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 3))

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:
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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 3)

20. Earnings and other financial issues

20.1 EBITDA in ASIC's pleadings, and the structure of this chapter

[6251] In para S41 of the schedule to the statement of claim, ASIC asserted that when adequate provision was made for doubtful debts and adjustment was made to recognise the operating expenses of the Australian operations properly, One.Tel suffered EBITDA losses of $25.8 million for January 2001, $20.4 million for February 2001, $12.4 million for March 2001 and $20.6 million for April 2001. Paragraph S41 also purported to set out year-to-date figures up to February, March and April 2001, and quarterly figures for March as follows:

•: for the year-to-date to 20 February 2001, $186.2 million;
•: for the quarter of trading to 31 March 2001, $58.6 million;
•: for the year-to-date to 31 March 2001, $198.7 million; and
•: for the year-to-date to 30 April 2001, $219.9 million.

[6252] Paragraph S42 asserts that those EBITDA losses occurred notwithstanding the public forecast made to the ASX on 1 February 2001 of an EBITDA Group loss for the financial year to 30 June 2001 of $91 million, and forecasts of EBITDA profits in the September budget and various other specified internal One.Tel documents.

[6253] Paragraph S43 asserts that the fixed wire/service provider business traded at a loss from at least January 2001, with a third-quarter loss of $25 million, notwithstanding better forecasts that had been made to the board. Paragraph S44 asserts that from at least January 2001, the Next Generation business traded at a loss, with a third-quarter loss of $29.9 million, notwithstanding better forecasts that had been made to the board. Particulars of these allegations are in Annex E, which compares "adjusted management accounts" with the September budget, flash reports and the market forecast.

[6254] ASIC's allegations about One.Tel's provision for doubtful debts are addressed in the Ch 19. In this chapter I shall make findings with respect to ASIC's pleaded allegations about EBITDA (at [20.2]), and then deal with some specific issues about EBITDA that have arisen on the pleadings and in submissions.

[6255] First, the defendants allege that ASIC has taken its EBITDA figures for the fixed wire/service provider business for January, February, March and April from draft management accounts that were not finalised prior to the commencement of voluntary administration, and that the figures are unreliable. I address this question at 20.3.

[6256] Second, Mr Hodgson prepared a document referred to at the hearing as the April reforecast, in an effort to update the EBITDA and other figures in the draft management accounts so as to assist Mr Miller and Mr Green in their review. Many submissions were made about the April reforecast, and I address them at 20.4. One of the reasons the issue is important is that ASIC needs to undermine the Miller/Green figures in their draft report of 8 May 2001 in order to prove its financial case, and it seeks to do so by contending that Mr Miller and Mr Green relied on the April reforecast, which it seeks to demonstrate to be faulty.

[6257] Third, the defendants contend that in the third week of March 2001, Mr Beck discovered that there was $40 million of unbilled data in the system. That led to the revised forecasts in the spreadsheet 2403C.xls, and in turn the management forecasts in the March board papers, and some concentrated efforts to identify the unbilled data and to bill and collect it. ASIC claims that the $40 million of unbilled data was an illusion. I consider this issue at 20.5.

[6258] Paragraph S44A of the schedule to the statement of claim asserts that the group EBITDA losses alleged in para S41 and the losses of the Next Generation business alleged in para S44 did not take account of costs of acquisition of customers of Next Generation (principally relating to the cost of handsets) in an amount of about $30 million over the period from January to April, as those costs were capitalised and amortised over the life of the subscribers' contracts rather than treated as costs of sales to be debited in full to the profit and loss account. That issue is considered at 20.6.

[6259] Paragraph S44B purports to identify "significant contributors" to the EBITDA losses referred to in para S41, relating to decreases in gross margin, growth in uncollectible trade receivables, and increases in operating expenses. These matters are addressed in the course of the narrative account in the judgment. Paragraph S44C asserts that a major cause of the decrease in gross margin derived by the fixed wire/service provider business over the period from January to April was a change in sales composition in which a greater proportion of revenue was derived from low margin, or even negative margin, sales on local calls compared with higher margin international and long-distance calls. That issue, which relates to Ms Ashley's margin analysis, is addressed in Ch 14.

20.2 January, February, March and April EBITDA

20.2.1 January and February EBITDA

[6260] The schedule to the statement of claim alleged that when the "actual results" were adjusted to make adequate provision for doubtful debts and to recognise operating expenses of the Australian operations correctly, the group EBITDA loss for the month of February 2001 was $20.4 million, and for the year-to-date to 28 February 2001 $186.2 million: para S41.

[6261] In written submissions, ASIC addressed the February EBITDA position by first referring to the half-yearly result, then the January EBITDA result, and then the February EBITDA result. In each case ASIC compared the results with the September budget, following the schedule to the statement of claim at para S42(b) and (c). But the defendants submitted (DPS [1812]) that it was inappropriate to use the September business plans in circumstances where they had been superseded by changes that were reported to, and in some cases specifically sanctioned by, the board. I consider this issue at 8.17.7. I agree with the defendants.

20.2.1.1 Half-yearly EBITDA result

[6262] According to the published half-yearly result and App 4B of the statement, the group EBITDA loss for July-December 2000 was $103.4 million. The forecast in the September board papers had been for a Group EBITDA loss for July-December 2000 of $61.131 million (Ex MTB 1/3), and so the result was about $42.27 million below that budget. As previously noted, in my view it is not helpful to compare actual results with a budget figure subsequently superseded. It appears from the January board papers (Ex MTB 1/187) that the estimate for the July-December 2000 half-year had by that time become $94.86 million.

20.2.1.2 January EBITDA result

[6263] The January flash report dated 7 February showed a Group EBITDA loss for that month of $7.69 million against a forecast loss of $6 million: Ex MTB 1/379B. ASIC compared the January flash result with the September budget figure for January, which was in EBITDA profit of $1.677 million. ASIC took the budget figure from App H to Mr Carter's principal report, which was in turn sourced in the business plans for the various business units in the Carter exhibits vol 1. Therefore the January flash EBITDA result was $9.367 million below the September budget. But the comparison with the September budget is a false comparison because of changes made to the budget in the meantime.

[6264] ASIC claimed (APS [375]) that the adverse flash report result occurred despite management using for the flash report the January fixed wire/service provider budget recut revenue rather than the actual revenue, which (ASIC claimed) was considerably lower. I consider this issue at 8.18.3. I conclude there that some figures in the flash report corresponded with the January recut figures because management considered that the recut figures were in fact correct at the end of the month.

[6265] According to the March board papers (Ex MTB 1/232), the January 2001 Group EBITDA loss was $8.25 million. ASIC contended that the actual January result was considerably worse than this. ASIC purported to derive the actual January EBITDA result, which it claimed was a Group EBITDA loss of $20.86 million, from management accounts taken from App H to Mr Carter's principal report. The source of this figure, via App L to Mr Carter's report, was the management accounts profit and loss statement as at March 2001. Taking the management account figure, ASIC submitted (APS [376], [904]) that the January Group EBITDA was $22.5 million behind the September budget, which provided for January EBITDA of $1.68 million (according to App H to Mr Carter's principal report). But if the figure in the March board papers is accepted, January EBITDA was $9.93 million behind the September budget (assuming comparison with the September budget remained pertinent).

[6266] Having regard to the matters addressed at length at 20.3, I have concluded that One.Tel's management accounts for the fixed wire/service provider business for January-March have not been shown to be final documents, and are unreliable as a source of information about monthly EBITDA. I have also concluded that the April fixed wire/service provider management accounts were not completed until after the commencement of administration and are unreliable as a source of information about monthly EBITDA. In my view the best evidence available as to January Group EBITDA is in the March board papers.

[6267] ASIC submitted that the year-to-date EBITDA result to the end of January was a loss of about $124 million, referring to Ex P93-744 which shows a first half EBITDA loss of $103.287 million and then a January EBITDA loss of $20.869 million, which add up to $124.156 million for the period from July to January. The source of the relevant figures in Ex P93-744 is App L to Mr Carter's report, which in turn took those figures from the management accounts profit and loss statement as at March 2001 in vol 3 of the Carter exhibits.

[6268] Following the schedule to the statement of claim, paras S40 and S44A, ASIC referred (at APS [376]) to some factors which, it claimed, indicate that the management accounts figure for the January EBITDA loss was in fact too low, namely:

•: inadequacy of the doubtful debt provision;
•: capitalisation of expenses related to the acquisition of Next Generation subscribers, thereby excluding that expense from the calculation of EBITDA (according to Ex P93-715, sourced in Ex CE 3 0230, costs of acquisition net of handset costs in the sum of $4.716 million were capitalised in January).

[6269] As to the doubtful debt provision, ASIC's submission was that One.Tel's provision for doubtful debts was inadequate at the end of February 2001 to the extent of at least $35 million, and therefore that the EBITDA position in the recent past had been overstated by at least $35 million, because charges to achieve an adequate doubtful debts provision should have been made progressively in the period up to the end of February: APS [391]; and see 2 JDR 1258 which recognises the effect of increasing the doubtful debts provision on EBITDA. ASIC submitted that the inadequate provision for doubtful debts also affected the accuracy of the balance sheet published to the public in respect of the half-year results and provided to the board in the board papers, because the asset constituted by debtors was worth at least $35 million less than indicated in the balance sheet: APS [392]. ASIC also submitted that projections of future cash flow and EBITDA based on the assumption that the provision for doubtful debt was adequate were affected by the invalidity of that assumption: APS [393]. I consider the adequacy of the provision for doubtful debts in Ch 19, where I reach the conclusion that ASIC's submissions should not be accepted.

[6270] I consider the capitalisation of COA expenses at 20.6 and 22.4. The issue was identified Mr Carter in his principal report, paras 202-3. He said that between January and April Next Generation incurred about $30 million in acquisition costs, principally handset costs, which were deducted from the costs of goods sold and recorded as an asset on the balance sheet, then amortised over the life of the subscribers' contracts, relying on Next Generation management accounts for those assertions. Mr Rich and Mr Silbermann challenged Mr Carter's analysis, on the ground that Next Generation's accounting treatment of the handset subsidies that One.Tel paid to dealers was in accordance with One.Tel's published accounting policies, and had not been questioned by Ernst & Young. At 20.6 and 22.4 I accept their evidence. Consequently, while handset subsidies were capitalised in the manner alleged in para S44A, the allegation that the management accounts figures were accordingly too low is unsuccessful because the accounting treatment of the handset subsidies was part of the company's accounting policies set out in its audited financial statements and half-yearly review.

[6271] I have noted the extent to which the "actual" EBITDA figure for January, as asserted by ASIC, depends upon management accounts. The defendants contended that the January to March management accounts figures for the fixed wire/service provider business were drafts, and that no management accounts were prepared for April prior to 17 May 2001: defences, para S41(b). I consider this issue at 20.3, reaching the conclusions that the fixed wire/service provider management accounts for January, February, and March have not been shown to be final documents, and those management accounts as well as the April fixed wire/service provider management accounts (which were prepared after the commencement of administration) are unreliable to prove the figures they contain, though the management accounts for the other businesses for those months are prima facie evidence of their contents.

[6272] Evidently in response to the allegation that the fixed wire/service provider management accounts were merely drafts, ASIC submitted that the defendants should have adhered to the normal practice and ensured that the January management accounts were available by the end of February at the very latest, and indeed, since the company was "treading a financial tightrope", information as to its earnings for a month should have been available by the end of the following month: APS [379], [380].

[6273] But the implicit suggestion that management accounts were an essential requirement for managing the company was unsupported by evidence and was not the view of Mr Rich. In his affidavit (2 JDR 1832), he said senior management placed most emphasis on ensuring that One.Tel had systems allowing management to monitor closely the key performance indicators that were fundamental to the cash flow and profitability of each business, in as close to "real time" as possible. He said relatively less emphasis was placed on measures of performance such as management accounts, which produced only "lagged" information about what was happening in the businesses. When it was put to Mr Rich in cross-examination of that 2001 was an important time to ensure that previous practices in respect of management accounts were adhered to strictly, he disagreed on the ground that "we had another system which gave us very accurate financial information with respect to the key performance indicators of the business that we were receiving in a more timely way" (T 10864). I considered Mr Rich's evidence on these matters at 20.3, and I accept it.

[6274] ASIC submitted that One.Tel departed from its well-established practice of preparation and consideration of monthly management accounts in 2001, for no good reason, and that it had no satisfactory alternative to the management accounts: ASR [1817]. I consider and reject this submission at 20.3.17.

[6275] ASIC submitted that the only challenge made by the defendants to the January to March management accounts of the group was that the management accounts for the fixed wire/service provider business were drafts: APS [381]. ASIC contended that the defendants raised no issue as to the accuracy of the Next Generation, international, One.Card and One.Net management accounts. In final submissions the defendants contested ASIC's claim that they had accepted the management accounts for the other One.Tel businesses: DPS [1818]. I consider this question at 20.3.1, where I conclude that the defendants should not be regarded as having conceded that any of the January-April management accounts were in final form. However, my decision is that, while the documents relied on by ASIC as the January-April management accounts for the fixed wire/service provider business are unreliable, the documents it has tendered as the January-April management accounts for the Next Generation, One.Card, One.Net and international businesses are prima facie evidence of the figures they contain: see 20.3.10, 20.3.12.

20.2.1.3 February EBITDA result

[6276] In final submissions ASIC asserted that the February 2001 Group EBITDA result was a loss of $16.032 million: APS [383]. It took that figure from App H to Mr Carter's principal report. The source of the figure can be traced, via App L, to the management accounts profit and loss statements as at March 2001, which were drafts so far as they related to the fixed wire/service provider business.

[6277] According to App H to the principal report, the September business plan provided for a Group EBITDA profit for February of $3.006 million, and so the "actual" result was, according to ASIC, $19.038 million down on budget. ASIC said the year-to-date EBITDA loss had increased from about $124 million at the end of January to about $140.2 million at the end of February, which was about $83.6 million down on the September budget which forecast and year-to-date EBITDA loss of $56.5 million (referring to Ex P93-744, which is relevantly sourced in management account and September business plan figures). Consequently, said ASIC, rather than achieving the turnaround in EBITDA performance that the September budget had contemplated, the heavy EBITDA losses of the first half of the year were continuing up to the end of February: APS [383].

[6278] As noted above, it is not helpful to compare so-called actual figures with the September budget, bearing in mind the changes subsequently made to that budget. But the main problem with ASIC's submission is its substantial reliance on figures taken from management accounts, given that the management accounts for the fixed wire/service provider business were probably drafts.

[6279] The March board papers (Ex MTB 1/232) reported that in February there was a Group EBITDA profit of $2.82 million, which became a loss of $3.68 million after subtracting unbudgeted prepaid marketing. Those figures, which were produced by One.Tel's management team according to the procedures explained at 12.10, can be taken to reflect the considered views of One.Tel's senior management, including but not limited to the defendants. They have not been shown to be wrong, and so I accept them.

20.2.2 Earnings position at 31 March

20.2.2.1 EBITDA for February and March, and year to date to March 2001

[6280] The March board papers (Ex MTB 1/232) estimated that in March there was an EBITDA profit of $3.54 million, which became a loss of $162,000 after subtracting unbudgeted prepaid marketing. The March flash report (Ex MTB 1/382) gave the actual March figure as an EBITDA loss of $108,689, which became a loss of $118,574 after taking into account additional unbudgeted prepaid marketing.

[6281] ASIC claimed that the actual Group EBITDA result in March was a loss of $ $7.7 million, relying on App H to Mr Carter's principal report. Those figures were taken from unadjusted management accounts: App L. It compared those results with the September budget figures, Group EBITDA of $3 million for February and an EBITDA loss of $2 million for March: App H to Mr Carter's report. As previously mentioned, the comparison with the September budget is of little or no utility.

[6282] According to management accounts figures taken from Mr Carter's App L and summarised in Ex 93-744, the total year-to-date EBITDA loss to the end of March (adding the January, February and March losses totalling $44.61 million to the half-year EBITDA loss of $103.29 million) was an EBITDA loss of $147.9 million. The September budget figure was a loss of $58.6 million.

[6283] ASIC submitted that while the actual figure for March would not have been known by the end of March, or by the date of the March flash report, nevertheless some information should by then had been available as to earnings performance of the group during March, and in light of the poor actual result, it cannot have been positive information: APS [909]. I agree that by the time of the board meeting on 30 March, One.Tel's management should have had information about the likely month-end EBITDA number that was very close to accurate, but in my view ASIC has not shown that the figure reported in the March board papers, an EBITDA loss of $0.16 million, was incorrect, because its submission relied on management accounts which I have found at 20.3 to be unreliable.

[6284] If ASIC were right about the inadequacy of the doubtful debt provisions, the earnings result would have been even poorer. The doubtful debt provision is discussed in Ch 19, where I have found against ASIC.

[6285] ASIC also contended (APS [910]) that the earnings results need to be considered in light of the fact that huge amounts of expenses relating to the acquisition of Next Generation subscribers were being capitalised and were not taken into account for the purpose of calculating EBITDA. ASIC said that in the months of January to April alone, $29.8 million was capitalised, $10.3 million of which was capitalised in respect of March (referring to Ex 93-715, which is a summary figures taken from a document purporting to be the April management accounts for the Next Generation business). I consider the capitalisation of COA expenses at 20.6 and 22.4, where I concluded that One.Tel's practice was in accordance with its disclosed accounting policy.

[6286] ASIC noted that in the March board papers no comparisons were given to the board of the February and March earnings figures to the September budget. Neither were those comparisons given in the March flash report. But for reasons I have given, the September budget had ceased to be the operative budget by March 2001 and in my view it would have been misleading to have referred to it, without reminding the board of the reasons why the September figures were abandoned (in which case the point of referring to the September figures would be destroyed).

20.2.2.4 EBITDA forecasts to year-end

[6287] Group EBITDA for the year ending June 2001 was forecast in the March board papers as an EBITDA loss of $85.1 million: Ex MTB 1/228. That compared with the forecast in the January board papers of a loss of $53.86 million (Ex MTB 1/188), a loss of $50.9 million in the November board papers (Ex MTB 1/127) and a loss of $44.78 million in the September budget (Ex MTB 1/3).

[6288] ASIC was critical (APS [917]) of the market announcement of 4 April (Ex CED 1-1070) on the ground that the year-end Group EBITDA forecast made in their half-yearly results presentation released to the market on 1 February (forecasting a loss of $91 million for the full year) was not revised in the April announcement, despite the deterioration in the year-end forecast between the January and March board papers. Part of that deterioration, ASIC noted, was that Group EBITDA for the year-to-date to March 2001 was $147.89 million (according to management accounts figures).

[6289] It is true that the April media release did not adjust the earlier EBITDA forecast (indeed, it did not refer to EBITDA at all, and gave the same OPAT figure as had been given in January, a loss of $195 million). But the March board papers were in fact forecasting a slightly better result than the market forecast of the beginning of February. ASIC's real complaint seems to be that the market forecast should have been revised so as to reinstate the "buffer" between management's forecast and the more conservative figures given to the market, since by the end of March the buffer between the market forecast and the figure given to the board was only about $6 million. But (assuming it is legitimate to take this approach to market disclosure), it seems to me there is not much point having a buffer of that kind if it is necessary to revise the market forecast so as to restore the buffer whenever the buffer is eroded by experience: DPS [3274].

[6290] ASIC also criticised the statement in the 4 April media release that One.Tel was "tracking very well against forecasts that were initially made by management in August 2000", in circumstances where by the end of March, the internal forecast for the year end was almost double the loss that had been budgeted for in August/September 2000 ($85.1 million against $44.7 million): APS [918]. Even against the revised budget position referred to in the January board papers, the shortfall is large ($85.1 million against $50.9 million budget). The media release and Merrill Lynch presentation on 4 April are considered at 14.2. ASIC complained (APS [920]) that the board's attention was not drawn to these comparisons at their March meeting, but it seems to me inconceivable that competent board members would need to be reminded of critically important figures that they had reviewed at their last meeting, and if they have somehow managed to forget they only had to ask for them.

[6291] In the Financial Executive Summary in the March board papers, the forecast Group EBITDA loss for the year of $85 million and the group OPAT loss of $171 million were noted in bullet points and another bullet point said "Market expectation -- EBITDA ($91 million) and OPAT ($195 million)". The draft media release annexed to the March board papers said that One.Tel was "on track, as promised" and referred to the forecast OPAT loss. ASIC submitted that, in view of the absence of comparative information about the January and September forecasts, the board papers gave a misleadingly positive impression as to the group's earning position. But the board papers were written for the directors of the company, not for outsiders. I think it can be inferred that the members of the management team who were responsible for preparing the board papers believed that the information they supplied about the company's present and forecast financial position was an accurate account, given in a concise and summary way to readers who were already well aware of the company's business and general financial circumstances. The directors had the responsibility of understanding the company's financial position, a responsibility they could not discharge simply by relying upon the text of board papers presented to them by management, in isolation from their knowledge of the company and the information they had acquired at previous board meetings. It was up to the directors to assess whether the statements in the draft media release were unduly optimistic and to resolve accordingly, and to seek from management such information as they needed for that purpose. I do not regard the board papers as misleading with respect to EBITDA and OPAT.

20.2.2.5 Next Generation revenue

[6292] In Ex P93-743 ASIC presented in spreadsheet form a comparison of various forecasts and "actual" results for the Next Generation business, month by month from July 2000 to April 2001, with year-to-date figures to March 2001, and comparisons of first-half and annual forecasts or 2000/2001. ASIC's table gave separate figures for revenue, subscriber numbers, ARPU, costs of acquisition, costs of goods sold, gross margin, gross margin percentage, EBITDA and EBIT. The "actual" results were taken from the Next Generation management accounts.

[6293] According to ASIC's table, the "actual" revenue figures were over budget, apart from a poor January result.

20.2.2.6 Next Generation subscribers

[6294] According to Ex P93-743, subscriber numbers were generally better than the September budget, presumably reflecting the increase in marketing expenditure approved at the November board meeting. The February "actual" total subscribers No was higher than the budget figure in the flash reports, but the March and April "actual" number fell a little short of the flash reports budgets.

[6295] Mr Rich said (1 JDR 1299(b)) that at the beginning of April 2001 (when total subscribers were 173,000 according to the management accounts) Next Generation was on track to reach forecast subscribers of 270,000 by 30 June 2001. Reaching that figure would have required Next Generation to obtain approximately 30,000 new subscribers per month for April, May and June. ASIC criticised Mr Rich's view on the ground that although there had been a high level of acquisition in March (35,000), the figures for earlier months were much lower (for example, the figure for February was 15,000) and consequently in ASIC's submission, there was no basis for any assurance that a level of new subscribers of 30,000 per month was attainable: APS [1890]. But Mr Rich no doubt took into account the March figure and One.Tel's marketing program, and it seems to me, on balance, that his expert assessment should be accepted. I note that the actual figure in April, according to ASIC's table, was 29,000.

[6296] Mr Rich's view that Next Generation would reach 270,000 subscribers by June 30 was reflected in the forecast contained in the March board papers: Ex P93-743, cell E21. ASIC referred to some earlier forecasts, namely the forecast of reaching 353,000 subscribers by June, made in the September board papers, and the forecast of 337,000 subscribers in the Next Generation 9-year plan contained in the January board papers. It submitted (ASR [1893]) that by the end of March 2001 One.Tel was nowhere near on track to achieve these subscriber numbers. That appears to be true but not of any significance. The forecasts had been revised and according to Mr Rich, One.Tel was on track to achieve the revised number.

20.2.2.7 Next Generation EBITDA

[6297] ASIC submitted that by the end of March 2001 it was evident that Next Generation's EBITDA loss for the year to June 2001 would be significantly in excess of budget forecasts: APS [1895]. I disagree with this submission. The September budget forecast for the full year to June 2001 was for an EBITDA loss of $106 million, and the forecast in the January budget and board papers was for an EBITDA loss of $94 million: see table 8.10 at 8.14.6. According to ASIC in Ex P93-743, the "actual" year-to-date EBITDA to the end of March 2001, taken from the Next Generation management accounts, was a loss of $80.7 million. At the average monthly rate of loss derived from the management account figures for January-April ($8.1 million), this would produce a full-year loss of about $105 million. But the management accounts give a higher loss than the flash report figures, also shown in ASIC's table, where the year-to-date figure to March is $76.92 million. If the "actual" flash report figures for the year to March 2001 given in line 65 of the second page of Ex P93-743 are used and projected out to the end of the year, the annual loss is about $101 million. That is almost identical to the forecast in the March board papers of a Next Generation EBITDA loss of $101.8b.

[6298] ASIC also submitted (ASR [1896]) that it should be "borne in mind that huge amounts of expenditure on Next Generation subscriber acquisition costs were not being expensed (and did not therefore reduce EBITDA) but were capitalised". This issue is considered at 20.6 and 22.4.

20.2.3 Earnings position at 30 April

[6299] According to the March board papers, Group EBITDA for March, after unbudgeted prepaid marketing, was a loss of $162,000: Ex MTB 1/232. There were no separate figures shown for April, but the April flash report circulated on 8 May gave the April "flash" EBITDA figure as a profit of $1.1 million before additional unbudgeted prepaid marketing, and a loss of $299,000 after taking that figure into account: Ex MTB 1/385b.

[6300] ASIC maintained (APS [1345]) that the group in fact incurred an EBITDA loss of $7.71 million in March and $15.56 million in April. It relied for that submission on Mr Carter's principal report, which extracted the EBITDA figures from management accounts. The figures taken by ASIC include adjustments made by Mr Carter to correct an error in the April figures: Ex CED 11-21, 22.

[6301] As noted above, my view is the April fixed wire/service provider management accounts were not completed until after the commencement of administration and are unreliable as a source of information about monthly EBITDA. It seems to me safer to accept the April flash report figures.

[6302] In ASIC's submission (APS [1342]), while the "actual" figure for April would not have been known by the end of April or by the date of the April flash report, nevertheless some information should by then had been available as to the earnings performance of the group during April, and in light of the poor "actual" result that transpired, it cannot have been positive information. But that submission relies on the April management accounts. ASIC added that if the doubtful debt provision was inadequate, the earnings losses would have been all the greater (APS [1347]; the doubtful debt provision is considered in Ch 19, my conclusion being that it was not shown to have been inadequate).

[6303] ASIC also submitted that the earnings results have to be considered in light of the fact that expenses relating to the acquisition of Next Generation subscribers were being capitalised and not taken into account for the purpose of calculating EBITDA: APS [1348]. In the months of January to April, said ASIC, $29.73 million was capitalised, and $8.18 million was capitalised in respect of April (referring to Ex P93-715, a table showing "Next Gen -- Capitalised Costs of Acquisition", taken from the document purporting to be the GSM management accounts for April). The capitalisation of costs of acquisition in the Next Generation business is considered at 20.6.

[6304] ASIC made some comparisons between the "actual" EBITDA results taken from management accounts and the September Group budget. I shall note them, although, for reasons I have given, they are of little significance to anything I have to decide. The September Group EBITDA budget for March was loss of $2 million and so the "actual" result was down by $5.7 million. For the budget figure for April was a profit of $1.2 million and so the "actual" result was down by $17.2 million. The September budget for the year to date EBITDA to the end of April was a loss of $57.4 million (Ex P93-744 gives the year-to-date figure to March, to which ASIC has added the April figure). The "actual" year-to-date EBITDA to the end of April was a loss of $163.46 million (the management accounts figure to the end of March in Ex P903-744, plus he corrected April figure supplied by Mr Carter's work). Earnings performance for the four months from January to April was $64.01 million down on the September budget.

[6305] ASIC noted (APS [1354]) that the year-to-date EBITDA losses to the end of April, $163.46 million, reflected a monthly loss rate of $16.35 million, so if that rate continued the EBITDA losses for the full year would be in the order of $200 million. ASIC contended there was no reasonable prospect of any positive earning results for May and June: APS [1355]. Consequently the full-year EBITDA loss was likely to be at least twice the loss of $85.14 million forecast in the March board papers: Ex MTB 1/229.

20.3 Management accounts

20.3.1 One.Tel's management accounts in the pleadings

[6306] It is common ground that the EBITDA figures set out in para S41 were taken from documents tendered by ASIC as the January, February, March and April management accounts of One.Tel.

[6307] In their defences, after referring to some detailed contentions about provisions for bad debts that are considered elsewhere in this judgment, Mr Rich and Mr Silbermann responded to the table in Annex E to the statement of claim, which sets out, inter alia, monthly EBITDA figures for January-April taken from management accounts:

•: the documents from which the management accounts figures used in the table were prepared include draft management accounts for the digital and fixed wire business of the Australian operations of the One.Tel Group, rather than final management accounts for that business; and
(1): no management accounts were prepared for the month of April prior to 17 May 2001.

Similar assertions appear in answer to ASIC's allegations about the EBITDA figures in monthly flash reports, at paras 44D and 45. ASIC submitted, correctly, the defence implies that the documents relied upon by ASIC at least constitute draft management accounts for the Australian digital fixed wire business: APS [1737].

[6308] In its principal submissions (APS [1736]), ASIC deduced from the defendants' pleadings that the defendants did not challenge the documents it relied on as management accounts for businesses other than the Australian digital fixed wire business -- that is, it inferred that the management accounts for the international, Next Generation, One.Net and One.Card businesses were not in contest. However the defendants pointed out in the defences that they did not admit any of the earnings figures pleaded by ASIC: DPS [1818]. In my view the defendants should not be regarded as having conceded that any of the January-April management accounts were in final form.

[6309] ASIC submitted that One.Tel's management accounts were relevant in two different but overlapping ways: APS [1725]. First, it said they were relevant to identifying from an objective point of view what the financial position of One.Tel was from time to time (frequently described by ASIC in submissions as the "actual" position). Indeed, as far as I can see, the management accounts are the principal source of ASIC's pleaded allegations about monthly EBITDA in the period from January to April 2001; it urges the court to prefer the figures in the management accounts to the figures in board papers and flash reports. Second, they were said to be relevant to the knowledge that the defendants had, or should have had, at relevant times during 2001. Thus, although the April and May management accounts could not have been expected to have been finalised in the normal course before Mr Rich left the company on 17 May, ASIC submitted that their contents, in their subsequently finalised form, are relevant both to an assessment of the financial position of One.Tel during April and to an assessment of the information possessed by or available to each defendant concerning the April position of the company: APS [1728].

[6310] The defendants contested both of these points, contending that management accounts were only one of several financial tools, and a relatively minor one, not necessarily more reliable (and probably less reliable) than other compilations of financial information such as flash reports and board papers; and in any case, that the management accounts for January, February and March 2001 for the fixed wire/service provider business were incomplete drafts, while the April management accounts could not be relied on because staff who were aware of the financial position had left and it was not clear how they were prepared.

20.3.2 Are the management accounts prima facie evidence of their contents?

[6311] In my judgment on the admissibility of ASIC's documentary tenders (ASIC NSWSC 417), I described the hard-copy documents tendered by ASIC as management accounts, and held to be admissible, as follows (at [51]):

[51] ASIC has tendered documents at 3 0001-3 0106 that purport to be management accounts for One.Tel for the months from June 2000 to May 2001. Each document is headed "MANAGEMENT ACCOUNTS -- ONE.TEL P/L" and then, on a different line, "For the Month Ended" followed by the date of the last day of the month in question. In some cases two documents with somewhat different figures identify the same month. They are all in spreadsheet style rather than A4 style. Most of them are profit and loss statements (headed as such), presenting revenue by business segments, costs of goods sold, contributions by business segments, gross margin, operating expenses, profit/(loss) before interest and tax and depreciation, net profit/(loss) before tax, net profit/(loss) after tax, and net profit/(loss) after tax and dividend. Actual and budget figures are given for the month and year to date. However, some give only operating expenses.

[6312] I then gave a detailed description of each document (at [52]). It is evident from the descriptions that the documents, in hardcopy form, are unsatisfactory in various ways. For example, some are illegible and many lack footers that would locate them electronically in the I:drive. There are two versions of part of the March documents. I said (at [53]-[54]):

[53] In some cases the properties pages seem to be correlated with the documents, but there are some discrepancies (for the documents at 3 0073-3 0081 and 3 0082-3 0084). For each of the documents with properties pages, the entry for "last saved by" is "tholmes", except for 3 0016 (nadeenj).

[54] There was a substantial amount of evidence about management accounts in the cross-examination of Ms Reynolds and Mr Carter, especially the former, which has been summarised by the defendants in DS 54. Ms Reynolds indicated, for example, that there was an early version of the April management accounts on the I:/Drive but it was substantially incomplete: T 1132-1133, 1135.

[6313] I noted that the documents were sourced in the Ferrier's I:drive. According to the index to the Carter exhibits, in most cases the file path through the finance directory is through "Mgtact2001", and a stated month, to "MgtAccount One.Tel.xls" or some close variant of that title. However, from March to May 2001 (except for 3 0102-3 0106) the file path is through "Tim" and "Administration" to "BS" with a stated month.

[6314] I held that the documents had been adequately authenticated for the purposes of admissibility, but I noted that it was open to the defendants to contend at the final hearing that any particular document had little or no evidentiary value to prove One.Tel's financial circumstances, because (for example) it was a draft, or for any other reason: at [116]-[121], [127]-[131], [138]-[140]. At the hearing the defendants challenged the veracity and reliability of the January-March and April management accounts for the fixed wire/service provider business on various grounds, including the assertion that the January-March documents were incomplete drafts.

[6315] I held that the management accounts identified at [52] of the judgment, which included consolidated figures for April, were admissible under s 1305 of the Corporations Act. They were "books" kept by One.Tel "under a requirement of [the Corporations] Act", the requirement being in s 286, and therefore they were admissible under s 1305(1) and were prima facie evidence of any matter stated or recorded in them: at [306], [310], [312]. I also held that under s 1305(2), there was a presumption that books which on their face were being kept by a body corporate were kept under a requirement of the Act, and that this presumption applied to the documents tendered by ASIC as management accounts, and had not been rebutted: at [318]. I observed that on their face, the documents tendered as management accounts purported to provide financial information of a kind that would assist to explain One.Tel's financial position and performance: at [312].

[6316] ASIC sought to take advantage of the presumption in s 1305(2), and submitted that in light of s 1305(1), the documents that it tendered as the January-April management accounts are prima facie evidence of the matters stated or recorded in them: APS [1732]. In my opinion that submission is correct and follows from my earlier judgment. The key question is not, therefore, whether ASIC has proved the authenticity and reliability of the documents tendered as management accounts, but whether the presumption arising under s 1305(1) has been rebutted.

20.3.3 The nature and scope of management accounts

[6317] Generally speaking, management accounts are used by business managers (sometimes, but not necessarily always, including boards of directors) to assist them to monitor business performance on a regular basis, usually monthly. Normally they are used and circulated internally in the business, and are not externally reported. In contrast with financial accounting reports, which are based on past information, management accounts are forward-looking and often pragmatically computed.

[6318] Companies are not specifically required to keep monthly management accounts, although an obligation to maintain some such records might be implied by the statutory requirement to keep financial records that correctly record and explain the company's transactions and financial position and performance and would enable true and fair financial statements to be prepared and audited: s 286(1); see ASIC NSWSC 417 at [282]-[301]. At any rate, if management accounts are in fact kept as part of the company's financial records, they are kept under the requirement in s 286(1), as I held in my judgment on the admissibility of the documentary tenders: at [38].

[6319] Neither the Australian accounting standards nor the ASX principles of good corporate governance and best practice recommendations expressly say anything about management accounts. The Australian Accounting Standards Board has published a paper called "Framework for the Preparation and Presentation of Financial Statements" (see www.aasb.com.au\/AASB Standards\/Australian Standards\/Table 1) in which the following is said:

(2): The management of an entity has the primary responsibility for the preparation and presentation of the financial report of the entity. Management is also interested in the information contained in the financial report even though it has access to additional management and financial information that helps it carry out its planning, decision-making and control responsibilities. Management has the ability to determine the form and content of such additional information in order to meet its own needs .... Nevertheless, published financial reports are based on the information used by management about the financial position, financial performance and cashflows of the entity.

[6320] Notwithstanding the wealth of publications on the subject (for example, K Langfield-Smith, H Thorne and RW Hilton, Management Accounting: an Australian Perspective, McGraw-Hill, Australia, 2006; P Weetman, Financial and Management Accounting: An Introduction, 4th ed, FT Prentice Hall, 2006; J Collis and R Hussey, Business Accounting: An Introduction to Financial and Management Accounting, Palgrave Macmillan, 2007), the concept of "management accounts" is not sufficiently specific to enable one to prescribe standard or uniform component parts and data sources. At least to a degree, it seems that business managers design the scope and contents of "management accounts" to suit the purposes of the particular businesses they manage. According to the literature, the lack of uniform practice seems to extend to public companies. Unfortunately there is no expert evidence in this case about the nature, reliability and use of the management accounts of listed public companies, either generally or in the telecommunications business or in the "start-up" circumstances of One.Tel.

[6321] It is pertinent to note the comments of the learned authors of Management Accounting: an Australian Perspective in the preface to their book:

Unlike the financial accounting area, there are no accounting standards or legally enforceable practices, and few widely-published debates over appropriate accounting practice. Management accounting takes place within organisations and can be quite specific to each business. Also, to understand the nature of management accounting practice we need to understand the broader aspects of business practice, across a range of areas including strategy, marketing, human resource management, operations management and organisational behaviour. Management accounting both draws on and contributes to these areas.

[6322] Management accounts are not prepared for the purpose of providing a statement of the financial position of the company to external users of financial information (such as shareholders, lenders, investment analysts and trade unions), but instead they are prepared in order to satisfy the needs of internal users (including the need of managers to assess current financial performance): see Weetman, 2006, op cit, pp 426-7; Collis and Hussey, 2007, op cit, pp 9, 210. That being so, one would not expect management accounts to be as reliable as statutory financial reports in stating the company's financial position at a past date. As Langfield-Smith, Thorne and Hilton observe (op cit at 9):

Relevance and timeliness are considered more important than objectivity and reliability.

[6323] Such case law as there is reflects the concept of management accounts that one gleans from the textbooks. Thus, in Consolidated Constructions Pty Ltd v Satellite Group Ltd [2000] NSWSC 984; BC200006543, where Santow J had to determine the solvency of the company, his Honour remarked (at [22]) that he would have expected to see reasonably up-to-date management accounts but that management accounts, if they existed, would be "no great assurance as to reliable financial information". In Duke Group Ltd (in liq) v Pilmer (1994) 15 ACSR 255 ; (2006) SASR 364 Mullighan J took the view that while it would be good practice for a company to keep management accounts, there was no requirement under the companies legislation (in particular, under the predecessor of s 286) to keep what his Honour called "interpretive or judgmental reports" (at [13]), a phrase he applied to management accounts.

[6324] There is an important difference between management accounts prepared for internal management purposes, and management accounts presented to a prospective purchaser of the business, because the supply of management accounts to a prospective purchaser will normally be taken to imply warranties as to their contents. In Thomas Witter v TBP Industries Ltd [1996] 2 All ER 573, where the purchaser of the business claimed damages for negligent misrepresentations conveyed in inaccurate management accounts supplied by the vendor, Jacob J observed that accounting practices that were acceptable when used for the purposes of providing information to management (such as the making of ad hoc deferrals) needed to be assessed in a different light when the management accounts were supplied to a purchaser with a warranty that they complied with good accountancy practice. Unioil International Pty Ltd v Deloitte Touche Tomatsu (A Firm) (1997) 17 WAR 98 addressed the converse problem, whether an accountant engaged by the purchaser to conduct due diligence should have demanded updated management accounts for the business prior to completion of the transaction. Ipp J gave an affirmative answer, after hearing evidence that a review of management accounts and actual performance against budget were essential to completing proper due diligence. There was evidence that the business, a pool business, had made a profit projection based upon the sale of new pools, but in fact it had incurred a massive trading loss because no pools had been sold. The failure to sell any pools would have been obvious if management accounts had been supplied, regardless of how they might have been prepared.

[6325] In the present case there is no issue about the supply of management accounts to a prospective purchaser, implying warranties as to their accuracy. The issues agitated by ASIC relate to the use of documents it claims to be management accounts for purposes of internal management (including management reporting to the board). The cases and literature indicate that such management accounts are less reliable than a company's periodic financial statements for external users, and their contents and formatting are determined by management needs.

20.3.4 One.Tel's management accounts

[6326] There is evidence to show that it was One.Tel's practice for the finance teams of each of the business units to prepare "management accounts" for those businesses on a monthly basis: 1 JDR 580. But what, exactly, were One.Tel's management accounts, how were they prepared, and what was done with them?

[6327] Fortunately the evidence includes some quite detailed information about the management accounts, in the form of a file note entitled "Financial Reporting -- Summary" (MTB 8.1, p 14), which appears to have been prepared by Mr Holmes in about July 2001, evidently for the assistance of the liquidators (T 15162-3). The file note was received into evidence without any limiting order. Except where noted, I accept the description of the management accounts given in the file note, and I take it to apply to the management accounts for the months of December 2000 and January-May 2001.

[6328] According to the file note, monthly management reports were prepared for each of the business units, namely the fixed wire/service provider business, Next Generation, One.Net, One.Card and the international businesses. There was no consolidation. The management accounts consisted of detailed profit and loss reporting to EBITDA level and reporting of key performance indicators including tolling, activations, and ARPU. No balance sheets were reported monthly but each business unit performed balance sheet reviews to ensure that the profit and loss information materially reflected performance, a process that involved monthly reconciliation of key balance sheet items (particularly those affecting profit and loss).

[6329] The information in the management accounts was based on the general ledger, with reports extracted from the Adept ledger system. The general ledger was interfaced with the billing system, which automatically posted to the general ledger, but because of timing issues relating to the availability of billing data, "significant manual intervention" was required to ensure recognition of revenue in the correct month. The need for manual intervention had been "compounded by problems in the billing system". Billing delays led to a greater reliance on estimates, although by December 2000, billing was largely up-to-date and accordingly the results reflected the figures in the billing system (other evidence considered in Chs 8 and 10 indicates there was a residual lag in the billing-catch up from the delays in October/November 2000). According to the file note, "in light of the billing issues and the impact on the accounting system less emphasis has been placed on the management reporting process and more reliance placed on the Flash process and results".

[6330] The file note contrasts the regular month-end closes with the closes that occurred bi-annually at 30 June and 31 December. The June and December figures were referred to as "hard month end closes" in which all balance sheet accounts were reconciled and reviewed by finance and senior executives, and the profit and loss account was prepared to OPAT. According to the file note, "all other month end closes are softer with the preparation of key balance sheet reconciliations only". The note said that certain transactions were not accounted for monthly but only on a six-monthly basis, and provided a list of those transactions, which included accounting for lease transactions and amortisation of losses on sale and leaseback.

[6331] The file note reported that the monthly profit and loss statements were reviewed by the finance team and Mr Hodgson on a monthly basis, but since July 2000, no formal presentation had been made of these results to the board on a regular basis. That statement seems to accord with the board papers in evidence, and there is no evidence to the contrary. I accept it. Since Mr Rich gave plausible evidence that he would be prepared to give the board additional financial information if a director asked for it, I infer that no board member sought to have management accounts circulated with the board papers for any meeting after mid-2000.

[6332] Thus, the situation was that "management accounts" of a limited kind, not including balance sheets, were prepared on a monthly basis but they were "soft closes" because only "key balance sheet reconciliations" were prepared and the profit and loss account was not prepared to OPAT, and after July 2000 they were not circulated to directors. The preparation of management accounts involved questions of judgment that were made all the more difficult by billing issues, with the result that more reliance was placed by management on more up-to-date information, including current information about KPIs and flash report figures, especially information made available through One.Tel's SAS system, which is not in evidence.

[6333] The questions of judgment involved in the preparation of One.Tel's management accounts require further elaboration. Mr Rich said (2 JDR 1826) that the determination, for the purposes of preparation of management accounts, of monthly revenue, cost of goods sold and operating expenses, involved a significant element of judgment, including judgment as to timing issues especially with respect to claims against carriers. It is necessary to consider what was involved in accruing revenue, claims against carriers and expenses (COGS and allocation of operating expenses).

20.3.5 Accrual of revenue; the "to be billed" reports

[6334] According to Mr Rich, the determination of revenue for the purpose of preparing management accounts involved considerable judgment, especially at times when billing information was affected by a disruption to the billing system: 2 JDR 1834. I agree. The evidence includes another file note, this one headed "Accruals -- Summary", which is also in the finance files on the I:drive: Ex MTB 8/31. Once again it appears from the properties pages that the note was prepared by Mr Holmes in about August 2001, and I infer that it was prepared for the assistance of the liquidators. It contains a description of the accruals process for revenue in the fixed wire/service provider business.

[6335] The information in the file note is generally to the same effect as the evidence of Mr Rich, and tends to corroborate Mr Rich's evidence. That has led me to accept Mr Rich's evidence on the subject. Accordingly my account of the accruals process for management account revenue is partly based on the file note and partly Mr Rich's evidence, as indicated below.

[6336] According to the file note, revenue accruals were generated from two sources, namely bill run data and "to be billed" reports.

[6337] The file note explained that billing data was allocated to billing runs. There were 10 billing runs for each month. Each customer was allocated to a particular monthly billing run. Each billing run was clearly attributed to a particular month, but it would not necessarily be finalised and posted in that month. For example, normally (assuming no delays) the last billing run for a month was generated and sent to customers by the middle of the following month, and then posted to the billing system. But that revenue "belonged" to the previous month. To correct this, analysis was performed and manual journals were posted so that the data from the 10 billing runs for a given month came to be reflected in that month's revenue. The billing team provided an excel file called a "Bill Run Summary", which summarised billing data by billing run and product. Manual journal entries were posted to "force" the revenue account to reflect the bill run summary, and any difference was posted to the balance sheet as a debit to accrued revenue: Ex MTB 8/31. That would presumably not show up until the time of the half-year or full-year accounts, as balance sheets were not prepared for monthly management accounts.

[6338] In addition to those adjustments, there was a second adjustment process which was undertaken for the following reasons:

(3)

to exclude from the revenue for a given month:

(4): charges to customer accounts relating to services not yet provided (for example, line rentals or access fees); and
(4): billing data relating to services provided in a prior month; and

(6)

to include in the revenue for a given month services provided in that month that were part of a billing run that had been attributed to the next month.

[6339] For example, if the billing run for a customer was for the period beginning on the 20th of the month, and the March billing run for that customer went out on 3 April, then:

(7): manual adjustments were needed to post the billing run to March rather than April;
(8): data relating to services provided from 20-28 February had to be reversed out of March; and
(9): data relating to the period 20-31 March, which was to be billed in the April billing run, had to be accrued in March.

Note that the accrual for March (item (iii)) could affect the debtors ledger, but it was not reflected in the trade debtors at reporting date because the bills would not have been sent to customers at that time.

[6340] Note also that the process of calculating revenue from the fixed wire/service provider business was quite different from calculating revenue for the Next Generation business, because Next Generation had its own switches which allowed revenue to be calculated from call data taken from the switches rather than through reliance on the billing system: Ex MTB 8/32; 2 JDR 1842. That might explain why, if the disruption of the billing system prevented Mr Hodgson from finalising the fixed wire/service provider management accounts for January and subsequent months, he might nevertheless have been able to finalise the Next Generation management accounts.

[6341] The information that was needed to achieve these adjustments was provided in a systems report drawn from the billing system, called the "to be billed" report. The figures in the "to be billed" report resulted from an electronic search of the billing database for billing runs relating to months following the month in question, from which data was then extracted having an "effective date" prior to the end of the month in question. In substance, the effective date was the date that the service was supplied.

[6342] Mr Rich emphasised that the accuracy of the billing accruals made on the basis of the "to be billed" report depended on the integrity and completeness of that report: 2 JDR 1838. He also observed that if the billing system was disrupted and there were delays in processing call data and sending out bills, then the process of calculating revenue would also be disrupted: 2 JDR 1839. Where a disruption of this kind occurred, judgment was required to be exercised, especially by Mr Hodgson, as to when the billing data were sufficiently complete to allow a reasonably accurate accrual of revenue to be calculated: 2 JDR 1840.

20.3.6 Was a reliable "to be billed" report necessary for the accrual of revenue in One.Tel's management accounts for the fixed wire/service provider business?

[6343] Mr Rich gave evidence about how billing delays affected the estimation of revenue in the fixed wire/service provider business for the purposes of monthly management accounts: 2 JDR 1841. He said that if no bills were sent out during, say, the first 2 weeks of February, a "to be billed" report run in February would contain less call data for January calls than would normally be the case, because the billing system would not have processed most of the data for calls made in January but not billed in January. Similarly, assuming the billing delay in the first 2 weeks of February had not been overcome, a "to be billed" report run in March in respect of February calls would contain less call data for February calls than in normal circumstances. Consequently a billing delay in the first 2 weeks of February, unremedied in February, would make "to be billed" reports run in February and March (and indeed, later if the problem was still not remedied) unreliable. That evidence is consistent with the description of the accruals and "to be billed" processes in Mr Holmes' file note, "Accruals -- summary" (see 20.3.5), and I accept it.

[6344] Mr Rich said that in such circumstances, one possible solution would be to hold off finalising the management accounts until a later date, when the "to be billed" reports would be more complete: 2 JDR 1841d. He said this was what in fact happened during late 2000, when the fixed wire/service provider management accounts for August and September were delayed until mid-November, when sufficient billing data for those months had been processed through the billing system to allow revenue to be estimated with reasonable accuracy: 2 JDR 1841e.

[6345] According to Mr Rich's evidence, a proper accrual of revenue for the fixed wire/service provider business management accounts at a time when there were billing delays depended upon the finance team having a "to be billed" report, which would give them the adjustments to be made to ensure that monthly revenue reflected calls made in that month: 2 JDR 1841. In cross-examination he said:

•: "there's no point in preparing them [draft management accounts] if you don't have the correct "to be billed" data available": T 12195;
•: "if you can't generate the "to be billed" report, you can't work out your accrual": T 12199;
•: "if you don't have billing delays then there are probably other methods that you could use", but in the circumstances confronting One.Tel in December 2000-February 2001 it was "an essential prerequisite of the accrual process": T 12221.

ASIC attacked this evidence by claiming that it was inconsistent with the views of Mr Carter, Ernst & Young and Mr Silbermann, and with the fact that billing was estimated in the spreadsheet 2403C.xls.

[6346] Mr Carter's evidence was contained in a report exhibited to his affidavit of 21 December 2004. He was asked to respond to a statement made on behalf of the defendants in written submissions dated 13 December 2004, in which they said, without further elaboration, that the management accounts were "not final, complete or accurate, but were recognised and dealt with by management at the time as significantly understating actual EBITDA, by reason of the disruption which One.Tel was experiencing in 2001 to its billings". Mr Carter responded by saying that, while a shortfall in billings would reasonably be expected to impact on cash flow, proper accounting processes would result in a correct measure of EBITDA, because those processes would include accrual of income earned but not yet billed. Indeed, he said, it is usual accounting activity for a telecommunications company such as One.Tel to routinely estimate such revenue and bring it to account: Ex P66, Tab 9, para 14(a) and (b).

[6347] I doubt that the defendants would disagree with these statements by Mr Carter. When Mr Rich eventually addressed the subject of billing accruals in his affidavit made on 27 March 2006, he readily accepted that accruals were necessary for the purpose of estimating revenue in monthly management accounts. He explained in considerable detail how and for what purposes accruals were needed, and the role of the "to be billed" reports in the processes actually used by One.Tel for estimating revenue. What seems to emerge is that, while there are no doubt many ways in which estimates of revenue can be made, according to Mr Rich's evidence the actual method that had come to be employed by One.Tel by the end of 2000 depended critically on the presence of a reasonably reliable "to be billed" report in respect of each month, because of the difficulty of taking into account the effect of billing delays by any other estimation method. That specific evidence is capable of standing together with Mr Carter's more general evidence.

[6348] ASIC also referred to Ernst & Young's "Early Warning Report", prepared for the purposes of the half-year review to December 2000. This report (Ex CED 5A) is undated, but since it sets out a list of things outstanding "as at 13 December 2000", it is a reasonable inference that the report was made on or shortly after that date. One of the "issues noted" in the report was "unbilled revenue". Under that heading, the report said:

One.Tel Ltd is using an estimation process to determine the recognition of revenue for amounts that are unbilled as at the end of the period. Prior to this the company relied on a "to be billed" report generated by the billing system; however, due to significant issues encountered in the billing system, this report cannot be relied upon presently.

The current practice has been to use actual unrated call data and apply a sales margin (based on average revenues by service type) to provide an estimate of revenue that should be recognized in a given period. The cost data used is actual costs received from carriers on a monthly basis.

The company has informed us that there have been no material differences between these estimates and amounts eventually obtained from the billing system. No detailed evaluation of estimated revenue has been performed at this stage and this evaluation will form part of our procedures at the half-year.

[6349] ASIC placed emphasis on the first of these three paragraphs, contending that it showed that there was an alternative estimation process that did not involve using a "to be billed" report and therefore that Mr Rich's claim that the estimated revenue for the fixed wire/service provider management accounts could not be finalised because of the absence of reliable "to be billed" reports must be false.

[6350] I read the report differently. It seems to me that the third quoted paragraph implies that the method being used by management to estimate revenue was an interim measure to be compared with "amounts eventually obtained from the billing system". Ernst & Young did not say that the estimation process that they described had replaced "to be billed" reports except in the short term and for short-term purposes; and therefore the report does not imply that such an estimation method had been adopted as adequate for management account purposes. It is consistent with the report that, although management were supplying Ernst & Young with such revenue information as they could for the purposes of the half-yearly review, the finalisation of fixed wire/service provider management accounts would be delayed until a reliable "to be billed" report could be generated. For the purposes of the half-yearly figures, Ernst & Young would carry out a "detailed evaluation of estimated revenue", a process that had not been undertaken at the time of the report.

[6351] Mr Rich reiterated his evidence that a proper "to be billed" report was essential for estimating December-February revenue for the Australian fixed wire/service provider business, when cross-examined about Ernst & Young's report. ASIC submitted (APS [1751]) that his answers revealed that he was prepared to state and then persist with an untenable position in order to advance his case. I do not regard Mr Rich's position, consistently stated in his evidence, as untenable or inconsistent with the Ernst & Young report. I therefore reject ASIC's submission.

[6352] Mr Silbermann was asked to state Mr Hodgson's response when he asked Mr Hodgson about management accounts, on about 20 April 2001. He said Mr Hodgson told him that management accounts for January to March for the fixed wire/service provider business had not been finalised "due to the fact that the billing accruals hadn't been taken up": T 12920. Mr Silbermann said he was surprised by this because he "didn't see logic in what Steve Hodgson was telling me". When asked to explain this, Mr Silbermann said:

Because even though the billing accruals could have been taken up in the normal way of accruing in the management accounts, there were other mechanisms that could have been used to make an accrual.

He said "the normal way of accruing in the management accounts" was to use the "to be billed" reports. But he was not asked to say what the "other mechanisms" were. He might have had in mind kinds of temporary measures described by Ernst & Young in their report. In these circumstances I would not conclude that his evidence is inconsistent with the evidence of Mr Rich.

[6353] My conclusion on this point is that a reliable "to be billed" report was necessary, as a practical matter, in order to produce an estimate of revenue for the fixed wire/service provider businesses. The billing delays affecting January and February revenue were an obstacle to preparing "to be billed" reports for those months and for March. A method of estimating revenue, which relied on the SAS system rather than the billing system, was available to be used and was used for the January and February flash reports and the January board papers, but evidently not sought satisfactory for the management accounts, which were based upon Adept ledger information adjusted by accruals.

[6354] My conclusion implies acceptance of Mr Rich's evidence, to the effect that the January, February and March management accounts for the fixed wire/service provider business were left open and not finalised pending receipt of a reliable "to be billed" report. Consequently, if the documents relied upon by ASIC as the January, February and March management accounts were documents in that state, they can only have been drafts and cannot therefore be relied upon as accurate statements of the financial position of the fixed wire/service provider business in any of those months. The critical question to examine, on the balance of probabilities, is whether the documents relied upon by ASIC were incomplete documents awaiting the final calculation of revenue because of the absence of a reliable "to be billed" report.

20.3.7 Accrual of carrier and other claims

[6355] Mr Rich gave evidence that disputes with carrier suppliers for overcharging or service levels were so frequent and material that the timing of recognition of claims by One.Tel arising out of those disputes could have a potentially material impact on the calculation of profits: 2 JDR 1848. He said that the decision as to when to take up these claims, and for how much, involved considerable judgment on the part of the senior executive responsible for signing off on the management accounts, a job that could not be done by the more junior finance team who might only have peripheral knowledge of the status of any particular dispute: 2 JDR 1851. I accept his evidence that a decision whether to take up such a claim would involve judgment best exercised by the senior executive supervising negotiations with the carrier; the question whether carrier disputes were frequent and material is considered elsewhere in these reasons for judgment.

[6356] Mr Rich said that accruals for claims were to some extent taken up in monthly management accounts, but they were reviewed in much greater detail shortly before each half-year or full-year reporting date: 2 JDR 1849. That appears to be correct. For example, as Mr Rich pointed out, One.Tel's $5.6 million claim against Telstra regarding local call charging was taken up and accrued in the December 2000 management accounts as part of the process of preparation of the half-yearly accounts, even though it related to the period from July to December 2000 (2 JDR 1850, referring to a spreadsheet in which sums of $42,579.76 and $5,559,028 million were brought into revenue for One.Tel Australia for "Telstra local usage": Ex CE 5 01843-4).

20.3.8 Accrual of COGS and allocation of OPEX

[6357] In his file note, accruals -- summary (Ex MTB 8/31), Mr Holmes explained that the vast majority of accrued expenses were specific accruals, which occurred where goods or services had been received at the reporting date but the invoice had not been entered into the accounts payable system at that date. Expenses were usually accrued against the invoice and therefore the amount was defined. But sometimes there were specific accruals without an invoice: for example, in the case of marketing expenditure, quotes were received from suppliers and when the service was committed the amount quoted was accrued.

[6358] There were also "general" accruals, which were required where goods or services had been provided but the invoice had not been received (I infer that carrier services were an illustration of this phenomenon). In those cases the amount to be accrued had to be estimated, usually on the basis of prior invoices. Mr Rich said that this involved the use of judgment and experience: 2 JDR 1831. The file note puts the matter more colourfully: "in some instances general accruals may include estimates that are very much a "thumb suck" that are considered reasonable based on prior experience".

[6359] As Mr Rich pointed out (2 JDR 1847), the process of accruals for carrier charges was independent of the calculation of revenue. Therefore, if an accrual was made for carrier call charges not yet invoiced but the revenue derived from those calls was not accrued for any reason, the COGS accrual would impact directly on EBITDA.

[6360] It was necessary, for the purpose of producing management accounts for the Next Generation business and separate accounts for other Australian businesses, to allocate operating expenses between those businesses. That was also a process that involved judgment: 2 JDR 1852. Mr Rich said the question of allocation was a matter of some debate internally at One.Tel during 2001, and that the finalisation of an appropriate methodology involved complex issues of some controversy between the finance teams of the two businesses: 2 JDR 1853. I accept that evidence: further, see 22.4. Eventually in late April 2001 approximately $21 million of operating expenses were reallocated to the Next Generation business for the year to 30 June 2001, as noted in the April flash report: Ex MTB 1/385B.

20.3.9 Differences in methodology between management accounts and other financial performance calculations made by One.Tel's management

[6361] The differences in methodology between the preparation of figures for flash reports, business plans (including the January budget recut) and board papers, on the one hand, and the preparation of monthly management accounts on the other, need to be considered more fully. The model for calculating the historical flash and business plan revenues used ARPU and subscriber figures from the SAS system, as explained by Mr Rich in his affidavit: 1 JDR 726. The method of calculating the revenue of a business was to take the figures for subscribers for each of the business's products during the month from the SAS system, convert them to monthly averages, and multiply the subscriber figure by the average ARPU for that product (also taken from the SAS system): 2 JDR 1844. Although the ARPU figures were derived from the billing system and therefore would not be up-to-date if there were a billing disruption, ARPU over large numbers of subscribers tended to vary only gradually over time and was not volatile over short periods, and so a revenue calculation based on ARPU would be reasonably accurate notwithstanding billing delays: 2 JDR 1845; compare ASR [522-4].

[6362] In cross-examination Mr Rich was taken through various subscriber and ARPU assumptions by reference to the January recut spreadsheet: especially at Ex CE 1 0012 and following. Though his attention was focused on the January budget recut, as I understand the position the same model was used for flash reports and board papers. I accept his evidence because it is consistent with, and explains, the spreadsheet figures.

[6363] He said that the model used for preparation of the January budget recut calculated the forecast revenue for a particular future month by a method that did not take into account revenue figures for previous months (T 12417):

The previous month's revenue number doesn't drive the current month's revenue or any part of the current month, so what I'm trying to say is I'm aware that in some forecasting models on occasions you see people say, "Well, let's add 5% to last month's revenue and that will then determine what we expect to do for next month," and then so on for each other month. That is not how this model has been constructed. It has been constructed in much more micro-detail than that.

[6364] The model calculated the forecast revenue for each future month on a product-by-product basis. The "products" were, for example in the wireline business, the "override" product, the "switch" product and the "preselected" product. Forecast monthly revenue per product was calculated by multiplying the expected subscriber number for the product for that month by the expected ARPU for the product for that month. Total revenue was the sum of the revenue for each product. The forecast subscriber numbers and ARPU rested upon assumptions that Mr Rich explained.

[6365] The subscriber number for a particular product in a given month was calculated by taking the tolling subscriber number at the end of the previous month and adjusting it in two ways. First, it was adjusted by taking the expected marketing spend for that month and dividing it by the cost of acquisition (which is a cost per customer) so as to derive the expected new subscriber take-up. That figure was added to the tolling subscriber number at the end of the previous month. From that gross number, the expected churn (that is, customers leaving One.Tel) was deducted. The assumptions involved in those calculations can be seen in the spreadsheet workings at Ex CE 1 0012. This produced the expected tolling subscriber number for the product as at the end of the month in question. The subscriber numbers for the end of the month in question and the end of the previous month were then added together and halved to produce the average tolling subscriber number for the month for that product.

[6366] ARPU was also calculated for each product. Take, for example, the "switch" product. The model subdivided the product into component parts, namely line rental, local call, long-distance national, long-distance international, and fixed-to-mobile. Then an assumption was made in respect of each of those elements: for example, the ARPU assumption for fixed-to-mobile was a constant $15 per month. The process can be seen at Ex CE 1 0013 (ARPU by product line). The assumptions for these component parts were extrapolated from actual historical experience, including, where appropriate, call data obtained via a direct feed from Optus. The figures produced for the component parts were then added together to produce the end-of-month ARPU for that product. The end of month ARPU was added to the ARPU at the end of the previous month and that figure was halved to produce the average ARPU for that product for the month in question.

[6367] On the other hand, revenue figures for the monthly management accounts figures were calculated in the manner described in the "Accruals -- Summary" file note (Ex MTB 8/31; see also 2 JDR 1834-41) considered above, at 20.3.5. What is striking, for present purposes, is the extent of the need for estimations and judgment, especially where the billing process was disrupted, compared with the more limited and specific discretions required in the method of revenue calculation used by One.Tel for other purposes.

[6368] The differences in methodology between the business plans and flash reports, on the one hand, and the management accounts on the other, meant that the two sets of revenue figures were usually different to a degree. For example, the defendants prepared a table based on historical revenue figures taken from the January recut and from the management accounts for the months from July to December 2000, which showed variations in every month other than December ranging from $2.7 million to $0.1 million, and then a larger variation of $11.1 million in December: DPS [518]. Apart from the December variation (which seems to be explained by other factors), these figures seem to be explained by the differences in methodology.

[6369] In my opinion, the extent of the judgmental or discretionary factors involved in preparation of monthly management accounts, especially in the context of billing delays, coupled with the "lagged" nature of the information in management accounts, when compared with the more immediate currency of revenue figures produced by the model from the SAS system and the relative speed and ease of deriving that information from the model, made it reasonable for the defendants to place greater reliance on the model than on the management accounts for the purpose of interim assessment of the company's financial performance, between yearly and half-yearly financial reviews.

20.3.10 Were the documents tendered by ASIC as January-March fixed wire/service provider management accounts merely incomplete drafts?

[6370] The defendants contended that the documents tendered by ASIC as January, February and March management accounts are drafts: defences, para S41(b)(i). Essentially they advanced two reasons for this conclusion: first, that billing delays and failure to process some billing data during January and February 2001 had prevented management from obtaining reliable "to be billed" reports, and therefore they were unable to accrue revenue accurately for management accounts purposes and so any management accounts documents that were prepared for January, February and March must have been incomplete; second, there were various indications in the documents themselves indicating that the documents tendered by ASIC were drafts.

[6371] As to the first point, Mr Rich gave evidence that no bills were sent out for the fixed wire/service provider business during the first 2 weeks of February 2001. He said that additionally, it emerged in late March 2001 that there was a substantial amount of billing data for January and February 2001 that had not been processed by the billing system. These data were to be processed during April and billed during April and May: 2 JDR 1841c. He expressed the belief that in those circumstances, draft management accounts were prepared, which included revenues calculated on the basis of the billing information to hand, but the drafts were then held open and not signed off pending more up-to-date billing information becoming available.

[6372] Mr Silbermann corroborated Mr Rich's evidence by saying that to his knowledge, no final management accounts for the fixed wire/service provider business were available for review during the period from January to March 2001 because the revenue accruals had not been completed: MS 59, 973. Mr Silbermann said that he became aware on about 20 April 2001 that the January, February and March management accounts had not been finalised, and that he did not recall seeing any management accounts for the fixed wire/service provider business during 2001: MS 971.

[6373] ASIC submitted that the court should reject Mr Rich's evidence that billing delays had given rise to problems in accruing revenue for the January and February management accounts because, according to Mr Rich's own evidence, that was not one of the reasons advanced by Mr Hodgson for the delay in the completion of the management accounts, when Mr Rich inquired in mid-March: 2 JDR 1856a.

[6374] As noted more fully at 20.3.14.1, when Mr Rich asked Mr Hodgson about the management accounts in mid-March, Mr Hodgson explained that they were not ready to be reviewed, the finance team had been working on the half-year numbers, Mr Barnes had left, Mr Holmes had fallen off his bike, and Mr Hodgson himself was about to go on leave. ASIC regarded it as significant that, according to Mr Rich, Mr Hodgson did not say that the management accounts had been delayed because of the impact of the billing delays on the accrual process. But that does not have any material significance, in my view. In mid-March, Mr Hodgson may well have believed that the difficulties in accruals were resolving themselves through the billing catch-up and that it would have been possible to resolve the outstanding issues if only he had the staff to do so.

[6375] There is other relevant evidence considered at 20.3.14.1 and 20.3.14.2, which ties the delay in finalising the fixed wire/service provider management accounts to the billing issues. The evidence indicates, inter alia, that Mr Rich asked Mr Hodgson about the management accounts for the fixed wire/service provider business in about the second week of April, and Mr Hodgson told him that Mr Holmes was having trouble finalising them because of billing issues. Mr Rich raised the matter again with Mr Hodgson in about the third week of April, so that the figures could be given to Mr Miller and Mr Green for their review, Mr Hodgson said he was working on finalising them. According to Mr Rich, the work was subsequently completed and resulted in the spreadsheet FW SP revised forecast monthly.xls, which was a source of the figures used by Mr Miller and Mr Green for the spreadsheet they provided to the board as part of the 17 May board papers.

[6376] In summary, the defendants have persuaded me that the billing delays were an obstacle to the accruals process for the January, February and March management accounts.

[6377] As to the second point (that there are indications on the face of the documents that they are drafts) it is necessary to examine Mr Rich's evidence arising out of his review, in preparation for the hearing, of the documents tendered by ASIC as the fixed wire/service provider management accounts for January, February and March 2001. The purpose of his evidence was to give grounds for his opinion that the management accounts were neither final nor complete and accurate statements of the financial performance of the fixed wire/service provider business during January, February and March 2001.

[6378] The documents tendered by ASIC as the January-March management accounts are in electronic form on the I:drive at FINANCE\/Mgtact2001, and then respectively at \/January 01\/MgtAccount One.Tel, \/February 01\/MgtAccount One.Tel and \/March 01\/MgtAccount One.Tel. Hard copies of the P & L tab for each month are in the Carter exhibits (Exs CE 3 0064, CE 3 0073 and CE 3 0085 respectively), and clearer copies of the P & L and also the KPI Analysis tabs are in the exhibits to Mr Rich's affidavit (the P & L tabs are at Ex JDR 6/1957, 6/1961, 6/1964CC; and the KPI Analysis tabs are at Ex JDR 6/1959, 6/1963,6/1964LL).

[6379] Mr Rich referred to various matters that, he said, were indications that the management accounts for the fixed wire/service provider business for January, February and March were not finalised. The first of these was the variance in January EBITDA between January and March management accounts. The EBITDA figure for the fixed wire/service provider business is negative $4.472 million: Ex JDR 6/1958, cell I 248. The profit and loss tab of the March management accounts is Ex CE 3 0085-94, which shows the EBITDA loss for the fixed wire/service provider business for January 2001 as $3.991 million: at Ex CE 3 0094. According to Mr Rich (2 JDR 1863) the fact that the January column in the supposed March management accounts had a different figure for EBITDA from the supposed January management accounts is an indication that the supposed January management accounts had not been finally "closed off" when the supposed March management document was prepared. This is because One.Tel's accounting practice was that when a management account was finalised and closed off, the EBITDA and other figures in it would not be altered, and any adjustments made to those figures thereafter would be put through a later set of accounts. I find Mr Rich's reasoning to be plausible.

[6380] The second matter to which Mr Rich drew attention (2 JDR 1864-7) was that the fixed wire/service provider management accounts for each of January, February and March 2001 included, in their electronic form, a tab for "KPI Analysis". He pointed out that there were no such tabs in the fixed wire/service provider management accounts for months prior to January 2001. He said consideration of the KPI Analysis tabs for the three months shows that the operator who prepared the documents identified a number of potential adjustments to the earning figures for the business, not at that point reflected in the P & L tab. The matters raised in the KPI Analysis tabs were, he said, precisely the sort of adjustments that he would have expected Mr Hodgson to review and consider as adjustments to be taken up in EBITDA, in the process of finalising the management accounts. That implied that the management accounts had not been finalised.

[6381] Mr Rich gave detailed illustrations of matters raised in the KPI Analysis tabs that were of this character: 2 JDR 1868-1874. He identified the following potential adjustments in the KPI Analysis:

•: a potential accrual for each month (respectively, $136,000 for January, $128,000 for February and $174,000 for March) in respect of a claim against Optus for an access fee dispute (2 JDR 1868a-c, 1871a-c and 1874a-b);
•: potential accruals of $900,000 for each of January and February to anticipate the result of claim by One.Tel against Telstra in its dispute about local call wholesale pricing: 2 JDR 1868e, 1871f);
•: a potential increase in the January profit of $1.264 million by "backing out" a reduction in revenue produced by an incorrect system posting (2 JDR 1868f);
•: a potential increase in the January profit result of $300,000 for an Optus datalinks credit;
•: a series of potential adjustments, not quantified, to the January and February profits, for reallocation of operating expenses from the fixed wire/service provider business to the Next Generation business: 2 JDR 1869, 1872;
•: two potential increases in February profit, of $243,000 and $250,000 respectively, and a potential increase of March profit of $243,000, by reversal of adjustments that had been put through the February P & L but which had nothing to do with the operating performance of the business in February: 2 JDR 1871c, 1871d, 1874c;
•: a potential accrual of $770,000 for "'to be billed' Feb re-run Missing Service Revenue": 2 JDR 1871g;
•: a series of potential and in some cases substantial adjustments to the total contribution for the fixed wire component of the business, in column D rows 225-38 of the KPI Analysis for March at Ex JDR 6/1964LL.

[6382] I have set these out fully, though in summary form, because it is the cumulative effect of them that persuades me to the view that there were in existence, concurrently with the P & L management account documents for January, February and March 2001, some proposals which, if adopted, would impact substantially on EBITDA for those three months as presented in those documents. I agree with Mr Rich that the matters raised in the KPI Analysis for each of those months were matters requiring assessment at a senior management level. I accept his evidence that they were the sorts of things that would and should have been referred to Mr Hodgson for decision. There is nothing in the evidence to indicate whether Mr Hodgson made decisions on them, or even whether they were referred to him. Mr Hodgson did not give evidence.

[6383] I am led to the conclusion that these matters indicate that the documents purporting to be P & L management accounts for January, February and March 2001 for the fixed wire/service provider business were not final documents. I reach this conclusion bearing in mind that under s 1305(1), the management accounts documents having been received into evidence, they are prima facie evidence of the matters stated or recorded in them. In my view, on balance, the statutory presumption has been undermined and rebutted by the evidence to which I have referred.

[6384] The third matter to which Mr Rich drew attention as an indicator that the management accounts were not final and accurate was the variance between the gross margin figures in the management accounts and the figures given in the margin analysis prepared by Ms Ashley in April 2001 and identified as "comparison.xls". Ms Ashley's calculations were based on primary data. She calculated the variable margin for the fixed wire component of the business as 22% (CM $5.146 million) in January, and 19% (CM $4.248 million) in February. According to the KPI Analysis in the January management accounts the variable margin for the fixed wire business in January was 11% (variable contribution $2.497 million) and according to the KPI Analysis in the February management accounts the variable margin for the fixed wire business in February was 9% (variable contribution $1.705 million): Ex 6 JDR 1959 cells D216 and D217; 6 JDR 1963 cells D217 and D218.

[6385] Mr Rich asserted (2 JDR 1878) that if Ms Ashley's calculations were correct, the EBITDA figures for the fixed wire business for January and February 2001 in the documents tendered by ASIC as management accounts understated the margin by $2.649 million for January and $2.543 million for February. Ms Ashley's calculations are further considered in Ch 12. I agree with Mr Rich's evidence.

[6386] The fourth matter referred to by Mr Rich as indicating that the management accounts were not final and accurate was the wide divergence between the management accounts and the flash reports for those months in the figures given for revenue, COGS, OPEX and EBITDA of the Australian fixed wire/service provider business. The variances were summarised in App L to Mr Carter's report of 31 May 2002, p 2.

[6387] The variance in revenue figures, by far the largest contributor to the variance in EBITDA, is particularly striking. The flash reports gave revenue for January, February and March respectively as $49.9 million, $44.4 million and $45.2 million. According to the management reports, the figures were $39.6 million, $35.9 million and $37.9 million respectively.

[6388] I have referred to the differences in the methodologies used for calculating revenue in the flash reports and the management accounts, and I have noted the extent of the discretionary or judgmental factors involved in the management account revenue figures, especially if there were billing delays. As I have explained, revenue figures in the flash reports were calculated by multiplying the average number of subscribers for each product line during the month by the average ARPU for that product line, using figures taken from the SAS system -- a much less discretionary exercise. Although the currency of the ARPU figures in the SAS system was affected by the billing delay in February, ARPU tended to move only gradually over time because of the large number of subscribers.

[6389] Mr Rich claimed (2 JDR at 1883) that the flash report revenue figures were not very different from the management accounts figures up until December 2000, with a variance of less than 3%. ASIC submitted that in fact the monthly divergence was much greater than 3%, and it was only a large variance in December 2000 that brought the total figures for the 6 months from July to December 2000 close together (APS [1765]). But in my opinion Mr Rich's statement, that the management accounts revenue figures up to December 2000 were not very different from the flash reports, is correct as a general statement, if one disregards December. In July, August, October and November 2000 management accounts revenue was higher than flash report revenue by, respectively, $2.077 million (5%), $5.67 million (14%), $3.095 million (7%) and $2.413 million (5%). The management accounts figure was lower than the flash report figure in September by $0.285 million: these figures are taken from App L, p 2, to the report of Mr Carter dated 31 May 2002. Overall, for those five months it is correct as a general proposition that the variance was not great and, significantly, that the tendency was for the flash reports to estimate revenue at a lower figure than the management accounts. There was a very large variance in December 2000, with the management accounts revenue less than the flash report revenue by $20.434 million. That discrepancy is dealt with elsewhere, where I have found that the explanation has several components including a substantial component of unbilled revenue.

[6390] Accepting, as I do, Mr Rich's general statement about the approximate congruence of the revenue figures in the flash reports and management accounts, I reject ASIC's submission (APS [1767]), apparently based on nothing more than its contention that there was a "lack of congruence" between the flash reports and the management accounts, that the flash reports were unreliable indicators. Taken as a whole, the evidence suggests, though obviously by no means conclusively, that it may have been the January-March management accounts (and also the April management accounts, where there was once again a big variance) that were unreliable, rather than the flash reports.

[6391] Mr Rich expressed the opinion that, rather than the flash figures being wildly wrong, it was inherently much more likely that the revenue figures in the draft management accounts were far too low because the revenue accruals in those accounts were not final or complete: 2 JDR 1885. ASIC invited the court to disagree with that opinion but it also submitted that, even if Mr Rich's view was right, the very fact of the large discrepancy should have been a matter of great concern to Mr Rich, leading him to further action and inquiry: APS [1758]. But Mr Rich's opinion was expressly based on his view that the management accounts were drafts that did not contain reliable revenue accruals for the fixed wire/service provider businesses. On the basis of that opinion (which I have found to be correct) there is no plausible foundation for arguing that he should have caused the finance team for the fixed wire/service provider businesses to give priority to an investigation based on those draft figures.

[6392] My conclusion is that the January, February and March management accounts for the fixed wire/service provider business were not in final form and are therefore unreliable for the purposes of ASIC's case against the defendants. As regards the January, February and March management accounts for the Next Generation, One.Card, One.Net and international businesses, the same considerations do not apply and in my view, the management accounts for those months are prima facie evidence of their contents under s 1305.

20.3.11 The $3 million accounting error

[6393] In his affidavit (2 JDR 1875) Mr Rich said he had identified an accounting error in the March P & L tab, which required recognition of additional revenue of $3 million. Such an error would require the addition of $3 million to the March revenue figure whether or not the March management accounts were merely drafts. He said the error arose because, in account 2762 (Ex JDR 6/2048), an accrued income account in One.Tel's Adept ledger system, $3 million of additional revenue was accrued at the end of December 2000, and then reversed on 1 January, and then reversed again on 31 March, apparently duplicating the earlier reversal (Ex 6 JDR 2049). The error was apparently corrected by another entry made on 30 April 2001, adding back $3 million, but according to Mr Rich, the March revenue and hence March EBITDA was $3 million below what it should have been.

[6394] ASIC relied on the evidence of Murray Smith, a chartered accountant with substantial experience in the insolvency and corporate restructuring fields. In his report dated 30 August 2006 (Ex MCS 1) he expressed the opinion that Mr Rich was wrong to conclude that there was an accounting error depressing the March revenue of the fixed wire/service provider business by $3 million.

[6395] According to Mr Smith (report, p 12), an accrual for income represents revenue that the company is aware it has earned, but for which it has not yet issued invoices at the date the accounts are prepared. The usual accrual for income relates to revenue earned in the days leading up to a balance sheet date, which the company has not been able to process into sales invoices billed to customers as at the balance date. Consequently one would expect that the accrual would be reversed in the first few days of the following month as those invoices were processed, issued to customers and paid.

[6396] To ascertain the accruals made by One.Tel for the fixed wire/service provider business each month, Mr Smith considered not only the accrual account 2762, to which Mr Rich had referred, but also the related revenue account 6527, and, importantly, some worksheets for the revenue account, which he called "reconciliation" worksheets. The reconciliation worksheets, which he extracted from the I:drive, were identified in the management accounts path as "bill revenue new" for the month in question. He annexed to his report hard copies of the worksheets for the months from November 2000 to May 2001.

[6397] Mr Smith pointed out that there were two kinds of accruals shown in the accounts: general accrued revenue for a month (apparently taken from the "to be billed" reports discussed elsewhere in this judgment) and an "additional revenue accrual" of $3 million that was introduced in the December 2000 revenue account. In the December reconciliation worksheets the additional accrued revenue of $3 million was identified and according to Mr Smith, was part of the "total accrual" for December of $8.478 million. That total accrual was taken into the accrual account but there it was separated out into its components, the accrual account separately identifying the $3 million of additional revenue accrual and general accrued income of $5.479 million. The accrual account also contained entries reversing the November accrual.

[6398] The position was different in the January and February accounts. The January reconciliation worksheet identified the $3 million accrual for additional revenue, which (according to Mr Smith's evidence) was part of the total accrual of $6.772 million. But the accrual account simply took into the ledger the total accrual amount of $6.772 million, without subdivision. On the other hand, the January accrual account separately reversed the two elements of the December accrual, namely the additional revenue accrual of $3 million and the general revenue accrual of $5.479 million. Considered in isolation from the reconciliation worksheet, the accrual account for January would create the impression that the accrual for additional revenue was reversed and eliminated once and for all, and that the January accrual was wholly a general revenue accrual; but according to Mr Smith's evidence, when recourse was had to the January reconciliation worksheet, it was evident that the amount accrued for January included the $3 million.

[6399] The February reconciliation worksheet identified the $3 million accrual for additional revenue, as part of the total accrual of $6.105 million for that month. The February accrual account took that total accrual of $6.105 million into the ledger without subdivision, and reversed the January accrual of $6.772 million, again without subdivision. That reinforced the impression, emerging from the accrual accounts in isolation from the worksheets, that the accruals for January and February did not include the accrual of $3 million for additional revenue. But according to Mr Smith, the reconciliation worksheets showed that in both months the amount accrued included an accrual of $3 million for additional revenue.

[6400] It is not self-evident from the documents that the "total accrual" line in the January and February worksheets includes the additional revenue accrual line, but this is a matter upon which it is appropriate for the court to accept Mr Smith's expert accounting opinion. Thus, One.Tel's monthly revenue for December, January and February includes in each case an accrual for $3 million of "additional revenue".

[6401] The documents for March are more problematic. In the reconciliation worksheet the "additional revenue accrual" line was left blank, and the "total accrual" for the month was $3.233 million, an amount low enough to justify the inference that it did not include the additional revenue accrual of $3 million. Mr Smith derived a further inference from the fact that the additional revenue accrual line was blank. He said (report, p 13, note 2 to the table, and para 3.3.8) that it was apparent from this fact that the additional revenue accrual of $3 million was no longer required when the March 2001 accrual was being finalised, and was therefore reversed by management. He agreed in cross-examination that his influence was based solely on the March reconciliation worksheet and in particular, the fact that the additional revenue accrual line was blank: T 14801.

[6402] An alternative explanation for the blank line is that the worksheet had not been completed, but that nevertheless the $3 million accrual was in fact made in March. The plausibility of this alternative derives from the fact that the "total accrual" figure in the worksheet was not taken into the ledger but instead, the general accrual figure in the accrual account was $6.233 million: that is, the "total accrual" figure in the worksheet plus $3 million. Mr Smith agreed in cross-examination that his view was based on an assumption that the March 2001 accrual had been finalised, and that he did not speak to the person who prepared the document, Ms Nassif, to ascertain whether that was so: T 14803. He also agreed that it was at least as possible that the worksheet was incomplete as it was that there had been a deliberate decision that the additional accrual was no longer required; and the very fact that $6.233 million had been taken into the ledger, rather than the $3.233 million figure in the worksheet, suggested, as one explanation, that the $3 million figure had not been added to the worksheet: T 14805.

[6403] Weighing up Mr Smith's evidence and the figures themselves, in my view it is more likely than not that there was no additional revenue accrual figure in the March worksheet because it was incomplete, and consequently there was no foundation for Mr Smith to infer that the additional revenue accrual line had been left blank because this accrual was no longer required. However, for reasons I shall explain, my view is that although the worksheet was incomplete, entries were made which had the effect of eliminating the accrual of $3 million for additional revenue for the months of March and April. But the evidence does not allow me to say whether those entries reflected a decision to abandon the additional revenue accrual. That would depend upon whether the accrual accounts for March and April were in final form: compare T 14809. A consideration suggesting they were not in final form is that if the additional revenue accrual related to missing services (as the note to the March line entry suggests) one would expect an accrual for March and for April unless it had become clear that the missing services had been identified and billed, but that does not emerge from the evidence about unbilled data reviewed elsewhere in these reasons for judgment. Of course, as ASIC pointed out (APS [1817]: T 14823) the fact (if it be so) that the March accrual account was not in final form would not increase the probability that it contained a duplicate reversal of the $3 million accrual.

[6404] As I have said, the general accrual carried into the March accrual account was $6.233 million. Considered in isolation, that would suggest the continuation of the practice adopted in January and February, of accruing a global amount that included the $3 million for additional revenue accrual. The March accrual account also reversed the February accrual of $6.105 million, without any subdivision of that figure.

[6405] However, there was another line entry in the March accrual account that pointed to a different outcome. The March accrual account contained an entry called "Rev Dec-00 miss serv acc" for negative $3 million. The meaning of this entry is obscure and disputed, except that it is common ground that "miss serv acc" is an abbreviation for missing services accrual: T 14806-7. Mr Rich took the description to mean that the entry was intended to reverse the additional revenue accrual that had been made in December. Given that there were equivalent additional revenue accruals for January and February, and that each of the December, January and February additional revenue accruals had been reversed in the next month's revenue figures, it would be strange if the author of this entry in the March accrual account had intended to reverse again the additional revenue accrual for December.

[6406] Mr Smith's explanation was that this item reversed part of the general accrual of $6.233 million in the same month. He said the description of the line entry was either wrong or loose (T 14797) and that one would have expected a very different description (T 14799), but he interpreted the reference to December 2000 as the author's attempt to identify the original accrual sum, which was eliminated in March after several months by virtue of this reversal.

[6407] Some assistance towards the solution of this conundrum can be found in the April figures. As in March, the April worksheet left the amount of the additional revenue accrual blank. It showed the total accrual as $3.077 million, an amount suggesting that an additional revenue accrual of $3 million was not included. In contrast with March, the general revenue accrual taken into the ledger was the figure in the worksheet, $3.077 million. The total amount of the revenue accrual for March, $6.233 million (a figure which, I have inferred, included $3 million for additional revenue accrual) was reversed but unlike March, there was an additional entry of positive $3 million for "Rev Duplicate accrual".

[6408] Mr Smith appears to have taken the view (report, p 11) that the entry of negative $6.233 million and the entry of positive $3 million must be taken together, so that, in effect, the $3 million entry is an adjustment item, with the result that the net revenue reversal in April was a reversal of only the general accrual amount for March of $3.233 million. That appears to me to be plausible, and consistent with the description of the $3 million line entry in the April accrual account, and I can see no other plausible explanation for the figures. Once one takes the view, however, that the April accrual account reversed an accrual of only $3.233 million, it becomes evident that the negative $3 million entry for March must be, notwithstanding its unhelpful line description, a reversal of part of the general revenue accrual for March of $6.233 million.

[6409] This leads me to the conclusions that:

•: there was no additional revenue accrual of $3 million in either the March or April accrual accounts (which may or may not have been in final form);
•: there were additional revenue accruals of $3 million in December, January and February;
•: there was no duplicate reversal leading to an understatement by $3 million of the March revenue;
•: consequently Mr Rich's evidence on this subject is mistaken.

[6410] I agree with ASIC (APS [1818]) that the absence of a duplicate reversal of the $3 million accrual tends to be confirmed by the defendants' own document put to Mr Smith in cross-examination, which is a copy of the accrual accounts manipulated to show where the $3 million was accrued and reversed (Ex D 81). The document showed that there was an even number of positive and negative entries, indicating that there was no double reversal, as Mr Smith confirmed: T 14822.

[6411] It appears that Mr Rich misread the accrual accounts in the ledger because, since he evidently did not refer to the supporting spreadsheets, he did not realise that there was an accrual for additional revenue of $3 million in each of January and February shown in the worksheets, that had been aggregated into the general accrual to produce a single figure in the accrual account. He therefore treated the line entry in March reversing the accrual for additional revenue of $3 million as a duplicate reversal of the accrual that had been made in December and reversed in January. In fact the negative $3 million entry in the March accrual account was a reversal of part of the aggregated March accrual of $6.233 million. There was therefore no duplication of reversals.

[6412] Mr Smith agreed in cross-examination that the inference Mr Rich drew was an open one on the face of account 2762: T 14791. Nevertheless ASIC submitted (APS [1815]) that Mr Rich's "preparedness to advance the point on the basis of that document without investigating the matter further, or having the accounting expert engaged by him investigate it further, demonstrated his willingness to deal with matters on a superficial basis when it suited him". I do not accept this submission. He said he had identified what appeared to him to be an error (2 JDR 1875), and then set out clearly and without embellishment the evidence upon which he had formed his view. The view that he had formed was an inference reasonably open to him, on the basis of that material. In particular, his view was consistent with the description of the March and April entries. In my opinion it was not unreasonable for Mr Rich to give this evidence without consulting spreadsheets or engaging an accountant to provide an expert opinion. It is not fair to say that his evidence dealt with the matter on a superficial basis, or that he did not look at the spreadsheets because it suited him.

[6413] Mr Smith also raised, without resolving, the questions whether the additional $3 million that was accrued for January and February may not have been required, and if so, whether the revenue of the fixed wire/service provider business was overstated in each of those months by $3 million (report, paras 3.1.5, 3.3.9, 3.3.10; at T 14812 he made it plain that the question was whether there was a $3 million overstatement, not a $6 million overstatement). But he accepted in cross-examination that he did not investigate what the $3 million accrual in December was for, beyond looking for schedules that would explain it: T 14806. Consequently he did not know why the additional revenue accrual had been made in the first place, and so in my view he was not in a position to answer these questions in any substantive way. ASIC did not seek to prove that the January and February revenue figures were overstated by $3 million because the additional revenue accruals were unfounded. In the circumstances it is unnecessary for me to express any view on these questions.

20.3.12 The April management accounts

[6414] In App I-10 to his report of 31 May 2002, Mr Carter purported to set out figures for "actual" revenue, gross margin, OPEX and EBITDA for (inter alia) the Australian fixed wire/service provider business. The source of the information was the January-April 2001 management accounts. There is an important issue, considered above at 20.3.10, as to whether the January-March management accounts for the fixed wire/service provider business were merely drafts. As to the April management accounts, Mr Rich said in his affidavit (2 JDR 1824) that he did not accept that they were an accurate statement of the financial performance of that business in April 2001. He explained that the April management accounts were not prepared prior to his leaving the company on 17 May 2001, and that they were in fact prepared during the administration of the company, after the company had ceased trading and most of its staff had had their employment terminated. Mr Rich said he did not know whether the April management accounts were prepared on a basis consistent with the way management accounts were prepared when One.Tel was a going concern.

[6415] Mr Rich elaborated his doubt about the April figures by comparing the EBITDA figure in the April management accounts with EBITDA figures given in other documents. According to App I-10 to Mr Carter's report of 31 May 2002, the figure for "adjusted actual EBITDA" for the fixed wire/service provider business was negative $12.512 million. Mr Rich said he could not understand how the figure for EBITDA was reached when that figure differed so widely from Mr Hodgson's calculations in the document FW SP revised forecast monthly.xls and the April flash report (MTB 1/385B) where the EBITDA figure was $1.216 million (before deduction of unbudgeted prepaid marketing). He also referred to PBL figures prepared by Mr Miller and Mr Green in early May 2001 (Ex JDR 6/1951), which give a flash figure of $0.3 million for EBITDA.

[6416] ASIC contended that there was no reason not to give the management accounts prepared after administration the same evidentiary effect as given to other business records: APS [1732]. ASIC referred to the administrators' report to creditors pursuant to Section 439A of the Corporations Law dated 12 July 2001, which said:

Following the cessation of trading in order to reduce overheads, the majority of the staff have been terminated, with a residual number of staff being retained for the purpose of assisting asset realisations (including Debt Collections) and maintenance of financial information (Ex CE 22 0005).

ASIC also referred to evidence showing that Mr Silbermann provided consultancy services to the administrators, via a company called Bema Pty Ltd, for a fee of $37,500 which was paid in full on 19 June 2001, and that Mr Hodgson was retained by the administrators up to 28 September 2001: affidavit of Luke Holtom made on 31 May 2006.

[6417] ASIC's point was that the administrators had the benefit of the services of experienced executives of One.Tel and therefore there was no basis for concern that the management accounts prepared during the administration might have been prepared on an incorrect basis. I am not prepared to make that inference. There is no evidence as to whether Mr Silbermann and Mr Hodgson were involved, specifically, in the preparation of the April management accounts, and if they were, whether they might have received instructions from the administrator which had the effect of departing from One.Tel's normal practices. Moreover, the evidence of Mr Rich and Mr Silbermann indicates that the management accounts were prepared by the financial management teams in the business units and then reviewed by more senior personnel: 1 JDR 582; MS 57. I infer from the administrators' report that the majority of the finance teams were dismissed before the April management accounts were prepared.

[6418] The question is whether the evidence leading to these doubts about the reliability of the April management accounts is sufficient to rebut the presumption arising under s 1305(1) and the business records provisions that the contents of the document are prima facie evidence of the matters stated or recorded in it. In my opinion, the presumption is rebutted in relation to the April fixed wire/service provider management accounts, but not the other April management accounts.

[6419] It seems to me that as a general proposition, when one is dealing with derivative books prepared by staff from the primary financial records of a company, the strength of the presumption is weakened once it is shown that the books in question have been prepared by a substantially depleted staff under the directions of administrators rather than the former senior management. The presumption still applies and as far as I can see, there is nothing to rebut the presumption as regards the April management accounts except for the fixed wire/service provider business. It is not established that Mr Silbermann and Mr Hodgson, though available to do so, were actively involved in finalisation of the April management accounts, but they might have been, and so there is room for the presumption to operate. However, in relation to the fixed wire/service provider business, the evidence described above establishes that reliable "to be billed" reports were needed to permit finalisation of the January-March management accounts but they were not available, and that raises an implication, not overcome by ASIC's evidence, that it was unlikely the situation would have been improved for the April accounts.

20.3.13 One.Tel's normal practice of reviewing management accounts

[6420] Mr Rich said that the management accounts were typically prepared in the 3 weeks after month-end, except at year end or half-year end when they were often delayed for a few weeks because the finance team gave priority to reporting obligations: 1 JDR 581; T 10863. He said management accounts, once prepared by the finance teams, were reviewed by the CEOs or CFOs of each business, before being circulated to the executive directors towards the end of the month. The summary pages of the management accounts were reviewed by the senior management team with whichever of the executive directors was in Sydney at the time: 1 JDR 582.

[6421] ASIC challenged this evidence. It contended (APS [1716]) that Mr Rich had not suggested that the December management accounts were not, as a matter of practice, the subject of a review. That seems to me to be incorrect. Mr Rich's affidavit evidence (1 JDR 581) was that there was an exception to the normal practice "at year end and half-year, when they were often delayed for a few weeks because of the finance team giving priority to reporting obligations". That leaves open the question whether, in view of the review undertaken for the half-year or year end, there was no additional review for the December figures.

[6422] Mr Silbermann said that, "ordinarily" or "in the normal course", the monthly management accounts for each business were reviewed by the group of senior managers towards the end of the following month: MS 57, 973. He said the practice was that the management accounts were reviewed by whoever of the executive directors was available in the relevant office at the time: MS 57. As to the December management accounts, he said that they were typically not reviewed but simply formed part of the half-year process: MS 973. In cross-examination he said that by the time of the February flash report, in the ordinary course of events the management accounts for January would have been available (T 12951), and he also said that the January accounts would ordinarily be finished towards the end of February (T 12918). It seems to me that in giving those answers, he was focusing on the ordinary course of events and there was nothing in his answers to indicate that he was considering whether there were any special circumstances in January 2001. He gave some evidence in re-examination concerning whether there was anything about January 2001 that meant preparation of the management accounts was not in the ordinary course (T 14007-10), which ASIC criticised. I shall consider that evidence, and ASIC's criticism, at 20.3.14.2.

[6423] ASIC submitted (APS [1717]) that there was no rational reason why the December management accounts should not have been reviewed, "because the way in which the company finished the half year should have been of considerable significance in the proper monitoring of the business". I agree that it was important for the financial performance of One.Tel's businesses in December to be carefully assessed and reviewed, but in my view, rationality did not require a process of review of the December figures independently of the other five months of the half-year, in circumstances where the focus of attention was on the finalisation and review of half-year figures. It was rational for management to fold consideration of the December figures into the wider review of financial performance over the six-month period. I therefore accept Mr Silbermann's evidence.

20.3.14 What did the defendants do to procure preparation and review of management accounts in 2001, and was it enough?

[6424] Since, according to the evidence of both Mr Rich and Mr Silbermann, the normal practice as to the preparation of management accounts was departed from in 2001, as regards the fixed wire/service provider business, it logically follows that the normal review practice could not be applied in those circumstances. The defendants gave evidence as to what they did in 2001 to cause management accounts to be finalised, which ASIC criticised on various grounds.

20.3.14.1 Mr Rich's evidence

[6425] Mr Rich said in his affidavit (2 JDR 1855) that he recalled reviewing the management accounts for the Next Generation business for January 2001 in early March 2001, and he had a vague recollection of receiving a copy of the management accounts for the Next Generation business for February 2001 in early April after he returned from the United Kingdom, but he did not recall reviewing them with the Next Generation senior management team. He did not recall receiving a copy of the March management accounts for the Next Generation business before he left One.Tel on 17 May. He did not specifically recall receiving a copy of the January, February or March management accounts for the One.Net business but he had a vague recollection of reviewing some management accounts for that business during early April.

[6426] As to the management accounts for the Australian fixed wire/service provider business, Mr Rich's evidence (2 JDR 1856) was that he asked Mr Hodgson about the status of the January management accounts before he left for Europe in mid-March 2001. ASIC is critical of this, implying that Mr Rich should have followed up earlier, in view of the company's deteriorating financial position, but the evidence indicates that Mr Hodgson had the carriage of preparation of the management accounts for this business and Mr Rich's inquiry was only a couple of weeks after they would have been finalised in the normal course. Mr Hodgson replied:

They are not ready to be reviewed yet. The finance team had been working on the half-year numbers. David Barnes has left and Tim Holmes has fallen off his bike. I am going on leave shortly. Let's do it when you get back from Europe.

Mr Rich said he understood that Mr Holmes had in fact been involved in a serious traffic accident in late February when he was cycling to work, and had been off work for several days.

[6427] ASIC submitted (APS [1741]) that these "excuses" were unsatisfactory, and that Mr Rich failed to inject any sense of urgency into the process, and instead passively accepted that the accounts would not be prepared until some time after 2 April. I do not agree that Mr Hodgson's explanation was unsatisfactory. Mr Barnes had been centrally involved in the financial affairs of the fixed wire/service provider business and his departure must have created some difficulty and delay, and the unavailability of Mr Holmes (who was his successor) must have added to the difficulty. I agree that Mr Rich did not say that the job had to be done before he returned from Europe, but whether that was culpable conduct on his part depends upon how important the finalised management accounts were for the assessment of the group's financial performance. Mr Rich contended, and I have found, that there were other available means of ascertaining how the group was tracking against budget, which were more reliable than management accounts. That being so, there was not any need for Mr Rich to insist that the finalisation of the management accounts be given priority over other important work.

[6428] Mr Rich returned to Sydney on 2 April. He said that initially he and Mr Hodgson were busy working with the billing team on issues surrounding the backbilling of unbilled CDRs. He asked Mr Hodgson about the fixed wire/service provider business management accounts in about the second week of April, and Mr Hodgson told him:

Tim Holmes is having trouble finalising them because of the billing issues. I am also working with Carlos [Perez] on the proper allocation of OPEX between FW/SP and Next Gen. I will get back to you later in April.

[6429] Again ASIC contended that these were "quite unsatisfactory excuses". I agree that the statement Mr Rich attributes to Mr Hodgson is vague, but presumably it was assessed by Mr Rich in the context of Mr Hodgson's overall workload in early April, which must have substantially increased after the March board meeting.

[6430] Mr Rich said he raised the matter with Mr Hodgson again in about the third week of April, so that the figures could be given to Mr Miller and Mr Green for their review. Mr Hodgson said he was working on finalising them and that he would make them available to Mr Miller and Mr Green before the end of April. Mr Rich said the work was subsequently completed and resulted in the spreadsheet FW SP revised forecast monthly.xls, which was a source of the figures used by Mr Miller and Mr Green for the spreadsheet they provided to the board as part of the 17 May board papers: the Miller/Green spreadsheet is at MTB 1/299-304 and Ex JDR 6/1948.

[6431] ASIC submitted that, even if Mr Rich was right that billing delays and the absence of a reliable "to be billed" report were an explanation for failure to finalise management accounts, at least the January management accounts could have been prepared by mid-March, and therefore could have been the subject of a report to the board at its March meeting: APS [1753]. ASIC referred to evidence which shows that the last January billing run went to the mailing house, QM, on 21 February and the last February billing run went to QM on 14 March: Ex CED 4-170, 1. But the evidence set out above indicates that the billing issues were still presenting a problem for Mr Holmes in April. By April, the difficulties may have been caused more by working out the staffing problems Mr Hodgson had identified in mid-March than by lack of data about the billing issues, but according to the evidence there was a continuing problem in March until Mr Hodgson found the time to prepare FW SP revised forecast monthly.xls.

20.3.14.2 Mr Silbermann's evidence

[6432] Mr Silbermann said he attended most of the management account reviews in respect of the international management accounts and could recall attending at least one review of the Next Generation management accounts in late 2000 and another in around March 2001: MS 58, 973. But he did not recall attending any review of the management accounts of the fixed wire/service provider business during 2001. He explained that it did not concern him because the management accounts were reviewed by whichever executive directors were available and he did not always participate: MS 973. By way of elaboration of the point, he listed some occasions upon which he was not available to take part in a review. One of them was as follows:

In late February 2001 when the January 2001 accounts would normally have been reviewed I was in the UK ...

[6433] He repeated the idea that the January management accounts would normally have been reviewed in February during the course of cross-examination: T 12918, T 12951. But in re-examination he gave further evidence, to the effect that because of the half-yearly review, and the fact that Mr Barnes (who was one of the key people who prepared management accounts) left in the middle of February, and the fact that Mr Holmes (who took over from Mr Barnes) had a bicycle accident, the circumstances were taken out of the normal or ordinary course: T 14007-10. He said in his affidavit that he became aware that the January management accounts had not been finalised only on around 20 April 2001: MS 971.

[6434] ASIC submitted (APS [378], [1719]) that Mr Silbermann's evidence in re-examination amounted to an attempt by him to depart from concessions made in cross-examination and to excuse himself for not having reviewed what he should have reviewed.

[6435] There does seem to be an inconsistency in Mr Silbermann's evidence, but I do not agree with ASIC that the inconsistency emerged only in re-examination. The inconsistency arises from a comparison of paras 971 and 973 of his affidavit. Taken together, the main thrust of the two paragraphs is that the January management accounts had not been finalised as at 20 April, even though in the normal course they would have been finalised in February. But then there is a supplementary question addressed in para 973, namely that if management accounts were normally reviewed in the following month, why was Mr Silbermann unable to recall participating in any review of management accounts for the fixed wire/service provider business in 2001? Instead of saying that he did not participate in any review because the January, February, March and April management accounts were never finalised (a proposition which his evidence supports), he said, in effect, that the management accounts were typically reviewed by whoever among the senior team was available, and in late February when the January accounts would normally have been reviewed he was in the UK. There is confusion of thought there, reflected in the same dichotomy of approaches exhibited in cross-examination and re-examination, but I do not regard the discrepancy as affecting Mr Silbermann's credit, since it was built into components of his affidavit evidence and does not in my view signify a shifting of ground after cross-examination.

[6436] As I have mentioned, Mr Rich said in his affidavit that management accounts were typically prepared in the 3 weeks or so after month-end, except at year end and half-year, when they were often delayed for a few weeks because of the finance team giving priority to the reporting obligations: 1 JDR 581. It seems to me probable that this observation was intended to apply to the December accounts rather than the January accounts. The January management accounts would normally have been prepared in February for review at the end of that month, presumably after the completion of the half-year accounts. Moreover, as ASIC pointed out (APS [1721]), there was no delay in the distribution of the January 2000 management accounts, which were sent by Mr Barnes to Mr Miller on 25 February 2000 (Ex P52-295).

[6437] Therefore on balance, my conclusion is that Mr Silbermann was wrong to attribute delay in the completion of the January 2001 management accounts to the half-yearly exercise. But it seems to me plausible to say, as he did in re-examination, that Mr Barnes' departure and Mr Holmes' injury were reasons (though not necessarily the only reasons) why the January management accounts were not completed in the normal way.

[6438] Mr Silbermann said he had a meeting with Mr Rich, Mr Hodgson, Mr Miller and Mr Green on 20 April 2001 at which Mr Miller and Mr Green outlined the nature and scope of the review of One.Tel's business they were about to begin. According to Mr Silbermann (MS 453), immediately after the meeting Mr Hodgson told him that the management accounts for fixed wire had not been signed off for the first quarter. Mr Silbermann said he had previously not been aware that this was so, and he asked Mr Hodgson to explain the delay. Mr Hodgson said (MS 454):

Because they don't include the proper billing accruals. I need some time to finalise the management accounts for January, February and March, and re-do the forecast to June.

[6439] Mr Silbermann said he replied that he would give Mr Green an introduction to the fixed wire business, the billing issues and Liz Ashley's analysis of the call mix and gross margin, while Mr Hodgson finished off the results for January to March and the re-forecast.

[6440] Mr Silbermann said that on the next day Mr Hodgson showed him a revised business plan for the fixed wire/service provider business for the remainder of the 2001 financial year, which he believed was FW SP revised forecast monthly.xls: Ex MS 1/259A. ASIC noted (APS [1744]) that it evidently took only a day for Mr Hodgson to finalise the figures. Presumably, however, the matter had become "front of mind" for Mr Hodgson because of his earlier discussions with Mr Rich, and I infer that some of the work that needed to be done would have been done by Mr Holmes.

[6441] ASIC was critical of Mr Silbermann because, it submitted, he as finance director was the person most responsible for the accounting and finance function of the company and it should have been of grave concern to him that no management accounts had been produced for 3 months: APS [1745]. It criticised Mr Silbermann for not even enquiring about the fixed wire management accounts until 2 months after the January accounts should have been available, saying that this was "an extraordinarily casual approach". Although Mr Hodgson's observations implied that there were some drafts available, Mr Silbermann had not examined them and had not brought their results to the attention of the board. Moreover the board was not told in the March board papers or at the March board meeting that there was any difficulty in the preparation of usual management accounts, nor that the January and February management accounts had not been prepared in the usual fashion. ASIC's criticisms assume that the management accounts had a level of importance that the defendants deny. If (as I have found) the defendants were right to say that there were other sources of financial information for management and the board which were more reliable and up-to-date than management accounts, then ASIC's criticism falls away.

20.3.15 One.Tel management's sources of financial information

[6442] Mr Rich said in evidence that the essential drivers of the financial outcomes expressed in One.Tel's management accounts were the determination of revenue, cost of goods sold, the accrual of claims against carriers and operating expenses: 2 JDR 1825. I accept that statement. I have explained that finalising the monthly management accounts figures for those matters involved very substantial questions of judgment.

[6443] Clearly it was necessary for those exercising judgment to be knowledgeable about the business and what was happening to it during the relevant month. The senior executives with the closest knowledge of the Australian fixed wire/service provider business were Mr Hodgson and (until his departure in February 2001) Mr Barnes. Mr Rich said (2 JDR 1828) that if during 2000/2001 he were given figures for that business, his first response would always be to ask whether the figures had been signed off by Mr Barnes and Mr Hodgson.

[6444] I survey the evidence explaining key performance indicators as management tools at 4.3, and I address the operation of the SAS system at 4.8.1. Mr Rich said the KPIs upon which he focused were those which ultimately would determine the health and performance of the business. During 2001, he watched particularly closely KPIs such as subscriber numbers (particularly tolling diallers) in the UK, UK gross margins, Next Generation subscriber acquisition numbers and cost of acquisition, the percentage of Next Generation traffic roaming on the Telstra network, and progress in the Next Generation build-out.

20.3.16 One.Tel management's use of management accounts

[6445] At 4.2.1 and 4.2.2 I review the evidence of Mr Rich and Mr Silbermann about the strategies and techniques they used to oversee the business unit management teams: evidence given at 1 JDR 568-584 and MS 35-84. It will be seen that according to the evidence of both defendants, management accounts were only one of several sources of financial information and not, for them, the primary source of information about the performance of the business units. Mr Rich explained (2 JDR 1832) that because of the element of judgment involved in finalising management accounts, and also because One.Tel's businesses were subject to a rapidly changing competitive environment, in his monitoring of the ongoing performance and health of the various businesses he placed most emphasis on ensuring that One.Tel had systems in place to monitor key performance indicators on a close-to-real-time basis. He noted that management accounts produced only "lagged" information, since they would not ordinarily be completed until almost a month after the month in question. His focus of attention was on what was happening to KPIs in the current month and what needed to happen to them in the following month, and for those purposes he needed information that was as up-to-date as possible.

[6446] I accept that evidence. I have dealt at length with the grounds for concluding that the preparation of One.Tel's management accounts involved, to a substantial degree, the exercise of discretion and judgment. I have also made findings about the timeframe for preparation and review of monthly management accounts according to One.Tel's normal practice. I accept that One.Tel's management, including the defendants, needed to focus on matters affecting KPIs in the current month and on what was likely to happen thereafter, and consequently they needed more up-to-date information than One.Tel's management accounts would provide. In my opinion the combination of significant judgmental factors and a time lag made it rational for management, including the defendants, to place greater reliance on near to real-time information about KPIs obtainable from the SAS system. I am satisfied that this is what the defendants did, during the period from January to May 2001.

[6447] Mr Rich suggested that in reviewing and interpreting monthly management accounts it was important to understand what was actually driving movements in figures for revenue, cost of goods sold, OPEX and EBITDA, and especially to understand whether any change shown in the figures was being driven by a real change in operating performance as opposed to such things as accounting adjustments relating to a prior period. If, for example, it was noticed that operating expenses in the monthly management accounts were higher than had been budgeted, that would be the beginning of an enquiry into precisely what had caused the movement, in order to understand whether it was merely a timing difference that would average out over the half-year or full year: 2 JDR 1832. He said that reviewing management accounts tended to be important in his mind only to the extent that they may have shown something new or different from what he already knew about the performance of the business. I accept that evidence.

[6448] According to Mr Rich, an alternative method of calculating revenue, used for the flash reports and other purposes, was to multiply a subscriber number by ARPU: 2 JDR 1845; see the discussion at 20.3.9. Mr Rich said he relied more heavily on flash reports than management accounts as a snapshot picture of the overall financial performance of the businesses. He said he would make further enquiries if the flash reports suggested some departure from the business plans that had not come to his attention through his close monitoring of KPIs.

20.3.17 Did the defendants neglect the management accounts in 2001?

[6449] ASIC characterised the approach described in Mr Rich's evidence as amounting to "neglect of the management accounts": APS [1760]. It advanced three reasons why Mr Rich's approach was unjustified. A general difficulty with the court's assessment of ASIC's submissions is that they invite the court to make judgments about what is essentially a business question, namely what is the best method of senior management tracking the performance of the business on a near-to-real-time basis? This is the kind of issue on which a court will always be reluctant to substitute its opinion for the opinion of the managers of the business. Nevertheless I shall do my best to assess ASIC's submissions.

[6450] First, ASIC contended that the KPIs upon which Mr Rich relied did not provide adequate information about critical aspects of the business, such as actual and prospective collections from the company's debtors, forecast and actual payments to creditors, aged amounts overdue to creditors and cash balances adjusted for unpresented cheques: APS [1761]. That is true, but the matters identified by ASIC were not matters one would expect the chief executive and finance director of a large corporate group to monitor personally on a regular basis. For example, one would expect that more junior members of the finance team for each business would deal with collections from debtors, with an obligation to report problems to more senior managers. The same is true of payments to creditors and aged amounts overdue to creditors, and the effect of unpresented cheques on monthly cash balances. The fact that the KPIs that were the focus of attention for the most senior managers did not address these matters in specific terms (but merely made an assumption of regularity) does not lead me to conclude that their approach was wrong.

[6451] Second, ASIC complained that the information from which the KPIs was drawn has not been adequately identified by the defendants and seems to have been largely based on estimates: APS [1762]. This submission was made without elaboration and in the absence of elaboration, I find it unpersuasive.

Mr Rich has given voluminous evidence about the ways in which information relevant to KPIs was extracted from various sources including, in particular, the SAS system, and he has explained in detail how revenue was calculated using a model based on KPIs. In view of his extensive evidence, it is not accurate to say that the defendants have not adequately identified the information from which the KPIs were drawn. As to whether the figures were based largely on estimates, while inevitably some degree of estimation is involved in a process that seeks to give up-to-date financial information or forecasts, I do not regard the process described by Mr Rich for calculating the revenue of the fixed wire/service provider business for flash reports and board papers to have been unduly based on estimates. It is the process for estimating revenue for management accounts purposes that, according to the evidence, involved a very large component of estimation/discretion/judgment.

[6452] Third, ASIC said (at APS [1763]):

... there was no justification for Rich and Silbermann not to undertake, and to require others to undertake, monitoring of the position and progress of the business by reference to standard accounting concepts of double entry bookkeeping embodied in conventional forms of monthly Management Accounts.

No evidentiary or other references are given in support of this assertion.

[6453] This submission seems to overlook the distinction between financial accounting and management accounting, to which I referred at 20.3.3. It assumes that there are standards and conventions for management accounts, without citing any expert evidence expressing that view -- a view which seems to be out of accord with the textbooks to which I have referred. The idea that monthly financial information prepared for management purposes in the form of a profit and loss account with "soft closes" and a KPI analysis, without monthly balance sheets, has some air of propriety or sanctification that other forms of management information lack seems to me implausible and in need of much justification, beyond mere assertion. I do not accept ASIC's submission.

[6454] Overall, ASIC's submissions on the question whether the defendants should have given management account information some pre-eminence over their other sources of financial information seem to me to suffer from lack of support by expert opinion evidence. Mr Carter did not address this question, in terms, and his evidence is unhelpful in resolving the issue. I find the evidence of Mr Rich and Mr Silbermann to be plausible, as I have explained in detail, and I accept it.

[6455] It is true, as ASIC submitted, that Mr Rich had an obligation to apprise the board at the March board meeting through the board papers of the financial position of the company. Mr Rich would have been aware of this at the time he spoke to Mr Hodgson about the management accounts in March, and he probably also realised that he would have to give the market an update on One.Tel's position, as he did on 4 April. But as he obviously believed, with adequate foundation, that he would be able to discharge his responsibilities to the directors and the market without having monthly management accounts figures because there were other and better sources of information available elsewhere, there was no need for him to demand management accounts earlier or to stress the urgency of their preparation.

[6456] ASIC contended that if the January management accounts had been finalised in February, as they should have been, they would have been substantially in accordance with the document tendered by ASIC as the January management accounts but objected to by the defendants on the ground that it is a draft document. ASIC said that the principal accruals made by Mr Hodgson in his late April reforecast were in respect of matters not known until at least March, and therefore would not have been reflected in January management accounts if they had been completed in February. Specifically, the Telstra claim was not thought of until late April, a claim against Optus in relation to missing CDRs was not pursued by correspondence until 16 March, and $40 million of data said to have been missing in billing was not "discovered" until about 20 March: APS [1754]. ASIC's point is basically correct, in the sense that if the January management accounts had been completed in February, they would have been completed before the development of the major Telstra roaming charges and damages claims and the Optus missing CDRs claim, and the discovery of the $40 million of unbilled data (though its description of the Telstra and Optus claims is somewhat loose: see 18.4 and 18.5). But in my opinion, ASIC's submission that if proper January management accounts had been finalised in February they would have been substantially in accordance with ASIC's tendered document is speculative, particularly as regards revenue in light of the emerging billing problems. I do not accept the submission.

[6457] ASIC also submitted that if, as Mr Rich said, draft management accounts were prepared in early 2001 which included revenues calculated on the basis of billing information to hand and then held open and not signed off pending more up-to-date billing information becoming available (1 JDR 1841(f)), then those drafts should have been scrutinised by the defendants and if they had been, they should have caused concern that should have led to a report to the board and the urgent finalisation of the accounts (APS [1756]). If more up-to-date billing information were not available, then the draft accounts would have constituted the best information available to the defendants as to the earnings position of the fixed wire/service provider business. But the position was that the defendants had, and relied upon, other means to ascertain the revenue of those businesses and made reports available to the board, including the January and February flash reports and the March board papers, based upon that other information. Moreover, the KPI analysis in the draft management accounts suggests that there were some major issues not yet considered by Mr Hodgson. I reject ASIC's submission.

20.3.18 Were the defendants obliged to secure the urgent completion of management accounts in 2001?

[6458] ASIC submitted (APS [1722]) that there was every reason in the early part of 2001 for the defendants to cause management accounts to be produced with the greatest urgency. This was said to be because the company had limited and rapidly diminishing cash resources and there was a need for close monitoring to see whether its performance was sufficiently different in the second half of the financial year from what it had been in the first half to enable the year-end targets to be met and to see if the company was going to survive.

[6459] I agree that early in 2001, the company had diminishing cash. According to the January board papers, the group cash balance at 30 June 2000 was $335 million, which fell to $101.25 million on 31 December 2000, and was forecast to continue to fall to $85 million at the end of January and $82 million at the end of February, then rising each month to be $114.25 million on 30 June 2001. I also agree that the preservation of cash and the meeting of these targets had become very important to One.Tel, not only because of the inherent business need to preserve cash but also because of market apprehension that the company would not meet its numbers, and because of the pressure being applied by Mr Packer Snr and some others at PBL. But I am not persuaded that the urgent completion of management accounts was a priority task for management in responding to the company's cash problem. While monthly EBITDA certainly had some relevance to forecasting the company's cash position, management accounts did not included a balance sheet and did not otherwise directly report the cash balance at month-end. It is not self-evident that the defendants should have diverted the fixed wire/service provider business finance team from other tasks in order to complete the January management accounts, especially bearing in mind that doing so would have principally involved the finalisation of accruals, a matter which would of itself have no impact on available cash. It is not surprising that management sought to obtain information about the cash position in other ways, such as by daily cash balance reports.

[6460] I agree that an important task for management was to monitor EBITDA so as to assess whether the group would perform sufficiently better in the second half that it would meet its forecast, which provided for a very considerable improvement over the first half on a group basis. But two points should be borne in mind. First, the dramatic improvement in EBITDA forecast in September and January board papers and budgets was forecast to occur primarily in businesses other than the fixed wire/service provider business. Indeed in that business the January board papers predicted a lower second-half EBITDA than the September budget: see table 8 at 8.13.9. Second, there is a real issue whether management accounts were the best mechanism for closely tracking EBITDA performance, given that they were normally only finalised nearly a month after the relevant month and depended upon a number of judgmental assessments on such matters as accruals. The issue is addressed at 20.3.16, where I conclude that for the purpose of closely monitoring the financial performance of the business units, alternative methodologies which depended upon the more up-to-date figures derived by a model taken from the SAS system were generally preferable to management accounts.

[6461] Much the same observations apply to ASIC's submission that urgent production of management accounts was needed to see whether the company would survive. Survival depended upon a range of issues going beyond cash balances and EBITDA performance, including in particular whether the company could look to its major shareholders to provide financial assistance to overcome cash difficulties encountered on the way to reaching critical mass. To the extent that reaching its forecast cash and EBITDA numbers without such financial support was important to the company's survival, there were other, more efficient and direct ways of assessing its position, as I have explained.

[6462] ASIC said (APS [1723]) that an immediate report to the board would be required if the company was not performing as anticipated. In my opinion, if Mr Rich had observed, whether from management accounts or from some other source, a material and unexpected decline in the One.Tel Group's performance against any of the KPIs for its businesses, or any material change in circumstances in respect of any of the issues that were being closely monitored (for example, tolling diallers in the UK and billing delays in Australia), he should have immediately consulted with Mr Keeling as joint chief executive and then with Mr Greaves as chairman, with a view to reporting to the directors, as well as to the market under the continuous disclosure provisions. If Mr Silbermann had observed any such thing, he should have drawn it to the attention of Mr Rich and Mr Keeling. To that extent I agree with ASIC, but I do not agree that either defendant had any obligation to make an immediate report to the board, without first making investigations, simply because management accounts were prepared which showed a material variance from other figures already reported to the board.

20.4 Mr Hodgson's April reforecast

[6463] Mr Rich gave evidence (2 JDR 1856) that in about the third week of April, he spoke to Mr Hodgson about completing EBITDA figures for January, February and March for the fixed wire/service provider business, so they could be given to Mr Miller and Mr Green for their review. Mr Hodgson said he was working on finalising them and he would do so and give them to Mr Miller and Mr Green before the end of April. Mr Rich said he subsequently was told that Mr Hodgson had completed his task, as part of the exercise of reviewing the forecast results for the remainder of 2000/2001. He said he understood that the revision had taken into account recent changes in the business, Ms Ashley's margin analysis, and the introduction of "talker plans" and other changes to the tariff and marketing plans for the business, and that Mr Hodgson had also reviewed the actual results of the business for January, February and March: 2 JDR 1475. He said Mr Hodgson's revision of the business plan would result in a change to the forecast EBITDA for the fixed wire/service provider business for the year to 30 June 2001 from $14 million to $10 million: 2 JDR 1476.

[6464] The results of Mr Hodgson's work are in a spreadsheet called FW SP revised forecast monthly.xls (the summary page is in hardcopy at Ex CED 5-1; the whole document is electronically at Ex P89; the copies of the summary page at Exs CED 5/5A, JDR 5/1865AA and MS 1/259A omit lines 33 and 34). I shall call this work "the April reforecast". Apparently it was in fact prepared by Mr Holmes, and reviewed by Mr Hodgson: T 11973. Mr Rich said this document was the source of the figures used by Mr Miller and Mr Green for their spreadsheet provided to the board as part of the board papers for 17 May 2001: the Miller/Green report of 8 May 2001 is at Ex CED 15-5ff and Ex JDR 6/1948 and following. Perusal of the documents provides support for that statement, as the EBITDA figures for the Australian fixed wire/service provider business for January, February, March, April and May 2001 in the Miller/Green report are the figures in line 42 of the April reforecast, rounded to the nearest $100,000.

[6465] In his affidavit, Mr Rich set out a table comparing the EBITDA figures for the Australian fixed wire/service provider business for the months of January to April 2001 in the April reforecast, with the figures in the flash reports, and in the management accounts relied on by ASIC: 2 JDR 1888. The table shows that the management accounts figures were very much lower than both the flash reports and the April reforecast, while the figures in the flash reports and the April reforecast were different but not greatly different. To illustrate the comparison, the total EBITDA for the months from January to April 2001 was $5.3 million in the flash reports, $2.6 million in the April reforecast and negative $25.9 million in the management accounts. This might be taken to suggest that the management accounts were out of step and should not be relied on. But ASIC opposed any inference to that effect, for reasons I shall explain.

[6466] Mr Silbermann also gave evidence about the April reforecast. He said that he and Mr Hodgson met with Mr Miller and Mr Green at One.Tel's offices on 20 April 2001, to enable Mr Miller and Mr Green to outline the nature and scope of the review of One.Tel's business that they were about to begin: MS 447. It was agreed that Mr Green would deal directly with Mr Hodgson in relation to the Australian fixed wire/service provider business: MS 449. Mr Silbermann said that immediately after the meeting, Mr Hodgson told him, for the first time, that the management accounts for fixed wire had not been signed for the first quarter, because they did not include the proper billing accruals, and he told Mr Hodgson to finish off the results and complete a reforecast: MS 453-4. He said that the next day, Mr Hodgson showed him a revised business plan for the remainder of the 2001 financial year, which was the document I have called the April reforecast. He said Mr Hodgson did not review the revised plan with him in detail, but he understood that it took into account Ms Ashley's analysis (and therefore assumed lower gross margins for the fixed wire business than had been assumed in the earlier plans), a reallocation of operating expenditure between the fixed wire/service provider business and Next Generation, accruals for claims against Telstra and Optus, and backbilling of unbilled call data (reflecting Mr Hodgson's most recent assessment based on his work with Mr Beck and the billing team): MS 457. Mr Silbermann said the day after Mr Hodgson had shown the April reforecast to him, he saw Mr Hodgson in a meeting room taking Mr Green through the plan projected onto a large screen: MS 458.

[6467] ASIC challenged Mr Silbermann's evidence that he had not reviewed Mr Hodgson's figures in detail, suggesting that in view of the importance of the work it was difficult to imagine that Mr Silbermann did not involve himself deeply in the preparation or approval of the reforecast: APS [1773]. But Mr Silbermann's evidence was that it had been arranged at the meeting on 20 April that Mr Hodgson would provide information about the fixed wire/service provider business, and that he would coordinate the provision of information on the international business and particularly the UK business: MS 449. In view of the timeframe for the Miller/Green review and the pressure that everyone was under, I regard Mr Silbermann's evidence as plausible and I accept it. I do not accept ASIC's submission that Mr Silbermann should have been more actively involved in the fixed wire/service provider business figures, having regard to the responsibilities in fact borne by Mr Silbermann in his position at One.Tel, set out at 4.2.2 and 4.4.2: APS [1773].

[6468] ASIC mounted an elaborate argument (APS [1775]-[1791]) that was designed to establish the following propositions:

(7): the April reforecast confirmed the accuracy of the management accounts for the year to date to December, and confirmed the substantial accuracy of the January and February management accounts upon which ASIC relied (APS [1789]);
(8): significance should not be attached to the April reforecast figures for March and following months, because for those months Mr Hodgson was estimating or forecasting rather than finalising management accounts dealing with actual figures (APS [1790]);
(9): the revenue figures in the April reforecast closely align with the revenue figures for the fixed wire/service provider business shown in the management accounts: APS [1791].

20.4.1 Did the April reforecast confirm the accuracy of the management accounts?

[6469] As to (i), ASIC's argument proceeded in three steps. The first was to seek to establish that the EBITDA figures in the April reforecast for January and February were arrived at after certain "adjustments" had been made to draft management accounts figures. To do this, ASIC sought to rely on Exs P93-734 and P93-734A (the latter being partly a correction of the former) and the evidence of Mr Rich in cross-examination. The whole of Ex P93 was subject to a limitation of use order under s 136 of the Evidence Act, that the documents in the exhibit were to be used only as a record for the purpose of understanding questions put by counsel and answers given by witnesses, and not to be used as evidence of any of their contents: T 14849. However, senior counsel for ASIC took Mr Rich through these documents in meticulous detail in conjunction with the electronic version of the April reforecast (T 11976-11993), and Mr Rich gave evidence which, in substance, confirmed that Ex P93-734 (and Ex P93-734A, by implication) identified the electronic steps by which the adjustments I shall describe were made in order to produce the final EBITDA figures in the April reforecast.

[6470] Exhibits P93-734 and P93-734A both show that three kinds of adjustments were made to the figures for January and February calculations of EBITDA. First, operating expenses were increased by $0.755 million in January and $2.255 million in February for "Realloc to Next Gen" (a much larger adjustment, adding $11.255 million to operating expenses, for the same reason, was made in December 2000). These appear to reflect the reallocation of OPEX between the fixed wire/service provider business and Next Generation that was negotiated in about April 2001, the evidence for which is discussed in Ch 14. As ASIC said, these adjustments would not have any impact on overall Australian operations figures because the increase in operating expenses for fixed wire/service provider business would have to be matched by an equivalent offsetting item in the Next Generation accounts: APS [1793]. Accordingly these adjustments would disappear on consolidation. ASIC does not challenge them.

[6471] The second group of adjustments for January and February were for the combined effect of three items relating to Optus SP, namely a reversal in January of revenue accrued at 31 December 2000 amounting to $1.25 million (not challenged by ASIC: APS [1794]), and then accruals for "Optus CDR claim" of $0.431 million for January and $1.294 million for February, and accruals for "Access fee dispute (missing customers)" of $0.779 million for January and $0.128 million for February. When these three adjustments were combined, the net effect in January was to reduce revenue by $40,000, and in February to increase revenue by $1.421 million. This was carried through to the EBITDA figures.

[6472] The third group of adjustments were net adjustments to the fixed wire business. One of them is a reversal of revenue of $3 million, which shows up only in the January 2001 column, which once again is not challenged by ASIC: APS [1799]. The other adjustments are changes increasing revenue by virtue of "Local call rebate" of $0.583 million in each of January and February, "Telstra margin claim" of $2.5 million in each month, "Fixed wire backbilling" of $1 million in January and $2.5 million in February, "Additional fixed wire backbilling" of $0.833 million in each month, and "Optus data links credit to December 2000" of $0.3 million in February only. The net effect was to increase revenue by $4.917 million in January and by $6.717 million in February. Once again, this was carried through to the EBITDA figures.

[6473] In my opinion the evidence establishes, as ASIC contended, that the April reforecast was derived after the specified adjustments had been made to the figures in the draft fixed wire/service provider management accounts.

[6474] ASIC's second step was to seek to show that if the adjustments were reversed, the EBITDA figures for January and February would be very close to the figures in the January and February management accounts on which ASIC relied. ASIC revised the April reforecast figures by reversing all of the adjustments to which I have referred, showing its calculations (which appear uncontroversial) at Ex P93-734A p 3. These are simply mathematical calculations that the court can accept because they are obviously correct, notwithstanding that there is an evidentiary restriction on use of the table.

[6475] ASIC then relied on a table comparing EBITDA figures taken from the documents it claims to be management accounts (specifically, Ex CE 3 0103a, which purports to be management accounts for May 2001) with the "adjustment-reversed" April reforecast monthly EBITDA figures (Ex P93-734, p 4). Once again, the court can accept the table notwithstanding the evidentiary restriction on use, because it simply extracts information from elsewhere and makes calculations that are obviously correct. That table reveals that

•: the monthly EBITDA results for the fixed wire/service provider business for the 6 months to December 2000 were identical in the two sets of accounts;
•: the EBITDA figure in the readjusted April reforecast was a loss greater than the management account figure by $0.78 million in January 2001, and greater than the management account figure by $0.975 million in February;
•: the figures for March, April and May were more widely divergent from one another.

[6476] This exercise established, according to ASIC, that if the adjustments were reversed, Mr Hodgson's figures in the April reforecast for the months of January and February would not materially diverge from the management accounts figures upon which ASIC relied. In my opinion, that is correct.

[6477] ASIC made a further point along the same lines. When the adjustments made by Mr Hodgson in the preparation of the April reforecast were reversed, the impact on the gross margin was that the figures of $11.536 million for January and $11.898 million for February became $6.659 million for January and $3.76 million for February: the unadjusted figures are in the April forecast at Ex CED 5-1, line 31; the adjusted figures are in Ex P93-734, line 31. The gross margin figures for January and February shown in the May management accounts were the same figures, $6.659 million and $3.76 million: Ex CE 3 0103a. Mr Rich was asked whether the correspondence of the figures indicated to him that the management accounts figures for gross margin were taken up in the April reforecast and then adjustments were made to those figures. He said he could not agree with that proposition without further inquiry (T 12006-8), but on the basis of the evidence before the court, the proposition appears to me to be correct.

[6478] ASIC's third step was to argue that the adjustments made by Mr Hodgson for the purposes of the April reforecast, identified as above, were not justified and should not have been made. I shall deal with each group of adjustments in the order in which they were addressed in ASIC's submissions: APS [1795]-[1809].

20.4.2 Optus missing CDR claim

[6479] The total accrual for the Optus CDR claim in the April reforecast, for January and February, was $1.725 million ($0.431 million for January and $1.294 million for February). ASIC contended that this was not a bona fide claim.

[6480] This issue is addressed at 18.5.9. For the reasons there given, the claim was in my opinion a bona fide claim. The person who made the accruals in the April reforecast (probably Mr Holmes, initially) misunderstood the nature of the claim set out in the letter of 19 April, which he wrongly treated as a loss of revenue claim, whereas it was in fact a loss of profit claim. The correct accrual for January and February should have been $4.25 million. By about 23 May, in consequence of further data collection, the total amount of the claim had become $11.9 million, comprising $9.3 million for profit lost from call revenue not billed and $2.6 million for minimum spend overcharged: Ex DTB 11/4684.

[6481] In light of the evidence I would not conclude that Mr Hodgson's accrual should not have been made.

20.4.3 Optus access fee dispute

[6482] The April reforecast contains accruals for "Access fee dispute (missing customers)" of $779,000 for January, $128,000 for February, and $125,000 for each of March, April, May and June 2001. The total amount accrued over the period from January to June 2001 was $1.4 million: Ex JDR 5/1865CC, line 123.

[6483] I consider this dispute at 18.5.10. My conclusion is that there was a dispute (or perhaps a series of disputes) about LTD activated customers being substantially lower than Optus records since August 2000, assessed by Mr Hodgson for accruals purposes at $1.4 million for the period from January to June 2001, not shown by ASIC to be other than a bona fide dispute.

[6484] ASIC has not shown that Mr Hodgson's accrual should not have been made.

20.4.4 Telstra local call rebate

[6485] The April reforecast made adjustments to the revenue for the wireline business of $583,000 for each month from January to June 2001 for "Local call rebate", totalling $3.5 million: Ex CED 5-4, line 166. The local calls issue is considered at 18.4.5.

[6486] As I noted there, ASIC contended (APS [1804]) that since $6 million had already been accrued for the 12-month period from July 2000 to June 2001, according to the general ledger reconciliation, and the $9 million payment from Telstra was in respect of the period up to 31 December 2001, it was not appropriate to make any additional accrual for the year ending June 2001. According to ASIC, the remaining $3 million in respect of the Telstra settlement should have been accrued in respect of the 6 months from July to December 2001. But it appears that the credit was allowed within the 2000/2001 financial year (to be precise, on 28 May 2001 if the final agreement was as stated in the Telstra letter of 19 April 2001), and presumably the credit was available for all purposes as at the date that it was granted. In those circumstances, in the absence of expert accounting evidence on the point, I am not in a position to accept ASIC's submission.

20.4.5 Telstra margin claim

[6487] In the April reforecast $2.5 million was accrued for the Telstra margin claim in respect of each month from January to June 2001, totalling $15 million: Ex CED 5-4 line 167. ASIC contended (APS [1806]) that this was not a bona fide claim.

[6488] I deal with the Telstra damages claim, to which it appears that the "margin claim" relates, at 18.4.7. ASIC contended (APS [1158]-[1159]) that the assumption in the April reforecast that $15 million would be received from Telstra in respect of One.Tel's proposed damages claim was quite unwarranted. In my opinion, that is correct. Therefore the accrual for the margin claim had no proper foundation.

20.4.6 Backbilling adjustments

[6489] The April reforecast contained two adjustments for backbilling. First, there was "Fixed wire backbilling" of $1 million in January, $2.5 million in February and $2.5 million in June 2001, totalling $6 million: Ex CED 5-4 line 168. This was described in the April reforecast as "identified": Ex CED 5-2, cell B60. Second, there was "Additional fixed wire backbilling" of $0.833 million in each month from January to June, totalling $5 million: Ex CED 5-4, line 169. This was described in the April reforecast as "unidentified": Ex CED 5-2, cell B62.

[6490] ASIC's contention was that there was no significant backbilling available to be effected and therefore it was inappropriate to make these adjustments for the purposes of the April reforecast: APS [1809]. However, elsewhere in its submissions (APS [1083]) ASIC seemed to acknowledge that at least part of the adjustments was appropriate. ASIC submitted that the adjustment of $1 million in January and $2.5 million in February showed that $3.5 million was regarded at the end of April as having been backbilled in respect of the fixed wire business (and perhaps also $0.833 million for each of the months of January to April, but that was uncertain because these accruals were referred to as "unidentified" at cell D62).

[6491] ASIC made extensive submissions to show that by April 2001 it was apparent that there was no significant amount of data available to be backbilled: APS [1047]-[1093]. Those submissions are considered at 20.5. By contending that those submissions showed that the adjustments in the April reforecast were inappropriate, ASIC assumed that those adjustments arose out of the allegation by the defendants that there was some $40 million worth of unbilled data.

20.4.7 Conclusion as to the adjustments in the April reforecast

[6492] ASIC submitted that the adjustments that had the effect of increasing EBITDA in the April reforecast should not have been made and should notionally be removed. The effect of doing so would be to bring the EBITDA figures in the April reforecast in to substantial equivalence with the management accounts figures for January and February EBITDA: APS [1811]. Indeed, there would be substantial equivalence if the only real adjustments that were made were to reverse the Optus CDR claim and the backbilling adjustments ($4.7 million in respect of January and $7 million in respect of February).

[6493] In my opinion, ASIC has failed to show that the following claims accruals were unwarranted:

•: $1.4 million over the period from January to June 2001 in relation to the access fee dispute;
•: $1.725 million over January and February 2001 in relation to the Optus CDR claim;
•: $3.5 million in the period to June 2001 in relation to the Telstra local call rebate;
•: $11 million for the period to June 2001 in relation to backbilling adjustments.

[6494] However, I agree with ASIC that the accrual of $15 million to June 2001 in relation to the Telstra margin claim was not warranted.

20.4.8 Should significance be attached to the April reforecast figures for March and following months?

[6495] ASIC's proposition (ii) at 20.4, urging that no significance be attached to the figures for March and subsequent months being reforecast, is really an anticipatory rebuttal of an argument that might be advanced against proposition (i): namely, that that although the April reforecast figures for January and February would be close to the management accounts figures if the adjustments were reversed, there are substantial differences in March and April and hence one cannot conclude with confidence that the April reforecast as a whole was based on the management accounts numbers subject to unwarranted adjustments. ASIC's response is that significance should not be attached to the March and April figures in the April reforecast because they were not based on actual numbers and were merely forecasts.

[6496] That is obviously the case with respect to April, because the month was not complete when the April reforecast was prepared, and in the ordinary course it would have been some weeks before even draft management accounts were available: APS [1788]. As regards March, at APS [1783]-[1787] ASIC asked the court to infer that Mr Hodgson did not have draft March management accounts figures available, because:

•: the properties page in the March management accounts (Ex CE 3 0095) shows a "modified" date of 28 May 2001, suggesting that the work of preparing the document was last attended to on that date (see the affidavit of Adrian Bannister made on 13 September 2004; and my judgment on the admissibility of documents, ASIC NSWSC 417 at [13]), and accordingly the March management accounts figures were not available in late April when the reforecast was prepared;
•: an examination of the electronic copy of the April reforecast shows that formulas for the January and February figures have been based on the management accounts while those for March and following months were not (in substance, Mr Rich agreed that this was correct, after considering cell notes for recurrent contributions for February and March: T 1193-5);
•: in the April reforecast the "Wireline -- actual" figures from March onwards appear on their face to be calculated by reference to tolling and average spend and a margin percentage, a process very different from "that involved in finalising double entry accounts to produce actual results": APS [1785].

[6497] I accept ASIC's submissions with respect to the March figures, and I therefore conclude that the March figures in the April reforecast were forecast figures rather than figures based on actual results.

[6498] The difference between the March figures in the May management accounts and the re-adjusted April reforecast was that the EBITDA loss in the management accounts was $2.661 million greater than the re-adjusted April reforecast; in April the EBITDA loss in the management accounts was $5.192 million greater than in the re-adjusted April reforecast. Without seeking to explain the April variance, ASIC noted (APS [1787]) that the two sets of figures for March would have been closely aligned but for the entry in the April reforecast of $4.697 million in respect of "Add GSMNet Indirect -- OPEX allocatn" (Ex CED 5-1, cell G34), compared with the figure of $2.833 million in the March results in the May 2001 management accounts bearing the description

"Allocation to Next Generation" (Ex CE 3 0104). I accept that ASIC is right about this, but the submission does not lead anywhere.

20.4.9 Alignment of revenue figures

[6499] ASIC's proposition (iii) is about the revenue figures in the April reforecast and the management accounts. Mr Rich gave evidence that it was not necessary, as part of the process of finalising the EBITDA figures, to finalise the revenue figures for January, February and March 2001: T 10938, correcting evidence given at T 10937; T 12428. Referring to the cell notes in the electronic version of the April reforecast, Mr Rich was able to show that the EBITDA figure for a given month (the month of February was the one he considered in the witness box) was calculated by subtracting total OPEX and similar charges from gross margin: T 12429. The gross margin figure was the sum of a series of other entries (at cells E14-E30 of Ex CED 5-1), the origins of which could be traced by looking at the cell notes for each item. That process, which involved drilling down through several layers of cell notes, was illustrated by Mr Rich's evidence at T 12429-12433, by recourse to the electronic version of the April reforecast. It emerged that the revenue numbers given in lines 64-7 of the April reforecast (Ex CED 5-2) had not been used in the calculation of EBITDA in the April reforecast. Without going through the same lengthy process in respect of January, Mr Rich said he had conducted a similar process for that month with the same result: T 12433. He also conducted some cross-checking exercises in the witness box by clicking on cells in the revenue lines and showing that they were not dependent on the gross margin cells: T 12434. I accept Mr Rich's evidence.

[6500] Mr Rich also said that in the April reforecast, Mr Hodgson was not attempting to finalise the revenue number for January and February and instead, he simply linked the electronic version of the April reforecast to the January and February management accounts: T 10931, 10934, 10937, 10939, 12435. He illustrated this point by working through the cell notes for the February revenue number in the electronic version of the April reforecast. The exercise showed that the revenue number for fixed wire (cell E65) came from the KPI analysis tab in the February management accounts (Ex JDR 6-1963), with two adjustments, to take into account fixed wire backbilling: T 12435. The Optus service provider revenue (cell E66) came from the management accounts with one adjustment. But, oddly, on the next line (cell E67) the effect of the adjustments was reversed: T 12438. The result was that the total of the revenue items for February in the April reforecast was almost the same as the revenue from the February management accounts, subject only to a small adjustment called "retention": T 12437-8.

[6501] In submissions, ASIC accepted that the revenue figures in the April reforecast were not linked to the calculation of EBITDA, but submitted that the presence of the revenue figures indicated that they had Mr Hodgson's imprimatur, and by inference, the imprimatur of Mr Silbermann as well: APS [1791]. I do not agree. The evidence of Mr Rich, which I have noted above and accept, is that Mr Hodgson was not attempting to finalise, and therefore was not attempting to validate or confirm, the revenue numbers for January and February contained in the management accounts documents (said by the defendants to be drafts). It would therefore be wrong to infer that Mr Hodgson agreed with or accepted the revenue figures.

20.4.10 Conclusions as to April reforecast

[6502] In terms of ASIC's propositions identified at (i)-(iii) in 20.4, I have reached the following conclusions:

(7): the April reforecast used the draft management accounts figures, but only to the extent necessary to finalise EBITDA, and it modified them in various ways that I have identified, including modifications to make accruals for claims that I have accepted as bona fide, and so to that extent the authors of the April reforecast did not accept the draft management accounts figures;
(8): the April reforecast figures for March and following months were in the nature of forecast figures rather than finalised management accounts figures, but they were nonetheless forecasts prepared by a member of the senior management team and were therefore not without significance;
(9): in the April reforecast Mr Hodgson was not attempting to validate and confirm the revenue figures in the draft management accounts for January and February, and it would therefore be wrong to infer that he or Mr Silbermann agreed with or accepted those revenue figures.

20.5 The claim to $40 million worth of unbilled data

[6503] The "discovery" of $40 million worth of unbilled data is an important component of the defendants' case that the company was not in the financial position alleged by ASIC during February and March. ASIC claimed that One.Tel's forecasts based upon significant unbilled data were a myth.

20.5.1 The emergence of the idea that there was $40 million worth of unbilled data

[6504] In his voicemail of Tuesday 20 March, Mr Silbermann said he had been told that billing run totals were down, causing a cash shortfall of $8.2 million: Ex CED 1-856, 857. The problem was discovered when Emily Joukhadar posted certain billing run totals to the Adept ledger after a delay: T 13117. Theoretically, the two principal alternative explanations for a discrepancy between billing run totals and forecasts are that the forecasts are defective, or that the billing runs are defective. Mr Silbermann's initial reaction, expressed in his voicemail, was that there was a problem with the forecasts, but according to his evidence, he soon came to believe that the problem was that a substantial quantity of data had not been billed.

[6505] Mr Silbermann's evidence was that on the following day, Wednesday 21 March, he asked Mr Hodgson to return from holidays early to investigate the shortfall, and Mr Hodgson returned to the office on 22 March: MS 321. Mr Silbermann said that on 22 March Mr Hodgson calculated that the billing runs from 19 February to 15 March were $13 million less than the forecast in the business plan: MS 323.

[6506] In cross-examination (T 13116; T 13154-5), Mr Silbermann confirmed that billing runs 525-534 were the billing runs in question. Their billing run dates ranged from 19 February to 15 March respectively, the first five having February dates and the second five having March dates; and their "QM dates" ranged from 8 March to 19 March 2001. Exhibit P93-757 is a table prepared by ASIC which compared forecast and actual billing run amounts for those ten billing runs. The actual results were taken from the billing run information in Ex P69. The forecasts for the February billing runs were taken from spreadsheet 0102.xls and the forecasts for the March billing runs were taken from the spreadsheet 0103.xls. The table shows that the forecasts were higher than the actual amounts by a total amount of $10,491,791.

[6507] Mr Silbermann said in cross-examination (T 13116, T 13155) that the shortfall was $13 million, but initially he did not explain how that figure was calculated, saying he did not look at "this level of billing" as a matter of normal course (T 13116). However, later in his oral evidence it emerged that the shortfall was measured against the spreadsheet 1903.xls, in which the forecast billing run totals for the cycle from 19 February to 15 March inclusive was $61 million, compared with the actual billing run totals for that period of $49.1 million according to 2103.xls, giving rise to a discrepancy of $11.9 million: T 13865. If that figure is "normalised" to account for the fact that February is a short month, the normalised shortfall becomes approximately $13 million: T 13865-6. I accept that evidence.

[6508] Thus by 22 March a discrepancy of $13 million between billing run totals and forecasts had been discovered. But at that stage the reasons for the discrepancy had apparently not been identified. ASIC contended that there was no basis for concluding that the billing runs were down on forecast as a result of billing being missed, rather than the forecasts of billing inaccurately reflecting the billable revenue earned: APS [547].

[6509] Mr Silbermann's evidence (MS 324) was that he, Mr Hodgson and Mr Beck met on the following day, Friday 23 March, and Mr Hodgson asked Mr Beck to consider whether there was a problem with the billing system and whether everything had been billed that should have been billed. Mr Silbermann said that later on the same day or the next day, Mr Beck came back to him and Mr Hodgson and announced the discovery of about $28 million of call data records that had not been billed. According to Mr Silbermann's evidence, Mr Beck reported that the data included a combination of some Telstra CDR tapes that had not been processed and data in negative bill runs. Mr Silbermann explained that a negative bill run comprised call data siphoned off by the system because it could not be processed for some reason, and placed in a separate "bucket" to be investigated. Mr Beck said that about $4 million dated back to November 2000 and the rest related to the period from December 2000 to March 2001: MS 358.

[6510] Mr Silbermann said that this information was "staggering": T 13118. Over the following week or so, Mr Hodgson and Mr Beck and the billing team investigated the shortfall in billing run totals, and regular meetings of the team were attended by Mr Silbermann, Mr Rich and Mr Keeling: MS 326. Mr Silbermann said that Ms Ashley summarised the position for the members of the team in an email dated 29 March (Ex EPA 2 to Ms Ashley's affidavit of August 2002), in which the total in the "Found -- To be billed" column was $28,481,273 (the email is considered below).

[6511] Ms Ashley's email is important because it provides some evidence other than from the defendants that there was at least a plausible basis for believing, on 29 March, that about $28.48 million worth of data had been found and was to be billed. ASIC claimed (APS [494]) that there was apparently no subsequent inquiry as to how data of that magnitude could have been overlooked, but I am not sure that is right. As noted at 10.6.2, the PwC review of the billing system was already under way, and although it was not intended to investigate this issue, there are plausible grounds for believing that the PwC recommendations would have substantially addressed the problems that led to Mr Beck's discovery, and it may well have been sensible for One.Tel management to await the outcome of that review before instigating any structural changes to the system. ASIC also submitted that no adverse view seems to have been formed as to Mr Beck's responsibility for the error or as to his competence (T 13119-20), and that there does not appear to have been any subsequent reluctance on the part of Mr Silbermann to rely on Mr Beck (T 13120). In my view that does not undermine the plausibility of the evidence that Mr Beck discovered $28 million worth of unbilled data, because such a discovery would not necessarily reflect on his personal competency (especially as the cause of the problem was not understood), and it is clear from Mr Silbermann's evidence that Mr Beck was held in high regard: T 13120.

[6512] My conclusion, relying in particular on Ms Ashley's email of 29 March, is that at some time not later than a few days after he was told on 23 March to investigate whether everything had been billed that should have been billed, Mr Beck did indeed report back to Mr Silbermann and Mr Hodgson that he believed he had discovered $28 million worth of unbilled data. There is a question, considered below, as to whether that discovery came before or only after the lengthy telephone conversation Mr Silbermann and Mr Hodgson had with Mr Rich on the evening of Monday 26 March (Sydney time).

[6513] Mr Silbermann said he had "potentially" two conversations with Mr Rich, who was in Europe, one to tell him about the $28 million that Mr Beck had found, and then a later lengthy telephone call in which Mr Hodgson also participated on Monday evening 26 March, about a proposed $40 million billing accrual which included the $28 million: T 13122. He said it was "very, very possible" that, when Mr Beck mentioned finding $28 million of CDRs, he would have left a voicemail or spoken to Mr Rich about that fact: T 13121. ASIC invited the court to reject Mr Silbermann's evidence that the first telephone conversation occurred (APS [495]), on the ground that no reference was made to it in his affidavit or his initial answer to the question, when he referred only to the lengthy conversation on the Monday: T 13121. This is one of those occasions upon which I do not attach significance to the omission of the evidence from the affidavit of the witness -- principally, on this occasion, because ASIC's case about the $40 million of missing data was not expressly pleaded: see 2.3.6.18-2.3.6.23.

[6514] Mr Rich gave evidence of two telephone conversations with Mr Silbermann and Mr Hodgson. The first occurred on Monday morning London time (2 JDR 1229), which would accord with Mr Silbermann's evidence that the call was on Monday evening Sydney time. Mr Rich said they told him they believed, as billings were down against forecast, that there was a substantial amount of billing data stuck in the system somewhere that had not actually been billed: 2 JDR 1229. They said that, using the "February billing run" (sic) as a base month to work out how much ought to have been billed, they thought the shortfall might be as much as $40 million. Mr Rich said he insisted on knowing how that had happened. He said that subsequently he was informed by Mr Beck, Mr Silbermann or Mr Hodgson that Mr Beck and the billing team had identified about $28 million of unbilled data from a variety of sources, and were trying to identify further data and to bill the data so far identified: T 1230.

[6515] Mr Rich also gave evidence of a lengthy telephone conversation he had with Mr Silbermann and Mr Hodgson "early in the week of 26 March 2001", in which he said they talked him through the work they had done on the financial forecasts for the remainder of the year to 30 June, a discussion which lasted for over an hour: 2 JDR 1243. Mr Rich said that by that time Mr Beck and the billing team had reported that they had found about $28 million of unbilled data, and Mr Silbermann and Mr Hodgson had undertaken detailed financial analysis to ascertain how much additional billing data were likely to be identified, and concluded that another $12 million was likely to be found: 2 JDR 1244. He said his recollection was that the cash forecasts for the rest of the year recognised cash inflows of about $20 million to reflect the expectation of additional billings over April, May and June in respect of the additional data, and he said that when this was explained to him he considered it to be a reasonably conservative figure: 2 JDR 1245. He noted that the forecasts also included additional cash inflows for additional collections, including re-presentation of direct debits dishonoured in March and a figure reflecting increased resources in the collections area: 2 JDR 1246. That is, in fact, a reasonably accurate recollection of the contents of spreadsheet 2403C.xls, though it omits the adjustments made to the New Feb Baseline: see the discussion below.

[6516] Mr Rich's evidence implies that there were two telephone conversations, the first before Mr Beck claimed he had discovered $28 million of missing data and the second after that event. It is the second conversation that Mr Rich described as a lengthy one talking through the work done by Mr Silbermann and Mr Hodgson on the financial forecasts for the remainder of the financial year, and in that conversation he was, according to his evidence, aware of Mr Beck's discovery of the $28 million of data. Mr Silbermann said they reviewed in detail the adjustments that he and Mr Hodgson had made to the cash flow forecast to account for the shortfall in billing run totals, and the reasoning and methodology that underpinned those adjustments: MS 346.

[6517] On the question of how many telephone conversations that there were, Mr Rich and Mr Silbermann said there were two, one being a long conversation in which they went through the financial work in some depth, and at that time Mr Rich was aware of the $28 million of data. Mr Rich's recollection of that conversation implies that it was a conversation about the forecasts in 2403C.xls, and Mr Silbermann confirmed in cross-examination that this was so: T 13123. He said it was "impossible" for Mr Beck's discovery to have occurred after that telephone conversation "because $28 million is part of the $40 million calculation, so ... it is logical that we spoke to him about the $28 million in discussing the three components of the $40 million": T 13122.

[6518] ASIC invited the court to find that the long telephone conversation took place before Mr Beck found $28 million of unbilled data, and therefore (despite Mr Silbermann's evidence at T 13122) that the spreadsheet 2403C.xls was formulated before that discovery (APS [499]). But it seems to me that the long conversation discussing 2403C.xls probably occurred after Mr Silbermann and Mr Hodgson had prepared their draft of 2403C.xls reflecting Mr Beck's $28 million "discovery", for the reason that Mr Silbermann gave. On the basis of the defendants' evidence, it seems to me that there were two telephone conversations, the first a shorter conversation or possibly even a voicemail, in which Mr Rich was informed of Mr Beck's discovery, and the second a detailed discussion of 2403C.xls in light of the $28 million "discovery". It follows that the adjusted inflows in 2403C.xls, in the form in which the spreadsheet was considered in the telephone conversation, took account of the unbilled missing data and were therefore based on a reasonably firm foundation, to the extent that Mr Beck's reported discovery may have rested on sure ground.

[6519] The evidence indicates that the spreadsheet was still in draft form when it was discussed with Mr Rich, and it was not completed until about Tuesday 27 March. Mr Silbermann gave evidence that the spreadsheet 2403C.xls was finalised on 27 March and that the $40 million accrual embodied Mr Beck's $28 million of unbilled data. Ms Ashley's email of 29 March appears to be a summary of points discussed at a meeting of the billing team held on the previous day, which probably discussed Mr Beck's figures after his initial discovery had been made. The fact that the spreadsheet was designated "2403C" indicated that it was created on Saturday 24 March, but I do not agree with ASIC that the court should infer from the designation that the "primary work" was done on that day. As the defendants pointed out, ASIC's submission ignores the fact that the sequence of the spreadsheets was 2403.xls, 2403a.xls, 2403B.xls and 2403C.xls, a sequence which indicates that work on the forecast extended over more than 1 day, probably into Monday 26 and Tuesday 27 March as Mr Silbermann said: DPS [2517b]. Ms Randall said Mr Silbermann told her about the new forecast "on or about" Monday 26 March and so she might have been told on Tuesday 27 March: compare APS [499]. It would make sense that the spreadsheet, considered in detail in the telephone conversation with Mr Rich, was still only a draft at the time of the telephone conversation, and that it was then finalised in light of what had been discussed.

[6520] Ms Ashley gave evidence (affidavit of 7 August 2002, paras 11-13) that at the meeting on 28 March, Mr Silbermann wrote on a whiteboard or butcher's paper the headings "To Find", "Found" and "To be found" with no figures under the latter two columns, and he said he wanted to know what had been found: this meeting is further considered at 20.5.4. ASIC submitted that the court should infer from this evidence that Mr Beck's discovery had not taken place at that stage, but I think that would be reading too much into her affidavit evidence, and is contrary to the evidence I have addressed above. Ms Ashley's subsequent email and attachment of 29 March included $28,481,273 in the "Found -- To be billed" column and she said she prepared this at Mr Beck's direction (affidavit, para 15(c)), implying that it reflected his discovery, which was therefore probably made on an earlier day.

[6521] ASIC submitted (APS [500]) that some support for the conclusion that 2403C.xls was completed before Mr Beck's discovery was made could be found in a comparison between the Change Feb Baseline tab of the spreadsheet (lines 87-104) and the schedule to Ms Ashley's email of 29 March: Ex CED 7-2. ASIC said that the figures did not bear any obvious relationship to one another: APS [500]. But the total of the Next Generation (NG) figures is $7.3 million in the spreadsheet and $8.3 million in Ms Ashley's email; if the Telstra items are included in Fixed Wire (FW) the total for Fixed Wire in the spreadsheet is $15.5 million compared with $17.76 million in Ms Ashley's email, and the figure for "Other" is $2.5 million in the former and $2.4 million in the latter. The continuation of the billing team's work between 27 and 29 March (as confirmed in Ms Ashley's affidavit of 7 August 2002, paras 14, 15(d)) would explain differences of that order.

[6522] Indeed, it seems to me that the contents of the Change Feb Baseline tab of the spreadsheet are a reasonably strong indication that Mr Beck had reported his discovery of $28 million of unbilled data before the spreadsheet was completed. The backbilling schedule on the Change Feb Baseline tab purports to identify $29.1 million of backbilling and postulates a further $10 million "not yet identified". The total amount of $39.1 million was then distributed to April and May in the amount of $19.55 million for each of those months, as considered at 12.7.6.

[6523] The March board papers referred to an "unidentified billing shortfall" (Ex MTB 1/236) and reported that $40 million of unbilled data relating to December 00-March 01 have been identified, that would be billed in April/May (Ex MTB 1/241). ASIC pointed out that the board papers did not mention the supposed discovery of $28 million of missing data, and submitted that they would have done so if the discovery had occurred by the time they went out: APS [501]. I find this submission to be unconvincing. I have found that Mr Beck reported his discovery before the long telephone conversation of Mr Rich, Mr Silbermann and Mr Hodgson (which took place early in the week, perhaps on Monday evening 26 March and almost certainly before the board papers were dispatched), and 2403C.xls was finalised on 27 March after the telephone conversation had occurred.

[6524] Mr Silbermann dispatched the board papers electronically to Mr Packer Jnr and Mr Kleemann, as well as Mr Rich and Mr Keeling, at 3.47 pm on 27 March: MS 351 and Ex MS 1/187. It may have been feasible to amend the draft board papers before they went out to Mr Packer Jnr and Mr Kleemann, but I am not persuaded that this would have been, and would at the time have been perceived to have been, a sensible and appropriate thing to do. According to 2403C.xls, which is analysed below, there were three components to the uplifted inflows forecasts, and probably only one of them related to the missing data. The effect of 2403C.xls was to reduce the forecast receipts from the missing data during the remainder of the year to $20 million, while revising the February baseline and adding a forecast receipt of $21 million in April for recovery of direct debit dishonours, CLEC debt and over 90-day debt. There is an important issue, considered below, as to whether the reasoning underlying 2403C.xls was disclosed to the board, but if we assume that there was adequate overall disclosure in the board papers, there may not have been any strong case for amending the disclosure for the purpose of reporting discovery of part of a component of the overall uplift. Therefore I do not regard the absence of any reference to the $28 million in the board papers as an indication that Mr Beck's discovery happened after the board papers were dispatched. As the defendants said, it would only be natural for management to wait until the board meeting so as to be able to identify the billing data that had been found with as much precision as possible: DPS [251 6b].

[6525] It was important for ASIC to establish that Mr Beck's discovery happened after completion of 2403C.xls and after the dispatch of the March board papers, because unless the "hard evidence" of Mr Beck's discovery was in the hands of the defendants for the purposes of the spreadsheet and the board papers, the view reflected in those documents that there was $40 million of unbilled data could only have been based on the discrepancy between billing run totals and forecasts amounting to $13 million, coupled with the unjustified conclusion on their part that the discrepancy must have been because of a billing defect rather than a defect in forecasting. ASIC submitted that there was no proper basis for that view other than "apparent blind faith in the budgeting and forecasting process": APS [503]. It contended that no explanation was ever given to the board for why the alternative explanation of the discrepancy, namely a mis-estimation of revenue, had been cast aside. But I have found that the premise of this argument is wrong: Mr Beck's discovery came before finalisation of 2403C.xls and provided some partial validation of the inflow forecasting in that document, as well as some partial validation for the statement in the board papers that $40 million of unbilled data had been identified.

20.5.2 Did Mr Beck "discover" $28 million of missing data?

[6526] ASIC claimed that it should have been clear to the defendants in the latter part of March, and that it certainly had become clear in April, that there was no significant amount of data available to be backbilled: APS [1047]. This submission is important because the claim to a significant quantity of unbilled data had important effects of two kinds. First, it fed into forecasts of backbilling and hence inflows; and second, the idea that there were missing data available to be backbilled underpinned the adoption of the New February Baseline in respect of April and June, so if that idea was without foundation then the New February Baseline was unwarranted. In both of these respects, the claim to significant unbilled data had an important positive impact on the cash flow forecasts that were submitted to the board at the March board meeting: see APS [1048].

[6527] As to whether it should have been clear in late March that there was no significant amount to be backbilled, ASIC submitted (APS [504]-[509]) that the following matters demonstrated that Mr Beck's "discovery" was not, and was not regarded by the defendants as, an irrefragable reality:

(7)

Ms Ashley carried out a "double-check" from "first principles" in early April: Mr Rich at T 11382, 11402;

(8)

the schedule attached to Ms Ashley's email at 29 March (Ex CED 7-2, "the Schedule") contained various indications that the "discovery" was at best the formulation of estimates of what might be able to be billed:

(4): the numbers of calls billable in respect of Next Generation for various months, which were expressed in round figures;
(4): the percentage of those calls said to be billable was a standard 80%;
(4): the billing rate for those calls was said to be "estimated";
(4): the figures allocated to flex tapes were with one exception round figures suggesting estimates;

(9)

in her affidavit (para 15(c)) Ms Ashley described the "Found -- To be billed" column in the schedule as:

(4): "a very broad estimate of further amounts ... which had been found but not yet billed for the relevant months";
(4): based on a status report she had been preparing that summarised "unbilled, and possibly billable calls reported by individual software developers": affidavit, para 15(c);
(4): a summary of possible sources from which unbilled call data records could be sourced, noting that it was not possible at the time to confirm whether those numbers accurately represented billable revenue;

(11)

the evidence, considered below, of continuing investigations during April about missing data, suggesting (according to ASIC) that the search for the $40 million including the $28 million supposedly "found" continued in April to be very much a work in progress; and

(13)

the ultimate outcome, considered below, which according to ASIC was that no significant missing data was able to be billed.

[6528] I do not regard the matters in (i), (iv) and (v) as determinative or even influential on the question whether the defendants realised or should have realised in late March that Mr Beck's "discovery" was based on estimation, making it misleading to say that he had "identified" $28 million of unbilled data. Ms Ashley's description of the "Found -- To be billed" column in the schedule (at (iii)) is a matter of significance. She said that she prepared this material at Mr Beck's direction (para 15(c)), thereby leaving open the possibility that he may have had a firmer foundation for the figures than she expressed, but no such firmer foundation has emerged from the evidence.

[6529] As to (ii), some major components of the $28 million figure appear on their face to be estimates, and would have appeared to be estimates to anyone who took the trouble to give the schedule anything more than a cursory glance. The schedule was emailed to Mr Silbermann, though not to Mr Rich.

[6530] In my view it would be a mistake to deduce from Ms Ashley's schedule that nothing more concrete had been discovered than some broad estimates. ASIC's submissions (see especially ASR [2518-26]) appear to assume that the distinction between "discovery" and "estimation" is black and white. But once the process being undertaken to identify the missing data is understood (see below), it becomes apparent that in this area there may be a "discovery" that leads to "estimates". Mr Beck's "discovery" cannot have been the immediate identification of all the files that would produce an additional $28 million of billing when processed, but on the other hand it is plausible to say that he "discovered" some matters, presumably to do with negative billing runs, zero billing runs and failures of the Lucent mediation device, which pointed to real errors that were to be addressed with further work, and not mere estimates. The fact that they were estimated figures does not mean that they were merely based on guesswork. Mr Beck has not given evidence as to what in fact he discovered and how he did so, but the evidence indicates that something was indeed discovered by Mr Beck, who was in the best position to ascertain whether there were missing data, that was judged by him and other senior management (including the defendants) to be concrete enough to warrant the steps that were taken, by way of preparation of 2403C.xls, the report to the March board, and the intense activity aimed at billing the missing data that had been found and identifying other missing data. As the defendants pointed out (DPS [2519]), the intense activity undertaken for the remainder of March and April to find the missing data, was not just activity on the part of the defendants themselves, but involved a substantial group including the senior executives of the Australian businesses, all of whom presumably had some belief in the prospect of identifying and billing substantial additional data.

[6531] In addition to the discrepancy between billing run totals and forecasts identified by Mr Silbermann in his evidence, some indication of the probability of unbilled call data can be found in the March "to-be-billed" report (Ex CE 4 0003), as Mr Rich explained in his oral evidence: T 12671-88. The "to-be-billed" reports were prepared to assist with the process of accruing for revenue, as explained at 20.3. The March report recorded data relating to calls made in March or earlier which had been rated, loaded and allocated to a billing run as at approximately the end of April, but which had not been billed during March: T 12676. The report shows that at the end of April, there was $41.8 million of such call data. In order to estimate the amount of data that was "stuck" in the system during March, it would be necessary to deduct from that figure the amount of March data that would not be billed in March in normal circumstances. Mr Rich estimated that figure at $15 million. That would indicate that there was about $27 million of abnormal call data up to the end of March that was not billed in the March billing runs. This does not include call data that had not been rated, loaded and allocated to billing runs because the billing system had rejected it for some technical reason or because it had not reached the billing system (for example, because of difficulties experienced with the Lucent mediation device). Consequently, according to Mr Rich's evidence, the total amount of "missing" data would be in excess of $27 million. Mr Rich's evidence on this matter is not precise evidence identifying missing data, but it gives a general indication that there was some problem processing call data records through the billing system in March.

[6532] The evidence does not show precisely what Mr Beck uncovered, but it can be inferred from the evidence of the computer programmers, Mr Maizels and Mr Harman, that the processes involved were quite complex. Ms Ashley explained that the information in her schedule was the result of working with the software developers and PwC on the revenue assurance project, including reports run by the software developers on the billing team, who had the necessary skills to extract information from the billing system and put it into report format: affidavit of 7 August 2002, para 14. Mr Rich explained that Ms Ashley's schedule comprised call detail records that had been found in a variety of different places in the billing process, including various "buckets" of data into which the CDRs had been diverted because of some technical issue about the data which prevented it being processed into bills in the absence of further analysis: 2 JDR 1334. These were referred to by the billing team as "negative bill runs", "zero bill runs" and "missing services". Additionally there were data that could not be processed because of problems with the Lucent mediation device (referred to by the billing team as the "CMM"). Mr Rich said that, as explained to him by Mr Hodgson and Mr Beck, the "% billable" figures in the schedule had been arrived at by the billing team based on historical experience in processing and billing such data in the past: 2 JDR 1335.

[6533] There was additional evidence about the problems associated with the Lucent mediation device. Mr Rich explained that the billing system for Next Generation involved the installation of new switches and the introduction of new data formats, which had to be read and loaded onto the billing system. Integral to that process was the installation of a mediation device supplied by Lucent, which was designed to collate CDRs from numerous different sources and convert them into a single call data record in a predefined format, for loading and rating in the billing system: 1 JDR 445. He said that in about October 2000 it became apparent that the loading and rating stages of the billing system were being overloaded because the Lucent mediation device was failing to work correctly: 1 JDR 446. Problems with the Lucent mediation device continued into January 2001, at which stage the mediation device was producing an enormous number of CDRs that had to be further processed before they could be put through the billing system: 1 JDR 808. Mr Rich said he explained these problems to Mr Howell-Davies and Ms Kekalainen-Torvinen late in March (2 JDR 1270), and at the board meeting on 30 March Mr Keeling and Mr Beck explained that the unbilled data for Next Generation had arisen from the failure of the Lucent mediation device, and the consequent rejection of data in Next Generation rating (2 JDR 1283). Similarly Mr Silbermann said that one of the reasons the billing team were taking longer than had been expected to recover, process and bill the unbilled data was the problem with the Lucent mediation device, which interfered with the billing catch-up and required part of the software for the device to be rewritten by a One.Tel software engineer: MS 406a. Ms Ashley also referred to the problem of billing for Next Generation as a result of the Lucent mediation device, which was supposed to filter the calls and pass them through to the billing system for rating, but was found not to be functioning correctly in March 2001: T 5535; T 5615.

[6534] This evidence, which I accept, implies that there was a real problem with the Lucent mediation device, capable of preventing a substantial volume of call data records from being billed. It serves to reinforce the technical nature of the problem. There is also evidence that people experienced in the telecommunications industry generally accepted One.Tel Management's analysis that there was a substantial quantity of missing data to be found and billed: namely Mr Kleemann, Open Telecommunications and PwC.

[6535] On 19 April Mr Kleemann was given a presentation by Mr Hodgson, Mr Beck and Mr Silbermann to explain how the unbilled data had come to be "stuck" in the billing system and the progress that was being made in identifying, processing and billing it: Mr Kleemann's affidavit of 26 July 2004, para 15. He gave oral evidence about that presentation, agreeing that he was keen to understand the issue concerning the $40 million of unbilled data, and that the presentation he received on 19 April was detailed: T 6327-8. He agreed that it was apparent that a considerable amount of work had been done (T 6329), and he said that by the end of the presentation he had received a satisfactory explanation of the issue (T 6339). He did not suggest that the presentation left him with a concern that the $40 million of unbilled data identified in the March board papers did not in fact exist.

[6536] The billing study prepared by Open Telecommunications in late May (Ex DTB 6/2156) lists "major problems that have occurred in the last six months", including the identification by PwC in March of 45 million CDRs from Next Generation that had not been rated and billed, due to faulty software, and 2.5 million CDRs that not been billed because they belonged to phone numbers that the billing system had no record of. As ASIC pointed out (ASR [2545]), it cannot be assumed that those CDRs were capable of being billed, but the fact that they were identified is of some significance to the question of whether further billings might occur with additional work.

[6537] In January 2001, following concern over falling revenue and a number of billing issues, the management of One.Tel engaged PwC to assess the control environment supporting the completeness and accuracy of One.Tel's billing function, and provide recommendations for improvement. PwC's report dated 20 March 2001 on "Next Generation Billing Controls Assessment" (Ex D 48 at pp 5-6) refers to their investigations having identified areas where revenue leakage had occurred, saying that the value of unbilled calls in negative bill runs dated before 31 December for all sources amounted to $7.2 million, and a total of $7.1 million was contained within zero bill runs relating to all sources for charges before 31 December. That, of course, related to the period to 31 December rather than the later period identified in Ms Ashley's schedule. The report later noted (pp 10-12) various concerns and problems in relation to revenue assurance at the call collection stage, the loading stage, the rating stage and the billing stage.

[6538] Notwithstanding such evidence, ASIC submitted that it became clear in April that the forecasts based on significant unbilled data rested on a myth. It complained that this discovery was not disclosed to the board, and that instead, the defendants attempted to make up the difference by various ruses: APS [1049]. The ruses were said to be the formulating of a damages claim against Telstra (considered at 18.4.7), the withholding of large amounts due to Telstra in respect of roaming for no good reason (considered at 18.4.6), the withholding of the April mid-month service provider payment due to Optus without valid reason (and in connection with that, the formulation of a baseless claim for missing CDRs, considered at 18.5.9), and resistance to the payment of properly due debts to carriers and others in the UK (considered at 18.11). Any plausibility that submission might have rests upon the assertion that these claims were bogus and not bona fide. As I have concluded that the claims were bona fide claims, I do not accept ASIC's contention that they were "ruses".

[6539] ASIC relied (APS [1051]-[1093]) upon evidence about the following matters, in order to demonstrate the non-existence of the alleged $40 million worth of unbilled data:

(7): billing run totals;
(8): butcher's paper records;
(9): the PwC report of 8 May;
(11): 2704jrmssh.new.xls;
(13): the service provider/fixed wire April reforecast;
(14): Mr Rich's email to Mr Murdoch Jnr dated 23 April 2007;
(15): Ms Ashley's analysis;
(16): Mr Silbermann's evidence as to his conversation with Mr Howell-Davies;
(17): the evidence of Mr Maizels and Mr Harman; and
(18): the evidence of Mr Rich (which according to ASIC, showed an inability to supply clear answers to basic questions about the $40 million).

The question to be considered, in respect of each of these categories of evidence, is whether they support ASIC's submission that there was no significant amount of unbilled data.

20.5.3 Billing run totals

[6540] Mr Rich returned from Europe to Australia on about 2 April 2001, in order to assist with the resolution of billing issues: 2 JDR 1308; MS 403. That is consistent with the importance of the $40 million missed billing assumption to the cash flows that had been presented to the board at the March board meeting. Mr Rich gave evidence of a conversation he had with Mr Packer Jnr and Mr Yates on about 3 May 2001 in which they discussed what was causing the cash position to be lower than forecast, and he said to them:

We have been closely monitoring the size of the bill runs during April day by day. Up until last week, the size of the bill run totals was lower than we expected to see given the billing catch up we were expecting to come through during April. During the last week, however, the last bill run was $8 million, which is $2 million more than we were forecasting. This gives me some comfort that the unbilled data is coming through the system, but it has been slower than we expected.

[6541] At Ex P93-758 there is a table setting out the April and May billing run totals that were forecast in spreadsheet 2403C.xls and spreadsheet 1104jrmssh.xls, and then the "actual" billing run figures set out in Ex P69: also Ex CED 4-162-76. Spreadsheet 2403C.xls incorporated backbilling of $39.1 million, and perhaps represents the high watermark of optimism about unbilled data.

[6542] Although Ex P93-758 is subject to a limitation of use order, it is appropriate to use the table simply as a convenient and accurate extract from the other evidence that it specifies. The table sets out ten billing runs beginning with No 540, dated 4 April and with a QM date (the date on which the data was sent to the mailing house) of 11 April, and ending with No 549, dated 30 April and with a QM date of 13 May. The forecasts for each of those billing runs in spreadsheet 2403C.xls are given in column D of the exhibit: for example, the forecast for No 540 is $7,482,165, and the forecast for No 549 is $7,810,461. The total for April is $89,326,559. Those are compared with the "actual" billing run amounts taken from Ex P69, which are in column F. For example, the actual figure for No 540 is $4,466,288, and the actual figure for No 549 is $5,319,171. The total actual figure for billing runs for April is $58,536,054, a shortfall against the forecasts in 2403C.xls of over $31 million. Nine out of the ten billing runs are substantially lower than the forecasts. Such a large difference between 2403C.xls and the "actual" numbers suggests that the forecast in that spreadsheet, to the effect that there would be additional revenue of about $40 million, largely in April, from previously unbilled data, was highly unrealistic. But that suggestion would be validated only if there were no supervening factors reducing the actual figures. In fact, as indicated in Ch 14, there were several factors adversely affecting April revenue.

[6543] The table in Ex P93-758 also has a column (column E) showing the forecasts or estimates for billing runs contained in spreadsheet 1104jrmssh.xls, which (as I have found elsewhere) was prepared on Easter Monday 16 April 2001. Mr Rich gave evidence that, 2 or 3 days before the data for a billing run went to QM, management would have had a good idea of the dollar value of the billing run (T 12583), and that for the first five April billing runs, 1104jrmssh.xls would have been based on data that was close to actual data, and the sixth billing run could well have been close to final form even though it was dated 19 April and its QM date was 1 May (T 12584). With one exception, the forecasts/estimates for the first six billing runs in 1104jrmssh.xls were approximately equivalent to the "actual" numbers and significantly lower than the numbers in 2403C.xls, although the estimates in 1104jrmssh.xls for the last four billing runs were all higher than the actual figures (and, indeed, identical with the forecasts in 2403C.xls), and the total estimate in 1104jrmssh.xls for April was just under $12 million higher than the actual total.

[6544] In the sixth billing run, No 545 (dated 19 April, QM date 1 May), the forecast in 2403C.xls was $8.146 million, but that was effectively abandoned in 1104jrmssh.xls which contained a forecast/estimated figure of $5.5 million, compared with the actual figure in Ex P69 of $5.218 million. Mr Rich said in re-examination that there must have been information available on 16 April concerning the quantum of that billing run: T 12584.

[6545] ASIC submitted that it would have been known to the defendants in the early days of April that the billing run totals, as emerging, were falsifying the projections in spreadsheet 2403C.xls. In my opinion, the comparison of 1104jrmssh.xls with the "actual" figures and with the forecasts in 2403C.xls suggests that when they prepared the spreadsheet on 16 April, Mr Rich, Mr Silbermann and Mr Hodgson revised the forecasts for the first six billing runs in April so as to eliminate, or largely eliminate, any forecast revenue from previously unbilled data, but they adhered to the expectation that some of this revenue would turn up later in the month, by persisting with the forecasts for the last four billing runs of April that had been made in 2403C.xls. But I am not persuaded that the billing run totals emerging in early April falsified, or ought reasonably to have been seen by the defendants as falsifying, the projections in 2403C.xls. The defendants' evidence was that at the time, there were various factors not known or reasonably foreseeable at the end of March, contributing to an unexpected decline in billing run totals in early April, including in particular the unexpectedly slow process made in identifying, processing and billing the unbilled data and the late April database corruption which delayed the dispatch of bills by about a week and made the system slow for some time thereafter: DPS [3488].

[6546] The single exception to the pattern of decline from the earlier estimate to the actual is the fifth billing run, No 544 dated 15 April, where the forecast in 2403C.xls was $7.646 million, the estimate in 1104jrmssh.xls was $6.5 million and the actual figure, anomalously, was $8.839 million. That may have been the billing run to which Mr Rich referred when he told Mr Packer Jnr and Mr Yates on 3 May that the last billing run was $8 million which was $2 million more than forecast. That statement was approximately correct if it was the fifth billing run and the forecasting in 1104jrmssh.xls that Mr Rich was referring to. But he should have had information about subsequent billing runs by 3 May, given that on 16 April, he and his colleagues were able to adjust for the sixth billing run which was dated 19 April, and therefore it appears that he was inaccurate in speaking of the "last billing run" during the "last week" if he was referring to the fifth billing run. If he was referring to any later April billing run, his statement was plainly wrong because none of them was for $8 million and each one of them was well below the forecasts. In any event, in my opinion the fact that the fifth billing run was higher than the forecasts was an anomaly and no cause for optimism about increased revenue from previously unbilled data, as the subsequent billing run figures showed.

[6547] For the May billing runs the actual figures were well down on the forecasts in 2403C.xls, and also generally down on the forecasts in 1104jrmssh.xls. There is an anomaly in billing run No 554, where the actual figure according to Ex P69 was very much higher than the forecasts. ASIC submitted (APS [1060]) that as spreadsheet 2905.xls shows this billing run as $6.2 million, the figure in Ex P69 is probably wrong (and if not wrong, then an anomaly not signifying any trend). But the defendants claimed that on its face, billing run 554 was a clear indication that substantial amounts of backbilling were starting to come through the system towards the end of May: DPS [3490]. The evidence does not enable me to embrace either of these submissions; certainly ASIC has not established that the figure in Ex P 69 is wrong or that billing run 554 is an anomaly.

[6548] The total for the month of May, $57.347 million, was about $34 million down on the forecast of $91.52 million in 2403C.xls, and nearly $13 million down on the forecast of $70.29 million in 1104jrmssh.xls. To the extent that the forecasts in 2403C.xls included a component of revenue from previously unbilled data, it is probable that this forecast was not realised.

[6549] All in all, the figures summarised in Ex P93-758 would suggest that there was no significant amount of unbilled data to be recovered in April/May, if there were no other factors tending to reduce the level of billings. But there do seem to have been some other factors, including the "issue in the billing engine" in the third week of April mentioned by Mr Rich at T 11402.

20.5.4 The "Summary -- Unbilled Calls" document and butcher's paper records

[6550] Ms Ashley gave evidence in her first affidavit (made on 7 August 2002, para 10) that in about November or December 2000 some changes were made to the billing system, resulting in difficulties in loading the Telstra tapes. She said that resulted in what appeared to be missing fixed wire data, and she estimated that about $6 million worth of data went missing from the system. She said that eventually these data were identified and were billed in January and February 2001: see below.

[6551] She said (paras 11-15) that on about 28 March 2001 she attended a meeting at One.Tel, with Mr Silbermann, Mr Hodgson and Mr Beck, for the purpose of discussing "the missing revenue problem". She said Mr Silbermann announced at the beginning of the meeting that the company was short by $50 million against budget, and that he wanted to know how much of the missing revenue had been accounted for and how much still had to be found.

[6552] Mr Silbermann disagreed with Ms Ashley's evidence that he had said there was a $50 million shortfall against budget. He said his belief in late March was that there was a shortfall of about $40 million and that is what he would have said to Ms Ashley: MS 840. That is consistent with other evidence and is probably correct.

[6553] Ms Ashley said Mr Silbermann wrote either on a whiteboard or butcher's paper, drawing up a table containing three columns headed, respectively, "To Find", "Found" and "To be found", with lines for Nov-00, Mar-01 and "Estimate". In the "To Find" column he wrote the figure $10 million in the November line, the figure $30 million in the March line, and the figure $10 million in the Estimate line. He said he wanted to know "what we've found" (pointing to the "Found" column), and "what we still need to find" (pointing to the "To Find" column).

[6554] On 29 March, Ms Ashley circulated an email which attached a spreadsheet headed "Summary -- Unbilled Calls": Ex EPA 2. The first part of the spreadsheet contained a table to the following effect:

Table 20.1: Ms Ashley's "Summary -- Unbilled calls" of 29 March 2001
	To Find	Billed	Found-To be billed	To be found
Nov-00	$10,000,000	$6,000,000	$1,000,000	$3,000,000
Mar-00	$30,000,000	--	$13,440,000	$16,650,000
Estimated	$10,000,000	--	$14,041,273	($4,041,273)
Total	$50,000,000	$6,000,000	$28,481,273	$15,518,727

[6555] According to Mr Rich, the document meant that the billing team had estimated there was approximately $40 million-$50 million in revenue to be found, of which $6 million had been found and billed, approximately $28.5 million had been found and was to be billed, and a further $15.5 million was still being investigated: 2 JDR 1333. That is broadly consistent with Ms Ashley's evidence though there are some differences of emphasis.

[6556] Ms Ashley said in her affidavit that the "To Find" column reflected the amount she had been instructed by Mr Silbermann to find, as the budget shortfall was to be made up by missing revenue. To the extent that this implies that Mr Silbermann had pre-ordained a figure to be produced, it is inconsistent with Mr Rich's evidence and seems to me to be unlikely. Nor is it consistent with Mr Silbermann's evidence: he said he would not have expressed himself to Ms Ashley in terms of an amount that needed to be found if the budget shortfall was to be made up by missing revenue, because his state of mind at the time was that there had been a shortfall in the actual billing run totals versus those forecast, and based on his conversations with Mr Beck, the shortfall appeared to be due to CDRs not having been processed: MS 842. Mr Silbermann said that while Ms Ashley's email of 29 March provided a detailed breakdown of the unbilled CDRs that had been identified in late March, he was also told by Mr Beck earlier in that month that the billing team had identified approximately $28 million of the missing CDRs: MS 841. The evidence of Mr Rich and Mr Silbermann, supported by the March board papers, indicates that a problem had been discovered by Mr Hodgson or Mr Beck, pointing to a substantial amount of missing data.

[6557] Ms Ashley also said the "Billed" column represented revenue that had been billed subsequent to the month in question after discovering unbilled revenue. The $6 million figure in the November column represented the billing, in either January or February, of two Telstra tapes that had been located and were referable to the month of November.

[6558] Ms Ashley said the "Found -- to be billed" column represented further amounts that had been found but not yet billed for the relevant months. The figures included "% billable" estimates that, according to Mr Rich, had been arrived at by the billing team based on historical experience in processing and billing such data in the past: 2 JDR 1335. He said (2 JDR 1334) he understood, from the document and explanations he had received, that the $28 million of unbilled data that had been identified comprised call detail records that had been found in various different places in the billing process, including "buckets" of data into which CDRs had been diverted because of some technical issue about the data that prevented it from being processed into bills without further analysis, referred to in the document as "neg bill runs", "zero bill runs" or "missing services". There was also some data that could not be processed because of problems with the Lucent mediation device (identified in the document as "CMM").

[6559] Ms Ashley said she prepared the figures in the document on the basis of a status report that she had prepared at Mr Beck's direction, summarising unbilled and possibly billable calls reported by individual software developers. Ms Ashley said she derived the amounts in this column from system-generated reports run by various software developers based on call data records that had not been billed. She said the figures were the best estimate of billable revenue at that point in time, but she did no analysis on the question of collectability of this possible revenue: affidavit, para 15(c)(i). Mr Silbermann disagreed with this, saying his understanding at the time was that the figures listed in the email of 29 March were CDRs that were billable: MS 843.

[6560] There is a breakdown of the figures on the second page of the spreadsheet, which Ms Ashley explained in her affidavit (para 15(c)), giving sources for the figures where she could recollect them. Out of the total amount of $28.481 million, $8.32 million was sourced in Next Generation and $17.761 million was sourced in the fixed line business.

[6561] In the latter category, $12.086 million was attributed respectively to three Telstra flex tapes, one for February and two for March 2001, relating to billing runs 535-4, 540-9 and 540-50. Ms Ashley remarked in her affidavit that she did not know whether those amounts had been included in "To be billed" reports as at March 2001, but if they were, they may not have constituted missing revenue but would instead have been accrued for in the general ledger: para 15(c)(v).

[6562] Also in the category of the fixed line business, there is a figure of $2.9 million for "Telstra missing services", which Ms Ashley said was based on a report by a software developer. But she said that within about a week after preparing the spreadsheet, she discovered that the Telstra account numbers on the missing service CDRs were largely for One.Tel's internal account and therefore not billable. She therefore reduced this figure by $2 million to $900,000 by updating figures recorded on butcher's paper that was used to give daily updates to Mr Rich: para 15(c)(iii). She said in her second affidavit (made on 7 July 2005, para 5) that Mr Rich visited level 17 almost daily to receive updates on the status of the billing work. Updated information was first displayed on a whiteboard but then subsequently on butcher's paper located behind her desk: an example is at Ex EPA 10 and, in reduced size, in Annex A to her second affidavit, reproduced at Ex CED 7-6A.

[6563] The final column, "To be found", represented the amount of money (presumably, the additional amount of money beyond what was recorded in the column "Found -- to be billed") that it would be necessary to find for the relevant months in order to make up the budget shortfall, and did not represent an assessment by Ms Ashley that this money would be found: para 15(d).

[6564] What emerges from Ms Ashley's evidence is that in her view, $6 million worth of unbilled data had been found and billed in January and February, and there was possibly an additional amount of unbilled data in excess of $28 million, but that was problematic in various respects that she detailed in her affidavit, so that the true amount might have been very considerably less than $28 million. On the other hand, Mr Rich's evidence implies that the document represented bona fide efforts by the billing team that had led to their identifying unbilled data and then making an estimate as to its recoverability, leading to the $28 million figure. Certainly the document on its face is amenable to that construction. Further, Mr Rich gave evidence of a meeting on 5 April 2001 attended by himself, Mr Keeling, Mr Hodgson, Mr Beck, Ms Ashley and Ms Joukhadar, convened to update him and Mr Keeling on progress in identifying and billing the unbilled data, at which a document similar to the "Summary -- Unbilled Calls" document was handed out and explained, and he was led to understand that the $28 million of data had been identified and was to be billed: 2 JDR 1330-6.

[6565] ASIC sought to demonstrate (APS [1062]) that subsequent experience showed that the amount of unbilled data was, indeed, very much less than $28 million. It referred to Ex EPA 10 (CED 7-6A in reduced form), the progressive report on butcher's paper of billings "found", noting that the amount "found" was almost $28 million on 2 April, according to the butcher's paper (in fact, the figure was $27.711 million), but then the figure was progressively reduced in subsequent days, as shown on the butcher's paper: on 3 April the amounts attributed to the three Telstra flex tapes for February and March (mentioned above as constituting $12.086 million of unbilled data) were reduced to zero, zero and $1 million respectively, suggesting (as Ms Ashley had foreshadowed in her affidavit) that it had been discovered that most of the amounts had indeed been accrued to the general ledger through "to be billed" reports. The grand total for 3 April was $17.5 million. That was reduced to $16.6 million on 4 April and there were various lower figures subsequently.

[6566] It is not easy to interpret the figures on the butcher's paper, partly because there seem occasionally to be two "grand total" figures for a single day, which, according to ASIC, represented a range. It is also not clear whether the figures entered for a day represent a downwards revision of figures for the previous day, or additional data. Plainly, however, the "grand total" figures on the butcher's paper for the days after 2 April, up to about 10 April, were very substantially lower than $28 million; but on the other hand, the figures were reasonably substantial, the lowest being in a range of $6.6-$14.7 million.

[6567] I referred earlier to Mr Kleemann's meeting on 19 April 2001 with Mr Beck, Mr Silbermann, Mr Hodgson and Mr Miller. Mr Kleemann said that during their presentation on billing issues, Mr Hodgson or Mr Beck or Mr Silbermann wrote on pieces of butcher's paper clipped to a board. He exhibited to his affidavit as Ex GRK 5 (CED 13-1 and 13-2) copies of two pages of butcher's paper. In a later affidavit he said he believed it was likely that these were among the pages used at the meeting, but he could not be sure: affidavit made on 23 September 2005, para 4. It appears that the two pages were produced to ASIC by Mr Beck: affidavit of Craig Allsopp made on 4 July 2005, para 12(a).

[6568] I note, in passing, that Mr Allsopp's evidence, which was not available to me when I wrote my judgment on the admissibility of documents (ASIC NSWSC 417 (5 May 2005)), provides an alternative and stronger basis for the conclusion that I reached in that judgment, namely that the butcher's paper exhibited to Mr Kleemann's affidavit was admissible: see judgment at [91], [92], [194], [308], [314], [320].

[6569] On the page at Ex CED 13-1, in the bottom right hand corner, there is the heading "Total" under which two entries appear, namely "Billed $5.9 million" and "To be billed $12.9 million", with a total of $18.8 million.

[6570] On the other page (Ex CED 13-2) there is a column headed "Billed", subdivided into "Total", "Billed to 15/4" and "Allocated to bill run". Under the "Billed -- Total" sub-column, figures are inserted in various categories for Next Generation, fixed line and One.Net, totalling $5.7 million. In the "Billed to 15/4" sub-column there are only two entries, for $1.5 million and $0.2 million, with question marks inserted next to other figures in the total column, and in the "Allocated to bill run" sub-column there is only one entry, $0.2 million, again with question marks inserted next to other figures. In another column headed "To be billed" there are figures for various lines, under which there appears to be a total given in a range from $13 million to $17 million. Then the figure $10.5 million appears, circled, joined with arrows to the $5.7 million figure for "Billed -- Total", and an arrow to the fig 16.2, presumably $16.2 million, which is the total of the "Billed" and "To be billed" columns. It is hard to know what to make of this column, beyond the proposition that it reflects various amounts to be billed which could be, in total, in excess of $10 million.

[6571] ASIC submitted that the proposition suggested in the "Billed -- Total" sub-column, that $5.7 million (or $5.9 million on the other page) was billed, was left "in a highly problematic state": APS [1064]. In the absence of evidence to explain the content of the presentation, including in particular the question marks, I would not reach that conclusion. Taken together, the two pages might seem to represent that by 19 April, about $5.7-$5.9 million worth of unbilled data had been billed, and there was some basis for billing another amount in excess of $10 million. But just how strong a basis that was is left unexplained.

[6572] The defendants submitted (DPS [3492c]) that it is not clear from Ex CED 13-1 whether the document is meant to represent all data found up to 19 April or only data found since the end of March (in which case it would be additional to the $28 million of unbilled data identified in the "Summary -- Unbilled Calls" document and referred to at the March board meeting). The latter interpretation would be consistent with Mr Rich's statement, in his email to Mr Murdoch 23 April (Ex MTB 4/1216), that "$18.8 million of additional CDO have been found", although in my view it would be wrong to attribute any particular significance to Mr Rich's use of the word "additional". But it is inherently implausible that the butcher's paper was recording that about $46.8 million in missing billing data (that is, $28 million plus the additional amount identified in the butcher's paper), and it seems to me inconsistent with the structure of the butcher's paper records which refer to the "Grand Total" and a breakdown of figures that seems to correspond with Ms Ashley's characterisation of the $28 million in Ex CED 1-1028D: see ASR [3491]. I therefore reject the defendants' submission.

20.5.5 The PwC report of 8 May

[6573] PwC produced a "Status Update" entitled "Revenue Assurance" dated 8 May 2001: Ex CED 12-2. In that document it is said that "to date, $17 million of backbilling has been identified". The document does not say who has identified the backbilling, but there is an approximate correspondence between that figure and the figures in the butcher's papers referred to above.

[6574] ASIC relied on this evidence: APS [1066]. The defendants submitted that PwC's report was open to the construction that the $17 million that had been identified was a part of the totality of unbilled call data that had been identified with the assistance of PwC: DPS [3495]. But that is not, in my view, the probable meaning of the language of the report, and it seems to me unlikely that PwC would have presented a report to PBL on 8 May which would do otherwise than identify all of the backbilling that had been found: see ASR [3495]. In my opinion, the evidence provides support for the view that the unbilled data was worth substantially less than the $40 million that had been reported to the March board meeting; but on the other hand, like the butcher's paper evidence considered above, this evidence suggests that there was a belief in the management team that a substantial amount, perhaps up to $17 million, had been identified as billable by late April.

20.5.6 2704jrmssh.new.xls

[6575] The cash flow spreadsheet 2704jrmssh-new-INFLOWSNO3 includes a page with some coloured numbers, which appears just before the beginning of spreadsheet 2905 in the hardcopy spreadsheet exhibits. It has columns setting out the dates of billing run cycles, dates of arrival in letterboxes, billing run totals, the number of customers per cycle, the number of customers per tape, and tape run totals. The billing run cycle dates run from 30 January 2001 to 30 July 2001. Then there are what appear, from the hardcopy in evidence, to be hard copies of electronic notes. These entries are placed under and across columns showing dates in November 1999 and August 2000, dates that appear to be meaningless.

[6576] The significant notes for present purposes are the following: "backbilling = 6.8" at cell K215; "Assumed $4 million backbilled form [sic] 1 April to 30 April + $2.8 million starting 23 May" across cells J218-N218; "Assumed $4.2 million backbilled form [sic] 4 May to 19 May + $1.7 million from 4 May for 10 cycles" across cells J227-N227; "backbilling = 7.3" at cell K229; "backbilling = 2.1" at cell K239; and "backbilling completed" across cells J242-K242.

[6577] Mr Rich said he did not recall, but did not deny, working on this cash flow spreadsheet, but as the defendants pointed out, there is no evidence to suggest that he worked on the document: DPS [3499]. ASIC noted (APS [1068]) that the three notes beginning "backbilling =" add up to $16.2 million, which is the figure handwritten on the butcher's paper at Ex CED 13-2, where the "Billed -- Total" figure and the "To be billed" figure are joined together with arrows. It drew attention to the similarity of that number with the $17 million referred to in the PwC report of 8 May. It then noted the words "backbilling completed", presumably in order to draw the inference that the $17 million billed and to be billed was the total amount that had been discovered as at the date of the spreadsheet.

[6578] ASIC also drew attention to the note saying "Assumed $4 million backbilled form [sic] 1 April to 30 April + $2.8 million starting 23 May", and submitted that this note showed that the authors of the spreadsheet did not believe that any more than $4 million had been backbilled prior to the date of the document, 27 April, and even as to that amount, it was only "assumed": APS [1069]. ASIC noted (APS [1070]) that the other two backbilling components, $7.3 million and $2.1 million, appeared on the face of the spreadsheet to relate to May and June and therefore were prospective at the date of the forecasts.

[6579] This evidence reinforces the butcher's paper evidence and the PwC report by indicating that in late April management's belief was that a substantial amount ($16.2 million on this evidence) had been identified to be billed.

[6580] ASIC also made some submissions on the basis of a comparison between the figures in 2704jrmssh-new.xls and what it called the "actual" billing run totals, taken from Ex P69 and spreadsheet 2905.xls. A table by ASIC setting out the figures for comparison is at Ex P93-729A. Although that document is subject to a limitation of use order, it is convenient to refer to it as a summary of figures already in evidence in other places.

[6581] The comparison shows that for billing runs 540 (4 April 2001, QM date 11 April 2001) to 545 (19 April 2001, QM date 1 May 2001) the figures in 2704jrmssh-new.xls are very close to the actual figures, save for an anomaly discussed earlier in respect of billing run No 544, where the actual figure given in Ex P69 is $8.839 million compared with the actual figure in 2905.xls of $6.2 million, suggesting that Ex P69 may well be wrong. This correspondence of figures is hardly surprising, since it had already been achieved in the earlier spreadsheet 1104jrmssh.xls. The actual figure for billing run 546 is higher by about $0.87 million than the forecast in 2704jrmssh-new.xls. After that, the forecasts in the spreadsheet are all higher than the actual figures (except for billing runs 556 and 559 where there are some anomalies between Ex P69 and spreadsheet 2905.xls).

[6582] ASIC's submission (APS [1074]) is that the fact that the actual figures in the late April and May billing runs were down on the figures estimated/forecast in 2704jrmssh-new.xls suggests that even the limited amount of backbilling provided for in the Inflows No 3 tab for that cash flow forecast did not "go through". That suggestion could be accepted only if there were no other factor pushing the actual revenue down.

[6583] ASIC also contended (APS [1076]-[1077]) that there was another indication that the concept of substantial backbilling, about which the board had been informed at the end of March, had been abandoned in April. Not only had the backbilling of $19.5 million that had been incorporated into the spreadsheet 2403C.xls been scaled back to about $7.3 million (the latter being the figure for May backbilling in the colour page of 2704jrmssh-new-INFLOWSNO3). Additionally, the new February baseline had been abandoned, according to ASIC's reasoning.

[6584] ASIC's reasoning, which is rather complex, was as follows, putting it into my words. The New February Baseline was an extrapolation, made in spreadsheet 2403C.xls, on the basis of an assumption that there had been missed billing in January, February and March. The extrapolation was that because of that missed billing, the April, May and June billings were (quite apart from any further backbilling in those months) likely to be considerably higher than the February actual figures. Thus one sees, in 2403C.xls-Change Feb Baseline-$10M up, that in cell L30 the total February actual figure is $54.409 million. Then in line 31 there is a "New Feb Baseline" which is higher than the February actual figure, the revised total figure being $69.409 million at cell L31. A note at line 33 explains that the February Baseline has been adjusted up due to an estimated $40 million unbilled for the January-March quarter, implying that normalised billing should be approximately $13 million higher. However, when one looks at what has happened in 2704jrmssh-new.xls, one sees that the total figure for May is $63.654 million (cell D31 in Ex P93-729A), and that this figure evidently includes May backbilling in the sum of $7.3 million (the figure noted at cell K229 in 2704jrmssh-new- INFLOWSNO3). If one subtracts that backbilling from the total for May, the net total May figure in 2704jrmssh-new.xls is seen to be $56.354 million. That figure is quite close to the February actual figure in 2403C.xls.

[6585] It seems to me that ASIC's submission misunderstands the new Feb baseline, which was a normalising adjustment that did not depend upon the idea of missing billing. I deal with the evidence about 2403C.xls in detail at 12.7.4. I do not accept ASIC's submission.

20.5.7 The April reforecast

[6586] In the April reforecast, there were, as noted elsewhere, two provisions for backbilling. The first was an accrual of $1 million in January, $2.5 million in February and (as a forecast) $2.5 million in June, described as "identified"; the second was an accrual of $0.833 million for each month from January to June, described as "unidentified": see Ex CED 5-2, cells D and E 167, and D-J 169.

[6587] ASIC submitted (APS [1083]) that it is apparent from the April reforecast that only $3.5 million (the January and February "identified" backbilling figures) was regarded in late April (when the April reforecast was prepared) as having been backbilled in respect of the fixed wire business. ASIC said it was difficult to conclude that the additional $0.833 million for January to April should be added to this, because it was described as "unidentified". When one bears in mind that, out of the approximately $28 million of backbilling summarised in the attachment to Ms Ashley's email of 29 March (Ex CED 7-2), $17.7 million was attributed by her to the fixed line business, it is plain, according to ASIC's argument, that a large part of the alleged $28 million had been abandoned by late April when the April reforecast was prepared.

[6588] My view is that in assessing the significance of the April reforecast, one must bear in mind that this document was relevantly a review of accruals for the purpose of finalising management accounts. One.Tel generally accrued 50% of estimated amounts, to be "conservative". Therefore the April reforecast figures for backbilling are likely to be significantly understated. When understood in this light, the April reforecast figures probably reflect estimates of the kind found in the butcher's paper records, the PwC report and the spreadsheet 2704jrmssh.new.xls. I think this is, in substance, the point made by the defendants, using different language, at DPS [3514a] and [3514c].

20.5.8 Mr Rich's e-mail to Mr Murdoch Jnr dated 23 April 2001

[6589] In his email to Mr Murdoch Jnr on 23 April 2001, headed "Update", Mr Rich said:

Bill Catch Up -- $18.8 million of additional CDR have been found -- Next Generation, and Telstra will be billed to customers in the next month bill cycles.

[6590] In the present context, ASIC's point about this information is that it correlates exactly with the first page of the butcher's paper presentation to Mr Kleemann and Mr Miller on 19 April (Ex CED 13-1, where the $5.9 million identified as billed and the $12.9 million "to be billed" add up to $18.8 million. This suggests that by 23 April, Mr Rich had come to the view that only $18.8 million had been identified and so the earlier claims to unbilled data of $40 million, and even $28 million, could not be sustained, to his knowledge. In my opinion that inference should not be made. Mr Rich was telling Mr Murdoch Jnr about the progress that had been made on the billing project. He was not thereby abandoning the expectation or hope that further unbilled data would be identified.

[6591] In passing, ASIC submitted that Mr Rich's statement to Mr Murdoch Jnr in the email was misleading, because the expression "additional CDR" implied that the $18.8 million was additional to the $40 million referred to in the March board meeting, or at least additional to the $28 million which had been supposedly "found" at that time: APS [1087]. I do not accept this submission. Mr Rich said in cross-examination that he had not intended that the $18.8 million was additional to what had been referred to in the March board meeting, although he was not able to recall what the purpose of the word "additional" was: T 11774-5. In my view, however, the word "additional" is ambiguous. It might have merely meant "additional" to the billing that had occurred in the normal course before the search for unbilled data began. It is impossible to say what meaning was intended, in the context of the email, and therefore inappropriate to conclude that the statement was intended to be misleading, or even that it was misleading in fact.

[6592] ASIC also submitted that Mr Rich should have pointed out to Mr Murdoch Jnr that the $40 million referred to in the March board meeting had by this stage been reduced to $18.8 million: APS [1088]. That would be correct if it had become clear, by 23 April, that the total amount of unbilled data was not going to exceed $18.8 million. Certainly the contemporary evidence, considered above, indicates that expectations had been revised and lowered in the period from the March board meeting until late April. But investigations were continuing.

20.5.9 Ms Ashley's analysis

[6593] In her first affidavit (made on 7 August 2002) Ms Ashley said (para 8(b)) that one of her duties was to determine whether the budget shortfalls for revenue for the fixed wire business were due to a lower than expected gross margin and if so, the cause of the problem. She said she concluded that there was a margin problem with the fixed wire business, caused by a higher-than-budgeted percentage of local calls and Telstra charges at a low margin, as opposed to long-distance calls at a higher margin. She said she concluded that the budget shortfalls for the fixed wire business were not due to any missing revenue, and that she finally confirmed her conclusions at a meeting with Mr Rich on 20 April 2001.

[6594] Assuming that Ms Ashley's conclusions were correct, they meant that One.Tel management could not infer from the simple fact that revenue was below budget that there must have been some unbilled data. But Ms Ashley herself recognised, in the same affidavit and in particular, in the Summary attached to her email of 29 March (Ex EPA 2), that there was a missing revenue problem to some degree. My conclusion is that the proposition that there was a not insignificant quantity of unbilled data was consistent with Ms Ashley's evidence. Her margin analysis probably added a dimension of complexity to the continuing investigations into missing billing.

[6595] That conclusion is reinforced by what the defendants called "the mathematical fact ... that her margin analysis in comparison.xls does not explain anything like the "whole" of "shortfall" in actual versus budgeted revenue for the fixed wire business for January and February 2001": DPS [3522]. The mathematics were put to Ms Ashley in cross-examination (T 5577-9) and a summary is set out at DPS [3523]. I think this point is correct. It seems to me that the evidence does not enable the court to find, as ASIC submitted that it should, that Ms Ashley's analysis explained a "significant part" of the revenue shortfall: ASR [352225].

20.5.10 Mr Silbermann's evidence as to his conversation with Mr Howell-Davies

[6596] Mr Silbermann had a meeting with Mr Howell-Davies, which lasted for about two hours on Friday 11 May 2001. One of the issues they discussed was billing in Australia: T 13400; Ex CED 9-1. In his email to Mr Rich and Mr Keeling on Sunday 13 May, copied to Mr Silbermann, Mr Howell-Davies said it was "very disappointing and somewhat disturbing that a 40M gap has come to light".

[6597] In cross-examination Mr Silbermann said he would not use the word "gap" to refer to the accrual of $40 million for unbilled CDRs through the cash flow forecast. When asked to explain, he said:

Well, doesn't "gap" mean that there is a hole and you are never going to fill it? I was explaining to Howell-Davies that there was potentially $40m of unbilled CDRs which we had accrued through the cash flow and we expected to bill those. Those aren't my words, though. I don't really want to speculate on that word "gap".

[6598] ASIC seized on that statement, saying it indicated that, as at 11 May, no significant billing of the $40 million of unbilled data had occurred: APS [1075], [1091]. ASIC also submitted that this evidence should not be accepted (APS [1091], cross-referring to APS [1938]-[1940] which, however, do not appear to challenge Mr Silbermann's statement). Putting that to one side, it seems to me that it would be reading too much into Mr Silbermann's statement in cross-examination to regard it as evidence that there had been no significant billing of the $40 million before 11 May. Mr Silbermann made a general statement, directed towards whether the word "gap" was an appropriate word to use, and his statements that there was "potentially" $40 million and that One.Tel "expected to bill" the unbilled data, were in that context directed to the eventual outcome rather than to the progress that had been made by the time of the statement. That conclusion is consistent with Mr Silbermann's evidence in cross-examination, at T 13402, which I do not find to be absurd at all: compare APS [1075].

20.5.11 The evidence of Mr Maizels and Mr Harman

[6599] In his principal report dated 31 May 2002, Mr Carter addressed the "Liquidity of the Australian Operations" as part of his presentation of what he called the "actual financial position" of the One.Tel Group. His liquidity analysis of the Australian operations, presented in a table at para 11 of his report, involved taking into account the cash balance, other liquid assets such as trade debtors and accrued income, and operational liabilities and accrued liabilities. Some of the table was ruled inadmissible.

[6600] In his affidavit, Mr Rich claimed that Mr Carter had not included in the table some other potential sources of liquidity for the Australian operations, including unbilled call data: 2 JDR 1720d. As to that, he said:

[A]t the end of March 2001, as described elsewhere in this affidavit, One.Tel Australia had identified approximately $28 million of unbilled call data which related to prior periods, and expected to find in due course approximately another $12 million of such data. Expected billings of those amounts during April and May were in excess of normal billing activity from ongoing operations during that period and therefore represented a liquid asset of One.Tel as at March, April and May 2001 which is only included in Mr Carter's table to the extent that that unbilled revenue had been included in accrued income. I believe that approximately $5-10 million of that unbilled call data is not included in the accrued income figures used by Mr Carter ...

[6601] ASIC attacked Mr Rich's claim that a very substantial amount of unbilled call data had been accrued and was therefore included in the figures used by Mr Carter in his liquidity table: APS [2028]-[2031]. Of course, to the extent that unbilled call data had been accrued, Mr Carter's liquidity figures were correct; Mr Rich's evidence that some of the unbilled call data had been accrued was in the nature of a concession, for if none of it had been accrued, he would say that Mr Carter's liquidity analysis was off the mark by the whole $40 million.

[6602] ASIC's point was said to be (APS [2030]): "the amounts of the billings prior to and subsequent to Administration indicate that in fact there was not within the accruals figures any significant abnormal amount of data which would give credence to the existence of the $40 million of unbilled data which was referred to at the March board meeting".

[6603] However, the submissions which developed this point (at APS [2031]) made no reference to the accruals figures. Rather, they seem to amount to looking at the actual billings after March and making a necessarily naive assessment from the amounts as to whether they contain any recovery in respect of old data. Thus, ASIC's submissions referred to the fact that the billings for April and May were, in each case, a little over $55 million: see Ex P93-706 for a summary of the figures, sourced in 2905.xls. That was said to suggest that there was no abnormal amount being recouped in those months. Similarly, it was contended that the billings subsequent to administration (CED 4-174, billing runs 560-580) were in accordance with what would be expected in the normal course of events, and did not disclose any abnormal recovery for old data.

[6604] The defendants submitted, referring to Mr Rich's evidence at T 12671-88, that an indication of a significant quality of unbilled call data as at the end of March was to be found in the March "to be billed" report. The "to be billed" report was prepared to assist in the process of accruing for revenue, as explained at 20.3: see 2 JDR 1834-45. The March report records billing data relating to calls made in March or earlier which had been rated, loaded and allocated to a billing run as at around the end of April, but which had not been allocated and billed in a March billing run: 2 JDR 1836; T 12676. The report shows that as at the end of April, there was $41.8 million of such call data. Mr Rich gave evidence (T 12683) that in order to estimate the amount of that data that was "stuck" in the system during March, one would have to deduct from that figure in the "to be billed" report the amount of March data that would not be billed in March in normal circumstances, an amount that he estimated at $15 million. Consequently, according to his evidence, the "to be billed" report for March indicated an abnormally high level of call data pre-dating the end of March 2001 and not billed in the March billing runs, amounting to about $27 million. This is, of course, separate from call data (considered below) that had not been rated, loaded and allocated to a billing run, perhaps because it had been rejected by the billing system for some reason or had not reached the billing system: T 12677, T 12678-82.

[6605] I have traced through the submissions of the defendants at DPS [6339]-[6340], and ASIC's response at ASR [6338-9]-[6340]. It is not necessary to set out all of the very detailed evidence canvassed in those submissions. Suffice it to say that, having considered that evidence, I have formed the view that the March "to be billed" report is not a strong or persuasive indicator that there was substantial data stuck in the system. In particular, I am not persuaded of the accuracy of Mr Rich's estimate that the normal "to be billed" figure would be $15 million. Billings in respect of April and May were approximately $55 million per month and were not much different from billings earlier in the year: Ex P93-706. The December "to be billed" report (Ex CE 4 0001) contains an amount of $26 million to be billed after month-end, which is roughly half of that monthly billing amount, and a significantly higher figure than Mr Rich's $15 million estimate. Indeed, Mr Rich accepted that one would expect about half of the data referable to a month to be billed after the end of that month: T 14130, see also T 14147. Additionally, part of the "to be billed" amount in the March report appears to relate to internal billing, as ASIC submitted at ASR [6338-9].

[6606] In summary, my view is that Mr Rich's evidence about the March "to be billed" report does not have any substantial support in other evidence, and is of itself speculative. A more scientific analysis of the problem of unbilled data is called for. Fortunately, there is some evidence of that kind, given by Mr Maizels and Mr Harman. The occasion for receiving that evidence was presented in Mr Rich's cross-examination, in the following manner.

[6607] Mr Rich was cross-examined as to whether, at the time when he wrote his email to Mr Murdoch Jnr on 23 April 2001, most of the $40 million of backbilling that had been referred to at the March board meeting had not been found: T 11776. It was put to him that only about $6 million had been billed, and that the estimates Mr Rich had received of what remained to be billed were in the order of only $12 million, and that even those estimates proved to be excessive. Then the following questions and answers occurred (T 11776-7):

Q -- With the benefit of hindsight, Mr Rich, you would agree, wouldn't you, that if there was any billing beyond the $6 million, it was of a very small amount -- that is backbilling I am referring to?

A -- No, that is an incorrect statement, Mr Macfarlan. With the benefit of hindsight, I know that is an incorrect statement.

Q -- The 2704jr, etc, daily cash flow spreadsheet contemplated the billing of further amounts in respect of the backbilling, but they were largely not able to be billed; that's the position, isn't it, Mr Rich?

A -- If you are putting to me that it was not billed, I would agree with you that there was a substantial portion of data at the time that I left and at the time of administration that had not been billed that could have been billed.

Q -- The amount of the $40 million backbilling referred to at the March meeting which was in fact billed at any time was significantly less than $10 million, wasn't it, Mr Rich?

A -- No, Mr Macfarlan, and I'm very happy to explain where you can go and have a look to test what you are putting to me.

[6608] Later he was asked to identify the documents to which he was referring, and he said "the two places that I would certainly go and look would be the March and April "to be billed" reports and then a report from the billing system of unbilled data at whatever date we are choosing to run the report for": T 11795. He said he thought there was a "possibility" that there was unbilled data that the administrators and liquidators failed to bill (T 11795), and he would "have to look at some documents" to answer the question (T 11796).

[6609] In re-examination he was taken back to his reference at T 11795 to "a report from the billing system of unbilled data" and was asked whether a report of that nature had been prepared by him, and he answered affirmatively: T 12689. He was asked what were the documents that he would want to look at to confirm whether the administrators and liquidators had failed to bill unbilled data, and he said he had in mind "the report that we ran in about 2003": T 12690. This led to my receiving into evidence (notwithstanding objection from ASIC) an affidavit made on 8 August 2006 by Andrew Maizels, a computer programmer engaged by Mr Rich, which annexed his report relating to March: Annex J, which is also Exs D 34; D 35 is the report with some explanatory notes.

[6610] The evidence shows that the report by Mr Maizels relating to March is the report to which Mr Rich referred in cross-examination. There was some uncertainty during cross-examination of Mr Maizels about whether the March report was produced in 2003 or only in 2005 (T 14185-7), but in the end his evidence seems to have been that the March report in 2005 may have been a rerun of the 2003 report to which Mr Rich referred.

20.5.11.1 The March report by Mr Maizels

[6611] Mr Maizels explained the work he had done to prepare his March report, and annexed copies of the computer programs he had written for that purpose. Fortunately it is unnecessary for me to delve into the content of the computer programs. But the broad shape and purpose of his work is not difficult to comprehend.

[6612] First, he extracted a "summary database" from a copy of the billing database that had been supplied to Mr Rich by Ferrier Hodgson. The summary database contained the information in the database relating to call data and monthly access charges billed for the period from late 2000 onwards.

[6613] Second, he identified and summarised, in a file called never.d, a subset of the call data in the billing system that had never been billed because it contained errors that prevented it from being processed. The subset identified by Mr Maizels was unbilled call data that he considered likely to be readily billable with further processing. Since some of this data had not been rated, he applied average retail rates to that data. In the result the total value he placed on the unbilled call data in never.d was $6,214,236.

[6614] Mr Maizels pointed out that the unbilled call data in never.d was only a subset of the unbilled call data in the database. He said in his affidavit (para 12) that he had run a further report, which had not at that stage been completed, which revealed that there were approximately 11 million minutes of unbilled calls in never.d and that the total of unbilled calls in the billing database (including the 11 million minutes in never.d) exceeded 68 million minutes of call data (note that ASIC appears to misunderstand this evidence, in the second bullet point at APS [2027]). He said (para 13) that in order to determine what proportion of the remaining unbilled call data would be billable (in excess of 57 million minutes after excluding the data in never.d), it would be necessary for him to review the data in order to analyse the issue that had led to its initial rejection by the billing system and consider how to correct that issue. Without doing that review work, it was not possible for him to ascertain what proportion of the data would be billable.

[6615] Mr Maizels' report at Annex J did two things. First, it took the figure of $6,214,236, which according to Mr Maizels was the value of unbilled call data in the system that was readily billable with further processing, and distributed it across the ten March billing runs, proportionally to the amounts actually billed in each billing run. I am not sure of the utility of doing this.

[6616] Second, the report identified the value of the calls, made by a group of customers before their March bill, that had been billed to that group of customers in billing runs at any later time. Thus, the group of customers who were billed in March in billing run 530 were billed again in billing runs 540, 550, 560, 570, and 580. The value of the calls that they made before the date of their March bills, billed to them in one or more of their subsequent bills, was $1,540,576. Naturally the greatest value was in the April bill ($1,151,029), tapering off in later months. The report showed that the total value of calls billed in later months but made before the March bills for all batches of customers was $26,529,489.

[6617] Obviously, the significance of the report is that if it is correct, then it was true to say, as at the date of the March board meeting, that there was a large amount of unbilled call data. According to the report, the amount unbilled at the end of March, which could have been billed by then, was a figure of up to $32,743,725 (that is, up to $6,214,236, plus $26,529,489). While this is substantially less than the $40 million figure given to the board, the difference is within the realm of variance between the eventual actual figures and a bona fide and careful estimate, especially when one bears in mind Mr Maizels' evidence that there was an additional amount of unbilled call data, more than 57 million minutes, as to which he could not say whether it would have been billable after further processing.

[6618] Mr Maizels gave some oral evidence that appears to be an explanation for the call data remaining unprocessed and unbilled. He said that from a few weeks after the commencement of administration, there were fewer people working in this area than there had been previously, and "we simply didn't have the resources to fix the problems and then process it", compared with earlier times when there were resources to carry out the type of work that would lead to the billing of some data that had previously thought to be problematical: T 14433-6. ASIC pointed out (ASR [2562]) that this evidence does not lead to an inference that there was any significant further data that could have been billed. But if data had previously been discovered that was "problematical", this evidence suggests an explanation for the non-billing of that data.

20.5.11.2 Mr Harman's evidence

[6619] ASIC was granted leave to adduce evidence from Toby Harman, a computer programmer, in response to the evidence of Mr Maizels. Mr Harman reconstructed the calculation Mr Maizels had made to identify the value of calls made before the date of the bills in billing run 530 and billed in billing run 540. He came up with the figure of $1,150,646, which may be compared with the amount arrived at by Mr Maizels, namely $1,151,029.

[6620] Mr Harman reviewed the data that he had valued at $1,150,646 and found the following:

(3)

the net value of the data loaded onto the billing system after 5 March 2001 (the date of the March billing run for this batch of customers, namely billing run No 530) was $401,384 (including $373,008 worth of data contained on flex tapes);

(6)

the net value of the data obtained from flex tapes was $706,887 (about 61% of the total), and out of this amount:

(19): the net value of non-local calls obtained from flex tapes was $111,486;
(20): the net value of local calls obtained from flex tapes was $340,586; and
(21): the balance was non-call data.

This evidence does not contradict the evidence given by Mr Maizels.

20.5.11.3 ASIC's critique of Mr Maizels' evidence

[6621] ASIC's submissions addressed Mr Maizels' evidence about:

•: unbilled call data value at $6,214,236;
•: the additional unbilled call data comprising calls in excess of 57 million minutes; and
•: call data value at $26,529,489 relating to March calls billed later.

I shall address the submissions on each of these subjects, in turn.

[6622] ASIC invited the court to reject, for three reasons, Mr Maizels' evidence that there was unbilled call data in the system valued at $6,214,236, readily billable with further processing. The first reason (APS [2033]) was that this evidence was based on a very subjective assessment of data, and Mr Maizels was not able to locate a copy of the program he had written to identify such data. I do not accept ASIC's submission. It is true that Mr Maizels made a subjective assessment, by means of a computer program that he has not been able to locate, to distinguish between unbilled call data that could readily be billed with some additional processing, and other unbilled call data. But he was an experienced computer programmer who worked at One.Tel from 1995 until January 2002, and therefore can be taken to have understood the relevant systems and to be in a position to make such judgments: and see DPS [6341]], with which I agree.

[6623] The second reason (APS [2034]) was that the data that led to the amount of $6,214,236 was taken from a date in late 2000 onwards (Mr Maizels' affidavit at para 9; he was not able to recall the precise commencement date in the witness box: T 14173. ASIC submitted that this did not suggest any necessary connection with the amount referred to at the March board meeting. That is true, but in the absence of other evidence, one would infer that a substantial part of the total amount had become unbilled data by the end of March.

[6624] The third reason (APS [2035]) was that no suggestion had been made during the cross-examination of the administrators/liquidators that there were data that they should have billed but did not bill. That is true, but the defendants do not (as I understand) suggest that the data to the value of $6,214,236 should have been billed by the administrators/liquidators, but only that on a proper analysis, it was there to be billed. As Mr Maizels indicated in cross-examination, the question of what the administrators/liquidators should have billed was dependent on the resources at hand: T 14173. As to the resources at hand, Mr Maizels gave evidence that less than a month after the administrators were appointed, all of One.Tel's programmers saved himself were retrenched (T 14433), reducing the number of software developers working on billing from 10 to Mr Maizels alone (T 14434). He said this meant that any call data that was in any way problematical was not billed after that point, because of lack of resources to fix the problems: T 14435.

[6625] ASIC did not ask the court to reject Mr Maizels' evidence that there was over 57 million minutes of other unbilled call data and that he could not ascertain what proportion would be billable without a detailed review. Instead, ASIC endeavoured to use this evidence to attack Mr Rich's credibility: APS [2037]. Mr Maizels said in cross-examination that he had told Mr Rich at some unspecified time that there was a considerable amount of data that was not included in the "unbilled" line of the report, but that he did not quantify it and could not ascertain what proportion of the data would be billable without a detailed review: T 14174. In re-examination Mr Rich referred to data that had either never been loaded by the administrator or never rated: T 12699. He said that this data could not be measured in dollars but it could be measured in minutes, and that he had been told there was somewhere between 20 million and 35 million minutes of data in this category. He said that these calls were national, international or mobile calls, since local calls were not timed, and he suggested that an average rate between 20 and 30c per minute could be applied: T 12699. That would produce a range roughly between $4 million and $10 million: T 12700. ASIC criticised Mr Rich for being prepared to give these estimates in re-examination without having suggested in his affidavit that this could be done, and without disclosing the expert advice that Mr Maizels had given him. But Mr Rich did not say, and was not asked to say, who had told him that there were between 20 million and 35 million minutes of unbilled call data in this category, and as far as valuing the data was concerned, he said several times that it was very difficult to do so: T 12699-700. In my opinion this tentative evidence is of little persuasive value, because of the inherent qualifications in it, but at the same time it is not inconsistent with the evidence of Mr Maizels and does not reflect poorly on Mr Rich's credit.

[6626] Perhaps most importantly, ASIC attacked Mr Maizels' report concerning March calls billed later and said to be worth $26,529,489, contending that for two reasons, the report did not indicate that there existed any significant, or indeed any, unbilled call data which might have constituted part of the $40 million unbilled call data referred to in the March board meeting: APS [2039].

[6627] The first reason was that, to be of assistance to the defendants, the report needed to show that the position in March was different from the position in other months, giving rise to the inference that there was an abnormal amount of unbilled data that could have been billed in March but was not: APS [2040]. In my opinion this analysis is correct. The March board papers said the management had "identified $40 million unbilled data relating to December 00 to March 01 that will be billed in April/May 01": MTB 1/241. The implication is that the billing of this unbilled data in April/May would be in addition to "normal" billing. Normally billing reflected the phenomenon that calls made within a particular month might not be billed until a later period, for various reasons including the possibility that the information might not be entered into the billing system until after the date of the billing run for that month. Therefore the board was being told that the billing of this additional data would be in addition to that phenomenon.

[6628] Mr Maizels' report was directed towards identifying the value of calls made before the date of the March billing runs but billed in subsequent months. But it was not directed towards making any comparison of the value of those March calls and the value of calls made in other months, such as might point to an anomaly in the March figures, perhaps because (as the defendants submitted: DPS [6346]) the report was not intended to be a complete and final analysis. It emerged during his cross-examination that in fact there were other reports in respect of other months (T 14171), and after a call was made, reports prepared by Mr Maizels for January, February and April were produced (T 14179) and became Ex P82. ASIC submitted that these other reports pointed strongly against the conclusion that the initial report by Mr Maizels, which related to March, had indicated the existence of an abnormal amount of unbilled data: APS [2047]. In fact it is evident from an examination of the January and February reports that they are incomplete, because they do not present figures for calls made in the month for which the report has been prepared but billed in the immediately subsequent month. Mr Maizels confirmed this by saying that they had been run with "incorrect parameters": T 14188. ASIC invited me to infer that if the missing data had been included they would have shown billings in later months of calls made in the month of the report that were at approximately the same level as in the March report: APS [2047]. But it seems to me that such an inference would incorporate an assumption about normalcy of the figures which is the whole point of the exercise to prove, and therefore I think it would be unwise to make the inference. In the end, I derive no assistance from the January, February and April reports.

[6629] ASIC's second reason for contending that the March report did not identify significant call data that might have constituted part of the $40 million unbilled call data referred to at the March board meeting was that Mr Maizels' report was based on an unjustified assumption that the data in question could have been billed to customers in their March bills: APS [2048]. I agree that Mr Maizels made such an assumption: see his affidavit at para 16(e)(ii). In cross-examination he conceded that he had not made any inquiry as to whether the call data in respect of the March calls had in fact been received by One.Tel in time for it to bill that data in the March billing run, and that the data might not have been received until some considerable time after the date of the billing run: T 14168-9.

[6630] According to ASIC (APS [2051]), Mr Harman's evidence showed that about one-third of the data in billing run No 530 was loaded onto One.Tel's billing system on a date subsequent to that billing run, and his exhibit showed that this data was contained on flex tapes from Telstra dated and received after the date of the billing run. Evidently the implication that ASIC sought to derive from this submission was that this data, valued by Mr Harman at $401,384, could not have been billed in the March billing run (No 530) because it was not received prior to the date of the billing run, 5 March, and had to be billed in the April billing run (No 540), and therefore could not be treated as unbilled March data.

[6631] However, the defendants challenged that implication, and in my view they did so effectively: DPS [6332]. They referred to evidence given by Mr Maizels to the effect that it would be wrong to assume, simply because call data was received subsequent to the date of the billing run (5 March in the case of billing run No 530), that it could not have been included in the 5 March billing run: T 14728. This was because "data received later than 4 March could be included on that bill run depending upon the decisions of the billing manager". According to Mr Maizels (T 14741), the issue for the billing manager was whether to

•: attempt to provide as complete a bill as possible to the customer for a particular billing cycle, at the cost of some delay, or
•: avoid any delay in sending the bill out in a timely manner, by excluding data not available on 4 March.

[6632] The defendants pointed out that billing run No 530 was not in fact sent to the mailing house until 14 March (T 14740), and in the ordinary course, would therefore have been finalised 2-3 days earlier (T 14741) -- say, on 11 March. They said that data for an amount of $195,245.27 was loaded between 5 and 11 March (Mr Harman, T 14763-6). According to the evidence of Mr Maizels set out above, it would have been open to the billing manager to include that data in billing run No 530, although it seems he or she chose to leave it to the April billing run for that group of customers, No 540.

[6633] According to the defendants' submission, it followed from these calculations that, of the $1,150,646 in call data for calls made before the date of billing run No 530 and billed in billing run No 540, only call data value at $206,138 (about 18% of the total) could not have been billed in the March billing run because it was received too late. If that was extrapolated to all of the March billing runs, then out of the total call data for calls made before the date of the customer's March billing run and billed later, valued at $26,529,489, the only data that could not have been billed in March would be data valued at about $4.78 million (18% of the total). In fact, as the defendants pointed out (DPS [6333]), the evidence did not establish that such an extrapolation could be made, and indeed Mr Maizels said he had checked Mr Harman's figure but had not done enough work to come to any conclusion on whether it was "representative" of the makeup of the other figures: T 14727, T 14738. Consequently the proportion of the total amount of calls before the date of the March billing run that were billed subsequently, that could not have been billed in March, might be greater or less than 18% ($4.78 million).

[6634] Consequently the effect of Mr Maizels' evidence, with which Mr Harman's evidence is consistent, is as follows:

(3): there was a substantial quantity of call data billed in the post-March billing runs that related to call charges incurred prior to the March billing runs, potentially as much as $26.5 million (excluding GST);
(6): a substantial proportion of that call data (82%, in the case of billing run No 530) could have been billed in the March billing run in the ordinary course, if the billing manager had aimed for a comprehensive March bill, but this did not occur;
(22): in addition, there was $6.2 million in unbilled call data relating to call charges incurred prior to the March billing runs, that could have been billed with further processing but was not;
(23): the evidence does not establish that the body of later-billed and unbilled but readily billable data was anomalously high for March, but neither does it show that the figures were routine;
(24): additionally, there was in excess of 57 million minutes of call charges prior to the March billing runs that had not been billed, and Mr Maizels could not say, without further work to ascertain why the billing system rejected those call charges, whether they could be billed.

[6635] The evidence therefore does not conclusively identify a foundation for the claim made to the March board meeting that management had identified $40 million of unbilled data. But it does seem to show a possible and plausible foundation for a substantial amount of unbilled data fitting the description, that is data relating to March calls that, according to the evidence of Mr Maizels, were received before the date of the March billing run but were not billed until later. Consequently ASIC has not established that the claim to $40 million of unbilled data was without foundation.

[6636] I do not find anything in this evidence that would lead me to conclude, as ASIC contended I should (at APS [2052]), that Mr Rich's evidence, the sequence of events and the evidence that was adduced by Mr Maizels and Mr Harman showed that Mr Rich was a witness who could not be trusted to give fair and frank evidence to the court.

20.5.12 The evidence of Mr Rich

[6637] ASIC submitted that in cross-examination, Mr Rich was unable to provide clear answers to basic questions concerning the existence of the alleged $40 million missing call data: APS [1093]. It said the inadequacy of his answers served to assist the inference that missed billing did not exist beyond an immaterial amount. ASIC's written submissions give 11 instances of allegedly inadequate or bewildering answers by Mr Rich. It is necessary to deal with them one by one, but as a general proposition, my view is that ASIC's submissions exaggerated the deficiencies in Mr Rich's answers and at times misrepresented the effect of them.

[6638] Mr Rich was cross-examined about his evidence (2 JDR 1229-30) that Mr Silbermann and Mr Hodgson telephoned him in London on 26 March to tell him they believed there was $40 million of unbilled call data in the system and that subsequently Mr Beck and the billing team identified $28 million of unbilled data. It was put to him that it later became apparent to him that Mr Beck had not in fact identified $28 million in missed billing, and he replied "the number was moving up and down during April if that's what you mean": T 11382. ASIC submitted that this was a vague and evasive answer: that after his return from the UK Mr Rich had kept a close eye on what was happening concerning the billing of the supposed missing data (T 11769) and must have been provided with detailed information that would have allowed him to give a straightforward and accurate answer that question. I do not agree with ASIC that Mr Rich's answer was evasive. The answer I have quoted was not a complete answer to the question but it made the relevant point that the figure for unbilled call data fluctuated during the billing team's investigations in April. He was not asked any supplementary question about that answer. He gave a direct negative answer to the next question he was asked, which was whether it had become apparent to him that the identification of unbilled data involved considerable estimation and guesswork. He gave a direct negative answer when it was put to him elsewhere during cross-examination that the actual billing of unbilled data was very small (T 11776), and when it was put to him that he had found out that the missing billing did not exist to any significant extent (T 11383).

[6639] ASIC referred to Mr Rich's evidence (T 11795) that the amount of unbilled data that was later billed could be tested by referring to the "to be billed" reports for March and April and a report from the billing system of unbilled data (which turned out to be Mr Maizels' March report). ASIC submitted that these documents did not identify amounts actually billed, but this is not true of Mr Maizels' report. ASIC also submitted that nothing in the evidence of Mr Rich and Mr Maizels served to rebut the proposition that had been put to Mr Rich, namely that the amount in fact billed at any time was significantly less than $10 million. In my opinion, for reasons explained when considering Mr Maizels' evidence, the effect of the evidence as a whole is that the question whether a substantially higher amount of unbilled call data was in fact billed is an open question.

[6640] Mr Rich gave evidence in cross-examination that he did not believe $40 million was billed prior to the company going into administration, but that some part of it was billed. When asked which part was billed, he said (at T 11383) that he did not know precisely but that "by 17 May my sense was that somewhere between $8 million and about $14 million or $15 million had been billed". ASIC submitted that it was remarkable that Mr Rich could not supply a more definitive and specific answer to that question. I disagree. He was answering questions in the witness box, relying on his memory and without access at that time to papers. More specific evidence on this question was given later, when Mr Maizels' report was tendered. I agree with ASIC that if there was $40 million of missed billing, Mr Rich's answer implied that some $25-$32 million of that amount had not been billed in the 7 weeks from the time of discovery of the problem on 26 March until 17 May, despite a major effort having been made to identify the unbilled data and process it for billing, and the urgent financial need to do so. But that does not, in my view, undermine the plausibility of Mr Rich's answer.

[6641] It was put to Mr Rich that the amounts estimated to be billed in April and May in spreadsheet 2403C.xls did not accord with what came to be billed in respect of those months, and he answered that "it depends on how you define 'billed'": T 11391. ASIC submitted that this was an evasive response. But the reason for Mr Rich's answer became evident in his answers to further questions. He evidently had in mind that there were some CDRs that had been rated and billed but not actually posted out to customers: T 11391.

[6642] Mr Rich was taken to the assumed billing for April in spreadsheet 2403C.xls, which was an amount of $89.3 million, and it was put to him that the billing for April was in fact $55.8 million, and he was asked to agree. He said (T 11391): "No, I think to test the $89 million you'd need to look at some other things as well", including the March and April "to be billed" reports. ASIC submitted that Mr Rich had "rejected that plain truth". In fact, as is common in answers given by a witness during cross-examination, Mr Rich endeavoured to address the significance of counsel's question rather than simply answering the question. He wanted to make the point that a proper comparison of the billing position disclosed in later spreadsheets with the forecast in 2403C.xls would require careful consideration of the "to be billed" reports, presumably because there may be a substantial amount in bills that had been accrued for revenue purposes but not posted and therefore not recorded as billings. I think it would be wrong to construe Mr Rich's evidence as rejecting the "plain truth" of the figures.

[6643] Mr Rich was asked why he had not told the board at the 17 May meeting that there was $25-32 million extra billing available to One.Tel. He said (T 11400) that the matter was "certainly" discussed with individual board members around that time. When pressed for specifics, he referred to a presentation to Mr Miller, Mr Green and Mr Kleemann towards the end of April, and a conversation with Mr Howell-Davies towards the end of April, and a conversation with Mr Murdoch Jnr in early May, and he said he had a "general sense" of discussing the matter with Mr Packer Jnr He was not able to recall the quantum that was discussed with Mr Packer Jnr, but he said the quantum mentioned in his conversation with Mr Howell-Davies was about $20-25 million. ASIC complained that Mr Rich's responses were vague and unconvincing and that the answers reflected adversely on his credit. I agree that the answers were not particularly specific, but my observation was that the witness was providing answers to the best of his recollection in the witness box, during the course of a very lengthy cross-examination.

[6644] When he was asked again why he did not tell the board on 17 May that he believed there was $25-32 million remaining to be backbilled, he said that on 17 May he did not believe there was $25-32 million to be billed but only $20-$25 million: T 11401. ASIC complained that this amounted to a change of evidence. In my view there was a change but not the kind that would reflect on Mr Rich's credit. The amount of $25-32 million was accepted by Mr Rich as a mathematical calculation, and he allowed counsel to take up those figures in subsequent questions. But when he was required to recollect the exact quantum mentioned to Mr Howell-Davies, he gave the figure of $20-25 million, and then thought it appropriate to clarify his understanding as at 17 May.

[6645] Mr Rich was asked why, if $28 million of unbilled data had been found before the end of March, it had not been billed by 17 May: T 11402. He responded:

It's quite a long answer. There were several components to the $28 million. Some of the components got billed, others they still had to do work on the data to bill it, and their backbilling efforts were frustrated by an issue that occurred in the billing engine I believe in about the third week of April that diverted the resources that were being put into the backbilling effort for about 10 days to 2 weeks. There was a team of I think about 10 people who were focused on not just ensuring that the backbilling occurred, but then looking for other data that the team felt was in the system that needed to be billed to customers.

[6646] ASIC said this was a "vague and unconvincing" explanation, but did not develop the submission. I do not regard the explanation as unacceptably vague or unconvincing, though obviously a lot more could be said about the additional processing necessary before billing (some of which was addressed by Mr Maizels) and about the issue in the billing engine.

[6647] ASIC referred to Mr Rich's evidence that there was a possibility that the administrators/liquidators had failed to bill some unbilled data, and that he would have to look at some documents to answer that question: T 11795-6. ASIC complained that Mr Rich did not refer to the work of Mr Maizels, which had been in part directed to that question. That is an almost brazen submission, given that senior counsel for ASIC was so insistent at this time that the witness should answer his questions without embellishment (see at T 11795-6, when Mr Rich suggested that a question was muddled and asked senior counsel for permission to explain what was troubling him, and senior counsel responded that he should just try to answer the questions and that "his Honour will find ultimately who is muddled").

[6648] ASIC contended that the idea that the administrators/liquidators had failed to bill a material quantity of data was an improbable one. It is improbable, speaking generally, that any external administrator would overlook getting in assets worth several millions of dollars. But the evidence about One.Tel's billing system demonstrates that an external party would have found it difficult to understand and work the system, that assistance from One.Tel personnel was effectively necessary, but that the administrators/liquidators retained only a relatively small group of One.Tel personnel. In the circumstances, I do not find it improbable that some potential recoveries may not have been effectively pursued.

[6649] ASIC also submitted that it had not been put to Mr Walker or Mr Sherman that they had failed to bill unbilled data (that is true) and that when Mr Rich was cross-examined about whether that suggestion had been made to the administrators/liquidators he answered evasively. In fact, what happened was that senior counsel asked a question which, though not objected to, was unclear. Mr Rich was asked whether there was unbilled data that the administrators/liquidators failed to bill and he said there was a possibility that there was: T 11796. It was then put to him that it had not been suggested in cross-examination of the administrators/liquidators by his counsel that there was any such unbilled data that they had failed to bill. Mr Rich said he had difficulty with the question because it assumed that unbilled data and "to be billed" data were the same thing. Evidently he was referring to his evidence at 2 JDR 1720d that there was approximately $5-$10 million of unbilled call data not included in the accrued income figures (that is, in the "to be billed" data). The question was repeated and Mr Rich answered (at T 11797), in effect, that he did not recall telling the administrators/liquidators about the $5-$10 million of unbilled data not in any "to be billed" report. According to my observation, Mr Rich had legitimately attempted to clarify counsel's questions and having done so, had given an answer to the best of his recollection. There was nothing evasive in his answers.

[6650] ASIC also referred to Mr Rich's answers in re-examination that led to the tender of Exs D34 and D35 and to the evidence of Mr Maizels and Mr Harman. That is dealt with at 20.5.9. ASIC contended that "the more the matter was delved into the clearer it became that Maizels' work did not support Rich's assertions and was in fact inconsistent with them". For reasons given in my discussion of Mr Maizels' evidence, I disagree with this submission.

[6651] I do not accept any of ASIC's criticisms of Mr Rich's evidence, and therefore I reject ASIC's conclusion that in cross-examination Mr Rich was unable to provide clear answers to basic questions concerning the existence of the missing billing, and ASIC's further submission that Mr Rich's inadequate evidence assisted the inference that missing billing did not exist beyond an immaterial amount.

20.5.13 Conclusions as to the $40 million of missing data

[6652] In my view ASIC has not established its contention that missing billing did not exist beyond an immaterial amount. It has not established that the belief of senior management including the defendants, in late March, that $28 million of unbilled data had been discovered and would be identified and billed through further the work, and that another $12 million was likely to be found, was other than a bona fide belief at that time. On the other hand, the original management expectation that $28 million of unbilled data had been found and was to be identified and processed, and that a further amount of about $12 million would be discovered through the intensive efforts that were being made, was not realised. As Mr Rich said, the amount expected to be billed fluctuated as the work progressed. By 17 May only about $15 million, or less, had been billed, according to the evidence of Mr Rich. The butcher's paper evidence, the PwC report, 2704jrmssh.new.xls, the April reforecast, Mr Rich's email to Mr Murdoch Jnr of 23 April all indicate that expected billings in late April and early May were in the same vicinity. But the evidence of Mr Maizels points to a potential for further billings, in the vicinity of $26 million that was not realised after the intervention of voluntary administration on the termination of employment.

20.6 Next Generation costs of acquisition

[6653] Paragraph S44A of the schedule to the statement of claim is in the following terms:

The EBITDA losses for the One.Tel Group referred to in S 41 above and the losses of the Next Generation business referred to in S 44 above did not take account of costs of acquisition of customers of Next Generation (principally relating to the costs of handsets) in an amount of approximately $30 million over the period from 1 January to 30 April 2001 which costs were capitalised and amortised over the life of subscribers' contracts rather than treated as a cost of sales and debited in full to the profit and loss account.

[6654] Paragraph S44A is part of the January, February, March and April circumstances identified in paras 13-16 of the statement of claim.

[6655] It appears that until the 1999/2000 financial year, subscriber acquisition costs including the cost of providing handsets to new subscribers were capitalised and amortised in One.Tel's financial statements. According to the board papers for the meeting of 26 May 2000 (Ex CED 24-1), the company announced a change in its accounting policy as a result of the then-proposed UK listing, a proposed euro issue and ASIC queries. The board paper continued:

The company has announced that it is changing its accounting policy to write off all deferred establishment, set up and subscriber acquisition costs, in line with UK GAAP. ASIC have confirmed that they are more comfortable with this treatment.

The result is a one-time write off of $202m and an ongoing write off of subscriber acquisition costs. The value of One.Tel's 1.8 million customers is not reflected in the group's balance sheet. This change in accounting policy has a significant impact on future reporting.

The 99/00 EBITDA profit under the previous accounting policy was $35 million. Under the new accounting policy the One.Tel 99/00 EBITDA loss will be $183 million. In addition the 99/00 EBITDA loss for the GSM 1800 network will be $40m. The three-year effect of the change is detailed in the business plan section of the board papers.

The effect of this accounting policy will be to closely align EBITDA with cash requirements.

[6656] Although it seems that the company had already announced the change in accounting policy, the board resolved at its meeting on 26 May 2000 "to adopt the recommendation of the Finance and Audit Committee to change the accounting policy in anticipation of a dual listing on the LSE and to effect a one-time write-off of $202 million", and also to write off some old debt of $20 million: Ex CED 24-3.

[6657] The board resolution did not expressly approve an ongoing write-off of subscriber acquisition costs. Whether that was implied from the resolution would depend upon whether such accounting treatment was required by UK GAAP. On 13 July 2000 an internal email was sent from David Simmonds of Ernst & Young in Sydney to Ernst & Young UK, asking whether One.Tel's policy of capitalising handset subsidies paid to dealers when acquiring digital mobile subscribers was acceptable under UK GAAP. The email explained that the subsidies were only capitalised if they could be recovered from the minimum revenues to be derived over the contract period, and amortised over the contract period: Ex CED 24-3B.

[6658] There is no direct evidence of the advice given by Ernst & Young UK, but the notes to the One.Tel financial statements for the year ended 30 June 2000 provide the basis for the court to infer that Ernst & Young UK advised that capitalising and amortising handset costs would be consistent with UK GAAP. Note 1, statement of accounting policies, establishes two things about the accounting policies that had been adopted for the year. First, the company had established a new accounting policy with respect to "certain costs associated with the establishment of business operations and subscriber acquisitions" with the intention of bringing the accounting treatment of these costs into conformity with UK GAAP by writing off the costs as incurred rather than deferring and amortising them over the periods appropriate to the nature of each asset: note 1(b), at Ex CED 24-7. Second, the handset subsidy was treated differently from other subscriber acquisition costs (note 1(k), at Ex CED 24-8):

On acquisition of new subscribers, costs associated with the initial subsidy on mobile handsets provided as part of the contract are deferred. These deferred costs are then amortised over the life of the contract, or should the contract be terminated the remaining unamortised balance is written off in full.

[6659] In its media release to the market dated 27 February 2001 relating to the half-yearly results to December 2000, the company noted that EBITDA for that half-year had been restated to reflect the change in accounting treatment of subscriber acquisition costs and business establishment costs adopted for the full financial year to 30 June 2000. This implied that while subscriber acquisition costs had generally been written off in full as incurred, the policy announced in the financial statements for the year 1999/2000 with respect to handset costs had also been applied, and consequently they had been capitalised and would be amortised.

[6660] ASIC submitted that, notwithstanding the change of policy adopted for the financial year 1999/2000 and purportedly applied to the half-year to December 2000, a very large proportion of the Next Generation costs of acquisition continued to be capitalised: APS [1822]. The implication of this submission was that One.Tel management was acting in disregard of the company's own policy as adopted by the board. ASIC sought to show this by referring to the April management accounts for the Next Generation business: Ex CED 24-13. For example, in those management accounts the total costs of acquisition in the month of December were $6,799,548 and the "CoA capitalised" was $6,753,850; that is, according to ASIC, almost all of the costs of acquisition were capitalised in that month. The figures in other months were similar. According to the management accounts, the total of the amounts capitalised in the months from January to April was $29.8 million.

[6661] However, when one looks at the breakdown of the costs of acquisition it is evident that by far the largest components were handset costs and dealer commissions. According to the email by Mr Simmonds (Ex CED 24-3, B) where a new customer was signed up to an independent dealer the handset subsidy was paid to the dealer as part of the dealer's commission. Paragraph S44A acknowledges that the costs of acquisition of customers of Next Generation to which it refers were principally related to the cost of handsets. Therefore it is not surprising that most of the costs of acquisition in the management accounts were capitalised, and the fact that they were seems consistent with the board's policy rather than contrary to it. ASIC's submission, and also the pleading, appear to have misunderstood One.Tel's new accounting policy as far as it related to handset costs, and therefore the case against One.Tel on this ground is without foundation.

[6662] Mr Packer Jnr, Mr Murdoch Jnr and Mr Howell-Davies each made statements in their affidavits to the effect that they were not aware before 27 May 2001 of the matters set out in para S44A: Mr Packer Jnr's affidavit of 23 July 2004, para 35; Mr Murdoch Jnr's affidavit of 23 July 2004, para 7; Mr Howell-Davies' affidavit of 1 October 2004, para 4. This evidence was not challenged. But in part it is inconsistent with the documentary evidence.

[6663] The company's accounting policy is plainly set out in notes 1(b) and (k) to the 1999/2000 financial statements, which were approved by the board. I do not understand these three witnesses to mean that they were unaware of the company's accounting policy. In the balance sheet estimate that was part of the board papers for the January and March 2001 board meetings, "Deferred Expenditure -- Handset Subsidy" in the sum of $21.432 million in January and $35.801 million in March was shown as a non-current asset: Ex MTB 210, 254. The cost of acquisition of Next Generation subscribers was a matter addressed in the March board papers: Ex MTB 236, 251. If they were unaware that the company was capitalising the handset subsidy it can only be because they did not read their board papers properly.

[6664] In its submissions (APS [1827]), ASIC referred to the draft balance sheet in the September 2000 board papers (MTB 1/98), and then said there was nothing to indicate that those amounts related to the current year rather than to amounts capitalised prior to the policy change in the year. But nor was there anything to indicate that the amounts related to the period before the policy change was made, nor (in view of the board's policy) any reason to assume that this would be so. When one considers the January and March board papers, noting in particular that the amount of the non-current asset for deferred handset subsidy expenditure increased from January to March, it is plain on the face of the board papers that capitalisation was continuing to occur in respect of current subscriber acquisitions. ASIC conceded in its submissions (APS [1828]) that a comparison of the balance sheets in subsequent sets of board papers would have revealed that the amounts capitalised in respect of the handset subsidy were increasing. That leads it to make the rather feeble submission that "it was not suggested to any of the directors referred to above that this was pointed out to them or that they appreciated that that was the case". No such suggestion was made, but one wonders how a director of any experience could have overlooked the growth in that non-current asset or, if he had noticed it, not realised that the policy of capitalisation was continuing.

[6665] In re-examination, Mr Silbermann referred to one of Mr Kleemann's reports, which had said that "One.Tel's financials are now very conservative and transparent with all acquisition costs, except handset subsidy, expensed as incurred": T 13926. At least Mr Kleemann, and those who read his reports at PBL, would have realised that the handset subsidies were still being capitalised. Had they read the accounting policy in notes 1(b) and (k) to the 1999/2000 financial statements, they would have realised that doing so was in accordance with the company's accounting policy.

[6666] ASIC invited the court to conclude, as alleged in para S44A of the schedule to the statement of claim, that this was one of the circumstances which the defendants failed to bring to the attention of the board. That submission is wrong.

[6667] To the extent that para S44A alleges that One.Tel's EBITDA figures did not take into account the handset subsidy paid by One.Tel to dealers in connection with the acquisition of Next Generation customers, it is correct. But that was in accordance with the company's announced accounting policy and, by inference, UK GAAP.

21. Liquidity

21.1 Mr Carter's liquidity analysis

[6668] Mr Carter's evidence about the liquidity of the Australian operations, expressed in his table at PR 101, was allowed into evidence in part, the excluded part relating to Mr Carter's revised provision for doubtful debts. As explained below, in final submissions ASIC adopted Mr Carter's liquidity analysis, subject to substituting for Mr Carter's doubtful debts provision a set of figures that it developed in submissions.

[6669] Mr Carter said, without further explanation, that in analysing the cash and creditor position of a corporate group, it is important to consider the overall liquidity of the group taking into account not only the cash balance, but also other liquid assets such as trade debtors and accrued income, and operational liabilities including not only overdue and current creditors but also accrued liabilities: PR 101. It seems to me plain that an assessment of the cash and creditor position of an entity (which I take to be tantamount to assessing its solvency in the cash flow sense) must take into account liquid assets other than cash, for those assets, being liquid, can be made available for payment of debts as and when they fall due. The assessment must obviously also take into account overdue creditors, and also current creditors so as to determine whether the entity is in a position to meet its liability to those creditors as the due dates arrive.

[6670] The relevance of accrued liabilities to this analysis is less clear: it depends whether the accrued liabilities relate to anticipated liabilities that will be current liabilities when they accrue, needing to be met out of cash flow in the short term, or accruals subject to contingencies that would exclude them from an analysis of the entity's present solvency. According to App I-4 of the principal report, the accrued liabilities of the Australian operations were to be divided into operational liabilities (such as accruals for group tax, payroll tax and superannuation) and carrier liabilities. The accruals for carrier liabilities raise issues that vary depending upon the carrier concerned; those carriers are considered in detail in Ch 18.

[6671] In the table at PR 101 Mr Carter set out a liquidity analysis which took into account, at month-end for each of the 6 months from December 2000 to 29 May 2001, One.Tel's cash, debtors, accrued income and carrier claims, deducting a provision for doubtful debts and the amounts of creditors and accruals (that is accrued liabilities), so as to reach a "net liquidity position".

[6672] The figures in this table were for the Australian operations only, because (Mr Carter explained) some of the requisite information (including, apparently, accrued liabilities for all international operations and aged creditor reports for continental Europe) was not available: PR 101. The utility of an analysis confined to the Australian operations is questionable because, as Mr Rich pointed out (2 JDR 1716-7), liquidity was considered on a group basis and as a general matter, he did not consider the cash position of the Australian operations separately from the cash position of the group and would not have considered the "liquidity" of the Australian operations without also taking into account cash balances held by One.Tel outside Australia: see also DPS [5686]-[5691]; ASR [5683-91] does not address the problem. Further, as I pointed out in my judgment on the "paragraph-by-paragraph" admissibility of Mr Carter's principal report (ASIC NSWSC 650 at [110]), the presentation of net liquidity calculations for the Australian operations without any figures for the international operations implies an assumption or opinion, apparently false, that the liquidity of the Australian operations was not affected by the international operations. Consequently the court needs to bear in mind the possibility, perhaps necessitating further inquiry, that tight liquidity in Australia in any given month might have been cured by ample or excess liquidity overseas.

[6673] Except for the December cash figure (which came from the statutory accounts at Ex CE 5 0089), the figures for cash in the Australian operations were taken from the monthly trial balances and accordingly must have been treated by Mr Carter as balances after accounting for unpresented cheques: compare the table at PR 74. The remaining figures are more fully set out and sourced in App I-13 to the principal report. The sources for the figures for trade debtors, accrued income and carrier claims are in each case the monthly trial balances, and App I-13 specifies the particular account items from which the figures are taken. The figures for the provision for doubtful debts, which were held to be inadmissible, were taken from a table at PR 190 and were the provisions calculated using Mr Carter's preferred "Method 2". The actual provisions for doubtful debts in the five months to May 2001 were considerably lower, as noted elsewhere.

[6674] Mr Carter did not justify using trial balance figures for cash, rather than intranet figures (DPS [5696]-[5697]), and he did not justify using trial balance figures for trade debtors rather than the collection profile summary figures that he used later at PR 158. As I noted in my July judgment, the absence of any justification for preferring the trial balance figures to other figures is a flaw in Mr Carter's reasoning process, but it does not seem that the use of the alternatives to the trial balance figures would have any impact on the overall contention that there was a steady decline in liquidity over the 6-month period: see ASR [5699] and reply Sch 21.

[6675] The "net liquidity position", according to Mr Carter, calculated by adding each month's cash, debtors, accrued income and carrier claims and subtracting the provision for doubtful debts and creditors and accruals, was $44.8 million for December, $11.9 million for January, negative $24.5 million for February, negative $22.4 million for March, negative $60 million for April and negative $98.7 million for May. Those net figures, along with the figures for the provision for doubtful debts, were held to be inadmissible. The figures that were admitted into evidence provide a liquidity analysis prior to deduction of a provision for doubtful debts, the net figure before that deduction being $103.5 million for January, $72.5 million for February and $79.9 million for March. Apart from the fact that the net liquidity figures depend upon the inadmissible provisions for doubtful debt, there is a point noted earlier that liquidity should properly be assessed on a group basis rather than by reference to the Australian operations alone.

21.2 ASIC's modified liquidity table

[6676] ASIC submitted that, since Mr Carter's provisions for doubtful debt were excluded from his evidence, One.Tel's liquidity position should be ascertained by taking the remainder of Mr Carter's figures and injecting other provisions for doubtful debt calculated according to ASIC's submissions on that subject. In the result, ASIC contended for a liquidity analysis reflected in the following table:

Table 21.1: ASIC's liquidity analysis for Australian operations ($m)
	31 Jan 01	28 Feb 01	31 Mar 01
Cash	22.1	(0.6)	15.5
Debtors	152.5	146.6	153.9
Accrued income	54.4	60.2	41.4
Carrier claims	13.7	9.2	9.0
Provision for doubtful debts	(86.6)	(94)	(99.35)
Creditors and accruals	(139.2)	(142.9)	(139.9)
Net liquidity position	16.9	(21.5)	(19.45)

[6677] The figures are the same as in Mr Carter's table at PR 101, except for a different provision for doubt-ful debts and consequently a different net liquidity position. ASIC calculated the provision for doubtful debts as follows:

Table 21.2: ASIC's provisions for doubtful debts ($m)
	31 Jan 01	28 Feb 01	31 Mar 01
Additional provision	30	35	40
Provision for accrued revenue	5.4	6	4.1
Existing provision	51.2	53	55.25
Total provision	86.6	94	99.35

[6678] It can be seen that ASIC's proposed provisions for doubtful debt increased very substantially over this three-month period. My analysis of debtors and provisioning in Ch 9 of this judgment leads me to the conclu-sion that I should reject ASIC's figures.

[6679] If the existing provisions for doubtful debt are substituted for ASIC's proposed provisions, then the liquidity analysis is as follows:

Table 21.3: Liquidity analysis for Australian operations based on existing provisions ($m)
	31 Jan 01	28 Feb 01	31 Mar 01
Cash	22.1	(0.6)	15.5
Debtors	152.5	146.6	153.9
Accrued income	54.4	60.2	41.4
Carrier claims	13.7	9.2	9.0
Provision for doubtful debts	(51.2)	(53)	(55.25)
Creditors and accruals	(139.2)	(142.9)	(139.9)
Net liquidity position	52.3	19.5	24.65

[6680] It can be seen, therefore, that the liquidity of the Australian operations is vitally affected according to whether ASIC's criticism of the provision for doubtful debts is or is not accepted. The substitution of ASIC's proposed provisions for the provisions in fact in place would move the Australian operations from reasonably comfortable liquidity to a deeply illiquid position in February and March. I should note, however, that the March position (but not the February position: APS [1844]) is enhanced by the end-of-February transfer of $26 million from the UK to Australia, so even if the existing provisions for doubtful debt are used, there appears to be a deterioration in liquidity each month from January to March.

21.3 Mr Rich's evidence about the liquidity analysis

[6681] Mr Rich made some general observations on the question of liquidity at 2 JDR 1702-9. He said his overall perception during 2001 was that One.Tel's financial position and prospects were improving, having regard to two principal matters, namely that:

•: the Next Generation network, which he saw as the company's future, was nearing completion and making substantial progress towards its objective of achieving at a reasonable cost of the subscriber base that was essential to becoming cash flow positive and profitable within the timeframe laid out in One.Tel's business plan; and
•: the European businesses, led by the UK business, were on the threshold of being cash flow positive and were promising to be a source of significant cash flow in 2001/2002.

[6682] Mr Rich said he was confident (evidently in about March/April 2001) that the company was on the threshold of generating positive cash flow from its operations and hence that liquidity would improve rapidly during the 2001/2002 financial year. That being so, he said, there were several potential sources of liquidity available to the company.

[6683] First, he said he felt reasonably assured (apparently in the period from December 2000 to about the end of April 2001) that if the company needed to borrow further funds from its bankers, especially Toronto Dominion (with whom it enjoyed a good long-standing banking relationship), then the funding would be available.

[6684] Second, he said, the company had assets which he was confident could be sold in a reasonably short time frame. He mentioned:

•: the European businesses, which had strategic value to other market participants interested in advancing or establishing market position in Europe, such as Telia, which showed strong interest in acquiring a half interest in those businesses in late April 2001;
•: the Optus service provider business, which had approximately 250,000 tolling subscribers and was cash flow positive, but was not a business that One.Tel was interested in sustaining in the longer term;
•: the local call subscribers of the fixed wire business in Australia, who were not essential to the medium or longer term future of the company and could be sold back to Telstra, which had recently entered into a similar transaction with a company in Western Australia; and
•: the CLEC business, which was not a business with any strategic importance for One.Tel and was producing a modest positive cash flow.

[6685] Third, he said he was confident (apparently in the period from December 2000 to about the end of April 2001) that the company enjoyed the support of its two major shareholders, PBL and News. He said his perception was that Mr Packer Jnr and Mr Murdoch Jnr and those who assisted them (particularly Mr Kleemann) understood and agreed with the company's business strategy, and that they fully appreciated that One.Tel faced some risk of unforeseen adverse developments or changes in market conditions that could reduce or delay cash flows. He continued (2 JDR 1709):

Until the events of May 2001 I never considered that PBL and News might simply walk away from their One.Tel investment in circumstances where nothing had happened to change the fundamentals of the company's businesses and strategy. On the contrary, I thought that, as long as the businesses were sound and the strategy continued to make sense, I could depend on PBL and News to stand behind the company and see it through any temporary liquidity issues which might unexpectedly arise.

[6686] Mr Rich criticised Mr Carter for not including in his consideration other potential sources of liquidity for the Australian operations during the period from January to May 2001, which Mr Rich would have brought to mind (he said) had he addressed the issue of liquidity of the Australian operations during that period.

Mr Rich listed the following potential sources of liquidity:

(3): handset subsidy: this was an asset of One.Tel which stood at $45 million at 28 February 2001 and $53 million at 31 March 2001, according to App K to Mr Carter's principal report, and represented amounts payable by mobile customers over time pursuant to the minimum payment terms under their contracts;
(6): pre-paid advertising: this was an asset of One.Tel which, according to App K, stood at $86 million at 28 February and $83 million at 31 March 2001, and represented an entitlement to advertise with PBL and News that, even if non-refundable, was available to defray what would otherwise be cash business expenses and to defray liabilities of One.Tel to its dealers by way of "contra" advertising deals;
(22): intercompany loans: during 2001 One.Tel Australia was owed substantial sums by its overseas subsidiaries, which stood at $310 million in mid-February 2001 (Ex JDR 4/1538), and could be taken into account if it were appropriate to consider the liquidity of the Australian operations separately from the overseas businesses;
(23): unbilled call data: this is the $40 million worth of unbilled data said to have been discovered at the end of March 2001;
(24): possible additional lease financing of assets: One.Tel made extensive use of lease financing in the acquisition of capital equipment, but there was some equipment the purchase of which had not been financed in that way, which was therefore available to be financed if necessary;
(25): other debt financing: although One.Tel did not have any unused borrowing facilities, Mr Rich claimed that it had unused borrowing capacity, because it could have obtained additional financing from its bankers (Toronto Dominion and ANZ Bank) either on an unsecured basis or, if necessary, by giving them security over its unsecured assets (during 2001 One.Tel's assets were unsecured, other than the Next Generation network and equipment that was subject to lease financing).

[6687] Mr Rich also made some comments of a more particular kind concerning various lines in Mr Carter's table at PR 101: 2 JDR 1718-21. He said that the figures in the debtors line of the table (ranging from a low of $144.6 million on 31 December to a high of $168.3 million on 29 May) were consistent with what he would have expected: total debtors would be at a relatively high level as at 31 December and 31 January because of the disruption to billings experienced in late 2000 and a subsequent catch-up in billings, falling in February as the late bills were paid, rising again in March to reflect further delays in billings experienced during February, and then falling again in April as those late bills were paid. He said he would have expected debtors to be higher at the end of the period than at the beginning, to reflect the growth of the businesses.

[6688] As to the "carrier claims" line of the table ($13.7 million in December and January falling to $9.2 million in February and $9 million in March and April), Mr Rich said that Mr Carter had used only the amounts of provisions for carrier claims as they stood at the relevant date, but the practice of One.Tel was to review accruals for claims against carriers in detail shortly before each reporting date: see also DPS [5714] and following. Therefore the figure at 31 December 2000 would represent the quantum of the provisions at that date and the overall decline in those figures over the ensuing period would reflect payment of amounts made in the settlement of those claims. However, during the period from January to May 2001 further claims by One.Tel against carriers and others (for example, Lucent) arose but were not provided for in the books of the company at that stage. That appears to be correct.

[6689] In relation to the "creditors and accruals" line in the table at PR 101 (which was $152.4 million at the end of December, $139.2 million at the end of January, $142.9 million at the end of February, $139.9 million at the end of March, $155.2 million at the end of April and $214.5 million on 29 May), Mr Rich claimed, plausibly, that an increase in creditors and accruals between December 2000 and May 2001 commensurate with the growth in the Australian businesses (especially Next Generation and One.Net) during that period would have been expected. He said, correctly, that the only increase in creditors and accruals during the January/May period that was remarkable was the increase between April and May, from $155.2 million to $214.5 million: see also DPS [5743]. He made the following observations about that increase:

(7)

he referred to Ms Randall's evidence (her affidavit of 26 July 2004, para 5) to the effect that between 17 and 21 May she went around One.Tel's offices collecting invoices from people she thought might have outstanding invoices in their possession, and he remarked that this might explain some part of the apparent increase in creditors and accruals during May (assuming that the invoices were then entered into the ledger);

(8)

the source of the figures for 29 May 2001, according to App I-13, was the trial balance at Ex CE 2 0097, which is dated 31 May 2001, and Mr Rich observed that it was likely that some part of the increase in creditors during May would be attributable to creditors issuing invoices other than in the ordinary course of business as a result of the announcement of the administration;

(9)

according to the creditors ledger for Optus (Ex JDR 6/1946A), amounts outstanding to Optus in the creditors ledger increased during May by over $30 million as a result of three transactions, namely the entry of an invoice on 1 May for $10,639,679, the cancellation of a cheque for $9,846,830 on 3 May, and the entry of an invoice on 23 May for $10,107,573, and Mr Rich commented that:

(4): the first of those transactions was the normal receipt of the monthly invoice from Optus;
(4): the second was due to the withholding of payment to Optus of the amount which would normally have been paid to it in mid-April, as a result of One.Tel's dispute with Optus about missing CDRs;
(4): the third was an invoice rendered a week before the month-end, which would normally have been received at the end of the month and entered into the ledger in June;

(11)

according to App I-13 to Mr Carter's principal report, a large part of the increase in creditors and accruals during May was an increase in the account "Accruals-GSM Networks" from $14.9 million to $47 million, however:

(4): a footnote in the appendix makes it clear that the figure of $47 million was the accrual of a liability in the trial balance as at 31 May of $222 million, from which Mr Carter deducted an accrued asset of $175 million for "Lucent Equipment";
(4): those accruals, which appeared only as at 31 May, were unusual, according to Mr Rich, who said that nothing occurred in May in the ordinary course of One.Tel's business that would account for them, and therefore he suggested it was likely that they related in some way to the appointment of the administrators on 29 May.

21.4 Mr Silbermann's evidence about the liquidity analysis

[6690] Mr Silbermann's evidence about Mr Carter's liquidity analysis was of more limited scope: MS 943-8. He pointed out that he did not generally have regard to the "liquidity position" of the Australian operations separately from the liquidity position of the group. However it was not his understanding, he said, during the early part of 2001 that the liquidity position of the Australian operations was as portrayed by PR 101. He was aware that short term liquidity was becoming tighter as the cash balance declined, but his understanding was that this was being offset to some extent by increases in debtors and accrued income as a result of delays in billing, and by the emergence of further claims by One.Tel against Lucent, Optus and Telstra. He said it was not his perception that there was any unusual increase in creditors during that period, except to a limited extent in late April and early May when the cash position was being closely managed.

[6691] Mr Silbermann said that Mr Carter's figures for "cash" in the table at PR 101 were taken from trial balances, but the source of information about cash to which Mr Silbermann would have had recourse in 2000/2001 would not have been trial balances but the group's Lotus notes database (the intranet). He compared the intranet numbers for Australian cash with the trial balance figures used by Mr Carter, noting that the intranet figures were substantially higher at the end of January, February, March and April 2001, the difference being as high as about $19 million at 31 January.

[6692] As to Mr Carter's figures for carrier claims, Mr Silbermann made a similar point to the point made by Mr Rich. He said Mr Carter's figures were taken from the general ledger account of carrier claims and they did not reflect the total quantum of outstanding disputes in each of the months listed. He said the practice at One.Tel was for the "carrier claims" account in the general ledger to be reviewed in detail only as the half-year and year-end reporting dates approached, and new provisions tended to be raised at that time. The balance of the account during the period dealt with by Mr Carter reflects the level of provisions at the December half-year and settlements during that period, but it does not include adequate provision for the new claims that arose during that period, such as claims against Lucent, Optus and Telstra, which would have been accounted for at year-end.

[6693] At PR 103 Mr Carter referred to the $26 million transfer from the UK to Australia at the end of February 2001 and said the UK then had insufficient funds to pay UK overdue creditors, and accordingly it was "questionable whether significant further funds would have been available from the international operations". Mr Silbermann responded to this statement by saying that his expectation as to the cash position of the international operations between January and mid-April 2001 was as per the figures in the January and March board papers: MS 948. He noted that in the March board papers (Ex MTB 1/235) there was a forecast of positive cash flow from international operations during the months of March, April, May and June 2001 and positive cash flow in 2001/2002 of $120 million.

21.5 ASIC's submissions concerning the defendants' liquidity evidence

[6694] ASIC made a number of specific criticisms of Mr Rich's evidence about liquidity, which I shall address under the subheadings used in ASIC's principal submissions: APS [1846]-[1874].

21.5.1 Further funding

[6695] ASIC criticised Mr Rich's suggestion that One.Tel was in a position to make further borrowings, on the ground that it was consistent with the available evidence: APS [1846]. ASIC referred to:

•: the board papers for the 17 May meeting, which gave details of investigations made for third-party funding alternatives to the proposed rights issue, expressing the conclusion of the executive directors that the company was not able to obtain funding elsewhere, and not able to do so on better terms: MTB 1/294-5;
•: the minutes of the 17 May meeting record Mr Beck's report on unsuccessful attempts to investigate alternative fundraising: Ex CD 16-2;
•: according to Mr Oude-Vrielink's notes of the board meeting of 28 May, there was consideration of other sources of capital (Ex CED 16-42), evidently without identifying any viable alternative; and
•: the minutes of the board meeting of 29 May record that the board members agreed that they were not aware of any other funding options being available: Ex MTB 1/354.

[6696] ASIC attacked Mr Rich's suggestion (2 JDR 1706) that he "felt reasonably assured" that funds would have been available to be borrowed from Toronto Dominion: APS [1847]. ASIC said there was no evidence whatever of any suggestion made during May by Mr Rich, Mr Silbermann or anyone else that additional funds might have been available from Toronto Dominion, despite the question of additional funding being clearly at the forefront of the minds of those involved, and despite the matter of further funding being discussed at the board meetings of 17 May, 28 May and 29 May. Although Mr Rich was no longer a director for the latter two meetings, ASIC submitted that he was in touch with Mr Silbermann after 17 May and had every opportunity to convey to Mr Silbermann his views as to the availability of further funding opportunities: see T 12187-8, where Mr Rich gave evidence of the contacts and he had with One.Tel directors including Mr Silbermann, after 17 May and before 29 May.

[6697] That submission seems to me to be related to the questions whether, as Mr Rich said (2 JDR 1708-9), he was confident until May 2001 that One.Tel enjoyed the support of PBL and News, and had a reasonable basis for that confidence; and whether he had a reasonable expectation that PBL and News would see the company through any liquidity issues that might unexpectedly arise. ASIC submitted that this was not the situation in which One.Tel found itself (presumably in the period from December 2000 to May 2001), and that there was nothing revealed by the evidence that would have warranted Mr Rich acting on the basis that PBL and News could be relied on for further funding of any description: APS [1848]. But that submission fails to take into account the evidence of the close relationship that had developed over time between Mr Packer Jnr and Mr Rich, and the strong support Mr Packer Jnr gave to the company, and his close day-to-day involvement in monitoring the company's financial position. It seems to me there was every reason for Mr Rich to believe, on the basis of Mr Packer Jnr's words and conduct, that PBL/CPH would support One.Tel through any temporary liquidity issues, and also that Mr Packer Jnr could persuade News to join in providing any such support.

[6698] On the basis that this is the correct assessment of the level of support available to One.Tel from its two major shareholders until late April or May 2001, it seems to me there was a reasonable foundation for Mr Rich's belief that further financial accommodation could be obtained from Toronto Dominion, if that were to be regarded as the most effective funding option. But the situation changed when Mr Packer Snr formed the view, at some time around 19 April, that One.Tel would run out of cash, and subsequently Mr Miller and Mr Green's work in late April and up to 8 May was perceived as confirmation of Mr Packer Snr's assessment. By at least 8 May the support extended to One.Tel by its two major shareholders was becoming qualified and less certain, and further funding came to be offered only on a restricted basis, namely an underwritten rights issue at a deep discount with resignation of the joint chief executives. Once the support of the two major shareholders became qualified in this way, the prospect of persuading a third-party funder such as Toronto Dominion to lend must have rapidly evaporated. It therefore seems to me unsurprising that Mr Rich did not advocate an approach to Toronto Dominion at the board meeting of 17 May and that he did not seek to persuade Mr Silbermann afterwards to pursue that course.

[6699] My observation as to the prospect of borrowing from Toronto Dominion is equally applicable to ANZ, mentioned by Mr Rich at 2 JDR 1720f, or indeed any other financier.

21.5.2 Sale of businesses

[6700] Mr Rich referred (2 JDR 1707) to the sale of the European businesses, the Optus service provider business, the local call subscribers of the fixed wire business, and the CLEC business. There are issues about how much Optus might have been prepared to pay for the S & P customer base, and the purchase price that might have been obtained for the sale of CLEC. ASIC referred to those issues (APS [1849]), but its main submission was that the prospect of saving the company by adopting an alternative strategy involving the sale of businesses was fully explored by management with the assistance of Mr Howell-Davies, and according to ASIC, the outcome was not materially different, so far as requirements for funding were concerned, from the views of Ernst & Young in their report of 28 May (APS [1850]).

[6701] I agree that the prospect of sale of the businesses was considered in the alternative strategy prepared by management on 28 May, but I do not agree that the outcome was similar in terms of cash requirements to the Ernst & Young analysis, for reasons explained in Ch 16. Therefore the sale of businesses was, in my view, a possible strategy for addressing or partially addressing One.Tel's liquidity problems during the period from December to May. As I understand Mr Rich, he did not claim that selling businesses would fully address the liquidity issue that had emerged by late April.

21.5.3 "Carrier claims" accrual

[6702] Mr Rich's point was that the figures used by Mr Carter for carrier claims accruals were taken from the trial balances for the relevant dates and were reviewed in detail only before each reporting date: 2 JDR 1719. Therefore, the figures at 31 December reflected the half-yearly review and thereafter the amount of the accrual declined as claims were settled and amounts were paid in settlement. This explained why the figure for carrier claims declined in the period from December to May, even though, to his knowledge, further claims by One.Tel against carriers and others (for example, Lucent) arose but were not provided for in the books of the company at that stage.

[6703] ASIC submitted (APS [1852]) that Mr Rich's evidence conflicted with Ms Ashley's evidence that she reviewed claims against carriers regularly and updated her records on a monthly basis: affidavit of 7 July 2005, para 3. What Ms Ashley said was that she maintained information in relation to claims or disputes in an electronic folder for each carrier and she regularly updated the information on a monthly basis. But she did not say that her information was transferred to the trial balances, and it seems to me having regard to the figures extracted by Ms Carter that this may not have occurred. ASIC conceded as much in relation to the Optus CDRs claim and the claims against Telstra and Lucent in 2001, but it submitted that even if those claims were successful they would not have been likely to produce funds in the short term to assist with liquidity: APS [1853]. The only reason given in support of that submission is the general statement that "the reality is that no assumption could be made that they [the claims] would be likely to be resolved quickly" and "more realistically, a powerful creditor such as a carrier is unlikely to be willing to continue to provide services indefinitely while its accounts are unpaid after demand has been made for them": APS [1854]. It seems to me that this submission is contrary to the evidence, which shows that when disputes arose One.Tel was able to withhold funds pending resolution of the claims, thereby directly contributing to its liquidity, and by and large the carriers continued to supply it. I therefore accept Mr Rich's evidence.

21.5.4 Other sources of liquidity

[6704] Mr Rich identified a number of particular sources of liquidity at para 1720 of his affidavit: see also DPS [5763] and following. ASIC made brief submissions about these matters.

[6705] As to the handset subsidy, Mr Rich's point was that One.Tel had an asset that represented the amounts payable by mobile customers over time pursuant to the minimum payment terms under their contracts, which were contracts for a usual term of 18-24 months. He said the asset was similar in principle to accrued income. He said if he were considering the question of liquidity, as distinct from cash, during 2001, he would have included among One.Tel's liquid assets the amount of handset subsidy which was expected to be recovered over the period under consideration.

[6706] ASIC commented that the amount payable by mobile customers was only collectible over the term of the contract and did not constitute an immediately recoverable debt, except perhaps to the extent of the current monthly instalment: APS [1857]. That is consistent with Mr Rich's evidence. Mr Rich's point, which ASIC apparently does not deny, is that the amount of the minimum spend under these contracts was a kind of accrued income that should properly be taken into account in assessing liquidity.

[6707] As to prepaid advertising, Mr Rich claimed, correctly, this was an asset representing One.Tel's entitlement to advertise with PBL and News. Mr Carter took the view that it should not be treated as a liquid asset, on the assumption that the amount available was non-refundable: PR 214. Mr Rich said that even on that basis, prepaid advertising was available to defray what would otherwise be a cash business expense and therefore contributed to the liquidity position of the company to that extent, and it was available to defray liabilities owing by One.Tel to dealers by way of "contra" advertising deals with them. ASIC submitted (APS [1858]) that this asset was not convertible into cash to reduce creditor obligations, but that is plainly wrong because prepaid advertising was available to reduce advertising expenses that would otherwise be owed to PBL and News as creditors.

[6708] As to intercompany loans, Mr Rich's point was that although Mr Carter's analysis in PR 101 was about the "liquidity" of the Australian operations rather than the group, the large intercompany loans owed to the Australian parent by the overseas subsidiaries were relevant because (to use my words) they provided the Australian operations with a means of access to any liquidity of the overseas businesses. Mr Rich properly qualified the point by saying that the amount of the intercompany loans would contribute to One.Tel Australia's liquid assets only to the extent that the loans could be repaid during the period under consideration out of operating cash flow or financing activity or the sale of surplus assets of the overseas businesses. ASIC's submission was that intercompany loans are of no value unless the lending company has the funds to repay them. That is consistent with Mr Rich's evidence.

[6709] As to unbilled call data, Mr Rich claimed that the $40 million of such data that had been identified was expected to be identified as at the end of March constituted a liquid asset which had only been included in Mr Carter's table to the extent that the unbilled revenue had been included in accrued income. He said that approximately $5-10 million of the unbilled data was not included in Mr Carter's accrued income figures. ASIC claimed (APS [1861]) that there was in fact no significant amount of unbilled call data. It also submitted, referring to the evidence of Messrs Maizels and Harman, that the court should not conclude $5-10 million referred to by Mr Rich existed. It contended that the accrued income figures used by Mr Carter did not include any significant unbilled call data beyond what would normally be expected to be billed, and that the building up to and including May and subsequently continued at the low levels of earlier months. These matters are extensively considered at 20.5.

[6710] As to the possibility of additional lease financing, Mr Rich claimed that there was capital equipment that One.Tel had purchased, that could be refinanced by lease if necessary. ASIC submitted (APS [1863]) that the availability of lease financing was considered at the 17 May board meeting, when Mr Beck reported that there had been a tightening of vendor finance and in his view no further lease funding was possible. Assuming that to have been the case on 17 May, the evidence does not indicate when that tightening occurred, and it may therefore have been that lease financing was available at earlier times in the period from December to May.

21.5.5 Creditors and accruals line

[6711] As noted above, the figures used by Mr Carter at PR 101 for "Creditors and accruals" were in the range $139.2 million-$155.2 million in the period from 31 December 2000 to 30 April 2001. But the figure jumped to $214.5 million as at 29 May. As mentioned elsewhere, the figures were taken from trial balances, and specifically the May figure was sourced in a trial balance bearing the date 31 May, which is at Ex CE 2 0097.

[6712] In para 1721 of his affidavit Mr Carter made some comments, summarised above, on what he described as the "remarkable" increase in creditors and accruals between 30 April and 29 May. ASIC addressed some submissions in response to Mr Rich's evidence on this matter: APS [1867]-[1874].

[6713] As to late posting of invoices, Ex P93-730 shows that there was a substantially lower amount for late posted invoices in May than in earlier months ($3.99 million for May compared to a range from $12.19 million to $7.38 million in the period from January to April). There was almost as much for late posted credit notes in May.

[6714] As ASIC submitted (APS [1868]), the normal practice in administration is that the administrators open accounts in their own name rather than continuing to use the company's accounts for supplies obtained during their term of office. But as I understand the position, if after the commencement of administration a creditor issues an invoice for goods supplied or services rendered prior to the appointment, the invoice will be posted to the company's books. Mr Rich's point was that some part of the increasing creditors in May would be attributable to creditors rendering invoices other than in the ordinary course of business once the announcement of the administration was made. It seems to me that is possible.

[6715] As to the Optus transactions, one of Mr Rich's points was that the invoice of 23 May for $10.1 million would ordinarily have been expected to be received on about 1 June and to be payable in mid-July, and that the early dispatch of the invoice may have related to the announcement of the rights issue. ASIC's submission (APS [1871]) was even if it did, the invoice related to services already provided by Optus and its receipt was an incident off the rights issue and the company's business prior to administration, not of the administration. All of that is correct, but it does not answer Mr Rich's point.

21.5.5.1 The "Accruals -- GSM Networks" account

[6716] One of the issues raised by Mr Rich concerning the "Creditors and accruals" line and Mr Carter's table related to an account shown in the trial balances called "Accruals-GSM Networks". The components of the creditors and accruals figure for each month are to be found in App I-13 to Mr Carter's principal report. It is evident from perusal of App I-13 that there is a large difference from April to May in accrued expenses account No 4305, "Accruals-GSM Networks", from $14.9 million in April to $47 million in May. The April trial balance figure for account No 4305 was $14.9 million (Ex CE 2 0081), and that was the figure used for April in App I-13. The figure for the same account in the May trial balance was $222.3 million (Ex CE 2 0096). But the May figure for account No 4305 used in App I-13 was $47 million. There is a note in App I-13 which explains that Mr Carter calculated the May figure for account No 4305 by taking the trial balance figure of $222.3 million and subtracting an amount of $175.3 million for "Accruals-Lucent Equipment", which he found as part of a balance sheet for the GSM Networks Group for the 11 months ending 31 May 2001: Ex CE 2 0121h.

[6717] Mr Rich's evidence (2 JDR 1721f) was that the May accrual was most unusual and he could not think of anything that occurred in May in the ordinary course of One.Tel's business that would explain the accrual, and so he suggested that it related in some way to the appointment of administrators.

[6718] This matter was addressed in an expert's report by Murray Smith, exhibited to his affidavit of 30 August 2006: Ex MCS 1. According to Mr Smith, whose evidence I accept, until April 2001 the One.Tel Group accounted for accrued expenses "net" of certain items of accrued revenue. Therefore the amount of $14.9 million in account No 4305 for accrued expenses of the GSM Network in April was net of accrued revenue for the Network. Mr Smith identified from the general ledger that the accrued expense balance in account No 4305 for April was $38.3 million on a gross basis, and there was in accrued income balance for April of $23.4 million, giving the net figure of $14.9 million which was brought to account and shown in the trial balance.

[6719] The group changed its reporting format in May to account for accrued expenses on a "gross" basis, while also bringing to account recurring accrued revenue separately. Additionally, the group capitalised certain expenses relating to Lucent equipment for the first time in May 2001, which can be seen in certain fixed asset accounts in the general ledger. Consequently the "gross" accrued expenses balance of $222.3 million included expenses of $175.3 million, which were capitalised and taken up as an asset in May. Additionally, the May trial balance brought into account accrued revenue relating to the GSM Networks, which is found in the "Accrued income" account for the column "GSM Net" in the May trial balance, the figure being $27.8 million. Consistently with Mr Smith's expert opinion that there was a change in accounting practice in May, the figure for GSM Net in the Accrued income account in the April trial balance is zero. To arrive at a figure for account No 4305 in May that is comparable with earlier months, it is necessary to deduct from the gross figure of $222.3 million shown in the May trial balance the capitalised asset figure of $175.3 million and the accrued income figure of $27.8 million, leaving a net amount of $19.2 million. This is an increase of $4.1 million (about 27.5%) over the April figure, a much lower increase than appeared in App I-13.

[6720] Mr Smith concluded that Mr Rich's suggestion that the increase in account No 4305 had to do with the appointment of administrators is incorrect. I accept that conclusion. He did not expressly deal in his report with the accuracy of Mr Carter's table at PR 101. He was cross-examined about the accuracy of the Carter report and he was reluctant to say that there was a mistake in it: T 14782. However, I infer from his written and oral evidence that in Mr Smith's view, Mr Carter was right to deduct $175.3 million from the gross figure to make it comparable with the figures in account No 4305 for earlier months, but he made a mistake by not also deducting $27.8 million for accrued income relating to GSM Networks, and by representing that the May figure in account No 4305 was comparable with the figures for earlier months without deducting that amount. It seems to follow that the table at PR 101 overstates "Creditors and accruals" for May by $27.8 million, but apparently the Accrued income line of the table at PR 101 would also go down by $27.8 million: T 14819.

21.6 Conclusions as to liquidity

[6721] ASIC seeks to establish that One.Tel's liquidity, defined in the manner explained by Mr Carter, declined drastically in the period from December 2000 to May 2001. It seeks to do so by relying on evidence about the Australian operations, notwithstanding that One.Tel's liquidity was measured and managed on a group basis that included the international operations. That is like trying to establish that the available water supply in the Sydney basin is diminishing, by proving declining water levels in every dam except the Warragamba. It may be shown that the water levels in the other dams are falling to dangerously low levels, but (hypothetically) it is possible that Warragamba is full to overflowing. Assuming that, the dams being part of the same system, water can readily be transferred from one to another, evidence about water levels in the other dams cannot, taken in isolation, establish that Sydney's available water supply is falling.

[6722] Apart from that fundamental flaw, ASIC's case about the liquidity of the Australian operations is overstated because it has not proven that One.Tel's provisions for doubtful debt were inadequate over the period in question. Nevertheless, when one substitutes One.Tel's actual provisions for the ones advocated respectively by Mr Carter and ASIC, there is some decline in "liquidity" in the Australian operations over the period from January to March, and beyond, suggesting cause for concern. But setting aside the month of May, which is anomalous in various ways, the decline in liquidity is explicable almost entirely by reference to the fall in cash over the period from December to April. It seems to me, therefore, that ASIC's case on liquidity depends on and is no stronger than its case on falling cash.

22. Mr Carter's evidence

22.1 Introductory matters

22.1.1 Admissibility of Mr Carter's evidence

[6723] Paul Carter, a chartered accountant and partner at PricewaterhouseCoopers specialising in forensic accounting, prepared for the purposes of these proceedings a substantial report dated 31 May 2002 (his "Principal Report" or "PR"; Ex P 64) and a supplementary report dated 13 December 2002 (his "Supplementary Report"), as well as several affidavits attaching further reports. The admissibility of his expert opinion evidence was challenged by the defendants and I ruled that his principal report was inadmissible or alternatively should be wholly excluded under s 135 of the Evidence Act: ASIC NSWSC 149 (7 March 2005) (my March judgment), essentially because he and his staff had prepared an earlier report for ASIC covering substantially common ground with access to a wider range of evidentiary material, including draft affidavits and s 19 examination transcripts and interviews with people who have not been called as witnesses by ASIC, and had prepared drafts of the principal report relying on parts of the broader evidentiary material before being instructed that much of the material upon which he had relied was to be disregarded. ASIC successfully appealed to the Court of Appeal (ASIC NSWSC 152 (20 May 2005)), who ruled that the principal report was not wholly inadmissible and I had not properly exercised my discretion to exclude evidence under s 135.

[6724] That led to a "paragraph-by-paragraph" assessment of the admissibility of the principal report on discretionary and other grounds, in light of the principles enunciated by the Court of Appeal. The results of that process were addressed in a further judgment by me: ASIC NSWSC 650 (8 July 2005) (my July judgment). ASIC made an application to me to reconsider certain aspects of that decision but I dismissed the application: Australian Securities and Investments Commission v Rich [2005] NSWSC 935 (26 September 2005). Subsequently I dealt with the "paragraph-by-paragraph" admissibility of the remainder of Mr Carter's evidence, by two subsequent judgments: the first addressed evidence relevant to the London hearing in this case (ASIC NSWSC 939 (30 September 2005) and the second addressed the rest of Mr Carter's evidence (ASIC NSWSC 999 (11 October 2005)).

[6725] In the result I rejected roughly half to two-thirds of Mr Carter's evidence, but a substantial body of his evidence remains before the court. Mr Carter's evidence goes to centrally important issues and has been the subject of responses in the evidence of Mr Rich and Mr Silbermann, and of many submissions in final argument.

[6726] In final written submissions, ASIC made only limited references to Mr Carter's evidence, other than his evidence concerning liquidity and measurement of compensation. However, when the defendants observed that there was little in ASIC's submissions that relied on Mr Carter's evidence (DPS [6301]), ASIC responded by setting out various matters upon which "substantial expert evidence" of Mr Carter was admitted by the court ASR [6299-302]. ASIC recognised that only limited aspects of that evidence had involved significant elements of opinion. It said that his evidence could almost all be shown to be correct by reference to the documents that are in evidence, but "nevertheless, ... the court will derive comfort from the fact that Carter's experience and expertise has been applied to extracting, collating and summarising the material in question". That seems to leave the court with no option but to give careful consideration to the evidence he has given.

22.1.2 Questions addressed in the principal report

[6727] In his principal report Mr Carter addressed the following seven questions:

(3)

Between 1 January 2001 and 17 May 2001, did the financial position and performance of the One.Tel Group (the group) alter?

(6)

By 28 February 2001, alternatively by 31 March 2001, if the group was to continue its existing operations and meet current and reasonably foreseeable liabilities (excluding approximately $365 million of additional indebtedness to Lucent Technologies Australia Pty Ltd (Lucent) for capital works) what amount of cash injection was required?

(22)

What were the reasons for that state of affairs?

(23)

Whether the group incurred net liabilities and suffered a reduction in net worth between 28 February 2001 and 29 May 2001 and alternatively between 31 March 2001 and 29 May 2001, and if so, by what amount?

(24)

Whether there was any reasonable factual basis for certain announcements made to the market on 27 February 2001 and 4 April 2001?

(25)

Whether the information provided to the Board during the period between 1 January 2001 and 17 May 2001 included all material information concerning the group which was necessary to enable the Board to monitor management, to properly assess the financial position and performance of the group, and to properly and promptly detect and assess any material adverse development affecting its financial position and performance, and in particular whether it included information revealing:

(19): the adequacy of the cash reserves within the group
(20): the actual, and not simply the estimated, financial position and performance of the various segments of the business of the group, and
(21): key events and transactions affecting the financial position and performance of the group

(b)

Whether any, and if so what, systems were established, maintained and monitored within the group, resulting in material financial information which was accurate and reliable, flowing from management to the Board in a timely fashion, so as to enable the Board to monitor management, to properly assess the financial position and performance of the group and properly and promptly detect and assess material adverse developments affecting its financial position and performance.

22.1.3 Information sources

[6728] In his principal report (para 9) Mr Carter said he had access to the information and documents contained in App B to his report. Appendix B is vol 3 of the principal report and comprises a series of tables running to 86 pages. The tables identify, item by item:

(3): documents and information said to have been provided to the board: board papers and minutes of board and committee meetings, flash reports and supporting documents and related correspondence, and daily email reports;
(6): miscellaneous documents including Ferrier Hodgson's reports, Ernst & Young's report of 28 May, ANZ bank documents, ASIC historical company extract, market announcements, transcripts of voicemails, and Toronto Dominion bank documents;
(22): budgets;
(23): trial balances including relevant miscellaneous documents for Australia and the United Kingdom;
(24): management accounts for the various businesses;
(25): miscellaneous documents relating to profit and loss including some "to be billed" reports and the spreadsheet "comparison.xls";
(b): statutory accounts;
(c): aged creditors reports for Australia and the United Kingdom;
(7): selected correspondence relating to threats of supply from creditors, including some internal emails;
(d): aged debtors ledgers (including collections profile summaries);
(i): intranet cash balances;
(ii): bank reconciliations;
(iii): daily cash flow spreadsheets;
(iv): unreleased/unpresented cheques listings;
: deferred payment listings/cash flow variances; and
(v): miscellaneous documents relating to cash, including various internal emails and spreadsheets.

[6729] As far as I can see, the matters listed in App B are all documents that are in evidence before the court (though in a few cases the documents are in fact transcripts of voicemails). Most and probably all of the documents are in the Carter exhibits, vols A-L inclusive, which were part of ASIC's documentary tender. But App B does not list any affidavit evidence and obviously Mr Carter was not able to take into account oral evidence in his report. Therefore the court has had access to a considerably wider range of information than Mr Carter was permitted refer to for the purposes of his principal report.

22.1.4 Structure of the principal report

[6730] After stating a summary and conclusions and giving some background and a chronology of events, the principal report addresses the questions posed by ASIC under two broad headings, namely "Actual financial position of the group" and "Reporting to the Board".

[6731] Chapter 3 of the report deals with the actual financial position of the group and is subdivided into:

•

the group's financial position (Pt 3.1, corresponding with question (a)), which is subdivided into

(vi)

cash and creditors: Pt 3.1.1;

(vi)

debtors: Pt 3.1.2;

(vi)

earnings: Pt 3.1.3;

•: cash deficiency: Pt 3.2, corresponding with question (b);
•: reasons for the company's state of affairs: Pt 3.3, corresponding with question (c);
•: reduction in net worth: Pt 3.4, corresponding with question (d); and
•: market announcements: Pt 3.5, corresponding with question (e).

[6732] Chapter 4 of the report deals with reporting to the board and addresses management's reports to the board on the following matters:

•: the adequacy of cash reserves within the group: Pt 4.1, corresponding with question (f)(i);
•: the actual compared to the estimated financial position and performance (subdivided into debtors and earnings): Pt 4.2, corresponding with question (f)(ii);
•: key events and transactions: Pt 4.3, corresponding with question (f)(iii); and
•: the company's reporting systems: Pt 4.4, corresponding with question (g).

[6733] I shall consider Mr Carter's evidence in respect of each of these topics. Although his own evidence was excluded, there remains a question whether the documentary evidence upon which he relied would of itself support reasoning and conclusions of the kind he adopted, without the interposition of his expert opinions. Where appropriate, I have considered that question.

22.2 Cash and creditors

[6734] Question (a) required Mr Carter to consider whether the financial position of the One.Tel Group altered between 1 January and 17 May 2001. He considered the group's financial position and performance from two perspectives, namely the "actual" compared with expectations reflected in financial forecasts, and the actual at the end of each month from January to May compared with the actual at earlier times: PR 45. He regarded the following issues as relevant to the answer to ASIC's question: PR 49:

•: balance of available cash compared to forecast;
•: balance of available cash less creditor amounts past their due date for payment;
•: liquidity of the Australian operations;
•: net cash flow compared to forecast;
•: deferral of payments to creditors;
•: threats to supply and actual cessation of supply by creditors.

22.2.1 Balance of available cash compared to forecast

[6735] Mr Carter's evidence on the balance of available cash compared to forecast (PR 50-71) was almost entirely excluded from evidence: July judgment, at [23]-[50]. All that survived was a table at PR 64 and an associated statement, considered below.

[6736] Mr Carter claimed that the cash balances reported to the board in board papers, flash reports and daily emails (all of which are in evidence) were based on actual bank account balances taken from One.Tel's intranet without regard to known commitments for cash, such as that represented by unpresented cheques and cash held as security for obligations. To calculate what he regarded as the unencumbered or available cash balance on any particular day he took the group bank account balances and deducted two amounts: $8.28 million which he said reflected bank guarantees or cash pledged to secure international lease liabilities, and an amount fluctuating from time to time to reflect unpresented cheques. His table at PR 54 purported to show that the group cash balances at the end of January, February, March and April, taken from the daily bank account balances available on the group's intranet site, should be reduced by:

•: a "pledged" amount of $8 million (rounded to the nearest million) on each of those days, and
•: unpresented cheques amounting to $7 million for January, $8 million for February, $3 million for March (though he thought the figure should probably be more) and $13 million for April.

Since he claimed that the figures given to the board were based on the intranet cash balances, he therefore concluded that the cash figures supplied to the board, as at the end of those four months, were understated by those amounts, totalling $15 million for January, $16 million for February, $11 million for March and $21 million for April.

[6737] The question is whether that reasoning can be sustained solely on the basis of the primary evidentiary documents. In my view it cannot. There are three propositions imbedded in the reasoning, the first two of which are not established by the evidence:

•: that there was an amount of $8.28 million in the UK and European businesses that was "pledged" to secure commitments (for example property leases);
•: that there were "unpresented" cheques in the amounts stated by him at the end of each of the four months; and
•: that the cash balances reported to the board were based on daily bank account balances taken from the intranet, not reduced by the amount of unpresented cheques as at the reporting date (proposition accented by the defendants at para S3(b)).

22.2.1.1 The $8.28 million pledge

[6738] As regards the $8.28 million, Mr Carter footnoted two items of evidence. First, there is a document at Ex CE 14 0009-10 which appears to be a spreadsheet prepared on about 12 May 2001 and later modified, apparently forecasting European daily cash balances from 1 June to 30 June 2001. For each day there is an opening balance, inflows and outflows and net outflows/inflows, and a daily closing balance. Under the closing balance there is an item described as "Bank Guarantees" which is the same figure every day, namely $8.28 million. The final line in the spreadsheet is "Funds Available", which is the closing balance for the day less $8.28 million. On some days the figure for Funds Available is positive and on other days it is negative.

[6739] As I pointed out in my July judgment at [48], that document does not provide evidence of the appropriateness of the deduction of $8.28 million in each of the months from January to May, as it is a series of forecasts for June. Further, the nature and purpose of the document is unclear and in particular, it is not clear that the document was prepared in order to calculate funds available for general purposes, as opposed (for example) to funds available to service some contemplated loan. The document does not indicate that the monthly $8.28 million is a limit on the availability of funds for general purposes, rather than simply a projected expense.

[6740] The other item of evidence cited by Mr Carter is Ernst & Young's financial position review report of 28 May 2001: Ex CE 23 0001. Under the heading "2.1 Current Cash Position" Ernst & Young purported to state the current free cash position of One.Tel, saying that the Australian businesses were overdrawn by $3 million and the UK and continental European businesses had $12 million at bank, leaving a net group position of $9 million. But there was a note to the UK and continental European figure, saying that it excluded approximately $8 million of cash "pledged to secure various commitments (for example property leases)". Ernst & Young did not give any further explanation of the basis for making the deduction. The document does not indicate that any review of security documentation was undertaken. It addresses the position only in late May and not at earlier times.

[6741] 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]. However, it submitted that by the end of April the pledge was operative and so $8 million of European cash was unavailable for general purposes: APS [1327]-[1328].

[6742] In my view the evidence supports ASIC's submission. I have noted that Ernst & Young's report of 28 May said that the UK and continental businesses had $12 million at bank, excluding $8 million that was pledged. According to the minutes of the board meeting on 29 May (Ex CED 16-68), Mr Long of Ernst & Young presented the report to the board and it was recorded that during the subsequent discussion, "Mark Silbermann asked whether the $12 million cash in the bank in respect of the European businesses included the bank guarantees".

[6743] Mr Silbermann was asked about this in cross-examination. He said he found out in about late April that there were guarantees in the nature of rental bonds for some of One.Tel's office premises in Europe, which amounted in all to about $8.8 million. He said he did not know when the guarantees were given: T 13393-4. There is some further evidence of the existence of the guarantees in Ex P 58 (Mr Simmonds' handwritten notes of his meeting with Messrs Beck, Silbermann, Hodgson and Savva on 28 May (T 7548), which refers to "Bank guarantees") and Ex MTB 8, p 184, Ernst & Young's working papers according to which they had a discussion with Ms Randall in which they were informed that "approximately $8 million of cash in the UK is pledged and this pledge is not reflected in the trial balance"). None of that evidence indicates that the guarantees were created earlier than April.

22.2.1.2 Unpresented cheques

[6744] As mentioned above, Mr Carter's table at PR 54 gave figures for what he called "unpresented cheques" of $7 million at the end of January, $8 million at the end of February, $3 million at the end of March and $13 million at the end of April. In App O to the principal report there are notes providing sources for these figures. Mr Carter relied on two items of evidence that he described as "unpresented cheques listings", which he found in the group's financial records for the months of December 2000 to April 2001. He noted that the total amounts given for unpresented cheques in those two listings were different, and he said he was unable to determine which list was correct.

[6745] The two sets of documents to which Mr Carter referred were, first, monthly spreadsheets listing unreleased cheques, and second, general ledger reconciliations in which unpresented cheques were brought into account as part of the reconciliation process. I shall illustrate how these documents worked by considering the January documents.

[6746] According to Ms Randall, the unreleased cheques spreadsheets were prepared by One.Tel's accounts payable team (T 5025), and she used them occasionally for cash forecasting purposes, to ascertain the cheques that had been drawn and the payments that were due to go out (T 5024). The unreleased cheques spreadsheet at the end of January 2001, which appears at Ex CE 12 0028-44, is a list of cheques identified by cheque number, amount, payee and other particulars, giving the date upon which the cheque was drawn and then a column headed "Released" (where either the letter "N" or the letter "Y" appears, standing for "no" and "yes" respectively, signifying that either the cheque had been released to the creditor or that it was still being held by One.Tel, according to Ms Randall at T 5025-6), and a column headed "Date Released" where there is a date wherever the letter "Y" appears in the previous column.

[6747] The document listed cheques with dates beginning 4 September 2000 and ending 31 January 2001 and appears to have been created at the beginning of February 2001. At the end of the document there is a line giving the "Total Unreleased" in the amount of $7,546,650.10. This is the figure used by Mr Carter as the amount of "unpresented" cheques as at 31 January. It is, as one would expect, the total amount of all of the cheques recorded as not released: T 5027. Figures also appear at the end of the document as follows: "31/01/01 Cheques Drawn 9,837,808.59" and "31/01/01 Total Released 8,427,799.99". The first figure represents the total amount of all of the cheques dated 31 January, and the second figure represents the total amount of all of the cheques bearing that date that were released on that day (that is, with the letter "Y" adjacent to them).

[6748] It appears from Ms Randall's evidence (T 5026-7) that the spreadsheet for February, and therefore probably the spreadsheets for other months, related to One.Tel's main operating account with ANZ Queensland. Therefore by and large the spreadsheet relates to cheques drawn in respect of the Australian operations. That is confirmed by a perusal of the payees and the fact that the cheque amounts are in Australian dollars.

[6749] The general ledger reconciliation as at 31 January 2001 for One.Tel's principal operating account with ANZ Queensland deducts a figure of $4,660,186.54 for "unpresented cheques" from the closing account balance, and makes various other adjustments: Ex CE 12 0046. The document attaches details of unpresented cheques. There are several variations between this list and the list in the unreleased cheques spreadsheet, suggesting that the listing of unpresented cheques as part of the reconciliation process did involve some manual intervention. The reconciliation list includes cheques that (according to the spreadsheet) had not been released, and cheques that had been released but evidently not presented for payment by 31 January. That difference alone would dictate that the balances would be different but it would suggest that the unpresented cheques balance should be higher than the unreleased cheques balance, whereas the figures are in fact the converse.

[6750] The defendants queried why the court should accept the authority of either document, in the absence of a witness giving evidence about the document that explained how it was prepared: DPS [1739]. It seems to me, however, that some conclusions can be drawn from the documents themselves, although they leave some unresolved questions.

[6751] According to my observation, part of the explanation for the discrepancy in the figures between the January unpresented cheques spreadsheet and the general ledger reconciliation, but evidently only a small part in the vicinity of $100,000, is that the unpresented cheques listed in the reconciliation document include all unpresented cheques going back to 1999, whereas the unreleased cheques spreadsheet begins in September 2000. Another partial explanation is that there were three cheques drawn in favour of Optus on 24 January 2001 for a total amount of about $2.4 million that were cancelled on the same day, and yet the amounts of these cheques were included in the figure of $7,546,650 for "Total Unreleased", whereas in the reconciliation document the Optus cheques were not listed at all and therefore not included in the figure for total unpresented cheques. Those considerations do not account for the whole difference between $4.66 million and $7.55 million but they point to the conclusion that if one had to choose between the two figures, the $4.66 million figure is probably the more reliable. If one prefers the figures in the general ledger reconciliations over the unreleased cheques totals, then figure for the end of January is $4.66 million rather than $7.55 million.

[6752] The February unreleased cheques spreadsheet (Ex CE 12 0078-97) gives a "Total Unreleased" figure of $8.033 million. Unlike January when most of the cheques drawn on the last day of the month were released, on 28 February cheques to the value of $5.737 million were drawn and only $199,315 worth were released. Unpresented cheques for a total amount of $10.53 million were deducted from the bank balance of the main operating account in the bank reconciliation document: Ex CE 12 0099-12 0106. Quite a large number of cheques, some for high amounts, were apparently presented very soon after the end of month. The cheque listing in the reconciliation document indicates this, and there is a table in App I-3 to Mr Carter's principal report (based on unreleased cheques listings and the daily cash flow spreadsheet 2905.xls) which summarises seven cheques in favour of Optus for the total amount of $7,213,261 that were dated in February (in one case, January) and were paid on 1 March. These are the Optus payments made out of the funds transferred from the UK business to Australia at the end of February, as discussed in Ch 10. It seems to me that the general ledger reconciliation is more accurate than the unreleased cheques spreadsheet because it records those Optus cheques correctly.

[6753] For the end of March there is a document in a somewhat different format from the unreleased cheques document of previous months: Ex CE 12 0109-15. This one has a column for "Date Released" but no column for "Released" and the total figure is expressed to be "Total Unpresented Cheques". Ms Randall said that

"unpresented" cheques included cheques that the company had not released to the creditor as well as cheques that had been sent out to the creditor but not presented for payment, but she could not indicate why the change of terminology was adopted: T 5029. Additionally, as Mr Carter pointed out, there are some cheques listed by cheque number and date but without the name of the payee or amount or date released. The "Total Unpresented Cheques" amount is $2,962,241.84, but that may well be an understatement because of the blank spaces in the table. The document, which was apparently created on about 2 April 2001, has the appearance of being incomplete. Ms Randall said, unconvincingly, that it indicated to her a "change of practice" (T 5028) -- unconvincingly because the alternative explanation, that the document was incomplete, seems more likely on the face of the document. The same figure is used for unpresented cheques in the general ledger reconciliation (only the first page of which is in evidence, apparently created as late as 7 May 2001 but not completed: Ex CE 12 0117). Although the evidence is rather shaky, both documents point to the conclusion that unpresented cheques stood at $2.96 million at 31 March (but see 11.2.3.7 where some additional post-dated Optus cheques are taken into account).

[6754] The spreadsheet for the end of April is, like the March document, for "unpresented" rather than "unreleased" cheques, and gives a figure for "Total Unpresented Cheques" of $13,101,841.55: Ex CE 12 0119-27. It appears to have been created on about 1 May. The general ledger reconciliation, apparently created on about 7 June 2001 after the commencement of voluntary administration, uses the same figure but only the first page of that document is in evidence: Ex CE 12 0129. It is appropriate to conclude that the total amount of unpresented cheques at the end of April was $13.1 million (and see 11.2.3.8, where it is noted that this figure includes a check in favour of Optus for $9.8 million, drawn on 17 April but cancelled on 3 May).

[6755] In summary, the evidence points to the conclusion that the amount of unpresented cheques at the end of January 2001 was $4.66 million, there was a large amount of unpresented cheques at the end of February 2001 but it is not clear whether the correct amount was $8.033 million or $10.53 million, the evidence for March is incomplete and no conclusions can be drawn, and it appears that the amount of unpresented cheques at the end of April was $13.102 million.

22.2.1.3 Lucent handset account

[6756] I should note that Mr Carter also referred to the Lucent handset advance, which he claimed to be available solely for the purpose of purchasing handsets, but he did not adjust the available cash balance by deducting the Lucent advance because, he said, an accurate adjustment would require an assessment of the forecast handset creditor payments. My view is that the evidence does not show that there was, at any time in the period from February to May 2001, an amount of cash held by One.Tel that it could not use except for the purchase of handsets. This is because, as I explained at 7.5, the evidence raises a plausible possibility, not disproven, that by February 2001 One.Tel had already spent the entire advance on the purchase of handsets even though there was an amount credited to the handset account until 12 April 2001.

22.2.1.4 Were the cash balances that were reported to the board based on the intranet and adjusted to reflect unpresented cheques and the $8.28 million "pledge"?

[6757] The cash figures given to the board (or some members of the board) are clearly disclosed by the evidence: the board papers, the flash reports and the daily emails. For the purposes of this analysis I shall limit my attention to the board papers and flash reports: the sourcing and calculation of the daily emails seems to have been a different and presumably less sophisticated process.

[6758] The intranet cash balances can be readily found in the evidence. In my view (explained above) the evidence does not provide an adequate basis for finding that there was an $8.28 million pledge over One.Tel's cash, and therefore the evidence does not support the conclusion that this amount had to be deducted from the intranet balance to ascertain the amount of free or available cash on any day.

[6759] There is a table in App C to Mr Carter's affidavit of 23 July 2004 comparing month-end intranet group cash balances with the group cash balances given in the March board papers for January, February and March 2001. What is striking is that the figures given to the board are so different from the intranet cash balances. The intranet group figures for those month-ends, to the nearest million, are $86 million, $38 million and $69 million. The group figures in the March board papers are $90 million, $64 million and $61 million. Mr Carter stated the February intranet figure at $64 million, apparently adding to the closing balance of $38 million the $26 million transferred overnight from the UK to Australia, which was debited to the UK and Global Wireless balances in the intranet on 28 February but not credited to Australia until 1 March and therefore would have "disappeared" from the closing balance at 28 February unless added back. In the result the adjusted 28 February intranet figure corresponds with the figure given to the board for that day, whereas the January intranet figure was $4 million less than the figure given to the board and the March intranet figure was $8 million more than the figure in the board papers (the March figure was an estimate, though it was given towards the end of the month). The fact that there are large variances in January and March undermines any inference, based solely on the equivalence of the numbers, that the February figure was simply lifted from the intranet figure; it may be that the figure given to the board was subject to some process of adjustment after which it was merely coincidental that it was the same number as the intranet figure.

[6760] The discrepancies suggest that some adjustments were made to the raw intranet figures before the figures were passed on to the board. Mr Carter said in his affidavit of 23 July 2004 that he was not aware why there was a difference between the intranet and reported figures for January and his only comment on the March figures was that the end of month board figure was an estimate. As I said in my July judgment (at [30]), "the degree and level of variances ex facie prevents any inference being made that the figures reported to the board were lifted without adjustment from the intranet, and also prevents any inference that if the intranet figures did not account for unpresented cheques the board papers likewise did not do so". That remains true. In the result ASIC has not proven that the group cash balances given to the board were based on the intranet balances; more particularly, assuming that the intranet balances were the starting point for preparation of figures for the board, the evidence shows that some process of adjustment was undertaken, but it does not explain what the adjustment was.

[6761] Another table in App C to Mr Carter's affidavit of 23 July 2004 compares the intranet cash balances for the Australian operations at the end of January, February, March and April 2001 with general ledger reconciliations at those times. The table deducts Mr Carter's figures for unpresented cheques (discussed above) from the intranet balances. The result is that the intranet balance less unpresented cheques was $34.4 million at the end of January, negative $0.2 million at the end of February, $21.3 million at the end of March and negative $4.7 million at the end of April. The general ledger reconciliations for the ends of those months are $22.1 million, negative $0.6 million, $15.5 million and negative $2.7 million. Mr Carter commented that while the figures do not precisely reconcile, the adjusted intranet balances is closer to the general ledger balance than the unadjusted intranet balance. That is hardly surprising since the general ledger reconciliation deducts unpresented cheques. He drew attention to the 28 February figure, remarking that the adjusted intranet balance of negative $0.2 million was "almost equal" to the general ledger cash balance of negative $0.6 million.

[6762] The more interesting issue is not the degree of similarity between the adjusted intranet and general ledger balances but the degree of difference, which Mr Carter has not explained. One possible explanation is that the general ledger reconciliations to which Mr Carter referred were reconciliations to a particular bank account, which appears to have been One.Tel's main Australian operating account. This leaves out of account any other sources of funds that may have been reflected in the intranet figures. That there were other sources of funds, indeed quite a few others, is indicated, for example, by the trial balances (see, for example, the trial balance at 31 January 2001, which identifies some nine bank accounts as well as security deposits and commercial bills: Ex CE 2 0056). In the absence of explanation for the differences between the intranet and general ledger reconciliations, the comparison makes no contribution to answering the question whether the cash balances reported to the board were essentially the intranet numbers without adjustment for unpresented cheques. In my view ASIC has not proven that assertion.

[6763] I should make it clear that I accept that if a cheque was drawn at or near the end of the month and was either not dispatched to the creditor or not presented by the creditor for payment until after the end of the month, the raw intranet figure for the cash balance at the end of the last day of the month would not be reduced by that payment, whereas the payment would appear in the creditors ledger as at the end of month because the cheque would have been processed at the time it was drawn. Evidence for the second limb of that proposition is identified in App C to Mr Carter's affidavit of 23 July 2004. There Mr Carter identified eight specific cheques that, according to the unreleased cheques listing to the end of February (Ex CE 12 0095-6), were drawn during February 2001 but were not presented as at 28 February. The amounts owing to the creditors and reflected in those cheques were recorded as outstanding in the 31 January creditors ledger (Ex CE 6 0002 and following) but not in the 28 February creditors ledger (Ex CE 6 0068). Although Mr Carter's evidence was excluded, it is appropriate to have regard to the intranet balances and creditors ledgers on which he relied in order to reach this conclusion.

[6764] In the result I am not able to conclude, on the basis of the evidence, that the group cash balances reported to the board in board papers and flash reports were based on the daily intranet balances, or that the figures given to the board failed to deduct the amount of unpresented cheques.

[6765] In argument about the admissibility of Mr Carter's evidence, an issue arose about his assertion (PR 50) that the cash balances reported to the directors in those documents were based on the actual bank account balances taken from the Lotus notes database (referred to in evidence as the intranet), without any adjustment for known commitments for that cash, such as would be represented by unpresented cheques and cash held as security for other obligations. His evidence on that subject was ruled inadmissible, but there remains a question whether the cash figures reported to the board were simply taken from the intranet database or were subject to some adjustments such as adjustments to reflect obligations and known commitments.

[6766] Mr Carter sought to respond to some objections to the admissibility of his evidence by App C to his affidavit of 24 July 2004. Again, this material was eventually ruled inadmissible but the sources for App C are in evidence and they are of relevance to answering the question now posed.

[6767] Mr Carter noted that in the board papers for 30 March 2001 (Ex MTB 1/235), the group cash balances for January, February and March 2001 were given as $90 million, $64 million and $61 million respectively (the last of these being an estimate as the board papers were prepared before the end of the month). He also gave the figures for the end of month balances for those three months taken from the intranet, thus: January $86 million (Ex CE 9 0011), February $64 million (Ex CE 9 0009) and March $69 million (Ex 9 0006).

[6768] There is an anomaly in the February figure that needs to be explained. In fact at Ex CE 9 0009 the closing balance on 28 February is $38,175,061, about $26 million less than the amount reported to the board. What has happened is that the transfer of the $26 million from the United Kingdom and the Global Wireless Account to Australia appears to have reached the outflow column for the UK and Global Wireless on 28 February but not the inflow column, the inflow being shown into Australia on 1 March. In concluding that the intranet balance as at the end of February was $64 million, Mr Carter has evidently adjusted for the transfer by eliminating the relevant outflow figures on that day.

[6769] It will be seen that on Mr Carter's figures the intranet and board figures were the same for February, but there were variances for January and March, namely that in January the intranet figure was $4 million lower than the board figure and in March the intranet figure was $8 million higher than the board figure. Mr Carter said in App C that he was not aware why there was a difference in the January figures, and he noted that the March board figure was an estimate.

[6770] In my July judgment on the paragraph-by-paragraph admissibility of the principal report I referred to Mr Carter's evidence on these matters and reached the conclusion that App C did not support the proposition that the cash balances reported to the board were based on One.Tel's actual bank account balances taken from the intranet: para 30. Indeed, looking at the matter again with the benefit of all the evidence, it seems to me more likely than not, in view of the discrepancies between the intranet and the board figures, that the intranet figures were the subject of some adjustments up and down before they were put into the board papers. Those adjustments certainly included an adjustment for the timing of the $26 million transfer at the end of February, and they may have been similar timing adjustments in the other months. On the evidence it is an open question whether any adjustments were made in order to take into account such matters as known commitments relating to unpresented cheques.

22.2.1.5 Comparison between "actual" group cash and board forecasts

[6771] In his table at PR 54, Mr Carter set out the group's "available cash balances" for the end of the months of January, February, March, April and on 29 May, calculated in the manner outlined above (intranet cash balances less "pledge" of $8 million and his figures for unpresented cheques; I shall disregard December which was based on statutory accounts figures). His figures showed available cash declining from $71 million in January to $15 million on 29 May.

[6772] He then compared these figures with the group forecast cash balances in the board papers for 28 September 2000, 24 November 2000, 25 January 2001 and 30 March 2001. In the board papers for each of those meetings group cash was forecast to fluctuate but within a relatively narrow compass: for example, the January board figures were, as noted earlier, $85 million, $82 million, $97 million, $88 million and $91 million for each of the five months respectively, and the March figures were $61 million for that month, $53 million for April and $62 million for May.

[6773] If Mr Carter's figures for available cash were correct, then the group cash shortfall against the January board forecasts would be $14 million for the month of January, $34 million for February, $39 million for March, $67 million for April and $76 million for May. The shortfall against the March board papers would be $3 million for March, $32 million for April and $47 million for May. Subject to the anomaly of March, Mr Carter's actual figures, were they correct, would show a steep decline in available cash and an increasing discrepancy between that figure and board forecasts. The board forecasts are directly in evidence and Mr Carter's evidence is not needed to establish them, and the ingredients of Mr Carter's calculation of "available cash balances" are also in evidence. The problem for Mr Carter's analysis is that it fails to explain the relationship between the board forecasts and the intranet cash balance figures that were available at the times when the board forecasts were prepared. As noted above, the figures are different; and the evidence does not establish Mr Carter's theory that the board figures failed to take account of the "pledge" and the amount of unpresented cheques.

[6774] As seen elsewhere in this judgment, the defendants contended that One.Tel's financial position deteriorated in February 2001 and after a small improvement in March it deteriorated further in April, leading to management recognising a need for a cash injection. The decline recognised by the defendants can be seen by comparing board forecasts. In November 2000 management was forecasting cash of $100 million at the end of January, falling to $87 million in February and then gradually rising again to $99 million in May. In the January board papers those figures were revised down to $85 million in January falling to $82 million in February and then $97 million in March, $88 million in April and $91 million in May. In the March board papers those figures were revised to $61 million in March, $53 million in April and $62 million in May. The contention that these figures were overstated because unpresented cheques were not deducted is not made out because ASIC has not proved that the figures presented to the board failed to take into account unpresented cheques. The contention that the figures presented to the board were overstated because the "pledge" of $8 million was not deducted is not made out because ASIC has failed to establish that there was some form of "pledge" or charge over $8 million of One.Tel's cash which prevented it from being used the general purposes. Consequently Mr Carter's contentions to the effect that the company's cash position was much worse than the board forecasts and that it was declining much more steeply have not been made out.

[6775] As noted above, Mr Carter's figure for the March cash balances, $58 million, seems out of step with his other figures because the amount he deducted for unpresented cheques in that month was only $3 million. I have noted that the unpresented cheques spreadsheet for 31 March seems to be incomplete, and the general ledger reconciliation uses the same figure. Mr Carter noted this, and he also said (at PR 56) that the 31 March cash balances did not take into account $21 million growth in overdue Australian creditors during the month of March, nor $26 million growth in overdue UK operations' creditors, and that if these additional overdue creditors of $47 million had been paid the cash balance would have deteriorated by $37 million between the end of February and the end of March. The question whether overdue Australian and UK creditors grew by these figures is explored later.

[6776] In his affidavit Mr Rich pointed out, as I have noted above, that the variance between the end of month cash balance forecasts of the board in the September, November, January and March board papers, and the actual figures taken from the intranet, was less extreme than Mr Carter's adjusted figures, though there were still some significant shortfalls (for example, the January board forecasts were for $82 million at the end of February, $97 million at the end of March and $88 million at the end of April, but the actuals were $64 million, $69 million and $42 million respectively).

[6777] Mr Rich also offered some explanations for cash shortfalls: 2 JDR 1686. First, he drew attention to the fact that the November board forecast for January cash was $23 million less than the September forecast, and the February forecast was $27 million less. He noted that there were some explanations for this in the November board papers (Ex MTB 1/128): the reworking of the European budget to take account of delays in preselection in the UK and the consequent decision to deploy diallers on a large scale during late 2000 and 2001, which had the effect of increasing the net cash usage of the European and Hong Kong businesses by $10 million in the period from October 2000 to February 2001; and delayed cash receipts as a result of billing delays in late 2000.

[6778] Second, Mr Rich said (2 JDR 1687) the shortfall between the cash balance at the end of February ($64 million) and the figure forecast in the January board papers ($82 million) was explained in the February flash report (Ex MTB 1/38 1b) as due mainly to customer receipts being down as a result of a decision to defer bills by 2 weeks to ensure data completeness and quality, and was also referred to in the daily mail for 23 February 2001 (Ex JDP 33).

[6779] Third, he said (2 JDR 1688) that the shortfall between the actual cats balance at the end of March ($69 million) and the forecast in the January board papers ($97 million) was due to a number of factors, including the $40 million shortfall in billings identified at the end of March, and higher than normal direct debit dishonours as explained in the March board papers (Ex MTB 1/227), which said that billing run totals had been $15 million less than expected and direct debit dishonours were 80% higher than normal.

[6780] Mr Rich said that a reduction in the cash balance of the group during the early part of 2001 was always an integral part of the business plan for 2000/2001, as it was contemplated that the group would fund the movement in the international businesses to a cash flow positive position and would also fund growth in the subscriber base of the Next Generation business: 2 JDR 1683. He said the lower than forecast cash balances in November-February seemed to him at the time to be principally short term timing issues within the group's cash flows, and that they would be "caught up" in due course: 2 JDR 1690. He said his belief that the shortfalls would be "caught up" was supported by his perception that, as issues arose, One.Tel was able to deal with them effectively: 2 JDR 1691. He noted that the issues with billing in late 2000 were ultimately dealt with by the upgrading of the capacity of the billing system and billing runs were up-to-date and going out in a timely way by early January. In the UK, the deployment of diallers during 2001 was progressing well and more or less in line with the business plan. The delay in billings during early February was brought up to date in early March, he said. As regards the shortfall in billing run totals identified in late March, $28 million in unbilled CDRs had been identified by the billing team by 30 March and they had expressed confidence that another $12 million or so would be found and that the entire amount would be processed and billed during April and May. As to dishonoured direct debits, he said that Brian Curran, who was in charge of that area, told him he had sampled 100 customers and had expressed confidence that the majority of direct debits were likely to be honoured on re-presentation.

[6781] Mr Rich said that during April 2001, a number of developments adversely affected the cash flow of the group, so that the group did not achieve the end of April forecast of $53 million made in the March board papers (the actual figure was $42 million) and group cash fell to levels that were "uncomfortably tight": 2 JDR 1692. He said (2 JDR 1693) the principal developments were:

•: a sudden escalation by WorldCom over Easter in their attitude to long-standing disputes with them about invoicing and a tightening of position by other European carriers regarding outstanding debt, resulting in higher than expected cash outflows of the European businesses during late April;
•: slower than expected processing and billing of the unbilled CDRs, and lower than expected collections, in both cases exacerbated by a database crash in late April.

[6782] As explained elsewhere in these reasons for judgment, I have reached the conclusion that Mr Rich's account of these matters is substantially correct.

22.2.1.6 The ANZ "overdraft"

[6783] Mr Carter said (PR 59, fn 28, excluded from the evidence) that the Australian operations had a "gross overdraft facility" with the ANZ Bank "whereby its main operating account could be overdrawn by $10 million so long as there were sufficient funds in other bank accounts to offset the overdrawn balance". He said that on 8 March 2001 ANZ increased the overdraft limit to $11 million.

[6784] These statements are substantially correct, according to the evidence at Ex CE 24 0006 and Ex CE 24 0031. By a letter of offer dated 25 August 1999 ANZ offered One.Tel various facilities comprising a "Gross Overdraft Facility (Net Overdraft Facility -- Nil)" of $10 million, plus an indemnity guarantee facility of $2 million, a direct payments facility of $5 million, a global payments facility of $5 million and an encashment facility of $10,000, the total facility amount being $22,010,000. The offer was subject to various financial reporting requirements, annual reviews, and review in the event of change of control. The offer was accepted in writing on behalf of One.Tel on 27 August 1999. The letter of offer appeared to contemplate that ANZ might allow amounts over the facility limit, subject to a penalty interest rate. The overdraft facility was subject to set-off arrangements contained in a separate agreement dated 12 May 1999. It appears that those set of arrangements included the Lucent handset account, notwithstanding that the use of the money in that account was restricted until there had been matching expenditure by One.Tel on handsets: MS 925; 2 JDR 1711c; see 7.5. The letter of offer was varied on 8 March 2001 to increase the Gross Overdraft Facility to $11 million, and to increase some other facilities and introduce a standby letter of credit facility, so that the total facility amount was $25,810,000. The increase was accepted on 13 April 2001.

[6785] Mr Carter set out in a table at PR 60 (excluded from evidence) the balance of what he called "the overdraft account" from 15 to 31 January 2001. According to that table, the account was in overdraft in the sum of $13,310,222 on 15 January, and it was in overdraft to a lesser extent on three other days. Mr Carter said the overdraft on 15 January exceeded the gross overdraft limit. He also set out in the table the general ledger balances for those days which, he said, indicated that the overdraft limit would also have been exceeded on 16 and 17 January had all of the unpresented cheques been presented.

[6786] Mr Carter derived his figures for daily bank balances from the bank reconciliations found in the I:drive in respect of the ANZ cheque account for Queen St Brisbane which appears to have been the main Australian operating account. The bank reconciliation as at 15 January does indeed show that the balance per bank statement was $13,310,222. That figure exceeded the gross overdraft limit, which presumably applied to that account. It should be noted, however, 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. While, therefore, it appears that the gross overdraft limit had been 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 the set-off arrangements were applicable (depending upon where the remainder of the funds were placed).

[6787] In those circumstances the fact that the gross overdraft amount was exceeded is not in itself evidence of deterioration of One.Tel's financial condition. As I pointed out in my July judgment, at [55], a variety of circumstances might cause a company to exceed its gross overdraft limit on a particular day while having adequate funds to cover the shortfall, for example clerical error within the company or the bank, or a timing mismatch between incoming and outgoing funds. It is worth noting that the overdraft limit was increased after One.Tel had apparently exceeded the gross overdraft limit.

[6788] In another table at PR 64 (admitted into evidence) Mr Carter set out some daily bank account figures from 19 to 28 February 2001. For the first four of those days he gave daily overdraft balances and general ledger reconciliation adjustments (the figures for the remaining 5 days were not available), all taken from the general ledger reconciliations for the ANZ Queensland account, which showed that the daily balances for that account for those 4 days were between $3.38 million and $6.6 million over the gross overdraft limit of $10 million, and that on three of those 4 days the situation was worse upon reconciliation (presumably because of the effect of unpresented cheques), the worst day being 22 February when the overdraft balance of the account after reconciliations stood at $21.77 million.

[6789] There is some evidence confirming that the ANZ operating account exceeded the terms of the banking arrangements for some time in February, namely an ANZ diary note dated 23 February: Ex CED 1-768A. The document recorded a recommendation, supported and approved by various bank officers, evidently authorising some specified One.Tel accounts to remain in overdraft with a gross debit balance of $16.72 million against a gross limit of $10 million and a net debit balance of $4.94 million. The diary note recorded that the ANZ relationship manager spoke to "new One.Tel Treasurer Sam Randall" on 23 February to ascertain the cause of the prevailing excess, and Ms Randall indicated that One.Tel's debtor payments had been set back by delays in completing the January billing run. The duration of the excess over the limit was expected to be three business days, as (apparently according to Ms Randall) the billing run had been completed and One.Tel was said to be expecting about $15 million in debtor payments within that period. One of the bank officers who supported the recommendation wrote in hand:

It is to be made clear to One.Tel that irregularities of this nature are unacceptable to the Bank and cash flow must be managed appropriately to ensure compliance with limits.

[6790] Mr Carter's figures differ from those in the ANZ diary note. He took into account the daily intranet balances for the Australian operations, which showed balances ranging from a low of $2.995 million on 22 February to a high of $7.8 million on 28 February, with negative balances on four of the 9 days. These are, of course, figures for all of the Australian operations and not merely the ANZ Queensland account.

[6791] Therefore while Mr Carter's figures do not clearly show that the Australian operations were not complying with the ANZ's requirements, because of the possibility of some credit balances that he was not able to take into account, the ANZ diary note does show that there was a temporary excess over the ANZ's authorised arrangements for a 3-day period, which was cured by bank permission.

[6792] Mr Carter added, in a statement that was allowed into evidence, that if the balance of the Lucent handset account, standing during February at $9,485,145, had not been offset against debit balances, then the Australian operations would have a net cash deficiency on every one of the 9 days, ranging from a high of $12.48 million on 22 February to a low of $1.67 million on 28 February. That is correct mathematically but it has not been shown that the outstanding balance in the Lucent handset account was not available for general purposes, nor that the deduction of the Lucent money would directly impact on One.Tel's ANZ Queensland account or other ANZ accounts covered by the overdraft arrangements.

[6793] Mr Rich gave evidence (2 JDR 1711) that he was never advised by anyone during February 2001 of any unauthorised overdraft incurred by One.Tel with the ANZ Bank. He said no complaint or expression of concern was ever made to him in February by any officer of the ANZ Bank to the effect that One.Tel had breached its financing arrangements. He drew attention to the set-off arrangements that One.Tel had with the ANZ Bank, in consequence of which he said that he would not have considered a negative balance in one account, offset by funds on deposit in other accounts, would have been a matter of great significance.

[6794] Mr Silbermann said (MS 923-8) that the person responsible for monitoring the cash flow and cash position of the Australian businesses was David Barnes, and after he left in February 2001, Mr Hodgson. He said the Australian accounts were operated on a consolidated basis, with debit balances in one account being offset by credit balances in other accounts. At no stage during 2000/2001 did Mr Barnes, Mr Hodgson or anyone else bring to his attention any unapproved overdraft in One.Tel's account with ANZ, and he did not recall any complaint being made about any such matter by ANZ. He said he had a meeting with One.Tel's ANZ account manager and the Head of Credit in April 2001, where such issues could have been raised, but nothing was said about the account being overdrawn and the ANZ representatives did not express any dissatisfaction about the relationship between the bank and One.Tel. He said his own consideration of One.Tel's cash position was on a group basis and he seldom considered the position of the Australian businesses until late April. The daily voicemail he received about the cash position was on a group basis. If there is an issue about the Australian cash position he would have expected Mr Barnes or Mr Hodgson to call it to his attention, as Mr Hodgson did on 27 February when he requested a cash transfer from the UK.

22.2.2 Balance of available cash less creditor amounts past due

[6795] Mr Carter made the undoubtedly correct point that, since a company may maintain cash at an artificially high level by delaying payments to creditors, a decrease in the available cash balance alone does not show the full extent of deterioration of the company, and so an accurate and complete assessment of the company's financial position must take into account any growth in liability to unpaid creditors: PR 72. Mr Carter gave evidence (PR 73) that when overdue creditors in the Australian and international operations were taken into account, it was apparent that from at least 28 February 2001 the One.Tel Group's operations had insufficient cash to pay creditors the amounts that had passed the due date for payment.

[6796] He also referred (PR 76, 78, 85 and 87) to the amounts owing to Australian trade creditors that were not overdue, and to additional accrued liabilities that he calculated in App I-4 to his principal report. I shall consider the relevance of those matters under the heading "Liquidity of the Australian operations", below.

22.2.2.1 Australian operations

[6797] Mr Carter presented (at PR 74, which was allowed into evidence) a table showing, he said, that from as early as 31 January 2001 the Australian operations had insufficient cash to pay overdue creditors. There is a question about the significance of this analysis, because as Mr Silbermann said, cash was dealt with internally at One.Tel on Group basis, and was transferred from one part of the group to another as and when required, with movements between subsidiaries being accounted for by intercompany loan accounts: MS 931.

[6798] The table at PR 74 purported to show the Australian available cash balances (per trial balance after accounting for unpresented cheques), at the end of the months of January, February, March and April and at 29 May 2001 (the figures were, respectively, $22 million, negative $1 million, $16 million, negative $3 million and $3 million). Then Australian overdue trade creditors at the month-end (respectively $24 million, $29 million, $50 million, $54 million and $77 million) were deducted, to produce an "Australian cash position" at each month-end (respectively deficiencies of $2 million, $30 million, $34 million, $57 million and $74 million).

[6799] The validity of this analysis depends on the accuracy of the source data. It is necessary to consider the source of Mr Carter's figures for the Australian cash balance after accounting for unpresented cheques, and his source of the figures for Australian overdue trade creditors.

[6800] Mr Carter derived Australian available cash balances from trial balances at each month-end. To ascertain available cash from the trial balance figures, Mr Carter identified a number of items in the trial balances, which are recorded there in the category "CSH" (presumably cash). The items he specified, in App O, were account items 2500-21 inclusive in each of the month-end trial balances: Ex CE 2 0056 for 31 January; Ex CE 2 0059 for 28 February; Ex CE 2 0072 for 31 March; Ex CE 2 0080 for 30 April and Ex CE 2 0095 for 29 May. These items included five ANZ accounts, a CBA account and an NAB/ANZ call deposit, and also two other bank accounts with unidentified banks, an amount on security deposit, a very large amount for "Commercial Bills & FOD" (for example, about $26.5 million as at 31 January), and petty cash. He added up the figures for those twelve items and treated the total as the available cash balance per the trial balance after accounting for unpresented cheques, implying that in his view the total of the twelve account items was already net of unpresented cheques without further adjustment.

[6801] In note (1) to the table, Mr Carter observed that the cash figure he took from the January trial balance ($22 million) differed from the intranet balance for the Australian operations as at 31 January, which stood at $41.4 million (Ex CE 9 0011) and also the daily cash flow spreadsheet, which gave the figure as $41.021 million. Mr Carter used the trial balance figure rather than the others. He said the difference of $19 million might be partially explained by unpresented cheques. He said the amount of unpresented cheques at 31 January was $7 million, citing the unreleased cheques spreadsheet at Ex CE 12 0044. For the reasons expressed earlier, my view is that the correct figure for unpresented cheques as at 31 January is about $4.6 million, the figure in the general ledger reconciliation for the ANZ Queensland account, and so Mr Carter's partial explanation would fail to explain about $14.4 million of the discrepancy. Mr Carter said he was unable to explain the remaining difference. The principal report gives no reasoning process for preferring the trial balance figures to the intranet and daily cash flow spreadsheet figures, except the need to deduct the amount of unpresented cheques, a deduction which could not reduce $41 million to $22 million. In my view Mr Carter has not made out a case for preferring the trial balance figures.

[6802] If the intranet figures and the best available figures for unpresented cheques were used, then the available cash balance

•: for January would be $41 less $4.6 equals $36.4 million, compared with $22 million used by Mr Carter;
•: for February would be $7.8 less $10.5 equals negative $2.7 million, compared with negative $1 million used by Mr Carter;
•: for March would be $24.3 million less an amount for unpresented cheques that cannot be ascertained from the evidence, compared with $16 million used by Mr Carter; and
•: for April would be $8.3 less $13.1 equals negative $4.8 million, compared with $3 million used by Mr Carter.

[6803] Note that in both the intranet figures and Mr Carter's figures for the February month-end, the transfer of $26 million to the Australian operations is excluded, because as Mr Carter explained in note (2) to the table, the transferred funds were not recorded as received in Australia until 1 March. If the $26 million is included in December intranet figure it becomes $33.8 million, which after deducting $10.5 million for unpresented cheques leaves $23.3 million, compared with Mr Carter's figure of $25 million.

[6804] In note (4) to the table Mr Carter said that he used the trial balance as at 31 March provided by Ferrier Hodgson rather than the document found in One.Tel's computer system. He did not explain why he preferred the document he chose to use. However, in para 2 of the report exhibited to his affidavit of 29 November 2004 he endeavoured to remedy this defect. It appears that the selection of one version of the March trial balance rather than the other has no material bearing on the available cash balance.

[6805] The other component of the table is the amount of Australian overdue trade creditors. Mr Carter took the monthly figures from aged creditor reports found at Ex CE 6 0064, CE 6 0143, CE 6 0241, CE 6 0318 and CE 6 0340. He appears to have taken the "Total Open" ledger total at the bottom of each aged creditor report, and then deducted the total figure for "Due After 31/01/01". This assumes the accuracy of the aged creditor reports generally. The aged creditor reports appear to have been prepared on the basis that all creditors were payable within 30 days of invoice date so if the invoice was 1 month old then the debt was due and if the invoice was over 1 month old the debt was past due.

[6806] As to Mr Carter's use of the term "overdue", at footnote 34 of the principal report he noted that the creditors ledgers for the Australian and UK operations classified creditors as not yet due, or overdue up to 30 days, 60 days, 90 days, 120 days or greater than 120 days. I allowed that sentence into evidence on the basis that I should treat it as an explanation by Mr Carter of the meaning of the word "overdue": July judgment, at [72]. I said the footnote indicated that according to Mr Carter's use of the word "overdue", all debts listed under a "due by" column, where the given date had passed, were overdue.

[6807] In my July judgment (at [79]) I noted the defendants' argument that Mr Carter's calculations should have made, but did not make, allowance for disputed claims and claims that had not been met because One.Tel was awaiting receipt of credit notes. I referred to the aged creditors report for the end of January, according to which the total open position was $46.762 million of which $22.341 million was due after 31 January. Mr Carter used the figure of $24 million (to the nearest million) to identify "overdue" trade creditors as at the end of January, apparently by deducting creditors due after 31 January from the total open position. But the aged creditors report (Ex CE 6 0064) shows that of this $24 million, some $19.109 million was due by 3 October 2000. That is, as I said in my July judgment (at [80]), nearly three-quarters of the "overdue" creditors at the end of January had been outstanding for more than 120 days, suggesting that a substantial part of the amount outstanding may have been disputed debts or subject to counter-claims or claims no longer payable but not yet purged from the ledger (because, for example, they awaited the issue of credit notes) -- especially bearing in mind that in early October 2000, One.Tel had approximately $250 million in bank account balances: Ex CE 90023. In my view those considerations make it 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.

[6808] The same argument appears to be available for February, when $20.447 million out of a total of $29 million said by Mr Carter to be overdue had been due for 120 days: Ex CE 6 0143. On Mr Carter's figures, the available cash balance of negative $1 million would be insufficient to pay the remaining $8.553 million even if all the debts due for more than 120 days were treated as disputed claims and disregarded. However, according to Mr Carter's evidence the figure for the available cash balances, taken from the trial balance, is net of unpresented cheques, which as I have observed were for an unusually high amount at the end of February. That raises the question whether some or all of the unpresented cheques might have been to pay "overdue" creditors -- if that were so, the amount owing to "overdue" creditors would have to be reduced by that amount, otherwise there would be double counting.

[6809] Mr Carter's figure for Australian available cash at the end of March was $16 million against overdue Australian trade creditors of $50 million, but of that $50 million some $15.483 million had been due for more than 120 days: Ex CE 6 0241. In April the available cash figure was negative $3 million and the total overdue was $54 million of which $15.82 million had been due for more than 120 days. In May the available cash figure was $3 million and the total overdue was $77 million of which $19.104 million was due for more than 120 days: Ex CE 6 0340.

[6810] Consistently with the conclusion in my July judgment (at [81]), my view is that the level of long-overdue debt was not sufficiently high, except perhaps for January, undermining Mr Carter's argument that the figures showed deterioration in the cash and creditors position month by month during the January-May period.

22.2.2.2 International operations

[6811] Mr Carter's analysis of creditor balances and overdue amounts in the international operations, which was by and large allowed into evidence, was restricted because the only creditors ledgers that were available were those for the UK operations. His figures for "international operations" were confined, so far as creditor balances were concerned, to the UK business: PR 88. He prepared a table (PR 89) which purported to show, as at the end of January, February, March and April, and on 29 May, "international available cash balances" and "international trade creditors overdue", and after deduction of the latter from the former, "international operations' cash position".

[6812] As to "international available cash balances", Mr Carter derived his figures from the One.Tel intranet, which showed daily cash balances for France, Germany, Global Wireless, Hong Kong, Netherlands, Switzerland and the United Kingdom. His figures were the total of these numbers, but in each case he deducted $8.28 million for what he regarded as a "pledged" amount. I have held that the evidence does not establish any such pledge or charge. He made no deduction for unpresented cheques. The net figures he derived for the five months were $37 million, $22 million (the February figure was after the transfer of $26 million to the Australian operations), $37 million, $25 million and $70 million.

[6813] As to "international trade creditors overdue", the figures given by Mr Carter were limited to the UK operations. He derived them from the UK aged creditors reports which are in Ex CE 6 0342 and following. He conveniently summarised the figures in a table in App I-6 to his principal report, using currency exchange rates specified in App I-1. To the nearest million dollars, the figures for overdue UK creditors were respectively $50 million (January), $56 million (February), $82 million (March), $83 million (April) and $76 million (May). When those amounts were deducted from the available cash balances to ascertain the "international operations' cash position", the results were deficiencies of, respectively, $13 million, $34 million, $45 million, $57 million and $59 million.

[6814] This led Mr Carter to conclude (PR 90) that the cash position of the international operations progressively deteriorated over the five months, from negative $13 million at the end of January to negative $59 million at 29 May. In another table (PR 91) he broke down the UK aged creditors reports, as at the end of each of the five months, into amounts not due, and amounts outstanding by more than 30, 60, 90 and 120 days. The figures showed that the greater than 30 days creditors steadily increased over the five months but the older debt seems to have spiked in March and then improved.

[6815] One matter that Mr Carter emphasised (PR 94) is that the intranet cash balance for the UK as at 28 February was $11.5 million whereas the creditors greater than 120 days in the UK operations amounted to $24.5 million (the "overdue" total was said to be $56 million), and therefore according to Mr Carter, the UK business had insufficient available cash to pay its creditors including those long overdue creditors. That conclusion would be correct only if available cash was the sole source of payment. Further, as Mr Rich pointed out (2 JDR 1714):

•: cash was managed on a group basis;
•: there was never any intention to maintain a cash balance for the UK operations sufficient to enable One.Tel UK to pay all of its creditors;
•: creditors of the UK operations were intended to be paid out of a combination of cash flow of those operations and recourse (if necessary) to other cash resources within the group;
•: a substantial portion of the amounts shown in the aged creditors report as over 120 days (relied on by Mr Carter) were the subject of disputes;
•: it was not his understanding at any time during February or March 2001 that the UK business was having difficulty paying creditors in accordance with normal payment practices.

[6816] Mr Carter noted (PR 97) that during March creditors overdue for between one and 30 days increased from $10.4 million to $36 million. That appears to be true, but he did not point out that this figure declined to $29.6 million on 30 April and $14.4 million on 29 May.

[6817] As with the figures for Australian overdue creditors, Mr Carter's international overdue creditors figures were based on the assumption that all debts were payable on 30 day terms and therefore anything that was not paid 30 days after the invoice date was "overdue", and he made no allowance for disputed claims or claims awaiting offsetting credit notes. In my July judgment (at [99]) I noted that according to the UK aged creditors report as at 31 January 2001, £11.4 million out of total trade creditors of £23.6 million was more than 120 days past "due dates". As with the comparable figures for the Australian operations, the large amount of old creditor claims raises the question whether at least a substantial portion of those old amounts was unpaid because of disputes or for other good reasons. As with the Australian operations, making such an inference would probably render the UK operations cash positive at the end of January (assuming the accuracy of Mr Carter's figures in other respects) but would probably not destroy the pattern of declining cash balances shown in the table at PR 89.

[6818] Mr Silbermann gave evidence (MS 932-5) that the normal payment practices of the UK operations did not change, except during late April and early May when some creditor payments were being delayed in the context of close management of cash. Until that time, the practice among the European carriers was to accept payment of outstanding amounts well past the formal due date on the invoices. In many cases the carriers did not press for payment until up to 120 days after the invoice date. He said the position changed during April 2001 when Global Crossing and WorldCom suddenly demanded immediate payment of all undisputed amounts outstanding beyond formal credit terms.

[6819] In addition to those payment practices, Mr Silbermann noted that there were some longstanding disputes between One.Tel and various European carriers in relation to charging. He said that One.Tel would usually pay the undisputed amount of the invoice and withhold the disputed amount, and often the disputed amounts would remain unresolved for months or even years without the carrier pressing for resolution of the dispute, and so the invoice amounts would remain in the ledger notwithstanding that One.Tel did not consider them to be payable. Sometimes the entire amount of the invoice was withheld: where the carrier could not provide CDR information to support its bill (as with WorldCom during 2000/2001), or where One.Tel decided to withhold payment of the entire invoice in order to crystallise resolution of the dispute.

[6820] Mr Silbermann noted some of the more substantial disputes between One.Tel and European carriers during 2001:

(3) Cable & Wireless, in relation to discrepancies in the reconciliation of bills, which led to withholding of disputed payments;

(6) GTS, in relation to the accuracy of the information used to compile its invoices, with payments being held pending the promised delivery of electronic CDRs to enable One.Tel to crosscheck the invoice charges;

(22) British Telecom, as regards two matters:

(19) a dispute over an amount of approximately £500,000, which One.Tel considered to be overcharged for capacity additions for periods prior to the date on which the capacity additions had been cleared for final testing for use; and

(20) a dispute in relation to the speed with which British Telecom was putting in place mechanisms for payment of the dialler rebate that Oftel had ordered it to pay on diallers as a result of delays in introducing preselection (approximately £2.5 million by around March 2001);

(23) Global Crossing, in relation to two matters:

(19) what Mr Silbermann called a serious service failure in around July 2000, when telephone numbers in the UK were changed and new prefixes were added to many numbers, and Global Crossing failed to update its systems to accommodate the change in a timely way, giving rise to an initial claim by One.Tel for damage of £1 million subsequently negotiated down to £375,000, ultimately agreed to be resolved as part of the deal in September 2004 for Global Crossing to give One.Tel reduced tariffs in the UK; and

(20) in around September 2000, Global Crossing promised One.Tel UK a reduction in tariffs but then delayed the implementation of the reduction, and One.Tel withheld amounts invoiced by Global Crossing pending resolution of the dispute;

(24) WorldCom, in relation to what Mr Silbermann described as WorldCom's failure to provide One.Tel with electronic CDRs to allow it to crosscheck WorldCom invoices, leading to withholding by One.Tel of some invoice amounts until the CDRs were provided, as well as a separate dispute in the Netherlands with WorldCom about delays in delivering additional capacity in a timely manner, which led to some withholding of payments there.

[6821] Mr Silbermann said (MS 936) that the bulk of the amounts outstanding by One.Tel to its UK creditors, while they might have been "overdue" in relation to formal payment terms, were not yet payable in accordance with the normal course of business between One.Tel and its suppliers, and as to a substantial part they were the subject of disputes and not considered by One.Tel to be payable at all. He emphasised that the cash resources of One.Tel were managed on a group basis and that it was never intended that the UK operation would maintain sufficient funds in its operating account to pay all of its outstanding creditors. He said it was not his understanding that the UK business was having any difficulty paying creditors when required until late April and early May 2001.

[6822] I consider the evidence concerning One.Tel's indebtedness to European (including UK) carriers in detail in Ch 20. My overall conclusion is that ASIC has not shown that I should reject the evidence of Mr Richard Mr Silbermann about payment terms and disputes.

22.2.2.3 Group operations

[6823] In a table at PR 99, Mr Carter set out the available group cash balances that he had calculated (in my view defectively, for reasons given) by deducting the $8 million "pledge" and amounts for unpresented cheques from the group cash intranet balances for the end of each of the five months (the original calculations were shown in the table at PR 54). He then set out the figures for Australian overdue trade creditors (table at PR 74) and for international (UK) overdue creditors (table at PR 89, and subtracted both of the overdue creditors figures from the month-end available cash balances. The resulting figures, which he designated "group cash position after deducting overdue creditors" were deficiencies, respectively, of $3 million, $37 million, $74 million, $116 million and $138 million. On the basis of these calculations, Mr Carter concluded that the group's cash position after allowing for overdue creditors changed from a deficit of $3 million at the end of January to larger deficits in each subsequent month and finally a deficit of $138 million on 29 May.

[6824] In my view the calculations made at PR 99 are correct but the resulting figures are only as good as the inputs. I have identified deficiencies in Mr Carter's calculation of available cash balances for the group and I have noted that the overdue creditor figures depend on a contested assumption that all creditor terms were for payment due 30 days from invoice date.

[6825] Mr Rich dealt with the table at para 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. He then addressed the Australian and international businesses separately.

[6826] As to Australia, he 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 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 invoice 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.

[6827] Mr Carter's figures for Australian overdue creditors suggested a steady rise from January to May, but Mr Rich noted that the aged creditors report which is Ex P 59-497 showed "overdue creditors" of $45 million as at 29 December 2000, so there was actually a decline between December and January of $21 million, followed by an increase of $5 million from January to February, an increase of $21 million from February to March, an increase of $4 million from March to April and an increase of $23 million from 30 April to 29 May.

[6828] Mr Rich said that out of the $21 million increase between February and March, $9.9 million was attributable to the entry into the ledger of invoice from Optus rendered on 2 March with an incorrect due date of 2 March, so that the amount appeared to be immediately "overdue" although normal payment terms as per the ledger were 45 days: referring to Ex JDR 6/1946A. He also said that $8.5 million was attributable to One.Tel not paying two disputed invoices from Telstra for roaming charges.

[6829] He said that out of the $23 million increase between April and May, $18 million was attributable to a movement in the amount "overdue" to Optus on its digital account (account No 124) from $4 million as at 2 May (Ex CE 6 0292) to $20 million as at 31 May (Ex CE 6 0333). Mr Rich said that the increase was due to part payment on 3 May in the sum of $2,154,547 of an invoice rendered on 2 March for $9,930,634 and non-payment on its due date of 15 May of an invoice rendered on 28 March for $10,216,747.

[6830] As to the UK business, Mr Rich said he was not aware of any change in payment practices other than in late April, in the context of the tightening of credit by the European carriers. Based on what he knew about carrier disputes, he said he would not have been surprised that there would have been an increase in the amount notionally "overdue" during the period up to late April as a result of the disputes. He referred, in particular, to One.Tel's concern that British Telecom was "dragging its feet" in putting in place arrangements to pay the rebate on dialler costs, which had been ordered by Oftel in late 2000. By around March 2001, the amount owing by BT to One.Tel was about £2.5 million, increasing at the rate of £5.60 for each dialler dispatched by One.Tel to a customer. Mr Rich said that during his visit to the UK in late April, he told Mr Weston to offset the amount owing against the amount owing by One.Tel to BT, in order to step up pressure on BT to pay the rebate. Additionally, he said that throughout early 2001 there was a continuing dispute with WorldCom about what Mr Rich described as WorldCom's refusal to provide One.Tel with CDRs that One.Tel could use to check its bills. He said that even without CDRs, One.Tel had detected persistent errors in WorldCom's billing systems.

[6831] At PR 99 Mr Carter identified increases in UK "overdue" creditors of $6 million from January to February, $26 million from February to March, and $1 million from March to April. Mr Rich made the following explanation of the large increase in creditors between February and March:

•: $8.9 million of the increase was, he said, due to a movement in the foreign exchange rate between the Great Britain pound and the Australian dollar;
•: £4.4 million of the increase was due to dealings with British Telecom, where the amount "overdue" was £2.72 million as at 28 February (Ex CE 6 0347) and £7.15 million as at 31 March (Ex CE 6 0352);
•: the balance of the increase, £2.3 million, was (he said) principally attributable to movements in the overdue amounts in the accounts of News, GTS and Global Crossing totalling approximately £1.3 million, but he pointed out that the increase in the amount showing as "overdue" to News was a liability to be offset against pre-paid advertising, while the increase in the amounts showing as "overdue" to GTS and Global Crossing were due to the fact that the data entry operator who completed the ledger entered due dates for invoices that were incorrect and too early.

[6832] Mr Silbermann responded to this part of Mr Carter's principal report, and particularly Mr Carter's claim that there was a "progressive deterioration in the available cash position of the group" over the period from January to May, in paras 937-41 of his affidavit. He said that a decline in the group's cash position during the period from January to May was in accordance with the group's forecasts and business plans for 2000/2001, but there was a greater than expected decline in the group's cash balance primarily because of a series of circumstances affecting the timing of expected cash inflows and outflows, rather than any fundamental problems about the group's business strategy. He provided a useful summary of the circumstances that affected cash flow in the period from January to May, dividing them into three categories.

[6833] The first category was events adversely affecting cash flow in the short term, that were being addressed and would be remedied and caught up during the financial year:

(3): the diversion of the collections team to call centre duties to cope with an influx of billing inquiries flowing from the catch-up during December of bills delayed in late 2000 by GST implementation and capacity issues within the billing system, which adversely affected collections during December but was being addressed during March and April by increasing the resources in the collections area (including the engagement of the third-party call centre contractor, Vectus) and a concerted collections effort;
(6): higher than budgeted levels of roaming by Next Generation subscribers on the Telstra network, following delays by Lucent in completing the build-out of the network, leading to a claim by One.Tel against Lucent for compensation in liquidated and unliquidated damages;
(22): the 2-week delay in billings in Australia in the first half of February, caught up by early March but reducing cash inflows during February and March;
(23): higher than normal direct debit dishonours (particularly during March) as a result of customers receiving their bills on different dates than normal as a result of the billing delays in February, which were to be re-presented in April;
(24): a shortfall in billing run totals during February and March, identified at the end of March as resulting from a backlog of unbilled data in the billing system, to be identified, processed and billed during April and May;
(25): lower than expected cash flow in the UK in April due to delays in billing and unbilled CDRs flowing from the theft of E10K computer network at the beginning of April; and
(b): a database crash in Australia in late April which adversely affected billing and collections but was remedied within about a week.

[6834] The second category related to developments in the business environment and issues that were not merely timing issues but were likely to have a more enduring impact on the cash position of the group:

(3): lower than forecast margins in the Australian fixed wire business, as identified by Ms Ashley's analysis in late April, which were addressed by the introduction of new product plans and the proposed introduction of new tariffs for fixed wire customers with effect from about 1 July 2001;
(6): high levels of subscriber acquisition by the Next Generation business, especially during March, at higher than budgeted cost of acquisition, a problem that was being addressed by increasing the focus on internal sales over the dealer sales; and
(22): higher than expected payments to carriers in the UK and the Netherlands in April and May as a result of WorldCom and Global Crossing unexpectedly demanding payment of all outstanding amounts in mid-April, and a general tightening of credit by carriers in Europe in late April and May.

[6835] The third category related to matters that favourably impacted on cash flow during the period:

(3): a decline in the exchange rate between the Australian dollar and the major European currencies including sterling;
(6): the increased use of prepaid marketing rather than cash marketing from January onwards;
(22): measures taken in the Next Generation business during April to reduce cash usage, including notification to dealers of a reduction in commissions; and
(23): a high level of the success by One.Tel in obtaining vendor financing or third-party financing of capital equipment purchases, such as Mantek financing the purchase of diallers in the UK.

22.2.3 Liquidity of the Australian operations

[6836] Mr Carter's evidence about the liquidity of the Australian operations, expressed in his table at PR 101, was allowed into evidence in part, the excluded part relating to Mr Carter's revised provision for doubtful debts. ASIC adopted Mr Carter's liquidity analysis, subject to substituting for Mr Carter's doubtful debts provision a set of figures that it developed in submissions. The liquidity analysis and ASIC's submissions about it are considered in Ch 21.

22.2.4 Net cash flow compared to forecast

[6837] In Pt 3.1.1.4 (paras 105-124) of his principal report, Mr Carter compared the actual net cash flow reported to the board in the board papers for 30 March 2001 with forecast net cash flow made in the board papers for 28 September 2000, 24 November 2000 and 25 January 2001, giving separate figures for the Australian (ex-Next Generation) operations, the Next Generation operations and the group operations. The figures he presented were intended to support his assertion that the actual net cash flow reported to the board for February and March in each of these operations was worse than forecast by a very large amount (worse still if the increase in overdue creditors was taken into account). This segment of the principal report was allowed into evidence except for para 117, in which he asserted that some figures for the December 2000 cash position might have been altered.

[6838] It seems to me that Mr Carter's analysis and assertions of the material received into evidence are correct, and as I understand it, not disputed. The figures in Mr Carter's tables at paras 106, 112 and 118 are the same as in the table at 2 JDR 1680a, except that Mr Rich added figures for Europe and Hong Kong and forecasts for the full year. Mr Silbermann seems to have accepted at least some of Mr Carter's figures at MS 950, and did not challenge PR 106-10.

[6839] It is evident that Mr Carter approached the material as an advocate for his point of view, because his presentation emphasised the point of greatest discrepancy between forecasts and actual results (for example, making only a few observations about the January figures where there was little or no discrepancy, and not endeavouring to tabulate the UK or European figures), but that does not invalidate the figures that he presented. What Mr Carter's tables show is that something quite serious and unexpected happened in February to affect net cash flow (given the huge discrepancy between the January forecast for February and the February actual), and there was a partial recovery in March but still a substantial shortfall against forecasts.

[6840] Thus, in the Australian (ex-Next Generation) operations:

•: the actual net cash flow for January as reported to the board in March was $6 million, which was the figure forecast in the November and January board papers;
•: the actual net cash flow for February as reported to the board in March was a cash usage of $7 million, compared with the November forecast of a cash inflow of $1 million and the January forecast of a cash inflow of $13 million;
•: the actual net cash flow for March as reported to the board in March (strictly, an estimate made just before month-end) was a cash inflow of $2 million whereas the November forecast had been for an inflow of $5 million and the January forecast had been for an inflow of $10 million; and
•: the actual net cash flow over the period from January to March was an inflow of $1 million compared with the November forecast of an inflow of $12 million and the January forecast of an inflow of $29 million.

[6841] In his affidavit, Mr Rich commented that, as appears from Mr Carter's report, the variances were contained in the board papers, and therefore all directors were aware that they were occurring: 2 JDR 1722. The main matter of concern, discussed at the board meetings, was to understand why the variances were occurring and in particular, whether they were permanent differences between forecasts and actual cash flow or primarily timing differences that would be "caught up" in the near term. He said it appeared to him from the information he was receiving at the time, summarised in board papers and flash reports, that the differences were principally timing differences causing delays in cash flow. He gave as an example the variance between February cash flow for the Australian (ex-Next Generation) operations, forecast as a cash inflow of $13 million in the January board papers but actually a cash outflow of $7 million, a variance of $20 million. According to Mr Rich's understanding at the time, he said, there were two reasons for this. The first was that the January forecast was on the basis that the billing catch-up in Australia with regard to November and December data, which was to be billed in January and February, would produce cash inflows of $35 million: Ex MTB 1/187, 1/194, 1/207. The second was that the expected billing catch up was delayed in February as a result of the decision taken at the end of January not to send out bills for 2 weeks in order to address various data accuracy issues, with the result that no bills were sent out between 23 January and 19 February, as reported in the February flash report: Ex MTB 1/381B.

[6842] Mr Silbermann said (MS 953) that he understood the reasons for the variance in February were as summarised in Mr Hodgson's email to him of 27 February (Ex MTB 2/774, the "heads up" email). There Mr Hodgson, addressing the Australian operations including Next Generation, said that the shortfall in cash inflows in February was due to delayed billing runs and the excess outflow was due in part to unbudgeted Lucent payments of $5 million.

[6843] Mr Rich said that the deferral of billing in February also affected cash flow in March. Additionally, there was a higher than normal level of direct debit dishonours affecting cash flow in March, and those direct debits were to be re-presented during April (Ex MTB 1/227), and also $40 million in unbilled January-March call data discovered at the end of March that was expected to be billed in April/May (Ex MTB 1/241). Mr Silbermann said (MS 954) that the reasons for the variance in March were as summarised in the financial executive summary and notes to Cashflow sections of the March board papers (Ex MTB 1/227 and 236), namely a decline in billing run totals, higher-than-expected direct debit dishonours, an unidentified billing shortfall, and in the case of Next Generation, higher roaming charges and cost of acquisition than budgeted.

[6844] In the Next Generation operations:

•: the actual net cash usage for January as reported to the board in March was $15 million, which was the figure forecast in the January board papers and was a lower usage than the November forecast ($18 million);
•: the actual net cash usage for February as reported to the board in March was $27 million, compared with the November and January forecasts of a cash usage of $11 million;
•: the actual net cash usage for March as reported to the board in March was $12 million whereas the November forecast had been for usage of $9 million and the January forecast had been for usage of $4 million; and
•: the actual net cash flow over the period from January to March was usage of $54 million compared with the November forecast usage of $38 million and the January forecast usage of $30 million.

[6845] In his affidavit Mr Rich responded to the Next Generation figures, and in particular to the $24 million variance between the actual cash usage for the January/March quarter and the cash usage forecast in the January board papers, by making similar points to those made in relation to the Australian (ex-Next Generation) operations. Thus, he noted that the variations were reported to the board, that he and the board were concerned to understand why the variations occurred and in particular, whether they were permanent differences or merely timing differences, and that it appeared to him at the time that the differences had to do with timing, particularly as regards the billing catch-ups, direct debit dishonours and the $40 million of unbilled call data, matters that were reported to the board: 2 JDR 1723.

[6846] As to the group figures:

•: the actual net cash usage for January as reported to the board in March was $14 million, compared with usage of $17 million forecast in the November board papers and $16 million forecast in the January board papers;
•: the actual net cash usage for February as reported to the board in March was $26 million, compared with usage of $13 million forecast in November and usage of $3 million forecast in January;
•: the actual net cash usage for March as reported to the board in March was $3 million compared with the November forecast of a cash inflow of $5 million and the January forecast of a cash inflow of $15 million; and
•: the actual net cash flow over the period from January to March was usage of $43 million compared with the November forecast usage of $25 million and the January forecast of usage of $4 million.

[6847] Of course, these figures reflect the variances in the Australian (ex-Next Generation) operations and Next Generation, and so Mr Rich's comments on those matters were applicable here as well.

[6848] Nevertheless the discrepancy between the forecasts in the January board papers and the actual figures for February and March (especially February) presented in the March board papers is striking:

•: on a group basis, the actual February cash usage figure was $23 million worse than the January forecast, while the actual March cash usage figure was $18 million worse than the January forecast, which was for a substantial cash inflow;
•: in the Australian (ex-Next Generation) operations the actual February cash usage figure was $20 million worse than the January forecast (which was for substantial positive cash flow), while the actual March cash inflow figure was $8 million worse than the January forecast; and
•: in the Next Generation operations the actual February cash usage figure was $16 million worse than the January forecast, and the actual March cash usage figure was $8 million worse than the January forecast.

[6849] Obviously the European figures had a mollifying effect: the actual figures for the two components of the Australian operations were together $43 million worse than the January forecast for February, whereas the group figure was only $23 million worse; and the actual Australian figures were $26 million worse than the January forecast for March, whereas the group figure was only $18 million worse.

[6850] Mr Carter emphasised that the net cash flow to the group in the eight-month period from 1 July 2000 to 28 February 2001 was a cash outflow of $209 million, which he compared with the forecast presented to the September 2000 board meeting of net cash usage for that period of $156 million, noting that the actual cash usage was $53 million greater than forecast. Mr Rich was critical of Mr Carter's observations on this matter: 2 JDR 1725. He pointed out that the comparison made by Mr Carter was without reference to the fact that at the September board meeting, the board approved a $22 million increase in marketing expenditure, not reflected in the forecasts presented in the board papers: Ex MTB 1/13 and the minutes at Ex MTB 1/319. The figures for the Next Generation business in the November board papers (Ex MTB 1/128) reflect this expenditure by changing the expected net cash usage for the period from July 2000 to February 2001 from $78 million to $100 million, with an appropriate note. Mr Rich said that Mr Carter had also made his comparison without reference to the adverse impact on the Next Generation cash flow during that period resulting from the billing delays in late 2000 caused by GST implementation issues and systems capacity issues, the further delays in the billing catch-up and in normal billing during February 2001 as a result of the decision to delay billing runs by 2 weeks in the first half of February, and in part, the unidentified billing shortfall, higher roaming, higher cost of acquisition and fewer post-paid customers, which were referred to as affecting cash flows in February and March 2001 in the March board papers: Ex MTB 1/236.

[6851] The fact that the January forecasts were very much more optimistic than the actual figures for February and March suggests that some detrimental event or events occurred very late in the January and/or in February that was or were unexpected and therefore not reflected in the forecasts in the January board papers. Mr Carter's figures underline the importance of assessing precisely what went wrong. Mr Rich's evidence is important because it purports to answer that question.

[6852] According to Mr Rich, the poor cash flow figures for the Australian (ex-Next Generation) operations were the result of a short-term disruption to cash flow caused by two matters: 2 JDR 1680c. The first was the delay until April of the collection of a proportion of the January and February billings as a result of the 2-week delay in early February in sending out bills. Mr Rich noted that this delay had been reported to directors in the February flash report (Ex MTB 1/381B):

Group cash balance at the end of February was $64 million against a forecast of $82m. Shortfall 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. Billing will be back up to date by mid March with the receipts shortfall being recovered in March and April.

[6853] The second factor was a shortfall in billings for the fixed wire/service provider business during the March quarter, which was expected to be caught up to a substantial extent during April/May. Mr Rich said this was reported to the board in the March board papers (Ex MTB 1/241) as follows:

Identified $40 million unbilled data relating to December 00 to March 01 that will be billed in April/May 01.

[6854] Mr Rich supplemented Mr Carter's figures by setting out the forecast figures in the January and March board papers for the full year results, and the variances between them: 2 JDR 1680a. For the Australian (ex-Next Generation) operations the January forecast was for cash usage of $2 million while the March forecast was for cash usage of $11 million (a variance of negative $9 million). For Next Generation the January forecast was for cash usage of $140 million and the March forecast was for cash usage of $168 million (a variance of negative $28 million). For Europe and Hong Kong the January forecast was for cash usage of $10 million and the March forecast was for cash generation of $3 million (a variance of positive $13 million). On a group basis the January forecast was for cash usage of $152 million and the March forecast was for cash usage of $176 million (a variance of negative $24 million). Further full year forecasts contemplated substantial improvement in the fourth quarter, especially in the Australian (ex-Next Generation) operations.

[6855] Mr Rich noted that the March board papers drew the attention of directors to these variances in the full-year forecasts by pointing out (Ex MTB 1/236) that:

•: the Europe/Hong Kong cash flow would be ahead of forecast by $13 million at year-end, due to foreign exchange rate movement and vendor financing of assets;
•: the cash flow in the Australia (ex-Next Generation) operations would be down by $9 million "due to unidentified billing shortfall";
•: as to the Next Generation cash flow, it would be down by $28 million "due to higher roaming 33% vs 31%, higher COA $350 versus $319, $30,000 less post-paid customers and unidentified billing shortfall, which is currently being investigated".

[6856] I accept Mr Rich's evidence on these matters. His evidence provides an important supplement to Mr Carter's evidence about the deteriorating cash flow. That evidence indicates that up to the time of the March board meeting there were at least grounds for believing, and Mr Rich did in fact believe, that the deterioration in cash flow in the fixed wire/service provider business was a short-term disruption that would be overcome in subsequent months.

22.2.5 Deferral of payments to creditors

[6857] Mr Carter wanted to give expert evidence, inadmissibly, that One.Tel systematically deferred payments to creditors so that the cash balance reported at month-end was artificially high and obscured both the extent to which the group had insufficient cash to pay its overdue creditors and the extent of the group's present and foreseeable cash deficiency. He presented an analysis of eight "indicators", claiming that if they were considered together they indicated that the group was involved in a systematic process of managing cash creditors. The eight matters were as follows:

(3): analysis of daily cash balance;
(6): analysis of unreleased cheques;
(22): growth in trade creditors overdue;
(23): deferred payment lists;
(24): comparison of daily cash flow forecast to actual;
(25): comments within the daily cash flow spreadsheet;
(b): separate agreement with supplier;
(c): internal correspondence describing delays in payments to creditors.

[6858] Items (a), (c), (d) and (e) were allowed into evidence, though as noted below, some of Mr Carter's assertions are to be treated as assumptions. Items (b), (f), (g) and (h) were rejected. I shall nevertheless deal with the rejected paragraphs in order to see whether the documents relied upon by Mr Carter, considered in isolation from his evidence, prove any relevant matter.

[6859] In my view Mr Carter's overall argument relying on these indicators is unpersuasive. My analysis of the claim that One.Tel managed creditors and systematically deferred payments in order to produce artificially high end-of-month cash figures is given principally in Ch 14.

22.2.5.1 Analysis of daily cash balance

[6860] Mr Carter prepared a graph plotting daily bank balances for the Australian operations, taken from the group's intranet site: PR 130. He claimed there was a "recurring pattern" at One.Tel of a "build-up of the cash balance toward month end and a subsequent sharp fall in cash balance shortly after month-end".

[6861] The graph shows that the daily bank balances fell, over the period from 1 January to 17 May, from an amount in excess of $100 million to about $9 million. More importantly for Mr Carter's analysis, it shows that the daily bank balances increased in the few days before the end of each month and then sharply fell in the few days after the end of the month.

[6862] As far as I can see, the graph is factually accurate. Whether it is an indicator that creditors were "managed" at month-end so as to produce an artificially high cash balance for the end of the month, is a more debatable matter. One reason why a corporate group's cash balance might increase at the end of the month is that its debtors have adopted the practice of paying at the end of the month. The company's cash balance might fall sharply after the end of the month because the company has large creditors whose debts are due to be paid at that time. In One.Tel's case, Mr Rich gave evidence in that the pattern of a mid-month cash low was a long-standing one at One.Tel and reflected the fact that the largest billing runs tended to have due dates falling in the last few days of the month, and payments by One.Tel to Optus were made at the beginning of each month and again in the middle of each month: 2 JDR 1727. Mr Rich said he was aware of this for some time before 2001, but only had occasion to focus on it in April 2001 when cash balances fell to unexpectedly low levels. He noted, as mentioned elsewhere in his reasons for judgment, that he discussed the pattern of cash flows with Mr Packer Jnr late in February 2001. Mr Packer Jnr made a comment about it at the March board meeting.

[6863] Moreover, once a pattern involving a spike in cash at month-end followed by a steep decline was established, it would be there to be observed by directors and others. Adhering to that pattern would not necessarily mean that the month-end cash was artificially high or, a fortiori, that there was a deliberate intention to produce such an outcome.

[6864] In One.Tel's case, the graph shows that there was a relatively steep decline even early in January, and presumably a corresponding rise in cash in the last few weeks of December, and one wonders whether that pattern would be exhibited if the graph were extended back into the year 2000.

[6865] Mr Carter said that the average cash balances over the month would convey a better indication of the cash position than the end of the month balances. Mr Rich and Mr Silbermann forcefully disagreed: 2 JDR 1729; MS 958. Mr Rich pointed out that averages smooth out fluctuations. Mr Silbermann said that the purpose of reported cash balances in the board papers was to give the board a measure of where cash was at that point in time both in absolute terms and relative to forecast cash, and that no-one had ever suggested to him that an average figure would be appropriate and no director had ever asked for an average figure. It seems to me that the important point here is for the figures to be presented consistently: if the reader of the figures wants to identify an upwards or downwards trend in available cash from month to month, then presumably month-end figures or mid-month or beginning-of-month would be sufficient, provided that the comparison is consistently made.

[6866] Mr Silbermann responded to this evidence: MS 955-8. He said the monthly cycle of One.Tel's group cash balance described by Mr Carter occurred because the billing runs with the largest totals generally had due dates near the end of the month, whereas carrier payments in Australia were generally concentrated at the beginning and middle of the month. He said he drew this feature of the group's cash flows to the attention of Mr Kleemann during their tour of the European operations in December 2000, and he noted that Mr Packer Jnr commented on it during the board meeting on 30 March 2001.

22.2.5.2 Analysis of unreleased cheques

[6867] Mr Carter prepared a table based upon One.Tel's unreleased cheques spreadsheets (Ex CE 12 0000 and following), which was held to be inadmissible: PR 131. The table purported to state, for each month from January to April 2001, the average number of days unreleased cheques were outstanding (calculated in the manner set out that App I-2), the number of unpresented cheques at month-end, and the total amount of unreleased cheques at month-end. Mr Carter said (PR 132, held inadmissible) that his table showed that the average number of days for cheques drawn but not released increased substantially from January to April, with a particular increase in number and amount in February. He regarded this as an indicator that One.Tel was systematically managing cash and creditors so as to produce artificially high month-end cash balances.

[6868] In my July judgment (at [146]-[148]) I noted that in fn 68, Mr Carter said that for the purposes of the principal report he did not "distinguish" between unpresented and unreleased cheques, but that in the table at PR 131 two of the lines were said to relate to unreleased cheques and the other was said to relate to unpresented cheques. As I have noted earlier, the unreleased cheques spreadsheets are in fact unclear because some of them are expressed in terms of "unreleased" cheques and others in terms of "unpresented" cheques.

[6869] In the circumstances it would be unsafe to attribute any particular significance to numbers of the kind that Mr Carter purported to present in his table. For example, if the number of cheques identified in the spreadsheets almost doubled from January to February, that might have been because (were it shown to be so) the January number was about unreleased cheques and the February number was about unpresented cheques. One would expect there to be more unpresented cheques than unreleased cheques, for the former includes the latter.

[6870] Another problem with the figures is that the total amount of the cheques in the March spreadsheet at month-end was very low compared with February and April. Mr Carter took the view that this discrepancy indicated, together with the fact that a number of the cheques included in March were reported with a nil value, that the March figure was wrong or incomplete. But that is hardly compelling. If the March figure is correct, then the figures contradict any claim that there was a gradual increase in the amount and value of unpresented/unreleased cheques over the period from January to April.

[6871] Yet another problem is that the table at para 131 relied only on the unreleased/unpresented cheques listings and made no reference to the aged creditors reports, which as noted above, give some different figures.

[6872] Finally, the defendants pointed to some curiosities about the spreadsheets that would undermine the probative value of the kind of figures Mr Carter wished to extract from the spreadsheets. They identified the following matters:

•: a substantial number of the unreleased cheques were drawn well before 31 December 2000;
•: many were for very small amounts;
•: in the February figures many of the cheques were drawn on 27 or 28 February;
•: the January figure included a substantial amount of cheques listed as having been cancelled; and
•: the figure for April included a single cheque for Optus of $9.85 million.

[6873] I agree with the defendants that these matters, considered together, significantly weaken any argument that the spreadsheet show a systematic scheme to artificially raised the month-end cash balances. In all these circumstances I think it would not be justifiable to use the unreleased/unpresented cheques listings as the foundation for an inference that the number, age and value of unpresented or unreleased cheques increased significantly over the ends of the months from January to April 2001 and a fortiori, that this showed an intention to artificially inflate the month-end cash figures while drawing cheques so as to reduce the creditors ledger.

22.2.5.3 Growth in trade creditors overdue

[6874] Paragraphs 133-7 were allowed into evidence, with the exception of some introductory words to para 133. In para 133 Mr Carter set out a table purporting to show the growth in Australian "overdue" creditors, and the growth in UK "overdue" creditors, progressively month by month from January to May 2001. The information came from the creditors' ledgers behind tab 6 in the Carter exhibits, and the analysis of the UK source figures in App I-6. According to the table, Australian overdue creditors were $24.4 million on 31 January, $29.3 million on 28 February, $49.8 million on 31 March, and $54.3 million on 30 April. Thus there was an increase from January to April of almost $30 million. UK creditors were $49.7 million on 31 January, $55.9 million on 28 February, $82.2 million on 31 March, and $82.8 million on 30 April -- an increase from January to April of about $33 million.

[6875] As far as I can see, Mr Carter accurately extracted these figures from the ledgers. The dramatic increase in creditors from February to March both in Australia and the UK is particularly notable. That was the month after the $26 million transfer, but that event would not explain the increase in creditors in both countries, for the transferred funds became available to pay Australian creditors at the beginning of March. The estimation of the increase must be found elsewhere, and a good deal of evidence was adduced by the parties, especially the defendants, directed to that issue.

[6876] Mr Carter's figures make assumptions about whether creditors were "overdue", as I have already explained. They do not include the continental European businesses or Hong Kong, where the creditors ledgers were not available. And most importantly, they do not take account of disputes or counter-claims or claims no longer payable but not yet purged from the ledger (because, for example, One.Tel was awaiting the issue of credit notes).

[6877] Mr Carter calculated that if overdue creditors had remained constant over the period from January to March it would have been necessary for the group to expend an additional $37 million in order to prevent the increase in Australian and UK overdue creditors: PR 137. He noted that this calculation did not take into account any increases in the creditors of the other overseas operations. The calculation in respect of the UK is imperfect because the December creditor figures were not available and so Mr Carter took the figures as at 31 January.

[6878] Mr Rich's observations about "overdue" creditors (2 JDR 1694-1701) are considered above.

[6879] Mr Silbermann said (MS 959-62) that was not his practice to review any listing of aged creditors in the normal course of his work, that being a task to be undertaken from time to time by Mr Hodgson and Mr Barnes (in relation to Australia) and Mr Weston and Mr Werner (in relation to Europe), on the basis that they would draw his attention to any issue they identified. He said the information he saw about creditors, in the January and March board papers, indicated an increase in total trade creditors between 31 December and 30 March of about $20 million ($314 million as at 31 December, an estimated $333 million as at 30 March), an increase of 6%. Over the same period group revenue went from $242 million to $346 million, an increase of 42%. Mr Silbermann said the figures did not suggest to him that there was any issue in relation to overdue creditors, and it was not his perception during that period that there was any increase in overdue creditors other than in the context of amounts being withheld in the normal course in relation to creditor disputes, although there were some delays for limited periods in late April and early May in the context of close management of the cash position at that time.

22.2.5.4 Deferred payment lists

[6880] At paras 138-41 of the principal report Mr Carter identified the deferred payments lists for December, March and April that are in evidence at Exs CE 14 0006, 13 0001 and 13 0005. He said these were indications that there was a systematic process by which the group deferred payments, and thereby caused the month-end cash balance figures to be artificially high: PR 138. His description of and observations about the documents he identified as deferred payments lists were allowed into evidence as assumptions.

[6881] The document that Mr Carter called the "deferred payment list" for December 2000 is an excel file in One.Tel's I:drive entitled "Deferrals from Dec.xls", apparently created on 8 January 2001: Ex CE 14 0006a and b. That is a short document containing two headings but the second is a duplicate of the first, that is "Deferred from Dec (excl GSM)". There seven items under the first heading, most of which are generic: for example Carriers $8.8 million. There are three much smaller items under the second heading. The total under the first heading is $11.792 million and the total under the second heading is $2.281 million, making a grand total of $14.073 million.

[6882] Mr Silbermann's evidence was that he had never seen the documents to which Mr Carter referred other than in preparation for these proceedings, and he gave extensive evidence (noted elsewhere) contradicting Ms Randall's evidence about a process of deferral of creditors beginning early in March, while acknowledging that there were some temporary deferrals of payments during the period from late April to early May when cash was tight: MS 964.

[6883] Mr Carter seems to have assumed that the word "Deferred" in each heading reflected a deliberate process of deferring payment from December to January, rather than non-payment in December for reasons not referable to such a deliberate intent. There is no evidence to support Mr Carter's interpretation of the document, which is ambiguous in its terms, other than the document I am about to consider.

[6884] According to Mr Carter (PR 139), the total amount shown in deferred payment document is "broadly consistent with" another electronic file entitled "cash est for jodee for dec.xls" (Ex CE 14 0007-8), which seems to have been created on about 13 December 2000. According to Mr Carter, this latter document is a reconciliation comparing the forecast cash flow given to the November board meeting for the Australian (ex-Next Generation) operations with "actual net cash usage" for December 2000. That appears to be correct.

[6885] The forecast given to the board in the November board papers for cash flow in December in the Australian (ex-Next Generation) operations was a cash inflow of $15 million: Ex MTB 128. The "cash for jodee" document purported to address "Cash flow -- Dec 2000" and to state the variance between the November board papers and current figures (that is, the cash flow forecast for December that was current on 13 December). The document dealt with "Australia" (evidently Australia (ex-Next Generation)) and "Next Generation". As to Next Generation the "current cash flow" was identical with the figure given to the board and so the variance was nil. As to Australia (ex-Next Generation) the document began with the figure of positive $15 million contained in the November board papers and then it noted that the "current cash flow" was negative $2 million, and so the variance was stated to be $17 million. That was said to be due to two factors. The first was "Estimate of 18 bills versus actual of 11", the figure for this being given as $28 million. On its face, that appears to be saying that there would be less cash inflow than previously forecast because there would be fewer billing runs in December. The second factor was said to be "Deferring creditors" where the figure given was negative $11 million. That was presumably saying that if creditors owed $11 million were deferred at the end of December there would be $11 million of additional cash for the purpose of calculating the December cash flow. The billing shortfall of $28 million less than the creditor deferral of $11 million equals $17 million, which is the amount of the variance to be explained.

[6886] The "cash for jodee" document might seem on its face to reflect a deliberate plan to defer the creditors worth $11 million at the end of December. However, Mr Rich gave an explanation for the document that needs to be considered: 2 JDR 1921-6. He said he did not recall having seen the document other than in the course of preparation for the proceedings, but he did recall that in mid-December 2000, before he went on holidays, he asked Mr Barnes how the cash flow was looking for the end of the month. He said that shortly afterwards Mr Barnes came back to him and told him that cash was going to be down somewhat for December on the forecast in the November board papers, principally because the catch up in billings was taking longer than had been expected in November. But Mr Rich did not recall Mr Barnes showing him "cash est for jodee for dec.xls" and he did not know whether Mr Barnes was the author.

[6887] Mr Rich made some observations about the document. He referred to the reference to "deferring creditors" by $11 million. He said he did not recall being specifically aware of such a deferral of creditor payments over the half-year end, but it would not have surprised him that some such deferral might have occurred over 31 December, consistently with One.Tel's normal practice. He said he did not instruct Mr Barnes to take any particular action in relation to deferring creditors in order to ensure that the actual cash flows for December were in line with the November forecast.

[6888] The cash flow estimates in "cash est for jodee for dec.xls" were for a cash usage of $2 million for Australia (ex-Next Generation) and $15 million for Next Generation, whereas the November board papers forecast cash generation for the Australian operations of $15 million and cash usage for Next Generation of the same amount. The January board papers reported the actual December figures as cash generation of $3 million for Australia (ex-Next Generation) and cash usage of $22 million for Next Generation. The shortfall in cash flow against forecast was commented upon in the January board papers (Ex MTB 1/207) as being due to delays in billing.

[6889] As to March 2001, Mr Carter identified an excel file entitled "deferred.xls" which contained a list headed "Deferred Payments Listing", evidently created on 2 April 2001: Ex CE 13 0001, 13 0004. The document lists 23 creditors by name under the heading "Creditor", and the amounts of debts owing to them, totalling $10,673,150.63. There is also a heading "Period of Bill" which is filled out for some but not all creditors. Mr Carter said the list referred to payments to creditors being deferred from March 2001, and noted that of the total amount of $10.7 million, approximately $5 million was paid by 12 April 2001 and at least $0.5 million was included in the April 2001 deferred payments list: PR 140.

[6890] As to April 2001, Mr Carter identified an excel file entitled "deferred.xls" which appears to have been created on 30 May 2001: Ex CE 13 0005, 13 0010. The document was headed "Deferred Payments Listing" and on the next line "APRIL". There are two components to the document. The first lists 13 named creditors and amounts and (for some) "Period of Bill", and for all "Deferred to". The total amount of debts to creditors in the list is $6,558,432. The "Deferred to" date is 1, 2, 3 or 4 May.

[6891] The second component of the document is introduced by the heading "Include after amended" and lists six creditors by name, with amounts which (if they had been separately added) would have totalled $19,075,523. There is a "Deferred to" column with a date next to each item, the dates being 1, 2 or 3 May. At the bottom of the page is the total figure for the two components, $25,633,955.

[6892] According to Mr Carter, this document refers to a total of $25.6 million of payments to creditors as being deferred from April 2001. He said the spreadsheet also specifically identifies that the deferred payments were to be paid between 1 and 4 May 2001. He noted that the majority of the payments were not paid prior to the group being placed into administration: PR 141.

[6893] Mr Rich gave evidence that he had not seen the deferred payment lists other than the course of preparation for the proceedings: 2 JDR 1731.

22.2.5.5 Comparison of daily cash flow forecast to actual

[6894] Mr Carter prepared a table (PR 143) comparing what he described as the actual cash position of the Australian operations in March 2001 with the forecast made in the daily cash flow spreadsheet for 20 February 2001. The daily cash flow spreadsheet 20.02.xls contained a forecast of negative net cash flow in March of approximately $28 million (in fact the figure for "inflow less all outflows", at cell FE 191 in Ex CE 11 0103 is negative $28,365,454), resulting in a net cash deficiency of approximately $24 million (the figure for "overall cash position" at cell FE 197 is negative $24,006,147).

[6895] Mr Silbermann said that he had not seen that spreadsheet until after the commencement of the proceedings: MS 966. He said the document contained one of many "forecasts" contained in the equivalent cash flow spreadsheets compared after 20 February, and should not be regarded as "the" forecast for March: MS 967. He said the daily cash flow spreadsheet was a tool for monitoring expected cash flows and inflows over relatively short periods, and was not generally used to forecast cash flows going further forward than about a month: MS 968. He said the forecasts used in the board papers were sourced directly from the management teams of the business units: MS 968.

[6896] Mr Silbermann also noted that the spreadsheet 20.02.xls appeared to contain an error in relation to forecast payments to Optus during March. He said that as a matter of normal business practice, Optus accounts other than the digital account were paid by One.Tel once a month at the beginning of the month, and the digital account was paid in the middle of the month. He noted that the spreadsheet 20.02.xls contained two sets of payments to Optus in March, namely $9.969 million on 1 March and $10.319 million on 30 March: Ex P 32-82 at p 10, cells EI 46-54 and FD 46-54. He said that in fact, as appears from spreadsheet 2905.xls (Ex P 32-86) what was actually paid to Optus was $7.213 million on 1 March (p 19, cells EI 48-55) and $6.992 million on 3 April (p 22, cells FG 48-55). Mr Silbermann's evidence appears to me to be correct.

[6897] Mr Carter said that through a combination of additional cash receipts and deferral of payments, the actual cash balance achieved as at 31 March 2001 for the Australian operations was $22.5 million, according to the cash flow spreadsheet 2905.xls (the figure for the "overall cash position" at cell FE 245 in Ex CE 11 0674 is $22,488,832; the figure for "inflow less all outflows" is $19,147,781). In other words, there was a positive net improvement over the forecast of approximately $46 million.

[6898] Mr Carter's table broke down the $46 million improvement into additional receipts and deferrals of payment. The additional receipts were the transfer from the UK operations of $26 million and higher than forecast cash receipts for Optus connection fee of $3.1 million, a total of $29.1 million. He calculated these figures by identifying the appropriate cell in each of the cash flow spreadsheets 20.02.xls and 2905.xls and subtracting the former from the latter. The calculations appear to me to be correct.

[6899] The table identified the following "payments deferred or not paid", calculated in each case by subtracting the appropriate figure in 20.02.xls from the figure in 2905.xls (once again the calculations appear to me to be correct):

• Deferred payments to Optus	$12.4 million
• Lower than forecast net carrier payments	$1.5 million
• Non-payment of forecast GST	$1.5 million
• Net other payments lower than forecast	$3.4 million

[6900] The total of these amounts is $18.8 million, from which Mr Carter deducted a higher than forecast payment to dealers of $1.4 million, leaving $17.4 million. He added together the additional receipts of $29.1 million and this amount of $17.4 million to reach the figure of $46.5 million, which is approximately equivalent to the improvement in net cash flow compared with forecast. He said it was "evident" from the table that the actual positive cash position was achieved primarily as a result of the $26 million transfer from the UK operations, and the deferral non-payment of selected creditors.

[6901] There is a more detailed summary of budgeted payments as well as comments associated with actual payment in App E to the principal report, which refers to cells in the daily cash flow spreadsheets (especially 2905.xls) where there are notes that purport to explain what has happened: for example, "Feb payt deferred to March": cell E149 in Ex CE 11 0685. In App E Mr Carter has identified five payments that were forecast to be paid in February but were not paid until March, 11 payments forecast to be made in March (in one case, earlier) but not paid until April and eight payments forecast to be made in April but not paid until later or at all.

[6902] Mr Rich gave evidence about the table at PR 143: 2 JDR 1732. He said he did not recall seeing a daily cash flow spreadsheet of the type referred to by Mr Carter until Easter 2001, when he and Mr Silverman and Mr Hodgson used one as the basis for forecasting daily cash flows for the business for April and May 2001. Mr Rich said that had he seen the spreadsheet 20.02.xls prepared by Ms Randall, he would not have considered that she was in any position on or around 20 February 2001 to have prepared a reliable forecast of cash flows for the Australian business, given that she had started with One.Tel only a few days previously and to his knowledge had no previous experience working in the telecommunications industry. He said that if he had seen the spreadsheet, he would have asked Mr Hodgson to review her figures in detail before he would give them any weight.

22.2.5.6 Comments within the daily cash flow spreadsheet

[6903] In the cash flow spreadsheets there was a line under "net funds available" where the words "not happy" appeared if the net funds available for a particular day were negative to a certain degree. Mr Carter said (PR 145), in evidence held not to be admissible, that the warning appeared as a result of the application of an excel formula, when the net funds deficit from Australian operations excluding cash deposits was greater than $10 million. That seems to me to be likely, simply on the basis of perusal of the spreadsheets. There is a line under the figures for "overall cash position" where the word "alert" appears if the figures are in deficit by a certain amount. Mr Carter said, in inadmissible evidence, that where the overall cash position of the Australian operations including funds on deposit was in deficit by a greater than $10 million, the excel program would cause the warning code "alert" to appear. Again, that appears to be likely just as a matter of inspection of the spreadsheets.

[6904] It seems to me that the "not happy" and "alert" codes are not of significance in themselves. I think it would be wrong to infer simply from the language of the codes that when they appeared there was some concern within One.Tel for its deteriorating cash position. There may well have been such a concern but in my view the appearance of one or both of the codes was not evidence that this is so, because the codes were merely reflective of the net balances and the true cash position of the group would need to be investigated on the day in question before anything more could be concluded.

[6905] Mr Carter also referred to the various cell notes that appeared in the daily cash flow spreadsheets, as summarised in App E. In inadmissible evidence, he interpreted a comment "Feb deferred for Dec 00" to mean, when the creditors ledger was considered, that the payment was to December 2000 services, invoiced on 8 January 2001 and due to be paid in February 2001 but not paid until after month-end on 1 March 2001. That seems to me to be the meaning of the cell note having regard to the documentary evidence. The reason for the non-payment, however, is not obvious from the comment.

22.2.5.7 Separate agreement with supplier

[6906] Mr Carter referred to the agreement made between One.Tel and Lucent in April 2001, under which One.Tel would postpone payment of outstanding non-finance payments to Lucent until after 30 June 2001: this matter is fully considered at 18.6. In inadmissible evidence, Mr Carter sought to conclude that Mr Pryke's letters to Mr Rich dated 23 and 30 April 2001, together with Mr Rich's voicemail message to Mr Keeling of 17 April 2001, indicated that in exchange for Lucent delaying until after 30 June issue of invoices that would otherwise have been issued between 24 April and 30 June, One.Tel would accept reduced payment terms (agreeing to pay within 5 days of invoice date) and would agree to various other proposals. That, according to Mr Carter, was an example of "management of creditors". But the arrangement between One.Tel and Lucent was rather more complicated, as explained in my discussion of the evidence.

22.2.5.8 Internal correspondence describing delays in payments to creditors

[6907] In inadmissible evidence, Mr Carter drew attention to some internal One.Tel correspondence which, he said, evidenced "the management of cash and a systematic deferment of payments to creditors". The evidence he identified was an email from Mr Werner to Mr Silbermann dated 7 March 2001, a voicemail from Mr Keeling to Mr Silbermann and Mr Rich dated 20 March 2001, and an email from Mr Werner to Mr Silbermann dated 24 April 2001. The evidence is considered, in its proper context, in my discussions of events of March and April 2001.

22.2.6 Threats to supply and actual cessation of supply by creditors

[6908] In para 155 (Pt 3.1.1.6) of the principal report, Mr Carter alleged that the group received several threats to supply from various creditors, apparently as a consequence of its deteriorating cash and creditor position. In App F he purported to lead these threats to supply in the form of a table, identifying the earliest date of the threat to supply, the creditor and the service, and the communications made. The creditors he identified were DH Tech (Ecom computers) MCI WorldCom (carrier and network services), Vodafone, Compaq Computer Australia (computer maintenance), Global One/France Telecom (network services) and Tilley (air-conditioning services). Apparently Mr Carter wished to deduce from this evidence the proposition that the threats to supply, and in some instances the actual cessation of supply, indicated that the extent to which One.Tel delayed payments to creditors was beyond reasonable bounds and unacceptable to suppliers.

[6909] I have reviewed the underlying evidence upon which Mr Carter relied. Generally I have reached the conclusion that although One.Tel was withholding payments from these suppliers for services, there were in each case grounds asserted for doing so, which were not manifestly unreasonable or fabricated. One.Tel and its suppliers were engaged in quite a tough commercial exchange of threats and promises and inducements, in which questions about payment for services supplied, questions of proper documentation by the suppliers, questions of the quality of the work done, and questions about future supplies and future expansion of business, tended to be involved in the negotiations. Indeed on the occasions when notices of discontinuation of one kind or another were issued there was always an arguable basis for One.Tel to resist the whole or part of the claim and evidence to indicate that the supplier was acting precipitously. Additionally I note that much of the evidence relied upon by Mr Carter in App F occurred in May 2001, by which time on any view One.Tel was in need of a cash injection.

22.3 Debtors

[6910] Mr Carter's analysis of debtors in the principal report is at paras 156-92. Almost all of this material was rejected, for reasons given at [167]-[201] of my July judgment. All that remained were the "signposts" paragraph at the beginning of the analysis (para 156), Mr Carter's statement in para 157 that his analysis was restricted to the Australian operations because he could not locate any detailed debtors' information in relation to the international operations, and para 182. In para 182 he said that the Australian operations' accounts receivable comprised, inter alia, trade debtors and accrued income (accrued income being the revenue earned from services provided but not yet billed to customers; any implication that One.Tel's actual practice may have disregarded accrued income was effectively rebutted by Mr Silbermann at MS 970). He said it was reasonable to expect that accrued revenue was as likely or unlikely to be collected as ordinary revenue and therefore it would have been appropriate to raise a provision in anticipation of the uncollectible portion of accrued revenue.

[6911] Notwithstanding the rejection of Mr Carter's evidence, it is appropriate once again to consider the evidence upon which he relied so as to assess whether it would support inferences of the kind he inadmissibly purported to make.

[6912] Mr Carter's analysis of debtors was directed to ascertaining whether there was an alteration in the debtors position in the period from January to May 2001, and particularly whether the collectability and ageing of debtors altered during that period: PR 156. In order to answer these questions, he looked at the composition of the ageing of creditors, One.Tel's provision for doubtful debts, and the historical collection of trade debtors.

[6913] As to the composition of the ageing of creditors, his table at PR 158 purported to set out the total trade debtors balance at the end of each month from December to May 2001, and the amounts and percentages of that debt that were greater than 90 days outstanding, 90-150 days, 180-300 days, and 330 plus days. The information in the table came from the "collection profile summaries" behind tab 8 in the Carter exhibits, and I shall return to these documents. Mr Carter purported to find that Australian trade debtors increased by $13.5 million (9.3%) in the four months from December to April, and the debtors aged greater than 90 days increased by $25.4 million in the same period. He contended that this information strongly suggested that the group was experiencing material problems with collectability of older debtors, and that the collection problems were growing over time: PR 160(b).

[6914] In a table at PR 165 he set out One.Tel's provisions for doubtful debts in June and December 2000 and then in each month from January to May 2001, and then expressed the provisions as a percentage of various categories of debt, such as over 90-day debt, over 180-day debt etc. He took the figures for One.Tel's provisions for doubtful debts from the trial balances behind tab 2 in the Carter exhibits, and the figures for actual debtors from the collections profile summaries. He concluded, for example, that the provisions for doubtful debts as a percentage of debtors greater than 180 days had been 110% as at 30 June 2000, 88.6% as at December 2000, and 86.1% as at April 2001; the provision as a percentage of debtors over 90 days fell from 89.3% in June 2000 to 75.4% in December 2000 to 62% in April 2001: PR 167.

[6915] The table at PR 169 endeavours to show what percentage of greater than 90-day debt outstanding in a base month had been collected by the time of a later comparator month. For example, the table purports to show that of the total amount of greater than 90-day debt outstanding in June 2000, 7.5% had been collected by February 2001, and of the amount of greater than 90-day debt outstanding in December 2000, 8.4% had been collected by April 2001. These figures were taken from the collections profile summaries. At PR 171 he presented a table comparing June 2000 with January 2001 balances of the debts of various categories to show percentages collected, reaching several conclusions including the conclusion that of the $69.6 million in debtors outstanding at 30 June 2000, only $19.7 million (28.3%) had been collected by 31 January 2001. He said it was evident from this work that the older balances were less collectible than the newer balances.

[6916] It will be seen that in all these tables, the figures for the actual level of debt in various categories were taken from the collections profile summaries. The critically important issue relates to the reliability of those documents. I considered the documents in my March judgment at [229]-[236], my May judgment at [77]-[82] and [144]-[145], and again in my July judgment at [168]-[174], where I also referred to Mr Carter's additional report dated 29 November 2004.

[6917] In my March judgment (at [236]) I held that in using the collections profile summaries in the way that he had in his principal report, Mr Carter had made assumptions that:

(3): the summaries recorded the totality of Australian trade creditors of One.Tel at the relevant dates; and
(6): the documents entitled "profile summary" were prepared on the same basis as, and were directly comparable to, the documents entitled "collections profile summary".

I held that the information assumed by Mr Carter could not have been inferred from the body of documents alone: at [233]. The Court of Appeal set out my findings on the collections profile summaries without criticism: ASIC NSWSC 152 at [45]-[49].

[6918] In my July judgment ([170]-[171]) I reiterated that finding and I said that "the assumptions were made notwithstanding some indications, explored in Mr Carter's cross-examination, that the documents were prepared with different parameters and contain different figures, making direct comparability impossible until the differences were explained by someone in a position to give direct evidence of the process by which the documents were compiled". No such evidence has been forthcoming.

[6919] Those findings led me to the conclusion that the collections profile summaries cannot be treated as evidence showing the amount of debts owed by trade creditors to One.Tel's Australian operations, either as total figures or in profile categories and categories based on ageing. My decision to exclude the evidence was partly based upon Mr Carter's access to information not tendered in evidence, but in the case of the collection profile report was also based on inherent uncertainty about the reliability of the documents themselves. The documents are in evidence because they satisfied the evidentiary requirements regarding provenance and authentication, but in my view they cannot be used to prove anything about the level of doubtful debts in One.Tel. Therefore the entire foundation of Mr Carter's tables and reasoning at PR 157-74 is unsound and the evidence does not support views of the kind he sought to draw from it.

[6920] Having reached the conclusion that One.Tel's provision for doubtful debts was inadequate, Mr Carter proposed two alternative ways of calculating a provision for doubtful debts (methods 1 and 2) and concluded that they were both viable, though he preferred method 2. Essentially method 1 involved calculating the percentage of June 2000 debt, in each aged category, that was uncollected at the end of January 2001, and using that percentage to calculate the required provision for each aged category as at each of the months from December 2000 to May 2001 (the historical collectability approach). The figures used for the calculations in method 1 came from the collections profile summaries (especially the table at PR 176, from which the "required provisions" in PR 177 and the total debtors outstanding at PR 180 are taken).

[6921] Method 2 was based on some complex alternative calculations (in App G), all using figures derived from the collections profile summaries, designed to identify the percentage of revenue billed that the Australian operations historically collected or were likely to collect (the percentage of revenue approach). Revenue figures were sourced in the management accounts. The alternative calculations carried out by Mr Carter in App G led him to conclude that it was "not unreasonable to assume" that approximately 10% of revenue was uncollectible, and that the provision for doubtful debts should be calculated accordingly.

[6922] In a table at PR 190 Mr Carter compared the provisions that would be required using methods 1 and 2. He concluded that method 1 was materially consistent with the provision that would have resulted from method 2, that method 2 (a charge of 10% of revenue) was not unreasonable, and that he would use that method for the purposes of the principal report: PR 192.

[6923] Mr Carter's opinion as to the appropriateness of methods 1 and 2 is not in evidence and his application of those methods depends upon using the collection profile summaries. There is no adequate evidentiary foundation for the court to conclude that methods 1 or 2 should have been used by One.Tel for the purpose of calculating appropriate provisions for doubtful debts, or for the court to conclude that either of those methods should be used to assess the adequacy and reasonableness of the provisions One.Tel actually made.

22.4 Earnings

[6924] In PR 193-209 Mr Carter endeavoured to show the progressive deterioration of the earnings position of the One.Tel Group from January to 17 May 2001. He proceeded in two steps: first, he adjusted the earnings figures taken from management accounts; and second, he made an analysis of the adjusted earnings figures by comparing them to budget. The paragraphs of the principal report dealing with the adjustment of earnings were allowed into evidence except to the extent that the adjustment was based on alleged under-provisioning for doubtful debts, because Mr Carter's evidence of the adequacy of provisioning for doubtful debts was rejected as noted above. The paragraphs of the principal report dealing with the analysis of the adjusted earnings compared to budget were wholly rejected, essentially because they relied on an adjustment said to be required because of under-provisioning for doubtful debts.

[6925] Mr Carter relied on earnings figures that he took from the management accounts for each of the group's operations, on the basis that these reflected the "actual earnings" of the group: PR 194, which was rejected. However, he expressed the opinion that adjustments were needed in two respects:

(3): to recognise an adequate provision for doubtful debts, and
(6): to recognise operating expenses that had previously been omitted due to incorrect recording of operating expense allocations between the Australian fixed wire/service provider business unit and the Next Generation business unit: PR 195.

[6926] As I have said, the adjustment in respect of doubtful debts was based on collections profile summaries which I regard as unreliable, for reasons I have explained; and further, I am not persuaded in light of all of the evidence that there was under-provisioning for doubtful debts in the period from January to the end of April 2001, for reasons I explain in Ch 19. I therefore do not accept that the adjustment to earnings proposed by Mr Carter on this ground should be made.

[6927] As to the other adjustment, Mr Carter explained (PR 197), and I accept, that the fixed wire/service provider business unit incurred operating expenses on behalf of Next Generation, and it on-charged to Next Generation an estimate of those costs. Of course, this had the effect of reducing the operating expenses of the fixed wire/service provider business unit and increasing Next Generation's operating expenses. However, according to Mr Carter the Next Generation business unit recorded a lower amount in its management accounts than had been charged to it, with the consequence that on a group basis some costs were omitted altogether: PR 197.

[6928] Mr Silbermann responded to Mr Carter's comments about these operating expenses: MS 974-77. He said that in the period from January to April 2001 there was an issue as to the appropriate allocation of operating expenses for the Australian operations between the fixed wire/service provider business and the Next Generation business. He said that during the early stages of development of Next Generation, most of the operating expenses had been allocated to the fixed wire/service provider business, but as the Next Generation business grew rapidly during 2000/2001 it became appropriate to allocate more of the expenses to that business. The issue in January-April 2001 was to determine the appropriate basis upon which to make the allocation, and there were differences of view between the two businesses. During the early part of 2001 Mr Hodgson and Mr Perez worked to come up with an appropriate methodology, and the issue was finally resolved in late April, with approximately $20 million of operating expenses for the year ending 30 June being reallocated from fixed wire/service provider business to the Next Generation business. Mr Silbermann said that though he was not aware of it at the time, he would not be surprised if there were some discrepancies between the amount of operating expenses that the Next Generation finance team were taking up in their accounts and the amount that the fixed wire/service provider finance team were assuming would be allocated to Next Generation. He said this may have occurred during the period from January to March, but the discrepancies would have been realised and adjusted for in April when the allocation issue was resolved.

[6929] Mr Carter showed the effect of his adjustments in a table at PR 198, which was allowed into evidence. The table showed that over the period from January to April 2001 Next Generation recorded in its management accounts an operating expenses charge that was cumulatively $4.8 million less than the operating expenses charged to it by the fixed wire/service provider business unit in their management accounts. The information shown in this table was derived from the management accounts specified in Apps H and O The figures appear to me to have been extracted correctly by Mr Carter, except that the figure of $2.9 million which was said to be the charge made by the fixed wire/service provider business unit for the month to 30 April was in fact, according to the documentary source identified by Mr Carter (Ex CE 3 0105), a charge in the May management accounts. But nothing turns on that error.

[6930] In App H Mr Carter said, without citing a source, that the problem of under-recording by Next Generation was substantially corrected in the statutory accounts to 31 December 2000 and so an adjustment was needed only in the period from January to May. I have been unable to verify that this was so, as there is no discussion of the matter in Ernst & Young's review closing report for the half-year to December 2000 (Ex JDR 2/764), but Mr Carter's statement was not challenged and I accept it.

[6931] In his affidavit Mr Rich commented that he was not aware of any such error as Mr Carter purported to identify prior to his leaving One.Tel on 17 May 2001: 2 JDR 1734. He added that the documents identified by Mr Carter as the "management accounts" for the fixed wire/service provider business for the purposes of this analysis were not finalised before he left One.Tel, and the sort of misallocation that Mr Carter described would have been identified and resolved in the process of finalising the management accounts and in the end of year reporting process: 2 JDR 1734.

[6932] Mr Carter's figures appear to be generally correct, and the management accounts do seem to identify a discrepancy between the operating expenses charged by the fixed wire/service provider business unit (Ex 3 0097a in the line "Allocation to Next Generation") and the operating expenses recorded by Next Generation (Ex CE 3 0231 in the line "Other operating expenses"). However, because the documents relied upon by Mr Carter as management accounts for the purposes of his analysis have not been proven to be the finalised management accounts of the fixed wire/service provider business for the relevant periods, I am not prepared to accept his conclusion that an adjustment to EBITDA of $4.8 million (rounded) for the period from January to April 2001 was required.

[6933] Mr Carter purported to identify another issue about One.Tel's reported earnings, though he did not make any adjustments to EBITDA to reflect it: PR 202-3. He said that Next Generation's costs of acquisition were deducted from the cost of goods sold and recorded as an asset on the balance sheet, then amortised over the life of the subscribers' contracts. He said that between 1 July 2000 and 30 April 2001 Next Generation incurred approximately $55 million in acquisition costs, $30 million being incurred between January and April. He relied on the Next Generation management accounts for these assertions. He said that the amortisation of the acquisition costs was recorded as a depreciation and amortisation expense which was therefore excluded from EBITDA, instead of being recognised as an ordinary expense, even though the revenue to which the cost related (subscriber billings each month) was included as ordinary revenue and consequently EBITDA. Mr Carter expressed the opinion that this mismatch of the revenue and the amortisation of the associated costs tended to overstate EBITDA, though the he did not purport to quantify this effect.

[6934] Mr Rich and Mr Silbermann challenged Mr Carter's analysis on this matter: 2 JDR 1735; MS 978-80. They pointed out that the accounting treatment identified by Mr Carter was in accordance with One.Tel's published accounting policies (noting, in particular, a note to the financial statements for the year ending 30 June 2000 in the statement of accounting policies, headed "Deferred Expenditure -- Handset Subsidy": Ex MTB 1, tab 8, p 15. They said no-one had ever suggested that the company's auditors had any issue with that policy, and Mr Rich noted that the policy was summarised in an internal Ernst & Young email from David Simmonds dated 13 July 2000, in which Mr Simmonds said that Ernst & Young had confirmed that One.Tel's treatment was acceptable and common practice under Australian and US GAAP and was consistent with international accounting standards: Ex JDR 6/1947. I think the challenge by Mr Rich and Mr Silbermann is successful for the reasons they give.

[6935] There is evidence to indicate that accounting practice in the telecommunications industry was evoking and that One.Tel made some important changes in this area for the purposes of its statutory accounts in the 1999/2000 year: see 7.11.2.

[6936] At PR 204 and 205 Mr Carter presented a table and a graph purporting to show the progressive deterioration of the group's EBITDA loss over the period from January to April 2001. This evidence was rejected because it included an adjustment for doubtful debts. But if one disregards that adjustment while including an adjustment for the understatement of Next Generation operating expenses, it can be seen that the EBITDA loss for the year to date did progressively increase, beginning at $103.3 million for the 6 months to December 2000, and then increasing by $21.7 million in January to $125 million, $17 million in February to $142 million, $9.2 million in March to $151.2 million, and $21.5 million in April to $172.7 million. On the other hand, the increases were not uniformly higher month after month, and indeed the biggest increase was in January while the lowest was in March.

[6937] In inadmissible evidence, Mr Carter compared the progressive deterioration in adjusted earnings with the earnings budget as per the September 2000 business plan for the group. Mr Carter's figures included an adjustment of EBITDA in respect of the provision for doubtful debts. If one disregards that adjustment while making an adjustment for the understatement of Next Generation operating expenses, and one accepts Mr Carter's September 2000 budget figures, the position on a group basis was that the year-to-date adjusted EBITDA for the 6 months to December 2000 ($103.3 million) was $42.2 million higher than budget, and the year-to-date figure for January was $65.5 million above budget, for February it was $85.6 million above budget, for March it was $92.7 million above budget, and for April it was $115.4 million above budget. But these figures are of no great significance, because (as noted elsewhere) the September budget figures were revised several times in the ensuing months to take into account changed business circumstances.

[6938] Mr Silbermann's evidence about Mr Carter's earnings analysis (MS 971-3) was that he became aware on about 20 April 2001 that the January, February and March management accounts had not been finalised, and he did not recall seeing any management accounts for the fixed wire/service provider business during 2001. He said that the earnings figures for that business for the months of January to April of which he was aware in the period from January to May were the figures contained in the board papers for the meetings of 25 January, 30 March and 17 May, and in the revised business plans for that business prepared in January and April. He summarised the normal practice for preparing and reviewing management accounts, considered elsewhere in this judgment.

22.5 Cash deficiency

[6939] Mr Carter made the inadmissible assertion (PR 210) that at 28 February 2001 the group required a cash injection of $270 million to meet current and reasonably foreseeable liabilities, and by 31 March 2001, the amount had risen to $287 million. His analysis at PR 211-34 was designed to support those claims. He relied (at PR 211, held inadmissible) on what he termed the "progressively deteriorating financial position of the group" with respect to the cash balance, growth in creditors and overdue creditors, growth in trade debtors and uncollectible trade debtors, and continuing trading losses for the group as a whole, all of which he had analysed in the manner described above, in some respects inadmissibly.

[6940] "Cash" for the purpose of calculating cash requirements was defined to mean the available cash balance, which was taken to be the bank balance as per the group's intranet site less unpresented cheques and (where appropriate) the $8 million "pledged" for bank guarantees. I have addressed these matters elsewhere.

[6941] Mr Carter acknowledged (at PR 214) that other "liquid resources" could be considered in assessing the group's cash requirements, including prepayments and trade receivables. But he made no adjustments for these items. As far as prepayments were concerned, he said the group's prepayments primarily related to prepaid advertising with PBL and News as part of their equity investment in the group, and the prepaid amounts were stated to be non-refundable. For that reason, he said, these prepayments should be excluded from the analysis of liquid resources. His statements on that subject were allowed into evidence as assumptions. As to trade receivables, he said that net trade receivables occurred in the ordinary course of business and were taken into account in the expected future cash receipts: PR 215.

[6942] Mr Rich contended that in assessing liquidity Mr Carter should have taken into account prepaid advertising, on the ground that it was an asset of One.Tel representing its entitlement to advertise with PBL and News, standing at $86 million at 28 February 2001. He said that even if the amount was non-refundable, prepaid advertising was available to One.Tel to defray what would otherwise be a cash business expense, and therefore it contributed to the liquidity position of the company at least to that extent, and was also available to defray One.Tel's liabilities to dealers by way of entering into "contra" advertising deals with them: 2 JDR 1720b and 1736. Mr Silbermann gave evidence to similar effect: MS 981. I find their views plausible on this subject.

[6943] Mr Carter said he did not include net trade debtors as an offset to the immediate cash deficiency because the collection of net trade receivables would occur in the ordinary course of business and be taken into account in the expected future cash receipts: PR 215. Mr Silbermann pointed out that Mr Carter's reasoning took no account of the backlog of unbilled call data which One.Tel had at the end of March 2001, some but not all of which was processed and billed during April: MS 982. He said this was a liquid resource of the company. That seems to me to be correct.

[6944] In making his calculations he deducted overdue liabilities to Australian creditors. As to international creditors, he was able to identify and deduct overdue creditors of the UK operations identified in UK creditors ledgers, but in the absence of comparable information for other European operations, liabilities for those operations were excluded.

[6945] In a table at PR 218, held inadmissible, he purported to calculate the "Cash deficiency before carrier claims" for Australia and the group (but excluding continental European operations) as at the end of February, March and April 2001. The calculation of the cash deficiency was made by taking the "available cash balance" (intranet cash adjusted for unpresented cheques and the "pledge") and adding in Australian and UK overdue creditors. The group figures were cash deficiencies of $37 million in February, $74 million in March and $116 million in April. In the figures for the Australian operations were cash deficiencies of $30 million in February, $34 million in March and $57 million in April.

[6946] To calculate "Normal cash" he gave credit against the cash deficiency figures for "possible claims against suppliers", the figures for which he took from the trial balances ($9 million in each month). Therefore the group normal cash figures were deficiencies of $28 million in February, $65 million in March and $107 million in April, and the normal cash figures for the Australian operations were $21 million in February, $25 million in March and $48 million in April.

[6947] It would be possible to follow Mr Carter's methodology to calculate monthly cash deficiencies and normal cash, but to use more accurate figures than he employed. That would involve removing the deduction for the $8 million pledge and using different figures for unpresented cheques, as explained above. It would also involve a more refined and precise analysis of what constituted "overdue" creditors in Australia and the UK, having regard to the precise terms of the arrangements between One.Tel and each of its substantial creditors. That work has not been carried out by Mr Carter. It would also involve reviewing the carrier claims to see whether the figure of $9 million in each month corresponded with the reality of the negotiations in each case. Mr Carter's figures cannot be accepted.

[6948] Having purportedly calculated the monthly cash deficiency and normal cash for February, March and April, Mr Carter turned his attention to determining the reasonably foreseeable net cash demands for the group through monthly cash usage from operations and any loan repayments: PR 220. He assumed that the international operations were cash flow neutral, on the basis that the positive cash flow generated by the UK operations would approximately offset cash flow deficits in other international operations (he returned to this assumption in his supplementary report, considered later). His table at PR 221 (held inadmissible) purported to calculate the "monthly average adjusted cash flow" for the Australian operations, after adjusting EBITDA for cash flow items.

[6949] In this table, Mr Carter took the monthly EBITDA figures from the management accounts for the respective operations for the period from July 2000 to February or alternatively March 2001, adjusted to include what he regarded as an "adequate" provision for doubtful debts and to address Next Generation's under-recording of operating expenses (considered above). He calculated an average monthly figure for adjusted EBITDA on the basis of those monthly figures. Then he made two additional adjustments. First, he added a monthly figure for "cost of acquisition capitalised", which represented Next Generation's expenditure for the cost of handsets that it had deducted from the costs of goods sold and had capitalised or recorded as an asset. Mr Carter's view was that the expenditure was cash usage from operations and, whether or not it was properly accounted for in the EBITDA figures, it should be taken into account when calculating the adjusted cash outflow. That reasoning seems to be correct. Second, he adjusted the figures to take into account lease costs, because those amounts were not included in the EBITDA calculation and yet they affected the cash outflow. Again, the reasoning appears to be correct. His conclusion was that the "total cash outflow" in respect of the Australian operations was $23.7 million for February and $24.6 million for March.

[6950] For reasons explained earlier, Mr Carter's figures for the adjusted EBITDA loss cannot be accepted, but his methodology in calculating the total cash outflow by adjusting the EBITDA loss for capitalised costs of acquisition and lease costs could be employed if EBITDA figures were available. Whether those adjustments were sufficient seems a more debatable question; in his supplementary report Mr Carter gave a somewhat longer list of matters that might cause variance between EBITDA and cash flow: SR 18.

[6951] The table at PR 221 was historical, in the sense that it purported to calculate total cash outflow for February and March on the basis of historical EBITDA data. At PR 222 Mr Carter presented another table in which he endeavoured to present a forecast of cash usage for March, April, May in June 2001 on the basis of the September 2000 business plan, with some adjustments. The adjustments he made were of three kinds. First, he drew on historical experience by reducing the gross margin contribution by a percentage that he calculated having regard to the historical variance between actual results and historical budgeted revenue and gross margin, and by reducing operating costs by a percentage reflecting the variance between historical operating expenses and the current month's budgeted operating expenses. Second, he increased the monthly budgeted cash deficits by reversing the capitalisation of handset costs of acquisition and by the amount of lease payments, comparably to similar adjustments at PR 221. Third, noting that in the 7 months from July 2000 to January 2001 actual costs of acquisition were $21.9 million higher than budget, an average increase of $3.1 million per month, he added $3.1 million in additional costs of acquisition for each month from March to June 2001.

[6952] Those calculations were held to be admissible, but Mr Carter also wished to add to the monthly deficits the growth in uncollectible trade debtors, figures which were inadmissible. In the circumstances, the table at PR 222 could be used in amended form, the amendment simply being to remove the growth in uncollectible trade debtors from each month's figures. This would produce adjusted budgeted cash outflows from the Australian operations of $18 million in March, $18.2 million in April, $15.2 million in May and $23.5 million in June 2001.

[6953] The utility of these figures depends upon whether the September 2000 business plan figures used by Mr Carter were reliable figures at any time and whether, if they were once reliable, they continued to be reliable in 2001. I have noted elsewhere that there were several adjustments to the business plans that appear to have been made for good business reasons: 7.16. In commenting on the similar calculations made in Mr Carter's supplementary report, Mr Rich challenged the utility of using old and superseded budget figures, and also the utility of forecasting future EBITDA and cash flow by mathematically adjusting the old budget figures to reflect the historical variance between actual and budgeted performance: 2 JDR 1803, 1809.

[6954] The calculations made by Mr Carter led him to say that, for the purposes of assessing the amount of cash required to fund the group until it became self-sustaining, he had "assumed" on the basis of normal trading that the group's average cash usage from operations would be at least $20 million per month until 30 November 2001 (PR 223; note that the calculations upon which he relied are for the Australian operations, but as noted above, he made the assumption that the UK and continental European operations would be cash neutral). Although Mr Carter used the word "assumed" at PR 223, the context suggests that he meant to convey something more than a mere assumption, along the lines that in view of his calculations and the figures that he used, it was probable that the group average cash usage from operations per month would be at least $20 million until November 2001. I cannot accept that figure as a reasonable forecast because it is founded in the September 2000 business plan figures, taken from a document of dubious reliability, figures that were revised several times after September for apparently good business reasons.

[6955] Mr Rich commented on Mr Carter's analysis: 2 JDR 1737. He made the point, with which I agree, that it is inappropriate to use the September 2000 business plan figures because the business plans had been revised from time to time subsequently in light of changing business conditions. He said that at no time during 2000/2001 did he expect One.Tel to have negative cash flow of $20 million per month throughout the second half of calendar 2001. He said that as at the day he left One.Tel, the most current versions of the business plans were those summarised in the figures prepared by Mr Miller and Mr Green at the beginning of May 2001: Ex JDR 6/1948. According to those figures, management's forecast was for total cash usage for the group over the period from May to November 2001 of $0.7 million, compared with Mr Carter's figure of $140 million. The revised figures of Mr Miller and Mr Green gave a forecast of total cash usage for the group over the period from May to November 2001 of $76 million, still substantially less than Mr Carter's forecast. Mr Rich said, plausibly, that it was simplistic (presumably, too simplistic) to multiply a monthly figure of $20 million by eight in order to project cash usage, because that calculation bore no relation to any reasonable expectation of what was actually likely to happen in the business during that period.

[6956] Mr Silbermann was also critical of Mr Carter's "assumption" of cash usage of $20 million per month until at least 30 November. He said that at no stage in the period from January to May 2001 did he hold that view (MS 984), but rather his expectations regarding group cash flow were in accordance with the forecasts in board papers and flash reports and the figures provided by One.Tel management to PBL during its review in late April and early May: MS 987. He noted that in the figures provided to PBL, management was forecasting group operating cash usage for the period from May to November at a monthly average of $400,000, $2.8 million for the period: MS 988. He referred to PBL's figures for group cash usage from January to April 2001, a total usage of $47.8 million, or an average for the period of $12 million per month: MS 985. He pointed out that the cash flows for the months from January to April were not based on normal trading because of the adverse effect of the various matters he had identified at MS 940 (relating to billing delays, direct debit dishonours etc), and said that the idea that One.Tel would experience operating cash usage at least $140 million over the period from May to November 2001 was totally contrary to his expectations: MS 989.

[6957] Mr Carter's table at PR 234 purported to calculate the cash requirements for the group and the Australian operations at the end of February, March and April 2001 respectively. He began with the figures for the "cash deficiency before carrier claims" and "normal cash" (that is cash deficiency plus possible claims against carriers) that were set out in the table at PR 218. To those he added the effect of his estimate of monthly cash usage of $20 million for each month until 30 November 2001 (that is, for each of the nine months from the end of February, the eight months from the end of March and the 7 months from the end of April) -- thereby increasing the cash usage by $180 million at the end of February, $160 million at the end of March and $140 million at the end of April. Then he added, with respect to the calculations at the end of each of those three months, $50 million for repayment of the Toronto Dominion loan and $12 million for Lucent lease payments. It is necessary to say some more about these two additional figures.

22.5.1 The Toronto Dominion loan

[6958] Mr Carter discussed the Toronto Dominion loan at PR 224-32. Part of that material was allowed into evidence on the basis that would be treated as assumptions, and part of it was rejected because it constituted conclusions of law or mixed fact and law as to the application of the loan covenants to the circumstances of the case.

[6959] The Toronto Dominion debt of $50 million was scheduled for repayment as follows: $5 million on 31 May 2001; $5 million on 4 August 2001; and $40 million on 4 February 2002. The loan documentation contained covenants requiring the quarterly figures for the Australian (ex-Next Generation) operations and the fixed wire business of the international operations for (inter alia) revenue, EBITDA and subscribers to reach certain minimum levels. Mr Carter asserted, inadmissibly, that the minimum EBITDA covenant was not satisfied as at 31 December 2000 and 31 March 2001. He also said, inadmissibly, that it would be prudent to assume that Toronto Dominion would not have waived its rights with respect to the loan covenant breach and would have required the $50 million to be repaid. He therefore included the repayment of the $50 million as a reasonably foreseeable liability to be paid as at the end of February, March and April.

[6960] According to Mr Carter, the Toronto Dominion loan covenants required that annualised EBITDA (the quarterly result multiplied by 4), after certain defined adjustments, was to be better than a loss of $20 million when calculated from the results of the financial quarter ending on 31 December 2000, and better than a profit of $20 million when calculated from the results of the financial quarter ending on 31 March 2001. According to the figures attached to One.Tel's compliance report as at 31 December 2000 to Toronto Dominion (Ex CE 28 0073), the annualised EBITDA figure in respect of the quarter to 31 December 2000 was a loss of $19.898 million, just within the $20 million limit. According to the figures with One.Tel's compliance report as at 31 March 2001 (Ex CE 280077), the annualised EBITDA figure in respect of the quarter to 31 March was profit of $20.031 million. Consequently on the face of those figures, One.Tel had complied with the EBITDA covenant both in December 2000 and March 2001. However, Mr Carter argued that One.Tel's figures had not taken into account an adequate provision for doubtful debts, and if they had, there would have been a clear breach of the EBITDA covenant on both occasions. His assertions to that effect were held inadmissible, they being an application of his previous inadmissible evidence about the inadequacy of One.Tel's provision for doubtful debts.

[6961] Mr Carter's decision to bring into account as a reasonably foreseeable liability the full amount of the Toronto Dominion loan was based squarely upon his views concerning the inadequacy of the provision for doubtful debts, which I have rejected because the foundation for his analysis of doubtful debts was the collections profile summaries which I have found to be unreliable evidence. I therefore do not accept his opinion that the whole of the $50 million was to be brought into account as an immediate or short-term liability. The evidence does not establish, in my view, that there was a present or imminent breach of the EBITDA covenant or any other financial covenant at any time in the period from January to April 2001. Moreover, had there been a breach during that time it could not have been said, on the balance of probabilities, that Toronto Dominion would have required repayment of the loan. One would expect that a reasonable financier in the position of Toronto Dominion would look closely at the attitude of the major shareholders of One.Tel, PBL and News. Once the proposed rights issue was announced to the market, underwritten by those shareholders, one would expect a reasonable financier to await the outcome of the rights issue before making any decision to call in the loan. One would also expect a reasonable financier in the position of Toronto Dominion to have some negotiations with One.Tel management with a view to exploring alternatives to terminating the loan arrangements, such as an extension of the loan perhaps with security or at a higher interest rate or with other advantageous terms.

[6962] Ernst & Young expressed the opinion in their review closing report of 28 May 2001 (Ex CE 23 0005) that in the circumstances of One.Tel's then current financial position, it would be unwise to assume that Toronto Dominion would waive its rights for an impending breach, and therefore there was a serious risk that a requirement to pay out the facility would fall due some time after 30 June 2001. But that opinion was expressed after the board meetings of 17 and 28 May and after the evaporation of any prospect of a rights issue; after the Miller/Green analysis had been presented to and given some consideration by the board; and as part of their report reviewing the Miller/Green document on an urgent basis on the instructions of the board, so that the board could decide on a course of conduct which might include voluntary administration. By that time the prospect that Toronto Dominion might have been prepared to waive the breach or renegotiate the facility must have already evaporated. The more important question is whether at any time up to 30 April 2001 it would have been reasonable to treat repayment of the facility in full as an immediate or short-term cash requirement.

[6963] Mr Rich addressed this question in his affidavit: 2 JDR 1738. He said that the executives of One.Tel responsible for the company's relationship with Toronto Dominion were Mr Silbermann, Mr Beck, Mr Wright and Mr Barnes. At no stage during 2001 was it ever suggested to him by them or anyone else that there was or might be a breach by One.Tel of any financial covenants in the agreement for that loan. He said that if there had been such a suggestion, he would not assume without talking to Toronto Dominion that the bank would insist on immediate repayment of the loan regardless of the implications for One.Tel. He said that One.Tel's relationship with Toronto Dominion was a good one and they had in the past been willing to waive departures from the financial covenants by One.Tel. Mr Rich said he could see no reason why their attitude would be any different in 2001. He noted that Toronto Dominion were also a major lender in the financing facility for the Next Generation network and would not have acted in a way that might jeopardise the fulfilment of the plans for that business. Additionally, by late April PBL were working on the possibility of a rights issue, which would have provided additional comfort to Toronto Dominion. Further, if Toronto Dominion had required security One.Tel could have offered it by way of a fixed or floating charge, as it had no secured debt other than equipment financing, apart from the financing for the Next Generation network. Mr Rich also claimed that under loan documentation, compliance was to be tested within 30 days of the end of the relevant calendar quarter (he referred to cl 11.2(p)-(s) of the $50 million of unsecured revolving amortising credit facility agreement at Ex CE 28 0037-8), so that any event of default would only occur after testing had been done, necessarily after the end of the quarter ending 30 June 2001.

[6964] Mr Silbermann addressed the question of repayment of the Toronto Dominion loan at MS 990-2. He said if there had been any question of potential breach of the financial covenants during calendar 2001, then based on his knowledge of One.Tel's relationship with Toronto Dominion and One.Tel's experience in obtaining waivers of potential covenant breaches in the past, he believed the most likely outcome would have been renegotiation of the covenants or, at worst, a requirement that One.Tel provide security. He said he did not believe the bank would default the loan and demand immediate repayment of the full outstanding amount unless it was convinced there was some fundamental problem with the prospects for the business, and in Mr Silbermann's view there was no such problem.

22.5.2 Lucent lease payment

[6965] The other adjustment made by Mr Carter in calculating the cash requirements was to add to the liabilities of the Australian operations and the group in each of the months of February, March and April a liability of $12 million for "Lucent lease payment". Mr Carter's justification for doing so was that in their financial position review report dated 28 May 2001, Ernst & Young identified in the list of "Major Overdue or Near Overdue Creditors" a sum of $12 million for "Lucent lease rentals". Ernst & Young did not explain that item, and Mr Carter has simply taken up a figure in his principal report.

22.6 Reasons for the state of affairs

[6966] Although Mr Carter's calculations about One.Tel's cash and earnings position in the period from January to April 2001 are controversial and to a considerable degree were held inadmissible, it is plain that over that period One.Tel's cash and earnings declined at a rate much worse than budgeted. It is also plain that by May 2001 there was a cash deficiency, in the sense that there was a need for a cash injection by equity or debt funding, although there is much controversy about when that came to be the case and when it should have been evident. But according to the defendants there were various explanations for the poor figures in February-April which essentially affected only the timing of revenue and earnings and did not signify any long-term deterioration.

[6967] Therefore the next stage in Mr Carter's reasoning process was of critical importance: ASIC asked him to explain the reasons for the company's decline over that time, and he endeavoured to do so at PR 236-54.

[6968] He began by saying that the cash deficiency arose from the progressively deteriorating financial performance of the group. That preliminary proposition is itself controversial. The defendants maintain that the shortfalls in cash inflow during February and subsequently were at least partly due to billing and collections problems that did not signify a deteriorating financial performance, but only a postponement of revenue that would be caught up later. Mr Carter did not address this alternative explanation for the poor cash flow in the Australian operations.

[6969] In Mr Carter's view (PR 236, allowed into evidence) there were three primary reasons for the progressive deterioration in financial performance:

(3): decreases in gross margin arising from revenue and gross margin percentage shortfalls against budget and against the results of the previous 6 months;
(6): increases in operating expenses;
(22): growth in uncollectible trade receivables.

[6970] It can be seen that these are not, in any meaningful sense, "reasons" for poor financial performance. Instead they purport to identify where the weaknesses were that produced the decline in cash and EBITDA. He identified decreases in gross margin, increases in operating expenses and growth in uncollectable trade receivables, but he did not explain why these phenomena occurred (assuming they did in fact occur).

[6971] Mr Carter presented an analysis of his three "reasons" for the deterioration in financial performance in two tables, one comparing actual with budgeted results for January/April 2001, and the other comparing actual results for the period from January to April 2001 with historical results from July to December 2000.

22.6.1 Actual v budget

[6972] The table at PR 239 purports to present, for the period from January to April 2001, the decrease in the actual financial performance of each of the Australian business units, the international operations and the group, compared to budgeted EBITDA. According to the table, over the four-month period the financial performance of the Australian fixed wire/service provider operations decreased by $48.6 million, Next Generation decreased by $7.5 million, the international operations decreased by $21.9 million, there were decreases in the other Australian business operations, and the total group decrease was $87.4 million (in the discussion that follows I shall disregard the figures for One.Card and One.Net). These figures were held inadmissible because they included what Mr Carter called an "additional doubtful debts expense", but the remainder of the table was allowed into evidence. If Mr Carter's adjustment for the additional doubtful debts expense were removed, the decreases would have been $39 million for the Australian fixed wire/service provider business, $4.3 million for Next Generation, $21.9 million for the international operations (no change), and $73.1 million for the group.

[6973] The table at PR 239 is the result of more detailed work in App J, which cross-refers to other appendices. It is necessary to explore the underlying work so as to understand the significance of Mr Carter's conclusions.

[6974] The first line of the table at PR 239 purports to present, for each business unit and the group, the decrease in gross margin contribution as a result of the decrease in revenue over the period (Next Generation is an exception to this, because Next Generation's revenue actually increased over the January/April period, so the table presents the amount of the increase). Mr Carter calculated these figures in the manner set out in the table at para 5 of App J.

[6975] In the table at para 5 of App J, Mr Carter first calculated the actual average monthly revenue in the period from January to April 2001 for each of the Australian business units, the international operations and the group. It appears to me that the monthly revenue figures were taken from the unadjusted management accounts, because:

•: the table at para 5 of App J identified App I-10 as the source of the average revenue figures that appear in the table at para 5;
•: Appendix I-10 identified App L as the source of the revenue and average revenue figures used in App I-10;
•: Appendix L identified the management accounts in the Carter exhibits as a source of the monthly revenue figures that it contained.

[6976] Then he calculated the budgeted average monthly revenue in the period from January to April 2001 for each of the business units and the group, taking the budget figures from the September business plan documents behind Tab 1 in the Carter exhibits: para 5 of App J refers to App I-9, which in turn identifies the source of the budget figures as the September business plan.

[6977] Except for Next Generation, the budgeted average monthly revenue figure was higher than the actual average monthly revenue. Over the January/April period, actual average monthly revenue for the fixed wire/service provider business was $15.8 million less than budget, and for the international operations it was $12.1 million less, and on a group basis it was $28.3 million less (for Next Generation the actual exceeded the budget by $2.3 million).

[6978] Mr Carter then calculated the budgeted average gross margin percentage for the period from January to April on the basis of September business plan figures: App I-9. As he explained in App J, the gross margin contribution is revenue less cost of goods sold, and typically the gross margin contribution is expressed as a percentage of revenue called the gross margin percentage. Therefore an average gross margin percentage of, say, 30% for the period from January to April would tell us that the net amount of revenue less the cost of goods sold to produce that revenue (that is, the amount of revenue going to earnings after direct costs) was, on average during those months, 30% of gross revenue. The budgeted average gross margin percentage for the fixed wire/service provider business was 24%, for Next Generation it was 53% and for the group it was 37%, according to Mr Carter in App J.

[6979] In order to assess the impact of the revenue shortfall for each business unit and the group over the January/April period, Mr Carter multiplied the difference between budgeted and actual average monthly revenue by the average budgeted gross margin percentage. Thus, for example, the average monthly revenue shortfall for the fixed wire/service provider business over the January/April period was $15.8 million and the average budgeted monthly gross margin percentage was 24%, and so the average monthly gross margin contribution (that is, net revenue after cost of goods sold) was lower than budget by $3.8 million. Likewise he calculated that the average monthly shortfall in gross margin contribution for the international operations was $5.1 million and for the group it was $9.2 million. Over the whole four-month period from January to April the shortfall in gross margin contribution for the fixed wire/service provider business was, he said, $15.1 million, the shortfall for the international operations $20.3 million and the shortfall for the group was $37.1 million (the mathematical discrepancy is explained by the fact that the figures are grossed up). These are the figures in the first line of the table at PR 239.

[6980] The second line of the table at PR 239 expressed, for each business operation and the group, the decrease in gross margin contribution over the four-month period as a result of the decrease in gross margin percentage. Mr Carter's calculations to support these figures are principally in the table at para 11 of App J.

[6981] First, Mr Carter calculated the actual average monthly gross margin percentage over the four-month period. The actual gross margin percentage for each of those months was calculated in App I-10, which was based on the gross margin contribution figures set out in App L, which said that the figures came from the unadjusted management accounts. Therefore the ultimate source of the figures was the management accounts in the Carter exhibits.

[6982] Next, he calculated the budgeted average monthly gross margin percentage for the four-month period, taking the monthly figures from App I-9, which relied on the September business plan figures behind tab 1 of the Carter exhibits.

[6983] Then he calculated the difference between the actual and the budgeted figures, showing that over the four-month period the average gross margin percentage decreased by 8% for the fixed wire/service provider business, 27% for Next Generation and 2% for the international operations. He applied these percentages to the actual average monthly revenue for each of the four months (as set out in the table at para 5 of App J, discussed above), to calculate the decline against budget of the average monthly gross margin contribution, which he then multiplied by 4 to produce the decline against budget of the average gross margin contribution over the four-month period. According to these calculations, the decline against budget of the average gross margin contribution over the four-month period was $11 million for the fixed wire/service provider business, $12.2 million for Next Generation, $3.5 million the international operations and $29.2 million for the group. These are the figures in the second line of the table at PR 239.

[6984] In the table at PR 239 Mr Carter added the first two lines (decrease in gross margin contribution as a result of decrease in revenue, and as a result of decrease in gross margin percentage) to produce figures for the total effect on gross margin contribution of these two influences during the four-month period: namely a decrease in gross margin contribution for the fixed wire/service provider business of $26.1 million, $7.4 million for Next Generation, $23.9 million for the international operations and $66.3 million for the group.

[6985] He then adjusted those figures by taking into account the increase or decrease against budget of operating expenses for each of the business units and the group, calculated as shown in the table at para 20 of App J. In that table he took the adjusted actual average monthly operating expenses for the four-month period for each business unit and the captain group, as calculated in App I-10. The adjusted actual OPEX expenses in App I-10 were taken from App L, where they were said to be based on unadjusted management accounts. (Apparently the adjustment was to Next Generation OPEX to take account of the fact (noted above) that when operating expenses were allocated between the fixed wire/service provider business and Next Generation, the amount recognised by Next Generation was less than the amount charged to Next Generation by the fixed wire/service provider business. The adjustment is not material for the purposes of the overall results shown in the table at PR 239.) He then calculated the budgeted average monthly operating expenses for the four-month period by taking the monthly OPEX from App I-9 which in turn derived the figures from the September business plan behind Tab 1 in the Carter exhibits. He calculated the difference between the actual and budgeted average monthly figures and then multiplied that by 4 to produce figures for the increase or decrease in average operating expenses over the four-month period. His conclusion was that over the four-month period average operating expenses increased by $12.9 million for the fixed wire/service provider business, decreased by $3.1 million for Next Generation, decreased by $2 million for the international operations, and increased by $6.9 million for the group. These other figures used for the purposes of the table in PR 239.

[6986] If one takes the figures in the third line of the table at PR 239, which are the addition of the decreases in gross margin contribution as a result of decreases in revenue and decreases in gross margin percentage, and then adjusts those figures by taking into account the increase or decrease in operating expenses, the result is that financial performance against budget (that is, movement in the gross margin contribution after adjustment for movement in operating expenses) declined over the four-month period by $39 million for the fixed wire/service provider business, $4.3 million for Next Generation, $21.9 million for international operations, and $73.2 million for the group. The table at PR 239 made another adjustment for additional doubtful debts expense, but as I have said, that was excluded from evidence.

[6987] I have set out the background to the calculations presented in the table at PR 239 in some detail in order to expose Mr Carter's reasoning process. In my view his reasoning process was correct, although I note that his figures were ultimately extracted from the unadjusted management accounts and the September business plan, and therefore the calculations are only as reliable as those sources.

[6988] I have said decreases in gross margin contribution resulting from decreases in revenue and gross margin percentage were not in any meaningful sense a "reason" for One.Tel's deteriorating financial performance. However Mr Carter did endeavour to explain the deterioration in revenue and gross margin percentage, by an explanation that relied upon the excel file, "comparison.xls", which has become a controversial document in these proceedings. Relying on that document, Mr Carter said that the decline in revenue in the fixed wire/service provider business was due to a decline in monthly ARPU, and the decline in gross margin percentage in that business was due to a change in sales composition.

These claims and the supporting analysis were allowed into evidence as assumptions, but they nevertheless warrant investigation to ascertain whether the evidence supports them.

[6989] Mr Rich commented on these calculations as regards the fixed wire/service provider business (2 JDR 1741-50), the international businesses (2 JDR 1751-5) and the Next Generation business (2 JDR 1756-61).

[6990] As regards the fixed wire/service provider business, Mr Rich noted that the budget figures used by Mr Carter were the September 2000 figures notwithstanding that the business plan had been revised in January and April 2001 to reflect changes in business conditions. He also noted, as I have pointed out above, that Mr Carter took the figures for actual results from management accounts which, according to Mr Rich, were only draft management accounts for the fixed wire/service provider business for the months of January, February, March and April 2001. He identified several inaccuracies in those documents:

(3): the figure used by Mr Carter in App I-10 for the January gross margin was $6.659 million, taken from the January column in the document treated by Mr Carter as the March management accounts (Ex CE 3 0091), whereas the gross margin figure in the document treated by Mr Carter as the January management accounts was $6.319 million (Ex CE 3 0066);
(6): it appears from the KPI analysis tab for the document treated by Mr Carter as the January management accounts (Ex JDR 6/1959) that these figures were predicated on a variable gross margin figure for the fixed wire business in January of $2.5 million, in contrast with Ms Ashley's calculation in comparison.xls of the actual gross margin for the fixed wire business in January of $5.2 million (Ex CE 4 0056);
(22): the figure used by Mr Carter for January EBITDA, taken from the January column in the March management accounts at Ex CE 3 0094, is a loss of $3.991 million, whereas the EBITDA figure in the document treated by Mr Carter as the January management accounts shows an EBITDA loss of $4.472 million, and both of those figures are to be contrasted with the actual EBITDA figure of $1.925 million in the March board papers (Ex MTB 1/234) and $0.9 million in the Miller/Green figures of early May 2001.

[6991] Mr Rich said his understanding of the revenue position in the fixed wire/service provider business was as given in the January board papers (Ex MTB 1/206), namely that sales in the fixed wire business were expected to be lower than budget due to One.Tel's withdrawal in late 2000 from door-to-door and telesales distributions as a result of the issues involving Axxess and the ACCC, summarised elsewhere in these reasons for judgment, but according to the board papers this was not expected to impact negatively on the full year EBITDA. As to gross margin percentage in the fixed wire/service provider business, his understanding was that the fixed wire part of the business was considered to be broadly on track in relation to its gross margins until Ms Ashley undertook her analysis of margins in that business in April 2001. Then it appeared that margins were being adversely affected by a call mix between local and other calls that was different from what had been expected. As regards the service provider part of the business, he understood that the business was experiencing lower gross margins than originally forecast as a result of a higher number of non-tolling customers than had been expected. The matter was the subject of investigation by the management team of that business during early 2001, giving rise to the conviction on One.Tel's part that Optus was not providing complete CDRs to One.Tel and leading to One.Tel making a claim against Optus for compensation, considered elsewhere in these reasons for judgment.

[6992] As regards the international operations, Mr Rich commented on the assertion in the table at PR 239 that there was a shortfall in gross margin contribution of $20.3 million because of a shortfall in revenue versus budget. He said a review of the management accounts for the various international businesses showed that the explanation for the variance between budget and actual revenue in the international businesses was not attributable to any single country, but was a combination of variances in different countries, each variance having its own explanation in terms of particular developments in the business environment of that country. The variances occurred in the context of rapid growth in the international businesses.

[6993] Mr Rich noted that the variances had been the subject of comment from time to time in board papers. Thus the board papers for the September 2000 meeting said that international revenue and EBITDA were behind budget due to the impact of the August holiday period in Europe: Ex MTB 1/19. The board papers for the November 2000 meeting reported that the forecast EBITDA loss for the international wireline business was $3 million higher than expected (Ex MTB 1/128) and individual variances in EBITDA by country were reported, indicating that the UK and France were more or less on budget but the Netherlands and Germany were trailing (Ex MTB 1/140), principally because of a six-week delay in delivery of capacity for the German network, and in the Netherlands an overflow of higher than expected local dial-up ISP traffic. The board papers for the January 2001 meeting identified a fall in forecast subscriber numbers for the international wireline business due to reductions in the projections for Germany and the Netherlands: Ex MTB 1/188. The EBITDA variance against budget for international in November/December was explained as due to a shortfall in the UK gross margin and tolling in the UK and the Netherlands: MTB 1/207. There was also commentary on the international businesses in the January flash report: Ex MTB 1/379B. The board papers for the March 2001 meeting contained actual, budgeted and historical comparative information on the international businesses on a yearly, half yearly and quarterly basis (Ex MTB 1/229-33 and 247), and according to the minutes of the March meeting (Ex MTB 1/329A) Mr Weston gave the board an overview of what was happening in each of the European businesses.

[6994] Mr Rich said that although EBITDA for the international businesses was down on the original budget, he was not concerned in 2001 that the prospects for the international businesses were anything other than bright. The board papers for the March 2001 meeting forecast an EBITDA result for the year to 30 June 2001 of $5.2 million for the international businesses, against an EBITDA loss in the year to 30 June 2000 $129 million, and an increase in subscriber numbers during that year from about one million subscribers to 1.8 million subscribers: Ex MTB 1/247. The board papers forecast further dramatic improvements in EBITDA in 2002 and 2003: Ex MTB 1/247. Moreover, the results of individual businesses steadily improved during the year to 30 June 2001 on a month-by-month basis, according to the March board papers: Ex MTB 1/233 and 247. In particular, the number of tolling subscribers, ARPU and gross margin for the UK business were increasing month-to-month.

[6995] Mr Rich commented on Mr Carter's assertion in PR 239 that there would be a shortfall in gross margin percentage against budget for the Next Generation business resulting in a $12.2 million shortfall in gross margin contribution. He pointed out, correctly, that Mr Carter's methodology, relying on the average gross margin percentage over the four months from January to April, did not take into account the fact that margins in the Next Generation business were increasing rapidly during that period. Referring to App I-10 to Mr Carter's principal report, Mr Rich said the gross margin percentage was negative $23 million for January, $26 million for February, $36 million for March and $39 million for April, and was therefore rapidly heading towards the budgeted target of 53%.

[6996] Mr Rich said that the explanation for the variance was primarily that there were delays in completion of the network on the dates contracted by Lucent, resulting in a higher than budgeted percentage of calls by One.Tel customers being made by them roaming on the Telstra network, at significantly lower margins than on One.Tel's own network. He said that this problem was reported in the board papers for September 2000 (Ex MTB 1/14) and March 2001 (Ex MTB 1/236 and 251). This gave rise to claims against Lucent, as reported in the March 2001 board papers (Ex MTB 1/245) and the February flash report (Ex MTB 1/381B). According to Mr Rich, the total of liquidated damages paid or payable by Lucent to 30 June 2001 was $26.7 million (assuming a delay in final acceptance of the Melbourne network of 4 weeks, when in fact it was delayed further and final acceptance had not been achieved when Mr Rich left One.Tel on 17 May).

[6997] Mr Rich gave evidence that, although the gross margins in the Next Generation business during 2000/2001 had been less than originally budgeted in September 2000, in 2001 he was not concerned about the performance of the Next Generation business overall; on the contrary, he asserted that the outlook for the business was very positive. He referred to the September 2000 forecast for Next Generation subscriber numbers of 77,000 as at 31 December 2000 (Ex MTB 1/3) and noted that, as reported in the January board papers, there were in fact 102,000 subscribers as at 31 December. He said that in March 2001 Next Generation had added a record 33,000 subscribers and had achieved ARPU of $66 (compared to $56 for service provider customers): Ex MTB 1/227, 260. He noted that by 30 March the network buildout was almost complete and so margins were set to improve further as roaming diminished and roaming charges with Telstra were renegotiated: Ex MTB 1/251.

[6998] Mr Rich also commented on Mr Carter's assertion in the table at PR 239 that the operating expenses of the fixed wire/service provider business during the period from January to April 2001 were $12.9 million higher than budgeted, although operating expenses in the other businesses were lower than budget by $6 million. Mr Rich pointed out that the allocation of operating expenses between the Australian (ex-Next Generation) businesses and the Next Generation business was a matter of debate at One.Tel during 2001, and was only ultimately resolved at the end of April 2001 when there was a reallocation to Next Generation of operating expenses that had previously been charged to the fixed wire/service provider business. He said that if one were to ignore the allocation between the businesses and consider only the total actual and budgeted operating expenses for the Australian businesses as a whole during the period from January to April, the figures (taken from Apps I-9-I-10 of Mr Carter's principal report) showed total operating expenses for the Australian businesses for the four months of $105.8 million as against budgeted operating expenses of $101.3 million, an increase of only $4.5 million. The average per month was $26.5 million as against a budget of $25.3 million, a difference of only $1.2 million.

22.6.2 Actual ARPU against budget

[6999] Mr Carter claimed that the lower than budgeted revenue figures for the fixed wire/service provider business in the period from January to April 2001 resulted from a significantly lower than budgeted ARPU per month: PR 242. Relying on figures taken from comparison.xls, he said that actual ARPU was $69 in May 2000, $62 in January 2001 and $64 in February 2001, compared with budgets for those months of $62, $73 and $73 respectively. He said the fall in ARPU compared to budget translated into a reduction in revenue per month of $4.112 million in January and $3.358 million in February, compared with an increase over budget of $1.94 million in May 2000: PR 243. In a table at PR 244 he showed that the variance between budget and actual subscribers, in conjunction with the variance in ARPU, led to a reduction in revenue in January of $3.858 million and in February of $5.087 million.

[7000] Mr Carter's analysis assumed that the figures taken from comparison.xls could be relied upon as actual ARPU for the relevant months.

22.6.3 Change in sales composition for the fixed wire/service provider business

[7001] According to Mr Carter (PR 247, allowed into evidence subject to a s 136 order), a major cause of the lower gross margin percentage was a change in sales composition for the fixed wire/service provider business. The evidence establishes that in this business a substantial proportion of revenue was derived from low margin or even negative margin sales such as local calls, compared with higher margin products such as long-distance and international calls. Mr Carter said that the analysis in comparison.xls showed that the actual composition of the revenue from the fixed wire/service provider business varied from budget figures, as there was a progressively higher weighting of sales of products supplied by Telstra compared to other customers. He said that Telstra products were budgeted to account for 38% of revenue but they were at 48% in May 2000, 54% in January 2001 and 61% in February 2001. He claimed, relying on comparison.xls, that Telstra products were budgeted to be resold for a gross margin loss percentage of 2%. He said the actual gross margin loss percentage in January was 3% although the figure was 0% in February.

[7002] Once again Mr Carter's analysis relies upon the accuracy of the figures taken from comparison.xls.

22.6.4 Actual v historical

[7003] As noted above, Mr Carter's "reasons" for One.Tel's financial deterioration depended on a comparison between actual and budget figures, and also a comparison between actual figures and historical figures over the preceding 6-month period: July-December 2000. His comparison of the actual to the historical is presented in a table at PR 253. Like the table in PR 239, this table is based upon more detailed work described in App J. Most of the table was allowed into evidence but a line purporting to show the growth in uncollectible revenue was rejected, together with the final calculation that took the rejected figures into account.

[7004] The first line of the table at PR 254 gives the increase or decrease in gross margin contribution as a result of an increase or decrease in revenue. Whereas in the table at PR 239 the comparison was between actual and budget, here comparison is between actual January-April 2001 figures and historical July-December 2000 figures. The table at para 8 of App J shows that actual average monthly revenue figures were taken, via App I-10 and App L, from the unadjusted management accounts. That is also the source of the figures in App J for the historical average monthly revenue.

[7005] At para 8 of App J Mr Carter calculated the difference between the actual and historical average monthly revenue, finding that the average monthly revenue had fallen by $9.3 million for the fixed wire/service provider business, while rising by $6.9 million for Next Generation and by $15.5 million for the international operations, leading to an overall rise for the group of $12.7 million. He ascertained figures for the historical average monthly gross margin percentage from the management accounts via App I-10, and then applied that percentage to the increase or decrease in average monthly revenue so as to calculate figures for an increase or decrease in average monthly gross margin contribution, which he multiplied by 4 so as to produce figures for the difference between the actual average gross margin contribution over the four-month period and the historical average gross margin contribution over the previous 6 months. The figures, which became the first line of the table at PR 253, were decreases of $8.8 million for the fixed wire/service provider business and $2.7 million for Next Generation, and an increase of $22.3 million for the international operations, leading to a group increase of $9.9 million.

[7006] The second line of the table at PR 253 gives the increase or decrease in gross margin contribution as a result of an increase or decrease in gross margin percentage, again measuring the increase or decrease by reference to the historical figures for July-December 2000. The calculations producing these figures are found in a table at para 13 of App J, which shows that the source of the figures was (via App I-10) the management accounts. Mr Carter calculated the difference between the actual average monthly gross margin percentage for the four-month period and the historical average monthly gross margin percentage for the preceding six-month period, and applied that percentage difference to the actual average monthly revenue for the four-month period taken from the management accounts. This led to figures for an increase or decrease in average monthly gross margin contribution comparing actual to historical, which he multiplied by 4 to produce the increase or decrease in average gross margin contribution over the four-month period. The figures were a decrease in average gross margin contribution for that period of $10.8 million for the fixed wire/service provider business, an increase of $16.1 million for Next Generation and an increase of $9.2 million for the international operations, leading to an increase in the group figure of $13.3 million.

[7007] In the third line of the table at PR 253 Mr Carter added together the figures on change in gross marginal contribution due to revenue and due to gross margin percentage. This resulted in changes to gross margin contribution between historical and actual as follows: a decrease of $19.6 million in the fixed wire/service provider business, an increase of $13.4 million in Next Generation, and an increase of $31.5 million for the international operations, leading to a group increase of $23.1 million.

[7008] Next Mr Carter took into account increases or decreases in operating expenses, calculated in the table at para 23 App J, which relied on figures from the management accounts: via App I-10. This calculation was made by taking the difference between adjusted actual average monthly operating expenses and historical average monthly operating expenses and multiplying that figure by 4 to produce the increase or decrease in average operating expenses over the four-month period. The resulting figures were increases in operating expenses of $8.3 million for the fixed wire/service provider business, $13 million for Next Generation, $1.9 million international operations and $23.7 million for the group.

[7009] If one takes the figures in the third line of the table at PR 253, which are the addition of the increases or decreases in gross margin contribution as a result of increases or decreases in revenue and increases or decreases in gross margin percentage, and then adjusts those figures by taking into account the increases or decreases in operating expenses, the result is that One.Tel's financial performance against historical results (that is, the movement in the gross margin contribution after adjustment for movement in operating expenses) declined over the four-month period by $27.9 million for the fixed wire/service provider business, but improved by $0.4 million for Next Generation and by $29.6 million for international operations, leading to a decline of $0.6 million for the group. The table at PR 253 made another adjustment for the growth of uncollectible revenue, but as I have said, that was excluded from evidence.

[7010] Mr Silbermann made some comments at a general level of about Mr Carter's view that the financial position of One.Tel in the period from January to May 2001 was fundamentally deteriorating as a result of decreases in gross margins and increases in operating expenses. He said that was not his perception during that period, but instead his perception was based on the information contained in the board papers and flash reports and other information he obtained in his position as executive director, principally in his dealings with the management teams for the various businesses: MS 994. He said that based on that information, his understanding was that the group was experiencing a shortfall in its forecast cash position as a result of a number of essentially short term factors which were adversely affecting cash flows (in particular billing delays, unbilled call data, and apparent shortfall in margins in the fixed wire business, and catch up payments to WorldCom in the UK during April and May), but which were being addressed in a proper way by the management teams: MS 995. He said he was confident that the business had strong prospects for the future and was fundamentally sound, and he only lost confidence in the ability of the business to survive the short-term liquidity difficulties it was experiencing in late April and May when it became evident from the events of 28 and 29 May that PBL and News were withdrawing their support for the business: MS 997.

22.7 Reduction in net worth

[7011] ASIC asked Mr Carter: "Whether the group incurred net liabilities and suffered a reduction in net worth between 28 February 2001 and 29 May 2001 and alternatively between 31 March 2001 and 29 May 2001, and if so, by what amount?" Almost all of his answer to this question, contained in paras 255-75 and App K to the principal report, was allowed into evidence. In answering ASIC's question he assumed that:

•: if the board had been aware of the group's financial performance and position, it would have placed it into administration at a date earlier than 29 May 2001: PR 256;
•: there was no material change in the net worth of the international operations between 28 February and 29 May 2001 and consequently his assessment of the reduction of net worth was confined to the Australian operations: PR 256 fn 131, 275;
•: One.Tel's reduction in net worth occurred linearly: PR 259.

[7012] He also made various more specific assumptions noted in App K. Although he did not say so, Mr Carter seems to have assumed that if the company were placed in voluntary administration it would thenceforward no longer trade: PR 256, 261.

[7013] Having reached the view, for reasons discussed above, that the financial performance and position of the One.Tel Group deteriorated over the period from January to April 2001, Mr Carter adopted two alternative methods of assessing the group's reduction in net worth, namely:

•: calculation of the change in net realisable value between 28 February and 29 May 2001 or alternatively between 31 March and 29 May 2001;
•: calculation of the net trading loss between 28 February and 29 May 2001 or alternatively 31 March and 29 May 2001.

He said these two calculations were conceptually two views of the same thing, and would be capable of producing the same answer if accurate and reliable information were available. However in the present case limitations in the data caused the two approaches to derive answers that were different "but sufficiently close to provide reasonable bounds to the loss estimate": PR 258.

[7014] Mr Carter's answer to ASIC's question was that if the reduction in net worth was assessed by reference to the reduction in net realisable value, then the figure was $99 million in the period from 28 February to 29 May 2001 and $78 million in the period from 31 March to 29 May 2001; whereas if the reduction were assessed by reference to net trading loss, the figure was $92 million from 28 February to 29 May 2001 and $60 million from 31 March to 29 May 2001. As to whether he preferred the net realisable value approach or the net trading loss approach, Mr Carter said this (PR 274 and App K-1 revised):

The primary focus of the calculations in Appendix K is on the change in net realisable value. The adjusted net trading loss represents a cross-check for reasonableness. However, the net realisable value calculation is potentially impacted to a greater extent than the trading loss calculations by uncertainties arising from incomplete data. In my opinion, based on the presently available information the adjusted trading calculation will tend to understate the loss between the two relevant periods, in part because of estimated losses on realisation of assets newly leased during those periods. For the purposes of this report, I have use the adjusted trading losses figures shown above.

[7015] This is a confusing passage but it seems to me, on balance, to put forward reasons for preferring the net realisable value approach notwithstanding that Mr Carter himself said he would use the adjusted trading loss figures in his report. The reasons for preferring net realisable value are as follows:

(2): Mr Carter's calculations of net realisable value were the primary focus of App K and seem to be more fully worked through;
(3): adjusted net trading loss is presented as a cross-check for reasonableness of the net realisable value figures; and
(4): adjusted net trading loss tends to understate the loss, in part because of estimated losses on the realisation of newly leased assets during the relevant period.

22.7.1 Reduction in net realisable value

[7016] Net realisable value is the difference between the realisable value of the assets of the enterprise and its total liabilities. Mr Carter expressed the opinion that change in net realisable value is a measure of loss because "it is reflective of the change in the value of the group as a result of the group continuing to trade", since by continuing to trade the group used up some of its resources and incurred further liabilities which diminished its value: PR 261.

[7017] Mr Carter relied on information about the realisable value of assets contained in reports to creditors made by the voluntary administrators/liquidators, Mr Walker and Mr Sherman of Ferrier Hodgson, dated 12 July 2001 (Ex CE 22 0001) and 4 October 2001 (Ex CE 22 0142). The information used by Ferrier Hodgson came principally from the directors' report as to Affairs (RATA) supplied to them by Messrs Packer Jnr, Murdoch Jnr, Howell-Davies, Yates and Macourt on 11 July 2001: see Ex CE 22 0020. They do not appear to have received comments from Mr Rich and Mr Silbermann on the RATA before issuing their report to creditors, which was dated 12 July.

[7018] After preparing his principal report and App K, Mr Carter was supplied with further reports by Mr Walker and Mr Sherman in their capacity as liquidators, namely two reports relating respectively to One.Tel Ltd (in liq) and to its subsidiaries, each dated 14 November 2002. He revised his calculations in App K to take into account the information in those reports, though he did not alter his methodology.

[7019] According to my understanding, Mr Carter's methodology was as follows:

•: he attributed a realisable value as at 29 May 2001 to each balance sheet account (asset class) of One.Tel Ltd (in liq), including its investment in the UK subsidiary and the One.Net subsidiary, by relying on the information in the Ferrier Hodgson reports;
•: he extracted the book value of those asset classes from the adjusted trial balance as at 29 May 2001, presented in App I-13 (which in turn relied on the information found in the adjusted trial balance at 31 May 2001 appearing at Ex CE 2 0095-101, which according to PR 264 was the trial balance prepared for the report as to Affairs as at 29 May 2001);
•: he calculated recovery percentages by expressing the realisable value as a percentage of the book value;
•: he extracted the book value of the asset classes as at 28 February 2001 and 31 March 2001 from the respective trial balances as at those dates: Ex CE 2 0059-62e; Ex CE 2 0072-79;
•: he applied the relevant recovery percentage to the book value of each asset class as at 28 February and 31 March respectively in order to ascertain the realisable value of the asset class each of those dates;
•: he calculated the total realisable asset value at 28 February, 31 March and at 29 May by adding up the realisable value of each asset class at those respective dates;
•: he extracted the total liabilities at 29 May, 28 February and 31 March from their respective trial balances;
•: he deducted the total liabilities at each of those dates from the total realisable asset values at the respective dates, thus producing the net realisable value at each of those dates; and
•: he deducted the net realisable value at 29 May from the net realisable value at 28 February and 31 March respectively, in order to ascertain the reduction in net worth in the periods from 28 February to 29 May and from 31 March to 29 May respectively.

[7020] This methodology relates to the assets and liabilities of One.Tel Ltd (in liq). Mr Carter explained at PR 265 that Ferrier Hodgson prepared a separate report for each of the companies within the Australian operations, although they included the companies associated with Next Generation in a single report. Mr Carter said that he used the same percentage recovery estimates for all of the group assets, conceding that this might have slightly overstated the net realisable value of inventory and plant and equipment but only to an immaterial extent.

[7021] Mr Carter explained (PR 266) that in some instances he did not incorporate the full value of assets and liabilities in the net realisable value, but instead he incorporated the change in value of the assets and liabilities from 1 day to another. From time to time he excluded certain assets from his calculations altogether (or included them at nil value): this was in cases where the information about those assets was non-existent or judged by him to be unreliable, but he was able to form the view that the realisable value of the assets in question did not change between February and May 2001. An example of an asset excluded from the calculations is the spectrum licence, for which recovery was judged by Mr Carter to be uncertain: PR 268. Of course, a consequence of this approach is that Mr Carter's figures for net realisable value on a particular date do not represent the full net realisable value on that date.

[7022] Mr Carter adopted a similar approach to certain liabilities: that is, not to include them in total liabilities where the amount was uncertain and where there would be no material change in the expenses whether they occurred after February or March or May. An example was the additional expenses incurred when a company is placed into administration, including the costs of the administration and subsequent liquidation, and employee entitlements such as to retrenchment arising from cessation of business: PR 267.

[7023] Mr Carter's calculations are set out in spreadsheets at App K-3 (change from February to May) and App K-4 (change from March to May). It is worth noting the adjustment items where the change from February to May or from March to May was calculated at a figure in excess of $1 million:

Table 22.1: Major items of change in net realisable value
Asset class	Increase/(decrease) in RV ($mill)
	Feb to May	Mar to May
Trade debtors	6.17	3.13/2.74
Bond moneys (debtors)	1.20	(0.09)
Interco -- UK	(26)	nil
GST -- AP input tax credit	2.79	(4.74)
Commercial bills & FOD	(9.96)	(8.53)
ANZ Qld cheque account	17.77	0.14
ANZ one day term deposit	(3.04)	(4.12)
ANZ (SSPF)	(1.06)	nil
Accrued income	7.88	7.88

Accrued Inc -- digital usage	(1.03)	(0.09)
Accrued Inc -- local usage	(4.69)	(3.80)
Leased equipment	9.18	3.44
Investment in globals	(6.7)	nil
Trade creditors	(57.17)	(45.96)
Trade creditor -- accruals	1.64	2.36
Accruals -- other	(8.27)	(8.43)
GST -- AR	(2.35)	4.93
Goods received not invoiced	(2.72)	(3.06)
Accruals -- marketing	10.67	11.87
Accruals -- GSM networks	(19.50)	(29.02)
Accruals -- carrier claims	(6.81)	(6.60)
Accruals -- Global One LD usage	(0.11)	3.55
Accruals -- LD Nat usage (pre-select)	0.35	1.78
Accrual -- Telstra miscellaneous	(0.96)	(1.41)
Accruals -- Telstra	(0.22)	(2.33)
Accruals -- Mobile digital usage	4.22	0.13
Accruals -- Digital access COGS	4.72	0.28
Accruals -- GSM airtime penalty	(1.42)	(0.67)
Lease liability	(14.94)	(1.94)
Total (midpoint between high and low, taking into account all adjustments)	(99.62)	(78.18)

[7024] It is unnecessary to set out fully Mr Carter's reasoning process in ascertaining the realisable value of various asset classes. He has explained his reasoning in App K-2, K-3 and K-4 Revised. I shall deal with a few matters requiring further explanation, but subject to what I say about them, it is sufficient to state that I have closely reviewed App K and I have not detected any flaw in the reasoning process, which I accept as a reasonable methodology for calculating the net realisable value of the net assets of the group as at 28 February, 31 March and 29 May.

22.7.1.1 Prepayments/other assets

[7025] In their July 2001 report, Ferrier Hodgson assessed recoverability of these assets (excluding subscriber lists and intellectual property) at nil: Ex CE 22 0024. Goodwill in subscriber lists was given an estimated realisable value of $3-5 million and intellectual property was valued at $2.7 million. Mr Carter attributed a nil value to the asset class generally. As regards the goodwill in subscriber lists and also intellectual property, he said he assumed that the amount realised would not be materially different as at 28 February, 31 March and 29 May and accordingly these items would have no impact on his calculation of the change in net realisable value.

[7026] As to prepaid advertising, it appears that One.Tel had an entitlement to prepaid advertising worth approximately $150 million under contractual arrangements it made with News and PBL in April 1999. At the time of the appointment of the voluntary administrators the unexpired portion of the advertising prepayment had a book value of $61.4 million (of which $20.2 million was due to expire in May 2002). According to management accounts referred to by Ferrier Hodgson (Ex CE 22 0025), prepaid advertising in the amount of $42 million had been transferred by One.Tel to the Next Generation companies, and the receiver of One.Tel Networks asserted an interest in the transfer to that company (Ex CE 22 0170; 22 0025). Ferrier Hodgson reported in their July 2001 report that the estimated realisable value of One.Tel's prepaid advertising rights was nil because the contract provided that the payment for the allocation of advertising was not refundable when the advertising was used and both PBL and News had denied any liability refunds for the un-used portion: Ex CE 22 0024. However, in their November 2002 report they recorded that, with the approval of the Committee of Inspection, they had made an agreement with News and PBL whereby those companies agreed to pay $21.5 million to eliminate the prepayment obligation: Ex CE 22 0170.

[7027] In App K Mr Carter assumed that there would have been no material change in the realisable value of prepaid advertising as at 28 February, 31 March or 29 May 2001, and therefore he attributed a nil realisable value to it. He noted, however, that this might have substantially understated the loss (that is, the reduction in net worth of One.Tel), apparently on the basis that if One.Tel had gone into voluntary administration at the end of February or March 2001 it may have been a possible for the administrators/liquidators to negotiate a settlement of the prepayment claim with News and PBL at an earlier time when the proportion of the prepayment that was due to expire in May 2002 (a total of $20.2 million as noted above) would still have had a significant value. I regard that point as speculative, but I need not make any determination because Mr Carter has not sought to quantify it.

22.7.1.2 Intercompany loans

[7028] In their July 2001 report, Ferrier Hodgson expressed the opinion that the key recoverable loans were loans to One.Tel Plc (UK) and One.Tel Ltd Hong Kong, and also a small loan to One.Tel Shop Pty Ltd (the net assets of which were included in the net realisable value of the Australian operations as a whole, and not separately valued). In relation to the balance of intercompany debt owed by international subsidiaries, Ferrier Hodgson said they were at that stage unable to reconcile how the net funds disbursed to the international subsidiaries had been applied by them: Ex CE 22 0022.

[7029] As to the UK loan, Ferrier Hodgson noted that the sale of One.Tel Plc had been concluded and $6.5 million had been received. This was the net figure after deducting from the amount of the loan ($56.5 million) the Toronto Dominion debt of $50 million, for which One.Tel Plc was apparently guarantor. It appears that the $50 million was deducted and recovered by Toronto Dominion on settlement of the sale of the UK business: Ex CE 22 0022. Mr Carter included the full amount of the UK loan, $56.5 million, as a realisable amount on 29 May 2001, and he included the full amount of the Toronto Dominion loan in total liabilities. For the purpose of ascertaining the amount of the loan as at 28 February, he added $26 million to the May figure to reflect the fact that as at 28 February the transfer of $26 million from the UK to Australia had not been completed and therefore the UK's debt to One.Tel was $26 million higher than it became after the transfer took place. The reduction in the value of the UK loan between February and May was presumably matched by an increase in assets acquired or a decrease in liabilities discharge by that money.

[7030] The realisation of the net amount of the UK loan took place on settlement of the sale of the UK business, which happened 36 days after the administration date. In para 99 of his supplementary report of 13 December 2002, Mr Carter assumed that if voluntary administrators had been appointed on 28 February or 31 March, settlement of the UK sale would have been 36 days after the appointment and therefore earlier than the actual date of settlement. Because the Australian dollar strengthened against sterling during the period from April to July 2001, the Australian dollar proceeds would have been higher by approximately $6.7 million had administration commenced on 28 February, and higher by approximately $1.5 million had administration commenced on 31 March. Although Mr Carter said at p 5 of App K that he adjusted his high scenario calculations to reflect the impact of the change in the exchange rate, he did not make any adjustment of the amount of the UK debt, which he recorded at $82.5 million as at 28 February and $56.5 million as at 31 March and 29 May: App K-3 Revised, page 1 and App K-4 p 1.

[7031] The Hong Kong loan was for $11 million. Ferrier Hodgson reported in their July 2001 report that negotiations were continuing for the sale of the Hong Kong business and said they were not in a position to disclose the anticipated sale price: Ex CE 22 0022. In their October 2001 report Ferrier Hodgson said that the agreements for the sale of the subsidiary were finalised on 29 September at a price inclusive of intercompany debt, and that proceeds of approximately $4.2 million were to be received by early October: Ex CE 22 0144. Mr Carter did not attribute any separate realisable value to the Hong Kong loan, but instead he included $4.2 million as the realisable value of One.Tel's Hong Kong investment.

[7032] Mr Carter attributed a nil value to the other intercompany debts, on the ground that Ferrier Hodgson considered that they would not be realisable: see Ex CE 22 0059, when no figures are attributed to those loans.

22.7.1.3 GST -- AP input tax credit

[7033] According to Ferrier Hodgson's November 2002 report, the claims of unsecured creditors against One.Tel included an ATO claim for $18 million in respect of GST, which had not been admitted to proof by the liquidators. The report stated (Ex CE 22 0164) that the claim mainly related to GST adjustments to April 2001, primarily with respect to the Lucent transaction, and that the claim was subject to further investigation in conjunction with the ATO. The same report noted (Ex CE 22 0170) that the liquidators had filed all BAS/GST returns up to May 2002 and they estimated that this might result in a net refund of $4.4 million, with possibly an additional $600,000 in respect of the period to 30 September 2002. According to the liquidators, those estimates would not be impacted by the ATO's unsecured claim against One.Tel.

[7034] Mr Carter referred to these matters and said that the GST asset (which I take to be the claims amounting to $5 million) was fully realisable, and he assumed that the amount would not be significantly different had the Australian operations been placed into administration as at 28 February, 31 March or 29 May. There were some other figures in the trial balances for input tax credits, which Mr Carter also took into account.

22.7.1.4 Cash accounts

[7035] According to Ferrier Hodgson's July 2001 report, at the time of their appointment One.Tel Ltd held funds in its operating accounts amounting to $2.9 million, and the ANZ Bank elected to consolidate its exposure to One.Tel and apply that indebtedness against both funds held in One.Tel's account at the time of appointment, and also bankings received by it on that day. Ferrier Hodgson said this left the company without funds at the time of appointment. Nevertheless Mr Carter included the full value of all cash accounts in the net realisable value calculation, for the purpose of incorporating the change in cash into the change in net realisable value.

22.7.1.5 GSM network assets and liabilities

[7036] There are several relevant GSM assets and liabilities in the trial balances, and some of them contain big numbers. As to liabilities, amounts owing at 29 May by One.Tel to Lucent in respect of the Next Generation network were settled subsequent to the commencement of the liquidation by an agreement dated 27 September 2001 as varied by a further agreement dated 28 November 2001: Ex CE 29 0001, 29 0017. Mr Carter adopted a nil realisation of the GSM assets and (for the most part) liabilities, primarily because he assumed the net realisable value was unlikely to have changed materially between February, March and May 2001. However, he took the view that part of the liabilities in the account called "Accruals -- GSM Networks" represented ordinary liabilities arising from the operations of the Next Generation business, which should be taken into account for the purpose of calculating movement in liabilities. The liabilities in that account are broken down in the GSM Networks trial balance at 31 May 2001 (Ex CE 2 0121h), from which it appears that apart from the large item "Accruals -- Equipment" the various accruals relate to smaller operational matters.

22.7.1.6 Fixed assets

[7037] The book value of the plant and equipment of One.Tel Ltd as at 29 May 2001 was, according to Ferrier Hodgson's report of July 2001, $111 million (the May trial balance reflected net fixed assets of $122.6 million). According to the July report (Ex CE 22 0023) the directors estimated that $50 million of this figure was applicable to finance leases. At that stage Ferrier Hodgson estimated that the realisable value of the unencumbered plant and equipment at a high of $10 million and a low of $7.5 million, but their November 2002 report indicated that the realisable value of plant and equipment was $1.77 million.

[7038] Mr Carter accepted Ferrier Hodgson's November figure and therefore he calculated the recoverability percentage as 1.77/(111-50), that is 2.9%.

22.7.1.7 Leased assets and liabilities

[7039] In their July 2001 report, Ferrier Hodgson said that the shortfall to leasing creditors upon recovery of equipment was estimated by the directors at $57.34 million, based on anticipated gross realisations to the leasing companies of about $20 million. Ferrier Hodgson said they considered the directors' estimates to be reasonable: Ex CE 22 0026.

[7040] Mr Carter said that the accounting for leases in the Australian operations after December 2000 did not appear to have been properly performed, because the leased assets and liabilities in the trial balances as at February and March 2001 did not reconcile with some detailed schedules setting out the group's leased assets and liabilities (the schedules are identified in a PwC working paper called "Calculation of lease liability as at February, March and May 2001" which is part of App I-12. The source documents are in the Carter exhibits with the trial balances behind Tab 2. Mr Carter chose to rely on the detailed schedules.

[7041] He calculated that there was an increase in leased assets of $23 million between February and May 2001 and $8.6 million between March and May 2001. Mr Carter noted that the book value of One.Tel Ltd's leased assets was $50.1 million and so the return on those assets was approximately 40%. He included $9.2 million (40% of $23 million) as the change in the net realisable value of leased assets from February to May and $3.4 million (40% of $8.6 million) as the change from March to May.

[7042] He also noted that total leased liabilities net of repayments increased by approximately $14.9 million between 28 February and 29 May and so he took that figure into account in calculating the increase in liabilities to be included in the calculation of change in net realisable value. The increased from March to May was $1.9 million.

22.7.1.8 Investments in subsidiaries

[7043] In their July 2001 report, Ferrier Hodgson expressed the view that the only investments by One.Tel Ltd in subsidiaries that had a likely realisable value were One.Tel Plc (UK), which they valued at $29 million (the amount in fact realised), One.Net, valued at $1 million, and One.Tel Ltd (Hong Kong), the value of which was unknown at that stage: Ex CE 22 0024. In their October report they noted that the total proceeds of sale of the Hong Kong operations, net of intercompany loans, was $4.26 million: Ex CE 22 0147. In their November 2002 reports Ferrier Hodgson confirmed the proceeds of sale of the investment in the UK operations, it said that the proceeds of sale of Hong Kong were only $3.72 million whereas $0.4 million had been generated from the operations in France, so the overall value of the investment in subsidiaries remained approximately the same.

[7044] Mr Carter accepted Ferrier Hodgson's figures for the UK and Hong Kong operations and accordingly gave One.Tel Ltd's investments in subsidiaries a realisable value of $33.3 million. He did not include One.Net because One.Net was consolidated within the Australian operations and so its net assets were included in the net realisable value of those operations. He adjusted his high scenario calculations to reflect the impact of the change in exchange rate upon the net realisable value of the UK operations, as explained in para 29 of his supplementary report dated 13 September 2002.

22.7.1.9 Creditors and accruals and carrier claims

[7045] Mr Carter assumed that all creditor and accrual amounts included in the trial balances as at February, March and May 2001 were payable in full, unless otherwise noted. He also assumed that One.Tel's claims against carriers were recoverable as at 28 February, 31 March and 29 May.

22.7.2 Adjusted net trading loss

[7046] Mr Carter's calculations of the net trading loss of the group between 28 February and 29 May 2001, or alternatively 31 March and 29 May 2001, are set out in Apps K-5 and K-6, with explanatory text at PR 270-5. He explained that his figures were derived from the trial balances for the Australian operations at 28 February and 31 March 2001 and the 29 May 2001 trial balance prepared for the RATA: PR 271; those trial balances are at Ex CE 2 0059, 2 0072 and 2 0095.

[7047] However, in calculating the net trading loss on the basis of the trial balance figures, he made several adjustments. First, he adjusted figures for depreciation and amortisation expenses, where those costs related to historical expenditure in the purchase of the underlying assets. He explained (PR 272) that such depreciation and amortisation expenses are accounting entries to apportion the cost of the assets over their useful life, and do not reflect a change in net worth of the enterprise, which is to be separately calculated. Second, he made an adjustment to account for an alleged under-provision for doubtful debts based on the estimated realisation of trade debtors and accrued income. Third, he made an adjustment to address the fact that Next Generation's costs of acquisition had been deducted from costs of goods sold and capitalised or recorded as an asset on the balance sheet: PR 273. The adjustments are set out in App K-6.

[7048] The adjustment with respect to doubtful debts needs to be commented on, in view of the fact that Mr Carter's evidence on that subject was generally excluded. Appendix K-6 includes two spreadsheet pages, one calculating an adjustment for the period from February to May and the other for the period from March to May. The methodology was the same in each spreadsheet and I shall concentrate on the February/May document.

[7049] First, Mr Carter took the figures for trade debtors in the 28 February and 29 May trial balances and subtracted from them the provision for doubtful debts and the provision for handset fraud, leaving a net asset after adjustment for provisions. Then he calculated the difference between the net asset on 28 February and the net asset on 29 May. The difference was that the May figure was higher by $17.27 million, principally because the amount of trade debtors had increased by nearly $22 million and the amount of the provisions had increased by about $4.4 million over the February/May period. Then he set out the change in recoverability of trade debtors and accrued income, as calculated in App K-3 (this, it will be recalled, was calculated by obtaining a recoverability percentage through comparing the book value of trade debtors and accrued income at 29 May with the liquidators' recovery estimates, applying that percentage to the February trial balance figures, and calculating the difference between the February and May figures so as to ascertain the amount of change).

[7050] The figures show that while the total amount of trade debtors and accrued income had gone up by $17.27 million from February to May (and therefore the amount of assets had increased), the recoverable amount had gone up by only $4.52 million, and so the difference between those figures, $12.76 million, was an increase in trade debtors and accrued income that would not be recovered and would therefore contribute to the loss between February and May. Similarly there was an increase in trade debtors net of provisions of $12.22 million from March to May but the increase in the recoverable amount was only $7.77 million, and therefore there was an irrecoverable increase in trade debtors of $4.45 million from March to May.

[7051] It seems to me that this reasoning process is plausible and permissible, on the assumption that the trial balances for February, March and May can be relied upon. Mr Carter's reasoning and calculations here do not depend, impermissibly, on the collections profile summaries.

22.7.3 Conclusion as to reduction in net worth

[7052] Mr Rich did not challenge Mr Carter's calculation of the reduction in net worth, but he gave evidence (2 JDR 1765-7) to the effect that during the period from February to May 2001 it was not his perception that the value of the business was declining, but rather he believed it was increasing. He said:

Although cash balances were declining during this period and the business overall was experiencing trading losses, these were the expected product of the investment being made at that time in building up the Next Generation network in accordance with the company's business plans.

[7053] He noted that during March, April and May 2001:

(2): One.Tel continued to add subscribers in its businesses for reasonable cost of acquisition;
(3): the Next Generation network was coming on line and was therefore increasingly in a state where it was able to contribute positively to margins, and the network in the various cities would become an asset with substantial realisable value as a completed network;
(4): the business was broadly achieving its business plans and targets, subject to timing issues in relation to cash flow primarily as a result of disruptions to billings;
(5): cash usage had declined significantly over the previous year and was expected to continue to decline in line with the company's business plans;
(6): the UK and Hong Kong operations were becoming increasingly cash flow positive and the other international businesses were making progress;
(7): the One.Net business had been EBITDA positive since September 1999 and was continuing to improve; and
(8): the One.Tel brand was well recognised and strong.

[7054] Mr Silbermann adopted a generally similar approach: MS 998-1001. He said it was not his perception at the time that One.Tel was experiencing any reduction in net worth in February and May 2001, and on the contrary, his understanding was that the business was investing in assets that would produce substantial profits in the medium term. He drew particular attention to the completion of One.Tel's technically state-of-the-art mobile telephony network, being fully funded by Lucent on terms that were favourable to One.Tel, and to the acquisition of subscribers for that network at a short-term cost that would be more than recaptured from the earnings from those subscribers in future years.

[7055] As I have said, Mr Carter's reasoning on this subject was found to be almost entirely admissible. The documents upon which he relied as sources of information, such as the trial balances and the liquidators' reports, have been allowed into evidence. There is no plausible challenge to his reasoning and calculations. I therefore accept his evidence. As I have indicated, Mr Carter prefers the change in net realisable values figures to the adjusted trading loss figures as the preferred means of ascertaining the reduction in net worth. I agree, for the same reasons.

[7056] However, Mr Carter's calculations of the reduction in value of the One.Tel business undertakings was based on realisable values assigned by Ferrier Hodgson and losses reported in the directors' RATA after the company went into voluntary administration. There are live questions as to the extent to which voluntary administration reduced the realisable value of the company's assets and also as to whether the figures supplied in the RATA, signed by directors other than the defendants and influenced by the Miller/Green analysis, were unduly pessimistic. If Mr Rich's assessment of the health of One.Tel's businesses in the period from January to April 2001 is correct, then the cause of the reduction in net worth over that period was not the continued trading of the businesses but rather the damage inflicted on them by PBL and News withdrawing from the rights issue and generally withdrawing their support.

22.8 Market announcements

[7057] As discussed elsewhere, on 27 February 2001 the group issued a media release stated, inter alia, that "One.Tel is focused and on track to becoming cash positive as forecast by June 2001". On 4 April the group issued another media release saying that "the company is primarily focused on achieving a positive cash position and is tracking very well against forecasts that were initially made by management in August 2000", and that "One.Tel is fulfilling promises made to our shareholders: to turn the business cash positive and to have a cash balance of $75 million by the conclusion of the financial year".

[7058] In PR 276-89 Mr Carter addressed the question whether there was any reasonable factual basis for the announcements made to the market on 27 February and 4 April 2001. Those paragraphs were not pressed by ASIC and therefore they are not in evidence. Nevertheless they contain some calculations based upon financial evidence that are worthy of consideration independently of Mr Carter's expert opinions.

[7059] The following matters emerge from those calculations. First, the group was engaged in rapid growth from 1999 onwards with a high net cash usage rate. As at 30 June 2000 the group's cash balance was $335.7 million, according to the balance sheet that was part of the One.Tel annual report 2000: Ex CE 5 0051. By 31 December 2000, group cash had fallen to $104.1 million, according to the App 4B half yearly/preliminary final report: Ex CE 5 0069. Of the $232 million of net cash usage in the 6 months from July to December 2000, $63 million was expended on repayment of the Lucent spectrum loan in December 2000, as noted elsewhere, and on the other hand approximately $16 million was received in cash receipts from the sale and leaseback of assets, and approximately $5 million was received through the sale of options: Ex CE 5 0077. Therefore the net cash usage on non-operational activities was about $42 million; and the net cash usage on operational activities was about $190 million for the 6 months. The average monthly net cash usage on operational activities during the July/December 2000 period was about $28 million if one disregards the receipt of the proceeds of sale and leaseback of assets and the sale of options, and about $32 million per month if one takes the usage of those receipts into account.

[7060] The preliminary half-yearly results presentation, released to the market on 1 February 2001, forecast a cash balance of $75 million at the end of June 2001 and a net cash usage for the group of $10 million in the 6 months from January to June 2001. It was forecast that Next Generation would use $66 million during those 6 months while the Australia (ex-Next Generation) operations would generate $41 million and Europe and Hong Kong would generate $15 million: Ex CE 26 0011. Achieving these cash flows would enable the group to achieve its forecast cash balance of $75 million as at 30 June 2001. In fact management's forecasts to the board were for higher cash balances than had been forecast to the market: specifically $115 million in the September and November 2000 board papers (Ex MTB 0003, 0126), $114 million in the January 2001 board papers (Ex MTB 0187) and $91 million in the March 2001 board papers (Ex MTB 0228).

[7061] If the cash usage continued in the 6 months from January to June 2001 at the same rate as in the 6 months from July to December 2000, and assuming payment of $5 million to Toronto Dominion but no other influences, there would have been a cash balance deficit at the end of June 2001 of $93 million: $mill(104 - (32 x 6) - 5). Actual net cash usage figures for January, February and March 2001 were $14 million, $26 million and $3 million respectively: Ex MTB 0235. If the cash usage for the remaining months to June 2001 were to continue at $26 million, there would be a cash balance deficit at the end of June 2001 of $45 million, taking into account the February balance of $64 million shown at Ex MTB 0235. According to the March board papers, the group would achieve a cash balance of $91 million at 30 June 2001 by virtue of strong positive cash inflows in May and June ($14 million and $29 million respectively) notwithstanding that cash flow had been negative every other month from the beginning of the financial year.

[7062] These figures are relevant to the question whether there was any reasonable factual basis for the announcements made on 27 February and 4 April 2001. Focusing on the high historical cash burn creates a factual presumption of unlikelihood of achieving an end of year outcome that would require a dramatic turnaround in cash performance. But a full assessment of whether there was a reasonable factual basis for the announcements requires that other things be considered. As shown elsewhere, the figures placed before the board as early as September 2000 envisaged such a dramatic turnaround, although it is true that the extent of the requisite turnaround increased as the high rate of cash usage continued longer than expected. What is needed is to examine the foundations for the forecast turnaround that was placed before the board and apparently accepted by the directors, and the reasons why the high cash usage continued especially in February 2001; and also to consider whether ASIC's contentions, including its claims about overdue creditors, under-provisioning for trade debtors and production in gross margin contribution, are validated by the evidence. These are matters explored at length and in detail in the body of this judgment.

22.9 Overall adequacy of reporting

[7063] Mr Carter was asked to express his opinion on the adequacy and quality of information reported to the board, under headings relating to the adequacy of cash reserves; the actual compared to the estimated financial position; and performance especially as regards debtors and earnings, key events and transactions, and reporting systems: PR 290. He was asked to consider whether the information provided to the board enabled the directors to monitor management, properly assess the financial position and performance of the group and properly and promptly detect and assess material adverse developments affecting its financial position and performance: PR 291.

[7064] Before considering these specific matters, he considered the sources of information reported to the board. The evidence establishes that the two primary sources of financial information provided to the board were the flash reports prepared and distributed to the directors on a monthly basis, and the board papers prepared and distributed to the directors bi-monthly for board meetings. The flash reports provided summary information on performance indicators such as subscriber numbers, ARPU, revenue, gross margin, operating costs and EBITDA. The board papers prepared similar information on a monthly, quarterly, half yearly or yearly basis, with comparisons to forecast and budget information, and with earnings information details on an operations basis. The precise format varied over time. As Mr Carter noted (PR 294), only the board papers provided a comparison of the group cash balances to updated forecasts and budget. Both the flash reports and board papers provided brief commentary on the causes of variances between actual and forecast results, and the board papers provided information on operational issues.

[7065] Mr Carter expressed the opinion (PR 296) that although from an accounting perspective the information provided in the flash reports and board papers was relevant, it was not sufficient in terms of adequacy or accuracy to enable the board to monitor management, assess the financial position of performance of the group or detect and assess materially adverse developments. He said (PR 297) that specifically, the information provided to the board did not disclose:

(2): the amounts currently due to be paid and the cash available to pay those amounts on a group basis or an individual operations basis;
(3): the detailed ageing of the debtors balance, particularly in the Australian operations (he added, inadmissibly, that the information did not disclose the inadequacy of the provision for doubtful debts);
(4): the actual earnings of the group (for example, the group's EBITDA for the three months ended 31 March 2001 as reported to the board was a loss of $10.8 million [in fact it was $14.73 million: Ex MTB 0231] whereas the management accounts reported an EBITDA loss of $44.6 million [apparently an addition of the results for each business operation, as per the March management accounts], some $33 million worse (he said) than the amount advised to the board);
(5): key events and transactions affecting the group's financial position and/or performance.

[7066] Mr Carter gave a list of information categories corresponding with the above four points, which, he said, would have put the board in a better position to be able to assess the deteriorating financial position and performance of the group. The additional matters were:

Cash and creditors

(9)
available cash balance taking into account restrictions on cash such as pledges and unpresented cheques

(9)
available cash balance compared to forecasts

(9)
overdue creditors

(9)
liquidity and working capital

(9)
net cash flow compared to forecast

(9)
extent of payments deferred

(9)
details of threats to supply and actual cessation of supply by creditors

Debtors

(9)
composition of the ageing of debtors

(9)
provision for doubtful debts

(9)
historic [sic] collection of trade debtors relative to provisions

Earnings

(9)
a detailed profit and loss account, with comparison to prior period and budget, sufficiently detailed to identify significant variances in income and expenditure, with explanations for those variances

(9)
a reconciliation of earnings (profit/loss) to cash flow, which would have quantified the amount of cash and non-cash adjustments such as uncollected revenue, cash outflows not charged as expenses such as capitalisation of acquisition costs and other cash payments such for leases, so that the board would be alerted to the extent to which EBITDA and cash flow may move in different directions

Other

(9)
a detailed balance sheet with comparisons to prior period and budget. Details of relevant accounts should have been separately reported, such as trade debtors and associated provisions, accrued revenue and trade creditors. Further, where estimated balance sheets were reported to the board, any significant differences between actual and estimated balance sheets should have been identified and explained

(9)
forecast information, including disclosure of major underlying assumptions and any variances

(9)
compliance with loan covenants

(9)
details of significant transactions or agreements by management with third parties such as suppliers

[7067] Mr Carter's prescriptions appear to be informed by hindsight and his view of what went wrong at One.Tel. Nevertheless, it is significant that as an expert forensic accountant he has committed to the proposition that the board should have required information about overdue creditors and the extent of deferred payments, and the composition of the ageing of debtors, apparently at some level of specificity. These are matters that one might have expected, at least in the detail, to have been left by directors to senior management, reporting to the board on an "exceptions" basis. It is also significant that Mr Carter believed that directors should have required additional detailed information about earnings and a detailed balance sheet, apparently for bi-monthly board meetings though presumably not for flash reports. It is less surprising that he would have expected the board to be given details of any threats to supply or actual cessation of supply by creditors and any issue about compliance with loan covenants. While I accept that expert opinion evidence from a forensic accountant is relevant to these issues, the general framework of the reporting responsibilities of management and the duty of directors to seek out information constitute a legal framework, and the application of the legal principles to the circumstances of One.Tel is a mixed question of law and fact. It is appropriate, in those circumstances, to address the respective responsibilities of management and directors in the reporting process, as a matter of law, before turning to the present case.

22.9.1 The responsibilities of management and directors in the present case

[7068] Some of the matters identified by Mr Carter as matters that should have been disclosed would, if true, be matters either known to management or capable of being discovered by management by making reasonable inquiries, but not matters about which reasonable directors would be put on inquiry in the absence of information suggesting some form of irregularity. For example, the pledging of cash and non-presentation of cheques fall within this description: in my view, the directors were entitled to assume either that management's figures on available cash either took such matters into account on the ground that they affected the available cash balances, or that management would the draw directors' attention to the fact that these matters were excluded from the cash figures and disclose sufficient information about them to permit the directors to assess the materiality of those matters. Similarly with respect to deferred creditor payments, the transfer of the $26 million from the UK to Australia on 28 February (if, as Mr Carter claimed, it left the UK operations with insufficient cash to pay overdue trade creditors), the ageing of creditors, details of material accounts payable balances that were in dispute, and details of threats to supply by unpaid carriers.

[7069] However, other matters mentioned by Mr Carter are ex facie in a different category: they are matters about which (if Mr Carter is right) directors acting reasonably might well be expected to demand information, even without any suggestion of irregularity. For example, Mr Carter complained that cash balances were not reported by individual operations, with the result that what he described as "the cash balance deficiency" in the Australian operations at the end of February and April was not disclosed to the board. Similarly, he said that "details of the Australian liquidity position" would have revealed that the Australian operations had insufficient cash and liquid assets to pay debts. He said a reconciliation of net cash flow to earnings would have revealed the extent to which sales revenue was represented by trade debtors that were not being collected in cash, the extent to which payments to trade creditors were being deferred, the amount of cash expenditure not expensed, and the amount of non-recurring cash usage.

[7070] Mr Carter's suggestion as to these matters seems to be that directors of a company like One.Tel should have required this information as a matter of routine, and should not have accepted as adequate the information that management in fact provided, notwithstanding that according to the evidence of Mr Rich (which I accept), the format and content the board papers were settled between management and the chairman of the board and no directors asked for additional information that was not provided. In my view there is a dividing line between information that must be given to and required by directors so that they can discharge their duties, and information of more detailed kind not materially affecting the accuracy of what is presented to the board and not necessary for the board to seek or management to provide. For example, in a corporate group where creditors are being properly managed and cash inflow is sufficient overall to pay debts as and when they fall due (allowing for legitimate disputes), it is not obvious that the board would need to be informed in detail of the ageing of creditors or of decisions by management to defer the payment of particular creditors because of disputes or for other commercial reasons. On the other hand, if the group is in difficult financial circumstances and management finds it necessary to defer the payment of material amounts because of inadequate cash inflow, the board should be provided with and should demand sufficient information to discharge their statutory duty not to permit the group or any of the entities within it to trade while insolvent.

[7071] If, from the perspective of One.Tel's board, taking into account what the directors knew, a reasonable director would have concluded that the group had crossed the line to a position of doubtful solvency at any time during the period from January to April 2001, then it seems to me that demanding additional information of the kind identified by Mr Carter would have been a reasonable course of action on the directors' part. In particular, I can see the wisdom of requiring a reconciliation of net cash flow to earnings if the directors were given grounds for concern as to whether there was a discrepancy between cash flow and earnings that might be explained by uncollectability of trade debtors or deferral of payment to trade creditors or the like. I do not say that any of the particular matters specified by Mr Carter would be necessary steps for the directors to take, but they may well be sufficient to satisfy the directors' duty to make further inquiries.

[7072] There is another category of information in Mr Carter's list at PR 303 of matters that management should have revealed to the board when reporting the group cash balance. He criticised management's reporting of the group cash balance on the ground that it did not contain explanations of why actual results were behind forecast, or explanations of changes to assumptions made for the purpose of group cash forecasts. The task of monitoring business performance is so important, for the board of a listed public company, that it is a basic function of the board. Business plans and forecasts are prepared partly for the purpose of measuring management's business performance against agreed goals (another purpose is to provide a foundation for statements to the market). Therefore it is essential that the board:

•: have a full explanation of, and fully understand, all assumptions underlying any forecast proposed by management for board adoption; and
•: be fully informed about, and explore rigorously, the underperformance of any business against an agreed forecast.

Note that there are two components of this, namely management's responsibility for adequate disclosure to the board, and the responsibility of every director to understand what is disclosed and to be satisfied about all material issues.

[7073] Therefore to the extent to which management failed to give an adequate explanation of why actual results were behind forecast, or failed to explain changes to assumptions made for the purposes of forecasts, there was a failing on the part of management; but management's failure on these matters would not excuse directors from discharging their responsibility to explore and understand all relevant assumptions underlying any proposed forecasts, and why the targets set out in forecasts adopted by the board had not been met.

[7074] There is, however, a dynamic between the board and the management team that manifests itself differently from one company to the next, and is influenced by such matters as corporate culture and agreed methods of communication. In the case of One.Tel, the evidence indicates that management's practice was that its reports to the board (principally board papers and flash reports) would be succinct and in bullet point style, and relevant members of senior management would then report more fully in oral presentation, and be available to answer questions. It appears the directors accepted this approach to communication of material information, as the style of board papers and flash reports did not change over the period from September 2000 to March 2001 even though there were some adjustments to the format and content. It is not self-evident that this kind of abbreviated written disclosure supplemented by oral presentation is inadequate. It may not lay a perfect paper trail but it is consistent with a realistic response to time pressures. I think the principal issue about the adequacy of board disclosure of cash balances in the present case is not about the nature of the duties and responsibilities at stake, but rather about whether in fact the defendants as part of the management team provided sufficient information to discharge their responsibility having regard to the style of communication that the board accepted.

[7075] Mr Carter's opinions are to be considered in light of the evidence of Mr Rich and Mr Silbermann, which I accept, to the effect that management was prepared to provide additional information requested by the directors. For example, Mr Silbermann said that at one point Mr Greaves asked for a balance sheet to be included in the board papers, and Mr Packer Jnr asked at the July 2000 board meeting that a rolling cash flow forecast be included, and one of them asked that a sensitivity analysis be included for the board meeting of May 2000; all of these requests were met: MS 1004; and see MS 1011. There is no evidence that any director required additional information in the categories specified by Mr Carter and was denied it. The level of detail of the information provided to the board in board papers was something that developed over time with input from various directors (2 JDR 1782a); indeed Mr Packer Jnr requested and received additional information in the form of the daily email updates, as noted elsewhere. Mr Rich said he sought at all times to ensure that the board was made aware of what were, in his judgment, the key issues and developments in the business and were kept materially abreast of how the businesses were progressing: 2 JDR 1782b. If there was an informational deficiency in what was supplied to the board, then prima facie that was something each director should be concerned about and should address. Indeed, as Mr Rich remarked (2 JDR 1782c) given the experience in business and the telecommunications industry of board members and those who advised them (especially, in the case of Mr Packer Jnr, Mr Kleemann), it was not generally the function of management to load up the directors with detailed information that they did not ask for, unless management formed the opinion that the information was necessary to address material, current issues in the business. Mr Silbermann gave similar evidence, and observed that it was not his role as finance director to dictate the board what regular reported information they should require: MS 1013-5.

[7076] In a table at PR 299 Mr Carter listed numerous items of information and claimed that if those items were provided to the board, they would have put the directors in a better position to assess the deteriorating financial position and performance of the group. The table of categories of information was allowed into evidence but Mr Carter's claim that this information would have put the board in a better position to assess the deteriorating financial position of the camp group was rejected. Although some of the information in the table was in fact provided to directors, though not precisely in the form prescribed by Mr Carter (2 JDR 1782e and f), the specificity evidently required by Mr Carter seems on the face of it to be excessive. As Mr Rich pointed out, board papers containing all this information would tend to be unwieldy and difficult to read and absorb, and the "real issues" would become lost (2 JDR 1782d); thus creating the risk that the board would focus on matters of detail at the expense of properly considering material, strategic issues. And as Mr Rich said, some aspects of a detailed profit and loss account, such as operating expenses broken down into categories such as rent, post, telephone and payroll, would appear to be inappropriate for routine review at board level in a company of One.Tel's size.

22.10 Adequacy of reporting cash reserves

[7077] At PR 301-3 Mr Carter purported to identify, more specifically, ways in which the information provided by management to the board as to the group's cash and creditors was inadequate. These paragraphs were excluded from evidence. They are, to a substantial degree, correlated to Mr Carter's views as to the adjustments that needed to be made to management's figures in order to reveal the group's true financial position and performance. For example, Mr Carter took the view, as noted above, that accurate calculation of One.Tel's available cash balance at the end of the month required that the intranet cash figures be adjusted to take account of cash "pledged" and the amount of "unpresented" cheques. The corollary is that the board should have been given information about these two matters.

[7078] Mr Rich made the following observations on this matter (2 JDR 1768):

•: no director of One.Tel ever asked for such information to be included in the board papers; and
•: at least until April 2001, the short-term liquidity position of the group was not, from his point of view, a real issue for the business, as there was no question in his mind that the group had sufficient cash available to pay amounts currently due to be paid in the normal course of business.

22.11 Adequacy of reporting actual compared to estimated financial position and performance

[7079] Mr Carter subdivided the question of the adequacy of reporting on the group's financial position and performance into two categories, namely debtors and earnings. He dealt with debtors at PR 306-12, some but not all of which was excluded from evidence. He dealt with earnings at PR 313-41, most but not all of which was excluded from evidence.

22.11.1 Debtors

[7080] Mr Carter's overall theme was that the information that the board received about debtors was less complete in the 2001 financial year than in previous years, and he expressed the view that the board was not informed of the cause and true extent of material difficulties concerning the collectability of debtors, difficulties that were known or should have been known to management: introduction to s 4.2.1. A substantial part of his opinion evidence was held inadmissible because it relied on the collections profile summaries and comparison.xls.

[7081] Mr Carter gave some evidence, held to be admissible, about the contents of information received by the board during the period from June 1998 to March 2001: PR 306-8, except for the first sentence of para 308. In a table at para 307 he compared the board papers for each meeting from June 1998 to March 2001, charting whether each set of board papers disclosed certain matters such as the balance of the provision for doubtful debts on a group basis and the total amount of aged debtors over 90 days. The table indicates that there was only very limited disclosure about debtors in the September and November 2000 and January 2001 board papers.

[7082] It seems to me, however, that it is artificial and potentially misleading to force the actual disclosure in each set of board papers into a handful of categories on a "yes or no" basis. It is necessary to look at the text of what was actually said, in its context, in order to assess the adequacy of disclosure.

[7083] In the board papers for the meeting on 26 May 2000, under the heading "Collections" (Ex CE 15 0237) there was a series of bullet points which informed the directors of the forecast total 90 day + debt at 30 June 2000 and the total forecast group provision. Another bullet point noted the growth in 90 day + debt and said that though current collections activities had improved, old debt was not being recovered, and therefore an additional $20 million provision against old debt was recommended. There was also a note about improvements in current collection activities by the use of such matters as hot-line routing and call barring. It seems to me plain that these bullet points were intended to provide a foundation for board discussion and for a decision to be made on management's recommendation to increase the provision for doubtful debt. The disclosure was relatively full because the board was being asked to make a decision on the adequacy of the current provision.

[7084] The Finance and Audit Committee met on 28 June 2000 (Ex CE 15 0278) and noted that an additional provision of $20 million against old debt was to be made, as discussed by the board meeting on 26 May.

[7085] In the board papers for the meeting on 28 July 2000, the financial executive summary (Ex CE 15 0264) explained that the Australian operation's loss reflected, in part, an additional bad debt provision relating to old debt of $20 million. Later in the board papers there was a bullet point discussion under the heading "Collections", in which figures were given for total 90 day + debt and the group's provision for doubtful debts at 30 June 2000, and there was a note about new tools and procedures that were said to be enhancing the collection effort: Ex CE 15 0271. The July board papers also contained a forecast balance sheet as at 30 June 2000 that showed trade receivables of $239.39 million and a provision for doubtful debts of $47.92 million: Ex CE 15 0280.

[7086] In earlier board papers there was a discussion of "Collections" under the general heading "One.Tel Australia", in effect as a regular item. In the September board papers that item has been removed from the position where one would have expected to see it: see Ex CE 15 0299. There may have been a good reason for removing it: the board had addressed the adequacy of the provision for doubtful debts in the May 2000 board meeting and their decision had been implemented in the results for the financial year 1999/2000 as noted in the July 2000 board papers; and additionally, there was relevant information in the September board papers about billing delays and billing difficulties, which would tend to explain an increase in uncollected debt: Ex CE 15 0284 and 15 0298. Monthly cash balances and cash flow were a focus of attention in the September board papers: Ex CE 15 0285.

[7087] In the November 2000 board papers there was again a focus of attention on cash, with a table for monthly cash balances and bullet point discussion about billing delays, which might again explain the absence of a discussion about "Collections": see Ex CE 15 0318; 15 0320; 15 0336.

[7088] In the January 2001 board papers there was again a focus of attention on cash (Ex CE 15 0366; 1503 70) and discussion of the billing catch up (Ex CE 15 0366; 1503 73; 15 0386), which may again have led management to believe that there was no need for separate discussion of "Collections".

[7089] The September and November 2000 and the January 2001 board papers contained only a single relevant piece of information, according to Mr Carter's summary. That was the balance sheet forecasts for 30 September 2000 and 30 November 2000 and the estimates for 31 December 2000 respectively. The September figure for receivables was $245 million and the provision for doubtful debts was $49 million. The November figure for receivables was $320.86 million and the provision for doubtful debts was $58.4 million. The December figure for receivables was $351.84 million and the provision for doubtful debts was $61.47 million. Although there was no discussion of these figures in the summary notes in the board papers, a conscientious board member would have seen by comparing current with previous figures that receivables were increasing steeply and the provision was rising though not sufficiently to cover the increase. That is a matter that directors, acting with reasonable care and diligence, might well have taken up at the board meeting. In circumstances where the board papers focused attention on cash and on billing problems, the provision for doubtful debts had been increased, and the new auditors, Ernst & Young, were not requiring any further increase in the provision for the purposes of 30 half-yearly review (a matter discussed elsewhere), in my view it was reasonable for management not to continue with the "Collections" discussion and to leave it to directors to raise issues about the adequacy of the provision in light of increasing trade receivables if they wished to do so.

[7090] There was some additional information about doubtful debts in the March board papers, though again a principal focus of attention was cash and cash flow (Ex CE 15 0406; 15 0414) and a further "unidentified billing shortfall" was noted (Ex CE 15 0415), and there was a report that $40 million of unbilled data had been identified that would be billed in April/May (as discussed in detail elsewhere) (Ex CE 15 0420). Although cash and billing issues were separately discussed, the March board papers reintroduced a bullet point discussion of "Collections" for the Australian operations, giving figures for the over 90-day balance at 31 March ($84 million) and the provision for doubtful debts at the same date ($54 million), pointing out that the provision was 64% of the over 90-day balance and was judged to be adequate to Mr Rich, who said that this information was included at his request: 2 JDR 1785g. This, together with the group balance sheet estimate at 31 March in which receivables stood at $362.2 million and the provision for doubtful debts was $66.45 million, were obviously (and, in my view, reasonably) thought to provide an adequate foundation for a discussion about collections and the adequacy of the provision, during which management would be available to provide further information orally.

[7091] Mr Carter was critical, in inadmissible evidence at PR 310, of the disclosure in the March board papers and the assertion that the provision was adequate. The board papers said that the debtors balance over 90 days was $84 million with a provision of $54 million. Mr Carter claimed, relying on the collections profile summaries, that at that time Australian debtors alone totalled $152 million for which $84 million was greater than 90 days, $61 million greater than 180 days and $48 million greater than 330 days. If that information were a reliable indication of the aged debtors of the Australian operations at the end of March, then plainly enough it would have been necessary to revisit the provision. But the question is whether that information was reliable.

[7092] Plainly the amount of written reporting of collections, the ageing of debtors and the current provision for doubtful debts fluctuated from one set of board papers to another. It does not seem to me, however, that there was progressively less and less information about these matters. Rather, there seem to have been plausible explanations for the fact that there was less information on these subjects in the September, November and January board papers than in earlier board papers or in the board papers for March 2001.

[7093] Mr Carter's main criticism of the disclosure in the board papers was that in the period from July 2000 to March 2001 there were only two occasions when the board papers reported the amount of trade debtors greater than 90 days (that is, in the July 2000 and March 2001 board papers), and there was nothing to indicate that the board received any aged debtor information in board papers or flash reports other than those two items: PR 306. He also complained that there was no written information concerning the nature of the billing problems that had been identified or explaining how and when they were to be resolved, nor was there subsequent reporting of the actual resolution of the problems. He gave a long list of information that would have assisted the board to assess the financial position with respect to debtors and the provision for doubtful debts: PR 311. These expressions of opinion were held to be inadmissible.

[7094] Mr Rich pointed out that as a general rule, One.Tel's practice was that the adequacy of provisioning for doubtful debts was considered by the board around May/June each year, in the context of the final provisioning for the year-end accounts, and the board papers for that time of the year tended to include more information on that topic than the board papers for the rest of the year: 2 JDR 1785b. He said that in One.Tel's early days the debt collection team was relatively small and One.Tel was relatively inexperienced in managing collections and ensuring adequate provisioning for doubtful debts. But by 2001, the debt collection team internally employed more than 200 people and was managed by a layer of internal managers overseen in Australia by Mr Hodgson. As those developments occurred, Mr Rich's perception was that the occasions for senior management and the board to be involved in detailed consideration of collections and provisioning commensurately decreased: 2 JDR 1785a. The occasion for the full board to consider provisioning issues was further reduced by the creation of the board's Finance and Audit Committee late in 1999, since that committee assumed responsibility (at least in the first instance) for reviewing the adequacy of provisioning in the context of its review of the half-yearly and end-of-year accounts: 2 JDR 1785c. I accept this evidence.

[7095] Undoubtedly provision of the information stipulated by Mr Carter would have equipped the board much more fully to make a decision about the adequacy of the provision and the company's degree of success in collections. But according to Mr Rich, no director ever asked for a detailed ageing of creditors to be included in board papers (2 JDR 1769b), and in my view, even at March 2001 there was no particular reason for board members to be so anxious about collections and provisioning as to require that level of information. That conclusion is consistent with Mr Rich's evidence (2 JDR 1769f) that in the period from January to May 2001 it was not his perception that there was any material issue concerning the adequacy of provisioning for doubtful debts, of a kind that would justify detailed consideration of that matter by the board in advance of the detailed review that would be undertaken by the finance team and the auditors for the preparation of the end of year results.

[7096] It is to be remembered that in the context of finalising the end-of-year results for the year to 30 June 2000, there was a review of the adequacy of the provisioning rates being used for ongoing provisioning for doubtful debts, and the board approved a substantial increase of $20 million in the provision. Mr Rich said that he considered the increased provision to be at a "generous level": 2 JDR 1785d. He also gave evidence that he asked Mr Hodgson and Mr Barnes to consider the adequacy of the provision for doubtful debts, in conjunction with members of the collections and finance teams, in December 2000, and he asked Mr Hodgson to do so again in March 2001, and on both occasions it was reported to him as a result of the review that the provision was considered adequate (2 JDR 1785e); indeed, he said, at no time during 2000/2001 did any One.Tel manager suggest to him or (to his knowledge) any other executive directors that they thought the provision was less than adequate or in need of review outside the normal processes of the group.

[7097] The new auditors, Ernst & Young, issued a review closing report for their review of the half-year results to December 2000, directed to the board's Finance and Audit Committee. That report included a detailed ageing of creditors as part of the section that considered the reasonableness of the provision for doubtful debts as at 31 December 2000: Ex JDR 2/759. Ernst & Young did not recommend any further increase for the time being, although the method of calculating an appropriate provision was raised as an issue for management to consider. Ernst & Young's half-yearly review was considered and discussed by Finance and Audit Committee at their meeting on 23 February 2001, attended by Mr Long and Mr Simmonds of Ernst & Young: Ex JDR 4/1454. If there was any issue about the ageing of debtors or the adequacy of the provision for doubtful debts, matters addressed in the auditor's half-yearly review, then one would have expected Mr Greaves, as chairman of the Finance and Audit Committee and of the board of directors, to have brought it to the attention of the board, but this did not happen (2 JDR 1769d), and in those circumstances it was reasonable to infer that the members of the committee had no issue with the figures on ageing or the provision for doubtful debts.

[7098] Trade receivables were rising over the period from January to April 2001, as I have noted elsewhere, but management had, according to the summary points in the board papers and the fuller evidence given by Mr Rich and Mr Silbermann, and the board minutes, been given explanations about the billing difficulties that arose in November and January-February and about improvements in the collections effort. Although the board papers were not comprehensive on the subject of billing difficulties, the evidence given at the hearing shows that there was substantial discussion on these matters at the board meetings in January and March.

[7099] I do not accept the proposition that detailed information about the ageing of debtors must routinely be provided to and required by a conscientious board to enable it to properly discharge its functions. Whether that information should be required depends upon the circumstances, including whether trade receivables have grown out of proportion to the provision for doubtful debts, what proportion of those receivables are aged debtors and whether the proportion of aged debtors is growing, and whether the efficacy of the collections effort has become an issue. Looking at the evidence as a whole, my view is that up until the end of March 2001 these issues had not come to the forefront to the extent that would make it necessary for careful and prudent directors to demand more detailed information and analysis.

22.11.1.1 Billing disruptions

[7100] Mr Carter acknowledged that some information concerning billing problems was provided to the board, at times quantified as the reason cash had fallen below expectations: PR 306(c). But he complained that "there was no written information concerning the nature of the problems, how and when they were to be resolved nor subsequent reporting of the actual resolution." Mr Rich responded to this criticism in para 1784 of his affidavit. First, he pointed out, correctly, that the board papers were in summary "bullet point" format and were intended to be, and were, spoken to at the meeting, and in addition he and Mr Keeling had the practice that at least one of them would speak to each of the directors prior to the board meeting to "walk them through" the board papers and in that process, they would usually add some explanation of the matters noted in the papers.

[7101] Although what was said in the board papers was in summary form, nevertheless it conveyed a substantial quantity of material information. For example, disclosure of the billing disruptions in August/September 2000 was reported in the September board papers (Ex MTB 1/3 and 17) in a manner that quantified the effect of the delays in billing runs and gave very succinct explanations (for example, "GST implementation issues"), and said that the delays would be recovered in the second quarter. That information, though very brief, would in my opinion be sufficient to prompt a director to seek a full explanation of what the GST issues were and to follow up the matter at a subsequent board meeting in order to ensure that the predicted recovery had occurred. The minutes of the meeting record that Mr Rich reported on the matter as part of his executive summary, and there was discussion about it: Ex MTB 1/319.

[7102] The topic of billing problems was addressed in the November board papers: Ex MTB 1/128 and 130. Once again the coverage was in succinct, bullet point form but substantial information was conveyed. The amount of cash usage over budget due to delays in billing runs was identified, and the timeframe for the "catch up" was given. The current status of billing runs as at 15 November was stated, as was the rate of production of billing runs. Software and other changes to improve performance were noted, as was the objective of improving the billing runs from three to five per week. The minutes of that meeting record that Mr Beck reported on the matter and there was discussion: Ex MTB 1/322.

[7103] The topic of billing problems was again addressed in the January board papers: Ex MTB 1/187, 194, 197, 205 and 207. The quantum of cash inflows forecast from the billing catch-up was stated, it was said that the previous delays had been brought up to date and bills were being issued on time, though a component of billing with respect to November and December data would be billed in January and February. It was noted that PwC were to be engaged to assist in a review of the billing system processes, to minimise revenue leakage through the billing system. A computer upgrade improving the capacity required for billing, inter alia, was noted. Billing delays in One.Tel Australia caused by GST implementation issues were noted and a billing run catch-up resulting in positive cash flow in the third quarter was forecast. The minutes of the meeting show that billing issues were discussed by the directors: Ex MTB 1/326B.

[7104] Delays in billings during February were reported in the February flash report: Ex MTB 1/381B. The group cash balance against forecast was noted and it was said that the shortfall 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 that billing would be back up to date by mid-March with the receipt shortfall being recovered in March and April.

[7105] Billing delays were also addressed in the March board papers: Ex MTB 1/227, 236 and 241. The shortfall in billing run totals was quantified and it was said that the shortfall would be back-billed in April and May. It was said that a billing shortfall in the Australian businesses was unidentified and was being investigated, that previous delays had been brought up to date and bills were now being issued on time, and that $40 million of unbilled data relating to December-March had been identified and would be billed in April/May.

[7106] Mr Rich gave evidence that he discussed the billing issues with Mr Howell-Davies, Ms Kekalainen-Torvinen, Mr Adler and Mr Greaves before the March 2001 board meeting, and that he discussed the various disruptions to the billing system regularly with Mr Packer Jnr during late 2000 and 2001. He said he found all the directors to have a good grasp of the nature and importance of the issues. He also spoke to Mr Murdoch Jnr about the delays in billing runs during February 2001. He gave some particulars of his discussions: 2 JDR 1784k. He said he asked Mr Beck and Mr Hodgson to give Mr Kleemann an update on billings in February, and he asked Mr Silbermann and Mr Beck to give Mr Kleemann an update on billings and collections in March, and was informed that they had done so. He also arranged for Mr Beck to have PwC give a presentation to PBL and News representatives in early May.

[7107] Having regard to the content of disclosure in the board papers and the February flash report, and Mr Rich's evidence of his conversations with directors, my view is that, notwithstanding Mr Carter's opinion, information concerning the nature of the billing problems, how and when they were to be resolved and what actually happened by way of resolution was in fact given to the directors in a timely fashion.

22.11.2 Earnings

[7108] Mr Carter purported to analyse differences between the earnings information known or that should have been known by management, and the earnings information provided to the board. His overall theme was that the board was incorrectly advised that the group was performing materially better than its actual loss performance: introduction to s 4.2.2. He developed his position by considering discrepancies in reported earnings between flash reports and management accounts, and between board papers and management accounts. The analysis was excluded essentially because of its reliance on management accounts that were not established to be final documents.

22.11.2.1 Management accounts

[7109] Management accounts are discussed elsewhere in my reasons for judgment. The profit and loss statements in the management accounts were prepared from general ledger balances derived from the Adept accounting system for the Australian operations. Mr Carter's view, held inadmissible, was that the management accounts were a more reliable source of information than the flash reports because they reflected the detailed accounting records of the Australian operations. In my view properly prepared and finalised management accounts would be a more reliable source of information than flash reports issued shortly after the month to which they related and containing estimated figures, although directors who understood the different methods of preparation of the two sets of figures would find both reports useful. Properly prepared management accounts would be based on the company's detailed accounting records including its debtors and creditors ledgers and the general ledger (presumably entered up for the whole of the month to which the management accounts related), and could be expected also to take revenue figures from actual billing runs rather than estimates. The difficulty in the present case is that the documents treated by Mr Carter as One.Tel's monthly management accounts during 2001 have not been shown to have been final management accounts for the months in question, and as noted elsewhere there is evidence suggesting that the documents treated by Mr Carter as the management accounts for January, February, March and April were incomplete drafts.

22.11.2.2 Flash reports

[7110] Mr Carter claimed, admissibly, that in the period from January to April 2001 the flash reports for the Australian fixed wire/service provider business were based on budgets or revised budgets rather than actual data: PR 316. He took the "revised budget" figures from the document at Ex CE 10009 headed "Profit and Loss -- Australia (Wireline and SP)" which, as I have said, appears to have been last modified on 30 April 2001. A table at footnote 184 (p 316) indicated that the January flash report used a figure for gross margin that was approximately $271,000 higher than in the revised budget forecast, and a figure for OPEX that was $271,000 lower than the revised budget, so that the flash and budget EBITDA figures were the same, but as the gross margin and OPEX figures used in the flash report were different from one another (even though the difference was the same amount), I infer that Mr Carter was not suggesting that the gross margin and OPEX figures in the flash reports were budget figures. The flash and budget revenue figures for January 2001 were the same, and I take Mr Carter's claim to be that the revenue figures in the flash report were the budget figures. The table in footnote 184 gives only revenue figures for February, March and April, and so the claim that the flash report figures were budget figures seems to be confined to revenue. In February and March, budget revenue exceeded flash revenue by $5 million each month. Mr Carter noted that there was an excel spreadsheet cell in the working papers for the February and March flash reports which contained a formula deriving revenue as budget revenue less $5 million. The April flash report revenue was $10.015 million lower than the revised budget.

[7111] Mr Rich considered this issue in his affidavit: 2 JDR 1786-96. He rejected the claim that the revenue figures in the flash reports were taken from the budgets. As to the January flash report, he noted that Mr Hodgson and the management team for the fixed wire/service provider business prepared a revised business plan in late January 2001: Australian wireline and SP uplift-final.xls: Ex CE 1 0009. Mr Rich said he assumed that the figures in that plan were based on the best available information, and therefore it would be unsurprising that the end-of-January figures calculated for the flash report were close to, and in the case of revenue, the same as, the business plan forecast.

[7112] As to February and March, Mr Rich said he reviewed the electronic form of the spreadsheets that Mr Carter had assumed to be the working papers for those months. He said the revenue figure for February appeared to have been arrived at by taking the budget revenue figure from the revised business plan of late January and adjusting it downwards by $5 million, but he could not find any workings explaining the origins of the $5 million adjustment. However, there was a worksheet referable to the March flash report (Ex JDR 6/1965), which according to Mr Rich, indicated the workings for that month. The worksheet showed that, for the fixed wire component of the business, the budget revenue for the month was $26,829,519.70, a figure built up from budgeted assumptions about the number of tolling subscribers in each product grouping and about ARPU. He drew attention to another table in the electronic document, which, he said, appeared to set out the actual revenues for the fixed wire component of the business. He said it appeared that the operator calculated the actual revenues by using figures for tolling subscribers obtained "from Dean Woodbury", which were different from the budget figures, and also by using ARPU figures that were different from the budget figures (taken, he expected, from the latest data in the SAS system). Actual revenue was calculated by multiplying the subscriber numbers by the ARPU number. The resulting calculation of revenue was $22,079,791.71, less than the budget figure by about $4.75 million. Mr Rich suggested in that the March flash report figure for revenue for the fixed wire/service provider business, which was $5 million less than budget, reflected that $4.75 million difference in the fixed wire component, together with a $250,000 difference in the service provider component of the business. He suggested the $250,000 was either an approximation of the difference in the service provider component or some adjustment based on a calculation that was not disclosed in the working paper. In that way, he reached the conclusion that the cell note referring to budget less $5 million was not a formula for deriving actual revenue from budget revenue, but in truth it was a summary of the differences emerged when actual figures were calculated or estimated for tolling subscribers and ARPU.

[7113] In relation to the April revenue figure, Mr Rich said that the source of the figure, as appears from the worksheet for the April flash report (Ex JDR 6/1969), was not the revised January budget adjusted by $10.015 million, but was in fact the revised budget for the balance of 2001 prepared by Mr Hodgson towards the end of April 2001 (the document referred to elsewhere as "FW SP revised forecast monthly.xls" (Ex JDR 5/1865AA).

[7114] Mr Rich's reasoning appears to me to be plausible and supported by the documents to which he referred. His evidence undermines Mr Carter's assertion that the revenue figures in the flash reports for January, February, March and April 2001 were taken from budget figures (by implication, without calculation based on actual component figures), and my conclusion is that it would be unsafe to accept Mr Carter's claim.

[7115] Mr Carter noted some anomalies in the flash reports for March and April 2001. The year-to-date revenue and EBITDA figures in the April flash report were different from the figures derived by adding up the March year-to-date figure and the April monthly figure. The April year-to-date revenue figure was $49.381 million lower than the addition of the March year-to-date revenue figure and the April monthly revenue (there was also a discrepancy between the comparable figures in February and March of $7.939 million and a much smaller discrepancy between January and February). There was no corresponding reduction to the reported gross margin or EBITDA. Indeed, the year-to-date EBITDA in the April flash report was $8.1 million higher than the addition of the March year-to-date EBITDA and the April monthly EBITDA.

[7116] The February flash report noted that at the January board meeting it was decided that marketing would all be prepaid and that News had advised One.Tel that it would lose any unspent prepaid marketing by the end of April. The impact of the board's decision was shown in the February, March and April flash reports by separately stating EBITDA before prepaid marketing and the additional unbudgeted prepaid marketing. Mr Carter prepared a table purporting to distribute the additional unbudgeted prepaid marketing between the Australian (ex-Next Generation) operations, Next Generation and the European and Hong Kong operations: PR 335. The table was held to be inadmissible.

[7117] Mr Rich responded to Mr Carter's view about these "anomalies" in his affidavit: paras 1797-9. He said that the working papers for the April flash report (Ex JDR 6/1969A) show that the April year-to-date revenue and EBITDA figures for the Australian (ex-Next Generation) operations were not arrived at by taking the March year-to-date figures and adding the estimate for April. He said the figures were based on the then most recent figures for the business calculated by Mr Hodgson in "FW SP revised forecast monthly.xls" late in April.

22.11.2.3 Comparisons between earnings reported in flash reports and management accounts

[7118] Appendix L to the principal report (allowed into evidence) is a comparison of reported earnings between flash reports and unadjusted management accounts, dealing with revenue, cost of goods sold, gross margin, OPEX and EBITDA for each of the business units and the group. The figures are monthly and also for various periods. As there is no flash report for December 2000, Mr Carter obtained a figure for the month of December by calculating the difference between the December year-to-date figure and the sum of the monthly results from July to November.

[7119] Appendix H to the principal report (allowed into evidence) is a comparison of EBITDA as per the flash reports, as per "adjusted" management reports, and as per budget. The adjustments made to the management accounts figures were adjustments to increase the provision for doubtful debts and to eliminate the effect of the operating expense charge made by the fixed wire/service provider business to Next Generation being higher than the amount actually recorded by Next Generation. The adjustments have the effect of increasing the differences between monthly and year-to-date management accounts and flash report figures. Thus, for example, the group EBITDA for the 6 months to December 2000 according to flash reports was a loss of $100.547 million while the unadjusted management accounts figure was a loss of $103.288 million, that is a higher loss by $2.741 million (evidently caused by adjustments to the December management accounts that were subsequently realised, according to evidence identified at PR 323). After Mr Carter's adjustments for doubtful debts and operating costs, the management accounts figure became a loss of $140.007 million, that is a higher loss by $39.46 million.

[7120] In a table at PR 320 Mr Carter compared the group EBITDA figures given in the flash reports (calculating the year-to-date to December 2000 in the manner noted above) with the unadjusted management accounts figures. He described the difference between flash reports EBITDA and management accounts EBITDA as the "understatement of flash reports' EBITDA loss". That description was disallowed because it assumed that the figures in the management accounts were correct and that the figures in the flash reports were not. The remainder of the table is in evidence. The difference between the two sets of figures for January, February, March and April is striking: the additional loss was $13.176 million (172% of the flash reports figure) for January, $12.368 million (338%) for February, $8.252 million (1523%) for March and $19.703 million (6590%) for April.

[7121] In the period from July 2000 to April 2001, the management accounts reported an EBITDA loss of $168 million compared to the flash reports' EBITDA loss of $112 million, a difference of $56 million which is 50% of the flash reports figure, almost all of which related to the January/April period. Mr Carter prepared a graph which is at PR 323 (not allowed into evidence) plotting the year-to-date figures in the monthly flash reports and management accounts for each month from July 2000 to April 2001. The table shows a growing discrepancy between the flash reports and management accounts figures in the period from January to April 2001. Of course, if Mr Carter's adjustments were made to the management accounts figures the differences would be even more dramatic.

[7122] In another table Mr Carter broke down the "understatement" of EBITDA loss in the flash reports compared to management accounts into figures for each of the business units of the Australian and international operations (PR 325), relying on the work in App L and also App M (which gives a more detailed analysis of the comparison in respect of each business unit). That table shows that the biggest component of the discrepancy between the monthly flash reports and management accounts figures for January, February and March 2001 was in the fixed wire/service provider business. According to the table, the "understatement" in the fixed wire/service provider business in the period from July to April was $35.405 million which is 63% of the flash reports' EBITDA loss for that period.

[7123] The size of the difference between the management accounts and flash reports figures demands explanation, but it does not necessarily point to the conclusion that the flash reports were misleading and wrong. The flash report figures were prepared shortly after month-end and the management accounts documents were evidently last modified at a much later date.

[7124] Mr Rich addressed this issue in his affidavit: 2 JDR 1771-4. As to the EBITDA variance in the fixed wire/service provider business, he pointed out that Mr Carter's assertion was based on an assumption by him that the EBITDA figures contained in the documents he treated as management accounts were complete, accurate and reliable. As I have found, the documents purporting to be management accounts for the fixed wire/service provider business for January, February, March and April 2001 cannot be taken to be finalised documents. Mr Carter said his understanding at the time was that the earnings information provided to the board during the January-May period was as accurate as the management team was able to make it, bearing in mind the difficulties caused by the disruptions to billings during that period. He also noted (as I have discussed elsewhere) that the methodology for the preparation of the flash reports and the management accounts was different and therefore it was not surprising that there was some variance in the figures.

[7125] Mr Carter's table at PR 325 noted a variance in the international fixed wire EBITDA for January 2001 of $4.96 million. Mr Rich addressed this at 2 JDR 1775-9, saying he had endeavoured to find an explanation for the discrepancy. He pointed out, correctly, that the variance in January EBITDA was principally caused by a $4 million variance between the OPEX numbers used to prepare the flash report and the OPEX numbers appearing in the management accounts for the international fixed wire business: referring to p 7 of App L to the principal report. He put forward two partial explanations for the OPEX discrepancy.

[7126] First, he referred to an email from David Trendle of One.Tel UK to various recipients dated 23 February 2001 re "UK late adjustments": Ex JDR 6/1964A. From that it appears that there was a series of late adjustments to the accruals in the UK half-year accounts to 31 December 2000. The spreadsheet attached to Mr Trendlel's email indicates that one of these adjustments arose out of the identification of an under-accrual of OPEX in the UK accounts to December 2000, in the sum of £691,125. The under-accrual was taken up in the January management accounts for the UK business and therefore reduced EBITDA in the January management accounts by that amount. Since, however, the OPEX that was the subject of the adjustment was not January OPEX but arose in prior months, it would not have been included for the purposes of the January flash report.

[7127] Second, he referred to another email from Mr Trendle to various recipients dated 30 April 2001, re "OPEX run rates & CAPEX": Ex JDR 6/1964AA. The email indicated that there were other "incorrect accruals" made to OPEX, and the spreadsheet attached to the email indicated that one of them was an accrual in January 2001 of £350,000. That would have the effect of giving a figure for OPEX in the January management accounts that was actually higher than attributable to January 2001, but the incorrect accrual would not have found its way into the flash report calculations for January 2001, which were not based on the management accounts.

[7128] Mr Rich said that these two adjustments explained approximately £1.04 million (that is, approximately $2.97 million) of the total discrepancy between the OPEX numbers used for the international fixed wire business in the January flash report and those that appear on the January management accounts. The remaining $1.9 million is unexplained, but that lower level of discrepancy would not support Mr Carter's assertion that the board had been incorrectly advised that the group was performing materially better than its actual loss performance.

22.11.2.4 Comparisons between earnings reported in board papers and management accounts

[7129] The "Monthly Trend Analysis" in the board papers for the 30 March 2001 meeting showed, inter alia, EBITDA figures for the Australian (ex-Next Generation) operations for January, February and March 2001. At PR 337 Mr Carter alleged, inadmissibly, that the figures in the board papers for the January and February EBITDA were based on the January and February flash reports. I note that in fact the figure in the board papers for January (profit of $3.225 million) is the same as the Australian (ex-Next Generation) figure for January EBITDA in the January flash report, and the figure in the board papers for February (profit of $2.754 million) is the same as in the February flash report. Mr Carter claimed, inadmissibly, that those two figures significantly overstated the EBITDA in comparison with management accounts. According to the management accounts summarised in App L, there was an EBITDA loss of $3.271 million in January and an EBITDA loss of $8.564 million in February.

[7130] At PR 338 Mr Carter pointed out, admissibly, that the January board papers estimated that in the half-year to December 2000, the group had an EBITDA loss of $94.9 million which was approximately equal to the half yearly forecast loss of $93.8 million reported in the November board papers. He said it was not until the March board papers that it was reported that the half-yearly EBITDA loss according to the group statutory reports was $103.3 million, 9% greater than the January figure. At PR 339 Mr Carter said, admissibly, that there was a similar discrepancy in the Australian (ex-Next Generation) operations. The January board papers said that there was an EBITDA profit of $6.6 million for the half-year to December 2000, equal to the half yearly forecast in the November board papers. It was not until the March board papers that it was reported that the half-yearly EBITDA profit was $760,000. There is no notation in the March board papers highlighting the difference between the EBITDA results previously reported and the results contained in the statutory accounts: PR 340.

[7131] Mr Rich dealt with this matter at para 1800 of his affidavit. After making the obvious points that there was no board meeting between January and March and that the figures contained in the January board papers did not purport to be final figures, he noted that the estimate of first half Group EBITDA made in the January board papers (a loss of $94.9 million) was revised to a loss of $101 million in the presentation given to media and investment analysts on 1 February. He said that presentation was reviewed by Mr Packer Jnr and Mr Kleemann in detail on 31 January and was sent to the Australian Stock Exchange on 1 February. He said in the ordinary course, a copy of it would have been sent to the directors by Tracy Cutting, but he was not able to say for sure that this was done. However when the results for the half year were released to the market on 27 February, they were the subject of the circular resolution to the directors: Ex JDR 6/1970. He explained that the reason for the variance between the original estimate and the final result was that there were a number of audit adjustments for various relatively minor matters. Mr Rich said Mr Hodgson told him he had taken Mr Greaves through the audit adjustments and had also discussed them with Mr Kleemann.

22.12 Adequacy of reporting of key events and transactions

[7132] Mr Carter claimed (PR 342) that the information provided to the board in flash reports and board papers in the period from 1 January to 17 May 2001 omitted or inaccurately reported a number of key events and transactions that affected the financial position and/or performance of the group. He gave three examples. His general assertion was allowed into evidence but some of his description of the examples was rejected. However, the three examples can be considered by reference to other admissible evidence.

22.12.1 $26 million transfer

[7133] As noted elsewhere, $26 million was transferred from the UK operations to the Australian operations on 28 February/1 March 2001. No disclosure of this transfer was made to the board.

[7134] Mr Rich gave the following evidence about this transfer (2 JDR 1780-1):

•: he did not consider at the time that the transfer was a "key event or transaction" which should be reported to the board, as alleged by Mr Carter;
•: the transferring of funds around the One.Tel Group was not unusual, as cash was managed on a group basis and was moved around as required, the movements being accounted for as intercompany loans;
•: the expansion of international business, including the UK, was funded from Australia and consequently there was a substantial intercompany loan balance owing from the UK to Australia, which stood at approximately $80 million in February 2001: Ex JDR 4/1538;
•: $6 million of the funds transferred came from the UK Global Wireless account, which was not an operating account of the UK or European businesses and did not form part of their working capital;
•: the business plans for 2000/2001 envisaged that the UK business would generate positive cash flow which would be used to fund the growth of the Next Generation business (Mr Rich referred to the forecast cash flows in the January 2001 board papers, Ex MTB 1/188-9, according to which in the second half of 2000/2001 Next Generation would have cash usage of $66 million while the Australian (ex-Next Generation) businesses would generate cash flow of only $53 million, not enough to cover the Next Generation outflow, and so the balance of the Next Generation cash usage would have to come from the forecast positive cash flow of $32 million for the international businesses);
•: no one suggested to Mr Rich at the time that they considered that there was anything particularly remarkable about the transaction, and while Mr Silverman and Mr Keeling (and possibly also Mr Beck) were aware of the transfer at the time they did not suggest that it be referred to in any flash report or board paper and they did not mention it themselves at the March board meeting;
•: Mr Weston attended the March board meeting and spoke for about 10 minutes about the UK and European businesses without mentioning the transfer as a significant event;
•: what prompted the transfer to occur when it did was, to a significant extent, the lower than expected customer inflows during February as a result of suspension of billing runs during the first 2 weeks, which were expected to be caught up in March and April (as reported to the board in the February flash report: Ex MTB 1/381B), rather than any fundamental variance in the business plans.

[7135] I agree with Mr Rich's evidence and analysis on this matter. I disagree with the assertion that the $26 million transfer from the UK to Australia was a "key event and transaction" that affected the financial position and/or performance of the group. In my opinion it would probably have been necessary to disclose the transfer to the One.Tel board if it appeared from the evidence that, according to information that management knew or should have known at the time, the transfer would prevent the UK business from meeting its obligations to creditors whose debts were due or to become due (for then there would be an issue about the solvency of the UK business and perhaps the group), but the evidence does not establish this.

22.12.2 Threats to supply

[7136] I have considered in detail various threats to supply that were received from creditors including carrier creditors. What is striking about the evidence, when it is examined fully, is that there is considerable ambiguity about the position of the carriers and in most cases One.Tel was asserting, on plausible grounds, counterclaims of various kinds or failure by the carrier to provide proper billing information. Further, One.Tel management were in fact able to make arrangements with carriers for the continuation of supply, at least until May.

22.12.3 Change in arrangements for payment of Lucent

[7137] I have considered in detail the evidence about the arrangements made with Lucent for the delayed issue of invoices until after 30 June 2001. Those arrangements were, in themselves, probably not sufficiently material to warrant specific disclosure to the board. If, however, they reflected a cash flow crisis within One.Tel by late April, then the fact of that cash flow crisis was obviously material and should have been disclosed.

22.13 Reporting systems

[7138] In Pt 4.4 of his principal report (paras 349-402), most of which was held inadmissible, Mr Carter gave a description of One.Tel's management information systems and its board information systems, and contended that the systems available to management were capable of providing accurate and reliable information on the matters that the board needed to know in order to monitor management and properly assess the group's financial position and performance and promptly detect and assess material adverse developments. He also contended that the material actually provided to the board did not contain all of the material information produced by the systems overseen by management and relevant to those issues.

[7139] Mr Carter's descriptions of the information systems is generally accurate, in my view, having regard to the admissible evidence. It seems to me correct on the evidence, as Mr Carter said, that the management information systems were able to provide accurate information as to the group's cash position, cash usage, outstanding creditors, debtors and ageing of debtors, and earnings. In particular:

(10): daily cash balances and total daily cash inflows and outflows for the Australian and international operations were available from the intranet;
(11): the group's cash balance was stated in daily emails as from 31 January 2001;
(12): bank reconciliations reconciled the cash balance as per the bank statement with the cash balance as per the general ledger and gave information about unpresented cheques that could be used to adjust the cash balance in order to identify available cash;
(13): the daily cash flow spreadsheets for the Australian operations recorded actual cash flows and revised forecasts based on expected receipts and payments, and enabling management to compare forecast daily receipts with actual receipts;
(14): the general ledger and creditors ledgers provided information about creditor balances and the growth in creditors, details of outstanding creditors, the balance of the provision for doubtful debts, and the ageing of creditors;
(14): management accounts for each business unit, when completed, gave information relevant to earnings, and additional information relevant to earnings could be obtained from the billing system and the intranet; and
(15): management were able to have direct communications with the staff responsible for such matters as cash flow forecasting, deferral of payment of creditors and details of restrictions on the use of any cash balances.

[7140] Mr Carter contended that although the relevant information was available to management from then management information systems, there were important gaps in the information provided to the board and some information was inaccurate. He noted that:

(2)

flash reports

(16): the flash reports did not routinely contain the group's actual cash balance although there was a statement of that figure in the comment section of the January and February flash reports;
(18): when the cash balance was disclosed, it appears to have represented the sum of the actual bank balances rather than the cash balance per the general ledger, and so the amount of unpresented cheques and the amount of cash unavailable for payment to creditors were not disclosed;
(19): the flash reports contained no information relating to outstanding creditors;
(20): the flash reports contained no information about debtors;
(21): flash reports during the period from January to April 2001 contain data that was significantly different from the management accounts: for example (as shown in the table at PR 392) group revenue for February was $9.137 million higher in the February flash report than in the February management accounts and Group EBITDA for that month was $12.37 million higher in the flash report than in the management accounts;
(22): in the flash reports from February to April 2001, earnings in the fixed wire/service provider business in the flash reports were based on the budget data;
(23): the figures given in flash reports were not updated when more accurate information became available through the management accounts;

(3)

board papers

(16)

the board papers contained cash flow forecasts providing both monthly cash usage and cash balance amounts, revised in each set of board papers;

(18)

however, when the forecasts in a set of board papers departed from forecasts in previous board papers the reasons for the revision were not explained in the board papers;

(19)

the disclosed cash balance was typically the sum of actual bank balances without taking into account unpresented cheques or cash amounts unavailable for payment of creditors;

(20)

the balance sheet estimate was based on information provided prior to month-end and so did not reflect the actual position of the group as at month-end;

(21)

the only information in the board papers about outstanding creditors was in the balance sheet estimate, which was not up-to-date and did not provide information about the ageing of overdue amounts;

(22)

the only board papers issued during the period from 1 January to 17 May 2001 and relating to that period were the 30 March 2001 board papers;

(23)

therefore the only information about outstanding creditors during that period was the information given in the March board papers, which was not timely or complete;

(25)

the only information about debtors during the period from 1 January to 17 May 2001 was in the March board papers;

(a): the March board papers provided a balance sheet estimate for 30 March 2001 for the total group's accounts receivable, which included trade debtors, and also provided the balance of the provision for doubtful debts (said to be "adequate") and the balance of the Australian operations' debtors outstanding for greater than 90 days;
(b): the information about receivables was not up-to-date, and the information about debtors was not complete because no ageing of debtors was provided;

(4)

daily e-mails

(16)

the cash balances reported in the daily e-mails were actual cash balances not adjusted to reflect unpresented cheques or amounts not available for payment of creditors;

(18)

the daily e-mails contained no information about debtors.

[7141] In my opinion these matters are correct according to the evidence, except for (a)(vi) (the claim that flash report figures were based on budget), and (b)(ii) (the claim that the board papers did not explain revisions to forecasts) where it needs to be pointed out that some matters addressed in the board papers (for example billing delays) went towards explaining failure to meet forecasts and revision of forecasts although they were not expressly identified as explanations of those matters.

[7142] The deficiencies Mr Carter identified in the information provided to the board led him to conclude, inadmissibly, that the information provided to the board was not timely, accurate or reliable, notwithstanding that timely, accurate and reliable information was available to management. In my opinion, the matters identified by Mr Carter, as summarised and accepted by me above, were deficiencies in the information flow from management to the board; but before a conclusion can be reached that management did not provide the board where sufficient information to discharge his responsibilities, it is necessary to consider the evidence concerning information provided to the board in otherwise, such as during management presentations at the board meetings and in oral discussion within and outside the boardroom. These matters are discussed elsewhere in my reasons for judgment.

22.14 Mr Carter's supplementary report dated 13 December 2002

[7143] In considering the financial position and performance of the One.Tel Group in his principal report, Mr Carter made a number of assumptions, two of which he considered much more fully in his supplementary report dated 13 December 2002 (supplementary report or SR). Those two assumptions were: Assumption 1 -- the international operations were cash flow neutral from 1 March 2001 or alternatively 1 April 2001 to 29 May 2001 (the Relevant Period); Assumption 2 -- for the international operations, there were no material changes in net worth between 28 February 2001 and 29 May 2001 or alternatively between 31 March 2001 and 29 May 2001.

[7144] In considering these questions he did not have access to the full books and records of the international operations, but he was provided with a specific selection of those books and records and he identified the sources of information available to him in App SRI of the supplementary report and App B of the principal report.

22.14.1 Assumption 1 -- International operations were cash flow neutral

[7145] Assumption 1 was made by Mr Carter in the principal report, in the context of providing an answer to ASIC's second question, which asked Mr Carter to estimate the amount of cash injection required at 28 February 2001 and alternatively 31 March 2001 if the group were to continue its existing operations and meet current and reasonably foreseeable liabilities. In s 3.2 of his principal report he answered that question, inadmissiby, by estimating that a cash injection of $270 million was needed as at 28 February and $287 million was needed as at 31 March.

[7146] Mr Carter arrived at those figures by first calculating the actual cash position at the end of February and the end of March for the Australian and international operations in the manner that I have described in detail above. Some but not all of his calculations were allowed into evidence. He then estimated the group's future cash requirements by forecasting group cash usage/generation from operations up to November 2001. But his forecast was effectively confined to the Australian operations, as he assumed that the international operations were cash flow neutral: PR 221(a), held inadmissible. That is to say, when considering as at 28 February 2001 and alternatively 31 March 2001, the group cash needs in the period up to November 2001, Mr Carter assumed that the international operations as a whole would neither contribute nor consume a material amount of cash over that period. His task in the supplementary report was to test the validity of that assumption. Some of his supplementary report was allowed into evidence while some of it was rejected.

[7147] He used EBITDA as a proxy for cash flow, for the purpose of forecasting future net cash flow of the international operations, because he did not have sufficient information to assess the extent to which EBITDA and cash flow differed. At SR18 he acknowledged that there were "timing differences" which might cause EBITDA and cash flow to differ from one another and he summarised some major causes for variance. SR 18 was held to be inadmissible but the summary of differences between EBITDA and cash flow seems to me to be correct and I am prepared to adopt it for my own analytical purposes.

[7148] Mr Carter's task, therefore, was to calculate actual EBITDA for the international operations to the extent that reliable information was available, and then to forecast EBITDA for the international operations up to November 2001.

[7149] He calculated the cash position of the international operations, after deducting UK overdue creditors (according to his figures), at PR 89, which was held admissible (though his assertion about a pledge of $8 million was treated as an assumption). He concluded that the international operations had a negative net cash position of $13 million at 31 January, $34 million at 28 February and $45 million at 31 March.

[7150] To assess future cash flow from the international operations, Mr Carter compared the budget contained in the September 2000 business plan with historical revenue, gross margin and operating expenses of the international operations. He made three sets of calculations, based on the historical figures for, respectively, for the 7 months from July to January, the eight months from July to February, and the nine months from July to March 2001. He used a methodology similar to the one used for the Australian operations, discussed above.

[7151] In SR 26-7 and App SRA (held admissible) he made separate calculations for the UK business and each of the European businesses and Hong Kong. In each case, he divided actual and budget figures for revenue, gross margin contribution and OPEX for July-January by seven to obtain historical average monthly actual and budget revenue, gross margin contribution and OPEX. He then calculated the difference between the monthly budget and actual figures and expressed them as a percentage of the budget figures. For the UK operations, for example, he found that monthly average revenue was 4.55% below budget over the 7-month period, the monthly average gross margin percentage was 1.84% below budget and monthly average OPEX was 6.68% below (that is better than) budget. He then took the budgeted monthly revenue, gross margin percentage and OPEX figures for each month from February to November 2001 and adjusted them by applying those percentages, so as to produce revised monthly EBITDA figures, which he then converted to Australian currency. The application of this methodology led Mr Carter to conclude that, whereas the September 2000 budget EBITDA for the ten months from February to November 2001 was for profit of $74.9 million, his revised budget figures provided for a net loss of $3.68 million over those ten months, and hence net cash outflow of that amount on the assumption that EBITDA and cash flow could be equated: SR 26.

[7152] Mr Carter made similar calculations, based on the eight months of historical figures to 28 February 2001 and forecasting for the nine months from March to November 2001, in SR 28-30 and App SRB (held admissible). His conclusion was that, while the September budget had forecast that the international operations would generate an EBITDA profit of $69.27 million for the nine months from March to November, his revised budget figures provided for a net EBITDA loss of $0.14 million over that period. He made another set of similar calculations based on the nine months from July 2000 to March 2001, forecasting for the eight months from April to November 2001, in SR 31-33 and App SRC (held admissible apart from an assertion in SR 33 about overdue UK creditors). His conclusion was that, while the September budget had forecast that the international operations would generate an EBITDA profit for the eight months from April to November of $65.77 million, his revised budget calculations produced an EBITDA profit of $12.86 million over that period.

[7153] In the result Mr Carter found the cash requirement for the international operations was:

•: as at 31 January 2001, $16.7 million (cash deficiency of $13 million at that date plus $3.7 million cash usage until November 2001);
•: as at 28 February 2001, $34.1 million (cash deficiency of $34 million plus $0.1 million cash usage until November 2001);
•: as at 31 March 2001, $32.1 million (cash deficiency of $45 million less $12.9 million cash generation in the period to November 2001).

These conclusions, expressed at SR 34, when held inadmissible because they contained some inadmissible components.

[7154] It is evident that the revised budget figures improve when one takes into account the actual results in February, and then the actual results in February and March. This is because the February and March figures for the international operations showed marked improvement: SR 22-24, held admissible except for some claims about one-off adjustments at SR 24. This is especially evident in the March OPEX figures, which were some $5.493 million better than budget. Year-to-date EBITDA from July 2000 to February 2001 was a loss of $56.9 million, whereas year-to-date EBITDA from July 2000 to March 2001 was a loss of only $50.3 million, according to App I-10 to the principal report. Mr Carter noted that there were several one-off adjustments to EBITDA in February and March 2001, which improved the figure (including adjusted income from dialler rebates, a reduction of costs for claims on the Netherlands carrier KPN, and adjustments for telephone and E1 installation expense: SR 20). He said, plausibly, that to the extent that the one-off adjustments were unlikely to recur, it was appropriate to reverse them in assessing future EBITDA/cash flow.

[7155] In paras 36-68 of his supplementary report (not pressed into evidence), Mr Carter considered some transactions that he described as "significant unusual transactions" within the management accounts and trial balances. His argument was that in forecasting future cash flows, it would be reasonable to assess the likely impact of unusual transactions and make adjustments to the forecasts accordingly. He said he had not been provided with sufficient documentation to determine whether it would be appropriate to adjust for the unusual transactions he had identified, but he provided an alternative calculation of the likely expected cash flows based on adjusting for them. The unusual transactions that he identified were:

(c): Dialler rebate: according to Mr Carter, One.Tel UK capitalised the cost of diallers and amortised the cost over the period of the subscriber's contract, which effectively excluded dialler costs from EBITDA, but dialler rebates were treated as reducing OPEX even though the original costs were capitalised and amortised -- an adjustment that would increase the EBITDA loss by £2.364 million as at 31 March 2001;
(c): Customer information expense in the Netherlands: some significant reductions were made to OPEX totalling Hfl 15.195 million in the period from September 2000 to April 2001, which Mr Carter attributed to One.Tel Netherlands' claims against the carrier KPN (principally a preselection claim, a carrier overflow claim and a 5% reduction claim), and he referred to some correspondence that raised questions as to the validity of the claims and the propriety of bringing them to account in this way;
(c): E1 installation expense: in February 2001 the UK, France, the Netherlands, Switzerland and Germany each reversed the E1 installation expense in the total amount of $3.662 million and thereafter reported this expense as an amortisation expense which consequently did not form part of EBITDA.

[7156] Mr Carter calculated that if adjustments were made to EBITDA to reverse the effect of these unusual transactions, then the revised budget would forecast, as at 31 March 2001, an EBITDA loss for the period from April to November 2001 of $6.86 million, as opposed to an EBITDA profit of $12.9 million if no adjustments were made.

[7157] Mr Carter's conclusion (not pressed) was that it was reasonable to assume that the international operations would be likely to have been approximately cash flow neutral for the Relevant Period. In addition to his calculations, he drew attention (at SR 69) to

•: local management forecasts prepared in late March or early April 2001 for the wireline business which (he said) were generally more consistent with his estimates than with the forecast that had been presented in the March board papers: Ex Carter SRB S 7 0001;
•: a statement by Mr Keeling at the board meeting on 28 May 2001 to the effect that the UK and European operations had roughly break-even cash flow on a consolidated basis: Ex CE 16 0046; and
•: Ferrier Hodgson's report to creditors dated 12 July 2001, which said that the UK operations were marginally cash flow positive but the European subsidiaries were operating at a loss: Ex CE 22 0036.

[7158] Although part of Mr Carter's reasoning about assumption 1 was not received into evidence, Mr Rich attacked Mr Carter's methodology: 2 JDR 1801-4. As he said, Mr Carter's approach was to use the budgeted EBITDA figures as they existed in September 2000 for the international businesses for the period to November 2001, and then to calculate the actual variances from budgeted figures in the period from July to January (and then to February and then to March) and to adjust the budgeted figures up to November 2001 by mathematically applying the historical variances to the forecast results. Mr Rich also noted Mr Carter's assumption that EBITDA equated to cash flow, though he did not specifically attack it.

[7159] Mr Rich said that if he had been concerned during his time at One.Tel to determine the forecast cash flows for the international businesses for the period from February to November 2001, he would have had recourse to the most recent forecasts prepared by the management teams of those businesses. He said he would not have gone to old forecasts and tried to adjust them for historical variances; at least he would not do so without giving careful and detailed consideration to the reasons for the historical variances from budget so as to arrive at a view as to whether they were likely to be permanent or timing differences and whether they were likely to affect future results in the same way as they had affected past results. He pointed out that at the time he left One.Tel, the most recent set of forecasts for the international businesses were those prepared by management for the purposes of the figures prepared by Mr Miller and Mr Green early May 2001: Ex JDR 6/1948. He noted that for the period from February to November 2001 those figures forecast total international net cash generation of $35.8 million, compared with Mr Carter's January calculation of a net cash outflow of $3.7 million.

[7160] In my opinion, Mr Rich's critique of Mr Carter's approach is persuasive. I can see no foundation for assuming that proportionate variances between the September 2000 budget (which was subsequently revised) and actual figures for subsequent months up to March 2001 would continue in those proportions in the future and up until November 2001. It seems to me necessary to consider why the variances occurred and whether, having regard to those explanations, they were likely to be repeated at the same level; and moreover, in view of those variances, there would need to be some specific justification for continuing to use pre-variance budget figures.

22.14.2 Assumption 2 -- no material change in the international operations' net worth

[7161] ASIC's fourth question to Mr Carter related to whether the group incurred net liabilities and suffered a reduction in net worth between 28 February and 29 May 2001 and alternatively between 31 March and 29 May 2001. Mr Carter answered that question in s 3.4 of his principal report, most of which was allowed into evidence. He estimated that the group incurred net liabilities and suffered a reduction in net worth of at least $99 million between 29 February and 29 May 2001, and $78 million between 31 March and 29 May 2001, on the basis of change in net realisable value: PR 274. He said (PR 275) that for the purpose of calculating the reduction in net worth of the group between 28 February and 29 May, he assumed there were no changes in net worth during that period for the international operations. He considered the reasonableness of this assumption in his supplementary report: paras 79-113.

[7162] Mr Carter considered the change in reported net asset value of the international operations over the relevant periods, by consolidating the balance sheets of the international operations as reported in management accounts and converting the figures to Australian dollars. In App SRG he calculated the net worth of each of the international businesses as at the end of February, March and April 2001 respectively by subtracting total liabilities from total assets, in each case producing a negative figure. The total negative net worth of the international operations according to this calculation was $143.602 million in February, $144.561 million in March and $164.454 million in April. The change in reported net assets from February to April for the international operations as a whole was a reduction of $20.851 million, and the change in net assets from March to April was a reduction of $19.892 million. The question which Mr Carter then addressed was whether there was likely to have been a material change to these net asset figures if the Australian operations had been placed into administration on 28 February or 31 March rather than 29 May 2001.

[7163] As Mr Carter noted (SAR 85-89), the following outcomes were achieved with respect to the international businesses:

•: the French operations were placed into administration in mid-June 2001 (Ex CE 22 0004) and the intercompany receivable from the French operations realised $0.4 million;
•: the UK operations were sold on 4 July 2001 for £32.6 million (Ex CE 22 0024) ($88.4 million), representing $56.5 million for repayment of the intercompany loan (comprising repayment of the Toronto Dominion loan of $50 million (Ex CE 22 0022 and 22 0163) and $6.5 million on the intercompany loan (Ex CE 22 0175)), $2.9 million for the sale of intellectual property rights, reserving continuing use in Australia, Hong Kong and the Netherlands (Ex CE 22 0175), and "proceeds from investment in subsidiary" of $29 million (Ex CE 22 0175);
•: agreements for the sale of the Hong Kong subsidiary were finalised on 29 September 2001 at a price of HKD16.2 million (Ex CE 22 0144) and an amount of $3.7 million was realised (Ex Carter SRB S 6 0036);
•: no other amounts were realised and the finalisation of the affairs of the international operations: Ex CE 22 0144 and 22 0161.

[7164] Mr Carter endeavoured to assess whether the price that a potential purchaser would pay for any of the international businesses would have been materially higher had they been available for sale at the end of February or March 2001. He observed (SAR 90) that in assessing the price a potential purchaser would pay for a business, one would typically consider the market value and composition of the assets, the current value of expected future cash flows, and other factors such as potential synergies with the purchaser's existing operations. He said the current value of expected future cash flows is calculated by taking the forecast cash flows and applying an appropriate discount factor. He said that the discount factor is likely to remain constant in the absence of substantial changes to the risk associated with the business.

[7165] Mr Carter proceeded on the basis that the sale of the international businesses other than the UK and Hong Kong would not have increased by a material amount given that nothing was realised except for France and the amount received in respect of the French business was small. He therefore proceeded to assess whether there would have been a substantial change in the sale proceeds for the UK and Hong Kong businesses had the administration commenced on 28 February or 31 May, having regard to the change in reported net assets of those businesses, historical EBITDA and the budgets for the period to November adjusted for the actual historical performance against budget. He said that reported net assets of the businesses were a proxy for market value.

[7166] As to the UK business, he found that during the period from 28 February to 30 April the business derived EBITDA of £4.3 million and reported negative assets which increased from £6.9 million on 28 February to £4.4 million on 30 April, representing a net gain of £2.5 million. He said that this net gain in net assets was not supported by growth in estimated EBITDA and was offset by a deterioration in the realisable value of net assets as a result of exchange rate fluctuation.

[7167] As to estimated EBITDA, Mr Carter adjusted the forecast EBITDA for the UK business for the period from June to November 2001 by the variances between actual and budgeted EBITDA between, respectively, July 2000 and January 2001, July and February 2001, July and March 2001, July and April 2001 and July and May 2001, relying on the work he had done in Apps SRA, SRB, SRC and SRD, to which I referred above: SR 96. He found that the total estimated EBITDA for the June/November period fluctuated very little by reference to the variances in these historical periods -- the lowest forecast EBITDA was £10.7 million for the June November period, and the highest was £12.6 million. He concluded that it was likely that there would have been no material change in the proceeds of sale of the UK operations during the period from 28 February to 29 May: SR 98.

[7168] However, he noted that if the proceeds of sale had been received earlier, the amount recovered by the parent company in administration/liquidation would have been affected by changes in the Australian dollar/sterling exchange rate. The UK business was sold 36 days after the appointment of administrators. If administrators had been appointed on 28 February rather than 29 May 2001, then assuming that the sale occurred 36 days thereafter for the same sale price in sterling, then the sale price in Australian dollars would have been $6.7 million greater than the gross amount in Australian dollars in fact paid. If the administration had occurred on 31 March then the sale price would have been $1.4 million higher: SR 99.

[7169] Mr Carter conducted similar calculations for the Hong Kong business. His figures indicated that during the period from 28 February to 30 April 2001, the Hong Kong operations derived EBITDA of HKD4.2 million and reported net assets between 28 February and 30 April 2001 increased by HKD4.2 million, resulting from a gain of HKD5.8 million in March offset by a deterioration of HKD1.5 million in April. He said that these historical results indicated that the proceeds of sale of the Hong Kong operations might have improved slightly over that period, but the increase was included in budget forecasts and therefore would have been taken into account in any valuation at both 28 February and 31 March: SR 106.

[7170] Applying the same methodology as for the UK operations, he calculated that the total estimated EBITDA for the period from June to November 2001 would not have fluctuated very much if it were adjusted by recourse to the historical variances from July to January, February, March, April or May: SR 107. He concluded that it was likely that there would have been no material change in the proceeds of sale of the Hong Kong operations had One.Tel gone into administration on 28 February or 31 March: SR 108. As to exchange rate fluctuations, he found that if administration had occurred on 28 February the administrators/liquidators would have received $280,000 more in Australian dollars than they in fact received, and if the administration had occurred on 31 March the figure would have been $260,000.

[7171] Mr Carter's overall conclusion was that his assumption that there were no material changes in net worth of the international operation between 28 February and 29 May 2001 was a reasonable assumption: SR 112.

[7172] Mr Rich was critical of Mr Carter's analysis about assumption 2: 2 JDR 1805-18. He said that in his experience in business, the most important factor that would typically be considered by a potential purchaser is the likely future cash flow of the business and the risks associated with realising that cash flow. He said that in the context of the telecommunications industry, an important factor in assessing likely future cash flow and valuing a telecommunication business is the subscriber numbers, given that subscribers are costly to obtain and, once acquired, form a base from which future cash flows can reasonably be expected.

[7173] Mr Rich said that as a businessman with experience in the telecommunications industry, he would never have based a decision on whether or not to acquire a business such as the UK business of One.Tel on old budget figures mathematically "adjusted" for historical variances. Instead he would have wanted to see, and consider carefully and in detail, the latest set of forecast cash flows produced by management. He would have insisted on seeing a forecast to at least 30 June 2003 and not simply to November 2001. In assessing the risks associated with those forecasts, a critical consideration would have been the number of tolling subscribers at the time of purchase.

[7174] Mr Rich said that between 28 February and 29 May several changes occurred in relation to the UK business that would have impacted on his view of its value. First, subscriber numbers increased materially; in particular there was a material increase in the number of subscribers tolling by using diallers, which had the effect of materially increasing ARPU for those subscribers. As reported in the January board papers, ARPU for UK customers tolling using diallers was £22.88 (Ex MTB 1/199), compared with overall ARPU for UK customers of £14.70 (Ex MTB 1/209). He also referred to the daily update emails sent to Mr Packer Jnr and Mr Kleemann (Ex JDP 33 to Mr Packer Jnr's affidavit of 22 July 2004), which showed that tolling customers increased from 642,000 on 31 January to 682,000 on 16 May and tolling diallers increased from 162,000 on 31 January to 317,000 on 16 May. He said that according to the daily update emails, the increase in ARPU over that period, which he said was caused by an increasing number off subscribers using diallers, was from £14.44 on 31 January to £17.74 on 16 May, an increase of £3.30 in ARPU over that period. This translated, he said, into a gross profit of about £1.15 per customer, or £784,000 (approximately $2.3 million) over the UK subscriber base of 682,000. Annualised, the increased gross margin for the business was $27 million.

[7175] Additionally, he said (relying on the daily update emails) gross margin percentage for the UK business increased over the period from 31 January to 16 May from 46%-51%. If the monthly revenue of the UK business was $27 million (that is the average of the January, February and March revenue figures for the UK as reported to the March board: Ex MTB 1/233), then the financial impact of that increase in gross margin percentage would be $1.1 million per month or an annualised increase in gross profit and EBITDA of over $13 million.

[7176] I accept Mr Rich's views and calculations in this evidence. It seems to me a much more realistic approach to valuation than the one taken by Mr Carter, particularly in the telecommunications industry. It seems to me obvious that the valuation of the UK business had to take into account the improvement in tolling diallers, at the core of the UK business strategy, and an up-to-date forecast for future development. Mr Carter's calculations did not do so, because they were based on outdated budget figures and they adjusted the budget forecasts by a calculation based upon historical variances from budget. Mr Carter did not purport to value the UK business but his calculations and reasoning would point to a much lower figure than the $88.4 million in fact obtained by the administrators.

[7177] A consequence of my accepting Mr Rich's evidence is that the UK business improved in value over the period from 31 January to 16 May 2001 by a figure that I am not in a position to quantify, because over that period:

•: tolling customers increased by 40,000;
•: tolling diallers increased by 155,000;
•: ARPU increased by £3.30; and
•: gross margin percentage increased by 5%.

23. Duty of care and diligence and the business judgment rule

23.1 The nature of the present case

[7178] ASIC's sole pleaded cause of action is for breach of the statutory duty of care and diligence now found in s 180(1) of the Corporations Act. This is a case where, for the most part, the issues concerning the application of the words of s 180(1) to the conduct of the defendants are issues of fact rather than law. Nevertheless it is appropriate to address the applicable legal principles in a summary way, having regard to the submissions of the parties, and to address the few points of difference between them.

[7179] There are, however, some important questions of law raised by the defendants, because in their final submissions, they stated that they rely upon the statutory business judgment rule contained in s 180(2) in respect of all claims made against them under s 180(1): DPS [405]. This leads to some questions of law, as well as questions of fact, including whether:

•: the myriad acts and omissions of which ASIC complains fall within the definition of "business judgment" in s 180(3) and therefore potentially qualify for the statutory business judgment rule;
•: the onus of proving the ingredients of the business judgment rule in s 180(2)(a)-(d) is borne by ASIC or the defendants; and
•: the requirement that the defendant must rationally believe that the business judgment is in the best interests of the corporation (s 180(2)(d)) is less onerous than a requirement that the belief be reasonable.

23.2 Section 180

[7180] Section 180 of the Corporations Act is in the following terms:

(1) A director or other officer of a corporation must exercise their powers and discharge their duties with the degree of care and diligence that a reasonable person would exercise if they:

(d)
were a director or officer of a corporation in the corporation's circumstances; and

(i)
occupied the office held by, and had the same responsibilities within the corporation as, the director or officer.

Note: This subsection is a civil penalty provision (see section 1317E).

(2) A director or other officer of a corporation who makes a business judgment is taken to meet the requirements of subsection (1), and their equivalent duties at common law and in equity, in respect of the judgment if they:

(d)
make the judgment in good faith for a proper purpose; and

(i)
do not have a material personal interest in the subject matter of the judgment; and

(ii)
inform themselves about the subject matter of the judgment to the extent they reasonably believe to be appropriate; and

(iii)
rationally believed that the judgment is in the best interests of the corporation.

The director's or officer's belief that the judgment is in the best interests of the corporation is a rational one unless the belief is one that no reasonable person in their position would hold.

Note: This subsection only operates in relation to duties under this section and their equivalent duties at common law or in equity (including the duty of care that arises under the common law principles governing liability for negligence) -- it does not operate in relation to duties under any other provision of this Act or under any other laws.

(3) In this section:

business judgment means any decision to take or not to take action in respect of a matter relevant to the business operations of the corporation.

[7181] I reviewed the history of the statutory duty of care and diligence in Australian law in my judgments in ASIC v Vines (2003) 48 ACSR 322 ; [2003] NSWSC 1116 (ASIC NSWSC 1116) and ASIC v Rich (2003) 44 ACSR 341 ; [2003] NSWSC 85 (ASIC NSWSC 85): see also Austin, Ford and Ramsay, 2005, at [6.2]. For present purposes it should be noted that s 180(1) of the Corporations Law commenced on 13 March 2000, before the happening of the events that are the subject of complaint in these proceedings. It was replaced by an identically worded and numbered section of the Corporations Act, which commenced on 15 July 2001, after the happening of those events. Section 180 of the Corporations Law was, therefore, in force at all times relevant to the present case. Though it was repealed by the Corporations Act, the effect of ss 1399 and 1400 of the Act is that, if the defendants had any liability under s 180(1) of the Law, on the commencement of the Act they became subject to an equivalent liability under the corresponding provision of the Act.

[7182] One.Tel was formed and registered under Australian corporations legislation and is therefore a "company" as defined in s 9 of the Corporations Act. Section 180 applies to a director or other officer of a corporation. Under s 57A(1)(a) "corporation" includes a company. One.Tel is therefore a corporation for the purposes of s 180.

[7183] Some of the conduct and events that are the subject of this case occurred in the United Kingdom and Europe. Section 5(4) of the Corporations Act says that subject to subs (8) (which is not relevant to this case), each provision of the Act applies, according to its tenor, in relation to acts and omissions outside "this jurisdiction" (in effect, for present purposes, Australia: see s 5(1)).

[7184] Section 180 applies to a director or other officer of a corporation. Clearly Mr Silbermann, at all relevant times, and Mr Rich until 17 May 2001, were "directors" of One.Tel within the meaning of that term in s 9, because they were each appointed to the position of director. They also held executive responsibilities in their respective roles as joint chief executive officer and finance director.

23.3 A summary statement of legal propositions about the statutory duty of care and diligence

[7185] Both parties placed before the court propositions addressing the general scope and application of s 180. It is strictly unnecessary to respond to every one of those propositions, but they provide useful background and orientation to the particular aspects of the section that are pertinent to this case, and so I shall respond to the submissions that have been made. The written submissions of the parties, other than ASIC's submissions in reply, were made before the Court of Appeal delivered judgment in ASIC NSWCA 75. I have taken that judgment into account, as well as some more recent first instance judgments.

23.3.1 Content of the statutory duty and its relationship with the common law

[7186] ASIC submitted (APS [2075]) that:

(2): the statutory duty of care and diligence is essentially the same as the duty of a director or officer at common law: ASIC NSWSC 171 at [372(3)]; and
(3): the availability of a civil penalty does not make the statutory standard lower than the common law standard of care and diligence: ASIC NSWSC 738 at [1096].

[7187] As to (a), there are some unresolved issues about the nature of the duty of care at general law. One question is whether the director's general law duty of care is an equitable duty (and if so, whether it is a fiduciary duty), or a common law duty reflecting the developments in the tort of negligence through seminal cases such as Donoghue v Stevenson [1932] AC 562 (Donoghue) and Hedley Byrne v Heller [1964] AC 465 ; [1963] 2 All ER 575.

[7188] The director's duty of care was developed in the 19th century in the exclusive jurisdiction of equity, by analogy with the duty of care of trustees, and the older cases were taken up and applied, in the decades after the Judicature Acts of 1873-1875 in England, without any suggestion that there was a common law component of the duty. Overend & Gurney Co v Gibb & Darby (1872) LR 5 HL 480 and Re City Equitable Fire Insurance Co Ltd [1925] Ch 407 remained the leading English cases until the second half of the 20th century. But after the expansion of the tort of negligence from Donoghue onwards, it became sensible to contemplate that directors might be subject to a common law action in tort, at the suit of the company. In Daniels (formerly practising as Deloitte Haskins & Sells) v Anderson (1995) 37 NSWLR 438 ; 16 ACSR 607 (Daniels) the Court of Appeal of New South Wales accepted an argument that directors owe their company a common law duty of care.

[7189] The existence of a common law duty of care has led to suggestions that the common law duty might have superseded and enveloped the earlier equitable duty: see Henderson v Merrett Syndicates Ltd [1995] 2 AC 145 ; [1994] 3 All ER 506; Bristol and West Building Society v Mothew [1998] Ch 1 ; [1996] 4 All ER 698; Bank of New Zealand v New Zealand Guardian Trust Co Ltd [1999] 1 NZLR 664. That, if it were so, might matter for several reasons: on the one hand, the common law standard of care emerging from the neighbour principle and the law of negligent misstatement would probably be higher than the old equitable trustee standard of care; while on the other hand, if the duty of care were not an equitable standard, the more restrictive common law rules as to measure of damages, causation and remoteness would apply in lieu of the equitable principles. In Permanent Building Society (in liq) v Wheeler (1994) 11 WAR 187 ; (1994) 14 ACSR 109 (Wheeler), the Full Court of the Supreme Court of Western Australia took the view that the director's duty of care is owed both in equity and at law, and consequently equitable compensation was available, assessed on a restitutionary basis in accordance with Re Dawson (dec'd); Union Fidelity Co Ltd v Perpetual Trustee Co Ltd [1966] 2 NSWR 211.

[7190] Another question is whether the equitable duty of care is to be regarded as an aspect of the company director's fiduciary duty. In Wheeler the court took the view that, though there is an equitable duty of care, it is not fiduciary. That position has been criticised, extra-curially, by Justice J D Heydon: "Are the Duties of Company Directors to Exercise Care and Skill Fiduciary?", in S Degeling and J Edelman, Equity in Commercial Law, Lawbook, New South Wales, 2005. This is an important issue for determination at the appellate level, but it need not be addressed here.

[7191] In ASIC NSWCA 75 at [68], Spigelman CJ referred to some observations of mine at first instance (ASIC NSWSC 738 at [1070]) to the effect that, whether the statute has adopted the equitable or common law duty of care of company directors and officers, the general law of torts may be called in aid as a source of guiding principles for the content of the statutory standard of care. It appears that no contrary submission was made on appeal: see at [82]. The Chief Justice accepted the proposition that Parliament, when it used language, albeit in a slightly modified form, plainly derived from the civil case law, had in mind a standard of care of a similar character: at [142]. Although the Court of Appeal in ASIC NSWCA 75 was addressing predecessor legislation, s 232(4) of the Corporations Law, it seems to me inconceivable that the law reverted to a less objective standard upon the enactment of s 180 in March 2000.

[7192] While the content of the statutory standard of care and diligence is accordingly informed by, and generally the same as, the general law standard applied in tort, there are some important structural and other differences between the statute and the general law.

[7193] In particular, damages are the gist of an action for breach of the duty of care at common law. In Vrisakis v Australian Securities Commission (1993) 9 WAR 395 at 450 ; 11 ACSR 162 at 212 (Vrisakis), Ipp J (with whom Malcolm CJ agreed) was dealing with an even earlier predecessor provision, s 229(2) of the Companies Code, which created a criminal offence. He noted that the section made no reference to damage suffered by the company, and so an offence could notionally have been committed under that section without any damage having been sustained, if it were established that the defendant director had failed to exercise a reasonable degree of care and diligence in the exercise of his powers and the discharge of his duties. Ipp J (as he then was) held that the statutory duty of a director to exercise a reasonable degree of care and diligence could not be defined without reference to the nature and extent of the foreseeable risk of harm to the company that would otherwise arise. Therefore no act or omission was capable of constituting failure to exercise care and diligence under the section unless at the relevant time it was reasonably foreseeable that harm to the interests of the company might be caused by that act or omission. But the mere fact that a director participated in conduct that carried with it a foreseeable risk of harm to the interests of the company did not necessarily mean that he or she had failed to comply with the statutory standard, as the legislature did not intend to dampen business enterprise and penalise legitimate but unsuccessful entrepreneurial activity. Accordingly, the question whether a director had exercised a reasonable degree of care and diligence could only be answered by balancing the foreseeable risk of harm against the potential benefits that could reasonably have been expected to accrue to the company from the conduct in question.

[7194] This reasoning was adopted and applied in ASIC v Doyle (2001) 38 ACSR 606 ; [2001] WASC 187 at [222], and in ASIC v Maxwell (2006) 59 ACSR 373 ; [2006] NSWSC 1052 at [102] (Maxwell).

[7195] In ASIC NSWCA 75 (at [595]-[600]), Santow JA (dissenting as to the application of the law to the facts but not on questions of law) referred to and applied Ipp J's observations to s 232(4) of the Corporations Law, notwithstanding that s 232(4) did not create a criminal offence and was a civil penalty provision. Ipp JA himself reiterated and applied the observations he had made in Vrisakis (at [814] and following). Therefore Vines is authority binding on me for the proposition that the "foreseeability" requirement articulated by Ipp J in Vrisakis applied to the statutory duty imposed by s 232(4) notwithstanding the substitution of the civil penalty regime for the creation of a criminal offence.

[7196] In my opinion the rationale of that decision applied to s 180 of the Corporations Law, enacted in March 2000, and continues to apply to the current s 180 of the Corporations Act. Section 180, like s 232(4), lays down a statutory duty of care and diligence for directors and other officers of a corporation in the exercise of their powers and discharge of their duties. In both cases the standard is the degree of care and diligence that a reasonable person would exercise in stated circumstances. Whereas s 232(4) referred to the degree of care and diligence that a reasonable person would exercise "in a like position in a corporation ... in the corporation's circumstances", s 180 now hypothesises that the reasonable person is a director or officer of a corporation in the corporation's circumstances and occupies the office held by, with the same responsibilities within the corporation as, the defendant director or officer. It appears that the change of wording was partly intended to make it clear, after Daniels, that non-executive directors are not subject to the same (higher) standard as executive directors, and partly to affirm that the statutory standard, while related to the office held and the responsibilities of that office, was intended to be an objective standard: see ASIC NSWSC 85 at [44]-[48]. The change of wording was confined to those issues, and therefore did not affect the proposition found to be applicable to s 232(4), namely that while a contravention of the section could be established without proving damage to the corporation, a necessary element of the statutory standard of care and diligence was that it was reasonably foreseeable that harm to the interests of the company might be caused by the defendant's act or omission.

[7197] I note that there were also some changes in wording to the civil penalty provisions, consequent upon the replacement of Pt 9.4B by the Corporate Law Economic Reform Program Act, which commenced in March 2000, after the events in ASIC NSWCA 75 but before the events in this case. Under the new s 1317G(1), the court is empowered to make a pecuniary penalty order for contravention of a corporation/scheme civil penalty provision if a declaration of contravention of such a provision has been made, and the contravention either materially prejudices the interests of the corporation or its members, or materially prejudices the corporation's ability to pay its creditors, or is serious. That provision makes it clear that material prejudice to the interests of the corporation is a relevant consideration for the making of a pecuniary penalty order, but not a necessary matter to be established. However, in my view that does not affect the question of foreseeability of damage to the interests of the corporation, which is an ingredient of the concept of care and diligence according to Ipp JA's reasoning.

[7198] As to (b), in their written submissions prepared before the Court of Appeal's judgment was delivered in ASIC NSWCA 75, the defendants contended that the legislative scheme only applies to negligence gross enough to become a matter of public concern, sufficient to interest the State by reason of its gravity: DPS [372]. That submission is untenable in view of the Court of Appeal's decision, which emphatically rejected the appellant's contention that the degree of negligence that must be established to constitute a contravention of s 232(4) was higher than that which would support a claim of negligence at common law (ASIC NSWCA 75 at [63], [142]-[152] per Spigelman CJ, with whom Santow JA (at [587], [779]) and Ipp JA (at [875]) agreed.

[7199] Spigelman CJ reached the conclusion that s 232(4) and the civil penalty provisions of that time did not attach serious consequences to a contravention, unless further matters were established over and above the contravention itself: at [150]. Thus, under the civil penalty provisions of the time, while the court was required to make a declaration of contravention if it was satisfied that the defendant had contravened a civil penalty provision (s 1317EA(2)), that determination was not of a qualitatively different order to a finding of negligence in a civil action: at [145]. However, no further consequence would flow unless the court formed an opinion with respect to additional matters, "each being of a kind which requires consideration of, and a determination of, a higher level of seriousness with respect to the breach or contravention": at [146]. Thus, at the time, the court was not permitted to make a disqualification order if it was satisfied that, despite the contravention, the defendant was a fit and proper person to manage a corporation (former s 1317EA(4)); it could not make an order for payment of a pecuniary penalty unless it was satisfied that the contravention was a serious one (former s 1317EA(5)); and the contravention of a civil penalty provision constituted a criminal offence, but only if the additional elements of knowledge, intention, recklessness and either dishonesty or intent to deceive or defraud were established: s 1317FA.

[7200] It seems to me that this reasoning applies to the new civil penalty provisions introduced in March 2000 and in force during the period relevant to the present case, January-May 2001. It is still necessary for the court to be satisfied of additional matters before making a pecuniary penalty order (s 1317G) or a disqualification order (s 206C). The fact that the main additional matter to be established for a disqualification order is now the very broadly expressed requirement that the court be satisfied that the disqualification is "justified" does not derogate from the point that an additional matter, adding to the weight of the contravention, must be established before a disqualification order can be made. Further, the civil penalty provisions no longer create an offence of contravening a civil penalty provision if additional elements of intention and dishonesty are present. That seems to me to reinforce the idea that the civil standard is applicable.

23.3.2 Some statutory elements

[7201] I adopt the following two propositions:

(2): the reference to the "corporation's circumstances" in s 180(1)(a) requires that consideration be given to the type of company involved, the size and nature of its business or businesses, the provisions of its constitution (not a significant issue here), the composition of the board and the distribution of the work between the board and other officers: Commonwealth Bank of Australia v Friedrich (1991) 5 ACSR 115 at 123 (Friedrich); Daniels at NSWLR 505; ACSR 668; ASIC NSWSC 85 at [35]; ASIC NSWSC 738 at [1070]. I would add, relevantly to the circumstances of this case, that it is necessary to have regard to the status of the company as a listed or unlisted entity, and in the case of a parent company, to have regard to the size and nature of the businesses of its subsidiaries if they are under the general supervision of the parent: and generally, see Austin, Ford and Ramsay, 2005, at [6.2];
(3): the reference to the "same responsibilities within the corporation" in s 180(1)(b) is not limited to the specific tasks delegated to the particular director or officer by formal means such as through the company's constitution or a resolution: ASIC NSWSC 85 at [49]-[50].

[7202] Point (b) requires further elaboration. In ASIC NSWSC 85 (2003), senior counsel for Mr Greaves submitted that the word "responsibilities" refers to the specific tasks delegated to the relevant director by the corporate constitution or by resolution or otherwise, as part of the distribution of functions of the corporation, serving to emphasise that the determination of whether or not a director or officer has discharged his or her statutory duty is not limited to the person's title but encompasses the tasks that fall within his or her bailiwick: at [30]. My conclusion, to which I adhere now, is that the word "responsibilities" directs attention to the factual arrangements operating within the company and affecting the director or officer in question, as opposed to the legal duty of care arising in particular circumstances. The "responsibilities" of a director or officer include arrangements flowing from the experience and skills that he or she brings to bear to the office, and also any arrangements within the board or between the person and executive management affecting the work that the person is expected to carry out: at [49]. I rejected the notion that the word "responsibilities" refers only to specific tasks delegated to the relevant director or officer by the corporate constitution or a board or members' resolution or otherwise, holding that it was a wider concept referring to the acquisition of responsibilities not only through specific delegation, but also through the way in which work is in fact distributed within the corporation and the expectations placed by those arrangements on the shoulders of the individual director or officer: at [50].

23.3.3 The requirement of diligence

[7203] The statutory duty incorporates a minimum standard of diligence, requiring every director or officer, including a non-executive director:

(10): to become familiar with the fundamentals of the business or businesses of the company;
(11): to keep informed about the company's activities;
(12): to monitor, generally, the company's affairs;
(13): to maintain familiarity with the financial status of the company by appropriate means, including (in the case of a director) review of the company's financial statements and board papers, and to make further inquiries into matters revealed by those documents where it is appropriate to do so: Francis v United Jersey Bank (NS 1981) 432 A 2d 814, approved in Daniels at NSWLR 503-4; ACSR 666; ASIC NSWSC 171 at [372(8)]; ASIC NSWSC 85 at [77]-[78]; Loiterton at [16]; Downey v Crawford (2004) 51 ACSR 182 ; [2004] FCA 1264 at [174]; and
(14): in the case of a director, and at least some officers, to have a reasonably informed opinion of the company's financial capacity: Friedrich at 126.

[7204] Point (v) is related to the statutory duty of directors to prevent insolvent trading by the company: s 588G. Directors must inform themselves as to the company's financial affairs so that they can form an opinion as to the company's solvency. If the company's insolvency is revealed by financial statements or board papers, directors cannot escape liability on the basis that they did not read those documents: Friedrich at 125; ASIC NSWSC 171 at [372(8)].

23.3.4 An objective standard of skill

[7205] ASIC submitted that:

(2): the statutory duty encompasses a duty of competence, measured objectively: ASIC NSWSC 1116 at [30], [46]-[47];
(3): compliance with the duty is determined by reference to what a reasonable person of ordinary prudence would do; a duty which is enhanced, where the directorial appointment is based on special skill, by an objective standard of skill referable to the circumstances: ASIC NSWSC 1116 at [38];
(4): the statutory standard of skill includes a standard of competence in reading and understanding financial material, which is not dependent on the director's subjective inexperience or lack of skill: Friedrich at 125; ASIC NSWSC 171 at [372(8)];
(5): it follows that directors and officers cannot escape liability on the basis that they did not read financial material made available to them for the purposes of their office, and at least to that extent, the statutory duty of care and diligence imports an objective standard of skill irrespective of the directors' or officers' subjective inexperience or lack of skills: Friedrich at 125; ASIC NSWSC 171 at [372(8)];
(6): the legislative history of s 180, discussed in ASIC NSWSC 85 at [46]-[48], confirms that the provision was intended to impose an objective standard of skill; and
(7): whatever particular skills an individual director or officer actually possesses, or inexperience the individual may suffer from, the director or officer is accountable to a core irreducible requirement of skill, measured objectively: Deputy Cmr of Taxation v Clark (2003) 57 NSWLR 113 ; (2003) 45 ACSR 332 ; [2003] NSWCA 91 at [108]-[109].

[7206] I accept these propositions, though they have somewhat different consequences for executive and non-executive directors. In the case of non-executive directors, the objective duty of minimum skill and competence may not extend much beyond financial matters, but in the case of an executive director, the statutory standard seems generally to reflect what is objectively expected of a person appointed to the designated executive office held by the defendant (in this case, joint chief executive and finance director respectively), and also any additional responsibilities acquired by the defendant. That was the view I took in ASIC NSWSC 1116 at [48] and ASIC NSWSC 738 at [1057] and following, and in the Court of Appeal Spigelman CJ noted those views without disapproval and said that the appellant did not challenge them: ASIC NSWCA 75 at [67]. Santow JA (dissenting, though not on propositions of law) said that s 232(4) applied an objective standard of care, diligence and, implicitly, skill: at [593].

[7207] It seems to me that, in light of ASIC NSWCA 75, the earlier view that "directors are not required to exhibit a greater degree of skill in the performance of their duties than may reasonably be expected for persons of commensurate knowledge and experience, in the relevant circumstances" (Maxwell at [101]) is no longer correct: compare Australian Securities and Investments Commission v Macdonald (No 11) (2009) 71 ACSR 368 ; [2009] NSWSC 287 at [236], [236].

[7208] The defendants took issue with the proposition that the statutory standard encompasses an objective duty of skill: DPS [368]. For the reasons I have given, I think the issue has been resolved against the defendants' submission by the subsequent Court of Appeal decision in ASIC NSWCA 75, especially at [67], [130], [593] and [805].

23.3.5 Shareholder acquiescence

[7209] The defendants submitted (DPS [348f]] that where there is an identity of interest between the directors and shareholders, so that in effect the directors are the shareholders, the requirement to constrain management and strengthen shareholder control is much less acute: Maxwell at [103]. They submitted that a fully informed general meeting of shareholders can prospectively or retrospectively ratify actions of the directors that would otherwise be in breach of their general law duty of care, and they claimed that where the directors and shareholders are one and the same, ratification is implicit. Their submission continued:

[103] ... Although the shareholders of the company cannot release the directors from their statutory duties imposed by s 180: Porge v ASIC (2004) 213 ALR 574 at 654-5 ; (2004) 52 ACSR at 81-2; ASIC v Australian Investors Forum Pty Ltd (No 2) (2005) 53 ACSR 305 at 314-5; Angas Law Services Pty Ltd (in liq) v Carabelas (2005) 53 ACSR 208 at 219 [32], their acquiescence in a course of conduct can effect the practical content of those duties, including any question of whether the directors acted with a reasonable degree of care and diligence: Angas Law Services Pty Ltd (in liq) v Carabelas (2005) 79 ALJR 993 at [29]-[32].

[7210] In my opinion those propositions are correct, but great caution needs to be exercised in applying them to cases where there is not a precise coincidence between shareholders and directors. Assuming, solely for the purposes of analysis, that PBL/CPH and News acquiesced in, or even that they consented to, the conduct on the part of the defendants that is now alleged by ASIC to be in breach of their statutory duty of care and diligence, and bearing in mind the defendants' own substantial shareholdings, it might be possible to say that the majority of the shareholders had in effect ratified the directors' impugned conduct. But there could not have been shareholder unanimity or anything near to it, as One.Tel was a listed company with many shareholders, and there is no principle of law short of the doctrine of unanimous assent that would allow the informal acquiescence of a majority of shareholders to have the same effect as a formal resolution at a properly convened general meeting. Additionally, there would be intricate factual questions involved in determining whether, in fact, PBL/CPH and News did consent to or acquiesce in the defendants' conduct, questions left substantially unaddressed by the evidence in this case. In my view there is no occasion for the application of the principles about shareholder ratification in this case.

23.4 The standard of care required of executive officers

[7211] An executive officer's services are made available to the company under an express or implied contract. In the present case, the company had a contract with a company controlled by Mr Rich and a contract with a company controlled by Mr Silbermann, by which those companies undertook to procure the services of Mr Rich and Mr Silbermann respectively: Ex MTB 2/472A, 506A. ASIC submitted that an implied term of those contracts was that the defendants (through their controlled companies) promised that they had the skills of a reasonably competent person in their respective categories of employment, and that they would act with reasonable care, diligence and skill: APS [2076], citing ASIC NSWSC 171 at [372(5)]; ASIC NSWSC 1116 at [20]-[21]; ASIC NSWSC 738 at [1064]. It is not clear to me whether the defendants made any express or implied promises of the kind alleged to One.Tel directly, or the only promises made to One.Tel were made by the controlled entities. But that does not matter, because it seems to me reasonably plain that implied promises along the lines alleged were at least made by the controlled entities of One.Tel to the knowledge of the respective defendants.

[7212] For the reasons I explained in my two ASIC NSWCA 75 judgments (ASIC NSWSC 85 (2003) at [38]-[48]; ASIC NSWSC 738 (2005) at [1057]-[1060], [1064]), promises of that kind affect the content of the statutory duty of care and diligence for such officers: see also South Australia v Marcus Clark (1996) 19 ACSR 606 at 627-9 ; 14 ACLC 1019 at 1036. In my view it does not matter, for the purpose of ascertaining the content of the statutory duty, whether the promises were made by the defendant personally or by his or her controlled entity.

[7213] The objective standard in the case of an executive officer or executive director has regard to the knowledge and expertise of persons in the same recognised calling as the person charged with contravention, and therefore recourse may be had to the evidence of experienced people who have occupied similar offices. In the present case ASIC adduced expert opinion evidence from two experienced company directors, Mr Cameron and Mr Warburton. Their evidence reflects the reality that, although under a typical corporate constitution the business of the company is to be managed by or under the direction of the directors (see the replaceable rule in s 198A(1)), the reality is that for large enterprises, the management of the company is delegated in large measure to its executive officers: AWA Ltd v Daniels (1992) 7 ACSR 759 at 832; American Law Institute, Principles of Corporate Governance: Analysis and Recommendations, 1992, at 3.01. That delegation is generally sanctioned by the law as long as the non-executive director acts reasonably and in good faith, after making an independent assessment of the information supplied by the executive officers: s 189; Daniels at NSWLR 502-3; ACSR 665; ASIC NSWSC 171 at [372(10)]-[372(11)]; Loiterton at [17].

23.5 Expert opinion evidence on the role and responsibilities of a managing director and a finance director

[7214] ASIC tendered evidence from expert opinion evidence from Mr Cameron and Mr Warburton concerning the role and responsibility of a managing director and the finance director of a listed public company. I accept their evidence, which I outline below.

23.5.1 Mr Cameron's evidence

[7215] Roderick Cameron was a partner in the accounting firm, Coopers & Lybrand, between 1962 and 1985, and thereafter he went into a career of public and other company directorships. He is or has been a director of large Australian companies, some much larger and longer established than One.Tel, though none in the telecommunications industry. He was a part-time commissioner in the National Companies and Securities Commission between 1986 and 1990. His evidence took the form of an expert's report based on his experience, annexed to his affidavit of 21 May 2002, in which he answered questions put to him by ASIC about (inter alia) the roles of managing director and finance director of a listed public company.

23.5.1.1 Managing director

[7216] Mr Cameron said that the managing director of a listed public company is the chief executive and bears full responsibility, subject to the ultimate supervision of the board of directors, for the financial position and performance of the company. He said it is an essential element of the role of the managing director that he [sic] have a detailed understanding of the actual financial position and performance of the company. The managing director has primary responsibility for the matters referred to below, but not to the exclusion of the collective responsibilities of the board.

[7217] Mr Cameron said the board of directors cannot effectively discharge their responsibility to monitor management without accurate and complete financial information from management, and the managing director as leader of the management team must ensure that the board is provided with adequate information that is both accurate and complete. Where the company is establishing a new business that is not yet cash positive, the managing director must ensure that he and the other directors are regularly informed as to the adequacy of the company's actual and forecast cash position and key events or transactions affecting its financial position or performance. If the company is establishing a new business that is currently making losses, its continuing survival depends on the adequacy of its cash reserves and in such a case, the managing director will particularly ensure that he and the other directors are in a position to properly assess the cash position on the basis of accurate and complete information. The managing director's responsibility is, he added, even greater where previous cash forecasts are not being met. Further, the managing director must take whatever action he finds necessary to satisfy himself that management's accounting and information systems produce accurate and reliable information and that the information properly flows from management to the board.

[7218] He said the finance director occupies an important position because the managing director will usually rely on him [sic] in relation to the ordinary administration of the financial affairs and records of the company. Therefore an important part of the managing director's role is to ensure that the person appointed to the position of finance director has the appropriate financial qualifications, expertise and experience, and the managing director must engage in continuing review and assessment of the finance director's expertise and effectiveness.

[7219] The managing director must not mislead the board or withhold material information from it, and is also responsible for ensuring that the ASX and the investing public are properly and accurately informed. The managing director must be rigorous in ensuring that there is a reasonable factual basis for public statements on behalf of the company, especially statements that might influence the share price. The managing director must ensure, as the senior executive officer of the company, that the company complies with the ASX Listing Rules and the Corporations Act as to the provision of information, and therefore must have a detailed understanding of the actual financial position and performance of the company.

[7220] Where the business is cash negative, it is an essential part of the managing director's role that he exercises substantial care to ensure that the cash reserves are maintained at a level that will enable the company to pay its debts as and when they fall due. The managing director is expected to make recommendations to the board as to the prudent financial management of the company or, where necessary, the need to cease business, or to appoint an administrator.

[7221] Mr Cameron did not directly address the responsibilities of a managing director who holds the position jointly with someone else.

23.5.1.2 Finance director

[7222] Mr Cameron also addressed what he considered to be the role a finance director ordinarily performs when acting in accordance with usual practice in Australia. He said that in all financial matters, the finance director's responsibility is the same as that of a managing director, except that the finance director reports to the managing director and the managing director ultimately bears full responsibility. In his view the finance director is the chief financial officer of the company who, having accepted appointment to the board, must also accept the additional responsibility that goes with that role.

[7223] Hence, the finance director is responsible, in the first instance, for ensuring that the board is provided with financial information that is both accurate and appropriate to the company circumstances, thereby ensuring that he and the other directors are fully informed of all material financial information. If the adequacy of the company's cash reserves is a regular consideration for the board, the financial director must ensure that accurate and complete information is produced that enables the board properly to assess the cash position. The finance director has responsibility, in the first instance, for the accounting and management information systems needed to record, track and forecast the company's financial position and performance. The finance director must not mislead the board or withhold material information, and must ensure that sufficiently accurate and detailed information is produced so that the ASX and the investing public are not misled. The finance director must have a detailed understanding of the actual financial position and performance of the company so that the company is in a position to comply with the ASX Listing Rules and Corporations Act. The finance director must take the utmost care to ensure that the board is fully and accurately informed about the company's cash reserves so that they can be maintained at a level sufficient to enable the company to pay its debts as and when they fall due. The finance director's role includes making recommendations to the board in relation to matters within his responsibility, such as funding, if necessary the cessation of business, or the appointment of an administrator.

23.5.2 Mr Warburton's evidence

[7224] Richard Warburton worked for 30 years with Du Pont Australia and New Zealand, eventually becoming a director from 1984 to 1995, managing director between 1987 and 1992 and chairman between 1992 and 1995. At the time of giving evidence, he was among other things chairman of several large Australian listed companies and a member of the board of the Reserve Bank of Australia. Like Mr Cameron, he gave evidence by way of an expert's report, in which he answered questions put to him by ASIC on the basis of his experience, concerning (inter alia) the role and responsibilities of the managing director and the finance director of an Australian listed public company.

23.5.2.1 Managing director

[7225] He said the managing director, as senior executive officer of the company, has a primary responsibility, in the first instance, for ensuring that the board is in the position to exercise its collective responsibilities with respect to:

•: monitoring management;
•: ensuring that the directors are fully informed of all material financial information and as to the adequacy of cash reserves and key events and transactions;
•: ensuring that monitoring systems have been established and are maintained so that the financial information received by the board is accurate and reliable and flows properly from management to the board; and
•: ensuring that the cash reserves of the company are maintained at a level that will enable the company to pay its debts as and when they fall due.

[7226] He said the managing director plays an essential role in ensuring that he [sic] and the other directors are fully informed of all material information concerning the company and that accounting and information systems are established, maintained and monitored which enable accurate and reliable information to flow from management to the board. If the company is establishing a new business that is currently making losses, its solvency depends on the board having accurate and reliable information as to its actual and forecast cash position.

[7227] The managing director must have a detailed understanding of the actual financial position and performance of the company. If the company is establishing a new business and making losses, the managing director will recognise the significance of the board being in a position properly to assess the cash position, including an analysis of debtors and creditors including aged listings. The managing director would ensure that cash flow forecasts are based on accurate and reliable information prepared and reviewed by the board at regular intervals, and he will ensure that the board is informed of any significant disparity between the actual cash position and the forecast position. He will recognise the need for adequate accounting and financial management systems and for an effective process of internal review of those systems.

[7228] Mr Warburton's evidence acknowledges that the managing director "has his responsibility for the appointment of the chief financial officer", but emphasises that the board acting on the advice of the chairman and of the chairman of the audit committee retains the right of veto to such an appointment, and after the appointment, the board through the chairman continues to informally review and assess the skills of the finance director and his suitability for the position, in consultation with the managing director.

[7229] Mr Warburton did not directly address the responsibilities of a managing director who holds the position jointly with someone else.

23.5.2.2 Finance director

[7230] The finance director, who is the chief financial officer and the senior member of the financial management team, has a significant responsibility in relation to the five matters listed in the bullet points for the managing director. He [sic] must have a detailed understanding of, and is responsible for maintenance of accurate and complete records of, the financial position and performance of the company, and for ensuring that the board is provided with financial information that is both accurate and appropriate.

23.6 Breach of the statutory duty of care and diligence

[7231] In ASIC NSWSC 738 at [1070], I expressed the view that the general law of torts can be called in aid as a source of guiding principles for the content of the statutory standard of care of company directors and officers, and for determining whether a breach of duty has occurred (see above at 23.3.1). I referred to the well-known passage in the judgment of Mason J in Wyong Shire Council v Shirt (1980) 146 CLR 40 at 47 ; (1980) 29 ALR 217 at 220 (Shirt), where his Honour said that in order to determine what a reasonable person would do by way of response to a given risk, the tribunal of fact needs to consider "the magnitude of the risk and the degree of the probability of its occurrence, along with the expense, difficulty and inconvenience of taking alleviating action and any other conflicting responsibilities the defendant may have". I applied those observations to the facts before me. In his judgment on appeal, Spigelman CJ set out my analysis of these issues without disagreement, as a prelude to dealing with the principal issue in contention about the statutory duty, namely whether the degree of negligence to be established in order to prove contravention of the statute is higher than at general law: at [63].

[7232] I infer that it is appropriate to apply the Shirt principles again in the present case. But recent High Court cases have focused renewed attention on the " Shirt calculus", and have served to emphasise that the criteria are to be applied in a case such as the present with some caution and flexibility: Koheler v Cerebos (Aust) Ltd (2005) 222 CLR 44 ; 214 ALR 355 ; [2005] HCA 15 at [54] per Callinan J; Mulligan v Coffs Harbour City Council (2005) 223 CLR 486 ; 221 ALR 764 ; [2005] HCA 63 at [2] per Gleeson CJ and Kirby J. The High Court has made it clear in that Shirt is concerned with questions of breach of duty and not whether the duty exists: Vairy v Wyong Shire Council (2005) 223 CLR 422 ; 221 ALR 711 ; [2005] HCA 62 at [72] (Vairy) per Gummow J; [129] per Hayne J; [27]-[30] per McHugh J. An analysis of the considerations stated in Shirt is impeded, rather than assisted, by formulating the relevant duty of care in terms of its breach: Graham Barclay Oysters Pty Ltd v Ryan (2002) 211 CLR 540 ; 194 ALR 337 ; [2002] HCA 54 at [191].

[7233] The defendants placed particular emphasis on the following observations of Hayne J in Vairy at [128]:

[128] If, instead of looking forward, the so-called Shirt calculus is undertaken looking back on what is known to have happened, the tort of negligence becomes separated from standards of reasonableness. It becomes separated because, in every case where the cost of taking alleviating action at the particular place where the plaintiff was injured is markedly less than the consequences of a risk coming to pass, it is well nigh inevitable that the defendant will be found to have acted without reasonable care if alleviating action was not taken. And this would be so no matter how diffuse the risk was -- diffuse in the sense that its occurrence was improbable or, as in Romeo diffuse in the sense that the place or places where it may come to pass could not be confined within reasonable bounds.

[7234] The defendants submitted (DPS [364]-[366]) that a "look forward" approach to the application of the Shirt calculus is as important in a case such as the present, akin to a professional negligence case, as it is in a personal injury case. They contended that, just as the High Court has refused to countenance a breach of duty in circumstances where the implication of their doing so would have been to require bodies such as local councils to fix warning signs profusely, or to prohibit certain kinds of conduct completely, in areas under their supervision, similarly the court should avoid a finding that certain information not contained in board papers should have been there, where the consequence may be to that board papers would grow to the size of a telephone book.

[7235] I think there is substance to this submission. ASIC's submissions about the defendants' alleged failure to inform the board of the company's financial circumstances have tended to focus on the Australian fixed wire/service provider business, but to a degree (particularly with respect to January and February 2001), singling out that business from all of the other businesses of One.Tel has the air of a submission made from a "looking back" perspective.

[7236] The Shirt principles are to be supplemented by the matter that was identified in the judgment of Ipp J (as his Honour then was) in Vrisakis, which I identified at 23.3.1: namely that in applying the statutory duty of care and diligence the court should consider whether the risk of harm from the director's or officer's conduct is foreseeable, and whether countervailing benefits might potentially accrue from the conduct.

[7237] The question of breach is not to be resolved merely by asking whether the defendants had a subjective appreciation of the dangers or risks affecting the financial health and position of One.Tel. It is also necessary to consider whether the defendant should have known the danger: Timbs v Shoalhaven City Council (2004) 132 LGERA 397 ; [2004] NSWCA 81 at [43], [46]. In that case it was held that the Council was liable in negligence in circumstances where, after it had accepted responsibility to advise on the safety of a tree, the Council officer's routine visual inspection of the tree was found not to be commensurate to the risk to property and life if the tree were to fall: at [52].

[7238] Conduct by a director that results in the company contravening a provision of the corporations legislation has been found to constitute a contravention by the director of s 180 or one of its predecessors. For example, in ASIC NSWSC 171, Mr Adler procured a subsidiary of HIH to make a $10 million payment to another company that resulted in HIH contravening s 208 of the Corporations Law, as well as the subsidiary contravening s 260A. It was found that Mr Adler's conduct contravened his statutory duty of care and diligence: at [22], [374]. A contravention of the statutory duty of care and diligence may occur if the defendant director's conduct exposes the company to potential liabilities under the corporations legislation, even if no actual contravention by the company results, provided that the risk of contravention by the company is clear and any countervailing benefits are insignificant: Maxwell. But s 180 does not provide a backdoor method of visiting on company directors a form of accessorial civil liability for contraventions of the Corporations Act for which provision is not otherwise made (Maxwell at [110]); the question is whether the directors have breached their statutory duty of care and diligence in exposing their company to contraventions of the law.

[7239] The statutory standard of care and diligence for company directors and officers, like the standard that applies in professional negligence cases, recognises the distinction between negligence and mere mistakes (ASIC NSWSC 738 at [1075], a passage not affected by the Court of Appeal's judgment). Dealing with duty of care of a solicitor, McLelland CJ in Eq said in Trust Co of Australia v Perpetual Trustees WA Ltd (1997) 42 NSWLR 237 at 247:

Not every mistake by a solicitor founds liability in negligence. There are many uncertain or difficult areas of the law and the expression of an opinion by a solicitor does not normally constitute a promise that the opinion is correct. The duty of care owned by a solicitor to his client is to exercise reasonable skill and care.

Later (at 247-8) he remarked:

... Mistakes of the kind which I have held to have been made by [the solicitors] become much more apparent with the benefit of hindsight and in the light of full argument and the opportunity for unhurried investigation and consideration.

[7240] In that case the court declined to find that the solicitors were negligent, having regard to the circumstances in which they were asked to act, the way the problem was put to them and the way it developed, and the nature of the mistake. It seems to me that his Honour's observations about mistakes apply, a fortiori, to errors of judgment.

[7241] In the ASIC NSWCA 75 case, I held that the quoted passages from McLelland CJ in Eq's judgment were applicable to people in the position of officers of a corporation, such as the defendants in that case. They are also relevant to the present case. In ASIC NSWCA 75 the facts concerned forecasting in a reinsurance business, whereas in the present case the facts concern, among other things, financial forecasting in a telecommunications company. In both situations, forecasting is a difficult and uncertain process, with much room for mistakes and errors of judgment, and for differences of opinion.

[7242] The statutory issue under s 180(1) is not whether the defendants made mistakes in the process of financial forecasting, and a fortiori, it is not whether they formed opinions different from the opinions of ASIC or even of the court. The statutory issue is whether they failed to meet the standard of care and diligence that the statute lays down. The statute requires the court to apply a standard defined in terms of the degree of care and diligence that a reasonable person would exercise, taking into account the corporation's circumstances, the offices occupied by the defendants and their responsibilities within the corporation. That requires the defendants' conduct to be assessed with close regard to the circumstances existing at the relevant time, without the benefit of hindsight, and with the distinction between negligence and mistakes or errors of judgment firmly in mind. If the impugned conduct is found to be a mere error of judgment, then the statutory standard under s 180(1) is not contravened and it is unnecessary to advert to the special business judgment rule in s 180(2). In the view that I have taken of it, explained below, s 180(2) provides a defence in a case where the impugned conduct goes beyond a mere error of judgment, and would contravene the statutory standard but for the defence: compare ASR [351-2].

23.7 Res ipsa loquitur

[7243] ASIC submitted (APS [2088], citing Schellenberg v Tunnel Holdings (2000) 200 CLR 121 ; 170 ALR 594 ; [2000] HCA 18 at [25]; and Cashflow Finance Pty Ltd (in liq) v Westpac Banking Corp [1999] NSWSC 671 at [358(xvii)]) that it would be open to the court to apply the principle of res ipsa loquitur in the present case, in the following way:

(2): the "occurrence" was the board's ignorance of the true financial position of the company;
(3): the "occurrence" was of a kind that would not ordinarily occur without the negligence of management; and
(4): the management of One.Tel's financial affairs was vested in the defendants (along with Mr Keeling, whose position was addressed in One.Tel Ltd (in liq), Re; Australian Securities and Investments Commission v Rich (2003) 44 ACSR 682 ; [2003] NSWSC 186).

[7244] The defendants contended that res ipsa loquitur has no application to a civil penalty case based upon s 180 or any other provision concerning directors duties, where (as discussed in Ch 3) the Briginshaw standard of proof applies: DPS [375]. They noted that ASIC had not identified any directors' duty or civil penalty case in which the maxim has been applied, and suggested that the attempt to do so involved an element of desperation reflecting ASIC's problems improving its case: DPS [381].

[7245] It may be that the res ipsa loquitur principle is capable of applying to a state of affairs such as the ignorance of a board of directors of the true financial position of their company over a particular period, as well as to a particular event. It may be, consistently with the view I expressed in ASIC NSWSC 738 at [1070], that this part of the general law of torts may be called in aid as a source of guiding principles governing the content and application of the statutory duty of care and diligence, and consequently in an appropriate case the res ipsa loquitur principle might possibly be applied for the purpose of determining whether there has been a contravention of the statutory duty. However, assuming that the res ipsa loquitur principle is capable of applying in the assessment of whether a company director or officer has breached the statutory duty of care and diligence, in the present case there is no occasion for applying the principle, because ASIC has failed to prove that the true financial position of the company at relevant times was as alleged in its statement of claim.

23.8 One.Tel's circumstances

[7246] Section 180(1) directs attention to the corporation's circumstances and the offices held by, and the responsibilities within the corporation of, the defendants. The defendants pointed out that One.Tel 's circumstances and the offices and responsibilities of the defendants were dealt with in detail in the historical and chronological account set out in Mr Rich's affidavit: DPS [383]. I have dealt with Mr Rich's evidence fully in these reasons for judgment.

[7247] The defendants set out in summary form some matters which, they said, were significant in relation to One.Tel's circumstances: DPS [388]. ASIC responded by saying that while some matters were not in dispute, many of the propositions in the defendants' summary were to a greater or lesser extent contentious and had been dealt with by ASIC in the body of their substantive submissions: ASR [388]. In the following list, I have modified the defendants' broad propositions in light of my findings in this judgment:

(2): the size of the company -- 3000 employees;
(3): its geographical spread -- One.Tel operated in eight countries;
(4): its number of operating divisions -- 16 spread over those 8 countries;
(5): its historical growth and strategic development, particularly the change in business strategy which came about with the $430 million investment by PBL and News;
(6): the detailed nature of the business plans, business by business, and the review of those plans by shareholder-appointed representatives such as Mr Kleemann, Mr Miller and Mr Green;
(7): the nature of the shareholdings in One.Tel (less than 5% held by the public and staff, and the balance held by entities represented by executive and non-executive directors and an institutional investor: Ex P74-247;
(8): the significant degree of access provided to representatives of the major shareholders to staff at all levels;
(iv): the management and financial reporting systems, with their strengths and limitations (Adept, SAS and the financial reporting systems);
(10): the nature of the businesses and their stage of development (most being in an early growth phase);
: Mr Packer Jnr's long involvement with the company as one of its seed investors;
(v): the substantial involvement of Mr Packer Jnr in the planning and operations of One.Tel from very early days;
(vi): the increasing involvement of PBL with One.Tel from about mid-2000, and in particular the involvement of Mr Kleemann, Mr Miller and Mr Green;
(vii): the nature of the industry in which One.Tel was operating, characterised by stiff competition and a supply environment in which disputes were endemic;
: the sophisticated management tools used by One.Tel to check carrier invoices;
(a): the significant success rate One.Tel had built up historically in disputes with suppliers and carriers, particularly Telstra, Optus and Lucent in Australia and WorldCom, GTS, Global Crossing and other carriers in Europe;
(b): the aggressive targets set in business plans, which had been substantially achieved in the years up to 2000;
(i): the expertise and experience of many of the non-executive directors;
(ii): the regular communication between senior management and non-executive directors outside board meetings;
•: the process by which board papers were discussed with the directors individually, prior to each board meeting;
: the type of information which the non-executive directors had required to be supplied to them on a regular basis, and the absence of any request by them for other types of information;
(iii): the frequent briefings received by PBL and News executives as to particular aspects of the One.Tel business, often given by, or participated in by, senior executives of One.Tel other than the defendants;
(14): the granting of the requests of Mr Kleemann, Mr Howell-Davies and Mr Packer Jnr for the information and access to One.Tel personnel and records that they required (apart from denial of Mr Packer Jnr's request for computer access to One.Tel's system, which was rejected on technical grounds to do with the firewalls protecting the systems of the respective companies);
(iv): the daily reporting of key performance indicators requested by Mr Packer Jnr and supplied from late January onwards;
(v): the open access granted to Mr Kleemann in 2000/2001, and to Mr Miller and Mr Green in April-May 2001, to One.Tel staff and systems in the period from late April 2001 until the 17 May board meeting;
(i): the significant "behind-the-scenes" influence wielded by Mr Packer Snr; and
(ii): the curious events that transpired after 17 May 2001, involving withdrawal of the proposed rights issue and putting the company into administration.

23.9 The business judgment rule

23.9.2 The defences to the statement of claim

[7248] In their defences, Mr Rich and Mr Silbermann plead some matters that are obviously intended to raise the business judgment rule: para 61. They contend that the following matters were decisions to take or not to take action in respect of a matter relevant to the business operations of One.Tel Ltd:

(10): what information in relation to the financial position and performance of the One.Tel Group was material at any point in time;
(11): what information in relation to the financial position and performance of the One.Tel Group ought to be brought to the attention of the board and in what manner;
(12): what systems were appropriate to be established and maintained for the provision of financial information to the board;
(13): what level of cash reserves of the One.Tel Group was appropriate in any particular point in time;
(14): the position and responsibilities of Mr Silbermann;
(15): whether there was a reasonable factual basis for public statements made by One.Tel Ltd; and
(iii): whether there existed at any point in time facts or circumstances which ought to be notified by One.Tel Ltd to the ASX.

[7249] The defendants' intention to invoke the business judgment rule is confirmed in their filed written submissions (DPS [405]), where they said that they rely upon s 180(2) in respect of all claims made against them under s 180(1).

23.9.2 "Business judgment" at general law and under the statute

[7250] All duties of care, whether statutory, common law or equitable, are subject to the statutory business judgment rule in s 180(2) and (3).

[7251] The defendants submitted that in addition to the statutory business judgment rule applying particularly to the statutory duty of care and diligence, there is a broader business judgment rule at general law, which applies to the statutory as well as the general law duty of care and diligence, and also to some other duties of directors and officers: DPS [390], citing H A J Ford, R P Austin and I M Ramsay, Ford's Principles of Corporations Law, 7th ed (looseleaf), Butterworths, Sydney, 1995, at [8.060]. They referred, in particular, to the following judicial statements:

(9): "Directors in whom are vested the right and duty of deciding where the company's interests lie and how they are to be served may be concerned with a wide range of practical considerations, and their judgment, if exercised in good faith and not for irrelevant purposes, is not open to review in the courts" (Harlowe's Nominees Pty Ltd v Woodside (Lake's Entrance) Oil Co NL (1968) 121 CLR 483 at 493 ; [1968] HCA 37 per Barwick CJ, McTiernan and Kitto JJ);
(9): "There is no appeal on the merits from management decisions to courts of law: nor will courts of law assume to act as a kind of supervisory board over decisions within the powers of management honestly arrived at" (Howard Smith Ltd v Ampol Petroleum Ltd [1974] 1 NSWLR 68 at 74 ; [1974] AC 821 at 832 ; (1974) 3 ALR 448 at 452 (Privy Council).

[7252] ASIC submitted that it is difficult to see what continuing work notions of "business judgment" under the general law have to play in the court's consideration of s 180(1), in view of the statutory defence in s 180(2): ASR [390-5].

[7253] It seems to me that the matters identified in the judicial observations quoted above form part of the court's assessment of whether, in the particular case, the defendants' impugned conduct is in breach of a general law duty. There is no "bright line" business judgment rule at general law, but rather the matters referred to in the quoted passages are in the nature of relevant considerations, in the same category as the distinction between errors of judgment and negligence, and the proposition that the court should not merely substitute its opinion on the merits of a matter for the opinion of the defendants. They are, moreover, relevant considerations that are an integral part of the application of the standard applied by the general law: in particular, the standard of care and diligence is perceived and understood by contrasting breach of that standard with an error going to the merits of a business decision. To take the "business judgment rule" out of the assessment of breach of the general law duty of care would be to remove one of the entrance points to an understanding of the standard of care itself, and to distort the underlying concept.

[7254] At 23.3.1, I set out my reasons for concluding that the statutory duty of care and diligence is essentially the same as the duty of care and diligence of a director or officer at general law. Since business judgment considerations are an integral part of the general law duty, it follows from my earlier reasoning that those considerations are to be taken into account in applying the statutory standard of care and diligence. But it does not follow that the statutory defence in s 180(2) is therefore redundant. The business judgment considerations that figure in the articulation and application of the statutory standard of care and diligence are open-ended, whereas s 180(2) is a specific statutory rule having defined components and a defined outcome. It is at least theoretically possible that s 180(2) might protect defendants from liability for acts or omissions that would otherwise constitute a contravention of s 180(1) notwithstanding business judgment considerations at that level. Additionally, on a practical level s 180(2) articulates criteria that can be a reference point for directors and officers and their advisers, and can offer a direct solution to the issue of breach of duty in a straightforward case (see, for example, Deangrove Pty Ltd (recs and mgrs apptd) v Buckby (2006) 56 ACSR 630 ; [2006] FCA 212 at [68] per Branson J).

[7255] The extent to which s 180(2) affords a broader protection than the general law business judgment considerations imported into s 180(1) depends upon the meaning of subparas 180(2)(a)-(d). It seems to me that in circumstances such as those of the present case, a crucially important question is whether, for the purposes of subpara (d), there can be a "rational" but nevertheless unreasonable belief that the decision is in the best interests of the corporation. That question is addressed below.

23.9.3 The US model

[7256] It has been said that the business judgment rule in s 180(2) was drawn, to a large extent, from the business judgment rule contained in the American Law Institute's Principles of Corporate Governance: Analysis and Recommendations, adopted by the ALI in 1992: Ford, Austin and Ramsay, 1995, at [8.310]. The ALI formulation, at para 4.01(c), has (broadly speaking) the same four elements as s 180(2). The ALI publication contains commentary, which refers to the extensive US case law.

[7257] While the ALI's formulation of the US rule, and the wealth of US case law on the subject, provide a useful resource when a business judgment rule is raised in Australian litigation, obviously the primary task of an Australian court is to construe and apply the statute, which is not necessarily a complete reflection of the US position.

23.9.4 Who bears the onus of proof of the elements of s 180(2)?

[7258] Where s 180(2) applies, it has the effect that the director or other officer to whom it applies is taken to have met the requirements of s 180(1) and also their equivalent duties at common law and in equity. The elements of s 180(2) are as follows:

•: the director or officer must have made a business judgment, which according to the definition in s 180(3) is any decision to take or not to take action in respect of a matter relevant to the business operations of the corporation;
•: the judgment must be made in good faith for a proper purpose;
•: the director or officer must not have a material personal interest in the subject matter of the judgment;
•: the director or officer must inform themselves about the subject matter of the judgment to the extent they reasonably believe to be appropriate; and
•: the director or officer must rationally believe that the judgment is in the best interests of the corporation (the director's or officer's belief being treated as rational unless it is one that no reasonable person in their position would hold).

[7259] In some cases the facts concerning the alleged contravention will incidentally establish the presence or absence of some or all of these elements and the question of onus of proof will not matter. But it is likely that in many cases, the court's decision as to whether the elements of the business judgment rule are present will require substantial findings of fact, and then the issue of onus of proof may be critically important.

[7260] ASIC submitted (APS [2090]-[2093]) that both the linguistic context and the purpose underlying the enactment of s 180(2) favour the view that the defendants bear the onus of proof of the elements of that subsection. The defendants submitted that the legal onus of proof of the elements of the business judgment rule rests with ASIC: DPS [406]-[413].

[7261] The ALI formulation of the US business judgment rule contains four ingredients broadly similar to s 180(2)(a)-(d). Professor Deborah DeMott, a leading academic commentator on US and comparative corporate law, described the US position for an Australian audience as follows ("Legislating Business Judgment -- A Comment from the United States", (1998) 16 Co & Sec LJ 575, at 576):

In litigation involving the business judgment rule, it is of great practical significance whether the director or the party asserting liability bears the onus of proof. As defined by cases in Delaware (by far the United States jurisdiction with the most fully-developed body of corporate law doctrine), the business judgment rule clearly creates a presumption on behalf of directors that the prerequisites to the rule's applicability have been satisfied [citing, for example, Aronson v Lewis 473 A 2d 805 (Del 1984)]. As a consequence, the plaintiff bears the onus as to whether the director's decision was disinterested, made in good faith with adequate information, and made with a rational belief that the decision served the corporation's best interests.

[7262] Parliament has not expressly indicated who carries the onus of proving the application of the business judgment rule. A different drafting style could have been adopted, to clarify the question of onus. Compare, for example, s 588E, which sets out a series of statutory presumptions to be made in recovery proceedings, each of which arises when certain matters are "proved", and then says (s 588E(9)) that the presumptions for which the section provides operate except so far as the contrary is proved. In that context, it is reasonably plain that the person who wishes to cause the presumption to arise (normally the plaintiff) must prove the statutory prerequisite for that presumption, and the person seeking to rebut the presumption, once it has arisen, has the onus of proving the contrary. Another drafting style is found in the insolvent trading provisions, s 588G sets out the ingredients for a contravention, which must be proven by the person who asserts the contravention, normally the plaintiff. Then the s 588H says it is a defence if certain matters are proved. Plainly enough, the defendant bears the onus of establishing the ingredients of the defence. If the legislative drafters wanted to replicate the US position, they might have said (as Professor DeMott suggested, referring to the Proposed Revised Model Business Corporations Act, para 8.31(a)) that a director is taken to have met the standard prescribed by s 180(2) "unless the party asserting liability establishes" that the director did not meet one of the four criteria for the application of the presumption.

[7263] Unfortunately s 180(2) takes a decidedly more opaque approach. It says that a director or officer who makes a business judgment is "taken to meet the requirements of" the statutory and general law duties of care and diligence "if" they satisfy the elements set out in s 180(2)(a)-(d). The question is whether s 180(2), so expressed, sets out some additional requirements to be satisfied by the person asserting a contravention, similarly to the US position, or has the effect of articulating a defence, the ingredients of which are to be established by the person who seeks to rely on it.

[7264] Professor DeMott expressed the view (op cit, at 576) that the language of s 180(2) is more apt to place the onus on the director to establish that the four criteria have been met, that to place it on the plaintiff to establish that the directors conduct did not satisfy at least one of the stated criteria. I respectfully disagree. It seems to me that statutory language is profoundly ambiguous. If, say, subs (2) had been part of the text of subs (1), following on from the present wording of subs (1), it would be at least as plausible to say that the additional wording was a continuation of the requirements for contravention, the onus of addressing which lay on the plaintiff, as it would be to say that it was up to the director to establish that the four criteria had been met. Separating the business judgment rule into a separate subsection, for the sake of drafting clarity, should not affect its meaning. I have reached the position that I cannot extract any reliable indication either way from simply reading the text.

[7265] Unfortunately no real assistance can be obtained on this question by consulting explanatory materials. The explanatory memorandum to the Corporate Law Economic Reform Program Bill 1998, which introduced s 180 in its present form, stated:

While it is accepted that directors should be subject to a high level of accountability, a failure to expressly acknowledge that directors should not be liable for decisions made in good faith and with due care, may lead to failure by the company and its directors to take advantage of opportunities that involve responsible risk-taking.

(iv) The statutory formulation of the business judgment rule will clarify and confirm the common law position that the Courts will rarely review bona fide business decisions. However the statutory formulation will provide a clear presumption in favour of a director's judgment. In particular, while the substantive duties of directors will remain unchanged, absent fraud or bad faith, the business judgment rule will allow directors the benefit of a presumption that, in making business decisions, if they have acted on an informal basis, in good faith, and in the honest belief that the decision was taken in the best interests of the company, they will not be challenged regarding the fulfilment of their duty of care and diligence.

[7266] But that begs the question of onus of proof of the prerequisites for the application of the rule. The use of the word "presumption" could be taken to invoke the US approach, except that the explanatory memorandum makes clear that the presumption applies only when certain requirements are satisfied. Nor, in my view, is any significant assistance to be derived from the statement of legislative policy considerations in the explanatory memorandum. On the one hand, the legislative effort to encourage responsible risk-taking would be dampened if directors were at risk of liability unless they could demonstrate that their decision was informed, in good faith for a proper purpose, without any material personal interest, and made in the rational belief that it was in the best interests of the corporation. On the other hand, if the party alleging contravention were required to demonstrate that one or more of the ingredients for the application of the business judgment rule was absent, the effect of the introduction of the rule would be to add substantial elements to the burden of proof of contravention, that were not present in previous statutory formulations of the duty of care and diligence, and therefore the objective of holding directors to a high level of accountability would be compromised.

[7267] The confusion implicit in the explanatory memorandum is made express in the second reading speech of the responsible minister, Mr Hockey MHR, who said (Hansard, 3 December 1998, p 1284):

A business judgment rule will be introduced to provide directors with a safe harbour from personal liability in relation to honest, informed and rational business judgments. The rule will apply where an officer makes an informed decision in good faith, without material personal interest in the subject matter of the decision and rationally believes that the decision is in the best interests of the company.

The objective of the rule is to protect the authority of directors in the exercise of their management duties. It is not designed to, and will not, insulate them from liability for negligent, ill-informed or fraudulent decisions. The rule will not lead to any reduction in the level of director accountability, but will ensure that they are not liable for decisions made in good faith and with due care.

Directors will benefit from the certainty that the rule provides in terms of their liability as they will be encouraged to take advantage of business opportunities and not behave in an unnecessarily risk averse way.

[7268] Thus, after paraphrasing the proposed subs (2), the minister said it would not insulate directors from liability for negligent decisions and would ensure that directors are not liable for decisions made with due care. But unless the business judgment rule provides a safe harbour for directors from what would otherwise be, at least potentially, negligence or breach of their duty of care, it is pointless.

[7269] The question whether the plaintiff or the defendant bears the onus of proving the ingredients of s 180(2) is an important one that will eventually need to be resolved at the appellate level. With some hesitation in light of the US approach, I have reached the conclusion that the Australian statute casts the onus of proving the four criteria in s 180(2) on the defendants. I have reached this conclusion for two reasons. The first is that if the onus were borne by the plaintiff, the enactment of the Australian statutory business judgment rule would have the effect of adding to the elements of contravention to be proven by the plaintiff, notwithstanding the clear intention expressed in the explanatory memorandum and the second reading speech that there was to be no reduction in the statutory requirement. Second, as Santow J pointed out in ASIC NSWSC 171 at [410], it would be unusual if, as part of its evidentiary burden of establishing breach of the statutory duty of care and diligence, ASIC were required to establish (as one of the four alternatives) that the defendant's business judgment was not made in good faith for a proper purpose, since that would amount to proving a more serious contravention of the law, namely a contravention of s 181. Approximately the same point can be made with respect to proving a material personal interest, in the sense that proving a material personal interest leading to an improper use of position or information (ss 182 and 183) is a more serious matter than proving negligence. An additional consideration is that the four elements in subparas (a)-(d) are matters principally within the knowledge of the director or officer, and it seems appropriate to make provision for him or her to come forward with evidence concerning those matters.

[7270] As revealed in the explanatory memorandum, paras 6.1-6.10, the purpose of the introduction of a business judgment rule was (generally speaking) to ensure that directors and officers are not discouraged from taking advantage of opportunities that involve responsible risk-taking. Casting the onus of proof of the elements of the defence on the director or officer is not necessarily incompatible with that purpose, because it may happen in practice that the evidential burden can be shifted to the plaintiff relatively easily, if the defendant addresses the statutory elements in his or her affidavit, though the price to be paid is that the defendant is exposed to cross-examination on those matters.

23.9.5 The elements of s 180(2)

23.9.5.1 "Business judgment"

[7271] The first element of the business judgment rule is that there must be a "business judgment" made by the director or officer, defined to mean a decision to take or not take action in respect of a matter relevant to the business operations of the corporation.

[7272] In the United States, the business judgment rule is frequently invoked to justify management conduct in response to a hostile takeover bid: see Ford, Austin and Ramsay, 1995, at [8.310]). A logical extension would be to treat the business judgment rule as available, in the Australian context, to the management decisions involved in propounding a scheme of arrangement for the purposes of acquisition, or for purposes of corporate reconstruction. That suggests that in general, decisions to enter into transactions for financial purposes are business judgments. The question pertinent to the present case is how much further the concept of business judgment is extended into the realm of management, organisation and planning.

[7273] Commenting on the US position, Professor Paul Redmond observed ("Safe Harbours or Sleepy Hollows: Does Australia need a Statutory Business Judgment Rule?", in IM Ramsay (ed), Corporate Governance and the Duties of Company Directors (Centre for Corporate Law and Securities Regulation, University of Melbourne, 1997, p 195):

In contrast [to the Australian position], the ALI formulation does not define the term business judgment. In the US, the rule undoubtedly extends, however, to decisions preparatory to the making of a business decision. The ALI Commentary notes that while most business judgment cases deal with "risky" or "economic" decisions, there is clear authority that the rule applies to decisions relating to corporate personnel, the termination of litigation and other less explicitly business decisions. Accordingly, the ALI formulation is intended to embrace those and like decisions including the setting of policy goals and the apportionment of responsibilities between the board and senior management.

[7274] To be a business judgment for the purposes of the Australian definition, there must be a decision to take or not to take action in respect of matters relevant to the business operations of the corporation. It seems to me that matters of planning, budgeting and forecasting are "matters relevant to the business operations of the corporation" the purposes of s 180(3), because they provide a financial framework within which business operations are conducted. In my opinion, the Australian statutory definition of "business judgment" encompasses all of the matters mentioned by Professor Redmond in his description of the US position, provided that they involve a "decision to take or not take action".

[7275] That conclusion is consistent with the approach of the Companies and Securities Law Review Committee who, when recommending the adoption of a business judgment rule in 1990 (Company Directors and Officers: Indemnification, Relief and Insurance, report No 10, May 1990, paras 68-92), defined "business judgment" to include a judgment as to various listed matters including plans and budgeting. Although the definition was not adopted, I regard it as significant that the committee put forward the view that business judgments, properly defined, would include such matters.

[7276] I note, in particular, the breadth of the Australian statutory language "in respect of a matter relevant" to the corporation's business operations. The words "in respect of", "matter" and "relevant" are well recognised as words of great breadth. A matter may be "relevant to the business operations of the corporation" though not itself a business operational matter. The defendants urged the court to adopt a wide interpretation of the definition of business judgment: DPS [399]. In light of the language chosen by the legislature, as well as the broad scope of the concept in the United States, that seems to me to be inevitable.

[7277] There is, however, an important limitation contained in the statutory language. For the statutory defence to be available in Australia, there must be a "decision to take or not to take action", consciously made so that judgment has actually been exercised: APS [2096(b)]. A director who "simply neglected to deal with proper safeguards, with no evidence that he even turned his mind to a judgment of what safeguards there should be" has not made a business judgment and accordingly cannot invoke the defence: ASIC NSWSC 171 at [406] per Santow J; Gold Ribbon (Accountants) Pty Ltd (in liq) v Sheers [2006] QCA 335 at [247] per Keane JA. The position in the United States is evidently much the same: Rales v Blasband 634 A 2d 927 (Del 1993); McCall v Scott; 239 F 3d 808 (6th Circ 2001) at 816; ALI Principles at 174. It is plain from the statutory definition in s 180(3) that a decision does not have to be a decision to take action; a decision to refrain from doing something may constitute a business judgment according to the definition. The important question is whether the director or officer has turned his or her mind to the matter.

[7278] I agree with ASIC (APS [2096(a)]) that the discharge by directors of their "oversight" duties, including their duties to monitor the company's affairs and policies and to maintain familiarity of the company's financial position, is not protected by the business judgment rule, because the discharge or failure to discharge those duties does not involve any business judgment as defined. That is important in the present case because one aspect of ASIC's claim is that the defendants failed to discharge their monitoring duty. Monitoring the company's affairs and maintaining familiarity with its financial position are not in themselves matters that involve a "decision to take or not to take action" in respect of a matter relevant to the company's business operations. An application of this, noted by the ALI, p 175, is that the defence is not available to protect failure by an officer to oversee the conduct of the company's business by not considering the need for an effective audit process, as there is no business decision-making involved.

[7279] ASIC submitted (APS [2096(a)]) that in para 61 of their defences, the defendants artificially attempted to treat what was in substance inaction or omissions on their part as conscious and considered acts involving the exercise of judgment. I disagree with this submission. The defendants gave evidence, which I have generally accepted, to the effect that they made decisions about the matters listed in their defences. Generally speaking, this not a case of defendant directors failing to turn their minds to decisions that ASIC alleges they should have taken; to a substantial degree, it is a case where the defendants considered the matters of which ASIC now complains and made decisions with which ASIC disagrees. Having regard to the statutory language, I cannot see any plausible basis for excluding from the concept of "business judgment" decisions to take or not to take action respect of any of the matters listed in the defences and summarised at 23.8.1.

[7280] My conclusion is that decisions taken in planning, budgeting and forecasting, including the matters listed in para 61 of the defences, are capable of receiving the protection of the Australian statutory business judgment rule.

23.9.5.2 In good faith for a proper purpose

[7281] ASIC submitted that it is doubtful whether the element of good faith can be established when an officer has failed to take action, in discharge of his or her responsibility to supervise, and the inaction has resulted in a failure to discover substantial corporate losses (citing Re Abbott Laboratories 325 F.3d 795 at 809 (7th Circ, 2003); Hern, "Comment: Delaware courts' delicate response to the corporate governance scandals of 2000 and 2001: heightening judicial scrutiny on directors of corporations" (2005) 41 Willamette LR 207 at 227). It seems to me that as far as the Australian law is concerned, the problem in such a case is that the officer who has failed to take action has probably not made any decision not to take action, and therefore there is no business judgment to be protected. If an officer decides not to do something, and that decision results in a failure to discover substantial corporate losses, there may well be a question of good faith on the facts, but there is no reason in principle why good faith cannot be established by evidence.

23.9.5.3 Material personal interest

[7282] ASIC accepts that the defendants did not have any material personal interest in relation to the matters in dispute in the present case: APS [2098].

23.9.5.4 Informing oneself about the subject matter

[7283] The element of the business judgment rule set out in s 180(2)(c) is that the director or officer must inform themselves about the subject matter of the judgment to the extent that they reasonably believe to be appropriate. I agree with ASIC's submission (APS [2096(e)]) that the reasonableness of the belief should be assessed by reference to:

•: the importance of the business judgment to be made;
•: the time available for obtaining information;
•: the costs related to obtaining information;
•: the director or officer's confidence in those exploring the matter;
•: the state of the company's business at that time and the nature of competing demands on the board's attention (referring to the ALI Principles at 178); and
•: whether or not material information is reasonably available to the director (citing Smith v Van Gorkom 488 A.2d 858 at 872 (Sup Ct Del, 1985)).

[7284] ASIC submitted (APS [2096(f)]) that the requirement that the director or officer inform themselves "to the extent they reasonably believe to be appropriate" reflects the view that regard must be had not only to what the director or officer actually knew, but what he or she should have known (citing People's Department Store Inc v Wise [2004] 3 SCR 461 at [67]). In my view that submission distorts the statutory language, for it would deny protection unless the director were able to show previous compliance with the duty of care and diligence on another issue, namely to keep informed of material matters affecting the exercise of the powers and the discharge of the duties office. The statutory language relates to the decision-making occasion, rather than the general state of knowledge of the director. It requires the director to become informed about the subject matter of the decision prior to making it, since the business judgment rule should not protect decisions taken in disregard of material information readily available. The qualifying words, "to the extent they reasonably believe to be appropriate", convey the idea that protection may be available even if the director was not aware of available information material to the decision, if he reasonably believed he had taken appropriate steps on the decision-making occasion to inform himself about the subject matter.

23.9.5.5 Rational belief as to the best interests of the corporation

[7285] The element of the business judgment rule set out in s 180(2)(d) is that the director or officer rationally believes that the judgment is in the best interests of the corporation. The section then explains that the director's or officer's belief that this is so is a rational one unless it is one that no reasonable person in his or her position would hold.

[7286] According to the ALI Principles, p 142, the phrase "rationally believes" is intended in the United States to permit a significantly wider range of discretion for directors and officers than the term "reasonable" would permit. According to the ALI, the expression "rationally believes" gives the director or officer a safe harbour from liability for business judgments that might arguably fall outside the term "reasonable". The primary author of the ALI Principles, Professor Melvin A Eisenberg, had previously expressed the view ("The Duty of Care of Corporate Directors and Officers" (1990) 51 U Pitt L Rev 945, 963) that the business judgment rule "goes much further than the honest-error-of-judgment of ordinary tort law", and he said there is no liability even if the decision is unreasonable.

[7287] ASIC submitted (APS [2096(g)]) that the Australian provision is quite different from the American rule, in that the Australian defence is not available if the decision taken by the director or officer is based on an unreasonable belief: citing Finlay, "CLERP: Non-Executive Directors' Duty of Care, Monitoring and the Business Judgment Rule" (1999) 27 ABLR 98 at 108. According to ASIC (APS [2097(g)]), the effect of s 180(2)(d) and the definition of rational belief is that "the issue of whether the director's belief that a judgment is in the company's best interests is 'rational' ... is determined by whether or not it is reasonable". As ASIC submitted in a somewhat different context (ASR [353]), "there are no multiple 'reasonable directors'".

[7288] The concept of reasonableness, used so often in the law, is an objective standard, in the sense that there are no degrees or levels of reasonableness. A belief is either reasonable or not reasonable. A "reasonable person" is a person who holds beliefs that are reasonable, and if a person holds beliefs that are not reasonable, the person is not a reasonable person in the eyes of the law. If that meaning of the word "reasonable" is employed in the definition of "rational belief" in s 180(2), then ASIC's submission is correct. However, some unfortunate consequences flow from accepting that submission:

•: s 180(2) would be useless, because subpara (d) would only be satisfied in circumstances where there would be no breach of the reasonable person standard of care and diligence;
•: the elaborate drafting adopted in subpara (d) and the definition of "rational belief" would have failed to achieve the drafters' evident purpose of setting the standard at a level lower than objective reasonableness, and the drafters might as well have required the director to "reasonably believe that the judgment is in the best interests of the corporation"; and
•: the Australian business judgment rule would have adopted the restrictive approach that the American jurisprudence has self-consciously avoided.

[7289] In my opinion there is an alternative and preferable construction of subpara (d) and the definition, which avoids these consequences and gives the Australian business judgment rule a justifiable field of operation. The drafters' objective was to define the words "rationally believe", taken from the US business judgment rule. According to the Shorter Oxford English Dictionary, while one meaning of the word "rational" is "agreeable to reason, reasonable, sensible; not foolish, absurd or extravagant", there are other meanings including (pertinently for present purposes) "based on, derived from, reason or reasoning". It is plausible to say that the drafters of the definition of "rationally believe" intended to capture this latter idea, namely that the director's or officer's belief would be a rational one if it was based on reason or reasoning (whether or not the reasoning was convincing to the judge and therefore "reasonable" in an objective sense), but it would not be a rational belief if there was no arguable reasoning process to support it. The drafters articulated the latter idea by using the words "no reasonable person in their position would hold".

[7290] On this view, which I favour, subpara (d) is satisfied if the evidence shows that the defendant believed that his or her judgment was in the best interests of the corporation, and that belief was supported by a reasoning process sufficient to warrant describing it as a rational belief, as defined, whether or not the reasoning process is objectively a convincing one. Consequently the Australian position on this matter is very close to the US position and s 180(2) has some protective work to do in cases where in its absence, there would or would arguably be a contravention of s 180(1).

[7291] The director or officer's belief about the best interests of the corporation is to be formed, and its rationality assessed, on the basis of the information obtained through compliance with subpara (c). It is not to be assumed, for the purpose of applying subpara (d), that the director or officer knew everything that he or she ought to have known, but only the things that he or she reasonably believed to be appropriate to find out.

23.9.5.6 General observations about the statutory business judgment rule

[7292] ASIC urged the court to apply to the Australian provisions the following statement about the essence of the US business judgment rule (taken from Delaware Corporations Law and Practice (vol 1), para 15.03):

In sum, notwithstanding the volumes which have been written on the subject, in practice the business judgment rule in Delaware stands for nothing more than the proposition that if directors perform their management functions properly they will not be held liable for losses caused by their decisions or failures to act, nor will the courts otherwise interfere with their activities. Conversely, the rule provides no shield against inadequate performance. The real test for directors and their advisors is in discerning requirements for proper performance under the various situations which they face from day to day in the business world.

[7293] The idea that the business judgment rule does not protect directors and officers from liability for inadequate performance is echoed by some commentary on the Australian s 180(2). Mr Neil Young QC has expressed the view that the business judgment rule arguably offers nothing but "window dressing", because as a defence to s 180(1) it propounds a standard no less stringent than that required by s 180(1) itself, so that it is difficult to conceive of a situation in which a director makes a good faith, rational decision for a proper purpose and yet breaches s 180(1): Neil Young QC, "Has directors' liability gone too far or not far enough? A review of the standard of conduct required of directors under sections 180-184 of the Corporations Act", (2008) 26(4) Co & Sec LJ 216.

[7294] It seems to me, however, that s 180(2) is capable of providing a defence in some cases that would otherwise involve breach of s 180(1). These are cases where:

•: the impugned conduct is a business judgment as defined;
•: the directors or officers are acting in good faith, for proper purpose and without any material personal interest in the subject matter;
•: they make their decision after informing themselves about the subject matter to the extent they believe to be appropriate having regard to the practicalities listed at 23.9.5.4;
•: their belief about the appropriate extent of information gathering is reasonable in terms of the practicalities of the information gathering exercise (including such matters as the accessibility of information and the time available to collect it);
•: they believe that their decision is in the best interests of the corporation; and
•: that belief is rational in the sense that it is supported by an arguable chain of reasoning and is not a belief that no reasonable person in their position would hold.

[7295] Therefore s 180(2) has the potential to be more than mere window dressing. It may be that its potential is particularly high in the case of decisions of the kinds identified in para 61 of the defences. My analysis of the business judgment rule, and of the statutory duty of care and diligence, is applied throughout these reasons for judgment in supporting the conclusions I have reached.

24. Other matters

24.1 Replacement of Mr Silbermann as finance director

[7296] Among the contraventions pleaded against Mr Rich in the statement of claim is the following:

(v): Further, Rich failed to take reasonable steps to ensure that One.Tel employed a Finance Director with the financial qualifications, skills and experience reasonably appropriate for a person occupying that position and having the responsibilities set out in paragraph 9.

[7297] ASIC contended (APS [2068]) that by July 2000, Mr Rich had formed the view that Mr Silbermann should be removed from his role as chief financial officer of the group. The evidence upon which ASIC relied for this claim was para 611 of Mr Rich's affidavit. ASIC cited only part of that paragraph, the words about it making "sense to recruit a new CFO with a higher profile". I think ASIC's submission was misleading, because it suggested incorrectly that Mr Rich's evidence reflected concern about Mr Silbermann's competence. In fact the conversation with Mr Keeling to which Mr Rich deposed was one where Mr Keeling made the following statement:

I think we should have CFO who is better known to the institutions. Mark is very good at getting things done but it seems to me that it makes sense to recruit a new CFO with a higher profile and to move Mark to more of a COO role.

Mr Rich responded to the effect that they should organise a search for a new CFO to take over that part of Mr Silbermann's role.

[7298] This evidence shows that Mr Rich had indeed formed the view that Mr Silbermann should be removed from his role as chief financial officer, but only because he and Mr Keeling wanted to find someone with a higher profile, presumably with the analysts. The quoted conversation indicates that both Mr Keeling and Mr Rich had a positive opinion of Mr Silbermann's general ability, that he was "good at getting things done". Mr Silbermann's evidence was that what was being contemplated was to free him up to concentrate on the operational role in relation to Europe that he had developed as a major area of focus over the preceding 2 years: MS 87. Mr Rich denied in cross-examination that his observation of Mr Silbermann from July 2000 was that he did not have the level of experience and confidence appropriate to a finance director of a major listed company: T 12189.

[7299] ASIC made the general claim that the evidence in the case revealed that Mr Silbermann was incompetent in his role as finance director (APS [2070]), and urged the court to infer that Mr Rich realised his incompetence and that was the reason for the decision to replace him, and if he did not realise then he should have done so. According to ASIC (APS [2071]), Mr Silbermann's incompetence is as referred to in the particulars to the statement of claim, paras 20 and 21. They are as follows:

(vi)

Silbermann did not have the appropriate financial qualifications, skills and experience because he:

(A): did not have any prior experience as a practising accountant, a finance director or chief financial officer;
(a): had no aptitude for financial details;
(i): had no aptitude for making objective assessments and reports of the actual and forecast financial position and performance of the One.Tel Group based on the detailed financial information available to him;
(ii): had no aptitude for investigating and analysing actual results of earnings as revealed by the accounting reports;
(iii): believed that One.Tel was "not a balance sheet company" (to use the words he stated to Drew Boaden in about December 2000) and hence he gave inadequate attention to the assets and liabilities position of the One.Tel Group;
: believed that it was appropriate to use modified budget data in reporting actual revenue and gross margin results to the Board;
(b): believed that it was not essential that he obtain and review monthly management accounts for the One.Tel Group and he do so promptly after month-end [sic]; and
(c): did not have an adequate understanding of the need to analyse information concerning the cash and creditors and debtors positions of the One.Tel Group referred to in paragraphs 303 and 311 of Mr Carter's report and to report on the results of the analysis to the Board.

(e)

Rich knew of the facts and matters in 20 above [this reference seems to be incorrect] and knew, or ought to have known, the facts and matters in 21 above as a result of continuous informal review and assessment of Silbermann's expertise and skills as Finance Director by:

(A): personal observation of him at work and inquiry of him, including inquiry concerning the sources and explanations for financial figures he presented, and inquiry as to his review of management accounts and balance sheet;
(a): consultation with Keeling;
(i): consultation with senior employees in the accounting and financial area such as Chris Werner, Drew Boaden and Samantha Randall; and
(ii): observation that the information supplied to the Board through the Board Papers and flash reports did not contain the information referred to in para 297 of Mr Carter's report.

[7300] In my opinion, the evidence does not support ASIC's claims. Mr Silbermann's qualifications and his career at One.Tel are considered at 4.4.2, and in my view they rebut para 21(a). Indeed, ASIC withdrew this particular in its submissions in reply: ASR [5893(a)(i)].

[7301] There is other evidence rebutting paras 21(b)-(d), as follows. Mr Rich's evidence of his discussions about Mr Silbermann in 1996 included the following (1 JDR 599):

Mr Silbermann's strengths as I perceived them in 1996 from my own observations and what I was told about him by others at that time were that he had very high energy and commitment, was reliable and meticulous at following through on tasks for which he was responsible and was quick to understand new issues when confronted with them.

[7302] As the defendants pointed out (DPS [5876]), Mr Silbermann's role at One.Tel exposed him to professional scrutiny by third parties, none of whom expressed any negative views to Mr Rich about Mr Silbermann's "confidence". Mr Rich gave evidence (1 JDR 607-609) that Mr Silbermann played a leading role in due diligence investigations undertaken by Gilbert Capital before its December 1998 investment in One.Tel, the investment banks Morgan Stanley and DLJ in connection with their proposals for high yield note issues and a US listing in 1998 and 1999, Sonera in connection with its proposed to strategic investment in One.Tel in late 2000, and ABN Amro and Toronto Dominion in connection with a loan facilities extended by them to One.Tel. Mr Rich said the only comments about Mr Silbermann that he could recall receiving were a positive comment by Mr Gilbert and the comment by the head of the due diligence team for DLJ, who said Mr Silbermann had impress them with his competence understanding of the businesses and that he was one of the most impressive CFOs they had come across. Mr Rich also noted (1 JDR 610) that Mr Silbermann regularly met and talked with investment analysts and he could not recall ever receiving any adverse comment.

[7303] Mr Silbermann said he regularly dealt with Mr Greaves, who was an experienced finance executive, who did not express doubts about his competence: MS 79-83. His performance was annually reviewed by Mr Keeling and Mr Rich, and he said he could not recall any concern ever being expressed in any of those reviews about his ability to discharge the duties of finance director at One.Tel: MS 85-6; see also 1 JDR 604-6.

[7304] The defendants also noted that Mr Silbermann had various regional CFOs reporting to him, including Mr Barnes and Mr Perez in Australia, Mr Werner and Mr Boaden in the UK and various CFOs from continental Europe, and none of them gave evidence casting any doubt on Mr Silbermann's confidence: DPS [5885]. Nor did Mr Kleemann.

[7305] As to the assertion in para 21(e) that Mr Silbermann believed that One.Tel was "not a balance sheet company" and had said so to Mr Boaden in December 2000, that was the evidence of Mr Boaden (affidavit 28 June 2002, para 19), who might have found to be an unreliable witness in various respects, but Mr Silbermann said he did not recall saying so (MSA 55). In any event, it is hard to know the meaning of such a statement, but probably it has to do with the importance of cash flow for a company in a start-up phase; I would not interpreted as meaning that as it is appropriate to ignore the assets and liabilities position of such a company. The matter does not on Mr Silbermann's competence.

[7306] As to para 21(f), this is presumably a reference to ASIC's claim that modified budget data was used in the January board figures from the January recut, but I have found in Ch 8 that this allegation has not been proven, and that there is a correspondence of figures because the executive team judge the estimated actual figures to be equivalent to the figures that have been so recently forecast.

[7307] As to para 21(g), the evidence is considered in detail at 20.5 but what emerges is that Mr Silbermann monitored the operating and financial performance of One.Tel's businesses in various ways, as detailed at 4.2.2, with the focus most directly on international businesses in reliance on Mr Hodgson, Mr Barnes and Mr Perez calling to his attention anything in the Australian management accounts that he should be aware of. That approach does not bespeak incompetence.

[7308] As to para 21(h), the submission assumes that the cash, creditors and debtors positions were much worse than they were according to the defendants' case. These matters are contentious and have been extensively considered elsewhere in this judgment, and I have, generally speaking, reached conclusions in favour of the defendants.

[7309] My conclusion is that the pleaded allegation in para 25 of the statement of claim has not been made out.

24.2 ASIC's compensation claim

[7310] ASIC relied (APS [2122]) upon s 1317H(1) of the Corporations Act, which provides that "a court may order a person to compensate a corporation or registered scheme for damage suffered by the corporation or scheme if:"

(d): the person has contravened a corporation/scheme civil penalty provision in relation to the corporation or scheme; and
(i): the damage resulted from the contravention.

[7311] ASIC submitted (APS [2123]) that since the claim for compensation is a statutory one, "cause" is identified by reference to the scope and purpose of s 180: Allianz Australia Insurance Ltd v GSF Australia Pty Ltd (2005) 221 CLR 568 ; 215 ALR 385 ; 42 MVR 311 ; [2005] HCA 26 at [99]; Travel Compensation Fund v Tambree (2005) 224 CLR 627 ; 222 ALR 263 ; [2005] HCA 69 at [28], [30], [49], [54] and [79]; Abigroup Contractors Pty Ltd v Sydney Catchment Authority (No 3) (2006) 67 NSWLR 341 ; [2006] NSWCA 282 at [47]-[50] and [154]-[155]. It contended that only loss or damage that has "resulted from" the defendants' contraventions of s 180 may be the subject of a compensation order under s 1317H: Adler at [709]; ASIC NSWSC 760 at [245]. ASIC submitted that this test is satisfied once it is shown that the defendants' acts or omissions were so connected with the losses and reduction in the company's net worth between January and May 2001 that, as a matter of ordinary common sense and experience, they should be regarded as a cause of them: Permanent Building Society (in liq) v Wheeler (1994) 11 WAR 187 at 242 ; 14 ACSR 109 at 161-2.

[7312] These propositions of law were not challenged by the defendants in their final submissions, and they seem to me to be correct.

[7313] As to the quantum of loss, ASIC's primary contention (APS [2125]) was that according to the evidence, if the defendants had performed their duties, the action that was taken at the end of May to appoint administrators would have been taken at the end of February, with the consequence that the company would have ceased to trade then. Its secondary contention, if the court were not to accept the primary contention, was that the evidence shows that such action would have been taken at least at the end of March; or in the third alternative, at the end of April. Compensation should be awarded, it said, to reflect the reduction in net worth by reason of the company continuing to trade between the end of February and the end of May, or between March and May, or between April and May. To assess the reduction in net worth, ASIC relied upon the evidence of Mr Carter.

[7314] Since I have not found any contravention on the part of either defendant, it is unnecessary for me to make any findings about the compensation claim. However, I am mindful of the possibility that the question of compensation might need to be addressed in the event of a successful appeal, and in those circumstances I have tried to provide some guidance through the labyrinthine facts. Specifically, I have set out and considered Mr Carter's evidence on reduction of net worth in detail at 22.7.

[7315] The defendants made extensive submissions (DPS [5862]-[6039]) which are best summarised by quoting (DPS [6039]):

In summary, it is submitted that:

(i)
ASIC's submissions make no attempt to articulate a basis for the Court to find that the alleged contraventions on the part of the defendants "caused" a loss to One.Tel and, in particular, do not set out why it is that the Court should find that:

(ii)
"but for" Mr Rich and Mr Silbermann's alleged breaches of duty, administrators would have been appointed on 28 February or 31 March instead of 29 May;

(iii)
administrators appointed as at those dates would have immediately caused One.Tel to cease to trade;

•
ASIC has not provided a sufficient evidentiary basis as to:

(ii)
what the board "would have done";

(iii)
what an expert appointed to advise on the financial position of One.Tel and options to allow it to continue trading "would have" recommended; and

(iv)
what any administrator "would have done", to enable the Court to make a finding as to each of those matters in order to found the conclusion contended for by ASIC that One.Tel would have "ceased to trade" on some particular date between 28 February and 29 May;

(c)
ASIC's case on compensation proceeds on the basis of a postulated causal connection between the defendants' conduct and the "loss" asserted which is contrary to common sense and good policy;

ASIC has proceeded about its "proof" of the quantum of "loss" allegedly suffered by One.Tel in a manner which seeks to persuade the Court to make very serious findings of fact based on a farrago of unproven assumptions, both as to the reliability and comparability of the documents on which the calculations are built and the integers which go to make up those calculations;

The Court cannot be satisfied that it has been provided with a proper basis on which to assess the quantum of the change in the net worth of One.Tel over the period in question; and

(e)
ASIC has made no submission as to why the Court should exercise its discretion in this case by ordering the defendants to pay compensation.

[7316] The last point was addressed by ASIC in its submissions in reply: ASR [6037-8].

[7317] It seems to me that questions of causation and quantum are closely connected to the nature and scope of the proven contraventions that are regarded as the foundation for the compensation order. The defendants' submissions proceeded on the question of compensation on a fundamentally different basis from the submissions of ASIC on this subject, because the defendants do not countenance that there were contraventions of the nature and scope of those alleged by ASIC. If I had concluded that ASIC had proven the contraventions that it alleged in final submissions, then on the common sense approach dictated by the cases, it is probable that I would have accepted ASIC's submissions as to compensation, both as to causation and quantum. If I had found that there were contraventions, but that the financial circumstances were not as extreme as ASIC alleged, then I might have hesitated to accept ASIC's submissions as to causation, and I might not have accepted the proposition that the quantum of compensation was to be measured by the reduction in net worth as calculated by Mr Carter. But these are hypothetical matters, in view of the conclusions I have reached. I mention them because the close relationship between the findings of contravention and the conclusions about compensation means that I cannot usefully go further into the defendants' submissions and ASIC's reply in this judgment.

25. Conclusions

25.1 Disposition of ASIC's case

[7318] ASIC has failed to prove its pleaded case against either of the defendants. Therefore judgment should be entered for Mr Rich and Mr Silbermann in the proceedings.

[7319] ASIC's contentions have a superficial appeal, but time and again they were shown to be unpersuasive when the underlying financial detail was investigated. When Mr Carter's evidence was largely excluded, ASIC presented what it described, frequently, as a documentary case. Although there were many categories of documents, three categories were particularly significant, so much so that the defendants described them as the "three pillars" of ASIC's case (T 14952): management accounts, aged creditors reports and collection profile summaries. When those documents were scrutinised in detail, they were found to be, wholly or in part, too unreliable to form the basis for financial findings: the Australian fixed wire/service provider management accounts at 20.3, Australian aged creditors reports at 11.2.5, and collection profile summaries at 4.8.6. The difficulties encountered with those documents might have been overcome, wholly or in substantial part, if ASIC had brought forward witnesses to explain the documents and give evidence as to their status, witnesses such as Mr Holmes or Ms Nassif for the fixed wire/service provider management accounts and Australian aged creditors reports, and Mr Basman for the collection profile summaries. But that evidence was not forthcoming and so the unexplained problems with the documents added up to a serious flaw in ASIC's case. No evidentiary presumptions are needed for the court to get to that conclusion, but some are available as discussed in Ch 3.

[7320] To the extent that ASIC's case rested on other documents of less uncertain meaning, and on the evidence of its witnesses such as the UK witnesses, Ms Randall and Ms Ashley, the defendants were able to advance alternative plausible explanations for what had occurred, and ASIC failed to prove its case to the appropriate civil standard, having regard to the presence of those alternative explanations.

[7321] An additional problem with ASIC's case has been the extent to which it has strayed outside its pleading. The problem areas are identified in para 2.3.6. I have not expressly correlated the findings made in para 2.3.6 to the substantive discussion of the submissions found in the body of the judgment. However, in cases where I have considered a submission by ASIC in the body of the judgment and rejected it on its merits, and I have also found at 2.3.6 that the submission is impermissibly outside ASIC's pleading, my intention is that the submission is rejected on both the substantive ground and the pleading ground.

[7322] This judgment and the verdict to which it leads are the product of civil legal proceedings conducted in accordance with our adversary system. Under that system the issue for determination is whether the plaintiff has proven its pleaded allegations, by the evidence that is before the court. The question for determination is not the larger issue of how it happened that a rising corporate group supported by two well-resourced investors came to fail, in spectacular circumstances. The court has not been asked to determine, at large, who was to blame for the disaster, as among the defendants, other executives, non-executive directors, major shareholders and advisers. The proceedings are not a royal commission. Notwithstanding the huge amount of effort that has been devoted to these proceedings by the parties and their advisers, and by the court, many questions about the failure of One.Tel are left unanswered. That was inevitable, given the nature of the proceedings and the questions placed before the court for resolution.

[7323] One of the unanswered questions is whether One.Tel would have survived if, in May 2001, PBL/CPH and News had maintained their support for the company and implemented their plan to underwrite a deeply discounted rights issue to raise $132 million. The tendered evidence has led me to reject ASIC's figures as to the financial circumstances of One.Tel at the end of February, March and April 2001, and to prefer the figures set out in Chs 11, 13 and 15 respectively. If those figures are right, a fundraising of $132 million accompanied by continuing support by the major shareholders would probably have been enough to address the company's cash requirement until November 2001, by which time, according to the business plans, the company's businesses would have been generating more healthy group cash flow. The withdrawal of that support, and the abandonment of the rights issue, may well have ensured that the company could not survive.

25.2 Costs

[7324] I see no reason why costs should not follow the event, and therefore I am inclined to order ASIC to pay each of the defendants' costs of the proceedings as agreed or assessed. I have considered whether there should be some refinement of the orders that would make particular interlocutory applications or issues subject to a different costs order than the general order, but my provisional view is that the correct result is a single general order, except to the extent (if at all) that the costs of a particular application have already been dealt with by an order of the court.

[7325] I have given close consideration to the question whether this is an appropriate case for ordering that costs be assessed on the indemnity basis, rather than on the usual party and party basis. My provisional view is that costs should be awarded on the usual party and party basis, as agreed or assessed.

[7326] In Oshlack v Richmond River Council (1998) 193 CLR 72 ; 152 ALR 83 ; [1998] HCA 11 at [44]; , Gaudron and Gummow JJ said (footnotes excluded):

[44] It may be true in a general sense that costs orders are not made to punish an unsuccessful party. However, in the particular circumstance of a case involving some relevant delinquency on the part of the unsuccessful party, an order is made not for party and party costs but for costs on a "solicitor and client" basis or on an indemnity basis. The result is more fully or adequately to compensate the successful party to the disadvantage of what otherwise would have been the position of the unsuccessful party in the absence of such delinquency on its part.

[7327] What "relevant delinquencies" might justify an order for costs on the indemnity basis? In Colgate Palmolive Co v Cussens Pty Ltd (1993) 46 FCR 225 ; 118 ALR 248; 28 IPR 561 (Colgate Palmolive), Sheppard J reviewed the cases and distilled from them some principles or guidelines, including the following (at FCR 233-4; ALR 256-7; IPR 569-70):

4.: In consequence of the settled practice which exists, the Court ought not usually make an order for the payment of costs on some basis other than the party and party basis. The circumstances of the case must be such as to warrant the Court in departing from the usual course. That has been the view of all judges dealing with applications for payment of costs on the indemnity or some other basis whether here or in England. The tests have been variously put. The Court of Appeal in Andrews v Barnes (1888) 39 ChD 133] at 141 said the Court had a general and discretionary power to award costs as between solicitor and client "as and when the justice of the case might so require". Woodward J in Fountain Selected Meats [Fountain Selected Meats (Sales) Pty Ltd v International Produce Merchants Pty Ltd (1988) 81 ALR 397] appears to have adopted what was said by Brandon LJ (as he was) in Preston v Preston [1981] 3 WLR 619] at 637; namely, there should be some special or unusual feature in the case to justify the Court in departing from the ordinary practice. Most judges dealing with the problem have resolved the particular case before them by dealing with the circumstances of that case and finding in it the presence or absence of factors which would be capable, if they existed, of warranting a departure from the usual rule. But as French J said (at p 8) in Tetijo [Tetijo Holdings Pty Ltd v Keeprite Australia Pty Ltd unreported, Federal Court of Australia, 3 May 1991], "The categories in which the discretion may be exercised are not closed". Davies J expressed (at p 6) similar views in Ragata [Ragata Developments Pty Ltd v Westpac Banking Corporation unreported, Federal Court of Australia, 5 March 1993].
5.: Notwithstanding the fact that that is so, it is useful to note some of the circumstances which have been thought to warrant the exercise of the discretion. I instance the making of allegations of fraud knowing them to be false and the making of irrelevant allegations of fraud (both referred to by Woodward J in Fountain and also by Gummow J in Thors v Weekes (1989) 92 ALR 131 at 152; evidence of particular misconduct that causes loss of time to the court and to other parties (French J in Tetijo); the fact that the proceedings were commenced or continued for some ulterior motive (Davies J in Ragata) or in wilful disregard of known facts or clearly established law (Woodward J in Fountain and French J in J-Corp [J-Corp Pty Ltd v Australian Builders Labourers Federation Union of Workers (WA Branch) (No 2) (1993) 46 IR 301]); the making of allegations which ought never to have been made or the undue prolongation of a case by groundless contentions (Davies J in Ragata); an imprudent refusal of an offer to compromise (eg, Messiter v Hutchinson (1987) 10 NSWLR 525; Maitland Hospital v Fisher (No 2) (1992) 27 NSWLR 721 at 724 (Court of Appeal); Crisp v Keng (unreported, Court of Appeal, NSW, Kirby P, Priestley JA, Cripps JA, No 40744/1992, 27 September 1993) and an award of costs on an indemnity basis against a contemnor (eg, Megarry V-C in EMI Records [EMI Records Ltd v Ian Cameron Wallace Ltd [1983] Ch 59]). Other categories of cases are to be found in the reports. Yet others to arise in the future will have different features about them which may justify an order for costs on the indemnity basis. The question must always be whether the particular facts and circumstances of the case in question warrant the making of an order for payment of costs other than on a party and party basis.
6.: It remains to say that the existence of particular facts and circumstances capable of warranting the making of an order for payment of costs, for instance, on the indemnity basis, does not mean that judges are necessarily obliged to exercise their discretion to make such an order. The costs are always in the discretion of the trial judge. Provided that discretion is exercised having regard to the applicable principles and the particular circumstances of the instant case its exercise will not be found to have miscarried unless it appears that the order which has been made involves a manifest error or injustice.

[7328] Throughout my judgment there are criticisms of ASIC's submissions and of aspects of its conduct of this case. Among the more serious are my views that:

•: the scope of the case, endeavouring to prove the financial circumstances of a large multinational corporate group over each of four months, was far too wide and produced an excessively long and burdensome proceeding;
•: in a substantial number of significant ways, ASIC's final submissions were outside its pleaded case;
•: ASIC chose not to call any witness to explain certain tendered documents, instead inviting the court to draw inferences from the documents notwithstanding their ambiguities and other grounds for doubting their reliability; and
•: ASIC's engagement of Mr Carter to provide expert evidence in the proceedings gave rise to substantial difficulties, in circumstances where Mr Carter had previously prepared a detailed report to assist the commission to decide what course of action to take, with unfettered access to documents and witnesses, and he was told when his forensic report was at a mature draft stage that he was to exclude information he had obtained from individuals who would not be called to give evidence.

[7329] Those matters, and the other expressed criticisms of ASIC's conduct of the case, might appear to be an invitation to the defendants to make an application for indemnity costs. Conceivably the defendants might also seek to attack the propriety of ASIC's conduct, by relying on evidence concerning the execution of search warrants at the premises of One.Tel, Mr Rich and Mr Keeling, adverted to in my judgment on the search warrant issues, ASIC NSWSC 62 (although they would not derive any encouragement from the terms of that judgment). Other issues going to "relevant delinquency" might be raised, and it would not be difficult to imagine an application for indemnity costs blowing out into a large and time-consuming supplementary hearing, particularly given the vigour with which the parties have contested every aspect of this litigation so far.

[7330] If a matter is properly placed before the court for determination, the primary task of the trial judge is to hear and determine the case, as I explained in Ch 1. But the court is entitled to take a different approach if it forms the view that a formal hearing on the matter brought before it would be futile. Having considered ASIC's conduct of the present proceedings in detail, in the light of all of the evidence and the parties' final submissions, my present and provisional view is that the aspects of ASIC's conduct that are open to criticism do not, on the whole, warrant the imposition of indemnity costs. On the evidence that has been presented, this is not a case of fraud or ulterior motive on the part of the plaintiff, or proceedings conducted in wilful disregard of known facts or clearly established law, or the making of allegations that ought never to have been made or the undue prolongation of the case by groundless contentions. The category that might superficially appear to have the strongest affinity to the present case is "evidence of particular misconduct that causes loss of time to the court and to other parties". But it seems to me that this contemplates conduct considerably more egregious than the conduct of ASIC in the present case. Consider, for example, the order for indemnity costs upheld by the Court of Appeal in Wentworth v Rogers [1999] NSWCA 403, in which (at [84]) the court referred to the extraordinary length of the hearing of the proceedings, a total of 37 hearing days, for an application that would normally be dealt with summarily in no more than a few hours, a gross waste of time for which the applicant was to be held accountable. According to my observation, ASIC doggedly pursued an extremely large case because of its conviction, erroneous in my view but not reckless or totally groundless, that the evidence would support its contentions.

[7331] There is another reason for not departing from the usual order as to costs in the present case. Justice normally requires that costs follow the event, but that does not mean that the unsuccessful party should pay for every expenditure incurred in relation to the case, however lavish, or for costs not properly attributable to the case. An example of possibly lavish expenditure might be accommodation expenses during the London hearing. According to information provided to me during the hearing, counsel for ASIC was accommodated modestly, while the defendants and their team stayed at the Savoy. If I were to order costs on the indemnity basis, then either the defendants' actual accommodation costs would have to be paid by ASIC, or else there would need to be a special application to the court to determine whether, notwithstanding the indemnity basis of the order, something less than full recovery should be allowed. That example could probably be multiplied many times, with the consequent risk of further and repeated demands by these parties on the court's time and facilities. As to costs not properly attributable to this case, my understanding is that Mr Rich has had other litigation running concurrently with the present case, including litigation about certain bonuses that were paid to him and others and litigation concerning professional indemnity insurance. Even assuming full disclosure of all relevant circumstances and a bona fide effort to confine the costs claim to costs properly attributable to these proceedings, I apprehend that there could well be arguments about whether costs items claimed against the present proceedings were wholly or partly attributable to something else.

[7332] Given the prospect that issues of these kinds will need to be determined in the process of assessment of costs, it seems to me desirable, in the interests of clarity and efficiency, for the governing principles to be those for the assessment of party and party costs, and for the determination of all issues to be handled by an expert costs assessor rather than by the court. I think those objectives are best achieved by the usual order for costs. Therefore even if, contrary to my view, this were a case falling prima facie into one of the categories identified by Sheppard J in Colgate Palmolive, these additional considerations would seem to be a strong disincentive to making an indemnity order.

[7333] However, I am mindful that the costs outcome in this case will be very important to the parties, for reasons that include the probability that costs will amount to some millions of dollars. I am conscious that I have not yet given the parties the opportunity to make submissions about costs in light of my findings in the proceedings. I have therefore decided that the best course is to set out my provisional view, as I have done, and give the parties the opportunity to make an application if they wish to achieve a different outcome than the usual costs order.

[7334] Since it is highly desirable that I be given the opportunity to determine any such application while the facts of this case remain reasonably fresh in my mind, I intend to set a short timetable for any such application. I also intend to make some directions designed to ensure that if a costs application is made, the hearing of that application does not blow out into a substantial factual hearing, bearing in mind my provisional view and the reasons for it.

[7335] After publishing these reasons for judgment, I shall adjourn the proceedings for a brief time and give directions to the effect that if either party wishes to make an application on the question of costs, they should notify the other party and my associate in writing by the time of the next hearing. If an application is notified, I will make directions at the next hearing for written submissions and a short hearing, which would exclude the taking of further oral evidence except by special leave. A party who invokes this procedure unsuccessfully is likely to be ordered to pay the costs of and incidental to the costs application.

Appendix A

DRAMATIS PERSONAE

George Malcolm Adams was the general manager of the voice and mobile marketing team within the wholesale division of Optus.

Rodney Adler was a non-executive director of One.Tel from 27 March 1995 until 12 April 2001. He was a member of the Appointments and Remuneration Committee, the Finance and Audit Committee and the Corporate Governments Committee. He was chairman and chief executive officer of Adler Corporation Pty Ltd: CE 5 0037.

Wendy Allen was Mr Rich's personal assistant/office manager at One.Tel: see 1 JDR 830.

Elizabeth Ashley was a financial analyst and financial manager, carriers, with One.Tel Australia: Ex P 17, affidavit of Ms Ashley of 7 August 2002, para 3; affidavit of 7 July 2005, para 2.

David Barnes was chief financial officer for the Australian fixed wire and service provider business unit, until he left in mid-February 2001.

Mark Basman was head of collections, One.Tel Australia.

Sharon Barrett-Legg was the UK collections manager: 2 JDR 1173.

Rick Baumgartner was chief financial officer for the Australian fixed wire and service provider business unit, from early April 2001.

Kevin Beck joined One.Tel as the operations director in March 1995, and was appointed to the One.Tel board on 30 March 2000: CE 5 0040. He is a chartered accountant: CE 5 0037.

Graham Bell was an executive at Optimal Communications.

Shanti Berggren was internal legal counsel at One.Tel Australia.

Marc Bernard was chief financial officer/financial controller, One.Tel Netherlands.

Paul Birch was One.Tel's relationship manager at Toronto Dominion Bank.

Drew Boaden was employed by One.Tel UK as European chief financial officer from October 2000, a position he held jointly with Christopher Werner.

Leigh Brown was a partner in Minter Ellison, the solicitors acting for PBL/CPH at relevant times.

Mike Butcher was President International Operations, Lucent Technologies, responsible for all of Lucent's operations outside North America: Mr Butcher's affidavit of 31 October 2003, paras 1 and 2.

Paul Carter was a forensic accountant and a partner at PricewaterhouseCoopers, and gave expert evidence in this case.

Roland Cage was joint chief executive officer, One.Tel Europe, with Mr Weston.

Rod Cameron was a chartered accountant in private practice until 1985, and thereafter he went into a career of public and other company directorships. He is or has been a director of large Australian companies.

Consolidated Press Holdings Ltd (CPH) was an unlisted company, closely held by Packer family interests.

Lawrence Corbett was chief financial officer for the One.Net business unit.

Andrew Coulsen was One.Tel's Group chief financial officer from 1995 until 1996. He was recruited from Cable & Wireless Optus. His successor was Mr Silbermann.

David Courtney was a PBL executive who took on some executive responsibilities at One.Tel after the resignation of Mr Rich and Mr Keeling on 17 May 2001.

Graham Cubbin was the finance director of CPH: T 7204.

Tracey Cutting was the media relations manager at One.Tel: 1 JD 875.

Dorigad Pty Ltd was a company used by Mr Packer Jnr to make his initial investment in One.Tel. For a while the economic interest in the company was shared between Mr Packer Jnr and Mr Onisforou.

Nick Falloon was a senior executive at PBL.

Gerard Frack was, from January 2001, joint chief executive officer of the Next Generation business unit, with David Wright.

Steven Gilbert was a non-executive director of One.Tel prior to January 2001: CE 5 0037.

John Greaves, the third defendant, was the non-executive chairman and a director of One.Tel from May 1995, and chairman of the Appointments and Remuneration Committee and the Finance and Audit Committee. He had been the finance director of John Fairfax Holdings Ltd from January 1996 to June 1999, and he was the chief financial officer of Optus from May 1992 to January 1996: CE 5 0036.

Martin Green was an associate director at CPH, who, with Mr Miller, prepared a report on One.Tel for CPH/PBL.

Andrew Harris was an executive at One.Tel UK.

John Hartigan was an executive at News Ltd.

Ian Hockings was the PricewaterhouseCoopers partner in charge of reviewing One.Tel's billing system.

Steven Hodgson was joint chief executive officer for the Australian fixed wire and service provider business unit, with George Savva.

Timothy Holmes was financial controller, One.Tel Australia. He took over some responsibilities of Mr Barnes when Mr Barnes left One.Tel in February 2001.

Peter Howell-Davies was a non-executive director of One.Tel from 30 March 2001. He was chairman of Optimal Communications Ltd from July 1999 to September 2001 and had about 40 years experience in the telecommunications industry.

Ashok Jacob was joint chief executive officer of Consolidated Pressed Holdings Ltd: Mr Packer Jnr's affidavit of 18 June 2002, para 2.

Guy Jalland was a senior executive employed by CPH, who had been trained as a lawyer and later became group general counsel and company secretary of PBL: Mr Jalland's affidavit of 10 November 2005, paras 1-4.

Emily Joukhadar was billing manager, One.Tel Australia.

Penny Jones was a finance controller, One.Tel UK.

Bradley Keeling, the second defendant, was joint managing director of One.Tel until 17 May 2001, and co-founder of the company with Mr Rich. He was marketing director of Franklin Mint in the early 1980s and then took up a position as national marketing manager at Imagineering Technology Ltd, and was also general manager of Imagineering Telecommunications: CE 5 0036. In 1991 he joined Strathfield Car Radios and until early 1995 he was the company's managing director.

Pirjo Kekalainen-Torvinen was a non-executive director of One.Tel from 30 March 2001.

Geoffrey Kleemann was chief financial officer, PBL: Mr Kleemann's affidavit of 26 July 2004, para 1.

John Linton was head of the Australian CLEC business unit.

Brian Long, a chartered accountant, was a senior audit partner at Ernst & Young. He became auditor of One.Tel and, with assistance from Mr Simmonds and Mr Shear, he prepared Ernst & Young's financial position review report, delivered to the board of directors of One.Tel on 29 May 2001.

Matthew Lovegrove was chief executive officer for the Australian One.Net business unit.

Lucent Technologies Australia Pty Ltd (Lucent) contracted with One.Tel for the financing and rollout of the Next Gen network.

Peter Macourt, an executive at News, was appointed to the One.Tel board on 17 May 2001.

Emma McMahen was a manager at PricewaterhouseCoopers.

Steve Menozzi was an executive at WorldCom.

Francois-Xavier Meyer was chief financial officer/financial controller, One.Tel France.

Robbie Millar was carrier relations manager, One.Tel Australia.

Darren Miller was a business analyst at PBL who, with Martin Green, prepared a report on One.Tel for CPH/PBL.

Stephen Moore was joint chief financial officer for the Next Generation business unit, with Carlos Perez.

Lachlan Murdoch (Mr Murdoch Jnr) was a non-executive director of One.Tel, having been appointed to the board in 1999. He was chairman of News Ltd and deputy chief operating officer of The News Corporation (his affidavit of 24 May 2002, para 1), with responsibilities including News Ltd's operations in Australia and News Corporation's US-based print businesses: CE 5 0037.

Rupert Murdoch (Mr Murdoch Snr) was executive chairman of The News Corporation Ltd, the holding company of News Ltd: affidavit of Mr Murdoch Jnr made on 24 May 2002, para 22.

Natasha Nassif was a management accountant, One.Tel Australia.

John Nestel was a partner with Freehill Hollingdale & Page, who acted for One.Tel.

News Corporation (The News Corporation Ltd) was the US parent company of the News group, and holding company of News Ltd.

News Ltd was an Australian operating subsidiary of News Corporation, which has a substantial shareholding in One.Tel.

Theo Onisforou was a co-investor with Mr Packer Jnr in various investments including One.Tel, through Dorigad.

Bart Oude-Vrielink was a partner at Minter Ellison.

James Packer (Mr Packer Jnr) was a non-executive director of One.Tel, having been appointed to the board in 1999. He was chairman of Publishing and Broadcasting Ltd and joint chief executive officer of Consolidated Press Holdings Ltd According to One.Tel's 2000 annual report (CE 5 0037), he was involved in the management and monitoring of the major assets of the PBL and CPH groups.

Kerry Packer (Mr Packer Snr) was the founder and a director of PBL and CPH.

Alicia Parker was internal legal counsel and company secretary at One.Tel.

Carlos Perez was joint chief financial officer for the Next Generation business unit, with Stephen Moore.

Ian Philip was chief general counsel of News Ltd: affidavit of 15 March 2004, para 1.

Andrew Pike was a partner at Freehill Hollingdale & Page, who acted for One.Tel.

Phil Pryke was CEO Australia of Lucent Technologies.

Publishing and Broadcasting Ltd (PBL) was an ASX listed public company in which CPH had a substantial shareholding, and it had a substantial shareholding in One.Tel.

Samantha Randall was treasury manager at One.Tel Australia.

Cassandra Reynolds was a manager and subsequently partner at PricewaterhouseCoopers, working with Mr Carter.

John David (Jodee) Rich, the first defendant, was joint managing director of One.Tel from 3 March 1995 until 17 May 2001, and co-founder of the company with Mr Keeling. He founded and took public the Imagineering/Tech Pacific group, an Australian information technology business, which he left in 1990: CE 5 0036.

William Rigby was an executive at GTS.

Allan Robertson was a sales director at Optus.

Dennis Romijn was an executive at One.Tel Netherlands.

Michel Rouilleault was chief executive officer, One.Tel France.

George Savva was joint chief executive officer of One.Tel's Australian fixed wire and service provider business unit, with Steve Hodgson.

Raymond Schrama was chief executive officer, One.Tel Netherlands.

Peter Shear was at relevant times a chartered accountant employed by Ernst & Young, and subsequently became a partner in the Corporate Finance-Restructuring division from July 2002: annexure to affidavit made 26 October 2005. With Mr Simmonds, he assisted Mr Long to prepare Ernst & Young's financial position review report delivered to the board of directors of One.Tel on 29 May 2001.

Steven Sherman was a partner of Ferrier Hodgson, who was appointed one of two administrators and then liquidators of One.Tel. The other administrator and liquidator was Peter Walker.

John Sherry was joint head of collections, One.Tel Australia, in April and May 2001.

Mark Silbermann, the fourth defendant, joined One.Tel in February 1996, with areas of responsibility including finance and operations, and he became the chief financial officer for the group, replacing Mr Coulsen, later that year. He became a director on 30 July 1997 and continued in that position until One.Tel went into voluntary administration on 29 May 2001.

David Simmonds, a chartered accountant, was an audit partner of Ernst & Young from 1989. With Mr Shear, he assisted Mr Long to prepare Ernst & Young's financial position review report delivered to the board of directors of One.Tel on 29 May 2001.

Murray Smith gave expert accounting evidence in reply, as Mr Carter was unavailable due to illness.

Gary Spratt was responsible at One.Tel for monitoring margins and traffic mix in the fixed wire business.

Nichola Thomas was a team leader, accounts payable, and One.Tel.

David Trendle was chief financial officer/financial controller, One.Tel UK.

Toronto Dominion Bank (TD) provided finance of $50 million to One.Tel.

Peter Walker was a partner of Ferrier Hodgson, who was appointed one of two administrators and then liquidators of One.Tel. The other administrator and liquidator was Steven Sherman.

Richard Warburton worked for 30 years with Du Pont Australia and New Zealand, eventually becoming a director from 1984 to 1995, managing director between 1987 and 1992 and chairman between 1992 and 1995. He was among other things chairman of several large Australian listed companies and a member of the board of the Reserve Bank of Australia.

Christian Werner joined One.Tel's German business in October 1999 as a management accountant, then moved to One.Tel's Swiss business, and in July 2000 became European chief financial officer based in London: UKT 1007. He became joint European chief financial officer with Mr Boaden in October 2000.

Christopher Weston was joint chief executive officer, One.Tel Europe, with Mr Cage.

Tony Worthington was an executive with ABN Amro.

David Wright was chief executive officer, and (from January 2001) joint chief executive officer with Mr Frack, of the Next Generation business unit.

Peter Yates was employed by Macquarie Bank until 21 April 2001. He became a non-executive director of One.Tel on 17 May 2001. From 21 April 2001 until 9 June 2004 he was the chief executive officer of PBL, and he was a director of PBL from 13 June 2001 to 9 June 2004. He was appointed chairman of the meetings of the board of One.Tel held on 28 and 29 May 2001: affidavit made on 27 September 2005, paras 1-5.

Appendix B

GLOSSARY OF ABBREVIATIONS, TELECOMMUNICATIONS AND ACCOUNTING TERMS

$ -- Australian dollar;

£ -- pounds Sterling;

Adept system -- an internal accounting and financial software system used by One.Tel, which produced raw financial data from which management accounts and final audited accounts of One.Tel were compiled;

April reforecast -- Mr Hodgson's revision of the forecasts for the fixed wire/service provider Australian operations, late in April 2001;

APS -- ASIC's written submissions in chief or principal written submissions after the conclusion of the final hearing; the numbers surrounded by square brackets refer to paragraph numbers;

ARPU -- average revenue per user, a measure for assessing business performance and used as a KPI;

AS -- ASIC's written submissions handed up during the hearing to address the many evidentiary and interlocutory issues that arose for determination were marked for identification with a number and the prefix "AS";

ASR -- ASIC's written submissions in reply, in response to the defendants' written submissions (DPS); the numbers surrounded by square brackets refer to the paragraph numbers in the DPS to which ASIC was responding in the ASR;

ATM -- asynchronous transfer mode (a global industry-based standard for broadband integrated communications that uses high-speed packet switching capabilities to carry two digital signals of varying bandwidth -- a precursor to Broadband ISDN);

Australian (ex Next Gen) operations -- the digital and fixed wire business units, and One.Net and One.Card operations;

Australian operations -- Australian (ex Next Gen) and Next Gen operations of the One.Tel Group;

Average tolling -- the average number of subscribers in a month who are actually using the service: T 13519;

Bandwidth -- the measure of how much data flows through a cable or radio link, usually expressed in bits per second;

Broadband -- networking technique for transmitting large amounts of voice, data, image, and multimedia signals over long distances on coaxial or fiber-optic cables (or, recently, by wireless transmission);

BNS -- Billed Number Screening (a telephone network service that provides the capacity of restricting collect and/or third number billing to telephone numbers);

Bucket -- in One.Tel's billing system, if call data could not be rated and billed for any reason, it would be consigned to an electronic "bucket" for further investigation;

Carrier -- a company which provides communications circuits, including local phone companies which are common carriers and are subject to regulation;

CDRs -- call detail records (computer records containing the data unique to specific calls);

CE -- the Carter Exhibits, a 12 volume documentary tender by ASIC put together by its expert forensic accountant, Mr Carter;

CED -- ASIC's cross-examination documents, being a collection of principal tendered documents;

CHAPS -- Clearing House Automated Payment System;

CHF -- Swiss francs;

Churn -- the process by which or rate at which customers migrated from one carrier to another;

CLEC -- "competitive local exchange carrier"; a business of One.Tel that provided fixed wire and digital services for corporate customers: T 5556; T 14569;

CM -- contribution margin;

COA -- cost of acquisition;

COGS -- cost of goods sold;

CPS -- carrier preselection;

CSPA -- carrier service provider resale agreement;

Diallers -- machines used by subscribers to the UK fixed wire business to route calls through One.Tel rather than British Telecom;

Dialler rebate -- an amount per dialler that British Telecom was required to rebate to One.Tel towards One.Tel's cost of installing diallers for subscribers;

Digital -- a term used when data is represented by digits -- a digital computer uses numbers in the binary code transmitted by electrical signals; the business described by ASIC as One.Tel's digital business was the Australian mobile service provider business;

Digital business unit -- One.Tel's mobile phone business prior to Next Gen;

Digital Fixed Wire (DFW) -- an expression used by ASIC to refer to One.Tel's Australian service provider (mobile phone service using the Optus network, as opposed to Next Generation) and fixed wire businesses;

DEM -- German deutschemark;

DPS -- the defendants' written submissions or principal written submissions after the conclusion of the final hearing and in response to ASIC's written submissions in chief; the numbers surrounded by square brackets refer to paragraph numbers;

DS -- the defendants' written submissions handed up during the hearing to address the many evidentiary and interlocutory issues that arose for determination were marked for identification with a number and the prefix "DS";

DSL -- digital subscriber line technology, which allows conventional telephone lines in a local network to transport large amounts of data;

DTB -- the defendants' 15 volume tender bundle;

E1 -- a measure of telephony capacity, measuring two megabytes per second of transmission capacity: Mr Carter's supplementary report at p 10;

EBIT -- earnings before interest and tax;

EBITDA -- earnings before interest, tax, depreciation and amortisation;

Fixed wire -- refers to calls connected to the fixed line or land line telephone system -- non-mobile calls;

Fixed wire business -- One.Tel's Australian fixed wire business, supplying telephony services through the Telstra fixed wire system, generally accounted for together with One.Tel's Australian service provider business;

Flash reports -- monthly financial reports provided to the board shortly after month-end;

GAAP -- generally accepted accounting practices;

GHz -- gigahertz, that is 1,000,000,000 hertz;

GM -- gross margin;

Gross margin -- revenue less cost of goods sold;

Gross margin % -- (gross margin contribution/revenue) x 100;

Group -- the One.Tel Australian and international businesses;

Global System for Mobile -- the European standard for digital cellular services that includes a suite of enhanced features similar to ISDN;

Gross margin contribution is revenue less cost of goods sold;

Gross margin percentage is the gross margin contribution expressed as a percentage of revenue;

GSM -- Global System for Mobiles, the most mature digital wireless standard, usually referred to as the "European" digital standard;

GSM 1800 Network -- a digital wireless phone network that operates in the 1800 MHz spectrum band;

GST -- goods and services tax;

Hfl -- Dutch guilder;

Hz -- hertz, a unit of frequency equal to one cycle per second, used for measuring change in state or cycle in a sound wave, alternating current, or other cyclical waveform (and thus used to measure, inter alia, electrical supply and broadcast transmission);

I:drive -- One.Tel's central document processing and storage facility;

Intercarrier roaming -- an agreement between one mobile carrier and another mobile carrier, which allows customers to "roam" to another carrier when they leave their carrier's home area;

International gateway switches -- switches to which a number of carriers are connected, designed to route voice calls through the carrier offering least cost to the desired destination;

International operations -- One.Tel's businesses in the United Kingdom, France, Germany, Switzerland, the Netherlands, Hong Kong and Singapore, being telecommunications services businesses primary involving the resale of mobile and internet services;

IP -- internet protocol (a standard describing software that keeps track of the internet work address for different nodes as well as routing outgoing and recognising incoming messages);

ISDN -- integrated services digital network;

ISP -- internet service provider (a vendor who provides access for customers to the internet);

IVR -- interactive voice response (a specialised computer that accepts input from either a telephone keypad or the caller's voice, and on the basis of that input, uses synthesised voice or pre-recorded messages to offer callers choices on how to achieve the purpose of their call);

January recut -- was the Australian fixed wire/service provider January budget recut carried out by Mr Hodgson and Mr Barnes: see 8.4.3;

JDR -- the two volumes of Mr Rich's affidavit made on 27 March 2006 cited in the judgment as "1 JDR" and "2 JDR" respectively, followed by the paragraph number; and the six volumes of documentary evidence in support of his affidavit, cited as "Ex JDR" followed by the volume number and the page number;

KHz -- one thousand Hz;

KPI -- key performance indicator (a performance indicator relating to a key driver in a business);

Liquidity -- cash balance plus liquid assets such as trade debtors, accrued income and carrier claims less trade creditors and accruals;

LTD activations -- "live to date"; the total number of subscribers who have been activated in respect of a service (in One.Tel's case, the service provider business);

MHz -- megahertz, that is 1,000,000 Hz;

MS -- Mr Silbermann's affidavit made on 27 March 2006 is cited in the judgment using this abbreviation, followed by the paragraph number; the volume of exhibits supporting his affidavit is cited as "Ex MS" followed by the page number;

MTB -- ASIC's merged tender bundle, in six primary volumes, later supplemented;

MVNO -- a mobile virtual network operator, a company that provides a mobile telephone service but does not have its own licensed frequency allocation of radio spectrum, nor (probably) the infrastructure required to provide a mobile telephone service;

Negative billing run -- call data siphoned off by the system because it could not be processed for some reason, and placed in a separate "bucket" to be investigated;

Net assets -- assets less liabilities;

Net cash flow -- cash received less cash payments;

Net realisable value is the difference between the realisable value of the assets of a business enterprise, and the total liabilities of that business enterprise;

Next Gen -- Next Generation business unit;

Next Generation -- the 2.5MHz Australian mobile telephone network that was being developed and progressively introduced by One.Tel in 2000/2001, under the build-out arrangements with Lucent;

OBS tapes -- the Flex tapes containing local call CDRs and line rental charges, provided by Telstra to One.Tel;

OLAT -- operating loss after tax;

OPAT -- operating profit after tax;

OPEX -- operating expenses;

Partial debt severance -- a practice by which, according to the defendants, when a customer transferred from Telstra to One.Tel, Telstra would require One.Tel to pay it all money owing by the customer to Telstra, leaving One.Tel to recover that money from the customer as part of One.Tel's billing: 2 JDR 1427;

Preselection -- a standard regulatory mechanism for allowing consumers access to a selected long-distance operator's service through nomination;

Provisioning -- connecting a customer to the network for service: 2 JDR 1424;

QM -- the mailing house which One.Tel used to print and dispatch its bills to customers: 1 JDR 450;

QM date -- the date on which billing data for a billing run was provided to QM for processing;

Run rate -- the rate (usually monthly) of cash burn in a business;

Roaming -- a roaming facility permits a mobile telephone to "roam" from one network to another, when the first network is unavailable: T 9122;

SAS system -- financial management reporting system adopted by One.Tel in 1998, which was a "data warehouse" deriving information from One.Tel's other reporting systems (including the Adept system and the billing system) so as to produce figures for various KPIs which were used by One.Tel's managers to operate and monitor the One.Tel businesses;

Second Generation (2G) -- cellular wireless technology that improved on the previous technology (subsequently dubbed "first generation") because second generation was a digital system whereas the first generation was an analog system. The main benefits of the 2G system over its predecessor were that phone conversations were digitally encrypted, the system was significantly more efficient on the spectrum allowing for far greater mobile phone penetration levels, and 2G introduced data services for mobile including SMS text messages.

Second and a half Generation (2.5G) -- cellular wireless technology that is a stepping stone between second generation (2G) and third generation (3G) systems. The term "2.5G" is generally used for marketing purposes to describe a 2G system that provides some of the benefits of a 3G system because it has implemented a packet-switched domain in addition to a circuit-switched domain.

Service provider business -- One.Tel's Australian mobile phone business using the Optus network, as opposed to Next Generation which was building its own network, generally accounted for together with the Australian fixed wire business;

SIM card -- a subscriber identity module card, loaded into a mobile phone and encrypted with information identifying the subscriber for billing and other purposes;

SLB -- Stoner, Lee & Browning, One.Tel's internal collection agency;

SMS -- short message service, a system for communication over a mobile telephone network by means of text messages;

SP -- service provider;

Spectrum -- the electromagnetic spectrum is the complete range of wavelengths (or frequencies) of electromagnetic radiation, often described by its frequency (the number of oscillations per second) expressed in hertz. These frequencies include visible light, ultraviolet light, x-rays, infrared, radio waves and gamma rays. Mobile telephony uses the radio frequency spectrum, generally at frequencies between 3 kHz and 300 GHz.

Third Generation (3G) -- refers to third generation wireless technology, permitting the operator to offer users a more extensive range of digitised services including wide-area wireless voice technology, video calls, broadband wireless data, packet-based transmission of text, and multimedia at high data transmission capabilities;

Tolling -- a customer was a tolling customer of One.Tel if he or she used a billable One.Tel telephony service in the previous 30 days;

UK operations -- the United Kingdom portion of international operations;

UMTS -- Universal Mobile Telecommunications Service;

US$ or USD -- US dollars;

VAS -- value-added services;

YTD -- year to date.

Appendix C

SUMMARY OF INVOICE EVIDENCE IDENTIFIED IN AS 69

[7336] ASIC presented its evidence of "creditor correspondence", by reference to a submission document called "AS 69". That was the product of a process of limiting the tendered creditor correspondence, which is explained in Ch 18. I have found it necessary to respond to the creditor correspondence evidence in some detail, including a close review of the invoices upon which ASIC chose to rely. My summary account of the invoice evidence is set out in this appendix.

C1 Telstra

C1.1 Account No 050 164 060 (International Freecall)

[7337] There are five invoices on this account identified in AS 69, dated respectively 29 March, 12 April, 25 May, 20 June and 11 July 2001: Ex MTB 4/1028B, 4/1146 and 4/1147D-E, 6/1614, 6/1697 and 6/1702. All of the invoices are for "International Freecall" and "Transit Plus Non Carrier" for varying but relatively small amounts.

Table C.1: Telstra account No 050 164 060 (International Freecall) ($)
Invoice date	Opening balance	Overdue	Payments	Current	Payable by	Balance outstanding
29 Mar	31,593.65	31,593.65	Nil	7,846.78	28 April	39,440.40
12 April	39,440.40	39,440.40	Nil	5,597.03	11 April	45,037.40
25 May	45,037.40	15,471.98	29,565.42	5,986.79	24 June	21,458.75
20 June	21,458.75	21,458.75	Nil	5,906.66	20 July	27,365.40
11 July	27,365.40		Nil	475.06	10 Aug	27,840.46

[7338] There are some handwritten endorsements on copies of the April statement, which appear from their content to have been made by the administrator/liquidator's staff ("Approved copy from One.Tel's records" and "This copy provided by Telstra Approved copy on file from One.Tel's records").

[7339] In isolation, these invoices are of no real significance because of the small amounts involved. They show that Telstra claimed the account was overdue but the amount paid and shown on the May invoice represented roughly 4 months of periodic charges.

[7340] On 29 May 2001 Telstra wrote a letter of demand to One.Tel for payment of the new charges shown in the March and April accounts ($7,846.78 and $5,597.03 respectively) totalling $13,443.81: Ex MTB 6/1643-4. The letter referred to the wholesale form of agreement dated 24 February 2000 between Telstra and One.Tel and said that if payment was not received by 5 June, Telstra reserved its rights to take whatever action it considered necessary under that agreement and at law to protect its position. The letter was written after a relatively substantial payment of creditors on the 25 May statement, and at a time shortly before the commencement of One.Tel's voluntary administration.

C1.2 Account No 108 2206 300 (SMS)

[7341] There is only one invoice, dated 19 June 2001: Ex MTB 6/1696. It is for "other charges and credits". It shows an opening balance of $118,849.15 said to be overdue, no payments, current charges of $72,465.36 payable by 19 July, and a balance outstanding of $191,314.50. June is too late to be given significance for present purposes. I cannot assume that the opening balance was incurred or due in April.

C1.3 Account No 116 6666 900 (Frame Relay)

[7342] There are two invoices, dated respectively 26 April and 25 May 2001: Ex MTB 4/1318, 6/1613. Both invoices are for "service and equipment".

Table C.2: Telstra account No 116 6666 900 (Frame Relay) ($)
Invoice date	Opening balance	Overdue	Payments	Current	Payable by	Balance outstanding
26 April	14,429.40	14,429.40	Nil	2,626.80	28 April	17,056.20
25 May	17,056.20	5,253.59	11,802.61	7,610.86	24 June	12,864.45

[7343] This evidence is of no real significance because of the small amounts involved, but it shows a substantial payment appearing on the May invoice that may have been for charges to February, leaving new charges for March, April and May outstanding.

[7344] On 29 May 2001 Telstra issued a letter of demand to One.Tel in respect of "Overdue invoices under the Access Agreement", including a demand for payment of $2,626.80, the amount of new charges on the April invoice on this account: Ex MTB 6/1647-8. The letter was issued after payment of the amount acknowledged on the May invoice.

C1.4 Account No 154 7859 200 (National Roaming -- Originating/terminating)

[7345] Telstra's claim for payment of roaming invoices became a large and controversial matter, and so careful attention must be paid to the evidence.

[7346] ASIC purports to list seven invoices but in fact one of them is repeated so there are six in all. They are dated respectively 12 January, 7 February, 14 February, 22 March, 5 June and 19 June 2001: Ex MTB 2/626 and 2/628A, 2/732, 2/747A-E, 3/904 and 3/909L-M and 3/909S-W, 6/1691, 6/1695. In some cases the evidence comprises a single page invoice where the account summary is "other charges and credits" but in other cases there are additional pages listing various categories of roaming charges in some detail. I infer that some of the invoices are incomplete. It appears that the invoices were sent more frequently than on a monthly basis.

Table C.3: Telstra account No 154 7859 200 (National Roaming)
Invoice date	Opening balance	Overdue	Payments	Current	Payable by	Balance outstanding
12 Jan	325,395.17	325,395.17	Nil	156,176.98	11 Feb	481,572.15
7 Feb	481,572.15	325,395.17 (156,176.98 on 11 Feb)	Nil	411,922.59	9 March	893,494.74
14 Feb	893,494.74	325,395.19	Nil	5,307,330.25	16 Mar	6,200,824.99
22 Mar	6,200,824.99	6,200,824.99	Nil	11,364,938.38	21 April	17,565,763.37
5 June	17,565,763.37	10,349,811.06	7,215,752.31	8,530,604.75	4 July	18,880,415.81
19 Jun	18,880,415.81	80,880,415.81	Nil	4,585,534.37	19 July	23,465,950.18

[7347] There is a note on the 7 February invoice stating that it includes all charges for daily files sent from 2 September 2000 to 1 October 2000. There is a statement attached to the 14 February invoice particularising services, amounts and dates, from which it appears that the services were allegedly provided in the period from 1 October to 31 December 2000.

[7348] There is a statement attached to the 22 March invoice particularising services, amounts and dates, from which it appears that the services were allegedly provided in the period from December 2000 to March 2001. Several copies of the summary page of the invoice are in evidence, containing handwritten endorsements. One endorsement is that the amount for new charges of $11,364,938.38 is crossed out and under that figure the words "Paying 4,637,340.83" are written. The same copy invoice also bears a "paid" stamp and underneath the stamp, the date 1/5/01, a cheque number and two amounts in brackets, namely 6,878,418.43 and 4,637,340.83. At another place in the same copy invoice the words "paid 21/5/01 $1,238,471.64" are written. On another copy of the summary page of the invoice a line is drawn from the figure $11,364,938.38 to a handwritten endorsement "part paid $5,585,812.47".

[7349] It appears from the invoices themselves that Telstra decided to backbill for services from September to December 2000 in its 7 and 14 February invoices, producing a very large figure for current charges. Then there appears to have been further backbilling, for the period December-March, in the invoice of 22 March, producing an even more massive current charge. We need to turn to other evidence to assess what is shown in the invoices, and I shall do so under the heading "Roaming Dispute" below.

C1.5 Account No 108 5567 200 (GSM Roaming)

[7350] It seems there was another roaming account. Although ASIC does not refer to any invoices for this account in AS 69, Telstra's letter to One.Tel dated 18 April 2001 (Ex MTB 4/1175-6) identified the account and claimed that the amount of $1,601,258.58 was outstanding on an invoice dated 13 February 2001 and due 14 March 2001. Also in evidence is a letter dated 13 February 2001 purporting to enclose an invoice on this account (not identified by ASIC in the evidence) for "National Roaming Terminating Charges and Rental" for October/November and December 2000, in the sum of $3,196,517.16 due on 15 March: Ex MTB 2/737A. This is presumably the same invoice as mentioned in the letter of 18 April, which indicates that by that date it had been part-paid.

C1.6 Account No 193 6448 200 (Domestic Wholesale)

[7351] There are two invoices, dated respectively 29 May and 23 July 2001: Ex MTB 6/1651, 6/1704. The invoices are for "other charges and credits" and only the summary page appears to be in evidence.

Table C.4: Telstra account No 193 6448 200 (Domestic Wholesale) ($)
Invoice date	Opening balance	Overdue	Payments	Current	Payable by	Balance outstanding
29 May	101,399.10	57,799.50	43,599.60	36,945.70	28 June	94,745.20
23 July	132,415.80	132,415.80	Nil	1,140.70	9 Aug	133,556.50

[7352] This evidence is too recent to be of any real assistance to ASIC's case. It indicates that Telstra claims there were substantially in arrears as at the end of May, but no information is given about the development of the account during the January-April period.

C1.7 Account No 216 1865 000 (National Connect Usage)

[7353] There are four invoices, dated respectively 10 April, 14 May, 8 June and 6 July 2001: Ex MTB 4/1133 and 4/1134A and C, 5/1512, 6/1693, 6/1699. All of the invoices are for "service and equipment" and "other charges and credits" and only the summary pages are in evidence.

Table C.5: Telstra account No 216 1865 000 (National Connect Usaage) ($)
Invoice date	Opening balance	Overdue	Payments	Current	Payable by	Balance outstanding
10 Apr	3,360,254.25	1,684,961.84	1,682,292.43	1,621,311.31	10 May	3,306,273.10
14 May	3,306,273.10	1,621,311.10	1,684,962	1,760,566.85	13 June	3,381,877.95
8 June	3,380,877.95	3,380,877.95	Nil	1,609,307.43	8 July	4,991,185.35
6 July	4,991,185.35	4,991,185.35	Nil	1,808,567.90	23 July	6,799,753.25

[7354] There are several copies of the summary pages of the April invoices in evidence, which appear to be endorsed by the administrator/liquidator's staff with endorsements indicating whether the copies came from Telstra or One.Tel's records.

[7355] The invoices indicate that One.Tel was paying the invoice amounts up to June, but later than demanded by Telstra.

[7356] On 29 May 2001 Telstra issued a letter of demand to One.Tel for "Overdue invoices under the Access Agreement" in the total amount of $1,797,574.76. One of the invoices in the list was the invoice on this account dated 10 April 2001, the amount demanded being $1,621,311.31, which was the amount of new charges in that invoice. At some time prior to the invoice dated 14 May, One.Tel paid $1,684,962 on this account, as acknowledged in that invoice.

C1.8 Account No 228 3157 200 (facility access agreement)

[7357] AS 69 does not directly refer to any invoices for this account, but it refers to a letter of demand from Telstra to One.Tel dated 29 May 2001 headed "Overdue invoices under the Facility Access Agreement": Ex MTB 6/1645-6. The letter referred to the facility access agreement dated 18 June 1999 between Telstra and One.Tel. It demanded payment by 5 June of $4,547,055.51 on six invoices issued under that agreement, bearing dates from 26 October 2000 to 27 April 2001, less credit for payments. The invoice amounts, due dates and payments were listed in a table. I note that the amounts invoiced on the last two invoices listed by Telstra (dated 26 March and 27 April) were $1,468,062.40 and $4,176,199.58 respectively, and the amount of each of the other four invoices in the list was under $300,000. By far the largest One.Tel payment was $1,721,964.82, credited against the April invoice.

[7358] As with the letter of demand under the wholesale form of agreement (Account No 050 164 060), this letter of demand was written after One.Tel had made a substantial payment and just before the commencement of One.Tel's voluntary administration. There is a handwritten note on the copy of the letter that is in evidence, dated 31 May, with an indecipherable signature, apparently seeking to confirm that there was no intention to turn off supply.

C1.9 Account No 245 1972 000 (National Connect)

[7359] There are three invoices, dated respectively 8 December 2000, 10 April and 9 May 2001: Ex MTB 2/0589C, 4/1134 and 4/1134B and D, and 5/1454. All of the invoices are for "service and equipment" and "other charges and credits" and apparently only the summary pages are in evidence.

Table C.6: Telstra account No 245 1972 000 (National Connect) ($)
Invoice date	Opening balance	Overdue	Payments	Current	Payable by	Balance outstanding
8 Dec	53,658.20+ adjstmts 42,372.20	$96,030.40	Nil	305,251.07	7 Jan	401,281.45
10 Apr	850,833.55	703,168.63	147,664.92	157,579.12	10 May	860,747.75
9 May	860,747.75	167,388.53	693,359.22	246,201.63	8 June	413,590.15

[7360] There is a handwritten endorsement of the December invoice, apparently by staff of the administrator/liquidator, that the copy invoice was provided by Telstra, "couldn't find anything in One.Tel's records", and also "claim $9,809.52".

[7361] This evidence indicates that by April, Telstra was claiming that the account was in deficit by over $800,000, but by the date of the May invoice One.Tel had reduced the account balance by a substantial payment.

[7362] On 29 May 2001 Telstra sent a letter of demand to One.Tel in respect of "Overdue invoices under the Access Agreement", requiring payment by 5 June and reserving its rights to take whatever action it considered necessary under the agreement and at law to protect its position: Ex MTB 6/1647-8. The letter referred to the access agreement dated 16 December 1999 between Telstra and One.Tel and set out in tabular form a list of nine invoices said to have been issued under that agreement, showing amounts, due dates and payments. The total amount alleged to be owing was $1,797,574.76, under various invoices.

[7363] There were four invoices listed for Account No 245 1972 000, namely invoices dated 8 December 2000 and 13 February 2001 which were shown as overpaid by about $5500, the April invoice for new charges of $157,579.12 (mentioned above), and an invoice dated 13 March for $708,663.33, of which $693,359.22 had been paid (this is the payment credited in the 9 May invoice, above), leaving a balance on that invoice of $15,304.11. Thus, as with the letters of demand on Account No 050 164 060 and on Account No 228 3157 200, this letter of demand was written shortly after a substantial One.Tel payment on this account.

[7364] As I have mentioned, this letter of demand related to several Telstra accounts. Most of the total debt claimed in the letter of demand was referable to the invoice dated 10 April on Account No 216 1865 000 for new charges of $1,621,311.31: mentioned above at 18.4.1.7. There was, however, a subsequent payment of $1,684,962, which was credited on the May invoice but not referred to in the letter of demand. Once again, therefore, the letter of demand was being issued shortly after a substantial One.Tel payment on the account.

[7365] The only other accounts mentioned in the letter of demand were for very small debts.

C1.10 Other Telstra accounts

[7366] I mention for completeness that in the letter of demand dated 29 May relating to invoices under the access agreement (Ex MTB 6/1647-8), the table of invoices identifies some additional invoices other than the three already mentioned:

•
Account No V 36047 for an amount outstanding of $2626.80 on an invoice dated 31 October 2000;

•
Account No 108 5567 200 for an amount outstanding of $3011.61 on an invoice dated 10 April 2001;

•
Account No 318350 for an amount outstanding of $609.60 on an invoice dated 31 March 2001.

C2 Optus

C2.1 Account No 9122 2163 40

[7367] AS 69 does not identify any invoices for this account, but the reconciliation of accounts as at 15 November 2000 includes reconciliation of this account. The reconciliation shows a total said to be owing at that date of $302,000, said to be due on invoices for which no date is given. No payments are credited.

C2.2 Account No 9122 4737 16

[7368] There are three invoices, for charges said to be due in May, June and August 2001: Ex MTB 4/1145, 5/1486, 6/1703. The May invoice shows a balance overdue, "please pay now", of $491,719.67, plus new charges of $426,608.82. It shows that the previous account was for $1,580,909.70 and that a payment of $1,089,190.03 had been received. The June invoice shows a balance overdue of $427,120.99, and that the amount outstanding on the previous account was $427,120.99, none of which had been paid. This suggests that there was another invoice after the May invoice, and that before the rendering of the intermediate invoice One.Tel had made a payment. The August invoice shows a balance outstanding on a previous account of $135,464.48 and a payment of $465.77, leaving a balance said to be overdue of $835,930.25 and a total amount said to be due of $1,796,676.17.

[7369] The reconciliation of this account as at 15 November 2000 shows a negative total of $826.32, implying that One.Tel had overpaid.

C2.3 Account No 9122 6118 29 (Corp)

[7370] There are six invoices, for amounts said to be due each month from December to May: Ex MTB 2/0578, 2/0609, 2/0655, 2/0749, 3/0891, 4/1210. There was a recurring monthly charge on this account of $9039.80. The December invoice shows an amount of $60,892.48 previously rendered as now overdue. Information on the invoices shows that according to those documents, One.Tel made only one payment on this account, a payment of $60,892.48 between the February and March invoices. The overdue balance on the May invoice was said to be $45,199, and the total amount due on the May invoice including new charges was $54,232.80.

[7371] The reconciliation of this account as at 15 November 2000 shows a total said to be owing at that date of $60,892.48, on invoices for which no dates are given. This is the amount shown as overdue in the December invoice.

C2.4 Account No 9040 6275 49 (mltnet)

[7372] There are four invoices, for amounts said to be due each month from April to July 2001: Ex MTB 3/0836, 4/1143, 5/1485, 6/1698. The April invoice shows a balance overdue of $1,441,055 and new charges of $71,646.30, and that there had been no payments since the previous account. The May invoice acknowledges a payment of $1,046,991.40 and a credit adjustment of $394,063.68 leaving a balance overdue of $71,646.22 and new charges of $71,371.30. The June and July invoices show no further payments.

[7373] The reconciliation of this account as at 15 November 2000 shows a total said to be owing at that date of $5,078,738.85. Apparently, therefore, the account was substantially paid down from November to April.

C2.5 Account No 9050 0514 71 (Internet)

[7374] There are six invoices, for amounts said to be due each month from January to June 2001: Ex MTB 2/0594, 2/0623, 2/0733, 2/0835, 3/1144, 5/1471. The January invoice says that the previous account was for $2,153,534.80, and acknowledges a payment of $1,078,270.55 leaving a balance overdue of $1,075,264.25, together with new charges of $624,647.67. The February invoice brings the total amount due up to $2,162,390.29, with no payment acknowledged, and the March invoice acknowledges a payment of $1,699,911.92 leaving a balance overdue of $462,478.37 and new charges of $170,976.24. The April invoice brings the total amount due up to $1,155,478.36, of which the total amount claimed in the March account of $633,454.61 is said to be overdue with no payments acknowledged. The May invoice acknowledges a credit adjustment of $54,418.01 but no payment, and so a balance overdue of $1,095,618.55 and new charges of $442,372.79. According to the June invoice the total May balance of $1,537,991.34 was overdue, with no payments acknowledged, and there were new charges of $461,208.97.

[7375] The reconciliation of this account as at 15 November 2000 shows a total said to be owing at that date of $1,658,377. That figure is consistent with the invoice figures, though we do not have the December invoice.

C2.6 Account No 9090 5518 23 (BNS)

[7376] There are eight invoices, for amounts said to be due each month from November 2000 to June 2001: Ex MTB 2/0549, 2/0566, 2/0595, 2/0627, 2/0734, 3/0837, 3/1142, 5/1484. According to the November invoice the previous account was for $1,222,547.68 and that amount was now overdue, with no payment acknowledged. There were new charges of $212,774 in the November invoice, said to be due on 11 November. In each of the later months new "recurring charges" were billed, for amounts generally comparable with the new charges in the November invoice. The total amounts said to be due were $1,644,128.25 (December), $1,867,311.85 (January), $775,802 (February), $1,058,847.59 (March), $1,260,366.49 (April), $1,221,109.49 (May), and $1,374,081.78 (June). A payment of $1,358,792.34 was acknowledged in the February invoice, and a further payment of $183,913.39 was acknowledged in the May invoice. Of the total amount said to be due in the June invoice, $1,221,109.49 was said to be overdue.

[7377] The reconciliation of this account as at 15 November 2000, 4 days after the due date for the November invoice, shows a total said to be owing at that date of $1,435,321.78, the total amount shown as outstanding in the November invoice.

C2.7 Account No 2012 1280 0001 71G

[7378] This is an account that billed call charges as well as recurring charges and other charges. There are four invoices, one for charges due in November 2000 and the other three for charges due in April, May and June 2001: Ex MTB 2/0578D-E, 3/1113, 5/1431, 6/1692.

[7379] According to the November invoice, the previous account was for $9,142,258.65, and a payment of $4,041,573.09 had been made, leaving a balance said to be overdue of $5,100,685.56. There were new charges of $2,864,821.43 and hence a total amount due of $7,965,506.95. There is a breakdown of the total charges into recurring charges, other charges, local calls, national calls, international calls, 1900 calls, mobile calls and operator assisted calls. The largest figures are for international and mobile calls. There is no breakdown of charges in the other three invoices.

[7380] The November invoice was endorsed:

Your account is now overdue. Please make immediate payment to prevent suspension of your service. If you have paid the overdue balance please disregard this notice. LATE PAYMENT FEES MAY APPLY IF THE ACCOUNT IS NOT PAID IN FULL BY THE DUE BY DATE.

The same endorsement appears on the April, May and June invoices.

[7381] According to the April invoice, the previous account had been for $4,371,586.65, with no payments made, and so that amount was said to be overdue. Obviously, however, the account had been paid down to a degree in the period from November to April. The April invoice showed new charges of $2,605,582.94 and a total amount due of $6,977,170.55. In the May account a payment of $4,371,587.69 was acknowledged leaving a balance overdue of $2,605,582.86 and a total amount due (including new charges) of $5,033,662.60. No payments were acknowledged in the June invoice and so the previous balance of $5,033,662.60 was said to be overdue and the total amount said to be due was $7,203,312.75.

C2.8 Account No 2083 0175 0001 85G

[7382] Like the account just mentioned, this is an account where there were call charges as well as recurring charges and other charges. There are three invoices, for April, May and June 2001: Ex MTB 3/1108, 5/1426, 6/1687. According to the April invoice, the previous account had been for $932,828.95, and no payment was acknowledged, so that amount had become overdue. There were new charges of $477,975.98 and so the total amount due was said to be $1,410,804.90. In the May invoice a payment of $932,828.99 was acknowledged, leaving a balance said to be overdue of $477,975.91, and a total amount due (including new charges) of $628,533.05. In the June invoice no payment was acknowledged and the balance of the May invoice was said to be overdue, and the total amount said to be due (including new charges) was $770,821.75.

C2.9 Account No 2092 9652 0001 04G (BNP2)

[7383] Again, this is an account where there were call charges as well as recurring charges and other charges. There are four invoices, one for charges due in November 2003, and others for charges due in April, May and June 2001: Ex MTB 2/0578B-C, 3/1112, 5/1430, 6/1690.

[7384] According to the November invoice, the previous account was for $2,459,678.55, and a payment of $940,702.28 had been made, leaving a balance said to be overdue of $1,518,976.27. There were new charges of $259,267.29 and hence a total amount due of $1,778,243.55. There is a breakdown of the total charges into recurring charges, other charges, local calls, national calls, international calls, 1900 calls, mobile calls and operator assisted calls. The largest figures are for international and mobile calls, the figure for local calls is not much lower. There is no breakdown of charges in the other three invoices.

[7385] All four invoices bear the same endorsement about the account being overdue as in Account No 2012 1280 0001 71G.

[7386] According to the April invoice, the previous account had been for $777,364.90, with no payments made, and so that amount was said to be overdue. Obviously, however, the account had been paid down to a degree in the period from November to April. The April invoice showed new charges of $866,630.05 and a total amount due of $1,643,994.95. In the May account a payment of $777,364.94 was acknowledged leaving a balance overdue of $866,630.01 and a total amount due (including new charges) of $1,903,037.20. No payments were acknowledged in the June invoice, but there was a credit adjustment of $147.52, and so $1,902,874.93 was said to be overdue and the total amount said to be due was $2,873,228.70.

C2.10 Account No 2121 8739 0002 49G (Regional Account)

[7387] There are two invoices, for charges due in April and May 2001 respectivel: Ex MTB 3/1110, 5/1428. They both bear the same endorsement about the account being overdue as in Account No 2012 1280 0001 71G. According to the April invoice the previous account was for $2,423,109.45 and there was a payment of $10 leaving a balance said to be overdue of $2,423,099.45. New charges, said to be call charges, were for $1,064,539.59, and so the total amount due was said to be $3,487,639. The May invoice acknowledged payment of $2,423,209.52 leaving a balance, said to be overdue, of $1,064,429.48, and a total amount due (including new call charges) of $1,939,540.15.

C2.11 Account No 2121 8739 0001 50G (Metro Account)

[7388] There are three invoices, for charges due in April, May and June 2001 respectively: Ex MTB 3/1111, 5/1429, 6/1689. They each bear the same endorsement about the account being overdue as in Account No 2012 1280 0001 71G. According to the April invoice the previous account was for $1,447,580.10 and there was a payment of $22 leaving a balance said to be overdue of $1,447,558.10. New charges, said to be call charges, were for $634,894.57, and so the total amount due was said to be $2,082,452.65. The May invoice acknowledged payment of $1,447,706.14 leaving a balance, said to be overdue, of $634,746.51, and a total amount due (including new call charges) of $1,157,626.55. No further payment was acknowledged in the June invoice and the total amount said to be owing was $1,656,889.70. In the June statement there is an endorsement adjacent to that amount, "CARD PAYMENT TO BE APPLIED ON 19 JUN 01".

C2.12 Account No 2122 2663 0001 11 (Kindy Account)

[7389] There are three invoices, for charges due in April, May and June 2001 respectively: Ex MTB 3/1109, 5/1427, 6/1688. They each bear the same endorsement about the account being overdue as in Account No 2012 1280 0001 71G. According to the April invoice the previous account was for $222,529.25, a payment of that amount was acknowledged, but then there was a debit adjustment of the same amount, leaving a balance said to be overdue of $222,529.25. New charges, said to be call charges, were for $105,700.51, and so the total amount due was said to be $328,229.75. The May invoice acknowledged payment of $428,381.07 but there was a debit adjustment of $205,829.79, leaving a balance, said to be overdue, of $105,678.47, and a total amount due (including new call charges) of $210,832.35. A payment of only $10 was acknowledged in the June invoice, and the total amount said to be owing was $312,017.55.

C2.13 Account No MR 5222 [?? -- illegible] (Optus Mobile)

[7390] There are three invoices from Optus Mobile, said to be for the months of November and December 2000, and January 2001: Ex MTB 2/0828J-O. The November invoice is for $723,920, comprising retail charges, starter kit and "Express KR". An annexure to the invoice indicates that the items charged are for recharge cards, to be sold retail for various prices from $30-100, at various levels of wholesale discount. That suggests that the account relates to the One.Card business. The December account is for $844,000, and the January account is for $960,000, in each case for recharge cards. There is no indication of arrears on any of the invoices.

Appendix D

AN INTRODUCTION TO THE JUDGMENT

[7391] In today's judgment the court has held that the plaintiff, ASIC, has failed to prove its case that either of the defendants, Mr Rich and Mr Silbermann, contravened s 180 Corporations Act, which lays down the statutory duty of care and diligence for company directors and officers.

[7392] The judgment, running to over 3000 pages, depends on a series of detailed factual findings about the financial circumstances of the One.Tel Group over the period from January to May 2001. The findings respond to 18 volumes (over 4000 pages) of written submission documents, as well as oral submissions, relating to a vast quantity of evidence received by the court in a hearing spread over approximately 3 years.

[7393] This is a case where the outcome is determined by a detailed understanding of the facts. In those circumstances, a meaningful and accurate summary would be very difficult, and is not attempted here. Instead, this appendix to the judgment seeks to introduce the reader to some issues addressed in the 25 chapters. Given that objective, this introduction is merely intended to give some signposts to provide a path through the judgment.

Chapter 1 -- Introduction

[7394] It is recommended that a reader seeking to understand the judgment should read Ch 1 in full.

[7395] There is a brief description of the proceedings at the beginning of Ch 1. They are civil penalty proceedings for a breach of the statutory duty of care and diligence of company directors and officers, arising out of the collapse in May 2001 of a large Australian listed company, One.Tel, and its local subsidiaries, and the collapse or on-sale of overseas subsidiaries. The proceedings were initially brought against four defendants, but orders have been made in respect of two of them, and the remaining defendants are the first defendant, Mr Rich (who was joint chief executive), and the fourth defendant, Mr Silbermann (who was finance director). The remaining two defendants are referred to together as "the defendants", and the plaintiff is referred to as "ASIC".

[7396] In ASIC's statement of claim and at the hearing, both parties placed the weight of emphasis on the issue of the actual financial position of the One.Tel Group during each of the months of January, February, March and April, and to a lesser extent May 2001. ASIC sought to show, as the central component of its case, that the financial position of the group and the Australian and international businesses within it, in terms of cash, cash flow, creditors, debtors, earnings (EBITDA) and liquidity, was much worse in each of those months than the information provided to the board of directors revealed, and that forecasts of those matters provided to the board, particularly for the period to June 2001, had no proper basis. They contended, among other things, that the defendants were aware of the poor financial position of the group, or ought to have been, and failed to make proper disclosure to the board.

[7397] Some issues arising out of the size of the case are discussed at 1.3. Statistics are given at 1.3.1, including 232 hearing days (including 9 days in the UK), 16,642 transcript pages, 67 published interlocutory judgments and 4384 pages of final written submissions (including 202 pages of financial tables). There is a discussion of the factors contributing to the length of the case at 1.3.2, including:

•
the scope of the evidentiary case that ASIC set out to prove;

•
the nature of the defences;

•
the vigour with which the defendants resisted ASIC's case;

•
the need to travel abroad to hear some of the evidence;

•
problems arising from the fact that many documents were first obtained through the execution of search warrants issued in the investigation of suspected criminal offences, then sought to be used in civil proceedings;

•
difficulties about the admissibility of the evidence of ASIC's forensic accounting expert, Mr Carter, because he had prepared an earlier report for ASIC with access to information that he was later told to exclude for the purposes of his forensic report;

•
subsequent attempts by ASIC to prove its financial case by other means, especially the preparation of its own financial tables and the introduction of some new material during the cross-examination of the defendants;

•
difficulties arising out of the tender of documents without supporting evidence from any person as to what they were and what they meant;

•
difficulties posed by the volume of evidence concerning One.Tel's dealings with creditors;

•
the consequences of the decision by the High Court of Australia, shortly before the trial began, that the defendants were protected by penalty privilege, and were therefore not required to give discovery or provide their evidence to ASIC until after ASIC had closed its case, leading to various applications by ASIC for leave to adduce further evidence, some successful and some unsuccessful;

•
the tendency of both parties to seek to support their respective cases by detailed financial argument in final written submissions, leading to submission documents that were not only long but dense.

[7398] At 1.3.4 the judgment makes the point that, although the court is obliged to facilitate the just, quick and cheap resolution of the real issues in proceedings, there are some cases that are just very large and costly, and where the judge's primary duty is to see the case through to its conclusion.

Chapter 2 -- Pleadings

[7399] This chapter first gives a detailed account of the allegations made by ASIC against the defendants in its statement of claim (2.1), and then gives an account of the defences: 2.2. It will be seen that much attention is given in these documents to the schedule to the statement of claim, which makes detailed allegations about the true financial position of One.Tel in the period from January to April 2001.

[7400] The defendants submitted that large portions of ASIC's final submissions strayed outside its pleaded case, and since the defendants had not had a proper opportunity to deal with them, it would be unfair for the court to entertain them: 2.3. Some relevant legal principles are considered at 2.3.1-2.3.5. Those principles are applied to resolve the defendants' challenges to some 62 particular allegations made by ASIC in final submissions. Findings are recorded on each occasion. On some occasions the court has found that ASIC has exceeded its pleaded case in final submissions, raising serious matters affecting the reputations of the defendants and allegations of facts that they would have wished to answer if they had been given an adequate opportunity to do so.

Chapter 3 -- Issues about Evidence

[7401] In their written submissions, the defendants identified some "critical documents" upon which ASIC's case turned, and some "recurring themes" that they developed extensively in their submissions in answer to ASIC's case. Their recurring themes were that the documents relied upon by ASIC were susceptible to misunderstanding, and ASIC did not call witnesses who could have given evidence to explain what the documents were, whether they were in final form, and what they said: at 3.1, 3.2. By and large, the court has accepted the defendants' submissions: at 3.1, 3.2. The contentious documents include the management accounts for the Australian fixed wire/service provider business for January-April 2001, "profile summaries" of debtors, and Australian aged creditors reports extracted from the creditors ledger. In their final oral submissions, the defendants described these three categories of documents as the "three pillars" of ASIC's case: T 14952. For reasons given in the body of the judgment, the court has found that there are some problems about the evidence concerning these documents, that have made them unreliable to prove the matters that ASIC alleges.

[7402] There is a discussion of the legal principles concerning the onus of proof in civil cases, the evidentiary status of a company's business records, and the standard of proof in civil penalty cases: 3.3 and 3.4. This includes consideration of the status, in civil penalty proceedings, of the "Briginshaw" standard of proof. Then there is consideration of some evidentiary rules as to the circumstances in which the court, when it comes to weigh up the evidence presented at a hearing, will take into account the power of the respective parties to produce other and better evidence: 3.5. A particular application of this is the rule saying that if a party has not called evidence of a particular kind, the court may infer that the evidence would not have assisted that party's case: 3.6. The court has applied these principles in the present case, in circumstances where ASIC has not called a witness to explain management accounts and profile summaries: 3.7.

[7403] Another evidentiary rule is the rule of practice that if a party wishes to invite the court to disbelieve a witness, the grounds on which the evidence is to be disbelieve should be put to the witness in cross-examination so that the witness has the opportunity to offer an explanation: 3.9. That rule is explored and considered in its application to the present case.

[7404] The defendants made lengthy submissions directed to establishing that ASIC is subject to a special duty of fairness in the conduct of civil penalty proceedings, analogous to the duty of prosecutorial fairness in the criminal area, and that it had failed to discharge the duty: 3.10. ASIC denied that it was subject to any special duty of fairness of the kind alleged. The court has decided, following precedent in the Court of Appeal, that ASIC is not subject to any special duty of fairness in civil penalty proceedings of a kind that might lead to a miscarriage of justice, although as a Commonwealth agency it is expected to act as a "model litigant" in civil proceedings.

Chapter 4 -- Management, Directors, Financial Organisation and Share Price

[7405] This chapter makes findings on some matters that provide a backdrop for the narrative account:

•
senior management personnel: 4.1;

•
management structure and the defendants' methods of supervising management teams: 4.2;

•
key performance indicators (for example, cost of acquisition (COA), average revenue per subscriber (ARPU), gross margin, subscriber numbers, churn and operating expenditure (OPEX)): 4.3;

•
the executive directors and their backgrounds: 4.4;

•
board composition: 4.5;

•
non-executive directors: 4.6;

•
management communication with directors, including board papers, flash reports and daily emails: 4.7;

•
One.Tel's financial records (including the Adept financial system, the SAS, the I:drive, and various categories of documents that figure in the evidence): 4.8.

[7406] A matter worth particularly noting is the discussion of profile summaries at 4.8.6, where a finding is made that these documents are not reliable evidence to prove either the ageing of debtors of the Australian operations or the risk of payment default.

[7407] There is some information at 4.9 about the movement of One.Tel's share price in the period from 1998 to May 2001. It seems likely that management and the board of One.Tel paid close attention to share price movements.

Chapter 5 -- Witnesses

[7408] In this chapter the court responds to the submissions of the parties about the plausibility and reliability of the evidence of witnesses, including submissions about their credit.

[7409] The court has not accepted the defendants' attack on the credit of Mr Packer Jnr, but there were some problems with his evidence. He misconceived his role in cross-examination, which he apparently regarded as an opportunity to put his side of the story rather than to answer the cross-examiner's questions. The extent of his inability to recollect relevant events, both generally and in particular relating to the period from 18 to 28 May, weakened his evidence: 5.1.

[7410] Likewise there were some difficulties with the evidence of Mr Murdoch Jnr, relating to his very poor recollection of events, but no adverse conclusion was drawn as to credit: 5.2.

[7411] In the case of most other witnesses for ASIC, except for Mr Kleemann, the court has not accepted submissions going to credit and has taken the view that where the evidence of these witnesses conflicts with other evidence, it should make findings by weighing up all of relevant evidence and the context, without any general disposition to believe or disbelieve the evidence of the witness. There were some problems with Mr Kleemann's evidence (5.5), relating to his understatement of his role in reviewing the One.Tel business, both before and after October 2000, his lack of recollection of events in the period from 17 May onwards, his misleading account of the circumstances in which Mr Packer Jnr's request for a direct link to One.Tel's computer system was found not to be feasible, and the circumstances leading to his change of heart on about 6 May 2001 concerning his assessment of the One.Tel business.

[7412] As to the UK witnesses, Mr Howell-Davies was generally a reliable and helpful witness and there was no submission attacking his credit: 5.6. Mr Weston seemed to have poor recollection of even important events, but the court has not made an adverse finding as to credit: 10.19.15.3. Mr Werner's evidence was found to be unsatisfactory in various ways, particularly for vagueness, inconsistencies and implausibility, although no adverse finding has been made concerning his credit: 10.19.15.2. Mr Boaden was found to be a thoroughly unreliable witness, who gave implausible evidence. The court concluded that his evidence should not be accepted unless corroborated or uncontroversial: 10.19.15.6.

[7413] ASIC claimed that the credit of Mr Rich and Mr Silbermann had been severely damaged by a very significant quantity of matters that emerged from their evidence. As a result, ASIC submitted, their evidence should not be accepted unless adverse to their interests and corroborated by evidence other than from their co-defendant. ASIC claimed that they were prepared to say whatever they perceived would advance their case, regardless of the truthfulness and frankness of what they were saying. These submissions have been firmly rejected by the court, which has formed the view that the evidence of Mr Rich and Mr Silbermann should be assessed in its context without any disposition to believe or disbelieve it: 5.12 and 5.13.

[7414] The court noted that they were interested witnesses, fighting for their commercial survival, but that did not mean that the court was required to disbelieve them. The court found that Mr Rich had demonstrated that he was a very well-prepared witness, knowledgeable about the subject matter of his evidence, who responded to questions thoughtfully and clearly, sometimes even perceptively. This was notwithstanding the arduous circumstances of his cross-examination, extending over 25 days. His objective in the witness box was to understand precisely what the cross-examiner was asking him and to answer that precise question, an approach which is to be applauded rather than criticised. What ASIC claimed to be evasive answers were, upon close examination, examples of this concern to understand the question and answer it precisely. While at times his recollection of events was less specific than the evidence in his affidavit, this happened remarkably infrequently bearing in mind the length of the cross-examination and the detailed nature of the subject matter.

[7415] Mr Silbermann was not as impressive a witness as Mr Rich, and there were some inconsistencies and mistakes in his evidence, apparent lapses of memory, and even a measure of prevarication. Nevertheless the court formed the impression that he was trying to answer the questions that were put to him to the extent of his knowledge (though sometimes a little circumspectly), and like Mr Rich, he endeavoured to answer precisely the questions that were put to him.

Chapter 6 -- The Years 1995 to 1999

[7416] Evidence relating to the early years of One.Tel, including the major investment in the company by PBL and News, are set out in Ch 6. Apart from providing information going to an understanding of the businesses of the group, and to their rapid rate of expansion, this evidence provides information about the extent of Mr Packer Jnr's involvement in One.Tel from the earliest times.

[7417] The key business developments in that period are summarised in dot points at 6.1.2. They include the early substantial investment by interests associated with Mr Packer Jnr, One.Tel's business association with Optus, the admission of One.Tel to the official list of the Australian Stock Exchange in November 1997, One.Tel's success in an early Australian spectrum auction, its entry into the Australian fixed wire business, the development of the Next Generation strategy, and the investment by PBL and News in February 1999. That investment is further considered at 6.2.2.

[7418] The extent of Mr Packer Jnr's participation in One.Tel's business activities during the period is addressed at 6.1.3. A description of the businesses in 1999 is given that 6.2. The roles of Mr Packer Jnr and Mr Murdoch Jnr during 1999, and the contribution by Mr Kleemann, are addressed at 6.2.3.

Chapter 7 -- The Year 2000

[7419] This was the calendar year leading up to the months that have been the focus of attention in this case. There were some important events in that year, which had an impact on those months, and additionally the developments in the year 2000 contribute to an understanding of the businesses and to the role of Mr Packer Jnr.

[7420] Among the important events of 2000 were the following positive developments:

•
PBL and News made further investments in One.Tel by the exercise of options in May 2000: 7.2;

•
the arrangements between One.Tel, PBL and News included cross-promotional and joint marketing activities, including prepaid advertising;

•
One.Tel was successful in a major Australian spectrum auction in January 2000: 7.2;

•
One.Tel made an arrangement with Lucent to fund the cost of providing handsets to Next Generation subscribers: 7.5, where there are some detailed findings relevant to the company's cash position in later months; and

•
the rollout of the Next Generation network began pursuant to contracts One.Tel had entered into with Lucent Technologies in 1999.

[7421] There were also some negative developments:

•
One.Tel's share price more than halved in calendar 2000, under the influence of external factors such as the tech wreck, but also scepticism in the investment community as to One.Tel's prospects: 4.9;

•
One.Tel withdrew from a European spectrum auction when the price exceeded its budget and funding: 7.3;

•
One.Tel's initial success in acquiring local call subscribers through the introduction of its switch product (7.12) led to aggressive competition from other telcos;

•
a series of billing problems emerged, substantially affecting revenue (7.13), together with associated difficulties in collections: 8.3;

•
there were delays in the Next Generation rollout in Brisbane, Adelaide and Melbourne;

•
the third-party marketing agency called Axxess adopted unacceptable tactics to acquire subscribers, leading to complaints to the ACCC and a negotiated outcome in December 2000; and

•
the UK government delayed in the introduction of preselection, leading to One.Tel UK introducing "diallers" for its subscribers in the second half of 2000.

[7422] Other matters to be noted are as follows:

•
One.Tel developed its 2000/2001 business plans and they were presented to the board in September 2000: 7.16, where a detailed account is given;

•
Ernst & Young were appointed auditors by the annual general meeting in November 2000: 7.7;

•
there was an important briefing of Mr Murdoch Snr in October 2000: 7.8;

•
Mr Kleemann undertook some major reviews of One.Tel beginning in October 2000: 7.9, 7.18, which gives detailed information about these reviews;

•
the annual general meeting was held on 13 November 2000, providing a useful snapshot of One.Tel's businesses as summarised in some detail at 7.11.

Chapter 8 -- January 2001

[7423] At the beginning of January 2001, One.Tel was half way through a financial year in which its business strategy envisaged very significant financial progress, particularly with respect to Next Generation (8.1.1) and the international businesses (8.1.2). The company's business plans, placed before the board of directors in September 2000, had been revised, in ways identified at 8.1.5, but still they were very ambitious. They provided for massive improvements in earnings and cash flow in the ensuing months. Most of the businesses in the group were start-up businesses that needed to attain critical mass in terms of subscriber numbers and ARPU before turning cash and earnings positive, and the strategic plan was that the established businesses would fund those businesses to get them over that hurdle.

[7424] The business risks inherent in the business plans were recognised by management, Mr Kleemann and Mr Packer Jnr (8.1.6), and by the directors (8.1.7). The company had the support of PBL and News: 8.1.10. Mr Kleemann's reviews, completed in December/January, generally supported the conclusion that the businesses were "on track" under their business plans: 8.1.11.

[7425] The difficulties with the billings system experienced in October/November 2000 led to a concerted effort for a billing catch-up, which was evidently achieved by mid-January: 8.2. There was a review of collections practices and procedures in Australia, following the difficulty experienced with Axxess, and plans were made to transfer staff from the call centre to the collections team when the billing catch-up had been achieved, so as to improve collections: 8.3. The idea was conceived to appoint a third party provider of call centre resources called Vectus, which was subsequently appointed in February to focus on collections for customers between 30 and 60 days, in order to leave the One.Tel collection staff free to pursue collections of over 90 days, though Vectus was not able to commence operations until April. These developments were reported to the March board meeting: 8.3.

[7426] Mr Rich and Mr Packer Jnr had various discussions about the business in January, including a discussion at Mr Rich's holiday home on 3 January (8.6), a review of the business plans with Mr Kleemann shortly after 15 January (8.10), and further communications almost every workday (8.11). There is inconsistent evidence about what was said on these occasions, but generally the court has preferred the evidence of Mr Rich.

[7427] Mr Rich gave a briefing to Mr Packer Snr and Mr Packer Jnr on 15 January, evidently suggested by Mr Packer Jnr so as to address his father's concerns about One.Tel's cash position. The meeting was important, inter alia, because it led to the initiation of daily emails from One.Tel to Mr Packer Jnr, Mr Kleemann and others: 8.7. Mr Rich was aggressively questioned by Mr Packer Snr as to whether the ambitious budgets would be achieved, and Mr Packer Snr told him he had to reduce cash usage. After that meeting there were further meetings with Mr Murdoch Jnr and Mr Macourt and Mr Hartigan of News on 16 January (8.8), and the content of the daily email reports was formulated with the assistance of Mr Kleemann: 8.9.

[7428] One.Tel made a market announcement on 16 January 2001, at the suggestion of Mr Packer Jnr, which said that One.Tel's business was tracking very well and it did not need to raise cash: 8.12. There was a Macquarie Research Equities report that reviewed One.Tel in positive terms: 8.13.

[7429] The business plans were further revised in January, in the manner described in 8.4. In particular, in about the third week of January, Mr Hodgson and Mr Barnes prepared a "recut" of the fixed wire/service provider budget, according to which the originally budgeted EBITDA and cash flow figures would be achieved through lower acquisition costs, increased promotional activity, increases in margins and lower operating expenses: 8.4.3.

[7430] ASIC was critical of the January budget recut, claiming there was a significant revenue shortfall in December 2000 that was not reflected in the recut, and that the recut was not adjusted to take that shortfall into account when the half-yearly figures became available. Instead, ASIC said, the recut was inappropriately used as the basis for the January, February, March and April flash reports, and the March board papers, without regard to the true position.

[7431] Those submissions are considered at length in 8.18. The analysis at 8.18.1 leads to the conclusion (at 8.18.1.6) that there was a substantial variance between the recut and the December management accounts, though a substantial portion of the variance was explicable in some ways. As to whether the recut should have taken account of that variance when the figures became available, the conclusion is reached (8.18.2.1) that ASIC has not shown that the variance in December revenue should have led to a reconsideration of the January budget recut figures, for the detailed reasons there set out.

[7432] ASIC was critical of the defendants on the ground that the recut figures, which were essentially forecasts, were treated as actual figures for the purposes of flash reports: 8.18.3. That submission is subjected to a detailed technical analysis at 8.18.3.1-8.18.3.3, and is rejected. At 8.18.5 the court accepts the defendants' submission that there were witnesses who might have been called by ASIC to explain discrepancies between draft management accounts, flash reports and board papers, including Mr Barnes and Mr Holmes, and the absence of that evidence was to be taken into account in assessing whether ASIC had proved its assertions about the January budget recut.

[7433] Details of One.Tel's January board meeting are given at 8.14. The board received revised forecast figures but they were still very positive. Management's explanation of the difference between first and second half cash flows is considered at 8.14.12. There are also some observations about the tone and style of the board papers at 8.14.15, where the "bullet point" presentation and clipped summary language are noted. There is consideration of what was disclosed to directors before and during the meeting at 8.14.16 and 8.14.17.

[7434] One.Tel made a presentation of its preliminary half yearly results to the media and investment analysts on 1 February 2001. There is an account of the circumstances of preparation of that presentation, and its content, at 8.15.

[7435] At 8.16 the judgment sets out a summary of One.Tel's financial position as at 31 January, as disclosed to the board and the market. ASIC's submissions drew attention to the difference between the group cash balance of $335 million at 30 June 2000 and the cash figure at 31 December 2000, which was $101 million according to the January board papers.

[7436] The explanation for that difference is considered at 8.17. The point is made that the sheer fact that in the January board papers management's forecasts for second-half EBITDA were very substantially better than the first half was not, in itself, reason for rejecting management's forecasts. Very substantial improvements had been built into the September budget figures as accepted by the board, and amended to January. As Mr Packer Jnr said in evidence, by January 2001 One.Tel was at a critical stage in its history, and by February "the rubber was hitting the road and it wasn't time for talk; it was time for results". The directors needed to consider whether, in light of the estimated half-year results, there was any basis for revising the reasoning that had led them to adopt the ambitious budget of September, revised in January, and whether that reasoning continued to be soundly based.

[7437] At 8.17.2 the point is made that it is inaccurate to say, as ASIC, did, that there needed to be "a major turnaround in performance" in the 6 months to June 2001 if One.Tel was to survive. The correct proposition was that the company needed to achieve its budget.

[7438] Throughout its submissions, ASIC compared estimated or actual figures for cash flow and EBITDA with One.Tel's September 2000 budget and business plans. At 8.17.7, the court considers whether it is appropriate to refer, as ASIC has, to superseded business plans in order to track performance against budget. The conclusion is reached that as a general proposition, actual results should be assessed by reference to revised business plans, not the original, superseded business plans.

[7439] At 8.17.9 that there is consideration of the question whether One.Tel's billing delays were an adequate explanation of its January cash usage shortfall.

Chapter 9 -- One.Tel's Financial Circumstances at the end of January 2001

[7440] This short chapter considers whether ASIC has proven its pleaded case concerning the financial circumstances of the company as at the end of January.

[7441] Particular attention is given to the "true" cash and creditors and debtors position. The statement of claim alleges that the group cash available to pay creditors was $71 million, but the evidence points to a figure of at least $81 million. It alleges that the cash available in the Australian operations to pay creditors was about $22 million, but the evidence suggests the figure was about $37 million. ASIC alleges overdue Australian creditors of $24 million but that figure fails to make adjustment for terms of trade or disputes, and so the court concludes that it would be unsafe to rely on that figure. Similar difficulties arise with respect to the alleged amount of $49.7 million said to be overdue in the UK. In the result, ASIC has not made out its pleaded case in relation to any of the matters constituting the true cash and creditors position for January 2001. The position regarding debtors is considered in Ch 19 and the position regarding EBITDA is considered in Ch 20, where conclusions are drawn contrary to ASIC's submissions.

Chapter 10 -- February 2001

[7442] Among the important matters affecting February 2001, were:

•
the half-yearly results;

•
the billing delay in the first 2 weeks of February;

•
the February funding requirement;

•
the transfer of $26 million from the UK to Australia at the end of the month, and the evidence leading up to that transfer;

•
dealings with creditors in the UK after the $26 million transfer, and alleged "management" of creditors;

•
the ASX announcement and media release on the final half-year results on 27 February 2001; and

•
communication between Mr Rich and Mr Packer Jnr, and the "hospital meeting" on 15 February.

[7443] The early part of Ch 10 considers the half-yearly results to December 2000. Ernst & Young produced their review closing report concerning those results, containing a form of "negative assurance": 10.5. On the same day that the company released its preliminary half-yearly results, 1 February, Mr Rich and Mr Silbermann made a presentation on those results to investment analysts: 10.2. The presentation made forecasts of group cash usage for the financial year to June 2001 of $189 million, a group cash balance at 30 June 2001 of $75 million, and a Group EBITDA loss for the financial year to June 2001 of $91 million. Those figures were considerably more conservative than the figures given to the January board meeting.

[7444] There was substantial evidence about a billing delay in February, which appears to have had some serious effects on cash flow. It appears that the billing system was down for a couple of days towards the end of January because of a problem with database corruption in the system. An internal quality assurance program had identified some minor errors in customer bills, and the ACCC had raised a number of customer complaints with Mr Rich and Mr Packer Jnr when they visited the commission in Canberra on 31 January. Mr Rich and Mr Beck accordingly decided to keep the system down for a while so that these problems could be sorted out. In fact, the system was down for about 2 weeks. The matters dealt with at 10.6.

[7445] ASIC sought to rely on the series of documents dealing with the "Funding Requirement", and the defendants strenuously objected. Generally ASIC sought to use these documents to show that there was a sizeable variance in cash flow between them and the January board papers. There is a detailed technical analysis of the documents and submissions at 10.7, which concludes that the documents do not prove the matters for which ASIC relied on them.

[7446] Relying on the "Funding Requirement" documents and other evidence, ASIC alleged that there was evidence that One.Tel was deferring payments to creditors in the period from October 2000 to February 2001. The allegation is considered at 10.8, in considerable detail. The court's general conclusion is that in the absence of an explanation of these documents from a witness, it would be unsafe to assume that they identified any actual deferrals of payments otherwise than in the ordinary course of business.

[7447] Beginning at 10.10, the discussion in Chr 10 reviews evidence as to what appears to have been the deteriorating cash position in the Australian operations, no doubt contributed to by the billing delay, and the need to address that cash problem by transferring funds from the UK. Eventually $26 million was transferred from the UK to Australia at the end of February. There is an important issue as to whether that transfer was pre-planned by Mr Silbermann before he travelled to the UK on 19 February, or (as the defendants said) the decision to make the transfer was made no earlier than 27 February.

[7448] There is consideration of the evidence of Ms Randall concerning her daily cash flow spreadsheets and a discussion with Mr Hodgson on 20 February about "managing" creditors, at 10.10, 10.11 and 10.12. Her cash flow spreadsheet 2002.xls, which appeared to show a weakening cash position in the Australian operations, is considered at 10.12.

[7449] There is evidence concerning Mr Silbermann's visit to the European businesses in February 2001, at 10.17. Mr Silbermann sent some emails to Mr Rich and others on 22 February from the London office, dealing with a forecast variance in EBITDA versus budget. The emails also addressed One.Tel's claim against British Telecom for a "dialler rebate" to compensate for additional costs incurred as a result of BT's delay in introducing preselection. The dialler rebate became an important matter in later months, as explained that 18.11.1.

[7450] Mr Silbermann's email to Mr Rich and others of 21 February, "Europe Cash", is considered at 10.17.4. ASIC submitted that the email was sent by Mr Silbermann to enable consideration to be given to the transfer of funds from the UK to Australia, but the court's conclusion at 10.17.4 is that there was no specific proposal to transfer a quantified amount from the UK to Australia until 27 February, and nothing in the email of 21 February or the surrounding circumstances would justify the conclusion that it was prepared for the purposes of a cash transfer from the UK to Australia.

[7451] The defendants' evidence about the $26 million cash transfer was that it was not an unusual matter, and was to be understood in the context that cash was managed by One.Tel on a group basis and the UK entity was substantially indebted to the parent entity on intercompany loan. That led ASIC to suggest, inaccurately, that the defendants were claiming that the Australian cash balance was not a matter of interest and concern to them, but as the court observes at 10.17.4.3, the evidence did not contain any suggestion that the performance of the Australian operations in terms of cash flow was a matter of no interest to the defendants or that they saw no need to monitor Australian cash flow.

[7452] ASIC invited the court to make a series of findings about the $26 million transfer, set out at 10.18. ASIC claimed, among other things, that:

•
the defendants formed the view by mid-February that the Australian operations were likely to require a cash transfer from the UK;

•
Mr Silbermann gave instructions to Mr Werner to defer payment to UK creditors in order to build up the UK bank balance to permit the transfer, and Mr Rich was aware of this;

•
the need to ensure that cash transfer occurred was one of the reasons for Mr Silbermann's trip to the UK; and

•
the defendants knew that senior European executives objected to the transfer and that it would be prejudicial to the UK operations.

[7453] The exploration of the evidence concerning these allegations takes up a large part of Ch 10 of the judgment: see 10.18, 10.19. That part of the judgment involves consideration of two important emails sent by Mr Hodgson to Mr Silbermann on 27 February, and consideration of the conflicting evidence of the UK witnesses, Mr Werner Mr Weston and Mr Boaden, on the one hand, and Mr Silbermann and Mr Rich on the other hand. That leads to findings about the reliability of the evidence of those witnesses and their credit, as noted in Ch 5. The court's conclusions are expressed at 10.19.17, by reference to ASIC's allegations. The overall conclusion is that ASIC's allegations have not been proven.

[7454] A matter on which there was considerable evidence was whether the UK cash balance rose during February, because of delayed payments to creditors. If it did, then that would corroborate Mr Werner's claim that he was told by Mr Silbermann to delay payments to creditors in order to hit certain cash flow targets for the European businesses. The evidence on that matter is considered in 10.20. The court concludes that there does seem to have been a reduction in creditor payments in the UK operations in February, and a consequent build-up of UK cash, but that happened by virtue of non-payments to a small number of large creditors, principally BT and WorldCom but also GTS and Cable & Wireless. Evidence is reviewed which suggests that there were reasons for those non-payments, not related to any desire to build up February cash to permit a transfer: 10.20.1.8.

[7455] In order to assess whether the transfer of the $26 million at the end of February prejudiced the European operations, it is necessary to identify the quantum of overdue European creditors in that month. That issue is addressed in 10.21. The evidence referred to by the defendants singled out a small number of large creditors and identified substantial evidence of disputes, and in the case of one of them (BT Carrier), a cross-claim. There was also evidence that as a matter of practice, carrier creditors provided a "commercial indulgence" to telecommunications companies by not requiring payment on strict contract terms. The overall conclusion is that the evidence referred to by the defendants is an obstacle to concluding that the transfer prejudiced the ability of the UK operations to pay creditors.

[7456] At 10.22 the court considers ASIC's claim that the transfer of $26 million was a highly unusual event, and the defendants' evidence that the transfer was merely an instance of the management of cash on a group basis. In circumstances where the UK operations were indebted to the parent for $80 million on intercompany loan, the court's conclusion is to accept the defendants' evidence on this matter.

[7457] The question of disclosure of the $26 million to the board and individual directors is addressed at 10.23. On the evidence that the court has accepted, the $26 million transfer was an intra-group transaction in circumstances where the transferring entity was indebted to the parent entity for substantially more than the amount transferred, and cash was managed on a group basis. Further, the cash was needed in the Australian operations because of the billing delay for the first 2 weeks of February, and also because One.Tel was required to make a substantial payment to Lucent as a result of a negotiated resolution of disputes reached on 27 February. Both problems were short-term problems in the sense that a billing catch-up was under way to make up for the delay, and the Lucent payment could be substantially recouped out of the funding arrangements, as in fact happened. In those circumstances, if Mr Rich had disclosed the transfer to Mr Packer Jnr, he would have been unlikely to have treated it as a matter of any significance.

[7458] The defendants acknowledge that cash became tight in the second half of April and from that time there was a need to "manage" creditors in the sense of matching outflows with inflows to keep bank accounts in balance, but they denied that there was any such problem in March or early April. ASIC relied on some evidence of "management" of UK creditors after the $26 million transfer, and pointed to a series of emails sent by Mr Werner to Mr Silbermann in March and April, said to be prepared for the purposes of that exercise: 10.25 and 10.26. There is a conflict between the evidence of Mr Weston and Mr Werner, on the one hand, and Mr Silbermann on the other, as to whether the process of "managing" creditors by choosing not to pay some of them until after the end of the month, began in March shortly after the $26 million cash transfer, or substantially later, in mid-April. The court concludes at the end of 10.25 that it has not been shown that any documents, of a kind that might be used for the purpose of conducting detailed creditors discussions, were in existence before 24 April, suggesting that Mr Weston and Mr Werner were wrong to say that the process of managing creditors in dealing with creditors complaints began as early as March.

[7459] One.Tel released its half-yearly results to the Australian Stock Exchange, accompanied by a media release, on 27 February 2001. The media release was in positive terms, as regards revenues, cash and subscriber numbers. As to cash, it said that "One.Tel is focused and on track to become cash positive as forecast by June 2001".

[7460] ASIC compared the positive tone of the media release with Mr Hodgson's "heads up" email of the same date, which presented a more gloomy picture. These matters are considered at 10.27. The court concludes that on the same day as the media release, but later, Mr Hodgson informed Mr Silbermann in his email that there was a variance of $37 million between the January board and actual February cash flow, because of delayed billing runs and an unbudgeted $5 million payment to Lucent, and that the March forecast would be only slightly better than the board forecast because of an unbudgeted $10 million payment to Lucent, though he was still working on the March inflows. Mr Hodgson continued to work on the March figures after the email, and by about 1 March he had revised the March cash flow forecast and was predicting a billing catch-up of just under $20 million. Moreover, while there were two Lucent unbudgeted payments amounting to $15 million, the European and Hong Kong results in February exceeded budget by $13 million, principally because of vendor financing receipts and a favourable movement in the currency exchange rate. In those circumstances, Mr Hodgson's email of 27 February was not necessarily incompatible with the "on track" statement in the media release.

[7461] ASIC's pleaded allegations about the media release are not about the general air of exuberance conveyed by the document. The pleading hinges on a particular construction of the "on track" statement, namely that it told the market that One.Tel would become cash positive on a month-by-month basis in June 2001. That is an odd construction of the statement, because monthly cash flow figures were not released to the market, which generally received only six-monthly results. The monthly cash flow forecasts given to the January board contemplated that after June, there would be 2 negative months, namely July and August, so if the "on track" statement meant that there would be positive cash flow each month after June, there was no reasonable basis for it in light of the board figures. But the January board figures forecast positive cash generation over the 6-month period to December 2001, and so if the "on track" statement was about becoming cash positive over the periods for which figures were released to the market, it would be supported by the January board figures. The reasons for the court preferring the latter construction are given at 10.27.4, and the factual basis for the statement, as construed, is explored at 10.27.6.

[7462] Communications between Mr Rich and Mr Packer Jnr during February 2001, on a daily basis, are reviewed at 10.28, where findings are made about conflicting evidence. The meeting of the defendants with Mr Packer Snr by his hospital bed on 15 February is considered at 10.29, where challenges to Mr Rich's evidence are considered.

Chapter 11 -- One.Tel's Financial Circumstances at the end of February 2001

[7463] This chapter contains some important findings that are relevant to the financial circumstances of the company at the end of March and April, as well as February.

[7464] One such matter is the significance of daily cash flows spreadsheets, considered at 11.1.1. The court finds that until March 2001, senior management including the defendants relied on the business plans/budgets, as updated by the business units, for the purpose of cash flow forecasting. The position changed in March, when it became plain that because of the impact of the billing delay in February and other matters, the business plans for the Australian operations would not be an adequate foundation for forecasting, and so Mr Hodgson had recourse to a cash flow spreadsheet for the purpose of preparing forecasts for the March board papers.

[7465] The court makes some findings about February cash flow at 11.1.6, noting the variance from the September budgets, which had been superseded in some ways.

[7466] ASIC's allegations about Australian and UK overdue creditors at 28 February are considered in detail at 11.2. The proper treatment of unpresented and unreleased cheques is considered at 11.2.3. The question whether month-end aged creditors should be adjusted for late posted invoices, and if so whether the amount of late posted invoices could be reliably calculated, is considered at 11.2.4, the main conclusion being that ASIC's attempt to quantify late posted invoices was unsuccessful.

[7467] At 11.2.5 the reliability of the Australian aged creditors reports is considered in detail. After an examination of some serious problems including errors in due dates and lack of reconciliation of the creditors ledger, as well as problems about usual business terms and disputed debts, the conclusion is reached that the Australian aged creditors reports were unreliable in ways that overstated the amounts of due and overdue creditors, for various stated reasons: 11.2.5.8. The defendants' attack on the reliability of the UK creditors reports was less successful, although some errors in due dates were exposed and the impact of foreign exchange movements was occasionally material, and amounts "overdue" were affected by the existence of extended terms and the level of disputes: 11.4. ASIC's claim that delayed payment of carrier invoices made One.Tel "vulnerable to a change in attitude of creditors" is considered at 11.4.1.2, where the general conclusion is that the assessment of a company's vulnerability to a change of creditor attitudes, when it chooses for commercial reasons to take advantage of extended credit, is a matter best left to the business judgment of the executives concerned, provided that the elements of s 180(2) are present.

[7468] The court's summary of its conclusions regarding creditors is given at 11.4.4. The court's findings as to cash usage and creditors are set out at 11.5. Earnings are dealt with in Ch 20, and doubtful debts in Ch 19.

[7469] At 11.6 the court considers ASIC's submission that the company's cash requirement at 28 February, to cover the period of 9 months to November 2001, was $270 million. Each component of ASIC's calculations was challenged by the defendants. The court makes rulings on those matters at 11.6.1-11.6.7. An important part of those findings relates to monthly cash usage, which ASIC had estimated at $20 million per month: 11.6.5. The court reviews the evidence as to appropriate figures and prefers a range constituted by the management and adjusted figures in the Miller/Green draft report of 8 May 2001. In the result, the court's finding as to the group cash requirement from February to November 2001 is in the range from cash generation of $16.8 million to cash usage of $57.9 million, plus an unknown amount for Australian overdue creditors, not exceeding $29 million. This is much less than ASIC's figure, and so ASIC has not proven its case.

[7470] The question of the board's knowledge of the cash, cash flow, and earnings and doubtful debts position is considered at 11.7. That has to be assessed in light of the court's rejection of ASIC's claim that the cash requirement to November was $270 million. The grounds for concluding that the board was provided with adequate knowledge of these matters are there set out.

Chapter 12 -- March 2001

[7471] The first part of Ch 12 deals with Ms Randall's daily cash flow spreadsheets up to 1203.xls, and the circumstances affecting preparation of that spreadsheet, which showed a considerable improvement in cash flow compared with her earlier work: 12.1. After reviewing the changes produced by 1203.xls, the court concludes that ASIC has not shown that the revision of figures was the result of a deliberate process of deferral of creditors of the Australian operations. There is an issue as to whether Mr Silbermann was responsible for the changes made in 1203.xls, but he gave evidence that he was not, which the court has accepted: 12.1.2.4.

[7472] Then there is consideration of the conflicting evidence of Ms Randall and Mr Silbermann as to the monitoring of daily cash flow (12.2) by daily cash flow spreadsheets, cash flow variance reports and deferred payments listings. Ms Randall's evidence was broadly along the lines that she acted under instructions from Mr Silbermann to manage creditors and to defer creditor payments, matters that Mr Silbermann denied. After a detailed review of the conflicting evidence and the submissions of the parties, the court concludes (at 12.2.8.5) that the defendants partially succeeded in contending that amounts "deferred" according to the March and April deferred payments listings were not in fact presently due and owing on the dates from which they were moved. Moreover, the deferrals recorded in the listings were for the most part the product of particular spreadsheet revisions (1203.xls, 3003.xls and 0304 amended.xls) rather than a day-to-day process of deferrals under Mr Silbermann's instructions, as alleged by Ms Randall. It is not established that Mr Silbermann had any involvement in the deferrals affected by 1203.xls and 3003.xls, and in the case of at least five of the six deferrals under the heading "Include after amended" in the April deferred payments listing, where he did have an involvement, there were legitimate business reasons for deferring the payments.

[7473] Mr Silbermann left a voicemail message on 20 March 2001, in which he referred to the month-end cash balance for Australia being "whittled down" every day and then "we just manage a few more creditors and spread cash flow out a bit" to make sure that the month-end number is achieved. There were extensive submissions about this voicemail, which are addressed at 12.6. After considering those submissions, the court concludes at 12.6.2.2 that Mr Silbermann was speaking of a process of "smoothing out" end of month variances by delaying payments to a few creditors for a few days over month-end, rather than the much larger-scale and longer-term deferrals of creditors alleged by ASIC.

[7474] Mr Keeling also left a voicemail message on 20 March, in which he referred to an "overhang" which was about to come crumbling down if in fact WorldCom "wanted their $16 million". The submissions on this voicemail (considered at 12.6.3) are mainly about whether the "overhang" to which he referred was a general overhang of debts to European carriers, or was specifically a reference to WorldCom. The court has preferred the latter construction.

[7475] One of the major issues considered in Ch 12 relates to the spreadsheet 2403C.xls. It was created in the fourth week of March and was used for the purpose of forecasts in the March board papers. It contained a very significant uplift in forecast inflows for April, May and June. The submissions delved into the components of the forecasts and the working papers lying behind the spreadsheet. The matter is considered at length in the judgment at 12.7. Essentially the court concludes that ASIC has not demonstrated that the principal adjustments to inflows made by 2403C.xls were without proper foundation.

[7476] There were three principal adjustments. The first was an adjustment to "normalise" the February baseline (12.7.4), by adding to the February figures an adjustment to reflect billings that should have been made in February but were not, and a mathematical adjustment to normalise the figures to a 30.5-day month. The second adjustment was to add $19.55 million to each of the April and May billing totals, to reflect the $40 million of unbilled data allegedly discovered by Mr Beck shortly before the March board meeting and reported to the board. The third adjustment was to add $21 million to April inflows from operations to reflect forecast receipts from three sources. The first source was re-presentation of direct debit dishonours in March, which had resulted from the shortened billing cycles that had been adopted for the billing catch-up after the February delay in billings. The second source of adjustment was a forecast increase in collection of CLEC debt. The third source was to reflect forecast additional cash inflows through collection initiatives and resources that were being deployed in April and May. ASIC sought to establish that none of these adjustments had any proper foundation, but after examining the detailed evidence the court has reached the conclusion that ASIC failed to destroy the defendants' explanations for the various items of adjustment: 12.7.10.

[7477] Another substantial issue in March related to forecast European cash flows: 12.9. ASIC claimed that there was a "wealth of evidence" that in late March the relevant European executives were forecasting European cash flow for April, May and June that was considerably worse than the figures presented to the March board meeting. The so-called wealth of evidence appears to be a series of European officers' forecasts, in the draft European business plans, and several emails from Mr Werner. Essentially the defendants' evidence was that the figures being generated by the European officers postulated full creditor payment in April, producing negative cash flow in that month, and that, according to the defendants, was a proposal to be further discussed. The court accepts the defendants' evidence: 12.9.3, 12.9.4.

[7478] The board meeting held on 30 March 2001 is discussed at 12.10, where detail is provided of the presentations and discussion. As to the statement by Mr Beck to the board that management had estimated there was $40 million of call data that had not been billed, the issue of the $40 million of missing call data is considered in detail at 20.5.

Chapter 13 -- One.Tel's Financial Circumstances at the end of March 2001

[7479] The court's consideration of the financial circumstances of One.Tel at the end of March follows on from the reasoning adopted in respect of February. ASIC claimed that the cash requirement to November 2001, considered as at 31 March, was $276 million, an increase of $6 million over the February requirement even though the March requirement was for only 8 months: 13.5.5. Applying the reasoning adopted for February, the court concludes that the cash forecast to November was in a range from cash generation of $1.1 million to cash usage of $73.6 million, plus an unknown amount for Australian overdue creditors not exceeding $41 million: 13.5.6. Even if high end of cash usage in that range is adopted, and the full amount of ASIC's estimate for Australian creditors is used, the cash requirement is still less than $132 million, the amount of the proposed rights issue.

[7480] The court's conclusions as to the board's knowledge (13.5.7) are similar to its conclusions in respect of February.

Chapter 14 -- April 2001

[7481] Chapter 14 begins by reviewing One.Tel's declining cash balance in April, and noting some of the reasons for the decline. There is an issue as to when Mr Rich came to develop concerns about the cash position, addressed at 14.1.3.

[7482] At 14.2, consideration is given to the Merrill Lynch presentation and the media release of 4 April 2001, in which Mr Rich was quoted as saying that "the company is on track to a positive cash position by 30 June 2001, as forecast", and that it was "tracking very well against forecasts that were initially made by management in August 2000". There is an issue as to whether the latter statement refers to internal forecasts made in the September business plans, or forecasts made to the market in an announcement on 11 September. The court concludes at 14.2.1 that the media release was probably referring to the forecast made to the market on 11 September, and subsequently refreshed. Mr Rich gave evidence as to his justifications for the April announcement at 14.2.3.

[7483] At 14.5 there is a discussion of the computer theft that occurred in One.Tel's UK premises, and the impact of that event on the company's cash flow.

[7484] At 14.6 there is an account of the efforts made by One.Tel management to find missing data, and the progress of PricewaterhouseCoopers' revenue assurance work during April. At 14.7 there is an account of the state of collections during April and the problems of direct debit dishonours and CLEC debt. At 14.8 there is an account of discussions with Optus about a proposal to sell the service provider subscriber base.

[7485] There was an important meeting between Mr Rich and Mr Packer Snr and others on 12 April, which is dealt with at 14.10, in which Mr Packer Snr insisted in graphic language that One.Tel should stop making connections. Mr Rich subsequently investigated the effect on cash usage of a reduction in Next Generation connections: 14.11.

[7486] The question whether there were changes in the carrier market in late March and early April which led to a tightening in carrier credit terms in Europe from about mid-April is considered at 14.12, and also at 13.3.5.

[7487] Mr Rich had dinner with Mr Packer Jnr on Easter Sunday evening, 15 April 2001 and they had a discussion in which Mr Packer Jnr expressed his frustration at his father's return to control of the Packer companies: 14.15. They discussed the cash position and agreed that the cash buffer was too tight, and they considered ways of addressing the problem.

[7488] On Easter Monday, 16 April, Mr Rich, Mr Silbermann and Mr Hodgson met at One.Tel's meeting room to review cash flows for the rest of April and to a lesser extent, May. The product of their work was the daily cash flow spreadsheet 1104jrmssh.xls. That work is considered extensively at 14.16. There are issues about the relationship between that spreadsheet and 2403C.xls, which are explored at 14.16.6.1. It appears, contrary to ASIC's submissions, that the $21 million April inflow in 2403C.xls was to a degree distributed over other lines in 1104jrmssh.xls and did not simply disappear.

[7489] Mr Rich was called to a meeting with Mr Packer Snr on 19 April at which Mr Packer Snr expressed his concern that One.Tel would run out of cash: 14.23. The growing concern in PBL/CPH about One.Tel's cash position evidently led to the engagement of Mr Miller of PBL and Mr Green of CPH to conduct a review, which they began on about 20 April: see 14.21. Mr Miller was briefed on billing issues on 19 April, together with Mr Kleemann: 14.22. There is evidence about the Australian part of the Miller/Green review at 14.26, from which it appears that the review was thoroughly conducted without any impediment on the part of One.Tel management. Mr Hodgson was required to complete some EBITDA numbers for the purposes of the review, and he did so in the April reforecast which is considered at 20.4: and see 14.28.

[7490] Ms Ashley, an accountant who worked on the billing team at One.Tel, carried out some work referred to in the evidence as a margin analysis, commencing on about 5 April after a meeting with Mr Rich. There is inconsistent evidence as to precisely when the meeting occurred (14.27.4) and why the margin analysis was undertaken (14.27.5). The work that she carried out, summarised in a document known as comparison.xls, appeared to show a significant shortfall against budget in the fixed wire business for January and February, because the "call mix" between low margin local calls and higher margin long-distance calls was different from the call mix that had been forecast: 14.27.8, 14.27.9.

[7491] There are issues in the evidence about whether the analysis was correct (14.27.10, 14.27.14) and whether the results could be explained (14.27.11). Mr Rich's response to her work was to have some doubts about the analysis but to recognise that steps would immediately need to be taken to address the imbalance in call mix, and so various ideas were developed: 14.27.12.

[7492] ASIC claimed that Mr Rich and Mr Silbermann should have established a better monitoring system for margin and should have undertaken the margin analysis earlier, but the evidence has led the court to find that there was a system in place in which Mr Spratt had the responsibility of considering margins and traffic mix and drawing attention to issues: 14.27.13.1. ASIC claimed that there were indicators of a margin problem at an earlier stage: 14.27.13.3. The court's conclusion is that while a management accounts analysis might have been undertaken that would have revealed some deterioration in the call mix, it has not been shown that in the circumstances existing in early March or before that time, such an analysis should have been undertaken. Some reasons why the shortfall in expected gross margins for the fixed wire business was not detected until April 2001 are put forward in the defences, para S36(g(v), considered at 14.27.16.

[7493] Mr Silbermann began monitoring and managing cash flows closely from about 23 April, according to his evidence, but Ms Randall said that this activity began much earlier. The court has concluded (14.29.1) that the process began after the spreadsheet 1104jrmssh.xls was prepared and carrier creditors tightened their payment terms in the UK and Europe, and therefore Mr Silbermann's evidence is preferred on that point. As part of the process of monitoring cash flow, a summary daily group cash flow forecast for April and May, which is called "the Global Forecast" in the judgment, was prepared and kept up to date. ASIC's criticisms of that document are dealt with at 14.29.3.

[7494] On 21 and 23 April Mr Packer Jnr and Mr Rich had discussions about the prospect of a capital raising supported by PBL and News. There is some inconsistency in their evidence, which is addressed at 14.30. It appears that the idea of a cash injection from PBL and News was developed rapidly after it was discussed by them. Mr Rich endeavoured to discuss the issues with Mr Murdoch Jnr, with limited success: 14.32. He was able to have a telephone conference with Mr Keeling and Mr Howell-Davies on 26 or 27 April.

[7495] Mr Rich and Mr Keeling met at Mr Kleemann's home on Saturday 28 August to discuss preliminary figures that Mr Miller had put together for the Australian businesses, and Mr Miller attended. Mr Miller and Mr Green left for London on 29 April, where they interviewed UK executives and reviewed the businesses.

[7496] Therefore by the end of April, active proposals were being developed for a capital injection by PBL and News, and Mr Miller and Mr Green were well under way in the review of One.Tel's Australian and international businesses.

Chapter 15 -- One.Tel's Financial Circumstances at the end of April 2001

[7497] As with March, the court's consideration of the financial circumstances of One.Tel at the end of April follows on from the reasoning adopted in respect of February. ASIC claimed that the cash requirement to November 2001, considered as at 30 April, was $310 million, an increase of $40 million over the February requirement even though the April requirement was for only 7 months: 13.5.5. Applying the reasoning adopted for February, the court concludes that the cash requirement to November was in a range from zero to cash usage of $75 million, plus an unknown amount for Australian overdue creditors not exceeding $66 million: 15.6. If the high end of cash usage in that range is adopted, and the full amount of ASIC's estimate for Australian creditors is used, the cash requirement is only $9 million more than the contemplated cash injection of $132 million.

[7498] The court's conclusions as to the board's knowledge (15.7) are similar to its conclusions in respect of February.

Chapter 16 -- May 2001

[7499] May started badly for One.Tel for various reasons, the predominant one being that the group cash balance at the end of April had fallen well below the figure forecast in the March board papers, and was putting at risk the market forecast of a cash balance of $75 million as at 30 June. There was growing concern at PBL/CPH and on the part of Mr Packer Jnr about One.Tel's cash position. There were various reasons for the cash decline, some of which suggested that the cash problem was at least partly a matter of timing. Nevertheless, the poor cash result strengthened Mr Packer Snr's concern that One.Tel was going to run out of cash: 16.1. Concerns were evident in Mr Rich's discussions with Mr Packer Jnr in early May: 16.5. In one of those discussions the possibility of a bridging facility was raised to assist One.Tel until the proposed rights issue could be put in place, and on another occasion Mr Packer Jnr told Mr Rich, "You guys may have to go".

[7500] In the first few days of May, after Mr Hodgson had completed his revised forecast for the Australian fixed wire/service provider business, he turned his attention to preparing a revised business plan for that business: 16.6.1. Mr Miller and Mr Green wanted revised management figures for the purposes of their review. A draft plan was sent to Mr Miller, providing for forecast EBITDA for that business for the year to June 2001 of only $20.26 million, compared with the March board papers where the forecast was $52.19 million. Mr Kleemann noticed the lower EBITDA figure and he called Mr Silbermann, who told him the document was a draft that should not have been sent out. Mr Rich told Mr Packer Jnr that the document should not have been sent out and was an incorrect draft. He also telephoned Mr Kleemann and they agreed to meet on Sunday 6 May at Mr Kleemann's house.

[7501] The revised draft business plan was circulated on 5 May, the EBITDA figure to June 2002 having become $44.94 million: 16.6.2. At the meeting at Mr Kleemann's house there was a discussion about various management initiatives that had apparently been reflected in the revised forecast. Mr Kleemann's evidence was that up until the meeting of 6 May, he thought One.Tel's business was viable notwithstanding its cash difficulties, which he regarded as a timing issue caused by billing problems. But he said that at this meeting, he lost confidence in the integrity of the information previously provided to him by One.Tel. He claimed to have said that he could not have any confidence in the new figures, which were all about a new business rather than the continuation of a tried and true existing business. Mr Rich and Mr Silbermann denied that Mr Kleemann said any such thing. The court has decided to prefer their evidence to Mr Kleemann's on this matter, for reasons explained at 16.6.3.

[7502] Mr Miller and Mr Green had prepared a draft report by about 8 May, referred to in the judgment as "the PBL Adjustments spreadsheets". The documents presented management figures and, additionally, PBL adjusted figures, which were substantially lower. Details are given at 16.10. Mr Rich and Mr Silbermann were critical of the PBL adjustments: 16.10.3.

[7503] ASIC made submissions designed to show that there were difficulties in the path of the Miller/Green investigation that had the effect that their figures were not based on full information and, though substantially lower than management's figures, were nevertheless too high: 16.10.4.1. The court has not accepted ASIC's submissions, for the reasons there given.

[7504] The PBL Adjustments spreadsheets were eventually presented to the board on 17 May, with an annexure to the board papers described as "One.Tel's notes to PBL Adjustments", which were handwritten notes: 16.10.5.

[7505] Subsequent events up to the 17 May board meeting can only be briefly noted in this introduction:

•
Mr Rich, Mr Keeling and Mr Silbermann met to discuss the PBL Adjustments with Mr Miller and Mr Green but they made very little progress: 16.11;

•
Mr Rich had a telephone discussion with Mr Howell-Davies and Ms Kekalainen-Torvinen on 11 May to update them on the PBL cash review, and there appears to have been a failure of communication about a "$40 million gap in revenues" (16.13), and subsequently a note was provided to Mr Howell-Davies dated 14 May which made some contentious allegations about the causes of One.Tel's difficulties: 16.13.3;

•
Mr Murdoch Snr, Mr Murdoch Jnr and Mr Packer Jnr met in Cannes on 9 May and Mr Packer Jnr said the position was worse than PBL had thought, but there was no underlying problem with the business, and they discussed an underwritten rights issue for $130 million on the basis that Mr Rich and Mr Keeling would have to go: 16.14;

•
Mr Rich met with Mr Packer Jnr on Monday 14 May and Mr Packer Jnr said, "Rupert wants you and Brad out and we'll put in $132 million in a 5c rights issue, one for one": 16.17.

[7506] There is detailed evidence about the preparation of a draft underwriting agreement and other preparations for the board meeting of 17 May: 16.18, 16.19. The events of the board meeting of 17 May are set out in detail at 16.21. They relate to the proposed rights issue and bridging loan, the resignation of Mr Rich and Mr Keeling, and other matters. Press releases were made after the meeting: 16.23.

[7507] The management of One.Tel effectively changed hands after the 17 May board meeting, as particularised at 16.24. Mr Miller and Mr Green, together with Mr Courtney, prepared a draft document "Major Items Beyond Normal Credit Terms", which was contentious: 16.25.

[7508] Mr Weston made a presentation to the due diligence committee for the rights issue, at which he gave a European overview in which he effectively abandoned the forecasts that he had presented to the March board meeting: 16.26.

[7509] The period from 18 to 25 May was a difficult one for Mr Packer Jnr, as he recounted in his evidence: 16.27. Evidence of various conversations in that period is given, including a meeting at Mr Murdoch Jnr's home on Sunday 27 May attended by Mr Packer Jnr and executives of PBL and News: 16.31. It was obviously a very difficult meeting for Mr Packer Jnr Mr Long of Ernst & Young attended a meeting on the evening of 27 May, at which there was discussion about what the board would do and he made a note that included the words "extract from underwriting": 16.33.

[7510] The contents of the Miller/Green schedules presented to the board on 28 May are reviewed at 16.36. They were generally substantially lower and more pessimistic figures than the draft of 8 May.

[7511] The board meeting on 28 May is considered at 16.37. The board approved a trading halt and took advice from Mr Sherman about the company's proposed course of action, which included the commissioning of Ernst & Young to review the Miller/Green schedules.

[7512] With the assistance of Mr Howell-Davies, One.Tel's management developed an "alternative strategy" position, which is described at 16.38, and they had a meeting with Ernst & Young and Mr Green about it. The alternative strategy document was agreed by about 11 am on 29 May, and One.Tel's management including Mr Silbermann presented it to a meeting attended by Mr Yates, Mr Murdoch Jnr, Mr Packer Jnr and others. There are some conflicting accounts of that meeting but it does appear that the alternative strategy was not received well: 16.38.5.

[7513] Ernst & Young completed their financial position review report on 29 May. There is some curious evidence about how the report was made available to directors, noted that 16.39.6 and 16.39.9. The contents of the report are reviewed at 16.39.7.

[7514] One.Tel made an approach to Lucent late in May to explore the possibility of funding by Lucent, considered at 16.40 and 16.41. It was unsuccessful.

[7515] The board meeting on the afternoon of 29 May is considered at 16.41. It led to a resolution that the company not proceed with the rights issue, followed by a resolution for the company to go into voluntary administration.

Chapter 17 -- After May 2001

[7516] This is a brief summary of events after the appointment of the voluntary administrators, taken mainly from their reports in that capacity and as liquidators.

Chapter 18 -- Creditors

[7517] Chapter 18 begins in 18.1 with an analysis of ASIC's pleaded allegations about creditors and the defences, and the evidence of Mr Rich and Mr Silbermann in response to ASIC's allegations of management and deferral creditors: 18.1.6. Then there is an explanation of the court's rulings on evidence concerning creditors: 18.2.

[7518] At the hearing ASIC wished to tender a large volume of evidence comprising communications between One.Tel and creditors, in order to prove that the creditors position was deteriorating over the period from January to April 2001, that One.Tel embarked on a systematic process of management of cash and creditors, and that the court should infer that One.Tel was unable to meet its obligations to creditors. ASIC also wished to prove that during this time One.Tel was failing to pay suppliers and was receiving threats to supply as well as demands for payment.

[7519] The creditor correspondence that was eventually tendered was a more limited tender in response to objections from the defendants and rulings from the court. Correspondence from creditors was received subject to a limitation order to the effect that the documents were not evidence of the truth of the assertions in them.

[7520] It became necessary for the court to examine the contents of the creditor correspondence to see whether each item of correspondence supported ASIC's allegations. ASIC produced a summary of the tendered correspondence which came to be numbered AS 69, which provided some guidance through the creditor evidence: 18.3. Chapter 18 contains a full analysis of the creditor evidence.

[7521] Major issues arose in the case as to the disputes that One.Tel had with Telstra (18.4), Optus (18.5) and Lucent (18.6). ASIC sought to establish that One.Tel's asserted disputes were not bona fide. It has failed to do so, for reasons given in those discussions.

[7522] The main issue regarding Toronto Dominion was whether there was a likelihood that One.Tel would breach the EBITDA covenant in its loan facility agreement and if it did, whether Toronto Dominion would be likely to call up its loan: see 18.7.

[7523] At 18.8 the "larger Australian" creditor correspondence is reviewed, and at 18.9 the "smaller Australian" creditor correspondence is considered. The conclusions drawn at 18.10 include the proposition that ASIC's evidence is unsatisfactory and it would be unsafe to draw any of the general inferences that it seeks to draw from that evidence.

[7524] Larger overseas creditors are considered at 18.11. They include BT and also the major carrier creditors such as WorldCom, Global Crossing and RSL COM. The correspondence reflected a pattern of trading of One.Tel with its European carrier creditors in which there was a substantial history of invoicing disputes, often found to be justified, and complaints by One.Tel that insufficient information was provided by the carrier to enable it to process and verify invoices. That situation, combined with the commercial reality of strong competition Among carriers for the business of second and third tier telcos such as One.Tel, led to a degree of liberality in theapproach of carriers to insistence on strict contract terms, at least until mid-April 2001. The evidence indicates that on a few occasions the carrier's accounts department was pressing for payment while the marketing department was seeking to do more business with One.Tel. Generally the correspondence did not support the inferences ASIC sought to draw. The evidence concerning smaller overseas carriers was unsatisfactory as specified at 18.12.10.

Chapter 19 -- Debtors and Provisioning

[7525] Chapter 19 begins by analysing ASIC's pleading concerning debtors and provisioning (19.1), and then reviews the provisioning process at One.Tel (19.3), notes the opinions of One.Tel's auditors (19.4), and considers Ernst & Young's financial position review report of 28 May together with Mr Basman's assessment for that purpose. It then addresses ASIC submissions to the effect that, due to various factors, the provision for doubtful debts was vastly inadequate (19.6), and the consideration of the matter at the March board meeting (19.8). The court does not accept ASIC's submissions and reaches the conclusion (19.13.5) that ASIC has failed to prove its pleaded allegations. An important part of that conclusion is the court's view that the profile summaries upon which ASIC relies are an unreliable source of information: 4.8.6.

[7526] As observed at 19.2.1, on the face of it ASIC's case against the defendants alleging inadequate provisioning seems implausible, not because of the assertion that the provision for doubtful debts appeared to be inadequate, but because of the claim that the alleged inadequacy of the provision reflected a breach of duty by these particular defendants. One.Tel had a system for provisioning for doubtful debts formulated by an experienced industry executive, administered by members of the Australian finance team ultimately reporting to Mr Hodgson, reviewed yearly and half-yearly by One.Tel's auditors and (from October 1999) the board's Finance and Audit Committee of which the defendants were not members. Additionally, the provision was substantially increased in the year 2000, and reviewed without increase at the instigation Mr Rich in March 2001.

Chapter 20 -- Earnings and other financial issues

[7527] Chapter 20 begins by addressing the pleadings concerning EBITDA (20.1) and then deals with January-April EBITDA according to the evidence (20.2).

[7528] At 20.3 there is a lengthy investigation of management accounts, dealing with their nature and scope (20.3.3), One.Tel's management accounts (20.3.4), and One.Tel's practices for the accrual of revenue (and in particular the "to be billed" reports) (20.3.5). The question whether a reliable "to be billed" report was necessary for the accrual of revenues in One.Tel's management accounts for the fixed wire/service provider business is considered: 20.3.7. The court gives an affirmative answer to that question, as a practical matter. There is a comparison between management accounts and other financial performance indicators used by One.Tel's management: 20.3.9.

[7529] The important issue of whether the January-March fixed wire/service provider management accounts relied upon by ASIC in the proceedings were merely incomplete drafts, is considered at 20.3.10, and the conclusion is reached that they were incomplete and unreliable. At 20.3.12 the status of the April management accounts is investigated, and the conclusion is reached that the April management accounts for the fixed wire/service provider business were not reliable because reliable "to be billed" reports were needed and were evidently not available.

[7530] The evidence as to One.Tel's normal practices for review of management accounts, and the steps taken by the defendants to procure their preparation and review in 2001, is considered at 20.3.13-20.3.18. The court reaches the conclusion that it has not been established that urgent completion of the management accounts was a priority task of management in responding to the company's cash problem.

[7531] Chapter 20 then deals (at 20.4) with Mr Hodgson's April reforecast, prepared so that completed EBITDA figures for January, February and March for the fixed wire/service provider business could be provided to Mr Miller and Mr Green for their review. ASIC mounted an elaborate argument, considered at 20.4.1-20.4.10, to show that the April reforecast confirmed the accuracy of the management accounts for January and February, and that the reforecast figures for March and following months should not be treated as significant, while the revenue figures for the April reforecast closely aligned with the revenue figures of the fixed wire/service provider business shown in the management accounts. The court's conclusions, unfavourable to ASIC's contentions, are expressed at 20.4.10.

[7532] Next, Ch 20 explores the evidence concerning the claim to $40 million worth of unbilled data: 20.5. It looks at the way the idea emerged (20.5.1), and considers the evidence as to whether Mr Beck really did make an initial discovery of $28 million worth of data as was said: 20.5.2. After reviewing other evidence which is fairly inconclusive, Ch 20 focuses attention on expert evidence given by Andrew Maizels, a computer programmer engaged by Mr Rich, supplemented by the evidence of Toby Harman, a computer programmer engaged by ASIC. The conclusion reached by the court (20.5.11) is that while Mr Maizels' evidence does not conclusively identify a foundation for the claim made to the March board meeting that management had identified $40 million of unbilled data, it does show a possible and plausible foundation for a substantial amount of unbilled data fitting the description, that is data relating to March calls that, according to the evidence of Mr Maizels, was received before the date of the March billing run but not billed until later or at all. Consequently ASIC has not established that the claim to $40 million of unbilled data was without foundation.

[7533] Finally, Ch 20 deals with Next Generation costs of acquisition: 20.6. ASIC's pleaded allegation is that the EBITDA losses of the One.Tel Group and Next Generation did not take account of the costs of acquisition of customers of Next Generation in an amount of approximately $30 million over the period from 1 January to 30 April 2001, because the costs were capitalised and amortised over the life of the subscribers' contracts rather than being treated as costs of sales and debited in full to the profit and loss account.

[7534] The evidence indicates that for the year ended June 2000, the company adopted a new policy with respect to certain costs associated with subscriber acquisitions, which was to write off the costs as incurred rather than deferring and amortising them. However, the handset subsidy provided to new subscribers was to be treated differently, and deferred and amortised. The court concludes that, to the extent that ASIC's pleading is referring to the handset subsidy rather than the other costs of acquisition of subscribers, it is correct that the handset subsidy continued to be amortised rather than treated as a cost of sales, but that was in accordance with the company's announced policy, appearing in the notes to the 1999/2000 financial statements which must been approved by the One.Tel board.

Chapter 21 -- Liquidity

[7535] Mr Carter gave evidence that in analysing the cash and creditor position of a corporate group, it is important to consider the overall liquidity of the group taking into account not only the cash balance, but also other assets such as trade debtors and accrued income, and operational liabilities including not only overdue and current creditors but also accrued liabilities: 21.1. ASIC adopted Mr Carter's liquidity analysis but it substituted for his tables, which were partly held to be inadmissible, some tables it developed in submissions.

[7536] There is a detailed discussion of ASIC's liquidity analysis in Ch 21 on a line by line basis, but the court has found that the analysis fails at a fundamental level. One.Tel's liquidity was measured and managed on a group basis that included the international operations. To seek to establish that One.Tel's liquidity declined drastically from December 2000 to May 2001 by measuring only Australian operations is, according to the court, like trying to establish that the available water supply in the Sydney basin is diminishing by proving declining water levels in every dam except the Warragamba: 1.6.

Chapter 22 -- Mr Carter's evidence

[7537] Paul Carter, ASIC's principal forensic accounting expert, gave a large quantity of evidence. While much of it was ruled inadmissible for reasons briefly explained in Chs 1 and 22, nevertheless a substantial quantity of his evidence remained. Although ASIC made little reference to Mr Carter's evidence in final written submissions, it invited the court to derive comfort from his evidence as confirmation of its submissions. Accordingly the court has undertaken an analysis of Mr Carter's evidence in Ch 22.

[7538] Mr Carter's work is the foundation for ASIC's submissions on liquidity (22.2.4 and Ch 21) and its compensation claim (22.7, the analysis of reduction in net worth). Other matters of significance for the remainder of the judgment are the treatment of the $8 million pledge at 22.2.1.1, unpresented cheques at 22.2.2.2, the Toronto Dominion loan at 22.5.1 and the Lucent lease payment at 22.5.2. There is consideration of whether the intranet cash balances were adjusted before they were presented to the board in board papers, at 22.2.2.4.

[7539] Many other aspects of Mr Carter's analysis are probably superseded having regard to ASIC's submissions: for example, his analysis of unreleased cheques at 22.2.6.2, in light of the treatment of unpresented and unreleased cheques at 11.2.3.

Chapter 23 -- Duty of care and diligence and the business judgment rule

[7540] Chapter 23 deals with the content of the statutory duty of care and diligence and the business judgment rule, found in s 180 of the Corporations Act. The court provides a summary statement of legal propositions about the statutory duty of care and diligence at 23.3, relating the statutory duty to the common law duty and addressing the question whether there is an objective standard of skill. The standard of care required of executive officers is addressed at 23.4.

[7541] Expert opinion evidence on the role and responsibilities of the managing director and the finance director, given by Roderick Cameron and Richard Warburton, is reviewed at 23.5. Some questions relating to a finding of breach of the statutory duty, particularly the principles enunciated in Wyong Shire Council v Shirt (1980) 146 CLR 40 ; 29 ALR 217 ; [1980] HCA 12, are considered at 23.6. ASIC's submission that the principle of res ipsa loquitur can be applied in its favour in this case is considered and rejected at 23.7.

[7542] The statutory business judgment rule is found in s 180(2) and (3). The question who bears the onus of proving the ingredients of s 180(2) is addressed at 23.8.2, and the meaning of each of the elements of 180(2) is considered at 23.8.3. The meaning of the concept of "rational belief" in s 180(2)(d) is considered, and the court adopts the view that establishing a "rational belief" does not require proof that the belief is objectively reasonable.

Chapter 24 -- Other Matters

[7543] Chapter 24 addresses two matters, ASIC's claim about the replacement of Mr Silbermann as finance director, and its compensation claim.

[7544] ASIC's statement of claim alleges that Mr Rich failed to take reasonable steps to ensure that One.Tel employed a finance director with the qualifications, skills and experience reasonably appropriate for a person occupying that position and having the relevant responsibilities. It relied on some evidence given by Mr Rich that he and Mr Keeling had a conversation in July 2000, in which they agreed that One.Tel should seek a chief financial officer better known to the institutions than Mr Silbermann. But the evidence did not suggest any concern about Mr Silbermann's conpetence: indeed, Mr Keeling said Mr Silbermann was very good at getting things done. ASIC also relied on some assertions in the particulars to its statement of claim, which are set out at 24.1. The court has found that none of those matters has been made out on the evidence, and consequently ASIC must fail.

[7545] As to ASIC's compensation claim, the issue of compensation does not arise as the court has not found any contravention. However, some principles are addressed concerning the requirements to establish a claim for compensation under statute. For the assessment of the quantum of One.Tel's loss, ASIC relied on the evidence of Mr Carter, who set out procedures for the calculation of the reduction in net worth of One.Tel that occurred when the company remained in operation after the end of February, March and April respectively. Mr Carter's reasoning is considered at 22.7. The defendants' extensive submissions about the compensation claim are briefly summarised.

[7546] The court's conclusion is that, since the questions of causation and quantum of recovery are closely connected to the nature and scope of the proven contraventions that are to be the foundation of the compensation order, the court is unable make any useful observations about the parties' submissions on the subject.

Chapter 25 -- Conclusions

[7547] The court's conclusions at 25.1, which are brief, should be read in full.

[7548] ASIC has failed to prove its pleaded case against either of the defendants. Its contentions had a superficial appeal, but time and again they were shown to be unpersuasive when the underlying financial details were investigated. ASIC relied on various categories of documents, some of which were obscure and needed to be supported by evidence of a person involved in creating or using them, but such evidence was not forthcoming. In cases where documents were explained by a witness, the defendants were able to advance alternative plausible explanations for what had occurred, and weighing up all the evidence, the court has concluded that ASIC has not dislodged those alternative explanations.

[7549] ASIC has also made some submissions that are outside its pleading. That provides an additional ground for not accepting the relevant submission.

[7550] The judgment is a determination, between the parties, that the plaintiff, ASIC, has not proved its pleaded allegations. The proceedings are not a royal commission to investigate what caused the spectacular collapse of One.Tel in May 2001 and who was to blame. Consequently, many questions are left unanswered, including the question whether One.Tel would have been able to survive if PBL/CPH and News had maintained their support for it and proceeded with the proposed rights issue in May 2001.

[7551] Chapter 25 also addresses the question of costs. The court's provisional view is that it should order ASIC to pay the defendants' costs on the usual party and party basis, as agreed or assessed. But a procedure is to be set up to enable either party to make an application seeking a different costs outcome, such as an order excluding some parts of the proceedings from the operation of the general costs order, or an order that all or part of the costs be assessed on the indemnity basis. Indemnity costs are awarded where there is a "relevant delinquency", as noted in the case law. There is a risk that an application by the defendants for indemnity costs might become a major supplementary trial, canvassing ASIC's conduct of the proceedings. The court wishes to avoid that outcome, having regard to the preliminary view it has taken and also the fact that over the course of the trial, there has been ample opportunity to observe the conduct of the parties.

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