Asic v Rich [2005] NSWSC 939 (30 September 2005)

Last Updated: 6 October 2005

NEW SOUTH WALES SUPREME COURT

CITATION: ASIC v Rich [2005] NSWSC 939



CURRENT JURISDICTION: Equity

FILE NUMBER(S): 5934/01

HEARING DATE{S): 11 August 2005 (and written submissions)

JUDGMENT DATE: 30/09/2005

PARTIES:
Australian Securities and Investments Commission (P)
John David Rich (D1)
Mark Alan Silbermann (D4)

JUDGMENT OF: Austin J

LOWER COURT JURISDICTION: Not Applicable

LOWER COURT FILE NUMBER(S): Not Applicable

LOWER COURT JUDICIAL OFFICER: Not Applicable

COUNSEL:
R B S Macfarlan QC with J P A Durack SC (P)
D L Williams SC with M J Steele (D1, D4)

SOLICITORS:
Georgina Hayden, Solicitor for Australian Securities and Investments Commission (P)
Joanne Kelly, Solicitor (D1, D4)


CATCHWORDS:
EVIDENCE - admissibility of expert opinion evidence - scope of valuation expertise of forensic accountant - whether opinions based on expertise - no issue of general principle

ACTS CITED:
Evidence Act 1995 (NSW), ss 79, 135, 136

DECISION:
See under heading "Conclusions"


JUDGMENT:

IN THE SUPREME COURT
OF NEW SOUTH WALES
EQUITY DIVISION


AUSTIN J

FRIDAY 30 SEPTEMBER 2005


5934/01 AUSTRALIAN SECURITIES AND INVESTMENTS COMMISSION V JOHN DAVID RICH & ORS

JUDGMENT

HIS HONOUR:

Introduction

1 In a judgment delivered on 8 July 2005 (ASIC v Rich [2005] NSWSC 650), I carried out a "paragraph-by-paragraph" review of Mr Carter's principal forensic accounting report dated 31 May 2002, ruling (with a few specified exceptions) on whether each sentence of the text of that report would be received into evidence, in light of the judgment of the Court of Appeal delivered on 20 May 2005 (ASIC v Rich [2005] NSWCA 152). Mr Carter prepared some supplementary affidavits and reports, to which the defendants also objected. Although I received detailed submissions on some parts of the supplementary materials, I decided to give the parties the opportunity to reconsider their positions on the supplementary materials in light of my decisions and reasoning with respect to the principal report (8 July 2005 judgment, at [280]). They did so, and provided me with further written submissions, on the basis that I would make my decision on the points they raised without additional oral argument.

2 Mr Carter's "supplementary materials" comprise the following:
· affidavit of 16 December 2002 and accompanying report dated 13 December 2002;
· affidavit of 14 April 2004;
· affidavit of 23 July 2004;
· affidavit of 8 September 2004;
· affidavit of 22 October 2004;
· affidavit of 2 November 2004;
· affidavit of 29 November 2004 and accompanying report;
· affidavit of 21 December 2004 and accompanying report.
ASIC has provided the court with a list of the parts of the supplementary materials that it wishes to press (AS 87).

3 The principal written submissions bearing on the issues under consideration are:
· Defendants' objections to the Carter Report dated 3 June 2005 (DS 69);
· ASIC's response to the defendants' detailed objections to the Carter Report (AS 79 - received in several tranches);
· Defendants' objections to the reports and affidavits of Mr Carter pressed by ASIC in AS 87, dated 29 July 2005 (DS 84);
· ASIC's response to DS 84 (AS 95);
· Defendants' reply to AS 95 (DS 86).

4 When it became evident that decisions would be necessary with respect to certain parts of the supplementary materials with international elements, prior to the court commencing to take evidence in London on 24 August 2005, and that there would be no time to deal fully with the evidentiary status of the whole of the supplementary materials by then, the defendants identified (in DS 88) the parts of the supplementary materials upon which rulings were needed before our departure for the United Kingdom. They are: the whole of the material pressed by ASIC in the affidavit of 16 December 2002 and the accompanying report dated 13 December 2002; paras 5 to 7 of the affidavit of 14 April 2004; and the whole of the material pressed by ASIC in the affidavit of 8 September 2004. After considering that material and the submissions on it, on 11 August 2005 I announced my decisions, reserving my reasons.

5 The present judgment provides my reasons for the rulings on admissibility and discretionary exclusion that I have made with respect to the international materials identified in DS 88. I shall deliver a separate judgment making rulings with respect to the balance of the supplementary materials pressed by ASIC in AS 87 (see ASIC v Rich [2005] NSWSC 999).

6 The defendants' objections to the material identified in DS 88 include objections to admissibility, submissions designed to invoke the court's discretion to exclude evidence under s 135 of the Evidence Act, and submissions urging the court to reject ASIC's application for leave to read evidence filed and served out of time. Although, strictly speaking, leave is required in respect of all three of Mr Carter's affidavits related to international matters, my view is that there is no plausible basis for denying leave in respect of the December 2002 affidavit, and so that issue relates only to the April and September 2004 evidence. The parties' submissions on the question of leave to rely on evidence filed and served out of time are related to their submissions concerning ASIC's application to amend its pleading, which I also rejected on 11 August, reserving my reasons. I have decided that the clearest way to present the reasons for my decisions is to address the questions of admissibility and discretionary exclusion of evidence in the present judgment, and to deal with the application for leave to rely on evidence (the affidavit material and the underlying documents) filed and served out of time in a separate judgment, which also considers the question of leave to amend the pleading: ASIC v Rich [2005] NSWSC 940.

Affidavit of 16 December 2002 and accompanying report dated 13 December 2002

(a) paras 29-33

7 On 11 August 2005 (T 5633) I announced my decision that this material would be allowed, with the exception of the last sentence of para 33 (which was not pressed). My reasons for that decision are as follows.

8 In his principal report, Mr Carter made a number of assumptions about the international operations, including assumptions that the international operations were cashflow neutral from 1 March to 29 May 2001, and that there were no material changes in net worth for the international operations between 28 February and 29 May 2001. His report of 13 December 2002 was a supplementary report in which he gave further consideration to those assumptions. ASIC pressed the whole of the affidavit and certain identified parts of the accompanying report (AS 87).

9 There is no issue about the affidavit itself, which is merely formal and is taken to be read. The following paragraphs of the report were pressed and not objected to, and are therefore taken to be read: 3-9; 22; 23; 24 (but excluding everything after "December 2000" in the second line to the end of the paragraph above the table); 26-27; and 28 (save for the second sentence).

10 In order to assess whether, during the period from 1 April to 29 May 2001, the international operations were likely to generate material net cash inflows to fund the Australian operations, Mr Carter estimated likely cashflows based on the September budget figures for EBITDA, adjusted to reflect year-to-date variances between actual and budgeted results (see para 25). In Appendix SRA he made an analysis of the variance between actual and budgeted EBITDA for the international operations during the period 1 July 2000 to 31 January 2001. Next, he revised the budgeted results for EBITDA from February to November 2001 on the basis of the actual variances from budget for the seven-month period to 31 January. He set out the revised budget figures for EBITDA for those months, compared to the September budget figures, in a table in para 26, which he presented as showing estimated cash usage for the international operations. As he noted in para 27, the tabulated revised budgeted results for the international operations fluctuated from negative $2.8 million to positive $4.5 million and the total expected cashflow for the 10-month period ending 30 November 2001 was projected at a net cash outflow of $3.68 million.

11 In an earlier part of his December report (paras 22-24), Mr Carter set out some tables showing calculations of the monthly variances between budgeted and actual revenue, gross margin and operating expenses. The table for OPEX in para 24 showed a marked improvement in February 2001, which would in the ordinary course be expected to flow through to February EBITDA. Mr Carter offered an explanation for that improvement in para 24 and paras 60-64, but ASIC does not propose to read that material. However, it is necessary to bear in mind the improvement in OPEX and EBITDA in February in order to understand why Mr Carter presented his second table, the one in para 28.

12 The table in para 28 is very similar to the one in para 26, except that it took into account the actual EBITDA figure for February, thus calculating the revised budgeted EBITDA for March to November 2001 rather than February to November, on the basis of the variance between budget and actual EBITDA for the eight-month period including February, rather than (in para 26) the seven-month period up to January. Again, the revised budgeted EBITDA was presented in the table as an estimate of cash usage for the international operations for each month to November. As one would expect, the estimated cash usage was not quite as bleak when the actual February EBITDA was taken into account as it had been when that figure was disregarded for the purposes of the calculations. In para 29 Mr Carter summarised the table in almost identical language (including use of the word "expected") to the language used and not objected to in para 27. The fluctuation in estimated cashflows, taking into account the February figure, was from negative $2.5 million to positive $4.6 million, with total expected cash for the nine-month period from March to November being projected at a net cash outflow of $0.1 million. Thus, said Mr Carter, his assumption that the international operations were cashflow neutral from March to May 2001 was vindicated even if the February EBITDA was taken into account (para 30).

13 There was a further improvement in OPEX and consequently EBITDA in March 2001, as shown in the table at para 24. Consequently Mr Carter prepared a third table, at para 31, purporting to show estimated cash usage for the international operations in the period from April to November, based on a calculated variance between budget and actual EBITDA for the nine-month period to the end of March. As one would expect, the table showed that if the March improvement in EBITDA was taken into account, the estimated cash usage dropped and, indeed, this time the total cash movement was in positive territory. In para 32 Mr Carter described that outcome in words almost identical with the words he used in paras 27 and 29, including use of the word "expected". This time the estimated monthly cashflows fluctuated from negative $1 million to positive $6.5 million and the total expected movement was a cash inflow projected at $12.9 million. In para 33 Mr Carter observed that, even allowing for the improved performance in March, the international operations' available cash position was negative $45 million (sourced ultimately in para 89 of the principal report, which has been allowed), and so a cash inflow of $12.9 million would have been insufficient to cover that negative position.

14 ASIC pressed paras 29-33, save for the last sentence in 33. The defendants objected (DS 84, para 16) to the use of the word "expected" in para 29, on the ground that Mr Carter was not qualified to express an admissible opinion about the expected future cashflow of the international businesses and offered no reasoning from specialised knowledge as to why his calculation amounted to a proper "expectation" as to the likely cashflows. They also objected, on the same basis, to para 30 and the portion of para 33 that is pressed by ASIC, in which Mr Carter purported to express opinions about "expected" future cashflow of the international businesses, and they objected to the word "expected” in the third line of para 32. ASIC's response (AS 95, para DS 16-17) was that the report made it clear that the word "expected" was based on the approach Mr Carter explained in paras 26 and 28, namely a revision of budgeted results to November based on historic variances from budget.

15 The description I have given of Mr Carter's analysis makes it clear that ASIC's submission is correct. The word "expected" is used consistently in paras 27, 29 and 32 to describe the effect of a table, which estimates cash usage on the basis of variations between budgeted and actual historical EBITDA, the tables differing from one another only to the extent that the actual EBITDA figures for February and March are taken into account. The word "expected" does not denote some other, unexpressed line of reasoning and its significance is to be ascertained by reference only to the tables. The reasoning process used in the preparation of the tables involved the application of Mr Carter's forensic accounting skills in relation to the financial health of business enterprises and the use of a methodology disclosed in the report. I regard it as reasonably clear that the word "expected" should be read in this way and I do not see the need to make a s 136 order.

16 The consequence is that paras 29-33 are received into evidence, with the exception of the last sentence of para 33. Although Mr Carter's affidavit and report of December 2002 were filed and served later than the time set by my pre-trial directions, no adequate basis has been advanced for denying ASIC's application for leave to read this material.

(b) paras 79-113 and Appendices

17 ASIC also pressed the whole of paras 79-113 of the December report, and the Appendices. On 11 August 2005 (T 5633) I announced my decision that this material would be allowed, and that paras 86 to 89 were to be treated as assumptions. My reasons for that decision are as follows.

18 To understand and assess the defendants' objections to these paragraphs, it is necessary to consider Mr Carter's reasoning in detail. Paras 79-113 are in a section of the December report headed "Assumption 2 - No material change in the international operations' net worth". In paras 79-81 Mr Carter explained the background before setting out, in the following paragraphs, to consider the reasonableness of this assumption. In para 82 he said that in doing so, he had taken into account the change in the reported net asset value of the international operations between the end of February and the end of April 2001, and the reported net trading loss of the international operations in that period. In para 83 he referred to Appendix SRG (which is a consolidation of the international operations' balance sheets as reported in the management accounts for each of the international operations) and presented a table summarising the net asset position. In para 84 he said it was evident from the analysis that the reported net assets of each of the international operations were negative and that there was a 14% decrease in reported net assets in Australian dollars between February and April 2001 and also between March and April 2001, the total decrease between February and April being $20.8 million. As I understand the defendants' submissions, paras 79-84 were not the subject of attack, except in the sense that if the later material were to be excluded they would be pointless. I see no proper basis for excluding any of those paragraphs from evidence.

19 The segment from para 85 to para 89 is headed "The impact on international operations upon appointment of Administrator to the Australian operations". In para 85, after noting that the Australian operations were placed into administration on 29 May, Mr Carter explained that the analysis that followed in his December report was directed to considering whether it was likely that there would have been any material change in the net proceeds of realisation received for the various international operations had the Australian operations been placed into administration earlier, either on 28 February or 31 March. That is a description of the issues to be addressed and is not itself open to objection.

20 In paras 86-89 Mr Carter purported to recount various matters of fact, relating to the administration of the French operations, realisations from the sale of the UK operations, and realisations from the sale of the Hong Kong subsidiary, and he said that no other amounts were realised from the finalisation of the affairs of the other international operations. These are matters which should be proved by more direct evidence, rather than by the assertions of Mr Carter. They were set out by him as a prelude to his consideration of the value of the businesses, so that he could assess whether the realisations would have been different if Australian administrators had been appointed to One.Tel in February or March rather than May. Although they were not described as such, in the circumstances they can only be regarded as assumptions. They are to be treated as assumptions for the purposes of admissibility.

21 In the remainder of the December report, Mr Carter made some general observations about valuation and then proceeded to consider, in the case of the UK and Hong Kong operations respectively, whether greater realisations would have been received in Australia if administrators had been appointed in February or March rather than May. The defendants strongly object to this material.

22 Paras 90 and 91, which appeared under the heading "Considerations in assessing the value of the business", stated some general propositions regarding business valuation, and then used those propositions as the basis of a methodology directed towards considering whether it was likely that there would have been a substantial change to the sale proceeds in fact received for the international operations had the Australian operations been placed into administration in February or March rather than May. Para 90 identified matters that "would typically be considered" in assessing the price a potential purchaser would pay for a business. The list included such things as the market value of the net assets, the current value of expected future cashflows, and potential synergies with the purchaser's existing operations. In my opinion, while the list is unremarkable and uncontroversial, it is a proper subject matter for expert opinion evidence.

23 On the basis of the propositions set out in paras 90 and 91, Mr Carter then considered, for the UK and Hong Kong operations, changes in reported net assets, historical EBITDA, and the budget for the period to November 2001 adjusted for actual historical performance (para 91). His thinking about the connection between these three matters and the principles of valuation set out in para 90 emerges from some of his remarks.

24 As to net assets, he said that changes in reported net assets were a "proxy" for the market value of net assets. But he recognised that for an operating business, the market value of net assets would be unlikely to determine the price to be paid and would only provide guidance as to the minimum price that the seller would accept.

25 In para 90 Mr Carter gave a brief explanation of the discounted cashflow valuation method. One component of this process is to ascertain the expected quantum of future cashflows, so that the appropriate discount factor or multiple can be applied so as to capitalise that figure. Mr Carter explained that in assessing the likely quantum of cashflows, it is likely that a potential purchaser will consider both budgeted and historical actual performance of the business, making adjustments for the effect of unusual transactions. He said that the historical actual performance of the business relative to the historical budgeted performance can be used to indicate the likelihood of the budget being achieved in the future. Thus it was appropriate, in Mr Carter's view, for him to consider the historical EBITDA of the international operations, and the budget for the period to November 2001 adjusted for the actual historical performance against budget. In paras 92-110 he set out to consider, in light of these principles and separately for the UK and Hong Kong operations, whether it was likely that there would have been a substantial change to the proceeds of realisation had Australian administrators been appointed on 28 February or alternatively 31 March, rather than 29 May.

26 He considered the UK operations in paras 92-102. In para 94 he presented a table setting out, for the four months from February to May 2001, reported net assets (and changes from month to month) as per monthly management accounts, and actual monthly EBITDA. Then in para 96 he set out a table of total estimated EBITDA for the period from June to November 2001 based on variances between actual and budgeted figures for various periods, namely July 2000 to January 2001, and then periods which also included actual figures for later months.

27 As to the significance of the net asset figures, he observed (at para 95) that there was a net asset gain in the period from February to April 2001 but it was not supported by growth in estimated EBITDA (as shown in the table at para 96), and was offset by a deterioration in the realisable value of net assets as a result of exchange-rate fluctuations. As regards discounted cashflow, he said (para 97) that estimated EBITDA for the period from June to November 2001 remained relatively constant according to the calculations presented in his table at para 96. He said (at para 98) that estimated future cashflows and the risks of the business for the UK operations remained reasonably constant in the period from February to May 2001, and he concluded that it was likely that in the February/May period there would have been no material change in the proceeds of sale from the UK operations.

28 The assertion in para 98 that estimated future cashflows remained constant in the period from 28 February to 29 May 2001 is not specifically sourced, but it appears in the context of the table in para 96 to be based on the appendices which are noted in the table. There is no identified source for the statement that the risks of the business also remained reasonably constant during that period, which appears to be an assertion based on general industry knowledge. ASIC's submission (AS 95, paras DS32b and32c) that the assertion is grounded in the constancy of the amounts budgeted for by the company is not expressly supported by the text of the report, although in fact the budgets do appear to provide some support for the assertion (cf DS 86, para 21a).

29 Mr Carter noted that the proceeds of sale received in Australia would have been affected by changes in the Australian dollar/Sterling exchange rate in the period from February to May. He set out a table in para 99 which purported to show that if the appointment of Australian administrators had occurred on 28 February rather than 29 May 2001 an additional $6.7 million would have been received by virtue of the better exchange rate operating at the probable time of sale. If the administrators had been appointed on 31 March, the additional figure in Australian dollars would have been $1.4 million.

30 Mr Carter carried out a similar analysis with respect to the Hong Kong operations in paras 103-110. He said (para 106) that, based on reported historical results, his analysis indicated that the proceeds of sale of the Hong Kong operations may have improved slightly, based on improved EBITDA and an increase in reported net assets in March and April 2001, but the increase was unlikely to have resulted in any material change in value because it was included in budget forecasts and would have been taken into account in any valuation as at February. At para 108 he noted that estimated future cashflow, represented by EBITDA (and apparently based on the tables at paras 104 and 107), in the period June to November 19, 2001 remained constant during the period from February to April 2001, and as there was no substantial change in the risks of the business, it was likely there would have been no material change in the proceeds of sale from the Hong Kong operations. The assertion that there was no substantial change in the risks of the business, like the similar assertion concerning the United Kingdom in para 98, appears to be based on general industry knowledge rather than any particular reasoning process. After considering the exchange rate, he concluded (para 110) that the Australian dollar proceeds would not have been materially altered by exchange-rate fluctuations, if the Australian operations had been placed into administration in February or March rather than May.

31 In para 111 he referred to the other international operations and gave brief reasons for concluding that it was unlikely that the quantum of proceeds would have changed materially if administrators had been appointed earlier. He summarised his overall conclusions in paras 112 and 113.

32 The defendants emphasised (DS 84, paras 18-20) that in conducting his analysis as to the likely effect of administration commencing at an earlier time, Mr Carter involved himself in expressing opinions as to the likely sale value of international telecommunications businesses in 2001. They contended (DS 84, paras 21-22) that there was nothing in Mr Carter's curriculum vitae that would provide a proper basis for the court finding that he had any specialised knowledge that would equip him to express views about such matters.

33 The defendants' submission rests on an alleged distinction between expertise of general valuation practice in Australia and perhaps the United States, and specific qualifications as a valuer of European or Hong Kong-based telecommunications businesses. There is no evidence before me that would warrant the conclusion that principles of valuation applicable to European and Hong Kong businesses are different from principles of valuation applicable to Australian businesses, telecommunications or otherwise, or that the application of those principles requires a level of expertise not possessed by a person with expertise in the valuation of telecoms in other countries. If it emerges from the evidence that businesses in those countries have idiosyncrasies of a kind relevant to valuation expertise, the weight of Mr Carter's opinions will be affected, but I am not persuaded, for the purposes of admissibility, that the valuation of telecommunications businesses in those countries is such a different undertaking as to constitute a separate field of expertise.

34 The submission also assumes that if there is such a distinction, Mr Carter lacks expertise of the specific kind necessary to value European or Hong Kong telecoms. I summarised Mr Carter's experience in my judgment of 7 March 2005 (ASIC v Rich [2005] NSWSC 149, at [394]-[397]), and in my judgment of 8 July 2005 (ASIC v Rich [2005] NSWSC 650, at [248]) I specifically rejected a submission, admittedly in a different context, that Mr Carter's expertise did not equip him to address matters of business valuation. Mr Carter has claimed expertise in a variety of financial matters including business valuations and financial modelling, and has asserted substantial practical experience in advising telecommunications companies. I note that on page 2 of the curriculum vitae annexed to his principal report he listed experience with respect to some European and Singapore telecoms and telecommunications service providers, and so his experience is not confined to Australia and the United States.

35 In my opinion Mr Carter has an expertise with respect to telecommunications businesses and business valuations that equips him to pursue the kind of reasoning process that he has used, and in the course of so doing he has used his forensic and other accounting skills to present his analysis in terms of EBITDA, net assets and budgets. His expertise in the telecommunications field equipped him, for example, to express the opinions in paras 98 and 108 as to whether business risks affecting a telecommunications business during a particular period had fluctuated. In my opinion the defendants' objection to admissibility on this ground is unsuccessful.

36 The defendants also contended (DS 84, paras 23-30) that Mr Carter's reasoning process was sketchy, weak and flimsy. First, they attacked his view that reported net assets of the business could be used as a proxy for their market value, asserting "as any commercial court knows well" that reported net asset values are seldom much of a guide to the likely market value, and complaining that Mr Carter undertook no consideration of the nature of the businesses and their particular characteristics. In my opinion Mr Carter's reasoning process on these matters is clearly exposed in his report and the criticisms go only to weight.

37 Secondly, the defendants submitted that Mr Carter had failed to undertake any analysis of expected cashflows, other than by taking the budget for the businesses and adjusting it for historical variances. They said the court should be sceptical as to whether a potential purchaser would give much, if any, credence to such an artificially constructed and short-term projection. Again, the reasoning process is clear from the report and the issues raised in the submissions relate to plausibility and weight.

38 Thirdly, they complained that Mr Carter had made no attempt to review or consider the risks associated with the businesses or whether there was any change to those risks during the relevant period. That seems to be true. As I have said, it appears that Mr Carter's assertion that there was no change in the business risks during the relevant period was a statement based on general industry knowledge. It may be open to attack on matters going to weight, but it is admissible opinion evidence, on its face based on Mr Carter’s expertise. Given the general way in which the assertion of constant risk is made, I do not think it would be appropriate to conclude that it was based on information obtained by Mr Carter and his staff from their contact with former staff of One.Tel.

39 Fourthly, they submitted that although Mr Carter acknowledged that "potential synergies" with the purchaser's existing operations would be relevant to business value, he made no attempt to consider the universe of potential buyers and whether there might have been some change in the period from February to May. The absence of any express consideration of this issue in the report may constitute a deficiency in the reasoning process or a limit upon the reliability of the conclusions, especially if some evidence emerges that there was indeed a change in the field of potential buyers during the relevant period, but the problem identified by the submission is not, in my opinion, a problem going to admissibility under the Makita test (Makita (Australia) Pty Ltd v Sprowles [2001] NSWCA 305; (2001) 52 NSWLR 705).

40 Fifthly, the defendants contended that Mr Carter had failed to consider some other matters going to the likely sale value of a telecommunications business, such as the regulatory environment, the availability to potential buyers of equity financing through the stock market, and other key parameters driving the valuation of telecommunications businesses such as subscriber numbers, ARPU, cashflow etc. This submission is in the same category as the fourth submission, in the sense that it may identify weakness in the reasoning and conclusions but is not a ground for inadmissibility.

41 I received some submissions from both parties as to the utility of the kind of analysis that Mr Carter has presented. Mr Carter's evidence will be relevant to the question of assessment of damages, in the event that liability is established. ASIC contended (AS 95, para DS23-31) that it was appropriate for the court to take a pragmatic approach to the assessment of damages, and unnecessary for it to determine the absolute value of assets, although it may have to decide whether there was any relative increase in the value of the overseas businesses over a limited period. In ASIC's submission, Mr Carter's approach was suitable for the court's purposes. It seems to me unnecessary to determine, at this stage, the approach that the court will take to the assessment of damages if liability is established, or the degree of utility of Mr Carter's reasoning process in that event. It cannot plausibly be contended that Mr Carter's reasoning and conclusions are irrelevant. Their relevance, together with compliance with the statutory criteria in s 79 of the Evidence Act amplified by the Makita tests, is sufficient to warrant the conclusion that the evidence is admissible.

42 In my opinion there is no basis for rejecting or limiting the use of paras 29-33 and 79-113 on statutory discretionary grounds, and no ground for rejecting ASIC's application for leave to adduce this evidence.

Affidavit of 14 April 2004: paras 5 to 7

43 ASIC pressed paras 5-7 and 22-25, but the defendants did not object to paras 22-25 and therefore they are taken to be read. There is an issue about paras 5-6, which relate to creditors of the non-UK international operations, and an issue about para 7, which relates to whether Group cash may have been understated by not recording creditors in the creditors ledger.

44 In para 5 Mr Carter referred to the statement in his principal report that he had not been provided with creditors ledgers for the non-UK international operations, and then noted information that he had subsequently received. This information comprised an aged creditors ledger dated 11 June 2001 for the France operations, a European Aged Creditor Report dated 18 May 2001 and a schedule for the international operations Aged Liability for Carrier Services dated 6 March 2001. He expressed the opinion that those documents confirmed that One.Tel non-UK international operations owed an amount of money to overdue creditors. He said that the documents quantified creditor balances at different dates and did not allow him to quantify precisely what that amount was at any particular month-end, though it would be possible to make a reasonable estimate. In para 6 he said that accordingly, he had understated the deficiency in the international operations' cash position in paras 89 and 99 of his principal report.

45 The defendants have objected to paras 5 and 6 on three grounds (DS 84, paras 33-35; see also AS 95 at para DS34-35). First, they submitted that there is no pleaded issue as to the quantum of overdue creditors other than in Australia and the United Kingdom. My opinion is that the evidence given by Mr Carter in paras 5 and 6 is relevant to ASIC's currently pleaded case, in the ways identified by ASIC in para 10 of AS 96. I shall develop this point when considering the September affidavit.

46 Secondly, they said it is too late to raise such an issue at this stage. That is a submission made in opposition to ASIC's application for leave to read the evidence, and is considered in another judgment: ASIC v Rich [2005] NSWSC 940.

47 Thirdly, the defendants contended Mr Carter's evidence in these paragraphs is nothing more than observation about the documents involving no application of specialised knowledge. I disagree. Mr Carter has the expertise to review and draw inferences from documents of the kind he identified in para 5 of his affidavit. His conclusions are non-specific but they are, in my opinion, based on his expertise and not open to objection on that ground.

48 In para 7 Mr Carter expressed the opinion that the Group cash required might also be understated to the extent that creditors might not have been recorded in the creditors ledger. He said this by reference to a voicemail of Mr Silbermann dated 17 April 2001 and an internal e-mail from Caren Wilson to Dave Robson dated 22 May 2001. Here I agree with the defendants' submission. The question whether the two documents provide evidence that the Group cash had been understated by not recording creditors in the creditors ledger is a matter of interpretation of the documents, which are not financial records but merely e-mails, and it does not involve any expertise of the kind possessed by Mr Carter. Therefore para 7 is rejected. Of course, it will be open to ASIC to make submissions inviting the court to make inferences of the same kind from the voicemail and e-mail.

49 The defendants submitted that they would be unfairly prejudiced by the introduction of this evidence, but in my opinion that submission does not provide a basis for excluding the evidence under s 135 of the Evidence Act or limiting its use under s 136. In my view the defendants' point relates to ASIC's delay in seeking to introduce the evidence, rather than some unfair prejudice flowing from the nature of the evidence and outweighing its probative value. The point is really about the application for leave to adduce the evidence rather than the statutory discretionary grounds for excluding or limiting evidence.

50 My conclusion is that paras 5 and 6 of the April affidavit are admissible, but para 7 is inadmissible.

Affidavit of 8 September 2004

51 ASIC presses paras 1-6, 7-9 (but excluding para "b" in 9), 12 and 13. The defendants do not object to paras 1-6, 12 and 13, and consequently those paragraphs are taken to be read. The only issue relates to paras 7-9. That includes admissibility of the single page "Non-UK International Creditor analysis" which is probably best treated as an annexure to the affidavit, identified at para 8. The defendants made several objections to this material (DS 84 at paras 40 and 41; and see AS 95 at paras DS40-41; DS 86 at paras 24-25).

52 First, they said that there is no pleaded issue as to the quantum of overdue creditors other than in Australia and the United Kingdom. In my view, paras 7-9 (and also paras 5 and 6 of the April affidavit) are relevant to ASIC's case as presently pleaded, in the ways identified by ASIC in para 10 of AS 96. First, evidence that the non-UK and European operations had substantial overdue amounts owing to their creditors supports ASIC's claim that the transfer of $26 million from the United Kingdom to Australia was a material event (FFASC, Schedule S21-24). Secondly, this evidence supports the allegation in the particulars to para 11(a) of the FFASC as to the likely monthly cash usage from operations until 30 November 2001, and tends to negate the existence of other resources which might be offset against the financial requirements specified in those particulars. Thirdly, it supports the allegations (FFASC, paras 37-48) that there was no reasonable basis for the media statements on 27 February and 4 April 2001 to the effect that One.Tel was tracking well against its forecasts. Fourthly, the evidence bears on the issue raised by the defences concerning the credit terms historically applicable to the European operations of One.Tel (see Defence of Mr Rich, s 36(g)(vi)). Fifthly, the evidence is relevant to the question whether there was a sound basis for the assumption made by Mr Carter in his principal report that there was no material change in the net worth of the international operations between 28 February and 29 May 2001 (Report, para 258 footnote 131).

53 ASIC submitted that Mr Carter's September evidence was relevant when seen together with other evidence which it specified in para 11 of AS 96, but it does not seem to me to be necessary to refer to that other evidence to reach the conclusion that the September and April evidence is relevant in the statutory sense.

54 That being so, the fact that that there is no pleaded issue specifically as to the quantum of overdue creditors other than in Australia and the United Kingdom does not render paras 7-9 inadmissible on the ground of irrelevancy.

55 Secondly, the defendants objected to the introduction of such an issue at this late stage. Again, this is a submission relating to the application for leave to read the evidence. It is considered in the judgment at [2005] NSWSC 940.

56 Thirdly, they objected to para 8 and the Non-UK International Creditor analysis on the ground that Mr Carter did not articulate the basis upon which he "estimated" the "various countries' month end overdue balances". They submitted that Mr Carter did not disclose the method and reasoning he used in arriving at his estimates of balances at dates other than those specified in the documents.

57 Mr Carter's conclusions in para 9 are merely a restatement of the total figures given in the "Non-UK International Creditor analysis". In that document he took information from the Netherlands and France creditor information and the merged tender bundle, identifying the sources in footnotes, and converted foreign currency figures into Australian dollars using currency exchange rates identified in the footnotes (and set out in Appendix I-1). The figures in the source documents are not month-end figures and there appears to be an assumption involved in using them as the source of month-end figures. But the source figures are close to month-end and so the assumption is obvious. In the circumstances my view is that the reasoning process has been adequately set out.

58 As with the April affidavit, the defendants have made submissions about an unfair prejudice, but upon analysis I think those submissions go to ASIC's application for leave to adduce the evidence though it was filed and served out of time, rather than the statutory discretionary grounds in ss 135 and 136 of the Evidence Act.

59 In the result, paras 7-9 of the September affidavit and the Non-UK International Creditor analysis are admissible.

Conclusions

60 The defendants' objections to the admissibility of paras 29-33 of the report of 13 December 2002 are unsuccessful, although the last sentence of para 33 is not pressed by ASIC. Their objections to the admissibility of paras 79-113 of that report are unsuccessful, although paras 86-89 are to be read as assumptions. Their objections to the admissibility of paras 5 and 6 of the affidavit of 14 April 2004 are unsuccessful, although their objection to the admissibility of para 7 of that affidavit is successful. Their objections to the admissibility of paras 7-9 of the affidavit of 8 September 2004 and the Non-UK International Creditor analysis are unsuccessful, though for reasons given in my judgment at [2005] NSWSC 940, leave to adduce that evidence has not been granted.

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LAST UPDATED: 05/10/2005