "rough and ready" and a "rule of thumb", and Ernst & Young used the calculation in its draft Long Term report. I would therefore not completely dismiss the utility of the calculation, and I accept that it was a calculation available to be made from the information provided in the board papers. To that extent the directors, being business people, were in a position to ascertain that by September 2000, and also as at March 2001, One.Tel was probably paying its trade creditors outside 30 day terms and even outside the normal payment period identified in the financial statements for 1999/2000, namely 45 days.

[2935] My conclusion is that members of the board were probably aware that One.Tel was taking advantage of extended payment arrangements with European carriers in order to improve its working capital position as a new and growing business, and they were probably also aware that the level of disputes in the telecommunications industry was especially high and that One.Tel was raising disputes when discrepancies between invoices and its records were identified through the application of One.Tel's procedures. It does not appear that the specific level of Australian or international creditors at any particular time, or movements in the figures, were disclosed to the directors in board papers or flash reports, or in conversations with the defendants. Conversely, however, it does not appear that they asked for such information.

[2936] There is no specific evidence to indicate whether any directors discovered such information through their discussions with other One.Tel executives in Australia or the United Kingdom, though we have the very general assertions of lack of knowledge of the pleaded circumstances in the affidavits of Mr Packer Jnr, Mr Murdoch Jnr and Mr Howell-Davies. It seems to me, however, that their denial of knowledge about the specific level of "overdue" creditors, as pleaded, does not imply that they were unaware of One.Tel's payment practices and the high level of disputes, and other evidence (to which I have referred) indicates that they were. In those circumstances, and given the information they received in the board papers and flash reports, they were in a position to make a rule of thumb calculation of the extent to which creditors were outside contractual terms, and more importantly, they were in a position to make an assessment of whether, as a commercial and practical rather than legal matter, One.Tel was vulnerable to the changing whims of creditors as to payment demands.

11.7.3 Board's knowledge of earnings position

[2937] According to the March board papers, the actual first-half Group EBITDA loss was $103.326 million: Ex MTB 1/230. The January board papers estimated this loss at $94.864 million (Ex MTB 1/188), against a budget of $86.55 million. ASIC criticised the defendants for not giving the January board meeting a comparison between the estimated loss and the September budget forecast loss of $61.131 million: Ex MTB 1/3. ASIC submitted that such a comparison would have emphasised the poor level of the first-half result: APS [407].

[2938] ASIC made a similar submission (APS [409]) with respect to January EBITDA. According to the January flash report, there was an EBITDA loss in January of $7.69 million, compared with what was described as the January 2001 forecast loss of $6 million: Ex MTB 1/379B. The forecast in the September business plans was for an EBITDA profit in January of $1.677 million, and therefore the January flash EBITDA result was $9.367 million worse than the September budget.

[2939] The responsibility of management of a listed company is to present material information in board papers in a fashion that is clear, adequate and accurate. That principle applies not only to papers prepared for a meeting of the board, but also to other reporting to the board, including flash reports, although the content of management's responsibility is affected by the nature of the communication. For example, in a flash report, where the essence of the undertaking is to get information out to the directors very quickly after the end of the month, the information can only be based on what is to hand at that time and the reporting style may be justifiably clipped.

[2940] Management reports to the board are not an occasion for members of the management team to apply a favourable "spin" to the facts. Human nature being what it is, there will be a natural and perhaps forgivable tendency for an executive, who is required to report to the board an adverse development that happened on his or her watch, to draw attention to factors that would tend to exonerate him or her from blame for what has happened. But, conceptually speaking, if not always in practice, there is a clear dividing line between reporting the true and complete facts in a favourable light, on the one hand, and on the other hand, reporting in a fashion that is obscure or materially incomplete or untrue. Management's responsibility, and the legal duty of executive officers, is to avoid the latter kind of board report.

[2941] Consistently with these general reporting responsibilities, when reporting current results, estimates and forecasts to the board, management has the responsibility of ensuring that the board has all material information necessary to enable the directors to assess the business significance of the new figures. That material information will, at least normally, include reference to a comparator: that is, a budget or business plan.

[2942] It follows from these general principles that the executive officers of One.Tel responsible for the relevant parts of the January board papers would not have complied with their responsibilities if they had given directors current results, estimates and forecasts with an inappropriate and misleading comparator, such as a forecast that departed from the current budget, without also supplying the current budget figure. There would also have been a failure to comply with management responsibilities if the board was not given and did not already have the appropriate comparator.

[2943] There are, however, two important considerations to bear in mind about the January board papers. First, the directors had already received the September budget figures, which were clearly set out in the September board papers. In those circumstances, in my view it was not necessary to repeat the EBITDA budget forecast even if the September figure remained pertinent in late January.

[2944] I do not mean to suggest that in preparing a report for the board, an executive officer is entitled to omit every fact that has been included in previous board papers. Judgment has to be exercised as to whether a reasonably competent director would have retained recollection of, or access to, the previously disclosed information and would be in a position to perceive its relevance to the new board report. That may well not be the case if the previous disclosure was directed to an entirely different issue, or the fact that has become pertinent was previously disclosed as part of an undifferentiated mass of information on the earlier occasion. If the executive officer preparing a report is in doubt as to whether the directors will appreciate the relevance of previously disclosed material information, it will normally be prudent to repeat the disclosure. But there might be legitimate countervailing considerations, such as the need for precise and economical reporting to the board prepared in a fashion that recognises the directors' competence and business comprehension.

[2945] In the present case, One.Tel's executive team could be confident that the directors would have been able to bring to mind in January 2001 a reasonably accurate sense of the September budget figures on such crucial matters as forecast EBITDA for the current half-year, and that they would have been able to make an assessment of whether (if at all) that information had any current relevance. Moreover, the interaction between the board and management in the decision-making process is not a one-way interaction: a director wishing to compare the half-yearly result with the unamended September budget but lacking current access to the figures could and should have asked the chairman to obtain that information, or have directly asked for it during the presentation at the board meeting. (In making these observations, I have intentionally left out of consideration the question whether directors should retain board papers from earlier meetings, a question that has not directly arisen in this case.)

[2946] Second, the September budget figures had been adjusted on several occasions. In principle, if a budget has been revised by management after its disclosure to the board, it is necessary for management to ensure that the board is fully informed of the revisions to the budget and the reasons for them; and if the initial budget was approved by the board it is normally appropriate that any material amendment be likewise approved by the board. However, once the budget has been amended and the amendments have been properly disclosed to the board (and if appropriate, approved by the board), there can be no obligation on the part of management to compare current results, estimates and forecasts with the unamended and outdated version of the budget. To do so would be at least potentially misleading, because it would encourage directors to overlook the impact of the events that had led to the budget revision.

[2947] Here the evidence is that there were material revisions to the September budget. The evidence is considered at 7.16 and 8.4. In my opinion, in view of those revisions the unamended September budget EBITDA was no longer material to the assessment of the half-yearly EBITDA estimate as at 25 January 2001 or to the EBITDA forecasts for the remainder of the year. It was therefore not necessary for the January board papers to compare the new figures with the unamended September budget.

[2948] For these reasons I reject ASIC's submission at APS [407] that the report in the January board papers of the estimated actual EBITDA result for the half-year to December 2000 should have contained a comparison with the unamended September budget EBITDA figure.

[2949] As to ASIC's submission that the January flash report should have provided directors with the September budget EBITDA for January, it does not appear that the directors already had that figure at the time of the January flash report, so the first of my two reasons for rejecting ASIC's submission about the January board papers does not apply. But if the "Jan Forecast" figure of $6 million given in the flash report was the January component of the correct current budget figure, having regard to the amendments to the September budget made and disclosed to the board, it was not necessary, and indeed it would have been inappropriate, to disclose the January monthly component of the unamended September budget. There is nothing in the evidence to suggest that the $6 million figure was otherwise than the January monthly component of the current EBITDA budget.

11.7.4 Board's knowledge of adequacy of provision for doubtful debts

[2950] ASIC submitted (APS [410]) that the directors were given no indication that the provision for doubtful debts was inadequate. The allegation that the provision was inadequate is considered in detail in Ch 19, and rejected. Further, the adequacy of the provision as at 31 December 2000 was reviewed by both management and the auditors and no recommendation was made to change it.

11.7.5 Conclusion as to board's knowledge

[2951] The question for determination is whether the defendants contravened their statutory duty of care and diligence by failing to disclose to the board the true position regarding the cash requirement, comprising the elements of cash and cash flow, creditors and other matters. If the position had been as dire as ASIC claimed, and the defendants knew that position or ought to have known, then their duty would probably have been to make immediate disclosure to the board members. But in circumstances where, according to management's estimates repeated up to 8 May, the cash forecast to November was for cash generation, it is hard to ascertain any reason for immediate disclosure to directors of the cash position. As to creditors, if as ASIC alleged the level of overdue Australian and UK creditors had become alarmingly high, then again prompt disclosure to board members would have been required. But in circumstances where management believed that the creditor situation was under control and there appeared to be good grounds for that belief, special disclosure does not appear to have been required. Similar remarks apply to the earnings and debtor positions. While, therefore, there were aspects of the financial position of the company at the end of February that were not expressly disclosed to the directors as a whole, and some matters (such as the precise level of aged creditors in Australia and the UK) that were not even expressly disclosed to Mr Packer Jnr who received daily financial updates on the company, in my view ASIC has not demonstrated that in the circumstances the defendants were obliged to disclose those matters to the board in the absence of a request.

11.8 Consequences of One.Tel's financial position at the end of February

[2952] ASIC submitted (APS [411]) that at the end of February 2001, the group was in a disastrous financial state, and without a massive injection of funds it was doomed to collapse. It claimed that neither the board nor the market was told the true position, and (on the contrary) the picture of the financial position of the company given to the board in the January board papers and the January flash report, and to the market in the announcement of 27 February, was quite erroneous: APS [412]. I have dealt with these matters fully in the present chapter, summarising my findings at 11.5 (and as to the cash requirement, at 11.6.8). I disagree with ASIC's submission.

[2953] ASIC submitted (APS [413]) that the defendants were either aware or should have been aware of the company's deplorable financial position. If they were aware, it said, they withheld their knowledge from the board in circumstances where it was not for them alone to assess the consequences that should flow from the company's financial circumstances and it was ultimately a matter for the board to determine. It alleged that the defendants had a personal interest in maintaining their credibility, in light of the emphatic statements they had repeatedly made or caused to be made to the board, the market and (in the case of Mr Rich) the Packers, which they should not have allowed to interfere with the performance of their duties as joint managing director and finance director respectively. Presumably this submission is not intended to raise an unpleaded case of breach of any provision of the Corporations Act other than s 180. ASIC contended that the defendants should have convened a board meeting or taken other steps to apprise all board members immediately of the group's position as to cash, creditors, earnings and debtors by at least the end of February: APS [414]. It said they should have recommended to the board that unless a significant injection of funds could be obtained, administrators should be appointed or alternatively the business of the company should be immediately closed down (APS [415]), and they should have caused the market to be informed of these matters (APS [416]).

[2954] These submissions by ASIC do not arise for determination, because of my findings that ASIC has not made out its case concerning the financial position of One.Tel at the end of February.

[2955] Mr Packer Jnr and Mr Murdoch Jnr gave evidence that if they had been apprised at the end of February of the February circumstances alleged in ASIC's statement of claim, which according to ASIC are very similar to the circumstances submitted by ASIC to have been proven (especially as to the cash requirement of $270 million), they would have taken an approach similar to the approach they took at the end of May and that voluntary administration would have resulted (see Mr Packer Jnr's affidavits of 18 June 2002 paras 97-102 and 23 July 2004 paras 34-5, and Mr Murdoch Jnr's affidavit of 22 May 2002 paras 41-6). Mr Howell-Davies' evidence, though directed to a later period of time, was generally to similar effect: affidavit of 29 May 2001, paras 28-31).

[2956] Mr Packer Jnr gave evidence (affidavit of 18 November 2005, para 11) that if he had been told in the period from February to May 2001 that the financial requirements of One.Tel were in excess of $132 million (without any buffer) but substantially less than as described in paras 34-35 of his affidavit 23 July 2004, a large range of circumstances would have been relevant to the view he would have formed, and he was unable to say what that view would have been, other than that the attitude of News Ltd to further funding would have been one of a number of important factors. Mr Murdoch Jnr gave evidence in his affidavit of 16 November 2005, para 6, that on 17 May 2001 he believed that the $132 million rights issue that was proposed would adequately provide for One.Tel's financial needs and would include a buffer of $50 million or more. He said:

News Ltd's share of the proposed underwriting of this rights issue was the maximum amount which News Ltd would have been prepared to provide by way of additional funding to One.Tel.

[2957] ASIC submitted that the court should infer from this evidence that administration would have resulted at the end of February, if it found that the cash requirement of One.Tel before any buffer exceeded $132 million but was substantially less than $270 million: APS [417]. ASIC submitted that the evidence of Mr Packer Jnr and Mr Murdoch Jnr was unchallenged and that the defendants did not give any evidence to suggest that they would have taken a different view if, contrary to their assertions, the financial circumstances had been as postulated: APS [417]. ASIC has not proven that the cash requirement at the end of February was $270 million, and according to my analysis of the evidence, summarised at 11.6.8, the position from March to November was somewhere between a cash surplus of $17 million and a cash requirement of $58 million. The evidence does not support a finding that if the directors had been told of that position, they would have placed the company in administration.

[Chapter 12 (paragraphs [2958]-[3661]) is not reproduced. It sets out the relevant evidence relating to March 2001. The chapter is summarised at [7471]-[7478]. The court's analysis of One.Tel's financial circumstances in March 2001 is set out in Chapter 13.]

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

[3662] Many of the issues to be addressed in respect of the financial position at the end of March are general issues applicable throughout the period of February-April, and have been considered in detail in Ch 11. My findings in relation to EBITDA for each relevant month are assembled together in Ch 20: for March, see 20.2.3. The following treatment identifies additional matters concerning cash and creditors that are pertinent to March, and gives a summary of One.Tel's financial position at the end of March.

13.1 Cash position

13.1.1 March Group cash usage

[3663] According to the March board papers, forecast March Group cash usage was $3 million and the forecast Group cash balance at the end of March was $61 million. In fact it appears from the intranet that the cash balance was $69.2 million at 31 March, as the last few days in March were better than expected in the board papers: Ex CED 4-61. The January board papers (Ex MTB 1/191) had forecast cash generation of $15 million in March and an end-of-March cash balance of $97 million. Thus, the forecast of March cash flow had fallen between January and March by $18 million and the forecast end-of-March cash balance had fallen by $36 million according to the board papers ($28 million according to the intranet).

[3664] There was also a discrepancy between the January and March board papers concerning the February cash flow and cash figures. The January board papers had forecast February cash usage of $3 million and an end-of-month cash balance of $82 million, whereas the March board papers reported $26 million cash usage in February and a February cash balance of $64 million.

[3665] ASIC proposed some adjustments to the March cash usage, to take account of major creditors who had not been, but according to ASIC should have been, paid in March (APS [818]): namely:

•: WorldCom ($13.4 million);
•: BT, Global Crossing, GTS and Colt ($27.7 million, referring to Ex P73-708);
•: Telstra (with respect to roaming charges) ($7.3 million, referring to Ex P73-726); and
•: the creditors on the March deferred payments list (Ex CED 6-1) ($10.67 million).

[3666] ASIC said that if these debts had been paid in March, the cash usage for the period from January to March would have been $102 million, an average monthly cash usage from January to March of $34 million ($94 million at the monthly average of $31 million if an adjustment is made for the better-than-expected 31 March cash balance). But according to my findings, it would not be appropriate to add the full amounts identified by ASIC to the March cash usage total, for reasons given at 18.11.5 (WorldCom), 18.11.1 (BT), 18.11.3 (Global Crossing), 18.11.4 (GTS), 18.11.2 (Colt), 18.4 (Telstra), 12.2.2 and 12.2.7 (deferred payments listings), and 11.4.3 (disputes generally).

[3667] Mr Rich and Mr Silbermann gave evidence to explain the $28 million shortfall in group cash in March. Mr Silbermann identified what the defendants referred to in their submissions as some "permanent" differences (DPS [3204a]) in relation to higher roaming, higher COA and fewer post-paid customers in the Next Generation business, matters that were expected to have a negative effect on cash flows to 30 June of $23 million (MS 940b, 941b; see Ex MTB 1/236). Apart from that, the shortfall was primarily, according to the defendants, the result of short-term timing issues, the main ones being:

(4): slower than normal collections as a result of late billing and backbilling of older call data, which required diversion of the collections team to call centre duties to deal with customer queries, and consequent payment delays by customers (2 JDR 1302b; MS 940a), to be addressed by the addition of 80 temporary staff in Melbourne to focus on 30-60-day debt, freeing up the full-time collections team to focus on 90-day debt: 2 JDR 1302b; MS 940a; Ex MTB 1/252);
(5): a shortfall in billings as a result of billing data being "stuck" in the billing system due, inter alia, to problems with the Lucent mediation device, forecast to be caught up during April and May as a result of a major effort by the billing team, a matter that was a major topic of discussion at the March board meeting (2 JDR 1302a; MS 940e); and
(6): a higher than normal level direct debit dishonours in March, flowing from the billing delays in February and expected to be redressed by re-presentation of the direct debits during April, also a matter discussed at the March board meeting: 2 JDR 1284, 1691e; MS 940d; Ex MTB 1/227.

[3668] ASIC attacked this evidence, claiming it was not credible to assert that the cash flow difficulties of March were essentially short-term timing issues: APS [820]. Each of the matters identified by the defendants is considered elsewhere, leading to the general conclusion that the defendants' evidence is plausible: diversion of the collections team at 12.6.2.2; billing data being "stuck" in the billing system at 20.5; and direct debit dishonours at 11.6.5.3, 12.1.2.3 and 14.7.

13.1.2 April to June forecasts

[3669] ASIC claimed that the forecast in the March board papers for the Australian operations was totally without foundation, and the forecast for Europe and Hong Kong departed, to a significant extent and for no good reason, from the forecast prepared by the responsible European officers: APS [821]. That meant, according to ASIC, that the group forecasts for April-June in the March board papers were without any proper foundation: APS [822]. ASIC contended that proper forecasts would at least have led to the reduction of the forecast 30 June cash balance of $91 million by $60 million in respect of the Australian operations and about $16.5 million in respect of the Europe and Hong Kong operations: APS [824]. That, said ASIC, would have led to the clear conclusion that the company had no prospect, even before full investigation of its cash and creditors position, of achieving the $75 million cash balance at 30 June that had been forecast to the market: APS [824].

[3670] Indeed, in ASIC's contention, having regard to its submissions about the spreadsheet 2403.xls, the overstatement of the Australian operations was even more, an overstatement of $74.5 million ($20 million plus $23.8 million plus $21 million plus $9.75 million): APS [825]. Additionally, if provisions were made for payment of overdue creditors, the forecast would have been for a massive negative cash balance, with the obvious consequence that the company would not have been forecast to survive until 30 June: APS [826].

[3671] These submissions rest upon ASIC's contentions concerning the spreadsheet 2403C.xls, which are addressed at 12.7, and its contentions about forecast European cash flows, which are addressed at 12.9. ASIC has failed to make out its case on both fronts.

13.1.3 Unpresented cheques

[3672] ASIC's central contention here is that a proper understanding of One.Tel's financial position at 31 March requires either that the cash figure be reduced to take account of unpresented cheques, or that the amount of creditors be adjusted to show that the payees of those cheques remained creditors for the cheque amounts: APS [127]. ASIC contends, referring to Ex P93-716, that the net amount of unpresented cheques at 31 March was $9 million, including the $6.9 million post-dated non-digital Optus cheques. These are the six cheques drawn dated 31 March considered at 12.11.

[3673] I consider the question of unpresented cheques in detail at 11.2.3, accepting ASIC's submission that adjustments should be made to the intranet figures for the purpose of calculating available cash at month-end. I conclude at 11.2.3.11 that total figure for unpresented and unreleased cheques at 31 March is $9.86 million. The correct figure for unpresented deposits, as per Ex P93-716, is $256,952. Therefore the correct net reduction in the end-of-March cash of $69.2 million is $9.6 million, leaving a balance of $59.6 million.

13.2 Australian overdue creditors as at 31 March

[3674] The aged creditors list for Australia as at 31 March showed $49.761 million due by 31 March 2001 (Ex CE 6 0241; the figure is the total of the columns from "due by 31/3/01 to "due by 1/12/00"). ASIC relied on that figure, while submitting that some adjustments should be made to it. The reliability of the Australian aged creditors reports is considered at 11.2.5, where I conclude that those reports are unreliable in ways that overstate the amount of due and overdue creditors, because of errors in recording the due date of invoices, late posting of credit notes, and failure for a substantial time to reconcile the creditors ledgers with the creditors statements and purge the ledger of amounts no longer considered due. On the other hand, the late posting invoices has led to the understating of total creditors by some unquantified amount. My conclusion at 11.2.5.8 is that the Australian aged creditors reports are so unreliable that they cannot be given credence even if adjustments are made to them to correct obvious errors.

13.2.1 Adjustments to aged creditors list

[3675] ASIC contended (APS [835]ff) that several adjustments were to be made to the aged creditor list as at 31 March.

13.2.1.1 Optus digital payment

[3676] First, as ASIC conceded (APS [835]), the Adept ledger (Ex CED 22-4) wrongly records $9.93 million payable to Optus as due on 2 March, the same date is the item date, when in fact it was due on 15 April: Mr Carter's evidence at T 8087; and 2 JDR 1698bi. Consequently the figure for creditors due by 31 March in the aged creditor list should be reduced by $9.93 million (APS [836]), although as noted at 13.2.1.2, ASIC proposes a net adjustment of that and other figures. That error is considered at 11.2.5.4, where it is held that the Optus invoice is only one example of incorrect entry of due dates, and ASIC's attempt at an incorrect ageing analysis is found to be unsuccessful.

13.2.1.2 Other adjustments

[3677] Exhibit P93-730 ASIC set out a summary of adjustments to be made to the aged creditor list, prepared as a result of working through the aged creditor list and comparing Adept ledger entries. The adjustments brought into account late posted invoices shown on Adept but not in the aged creditor list (thereby increasing the total "overdue"), late posted credit notes (thereby reducing the total "overdue") and incorrect ageing, reflecting incorrect due dates entered in Adept and therefore in the aged creditor reports (this last category included the $9.93 million mentioned above). There are some other adjustments that need not be explored. The net effect is a reduction in the total "overdue" of $8.768 million. Consequently, according to ASIC, the figure in the aged creditor list should be reduced from $49.76 million to $40.99 million.

[3678] The components of Ex P93-730 are extensively considered at, respectively, 11.2.4.2 (late posted invoices), 11.2.5.4 (incorrect entry of due dates in the Australian ledger), 11.2.5.5 (late posting of credit notes), and 11.2.5.6 (missing payments). My conclusion is that the court should not rely on Ex P93-730 and the working papers in reply Sch 30 to prove the quantum of late posted invoices and the effect of incorrect ageing in the period from January to May 2001. Consequently ASIC has not established the case for an adjustment of $8.768 million to a reliable aged creditors listing (if there were one). But it has established the case for reducing the total sum of due and overdue creditors (if it could be ascertained) by $9.93 million because of the error in the due date for the Optus invoice.

13.2.2 Disputes with creditor

[3679] In cross-examination, Mr Rich identified four matters that might lead to the conclusion that an unpaid invoice that was outside formal contractual terms of payment was nevertheless not overdue: usual business terms, disputes, set-offs and payment plans (T 11231; T 12094; as usual business terms and disputes, see also Mr Silbermann at T 13577, T 13626). Mr Rich said that as joint chief executive officer he was concerned to know whether any "material creditors" were overdue, but by "overdue" he meant beyond the usual business terms under which they were normally paid, rather than overdue by reference to the formal contractual terms of payment: T 10851. He also said that there were formal dispute resolution processes in place with carriers, which meant that if particular invoices were in dispute, they were not due until the dispute was resolved, even though they were outside formal payment terms: T 11091. In his affidavit he said that One.Tel from time to time deliberately withheld payments to suppliers with whom there was some ongoing dispute: 2 JDR 1649, especially with telecommunications carriers who were both suppliers to One.Tel and competitors: 2 JDR 1650. Mr Silbermann's evidence was similar: MS 800-1.

[3680] ASIC submitted that the evidence considered below revealed that the bona fide disputes were of a limited character: APS [839]. I shall return to this submission after examining the evidence upon which ASIC relied to support it.

13.2.2.1 Checking of carrier invoices

[3681] According to Mr Rich, One.Tel's experience over time was that the billing systems of its telecommunications suppliers were inaccurate, so that it was frequently overcharged for services: 2 JDR 1651. He said that One.Tel's historical experience was that diligent checking of carrier invoices on average resulted in an effective saving in the amount payable of up to 4-5% of the amount billed.

[3682] ASIC submitted that there was no basis for thinking that those savings were not reflected in the many credit notes from carriers shown in One.Tel's ledgers relating to the carriers: APS [840], [895]. That submission requires the court to make an assumption about the basis for carrier credit notes, which has not been proven. I therefore do not accept the submission.

13.2.2.2 Provision for carrier claims

[3683] ASIC referred (APS [841]) to what it described as "provisions in the accounts of One.Tel in Australia" in respect of carrier claims. In fact the provisions were in One.Tel's monthly trial balances, extracted by Mr Carter in App I-13 to his principal report and then used to calculate the liquidity of the Australian operations in paras 16(b) and 101 of the report. The provisions for carrier claims were $9.116 million on 28 February, $8.96 million on 31 March, $8.96 million on 30 April and $2.359 million on 29 May. Mr Carter added these figures to cash, debtors, accrued income and provisions for doubtful debt, and then deducted creditors and accruals, to calculate the net liquidity position.

[3684] Mr Carter gave evidence that he assumed that the carrier claims provided for in the trial balances were a fair representation of what the company anticipated it would recover, and were an adequate representation of the amounts likely to be recovered: T 7976-7. ASIC submitted (APS [842]) that was a proper and reasonable approach for him to have taken. That would be prima facie the case in respect of such accounting records, but as indicated below, there is other evidence suggesting that the trial balance figures very substantially understate the level of disputes.

[3685] ASIC submitted (APS [843]) that some unchallenged evidence given by Ms Ashley (in her affidavit made on 7 July 2005, para 3) provides additional support for the quantification of carrier claims contained in the trial balances. Ms Ashley's evidence was that she regularly reviewed the claims One.Tel had against each of the carriers (apart from the claims against Telstra and Optus that emerged in April 2001, in which she had limited involvement (T 5464, T 5590-5), and updated them on a monthly basis for any new claims. She said information in relation to claims or disputes was maintained by her in an electronic folder for each carrier, and she also maintained hardcopy folders which contained a copy of each letter that was sent to the carriers in relation to claims and disputes. She said that from time to time, representatives of One.Tel's auditors and management of One.Tel sought information from her in relation to the status of the claims.

[3686] In her oral evidence in chief (T 5463), Ms Ashley identified a spreadsheet printout from the I:drive called "Carrier Claims Status.xls", which was received as Ex P35. The document is of very limited utility, because of the age of the information. It comprises a carrier claim status report at 17 July 2000 (with claims listed carrier by carrier), a status report at 26 July 1999 and a single page summarising outstanding disputes between One.Tel and Global One as at 28 May 2001 on two identified accounts. Only the last page has currency in respect of the January-May 2001 period which is the focus of attention in this case, and that page is limited to a single carrier and two accounts. As far as I can see, the July 2000 and July 1999 information is interesting only to the extent that it shows the large number of claims Optus submitted to various carriers at those earlier times, laying a foundation for the defendants' evidence that by January 2001 there was a relatively long history of disputes between One.Tel and its carriers.

[3687] At T 5467 Ms Ashley also identified a spreadsheet from the I:drive entitled "Carrier Disputes.xls", which was received as Ex P36. That document gives a markedly different picture of the level of disputes, compared with the trial balance figures. According to page headed "Disputes Raised as at 18 May 2001" the total amount of disputes with various listed carriers was $78.883 million, and the total amount of payments withheld was $28.327 million. The listed amounts of disputes included $46.832 million for "CSPA Issues" with Telstra, and $12.235 million for "GSM Roaming" also with Telstra. The only dispute in that list with Optus was for "Minimum Spend" in the sum of $11.445 million, and yet the next page of the exhibit indicates that there were disputes raised with Optus for unmatched calls totalling $5.318 million in the period from July 1998 to November 2000, so (assuming that information remained current at 18 May) the grand total of disputes seems to be $84.201 million, compared with the total provisions in the trial balances from February to May of $29.395 million, a total which assumes there is no repetition in the provisions.

[3688] Ms Ashley gave evidence that she was responsible for reconciliations of the carriers AAPT, Global One, PG, WorldCom and Primus, shown on the list for a total amount of disputes of $5.186 million. She said someone else added the information regarding Telstra, and Optus had a dispute with Global One about "Frame Relay": T 5465-6. But she did not suggest those figures were wrong.

[3689] Exhibit P36 also has details of disputes raised with other carriers, but unfortunately the date at which information is extracted is not given and the various documents are not necessarily connected or contemporaneous. Ms Ashley said (T 5467) these other pages would have been updated on a monthly basis, but the documents do not indicate the end date for the updating process. The document as tendered appears to be incomplete, except for the summary as at 18 May 2001 on the first two pages.

[3690] It seems to me that this evidence shows that a very substantial amount of creditor claims against One.Tel in Australia were subject to disputes not reflected in the monthly trial balances, which must therefore be taken to be unreliable. I have not carried out the exercise of correlating the disputes identified in Ex P36 with the "overdue" amounts shown in the aged creditors list for Australia as at 31 March, but the evidence is sufficient for me to conclude, contrary to ASIC's submission at APS [839], that the disputes were substantial in quantity. In the circumstances the appropriate finding is that ASIC has not shown that the amounts listed as "overdue" were not amounts that were the subject of disputes.

[3691] More generally, having regard to the review of ASIC's evidence under the present heading (13.2.2.2), I do not accept ASIC's submission that bona fide disputes were of a limited character: APS [839].

13.3 European overdue creditors as at 31 March

13.3.1 UK creditors

[3692] ASIC relied (APS [845]) on the aged creditor list for the UK, according to which UK overdue creditors at 31 March totalled $82 million. The figure was taken from the UK creditors ledger at Ex CE 6 0356, converted to Australian dollars in App I-6 of Mr Carter's principal report. Mr Carter used those calculations for the preparation of the table in para 99 of his report, which reported to show the "group available cash position" by deducting Australian and UK "overdue" creditors from the available cash balance for the group.

[3693] ASIC contended that certain adjustments needed to be made to the figure for UK creditors in order to identify the true level of overdue creditors in Europe at 31 May, and it resisted arguments advanced on behalf of the defendants in favour of certain other adjustments. The issues relating to adjustments, which I shall consider in turn, relate to:

•: non-UK European creditors;
•: whether old debt needed to be purged;
•: UK carrier pressure at the end of March;
•: "usual business terms"; and
•: disputes with creditors.

13.3.2 Non-UK European creditors

[3694] ASIC contended (APS [846]) that according to Mr Werner's email of 6 March 2001 (Ex CED 1-816) there were at that time debts due and overdue to non-UK European creditors of (according to ASIC) $15.4 million. A similar submission in relation to February (APS [371]) is considered and accepted at 11.3.2. At APS [371] a calculation is made of the level of non-European carrier creditors as at 6 March 2001, based on the figures in Mr Werner's first email at that date, headed "Carrier Libilities" [sic] (Ex CED 1-810). ASIC's figure, using rounded numbers, is $15.4 million. The figure is $15.09 million if more precise figures are used.

[3695] As noted at 11.3.2, Mr Werner sent another email on the same subject later on 6 March, containing somewhat different figures, presumably more refined: Ex CED 1-813; consider at 10.26.1. When ASIC comes to consider the March figure for non-UK European carrier creditors (APS [846]), it submits again that the non-European carrier figure at 6 March was $15.4 million, but this time it confusingly refers to the second email of 6 March. If one performs the same calculation on the figures in the second email that ASIC performed on the figures in the first, the amount owing to non-UK carrier creditors over 30 days is $19.49 million. At 11.3.2, I noted the disparity and took the conservative approach of accepting the lower figure, approximately $15 million.

[3696] Mr Werner's email of 18 May 2001 attached an aged creditors summary report for Europe, including Internet and wireline, in local currency. The exchange rate conversions are at Ex P93-739. The total in Australian dollars is $80.009 million, of which the non-UK part is $21.646 million. It appears from the note on Mr Werner's table that the category of debt described as "0-30" includes invoices received but not due (typically, one presumes, because the terms of payment are 30 days and the 30 day payment period has not expired), and also invoices where the payment period has expired but not by more than 29 days. Consequently the total of $21.646 million includes an amount, not revealed, of debt that had not yet fallen due at the time of preparation of the table.

[3697] Obviously there was some non-UK European debt at all relevant times in the period from January to May 2001. The more difficult question is whether the two emails of Mr Werner relied on by ASIC constitute evidence quantifying that debt as at 31 March 2001. Neither of them relate specifically to that date. Nevertheless it seems to me appropriate to infer, given that (according to Mr Werner) there was continental European debt in the order of at least $15 million on 6 March and in the order of, but not exceeding, $21.6 million on 18 May, that there was probably continental European debt of somewhere between those figures at 31 March. On the other hand, it seems likely that Mr Werner used the expression "overdue" as meaning beyond formal payment terms, without regard to usual industry payment practice (if different), payment plans, set-offs or disputes.

13.3.3 Whether old debt needed to be purged

[3698] I have dealt with the defendants' evidence that the UK aged creditors lists had not been purged of old debt (T 5664 (submissions of senior counsel for the defendants); 2 JDR 1183 and 1184), and ASIC's submissions on that subject, at 11.3.1.3. In addressing the financial position at 31 March, ASIC made further submissions (APS [850]-[853]) dealing with the conversations referred to in Mr Rich's affidavit. The defendants' response is that DPS [3222]-[3236], and ASIC's reply is at ASR [3222-3236]-[3236].

[3699] Mr Rich deposed to a briefing by One.Tel UK executives that he arranged to have while he was in London towards the end of March, after he received a voicemail message from Mr Keeling on 20 March in which Mr Keeling raised concerns about an "overhang" of money owing to WorldCom. Mr Rich said (2 JDR 1179) that he wanted to satisfy himself that there was no "overhang" of any other debt in Europe that might cause sudden pressure on cash flow. The briefing involved going through an aged creditors listing, and he said that as they went through the listing, he noticed that there was a large number of smaller creditors shown with relatively small amounts of debt that had been overdue for more than 180 days (2 JDR 1183; the Mr Rich's reference to "180 days" seems to be wrong because the aged creditors reports do not identify debts over 180 days, but only over 120 days). He said he asked about those amounts and either Mr Weston or Mr Cage said:

They are probably not payable at all. The ledger hasn't been reconciled and purged in some time. I will have someone review it to reconcile these old amounts and write them off if they have been paid or are otherwise not payable.

[3700] ASIC's submissions were directed to establish two propositions:

•: Mr Rich's evidence, if accepted, was far from sufficient to counteract the evidentiary value of the aged creditors lists and supporting ledgers as business records;
•: Mr Rich's evidence should not be accepted.

[3701] As to the strength of the evidence of the conversations, it is true (as ASIC pointed out: APS [850], first bullet) that the conversation described by Mr Rich did not in terms relate to carrier creditors. It was about smaller creditors with relatively small amounts owing. But I do not accept ASIC's submission that in those circumstances the evidence tends to suggest the absence of a need for reconciliation and purging (which I take to mean removing from the ledger by some appropriate entry) in respect of larger carrier creditors. One can understand that the smaller creditors with long outstanding debts would have been particularly noticeable to Mr Rich as he worked through the aged creditors listing, whereas the old debt for larger creditors may not have been so obvious. But in my view Mr Rich's evidence leaves open the question whether there was a need for reconciliation and purging in respect of larger as well smaller creditors.

[3702] ASIC pointed out (APS [850], second bullet) that the comment by Mr Weston or Mr Cage related only to amounts overdue for more than 180 days, and therefore the debts must have been included in the ledger and the aged creditors list as at 31 December, subject to audit review and a public announcement to the market. In those circumstances, said ASIC, it should not be assumed without very good reason that there were any debts recorded in the accounts at 31 December that should not have been there. There is no evidence before the court as to proper business and accounting practice in terms of purging the creditors ledger of old debt no longer payable. My understanding is that the limited audit review conducted for the purposes of the half-year report would not include a reconciliation and purging of the kind that Mr Cage or Mr Weston was talking about. In those circumstances I would be reluctant to treat the unpurged figures as anything more than prima facie correct and open to rebuttal. Mr Rich's evidence, if accepted, go towards such a rebuttal, as regards unpurged debt, though it does not seem specific enough to overcome the prima facie the status of the ledger as a business record.

[3703] ASIC claimed (APS [850], third bullet) that the statement by Mr Weston or Mr Cage did not convey any definite view about any debts, and there was no suggestion that the review that was to be undertaken did in fact produce a need to purge any debts. I accept that point, but I note that Mr Rich's own evidence is that he identified particular small amounts of debt and was told that they were probably not payable.

[3704] As to whether the court should accept Mr Rich's evidence, ASIC made several points: APS [851]. First, it submitted that the fact that Mr Rich could not recall with whom he had the conversation casts initial doubt on the evidence. I disagree, since according to Mr Rich the statement was made in the course of a review attended by Mr Weston and Mr Cage, joint chief executives, and it seems to me plausible that he might be unsure which of the two of them made the statement.

[3705] Second, ASIC criticised Mr Rich's evidence in cross-examination on the grounds that it was inconsistent with his affidavit, that he resisted a proposition he put forward in his affidavit, and that he was evasive.

[3706] Mr Rich said in his affidavit (2 JDR 1179) that after receiving Mr Keeling's voicemail about an "overhang" of money owing to WorldCom, he "therefore" arranged for a meeting to review aged creditor reports. ASIC submitted (APS [851], second bullet) that in cross-examination at T 11568-9 Mr Rich resisted that same proposition, and was evasive. In my view, however, what ASIC claimed to be Mr Rich's "resistance" arose from a misunderstanding, because the proposition extracted from his affidavit was taken out of context in the cross-examination and he was confused by use of the word "Europe", which he took to be used in juxtaposition with "UK" whereas in his affidavit the context indicates that he used the word "Europe" to include the UK. Thus:

Q -- Would you agree with the proposition that you wanted to satisfy yourself that there was no overhang of any other debt in Europe which might cause sudden pressure on cash flow other than what was owing to WorldCom?

A -- That doesn't make sense because I was looking at the UK creditors listing, not Europe. I don't believe your question makes sense.

[3707] When the question was rephrased, replacing the word "Europe" with "UK", he answered "in part, yes", with no suggestion of resistance to the proposition: T 11569. When counsel formulated the question yet again, this time substituting "Europe" for the UK, Mr Rich explained that he was struggling with the context because his review had been of UK creditors, again evidently assuming that "Europe" meant continental Europe. When he was asked, without reference to his review of aged creditor reports, whether in the second half of March he wanted to satisfy himself that, apart from any money that might be owing to WorldCom, there was no overhang of any other debt in Europe which might cause sudden pressure on cash flow, he answered "yes", again with no suggestion of resistance to the proposition: T 11569.

[3708] Mr Rich said concern about a creditor overhang for WorldCom after Mr Keeling's voicemail was one of the reasons why he apprised himself of the contents of the UK creditors ledger, but not the only reason: T 11569, T 11575-6. It was the only reason he gave in his affidavit, but he did not say in the affidavit that it was his sole reason, as ASIC seemed to imply at APS [851]. Thus, his oral evidence developed the account given in his affidavit, but in my view there was not such a measure of inconsistency as would reflect on his credit.

[3709] Third, ASIC submitted (APS [851]) that Mr Weston's evidence was convincing evidence against Mr Rich's account. In cross-examination Mr Weston agreed that he and Mr Cage had gone through aged creditors reports with Mr Rich when Mr Rich was in London in March, that Mr Rich made reference to figures appearing in the over 180 days column, and that there was a discussion about whether those amounts were payable or not: UK T 874. Mr Weston said he could not recall whether it was said that large portions of those amounts were subject to dispute (UK T 874), but he conceded that a proportion of the over 180 days debt may have been referable to old disputed debt: UK T 875. He said he had no recollection of either himself or Mr Cage saying that some of the amounts were probably not payable because the ledger had not been reconciled or purged (UK T 875), and he said he did not know what purging was: UK T 876. When it was put to him that either he or Mr Cage said they would have someone review the ledger and reconcile old amounts and write them off if they were no longer payable, he said "I do not remember that at all".

[3710] Mr Weston's evidence partly supports Mr Rich's evidence, to the extent of agreeing that there was discussion as to whether the over 180-day debt was in fact payable, and that a proportion of it was subject to dispute. As to whether he or Mr Cage said words to the effect that the old debt would be reviewed and written off if no longer owing (whether or not the word "purged" was used), I have on the one hand firm evidence from Mr Rich, and on the other hand evidence of lack of recollection from Mr Weston, and so I prefer Mr Rich's evidence.

[3711] Fourth, ASIC submitted (APS [850]) that it was not suggested to Mr Werner in cross-examination that the creditor figures he produced in his emails of 30 November, 6 March, 18 May and 23 May included debts that should have been purged from the ledger. That is true, but does not require that Mr Rich's evidence be rejected, for two reasons. One is the general point that failure to put a particular proposition to a witness for the plaintiff is not of cardinal importance in a long civil penalty trial in which the defendants do not decide whether to go into evidence until after all of the plaintiff's evidence has been heard. The other is that Mr Werner may not have been in a position to answer the question, had it been put, in the absence of detailed consideration of the UK aged creditor lists, given that he was not said to be a party to the conversation between Mr Rich, Mr Weston and Mr Cage about the UK aged creditor list.

[3712] Mr Rich's evidence on this matter was only partly corroborated by Mr Weston's evidence, and was favourable to the defendants' case. Nevertheless it seems to me on balance that the evidence should be accepted.

[3713] Mr Rich said in his affidavit that after his discussion with Mr Cage and Mr Weston about the UK aged creditors list, he left a voicemail message for Mr Hodgson in Australia, asking him to ensure that the Australian creditors' ledger was reviewed in the same way to reconcile it and purge any old debts that should be written off, and that Mr Hodgson left him a voicemail message in reply saying he was going to have that job done and they would get to it as soon as they could: 2 JDR 1184.

[3714] Again ASIC urged the court to reject Mr Rich's evidence, largely on grounds that I have already dealt with in assessing Mr Rich's evidence about his meeting with Mr Weston and Mr Cage to discuss the UK aged creditors list: APS [853]. One point made by ASIC in this context but not in the other context was that it was not suggested to Ms Thomas that she received any instruction to do so, or that there was any need to do so, although she was the "Accounts Payable -- Team Leader" at the time, according to her affidavit, and she was taking steps in late April to obtain a more accurate aged creditor listing by attempting to ensure that all invoices came directly to accounts payable (according to Ex CRA 2 to the affidavit of Craig Allsopp of 4 July 2004). That is true but not of great significance. Mr Rich's evidence is that Mr Hodgson said the job was on the list and would be reached as soon as the Australian team could do so, not that he had instructed anyone to undertake the task.

[3715] Under s 1305(1) of the Corporations Act the Australian ledgers and aged creditor lists are prima facie evidence of the matters recorded in them, but in my view uncorroborated evidence that is plausible in its context is capable of rebutting that presumption. Mr Rich's evidence of his voicemail exchange with Mr Hodgson, which I accept, contributes to the doubt about the accuracy of the aged creditor information in the Australian creditors ledger and the Australian aged creditors lists that arises from other evidence, considered at 11.2.5. As to the UK creditors ledger and aged creditors reports, while I accept Mr Rich's evidence, I conclude at 11.3.1.3 that the defendants' evidence as a whole is too indeterminate to overcome the proposition that the ledger is a business record that is prima facie the evidence of the truth of its contents, except as regards over 90-day debt.

13.3.4 UK carrier pressure at the end of March

[3716] Mr Rich gave evidence that until late April he was not aware of creditors being paid outside One.Tel's normal payment practices (including in relation to disputes) (2 JDR 1695), and he said it was not his understanding at any time during February or March that the UK business was having difficulty paying its creditors in a manner consistent with its normal payment practices: 2 JDR 1714d. He said that at no time during his visit to London in late March did any of Mr Weston, Mr Cage, Mr Werner or Mr Boaden suggest him that the UK business was in "crisis" in dealing with its creditors, as stated by Mr Boaden in para 15 of his affidavit of 28 June 2002: 1 JDR 1112e. He challenged Mr Boaden's evidence that from the end of February he was spending about 75% of his time dealing with the subject of payments to creditors. Mr Rich said that he worked in the open plan London office of One.Tel at a desk a few metres from the desks of Mr Boaden, Mr Werner, Mr Weston and Mr Cage, and he did not recall a single occasion during March when he overheard any of them speaking on the telephone with creditors about payments that were being demanded and not made: 1 JDR 1113. Mr Rich's evidence implies that he believed at the end of March that One.Tel's indebtedness to European carriers was properly under control. Likewise Mr Silbermann said that it was not his understanding that the UK business was having any difficulty in paying its creditors when required, until late April or early May 2001: MS 936c.

[3717] ASIC submitted that in fact there were huge amounts overdue to carrier creditors at the end of March and there was considerable pressure from a number of carriers for payment, and that it would be a remarkable state of affairs if Mr Rich and Mr Silbermann were not aware of these facts: APS [855].

[3718] ASIC summarised the position, according to its contentions, as follows (APS [857]-[862]):

•: British Telecom had issued a letter of demand on 21 February, breach notices on 2 March and a letter of demand threatening proceedings on 27 March;
•: by its email of 26 February, WorldCom made it clear that it regarded One.Tel as presently liable to pay $23.9 million, and Mr Boaden's internal email of 20 March referred to $13.4 million being "payable now" and $2.6 million being "current", in the context of discussions occurring with WorldCom as to the payment of amounts that WorldCom clearly required to be paid;
•: GTS had issued a shut-off threat on 23 March and a notice of default on 26 March;
•: RSL had issued a demand on 26 March for payment by return that day, with the threat to suspend service and commence legal action;
•: Teleglobe had demanded payment in late March and threatened that One.Tel would be turned off; and
•: Mr Weston accepted that from March 2001, One.Tel UK was paying creditors such as BT at the outer limits of their tolerance: UK T 692-3.

[3719] I have given detailed consideration to UK creditors in Ch 18, and I have assessed the significance of disputes at 11.4.3. It is not feasible to summarise in a few words the results of my analysis of that large volume of evidence. ASIC's submission seems to assume, or invite the court to infer, that there was no proper basis for resisting any of the demands for payment listed above. The true position is much more complex in each case.

13.3.5 "Usual business terms"

[3720] Broadly speaking, the defendants contended that there was a long-established practice that the UK and European carriers would not demand payment of invoices for a period of up to 180 days, even though their strict contractual trading terms were for much shorter payment periods (typically 30 days). But according to the defendants, there was a sudden and unexpected change to that practice in Europe in April 2001, manifested by WorldCom and Global Crossing tightening their position in relation to outstanding debt.

[3721] Thus, in their defences the defendants denied allegations in the statement of claim about the company's financial position at the end of January 2001 by saying, inter alia, that ASIC's figure for creditors "past due" included "amounts for creditors which were not in fact beyond their normal payment terms": Mr Rich's defence, para S5(b)(i). The defences made the following general contention in relation to allegations in the statement of claim about "overdue" creditors (at para S5(c)(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.

[3722] Then, responding to ASIC's allegations about the "true cash and creditors position" at the end of April 2001, the defendants said in para S36(g)(vi) of their defences that the difference between the actual group cash balance reported to the board and the actual group cash balance forecast in earlier board papers was referable to a number of factors, including:

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

[3723] The defendants' evidence supported these propositions: 2 JDR 1186, 1640-41, 1695, 1714d; MS 802-3, 850; Mr Rich's evidence at T 10851, T 11010, T 11014, T 11091, T 11227, T 11231, T 11631; Mr Silbermann's evidence at T 2910, T 12911, T 13024, T 13577, T 13626, T 13785, T 13823. Further consideration is given to this evidence, and other evidence supporting the defendants' case at 11.4.1.1.

[3724] The language used to convey the propositions varied from time to time:

"normal business practice" (2 JDR 1186);

"the normal course of dealing with those creditors" (2 JDR 1640);

"normal practice" (2 JDR 1641b);

"normal payment practices" (2 JDR 1695 and 2 JDR 1714d);

payment outside strict contractual terms as part of "ordinary business relationships with their customers" (MS 802-3);

"normal business practices" (MS 850);

"usual business terms" (Mr Rich at T 10851, T 11014, T 11091, T 11227, T 11231; T 11631);

"usual business terms" explained to mean "the normal payment pattern for a particular supplier" (T 11010);

"usual business terms" (Mr Silbermann at T 12910, T 12911, T 13024, T 13577); T 13626, T 13785, T 13823);

"tolerated usual business terms" (Mr Silbermann at T 13322).

Notwithstanding these variances in language, in my view the defendants' evidence was consistent and in support of the passages in the defences to which I have referred.

[3725] As ASIC pointed out (APS [864]), expressions such as "usual business terms", used without explanation, would suggest some mutual arrangement between creditor and debtor. In cross-examination Mr Rich said that when he used the expression, he was referring to a situation where, in strict legal terms, a payment was due, but in the past there had been a practice of paying the account at a later date: T 11010. When asked whether he was talking about a situation where the creditor had entered into an agreement to permit payment at a later date, he said the situation was that the later payment was permitted by the creditor, although there was always the prospect that the creditor might change its policy: T 11011. That seems to be the same concept as identified by Mr Silbermann in his affidavit (MS 802), when he said that debtors often pay "late" and creditors tolerate a certain degree of "late payment" as part of their ordinary business relationships with their customers.

[3726] That is, the concept underlying the evidence of Mr Rich and Mr Silbermann seems to be that the creditor is not contractually bound to accept late payment but tolerates or permits late payment, although it could insist on strict payment terms. The creditor might be constrained by "commercial desire" from calling for payment in accordance with strict terms, but not by any contract:

T 11241-2; see also T 13322-3. In submissions the defendants referred to the position of the carrier creditors as granting One.Tel a "commercial indulgence" (for example, DPS [3241b]), although they submitted that it was "far from self-evident" that no legal defence would have been available against a sudden change of position by the carriers in relation to time to verify invoices and then pay, if made without reasonable notice to One.Tel": DPS [3242]. The availability of some such defence, presumably grounded in estoppel, would depend on establishing facts beyond a mere "commercial indulgence". The prospect of making out such a case seems to me somewhat fanciful, having regard to the creditor correspondence and other relevant evidence reviewed in Ch 18. But the defendants' case does not depend upon showing a legal entitlement as opposed to a commercial expectation of extended terms.

[3727] ASIC submitted that the defendants' account of their arrangements with carrier creditors was contrary to the evidence, which showed that the UK carrier creditors were in fact pressing for payment in February and March, with the possible exception of Global Crossing: APS [867]. I have considered the evidence concerning UK carrier creditors in some detail, in Ch 18 and at 11.3 and 11.4. In light of the evidence there reviewed, I reject ASIC's submission.

[3728] Apart from their contention that in fact the carrier creditors did not agree to "usual business terms" other than strict contractual terms, ASIC made various other submissions concerning the defendants' case on this question. ASIC's submissions were directed towards establishing the following propositions:

(4): contrary to the defendants' assertions, there was no change in market conditions in late March and no change in the attitude of One.Tel's carriers in April 2001 (APS [882]-[888]);
(5): the defendants gave inconsistent and unconvincing explanations as to why the changes they alleged in market conditions in late March had occurred (APS [869]-[881]); and
(6): One.Tel was vulnerable to European carriers calling for payment in accordance with agreed credit terms rather than acquiescing to longer payment periods, and therefore it was extremely rash to work on the basis of an assessment that the carrier creditors would not require payment for lengthy periods (APS [889]-[893]); even if (contrary to ASIC's submission) no pressure for payment was being exerted by the carriers as at the end of March, it was wholly inappropriate to conduct the business on the basis that debts would not be called for long periods (APS [868]).

[3729] I shall consider each of these matters in turn.

13.3.5.1 Defendants' assertions as to change in the market

[3730] I should say at the outset that, as I understood the evidence, references to the "market" and "market conditions" were for the most part references to the trading market for telecommunications carriers rather than to the sharemarket, although to the extent that I shall indicate, the evidence dealt with the market for telecommunications shares as a possible factor in the change of attitude of One.Tel's carrier creditors.

[3731] I have referred to the allegation in the defences that there was an unforeseen tightening in credit terms by some European carriers in April, which was a factor contributing to the lower than forecast cash balance at the end of April. The defendants submitted (DPS [2994]ff) that the market began to change from around the beginning of April 2001, after number of carriers in Europe and the USA announced in March 2001 that they were in financial difficulties. There was an issue in the evidence as to when the market change began. ASIC contended that it was earlier than the beginning of April.

[3732] There is some evidence supporting the defendants' claim, in their affidavits and elsewhere. In his affidavit Mr Rich said that just before Easter, WorldCom and Global Crossing had "suddenly tightened their position in relation to outstanding debt", and he said he was "concerned that if this tightening of credit terms by the European carriers became more widespread and permanent then the European businesses would require more working capital than they had up to that point": 2 JDR 1486b. He said that the change was heralded in March 2001 when RSL COM announced that it was going into administration and GTS defaulted on some bond obligations and announced a restructuring: 2 JDR 1388.

[3733] Mr Rich also referred to a voicemail he received from Mr Weston on Good Friday, 13 April 2001, in which Mr Weston said that WorldCom was insisting on an immediate reduction of One.Tel's outstanding balances and was demanding that One.Tel immediately bring back their credit terms to 30 days, and that RSL COM in the Netherlands had escalated One.Tel's dispute with them by taking steps to freeze One.Tel's bank account, and that some legal documents were needed to unfreeze it.

[3734] Mr Rich expressed similar views in April and May 2001. Thus, in his email to Mr Murdoch Jnr of 28 April 2001 Mr Rich said "UK Carriers who were previously trading 60 days are now requiring 30 days": Ex CED 1-1331. According to the minutes of the board meeting of 17 May (Ex MTB 1/330), Mr Rich reported that the cash levels of the company were lower than expected, citing several contributing factors including that "European carriers had tightened their credit terms to 30 days".

[3735] In his affidavit Mr Silbermann said that in many cases European carriers "did not press for payment until up to 120 days or even more after the invoice date". This position changed during April 2001 when Global Crossing and WorldCom suddenly demanded immediate payment of all undisputed amounts outstanding beyond formal credit terms": MS 934a.

[3736] At the UK hearing, Mr Howell-Davies and Mr Weston gave some differing evidence on this question. In his cross-examination, Mr Howell-Davies said that the major carriers were clawing second and third tier carriers back to their contractual dates of payment well before February 2001; he rejected the proposition that the industry practice of allowing carriers such as One.Tel to pay invoices up to 120 days after the invoice date continued up until March, and said that some major carriers had started to "call back" payment dates prior to that time, though the practice was not uniform: UK T 99. It appears that in late March 2001 some of the RSL operations went into receivership: UK T 707. Mr Howell-Davies agreed that this event was a fairly significant event in Europe in March, and was the first of the number of insolvencies that occurred among carriers in Europe: UK T 100. But he did not accept that there was a change in market conditions coinciding with the insolvency of RSL COM in Europe, saying that a lot of major carriers had already clawed back second and third tier carriers to paying within the timescales of their contracts: UK T 99.

[3737] On the other hand, Mr Weston agreed that some concern started to develop in the industry as a result of the events of GTS and RSL COM as to the solvency of some of the players (UK T 707-8), and at about that time "carriers started to rein in the credit terms that they had previously allowed to customers", including One.Tel, and that from the end of March the market started to change: UK T 708. But he said that WorldCom was "becoming more insistent over time, leading up to mid-April", rather than suddenly changing its attitude at that time. He agreed that in response to the changing market conditions, a number of carriers started to become more vigilant in requiring payment in accordance with contractual terms: UK T 708. He accepted that in April 2001 those changes in the marketplace came to affect One.Tel, in terms of pressure from carriers for payment: UK T 709.

[3738] On balance I prefer the evidence of Mr Weston to Mr Howell-Davies' evidence on this point. Mr Weston was at the right place to know whether there was a change of market conditions in about March 2001, leading to a change in the attitude of One.Tel's carriers to One.Tel's payment terms in April. Mr Howell-Davies had considerable experience of the telecommunications industry generally, but not such focused and direct experience as Mr Weston of the carriers with which One.Tel was dealing at the time.

[3739] Consequently there is some reasonably persuasive evidence that something happened in the telecommunications industry that led to concerns about the financial condition of some carriers and a general tightening of credit terms.

[3740] ASIC submitted (APS [888]) that the defendants' contention that there was a surprising change of attitude on the part of particular European carriers in April should be rejected because it did not withstand scrutiny of the dealings of those carriers worth One.Tel. I have considered the evidence about One.Tel's dealings with European carrier creditors in detail, including its dealings with WorldCom, Global Crossing and RSL COM. I have drawn the conclusion that the evidence on the whole supports the defendants' contentions.

[3741] ASIC claimed (APS [888]) that the defendants' contention of a surprising change of attitude on the part of carriers is inconsistent with the following:

•: the proposition taken from Mr Weston's evidence that One.Tel UK was paying creditors such as BT at the outer limits of their tolerance;
•: the reference in Mr Keeling's 20 March voicemail to a concern about an overhang with WorldCom that was about to come crumbling down;
•: the April cash flows prepared by Mr Werner, forecasting cash usage for Europe of $22 million;
•: the evidence of Mr Werner and Mr Weston concerning management of creditors in the UK; and
•: the inevitable result of management of creditors, which was that a substantial creditor catch up would be required.

[3742] I have dealt with all these matters. I do not accept ASIC's submission. My conclusion is that there was a change of attitude on the part of some European carriers including WorldCom and Global Crossing in April 2001, and I accept the evidence of Mr Rich and Mr Silbermann that they were surprised in all the circumstances by this change of attitude.

[3743] On the basis that there was a change in market conditions, when did it happen? According to ASIC (ASR [2996]) the GTS default occurred in December 2000, and therefore the market change was well under way before April, when WorldCom and Global Crossing demanded payment from One.Tel.

[3744] The evidence indicates that some carriers were tightening up their payment terms earlier than the end of March, in response to generally poor market conditions and some nervousness about financial conditions, probably contributed to by the GTS default in either December or January, which appears to have become generally known. But apparently it was in late March that the continuing stockmarket decline for telecommunications carriers began to force business failures. The publication Communications Week International (Ex DTB 16/61) contained a report on 2 April under the headline "Market sends telecoms business users into shock". That article reported that business telecoms users in Europe were for the first time facing risks to network services supply. It explained that the global stock markets crash was bearing down on telecoms companies, several which had issued profits warnings, and said that "Telecom's share prices have been falling since October at least, but only now are starting to force business failures among European and global service providers". The article cited Viatel (which had appointed financial advisers), RSL COM (which had started insolvency proceedings as well as delisting from NASDAQ), World Access (which announced it had appointed an investment bank to restructure its finances and if that failed, it would seek Ch 11 protection from bankruptcy in the US), and GTS (which had announced a restructuring deal in the previous week in order to resolve a debt crisis).

[3745] That is consistent with statements by Ms Redfern, ASIC's legal counsel, in Observations to counsel prepared in February or March 2002 after interviews with some of One.Tel's European creditors (Ex DTB 10/3940):

You will note that all creditors raise issues about debts which have been classified as "past due", which are not straightforward. Some of the debts, particularly those falling into the 120 day plus category, were legitimately disputed. All concede an apparent custom of delayed payment in the industry and at least one creditor acknowledges the tightening of the market in early April 2001 ...

It is also 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 later in the same section of the document:

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.

[3746] The magazine article reinforces the evidence of Mr Rich and Mr Silbermann, to the effect that something happened in the market for telecommunications services in late March that contributed to the decisions of WorldCom and Global Crossing to take a tough line with One.Tel, notwithstanding negotiated arrangements in the case of WorldCom and disputes in the case of Global Crossing. Ms Redfern's observations indicate that this was an issue ASIC was considering in early 2002.

13.3.5.2 Reasons for European carriers' change of attitude

[3747] ASIC directed some submissions to the inadequacy and inconsistency of the evidence given by the defendants to explain the carriers' change of attitude: APS [872]-[881]. I observe at the outset that it was not incumbent upon the defendants to explain the change of attitude of carriers, but only to prove that it occurred. However, some evidence was given by the defendants seeking to explain the carriers' attitude, and by ASIC with respect to various market influences. Several explanations were given by the defendants.

[3748] First, Mr Rich gave evidence that "during March 2001, a number of carriers in Europe and the United States announced that they were in financial difficulties", referring to RSL COM which (he said) announced that they were going into administration, and GTS, which announced that it was defaulting on repayment of some outstanding bonds: 1 JDR 1388. Mr Rich suggested that the changes of approach by WorldCom and RSL COM reported to him by Mr Weston just before Easter were related to those developments.

[3749] Subsequently Mr Rich corrected that evidence, when it was drawn to his attention that the default by GTS on interest payments to bondholders had occurred in December 2000 rather than March 2001: Mr Rich's second affidavit, para 9. Mr Rich acknowledged in cross-examination (T 11238) that the events concerning GTS occurred in December 2000, and the fact that GTS was in difficulties was well known for months before March 2001. Additionally I note that in the ABN Amro presentation slides on One.Tel prepared in February 2001, and presented to Mr Rich on 14 February (1 JDR 1050; T 11236), one of the presentation slides said "One.Tel fixed business being hit by adverse RSL/Primus performance ... RSL delisted": Ex JDR 4/1437. That evidence indicates that RSL's difficulties arose earlier than March. However Mr Weston gave evidence that RSL went into receivership in March 2001 (UK T 707) and so, even if RSL's problems began earlier than March, there was a significant event in March that may have affected the attitude of other carriers to overdue debt.

[3750] It therefore seems that the evidence does not support Mr Rich's theory that the change of attitude of One.Tel's European carriers in April 2001 was caused by financial difficulties experienced by GTS and RSL COM in March. He seems to have effectively abandoned that theory in cross-examination: T 11238.

[3751] Second, senior counsel for the defendants suggested to some witnesses in cross-examination that there was a dramatic drop in the market for telecommunications shares in about March or April 2001 (cross-examination of Ms Reynolds at T 1029; cross-examination of Mr Boaden at T 5396). But the so-called "tech wreck", in which the NASDAQ telecommunications index fell dramatically, in fact occurred in April 2000, that is to say, about a year earlier (Ex CED 4-1), as Mr Rich acknowledged: T 11235. The tech wreck itself cannot be an explanation for a change in attitude of European carriers a year later. ASIC relied (APS [884]) on an exchange of facsimiles between Mr Adler and Mr Rich on 16 January 2001, in which Mr Adler talked about telco stocks having fallen globally and the "general horrible market", and Mr Rich responded saying that he agreed "re share price": Ex CED 1-629, 631. That shows Mr Rich was aware of the state of the telco sharemarket (indeed, one would expect him to have been very well aware of it as the chief executive of a telco), and therefore he cannot have credibly claimed that the tech wreck explained the change of attitude of carriers in April 2001. But he did not make such a claim.

[3752] Mr Rich suggested in cross-examination that the tech wreck may have had a different effect. He said his belief at the time was that the tech wreck created more competition among second and third tier telcos for customers like One.Tel, which then caused One.Tel to be in a stronger negotiating position with them: T 11240. Consequently the tech wreck had the effect of extending rather than restricting One.Tel's payment terms with carriers. But then there was a change in attitude in April 2001, which operated adversely to One.Tel by restricting payment periods, and Mr Rich said he did not foresee that adverse change: T 11240. ASIC submitted (APS [879]) that this evidence was illogical, but I can see nothing illogical about it. It is expert opinion evidence that the court should accept, not being in a position to substitute its own opinion for the expert's, and without other contradictory expert evidence.

[3753] Third, later in cross-examination Mr Rich advanced another theory to explain the carriers' change of attitude. He said that the market for telecommunications shares continued to fall after the tech wreck (that is correct: Ex CED 4-1-2), making it harder for telcos to raise money in the sharemarket; this continued deterioration caused some of One.Tel's competitors to go out of business, and some of the second-tier carriers with which One.Tel did business reacted to the market conditions by tightening their terms of payment: T 11262. He referred in particular to RSL COM, which took legal proceedings to freeze One.Tel's Netherlands bank account in late March. Mr Rich said that the freezing of the One.Tel bank account became known to WorldCom and Global Crossing and they reacted to that event, at a time when they were under financial pressure themselves: T 11263.

[3754] ASIC described Mr Rich's various attempts to explain the change in carrier attitudes in April 2001 as "prevarications" which, it said, reflected poorly on his credit: APS [881]. According to my observation of the unfolding evidence, this was not a case of prevarication reflecting on credit. As I saw it, Mr Rich had tried to explain the change of carrier attitudes in his affidavit but his explanation was unsuccessful because he was wrong about chronology, and so (urged on by senior counsel for ASIC) he suggested other explanations in the course of cross-examination; but the language he used was not categorical and it was plain to the observer that he was simply doing his best to suggest explanations, and also to recollect the explanations he had in mind at the time (see, for example, T 11263, where Mr Rich said candidly that he was not sure that the reduction of the number of carriers in the marketplace had a relationship to the tightening of credit terms, and that it "could go either way", but in fact the particular link that caused an adverse consequence was RSL COM freezing the One.Tel account and WorldCom and Global Crossing reacting to that event). I need not make a finding on this question, but I record my view that Mr Rich's evidence at T 11263 seems plausible.

13.3.5.3 Vulnerability of One.Tel

[3755] ASIC made submissions at APS [889]-[893], and also in other parts of its written submissions, to the effect that One.Tel's extended payment practice with carrier creditors, at a time when it did not have the cash resources to pay them in full, made it vulnerable to the whims of the creditors, and consequently it was a breach of duty by the defendants to put the company in that position; and further, the defendants had a duty to inform the board of all relevant facts and circumstances, but they did not do so. I deal with the "vulnerability submission" at 11.4.1.2, and with the question of the board's knowledge of the risk to the company at 11.7.2.

[3756] ASIC's submissions at APS [889]-[893] are that

(4): One.Tel's extended payment arrangements with carriers, which the carriers could at any time revoke by calling for payment in accordance with strict contractual terms, put the company in a vulnerable position, as the company did not have a cash balance sufficient to enable it to meet carrier debts in accordance with contract terms;
(5): a creditor might demand payment in accordance with strict contractual terms for a variety of reasons, relating to its assessment of One.Tel's financial position and the prospects of doing further business with it, or the creditors' individual circumstances, or changes of personnel within the creditor, or general market conditions;
(6): it was rash in the extreme for One.Tel's management (including the defendants) to make an assessment that creditors would not demand immediate payment of substantial amounts that were beyond contractual terms, without having a cash balance sufficient to meet all and any such demands; and
(11): the board was unaware that management were adopting this approach.

[3757] As to (a), the defendants' evidence (noted above) concedes that as a matter of contract, the carrier creditors were entitled to demand payment in accordance with strict contract terms. Mr Rich also conceded that there was never any intention on his part to seek to maintain a cash balance in the UK operations sufficient to enable it to pay all its creditors: T 1714a. However, the defendants do not concede that this placed One.Tel in a vulnerable position. Mr Rich said (T 11011):

By "vulnerable", I am assuming that you mean that there was some probability -- some not insignificant probability that terms may be changed and you are assuming that One.Tel then couldn't obtain supply from some other carrier who was wishing to compete for that business. So in my mind, the vulnerability was very unlikely.

[3758] ASIC submitted that the risk to One.Tel came down to an assessment of the probabilities, that is, an assessment that it was unlikely that payment would be demanded: APS [866]. But that was not quite how the defendants put it in their evidence: T 11011-2, T 11240-3, T 13322-3. Their assessment was that the conduct of carrier creditors was governed by the commercial situation affecting the carrier and One.Tel, including the question whether One.Tel could obtain supply from another carrier. These commercial considerations protected One.Tel from vulnerability, or according to the defendants.

[3759] It seems to me that there was necessarily a risk to One.Tel constituted simply by the company paying carrier creditors outside strict contract terms and hence leaving substantial unpaid balances, without holding cash balances sufficient to cover the amounts unpaid. Whether that risk amounted to a vulnerability to which the company should not have been exposed depends upon whether ASIC is right on submissions (b) and (c).

[3760] As to (b), Mr Rich's evidence (T 11011-2, T 11240-3, T 13322-3) was to the effect that the commercial circumstances of carrier relationships tended to minimise the risk, and hence make it responsible for One.Tel management to expose the company to that risk in order to grow the company's businesses until they reached a point of routinely generating positive cash for operations. In my detailed consideration of the creditor evidence, I note several examples of carriers who on the one hand were applying pressure for payment, even of disputed amounts, and on the other hand were seeking to expand their business relationship with One.Tel. That evidence tends to support Mr Rich's evidence, but the evidence is not sufficiently complete to permit the court to decide, on the basis of that evidence and independently of Mr Rich's assessment, that One.Tel was not in a practical sense vulnerable to changes in the attitude of carrier creditors to payment periods during January-May 2001.

[3761] ASIC drew attention to three occasions when Mr Rich conceded in his affidavit that certain events might cause the carrier creditors to change their attitude and insist on strict contract terms, and it submitted that these exposures demonstrated the company's operability: APS [893]. First, Mr Rich said he told Mr Packer Jnr on 14 May that "when we announce the 5 cent rights issue, it is possible that creditors may panic and bring in their credit terms": 2 JDR 1608. But a rights issue at a massive discount to the market share price would be a very unusual event, and moreover, an event within the control of the company. That evidence is not a concession that the company was honourable to shifts in creditor position is in the ordinary course of trading.

[3762] Second, Mr Rich said that "One.Tel's experience with carriers in Australia was that they insisted on strict payment terms in relation to services where there were few competitors (for example, Telstra's provision of local call service) but were prepared to tolerate longer payment terms in markets where there were a number of competitors (for example, the provision of long-distance services): 2 JDR 1641c. ASIC contended that the prospect that the number of "players" in a market would change was always a real one: APS [893], second bullet. It referred to evidence that some carriers had gotten into financial difficulties (whenever precisely that may have occurred) (2 JDR 1388; and Mr Harris' "Barely-Up Carrier Campaign" email of 27 March 2001 at Ex CED at 1-1004). However, it seems to me that the influence of such events on payment terms would not be immediate; it has not been shown that there was a real risk that a change in the number of "players" would affect payment terms so quickly that One.Tel would have no time to put alternative arrangements in place to meet the changed conditions.

[3763] Third, Mr Rich contemplated, at least in mid-April, that the "tightening of credit terms" by WorldCom and Global Crossing might become "more widespread and permanent": 2 JDR 1486b. ASIC said (APS [893], last bullet) that this evidence illustrated the vulnerability of One.Tel to the "knock-on" effect of a change of attitude of only one or two carriers. Similarly, as noted above, Mr Rich said that RSL's action in freezing One.Tel's bank account may have provoked WorldCom and Global Crossing. ASIC said that the risk of a knock-on effect was particularly acute in a context where One.Tel was deferring payments to creditors to a significant degree. It seems to me that ASIC's submission overlooks Mr Rich's evidence that carriers were under commercial constraints because of their desire to do more business with One.Tel in the risk to them that One.Tel would move to another supplier. The possibility of knock-on effects of a particular event needed to be factored into the commercial assessment by One.Tel's management, but it was probably not dominant.

[3764] ASIC submitted that, apart from the circumstances conceded by Mr Rich, there were various other circumstances, beyond the control of the debtor company, in which a creditor might "bring in their credit terms", including matters relating to the debtor company and matters relating to the creditor's own individual circumstances and personnel, and matters relating to market conditions: APS [983], first bullet. But Mr Rich's evidence was that, although there may be tension between the sales and marketing and the finance sides of a creditor's business as to payment terms, there was normally a balance and consistency between the two sides of the business and it would be very unusual to see a swing from one attitude to another in a particular company: T 11242. He insisted that the historical pattern of One.Tel's relationship with a particular creditor was a good basis for assuming the creditors attitude would continue: T 11242-3. It seems to me that, whatever might be the propensity for creditor companies generally to shift from extended to strict payment terms, there is no reason to disbelieve Mr Rich's evidence that in his assessment, the historical pattern of One.Tel's relationships with carrier creditors provided a sufficient basis for assuming that extended payment terms would continue.

[3765] As to (c), the question whether the defendants were acting rashly in exposing One.Tel to the risk of a creditor enforcing strict contract terms depends upon just how vulnerable the company was. One can readily envisage circumstances where it would be irresponsible and a breach of duty of care for management to expose their company to the risk that contract terms would be enforced by creditors and hence the company would be insolvent. But in my view it is not always irresponsible for management to take advantage of an industry practice of certain creditors accepting late payment of supplier invoices. The key issue is a commercial one: is the risk that an industry practice of creditors accepting late payment, driven by their commercial interests, will change and lead to the enforcement of strict contract terms a sufficient risk to the company's interests (and in particular, its solvency) that it would be reckless to use the company's funds to grow the business to a cash-positive stage?

[3766] In terms of duty of care of directors and other officers of the corporation, the answer to the question is affected by s 180(2), which I have considered in Ch 23. It seems to me plain from the evidence that Mr Rich and Mr Silbermann made business judgments (as defined in s 180(3)) as to whether they could continue to grow One.Tel's businesses so that they would become consistently cash positive, in circumstances where there were carrier debts that were overdue in strict contract terms though (according to their assessment) not required to be immediately paid, and insufficient cash resources in the group to meet the carrier claims if strict contract terms were demanded in those demands were met without deduction for disputes. I think the evidence of the defendants, which I relevantly accept, shows that they made their business judgment in good faith for a proper purpose, namely to get the businesses to a cash positive stage as forecast in the business plan as approved by the board: s 180(2)(a). The defendants had a personal interest in achieving that objective as shareholders and directors of the company, but they did not have a material personal interest in the subject matter of the particular business judgments they made, namely decisions not to pay carrier creditors in accordance with strict contract terms and not to accumulate cash to cover the claims: s 180(2)(b). Their evidence also satisfies me that they informed themselves about the subject matter of the judgment to the extent they reasonably believed to be appropriate: in Mr Silbermann's case, by close consideration on ongoing basis of the financial position of the UK and European businesses including carrier creditors, and in Mr Rich's case by participating in regular reviews of the businesses and, in March 2001, reviewing the UK and European businesses by personal attendance: s 180(2)(c). It seems to me both defendants rationally believed that the judgment they made about creditor payments was in the best interests of the company: s 180(2)(d). In those circumstances the defendants, by force of s 180(2), are taken to meet the requirements of the statutory duty of care and diligence in s 180(1) and their equivalent duties at common law and in equity.

[3767] As to ASIC's submission (d), the question of whether the board knew the facts and circumstances relating to the company's alleged vulnerability at relevant times is addressed at 11.7.2. The following observations respond to ASIC's further submissions at APS [889]ff.

[3768] ASIC contended that if One.Tel's management were conducting the UK business on the basis that carriers would not be paid on strict contract terms and the company would not maintain a cash balance in the UK operations sufficient to enable all creditors to be paid, the board needed to be told that this was the basis upon which the operations were being conducted, so that the board could decide whether it was appropriate to do so: APS [891]. There is no evidence that the board had specifically required reporting of such matters, and so the issue is to be addressed as a matter of general board/management relations in a listed public company.

[3769] It seems to me that management's obligation to report such matters to the board, in the absence of specific instructions, cannot be expressed in categorical terms. If, for example, management adopted a general policy that they would not pay carrier creditors in accordance with contract terms in order to establish a pattern of tolerance that did not already exist, and that they would not maintain a cash balance anywhere in the corporate group at a level sufficient to pay the outstanding amounts if demanded, there would be a level of risk in the policy that would require that it be thoroughly considered by the board. If, on the other hand, management were simply dealing with each carrier creditor on its own terms, according to the issues between the carrier and One.Tel and without any general policy, there may be no obligation to report to the board a decision to pay the carrier outside contract terms, unless the decision put the company's interests at risk (as it presumably would, for example, if there was no industry practice of deferred payment and the carrier was providing essential services discontinuation of which would seriously damage the business). The present facts fall somewhere in between these examples.

[3770] Mr Rich said in cross-examination that the board was "well aware" of the historical pattern of payments to carrier creditors, which formed the basis for management's view that carriers would accept payment outside contract terms: T 11243. When asked whether he told the board about the matter at a board meeting, he said he could recall discussions before a board meeting and he mentioned the possibility that the matter was discussed in January (presumably at the January 2001 board meeting) and in the middle of 2000: T 11243. When he was asked about the matter subsequently, he said he had in mind "specific conversations that I had with various board members at various times": T 11271. When pressed, he said:

•: he recalled a conversation with Mr Packer Jnr about WorldCom and their billing, and the time it was taking to pay WorldCom (T 11272);
•: he had a general recollection of discussing with Mr Greaves and Mr Kleemann the extended terms that One.Tel was receiving, particularly from WorldCom but also from other carriers generally (T 11272);
•: his conversation with Mr Greaves was towards the end of 2000 when Mr Greaves visited One.Tel's Dutch and UK operations (T 11272);
•: his conversation with Mr Kleemann was towards the end of 2000, either before or just after Mr Kleemann had been to the UK, and it was a conversation about how the business had used the extended credit from carriers to assist funding its working capital (T 11273); and
•: he had a dim recollection of a general conversation on the subject with Mr Adler (T 11272), though he could not recall the specific conversation or exactly what time it occurred (T 11273).

[3771] ASIC invited the court to reject this evidence (APS [892]), on the basis that no such evidence was in Mr Rich's affidavit, he was unable when pressed to provide specific recollections, it was evidence favourable to his case and was uncorroborated. This is one of those occasions where I think would be unfair, given the nature and length of the trial, to hold these matters against an opponent. Further evidence and submissions are reviewed at 11.7.2. In all circumstances, I accept Mr Rich's evidence.

13.3.6 Disputes with creditors

[3772] As with Australian creditors (APS [839]), ASIC contended that One.Tel's disputes with UK and European creditors, or at least the bona fide disputes, were of a limited character (APS [894]). The evidence upon which it relied to support this submission was Mr Boaden's email of 1 May, evidence taken from ledgers to show that most of the amounts invoiced by the carriers were eventually paid, and Mr Werner's email of 23 May. I shall consider each of these in turn: also 11.4.3.

13.3.6.1 Mr Boaden's e-mail of 1 May

[3773] Mr Boaden sent an email to Mr Silbermann, Mr Rich and others on the subject "info for tomorrow" on 1 May 2001. The email attached an aged carriers report and other documents. He observed in the email that the aged carriers report was a model showing that the outstanding carrier amounts after paying down in April and May would be approximately £6.5 million, almost all of which was less than 60 days.

[3774] The attached aged carriers report listed amounts due, in various age bands, to named carriers, and there was a column headed "Disputed Amount", showing amounts for each carrier and a total amount of £3.99 million. ASIC pointed out (APS [897]) that the disputed amount is in addition to the "total" figure of £15.594 million. It submitted (APS [898]) that the disputed amount was only about 20% of the total due and overdue of £19.58 million (£15.59 million + £3.99 million).

[3775] On the other hand, the defendants pointed out (DPS [3249]) that according to the report, £8.7 million was between zero and 30 days "overdue". They pointed out that £5.3 million was attributed to two invoices said to be "overdue" on the BT carrier account. One of them, an invoice dated 12 April for £2.93 million, was shown in Mr Boade's table as "overdue" in the zero to 30 days column, reflecting the BT ledger (Ex DTB 14/5539), but in fact, as considered at 18.11.1, the contractual payment period was 30 days, and so the invoice had not become "overdue" 30 April at all (DPS [3251bi]. The other invoice, dated 13 March for £2.4 million, which appeared in Mr Boaden's table in the 30-60 days column, was in fact only about 2 weeks "overdue" at 30 April and was paid on 3 May, reflecting (according to the defendants) One.Tel's "go slow" on payments to BT, as explained at 18.11.1. Similarly, according to the defendants, an amount of £1.78 million shown as overdue to Global Crossing and an amount of £388,500 shown as overdue to Cable & Wireless were not in fact overdue, having regard to the correct payment periods, and an amount of £1.3 million for Global Crossing was only about 3 weeks "overdue" at the time the table was prepared and was in fact paid on 2 May. I agree with those submissions.

[3776] If all those invoices, totalling £8.8 million, are taken out of Mr Boaden's figures, the remainder of the total amount due is £10.78 million (£19.58 million-£8.8 million), and the disputed amount (£3.99 million) is about 37% of that remaining total amount. If the amounts falling due during April and paid in early May are left in the calculation, the total amount due is £14.48 million and the percentage recognised as in dispute is 27.5%, this being still a substantial amount.

[3777] Moreover, there is an issue as to the accuracy of Mr Boaden's figures, assuming that the UK aged creditors report at 30 April 2001 (Ex CE 6 0357) is correct. The defendants noted (DPS [3256]) that the total amount outstanding according to Mr Boaden's table, including the disputed amount, was £19.58 million, whereas the total of the amounts outstanding as at 30 April to the carrier creditors listed in Mr Boaden's table, as per the aged creditors report, was £17.39 million. They referred (DPS [3255]) to WorldCom, where the aged creditors report shows total outstanding debt at 30 April of £3.7 million, of which £3.2 million is "overdue", whereas Mr Boaden's table shows total debt outstanding to WorldCom as at 30 April (including the disputed amount) as £5.48 million.

[3778] ASIC responded by referring to reply Sch 2, which sets out a reconciliation between Mr Boaden's table, the aged creditors report relied upon by ASIC for the overdue debt and the ledger: ASR [3255-58]. I agree with ASIC that reply Sch 2 demonstrates that Mr Boaden's figures reflect the contents of the creditors ledger with respect to the six carriers with which the schedule deals. But reply Sch 2 does not deal with WorldCom.

[3779] If the aged creditors report is correct, Mr Boaden has overstated the amount of overdue to WorldCom by £2.3 million. ASIC seems to have confirmed this in its submissions in reply, in which said that the disputed amount of £2.4 million (presumably the amount listed by Mr Boaden as disputed for WorldCom) was an error: ASR [3255]. If £2.3 million is subtracted from the revised total amount of £10.78 million identified above, to produce a total amount of £8.48 million, then the recognised disputed amount is 47% of that total.

[3780] There are some indications that the amount in dispute at the end of March was probably higher, in proportion to the total amount owing, than as at 1 May. One matter is that during April, One.Tel received credit notes from carrier creditors totalling almost £800,000: Mr Rich, T 12548-55. Another is that One.Tel and WorldCom reached a commercial settlement in April, according to which One.Tel compromised claims against WorldCom for an agreed reduction in amounts outstanding to WorldCom. The defendants claimed that the reduction was £1.5 million (DPS [3259b]), but it appears that the correct figure is £0.5 million (ASR [3129(a)], [3259(b)]). If those two figures are added to the £3.99 million recognised as in dispute in Mr Boaden's table of 1 May, the total amount in dispute becomes £5.3 million, which is 62.5% of £8.48 million.

[3781] ASIC submitted that as the credit notes received in May were only for about £58,000 (Ex P93-714, cell F13), the court should infer that few of the disputes lying behind the £3.99 million in Mr Boaden's table had any substance (ASR [3259(a)]). But there could be many explanations for the slowing down of the issue of credit notes in May, given the decisions of the board on 17 May. I would not draw that inference.

[3782] The defendants' calculations serve to indicate, contrary to ASIC's submission, that the amount of carrier claims in dispute at 31 March was a significant part of the total amount.

[3783] ASIC also drew attention to Ernst & Young's review closing report for the half-year to December 2000, which said that the general rule applied by One.Tel in recognising disputed items in Europe was to recognise 60% unless there was compelling evidence that a higher recovery would be achieved: Ex CED 4-144. This seems to be correct.

13.3.6.2 Most of the carrier invoices were paid

[3784] Exhibit 93-708 is a set of tables prepared by ASIC showing "UK Carrier Creditors -- Payment Patterns", using information taken from UK aged creditor reports in the Carter Exhibits and payments shown in the Adept ledger. It is considered further at 10.20.1.3. ASIC submitted that the table shows that most of the amounts invoiced by the carriers were eventually paid. Pages 4 and following of the table allocate payments made in January, February, April and May 2001 to specified invoices from WorldCom, Global Crossing, GPS and BT and Colt respectively. The dates for the invoices are no later than March 2001. The amounts allocated to those invoices as payments are for varying percentages of the invoice amounts, invoice-to-invoice and month-to-month. Although one of the percentages is only 7.12%, most of them are over 90%.

[3785] The defendants submitted that the document shows there was a substantial withholding of disputed amounts from those invoices throughout the period, with such withholding not infrequently (as in the cases of WorldCom, Global Crossing and GTS) amounting to 10-30% of the invoiced amount: DPS [3260]. ASIC submitted that the withholding of payment for significant periods, followed by eventual payment, indicated that One.Tel was stalling and there were no bona fide disputes: ASR [3260]. But the position in respect of individual creditors, considered in Ch 18, seems to me to indicate otherwise in many cases.

13.3.6.3 Mr Werner's e-mail of 23 May

[3786] Mr Werner sent an email to Mr Silbermann on 23 May which attached some documents, one of which was entitled "UK Creditors Catch-Up.xls". After a table identifying creditors, total open amounts and the ageing of debts, there is a heading in the document "UK Creditors Catch Up Plan" followed by a subheading, "Aged Creditors as at 21st May '01", and then figures are given for total open amounts and due dates for categories of creditors such as "Capex & diallers", "COGS & Telephony" (evidently including carriers) and "Marketing". Payments for the remainder of May are set out and then figures "Open End of May" are set out, and similarly payments and open amounts in June and July are given, along with new invoices in those months.

[3787] The total amount open at the end of July for debt in the categories 90, 120 and 120+ was to be £1,087,963, of which only £346,911 related to carriers (COGS & Telephony). In other words, said ASIC (APS [902]), it was contemplated by the responsible officer as at 23 May that by the end of July virtually all of the amounts invoiced by creditors would have been paid by One.Tel, and moreover that payment process was to occur within the period from 23 May to 31 July.

[3788] The defendants pointed out (DPS [3261] and following) that the document was tendered only in late 2005, as part of Ex MTB 9, after Mr Werner's evidence had been taken in London, and there was therefore no opportunity for the defendants to test, by cross-examining its author, whether the document supported the inferences ASIC sought to draw. That is correct. They questioned whether adjustments or allowances had been made for disputes in the creditor listing with which the "plan" began, and whether the "plan" was prepared as Mr Werner's estimate of what was actually going to be paid to the creditors, as distinct from, for example, a "worst-case" scenario.

[3789] But as ASIC pointed out (ASR [3266(a)]), the opening figures in the document approximately accord with Mr Boaden's email of 1 May, and do not suggest that there was any allowance or adjustment to the balances. On the face of it, Mr Werner was putting forward a plan which amounted to following up on his earlier emails: in those emails he had postulated full payment of the carrier creditors in April, producing a large cash outflow in that month, as the foundation for discussion of how the payment of the carrier creditors would be addressed, and so on 23 May, after the change of control at One.Tel and at a time when presumably there was no longer any real prospect of detailed and informed discussion about carrier payments, he was presenting his own plan for paying down the carriers. The fact that Mr Werner was persisting, on 23 May, in the view he evidently took throughout March, April and May, that the carrier invoices should be paid in full, regardless of disputes, seems to me unremarkable. The evidence should not be interpreted as implying a determination, by someone fully aware of One.Tel's position vis-a-vis each carrier from whom payments had been withheld, that there was no bona fide basis for that withholding.

13.4 Conclusions as to creditors

[3790] A summary of my conclusions with respect to Australian and European creditors over the period from January to April is at 11.4.4. The considerations addressed at 13.2 and 13.3 have not altered those conclusions, for reasons I have explained. As regards March, I reiterate that:

(4)

according to the aged creditors report, Australian due and overdue creditors stood at $49.8 million at 31 March;

(5)

Mr Rich was not aware of creditors being paid outside One.Tel's normal payment practices;

(6)

a net adjustment for unpresented and unreleased cheques and unpresented deposits should be made by adding $9.6 million to total creditors, or subtracting that amount from total cash, at 31 March, but no adjustment is called for in respect of late posted invoices [for the purpose of my calculations, I shall subtract $9.6 million from the cash balance rather than adding it to creditors, since I do not have a reliable figure for creditors];

(11)

the Australian aged creditors reports are unreliable in ways that overstate the amount of due and overdue creditors, because of substantial errors in recording due dates of invoices, late posting of credit notes and failure to reconcile creditors' ledgers and purge the ledger of amounts no longer considered to be due;

(12)

even if they had been reliable, it would be wrong to interpret the Australian aged creditors reports as showing a steady rise in overdue creditors from January to April, having regard to the sharp decline from December to January, and a fairly stable level of creditors over 120 days;

(13)

what might appear to have been large increases in "overdue" Australian creditors in the period from January to April 2001 are substantially explained by recourse to a small number of disputed invoices for large amounts, including Telstra's roaming charges and the Optus GSM account (dealt with at 11.2.7 and 11.2.8 respectively);

(14)

the UK aged creditors reports are not generally unreliable, but the figures in the reports need to be adjusted to take into account the impact of foreign exchange movements and errors of due dates, with the result that "overdue" UK creditors stood at $70.2 million at 31 March 2001;

(15)

as at 31 March, non-UK European creditors over 30 days stood at between $15 and 21 million;

(16)

One.Tel adopted the practice of paying carrier creditors well outside contractual terms and, although the creditors did not agree to or generally acquiesce in that practice, there was a rational basis for belief, until about mid-April, that to adopt that payment practice was in the best interests of the company;

(17)

there were substantial disputes between One.Tel and Telstra, One.Tel and Optus, and between One.Tel and its European carriers, as well as many other disputes for smaller amounts;

(b)

in the case of both Australian and UK creditors, a substantial and unquantified adjustment is to be made to reduce the level of unpaid creditors by the disputed amounts, in order to identify creditors immediately payable;

(i): the amount of Australian and UK debt at 31 March should therefore be reduced by a substantial but unquantified amount reflecting disputes; and
(ii): the level of Australian and UK over 120-day debt can be taken as a guide to the total amount of disputed debt on the assumption, for this limited purpose, that the figures are accurate: over 120-day debt at 31 March stood at $15.5 million in Australia and $17.8 million in the UK.

13.5 Summary of Group financial position at 31 March

13.5.1 Cash usage

[3791] Group cash usage in March was $3 million according to the March board papers, as against a forecast in the January board papers of cash generation of $15 million, an $18 million variance. The group cash balance at 31 March was $69.2 million, against a forecast in the January board papers of $97 million, a $28 million variance. To the $69 million group cash balance one must add $9.6 million for unpresented cheques less unpresented deposits, in order to calculate available cash at the end of the month. The balance is $59.6 million.

13.5.2 Creditors

[3792] ASIC submitted (APS [927]-[928]) that:

(4): the Australian operations had at least $41 million in overdue creditors;
(5): the UK operations had at least $82 million in overdue creditors;
(6): there was at least another $15 million due or overdue in respect of the non-UK European operations;
(11): therefore in excess of $147 million was required to pay overdue creditors; and
(12): at 31 March the group had $69 million cash, which was nowhere near enough to pay overdue creditors.

[3793] See the summary of my conclusions at 13.4. The figure for Australian creditors is unproven and the figure for UK creditors is $70.2 million less a provision for disputes of, say, $17.8 million, a balance of $62.4 million. One.Tel was paying most of this debt on "usual business terms" beyond contractual terms, and therefore substantially less than this figure was required to be paid at the end of March. Considerations regarding usual business terms and disputes also apply to the non-UK European creditors.

[3794] ASIC also contended (APS [928]) that in addition to the amount required to pay overdue creditors, a buffer of at least $50 million was needed in order to cover the mid-month low point and to cover contingencies. The proposition that such a buffer was needed is supported by the evidence. According to Mr Rich's evidence, he told Mr Packer Jnr on about 20 February 2001 that the mid-month cash flow point was $20-$30 million (1 JDR 1121b), and he told Mr Murdoch Jnr that $50 million would provide a good buffer until the timing issues were sorted (2 JDR 1538). Mr Murdoch Jnr said that on about 9 May Mr Packer Jnr told him that there were spikes of about $20 million in the cash flow and a buffer was needed: affidavit of 24 May 2002, para 22. Mr Yates told the board meeting on 28 May that due to movements in the monthly cash, a monthly buffer of $30 million was required: Ex CED 16-27. Mr Phillip, general counsel of News, made provision for a buffer of $30 million when he set out the "anticipated Management high case" (Annex A to Mr Murdoch Jnr's affidavit of 21 July 2005, admitted subject to a limitation of use order). I consider ASIC's equivalent submission with respect to February at 11.6.3, and where I conclude that the submission has been made out. It is also made out in respect of March. In neither month is a buffer written into ASIC's calculation of the cash requirement.

[3795] ASIC pointed out (APS [929]) that the cash balance fell rapidly after 31 March (as shown by intranet figures that Ex CED 4-60, 61): $47.2 million on 4 April, $41.3 million on 5 April and $33.1 million on 9 April. This, it said (APS [930]), was not as a result of any substantial inroads being made into the amount of overdue creditors, as there was no significant reduction in creditors by 30 April (Ex CED 11-1, which is a table prepared by Mr Carter from the Australian and UK creditors ledgers showing that "overdue" creditors stood at $132 million on 31 March and $137 million on 30 April).

13.5.3 Earnings

[3796] ASIC submitted (APS [931]-[933]) that:

(4): the first half EBITDA earnings were about $42 million down on the September budget;
(5): the January earnings were down on the September budget by $22.5 million, February by $19 million and March (when subsequently known) by $5.6 million; and
(6): the year-to-date earnings to the end of March were down on the September budget by about $89 million.

[3797] March earnings are dealt with at 20.2.2.

13.5.4 Debtors

[3798] ASIC submitted (APS [934]) that the provision for doubtful debts was inadequate to a significant extent. That matter is dealt with in Ch 19, where the conclusion is drawn that ASIC has not proven its pleaded case.

13.5.5 Cash requirement at 31 March

[3799] The following table compares ASIC's submissions (APS [934A]) concerning the March group cash requirement with the submissions within ASIC's pleading. ASIC submitted (APS [98]) that the cash requirements indicated in the table at [934A] are in the vicinity of the cash requirements of $287 million contained in the particulars to para 11a of the statement of claim, and in excess of those were pleaded in the "Contraventions" section of the statement of claim at paras 22(d) and 32(d). ASIC invited the court to conclude that the cash requirements were approximately or in excess of those set out in the statement of claim, after taking into account the need for a buffer and the debt to non-UK European creditors.

Table 13.1: March Group Cash Requirement (ASIC submissions & pleading)
	ASIC submissions ($m)	statement of claim ($m)
Available cash balance	60	58
Aust overdue creditors	(41)	(50)
UK overdue creditors	(82)	(82)
Possible claims against suppliers	9	9
Monthly cash usage from operations at $20m per month to 30 November	(160)	(160)
Toronto Dominion loan repayment	(50)	(50)
Lucent lease repayment	(12)	(12)
Cash requirement to November	(276)	(287)

[3800] I shall address each of these lines. Although there is a difference of $11 million and differences in the composition of the total figures, ASIC submitted that there is no material difference between the figures in the pleading and in its submissions: ASR [3304]; compare DPS [3304] and following. Were it necessary to make a finding on that matter, I would agree with ASIC. The table is closely similar to ASIC's table of cash requirements as at the end of February (APS [393A]), which was the subject of consideration at 11.6. As to many of the items in the table, the same reason applies in February and March (and also April).

[3801] The available cash balance of (rounded) $60 million is the intranet balance less unpresented cheques, and is correct. The $8 million "pledge" has not been deducted (APS [936]), as ASIC has conceded that the evidence does not establish its existence prior to the end of April: APS [396].

[3802] The figure for Australian overdue creditors cannot be accepted as proven because it relies on an Australian aged creditors report and I have found that these reports are unreliable. My finding in relation to February (11.6.8) was "not known" and that must be so here as well.

[3803] It is convenient to deal with monthly cash usage before considering UK overdue creditors and possible claims against suppliers, for reasons that will become evident from my explanation. At 11.6.5.7 I express the conclusion that, for the purposes of the February cash requirement, the monthly cash usage for the nine months from March to November inclusive should be calculated by using the Miller/Green forecasts of 8 May. I adopt, for the February cash requirement, a range from the unadjusted management figures supplied to Mr Miller and Mr Green (the more optimistic end of the range) to the PBL adjusted figures (the more pessimistic end of the range). That approach produces a cash usage for the nine months in the range from $22.7 million (unadjusted) to $97.4 million (PBL adjusted). I shall apply the same approach in calculating the March cash requirement. Using the figures in the table at 11.6.5.7, the usage for the eight months from April to November inclusive is $22.4 million (unadjusted) to $97.1 million (PBL adjusted).

[3804] As to UK overdue creditors, the figure in the UK aged creditors report for 31 March was $82.2 million (as per App I-6 to Mr Carter's principal report), but I have held that the ledger misstated the due dates of invoices for some unimportant creditors. In reply Sch 3, ASIC calculated that if (contrary to its submissions but in accordance with my findings) the due dates were misstated as alleged by the defendants, the effect would be that the aged creditors report for 31 March would overstate the amount of overdue creditors by $12 million. I accept that calculation for the reasons given at 11.3.1.2. Consequently the UK overdue creditors figure should be $70.2 million, subject to the adjustment to which I shall now turn.

[3805] For the purposes of calculating monthly cash usage I have used the Miller/Green draft report of 8 May 2001, as noted above. The cash flow figures used by Mr Miller and Mr Green made provision for a very large payment of European creditors in April, recorded in the Miller/Green spreadsheet (Ex CED 15-1) as a decrease in creditors of $20.27 million. That correlates with Mr Werner's emails of 25 and 26 March and 9 April, considered at 12.9.2.1-12.9.2.4. Mr Werner was hypothesising full payment of the carrier creditors in the month of April, thereby largely eliminating overdue UK and European debt, regardless of disputes and normal payment terms.

[3806] As explained at 11.6.5.7, it is necessary to make a further adjustment to the UK overdue creditors figure in the calculation of the cash requirement, in order to avoid the double counting. Since the calculation of the monthly cash usage took into account the large cash outflow in April to pay the European creditors, the amount of those debts (or more precisely the amount of payment of those debts) contributed to the size of the monthly cash usage figure. Therefore those creditors should not be counted again in the UK overdue creditors line in the cash requirement table.

[3807] Consequently, following the approach taken in the findings at 11.6.5.7 and 11.6.8 as to the February cash requirement, I shall reduce the UK overdue creditors at the end of March from $70.2 million to either $49.9 million or $57 million, depending upon whether the net reduction in UK creditors was the full amount provided for by Mr Miller and Mr Green ($20.3 million) or the revised figure I suggested at 11.6.5.5 of $13.2 million.

[3808] As to possible claims against suppliers, at 11.6.4.7 I make findings as to the level of unresolved Australian disputes ($13.35 million in February, $14.25 million in March and $17.75 million in April), and as the level of unresolved UK disputes ($18.2 million in February, $17.8 million in March and $17.75 million in April). The total disputed claims, adding the Australian and UK monthly figures together, are $31.55 million in February, $32.05 million in March and $35.85 million in April. However, an adjustment is needed because of the evidence upon which I have relied in order to calculate monthly cash usage and UK overdue creditors. The monthly cash usage figures treats most UK overdue creditors as paid in April, and therefore I have removed them from the UK overdue creditors line in the cash requirement calculation. That affects the provision for claims against suppliers, which needs to be reduced to reflect the fact that some of the claims to be paid in April were disputed claims.

[3809] If one accepts the Miller/Green figure of $20.3 million as the amount of extraordinary payment to European creditors in April, then the most straightforward, though admittedly only approximate, method of reducing claims against suppliers is to remove the UK element of the composite figure. In March, the total figure was $32.05 million and the European component was $17.8 million. If the European component is removed, the figure for claims against suppliers at the end of March is reduced to $14.25 million. If, however, one takes the view that I suggested at 11.6.5.5, that the amount by which European creditors were paid down was only $13.2 million, then (following the approach taken for February at 11.6.5.7), I shall reduce the composite figure for disputed claims of $32.05 million by a figure calculated by multiplying the estimated value of UK claims, namely $17.8 million, by the ratio that 13.2 bears to 20.3. The result of the calculation is that the total amount of disputed claims is to be reduced by $11.57- $20.48 million.

[3810] Therefore, I find that the provision for claims against suppliers in the March cash requirement is in the range from $14.25-$20.48 million.

[3811] As to the Toronto Dominion loan repayment, the matter is considered at 18.7 and 11.6.6. My conclusion is that the cash requirement at the end of March, like the cash requirement at the end of February, should not include provision for repayment of the Toronto Dominion loan.

[3812] As to the Lucent lease repayment, the matter is considered at 18.6 and 11.6.7. For the reasons given there, the cash requirement at the end of March, like the cash requirement at the end of February, should not include provision for the Lucent lease repayment.

[3813] ASIC noted (APS [935]) that its calculations made no provision for the buffer that was undoubtedly necessary for the proper conduct of the group's business, in the order of $50 million, as noted above. Further, no provision was made in the figures for the payment of an amount of at least $15 million that was overdue to non-UK European creditors. But it did not propose to include figures in its cash requirement table to reflect these matters, and therefore the court will not make provision for a buffer or for non-UK European creditors.

13.5.6 Conclusions as to the cash requirement

[3814] The following table sets out ASIC's submissions and the court's findings as to the February Group cash requirement:

Table 13.2: March Group Cash Requirement (ASIC submissions & court's findings)
	ASIC submissions ($m)	Court's findings ($m)
Available cash balance	60	60
Aust overdue creditors	(41)	Not known
UK overdue creditors	(82)	(57) or (49.9)
Possible claims against suppliers	9	20.5 or 14.2
Cash usage from operations to 30 November	(160)	(22.4) or (97.1)
Toronto Dominion loan repayment	(50)	--
Lucent lease repayment	(12)	--
Cash requirement/surplus to November	(276)	Range from 1.1-(73.6), also unknown Aust overdue creditors not > ($ 41m)

[3815] ASIC has not proven its case.

13.5.7 Board's knowledge

[3816] In part, ASIC's allegations that the board was not informed of the true financial position of One.Tel were considered and rejected at 11.7: see also the discussion at 12.10.1.2. The present section deals with evidence and submissions concerning the directors' state of knowledge specifically at the time of the March board meeting. In response to ASIC's allegations that the board was not adequately informed of the true financial position at the March board meeting or in the March board papers, the defendants referred (DPS [3310] and following) to evidence of three kinds: relating to briefings of individual directors before the meeting, relating to the contents of the board papers, and relating to the discussion at the meeting. I shall take those matters in turn.

[3817] The evidence about briefings related to Ms Kekalainen-Torvinen and Mr Howell-Davies, Mr Packer Jnr and Mr Kleemann, and Mr Greaves and Mr Adler.

[3818] In the days before the board meeting, Mr Howell-Davies and Ms Kekalainen-Torvinen were in the London office of One.Tel, where they received briefings on the European businesses: Mr Howell-Davies at UK T 88-9; 2 JDR 1265. The briefings included marketing strategy (including installation of diallers in the UK and the use of prepaid advertising), billings and collections, One.Tel's procedure for reconciling carrier invoices against CDRs, and a review of disputes with carriers: 2 JDR 1267; Mr Howell-Davies at UK T 88-9. Mr Rich took them through the board papers on the day before the meeting, when they discussed the Australian operations, including the build-out of the Next Generation network, billing issues in Australia, issues with Telstra over the late delivery of call data and delays in providing e-bill, problems with the Lucent mediation device, and the billing delays in February: Mr Howell-Davies at UK T 102-5; 2 JDR 1270. There was also a dinner on the evening before the board meeting, attended by Mr Howell-Davies, Ms Kekalainen-Torvinen, Mr Rich and his wife, at which according to Mr Rich, here Mr Howell-Davies discussed One.Tel's dissatisfaction over BT with respect to the dialler rebate: 2 JDR 1272; compare Mr Howell-Davies at UK T 107.

[3819] Mr Howell-Davies had already conducted his "due diligence" on One.Tel before accepting a board position, including a briefing by Mr Weston: UK T 49-58. He confirmed that he was given free rein to speak to the managers of the various businesses and he found them very responsive to his requests for information: UK T 53-4.

[3820] Mr Packer Jnr had a conversation with Mr Rich about the topics in the board papers, shortly before they were sent out. They discussed the shortfall in billings and the fact that the billing team had found a large quantity of unbilled call data, and Mr Rich suggested that Mr Kleemann be sent out to One.Tel for a briefing on the issue: Mr Packer Jnr at T 9554; 2 JDR 1260. That is in the context that Mr Packer Jnr and Mr Kleemann had been receiving daily briefings from One.Tel since late January. After Mr Packer Jnr received the board papers, he and Mr Rich spoke again on the telephone and they went through the board papers, with Mr Packer Jnr asking questions that indicated he also had the January board papers in front of him: Mr Packer Jnr at T 9555, T 9559; 2 JDR 1262. On the morning of the board meeting, Mr Kleemann met with Mr Silbermann and went through the board papers for two hours: MS 356; Mr Kleemann at T 6139, T6323, T 6326-7; Ex DTB 4/1477. Mr Hodgson and Mr Beck also attended at least part of the meeting, to discuss the shortfall in billings: MS 357-9. The topics discussed also included forecast cash flow and EBITDA to 30 June and a higher than normal level of direct debit dishonours during March: MS 360-1.

[3821] Mr Greaves and Mr Adler went through the board papers with Mr Rich on the telephone prior to the board meeting: 2 JDR 1263. Mr Greaves also came into One.Tel's offices before the board meeting and spent some time with Mr Keeling and Mr Silbermann, going through the board papers: MS 362.

[3822] I agree with the defendants (DPS [3311]) that this evidence justifies the general inference that by the time of the board meeting, the non-executive directors were well-acquainted with the matters dealt with in the board papers and had discussed them with the one or several members of the One.Tel senior management team. Additionally, I note that the February flash report sent to directors on 5 March (Ex MTB 1/381B) explained the shortfall of $18 million in the group cash balance at the end of February as due to the deferral of billing for 2 weeks in late January/early February, and said that billing would be up-to-date by mid-March, with the receipts shortfall being recovered in March and April.

[3823] The contents of the board papers are reviewed at 12.10. As regards the issues about cash flow and backbilling raised in ASIC's final submissions, the defendants noted (DPS [3312]) the following aspects of the board papers:

(4): a degree of focus on the forecast position for the final quarter of the 2000/2001 financial year, including a "Comparison to Market Estimate" table (Ex MTB 1/228) and a series of tables showing actual and forecast performance of the group's businesses on an annual, half-yearly, quarterly and monthly basis across a range of operational and financial parameters, including EBITDA and cash flow (Ex MTB 1/229-234);
(5): the Financial Executive Summary (Ex MTB 1/227) identified a shortfall of $23 million in the estimated cash balance at month-end ($91 million as against $114 million in the January board papers), compared with the forecast figure in the January board papers, and gave an explanation in summary terms referring to a shortfall in billing run totals, and direct debit dishonours in March being 80% higher than normal, and (elsewhere: Ex MTB 1/241) $40 million of unbilled call data in period from December 2000 to March 2001;
(6): there was a breakdown of monthly cash flows (actual and forecast) for 2000/2001 and 2001/2002 in the Cash Flow Forecast Summary (Ex MTB 1/235), which indicated that the actual cash flows for February and March has fallen short of the January forecasts, principally in the Australian businesses, so that on a group basis the shortfall was $23m for February and $18 million for March;
(11): the "Notes to Cash Flow" (Ex MTB 1/236) drew attention to variances in the forecast full-year cash flows for business segments, as between January and March forecasts, the total variance on a group basis being additional cash outflow of $24 million forecast in March, with the variances being explained in summary form (Australia: down $9 million, due to unidentified billing shortfall currently being investigated; Next Generation: down $28 million, due to higher roaming and COA, fewer post-paid customers and identified billing shortfall; Europe and Hong Kong: ahead by $13 million, due to foreign exchange rate movement and assets from previous year vendor financed current year); and
(12): two major items considered to be potential "downside to cash flow" were identified, namely "Telstra local call pricing" at $9 million and "KPN preselection claim" at $8 million: Ex MTB 1/236.

[3824] Cash flow, billing and collections were topics of discussion at the board meeting itself. The major topics discussed at the board meeting included the outlook for the year to 30 June 2001, in terms of financial measures including cash flow and EBITDA (Mr Howell-Davies at UK T 111; 2 JDR at 1277a), and billing (particularly the billing catch-up after the February delay and the proposed billing during April of the $40 million of unbilled data: 2 JDR 1277c; Mr Howell-Davies at UK T 113; Mr Packer Jnr at T 9576. Mr Weston addressed the board about the outlook of the UK and other European businesses, and Mr Keeling reported on the group's financials, and Mr Beck gave an update on billing. Mr Hodgson and/or Mr Keeling spoke to the higher than normal level of direct debit dishonours in March. Mr Hodgson spoke about collections and the rise in 90-day debt, and the engagement of Vectus to improve the collections effort: Mr Howell-Davies at UK T 133-5; 2 JDR 1291.

[3825] The defendants submitted (DPS [3314]) that, in view of the contents of the board papers and the discussion at the board meeting, by the end of the meeting the directors well understood that:

(4)

the cash flow of the group during February and March had been lower than forecast in January, due primarily to billing delays, higher than normal direct debit dishonours in March and the shortfall in billings;

(5)

the forecast cash flow of the group for the full dear was $23 million lower as at 30 March than it had been at the date of the January board meeting;

(6)

the forecast cash flows to year-end, in addition to a raft of assumptions as to the operating performance and competitive environment of the businesses over the remainder of the year, also incorporated assumptions as to:

(7)

the ability of the company to identify, process, bill and then collect the $40 million of unbilled call data referred to in the board papers;

(8)

incremental collections from the increased collections effort flagged under the heading "Collections" in the One.Tel Australia section of the board papers;

(9)

the collection of direct debit dishonours due to be re-presented in April;

•: the absence of further delays or disruptions to billing during the balance of the financial year;
: receipt of $9 million in settlement of the dispute with Telstra over local call charges; and
(iii): receipt of $8 million in settlement of the dispute with KPN over preselection.

[3826] I agree with these submissions. However they do not answer the specific submissions by ASIC about the board's lack of knowledge at the end of March. ASIC made the following submissions as to the board's state of knowledge:

(4): Cash: in the March board papers the board was informed that cash at month-end was estimated to be $60 million (Ex MTB 1/227), and in fact it was $69.2 million (Ex CED 4-61);
(5): Creditors: the board was not aware of the overdue creditors;
(6): Earnings:
(7): the fact that the first half earnings fell short of the September budget by about $42 million was not pointed out to the board;
(8): the board was not aware of the actual earnings for January and February or the fact that they fell short of the September budget by $41.5 million;
(9): the board was given no indication that the March earnings were likely to fall well short of the September budget or that the year-to-date earnings to 31 March were likely to be vastly short of the September budget;
(11): Debtors: the board was not told that the provision for doubtful debts was inadequate, and it was in fact told the opposite by the March board papers (Ex MTB 1/252, where it was said that the provision was adequate).

[3827] My findings have the following consequences, which summarise the detailed findings I have made. First, (a) is correct and not controversial.

[3828] As to (b), the board was not informed of the actual amount outstanding to creditors according to strict contract terms in the March board papers or at the March board meeting. However, ASIC's allegations about the true position do not take account of usual business terms of payment, and disputes (see 11.4), and they rely on figures prepared by Mr Werner which were only drafts of a business plan in which carrier claims were loaded into April without regard to these matters, as the basis of the discussion: see 12.9. While there is no evidence that total creditor figures were given to the board members at the March board meeting, the evidence concerning disclosure at and prior to the March board meeting (summarised above) indicates that there were discussions between One.Tel management and various directors before and at the board meeting in which carrier disputes were reviewed, and billing issues in the Australian operations were discussed,. That implies that the central issues regarding carrier creditors, relating to the substantial level of disputes and inaccuracies of CDRs, were discussed with individual directors or their representative (in the case of Mr Packer Jnr and Mr Murdoch Jnr, by means of the discussion with Mr Kleemann) prior to the meeting, and to some extent at the meeting itself. It was open to any director to ask for the figure for total creditor, s but there is no evidence that any of them did so.

[3829] As to (c), the board was in fact aware of the September budget figures because they were provided in the September board papers. There was no obligation on management to remind the board of those figures, particularly since the budget had been superseded in the meantime. The board was given actual EBITDA figures for January and February in the March board papers: Ex MTB 1/232. ASIC's contentions are wrong.

[3830] As to (d), the board was not told in the March board papers or at the March board meeting that the provision for doubtful debts was inadequate because management believed on good grounds that the provision was adequate, though it needed to be reviewed at year-end. ASIC's contention is wrong.

13.5.8 Consequences of financial position

[3831] ASIC submitted (APS [945]) that, as had been the case to the end of February, the group was in a disastrous financial state at the end of March. It claimed that neither the board nor the market had been told that that was so, and that a contrary picture was painted to the board in the March board papers and at the March board meeting, and to the market in the 4 April announcement. It claimed (APS [946]) that without a massive injection of funds the group was doomed to collapse, and that its position declined further after March, through until the administration intervened at the end of May. Disclosure to the March board meeting is considered at 12.10, and the financial position of One.Tel at 31 March is addressed earlier in the present Chapter. ASIC's submissions are not accepted.

[3832] ASIC repeated the submissions about the consequences of One.Tel's financial position that it made in respect of the period to the end of February, which I have dealt with at 11.8. My conclusions with respect to February are also applicable with respect to the financial position at the end of March, except that the cash requirement at the end of March had deteriorated from February. At the end of February the forecast cash position to November (excluding Australian creditors) was somewhere between a cash surplus of $17 million and a cash requirement of $58 million, and by the end of March the range was somewhere between a cash surplus of $1 million and a cash requirement of $74 million. Even if ASIC's figures for Australian creditors were accepted, the cash requirement would be nowhere near ASIC's figures, namely a February cash requirement of $270 million and a March cash requirement of $276 million.

[Chapter 14 (paragraphs [3833]-[4286]) is not reproduced. It sets out the relevant evidence relating to April 2001. The chapter is summarised at [7481]-[7496]. The court's conclusions regarding One.Tel's financial circumstances is set out in Chapter 15.]

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

15.1 Cash position

15.1.1 April cash usage

[4287] The starting point for ASIC's submissions on the end-of-April cash position (APS [1316]) was that the group cash usage for the month was $27.22 million. This is calculated, correctly, by subtracting the closing intranet group cash balance on 30 April ($42.0 million; Ex CED 4-58) from the closing intranet balance on 31 March ($69.22 million; Ex CED 4-61). The March board papers had forecast group cash usage of $8 million for April and a cash position at the end of April of $53 million: Ex MTB 1/235.

[4288] The defendants submitted that the principal reason for the lower than forecast cash flow in April related to the international businesses, and was produced by the tightening of credit terms by some carriers, in particular WorldCom and Global Crossing in mid-April: DPS [3855]. The issue is considered at 13.3.5.1 and 14.12.

[4289] ASIC identified four factors that, in its submission, made One.Tel's financial position even worse than the calculation of cash balances suggested. These four factors related to deferral of Australian creditors, deferral of European creditors, UK financing receipts and pledged cash.

15.1.1.1 Deferral of Australian creditors

[4290] Schedule 8 to ASIC's principal submissions is a table prepared by ASIC identifying differences in the April forecasts between the Australian spreadsheets 0204.xls and 2905.xls. It is a schedule to submissions, presumably because it was not completed in time to be tendered as part of Ex P93. That does not affect its status since, as I have explained, Ex P93 is essentially a set of financial submissions prepared by ASIC in tabular form. ASIC submitted (APS [1317]) that Sch 8 shows that the poor actual cash usage result in April was arrived at after substantial deferrals of creditors, and would have been much worse if those deferrals had not occurred.

[4291] ASIC made the following submissions concerning the schedule (APS [1318]):

(iv)

"Actual" inflows from operations, taken from 2905.xls, were very close to the forecast in 0204.xls, in fact $505,973 higher. But that is after taking into account the receipt of $7.48 million, which was the transfer of money from the Lucent handset fund. That was not forecast in 0204.xls, and if the transfer had not occurred then the "actual" would have been substantially down on the forecast. That submission is correct, although I have found that the transfer of the handset fund was permissible by way of reimbursement of expenditure One.Tel had already incurred on handsets.

(v)

The forecast inflows figure in 0204.xls was reasonably accurate, subject to (1) above, but Mr Silbermann subsequently increased the inflows forecast to $65.04 million in 0304 amended.xls, as shown in Ex P93-719A.

(i): The figure for inflows less all outflows in 0204.xls was negative $37.97 million, compared with negative $8.08 million in 2905.xls, a difference of $29.89 million. ASIC submitted that as the inflows were $0.5 million more than forecast, the outflows must have been about $30.4 million less than forecast. That difference was partly explained by the fact that GSM interconnect revenue was according to 2905.xls about $4.65 million less than had been forecast in 0204.xls. The remainder of the explanation was that some creditors forecast to be paid in 0204.xls were not paid according to 2905.xls.
(ii): ASIC summarised the principal creditors forecast to be paid but not paid as follows, in reliance on the schedule:

Optus Digital	$10.3 m
Telstra Resellers	$7.1 m
Dealers	$1.25m
Telstra Roaming	$11.47m
Inventory	$2.2 m
Lucent Rental	$4.5 m
Total	$36.46m

[4292] The defendants raised an issue about the status of 0204.xls, submitting that Ms Randall gave no evidence about that spreadsheet except that it was prepared at a time when she was still preparing her April forecast: T 5033, T 5050, T 5035-6. But in her first affidavit she said that on about 23 March she prepared a monthly forecast for April and incorporated it into the daily cash flow spreadsheet, and later in March, she ascertained that the forecast cash usage for April was $53 million, and thereafter she unsuccessfully attempted to achieve the $40 million reduction in cash usage which (she said) Mr Silbermann and Mr Hodgson had told her was required: affidavit, paras 43, 47-8. This led to the preparation of 0304 amended.xls (T 5035-6), which is considered in some detail at 12.8. ASIC submitted that it followed from Ms Randall's evidence that 0204.xls was a very advanced forecast for April, and in any event it was not significantly different from 0304.xls: ASR [3857(a)]. However, "advanced forecast" though it may have been, it was an interim forecast quickly superseded and therefore evidently in the nature of a working draft, as Ms Randall continued her efforts to improve cash flow figure. It does not have any significant status as a management forecast, and that suggested ASIC was not justified in using it as a baseline for submissions about deferral of creditors. Not surprisingly given its status, it contains round figures that appear on their face to be estimates.

[4293] The defendants made the following submissions about the creditors listed by ASIC at (4) above (DPS [3857d]):

(16): the Optus digital payment in April was withheld and then partly paid in the circumstances of One.Tel's dispute with Optus as to missing CDRs, considered at 18.5;
(v): the Telstra resellers amounts were not paid because of a credit from Telstra as an interim settlement of the local call dispute, considered at 18.4;
(vi): the amounts forecast for dealers in 0204.xls which were not paid included amounts that were obviously estimates (such as weekly "commission" payments of $199,000 and a forecast "airtime" payment of $600,000);
(vii): the Telstra roaming amounts were not paid because of the dispute with Telstra in that regard (see 18.4);
: the amounts forecast for inventory payments in 0204.xls comprised weekly estimates of $900,000; and
(iii): the amounts forecast for payment in the "Periodical Payments -- rental" line in 0204.xls comprised a single rounded payment of $4.5m on the last day of the month, evidently an estimate, and if that amount related to Lucent as ASIC assumed, it was almost certainly not paid because of the agreement by Lucent to defer such payments until July, when One.Tel expected to be able to offset them against the damages it claimed against Lucent: see 18.6.

[4294] The defendants' observations are correct, in my view. The consequence is that while the April cash flow figures need to be adjusted for the creditor payment was due and payable but not paid, in order to calculate available cash at the end of the month, there is real doubt about the amount of the adjustment in respect of amounts that were merely estimated or subject to dispute.

[4295] ASIC also referred (APS [1319]) to Ex P93-738, another ASIC table, which presents a comparison of April cash flows between 2403C.xls and 2905.xls. ASIC drew attention to the following:

(16): inflows from operations in 2905.xls were $30.98 million less than forecast in 2403C.xls, even after including the $7.48 million inflow representing the withdrawal of the handset fund;
(v): airtime services expenses in 2905.xls were $19.92 million less than forecast in 2403C.xls:
(vi): the expense for Telstra Roaming in 2905.xls was $10.48 million less than forecast in 2403C.xls;
(vii): there were no rental payments to Lucent in 2905.xls, whereas 2403C.xls forecast payments of $7.5 million;
: overall, outflows from operations according to 2905.xls were $18.44 million less than forecast in 2403C.xls, and non-operating outflows according to 2905.xls were $17.84 million less than forecast in 2403C.xls (the latter figure takes into account the fact that GSM interconnect revenue was down $4.65 million on forecast);
: if the shortfall in GSM interconnect revenue is disregarded, the total outflows (that is, outflows from operations plus non-operating outflows) in 2905.xls were $40.93 million less than forecast in 2403C.xls.

[4296] I note that the differences in airtime services expenses, Telstra Roaming and rental payments to Lucent add up to $37.9 million, so those items largely account for the difference in total outflows specified above. Other differences can be identified in Ex P93-738. ASIC also referred to Ms Randall's deferred payments listing for April, which identifies $25.63 million in deferrals: Ex CED 6-2. Again, as with the submissions at APS [1318], the comparisons made at APS [1319] identify matters that were subject to substantial disputes.

15.1.1.2 Deferral of European creditors

[4297] Earlier I referred to the $7.66 million difference between Mr Werner's cash flow of 2 May and the Global Forecast for May, and the evidence of discussions between Mr Silbermann and Mr Werner, which evidently led to substantial payment deferrals from April to May: 14.29.3.2. ASIC relied on this evidence to show that there were substantial deferrals of European creditors at the end of April: APS [1321]. It also pointed to cellnote 10 in Mr Werner's cash flow of 24 April, submitting that this gave an insight into the extensive deferrals of creditors that were occurring in the UK.

[4298] I am not sure how much significance to attach to that cellnote, but clearly enough there were some deferrals of payment of European creditors at the end of April, in circumstances of tight cash and anticipated inflows, including a substantial inflow by way of funding from the major shareholders. On the other hand, as the defendants pointed out (DPS [3858]), payments to carriers in the UK in April were £11.3 million, compared to the average over the preceding nine months of £5 million (Ex P39), so that the UK business paid down "overdue" creditors during April by a substantial amount. The defendants claimed that the amount of reduction during April was $20.3 million, but see the discussion at 11.6.5.5, where I suggest a net figure in the UK of $13.2 million, still a sizeable amount. Additionally, as the defendants point out by reference to Ex P93-707, payments to creditors in the Netherlands in April were $12.7 million, almost double the average of $6.4 million over the preceding seven months; payments to carriers in France in April were 30% higher than that average, and payments to carriers in Germany in April were more than double the average.

15.1.1.3 UK financing receipts 30 April

[4299] Senior counsel for the defendants suggested to Mr Packer Jnr in cross-examination that in the meeting on 12 April in the office of Mr Packer Snr to discuss One.Tel's cash position, Mr Rich said that One.Tel was expected to receive $10 million from Mantek for dialler finance by the end of the month, and Mr Packer Jnr said he could vaguely recall something like that: T 9590. The Carrier Presentation of 5 June attaches an appendix (App 3) which presents a cash flow. The "Finance Lease receipts" line has an entry of £3.04 million for "Actual-April". At the April conversion rate of 2.843 taken from App I-1 to Mr Carter's principal report, that becomes $8.63 million. It seems reasonable to infer that this was the Mantek finance to which Mr Rich referred, which did indeed arrive before the end of the month of April as he foreshadowed.

[4300] ASIC's submission (APS [1326]) was that the Mantek receipt should not be regarded as part of the ordinary operational receipts of One.Tel, and therefore it would need to be disregarded in assessing the operational cash flow in April. ASIC noted that at the 17 May board meeting Mr Beck reported that there had been a tightening of vendor finance and he was of the view that no further funding was possible in this area: Ex MTB 1/331. On the other hand Mr Rich gave evidence: 2 JDR 1657, T 12555-7 that One.Tel often financed capital equipment purchases using vendor finance from companies such as Cisco and Compaq, or third-party equipment leasing finance such as the dialler finance in the UK from Mantek. Mr Silbermann gave similar evidence: MS 1029a. I did not have the benefit of accounting evidence on the proper treatment of such receipts in calculating operating cash flow, but it seems to me that it would be odd, if the expense of acquiring assets turned over in the company's business, such as the diallers supplied the UK customers of One.Tel, were treated as depleting operational cash flow, to exclude the financing receipts for those assets.

15.1.1.4 Pledged cash

[4301] At 22.2.1.1, I reviewed the evidence that there was a "pledge" of European cash of about $8 million. My conclusion was that from about late April an amount of about $8 million was the subject of rental bonds or other guarantees in respect of leases of European office premises. The defendants made submissions (DPS [3860]-[3869]) generally to the effect that the witnesses called by ASIC who could have given some evidence about the pledges were not asked to do so, and that the evidence relied on by ASIC to support its claim, that from late April about $8 million of One.Tel's UK cash could not be used for general purposes, was insufficient. I agree that the evidence identified by the defendants and the further evidence identified by ASIC at APS [1327] and [1435] is not strong, but on balance and for the reasons more fully given at 22.2.1.1, I have concluded that ASIC's claim is correct. Consequently, as ASIC pointed out at APS [1328], out of One.Tel's Group cash of $42 million at the end of April, $8 million was unavailable for general purposes.

15.1.2 May/June forecast

[4302] As to May, ASIC referred (APS [1329]) to the Global Forecast (Ex P91), which forecast a group cash outflow in the month of $752,600. ASIC criticised the Global Forecast on the ground that it was built upon unrealistic assumptions as to inflows and outflows, and said that if it were right, the forecast was about $15m below the forecast in the March board papers of group cash generation of $14 million in May: Ex MTB 1/235. ASIC described the group's cash position at the end of April as "disastrous" (APS [1330]), said this was illustrated by the fact that the group cash balance plummeted from $42.0 million at the close of business on 30 April to $9.07 million on 17 May (of course, that submission selects the low point of the month of May), the outflows on 2, 3 and 4 May having totalled $47.5 million.

[4303] As to June, ASIC referred (APS [1331]) to the daily cash flow spreadsheet 2704jrmssh-new.xls, which forecast net outflows for Australia of $19.1 million, leaving an Australian cash balance at 30 June of negative $2.6 million. In the March board papers the forecast for June was for group cash generation of $29 million: Ex MTB 1/231. Of course, the group forecast includes Europe and Hong Kong. But Mr Rich said that he did not believe the June forecast was valid (T 12036), and there is evidence that Ms Randall's daily cash flow spreadsheets were at best a forecast for the month following the then current month: see 11.1.1. In the Miller/Green draft report of 8 May 2001 (Ex CED 15-8) the net cash flow figure based on management projections was $36.3 million and the PBL adjusted figure was $11.8 million. In those circumstances, it seems to me that the cash flow spreadsheets figure is unreliable.

15.2 Australian creditors at 30 April

[4304] ASIC purported to derive the figure for Australian "overdue" creditors at the end of April from Mr Carter's principal report, para 16(a), where the figure given is $54 million, taken from the creditors ledger. Mr Rich referred to that table in paras 1694-1701 of his affidavit. He said that until late April he was not aware that creditors were being paid outside One.Tel's normal payment practices, including practices in relation to disputes. He referred to disputes with carriers (particularly the dispute with Optus about providing complete CDRs and the dispute with Telstra about the accuracy of roaming invoices) and the dispute with Lucent about incorrect operations and maintenance charges.

[4305] There was a substantial amount outstanding to Australian creditors at the end of April and, as mentioned above, evidence of some deferrals of payment at month-end. But to a substantial degree, unpaid creditors were in dispute with One.Tel; I refer in particular to Telstra, Optus and Lucent. Additionally, for the reasons explained at 11.2.5, the Australian aged creditors reports and the ledgers from which they were extracted were significantly unreliable. In my opinion, therefore, ASIC has not proved that the amount "overdue" to Australian creditors was $54 million.

[4306] ASIC submitted that two kinds of adjustments needed to be made to the "overdue" creditors figures at the end of April, relating respectively to adjustments to aged creditors listings and unpresented cheques.

15.2.1 Adjustments to aged creditor listings

[4307] The adjustments advocated by ASIC (APS [1334]) are set out in Ex P93-730, headed "Summary of Adjustments to Aged Creditor Listings", a table extracted from aged creditors reports and the Adept ledger. The adjustments to the aged creditor listing of 2 May, the nearest to the end of April, increase the amount outstanding as at 2 May by a net amount of $11.57 million. The principal components of this net increase are late posted invoices ($10.54 million) and cancelled cheques ($10.95 million), less credits of $3.28 million for late posted credit notes and $6.55 million for "missing payment" (cheques recorded in Adept in the month of April but after the month-end aged creditors report, and therefore omitted from that report). The main cancelled cheque adjustment relates to cancellation of the cheque in favour of Optus on the digital account No 124 in the sum of $9,668,647.33.

[4308] The table at Ex P93-730 is considered in detail at 11.2. My conclusion is that, as the methodology for calculating late posted invoices is flawed, no adjustment should be made in that category (11.2.4.2), but in calculating available cash it is appropriate to take into account late posted credit notes (11.2.5.5) and missing payments (11.2.5.6), as well as unpresented and cancelled cheques.

[4309] In my view the adjustments advocated by ASIC are best made as adjustments converting the actual cash balance at the end of the month to an "available cash" figure, rather than adjusting "overdue" creditors (in any event, we do not have a reliable figure for overdue Australian creditors at the end of April). Applying the reasoning set out at 11.2, I would add to the April cash balance of $42 million the sum of $3.28 million for late posted credit notes and also $6.5 million for missing payments, a total of $9.78 million, which I would offset against the figure for cancelled cheques of $10.95 million, leaving a net debit to April cash of $1.17 million.

15.2.2 Unpresented cheques

[4310] ASIC submitted (APS [1337]), correctly, that a proper understanding of the financial position of the company requires notional adjustment of the end of month cash balance by the amount of unpresented cheques. According to Ex P93-716, headed "General Ledger Reconciliation", the total amount of unpresented cheques at 30 April was $13.1 million, after taking into account a small amount of unpresented deposits. But most of these cheques were subsequently cancelled, and so they have been taken into account in the adjustments to aged creditor listings at Ex P93-730 and in my calculations above. Unpresented cheques not subsequently cancelled amounted to about $2 million, according to Ex P93-716. I would therefore reduce April cash by that figure of $2 million, in addition to the figure of $1.17 million mentioned at 15.2.1.

15.3 European creditors at 30 April

15.3.1 UK creditors

[4311] Again ASIC relied on thetable at para 16(a) of Mr Carter's principal report, according to which UK overdue creditors stood at $83 million at the end of April, and there were no figures for other international creditors. I have generally accepted the reliability of the UK aged creditors reports, although in assessing their significance, regard must be had to the impact of foreign exchange movements and some errors in due dates in the UK ledger: 11.3.1.

[4312] Mr Rich gave evidence that he was not aware of any change in the payment practices of the UK business other than in late April, and that there were disputes with carriers in the UK and Europe that may have led to an increase in amounts "notionally overdue" during the period up to late April. He referred to the dispute with British Telecom about the dialler rebate, saying that the amount owing by BT was about £2.5 million by March 2001, and so he told Mr Weston when he visited the UK in late March to offset the amount owing against amounts owing by One.Tel to BT in order to step up the pressure on BT to get on with paying the rebate: 2 JDR 1700a. He said there was a continuing dispute with WorldCom throughout early 2001 about its refusal to provide One.Tel with CDRs to enable One.Tel to check its bills, after One.Tel had detected persistent errors in WorldCom's billing systems: 2 JDR 1700b. That evidence reinforces the view expressed throughout my analysis of creditor issues, that there were significant disputes particularly as regards UK and European carrier creditors, that need to be taken into account in assessing the true amount payable to those creditors at any particular time.

15.3.2 Non-UK European creditors

[4313] ASIC relied on an email from Mr Werner to Mr Silbermann and others dated 18 May attaching aged creditors and aged debtors summary reports for Europe: Ex CED 1-1543. The foreign currency amounts in that email are converted to Australian currency in Ex P93-739. In Australian dollar terms, the total amount owing by the UK and comparable European businesses for more than 30 days amounted to $80.01 million, and the total amount owing for more than 30 days in the UK was $58.36 million, and consequently according to Mr Werner, the amount owing to non-UK European creditors for more than 30 days was $21.65 million. Mr Werner explained that the 0-30 days category meant "not due and up to 29 days overdue".

[4314] Non-UK European creditors are considered further at 11.3.2.

15.4. Were One.Tel'S financial problems just a matter of timing?

[4315] Mr Rich and Mr Silbermann both asserted that One.Tel's problems were short-term problems relating to the timing of cash flow: 2 JDR 1690-3; MS 939-42. I note ASIC's submissions (APS [1832]-[1839]) were that this was not true for the following reasons:

•: One.Tel's earnings performance for February, March and April, according to the monthly management accounts, was as poor as its cash flow performance, and therefore the problems were not just about cash flow: APS [1832];
•: One.Tel's earnings performance was even worse than indicated by the monthly management accounts, because of the inadequacy of the doubtful debts provision, the large amounts of Next Generation costs of acquisition that were capitalised and therefore not reflected in EBITDA (Ex CED 24-1), and the overstatement of EBITDA in the January to April management accounts to the extent of about $4.8 million by reason of operating expenses charged by the fixed wire/service provider to Next Generation being credited to the former but not debited to the latter: see Ex CED 11-5;
•: the need to pay well over $100 million to bring creditor payments up-to-date, a one-off payment that would not be recouped at a later time, and associated with that, the fact that actual cash usage was substantially less than what it should have been because creditors were not being paid;
•: the alleged problem of $40 million of missing billing data was not a billing problem and therefore not a cash issue, but in truth was a revenue and therefore an earnings problem;
•: the cash performance of the company was consistently poor compared with the September forecasts and even the lowered targets set in January and March, and there was no evidence that the cash shortage of February was being caught up at a later time (for example, the forecasts in the March board papers for April, May and June were far below those given at the January board meeting, as shown by the table at 2 JDR 1685, even before the adverse April developments);
•: the adverse developments in April, referred to by Mr Rich at 2 JDR 1692-3, were just a continuation of a series of problems that had beset One.Tel from at least the second half of 2000, and previous shortfalls in cash were largely not expected to be recovered, as shown by the continually falling projections.

[4316] These matters have all been considered extensively in other parts of the judgment. In my opinion, the assumptions underlying ASIC's submissions have not been made out, and therefore the submissions are rejected.

15.5 Earnings position at 30 April

[4317] One.Tel's EBITDA position at 30 April is considered, together with EBITDA in other months, in Ch 20.

15.6 Cash requirement at 30 April

[4318] ASIC's submissions (APS [1364]) concerning the April Group cash requirement are set out in the following table, which compares the submissions with ASIC's pleading:

Table 15.1: April Group Cash Requirement (ASIC submissions & pleading)
	ASIC submissions ($m)	statement of claim ($m)
Available cash balance	32	21
Aust overdue creditors	(66)	(54)
UK overdue creditors	(83)	(83)
Possible claims against suppliers	9	9
Monthly cash usage from operations at $20m per month to 30 November	(140)	(140)
Toronto Dominion loan repayment	(50)	(50)
Lucent lease repayment	(12)	(12)
Cash requirement to November	(310)	(309)

[4319] I shall address each of these lines. The table is closely similar to ASIC's tables of cash requirements as at the end of February (APS [393A]) and the end of March (APS [934A]), which were considered at 11.6 and 13.5.5 respectively. As to many of the items in the table, the same reasoning applies in February, March and April.

[4320] The "Available cash balance" of $32 million is the intranet cash balance at 30 April of $42 million less $8 million "pledged" and $2 million in respect of the net amount of unpresented cheques. I agree with ASIC as to the deduction for the $8 million pledged amount from April cash (15.1.1.4) and as to the deduction of $2 million net for unpresented cheques (15.2.2) for reasons given at 15.2.1, I will make other adjustments for a net amount of $1.17 million, reducing the April available cash figure to $31 million (rounded).

[4321] As to Australian overdue creditors, my finding is that ASIC's figure, relying as it does on the Australian aged creditors report, is unreliable and cannot be accepted as proven. My findings in relation to February (11.6.8) and March (13.5.5) were "not known" and that must be so here as well.

[4322] As to UK overdue creditors, the figure in the UK aged creditors report for 30 April was $83 million: as per App I-6 to Mr Carter's principal report. As with UK overdue creditors in March (see 13.5.5), I shall adjust that figure by reference to reply Sch 3, since I have found that the UK creditors ledger misstates due dates of major creditors, and reply Sch 3 quantifies the effect of that mistake on the end-of-month total. For April the required adjustment is to reduce the overdue creditors figure by $16.97 million, so in rounded terms the UK overdue creditors figure is $66 million.

[4323] The adjustments made for February (11.6.5.7) and March (13.5.5) to cater for the fact that the Miller/Green figures contemplated a substantial creditor catch-up in April is not an adjustment that needs to be made for the purpose of calculating the cash requirement at the end of April, as the effect of the catch-up has by that time flowed through into the cash balance and overdue creditors figures.

[4324] As to possible claims against suppliers, at 11.6.4.7 I make findings as to the level of unresolved Australian disputes ($17.75 million in April), and as the level of unresolved UK disputes ($17.75 million in April). The total disputed claims, adding the Australian and UK monthly figures together, are $35.85 million in April (rounded to $36 million). As with UK overdue creditors, no adjustment is needed to those figures to take into account the creditor catch-up in April, as the assessment of the level of disputes is at the end of April, after the creditor catch-up had taken place.

[4325] As to monthly cash usage, for the reasons given at 11.6.5.7 and 13.5.5, I shall apply to April as well as to February and March the range constituted by the management forecasts provided to Mr Miller and Mr Green and the PBL adjustments made in their draft report of 8 May. Using the figures in the table at 11.6.5.7, the usage for the seven months from May to November inclusive is $0.8 million (unadjusted, rounded to $1 million) to $75.5 million (PBL adjusted, rounded to $75 million).

[4326] As to the Toronto Dominion loan repayment, the matter is considered at 18.7, 11.6.6 and (briefly) at 13.5.5. My conclusion is that the cash requirement at the end of April, like the cash requirements at the end of February and March, should not include provision for repayment of the Toronto Dominion loan.

[4327] As to the Lucent lease repayment, the matter is considered at 18.6, 11.6.7 and (briefly) at 13.5.5. For the reasons given there, the cash requirement at the end of April, like the cash requirement at the end of February and March, should not include provision for the Lucent lease repayment.

[4328] As with the February and March cash requirements figures (Chs 11 and 13), ASIC's calculations make no provision for the buffer that was undoubtedly necessary for the proper conduct of the group's business, in the order of $50 million. Nor do they make any provision for payment of non-UK European creditors, to whom about $21 million was due or overdue.

[4329] The following table sets out ASIC's submissions and the court's findings as to the April Group cash requirement:

Table 15.2: April Group Cash Requirement (ASIC submissions & court's findings)
	ASIC submissions ($m)	Court's findings ($m)
Available cash balance	31	31
Aust overdue creditors	(66)	Not known
UK overdue creditors	(83)	(66)
Possible claims against suppliers	9	36
Cash usage from operations to 30 November	(140)	(1) or (75)
Toronto Dominion loan repayment	(50)	--
Lucent lease repayment	(12)	--
Cash requirement/surplus to November	(310)	Range from 0 to (75), also unknown Aust overdue creditors not > ($ 66m)

[4330] ASIC has not proven its case. It is also noteworthy that on the basis of the court's findings, a capital raising of $132 million as proposed at the 17 May board meeting would have been sufficient to meet the company's cash requirement, depending on the correct figure for Australian creditors. In that regard, it should be noted that ASIC's figure of $66 million adds to the aged creditors report balance of $54 million a further amount for unpresented cheques, which I have taken into account in another way by deducting it from the cash balance.

15.7 Board's knowledge

[4331] ASIC submitted (APS [1371]-[1376]) that:

(4): Cash: the April flash report sent out on 8 May (Ex MTB 1/385A) did not refer to month-end closing cash, or provide any indication as to what ASIC called the "disastrous financial position" of One.Tel, and although by e-mail dated 1 May Mr Packer Jnr was informed that the 30 April Group cash balance was $38 million, the other non-executive directors were not given that figure;
(5): Creditors: the board was not aware of the overdue creditors, and although during April some information was provided as to amounts claimed by some major carrier creditors, Mr Rich and Mr Silbermann always asserted that where payment had not been made there was a proper basis for declining to pay;
(6): Earnings: the board was not told that the first-half earnings fell short of the September budget by $40 million, and was not made aware of the actual earnings for January, February and March or of the fact that they fell short of the September budget by $47.2 million (referring to Ex P93-744), and they were not given any indication that the April earnings were likely to fall well short of the September budget;
(11): Debtors: the board was not told that the provision for doubtful debts was inadequate, and it had in fact been told the opposite by the March board papers: Ex MTB 1/252.

[4332] As to (a), it is true that the April flash report did not state the month-end closing cash and that the daily email showing the 30 April Group cash balance was not circulated to all non-executive directors. While the fall in group cash at the end of April, from $53 million forecast in the board papers to $42 million according to the closing intranet balance of 30 April, was a matter to be disclosed to the board, it does not seem to me to have been necessary to make special and immediate disclosure in circumstances where:

•: Mr Miller and Mr Green were well into their review, which was expected to lead to a report that would in the near future be, and was, disclosed to the full board;
•: proposals were being developed for a capital raising by rights issue, that was intended to address the company's short-term cash flow difficulties;
•: there were grounds for believing, and the defendants did believe, that the problems affecting cash flow were short-term problems that would soon be overcome; and
•: some of the non-executive directors received the information in the daily emails, and there is no evidence that those who did not receive the daily emails had asked for such information.

[4333] As to (b), see the discussions at 11.7, 12.10.1.2 and 13.5.6. The main new development in April was the change of attitude to credit terms on the part of the European carriers, and in particular WorldCom and Global Crossing. That was obviously something that needed to be disclosed to the board, and was disclosed by Mr Rich at the board meeting on 17 May. In the circumstances obtaining at the end of April, I am not persuaded that there was any obligation on Mr Rich or Mr Silbermann to prepare a special board circular to disclose the change in the creditor situation prior to that board meeting. In particular, as at least some of the directors knew, Mr Miller and Mr Green commenced their review shortly after the carriers' change of attitude became known to One.Tel, and a proposal was developed and presented to the board on 17 May for a fundraising that would address the creditor problem.

[4334] As to (c) and (d), see my observations concerning the equivalent allegation for March, at 13.5.6.

15.8 Consequences of financial position

[4335] ASIC submitted that, as had been the case at the end of March, the group was in a disastrous financial state: APS [1377]. It said the board was not told that this was so, nor was the market. Quite the contrary picture had been painted to the board by the March board papers and at the March board meeting, and to the market by the 4 April announcement. It submitted that although various board members were given some information during April as to the tightness of cash, there was no disclosure of the extent of the group's problems.

[4336] According to ASIC (APS [1378]), without a massive injection of funds the group was doomed to collapse. Its position declined further after April, through until the administration intervened at the end of May.

[4337] ASIC repeated for April its submissions made in respect of February (considered in Ch 11), that the defendants were aware or should have been aware of the deplorable financial position, should have called a board meeting, should have recommended that unless a significant injection of funds could be obtained administrators be appointed, and should have caused the market to be informed. Had they brought the true facts of the board, then the evidence of Mr Packer Jnr, Mr Murdoch Jnr and Mr Howell-Davies (considered in Ch 11) indicates that an administration would have resulted.

[4338] I do not accept ASIC's submissions. My conclusions on this matter with respect to February and March are also relevant to the April submissions. I have found that at the end of February the forecast cash position to November (excluding Australian creditors) was somewhere between a cash surplus of $17 million and a cash requirement of $58 million; by the end of March the range was somewhere between a cash surplus of $1 million and the cash requirement of $74 million; and by the end of April the range was somewhere between zero and a cash requirement of $75 million. The cash position was tight, there were substantial difficulties concerning the company's relationships with Telstra, Optus, Lucent and the European carriers, and there were problems about margins and call mix in the Australian fixed wire/service provider business, but the evidence does not support ASIC's assertion that the position was disastrous. Even if ASIC's figures for Australian creditors were accepted, on the face of the figures the $132 million rights issue would have been sufficient to meet the company's cash needs to November.

[Chapter 16 (paragraphs [4339]-[4935]) is not reproduced. It sets out the relevant evidence relating to May 2001. The chapter is summarised at [7499]-[7515].]

17. After May 2001

17.1 The report of the administrators of One.Tel to creditors, dated 12 July 2001

[4936] On 29 May 2001 the board of One.Tel Ltd appointed Messrs Sherman and Walker of Ferrier Hodgson as voluntary administrators. The next day One.Tel's subsidiary operating entities each resolved to appoint them as voluntary administrators. An indication of what happened to One.Tel after the appointment of voluntary administrators can be obtained from their report to creditors.

[4937] The first creditors meeting was held on 5 June 2001 at which time a preliminary report was presented to creditors. The preliminary report estimated the liabilities of the Australian Group to be in excess of $600 million and envisaged winding down and closure within 14-21 days. Lucent Technologies appointed Mr Hall of PwC as Receiver and Manager of the One.Tel Next Generation companies. Lucent had become a secured creditor after acquiring a $52 million debt from Toronto Dominion Bank, who had provided a drawdown facility to the Next Generation companies (see below).

[4938] One.Tel's mobile, fixed line and Internet businesses ceased. The majority of One.Tel's employees were terminated "in order to reduce overheads", except those retained to assist with asset realisation and the maintenance of financial information. Negotiations for the sale of overseas entities were ongoing in continental Europe and Hong Kong, and were concluded in the United Kingdom.

[4939] On 12 July 2001 One.Tel's voluntary administrators issued a report to creditors pursuant to s 439A (the report) [Carter Affidavit, Vol K, p 22-0001ff] in anticipation of the 2nd meeting of creditors on 24 July 2001. The court had twice extended the convening period for the calling of the meeting, on 15 June and 3 July 2001, on the applications of the administrators. The report is summarised below. It was intended to provide creditors with relevant background information, an outline of the reasons for the company's failure, an outline and assessment of its financial position and the options open to creditors. Those options included whether the company should execute a deed of arrangement (though, at this stage, no proposal had been received), end administration or alternatively whether the company should be wound up. The report used information obtained from One.Tel's published accounts and from financial information and reports held by the company.

[4940] The historical financial analysis conducted by Ferrier Hodgson indicated One.Tel was:

Carrying debtors well in excess of what could be regarded as acceptable trading terms;

Experiencing declining cash reserves from early 2001;

Experiencing working capital problems from January 2001;

Incurring continuing losses for the 2001 year.

[4941] The administrators received, and the report made comment on, reports from directors as to the affairs of One.Tel at the time of appointment. Certain matters could not be verified, such as whether all creditors' claims had been notified; the quantum and merits of those claims; and the ownership and the realisable value of Spectrum.

[4942] The company was without funds at the time of appointment after ANZ bank consolidated and applied One.Tel's funds against its own exposure. Trade debtors due amounted to $173 million, but there were issues in relation to recoverability (individual customers owing relatively small amounts, high level of debtors in the 120 days plus category) and the termination of carriage and other supply agreements. Around $100 million of this was in the hands of debt collection agencies at the time of the report. Intercompany loans had a book value of $439 million, comprising of money due by Australian and international subsidiaries of One.Tel. The key intercompany loans estimated as being recoverable amounted to $17.75 million and it was not clear at the time of the report how the balance of intercompany funds dispersed to international subsidiaries had been applied. As alluded to above, negotiations for the sale of One.Tel Plc (UK) were successful, which yielded $6.5 million of recoverable loans.

[4943] The book value of One.Tel inventory was assessed as $9.5 million but approximately 70% of stock held was potentially the subject of retention of title claims. On that estimate, approximately $855,000 was recoverable. Assuming only 50% of stock was so encumbered, approximately $1.575 million was recoverable. Plant and equipment had a book value $111 million. The directors estimated that $50 million of that was applicable to finance leases but the administrators faced difficulties reconciling this in terms of identifying ownership as between One.Tel and leasing companies. An estimate of the realisable value of unencumbered plant and equipment was offered as, at the high end, $10 million and, at the low end, $7.5 million. Investments in subsidiaries were $35.9 million, but the report expressed the view that only the following had a likely realisable shareholding value: One.Tel Plc ($29 million realised on 4 July 2001), One.Tel Ltd (HK) (unable to disclose at that time in light of ongoing negotiations for sale) and One.Net Pty Ltd ($1 million estimated return). Other assets, such as prepaid advertising, goodwill and intellectual property, had a combined estimated realisable value of, at the high end, $7.7 million and, at the low end, $5.7 million.

[4944] In relation to the Spectrum licences, while the book value was $493 million, the administrators were unwilling to estimate their value in particular because Lucent Technologies asserted an interest in all of Spectrum.

[4945] The total estimated cost of realisation for the voluntary administration period was estimated at $18 million. The claims of unsecured creditors were assessed by the directors as $227 million and by the administrators in the report as $229 million. It was further noted that a number of creditors, in particular Lucent Technologies, might have contingent claims, the value of which were unknown. Lucent asserted a claim estimated at $957 million, the merits of which the administrators were unwilling to assess.

[4946] The report outlined directors' explanations of the failure of One.Tel:

Problems with the One.Tel billing system resulting in both billing and collection issues.

Implementation of the GST in the context of billings, collections and cash flow.

Delays with Telstra switching from manual tapes to electronic inputs into the billing system.

Credit squeeze (mid-April) by European carriers, causing a shift from 120 day extended credit terms to (30 day terms).

Failure of the UK/European computer system (mid-April) due to theft of a critical component. This resulted in billings being down for one week with a A$20m impact on cash flow.

[4947] The report then outlined the preliminary assessment of the administrators:

During the year ended 30 June 2000 the group moved into a growth cycle, both in terms of revenue expansion and development. Based on available information:

(a)
Revenue approximately doubled between 1999 and 2000;

(b)
Acquisition of Spectrum licences at a cost of A$520m;

(c)
Further revenue growth exhibited to December 2000;

(d)
Development phase on Next Generation mobile network with Lucent.

[4948] The group had trading losses since July 1998. The net drain on cash flow from operating activities being in excess of $400 million to 31 March 2001. The key factors impacting on this position were:

Continental Europe

Next Generation Mobile Development

Billing issues/debtor collections.

[4949] The equity-raising of 2000 was essentially committed by December/March 2001 [see p 22-0032]. The funding of the business model into the 2002 year would have required either further equity or debt funding.

[4950] The following specific comments should also be noted:

•

the billing system issues would also appear to relate to problems associated with modifications to cope with data relating to--

(iv): GST implementation; and
(iv): the integration of the Next Generation mobile network;

•

the UK credit squeeze and issues relating to the UK computer system are business risks that occurred at a time when One.Tel had marginal liquidity;

•

Mr Rich, through his advisers, have [sic] communicated with us to the effect that:

(iv): at the time he resigned as a director on 17 May 2001, he did not believe that the company was insolvent, particularly in the circumstances where the company had announced a $132 million renouncable rights issue;
(iv): he is not aware of all the details of what transpired between 17 May 2001 and 29 May 2001;
(iv): he believes that any deficiency in the value of the net assets as at 29 May 2001 would be marginal.

[4951] The report also outlined certain events subsequent to voluntary administration to provide creditors with an overview of One.Tel's current state. It had quickly become apparent that the ability of administrators to hold One.Tel together as a going concern was substantially impaired due, in particular, to the lack of cash reserves, cash flow shortfalls and the actions of competitors which led to churning of One.Tel's customer base and therefore the erosion of its revenue stream. This undermined the ability of the administrators to find a purchaser for One.Tel or its customer bases.

[4952] The report relays that the administrators immediately took steps to realise value from the customer service related assets and to eliminate ongoing operating costs. Arrangements were made to reach agreement with other service providers in relation to the transfer of One.Tel's GSM mobile resale customers, fixed line customers, Next Generation mobile customers and internet customers. Action was taken by the administrators to process customer billings to the time of closure and recover relevant debts. Some 1600 employees were terminated on 8 June 2001.

[4953] It was also apparent around this time that efforts of the boards of One.Tel's European subsidiaries to sell their businesses for net value had been unsuccessful and that it was likely, if no buyers were found, that European subsidiaries would proceed to various forms of insolvency administration.

[4954] Preliminary investigations were undertaken and outlined in the report in relation to whether any transactions entered into by One.Tel might be voidable pursuant to Pt 5.7B of the Corporations Act. At that stage the investigations were superficial, being directed to provide creditors with information relevant to their decision on One.Tel's future. The following issues were canvassed:

(4)

insolvent trading: based on preliminary observations, the administrators considered that One.Tel became insolvent at some time between March and the end of April 2001. The tentative nature of this assessment in turn made assessments of liability pursuant to s 588G, Corporations Act difficult. It was considered that directors appointed on 30 March 2001 and 17 May 2001 may have adequate defences to any insolvent trading claims. Any claim in respect of other directors, including the first and fourth defendants, was estimated at collectively between $20-$80 million, depending on further investigations and finalisation of the likely date of insolvency;

(5)

unfair preferences: in respect of payments made by One.Tel in the 6 months prior to its being wound up on 29 May 2001, the majority of material payments appeared to the administrators to have been made in the ordinary course. Hence the preliminary view that there was little likelihood of there being material recovery on this basis;

(6)

other transactions, including uncommercial and insolvent transactions: the administrators referred to a number of transactions which had aroused their interest as potentially voidable as against a liquidator, including--

(7)

the application by ANZ of funds in One.Tel's account against the bank's exposure at the time of appointment;

(8)

whether the proposal that PBL and News underwrite a $132 million rights issue, aborted when it became apparent the company was insolvent and not likely to be solvent even after the rights issue, might have constituted a binding agreement;

(9)

unused advertising paid in advance by One.Tel to PBL and News as part of those companies' share subscription arrangements;

•: the assignment by One.Tel of Spectrum to One.Tel GSM 1800 Pty Ltd;
: the assignment by One.Tel of its mobile subscriber base to One.Tel GSM 1800 Pty Ltd during April/May 2001;
(iii): the payments of bonuses to the first defendant and Mr Keeling in the order of $14 million during 2000 in respect of One.Tel reaching certain levels of market capitalisation, in circumstances where it was questionable the assessment could be made, as was required under the bonus arrangements, that the relevant level of market capitalisation could be sustained for a reasonable period of time;
(v): the payment of royalties to entities associated with the first defendant and Messrs Keeling, Packer, Greaves and Adler, in respect of the acquisition of One.Net Pty Limited and One.Card Pty Limited by deferred consideration;
(vi): the activities of One.Tel's internal debt collection business, International Recovery Services Pty Limited, in which the first and fourth defendants and Mr Keeling held shares, apparently beneficially for One.Tel.

[4955] Shortly before the administrators issued the report of 12 July 2001 to creditors, it received two proposals for the making of a deed of company arrangement. The first, made by the first defendant, was for a contribution of $60m from various parties, conditional upon a release against all claims. However, this was not realised, as key parties were apparently unwilling to participate. Another was received from a Mr Du Puy which the administrators assessed bluntly as not in the interests of creditors.

[4956] The report then estimated the dividends available to creditors on winding up and made recommendations in respect of the future direction of the voluntary administration. The analysis was affected by uncertainty in a number of key respects, in particular: the pending status of a claim by Lucent Technologies; the emergence of further creditors' claims; the nature and size of trade debtors; the prospect of recoveries from any claims made by a liquidator in respect of voidable transactions; and the realisation of value from the Spectrum licences and investments in subsidiaries (in particular One.Tel Ltd (HK), then outstanding). The administrators tentatively estimated employee claims at $17.1 million and unsecured creditors claims at $230 million. The report then offered various creditor recovery scenarios, ranging from 11c in the dollar to 37c in the dollar, depending on the outcome of the Lucent claim which might have ranked for between $50m to $500m, or not ranked at all. It was forecasted that subject to litigation, dividends might be paid to creditors within 12 months. The administrators recommended One.Tel be wound up.

17.2 The administrators' reports dated 12 July 2001 in respect of One.Tel'S Australian operating subsidiaries

[4957] As alluded to above, Ferrier Hodgson were also appointed voluntary administrators of One.Tel's subsidiary operating entities on 30 May 2001. The only matter of interest in their reports relates to the report on the GSM subsidiaries, One.Tel Network Holdings Pty Ltd, One.Tel Network Finance Pty Ltd, One.Tel GSM Spectrum Pty Ltd, One.Tel GSM 1800 Pty Ltd, and One.Tel Network Pty Ltd.

[4958] As noted above, on 5 June 2001, Lucent Technologies as secured creditor of the Next Generation companies appointed Mr Hall of PwC as Receiver and Manager, so control of those companies passed to Mr Hall. Toronto Dominion Bank, which had participated in the $1.15 billion Lucent debt facility to the Next Generation companies, had been a registered securities holder in each entity from 5 July 1999 to 13 June 2001, at which time it assigned its interests to Lucent Technologies. The debt secured under the facility was, as at 30 May 2001, in the order of $52,955,000.

[4959] The administrators report notes that the cash flow for the Next Generation companies was to a large extent consolidated through One.Tel. According to the report, the management accounts of One.Tel Network Finance Pty Ltd, One.Tel GSM Spectrum Pty Ltd and One.Tel Network Pty Ltd for the year ended 30 June 2000 revealed combined losses of $35,308,000 and, for the period to 30 March 2001, combined losses of $105,632,000. The administrators presented a statement of the Next Generation companies' combined assets and liabilities, which indicated an estimated realisable value deficiency of $464,804,000, subject to the value of network assets, the Spectrum licences and the contingent claims of Lucent Technologies: Ex CE 22-0106.

[4960] The administrators then made some preliminary assessments in respect of Pt 5.7B, Corporations Act. Any conclusions on insolvent trading would flow on from those made in relation to One.Tel; but the likelihood of liability may be remote given that the key Lucent Technologies contracts might have predated any insolvency and because most liabilities were funded through One.Tel. It was also considered unlikely that there would be any incidence of unfair preferences, however, as alluded to above, certain transactions might be voidable as against a liquidator, namely the assignment of the Spectrum licences and the assignment of the GSM subscribers.

[4961] The administrators recommended the Next Generation companies be wound up, though they estimated that any dividend payments to unsecured creditors were likely to be nominal only.

17.3 Liquidation of One.Tel companies

[4962] The voluntary administrators, Messrs Sherman and Walker of Ferrier Hodgson, were appointed liquidators of One.Tel on 24 July 2001.

[4963] Lucent Technologies Inc and related entities filed two claims in the winding up of One.Tel: the first, a claim for $41,465,000 in respect of indemnities and tax; and the second, a claim for $1,042,657,000 in respect of asserted misleading and deceptive conduct within the meaning of ss 51 and 52, Trade Practices Act 1974 (Cth). The first was assessed by advisers to the liquidators as bona fide and likely admissible in the winding up, while the second and substantially larger claim was assessed as having little merit or chances of success. It was also suggested that One.Tel might have claims against Lucent for delay and failure to deliver the Next Generation network on time.

[4964] A significant cause for uncertainty in the liquidation process was the claim by the receiver of the Next Generation companies, appointed by Lucent Technologies as secured creditor, that it was entitled to: the Spectrum licences (disputed by One.Tel); the proceeds of sale of the Next Generation subscriber list; any recoverable amount of the $42 million in unused prepaid advertising pursuant to the agreement with PBL and News; ownership of certain equipment transferred to One.Tel Network Pty Ltd; and claims on recoveries of certain debts of Next Generation mobile customers.

[4965] As at 29 May 2001 the registered owners of the Spectrum licences were One.Tel (50MHz) and One.Tel Network Pty Ltd: 25 MHz. The liquidators were having difficulty estimating the realisable value of One.Tel's interest in the Spectrum but determined that the most appropriate means of realising any value would be by way of auction, notwithstanding the possibility that the receiver of the Next Generation companies might attempt to frustrate any auction by injunction and that the Australian Competition and Consumer Commission might have concerns should incumbent mobile carriers bid for the Spectrum. The value of One.Tel's portion of the Spectrum was at this time estimated, tentatively, at between $20 million and $70 million.

[4966] In their letter to the committee of creditors dated 28 September 2001 (Ex CE 22 0135), the liquidators outlined a proposal by Lucent Technologies to settle outstanding matters between it, One.Tel and its Next Generation subsidiaries. Under the proposal Lucent would pay One.Tel $4 million and be responsible for current Spectrum licence fees, there would be mutual releases on certain matters and Lucent would have an option to acquire the Spectrum licences for $25 million. Based on the Lucent proposal, the liquidators foresaw a return to creditors of 35c in the dollar. The liquidators estimated various other return scenarios based on the rejection of the Lucent proposal, returning between 32c and 46c in the dollar. It was suggested that the Lucent proposal warranted consideration.

[4967] On 4 October 2001, the liquidators issued to the committee of creditors its 2nd report on the status of the liquidation: Ex CE 22 0142. The report conveyed that $35 million of debtors had been realised and $5-10 million might further be realised. Should any auction of the Spectrum licences proceed, it was likely to take place in the first quarter of 2002. While the sale of One.Tel's Hong Kong subsidiary had proved difficult, the liquidators expected proceeds of approximately $4.2 million; and further expected $2.5 million by way of insurance policy benefit in respect of the United Kingdom business. The liquidator noted that investigations into One.Tel's affairs were substantially advanced but ongoing, in particular demands were made against the ANZ Bank and Commonwealth Bank in respect of alleged unfair preferences. Claims of employees had largely been settled, while approximately 30% of creditors had lodged proofs. Further, the agreement between ASIC and the first and fourth defendants and Mr Keeling on 24 September 2001 was noted, pursuant to which those parties gave ASIC undertakings and asset freezing orders were dismissed.

[4968] The liquidators attached to their 2nd report a statement of assets and liabilities as at 30 September 2001. At the high end, in terms of estimated realisable values, the liquidators forecasted a deficiency of $174,758,000; with a low estimate of $182,758,000. In the administrators' estimations as at 29 May 2001, those figures had been $150,558,000 and $176,778,000 respectively. It was anticipated by the liquidators that an interim dividend could be paid to creditors on 31 December 2001.

[4969] The liquidators' second report to the committee of creditors was tabled at a meeting of the Committee of Inspection on 4 October 2001: Ex CE 22 0152. A key item on the agenda was the proposal of Lucent Technologies of 28 September 2001. The liquidator, Mr Walker of Ferrier Hodgson was present, as were representatives of Telstra, Optus, Cisco and CIT appointed to the committee on 24 July 2001. After some discussion of the Lucent proposal, representatives of Lucent also attended and it was put to them that certain aspects of the proposal were unsatisfactory. The meeting was adjourned to 10 October 2001 and in the meantime talks were held between the liquidator and representatives for Lucent. When the meeting resumed a term sheet of a revised Lucent offer was tabled. The key terms of that proposal were an option in favour of Lucent of $25 million for Spectrum owned by One.Tel, expiring on 1 October 2002, and upfront payment by Lucent of $4 million. If the option were not exercised, all Spectrum (held by One.Tel and One.Tel GSM Spectrum Pty Ltd) would be bundled up under One.Tel's control for sale. The net proceeds of any such sale would be split -- One.Tel being entitled to 85% and Lucent to 15%. There would be mutual releases of all claims.

[4970] The key difference in the revised offer was that, if Lucent did not take up the option to purchase the Spectrum from One.Tel, control of the Spectrum would vest in One.Tel for the purposes of sale, rather than a portion being transferred to One.Tel GSM Spectrum Pty Ltd. Those present (no longer including Telstra) resolved unanimously to accept the revised Lucent's proposal as represented in the term sheet. That settlement was estimated to be equivalent to a realisable value of Spectrum of $45 million.

[4971] The annual report of One.Tel (in liq) of 14 November 2002, prepared by the liquidators, provided an account of the liquidation to 30 September 2002 in anticipation of the Annual General Meeting of 29 November 2002: Ex CE 22 0157). The date for holding the meeting had been extended by the court on 12 August 2002. The liquidators raised an issue of allegations of prior professional involvement and conflict of interest. This related to articles in the Australian Financial Review suggesting that Mr Sherman in particular had a conflict of interest as liquidator, as he had previously attended One.Tel board meetings of 28 and 29 May 2001 as an adviser, when the PBL/News renouncable rights was discussed and ultimately terminated, and he did not object to that action at the time. The liquidators did not see the issue as giving rise to a conflict and assessed the prospect of being joined to proceedings in respect of the renouncable rights issue as remote.

[4972] The summary of assets and liabilities in the annual report represented an estimated realisable value deficiency of $242,625,000, not including any return from the mooted sale of Spectrum. The report also attached a summary of receipts and payments and liquidators fees to that time. The liquidators noted the following in relation to One.Tel's statement of assets and liabilities:

•: estimated uncollectible debtors stood at $147.8 million;
•: there were $368.5 million in intercompany loans of which $10.6 million had been realised;
•: Lucent had not exercised its option for the Spectrum licences, and therefore One.Tel was proceeding to organise the sale of its licence interest and that of One.Tel GSM Spectrum Pty Ltd, and the liquidators were not prepared to speculate on the combined value;
•: of other assets of a combine book value of $93 million, $31.7 million had been realised (this included prepaid advertising, "goodwill -- subscribers" and intellectual property);
•: in relation to the advertising, it was noted above that some $61.4 million in prepaid advertising was earlier paid to PBL and News as part of part of those companies' share subscription arrangements. While PBL and News initially denied any refund, a settlement was reached whereby they would pay One.Tel $21.5 million to eliminate the prepayment, representing a return of 50c in the dollar on the undisputed portion of the payment;
•: the costs of asset realisation stood at $14.4 million;
•: the costs of the voluntary administration and winding up stood at $19.1 million (including administrators and liquidators' fees);
•: the liquidators estimated that total claims of unsecured creditors would amount to $335 million, up from an estimate of $277 million at the time of appointment; and
•: the liquidators had received claims from a number of directors, namely the first and fourth defendants and Messrs Keeling and Beck, whose claims had been stood over.

[4973] The first interim dividend had already been paid at 15c in the dollar, and a second was expected to be declared in the first quarter of 2003.

[4974] The liquidators further noted the status of, and their approach to, various investigations and possible claims on behalf of One.Tel. The ANZ Bank unfair preference claim, for instance, was settled. The focus of outstanding investigations was on whether certain transactions entered into before voluntary administration were voidable by the liquidator pursuant to Pt 5.7B, Corporations Act and whether there had been any substantive breach of directors' duties. Thirty-two days of public examinations of directors and other relevant persons were held at the behest of the liquidators for the purposes of investigating claims. This process had focused attention on the payment of the directors' bonuses in relation to market capitalisation; insolvent trading; the PBL and News renouncable rights issue; and in relation to the acquisitions of One.Net and One.Card.

[4975] The annual report also noted the commencement of the proceedings by ASIC against the first and fourth defendants and Mr Keeling, seeking freezing orders against personal assets; and the present proceedings in respect of alleged breach of directors duties against the first and fourth defendants and Messrs Keeling and Greaves; and proceedings by directors against One.Tel's providers of director and officer liability insurance, after the insurer had denied liability under the policy.

[Chapter 18 (paragraphs [4976]-[5913]) is not reproduced. It sets out a lengthy analysis of One.Tel's position in relation to its creditors. The chapter is summarised at [7517]-[7524].]

[Chapter 19 (paragraphs [5914]-[6250]) is not reproduced. It sets out the evidence relating to debtors and provisioning for doubtful debts. The chapter is summarised at [7525]-[7526].]

Individuals online services

Business online services

Agents online services

Non-residents online services

Foreign Investor

Australian Securities and Investments Commission v Rich and Another

Tools

Tax information for

Help and support