DSHE Holdings Ltd (Receivers and Managers) (in liq) v Potts; HSBC Bank Ltd v Abboud; Potts v National Australia Bank Ltd

1. [1]

   THE COURT: These three appeals arise from events culminating in the collapse, in January 2016, of the retail business carried on under the name “Dick Smith”. The company, Dick Smith Holdings Ltd, was floated on the Australian Securities Exchange in late-2013, and is now known as DSHE Holdings Ltd (receivers and managers appointed) (in liq) (DSH). The appeals have been brought from orders made in two proceedings following a trial in the Corporations List lasting some 57 days, mostly in September to December 2020 and February 2021 (the trial commenced in March 2020 but was delayed for six months, following the outbreak of the COVID-19 pandemic). The proceedings were brought by National Australia Bank Ltd (NAB) and HSBC Bank Australia Ltd (HSBC) (jointly), and by the receivers appointed to DSH. Mr Nicholas Abboud, the Managing Director and Chief Executive Officer of DSH, and Mr Michael Potts, the company’s secretary, Chief Financial Officer and also a director, were defendants to both proceedings. Six non-executive directors of DSH were also defendants to the proceeding brought by the company.

2. [2]

   Three representative proceedings brought on behalf of DSH shareholders were also heard concurrently, but settled during the course of the hearing, as did a claim against the company’s auditors.

3. [3]

   HSBC and NAB sued Messrs Abboud and Potts in respect of misleading and deceptive conduct said to have induced the banks to enter into a Syndicated Facility Agreement in June 2015 and, in HSBC’s case, a related Extension Agreement entered into in November 2015. DSH sued Messrs Abboud and Potts and the non-executive directors for breaches of the duty of care they owed under s 180(1) of the Corporations Act 2001 (Cth) and the general law by deciding to declare an interim dividend of $16.555m in February 2015 and a final dividend of $11.826m in August 2015. A further alleged breach was the failure to cause DSH to implement adequate procedures, practices or systems to manage the risks created by the adoption of a scheme to maximise rebates offered by suppliers, particularly “O&A rebates”, which were payments separate from ordinary trading terms, often agreed to informally at the time a purchase order was placed, and which were often associated with superseded or slow-moving stock. “O&A” is an abbreviation of “Over and Above”, reflecting the fact that the rebate was agreed to separately from the ordinary terms of trade with that supplier. As will be seen, O&A rebates had a direct and significant impact on profit, because they were recognised as revenue immediately (ie before the stock was sold).

4. [4]

   The primary judge delivered a substantial judgment of 613 paragraphs in June 2021: DSHE Holdings (Receivers & Managers Appointed) (In Liquidation) v Nicholas Abboud (No 3); National Australia Bank Limited v Nicholas Abboud (No 4) [2021] NSWSC 673. Very broadly speaking, his Honour found in favour of NAB but not HSBC, and he dismissed DSH’s claims against Messrs Abboud and Potts. The issues on the three appeals heard over five days in this Court are considerably narrower. These reasons take the following course:

   1. (1)

      Part A provides an uncontroversial factual overview of the events in question, drawn very substantially from unchallenged findings by the primary judge at [1]-[337], and with a focus upon the events between February and November 2015.

   2. (2)

      Part B addresses the appeal brought by DSH against Messrs Potts and Abboud.

   3. (3)

      Part C addresses HSBC’s appeal against Messrs Abboud and Potts.

   4. (4)

      Part D addresses Mr Potts’ appeal against NAB.

5. [5]

   We have concluded that DSH’s appeal against Messrs Potts and Abboud should be allowed in part, in that both men are liable to compensate DSH for breach of the duties they owed in deciding to declare a final dividend in August 2015, but otherwise dismissed. We have also concluded that each of the appeals brought by HSBC and Mr Potts should be dismissed.

6. [6]

   A more detailed outline of the balance of these reasons is as follows.

PART A: FACTUAL BACKGROUND

1. [7]

   On 26 September 2012, all of the issued shares in DSE Holdings Pty Ltd (DSE), the then holding company of the Dick Smith group, were acquired by Dick Smith Sub-Holdings Pty Ltd which had been established for that purpose and which was owned as to 98% by Anchorage Capital Partners Limited, a private equity firm. As part of its planning for the acquisition of the Dick Smith business, Anchorage put together a management team with the assistance of Mr William Wavish, who had been engaged by Anchorage as a consultant to assist with the acquisition. Whilst in a previous role, Mr Wavish had met Mr Nicholas Abboud and a number of other senior executives who were offered positions at Dick Smith following its acquisition by Anchorage. Those executives included Mr John Skellern, Mr Neil Merola, Mr George Papacosta, and Mr Mark Scott.

2. [8]

   Mr Wavish believed that DSE’s financial performance had been poor. It was his experience that supplier support, particularly in the form of rebates, was an important source of revenue for retailers as it enabled them to increase profitability and price their products competitively. According to Mr Wavish, prior to the acquisition, he together with Mr Phillip Cave, the Managing Director of Anchorage, and Mr Abboud decided that if they were successful in their bid for DSE, increasing supplier support (including maximising rebates) should form a key part of their overall strategy to improve DSE’s profitability.

3. [9]

   For the purposes of the float on the ASX, a new company, DSH, was incorporated on 25 October 2013. Following the float on 4 December 2013, Mr Michael Potts, who had joined DSE on 18 September 2013, became CFO and company secretary, and Mr Wavish became a non-executive director. A series of weekly management meetings was introduced, including a buyer/planner meeting at which the results of the previous week were discussed. The board of DSH met monthly, except in the months of December, January and September, and the directors were provided with board papers primarily prepared by Mr Potts and Mr Abboud, with the assistance of management. DSH retained Deloitte to audit and review its financial statements, a key focus of which was the accounting for and collection of rebates.

4. [10]

   In the first half of (calendar) 2014, DSH began to place greater emphasis on obtaining O&A rebates, for which Mr Skellern was delegated responsibility. He introduced regular “O&A meetings” attended by himself, buyers, merchandising managers, and the head of buying, at which targets were set for O&A rebates and buyers were encouraged to meet those targets. From April 2014, buyers were required to complete tracking sheets showing O&A rebates and other support received against all orders. Mr Skellern’s approval was required before an order could be placed with a supplier and often his approval was conditional on obtaining O&A rebates from that supplier.

5. [11]

   In order to meet the budgeted EBITDA for the year, Messrs Abboud, Potts and Skellern developed a plan in April 2014 which involved reducing the marketing expenses for the remainder of FY14 from $9.7m to $7.6m and increasing the target for O&A rebates from $10.2m to $17.2m. In order to achieve that increase, Mr Abboud approved an increase in “open to buy” (OTB), the available budget for each buyer that identified the value of stock that the buyer was authorised to buy, by $20m and subsequently $23m. Later in the financial year, the budget for O&A rebates for May and June 2014 was increased. Mr Abboud conceded in cross-examination that “the increase in the over and above rebate collect would be achieved, at least in part, by $20m extra OTB”, although he said that the release of a further $3m in OTB was because “a lot of our regional stores didn’t have enough stock to get the sales, and we were about to go into the June tax time period”.

6. [12]

   In order to increase the level of O&A rebates, some buyers suggested on occasions that suppliers increase the price of their products and provide the difference in the form of O&A rebates. Evidence was given that the amounts raised by that practice were sometimes referred to within DSH as a “fighting fund”. How widespread that practice was, however, is unclear, and there was no evidence that the board, including Mr Abboud and Mr Potts, were aware of it.

7. [13]

   On 26 May 2014, there was a board meeting to approve the budget for the 2014/15 financial year (FY15) attended by Messrs Abboud, Potts, Cave, Wavish, Ishak and Ms Raine. The budget forecast that DSH would earn $32.8m in O&A rebates and $29.2m in advertising subsidy (Ad Sub) rebates, with a gross marketing spend of $45m. It also forecast net profit of $47.3m and projected that inventory would be worth $226m at 28 June 2015 and that net end of financial month debt would peak in March 2015 at $55m.

8. [14]

   Mr Abboud accepted in cross-examination that in around June 2014, approximately $17m of O&A rebates were transferred to gross profit. In the middle of June 2014, Mr Abboud agreed to the release of a further $5m in OTB to generate $250,000 in Ad Sub and $500,000 in O&A rebates as part of a strategy to obtain an additional $2m in gross profit in order to meet the projections contained in the prospectus for the float.

9. [15]

   Evidence was also given that DSH bought stock in June 2014 that it did not need in order to generate additional gross profits through O&A rebates. Documents distributed to the Finance and Audit Committee (FAC) by Mr Potts on 11 July 2014 indicated that receivables had increased from an amount of $10.4m shown in the prospectus to $48.7m and that inventory had increased from $168.5m to $252m. Mr Potts’ commentary explained that the increase in inventory was “due to stock for new stores and David Jones ($35m), a lift in stock levels to a more normalised level ($30m) and additional stock purchased in June to ensure a strong start to FYI5 ($20m)”.

10. [16]

    The FAC met on 12 August 2014 to consider the FY14 accounts. On the same day, Mr Murray and Mr Potts were appointed directors of DSH. The accounts were approved at a board meeting held on 18 August 2014, and it appears to have been accepted by the board that the increase in inventory levels reflected the opening of new stores during the year and a healthier stock position, as well as an increase in the quality and ageing of inventory.

11. [17]

    The emphasis placed on collecting O&A rebates continued throughout FY15. Evidence was given that Mr Skellern typically required purchase orders to include a minimum of 10% in O&A rebates before they would be approved. At the request of Mr Abboud, OTB started to be allocated to categories in which the supplier paid more O&A rebates, so that in the case of categories where the supplier paid low or no O&A rebates, the business retained less stock (measured in terms of “weeks covered”) but in the case of categories where the supplier paid higher O&A rebates the business worked to higher weeks covered. By 23 October 2014, DSH had a spreadsheet in place which listed the O&A targets for each buyer and the “OTB Overspend Required” in order for the buyer to meet that target.

12. [18]

    In about September or October 2014, Mr Abboud introduced a system requiring private label suppliers to provide O&A rebates paid by the suppliers in exchange for an agreement by Dick Smith to increase the price it paid for their stock. That is to say, the price was increased and a rebate recorded for the difference, such that DSH’s profits increased but there was no change in the amount of money paid. Mr Abboud said that it was part of a strategy to expand the range of private label inventory and sales. By 28 December 2014 (the last day of the financial half year), a total of $6.9m of profit was recognised in the form of O&A rebates in respect of private label stock.

13. [19]

    It was also in around late October 2014 that Mr Michael Sullivan, General Manager – Procurement & Strategic Buying Operations, emailed buyers regarding the reporting of O&A rebates in the context of the upcoming yearly review. The email said that buyers should “[r]eference all O&A claims as promotional support or promotional activity”. The primary judge considered it plain that this instruction was given to provide support for DSH’s practice of taking O&A rebates immediately to profit. A similar instruction was given to buyers in January 2015, which specified that “the wording must not relate to an order and such”.

14. [20]

    Throughout FY15, Mr Christopher Borg began to express concern about DSH becoming overstocked. Mr Borg had joined Dick Smith in March 2013 as the Merchandise Planning Manager, with his title later changed to “General Manager – Planning”. On 19 November 2014 he emailed Messrs Orrock and Skellern saying, “As you know, we have over-ordered for the quarter and our closing stock is at risk”. Mr Borg put forward a proposal to move or cancel some purchase orders to deal with the problem. He noted in subsequent emails that a “significant amount” of purchase orders had been raised that quarter “to deliver our sales budget and drive the Ad sub and O&A [rebates]”. On 19 December 2014 there were almost $20m of purchase orders due between 29 and 31 December; Mr Borg noted that this was done “to maximise Dec O&A”, but requested that the payment terms be pushed out. The excessive stock position was compounded by delays in delivering containers of private label stock from China in time for the Christmas trading period.

15. [21]

    DSH began increasingly to delay paying some suppliers, pushing out in the order of $20m to $30m at any one time. Mr Abboud accepted in cross-examination that this was because DSH could not pay the creditors on the day their debts fell due. Some extensions were agreed with suppliers, and some were not. As explained further below, there was an extensive effort at trial to attempt to quantify this, but the primary judge accepted the criticisms made of the attempt, such that there is no clear evidence of precisely how many suppliers agreed to delayed payment, how many acquiesced in a delay, and how many actively indicated their absence of consent and who took further steps (including placing further orders by DSH on hold) until they were paid. Every supplier over the period seems eventually to have been paid, albeit that some were paid some weeks later than the contractual terms required.

16. [22]

    Many trade suppliers were on trading terms requiring payment at the end of the month which was one or two or three months after the stock was delivered. The consequence was that while the retail stores would generate revenue throughout the month, there would be a spike in payments falling due at the end of each calendar month.

17. [23]

    Further, DSH reported in terms of “financial months”, which ended on the last Sunday before the end of the calendar month (if the last day of the calendar month was a Sunday, the financial month ended the previous Sunday). The fact that revenue and expenses were reported in financial months, but there was a sharp spike in payments due at the end of the calendar month, meant that cashflow for a financial month would omit the outflows which would occur a few days later, at the end of the calendar month. As will be seen below, this is significant to the finding of breach made against Mr Potts in relation to the final dividend, and the appeal against Mr Abboud on the same topic.

18. [24]

    On 8 January 2015, Mr Borg informed Messrs Abboud and Potts that the current stock on hand was worth $356m, a substantial increase from the end of the previous financial year, and above forecast. The stock on hand covered some 19.14 weeks of sales across all categories, against an agreed position of 13.2 weeks. In the “Home Solutions” group, all categories were more than 100% overstocked. There was also said to be over $100m in stock on order (including some orders which had been pushed out from December).

19. [25]

    The following day, Mr Potts emailed Mr Abboud with a list of “key priorities” to deal with the inventory position, which included preparing “a list of suppliers … to push out in February and March” and modelling by Mr Borg of the “impact of $50m (?) clearance activity to reduce stock and increase cash”. Another item was to meet with HSBC, ANZ, CBA and NAB prior to meeting with Westpac in February, at which time an increase in DSH’s facility with Westpac was to be requested, upon which part of HSBC’s appeal turns and which is addressed in more detail below.

20. [26]

    The following week, Mr Borg sent Messrs Abboud, Potts and Skellern an analysis showing that if OTB was reduced to target a closing inventory position of $260m to $270m, then it was likely that DSH would fall $14.9m behind its target profit projections. That analysis assumed an “Extra Private label uplift” of 20%, adding $4.6m to profits. A revised analysis suggested that the shortfall in O&A rebates could be overcome by moving $8m of purchases away from Apple to “Ad sub and O&A attracting vendors” and acquiring $40m of extra stock to deliver an extra $6m of Ad Sub and O&A rebates. It is unclear what in fact occurred. However, DSH’s accounts disclosed that in fact a total of $16.697m was booked to private label O&A in January to June 2015, and the inventory was reduced to $293.044m by the end of FY15.

21. [27]

    At a meeting on 12 February 2015 attended by Messrs Wavish, Ishak, Abboud, Potts and Ms Raine, the FAC considered a report prepared by Deloitte in connection with its review of the half year accounts (HY15). That report identified increases in O&A rebates for HY15 and noted that while there were still “internal control deficiencies in the accrual process for O&A Rebates”, there had been a “significant improvement in the quality of information and supporting evidence for rebates accrued”. In relation to inventory, the report stated that “[i]nventory balances have increased from FY14 as a result of additional stores open at 28 December 2014 and increased buying activity in the period”.

22. [28]

    At the same meeting, the FAC considered a short dividend discussion paper prepared by Mr Potts which recommended an interim dividend of 7 cents per share, which represented a payout ratio of 65.7% and a total dividend of $16.555m, to be paid on 30 April 2015. According to the paper, “[t]his timing reflect[ed] the Company’s operational cash flow requirements and ha[d] been factored into the weekly cash flow forecast”. The FAC accepted the recommendation.

23. [29]

    It is not clear which cash flow forecast formed the basis of the recommendations in the paper, although a daily and weekly forecast from about 9 February 2015 predicted that on several occasions before the dividend was due to be paid, DSH would exceed the limit of the facility it had with Westpac at the time.

24. [30]

    The DSH board meeting on 16 February 2015 was the first meeting since November 2014. Present were Messrs Cave, Wavish, Ishak, Murray, Abboud, Potts, Orrock and Ms Raine. Board papers circulated prior to the meeting included a trading update that stated that there had been an “[i]nventory increase in line with seasonal requirements for Christmas trade”. Sales for January 2015 were well ahead of budget, attributable to a sale on Apple products at a 10% discount, but the net inventory figure for January was well above the November 2014 forecast, and net profits after tax for the month were approximately 17.7% below budget. Mr Murray gave evidence that Mr Abboud and Mr Orrock were questioned at that meeting by the non-executive directors about the reasons for the unexpected build-up in inventory between November 2014 and January 2015 and how management intended to sell down that inventory.

25. [31]

    By reference to the dividend discussion paper prepared by Mr Potts, the board declared the payment of an interim dividend which was subsequently paid on 30 April 2015. Evidence was given that the payment of the interim dividend required the deferral of payment of some of DSH’s creditors.

26. [32]

    On 3 February 2015, two weeks prior to the board meeting at which the interim dividend was declared, Messrs Potts and Abboud attended a meeting with representatives from HSBC, Messrs Kowik, Katiforis and Sargent, to discuss the direction of the DSH business and what HSBC could offer DSH. This followed a number of discussions prior to February 2015 about HSBC providing one or more facilities to DSH. In particular, in connection with a $10m supply chain facility not taken up at the time, Mr Kowik had prepared a credit application, known within HSBC as a “Credit Analysis & Risk Management” document (CARM).

27. [33]

    At the time of the float, DSH had had a finance facility with GE Commercial Corporation (Australia) Pty Ltd. In March 2014, Mr Potts took steps to replace that facility with one on more favourable terms, and on 26 June 2014, DSH entered into a facility agreement with Westpac. The agreement included working capital facilities of $27m and $25m and an overdraft facility of $30m. At about the same time, DSH entered into an extended vendor financing arrangement with Macquarie Bank with a $15m limit. The limit on the Westpac overdraft facility was increased to $45m from 24 October 2014, and then to $50m from 30 January 2015 to 30 April 2015 (there was also a short term extension for the Christmas period). DSH exceeded each of the approved limits on a number of occasions during that time. The non-executive directors were not informed of the increases in the overdraft limit. The overdraft facility with Westpac was due to expire in June 2015.

28. [34]

    That was the background against which the 3 February 2015 meeting with HSBC occurred. Messrs Abboud and Potts took three HSBC representatives, Messrs Kowik, Katiforis and Sargent, through a PowerPoint presentation on DSH’s history, the terms of its current facility with Westpac and its plans, indicating that there had been strong improvements in gross margin and that net profit had increased from FY13 to FY14.

29. [35]

    During the meeting, Mr Katiforis suggested that DSH obtain its replacement facility from a syndicate of at least two banks and suggested that security could be provided through a security trust deed mechanism. Around the time of the meeting, DSH was in a tight financial position and was experiencing difficulties in paying a number of creditors.

30. [36]

    Following the meeting, Mr Kowik prepared a CARM for a $50m overdraft facility for DSH. The CARM was dated 5 March and submitted for assessment on 18 March 2015. The credit application was assessed by Mr Gregory Rogers, the Senior Manager, Wholesale & Market Risk, at HSBC. The treatment of Mr Rogers’ evidence by the primary judge formed a central part of this aspect of HSBC’s appeal.

31. [37]

    The CARM contained general statements relating to DSH’s financial position, inventory and trade payables, notably:

    1. (1)

       DSH paid suppliers once a month on the 30th day of the month, whereas it collected sales on a daily basis.

    2. (2)

       DSH normally settled its suppliers during the first five days of the next month after delivery. This pattern was said to be consistent with DSH’s financial reporting which indicated relative cash rich positions at month’s end.

    3. (3)

       DSH’s inventory had increased by $85m in FY14, with stock turnover at 101 days in FY14, up from 85 days in FY13. This increase was said to have been due to (i) a net increase of 54 stores, (ii) normalisation of stock levels following the clearance of obsolete stock that occurred in FY13, (iii) private label stock in transit, and (iv) an expected strong start to FY15.

32. [38]

    On 19 March 2015, Mr Rogers emailed Mr Kowik a number of questions about the information in the CARM, including as to stock turnover and obsolescence and a periodic “clean down” (ie repayment in full) of the facility. Mr Kowik replied that a clean down of the overdraft facility would be required once during each half of the year for not less than three consecutive days, which he believed would be effective as the overdraft was expected to be used only for working capital, and that “[t]here is no obsolescence stock [sic] anymore under the new management”. Mr Rogers approved the facility on 20 March 2015.

33. [39]

    Following that approval, several additional CARMs were submitted seeking variations to the facility, including one which explained that DSH was looking for a total on balance sheet borrowings of $130m using a two bank structure, with HSBC providing an overdraft facility of $60m. Mr Rogers approved this revised CARM conditionally “for the same reasons as the original approval”.

34. [40]

    At the board meeting on 20 April 2015, by which time Mr Tomlinson had been appointed as a director of DSH, the board, on Mr Potts’ recommendation, authorised a competitive tender between Westpac, ANZ, the CBA, HSBC and NAB for a facility of $135m to replace DSH’s facility with Westpac. At that same meeting, Mr Tomlinson raised the issue of DSH’s cash position; the cash flow statement showed that cash was negative $101m, more than the $82m limit of the Westpac facility. Mr Potts explained that he had arranged an extension to the Westpac overdraft facility to a maximum of $50m.

35. [41]

    There followed discussion of the fact that the board had not been informed of the extension, despite the fact that board approval was required to a change in existing debt facilities.

36. [42]

    On 28 April 2015, Messrs Potts and Abboud met with NAB representatives, giving a PowerPoint presentation substantially the same as the one provided to HSBC, on the background to DSH’s business and the current facilities with Westpac. One NAB representative, Mr Tim Cohen, prepared a file note of the meeting (referred to as a “Call Report”). Little turned on what was said at this meeting, save that Mr Abboud accepted that he did not recall anything being said about the practice of increasing the price of private label stock to obtain O&A rebates, nor was there any mention of DSH delaying paying creditors.

37. [43]

    Mr Cohen directed the proposed tender to Mr Paul Taylor, who was assisted by Mr Alan Menzies, each in NAB’s Client Fulfilment Team, to prepare the relevant credit application and associated documents for approval by, inter alios, Ms Karen Peter, Head of Credit – Property, Consumer, Telecommunications, Media and Entertainment. Messrs Taylor and Menzies undertook financial modelling for that purpose, based upon publicly available accounts for DSH and broker reports. Mr Potts also provided them with DSH’s monthly financial information for FY15 and the forecast numbers for FY16. The primary judge records that Messrs Taylor and Menzies noticed that the monthly figures revealed that DSH’s inventory peaked in January 2015, contrary to their expectations that inventory would fall following the Christmas trading period.

38. [44]

    It was against that background that Messrs Cohen, Taylor and Menzies attended a meeting with Mr Potts on 6 May 2015 to discuss the management accounts. Mr Menzies made a file note of what occurred at the meeting. Mr Menzies (by reference to his file note) and Mr Taylor gave evidence that the principal reason Mr Potts gave when asked why DSH was overstocked in January 2015 was the late arrival of a shipment of private label stock from Hong Kong. The primary judge accepted that evidence, the detail of which is central to the challenge in the Potts appeal.

39. [45]

    Following the meeting on 6 May, Mr Menzies circulated drafts of the credit memorandum within NAB, based upon which he received comments and questions. He then had a telephone conversation with Mr Potts on 11 or 12 May. Mr Menzies gave evidence that in that conversation Mr Potts explained that the projections for 2016 which he had provided to Mr Menzies showed only a small increase in sales because they excluded commercial sales, which had been included in the data for 2015. Mr Menzies largely rewrote the clause in the credit memorandum entitled “Working Capital and Facility Requirements” and recirculated the draft memorandum on the evening of 12 May. The memorandum was submitted for approval in substantially the same terms on 15 May. The memorandum sought approval for 50% participation in a two bank structure, with proposed facilities of up to $150m to allow for DSH’s seasonal peak. Information in sections of the memorandum bearing upon DSH’s inventory levels was said to have come from Mr Menzies’ discussions with Mr Potts, which are also relevant to the Potts appeal. The memorandum was approved on 20 May 2015, again subject to conditions which included a clean down of the facilities every six months.

40. [46]

    Ultimately, on 22 June 2015, NAB and HSBC entered into the Syndicated Facility and associated agreements with DSH and its related bodies corporate. The Syndicated Facility contemplated, for NAB, working capital advances of $35m and $40m for specified purposes, and for HSBC, a single overdraft facility in the amount of $60m. The primary judge summarised the evidence of the credit approvers for NAB (Mr Johnson and Ms Peter) and HSBC (Mr Rogers) at [255]-[256], to the effect that they likely would not have given credit approval had they been informed that, inter alia:

    1. (1)

       By reason of its emphasis upon rebate maximisation, DSH management made purchasing decisions based on the rebates available from suppliers, rather than based on current or likely demand for the stock, and these purchasing practices were the real reason why DSH had ordered significant additional inventory before Christmas 2014;

    2. (2)

       DSH had requested that certain suppliers defer delivery of goods ordered before Christmas 2014 to January 2015 or later because DSH had insufficient funds to pay for that inventory; and

    3. (3)

       DSH did not have in place adequate procedures, practices or systems to detect, value or, where necessary, provision for or write-off obsolete or near end-of-life inventory.

41. [47]

    At the board meeting on 17 March 2015, a presentation was given on vendor rebate processes, following a request Mr Murray had made to Mr Abboud. Mr Murray had made the request because he was conscious of the significance of O&A rebates to DSH’s profits and was conscious that they were in the discretion of suppliers. The presentation noted deficiencies in DSH’s systems for collection and timely and accurate reporting of O&A rebates, but there was apparently no discussion of the accounting treatment of O&A rebates or of the payment of O&A rebates on private label stock through a process of increasing the price of the stock.

42. [48]

    In April 2015, Mr Tomlinson was appointed a director of DSH and chairman of the FAC. On 20 April 2015, in addition to the board meeting (at which the competitive tender for the banking facility had been authorised and the negotiation by Mr Potts of the extension to the Westpac facility without board approval had been discovered), there was a meeting between Messrs Abboud, Potts, Borg, Skellern and others to review the stock position. The minutes from that meeting recorded that the stock position would be reviewed weekly. On 22 April, Mr Tomlinson emailed the chair of the board’s remuneration committee, raising concerns that the remuneration of management was encouraging risky behaviour, and on 27 April he emailed Mr Potts asking whether negative $91m cash flow at the end of March was normal and seasonal. Mr Potts replied that it was not. He noted that:

43. [49]

    As has been noted, the interim dividend declared on 16 February 2015 was paid on 30 April 2015. At the board meeting in May, Mr Tomlinson had noticed that the level of inventory had not decreased as had been forecast. He gave evidence that Mr Potts said that management was making “deliberate decisions in building inventory” to take advantage of the high exchange rate, to implement the strategies of investing in private label inventory and building DSH’s appliances business, and to support new store growth. Mr Tomlinson said that he and other directors expressed concern about the how these strategies were impacting DSH’s balance sheet and inventory levels. At the board meeting on 16 June 2015 (at which the Syndicated Facility was approved), a “KPI Summary” included in the board papers indicated that DSH’s net debt as at the end of May 2015 was $104.7m and the forecast net debt position at the end of the financial year was $40.1m. It also indicated that days covered ranged from approximately 90 to 120 days during the financial year, had remained above 110 days since October 2014 and were still at 110 days at the time the board papers were prepared, although they had declined from a peak in about early February 2015 and were forecast to decline again slightly in June. Mr Murray said he sought assurances at that meeting from management that they believed that Dick Smith would achieve the forecast inventory figure of $275m.

44. [50]

    In the lead up to the end of the FY15, DSH continued with its strategy of seeking to improve its financial results by maximising O&A rebates. An additional $20m in OTB was released during this time and the merchandise managers, Mr Borg and Mr Orrock, received daily updates of the amount of O&A rebates obtained from the use of the additional OTB.

45. [51]

    DSH’s daily cash flow as at 26 June 2015 forecast that the net cash position would be in excess of its new facilities at the end of the financial year. The forecast suggested, however, that the cash position would improve substantially after that date. Papers prepared for a board meeting on 20 July 2015 recorded that net debt at the end of FY15 was $41m against a forecast of $40.4m and that inventory days covered was slightly above 110 days.

46. [52]

    On each of 28 and 30 July 2015, Mr Borg sent emails to Mr Abboud, with copies to Mr Orrock and Mr Potts, seeking a meeting to discuss stock. He stated in his emails that the overstocking of certain accessories meant that OTB was being squeezed for other categories which were understocked, and outlined the categories driving the overstocks. It was around this time that Mr Potts engaged Mr Mike Holtzer, a consultant who had worked with DSH in the past, to develop and implement a system for recording and tracking vendor rebates, and to investigate the size of the problem with DSH’s inventory position. Mr Holtzer engaged Mr Andrew Powell of Agile Commerce Consulting Pty Ltd to assist him with that task.

47. [53]

    The FAC met on 11 August 2015. Presented at the meeting were DSH’s accounts for FY15 as well as a report dated 6 August 2015 from Deloitte. In relation to inventory obsolescence, the report repeated much of what was said at the time of the half yearly review. It pointed out that the provision for obsolete stock had reduced by $3.2m from the previous year and explained that management had adopted a new methodology for calculating the provision which had been further refined in FY15. There was also a discussion at the FAC of a final dividend, although it appears that no paper was presented to the committee on the payment of the dividend and there is little evidence of what was discussed.

48. [54]

    The daily cash flow forecast for the period starting 17 August 2015 showed that from the week starting 31 August 2015, DSH would exceed its facilities limit of $135m on multiple occasions up until mid-December 2016, and that cash at the end of FY16 would be negative $85.29m. This forecast may be contrasted with the one produced at the end of FY15, which suggested that DSH would not exceed its facility limit during the forecast period. It may also be contrasted with the cashflow position contained in the board papers, which reported in terms of financial months and did not show the end of month payments out (there were other differences too, which will be addressed in detail in Part B below).

49. [55]

    Mr Tomlinson gave evidence that by this time, he had formed the view that Mr Abboud was overly optimistic and that Mr Potts was out of his depth.

50. [56]

    Nonetheless, at the board meeting on 17 August 2015, attended by all the directors, DSH’s FY15 financial statements were approved, which were published and lodged with the ASX on the same day, as was the final dividend of 5 cents per share with a total value of $11.826m, to be paid on 30 September 2015.

51. [57]

    On 2 September 2015 Mr Potts foreshadowed, and on 13 October requested, a temporary increase in DSH’s overdraft facility with HSBC. In an email following the second conversation, the increase was described as “Boxing Day financing”. On 14 October, Mr Kowik submitted a CARM in respect of the increase for approval by Mr Allan Byrne, Senior Manager, Wholesale Risk at HSBC. Approval was sought for a temporary increase to the existing overdraft by $20m for the period 15 November 2015 to 15 January 2016 “to fund increased inventory required for anticipated Boxing Day sales”. After 15 January 2016, the limit would “revert back to the original $60m facility limit”.

52. [58]

    Mr Kowik was asked to clarify whether the increase was a normal seasonal requirement which had been a feature since DSH was floated in 2013. He confirmed that “the seasonal requirement started in Dec14 with $20m” and there was no earlier seasonal requirement, as “in 2013 they were trying to re-shape their inventory”. Mr Byrne approved the increase later that day, 20 October 2015, commenting:

53. [59]

    Mr Byrne gave evidence that had he been told, inter alia, that the increase was in fact sought to fund DSH’s ongoing cash flow difficulties or that DSH’s practices with respect to obsolete stock were inadequate, he would not have granted credit approval absent a favourable report by an independent external reviewer.

54. [60]

    There was evidence that, in September and October 2015, restrictions were placed on DSH’s ability to buy stock that it needed because of its deteriorating financial position. According to Mr Borg, the Sydney International Airport store did not have the stock it needed and “OTB was not available to buy the product required until the next month”. DSH was seeking to delay payment of as many creditors as possible, including by seeking payment extensions from a number of private label suppliers.

55. [61]

    Board approval of the $20m facility increase was still required. On 21 October, the day after HSBC approved the credit application, Mr Ishak and Ms Raine were asked to sign a circular resolution approving the increase. They declined to do so and Mr Tomlinson asked Mr Murray to convene an informal meeting of the board to discuss DSH’s cash/debt position ahead of the AGM. Mr Murray replied:

56. [62]

    The board met on three consecutive days in late October. On the 26th, there was a discussion of cash flow requirements up to Christmas 2015. Mr Abboud advised that trading in October 2015 was likely to be significantly below budget. Mr Potts also presented on the accounting treatment of O&A.

57. [63]

    On the 27th, Messrs Abboud and Potts advised the board that the October month trading shortfall to budget was approximately $5m net profit after tax (NPAT). They presented the outcomes of management’s scenario analysis that indicated a revised likely NPAT range for FY16 of $37m to $43m, but indicated that the range did not include any clearance of over-stocked inventory, nor the impact of any adjustment to O&A accounting treatment. This followed a presentation on the same day, given by Messrs Holtzer and Powell to Mr Potts, according to which DSH held $120m of problem inventory and an appropriate impairment liability was $63,877,544. Mr Potts told Messrs Holtzer and Powell that their analysis would not be believed and instructed them to get a second opinion from Mr Borg.

58. [64]

    On the 28th, Messrs Abboud and Potts presented revised financial forecasts. They told the board that “the drivers of the result include[d] lower sales and adverse gross margin” and that “November had commenced trading consistent with October, with a commensurate concern regarding Christmas trading”. Again, these forecasts did not incorporate any impact of accelerated clearance of approximately $56m of over-stock inventory or changes to O&A accounting treatment. The board resolved that a detailed inventory analysis be presented at the November 2015 meeting, and approved the issue of a trading update which indicated that NPAT could be $5m to $8m below previous guidance of $45m and $48m. Mr Abboud gave evidence that the poor trading performance in October 2015 and the forecast poor performance for the rest of the year was largely due to a decline in sales, particularly in the Office group which made up 42% of Dick Smith’s sales in FY15. The decline was said largely to have been due to the launch of Windows 10 by Microsoft, which adversely impacted computer sales globally.

59. [65]

    Also on 28 October, Mr Kowik sent Mr Byrne a CARM in relation to the profit downgrade DSH had announced that day. Mr Byrne said that he regarded the profit downgrade as “quite a cause for alarm”, but that by that stage he believed that HSBC was committed to providing the increase in the overdraft facility. HSBC entered into the Extension Agreement with DSH on 16 November 2015, by which it agreed to increase the total commitment provided by HSBC from $60m to $80m. The money was advanced that day.

60. [66]

    On the basis of instructions given to them by Mr Potts, Messrs Holtzer and Powell continued to work on the inventory issue with Mr Borg. Dividing stock into six categories, the first five of which were classified as “problem stock”, each of the three applied a different methodology to calculate the value of the problem inventory and the corresponding value of the impairment to DSH in selling that stock. The results were diverse. Mr Borg calculated an impairment of $19.8m in the value of problem inventory of $189m, Mr Holtzer calculated an impairment of $58m, and Mr Powell an impairment of $65.8m.

61. [67]

    Although it was submitted by Mr Abboud and Mr Potts at first instance that Mr Holtzer and Mr Powell had an interest in calculating higher levels of impairment in order to secure themselves additional work from DSH, the primary judge acknowledged that nothing turned on the issue. Messrs Holtzer and Powell were not called as expert witnesses, and their evidence was only admitted as evidence of their subjective understanding or belief, and not as evidence as to the truth of any fact or opinion asserted. Their evidence helps to explain the circumstances in which the board took the decisions it did. It is not evidence that the impairments they identified were correct.

62. [68]

    At a board meeting on 24 November 2015, the board requested an updated inventory analysis highlighting excess inventory and plans to reduce it. In advance of a further board meeting on 27 November 2015, Mr Potts gave Mr Abboud a summary of how the impairment was calculated based on the work done by Messrs Holtzer and Powell, and a document outlining a way forward. Both of those documents were provided to the board, which requested a further analysis of inventory, cash flow and debt implications and asked that a solicitor from MinterEllison attend further discussions. At a meeting on 29 November 2015, the board resolved to take a $60m non-cash impairment. Of that decision Mr Murray and Mr Tomlinson both gave evidence that the board had been placed in a difficult position and that it did not have adequate time to consider the information it had been given. The impairment was announced to the market at the opening of the ASX on 30 November 2015.

63. [69]

    Following the announcement to the ASX, the board met again on 7 December 2015. At that meeting Mr Potts advised the board that discussions with NAB and HSBC were ongoing and that management was accessing options to increase the available capacity within the banking facility. The board requested that management formally request an extension of the $20m temporary facility, recognising, based on the information provided by Mr Potts, that it was unlikely the request would be granted.

64. [70]

    Further negotiations with the banks led to an agreement by the banks to extend the overdraft facility on a number of conditions, including that no draws on the overdraft facility would be used to repay or reduce debt owed to creditors including Macquarie Bank. Mr Abboud did not believe that the varied arrangements prevented DSH from using those funds to repay Macquarie prior to the commencement of the extended facility period (a view shared by Mr Murray) and on 24 December 2015, DSH drew down the HSBC overdraft facility to pay $9.961m to Macquarie. On 30 December 2015, it drew down a further $1.195m to pay Macquarie.

65. [71]

    On 31 December 2015, NAB wrote to DSH notifying that it had breached the terms of the Syndicated Facility by making the payments to Macquarie and requiring the breach to be remedied within 10 business days. Unable to remedy the alleged breach or reach agreement with the banks to waive it or to accept DSH’s interpretation of the condition in question, on 4 January 2016, the board resolved to put DSH and its subsidiaries into voluntary administration. Following that resolution, the banks appointed the receivers.

66. [72]

    The receivers elected to continue to trade with a view to selling the business in mid-March. However, in a report dated 14 January 2016, they observed that the business was in a “very distressed state” and that a series of problems had led to large declines in sales, rendering continued trading unsustainable. On 24 February 2016 the receivers decided to close the business, and appointed Hilco Merchant Australia Pty Ltd to close the stores and sell the remaining stock.

67. [73]

    The most recent report of the receivers in evidence at first instance was Update No 25 dated 7 November 2018. The report estimated that there would be a deficit of between $72.70m and $75.52m in the return to the banks. Earlier reports indicated that the receivers had funded a number of preference claims brought by the liquidator, including a preference claim against Macquarie, which was settled for $6.5m.

PART B: DSH’S APPEAL AGAINST MESSRS POTTS AND ABBOUD

1. [74]

   As noted above, DSH sued Messrs Potts and Abboud, along with the non-executive directors, for breach of s 180 of the Corporations Act in voting as directors (and CFO and CEO respectively) in favour of the board resolutions to pay each of the interim dividend and the final dividend with respect to FY15, along with their alleged failures to cause the company to implement adequate procedures relating to the O&A rebates.

2. [75]

   With respect to the claim for the interim dividend the primary judge held DSH had not established that either of Messrs Potts or Abboud had contravened s 180. As regards the final dividend, his Honour held that DSH had established a contravention of s 180 by Mr Potts but not by Mr Abboud. However, he held that the company had not made out that it had suffered any damage as a result of Mr Potts’ contravention.

3. [76]

   So far as DSH’s claims rested on the O&A rebates, the primary judge held that Mr Abboud breached s 180 because from about January 2015 there was “mounting evidence that there were problems with the approach DSH was taking to the acquisition of stock”, and that Mr Abboud should have ensured that a review was undertaken “to determine the categories of stock where DSH had too much stock and those where it did not and would have put in place a system designed to ensure that buyers bought stock falling into the latter category”: [414]. He reached a similar conclusion as regards Mr Potts: [415]-[416]. However, his Honour found that DSH’s evidence did not establish what, if any, loss the company suffered as a result. DSH has not appealed from this finding. However, to some extent the findings of breach on this issue echo in the arguments raised by both sides as regards the dividends.

4. [77]

   DSH appeals against the decision of the primary judge on three grounds relating to the two dividend payments, which are numbered 1, 2 and 4 in the amended notice of appeal (ANA). Ground 3 related to claims made against the non-executive directors, but the appeal against those directors was withdrawn. DSH seeks that Messrs Potts and Abboud pay damages representing the full amounts that the company paid out in the final and interim dividends, along with interest from the date the money was paid out. Messrs Potts and Abboud filed a joint notice of contention (NOC).

5. [78]

   The issues that are raised by the parties are as follows:

   1. (1)

      Did the primary judge err in finding that Mr Potts contravened s 180 of the Corporations Act by voting in favour of the decision to pay the final dividend, and did he err in finding that Mr Abboud did not do so (NOC grounds 1 and 2; ANA grounds 2(a)-(b))?

   2. (2)

      Did the primary judge err in finding that neither Mr Potts nor Mr Abboud contravened s 180 by voting in favour of the resolution to pay the interim dividend (ANA, grounds 4(a)-(b))?

   3. (3)

      To the extent that any contraventions are made out, did his Honour err in finding that any such breach did not result in DSH suffering any damage for the purposes of s 1317H of the Corporations Act (ANA, grounds 1, 2(c) and 4(c))?

6. [79]

   These issues shall be addressed in turn. Before doing so, however, it is necessary to consider the construction of s 254T of the Corporations Act, which is central to DSH’s arguments on contravention, and then the potential relevance of that provision to an allegation of contravention of s 180.

The construction of s 254T

1. [80]

   At the relevant times s 254T provided as follows:

2. [81]

   The focus of the dispute was the third element of the prohibition, namely that “the payment of the dividend does not materially prejudice the company’s ability to pay its creditors”. Two principal questions of construction were suggested to arise. One is whether paragraph (c) is to be construed as if it included the words “as and when they fall due” (or, as it was put equivalently, “in full and on time”), as was submitted by DSH but disputed by the respondents. In fact, as shall be seen, this question does not involve reading in words but, rather, understanding what is conveyed by the notion of “prejudice” in the context of the subsection. The other question of construction concerned the company’s “ability” to pay its creditors, and whether that was satisfied merely by the presence of trading stock which could be sold.

3. [82]

   On the first issue, the difference between the parties was not as great as first appeared. There is good reason to be wary of reading words into text. That is especially so where, as the respondents to this appeal submitted, it is somewhat striking that the familiar words “as and when they fall due” are absent from s 254T(1)(c), in contrast to the definition of “solvency resolution” in s 9 and in the definition of solvency in s 95A. However, senior counsel for DSH also expressed the company’s construction in terms of identifying what constitutes the “prejudice” to which the paragraph refers. So understood, that was not far-removed from the following submission put by senior counsel for Mr Potts (who took the lead role on this point for the respondents):

4. [83]

   Thus Mr Potts accepted that the notion of “prejudice” could encompass late payment, but qualified by the notion of materiality. This approach was consistent with the primary judge’s statement at [457] that the reduced ability referred to in the provision “includes a material increase in risk that the creditors will not be paid at all and a material delay in paying them when their debts are due” (see also [482] and [509]).

5. [84]

   Consistently with these views, the type of prejudice identified in s 254T(1)(c) should be understood as encompassing not only payment to creditors per se, but also payment of debts as and when they fall due.

6. [85]

   As a matter of grammar, the word “prejudice” is employed in the paragraph as a verb, which should be understood in its ordinary sense of affecting disadvantageously or detrimentally. Not paying creditors on time is, in general, a detriment to them.

7. [86]

   More directly, in terms of the statutory text, a company’s ability to pay its creditors may meaningfully be said to be prejudiced if payment of a dividend would detrimentally affect the company’s capacity to pay its creditors in compliance with its legal obligations. As counsel for DSH put it, “an ability to pay always involves consideration of how much and when”. Further, as DSH also submitted, it would be surprising were s 254T(1)(c) to be capable of being satisfied merely by a liquidator ultimately making a distribution paying creditors in full. There is thus a need for there to be some temporal restriction upon when the payment of a company’s creditors is to occur. If the issue posed by paragraph (c) is not answered by the temporal qualification “in accordance with the time frame agreed between creditor and debtor”, then it is difficult to see what alternative exists.

8. [87]

   The first statutory note underneath s 254T(1) gives an example of material prejudice, namely that the company would become insolvent as a result of the payment. Solvency involves an ability to pay debts as and when they become due and payable, and the Act defines insolvency as being not solvent: s 95A. It is not necessary to seek to address here precisely how much an ability to pay on time feeds into solvency assessment. The note is, in any event, only one example. It suffices to say that the content of the note lends some support to the notion that prejudice can include having to delay payments.

9. [88]

   Questions of coherence also inform the analysis. The day after a debt falls due the creditor has a cause of action upon which it can sue the company, and which would (in the absence of an arguable case for variation or estoppel) sustain a statutory demand. If common law and statute law is available to vindicate a creditor’s entitlement to be paid in full and on time, why should s 254T be read so as to permit greater capacity to reduce the capital of the limited liability entity which incurs such debts?

10. [89]

    Turning to contextual considerations, the current version of s 254T was introduced by the Corporations Amendment (Corporate Reporting Reform) Act 2010 (Cth). Previously, the provision had provided, simply, that “[a] dividend may only be paid out of profits of the company”. This prohibition was of long provenance: see eg Wambo Coal Pty Ltd v Sumiseki Materials Co Ltd (2014) 88 NSWLR 689; [2014] NSWCA 326 at [56]-[59]. It manifested an aspect of the principle of capital maintenance, the basis of which was that people who deal with a limited liability company should be entitled to assume that, subject to capital being diminished in the course of trading, the company maintains the level of capital provided for in its constitution: see Trevor v Whitworth (1887) 12 App Cas 409 at 423-4. Minister Bowen stated in his second reading speech that the replacement of s 254T “relaxes the statutory requirement that companies may only pay dividends from profits, replacing the profits test with a more flexible solvency based requirement” (Hansard, House of Representatives, 26 May 2010 at 4132).

11. [90]

    As to the three requirements in s 254T(1), the explanatory memorandum states the following, under the heading “Detailed explanation of new law”:

12. [91]

    The memorandum also stated at [10.60] that “[t]he proposed new safeguards will also significantly improve the existing safeguards contained in the Corporations Act”. Presumably that statement was meant to reflect the fact that although the simple requirement that dividends only be paid from profits had been removed, three new requirements had been inserted.

13. [92]

    Beyond what has just been quoted, the explanatory memorandum did not expand upon what s 254T(1)(c) was meant to encompass. As referred to in the memorandum, the notion was taken from provisions in Ch 2J of the Act. In particular, s 256B(1) provides that a company “may reduce its share capital” if, inter alia, the reduction “does not materially prejudice the company’s ability to pay its creditors”. Section 257A deals with when a company may buy back its own shares, and applies the same criterion. Section 260A regulates when a company may give a person financial assistance to acquire shares in the company, and the criteria include that giving the assistance “does not materially prejudice” the interests of the company or its shareholders or “the company’s ability to pay its creditors”. These provisions all involve inroads into the general principle of maintaining capital.

14. [93]

    Re CSR Ltd (2010) 183 FCR 358; [2010] FCAFC 34 concerned a proposal by CSR to demerge its businesses by a scheme of arrangement. The proposal involved a reduction of share capital, such that s 256B applied. CSR had significant potential asbestos-related liabilities, which it had sought to quantify but which were inherently uncertain. Various parties opposed the proposed demerger on the basis that it could prejudice the asbestos claimants’ prospects of recovery. The primary judge in that case refused to order a shareholders meeting to consider the scheme of arrangement on the basis that the Court would be obliged ultimately to reject the scheme. The Asbestos Injuries Compensation Fund put the argument that “a company’s ability to pay its creditors is ‘materially prejudiced’ if the company is unable to pay its debts from its cash flow but is obliged to have recourse to the sale of its assets or to raise capital” (at [39]). The Full Court of the Federal Court rejected this argument insofar as it was said to be grounds for refusing to let the matter go to a shareholders meeting. Keane CJ and Jacobson J stated:

15. [94]

    Although it is possible that the issue of delays in payments causing prejudice to creditors was implicit in the argument put by the Fund, the issue was not considered in the Full Court. The Court’s acceptance that account can be taken of potential asset sales did not address the issue of delays. Where there is a long tail of liabilities, as in that case, the need to have recourse to asset sales in order to meet the liabilities may become apparent well in advance.

16. [95]

    The quotation within [45] of the joint judgment was from the explanatory memorandum to the Company Law Review Bill 1997. The paragraph quoted from the memorandum goes on to identify potentially relevant circumstances as “including the particular characteristics of the company and the situation of the company’s creditors”. The situation of the company’s creditors would include whether or not they were being paid on time.

17. [96]

    The prohibition on providing financial assistance in s 260A was considered by the High Court in Connective Services Pty Ltd v Slea Pty Ltd (2019) 267 CLR 461; [2019] HCA 33. The Court stated at [26]:

18. [97]

    It might be argued against the position of the parties that to introduce notions of “as and when debts fall due” is to put a gloss on the statutory text. However, any such suggestion would fail to recognise that the issue is understanding what types of prejudice can be relevant in applying the test of material prejudice to the ability to pay creditors. The High Court’s judgment does not suggest that a narrow approach should be taken to assessing that issue.

19. [98]

    Consistently with the parties’ submissions, in an earlier paper discussing the prohibition on financial assistance in s 260A the following was stated (Y Cho and V Kishore, “The ‘material prejudice’ test and the financial assistance prohibition” (2004) 78 ALJ 194, 201):

20. [99]

    Taking account of textual and contextual considerations, along with the cases cited, the parties were correct to accept that the relevant prejudice extends to the company’s ability to pay creditors as and when their claims fell due. However, it is important to understand that conclusion in the context of the other aspects of paragraph (c).

21. [100]

    As noted, the thing that must be materially prejudiced under paragraph (c) is the company’s ability to pay its creditors. The primary judge sometimes expressed the issue in terms of whether or not the payment of the dividends “materially prejudiced the interests of creditors” (eg [482], [486]). That phrase may have been employed by his Honour as a shorthand, but its use carries with it the danger of distracting from the statutory question. That question is not directly about the interests of the creditors, even if protecting those interests goes to the purpose of the requirement. Nor is the question whether or not creditors are actually prejudiced.

22. [101]

    That a company had a practice of paying creditors late does not necessarily mean that s 254T would be contravened by the company paying a dividend, although it does serve to raise the question. As the High Court indicated in Connective Services at [26], quoted above, the appropriate focus is on a comparison of the position before and after the payment. The question posed by the provision is whether the company’s ability to pay is materially prejudiced by the payment of the dividend. Ability, in the sense of capacity, is distinct from voluntary choice. A company may make a choice to pay creditors late. It may have an established habit of doing so. Similarly, a company may make a choice simply not to pay some creditors at all. Such behaviour may well point to circumstances of the company experiencing some degree of financial distress, in which case the s 254T issue may be starkly raised. But it does not necessarily do so. A company which regularly breaches its contractual obligations in pursuit of its own perceived short term self-interest might still have the ability to pay – in full and on time – regardless of whether or not a dividend is paid.

23. [102]

    A company which pays a dividend in circumstances where it is regularly not paying creditors in full and on time may well be criticised. By definition it will be in breach of its contractual obligations. Other legal norms might also be contravened in such circumstances. But s 254T does not impose a requirement of commercial purity before a dividend may be paid; its focus is narrower than that. The explanatory memorandum for the 2010 change stated at [10.52] that the “objective is to ensure that companies have the ability to distribute dividends if they have the ability to do so without causing detriment to ongoing operation”.

24. [103]

    Next, as senior counsel for Mr Potts rightly emphasised, the prejudice to the company’s ability to pay its creditors must be material. It is not just any prejudice to that ability which will meet this requirement. One must beware of putting a gloss on this notion. As the High Court stated in Connective Services at [27], drawing upon the explanatory memorandum for the 1997 Act which introduced the notion, “the question of material prejudice is fact-intensive”, and not to be determined “by reference to arbitrary rules”.

25. [104]

    Counsel for DSH submitted that “it can’t sensibly be supposed that that is a test which can be passed by leaving out of account some of the creditors”. However, he also put that the “focus is always on the company and considering all its creditors. It’s not a creditor by creditor question”. There must be material prejudice to the company’s ability to pay its creditors. That payment of a dividend may necessitate a delay in payment to one creditor does not of itself establish material prejudice to the company’s ability to pay. The delay might be slight and/or the amount small, such that the delay could not be characterised as meeting the statutory test. On the other hand, if payment of the dividend could only occur if large payments (in the context of the company in question) due to be made to one particular creditor had to be delayed for some period, that could potentially be characterised as material prejudice to that company’s ability to pay its creditors.

26. [105]

    It is then necessary to turn to the second construction issue raised, namely whether a characterisation of material prejudice of the relevant kind could be avoided by the company holding trading stock which could be sold. As follows from the analysis above, the answer is that it may be. As Keane CJ and Jacobson J stated in Re CSR at [44], “ability to pay one’s debts is a matter of objective measure of capacity rather than a subjective question of choice and to be determined by reference to all one’s resources whether income or assets”. But, again, statements of hard and fast rules should be avoided.

27. [106]

    Put in practical terms in the context of dividends, if the company in question could readily sell trading stock (eg by discounting) in order to address any cash flow issues arising from the payment of the dividend, then it may well be that payment of the dividend could not be characterised as materially prejudicing the company’s ability to pay its creditors as and when they fall due. On the other hand, if the stock or assets in question were of a kind that might be difficult to sell readily, the situation may be different. To pay out a dividend in such a case may well, in practical terms, materially prejudice the company’s ability to pay its creditors (in full and on time). The issue turns on the facts.

28. [107]

    In assessing those facts, some caution is warranted in accepting submissions that cash could be generated more or less readily by selling stock through having a sale. It is to be borne in mind that the core business of a retailer is selling trading stock, that a very familiar means of doing so is to have a sale, that many retailers (including DSH) were very familiar with sales promotions, that every product sold at a discount erodes the retailer’s margins, and thus converting stock into cash by discounting comes at a cost to profitability. All these things will be second nature to experienced retailers such as DSH. In short, a submission that stock can be sold rapidly at a discount is more complicated than it might seem, because if there were an easy and relatively profitable way for DSH to reduce the high stock levels with which it had been burdened for many months, there is no reason to doubt that it would have done so.

29. [108]

    A temporal issue arises with respect to applying s 254T. The prohibition applies to payment of the dividend. The asset test requirement stated in s 254T(1)(a) expressly refers to the position “immediately before the dividend is declared”. Paragraph (c) does not identify a particular time, suggesting that the relevant time to be assessed is as at the date of payment. The matter is complicated by s 254V(1), which provides that a company “does not incur a debt merely by fixing the amount or time for payment of a dividend”, and states that the debt “arises only when the time fixed for payment arrives and the decision to pay the dividend may be revoked at any time before then”. However, pursuant to s 254V(2), if the company has a constitution and “it provides for the declaration of dividends”, then “the company incurs a debt when the dividend is declared”. By implication, in such circumstances the decision to pay a dividend cannot be revoked once declared.

30. [109]

    Either way, in practical terms seeking to comply with the provision requires a company to look forward to the time of payment at the time of making the decision to declare a dividend. As the primary judge correctly stated at [455], “the directors must, consistently with their duties under s 180, consider what creditors the company is likely to have at the time of payment and whether the interests of those creditors will be materially prejudiced”. For companies where the issue is not addressed in their constitution, there may be a need to keep the issue under review until the time of payment.

31. [110]

    In summary, then, for the purposes of s 254T material prejudice can encompass a detrimental effect on the company’s ability to pay the claims of its creditors as and when they fall due. The issue is directed to the ability of the company to pay its creditors. The payment must cause material prejudice to that ability; it is not the case that any prejudice to any creditor will necessarily suffice. That question raises an issue to be assessed on all the facts of the case.

The significance of s 254T to the alleged contraventions of s 180

1. [111]

   Section 254T is not a civil penalty provision. The claim by DSH was not for a breach of s 254T per se, but rather that Messrs Potts and Abboud breached their duties as directors of the company under s 180 of the Corporations Act by voting in favour of payment of the dividends.

2. [112]

   It is well-established that a contravention of directors’ duties may be made out by failing to take reasonable care to ensure that the company did not breach other legal norms, whether within or outside the Corporations Act. Both sides referred to Cassimatis v Australian Securities and Investments Commission (2020) 275 FCR 533; [2020] FCAFC 52, in which a majority of the Full Court of the Federal Court upheld findings by Edelman J at first instance that directors of a financial services provider (Storm Financial) contravened s 180 by failing to exercise due care and diligence to ensure that the company avoided breaching legal requirements relating to the provision of financial advice.

3. [113]

   It is necessary in such a case to keep in focus that the relevant contravention is of the director’s duty owed to the company. Merely because an action of a company is likely to breach, will breach, or does in fact breach some other legal norm does not necessarily establish a breach of the duties owed by the directors to the company. Conversely, just because an apprehended breach did not in fact occur does not necessarily establish that there was no failure to comply with the duties of directors. Brereton J addressed the issue in Australian Securities and Investments Commission v Maxwell (2006) 59 ACSR 373; [2006] NSWSC 1052:

4. [114]

   At first instance in Australian Securities and Investments Commission v Cassimatis (No 8) (2016) 336 ALR 209; [2016] FCA 1023, Edelman J stated as follows, having referred to the passage from Maxwell:

5. [115]

   These points were echoed by Thawley J at [458]-[466] on appeal in that matter; see also Greenwood J at [71]-[79] and [179]-[184].

6. [116]

   The primary judge said here at [450] that, although the duty of directors under s 180 is owed to the corporation, it “cannot be the case that a director when considering whether to pay a dividend is entitled to ignore the requirements of [s 254T]”. No party took issue with that statement.

7. [117]

   As addressed above, s 254T looks forward to the time of payment of dividends. DSH’s case was focused upon the participation of Messrs Potts and Abboud in the decisions to declare the dividends, which of necessity occurred prior to payment. In those circumstances, it was not required that DSH establish that the company did in fact breach s 254T when it paid out the interim and final dividends. Rather, it was necessary that it establish that as at the time of the relevant board meetings the likelihood of non-compliance with s 254T was such that, with all the circumstances taken into account, a director exercising powers as a director with the degree of care and diligence that a reasonable person would exercise in the position of the respondents would not have supported the resolutions to pay the dividends. Consideration of that issue must take account, of course, of the fact that the respondents held the positions of CFO and CEO at the time; they were not non-executive directors.

8. [118]

   There was little disagreement between the parties as to the legal principles to apply in relation to s 180. Pursuant to s 180(1) of the Corporations Act, Messrs Potts and Abboud were obliged to exercise their powers and discharge their duties as such “with the degree of care and diligence that a reasonable person would exercise” if they (a) “were a director or officer of a corporation in the corporation's circumstances”, and (b) “occupied the office held by, and had the same responsibilities within the corporation as, the director or officer”.

9. [119]

   It has been recognised that s 180 overlaps with principles of negligence at common law: Vines v Australian Securities and Investments Commission (2007) 73 NSWLR 451; [2007] NSWCA 75 at [137]-[151] per Spigelman CJ, Ipp JA agreeing at [805]. It is thus unsurprising that whether or not a director or officer has breached the duty depends very much on the particular facts of the case. So much is reinforced by the statutory reference to “the corporation's circumstances”.

10. [120]

    The statutory test itself requires that account be taken of the office and responsibilities of the person. The “responsibilities” referred to may be statutory, or specific responsibilities conferred in fact on the person or office in question: Shafron v Australian Securities and Investments Commission (2012) 247 CLR 465; [2012] HCA 18 at [18].

11. [121]

    The parties cited the following statements by Middleton J in Australian Securities and Investments Commission v Healey (2011) 196 FCR 291; [2011] FCA 717 at [20]:

12. [122]

    DSH accepted that a director may delegate the carrying out of certain functions to others, and can in many cases “rely without verification on the judgment, information and advice of management and other officers appropriately so entrusted”, subject to such reliance being reasonable in the circumstances: Australian Securities and Investments Commission v Adler (2002) 41 ACSR 72; [2002] NSWSC 171 at [372(10)] (Santow J).

13. [123]

    These statements reproduced above were made as regards directors generally: see Vines v Australian Securities and Investments Commission at [730]-[731]. Much may turn on whether they also hold some office, such as being CEO or CFO; on whether some particular responsibilities have been placed upon them; and on what they actually did know or should have realised or queried. These matters serve to confirm the fact intensive nature of the assessment.

Did Messrs Potts and Abboud contravene s 180 with respect to the final dividend?

1. [124]

   Both in its amended notice of appeal and in its submissions DSH addressed its complaint with respect to payment of the final dividend before addressing its complaint about the earlier payment of the interim dividend. We will do likewise.

2. [125]

   As noted above, the primary judge found that Mr Potts, but not Mr Abboud, contravened s 180 in voting for the final dividend. Mr Potts challenges the finding that he did contravene the provision. DSH challenges the finding that Mr Abboud did not. DSH then challenges the finding that any contravention of s 180 did not cause the company any damage. It is convenient to address the liability issues as regards Mr Potts, then those relating to Mr Abboud, then to consider the issue of whether any damage resulted. We then turn to the interim dividend.

3. [126]

   The primary judge described DSH’s case in relation to dividends as “somewhat amorphous”: [440]. As pleaded, it had two limbs (Third Amended Commercial List Statement at [53], [68], [92], [94], [96] and [98]). The allegations were that there was no proper or adequate basis for the directors to approve either the interim or final dividend because:

   1. (1)

      there was no proper or adequate basis to approve the HY15 accounts (for the interim dividend) or the FY15 accounts (for the final dividend); and

   2. (2)

      there was no proper or adequate basis to form the view that payment of the dividends would not contravene s 254T.

4. [127]

   The first limb fell away in the course of the hearing below, as the allegations that the HY15 and FY15 accounts were materially misstated were struck out or abandoned: judgment at [10]. DSH has not sought to disturb that position on appeal. The company’s auditor, Deloitte, performed a review of the HY15 accounts and an audit of the FY15 accounts. Messrs Potts and Abboud had filed cross-claims against Deloitte in light of DSH’s attack on the accounts. When that attack failed, the case against Deloitte was dismissed in the course of the hearing. In this context, as stated by his Honour at [451], “[a]bsent some challenge to the accounts, it is difficult to see why the directors were not entitled to proceed on the basis that the accounts gave a true and fair view of the financial position of DSH”.

5. [128]

   As for the case based on s 254T, the contravention of s 180 was relevantly said to arise in circumstances where DSH said, as the primary judge summarised it, that “DSH had insufficient cash flow to pay a dividend consistently with s 254T(1)”: [444]. His Honour said at [445] that “[a]s finally put in oral submissions, the case rested principally on s 254T”. The contravention was relevantly pleaded in terms of Messrs Potts and Abboud contravening s 180 by:

6. [129]

   In simple terms, the heart of the company’s complaints was that DSH was having cash flow difficulties, and that payment of the final dividend exacerbated these, with the result that the ability of the company to pay creditors in full and on time was materially prejudiced. Messrs Potts and Abboud were said to have breached their directors’ duties by voting in favour of the dividends without having properly considered this issue.

7. [130]

   Clause 85 of DSH’s constitution authorised the directors to declare a dividend, subject to legal requirements and if “in their judgement … the financial position of the company justifies it”. Clause 86 authorised the directors to amend or revoke such a resolution prior to the record date, so long as this was permitted by the ASX Listing Rules. It is not necessary to consider here how this provision would interact with s 254V of the Act. DSH sought to argue in closing below that the directors breached their duties by not revoking the decision to pay an interim dividend. The primary judge rejected this argument on the basis that it had not been pleaded and should have been: [465]. That point has not been challenged on appeal. No such argument was put as regards the final dividend.

8. [131]

   Given that the alleged contravention of s 180 is voting in favour of the resolutions to pay the dividends, the relevant time for considering the alleged contraventions is as at the dates of the board decisions. The board resolved on 17 August 2015 to pay a final dividend of $11.826m, with a record date of 31 August 2015. The dividend was paid on 30 September 2015. The relevant time for consideration is thus as at 17 August 2015.

9. [132]

   When approving the dividend the board had before it the audited accounts for FY15: judgment at [489]. Those accounts indicated that the company had NPAT of some $37.4m (up from $19.4m in FY14) and had net assets of some $169m. At the time DSH was forecasting NPAT of $47.1m for FY16. The primary judge stated at [491] that there was nothing in the figures in the accounts “which would suggest that creditors would be materially prejudiced if DSH paid the proposed dividend”.

10. [133]

    The August board papers included a monthly cash flow document (the Cash Flow Statement) which recorded a negative position of $100.8m in July, which was then projected to decline, achieving a positive figure of $8.9m in December 2015. These figures showed that “DSH remained well within its new facility limit of $135 million”: [493]. His Honour concluded at [493] that “management’s cash flow forecasts included in the board papers for March 2015 to July 2015 had proved to be reasonably accurate” and, thus, that the non-executive directors were entitled to rely on these forecasts. He considered that was a sufficient basis to dismiss the claims against those directors: [495].

11. [134]

    As regards Mr Abboud, the primary judge said at [496] that he was in the same position as the non-executive directors, in particular because there was no evidence that he was aware of the daily cash flow projections which (as shall be seen) indicated that the company would have significant cash flow difficulties after August 2015.

12. [135]

    His Honour concluded that the position was different as regards Mr Potts because he must have had access to the more detailed daily and weekly cash flow forecasts: at [497]. Mr Potts did not give evidence at the hearing. His Honour referred at [498] to a weekly forecast prepared shortly before the board meeting which was said to indicate that “DSH would exceed its facility limit on multiple occasions and that it would exceed the facility limit by approximately $33 million on 30 September 2015 — the date that the dividend was due to be paid”. He concluded at [503]:

13. [136]

    The primary judge found that Mr Potts had contravened his duties as a director under s 180, albeit he then found that DSH had not established that it suffered any loss as a result.

14. [137]

    A proposal to pay a final dividend had been discussed at a FAC meeting on 11 August 2015, although the minutes of the meeting do not record this.

15. [138]

    The papers for the 17 August 2015 board meeting included a “FY2015 dividend discussion paper”. It is one and a half pages and contains relatively little analysis. Notable parts are as follows:

16. [139]

    There was no express discussion in the paper of how payment of the dividend might affect creditors, although the reference to the timing of the payment reflecting cash flow requirements and having been factored into the cash flow forecast implied that the payment would not cause difficulties with paying creditors. There was no mention in the board papers of the practice of deferring payment of creditors.

17. [140]

    The board papers also included a document titled “Position Paper – Capital Management”, although this did not address issues relating to payment of the final dividend.

18. [141]

    The minutes of the meeting do not record a resolution to pay the dividend as recommended, although they do record a resolution about how New Zealand domiciled employee shareholders were to be paid dividends, including the final dividend for 2015. It was not in dispute that the board did resolve to pay the dividend as recommended in the board paper.

19. [142]

    The board papers included the one page long Cash Flow Statement referred to above, which was part of a group of documents headed “CFO Update” summarising the company’s financial position. As the primary judge recorded at [492], this statement indicated the following month-end cash position (in thousands of dollars):

20. [143]

    His Honour’s finding at [493] that “management’s cash flow forecasts included in the board papers for March 2015 to July 2015 had proved to be reasonably accurate” was not challenged on appeal (see also at [476]). It seems that this Cash Flow Statement records the consolidated position of the corporate group headed by DSH.

21. [144]

    By this time the Syndicated Facility with NAB and HSBC had come into operation and had a total limit of $135m. Taking that into account, on the face of the Cash Flow Statement provided to the board a payment of a dividend of nearly $12m at the end of September would not cause the company to exceed its facility limit, and was well within its capacity.

22. [145]

    It is important to note a quirk of timing affecting the figures given in the Cash Flow Statement. As was noted above, DSH had adopted a practice of treating the financial month-end for accounting purposes as prior to the actual end of the month. That practice and one of its consequences were explained by the primary judge at [36]:

23. [146]

    To explain the latter point, there was evidence that payments to vendors on “30/60/90” day terms were paid on or around the last calendar day of the month, and that those payments, together with rental payments, were typically the largest payments made by DSH. Thus the figures given in the Cash Flow Statement did not identify the peak cash flow demands for DSH. The figures as to peak debt were obtainable from the more detailed cash flow projections prepared as spreadsheets, referred to as the daily and weekly cashflow projections. The end of month payments were substantial. They were regularly amounts of some tens of millions of dollars. A few months earlier, when NAB was considering granting a facility to DSH, one of its representatives made a file note of information supplied at a meeting by Messrs Abboud and Potts, reproduced by the primary judge at [207], which included the following:

24. [147]

    Much attention was paid in oral submissions to the latest daily cash flow projection that was available as at 17 August 2015. A line on the spreadsheet is “DSG Facility Position”, which appears to record the net cash position for the DSH group as at the end of the relevant day. Key points to emerge from the face of that spreadsheet are as follows:

    1. (1)

       As at the date of the document, seemingly just before 17 August 2015, the actual cash position is recorded as being negative $116.035m. The figures after that were forecast positions.

    2. (2)

       At the close of Friday 28 August 2015 the forecast cash position was negative $109.283m.

    3. (3)

       On the next day recorded, Monday 31 August (there being no projections for Saturdays and Sundays), there was a net outflow of some $37.6m, and the net cash position jumped to negative $146.902m, which was well over the facility limit. No doubt that jump reflected the fact that it was projected that many trade debts would be paid at the end of the calendar month.

    4. (4)

       The net position was forecast to remain above the facility limit till 17 September 2015, with the exception of three days in that period where it was just below the facility at around negative $132m. The peak figure in that period was negative $151.353m on 1 September.

    5. (5)

       On 30 September there was a net outflow of $49.5m, and the net cash position jumped to negative $166.379m. This was the date the dividend was due to be paid, and presumptively (and consistently with what was stated in the dividend discussion paper) this figure includes payment of the dividend. The primary judge said at [498] that the forecast indicated that DSH would exceed its facility limit by approximately $33m on this date. It appears that his Honour was referring to the negative “AUS Bank Balance” row which showed a projected reduction to a debit balance of $33.565m on 30 September (down from a credit balance of $10.320m the previous day). If account was also taken of the New Zealand position, the figure was reduced to $31.379m. Mr Potts’ counsel did not suggest anything turned on this difference.

    6. (6)

       The cash position then remained above the facility limit till 16 October, with the peak being the figure for 30 September. After that date, on the hard copy version available to us, the projection was done on a weekly basis (the Court was told that the electronic spreadsheet also had daily projections for this period). For four of the seven following weeks the projections exceeded the facility limit. For the eighth week, ending on Friday 11 December 2015, the projection was negative $130.376m, then falling significantly the week after that to negative $105.927m.

25. [148]

    As the primary judge stated at [278], the “daily cash flow forecast for the period starting 17 August 2015 paints a substantially different picture from that shown in the board papers”.

26. [149]

    The company did not in fact exceed the limit of its Syndicated Facility through to the end of December 2015: [499]-[500]. Nor is it suggested that it was likely to do so in practice, viewed from 17 August 2015. Rather, DSH makes the point that on these projections payments to other creditors would have to be “pushed off” (ie deferred) in order to avoid exceeding the debt limit.

27. [150]

    It is convenient at this point to address an argument raised by the respondents, who sought to place some reliance on an industry practice of deferring payment of creditors. The primary judge referred to evidence to that effect at [483] when considering arguments relating to the interim dividend:

28. [151]

    However, his Honour did not attribute any particular weight to this evidence in his findings on s 180 with respect to either the interim or final dividend. He was correct not to do so.

29. [152]

    As Edelman J explained in the passage from Australian Securities and Investments Commission v Cassimatis quoted above at [114], s 180 requires directors to take account of the interests of the corporation, including any threats to those interests. A failure to comply with legal obligations may give rise to a range of risks: reputational; litigious; regulatory; and the potential for undermining relationships with creditors or others. Such risks are likely to be amplified if the failure to comply is repeated. The fact that others in the relevant industry may be doing the same thing is not likely to remove these risks to the interests of the company. Of course, any alleged contravention of s 180 must be assessed in light of the particular facts of any case.

30. [153]

    The respondents sought to rely upon views expressed by Austin J in Australian Securities and Investments Commission v Rich (2009) 75 ACSR 1; [2009] NSWSC 1229 that in a s 180 case involving a series of late payments “it would be possible to reach the conclusion that a defendant’s conduct has been reasonable” (at [2498], see also [2715]), and his Honour made some mention of industry practice in this regard (at [2712]). These views simply manifest that the issue is fact-dependent. Here, DSH’s practice of pushing out creditors clearly did potentially threaten detriment to the interests of the company. For example, as is discussed below, some suppliers withheld supply of further products until invoices were paid.

31. [154]

    In any event, all that is beside the point, as reliance on industry practice with respect to late payment of trade creditors could not be an answer to an alleged failure properly to consider the distinct issue, raised here, of whether payment of a dividend may contravene s 254T. Payment of a dividend in contravention of that provision gave rise to distinct regulatory risks, together with the risks to relationships with current and future suppliers.

32. [155]

    The primary judge noted at [499] that Messrs Potts and Abboud submitted that the daily document did not include all sources of cash available to the company. His Honour said the following in response at [500]:

33. [156]

    Debate about this finding was raised by ground 1 of the respondents’ notice of contention, which alleged that the primary judge erred at [503] in finding that Mr Potts breached his duties under s 180 in circumstances where: (a) his Honour accepted that the Cash Flow Statements provided to the board had proved to be reasonably accurate; (b) those statements showed cash position gradually improving from August 2015, with the company remaining well within its facility limit; and (c) the variance between the Board Cash Flow Statement and the daily cash flow forecast “was explained by the latter excluding various sources of cash which were included in the former (cf [499]-[500])”.

34. [157]

    Mr Potts submitted that the two documents could be reconciled because the daily forecast did not include, whereas the board’s Cash Flow Statement did, the following additional cash flows available to DSH:

35. [158]

    Mr Potts submitted that his Honour thus erred at [500] in stating that it was not clear what sources of cash were excluded from the daily cash flow document and, critically, erred in concluding that the excluded sources of cash (ie beyond the cash in transit to which his Honour referred) would not have been sufficient to make up the shortfall as at 30 September 2015. Mr Potts’ reconciliation of the two documents was based upon analysis by the accounting expert called by DSH itself, Mr Martin Dougall of KPMG. Mr Dougall concluded in his second report (dated 19 December 2019), as regards the actual figures up to August 2015, that “the Board Pack cash flows and the Daily cash flows reconcile”, and identified that the reconciliation lay in the fact that the daily cash flow document did not include the matters just identified (cash in transit etc). He reached a similar, if slightly more uncertain, conclusion as regards the projections from August onwards in his first report (dated 14 December 2018).

36. [159]

    DSH’s written submissions in reply stated that Mr Potts’ submissions all stemmed from a single erroneous contention, namely that the primary judge did not properly take account of cash in transit. The written reply did little to engage in substance with the points made by Mr Potts. A different tack was taken by DSH in oral submissions in reply. Counsel accepted that the two documents could be reconciled “in substance completely”, then submitted as follows:

37. [160]

    This point was repeated a number of times in the oral submissions in reply. Insofar as the submission suggests that what the board was told was misleading, it is not to the point. The company’s case (at least on appeal) is not based on some allegation of misleading conduct by Messrs Potts and Abboud, whether put as breach of directors’ duties or otherwise. Rather, the case is put on an objective basis: they did not have a proper or adequate basis to vote in favour of the dividends because of their failure to consider, with reasonable care and diligence or at all, whether the payment of the dividends would comply with s 254T in light of the possible material prejudice to DSH’s ability to pay its creditors. It may be accepted that the Cash Flow Statement presented to the board did not show peak debt/liabilities, given the timing issue identified above at [145]-[146]. But the issue raised by ground 1 of the notice of contention was whether or not the apparent significant difficulties revealed in the daily cash flow document reflected the reality when account was taken of the further reconciliation amounts which were identified on behalf of Mr Potts.

38. [161]

    Before turning to that issue, one further point raised orally in reply should be noted and dismissed. DSH pointed out that under the Syndicated Facility the company was required to bring its debt below $50m for five successive business days in each financial half year. The company suggested that on the cash flow projections this “clean down”, as it was called, would not occur prior to the end of December 2015, and this was suggested to be a further problem with the cash flow projections. This point was not raised in previous oral or written submissions by the company. It was not addressed by Messrs Potts and Abboud. It was not part of the primary judge’s finding against Mr Potts, and it was not raised in the company’s amended notice of appeal or any equivalent document. It does not seem consistent with the s 180 case as pleaded and run below. In these circumstances it is not open to the company to seek to raise the point in this way.

39. [162]

    As for the significance of the reconciliation amounts, the fact that they are accepted by DSH to enable reconciliation of the two cash flow documents does not of itself establish that the company did not have projected cash flow difficulties, in particular taking account of the timing issue identified. The key question is whether or not his Honour’s conclusion at [500] that these amounts – his Honour just referred to “cash in transit” – would not have sufficed to make up the projected shortfall of some $31m as at the date when the dividend was due to be paid was correct.

40. [163]

    We are not persuaded that his Honour erred in this regard. First, Mr Potts’ core point on the notice of contention was that “the discrepancy was fully explained by the fact that the 17 August Daily Cash Flow excluded substantial sources of cash which were available to DSH and which were included in the Board Cash Flow”. Yet the reconciliation is not enough to solve the problem. As noted, the board’s Cash Flow Statement did not reveal the large outflows of cash that were required at the end of each calendar month. On the table produced by Mr Dougall based on the actual cash position, the total additional amount for all the reconciliation amounts in the period July 2014 to August 2015 was always in a range between $12.82m to $19.5m, with the exception of a figure of $52.56m in December 2014, which presumably related to the significance of pre- and post-Christmas sales. Based on these figures, and excluding the December outlier, the reconciliation amounts would not have bridged the $31m gap shown by the daily cash flow forecast as at 30 September 2015.

41. [164]

    The reconciliation figure for September 2015 in Mr Dougall’s report based on what actually occurred (which figure would not have been available in August 2015) was $25.95m. That amount, too, would not have bridged the gap, even if it could be taken into account.

42. [165]

    Mr Dougall’s first report, dealing with the projected figures, included a graph which showed the apparent disparity between the board pack cash position forecasts and the daily cash flow forecasts, as at the financial month end. For the financial month end in September 2015 (ie as at 25 September) the difference is just under $50m. Mr Dougall’s evidence was that he “expected” these differences would be because of the reconciliation amounts. The differences in the graph were much larger than those shown in his table based on the actual figures. Why that should be so was not explained. Mr Dougall’s table based on actual figures showed what amounts arose from each of the reconciliation sources (cash in transit, cash at bank, etc). No such specific attribution was made by Mr Dougall as regards the projections. That was so, senior counsel for Mr Potts said, because “[t]here was no evidence, no material to show what the forecast of those excluded elements was” as at 17 August 2015. No doubt these matters might have been explained by Mr Potts, but he chose not to give evidence. The actual figures in the 12 months leading up to the date of the August board meeting are a more reliable source than projected but substantially unexplained figures derived from the graph. That conclusion is reinforced by what the actual figures showed for September 2015, as referred to in the preceding paragraph.

43. [166]

    Secondly, we are not persuaded that all of the reconciliation amounts can properly be taken into account in assessing the company’s cash flow position and its ability to pay its creditors as and when the debts fell due. The largest component of those amounts, according to Mr Dougall’s table, was “cash in transit”. His Honour stated at [70] that this consisted of “actual cash collected from stores by Armaguard and credit card sales which had not been processed”. In Mr Dougall’s table, cash in transit in the period July 2014 to August 2015 ranged from $9.85m to $13.02m, save for a December 2014 outlier of $44.02m.

44. [167]

    As regards the credit card sales, at least, these were amounts owed by the relevant credit card company to the relevant member of the DSH group. But they were not amounts possessed by the company. Mr Dougall stated in his second report, reasonably, that “until it clears the bank, [it] is not available to pay creditors as when they fall due”. His Honour said at [164] that the “evidence suggests that Westpac had no difficulty in allowing DSH to exceed its facility limit if the excess was covered by cash in transit”. By August 2015, however, Westpac was no longer DSH’s lender. In this context, it is not apparent why the (un-delineated) credit card proportion of cash in transit should be counted as available to DSH in terms of the cash flow projections.

45. [168]

    The next largest component of the reconciliation amounts was balances held by a subsidiary within the group, Mac 1 Pty Ltd. There was debate between the parties as to whether cash held by it could properly be counted as available to DSH, and further as to whether all liabilities of Mac 1 were taken into account in the daily cash projections. Suffice it to say that this, too, required some explanation which was not available on the evidence.

46. [169]

    His Honour stated at [503] as follows:

47. [170]

    We agree. Of course, Mr Potts had no onus to prove he did not contravene his duties as a director. Rather, the daily cash flow forecast which must (or should) have been available to Mr Potts as at 17 August 2015 indicated that DSH would exceed its facility limit regularly up until when the dividend was paid, and beyond, by a sizable margin. As at the date of payment, the particular projected margin was some $31m. It has not been established that this significant apparent problem would have been answered by taking account of the reconciliation amounts which were not included in the daily cash flow projection. Rather, it seems likely that Mr Potts anticipated that this gap between payment of creditors and receipt of cash would be bridged by the company’s ongoing practice of pushing out the payment of creditors. As addressed below at [192]-[193], Mr Abboud gave evidence that it had been necessary to employ that practice in order to be able to pay the interim dividend.

48. [171]

    It was not argued by Mr Potts pursuant to his notice of contention (as opposed to his arguments on causation) that the issues with projected cash flow could have been solved by “pulling levers” of discounted sales or the like, so that issue need not be considered here.

49. [172]

    It is appropriate to address here a possible tension in his Honour’s reasoning as regards Mr Potts, albeit one which was not directly challenged by Mr Potts when dealing with the notice of contention. It is appropriate to address it because the issue also has significance as regards Mr Abboud.

50. [173]

    The nub of the breach of s 180 by Mr Potts, by reference to s 254T, was stated by his Honour at [503] in the following terms:

51. [174]

    DSH had relied on evidence from two witnesses to seek to make out the significance of the deferral issue. DSH was permitted to read an affidavit of Ms Rachel Howard, who had been the Transaction Processing Manager of Dick Smith for five years until the appointment of receivers to DSH. Ms Howard had died before the hearing, so could not be cross-examined. She had done an analysis of invoices that were paid late based on information contained in the company’s AS400 stock management system. That analysis showed that there were thousands of delayed payments in each month in the period October 2014 till December 2015, with the exception of December in each year (where there was less than a thousand delayed payments). It was explained to us that the number of delayed payments was so high (ie in the thousands) because one particular supplier had a practice of issuing an invoice for each small supply. The recorded delays were between 9 and 31 days late. His Honour noted at [135] that it was not suggested that the information recorded in the tables was an inaccurate record of the information contained in the AS400 system.

52. [175]

    The second witness DSH relied on in this regard was Mr Dougall, the accounting expert already referred to. His analysis was based on Ms Howard’s data. It purported to show what percentage of payments had been delayed.

53. [176]

    His Honour considered that there were problems in relying upon these analyses. He noted at [133] that Ms Howard had kept a hard copy list of which suppliers had been notified to her as having agreed to extensions, but this list had been lost, and “consequently there is now no reliable record of which extensions were agreed and which were not”. Then at [484], in considering the position with respect to the interim dividend, his Honour said the following:

54. [177]

    On appeal DSH did not challenge his Honour’s conclusions as to the limited assistance to be derived from the analyses of Ms Howard and Mr Dougall.

55. [178]

    In the context outlined, the primary judge was not persuaded by that evidence when considering the alleged contraventions relating to the decision to pay the interim dividend, saying at [482]:

56. [179]

    His Honour implicitly referred back to that conclusion at [496] when considering the position of Mr Abboud, stating that “there are problems” with the analyses of Ms Howard and Mr Dougall, and “I do not think that they form an adequate basis for concluding that Mr Abboud ought to have appreciated that there was a risk that the interests of creditors would be materially prejudiced if the dividend was paid”.

57. [180]

    It might then be asked why his Honour concluded that Mr Potts contravened his duties given the problems he had identified with the analyses of those two witnesses. The issue is not expressly addressed in the judgment, but it is evident from [497] that the point that made a difference for Mr Potts as opposed to Mr Abboud and the non-executive directors was that Mr Potts must have had access to the daily and weekly cash flow forecasts. His Honour implicitly concluded that – whatever doubts may have arisen as to how many creditors agreed to be pushed out, in what amounts and for how long – the daily cash flow of itself revealed that the company would not be able to pay its debts in full and on time at the date the dividend was to be paid. That was a reasonable and appropriate conclusion, in the absence of further explanation.

58. [181]

    We reject ground 1 of the notice of contention. The primary judge did not err in finding that Mr Potts contravened his duty as a director under s 180 of the Corporations Act by voting in favour of payment of a final dividend.

59. [182]

    It remains, then, to consider the issue of what if any damages are payable by Mr Potts. We return to that issue below, after addressing first the position of Mr Abboud, then the interim dividend.

60. [183]

    The reasons of the primary judge for concluding that DSH had not made out a contravention of s 180 as against Mr Abboud are at [496]:

61. [184]

    DSH did not challenge the finding that it had not been established that Mr Abboud was aware of the information contained in the daily cash flow projections. Rather, it was put that he should have been aware of it and, in any event, knew enough of the cash flow difficulties to give rise to a contravention of s 180.

62. [185]

    The primary judge concluded that it was not established that Mr Abboud should have sought access to that information. We respectfully disagree. It is necessary first to consider what Mr Abboud knew, then to address what he ought to have done, then to consider if this issue was fairly raised with him by DSH.

63. [186]

    It was not in dispute that DSH developed a practice over the course of FY15 of “pushing out” payments to many suppliers, that is, delaying payment beyond the contracted terms. The primary judge summarised the position as follows, in terms which no party disputed (emphasis added):

64. [187]

    As indicated in this passage, Mr Abboud was not only aware of the practice, he approved of and participated in it. He stated in his affidavit that Mr Potts would inform him of “vendors for whom payments were to be extended”, and his practice was then to send an email to the supplier asking “for their support in permitting an extended payment”. Whilst agreement would be sought, at least for some suppliers, payment would be deferred regardless of agreement. In response, some such suppliers would put a hold on the supply of new product until they had been paid.

65. [188]

    In cross-examination Mr Abboud stated that he did not consider that pushing out payments worth some $20-30m was material for a company with approximately $1.2b of expenditure per annum, and in circumstances where all creditors got paid in the end (leaving aside the final days of the company).

66. [189]

    As regards payment of the final dividend, Mr Abboud stated in his affidavit:

67. [190]

    He gave much the same evidence with respect to his thinking about payment of the interim dividend.

68. [191]

    In these circumstances, it is clear that Mr Abboud fully appreciated that ongoing prejudice was being caused to creditors by the company’s practice of pushing out payments, including at the times that the decisions were made to pay the dividends.

69. [192]

    Further, and importantly, Mr Abboud understood that DSH from time to time was not able to pay the claims of its creditors as and when they fell due. The practice of pushing out creditors was not merely a cynical practice in the perceived self-interest of the company. It was, at least at times, a necessity. He gave the following evidence in cross-examination about the period around which the practice of deferring payments seems to have started (emphasis added):

70. [193]

    Whilst that evidence was about an earlier time, there is good reason to think that the necessity continued from time to time. The primary judge appears to have accepted as much at [132], as quoted above. Further, so much is supported, tellingly, by the evidence he gave in cross-examination with respect to payment of the interim dividend:

71. [194]

    The last answer indicates an acceptance that there was a problem paying both the dividend and what was due to creditors, causing deferral of some payments to creditors.

72. [195]

    As regards the position in August 2015, he could not recall in cross-examination whether suppliers were being pushed out at the time, but accepted that the company had a practice of doing so. As noted above, he accepted in his affidavit that payment of the dividend would lead to the payment of some creditors being deferred or pushed out.

73. [196]

    In the context just outlined, it is not a sufficient answer to the company’s arguments with respect to s 254T to say that Mr Abboud was not aware of the daily and weekly cash flow documents. DSH’s complaint is that payment of the dividends involved “robbing Peter to pay Paul”, that is, paying the dividend at the cost of creditors whose payments were pushed out contrary to their entitlements. Mr Abboud knew that that was occurring, regardless of his knowledge of the detailed cash flow documents.

74. [197]

    That conclusion does not suffice of itself to establish that Mr Abboud failed to fulfil his duties as a director. Two overlapping questions arise: should he have asked Mr Potts for more detailed information about the cash flow position before supporting the dividend recommendation in August 2015, and in any event does the evidence establish that he failed properly to consider the possibility of contravention of s 254T by way of payment of the final dividend causing material prejudice to the company’s ability to pay its creditors? In our view the answer to both questions is “yes”.

75. [198]

    Mr Abboud knew that the company needed to push out creditors in order to meet its debts and, indeed, that this had been necessary to pay the interim dividend. That was enough to put him on notice that there was an ongoing issue about prejudice being caused to creditors. As the primary judge said at [503], when addressing Mr Potts’ position, “payment of the dividend was likely to make the position materially worse because it reduced the amount available to pay creditors”. We agree, except insofar as his Honour’s proposition is framed in terms of what was merely “likely”. Payment of the final dividend inevitably prejudiced the ability of DSH to pay trade creditors on time, because there was some $12m less cash to do so, and there was no reason to think that the company’s cash reserves in September would be materially better than they had been over the previous months, necessitating the practice of pushing out payments.

76. [199]

    The situation as known to Mr Abboud raised a large question about whether paying the dividend would cause material prejudice to the company’s ability to pay its creditors (in full and on time). In those circumstances, not to ask Mr Potts for a more detailed daily cash forecast than was provided in the board papers fell below the degree of care and diligence that a reasonable person in his position as a director and CEO would have exercised.

77. [200]

    We have discussed above at [119]-[123] the significance of taking account of the particular position held by the officer or director in question, along with the responsibilities allocated to him or her, and the particular knowledge that he or she had. DSH had a Board Charter which, amongst other things, set out certain responsibilities of the “MD & CEO”. It stated that “day to day management and administration of the Group” was delegated to the MD/CEO and the executive team, to be undertaken in accordance with the strategy, plans and policies approved by the board. The MD/CEO’s responsibilities included “developing and recommending to the board strategies, business plans and annual budgets for the Group”, “ensuring compliance with all applicable laws and regulations”, and “ensuring that the board is given sufficient information to enable it to perform its functions, set strategies and monitor performance”. On its face, the Board Charter required Mr Abboud to seek to ensure, amongst other things, compliance by the company with s 254T. Of course, there were myriad other legal obligations on the company which Mr Abboud might have been said to have a duty to consider. But here the circumstances raised a large question about this particular issue.

78. [201]

    Mr Abboud made the point in his written submissions that he was not suggesting that he had delegated to Mr Potts consideration of whether or not to pay a dividend. That may be accepted. He also noted, without challenge, that the primary judge stated at [479] that “[a]s the CEO, it is to be expected that Mr Abboud would monitor the actual financial performance of the company closely, including sales and profit”. Mr Abboud submitted he was relying upon Mr Potts to have performed the “operational task” of preparing reliable information for the board, including with respect to cash flow. However, this submission did not grapple with the point that he had sufficient knowledge of problems to put him on notice that there was an issue regarding cash flow which needed to be investigated at a higher level of specificity than was disclosed in the Cash Flow Statement presented to the board.

79. [202]

    That point is reinforced by the timing issue explained above at [145]-[146], the effect of which was that the figures given to the board for the end of the financial month did not disclose the peak cash demands on the company. Mr Abboud must have known that fact, which was a consequence of, first, a very basic feature of its accounting approach to financial months and years combined with, secondly, the fact that the bulk of the payments the company were due to make to suppliers fell due at the end of each month. Mr Abboud accepted in cross-examination that he knew that there would be cash outflows at the end of the calendar month. In these circumstances, Mr Abboud could not reasonably say that any concerns about potential detriment to the company’s cash flow from paying the dividend could be answered simply by relying on the Cash Flow Statement given to the board.

80. [203]

    It was submitted on behalf of Mr Abboud that he did not simply rely upon what he had been told by Mr Potts; rather, it was said, the evidence showed that he had “diligently and carefully considered the information provided to him, and formed an independent view”. It was also pointed out that the dividend proposal had been reviewed by the FAC, which the auditors had attended, and then considered and approved by the whole board. The primary judge indicated at [68] that the FAC had its own charter, which indicated its purpose was to “assist the board to achieve its governance objectives in relation to financial reporting, the application of accounting policies, business policies and practices, legal and regulatory compliance, and internal control and risk management systems”. That purpose did not relieve Mr Abboud of his obligations. Mr Abboud had in fact attended that meeting of the FAC, though he was not a member of it. As noted above at [137], the committee minutes do not record any discussion of the issue, and it is not apparent what papers, if any, the Committee had before it. Whether or not the auditors should have considered the s 254T issue (an issue it is unnecessary to address) is no answer to the company’s duty to comply with the provision. And the board only had the Cash Flow Statement, which Mr Abboud should have known was inadequate to the task of considering the s 254T issue. Carefully and diligently considering such inadequate information, in circumstances where he knew of the substantial cash outflows at the end of each month, did not constitute fulfilment of his duties.

81. [204]

    Mr Abboud said in cross-examination that the company had “significant headroom” on its loan facility as projected from August 2015 (ie the company was well short of having drawn down the full amount available under the facility). But that understanding relied on the Cash Flow Statement presented to the board, and did not address the end of month outflows which did not appear on that statement.

82. [205]

    In Mr Abboud’s written submissions to this Court it was said that it “was important for Mr Abboud to know if there was any issue with the payment of creditors and whether DSH was likely to exceed the limits of its facilities”. Mr Abboud did know that there was an issue with the payment of creditors. This should have led him to inquire further with respect to cash flow. Doing so would have led him to the daily cash flow projections, which revealed there was also a potential problem with exceeding the limit of the facilities.

83. [206]

    At [496] his Honour referred to the problems with the analyses of Ms Howard and Mr Dougall in terms of establishing the extent of the deferral practice. But, as observed above at [174]-[180], these problems did not preclude his Honour finding that Mr Potts had contravened his s 180 duties. In circumstances where Mr Abboud should have investigated the issue further, we similarly consider these problems did not preclude a finding against him.

84. [207]

    His Honour also stated at [496] that “DSH continued to have ample working capital”. Precisely what that meant need not be considered, because it did not alter the fact that the company’s had cash flow difficulties, which had affected and could reasonably be expected to continue to affect its ability to pay creditors in full and on time. The same may be said of Mr Abboud’s evidence that he took into account the fact that “the company had just made a large profit”.

85. [208]

    In cross-examination Mr Abboud also said that in a company with expenditure of some $1.2b per annum pushing out creditors worth up to some $30m, in circumstances where they did all get paid, did not cause “any material prejudice to those suppliers at any point”. It might also be argued on his behalf that the final dividend was only a further $11.826m. However, the detailed cash flow projection indicated that when the dividend was due to be paid the company would be some $31m beyond its facility limit. In practice, that meant some creditors would have to be deferred in order to pay the dividend. Thus, as his Honour found with respect to Mr Potts, paying the dividend would make the position materially worse. Expressed in terms of s 254T, it would materially prejudice the company’s ability to pay its creditors. This is not a case of the kind discussed above at [101] where there is no causal link between prejudice being caused to creditors and payment of the dividend.

86. [209]

    Mr Abboud further submitted that the primary judge accepted evidence from Mr Wavish that “DSH also had the ability to raise additional cash by, for example, conducting a sale either generally or in one or more specific markets” (at [500], see also [491]). Mr Abboud did not address this point in his evidence. In any event, the argument draws upon the views expressed by Keane CJ and Jacobson J in Re CSR, as discussed above at [93]-[94]. But this point did not suffice to save Mr Potts from a contravention in the view of the primary judge.

87. [210]

    As we have discussed above at [105]-[106], the ability to sell assets may be an answer to an argument that payment of a dividend will cause material prejudice to a company’s ability to pay its creditors, but it is fact-dependent. In addressing causation issues, the primary judge said at [508] that an option open to the company “would have been to require management to formulate a plan to raise additional cash through the sale of stock to enable the dividend to be paid”. To the extent that was an option, his Honour was right to say that it would have required a plan. That point serves to reinforce that to the extent a s 254T concern arose it needed consideration.

88. [211]

    The pleaded contravention of s 180 relevantly focused on Messrs Abboud and Potts participating in the resolution to declare and pay the dividends having failed “to consider, with reasonable care and diligence or at all, whether the payment … would comply with s 254T of the Corporations Act and, in particular whether the payment … would materially prejudice DSH’s ability to pay its creditors” (see above at [128]). That allegation does not require a finding that s 254T would have been contravened. Rather, the allegation was that it needed to be considered (and, thus, needed to be raised with the board). Mr Abboud, like Mr Potts, failed to consider the issue, or undertake the necessary investigations, or consider how a contravention might have been avoided. As it was, without such consideration and development of a plan, the information available on 17 August 2015 indicated that the company was on course to contravene s 254T by deciding to pay the dividend.

89. [212]

    For all these reasons, subject to the issue of fairness addressed next, DSH has made out a contravention of s 180 by Mr Abboud with respect to payment of the final dividend.

90. [213]

    Senior counsel for Mr Abboud sought to resist the case made on appeal on both pleading and procedural fairness grounds. The pleading argument focused on what Mr Abboud’s representatives perceived to be a proposed contravention of s 180 not founded on a link to s 254T. We have identified at [126] the two limbs of the s 180 argument, as pleaded. The issues considered above fall within the second limb, and are indeed focussed on a link to s 254T.

91. [214]

    The procedural fairness point was founded on the rule in Browne v Dunn. Senior counsel contended that the following four matters should have been, but were not, specifically put to Mr Abboud in cross-examination:

    1. (1)

       that he could not rely on the Cash Flow Statement in the board papers;

    2. (2)

       that, as a result, he should have sought to obtain the daily cash flow projection;

    3. (3)

       that the need to defer payment of creditors in order to pay the interim dividend in April 2015 should have led him to query if the same would happen again; and

    4. (4)

       that failure to do these things was a breach of the Board Charter.

92. [215]

    Mr Abboud was asked in cross-examination whether he was aware of daily cash flow figures, indicating that he did not recall. He was asked more generally if he was receiving any cash flow figures other than those which were provided to the board; again, he could not recall. Beyond that, Mr Abboud was not asked about the specific matters identified by his counsel.

93. [216]

    As Mason P explained in Scalise v Bezzina [2003] NSWCA 362 at [95]-[98], “[t]he rule [in Browne v Dunn] is rooted in considerations of fairness”. Mason P observed that “[i]f the contending party keeps mum until after the close of the other party’s case then the other party may unfairly have lost the opportunity to corroborate, elucidate or explain”. He also explained that “[t]here is no unfairness in letting the sleeping dog lie … so long as the moving party has by pleadings or otherwise signalled the matter sought to the proved and led necessary evidence on the topic” (see also, more recently, Yebdoo v Holmewood [2021] NSWCA 119 at [57]; Day v SAS Trustee Corporation [2021] NSWCA 71 at [53]).

94. [217]

    The issue is not, however, whether the four matters identified by Mr Abboud’s counsel on appeal were squarely raised with him in cross-examination. The Board Charter is not a necessary part of DSH’s case against Mr Abboud, and may be put to one side. The other three matters identified by Mr Abboud are more closely related to DSH’s case, but those were not matters that needed to be put to him in precise terms. There was no challenge to the finding by the primary judge that the Cash Flow Statement in the board papers was accurate (albeit incomplete insofar as it did not disclose payments at the end of the calendar month), but DSH’s point is that it was not sufficient given, especially, the payments at the end of each calendar month, of which Mr Abboud was aware.

95. [218]

    It was not a necessary part of that case that Mr Abboud should have obtained the actual daily cash flow projection spreadsheets themselves. They were not his document. Mr Abboud was asked whether he had access to the daily cash flow forecasts, and said he could not recall. In his affidavit, he had said that he did not have access to the daily cash flows. Nor was it necessary to take Mr Abboud specifically to the need to defer creditors in order to pay the interim dividend in April 2015. DSH’s case was more general than that, based as it was on Mr Abboud’s knowledge that deferral of suppliers at the end of each month was a general practice, undertaken for the reason that DSH otherwise was unable to pay its creditors on time. In other words, Mr Abboud knew the company had a cash flow problem.

96. [219]

    As is implicit in what has been said in the previous two paragraphs, the issues posed by Mr Abboud’s reliance on Browne v Dunn do not turn on the specific matters framed by Mr Abboud on appeal, but whether he was confronted in cross-examination with the essence of DSH’s case against him, so that he had an opportunity to “corroborate, elucidate or explain” as Mason P put it in Scalise.

97. [220]

    What was put to Mr Abboud in cross-examination may be summarised as follows.

    1. (1)

       Mr Abboud agreed that he knew that, in accordance with the company’s usual practice, there would be a cash outflow at the end of the calendar month.

    2. (2)

       Mr Abboud was asked whether he knew how much the cash outflow would be, and said that he did not recall.

    3. (3)

       Mr Abboud agreed with the proposition that he knew that the company was not paying its creditors on time, and that that was a general practice at the time.

    4. (4)

       As summarised above, Mr Abboud accepted that he knew that the reason that the company was not paying its creditors on time when the interim dividend was paid was because it was unable to do so within the limits of its banking facilities.

98. [221]

    DSH said that in those circumstances, in order to fulfil his obligations under s 180 and form a view that the final dividend did not contravene s 254T, it was necessary to do more than rely on the Cash Flow Statement. As much was expressly advanced in DSH’s written opening at trial, in which DSH submitted:

99. [222]

    The written and oral openings raised the key point that the daily cash flow document revealed a $30m exceedance of the bank facility on the date the dividend was due to be paid. Some notice was thus provided of the significance DSH attributed to the document. In any event, although that document is probably the single clearest indicator of the s 254T difficulties which attended the declaration of a final dividend, that fact did not mean that that daily cash flow document of itself was an indispensable part of DSH’s case, nor that Mr Abboud needed to be confronted with it in cross-examination after he had first denied, and then said he could not recall, having access to it. What mattered was that the projection showed that there were already very large end of calendar month payments projected at the end of September. Mr Abboud well knew this, and it was squarely put to him.

100. [223]

     In short, Mr Abboud was a CEO who was personally involved in deferring trade suppliers. He knew that the reason for deferring payment was that the company lacked the cash to pay them on time, and that some 50% of payments to creditors was made at month end. In those circumstances, he did not without more have a sound basis to vote in favour of the final dividend, and in doing so did not comply with s 180. Mr Abboud was sufficiently confronted with this in cross-examination.

101. [224]

     For those reasons, ground 2 of the amended notice of appeal is made out.

Did Messrs Potts and Abboud contravene s 180 with respect to the interim dividend?

1. [225]

   The board’s decision to pay an interim dividend of $16.555m was taken on 16 February 2015, with a record date of 12 March 2015, payable on 30 April 2015.

2. [226]

   In its pleading the company put its case in much the same way with respect to the interim dividend as it had done for the final dividend, as described above at [126]-[128]. The primary judge noted at [467] that the matters DSH had pleaded in support of its alleged contravention with respect to the interim dividend fell into four categories. The first related to the accuracy or reliability of the HY15 accounts. As noted, the challenge to the accuracy of the accounts fell away, so this first matter was rejected. His Honour noted at [468] that the accounts disclosed net profit for the half year ending 28 December 2014 of some $25m, and net assets of some $179m. The accounts were said to show two things (at [470]):

3. [227]

   The second matter was that DSH had too much stock as a result of the Rebate Maximisation Policy. As noted above at [76], his Honour had held that each of Messrs Potts and Abboud had breached s 180 by around the beginning of 2015 with respect to the distorting effects of the approach taken to O&A rebates. However, his Honour held that that did not sound in a further breach of s 180 with respect to the decision to pay the interim dividend, because it was not established that the effects of that policy meant that payment of the dividend would materially prejudice creditors: [471]-[472]. That was so in particular because it was not apparent that the stock excessively accumulated, as a result of the company’s approach, could not be sold for the value recorded in the accounts. Further, the directors were taking some steps to address the issue.

4. [228]

   The third matter related to an allegation that the interim dividend could not be paid without exceeding the company’s banking facilities. His Honour found, most pertinently, that the cash flow forecasts at the time of the decision indicated that the company would exceed its facility limit once by approximately $10m, but that was well before the dividend was due for payment: at [478].

5. [229]

   The fourth matter was that the dividend could not be paid without deferral of payment of creditors. We address his Honour’s reasons for this further below.

6. [230]

   The company’s ground of appeal with respect to the interim dividend was focused on the effects of the O&A rebates policy. It stated that the primary judge:

7. [231]

   This ground thus focused on a link to the O&A rebates issue, being the second matter of the four that his Honour identified as being in issue, although this is said to be linked in turn to the delay in paying creditors (the fourth matter his Honour addressed). DSH provided only brief written submissions on this ground, and it can be addressed with relative brevity.

8. [232]

   The heart of the contravention is again said to be a failure to consider, with reasonable care and diligence or at all, whether the payment of the interim dividend would comply with s 254T, in particular because the payment would materially prejudice DSH’s ability to pay its creditors. Some suggestion was made in the written submissions of DSH that the case had been put more broadly than that, but that submission is not consistent with how the primary judge, reasonably, understood how the case had been put.

9. [233]

   The primary judge was not persuaded that DSH had made out that paying the interim dividend would be likely to cause any material prejudice to the company’s ability to pay its creditors. His Honour noted at [482] the problems that arose with the analyses of Ms Howard and Mr Dougall on which the company had sought to rely:

10. [234]

    His Honour held that the evidence of the two witnesses relied upon by DSH, Ms Howard and Mr Dougall, did not establish the extent to which payments to creditors were being pushed out and the extent to which this occurred by agreement. Those problems are discussed above at [174]-[179]. His Honour thus concluded at [484] as follows:

11. [235]

    As mentioned above, DSH made no attempt to undermine his Honour’s critique of the evidence of Ms Howard and Mr Dougall.

12. [236]

    The key difference to the position for the final dividend was what the daily cash flow projection showed as at the date of the board meeting on 16 February 2015. It will be recalled that the projection at the time of the decision to declare a final dividend projected that the company’s cash needs on the date of payment of the dividend would exceed its banking facilities by some $31m. In contrast, for the interim dividend the position was as follows (at [478]):

13. [237]

    His Honour’s description of the daily cash flow projection was correct.

14. [238]

    In these circumstances, his Honour made no error in finding that it had not been established that Messrs Potts and Abboud had contravened their duties as directed by failing properly to consider the possibility of a contravention of s 254T. The evidence did not establish that such a contravention was in prospect viewed from the date of the decision on 16 February 2015.

15. [239]

    It is clear that by that time DSH had fallen into the practice of regularly deferring payment of some of its creditors, and to a significant extent. However, as we have explained above at [101]-[102], the question posed by s 254T is whether the company’s ability to pay is materially prejudiced by the payment of the dividend. The fact that the interests of creditors are being prejudiced by the actions of the company at the time of payment of the dividend does not, of itself, establish a contravention of the provision. Here, the evidence did not establish that the company’s ability to pay its creditors was or would be compromised around the payment date of 30 April 2015.

16. [240]

    As discussed above, Mr Abboud gave evidence in cross-examination that in order to pay the interim dividend he had caused the company to defer payments to some of its creditors. Self-evidently, that event occurred after the decision to pay the dividend was taken.

17. [241]

    DSH’s arguments seeking to build on the contraventions of s 180 that the primary judge found with respect to the O&A rebates do not advance matters. Those contraventions meant that Messrs Potts and Abboud had failed in their duties to the company in a particular respect. As a result, as his Honour stated at [470], “DSH was overstocked, with a corresponding deterioration in its cash position” (and see further at [414]-[415]). But those failures did not of themselves establish that payment of an interim dividend would be liable to cause material prejudice to the company’s ability to pay its creditors.

18. [242]

    Referring to the cash position deteriorating is simply a statement relative to what the position had been previously. That the position may have been better but for the failures does not establish that a dividend could not properly have been paid.

19. [243]

    As for being overstocked, as his Honour said at [471], in terms which were not undermined on appeal:

20. [244]

    Arguing that a decision was imprudent, or that there were problems in the management of the company, does not establish that the decision manifests a failure properly to consider s 254T issues, nor that payment of the dividend would materially prejudice the company’s ability to pay its creditors. Nor does it establish that the decision was taken in contravention of directors’ duties generally, insofar as DSH was seeking to make some argument that was not founded on s 254T.

21. [245]

    DSH argued that “[i]n circumstances where these directors had done nothing to change the Company’s rebate maximisation strategy, they should have appreciated as at February 2015 that the Company’s cash flow position would continue to deteriorate”. The submission is unfounded; the directors had not “done nothing”. As his Honour stated at [472], by this time these directors had realised that DSH was overstocked and were taking some steps to address it, and “the evidence is that a plan to that effect was implemented which met with some success”.

22. [246]

    DSH argued in its written reply that the company “only had the funds to pay the $16.555 million dividend through borrowings” (emphasis in the original). A great many companies borrow money to fund their activities, which borrowings are exceeded by company assets. That a company has debt does not establish that it is not in a position to pay a dividend, or that doing so will cause material prejudice to its ability to pay creditors.

23. [247]

    Ground 4 of the company’s amended notice of appeal is rejected.

Did the primary judge err in finding contraventions as regards the O&A rebates?

1. [248]

   Ground 2 of the notice of contention filed by Messrs Potts and Abboud asserts that the primary judge erred in finding at [414]-[416] that they contravened s 180 by failing to take steps to reduce the priority given to obtaining O&A rebates, which was causing DSH to buy too much stock in certain categories. The notice identifies three bases on which this contention was founded.

2. [249]

   This ground goes to what was called the “bad stock” case below, even though DSH has not appealed from its failure to make out its claim based on that case. The reason the ground is raised in the company’s appeal is that in its appeal grounds relating to the primary judge’s finding on the final dividend claim as regards Mr Abboud, and the interim dividend claims as regards both Messrs Abboud and Potts, one of the grounds invoked is that the company’s cash flow position had been negatively impacted by issues connected to the O&A rebates.

3. [250]

   As regards Mr Potts, our conclusions above do not depend on the O&A rebates issues. As regards Mr Abboud, that ground was by no means at the forefront of the way the company presented its appeal. In any event, again, our conclusions do not depend on the rebate issues.

4. [251]

   To address this ground would significantly lengthen a lengthy judgment. We do not consider it necessary or appropriate to do so.

What if any damages are payable?

1. [252]

   Although the primary judge found that Mr Potts had contravened s 180 with respect to his participation in the decision to pay the final dividend, he found that DSH had not made out that it had suffered any damage as a result. On that basis the company’s claim against Mr Potts was dismissed. DSH appeals from this finding, which applies to Mr Potts as found by the primary judge, and extends to Mr Abboud following the success of ground 2 of the amended notice of appeal.

2. [253]

   His Honour’s reasoning on damages was relatively brief, identifying three difficulties that he perceived with DSH’s claim. It is worth quoting the whole of these reasons:

3. [254]

   We respectfully consider these reasons manifest error.

4. [255]

   The claim for damages was made under s 1317H(1) of the Corporations Act, which provides as follows:

5. [256]

   Section 180 is a “civil penalty provision”.

6. [257]

   The term “damage” is not defined, although subs (2) provides that it may include profits made by any person resulting from the contravention, and subs (3) indicates that it may include any diminution in value of property of a scheme or fund. Those provisions do not suggest a narrow approach was intended to be taken to the notion of “damage” in this section.

7. [258]

   In Murphy v Overton Investments Pty Ltd (2004) 216 CLR 388; [2004] HCA 3 at [45] the High Court said that references in the Trade Practices Act 1974 (Cth) “to ‘loss or damage’ can be given no narrow meaning”. And in Marks v GIO Australia Holdings (1996) 196 CLR 494; [1998] HCA 69, at [46], McHugh, Hayne and Callinan JJ stated that in misleading conduct claims the central notion is that “the plaintiff has sustained (or is likely to sustain) a prejudice or disadvantage as a result of altering his or her position under the inducement of the misleading conduct”. There is no reason to doubt that similar principles apply as regards s 1317H.

8. [259]

   The section requires that the damage “resulted from” the contravention. The parties accepted that “only the damage which as a matter of fact was caused by the contravention can be the subject of an order for compensation”: Adler v Australian Securities and Investments Commission (2003) 46 ACSR 504; [2003] NSWCA 131 at [709]. That raises an issue of factual causation. It is not necessary to consider here what normative causal constraints may also apply.

9. [260]

   DSH’s damages claim was simple: it claimed the amount of the dividends that it had paid out. There was no claim for consequential loss. It was not argued, for example, that the payment of the dividends had tipped the company into insolvency such that there was some much greater liability.

10. [261]

    The respondents argued that payment by a company of a dividend could not be “damage suffered by the corporation” within the meaning of s 1317H(1). That argument is rejected.

11. [262]

    Declaring and paying the dividend caused prejudice or disadvantage to the company in that it had diminished its assets; it had less money. Of course, any payment – whether to shareholders by way of dividend, or to a creditor, or to others – means that the company will have less money. In general such payments would not reasonably be described as causing the company a disadvantage. There are few businesses which do not have to spend money in order to make money. But that is besides the point for current purposes. Here, the claim for damages under s 1317H is founded on a contravention of s 180 of the Corporations Act. It was the declaration of a dividend and the consequent payment out of money as a result of a breach of that statutory norm which means that the loss of money can be said to be a prejudice or disadvantage to the company. Mr Potts ignores that point in submitting that on DSH’s arguments “it is difficult to see the basis on which directors of any company could declare a dividend, consistently with their duties”.

12. [263]

    No doubt, as Mr Potts submitted, one of the key reasons shareholders purchase shares in a company is to share, via dividends, in the profits of the company. He is also correct to submit that payment of a dividend is, at least generally, in the interests of recipient shareholders. But it does not follow, as he suggests, that these points mean that payment of a dividend cannot constitute damage suffered by the corporation.

13. [264]

    Here, what was alleged was a breach of directors’ duties under s 180, being duties owed to the company. The interests of the company and the shareholders cannot be treated as identical in the way suggested by Mr Potts. In Pilmer v Duke Group Ltd (in liq) (2001) 207 CLR 165; [2001] HCA 31, a majority of the High Court rejected a claim that a company suffered damage when new shares are issued, distinguishing that point from whether the shareholders were disadvantaged: see at [48]-[65]. As part of their reasoning, they explained as follows (at [18], citation omitted):

14. [265]

    Here, the converse point arises. That the shareholders obtained a benefit from the issue of the dividend does not mean that the company did not suffer some prejudice or disadvantage.

15. [266]

    Consistently with Pilmer, in Bell Group Ltd (in liq) v Westpac Banking Corporation (No 9) (2008) 39 WAR 1; [2008] WASC 239, at [4395], Owen J explained the following:

16. [267]

    This statement has been reiterated in a number of cases: see Australian Securities and Investments Commission v Cassimatis (No 8) at [515]-[517] per Edelman J, and authority there cited.

17. [268]

    The basis of the contravention found against Messrs Potts and Abboud involved a failure properly to consider s 254T. That provision is a constraint on payment of dividends to shareholders. It requires that consideration be given to broader interests than those of shareholders, in particular those of creditors. As addressed above at [152]-[154], the company’s interests are detrimentally affected by payment of a dividend in contravention of the provision, even if the interests of shareholders might not have been prejudiced. To say that the dividend payments were a benefit to shareholders does not establish that it did not result in damage to the company.

18. [269]

    DSH placed some reliance upon Segenhoe Ltd v Akin (1990) 29 NSWLR 569, in which Giles J held an auditor liable in negligence to a company which had paid a dividend to its shareholders based upon erroneous accounts. The case does illustrate that payment of a dividend can constitute damage (there, at common law). In response, Mr Potts sought to emphasise that the liability found was not for the whole amount of the payment, but only for that portion of the dividend which had been paid out of capital rather than profits, in breach of the then requirement of the Companies (New South Wales) Code. That point merely serves to emphasise that close attention must be paid to the nature of the legal claim, and to the counterfactual issue of what would have occurred but for the breach of the relevant legal norm. In that case all that the company claimed was the amount paid out of capital, “being a sum which would not have been paid as dividend but for the error in the June accounts” (at 571).

19. [270]

    The primary judge’s first reason for finding that DSH had suffered no damage was that the contraventions alleged were that Messrs Potts and Abboud had exposed DSH to the risk of contravening s 254T, but unless that risk came to fruition, DSH suffered no loss as a result of the breach. His Honour had earlier noted at [451] that DSH had not alleged that s 254T was in fact breached when the dividends were paid. His Honour had asked in that paragraph how it could “be said that DSH suffered a loss because the directors did not consider adequately the question whether the payment of the dividends breached s 254T if, in fact, the payments did not breach that section”. The answer to that question is as set out above: DSH suffered damage by paying out money that would not otherwise have been paid out.

20. [271]

    His Honour said at [507] that “unless that risk [of contravening s 254T] came to fruition, DSH suffered no loss as a result of the breach”. As addressed above at [108], the issue of whether or not s 254T was actually breached by payment of the dividends arises at a subsequent point in time, when the payments were made. The company was suing on contravention of s 180, not s 254T. The contraventions of s 180 sued on occurred on the dates that the board decided to pay the dividends (see [117] above). We address the issue of causation below, but assuming here that causation is made out, then but for the contravening actions the decision to pay the dividends would not have been made, the dividends would not have been paid, and the company would have retained the moneys in question.

21. [272]

    The primary judge’s third reason suffers from the same erroneous focus on s 254T. His Honour said that the “relevant harm in the case of a breach of s 254T is the inability to pay creditors or to pay them on time”, where in fact the evidence was that trade creditors were paid, albeit in some cases late. Again, that is to proceed on the basis that the contravention said to give rise to the right to compensation was of s 254T, as opposed to a contravention of s 180 by reference to a failure properly to consider s 254T.

22. [273]

    The second reason of the primary judge raised an issue of factual causation. His Honour was not persuaded that but for any contraventions the dividend would not have been paid. He noted that the board had the options of delaying payment and it would have had sufficient cash to pay the dividend in December 2015, and another option would have been to require management to raise additional cash through the sale of stock to enable the dividend to be paid.

23. [274]

    Both of those options would indeed have been available to the board. As for delaying the payment, as discussed above at [147(6)], the daily cash flow forecast at the time of the August 2015 board meeting projected that for the week ending on Friday 11 December 2015 the company’s cash position would be negative $130.376m, thus within the $135m facility, then falling significantly the week after that to negative $105.927m. As for the ability to sell stock, his Honour at [500] had accepted the evidence of Mr Wavish that DSH “had the ability to raise additional cash by, for example, conducting a sale either generally or in one or more specific markets”. Accepting that those options were available, the question remains whether or not the board would have taken them.

24. [275]

    Senior counsel for Mr Abboud suggested that the company’s pleaded causal pathway depended upon it showing that all directors had breached their duties. Yet, unsurprisingly, the pleading also encompassed the possibility that only some of the directors breached.

25. [276]

    The relevant causal pathway that DSH was implicitly invoking was correctly identified by the primary judge at [505]:

26. [277]

    The onus was on DSH to establish that but for the contraventions it would not have suffered the loss that it did: see analogously Berry v CCL Secure Pty Ltd (2020) 271 CLR 151; [2020] HCA 27 at [28] and [64]-[65]; also note Termite Resources NL (in liq) v Meadows (No 2) (2019) 370 ALR 191; [2019] FCA 354 at [732]. That is a consequence of the general principle that those who claim must prove: see eg Brady (Inspector of Taxes) v Group Lotus Car Cos plc [1987] 2 All ER 674 at 686–687 per Browne-Wilkinson VC.

27. [278]

    DSH complained in its submissions that “his Honour required the Company to disprove every other counterfactual in which the final dividend might have been paid anyway”. That complaint is unfounded. The primary judge’s second reason is best understood as simply recording that he was not persuaded that the company had made out that but for the contravention the dividend would not have been paid.

28. [279]

    DSH similarly sought to argue that once it had “established Mr Potts’ breach of s 180 and the $11.826 million loss flowing from it, the evidentiary onus shifted to Mr Potts to break the causal connection between his contravention and the relevant damage”. This is a problematic submission. The reference to establishing the “loss flowing” from the contravention implicitly accepts the point in issue, that is, that it did bear the onus of making out that but for the contravention the money would not have been paid. And the reference to an evidentiary onus was a distraction. The company had the legal burden of establishing its claim. This was not a case where the absence of evidence on the respondents’ side of the ledger, or some applicable legal presumption, meant that some kind of evidential burden arose: cf eg Berry v CCL Secure Pty Ltd at [29], [39], [66].

29. [280]

    The company claims the whole dividend payment. It did and does not make any lesser claim in the alternative. On the findings of breach made by the primary judge, it was for DSH to make out, on the balance of probabilities, that but for Mr Potts’ contravention the whole dividend would not have been paid out. The question to be addressed was the necessarily hypothetical one of what would have happened if Messrs Potts and Abboud had not contravened s 180.

30. [281]

    In asking that question it is necessary to start with the contravention alleged and found. No doubt the contravention could have been put in different ways, for example, that Mr Potts contravened his duties by proposing the dividend in the first place in the dividend discussion papers which he had prepared (see judgment at [162] and [497]). But the contravention put and found was voting in favour of the resolution to pay the dividend. The counterfactual question, thus, is what would have happened if each of Messrs Potts and Abboud had said at the board meeting words to the effect of “I cannot support this proposal”. Undoubtedly each of them would have been asked to explain why, and it is to be presumed that in answering they would have acted lawfully, and thus given a truthful explanation: see Lewis v Australian Capital Territory (2020) 271 CLR 192; [2020] HCA 26 at [36] and [151]. In that way the cash flow issues of the company would have been revealed.

31. [282]

    There is little direct evidence addressing what would then have occurred. Plainly, however, it would have been very significant that the two executive directors would have indicated that they did not support payment of the dividend. Mr Potts notes that three of the six board members who were present at the 17 August 2015 meeting gave evidence in the case: Mr Abboud, Mr Tomlinson (Chair of the FAC and chair of the meeting) and Mr Murray (the Chair of the company; he did not chair this particular meeting because he was present only by phone from England). Mr Potts criticises the company for not putting to these witnesses that if they had been shown the daily cash flow forecast they would not have voted in favour of a final dividend. The rule in Browne v Dunn does not serve to protect a different party to the witnesses not challenged. Moreover Messrs Potts and Abboud, like DSH, could have questioned them on the issue.

32. [283]

    It is certainly possible that the board would still have decided to pay the full dividend. As recorded in the dividend discussion paper that we have quoted above at [138], the board had adopted a policy of a dividend payment ratio of 60-70% of NPAT. For a company with a record of paying a dividend, a decision not to do so might well have caused an adverse reaction on the share market of a kind to which directors of public companies tend to be adverse.

33. [284]

    However, the more probable outcome would have been a decision by the board not to pay the dividend at all. It is necessary to recall the cash flow situation that the company faced on 17 August 2015. The projection was that as at the proposed date of payment, 30 September, the cash demands on the company would exceed available funds by some $31m. It may be that some additional amounts could have been brought to book in this regard, although there is some doubt about the extent to which that could properly be done, as discussed above at [166]-[167]. In any event, the shortfall was not minor. The dividend itself was a sum of just under $12m. Not paying the dividend was one significant way of seeking to bridge the gap.

34. [285]

    It will be recalled that Mr Abboud gave evidence that he did not consider pushing out creditors in an amount of up to some $30m to be material. However, for the purposes of analysis here it is necessary to consider that the board would have acted lawfully, and thus would have sought to avoid contravening s 254T. In that context, the company’s practice of pushing out creditors was not an available option for the purposes of the counterfactual assessment. That leaves the two postulated options of having a sale to generate cash or postponing the date of the payment of the dividend.

35. [286]

    Mr Potts placed some reliance on the affidavit evidence of Mr Tomlinson, in which he said the following:

36. [287]

    The last two sentences were admitted only as evidence of his subjective belief, but it is his beliefs that are relevant for current purposes. Mr Potts’ senior counsel suggested that this showed that Mr Tomlinson was “looking for a means to declare a dividend if possible”. This overstates his evidence. Mr Tomlinson clearly had that inclination, but he also gave evidence that he had taken steps to satisfy himself “that, from a cash flow perspective, the Final Dividend could be paid”. He said he formed the view that “the quantum of the Final Dividend proposed would not put the company at risk of being unable to pay its creditors”. And he said that he voted in favour of the dividend “having formed the view that, provided there was not any concern about DSH’s cash flow and not any exceptional circumstances that meant DSH could not declare a dividend, the board should do so”.

37. [288]

    This evidence does not support the position of Mr Potts, for it suggests that if Mr Tomlinson had been told that there were concerns about cash flow, and the exceptional circumstance of there potentially being a $31m shortfall as at the date of payment, and the fact that creditors were being pushed out in order to allow the company to meet its obligations, he would not have supported paying a dividend. True, he might have supported paying it later, or selling stock to enable payment. But on balance his evidence manifests a degree of cautiousness which does not suggest to us that he would have favoured those options if he had been properly informed of the situation.

38. [289]

    Mr Potts also sought to rely on the evidence of Mr Wavish, who had in fact been sent a daily cash flow forecast on 17 October 2014. That projected that the company would exceed the then limit of its Westpac facility for two periods in the first half of FY15. Mr Wavish said in cross-examination that his reaction on seeing it at the time was “that that looks quite handleable, so it wasn’t an orange light for me”. He added that the projected cash flow:

39. [290]

    In the context of the interim dividend he said:

40. [291]

    Mr Wavish was an experienced retailer, and this evidence is entitled to some weight. But he resigned as a director in April 2015 (see judgment [4]). He was not at the board table when the decision came to be made about the final dividend. Someone else may have expressed similar views if the issue had been properly ventilated, but it would not have been him.

41. [292]

    A guide to what would have occurred is what actually did occur when problems were brought to the attention of the non-executive directors. On 21 October 2015, as discussed above at [57]-[61], board approval was needed for the proposed $20m increase in the loan facility. A circulating resolution was proposed. Mr Tomlinson emailed Mr Murray expressing concern about the proposal, and noting that he had been told in the course of an employment interview that day that Dick Smith was difficult to deal with from a supplier’s perspective and had been delaying payments, and that industry members were suggesting it had balance sheet weakness. He added that there were concerns amongst directors about cash flow and debt, and requested an informal board meeting. As explained above at [62]-[64], the board met on three consecutive days in late October. Mr Murray gave evidence that from this time “I became even more focussed on Dick Smith’s sales results, and requested that Mr Abboud arrange for weekly cash flow information to be provided to the board”.

42. [293]

    There was a board meeting held on 29 November 2015, which resolved to take a $60m write-down on the inventory. Mr Murray’s evidence was that at this time the board was receiving “a detailed weekly cash flow report from management, which was subsequently updated almost daily”. He said that at that board meeting he asked management to consider the impact of DSH not paying an interim dividend for FY16 in future cash flow forecasts and analyses. Consistently with that request, the board papers for the board meeting of 7 December 2015 have a cash flow forecast which expressly assumed that no dividend would be paid in the second half of FY16.

43. [294]

    True it is that the financial situation that the board faced in October to December 2015 was more dire than the projected situation in August 2015. Nevertheless, this evidence suggests that when the board learned of cash flow and other issues it was prepared to take significant action in response, including accepting a substantial write-down and giving consideration to not paying any dividend.

44. [295]

    The cash flow difficulty disclosed by the daily projection as at 17 August 2015 was not minor. It would have been a rather bold decision to pay a final dividend of some $12m given the situation that should then have been disclosed. It is possible that it would have occurred. But taking account of the degree of caution manifest in the evidence of Mr Tomlinson and Mr Murray, and what actually occurred subsequently, we consider it unlikely that the board would have taken that bold decision.

45. [296]

    For these reasons, we consider that his Honour erred in finding that DSH suffered no damage for the purposes of s 1317H. It suffered the damage it claimed, namely payment out of the final dividend. It is entitled to the order for compensation in that amount against each of Mr Potts and Mr Abboud which should have been entered after trial, together with interest. As to interest, it is entitled to pre-judgment interest in accordance with s 100 of the Civil Procedure Act 2005 (NSW) from 30 September 2015 until 7 October 2021 (being the date the final orders were made below). That amount should be calculated by the parties. The company’s interest entitlements after that date are governed by s 101 of the Civil Procedure Act.

46. [297]

    As regards the interim dividends, the principles we have outlined would apply equally if contraventions had been made out, but whether or not factual causation could be made out would require additional consideration. It is not practical or sensible to seek to consider what would have happened but for a contravention having concluded there was no contravention.

Conclusion on the DSH appeal

1. [298]

   DSH should succeed in its claim against Mr Potts and Mr Abboud with respect to the final dividend, but not the interim dividend.

2. [299]

   The result is that each of DSH and Mr Potts and Mr Abboud has had some success. The issues relating to the final dividend occupied more time and resources than those on the interim dividend. That being said, there was significant overlap between the arguments made in relation to the two dividends. In all the circumstances we consider it appropriate that there be no order as to costs of the appeal.

3. [300]

   It is necessary to re-exercise the discretion as to the costs at first instance of the proceeding brought by DSH. If the issue cannot be resolved by agreement, DSH and Mr Potts and Mr Abboud should provide further brief submissions on this issue, which will be resolved on the papers. Those submissions can also address interest calculations, if not agreed.

4. [301]

   The orders in this appeal will thus be as follows:

   1. (1)

      Appeal allowed in part.

   2. (2)

      Set aside order 7 made on 7 October 2021 and the orders made on 11 February 2020 insofar as they apply to the costs of Messrs Potts and Abboud being paid by DSH in proceeding 2017/81927.

   3. (3)

      In lieu thereof, judgment against each of the first respondent (Mr Potts) and the second respondent (Mr Abboud) in the amount of $11,826,000, to take effect from 7 October 2021.

   4. (4)

      The appeal is otherwise dismissed, with no order as to costs, with the intent that the parties bear their own costs of the appeal.

   5. (5)

      The parties are directed to provide within 14 days written submissions of no more than 5 pages, along with any evidence in support of those submissions, addressing the issues of the costs of trial and the interest payable. Any submissions (of no more than 3 pages) and evidence in reply is to be provided within a further 7 days after that, with a view to all outstanding issues being determined on the papers.

PART C: HSBC’S APPEAL

1. [302]

   It will be recalled that HSBC participated in the Syndicated Facility in June 2015, and then in November 2015 HSBC entered into the Extension Agreement granting a temporary increase in the funds available to be drawn upon by DSH from $60m to $80m. At trial, HSBC contended that its entry into each of the Syndicated Facility and the Extension Agreement was caused by the misleading or deceptive conduct of Messrs Abboud and Potts. Both aspects of HSBC’s claims were dismissed, and both were maintained on appeal. But there was a critical difference, in that while the primary judge declined to find any misleading or deceptive conduct in relation to the Syndicated Facility, his Honour did find that Mr Potts had misled HSBC when seeking the Extension Agreement, although nonetheless dismissing that aspect of HSBC’s claim for failure to establish causation or damage. Understandably, HSBC’s challenge to its claims based on the Extension Agreement, even though they were later in time, were at the forefront of its appeal. These reasons follow the same course.

2. [303]

   Mr Potts did not challenge the finding at [580] that he engaged in misleading conduct when he told HSBC that the increase in the overdraft was “to fund increased inventory required for anticipated Boxing Day sales”. That Mr Potts said something to that effect was clear from what was recorded in a contemporaneous HSBC document and of course Mr Potts did not give evidence. That Mr Potts’ statement was misleading or deceptive is also tolerably clear. Around half of DSH stock was supplied on end of month terms, and thus stock that arrived in December on end of month terms would not require payment until 31 January 2016 at the earliest. Even if Boxing Day sales stock arrived in November, to the extent that it was on 60 or 90 day end of month terms, payment for it would not be due before 31 January. Most significantly, and as his Honour observed, even if what Mr Potts said were literally true, it was misleading because the reason for seeking an increase in the facility was not in order to pay for Boxing Day sales stock. It was because DSH was in serious financial difficulty, lacking funds to pay its existing creditors on time.

3. [304]

   It remained for HSBC to establish that Mr Potts’ misleading or deceptive conduct caused loss to HSBC. Causation and loss were addressed separately by the primary judge, and in the parties’ submissions. However, it is to be borne in mind that whether or not the relevant provision was s 18 of the Australian Consumer Law, s 12DA of the Australian Securities and Investments Commission Act 2001 (Cth) or s 1041H of the Corporations Act 2001 (Cth), it was necessary for HSBC to show that Mr Potts’ contravention of the statutory norm by engaging in conduct which was misleading or deceptive caused loss or damage to HSBC. It was not suggested that the different language in the Australian Consumer Law (“because of”) or in the ASIC Act or Corporations Act (“by”) had any significance. But it is not correct to identify some causal effect in the abstract. What must be caused by the misleading or deceptive conduct is the loss or damage for which the claim for damages is made. While bearing that in mind, it is convenient to follow the course adopted by the reasons of the primary judge and the parties’ submissions and deal with causation and loss in turn.

Causation

1. [305]

   The issues then arising on ground 1 of HSBC’s appeal and ground 1 of Mr Potts’ notice of contention concern his Honour’s findings of causation. The primary judge addressed this in two ways. First, at [581]-[582], his Honour concluded that no weight could be placed on the evidence of Mr Byrne, the decision-maker at HSBC. Secondly, at [583], his Honour concluded that, based on the objective evidence, including what HSBC actually did when it learned the truth of DSH’s financial position, it would not have walked away from providing additional funding to DSH. Each aspect is addressed in turn.

2. [306]

   The primary judge said at [582] that “no weight can be placed on Mr Byrne’s evidence of reliance”. This conclusion was challenged by HSBC. It was said that in circumstances where the cross-examiner chose not to confront Mr Byrne with the hypothesis that he was told about DSH’s serious liquidity problems, it was inappropriate for his Honour to make the finding that he did, and further that the selective approach to cross-examination should have been disclosed in the reasons.

3. [307]

   HSBC’s submission cannot be accepted. It turns upon the form of Mr Byrne’s evidence, accurately described by the primary judge as given in a “somewhat formulaic way”. Mr Byrne was asked to assume that any one or more of four discrete circumstances was the fact. Those four circumstances were (a) ongoing cashflow difficulties unlikely to lessen after January 2016, (b) inadequate procedures, practices or systems to make provision for or write-off obsolete or near end-of-life inventory, (c) a real prospect of an imminent profit downgrade of $5m to $8m and (d) a real prospect that DSH would shortly announce a write-off of $60m of inventory. Mr Byrne then said “if I had been told of any of these matters then I would not have granted credit approval” and that instead he would have required that an independent external reviewer be given access to DSH’s records and no credit approval would be granted unless that reviewer reported that DSH would be able to trade for a sufficient period to repay the whole of its debt to HSBC. Thus Mr Byrne’s evidence was in a single sentence, framed in terms to suffice for all the ways in which HSBC alleged misleading and deceptive conduct.

4. [308]

   Of course, when in fact DSH announced a profit downgrade (about a fortnight before the Extension Agreement was executed) that was not what occurred. Mr Byrne sought to explain this by saying that in his view, despite the Extension Agreement not having been executed, HSBC was “committed”. His Honour acknowledged the force of that, and said that little could be inferred from this.

5. [309]

   Contrary to HSBC’s submission, Mr Byrne was confronted in the witness box with his failure to take the steps he said he would have taken when DSH’s financial position became apparent. It was not separately put to him by counsel cross-examining him on behalf of Mr Potts that his evidence of reliance was false insofar as it extended to a misrepresentation as to DSH’s ongoing cashflow difficulties, but given the way the evidence was adduced, it was not necessary to do so. It is to be borne in mind that in a single sentence, Mr Byrne was giving necessarily hypothetical evidence of what he would have done if he had been told of any one of four nominated circumstances, and what he would have done if he had been told that two of the nominated circumstances, or three of the nominated circumstances, or all four nominated circumstances were the fact. Further, the nominated circumstances were expressed at a high level of generality (thus, cashflow difficulties “unlikely” to lessen after January 2016 and a “real prospect” of an “imminent” profit downgrade). It was open to the primary judge to take a sanguine view of the value of evidence adduced at that level of generality, years after the event, and to prefer inferences based on what HSBC actually did as the company’s parlous circumstances became known to it. In any event, it was put to him (by counsel cross-examining on behalf of Deloitte) that the entirety of his evidence was false. There was nothing missing from the cross-examination which stood in the way of the primary judge giving no weight to Mr Byrne’s evidence, or requiring further explanation in his Honour’s reasons.

6. [310]

   The real problems confronting HSBC’s submissions on appeal seeking to resurrect Mr Byrne’s evidence are twofold. First, Mr Byrne’s evidence was too generalised. It sought to establish reliance on all aspects of HSBC’s case, without descending to the details of any particular aspect of the misleading and deceptive conduct of which HSBC complained. Secondly, the finding that Mr Byrne’s evidence was of no weight is one which is likely to have been affected by impressions about the credibility and reliability of the witness formed by the primary judge as a result of seeing and hearing him give evidence: cf Lee v Lee (2019) 266 CLR 129; [2019] HCA 28 at [55]. It is not open to this Court, which did not see Mr Byrne give evidence, to interfere.

7. [311]

   Having put Mr Byrne’s evidence to one side, the critical reasoning of the primary judge is at [583]-[584]:

8. [312]

   At the forefront of HSBC’s submissions was the proposition that once his Honour had found that “if Mr Potts had disclosed that the reason DSH wanted an increase in its facility was because it was facing serious liquidity problems, HSBC would not have entered into the Extension Agreement on the terms that it did”, that should have been the end of the analysis, at least in the absence of a pleaded and demonstrated counterfactual case advanced by Mr Potts. HSBC said that “it was irrelevant whether HSBC might have entered into some other, hypothetical transaction”. It was said that “it is not within the statutory purpose ‘for a contravenor to be able to say that, despite having misled and deceived the representee, the latter is really no worse off because he would have suffered the same loss as that suffered by the misleading conduct in some other transaction that did not eventuate’”, citing Wyzenbeek v Australasian Marine Imports Pty Ltd (in liq) (2019) 272 FCR 373; [2019] FCAFC 167 at [118]. The approach taken by the primary judge was said to require HSBC to disprove the possibility of an alternative transaction, in circumstances where this had not been pleaded or developed at trial by Mr Potts. In particular, HSBC relied on what had been said in Berry v CCL Secure Pty Ltd (2020) 271 CLR 151; [2020] HCA 27 at [72] by Gageler and Edelman JJ:

9. [313]

   There is no rule of law that requires the approach proposed by Gageler and Edelman JJ reproduced above to be adopted in every case of misleading and deceptive conduct. No such obligation is to be found in the reasons of the joint judgment of Bell, Keane and Nettle JJ, and nothing in the reasons of Gageler and Edelman JJ lends support to the proposition that they were enunciating a fixed rule to be applied invariably. In the present litigation, the circumstances leading up to the appointment of administrators to DSH were examined in detail. So too was the attitude of HSBC as it was confronted with information concerning the financial position of its customer DSH.

10. [314]

    There is a distinction between a person who joins a partnership or buys a property as a result of misleading and deceptive conduct, and a person who is already in contractual relations with the person who engages in misleading and deceptive conduct which causes an alteration to those contractual relations. HSBC relied on cases such as Smith v Noss [2006] NSWCA 37, where misleading or deceptive conduct caused the plaintiff to enter the partnership. In such a case, it is natural to proceed on the basis that the consequence of the misleading or deceptive conduct was to bring the parties into contractual relations. But HSBC’s case that it would not have executed the Extension Agreement was very different from a case such as Smith v Noss. Irrespective of any contravention of statute by Mr Potts, DSH (i) owed HSBC millions of dollars, (ii) needed more money, and (iii) was in contractual relations with a banker whose business it was to lend money.

11. [315]

    HSBC sought to put these matters to one side in its submissions:

12. [316]

    We do not accept this. To label HSBC’s case as a “no transaction” case and to put to one side the fact that the parties were already in contractual relations runs the risk of disregarding the reality of the situation, and conflating it with a true case of where parties were brought into contractual relations because of the contravening conduct.

13. [317]

    HSBC placed reliance on the reasoning in Wyzenbeek, where it was said to be erroneous to have inquired into what the claimant would have done had, hypothetically, the defendant not engaged in misleading or deceptive conduct, and where a Full Court regarded aspects of the reasoning in Westpac Banking Corporation v Jamieson [2016] 1 Qd R 495; [2015] QCA 50 as plainly wrong. The passage from Wyzenbeek relied on, in its context, is at [89]-[90]:

14. [318]

    It is tolerably plain that the Full Court was not addressing the intermediate case where the misleading or deceptive conduct caused a variation in the contractual relations between the parties between whom there was already an ongoing contractual relationship. In the present case, HSBC was already DSH’s lender, and DSH had fully drawn down the facility. It therefore is not enough for HSBC to obtain relief under the statute merely to conclude that it would not have entered into the Extension Agreement on the terms that it did had the serious liquidity problems been disclosed. It was for HSBC to allege and prove what it would have done, thereby establishing recoverable loss or damage. To use the language in Wyzenbeek on which HSBC relied, HSBC’s case was a “different transaction” case, not a “no transaction” case. It was not enough merely to say that Mr Potts’ misleading and deceptive conduct had some causal impact upon HSBC. It was necessary for HSBC if it wished to recover damages or compensation to establish what “different transaction” it would have entered into.

15. [319]

    To reiterate, HSBC’s case was that Mr Potts’ misleading and deceptive conduct caused it to enter into the Extension Agreement. But if HSBC had not entered into the Extension Agreement, it would still have had an existing customer to which it had already lent $60m and which wanted to borrow more from its banker which was, after all, in the business of lending money, and had been trying to secure DSH’s business for at least a year. Nothing in Wyzenbeek should be understood as making it irrelevant to inquire what HSBC would have done in those circumstances with its existing client. That involves neither any endorsement of Wyzenbeek nor disapproval of its reasoning, but rather merely points out that the reasoning in Wyzenbeek was not directed to a case such as that brought by HSBC.

16. [320]

    The premise of ground 1 of Mr Potts’ notice of contention, which challenged the finding that HSBC would not have entered into the Extension Agreement on the terms that it did, was that no weight could be placed on Mr Byrne’s evidence of reliance. Mr Potts submitted that the consequence was that causation could not be made out. But the primary judge made no error in proceeding on the basis that the requisite causal connection between the contravening conduct and loss or damage could be satisfied by inference based on the objective evidence bearing upon HSBC’s decision-making at the time.

17. [321]

    Further, HSBC attacked what it stated was the “speculative” and “hesitant” analysis in [583]. But that mode of expression accurately reflects the fact that the nuanced analysis undertaken by the primary judge was unavoidably counterfactual.

18. [322]

    As senior counsel for HSBC acknowledged, the best evidence of what would have happened had HSBC not been misled was what actually happened after HSBC had been told the truth. An internal HSBC chronology of its dealings with DSH shows that in the last nine weeks of 2015, HSBC was told about a series of significant adverse matters concerning its customer.

    1. (1)

       First, there was the profit downgrade on 28 October 2015.

    2. (2)

       Then there was the $60m non-cash impairment announced on 30 November 2015, which was coupled with a statement that DSH could not reaffirm its (downgraded) profit guidance which had been provided the previous month.

    3. (3)

       Thirdly, on 8 December 2015, HSBC received a request to waive the requirement that it “clean down” its facility at the end of the year.

    4. (4)

       Fourthly, on 21 December 2015, there was a trading halt given the expected financial covenant breaches which would occur on 31 December and an inability to repay the overdraft by 15 January.

    5. (5)

       That in turn led to a waiver of the covenant and an extension of the overdraft facility until 15 February 2016, with certain additional conditions imposed (including an extension fee of $20,000 payable by DSH).

19. [323]

    The point made by the primary judge is that all of those actual facts were known and very much bore upon how HSBC would have conducted itself had it not been misled by Mr Potts. HSBC was well placed to say, if it were the case, why the misleading and deceptive conduct by Mr Potts would have had a different effect upon its stance than the adverse information that was received in the ensuing weeks.

20. [324]

    It is also true that it is one thing to grant a temporary increase in a customer’s overdraft, and another to alter the terms of the relationship (by granting a further month’s grace to repay existing indebtedness). There are cases where a bank might take the second course (as HSBC in fact did in December 2015) but might baulk at the first. The primary judge was conscious of this. In [583] his Honour made the point that it is one thing to extend further debt finance to a customer, and another to alter the conditions or timing for its repayment. However, his Honour ultimately rested on the fact that HSBC had not provided evidence to explain “why it would not have advanced money on some terms if it had known the true position”.

21. [325]

    Making those inquiries was not inverting the onus or subverting the beneficial purposes of the statutory prohibitions against misleading and deceptive conduct. Nor does the issue turn upon any pleaded or articulated case by HSBC at trial. The natural inference from the documents, upon which his Honour relied, was not that HSBC would decline to provide finance to a customer, and the forensic stance adopted by HSBC was to provide testimonial evidence in a rolled-up manner which did not attend to what HSBC actually did in the immediate aftermath. Thus, contrary to HSBC’s submission, it was fair to say as his Honour did at [584] that HSBC’s case on reliance was that it would not have entered into the Extension Agreement at all and that it did not advance an alternative case that it would have been prepared to enter into some other agreement less disadvantageous to it. In the absence of any other more nuanced evidence from HSBC than that put forward through Mr Byrne, it was open to conclude that HSBC had not made out a case for loss or damage caused by the misleading or deceptive conduct.

22. [326]

    This ground is not made out.

Failure to find loss and damage (ground 2)

1. [327]

   This ground does not affect the outcome of this appeal, just as it was not necessary to the decision of the primary judge. Nevertheless, it is appropriate to address it. Having found that Mr Potts’ conduct did not cause HSBC to enter into the Extension Agreement, his Honour proceeded to find that HSBC’s case in relation to the Extension Agreement would fail in any event because it had not proved that it had suffered any loss as a result of Mr Potts’ misleading conduct.

2. [328]

   The starting point is the extent of DSH’s indebtedness to HSBC at the relevant times. Immediately after the additional $20m overdraft became available, DSH proceeded to draw it down, including some $15m on the following day. DSH’s maximum indebtedness occurred on 22 October 2015, when its account was drawn down to $77,844,036.35. However, there were very substantial credits on 23 December 2015 (some $18.5m), leading a debit balance of $57,595,897.24. From and after 23 December 2015, the indebtedness never exceeded $60m.

3. [329]

   If one were speaking colloquially or commercially, it would be natural to regard the short term overdraft facility for $20m, which was available between 15 November 2015 and 15 January 2016, as having been availed of in November and December, but repaid in full by 24 December 2015. And indeed that was the language used by HSBC and DSH at the time.

4. [330]

   Even so, HSBC contended that it had suffered a loss following its entry into the Extension Agreement. The primary judge summarised at [609] the essential dispute between the parties at trial:

5. [331]

   The dispositive reasoning was at [610]:

6. [332]

   On appeal, and for the first time, HSBC said that its account with DSH was a running account, and that the ordinary rule in Clayton’s case meant that the deposits into the account on 23 December 2015 were to be taken to have reduced the earlier advances by HSBC, and not the $20m later advanced under the Extension Agreement. Against this, Mr Potts said that HSBC ought not to be permitted to raise this submission, not raised at trial, maintaining that it would have affected the evidence adduced and the cross-examination. HSBC replied that Mr Potts first took any point based upon the reduction in the overdraft below $60m only when, on the 29th day of the trial, his case against HSBC was opened and said that the question was a pure question of law. Mr Potts rejoined that HSBC had not deigned to particularise any loss suffered as a result of the execution of the Extension Agreement.

7. [333]

   The contemporaneous documents make it plain that both banker and customer regarded the $20m temporary overdraft facility as a short term separate facility. In point of law, it was effected by a formal agreement amending the Syndicated Facility. But that does not reflect any of the contemporaneous documents, including HSBC’s evidence that it regarded itself as “committed” when approval had been communicated to DSH some four weeks earlier.

8. [334]

   The so-called “rule” in Clayton’s case was reproduced in the joint judgment in Australia & New Zealand Banking Group Ltd v Westpac Banking Corporation (1988) 164 CLR 662 at 676; [1988] HCA 17:

9. [335]

   The “rule” is a presumption, rebuttable by contrary agreement or evidence sustaining a contrary intention. It is a rule which is used in a number of areas of the law in order to identify the relationship between credits and debits. It is not used invariably. It says little, if anything, concerning the relations between trustee and beneficiary, as Sir George Jessel MR intimated in Re Hallett’s Estate (1880) 13 Ch D 696 at 728 and as Kearney J confirmed in Hagan v Waterhouse (1991) 34 NSWLR 308 at 358, for equity developed its own rules where there were ongoing deposits and withdrawals, including in cases where there were multiple depositors into the same account. The authorities are reviewed extensively in Caron and Seidlitz v Jahani and McInerney in their capacity as liquidators of Courtenay House Pty Ltd (in liq) & Courtenay House Capital Trading Group Pty Ltd (in liq) (No 2) (2020) 102 NSWLR 537; [2020] NSWCA 117.

10. [336]

    The rule may be used in a range of circumstances where there is a running account between parties, and it is necessary to identify precisely when a particular debit is discharged by a particular credit. The purpose of HSBC’s invocation of the rule in Clayton’s case is quite different. HSBC submits that because the deposits into the account on 23 December 2015 are taken to have discharged the withdrawals from the initial $60m Syndicated Facility, it cannot be said that the Extension Agreement was repaid in full such that there was no loss. This is an innovative use of the rule, and one which is not sustained on the facts of this case.

11. [337]

    There was only ever (relevantly) a single contract between HSBC and DSH. That permitted HSBC to run an overdraft of $60m, and was varied so as to extend the overdraft to $80m for the period from 15 November 2015 until 15 January 2016. There was not in point of law a separate “line” of credit as between banker and customer, to which any debit and any credit might be appropriated. There was at all times a running account with a single outstanding balance. Now true it is that the rule in Clayton’s case permits a notional identification of earlier debts against the deposits made on 23 December 2015. However, the rule in Clayton’s case does not speak to the issue now arising, which is whether the indebtedness which was discharged was indebtedness under the Syndicated Facility as opposed to the Extension Agreement. In truth, the latter was simply an amendment of the former and there was only ever a single contract governing the relations between banker and customer, namely the Syndicated Facility as amended from time to time. There was only ever indebtedness of DSH to HSBC which was created when further funds were drawn down following the amendment made by the Extension Agreement, and which was discharged when repayments were made on 23 December 2015.

12. [338]

    HSBC’s submissions based on Clayton’s case distract from the nature of the case sought to be advanced. A lender does not necessarily suffer loss when a loan is agreed to. Nor does a lender necessarily suffer loss when a loan is drawn down. The promise to lend money, or the actual loan of money, is only a loss if and when the borrower fails to repay. The drawdown of a loan merely converts the lender’s liquid asset (cash) into the debt owed by the customer. After all, a banker’s core business is lending money.

13. [339]

    HSBC’s case is that it suffered loss when the funds lent after the Extension Agreement was executed were not repaid, such that it was left with a less valuable chose in action against DSH. But that case must have regard to the repayments which in fact occurred on 23 December 2015.

14. [340]

    It is true that, in theory, it might be open to HSBC to say that Mr Potts’ misleading and deceptive conduct caused it to enter into the Extension Agreement, and it otherwise would not have done so and would have still insisted upon DSH making substantial repayments of the existing $60m facility prior to 23 December 2015. If that were so, then it would have a substantial claim for damages and compensation. But no such case was advanced.

15. [341]

    Further, it is plain from the above that these matters were affected by the way the case was run. It is not a pure legal point which can be run for the first time on appeal: Suttor v Gundowda Pty Ltd (1950) 81 CLR 418; [1950] HCA 35. There is force in HSBC’s submission that Mr Potts should not have been permitted to advance the point for the first time on the 29th day of the trial, but he did so, without opposition, and indeed the Court was told that HSBC, without objection, thereafter tendered further documents in response. Perhaps had objection been taken, Mr Potts’ submission might not have been permitted. It is not necessary to express a view on that (a point which was not the subject of argument) for it is plain that that the litigation did not extend to this point.

16. [342]

    HSBC also advances other bases not propounded at trial in support of this ground, namely, a contractual right of appropriation, and a common law right of appropriation, but they rise no higher than what has already been said. None was advanced at trial, each might have been met by evidence, and none can be raised for the first time on appeal.

17. [343]

    None of this casts doubt upon the reasoning of the primary judge at [610]. Ground 2 must be rejected.

Remaining grounds in HSBC appeal – grounds 3, 8 and 9

1. [344]

   Ground 3 challenged the dismissal of HSBC’s case that it had entered into the Syndicated Facility by reason of Mr Potts’ misleading and deceptive conduct at a meeting on 3 February 2015. Success on this ground would carry with it success in relation to the Extension Agreement, but counsel candidly and realistically acknowledged the difficulties which beset this ground, which was deferred in written and oral submissions so as to follow the grounds based on entering into the Extension Agreement.

2. [345]

   Ground 8 challenged the failure to find that anything said or left unsaid by Messrs Abboud or Potts caused Mr Rogers on behalf of HSBC to approve the Syndicated Facility.

3. [346]

   Ground 9 was consequential, namely, a challenge to the failure to find loss in entering into the Syndicated Facility. Mr Potts accepted that if grounds 3 and 8 were made out, HSBC’s loss was $28,851,407.83 plus interest, but that his proportionate liability defence would arise. Grounds 4, 5, 6 and 7 were abandoned before or during the appeal.

4. [347]

   Messrs Potts and Abboud attended the meeting on 3 February 2015, and spoke to a PowerPoint presentation which was in evidence. Mr Kowik of HSBC prepared a filenote, known internally as a “call report”, either while the presentation was being made, or shortly thereafter. It too was in evidence. Also in attendance on behalf of HSBC were Mr David Katiforis and Mr Matthew Sargent.

5. [348]

   DSH was seeking a “key banking partner” to “come to table” to supply a facility for working capital and overdraft. Mr Katiforis is recorded as saying that “HSBC offers unsecured and subordinated to WBC to support Supply Chain Solution”. That appears to be a reference to funding to pay trade creditors, and perhaps also to assist DSH to pay its suppliers based in China, which was an advantage of which HSBC was conscious. (Mr Kowik’s memorandum of the previous November had stated “Our competitive advantage is to leverage HSBC HK to present a Supply Chain Solution (‘SCS’) benefit to DSE’s suppliers across the APAC region, which make up majority of their supplies and is a growth procurement market for them”.)

6. [349]

   The main theme of the presentation on 3 February was DSH’s rapid and recent growth, which was said to warrant greater funding. The first PowerPoint slide included the words “New CEO, Nick Abboud commenced the turnaround lifting net profit from $6.7m in FY13 to $42.2m in FY14”, and in a slide directed to the private label products, there was the statement “Strong improvement in gross margin on better sourcing and review of price points”. Mr Kowick’s filenote commences with the recent history of the company following its purchase by Anchorage, and continues:

7. [350]

   It is plain from the call report, and from an email from HSBC on the evening of the day of the presentation wishing Messrs Abboud and Potts “[b]est of luck with the upcoming results presentation” that DSH told HSBC that it was shortly to release its half year financial results to the market. There is no reason to think that either Messrs Abboud or Potts told HSBC what those results were, and no submission was made to that effect.

8. [351]

   Ground 3 was directed to what had been said about the “keys” to the remarkable turnaround of DSH’s profit. The primary judge noted there was a dispute whether Mr Abboud had used the expression “centralise buying power”, and did not resolve it, save to observe that nothing turned upon it: at [154]. (No criticism was directed to this approach.) HSBC submitted that statements to the effect that the “keys” to the rapid growth in profits were controlling costs and supply chain savings were misleading and deceptive in the absence of any disclosure that (a) profits had been increased by a policy of maximising O&A rebates which were accounted as profit immediately, (b) DSH was overstocked and had been since at least November 2014, substantially because of the focus on O&A rebates, (c) DSH was in a “tight financial position” and had difficulties paying its creditors on time, and (d) DSH had exceeded its facility limits with Westpac repeatedly over the previous months. HSBC said that Mr Abboud’s conduct in making the statements was misleading and deceptive, as was Mr Potts’ silence in letting them be made without qualification.

9. [352]

   The primary judge observed at [155] that at the time of that meeting, DSH had spent almost all of its OTB budget for the month, that the supplier of Go Pro cameras had placed DSH on credit hold (thereby holding up the delivery of an order of some $1m) and Canon was demanding payments of overdue invoices until the end of December 2014 totalling some $3.9m and threatening to place its account on hold if payment was not made within seven days.

10. [353]

    The primary judge rejected this aspect of HSBC’s case as follows:

11. [354]

    HSBC relied on the proposition that a statement which is literally true may nonetheless be misleading or deceptive if the recipient would be misled into believing that the statement was complete.

12. [355]

    HSBC submitted that it was not to the point to reason, as the primary judge reasoned, that HSBC could not have thought that Messrs Abboud and Potts were giving an account of all of the reasons for the profit turnaround, when what was represented was the “keys” to the company’s improvement.

13. [356]

    These grounds should be dismissed, substantially for the reasons given by the primary judge.

14. [357]

    HSBC had already subjected DSH to intensive financial analysis, based on its published accounts and the analysis by brokers. This is best seen by the 26 (single-spaced) page internal memorandum prepared by Mr Kowik and others dated 5 November 2014. The analysis is detailed and sophisticated. Among other things, the document disclosed an awareness of a “substantial increase” in trade vendor receivables from $11m to $47m in FY14, and noted that “[t]he substantial increase was the result of a strategic focus on collecting vendor marketing rebates, as detailed in the Prospectus and estimated at A$23.6m”.

15. [358]

    There was no dispute that the meeting on 3 February 2015 was preliminary and introductory. The immediate context was that DSH was about to release its half-yearly results, in circumstances where its most recent publicly available results were from a period seven months earlier, and did not include the most profitable period of the year (Christmas). The hope was that HSBC would then submit an “indicative facility proposal”, by 28 February.

16. [359]

    Thus it was plain that there would shortly be a further release to market of detailed, up-to-date financial information which could supplement the analysis already undertaken, which was now based on data for the previous financial year. That is a very long time for a company which had only been listed in 2013 with a new mode of management and whose profits had jumped seven-fold in the last two financial years.

17. [360]

    In those circumstances, there was no basis upon which HSBC could reasonably infer that what was said in the meeting constituted a complete account of the drivers of DSH’s increased profitability.

18. [361]

    It is not necessary to address additional points raised on appeal which were not relied on at trial, such as the disclaimers in the PowerPoint presentation or the warranties in the Syndicated Facility executed months later. Nor is it necessary to address the objections of HSBC to relying on those matters for the first time on appeal.

19. [362]

    Turning to whether anything that had been said caused HSBC to enter into the Syndicated Facility, the primary judge found at [543]:

20. [363]

    Oral and written submissions on this ground were brief, and much that had been written was disavowed in address. In particular, any reliance on Mr Rogers’ evidence was disavowed. Instead, it was put:

21. [364]

    HSBC pointed to the Gould v Vaggelas inference to the effect that it should be presumed that a representation calculated to induce entry into a contract had such an effect, and relied on the fact that notwithstanding an absence of direct evidence, causation might nonetheless be inferred: Lord Buddha Pty Ltd (in liq) v Harpur (2013) 41 VR 159; [2013] VSCA 101 at [159(7)].

22. [365]

    This ground does not arise, but it may nonetheless be addressed concisely. Let it be assumed that, contrary to the above, Messrs Abboud and Potts conveyed that the turnaround in profits was attributable to controlling costs and improving supply chains, and that that was misleading, insofar as it omitted the strategy of maximising O&A rebates, DSH’s overstocking and its ongoing cashflow problems. It is far from clear that the contravention caused HSBC to enter into the Syndicated Facility. First, the anticipated meeting on 28 February 2015 after the publication of the half-yearly profits did not occur. The fact that a decision was only made months later, after a separate period of analysis and requests for information from DSH, diminishes the effect of what was said on 3 February 2015. Secondly, the half-yearly profits disclosed that DSH’s stock had increased by more than $80m, and that fact was noted in a later internal HSBC analysis in March. An increase in stock of $80m represents $80m in funds or payables which were not available to DSH, and thus an $80m worsening of cashflow. Thirdly, the hearing proceeded on the basis that the way in which DSH accounted for O&A rebates was compliant, and there is nothing to suggest that HSBC would have been interested in any more detailed analysis. All these matters indicate the difficulties confronting this ground, and explain why very little attention was given to it in the appeal.

23. [366]

    It is unnecessary to say more, because this ground does not arise once ground 3 is rejected.

Conclusion

1. [367]

   For those reasons, HSBC’s appeal fails. It is unnecessary to address the submissions made on behalf of Messrs Abboud and Potts on proportionate liability, and it is inappropriate to do so in the absence of precise (necessarily hypothetical) findings of their involvement in the particular contraventions giving rise to loss.

2. [368]

   The appeal should be dismissed. There is no reason for costs of this appeal (which were separate from the other appeals) not to follow the event, such that HSBC pays the costs of Messrs Abboud and Potts of this appeal.

3. [369]

   The order in this appeal will thus be as follows:

   1. (1)

      Appeal dismissed.

   2. (2)

      The appellant is to pay the respondents’ costs.

PART D – MR POTTS’ APPEAL

1. [370]

   Mr Potts played a significant role in the operations of DSH. He was both the company secretary and CFO; he was also a director. He was a defendant in proceedings brought by HSBC, NAB and DSH. Of the claims by the two banks, that by HSBC failed and its appeal has been addressed in Part C above. The claim brought by NAB was, however, successful and it obtained a judgment in its favour in an amount of $57,278,091.44. Mr Potts has appealed.

Background

1. [371]

   NAB pleaded broad-ranging complaints of misrepresentation and misleading or deceptive conduct in relation to the Syndicated Facility Agreement entered into by DSH with HSBC and NAB on 22 June 2015. The claims pleaded by NAB in relation to Mr Potts fell into three categories, namely (i) representations made by Mr Potts at a meeting with NAB representatives on 28 April 2015; (ii) representations made on 5 May 2015 by the provision of management accounts to NAB; and (iii) representations as to DSH’s high level of inventory at the start of 2015, made at a meeting on 6 May 2015 and addressed further in a telephone conversation on 11 or 12 May 2015. The judge rejected the claims in relation to the first two limbs, but upheld the claim in relation to the third limb, concluding:

2. [372]

   Ground 1 of Mr Potts’ appeal challenged that finding.

3. [373]

   The primary judge then turned to the question of reliance and concluded that NAB did rely upon Mr Potts’ conduct:

4. [374]

   Ground 2 of Mr Potts’ appeal challenged the finding as to reliance.

5. [375]

   A number of affirmative defences were pleaded by Mr Potts, but only one was pursued at trial both by Mr Abboud and Mr Potts, “namely, a proportionate liability defence that DSH and each other were concurrent wrongdoers”: at [515]. All claims against Mr Abboud failed, but some claims against DSH were successful. On the basis that DSH’s appeal failed, Mr Potts pursued the defence of apportionment, with DSH being the concurrent wrongdoer.

6. [376]

   The primary judge said:

Ground 1: Liability – misleading or deceptive conduct

1. [377]

   The misleading impression created by Mr Potts at the meeting with Mr Taylor and Mr Menzies on 6 May 2015, and during the telephone conversation with Mr Menzies on 11 or 12 May 2015, related to “the reasons for the stock build-up in January 2015 and the appropriateness of the steps that DSH had taken to address the problem”, as identified in ground 1 of Mr Potts appeal. There were said to be three errors in reaching that conclusion, which were particularised as follows:

2. [378]

   There were, in effect, two limbs to ground 1(a). The first limb relied upon that which NAB pleaded had been conveyed at the meeting or in the telephone calls, namely that DSH’s level of inventory at the start of the 2015 calendar year was the result of “(i) delayed shipments of private label stock which had arrived late and had not arrived in time for Christmas; (ii) a moderate level of opportunistic purchases to obtain rebates from suppliers”.

3. [379]

   As to the second limb, Mr Potts did not give evidence, but disputed that NAB’s evidence supported a finding that he had used the word “moderate”. The judge concluded that nothing turned on that question, but rather, “[t]he real question is whether the reasons Mr Potts gave for the high level of inventory gave a misleading picture of the true position”: at [551]. The submission was that NAB understood that “the overstocking was not the result of a deliberate decision by management, but was caused by a ‘misjudgement in over-ordering’ stock”: Potts’ written submissions, par 21.

4. [380]

   Neither the fact that there had been reference to purchases to obtain rebates, nor the fact that NAB was aware of overstocking is to the point. The reason the statements made at the meeting and on the telephone were misleading was that they failed to disclose that “a substantial cause of the high level of inventory was the emphasis DSH, and Mr Abboud in particular, placed on the collection of O&A rebates”: at [559]. That was a regular practice and was not explained by reference to “opportunistic purchasing” at a particular time. The primary judge accepted that “the true position was that DSH acquired stock that it did not need in order to obtain O&A rebates; and it did that in order to increase its reported profits”: at [571]. That was the situation which was not revealed by Mr Potts’ statements to Mr Menzies and Mr Taylor. It was not knowledge of overstocking in November/December that was undisclosed; it was the overstocked position in January, following the Christmas sales, which led to concern on the part of NAB.

5. [381]

   The judge dealt with the evidence in respect of that issue earlier in his judgment, partly in the following terms:

6. [382]

   The evidence then went on to consider reassurance given by Mr Potts in the following terms:

7. [383]

   The judge noted (at [231]) that, following his conversation with Mr Potts on 11 May, Mr Menzies updated his credit memorandum with the following statement:

8. [384]

   Mr Taylor gave evidence that the “principal or only reason” Mr Potts had given him for the overstocking in January 2015 was the late arrival of a shipment of private label stock. He did not recall any other reason being given: at [226].

9. [385]

   The judge accepted Mr Taylor’s recollection in the following passage:

10. [386]

    In the absence of any contradictory evidence from Mr Potts, there was ample evidence to conclude, as the judge did, that the accounts given to Mr Taylor and Mr Menzies by Mr Potts simply did not reveal the level of overstocking which was resulting from the practice of over-purchasing to obtain O&A rebates. There is no substance in the challenge raised to that finding in ground 1(a).

11. [387]

    The issue raised by ground 1(b) related to Mr Potts’ statement as to the holding of buyers’ meetings. This issue is directly related to the previous issue, dealing with opportunistic purchasing. Quite apart from wanting to understand the cause of the overstocking, NAB directed its enquiries to the proposed treatment for the problem. The judge’s finding in that regard had two elements. The first was directed to the substance of the problem:

12. [388]

    The second part, omitted from that extract, related to the putative solution, namely the weekly buyers’ meetings. The judge stated:

13. [389]

    The first basis of complaint with respect to that passage was that Mr Borg gave evidence that he believed there had been weekly meetings attended by Mr Potts, called “stock meetings”, in April, May, June 2015. Mr Potts submitted that there were also documents that demonstrated that the 20 April meeting (for which there was a set of minutes) was “just the first of the series of meetings between Mr Potts and the buying team for the purpose of monitoring compliance with OTB budgets”.

14. [390]

    The documentary evidence was somewhat sparse: there was an invitation for a weekly stock meeting issued by Mr Potts on 27 April 2015. On the other hand, Mr Abboud’s lengthy affidavit of 20 August 2019, under the heading “inventory management”, had a separate heading for “buyers’ meetings” which he stated were held “monthly and quarterly”. He referred to a “buying team update” which was prepared ahead of each monthly meeting, noting that the May update recorded (par 183):

15. [391]

    It is true that the primary judge did not identify all the references in the extensive evidence to weekly buyers’ meetings. To the extent that the holding of such meetings was evidence of an intention to resolve the problem of over-purchasing to obtain O&A rebates, there was little support in that material for that purpose.

16. [392]

    That led to the second complaint in Mr Potts’ submissions as to the finding that steps had not been taken to prevent a recurrence of the problem. That was said to be supported by Mr Abboud’s affidavit of 20 August 2019.

17. [393]

    It was no doubt true that steps were taken in and around April 2015 to reduce the level of stock, primarily by limiting the OTB value, which reduced the buyers’ spending budgets. However, the reduction achieved in April was whittled away by increases to the OTB in late May and June. As NAB submitted, the problem which needed to be addressed was the over-emphasis on purchasing to obtain O&A rebates. This issue has been extensively addressed in discussing the breaches of duty by Messrs Abboud and Potts under s 180 of the Corporations Act and need not be repeated here. Two passages in the primary judge’s reasons suffice for present purposes.

18. [394]

    Although Mr Potts did not give evidence, Mr Abboud was cross-examined on a detailed affidavit of 20 August 2019. It is helpful to note the judge’s summary of that evidence because it explains a distinction which Mr Potts’ submissions in this Court tended to elide. First, the summary of Mr Abboud’s evidence:

19. [395]

    It is not necessary to set out the detailed explanation which follows in relation to Mr Abboud because, relevantly for present purposes, it was reiterated in relation to Mr Potts:

20. [396]

    Although not explicitly challenged, this reasoning was implicitly challenged by the second limb of Mr Potts’ submissions in support of ground 1(b). Because that submission focused entirely on what steps may have been taken to reduce overstocking, it failed to address the absence of steps taken in relation to the underlying problem. Accordingly, the submission did not provide an answer to the finding of the primary judge.

21. [397]

    The third submission by Mr Potts was, in substance, a reformulation of the second, his written submissions stating at par 33:

22. [398]

    It is not possible to pigeonhole the reasons that the judge gave at [570], namely the two pieces of evidence identified in the submission, as the sole bases for his conclusion as to Mr Potts’ state of knowledge in May 2015. As already noted, there is further discussion, part of which expressly contemplated the possibility that there was a single act or omission of two or more persons: see primary judgment at [415], at [395] above. In addition to that passage, there was an important aspect of retrospective reasoning upon which the judge relied to reveal the positions taken by Mr Potts in May 2015.

23. [399]

    It may be added that the findings set out above in relation to the breaches of duty under s 180 of the Corporations Act were themselves the result of extensive discussion of the evidence, parts of which have been dealt with in considering the company’s appeal. They need not be repeated here. The point is merely that there was ample basis in the evidence to support the finding by the primary judge that Mr Potts knew what the problem was with the pursuit of O&A rebates; the issue was not raised by him at the meeting on 6 May 2015 with the NAB representatives, nor in subsequent telephone calls, nor, accordingly, was any sufficient explanation given of steps taken to address the unidentified problem.

24. [400]

    None of the three submissions relied upon as demonstrating error on the part of the primary judge in finding that Mr Potts engaged in misleading and deceptive conduct at the meeting with NAB on 6 May 2015 and during the telephone conversation with Mr Menzies a week later has been made good. Ground 1 is rejected.

Ground 2: Reliance

1. [401]

   Principles relating to reliance have been addressed when considering the HSBC appeal: those principles need not be restated here. There is, however, a similarity with respect to the manner in which the primary judge dealt with direct evidence of reliance by officers of each bank. That is not to say that the factual issue was the same in each case, but rather that in neither case did he place weight upon their evidence.

2. [402]

   In considering whether NAB relied on Mr Potts’ conduct, the judge stated at the outset:

3. [403]

   The evidence was said not to be of assistance because it was formulated by reference to six factors (a)-(f) which were not made out in precisely the manner they were pleaded: [255]. Some points were not made at all: for example (d), which asserted that the rebates had not been properly accounted for in accordance with Australian accounting standards, was abandoned. Because there was no notice of contention seeking to rely upon that particular evidence of the officers, it is not necessary to revisit the basis of its rejection. However, Mr Potts submitted that once NAB’s express evidence of reliance was rejected, it cannot succeed on its claim. To do otherwise, Mr Potts submitted, would be to repeat the error made by this Court and identified in Campbell v Backoffice Investments Pty Ltd (2009) 238 CLR 304; [2009] HCA 25 (Backoffice”).

4. [404]

   Mr Potts relied on the statement in Backoffice that where specific evidence of reliance is not accepted, “it was not open to the Court of Appeal to infer, from its own assessment of the materiality of the representation and its own assessment of whether the representation was calculated to induce entry into a contract” that the representee would not have proceeded: Backoffice at [147]. Although the submissions also placed reliance on the reasoning of Bell P (Bathurst CJ and Payne JA agreeing) in Wormald v Maradaca Pty Ltd [2020] NSWCA 289 at [143] the facts in that case were significantly different, the Court determining that the key representations relied on by the claimant had not been given, either directly or inferentially.

5. [405]

   There are a number of responses to Mr Potts’ submissions on reliance. First, it is necessary to note two matters, namely (i) what precisely the High Court stated in Backoffice and (ii) what precisely was the evidence the primary judge rejected.

6. [406]

   As to the first, the full statement in the joint reasons in Backoffice read:

7. [407]

   The case was one where the only evidence of reliance was as to what the representee had known was the falsity of both of two statements. There was no evidence as to what he would have done had he known the falsity of one, and only one was proved to be false. Further, given the reference to the Court of Appeal making its own assessment of the “materiality” of the representation and as to what the representee would have done, it is necessary to return to the beginning of the passage, at [142], to identify the difficulties with the reasoning of this Court. One problem was that the finding “carries within it a number of subsidiary questions, such as what is a ‘material’ representation, and when is a material representation ‘calculated’ to induce entry into a contract”. The High Court further noted that the drawing of an inference cannot be undertaken without due regard to “all of the evidence that is adduced that bears upon the question being examined”. That statement reflected established principle.

8. [408]

   The general approach to questions of causation of this kind was discussed in Rosenberg v Percival (2001) 205 CLR 434; [2001] HCA 18, albeit in the case of an assessment of the effect of failure by a medical practitioner to advise a patient of risk, where the question was whether the patient would have proceeded with the operation if the risk had been disclosed. As McHugh J noted at [24], the common law test requires the court to ask “whether this patient would have undertaken the surgery”. It is thus a “subjective” test, but McHugh J continued:

9. [409]

   The characterisation of the test as “subjective” should be understood as requiring a determination of the likely conduct of the particular plaintiff, but having regard to all of the evidence. A related issue arises where the question is whether a particular representation has induced the plaintiff to act in a particular way. In Sidhu v Van Dyke (2014) 251 CLR 505; [2014] HCA 19 French CJ, Kiefel, Bell and Keane JJ stated:

10. [410]

    There is no suggestion that some new approach had been adopted in Backoffice: rather, the question as to the likely conduct of the plaintiff in the counterfactual situation is always to be determined on the basis of the whole of the evidence, and will include an assessment of what is “material” or significant to the party concerned.

11. [411]

    Where the party is a large institution, and where a particular decision will involve the input of a number of officers, there is less reason than in the case of an individual to place significant weight on the evidence of particular officers, especially where they have addressed issues which did not conform to the findings of the court. However, what the officers did provide, was a range of information as to what matters were material, or significant, for NAB. That leads directly to the second issue.

12. [412]

    The second issue is to identify the evidence which the primary judge found to be of no assistance. He clearly did not reject all of the evidence of Ms Peter or Mr Taylor, much of which had been discussed in previous parts of the judgment. Rather, what he rejected was the usefulness of a statement in Ms Peter’s affidavit (pars 47, 48) and a statement in Mr Taylor’s affidavit (pars 52-54) which set out the pleaded case in seven particulars (a)-(g) and then expressed a view as to what course the witness would have taken had he or she been informed that “one or more of the following was the case with respect to DSH and its business”. Other NAB witnesses gave similar evidence by reference to six or seven factors, including Mr Johnson and Mr Menzies.

13. [413]

    In answering that question, Ms Peter blandly stated at par 48:

14. [414]

    Ms Peter also gave evidence as to her approach to the approval of the loan, including her assessment of the nature of the electronic retail industry, which dictated a conservative approach. She described the matters she had raised with Mr Johnson and Mr Menzies as matters of concern. She further explained the proposed conditions, with particular reference to liquidity/cash flow and inventory management systems. After reviewing the revised credit memorandum from Mr Menzies, she stated at par 35:

15. [415]

    Ms Peter’s view that it was “highly unlikely” that she would have approved the facility with DSH if any one of the seven issues had been identified in the credit memorandum was problematic, because at least one, par (d), related to the accounting standards and their application to rebates from suppliers, a matter which was abandoned, and a second, par (e), referred to inadequate systems for making provision for write-offs of obsolete inventory, another matter which was not ultimately established. However, three other matters were established and found by the judge to be of central importance to NAB’s decision-making process. The first was the policy of maximising O&A rebates and the fact that the purchasing practice was a significant cause of DSH ordering excess inventory before Christmas 2014: pars (a) and (b). Similarly, the information that DSH had either requested suppliers to delay delivery or extend time for payment, because of cash flow problems: pars (c) and (g). The third matter was that DSH had exceeded its finance facility limits with Westpac on a number of occasions: par (f).

16. [416]

    Mr Taylor noted in his affidavit at par 52 that he had been asked to assume the same seven factors and state what approach he would have taken to the decision whether to support the credit approval in May 2015. His response was more nuanced and less formulaic:

17. [417]

    Mr Johnson commenced his discussion of the counterfactual proposition with the following statement at par 33:

18. [418]

    Mr Johnson set out six of the standard assumptions (a)-(f) and concluded at par 35:

19. [419]

    Mr Menzies addressed the preparation of the internal credit memorandum. After setting out his understanding of the various statements made by Mr Potts in the course of his meetings with him and by telephone, he noted the statement in his final version of the credit memorandum to the following effect, at par 32:

20. [420]

    At the trial, Ms Peter was cross-examined by counsel for Mr Abboud about the assumptions in pars (a)-(g) at some length: Tcpt, pp 896(1)-912(17). Although she accepted that in some circumstances she would have required further information to reach a firm conclusion, in other respects her answers provided material inconsistent with Mr Potts’ submissions in this Court.

21. [421]

    Ms Peter was taken to par (a) of the assumptions which read:

22. [422]

    Ms Peter said that she understood the assumption to indicate that “the weighting was more to rebates” and that “the rebates were prioritised over the demand for the stock”: Tcpt, p 903(7), (19). When pressed as to how she understood the word “rather” in assumption (a), she said it “indicates that the drivers of the decision were the availability of rebates rather than how quickly the stock could be liquidated”. Although it was suggested to her that she was adding to the assumption “facts” which she regarded to be material, she stated that she was indicating her reading of the assumption: Tcpt, pp 903(40)-905(41).

23. [423]

    Mr Johnson, in his affidavit, had not stated that any one of the assumptions would have been sufficient to withhold approval, a matter which was confirmed in cross-examination: Tcpt, pp 870(27)-871(26). Mr Johnson gave a reason for that:

24. [424]

    The cross-examination of Mr Taylor on this topic was limited. He was taken only to assumption (a), which was in the same terms as that set out above. The cross-examiner asked (Tcpt, p 824(40)):

25. [425]

    Mr Taylor was separately cross-examined by senior counsel for Mr Potts, including with respect to the assumptions (a)-(g). There were two limbs to the cross-examination. The first was that Mr Taylor was, as par 53 of his affidavit suggested, focused on the working capital requirements of DSH and how they were affected by inventory issues. He agreed with that: Tcpt, p 841(38)-(41). The cross-examination continued (Tcpt, p 842(32)):

26. [426]

    The cross-examiner then turned to an issue which had been raised with Mr Potts, namely the apparent overstocking in January 2015, which had raised a particular red flag with Mr Taylor, but had been addressed by Mr Potts and he considered to have been resolved. The cross-examiner then suggested there would have been a similar response in relation to the hypothetical issues: Tcpt, p 845(33):

27. [427]

    Given that the list of assumptions were things which NAB said Mr Potts had not disclosed, there was a degree of awkwardness in the cross-examination as to what Mr Taylor would have done had they been disclosed. Nevertheless, the cross-examination did not appear to cast doubt on Mr Taylor’s credit and the judge did not find that it did.

28. [428]

    As counsel for Mr Potts pointed out on the appeal and, unsurprisingly, the primary judge accepted, buyers did not purchase stock for their O&A rebates in disregard of any question as to likely demand for the products. The judge stated:

29. [429]

    The judge further noted (at [375]), that there were other key performance indicators which the buyers took into account and continued:

30. [430]

    In written submissions, counsel for Mr Potts asserted, with respect to the assumptions (a) to (g), that “none of those matters was made out on the evidence”: written submissions, par 38. However, that conclusion depended, in relation to the O&A rebates, on a particular reading of the assumption.

31. [431]

    Further, it was not correct to treat what may be described as a formulaic acceptance of pleaded assumptions as determinative of causation, or, if rejected, determinative of a failure to prove causation. Nor was the case to be determined by a semantic debate with the witnesses as to their understanding of the assumptions. However, to the extent that the key assumption was that relating to the O&A rebate policy, there was no reason to hold that the maximisation of rebates was to be pursued as the sole policy without any regard to consumer demand. Such an understanding would not be commercially realistic. It was not the understanding that the primary judge adopted. There was powerful evidence to support the judge’s conclusion that “the likelihood is that if [NAB] had been told that one of the reasons for the build-up in stock was the emphasis on O&A rebates and that DSH had not taken steps to change its policies and procedures to deal with that problem, it would not have agreed to participate in the syndicate with HSBC”: at [374]. That is an expression of causal connection between misleading and deceptive statements, found on the evidence to be highly significant to NAB, and NAB’s likely response given disclosure of the true position, as found on the evidence.

32. [432]

    By way of comparison with HSBC, the judge was entitled to take into account, as he did in dealing with the HSBC claim, that HSBC had pursued DSH, seeking to establish a banking relationship and leverage its Chinese connections to assist in dealing with suppliers. A separate factor was that HSBC had entered into the Extension Agreement, a fact which was patently relevant to an assessment of HSBC’s likely attitude to a correction of misleading information. In assessing and reaching his own view about the extent to which NAB placed reliance on particular matters, the judge had before him not merely formulaic statements in the affidavits, but significant other evidence, including the cross-examination of Ms Peter, and Messrs Taylor, Menzies and Johnson. No error was established.

33. [433]

    The challenge by way of ground 2 to the finding of “reliance” must be rejected.

Ground 3: Proportionate liability defence

1. [434]

   Each of the causes of action relied upon by the plaintiff was accompanied by a defence seeking apportionment of liability for economic loss. The relevant provisions were as follows: (i) Australian Consumer Law, s 18 and s 236 (liability to pay damages for misleading or deceptive conduct) and Competition and Consumer Act 2010 (Cth), s 87CB (proportionate liability defence); (ii) Corporations Act 2001 (Cth), s 1041H (liability for misleading or deceptive conduct) and s 1041L (proportionate liability defence); and (iii) Australian Securities and Investments Commission Act 2001 (Cth), s 12DA (liability for misleading or deceptive conduct) and s 12GP (proportionate liability defence). Each of these sets of provisions is in relevantly similar terms. Although there are differences as to the coverage, it was not in dispute that all three covered the conduct engaged in by Mr Potts in the present case. It is convenient to note that the proportionate liability provisions under Commonwealth laws mirror those under Pt 4 of the Civil Liability Act 2002 (NSW), which have been addressed in several cases.

2. [435]

   It is sufficient for present purposes to set out s 87CB and related provisions in Pt VIA of the Competition and Consumer Act.

3. [436]

   Because NAB’s claim was a claim for damages for economic loss caused by conduct in contravention of s 18 of the Australian Consumer Law (for which damages were available under s 236) it was not in doubt that the claim was an “apportionable claim”. The other party was said to be DSH. The operative provision reads as follows:

4. [437]

   For Mr Potts to be a “concurrent wrongdoer” for the purposes of this provision he needed to be one of two or more persons of the kind identified in s 87CB(3). The operation of that provision has given rise to some difficulties of construction. The first is whether there need be more than one act or omission. That there may be more than one act or omission is apparent from the use of the plural “acts or omissions”. However, the provision also refers explicitly, in parenthesis, to the singular “act or omission”. As explained by Emmett JA in Williams v Pisano (2015) 90 NSWLR 342; [2015] NSWCA 177 at [71], the words in parenthesis could cover a single act or omission on the part of two persons separately, although that construction is more than a little awkward. The syntax also requires consideration of the fact that the act or acts and omission or omissions can be causal factors independently of each other, or jointly. To treat the singular act or omission as operating “independently of each other” reinforces the awkwardness of speaking of an act of each of two persons. The difficulty is created by drafting which incorporates four sets of alternatives within a single sentence. However, relevantly for present purposes, one can disaggregate the sets to isolate a specific reading, being one act of two persons acting jointly which causes the loss or damage, the subject of the claim. Such a reading makes sense in ordinary parlance and in legal terms. It is difficult to understand why such a case should be excluded from the coverage of the provision, although it may be accepted that two acts, each involving legal liability on the part of separate persons, is likely to be the more common case. However, as Bell and Gageler JJ explained in Hunt & Hunt Lawyers v Mitchell Morgan Nominees Pty Ltd (2013) 247 CLR 613; [2013] HCA 10 at [91] the provision should be understood as referring to “one or more legally actionable acts or omissions”. One act is sufficient, at least in the case of joint liability.

5. [438]

   Liability can be characterised as joint or several, or both. Separately, it can be characterised as direct or vicarious. These different forms of characterisation will have different purposes. The statutory purpose of proportionate liability is to prevent a solvent concurrent wrongdoer being liable for the whole of the loss or damage suffered by the plaintiff in circumstances where there are one or more other concurrent wrongdoers who will escape liability because they are impecunious.

6. [439]

   Some care must be taken when these provisions are applied to cases where a natural person and a corporate entity which is controlled by the natural person are each said to be concurrent wrongdoers. That was the case in Tomasetti v Brailey [2012] NSWCA 399 (where the acts of Mr Brailey were the corporate acts of his company) and in Robinson v 470 St Kilda Road Pty Ltd (2018) 263 FCR 572; [2018] FCAFC 84 (where the company had a sole director). There are statements in the former case at [154]-[156] that each of two concurrent wrongdoers may be 100% liable to a plaintiff. If so, that would be directly contrary to a principal objective of the regime. In the latter case, upon which Mr Potts relied, the question arose as to whether a company, with a sole director who was the alter ego of the company, could be a concurrent wrongdoer with the director. McKerracher and Markovic JJ reasoned:

7. [440]

   It is difficult to reconcile the rejection of a single act for which two wrongdoers are jointly liable with statutory language which expressly contemplates the possibility that there is a single act or omission of two or more persons. Further, it is important to bear in mind that, although perhaps obscurely worded, the legislation does not allow a vicariously liable principal to be a concurrent wrongdoer. That follows from two provisions. First, s 87CF, which confers on a defendant who is a concurrent wrongdoer immunity from claims for contribution or indemnity by any other wrongdoer. Secondly, s 87CI(a) provides that “[n]othing in this Part… prevents a person being held vicariously liable for a proportion of an apportionable claim for which another person is liable”. These provisions would not work harmoniously if a defendant whose liability was purely vicarious could be a concurrent wrongdoer. That that was the intention of the provision appears from the report of Professor JLR Davis, upon which the proportionate liability defence in various statutes was based: Commonwealth of Australia, Inquiry into the Law of Joint and Several Liability: Report of Stage 2 (1995). Professor Davis recommended that the proposed scheme for proportionate liability should not apply to instances of vicarious liability, as noted in Woodhouse v Fitzgerald (2021) 104 NSWLR 475; [2021] NSWCA 54 at [101]. Emmett JA noted in Williams v Pisano, that that consideration would justify the result in Hadgelias Holdings Pty Ltd v Seirlis [2015] 1 Qd R 337; [2014] QCA 177 at [14], [21], which had inappropriately held there must be “distinct acts (or omissions) or sets of acts (or omissions) by different actors”.

8. [441]

   In the present case, the difficulty faced by Mr Potts was that he accepted he was not the alter ego of the company (in which case his acts would have been the acts of the company) (Tcpt, p 4270(1)); rather, the company may have been vicariously liable for his acts, but on that basis it would not have been a concurrent wrongdoer.

9. [442]

   These issues may be put to one side, however, because Mr Potts accepted that he had to establish some act attributable to DSH, other than his own acts vicariously attributable to DSH, in order to establish that DSH was a concurrent wrongdoer. In that he was correct. Mr Potts relied upon both acts and omissions.

10. [443]

    Mr Potts’ pleading that the claims by the banks involved apportionable claims (Amended Commercial List Response, par 129) was correct. Without Mr Abboud’s liability, the question was whether DSH was a concurrent wrongdoer. The primary matters relied upon in this regard were three statements said to constitute representations made by DSH in the Syndicated Facility Agreement executed on 22 June 2015. These were particularised as such in NAB’s Third Amended Commercial List Statement. However, the fact that they were pleaded did not mean that they had been shown to be false, nor that NAB had relied upon them. The relevant representations, contained in Pt 7 of the Syndicated Facility Agreement, read as follows:

11. [444]

    There is no dispute that DSH made those written representations. Further, NAB pleaded that it had relied upon them: Third Amended Commercial List Statement, par 19. Mr Potts then submitted that the judge had made express findings to the effect that those representations were false and that NAB had relied upon them. However, what the primary judge upheld were NAB’s claims with respect to Mr Potts’ conduct, as set out above. Significantly, the primary judge did not uphold any claim with respect to the CEO, Mr Abboud. Further, the judge made no finding that, in the first part of 2015, the non-executive directors and the board generally, breached their duties. However, he treated the positions of Mr Abboud and Mr Potts differently: primary judgment at [409].

12. [445]

    What was missing from this case was identification of facts which constituted breaches of the relevant representations. Thus, putting to one side information known to Mr Abboud and Mr Potts, there was no finding that DSH as an entity failed to disclose to NAB documents and information “reasonably considered by [DSH] to be material to the assessment of the nature and amount of risk undertaken by [NAB]”. It was not submitted that Mr Potts had identified such documents or information in cross-examination of the company directors. With respect to subpar (t), there was no evidence that any of the directors (other than Mr Abboud and Mr Potts themselves) had reason to believe that the matters disclosed were otherwise than accurate in all material respects or were, by omission or otherwise, misleading. Nor was there any finding in respect of subpar (u) that the financial projections had not been prepared in good faith and with due care and skill, or that such inadequate financial projections were provided by DSH or on its behalf to NAB.

13. [446]

    No doubt that affirmative case against DSH would have been forensically difficult for Mr Potts to run, given his position as the primary contact between NAB and DSH and the person responsible for identifying what material was and was not to be disclosed. It was one thing for him to eschew any claim that the liability of DSH turned on his conduct, but it was quite another to claim to have established that DSH had breached its duties with respect to the representations in the Syndicated Facility Agreement. In the event, that case against DSH was not made good. As NAB submitted, there were various documents prepared by other officers of DSH, including Ms Puja, which were supplied to NAB. However, Mr Potts eschewed any claim that any particular officer of DSH had failed in his or her duty.

14. [447]

    In his written submissions in reply (par 26), Mr Potts asserted that “ground 3, which arises only if grounds 1 and 2 fail, accepts as its starting point the findings which are challenged by those other grounds”. For reasons explained above, that is not so. It does not follow that “if Mr Potts is liable to NAB…, it must follow that DSH knew the ‘true position’ regarding its overstock position (namely, that it was overstocked as a result of pursuing O&A rebates …)”.

15. [448]

    Mr Potts also relied upon the fact that public explanations given by DSH for its stock position in early 2015 were incomplete and misleading. While it is true that officers at NAB, including Mr Menzies, read the public statements made by DSH, they found them inadequate to explain the overstocking problem. It was for that reason that they spoke to Mr Potts. Accordingly, far from relying on the public statements, NAB officers sought to go behind them. But it was Mr Potts who failed to disclose information which ought to have been disclosed. Those circumstances are inconsistent with the proposition that NAB relied upon the inadequate public statements. Indeed, they established the contrary.

16. [449]

    Ground 3 must be rejected.

Conclusion

1. [450]

   For the foregoing reasons, the findings of the primary judge with respect to liability must be upheld. The failure of the judge to carry out an assessment of the proportionate liability defence may have been the result of a reasonable apprehension that the case could only be made good by reference to the wrongdoing of Mr Abboud, which was not established, or it may have been an inadvertent omission. In any event, the appeal must be dismissed. Mr Potts must pay NAB’s costs of the appeal.

2. [451]

   In this appeal the Court makes the following order:

   1. (1)

      Appeal dismissed.

   2. (2)

      The appellant is to pay the respondent’s costs.