FEDERAL COURT OF AUSTRALIA

Adelaide Brighton Cement Limited, in the matter of Concrete Supply Pty Ltd v Concrete Supply Pty Ltd (Subject to Deed of Company Arrangement) (No 4) [2019] FCA 1846

ORDERS

THE COURT ORDERS THAT:

1.    The plaintiff file and serve draft minutes of order which reflect the conclusions expressed in these reasons and contain such other orders as it seeks on or before (a date to be fixed).

2.    The proceeding be listed for the making of final orders on (a date to be fixed).

Note:    Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.

REASONS FOR JUDGMENT

BESANKO J:

INTRODUCTION

1    The plaintiff in this proceeding is Adelaide Brighton Cement Limited (ABCL). ABCL is a public company incorporated in Australia and it carries on business in South Australia of supplying cement and lime. It is one of the subsidiaries of Adelaide Brighton Limited (ABL), which is listed on the Australian Securities Exchange (ASX). There are a number of companies in the Adelaide Brighton Group.

2    There are six defendants to the proceeding. The first defendant is Concrete Supply Pty Ltd (subject to Deed of Company Arrangement) (Concrete Supply). As its name indicates, it is a private company and it carries on business in South Australia of supplying concrete. It is currently the subject of a deed of company arrangement (DOCA). There are two companies which are related to Concrete Supply and they are Mantina Earthmovers and Constructions Pty Ltd trading as Mantina Quarries (Mantina Earthmovers), and Mantina Investments Pty Ltd (Mantina Investments). These three companies are the main operating companies in the Mantina Group. The directors and shareholders of Mantina Earthmovers and of Mantina Investments are the same as the directors and shareholders of Concrete Supply. The one exception is that Ms Patricia Pacillo, who is not a director of any of the three companies, has a small shareholding in Concrete Supply and Mantina Earthmovers.

3    The second and third defendants are Mr Dominic Charles Cantone and Mr Nicholas David Cooper respectively and, at all relevant times, they were registered liquidators and chartered accountants. They are members of Worrells Solvency & Forensic Accountants (Worrells). On 14 November 2017, the directors of Concrete Supply resolved to put the company into administration on the basis that, in the directors’ opinion, the company was insolvent, or was likely to become insolvent at some future time, and to appoint Messrs Cantone and Cooper as joint and several administrators of the company. A DOCA was subsequently proposed by the directors of Concrete Supply and it was approved at a second meeting of creditors of the company on 19 December 2017. Messrs Cantone and Cooper were appointed deed administrators. For convenience, I will refer to them as the administrators.

4    The fourth defendant is Mr Pelegrino Obbiettivo. He was referred to in the course of the evidence as Rino and for convenience, and without intending any disrespect, I will refer to him in that way. His late father and his mother established the business of Concrete Supply in 1987. At all material times, Rino was a director and shareholder of each operating company in the Mantina Group.

5    The fifth defendant is Mr Genesio Obbiettivo. He was referred to in the course of evidence as Jason and for convenience, I will refer to him in that way. He is Rino’s brother. At all material times, Jason was a director and shareholder of each operating company in the Mantina Group.

6    The sixth defendant is Mrs Tina Obbiettivo. For convenience, I will refer to her as Tina. She and her late husband established Concrete Supply and she is the mother of Rino and Jason. At all material times, Tina was a director and shareholder of each operating company in the Mantina Group. As I will explain in due course, she played a part in the conduct of the business, but not a major part.

7    Where necessary, I will refer to Concrete Supply and Rino, Jason and Tina as the Concrete Supply defendants, and Rino, Jason and Tina as the directors.

8    Concrete Supply was incorporated on 18 October 1977 as Karkiwarri Pty Ltd. The name of the company was changed to Concrete Supply on 26 April 1988. The company commenced operating a concrete batching plant at 76 Research Road, Pooraka in the State of South Australia (the Pooraka property) in about 1987. The Pooraka property is owned by Tina and she leases it to Concrete Supply. Concrete Supply continues to operate a concrete plant at the Pooraka property. It also operates concrete plants at a property at 216 East Terrace, Kapunda (the Kapunda property) and a property at Roadtrain Drive, Two Wells (the Two Wells property). The concrete plant at the Two Wells property was established in about September 2017.

9    Mantina Earthmovers (then known as Mantina Earthmovers Pty Ltd) was incorporated on 28 February 1977. The company changed its name on 29 October 1982. The Kapunda property comprises a hard rock quarry and other rural land. Mantina Earthmovers operates the quarry.

10    Mantina Investments was incorporated on 10 August 2004. It is the trustee of the Mantina Investments Unit Trust and it owns the Kapunda property and the Two Wells property.

11    This proceeding was commenced by ABCL on 17 January 2018. ABCL’s case is that between 1 August 2009 and 6 November 2017, it supplied cement to Concrete Supply to the value of $32,599,450.55, but that Concrete Supply has made payments to it of only $20,938,867.69 for the cement it supplied. ABCL’s case is that the difference between these two amounts, together with an opening balance as at 30 July 2009 of $787,259.72, namely an amount of $12,477,842.58, is a debt due to ABCL by Concrete Supply. Concrete Supply does not dispute part of this alleged debt, being an amount of $2,168,328.51. The balance of the alleged debt is in dispute.

12    The fact that ABCL is seeking to recover monies said to be owed for cement supplied over a period of approximately nine years is but one of many unusual features in this case.

13    ABCL established the primary amounts of $32,599,450.55, $20,938,867.69 and $787,259.72 respectively and, by the end of the case, I did not understand those amounts to be in dispute. In any event, as I will explain in due course, I am satisfied that the amounts are established by the evidence. The Concrete Supply defendants’ case (putting it generally at this point) is that the difference between the amounts is not a debt due to ABCL because ABCL by its conduct gave substantial discounts or rebates to Concrete Supply in connection with its supply of cement to the company.

14    At the second meeting of creditors of Concrete Supply, ABCL’s alleged debt was admitted in the full amount for voting purposes. Mr Cantone was the chairperson of the meeting. The meeting considered alternative resolutions for the future of the company, namely, the execution of a DOCA proposed by the directors or a winding up. A resolution was carried on the casting vote of Mr Cantone that the company execute the proposed DOCA and that was subsequently done. ABCL seeks orders on various grounds that would see the DOCA terminated or set aside and Concrete Supply placed into liquidation.

15    In its Originating Process, ABCL sought the following relief:

1.    Pursuant to section 440D of the Corporations Act the plaintiff have leave to begin and proceed with this proceeding against the Company.

2.    Pursuant to section 75-42 of sch 2 of the Corporations Act that the resolution that the Company execute a deed of company arrangement, passed on the casting vote of second defendant, be set aside.

3.    In the alternative to paragraph 2, pursuant to section 90-15 of sch 2 of the Corporations Act setting aside the second defendant’s decision to exercise his casting vote in favour of the resolution that the Company execute the deed of company arrangement.

4.    In the further alternative to paragraph 2, pursuant to section 445D or 447A of the Corporations Act that the deed of company arrangement executed by the Company be terminated.

5.    Pursuant to section 75-43 or 90-15 of sch 2 of the Corporations Act that the proposed resolution that Company be wound up, defeated on the casting vote of the second defendant, be taken to have been passed and that Messrs Martin Lewis and David Kidman be appointed as joint liquidators.

6.    In the alternative to paragraph 5, pursuant to section 447A of the Corporations Act that the Company [be] wound up and Messrs Martin Lewis and David Kidman be appointed as joint liquidators.

7.    In the further alternative to paragraph 5, pursuant to section 90-15 of sch 2 of the Corporations Act that the second and third defendants be removed as external administrators of the Company and Messrs Martin Lewis and David Kidman be appointed as external administrators.

8.    Pursuant to section 483 of the Corporations Act, that the second to sixth defendants deliver, convey or surrender the Company’s books to the liquidators of the Company as soon as practicable.

  9.    A declaration that the Company owes the plaintiff $12,457,472.22;

10.    A declaration that the Company failed to maintain adequate books and records in contravention of section 286 of the Corporations Act.

11.    A declaration that the Company engaged in misleading or deceptive conduct or unconscionable conduct in contravention of sections 18 and 20 of the Australian Consumer Law or unconscionable conduct under the general law.

12.    A declaration that the fourth to sixth defendants were involved in conduct by the Company which contravened Chapter 2 of the Australian Consumer Law within the meaning of sections 2, 236 and 237 of the Australian Consumer Law.

13.    A declaration that the Company held cement which was received but not paid for, and any income generated using that cement, on trust for the plaintiff.

14.    A declaration that (a) the Company breached its fiduciary duty to the plaintiff by disposing of property held on trust for the plaintiff; and (ii) [sic] the fourth to sixth defendants procured or knowingly assisted or benefited from that breach of trust by the Company.

 15.    Damages.

 16.    Equitable compensation.

 17.    Interest.

 18.    Costs.

 19.    Such further or other order as the Court thinks fit.

16    ABCL required the leave of the Court to begin or proceed with the claims for relief described in paras 9, 10, 11, 13 and 14(a) above by reason of s 444E(3) of the Corporations Act 2001 (Cth) and, on 14 March 2018, I granted such leave, nunc pro tunc (Adelaide Brighton Cement Limited, in the matter of Concrete Supply Pty Ltd v Concrete Supply Pty Ltd (Subject to a Deed of Company Arrangement) [2018] FCA 315). One of the issues which I discussed in those reasons was the advantages and disadvantages of hearing and determining the issue of whether the DOCA should be set aside or terminated before considering other issues in the case and, in particular, ABCL’s claim in debt. In the result, I decided that a determination of all issues at the one time was the appropriate course (see the discussion in the reasons at [31]–[54]). The course of these proceedings has only confirmed in my mind that that was the appropriate course.

17    There have been a number of other interlocutory disputes in this proceeding, including an application for an order which varied the DOCA and an order that this proceeding proceed on pleadings (Adelaide Brighton Cement Limited, in the matter of Concrete Supply Pty Ltd v Concrete Supply Pty Ltd (Subject to a Deed of Company Arrangement) (No 2) [2018] FCA 1003) and applications for discovery (Adelaide Brighton Cement Limited, in the matter of Concrete Supply Pty Ltd v Concrete Supply Pty Ltd (Subject to a Deed of Company Arrangement (No 3) [2018] FCA 1058).

18    The Concrete Supply defendants had common representation in this proceeding and the second and third defendants had their own separate representation.

19    ABCL summarised the issues which are raised by their claims. It is a useful broad and general summary. However, it is only a summary and, as will become apparent, it does not encapsulate all of the issues and sub-issues which are raised.

20    First, is Concrete Supply indebted to ABCL in the amount of $12,457,472.22? If yes, has Concrete Supply in those circumstances failed to comply with s 286 of the Corporations Act, having regard to the fact that the books and records of Concrete Supply showed a liability by Concrete Supply to ABCL of only $2,168,328.51?

21    Secondly, are the directors of Concrete Supply also liable for the amount claimed against the company by reason of their participation in misleading or deceptive conduct by Concrete Supply and their participation in breach of fiduciary duty by Concrete Supply?

22    Thirdly, should the DOCA be terminated pursuant to s 445D of the Corporations Act and Concrete Supply placed into liquidation by reason of the facts (if the facts are established) that the investigations of the administrators and the Second Report to Creditors were deficient in various respects and Mr Cantone’s exercise of the casting vote at the second meeting of creditors cannot be sustained?

23    Finally, even if the administrators’ investigations and the Second Report to Creditors were not deficient, should the DOCA be brought to an end by an order under s 447A(2) of the Corporations Act because, on the circumstances now known to the Court, the DOCA is an abuse of Pt 5.3A or for other reason? The submission is that an order bringing the DOCA to an end is appropriate, having regard to the public interest and considerations relevant to commercial morality.

24    I will identify the witnesses as I address the issues which are raised and I will make findings with respect to their evidence. The standard of proof is the civil standard, namely, on the balance of probabilities. Some of the findings I am asked to make involve serious allegations of improper conduct and I must bear that in mind when deciding whether the finding should be made: s 140(2) of the Evidence Act 1995 (Cth); Briginshaw v Briginshaw (1938) 60 CLR 332 at 362 per Dixon J (as his Honour then was); Whitlam v Australian Securities and Investments Commission [2003] NSWCA 183; (2003) 57 NSWLR 559 at [115]–[121].

ABCL’S CLAIM IN DEBT

Mr Darryl Hughes

25    In October 2017, it came to the attention of ABCL that its books and records were not accurate and that Concrete Supply had underpaid for cement supplied to it by ABCL in an amount in excess of $10 million. ABCL launched an investigation into the matter and a manager, Mr Darryl Hughes, was involved in the investigations.

26    Mr Hughes gave evidence before this Court. He was an honest witness and I accept his evidence. As I will explain, he identified certain false entries in the books and records of ABCL by a Ms Glenda Burgess. Ms Burgess was a credit manager at ABCL’s office at Birkenhead. She is not a party to this proceeding and did not give evidence in this proceeding. She faces a civil claim by ABCL in the Supreme Court of South Australia. That proceeding was stayed pending a criminal investigation (Adelaide Brighton Cement Ltd v Burgess [2018] SASC 134). I am mindful of these matters, but findings as to Mr Burgess’ conduct and its character are central to a number of issues in this case. The evidence before me does not reveal a motive for Ms Burgess making the false entries. ABCL said that it was not part of its case to prove collusion between Ms Burgess and Concrete Supply or that Concrete Supply procured her conduct.

27    During the course of this hearing, I was required to make various rulings. Those rulings and my reasons for them are set out in Appendix A to these reasons.

28    The first ruling arose as a result of certain objections made by the Concrete Supply defendants to Mr Hughes’ affidavits. The ruling is described in Appendix A and it led to the filing of a Reply and a Rejoinder. I will refer to features of the Reply and Concrete Supply’s Rejoinder before addressing Mr Hughes’ evidence because those features will make clear the relevance of a number of matters which Mr Hughes’ evidence addressed.

29    In ABCL’s Reply, it denied that any knowledge of Ms Burgess was to be equated with “a conscious and deliberate decision by the plaintiff” or was otherwise the knowledge of ABCL, and it denied that Ms Burgess was authorised by ABCL to agree the lump sum deductions and the Recipient Created Tax Invoices (RCTIs) deductions, or that these were ever “agreed as between ABCL and Concrete Supply”. ABCL alleged that conduct by Ms Burgess whereby ABCL stopped sending invoices and statements to Concrete Supply, or otherwise did not object to the lump sum deductions and the RCTI deductions, was not authorised by ABCL and was contrary to and not in the course of Ms Burgess’ ordinary duties. ABCL further alleged in para 3 of the Reply that between 2009 and 2017, Ms Burgess engaged in the conduct described below without authority from ABCL and contrary to and not in accordance with her ordinary duties with ABCL and to the financial benefit of Concrete Supply and in fraud of ABCL:

3.1    allocated payments made by other customers against Concrete Supply’s account:

  3.2    transferred debt from Concrete Supply’s account to other customers’ accounts;

3.3    “refreshed” Concrete Supply’s debt by raising new debt to meet outstanding and overdue debt owed by Concrete Supply;

3.4    omitted to reveal the full extent of Concrete Supply’s debt in the reports which she prepared for the Board of ABCL;

3.5    failed to reveal Concrete Supply’s true indebtedness at the sales and marketing meetings which she attended;

3.6    deleted any reference to Concrete Supply from aged trial balances provided to ABCL’s auditors;

3.7    increased Concrete Supply’s credit limit; and

3.8    did not pursue payment of Concrete Supply’s true indebtedness in accordance with its actual credit limit and terms of trade.

30    Concrete Supply filed a Rejoinder to ABCL’s Reply in which it denied ABCL’s allegations. It pleaded that the conduct of Ms Burgess, as referred to in para 3 of the Reply and set out above, was known, or ought to have been known, to other employees of ABCL based at its Birkenhead office. The particulars of this allegation were that the other accounts receivable staff, the sales representatives and Ms Burgess’ supervisors also accessed customer accounts in which the alleged transactions occurred and, therefore, would have known, or ought to have known, of the unauthorised transactions and that the size and frequency of the transactions were such that other employees would have known of them. Concrete Supply alleged that Ms Burgess did have authority, either actual authority or implied authority. It further alleged that the absence of any controls and supervision of Ms Burgess by ABCL gave rise to an estoppel against ABCL from it now alleging that she did not have any authority. Finally, Concrete Supply pleaded that further, and in any event, if the conduct of Ms Burgess was in fraud of ABCL, it was still attributable to ABCL because of the matters pleaded in the Rejoinder and because it was not a total fraud of ABCL and ABCL benefited from an ongoing trading relationship being maintained between it and Concrete Supply.

31    I turn now to the evidence of Mr Hughes.

32    Prior to September 2018, Mr Hughes was the general manager of finance of ABL. In that role, he was responsible for the corporate reporting of ABL and its subsidiaries, including ABCL. Mr Hughes is employed by one of ABL’s subsidiaries, Adelaide Brighton Management Limited, which provides corporate management services to the Adelaide Brighton Group, including ABL and ABCL. Mr Hughes commenced his role as general manager of finance in 2011 and he reported to Mr Michael Kelly, who was ABL’s chief financial officer. Mr Hughes set out his responsibilities in more detail in his evidence-in-chief, but it is not necessary for me to describe those matters. In September 2018, Mr Hughes became the acting chief financial officer of ABL and it was at about this time that Mr Michael Kelly left ABL.

33    Mr Hughes is and has always been located in Sydney. He has been a director of ABL since about 2012. He was not personally involved in the Concrete Supply account and the trading relationship between ABCL and Concrete Supply.

34    ABCL met as a board to fulfil its statutory obligations, but where there was an issue of board significance in respect of Birkenhead, then a meeting of the board of ABL would be convened.

35    ABCL’s financial records consist of entries in a “SAP” accounting software system and in supporting documentation. Prior to 1 August 2009, ABCL’s financial records were contained in a programme known as “Protean”.

36    ABCL manufactures cement, lime and pre-packaged dry-blended products. It operates two manufacturing plants in South Australia, one at Birkenhead and the other at Angaston. The Adelaide Brighton Group has offices at Birkenhead where a number of staff are employed.

37    ABCL’s product can be purchased in bags, including “bulker” bags or it can be purchased in bulk and loaded directly into a tanker. The product can be collected directly from ABCL’s plants or delivered by ABCL to customers.

38    ABCL has a process for the purchase and delivery of bulk product from its plants which is largely automated. Customers can send a purchase order to ABCL which sets out the type and volume of cement or lime required which is entered into ABCL’s Central Administration System (CAS) or, as is the case with most customers, they have a general purchase order which covers all deliveries to them. Where a customer collects bulk cement using its own cement tankers, as was the case with Concrete Supply, the customer has an electronic card for each of its tankers. The card is linked to CAS and it enables ABCL to identify both the customer and the order being fulfilled. The tanker is weighed, both before and after loading, and the information is recorded in CAS which produces a delivery docket for the driver of the tanker. Mr Hughes produced CAS records for deliveries to Concrete Supply between 1 August 2009 and 6 November 2017.

39    CAS sends information to the SAP system as to the following matters:

(1)    the date of supply;

(2)    the type and quantity of product supplied;

(3)    the customer being supplied;

(4)    the purchase order which the supply related to; and

(5)    the docket number.

40    The SAP system contains details of the terms of trade with each customer which, with the information received from CAS, is used to generate invoices and to record sales in ABCL’s general ledger and customer accounts. ABCL invoices are a combination of information contained in CAS and information in the SAP system.

41    Although sales are automatically recorded in the SAP system, invoices in hard copy must be printed and then sent by post to the customer by a member of ABCL’s accounts receivable section. Mr Hughes said that in the ordinary course, ABCL invoices are sent to customers by post or by email. Mr Hughes is aware that that ordinary course was not followed with respect to Concrete Supply, at least for part of the relevant period. Mr Hughes said that it was nevertheless possible for Concrete Supply to calculate the amount it owed to ABCL by referring to delivery dockets and letters from ABCL to Concrete Supply advising Concrete Supply of price increases for product. As I will explain, that evidence is correct.

42    In the usual case, when a customer pays by cheque, the amount is deposited in ABCL’s bank account that day or the following day. Upon receipt of the proceeds into the bank account, the payment is entered into the SAP system and allocated to the relevant customer’s account. When a customer pays by an electronic funds transfer, the payment is entered in the SAP System and allocated to the relevant customer’s account at the time the payment appears in ABCL’s bank account. Payments are all allocated against the invoices being paid which enables ABCL to track which invoices are outstanding and the age of the customer’s debt.

43    Mr Hughes described his understanding, based on the books and records of ABCL, of the trading relationship between ABCL and Concrete Supply.

44    ABCL commenced supplying cement and lime to Concrete Supply in 1988. On or about 27 June 2008, ABCL and Concrete Supply entered into an agreement for the supply of cement by ABCL to Concrete Supply. The agreement is entitled “Bulk Supply Agreement” and I will refer to it as the BSA. Rino signed the BSA as the authorised officer of Concrete Supply and Jason signed as the witness to Rino’s signature. The commencement date is specified in the BSA as “1 August 2008” and the term of the BSA is specified as “Minimum Term 3 years”. Schedule 1 to the BSA sets out the price for the product by reference to the type of product and the ABCL plant from which the product is obtained. It specifies an ABCL list price, a discount amount and then a price per tonne taking into account a discount. Within that part of the BSA containing special conditions, there is a clause to the effect that ABCL may adjust the price on 60 days’ written notice to Concrete Supply.

45    Between 1 August 2008 and 6 November 2017, ABCL sent a number of letters or notices, or both, to Concrete Supply advising it of price increases. These documents were referred to in the evidence as “the price increase letters” and I will use that description. These price increase letters were produced by Mr Hughes. As I will indicate later in these reasons, I find that these price increase letters were sent by ABCL and received by Concrete Supply.

46    According to ABCL’s books and records and information provided to Mr Hughes, ABCL provided the following discounts to Concrete Supply:

(1)    General Purpose (Normal Portland) cement – in 2007 a discount of $19.00 per tonne; in 2008 (i.e., at the time of the BSA) a discount of $20.00 per tonne; in late 2010 a discount of $25.00 per tonne; and

(2)    other discounts for other types of cement.

47    Mr Hughes produced a schedule showing the base price, the discount and the discounted price for the supply by ABCL of General Purpose (Normal Portland) cement to Concrete Supply. It is as follows:

48    One slight qualification to the pricing structure is that from time to time ABCL was unable to supply product to a customer which that customer normally took, and in those circumstances, ABCL offered an alternative product at a price that was not dissimilar to the price of the product that the customer normally took. In other words, a customer would receive a higher priced product at a price similar to the price of the product the customer would normally take. From time to time, this occurred in the case of Concrete Supply.

49    Mr Hughes set out his understanding of certain terms in the BSA. Ultimately, those matters are matters for the Court and I do not need to refer to this evidence.

50    On 7 November 2017, ABCL changed the terms of trade such that Concrete Supply was required to pay for future supply prior to delivery.

51    The background to Mr Hughes’ investigation is that in early October 2017, Mr Hughes was told by Mr Martin Brydon, the chief executive officer of the Adelaide Brighton Group, that irregularities had been identified in ABCL’s accounts with respect to Concrete Supply. Mr Bruce Shaddock, who was the divisional manager for cement and lime, had identified the irregularities and had advised Mr Brydon and Mr Brad Lemmon of their existence. Mr Shaddock was based in Munster, south of Perth in Western Australia. He did not give evidence at the trial. Mr Lemmon did give evidence and I refer to his evidence below.

52    Mr Hughes was informed that Mr Shaddock had identified irregularities while reviewing a customer account in the absence of Ms Burgess who was not available at that time. Mr Shaddock had replaced Mr Claude Taeger as the divisional head of cement and lime. Mr Hughes was instructed to investigate the irregularities.

53    Mr Hughes said that between 3 October 2017 and early December 2017, he spent almost seven days a week reviewing and going through the transactions.

54    I have referred to the transfer from Protean to the SAP system. At the time of the transfer, all unpaid invoices in Protean were transferred to the SAP system. By reference to the unpaid invoices, there was an amount owing by Concrete Supply to ABCL of $787,259.72 as at 31 July 2009 in relation to product supplied, but not paid for, between April 2009 and July 2009.

55    One of the exercises Mr Hughes carried out in November 2017 in relation to the books and records of ABCL and the supply of bulk product to Concrete Supply between 1 August 2009 and 6 November 2017 was the transfer of entries relating to Concrete Supply from CAS and the SAP system respectively to Excel files so that the information could be produced to the Court and more easily understood.

56    The Excel file which contains entries from CAS relating to Concrete Supply consists of the date, product, quantity and purchase order for every collection of product by Concrete Supply from ABCL in the period 1 August 2009 to 6 November 2017.

57    The Excel file which contains entries from the SAP system consists of entries recording details of automated invoices (designated “RV” entries) and manual entries (designated in some other way) such as payments by Concrete Supply. It was in relation to the manual entries that Mr Hughes discerned a number of entries which did not reflect dealings between ABCL and Concrete Supply and which he described as false entries. Mr Hughes explained that in relation to RV entries, the SAP system takes a file from CAS overnight and processes that file. The entry itself is done by a batch programme and there is no need for the accounts receivable staff to enter the document or the invoice. Mr Hughes explained that batch programmes are able to be operated under a user ID and, therefore, track the user ID within the SAP system as the user running the programme, but that does not mean that that person physically entered invoices into the system one by one. Mr Hughes explained that a ZV document is a payment process document, namely, a document recording a payment from a customer. A person goes into the function within the SAP system that would allocate a payment to a customer and processes a payment to a customer’s account. This process is what Mr Hughes refers to as a “manual entry”. Mr Hughes explained that a manual entry, namely a payment, is a reduction in the customer’s account in the balance owing. To see a positive amount is the reverse of what one would expect to see when a payment is made to a customer’s account or a payment is allocated to a customer’s account.

58    At all events, from the information in the two Excel files, Mr Hughes was able to discern that ABCL sold Concrete Supply the following volumes of product:

59    I will return to Mr Hughes’ evidence with respect to the false entries after I have identified the difference between total sales to Concrete Supply by ABCL and total payments by Concrete Supply. After the false entries are removed, the details of the actual payments made by Concrete Supply between 1 August 2009 and 6 November 2017 are as follows:

60    The effect of this evidence, which I accept, is that, assuming the entries identified by Mr Hughes as false entries are properly so characterised and, leaving aside Concrete Supply’s argument that it is entitled to a discount or rebate, the true position is that, according to ABCL’s books and records, Concrete Supply has not paid for product received from ABCL in an amount of $12,447,842.58 comprised as follows:

(1)    the amount outstanding as at 1 August 2009 of $787,259.72; and

(2)    the amount of $11,660,582.86 being the difference between the amount of $32,599,450.55 and the amount of $20,938,867.69.

61    I turn now to the false entries detected by Mr Hughes. As I have said, they relate to the manual entries in the SAP system. Mr Hughes investigated 116 entries in the manual entries report which he had produced and examined the underlying journal entries. He discovered that 115 of the 116 entries did not relate to trading between ABCL and Concrete Supply. He described the matters to which these entries appeared to relate as follows:

  43.1    4 relate to payments made by other customers;

43.2    5 relate to journal entries transferring indebtedness from Concrete Supply to other customers;

43.3    57 relate to journal entries which record the payment of Concrete Supply’s debt by the creation of new credit;

43.4    49 relate to journal entries which record the payment of Concrete Supply’s debt by a combination of the creation of new credit and the application of a legitimate payment; and

43.5    one entry (recording a payment in the amount of $108,814.57 on 26 October 2017) was genuine.

62    Mr Hughes also identified a further instance of a payment by another customer being allocated to Concrete Supply and a further 11 entries which relate to journal entries which record the payment of Concrete Supply’s debt by the creation of new credit.

63    The false or anomalous entries involved a user ID of one of ABCL’s accounts receivable staff, Ms Burgess.

64    Ms Burgess was responsible for customer accounts, including the customer account of Concrete Supply. Her duties included the following: (1) sending invoices and monthly account statements to Concrete Supply; (2) taking action to ensure overdue accounts are paid; (3) dealing with any queries from Concrete Supply concerning invoices or statements; and (4) reporting to the executive management team on the level of indebtedness of Concrete Supply and other customers. Ms Burgess reported directly to Mr Shaddock, and Mr Shaddock in turn reported to the executive general manager, Mr Lemmon.

65    Mr Hughes set about investigating the false entries with a particular emphasis on Ms Burgess. A search of email records revealed that there was no correspondence between the accounts section of ABCL and Concrete Supply after 12 September 2012. There was some correspondence regarding invoices and payments prior to this date. Furthermore, Mr Hughes was not able to locate any invoices or statements from ABCL to Concrete Supply since 2012. Other evidence in this case enables a more precise finding to be made, that is, that statements of account ceased after April 2012 and invoices after March 2013.

66    Concrete Supply provided two RCTIs in October 2017 and at the time he swore his first affidavit on 16 January 2018, Mr Hughes had found one such invoice dated 10 June 2017 in Ms Burgess’ office. Mr Hughes said that the practice of customers issuing RCTIs is not the norm for ABCL’s customers and ABCL had only one customer which did so. Mr Hughes later clarified this when he said that he was aware of only a handful of customers on an RCTI arrangement. Mr Hughes is not aware of any written agreement between ABCL and Concrete Supply whereby the latter is to provide RCTIs to the former. Other evidence in the case establishes that from a time in 2013, Concrete Supply sent RCTIs with cheques to ABCL.

67    Mr Hughes explained in his oral evidence-in-chief that since swearing his first affidavit, he had discovered that there were a number of RCTIs generated by Concrete Supply in Ms Burgess’ office and in cross-examination, he said that he was prepared to accept that a number of RCTIs were sent to Ms Burgess by Concrete Supply. Mr Hughes explained that it was not the RCTI that was processed into the SAP system, but rather the cheque payment itself. Mr Hughes explained that RCTIs for ABCL’s customers were “exceptionally rare”. ABCL has between 600 and 700 customers within the Cement and Lime Division, and (as I have said) Mr Hughes was aware of only a handful of customers on what he called an RCTI arrangement.

68    The Goods and Services Tax Ruling 2000/10 relevant to the generation of RCTIs was tendered by ABCL as part of Mr Hughes’ evidence-in-chief.

69    Mr Hughes and a Mr Mark Tosolini, who is the group information technology manager at ABCL, investigated entries in the SAP system which had been identified as suspicious by forensic accountants (KPMG) engaged by ABCL. The investigation revealed that numerous entries had been made using the user ID and work station of Ms Burgess which did not reflect legitimate entries and which resulted in ABCL’s accounts materially understating the indebtedness of Concrete Supply to ABCL.

70    Mr Hughes identified one of the suspicious transactions and he reviewed all user activity in the accounts receivable section of ABCL at the time of the transaction. He found that all user IDs were active at their usual workstations, including Ms Burgess’ ID at her usual workstation. Furthermore, the review showed that all other users were engaged in other work at their workstations.

71    In order to access the SAP system, a user needs to log in using a registered ID and password. Each user ID has a set of “permissions” which define the level of access the user has within the SAP system, including the changes or entries that user may make. Ms Burgess’ user ID was “GLENDAB”. The accounts receivable section was based at the Birkenhead site and comprised Ms Burgess and three other employees. The SAP system records “session information” each time a person logs into the system and that session information records when the user ID logged into the system and transactions, including reports, which were run during the session. In addition, ABCL records the activities of users who are logged onto its network through a Wyse terminal. That audit log records information, including the terminal from which the user accessed ABCL’s network, the applications run during the session and all websites visited during the session.

72    Mr Hughes reviewed the SAP system security log and work time data for Ms Burgess and the other members of the accounts receivable section for the period from August 2009 to October 2017. He drew the following conclusions from the review. First, all false entries referred to in his evidence were made using Ms Burgess’ user ID, “GLENDAB” at a time when Ms Burgess was logged into the SAP system for an extended period of time. Secondly, at the time the false entries were made, all other members of the accounts receivable section either did not log into the system for the entire day, or were logged into the system for an extended session. Mr Hughes expresses the opinion (which I accept) that the SAP system security log and work time data was not consistent with a person logging into the system using Ms Burgess’ user ID, making a false entry and logging out again. He said that the SAP system security log and work time data for Ms Burgess and the accounts receivable section runs to thousands of pages.

73    Under ABCL’s system, the only entries which should be made in a customer’s debtor account by a staff member in the accounts receivable section relate to records of invoices (automatically generated), records of payment by the customer and of credit notes. They are the only legitimate entries. In fact, there were numerous entries made using the user ID of Ms Burgess which did not fall into the above categories, but rather were false entries of the following types.

74    First, there were misallocations of payments whereby payments made by ABCL customers were allocated to the accounts of other customers in the absence of any evidence of instructions from the customer making the payment to do that.

75    Secondly, there were journal entries whereby indebtedness was transferred between customers in the absence of any authority from the affected customers to do that.

76    Thirdly, there were journal entries in ABCL’s accounts whereby an indebtedness was transferred to ABCL’s cash account at the end of certain months, which had the effect of disguising a customer’s accounts receivable balances. The balance was then transferred back to the customer a short time later.

77    Finally, there were journal entries which purported to be payments of invoices, but which were not supported by any evidence of payment. Instead what occurred was that the affected customer was extended new credit. Mr Hughes explained that refreshing a debt means an entry which is posted which leaves the account balance at the same value as before the entry, but because of the entry itself, a debit and credit within the account, the credit would be applied to old debt which was past due, or past due and payable and the new entry, the debit that would result at the end of the process, would then have a due date which would reflect the actual date of the transaction. The net result is that the balance does not change, but the age of the account is refreshed and brought more up to date. Mr Hughes identified ZV transactions which apparently involved the refreshing of a debt. Mr Hughes explained that refreshing a debt did not necessarily involve processing the entry against the oldest invoices. It was up to the person who was engaged in the process to identify the relevant invoices.

78    I referred earlier to entries in Concrete Supply’s debtor account involving transfers from other customer’s accounts and the misallocation of other customers’ payments. These entries had a net effect of reducing the balance owing on Concrete Supply’s debtor account of $8,355,817.97 as follows:

79    There were two other important matters Mr Hughes discovered as a result of his investigations.

80    First, the accounts receivable manager for each division was required at the end of each month to provide to senior management a schedule setting out the account balances of the largest debtors for their division. The schedule for each division was then merged to produce a single report for ABL. The report is then provided to the board of ABL so that it has information as to the financial position of the company. Ms Burgess was responsible for providing the schedule for the Cement and Lime Division of ABL to Mr David Patterson who was the group credit manager for ABL. Mr Patterson in turn provided it to the group accountant. The group accountant collated the information into a performance report for the board and that report included a section on debtors. The summary of debtors in fact showed the largest 21 debtors in respect of ABL’s Cement and Lime Division, although the obligation was to provide a list of the 10 largest debtors. On 27 November 2017, Mr Hughes compared the debtor records in the SAP system with the summary of debtors for the period from October 2016 to September 2017. That comparison revealed that Concrete Supply should have appeared on the summary of debtors for each month, but in fact only appeared on the summary of debtors for the month of February 2017. By the time of the trial, he had updated this information to include the position between August 2009 when the SAP system was introduced, and September 2016. A similar pattern of non-reporting of information about Concrete Supply emerged and Mr Hughes said that Concrete Supply should have been on about 85% of the reports to management within that period.

81    Secondly, each customer of ABCL who received cement on credit from ABCL has a credit limit. Under the delegated authorities issued by ABCL only ABL’s chief executive officer and managing director had authority to approve credit limits over $1 million. Mr Hughes’ examination of the books and records revealed the following:

(1)    Ms Burgess increased Concrete Supply’s credit limit from $400,000 to $1 million on 23 August 2010 without authorisation;

(2)    Ms Burgess increased Concrete Supply’s credit limit from $1.5 million to $3 million on 27 November 2014 without authorisation; and

(3)    even accepting the false entries, Concrete Supply was trading well above the recorded credit limit of $3 million (over $4 million) as at 25 October 2017.

82    Mr Hughes and another ABL representative interviewed Ms Burgess on 25 October 2017. At that time, she was suspended from her duties and she subsequently provided medical certificates to the effect that she was unfit for work. On 15 February 2018, Ms Burgess’ employment was terminated for serious and wilful misconduct. Other employees of ABL or ABCL have spoken to Ms Burgess on other occasions. Mr Hughes’ investigations did not reveal the reasons Ms Burgess made false entries in the records of ABCL. Mr Hughes expressed the view that there were two alternatives. First, although Ms Burgess did not intend to benefit Concrete Supply, she made entries over eight years which coincidentally benefited Concrete Supply. Secondly, and in the alternative, Ms Burgess intended to benefit Concrete Supply for some undisclosed reason. He considers it a “striking fact” that the benefit to Concrete Supply corresponded precisely with the quantum of invoices which Concrete Supply declined to pay on the basis of an alleged “discount” or “rebate” on certain invoiced amounts.

83    I discuss below the ABCL statement of account for March 2012 (the March 2012 Statement of Account) (at [187]–[195]). Mr Hughes’ evidence establishes that the SAP system records of ABCL show the same outstanding balance of $2,045,377.11 as Concrete Supply’s books and records. Mr Hughes produced the March 2012 Statement of Account for Concrete Supply available within the SAP system. Mr Hughes has confirmed that the March 2012 Statement of Account sent by Ms Sandra Cook of ABCL to Ms Heather Booth of Concrete Supply with an email dated 26 April 2012 recorded an incorrect balance of $1,428,588.16, rather than the correct balance of $2,045,377.11. The difference between the two amounts is that a debt of $622,196.38 and a credit entry of $5,407.43 have been removed. Mr Hughes is not aware of how this could have been done. He said that he had instructed ABCL’s IT team to investigate how the two entries might have been removed from Concrete Supply’s statement, either inadvertently or deliberately, but at the time of swearing his second affidavit, he had not been informed of how it could have happened. He did not provide any information as to the results of this investigation in his oral evidence.

84    Mr Hughes reviewed the minutes of meetings of ABCL’s sales and marketing team at which Ms Burgess was present. He noted that there was a standing item on the agenda for those meetings regarding the reporting of problem debtors. The minutes do not record Ms Burgess ever disclosing that Concrete Supply was trading significantly outside of its terms of trade, both as regards its credit limit and the age of its debt.

85    Mr Hughes was cross-examined at some length. The focus of the cross-examination was on exposing deficiencies in ABCL’s system in terms of checks that might have brought the false entries to light earlier and on circumstances suggesting that others at Birkenhead knew of the false entries. Those matters are relevant to attribution and contributory negligence which I address later in these reasons.

86    Mr Hughes had dealings with ABCL employees at Birkenhead from 2008 onwards. Mr Taeger, who was based at Birkenhead, was the most senior member of the cement and lime finance team. Mr Hughes identified other members of the finance team at Birkenhead. He said he did not have much interaction with the sales and marketing team. His estimate of the number of employees located at Birkenhead between 2011 and 2014 was 50 to 60.

87    Mr Hughes was taken to entries for 30 June 2011 in the Excel file he prepared and it was put to him that any person from the accounts receivable section at Birkenhead who looked at the information ought to have formed the view that the entries looked unusual. Mr Hughes said that if a member of the accounts receivable staff at Birkenhead had looked at that level of detail and identified those particular transactions, they would have seen that they were out of scope with the other transactions within the account. He said:

So yes, they – that would have flagged it as being unusual.

88    Mr Hughes was asked the same question in relation to entries on 9 September 2011 and he gave a similar answer. The entries would have been seen as vastly different to other transactions within the accounts and, therefore, identified as unusual. The entries were different because they were of a very different quantum. Furthermore, one of the entries, being an increase in a liability of $953,741.66, would have been seen as unusual. Mr Hughes gave similar evidence with respect to entries on 10 October 2011 and other entries in 2011.

89    Mr Hughes said that from mid-2011 to November 2017, the persons from the accounts receivable section at Birkenhead who were accessing the SAP system records in relation to Concrete Supply were primarily Ms Burgess and Ms Cook.

90    By reference to a modified document prepared by the Concrete Supply defendants, Mr Hughes was able to identify uses of the Concrete Supply customer account information in the SAP system by Ms Cook. In 2009, “DZ” was an early version of “ZV”, a customer payment. Mr Hughes admitted that there was manual entries by Ms Cook.

91    Mr Hughes interviewed Ms Cook as part of his investigations. Mr Hughes was accompanied by Ms Bronwyn Schoen, who is the general manager of HR Services. A record of the interview is contained in the Court Book. It seems that Ms Cook had on occasions made use of Ms Burgess’ ID and that that was contrary to ABCL’s IT policy. Ms Cook did not give evidence and Mr Hughes was not aware of any reason Ms Cook could not have given evidence.

92    In 2009, Concrete Supply was purchasing cement from ABCL at a value of approximately $200,000 to $300,000 per month. The same position applied in 2011. Mr Hughes agreed that the customer balance records in the SAP system showed large amounts in June, September and October 2011 that appeared to be “out of kilter and irregular”. He agreed that with its profile, Concrete Supply was not likely to have debits of $4 million in October 2011. Mr Hughes agreed that the feature of debits and credits far exceeding the sales and purchases was something apparent from the years that followed, namely, from 2012 to 2017. He agreed that there were “similar patterns” throughout that period. Mr Hughes agreed that if a member of the accounts receivable section had seen those matters, then he or she would have seen those discrepancies.

93    Mr Hughes was taken to a document entitled “Summary of Issues” prepared by Mr Matthew Beeby and Mr James Rivett of KPMG as part of KPMG’s investigation. This document was prepared following an “initial review” of the accounts receivable of ABCL by internal auditors from KPMG. The investigators identified dormant accounts as an issue. The issue was that a dormant account, being an account that did not have trading activity, had balances outstanding within that account. Mr Hughes discovered when examining the transactions in those accounts that they had been transferred in from other accounts within the accounts receivable system, that is, other customer accounts. He agreed that there was no rational explanation as to why the dormant accounts would be involved in a way suggesting a recent trading history. The second issue was identified as “Unusual entries in low value customers’ accounts”. The issue here was that there were large entries in a customer’s account in circumstances where the customer was doing a small amount in terms of sales per year. The third issue was unusual entries in the account of “Concrete Supply”, having regard to the profile of a company with sales of approximately $500,000 a month. For example, there is a debit entry in September 2017 of $1.4 million approximately. The fourth issue identified is “ICL’s payments used to offset other debtors’ balances”. ICL (Independent Cement and Lime) is a joint venture in which Adelaide Brighton has a 50% share. The other partner is the Barro Group which is a large shareholder within Adelaide Brighton. Mr Hughes agreed that the investigation showed that debit balances or amounts due had been transferred into the ICL account and were sitting there as if it was an amount due from ICL. The effect was to over inflate ICL’s indebtedness. The final issue was “Payments outside of terms (by multiple months)”. Mr Hughes was taken to a printout of the full debtors ledger for September 2017 and to five entries which had been flagged as unusual entries by KPMG. Mr Hughes agreed that someone looking at the detailed records would have identified the unusual transactions. Mr Hughes did not agree that Mr Taeger should have picked up the unusual transactions. It was not his job to run through every single transaction that went through the debtors ledger. The credit team were responsible for that area. They were then to provide the information to Mr Taeger. At the same time, Mr Hughes agreed that had Mr Taeger looked through the detail of the “individual customer account”, then the transactions in that account that were unusual would have flagged something was occurring within that account.

94    Mr Hughes said that on his analysis the “refreshing” conduct began in mid-2011 and he agreed that had anybody from ABCL in 2013 or in 2014 looked within the detail of a specific customer account and identified those transactions, they would have come across those transactions.

95    Mr Hughes agreed that in December 2017, KPMG had identified 46 customers who had been affected by the irregular transactions. The period was from 1 August 2009 to 2017, and although Mr Hughes could not remember the precise number of unusual transactions, there were a “substantial” number. Mr Hughes said that he did not consider it implausible that the only person who knew about the irregular transactions at Birkenhead was Ms Burgess. There were between 600 and 700 customers to manage. As far as the credit or accounts receivable section was concerned, Ms Burgess took primary responsibility for the ledger, that is to say ABCL’s ledger, and whilst entries had been posted by others, they were of limited scope in terms of invoicing and processing payments.

96    It seems that by about February 2018, the number of customers affected by the unusual transactions had been identified as 59.

97    In early January 2018, Mr Hughes went through the BHP Olympic Dam (BHP) ABCL account (3,036) and provided a report to Mr Michael Kelly. He noted that the summary of the account for the period since 1 August 2009 revealed a shortfall in payments from BHP in most years, some $1.9 million over the time period. Mr Hughes formed the opinion that there had been an irregularity at the time of the transfer from Protean to the SAP system. There were short payments between what ABCL had invoiced BHP and had recorded in its system compared to what BHP had paid. Mr Hughes agreed that the “investigation team” identified items such as re-aging, which disguised the lack of payment from a customer.

98    BHP is a customer which generates RCTIs in relation to its purchases from ABCL and it is the second largest customer after Concrete Supply in terms of short payments. In the case of BHP, the short payments total an amount of approximately $3.7 million. Towards the end of January 2018, the investigation had identified 60 customers affected by the irregular transactions, and the total impact in terms of the profit and loss of ABCL was $17.1 million.

99    Mr Hughes agreed that Concrete Supply would have been within the top 25 customers of the Cement and Lime Division. Mr Patterson was the national credit manager and he was based in Sydney. Mr Hughes is not aware of any reason why he could not give evidence in the proceeding. Mr Hughes did not know what checks and balances Mr Patterson went through in reviewing the spreadsheet which showed the top 25 customers at that time. He said it was not part of Mr Patterson’s role to check the amounts that appeared on the spreadsheet against the underlying amounts in the SAP system. Mr Patterson’s role was to review the information in terms of credit exposure. The credit managers were the people who were to compile the information from the SAP system and provide it to Mr Patterson as part of monthly reporting. The main user ID of the file which was shared as between Mr Patterson and Ms Burgess was the user ID of Ms Burgess.

100    Mr Hughes agreed that if Mr Taeger or Mr Shaddock had been aware of the amount that Concrete Supply “traded”, then they would have identified a credit limit of $3 million as unusual. Unless a specific amount was drawn to Mr Taeger’s attention, Mr Hughes did not agree that Mr Taeger would have known how much Concrete Supply “traded”. Ms Burgess did not have authority to increase the credit limit, but she did have the ability to record an increase in the credit limit approved by an unauthorised person.

101    Mr Hughes agreed that during the period 2009 to 2017, KPMG did a series of internal audits. He agreed that the investigation which he carried out identified a number of credit limit changes, such as the one involving Ms Burgess, that had resulted in adjusted credit limits outside the scope of delegated authorities.

102    The documents indicate that KPMG expressed concern about ABCL’s credit policies in October 2010. Mr Hughes was not aware of what was done in relation to credit policies between October 2010 and November 2017.

103    KPMG conducted a complete review of the credit area and accounts receivable area in late 2017 and identified a number of issues and recommended remedial action.

104    Mr Hughes is aware that under the BSA, the seller is obliged to prepare tax invoices. He was unable to say who made the decision at ABCL or why the decision was made to stop sending tax invoices to Concrete Supply.

105    Mr Hughes agreed that he filed an affidavit in the civil proceeding ABCL has brought against Ms Burgess in the Supreme Court of South Australia. In that connection, he was referred to a customer aging report which showed Concrete Supply’s debt to ABCL at 30 days at $1.99 million. He agreed that given the values that are set out against that particular customer, the amount in the 30 days appeared unusual. He agreed that it would appear to be the case that that came about as a result of the refreshing of debt. Mr Hughes said it would be most unusual for a customer to go from $300,000 per month (the current amount shown in the report was $324,056.61) to $1.99 million in a single month. Mr Hughes described an aged trial balance as a document used within the credit section to assess where particular customers are up to and which customers they needed to follow up for payment.

106    Mr Hughes said in practice that Mr Patterson did not go into the SAP system, but rather received information from individual credit teams “in terms of managing those accounts which had been flagged by the individual credit teams”.

107    Mr Hughes agreed that various entries in the general ledger in relation to the Concrete Supply customer account were unusual because of the amounts involved. He was taken to an entry of $1,648,296.49 for Concrete Supply which had been posted on 31 December 2015. He was asked whether he agreed that if a person from the accounts receivable section at Birkenhead saw that he or she would recognise it as an unauthorised transaction. He said that if such a person understood the value Concrete Supply would normally do, then an entry of that value “would have raised a flag”. Mr Hughes agreed that there was a tendency for the transactions identified to appear at key times, including at the end of a financial reporting period. Mr Hughes described what would appear on a customer’s monthly statement where a debt had been refreshed. The invoices which had been selected (whether they be the oldest invoice or not) would be removed from the monthly statement and there would be a much larger lump sum value in the statement. He did not agree that the customer would know and, in addition, anyone from the accounts receivable section at Birkenhead would know over time that the lump sum amounts were appearing on the monthly statements. When asked whether the person processing a cheque received would be aware of the refreshing, Mr Hughes said the following:

Depending upon the customer account, the screens that you go into when you allocate the invoice – or the payment, sorry, against invoices presents from the oldest invoice through to, at the top of the page and depending on the number of invoices that you have on the account outstanding, can run to many pages, inter-screen pages. So if you’re allocating, and generally payments come in oldest – sorry – a customer paying oldest, you would allocate it to the first series of invoices that are on that screen and may not get to the screen in which that refreshing entry appears on.

Mr Hughes could not say how often a person other than Ms Burgess would be involved in that process.

108    Mr Hughes was taken to KPMG’s report for ABL dated 18 July 2018. In that report, KPMG state that it had identified 44 instances where amounts had been inappropriately transferred between customers totalling an amount of $39,148,675.75. This was referred to by KPMG as category 2. Category 1 comprises transactions where amounts were inappropriately miscalculated to customers and the amount involved was $15,877,166.12. The category 1 and category 2 transactions affected approximately 60 customer accounts. Mr Hughes was taken to some of the transactions comprised first, in category 1. He was taken to transaction 2.05a which involved an amount of approximately $1.4 million. The amount of approximately $1.4 million was transferred from Concrete Supply’s account and went into the account of a company called Newmont Tanami Pty Ltd. The effect of the transaction was to reduce Concrete Supply’s account and increase that of Newmont Tanami. Concrete Supply’s liability to ABCL was reduced within the SAP system. Approximately one month later, there was a transfer of the amount from Newmont Tanami to Darwin Cash Sales. That meant that the Newmont Tanami account was reduced by $1.4 million approximately and the Darwin Cash Sales account was increased by $1.4 million. Approximately two months later, the amount was transferred from Darwin Cash Sales back to Newmont Tanami. Mr Hughes agreed that refreshing was the irregularity in addition to the irregularities comprising categories 1 and 2. Another example involves information in relation to both categories 1 and 2. On 24 March 2016, ABCL received cash in the sum of $139,000 approximately from Premix Concrete SA. That was incorrectly allocated to BHP. On 29 March 2016, Premix Concrete SA’s indebtedness was reduced by $139,403.44 and BHP Billiton (ODC) Pty Ltd was increased by that amount. Mr Hughes said that the investigation team did identify that there were transfers between various customer accounts, that is to say, from one customer account to another over time. Mr Hughes did not agree that it was inconceivable that either Mr Taeger or Mr Patterson were unaware of what was occurring and nor did he agree with the proposition that he was deliberately understating the role and functions of Mr Taeger and Mr Patterson.

109    Mr Hughes did not have a clear recollection of the time at which staff held various positions in the sales department. Mr John Niarchos was the sales and marketing manager for South Australia for ABCL in 2016 and for a period before that. Mr Hughes accepted that he would expect Mr Niarchos as the sales and marketing manager to have an understanding of the profile of the customers with whom ABCL dealt.

110    Mr Hughes said that in 2016, the head of the sales department was either Mr Niarchos or Mr John Plunkett. He said that Mr Greg Fiedler was Mr Niarchos’ predecessor. Mr Mike Miller was at some point the head of the sales department. Mr Hughes agreed that Mr Taeger’s role between 2012 and 2017 included managing the accounts receivable credit section and that that would include a level of monitoring and of reviewing the debtors’ accounts. Mr Hughes’ belief was that Mr Taeger relied upon the credit department to manage the individual customers and would not necessarily go to the individual transactions, namely, the unusual ones identified.

111    Mr Hughes was referred to communications between Mr Taeger and Ms Burgess concerning the low percentages of collections in relation to Concrete Supply, but it is not necessary for me to set out the details.

112    Mr Hughes’ evidence establishes that the amount claimed by ABCL represents the difference between the price payable by Concrete Supply under the BSA and the price increase letters and the amount paid by Concrete Supply. Subject to an argument concerning the operation of the BSA and an argument that the difference represents a discount or rebate given to Concrete Supply by ABCL, Concrete Supply is indebted to ABCL for this amount. Mr Hughes’ evidence also establishes that a large number of false entries were made in the books and records of ABCL by Ms Burgess, an employee of ABCL, over an extended period of time which had the effect of disguising the level of indebtedness of Concrete Supply and other customers. Whether others at ABCL were involved in the false entries and whether those entries can and should have been detected earlier is considered later in these reasons.

Mr Brad Lemmon

113    The other witness called at the trial from the Adelaide Brighton Group was also a senior member of the Group’s management team.

114    Mr Brad Lemmon is the executive general manager for the Cement and Lime Division of ABL. He is responsible for managing the Cement and Lime Division of ABL and all components thereof. He reports to Mr Brydon. ABL’s operational managers, sales managers, and market, financial and support managers report to him. Mr Lemmon was an honest witness and I accept his evidence.

115    As I have said in the context of Mr Hughes’ evidence, there is an issue between the parties as to whether Ms Burgess’ knowledge or conduct is to be attributed to ABCL. One circumstance said to be relevant to that issue is whether her conduct was in total fraud of ABCL. The Concrete Supply defendants submitted that it was only if it was that there could be no attribution of Ms Burgess’ conduct to Concrete Supply. This argument prompted ABCL to attempt to lead further evidence from Mr Lemmon as to ABCL’s costs per tonne to produce cement.

116    Mr Lemmon’s first affidavit was affirmed on 12 January 2018. He affirmed a second affidavit on the second day of trial and ABCL sought to tender the affidavit.

117    In his second affidavit, Mr Lemmon explained how he prepared a confidential table showing a comparison between the price paid per tonne of cement by Concrete Supply and the cost of production to ABCL of cement (per tonne) for the calendar years 2015, 2016 and 2017. This analysis showed ABCL making a profit per tonne in 2015 and a loss per tonne in 2016 and 2017. The costs of production included fixed costs, variable costs, corporate overheads and costs of capital, being 10% of funds employed. ABCL produced a further document showing a different and lower percentage for “Capital Allocation”. This document was marked “Document “B”. The problem in terms of admissibility related to the amount allowed for the weighted average cost of capital (WACC).

118    My ruling was that I declined to receive Mr Lemmon’s evidence with respect to the WACC. My reasons for that ruling are set out in Appendix A.

119    I received Mr Lemmon’s evidence on the voir dire excluding the reference to the figure for the WACC consistent with my ruling. That evidence establishes some of the costs of production, but it does not establish the cost of capital. I am prepared to accept that there is a cost of capital, but the figure has not been established. I make two further observations. First, even if the evidence had been admitted, the material would have shown a profit per tonne for the years 2012, 2013, 2014 and 2015 and a loss for the years 2016 and 2017 and, if it be relevant, an overall profit over the six years in the order of $265,000. Secondly, in closing submissions, ABCL developed different arguments to refute the argument that Ms Burgess’ knowledge or conduct was to be attributed to it in the absence of total fraud. I will deal with those arguments when I consider the attribution issue.

120    Mr Lemmon said that he had a telephone conversation with Mr Albert D’Alessandro on 2 November 2017. Mr D’Alessandro was employed by Concrete Supply as its financial controller or chief financial officer. During the conversation, Mr Lemmon discussed with Mr D’Alessandro the commercial resolution of the dispute. The topics were then changed and he discussed the historical matters which had been discussed at an earlier meeting on 25 October 2017. Mr D’Alessandro explained to Mr Lemmon that he had told Rino and Jason some time ago that the “discount” they were obtaining was “not right” and that they needed “paperwork” in place to verify it. Mr Lemmon said that Mr D’Alessandro said that the response from Rino and Jason was to the effect that Adelaide Brighton loved them and that it was not a problem. Mr D’Alessandro said to Rino and Jason that it should be a major concern for them and that it will come back on them one day. There was a dispute between the parties as to whether this evidence was protected as evidence of settlement negotiations (see s 131 of the Evidence Act). I heard evidence on the voir dire on this issue. It was common ground that there were discussions which were without prejudice discussions and that they involved a proposal from one side of the negotiations as well as counter-proposals from the other side. Mr Lemmon said that another matter discussed during his discussions with Mr D’Alessandro was the ongoing supply of cement by ABCL to Concrete Supply. Mr Lemmon believed that the order of discussions was the settlement negotiations, the ongoing supply of cement by ABCL to Concrete Supply, and then the comments made by Mr D’Alessandro. He said that it came towards the end of the conversation. He considered that Mr D’Alessandro’s tone was reflective. At the time Mr D’Alessandro made his comments, he and Mr D’Alessandro had moved on from discussing settlement negotiations. Mr Lemmon agreed that at the time of the discussions, legal proceedings were a potential outcome. He agreed that at no time during the discussions did either say that they were closing the without prejudice discussions. In cross-examination, Mr Lemmon said that the without prejudice settlement discussions did not involve specifics and were more about the logistics of getting together as the parties continued those discussions. Mr Lemmon said that the telephone conversation went for 15 to 20 minutes at the most. Mr Lemmon did not fully agree with the proposition that the settlement negotiations and the ongoing supply were interlinked or relevant to each other.

121    Counsel for the Concrete Supply defendants submitted that the conversation was part of the without prejudice negotiations and protected by s 131 of the Evidence Act. I ruled against that submission and the evidence was admitted. My reasons for so ruling are set out in Appendix A.

122    A good deal of the body of Mr Lemmon’s first affidavit was either not pressed by ABCL because it dealt with settlement negotiations or was received on a limited basis such that it does not call for comment.

123    Mr Lemmon’s direct involvement in the matter began on 7 October 2017 when he was informed by Mr Shaddock that Mr Shaddock had identified anomalous entries in ABCL’s accounting records. Mr Shaddock advised him that the anomalous records had been made using the user ID of Ms Burgess. Mr Lemmon informed Mr Brydon and Mr Michael Kelly of the situation. Approximately one week later, Mr Lemmon was informed by Mr Michael Kelly that ABCL had engaged KPMG to assist the company to investigate the anomalies and that false entries appeared to be disguising a large undisclosed debt owed to ABCL by Concrete Supply. Some weeks later, Mr Shaddock reported to Mr Lemmon that he believed “that there were what appeared to be deliberate manipulations of various transactions in the sense that amounts were recorded as being paid and then transferred between different accounts so as to disguise the fact that there was certain other outcomes in other accounts”.

124    In October 2017, Mr Plunkett was ABCL’s sales and marketing manager. At Mr Lemmon’s request he arranged a meeting between Mr Lemmon and Jason. The meeting took place on 25 October 2017. Mr Lemmon and Mr Michael Kelly attended the meeting. At the beginning of the meeting, Jason was the only representative for Concrete Supply, but he was later joined by Rino, Mr D’Alessandro and Ms Devika Senanayake. Mr Lemmon took a detailed note of the meeting. At the beginning of the meeting, Mr Michael Kelly handed Jason a letter from ABCL which pointed out that ABCL had identified a shortfall in payments by Concrete Supply over the period 2009 to 2017 of more than $10 million. Mr Lemmon also explained to Jason that ABCL had identified an underpayment totalling more than $10 million by Concrete Supply. Jason responded that the difference between the price for the product supplied and the amounts paid was because Mr Fiedler, a sales representative of ABCL, had put in place a “discount structure” because Concrete Supply was a loyal customer.

125    Further meetings followed, including a meeting on 27 October 2017.

126    On 3 November 2017, Adelaide Brighton received a letter from Tindall Gask Bentley, solicitors acting for Concrete Supply. That letter was tendered in evidence. In the letter, Tindall Gask Bentley refer to the fact that Concrete Supply has had a longstanding arrangement with ABCL regarding the supply of materials to Concrete Supply and that the basis of this longstanding arrangement is set out in the BSA between the two companies. The letter goes on to say that the solicitors are instructed that the foundations set out in the agreement (with variations) “remain binding on the parties to this day”. The solicitors refer to a longstanding arrangement which grants Concrete Supply a “30% rebate” on the wholesale price of product of ABCL’s products. The solicitors state the following:

8.    We are instructed from 2009 until 2012 you prepared and provided our client with tax invoices and statements which confirmed that you agreed to provide our client with the Agreed Rebate Amount.

9.    We are instructed that during this time you developed and implemented your own formula to calculate the Agreed Rebate Amount (‘formula’).

10.    Enclosed is a copy of your letter to our client dated 2 December 2009 confirming the above.

(Emphasis in original.)

127    The enclosed letter is a letter from ABCL to Concrete Supply dated 2 December 2009 wherein ABCL asks Concrete Supply to confirm the balance in ABCL’s favour of $971,210.70 as at 31 October 2009. The letter is signed by Glenda Burgess, who is described as “Credit Manager – Cement & Lime Division”. The letter is signed by Rino. This letter, which I refer to as the “audit confirmation letter”, is discussed in detail below.

128    The letter from Tindall Gask Bentley states that from April 2012, ABCL stopped sending invoices to Concrete Supply. A statement in the letter that RCTIs issued by Concrete Supply since 2012 have taken into account the agreed rebate amount is not strictly correct on any view. The true position is that from time to time certain RCTIs and cheques made out in relation to them were not paid to ABCL and the cheques were cancelled.

129    Mr Lemmon gave evidence of ABCL’s pricing of cement and the extent to which the alleged discount or rebate would be consistent with ABCL’s approach to the pricing of cement. ABCL supplied two types of cement product to Concrete Supply. The first type was general purpose cement or GP, or ordinary Portland cement. It is more expensive than the second type which is general blended cement. Over the period of supply to Concrete Supply, these types of cement have been supplied in a proportion of approximately 50/50 with slightly more general blended cement in the later years. As a general proposition, ABCL sets its pricing in the Cement and Lime Division by reference to a range of factors, but as Mr Lemmon put it, “essentially, by a concept of what the market will bear specific to a particular market sector”. Mr Lemmon said, and I accept, that he would not be prepared to authorise the supply of cement to Concrete Supply at the prices actually paid by Concrete Supply. Those prices are below the prices offered to other customers and below the objectives ABCL had for a return on funds applied. It would also affect adversely parity and relativity of pricing with other customers. Mr Lemmon said, and I accept, that there are a small number of customers, two as he understood it, who have prices which facilitate them having a competitive price in the market relative to their peers in that sector. Those arrangements are called “favoured nation arrangements”. Concrete Supply is not one of those customers. If the type of price actually paid by Concrete Supply was approved by ABCL, then it would have to be provided, as Mr Lemmon put it, “on a broader footing”.

130    Mr Lemmon said, and I accept, that the level of the rebate asserted by Concrete Supply would be “unprecedented” in this market segment. Assuming a rebate of 34% was applied in addition to the discount already given by ABCL, the result is a total discount or rebate in excess of 40%. Mr Lemmon set out his understanding of the position in the following table.

131    Mr Lemmon states that in his experience of more than 20 years in the cement industry, discounts or rebates in the order of 40% have never been given to independent customers in the premixed concrete sector.

132    Mr Lemmon was cross-examined on various matters, including ABCL’s fixing of credit limits for customers, the fact that a customer’s profile, that is, their average purchases per month, would include the size of the transactions one would expect to see, or not see, as the case may be, in a customer’s account, the information available on the SAP system if it is properly interrogated, the fact that ABCL stopped sending monthly statements and invoices to Concrete Supply, competition in the market of the production and sale of cement and other customers affected by the false entries. Before examining those matters, it is convenient to outline Mr Lemmon’s experience in more detail.

133    In 1994, Mr Lemmon commenced employment with Cockburn Cement Limited (Cockburn Cement) in Kalgoorlie in Western Australia. He then moved to Dongara and thereafter he moved to Perth where he assumed a role in the marketing department. He was working in the marketing department of Cockburn Cement when the company merged with Adelaide Brighton in 1999. He was involved in sales and had the role of area manager or account manager. In this role, he visited customers who were primarily involved in mining. It was part of his role to understand their profile and their account. He described that as a fundamental aspect of the role. Such an awareness included an awareness of volume and pricing and revenue generated from the sales. Mr Lemmon’s visits to customers gave him a good understanding of their processes and how their businesses worked.

134    In 2001, Mr Lemmon was appointed to the role of lime development manager and part of his role was to identify opportunities to expand “the lime position”. In or about 2004, Mr Lemmon became the sales and marketing manager for the Western Australian part of the business and the area manager of sales reported to him. Mr Lemmon said that at that time there were five or six area managers plus sales administration people and also technical resources.

135    In 2008, Mr Lemmon was appointed to the role of general manager, sales and marketing, for the Cement and Lime Division. The Cement and Lime Division included the territories of Western Australia, South Australia and the Northern Territory, and, managed through the South Australian operations, the sale of products into the east coast of New South Wales and some joint ventures on the east coast. Mr Miller was the sales and marketing manager for the South Australian/New South Wales business and he reported to Mr Lemmon. Mr Lemmon held this position until early 2011 and Mr Miller was the sales and marketing manager for that entire time.

136    In 2011, Mr Lemmon became general manager for strategy and business development of the Cement and Lime Division. That role included responsibility for considering various strategic projects and managing the business’ international trade arrangements at that time. Thereafter, Mr Miller and his counterpart in Western Australia, reported to the executive general manager of the Cement and Lime Division, who at that time was Mr Brydon.

137    In early 2014, Mr Lemmon became the executive general manager of cement and lime for the Western Australian and Northern Territory parts of the business. In 2014, Mr Miller was the executive general manager, cement and lime for South Australia and New South Wales and he reported to Mr Brydon, who was at that time, the chief executive officer of the Adelaide Brighton Group. In May 2016, accountability for the South Australian and the New South Wales operations was added to Mr Lemmon’s responsibilities.

138    Since he became the executive general manager of the Cement and Lime Division in early 2014, Mr Lemmon has been part of the senior leadership team within Adelaide Brighton.

139    The effect of Mr Lemmon’s evidence is that his contact with South Australia occurred between 2008 and early 2011 when he was general manager, sales and marketing, and since May 2016 as executive general manager for cement and lime.

140    Mr Lemmon became aware during the course of the investigation in 2017 that Ms Burgess had made an entry in the SAP system authorising a credit limit of $3 million for Concrete Supply. Mr Lemmon was unable to state the reasons there were no locks put on in respect of the appropriate people in terms of the credit limits that they could authorise.

141    In the course of the investigation, Mr Lemmon became aware that in October 2017, Concrete Supply’s accounts stood at about $4 million. Mr Lemmon was unable to explain how Concrete Supply was able to trade over the credit limit of $3 million. Mr Lemmon made the point that other sales staff relied on information provided by Ms Burgess and that she routinely attended sales meetings and did not raise the issue. He agreed that a member of the sales staff could have observed the fact that Concrete Supply was trading at $4 million “within the SAP platform”. He agreed that all one would have had to have done is bring up the customer account in respect of Concrete Supply, or any number of reports, and it would have indicated that Concrete Supply had an indebtedness of $4 million.

142    Mr Taeger was the finance manager for cement and lime, South Australia and New South Wales and he was located in South Australia. Mr Lemmon was taken to the document in evidence which consists of a message from Mr Taeger to Ms Burgess and accompanying spreadsheets referring to debtors’ balances. One of the spreadsheets shows that Concrete Supply was, as at early December 2015, indebted to ABCL in an amount of approximately $3.2 million. Mr Lemmon agreed that this was inappropriate and that “potentially” anyone who looked at that and who had an understanding of the profile of Concrete Supply would have concluded that there were problems. He said that “potentially” it ought to have caused Mr Taeger to make inquiries in respect of Concrete Supply’s account.

143    Mr Lemmon was taken to the screenshot of the entry in the SAP system which shows that on 27 November 2014, Ms Burgess increased the credit limit of Concrete Supply from $1.5 million to $3 million. Mr Lemmon said that it was his understanding that Ms Burgess did not have a delegated authority to authorise this increase in the credit limit. Mr Lemmon said that the delegated authorities were available in 2014. Mr Lemmon said, and I accept, that the fact that Ms Burgess made the entry did not of itself indicate that the increase was not authorised because Ms Burgess would have had the authority to enter into the system the increase approved by a person who was properly authorised.

144    In November 2010, Mr Lemmon sent a memorandum to Mr Miller and others in which he expressed concern about a number of shortcomings identified within the credit management processes. Mr Lemmon said in evidence that he could not remember the “specifics”. In November 2010, Mr Terry Linto, who was sales administration officer for the sales and marketing team, prepared a table which referred to the need for the development of a credit policy and that the responsible person was Ms Burgess. Mr Lemmon could not remember whether or not Ms Burgess in fact developed a credit policy.

145    Mr Lemmon said that in November 2014, he would expect the SAP system to be “interrogated” from time to time to produce aged debtor balances. The aged debtor balances would show the debts aged 30 days, 60 days and 90 days respectively. Mr Lemmon said that in 2014, he would expect Mr Taeger, Mr Miller, who was executive general manager at the time, and Mr Niarchos of sales and marketing to receive aged debtor balances.

146    Mr Lemmon agreed that the SAP system is an advanced database system that can be interrogated and used to produce reports. He was taken to a hard copy of a customer balance display for the 2017 calendar year. He said that he would not look at this particular report “typically”. He said that he would look at information that is pulled together to produce a broader report of debtor balances etc. Mr Lemmon agreed that the customer balance display to which he was taken, showed sales of between 200,000 and 700,000. It also showed a maximum debit of $1.7 million and a maximum credit of $1.5 million. Mr Lemmon agreed that the size of those debits and credits would appear to be unusual. In response to a question as to whether somebody noticing those debits and credits and sales on the same page ought to have made a further inquiry in respect of the company, Mr Lemmon said that it would depend on who was looking and for what purpose. He said that had it been him, he would have “potentially made inquiries”.

147    Mr Lemmon agreed that he became aware in the course of the investigation that in or about May 2012, ABCL stopped sending monthly statements to Concrete Supply, and he agreed that that was a “wholly unusual fact” in terms of the business of ABCL. He agreed that he would expect other members of the accounts receivable section to know that monthly statements were not being sent to Concrete Supply. He also became aware in the course of the investigation that about a year later, ABCL stopped sending invoices to Concrete Supply and he said that he would have expected the accounts receivable section to know that invoices were not being sent to Concrete Supply. Mr Lemmon said that Ms Burgess went to some lengths to avoid a situation where the failure to carry out various tasks would be highlighted.

148    At the end of 2017, Mr Plunkett was the head of sales and marketing and he was located at Birkenhead. Before that, Mr Adam Needra was the head of sales and marketing for a short period. Before Mr Needra, Mr Niarchos was the head of sales and marketing, and Mr Lemmon said that he thought that Mr Niarchos had held that position for about two years. Mr Lemmon considered that Mr Niarchos would have had “a reasonably sound understanding” of the production of cement.

149    Mr Lemmon was asked whether Cement Australia was a competitor of Adelaide Brighton Cement. He said that it was in 2018, but it had not been in 2009 and 2010. He had an understanding of the South Australian market and he said that at that time, Cement Australia was a customer of ABCL, not a competitor. Mr Lemmon was taken to the minutes of various sales and marketing meetings beginning on 20 April 2009. It would seem that Ms Burgess was at the meeting so it is more accurate to describe it as a meeting of sales and marketing, and accounts receivable. Mr Lemmon slightly modified his evidence and said that Cement Australia is not a major competitor. Mr Lemmon was taken to minutes of a meeting of the sales and marketing department on 17 May 2010. He said that the minutes did not show that Cement Australia was a competitor in the bulk cement sector. Mr Lemmon was taken to minutes of 16 July 2010 and minutes of the sales and marketing department dated 2 May 2011. As a result of being taken to these references, Mr Lemmon agreed that “there were incidents where Cement Australia did compete in a – in a small level”. It seems to me that Mr Lemmon’s evidence on this topic was to the effect that his understanding of the market in South Australia and the level of competition within it was, as he described it, no more than “broad”.

150    Mr Lemmon was questioned about whether it was an easy matter at the time for ABCL to increase production at the Birkenhead site. He agreed that there would be someone from Birkenhead who would be able to answer questions about “forecast scheduling and production scheduling”. I think it is fair to say that Mr Lemmon did not have a detailed understanding of this topic.

151    Counsel for the Concrete Supply defendants asked Mr Lemmon about his analysis of the costs incurred by ABCL in producing cement and, in particular, his figure for divisional costs between 2012 and 2017. He focused on the figure per tonne for 2016. It was put to Mr Lemmon that that would be the figure used internally in ABCL as the cost of producing cement. As I understand the proposition, that means that in the minds of, for example, the sales and marketing staff, the capital allocation figure and the allocation of divisional corporate overhead figure are excluded. Mr Lemmon appeared to accept that proposition to a point.

152    As a result of the investigation, Mr Lemmon understood that one of the customers that had an excessive amount due to ABCL, but which was nevertheless not disclosed in ABCL’s accounts was BHP. Mr Lemmon was briefed about this matter and “very generally” about accounting standard AASB108.

153    Concrete Supply was the largest beneficiary of the anomalous transactions. Mr Lemmon had not seen the ABCL document which is dated 15 February 2018 and which contains the comment in relation to Concrete Supply as follows:

ABCL has financed CS over a period of time – rationale to expand.

154    Mr Lemmon is not aware of any reason why Mr Niarchos could not give evidence in the proceeding. Mr Lemmon was aware that Jason was invited to attend and did attend Adelaide Brighton’s corporate box at the grand final of the AFL football in 2014 and he was aware that invitations to the corporate box are reserved for important customers.

155    Mr Lemmon believes the following to be correct. The records of ABCL show the indebtedness of Concrete Supply was about the same amount as the discount or rebate that was being claimed by that company as at 25 October 2017. Mr Lemmon’s understanding is that approximately 60 customers were actually impacted by the anomalous transactions. ABCL has, since the investigation, made entries in its accounts which reflect what it considers to be the true position. In response to a suggestion that no-one within ABCL or ABL was supervising Ms Burgess, Mr Lemmon said that she was reporting to a finance manager.

156    In re-examination, Mr Lemmon made it clear that he would expect statements of account and invoices to be sent and he would expect that others, beyond Ms Burgess, would have some understanding and knowledge of that practice.

Mr Brian Morris

157    Mr Brian Morris was ABCL’s final witness. He is a chartered accountant and auditor. He practices as a forensic accountant which is a discipline in which he has considerable experience. I will not set out the details of that experience and Mr Morris’ qualifications. They are contained in Mr Morris’ curriculum vitae which is an annexure to his first affidavit.

158    Mr Morris prepared two documents which contain his expert opinions. The first document is an affidavit which he swore on 16 January 2018 and which became exhibit A8 in the proceeding. The primary focus of his expert opinions in the affidavit is the conduct of the administrators and the Second Report to Creditors of Concrete Supply. There are references to the discount or rebate issue, but that issue is dealt with more comprehensively in his later document i.e., his second report, and those references can be put to one side. I will refer to this document as Mr Morris’ first report.

159    The second document prepared by Mr Morris is a report dated 19 October 2018 which is annexed to an affidavit which became exhibit A7 in the proceeding. The primary focus of the expert opinions in this report are the accounting records of Concrete Supply and the inferences to be drawn from those records in relation to the discount or rebate issue. It is fairly described as involving a substantial forensic accounting exercise. I will refer to this document as Mr Morris’ second report.

160    The focus of this section of my reasons is the alleged discount or rebate and, as I have said, that topic and the books and records of Concrete Supply are dealt with in Mr Morris’ second report. I will deal with Mr Morris’ first report when I address ABCL’s challenge to the DOCA.

161    There were some hearsay objections to Mr Morris’ second report, but they were withdrawn and I was asked to treat them as matters going to the weight to be accorded to the evidence.

162    Mr Morris prepared his report in response to a request from ABCL’s solicitors. He was provided with the affidavits which had been filed by Concrete Supply and some of Concrete Supply’s financial records relating to the recording of the rebate in the company’s management reports, business activity statements (BAS) and income tax returns. He was also provided with some of the administrators’ records of their investigations in November and December 2017, prior to their recommendation to the creditors of Concrete Supply that they accept the DOCA proposed by the directors. Mr Morris was asked to address a number of questions concerning the alleged discount or rebate and Concrete Supply’s method of accounting for purchases from ABCL, payments to ABCL and the alleged “rebate” from ABCL.

163    Mr Morris was cross-examined by the administrators and the Concrete Supply defendants. The focus of the administrators’ cross-examination was Mr Morris’ first report and allegations of a lack of independence and expertise were put to him.

164    As I have said, I will deal with Mr Morris’ first report and the administrators’ cross-examination with respect to it when I deal with ABCL’s challenge to the DOCA. One matter which emerged from Mr Morris’ cross-examination may be noted at this stage because of its importance to the administrators’ case. Mr Morris was asked in cross-examination by counsel for the administrators whether he could say the return to creditors on a liquidation would be as good as the return to creditors under a DOCA. In answer to this question, Mr Morris said that there were matters which “cried out” for investigation, but that he did agree that it could possibly be the case that the matters which he identified as requiring investigation might be investigated “at great expense”, but with the result that there is less money available to creditors at the end of that process “than is on the table now”.

165    The focus of the Concrete Supply defendants’ cross-examination of Mr Morris was a discrete number of topics relating to his second report: (1) the March 2009 Statement of Account; (2) the March 2012 Statement of Account and the April 2012 Statement of Account, including whether the alleged discount or rebate was permanent beyond April 2012; (3) the quantum of the alleged discount or rebate during the relevant period, particularly during the 28 month period from July 2015 to October 2017; (4) whether Concrete Supply properly accounted for the alleged discount or rebate in its books and records for income tax and Goods and Services Tax (GST) purposes; and (5) whether Mr Morris had carried out a solvency analysis, that is, an analysis to determine the date upon which Concrete Supply became insolvent. I will address the matters which emerged from the cross-examination of Mr Morris in the context of those particular topics.

166    Subject to these matters, a good deal of the evidence in Mr Morris’ second report was not challenged and, in any event, is established by the documentary evidence or evidence adduced by the Concrete Supply defendants. Mr Morris did express certain opinions on the existence or otherwise of the alleged discount or rebate having regard to the accounting evidence. I do not need to pause on the admissibility or weight to be given to that evidence because ultimately, the question is one for the Court based on all the evidence, including the accounting evidence.

167    Before examining the details of Mr Morris’ second report, and in order to understand the relevance of a number of the issues he addressed, it will assist if I identify some key matters.

168    First, the Concrete Supply defendants referred to the benefit the company received as a discount or rebate and often the terms were used interchangeably in the evidence. Dictionary definitions suggest that a discount is a reduction in the price of goods, and a rebate, while it can include such a reduction, can also include a payment of monies or relief from an existing obligation to pay. The administrators sought to rely on dictionary definitions of the word “rebate”, perhaps, as will become clear, in an effort to justify the unusual way in which Concrete Supply took advantage of the alleged discount or rebate. At all events, there is no written or oral agreement which uses the word “discount” or “rebate” and I am not persuaded that the matter turns on the precise meanings of the words, discount or rebate respectively.

169    Secondly, for a reason or reasons never made clear in the evidence, ABCL stopped sending monthly statements to Concrete Supply after April 2012 and stopped sending invoices to Concrete Supply after March 2013. Thereafter, Concrete Supply began preparing RCTIs and from March 2013, Concrete Supply prepared RCTIs for its cement purchases. The RCTIs were based on delivery dockets issued by ABCL and, for the most part, were calculated at the agreed price of cement. The RCTIs which Concrete Supply intended to pay were sent to ABCL with the relevant cheque. Concrete Supply would account in its own books and records for all of the cement purchased from ABCL at the full value of ABCL’s invoices or the RCTIs. It would draw cheques payable to ABCL for all of the invoices or RCTIs as if it was intending to pay in full for the cement it had purchased. It would make entries in its accounting records reflecting those cheques. However, Concrete Supply would retain the cheques in its safe. It would remit some of the cheques to ABCL from time to time. For the most part, it was not sending those cheques within 30 days of the invoices or RCTIs, or in the month following the purchase. Concrete Supply would not send to ABCL a number of the cheques which had been completed and those cheques were subsequently cancelled and written back into Concrete Supply’s accounting records. The cheques were intended to represent the discount or rebate that Concrete Supply contends that it was entitled to receive.

170    Thirdly, there is a document prepared by ABCL and provided to the administrators during the administration which sets out the composition of ABCL’s claim in terms of the value of cement supplied, but not paid for, in the years comprising the relevant period of 2009–2017. The document is in the form of a table and is as follows:

171    Fourthly, there is a document prepared by Concrete Supply and provided to the administrators in mid-November 2017 in response to a request by the administrators for details of the alleged discount or rebate. The document is as follows:

Concrete Supply Rebate profile

•    2009 discounts deducted from ABC statements by ABC $529,423

•    2012 discounts deducted from ABC statements by ABC $616,788

•    Between 2012 & 2017 CS deducted between 30 to 35% discounts annually

•    Between 2012 % 2017 ABC no longer provided invoices and statements and CS took the initiative to process purchases by raising Recipient Created Invoices.

•    Between 2012 and 2017 there was no contact by any credit management from ABC to advise that the account was out of terms.

•    CS took this as an endorsement of the rebates taken over this time

•    Oct 2017 ABC advised that there was a discrepancy in the account and demanded repayment of all rebates taken by CS.

It is important to note that this document, and indeed all the evidence in the case, makes it clear that the entitlement to the discount or rebate is not based on a written or oral agreement.

172    In summary, Concrete Supply’s case is that ABCL, by its conduct, agreed, or is estopped from denying that it agreed, to provide it with a discount on the price of cement ABCL provided to it of between 30% and 40%. The agreement or estoppel arose by reason of the conduct of both parties, in particular, ABCL, over a number of years. The first stage is a discount provided in March 2009 and evidenced in the March 2009 Statement of Account prepared by ABCL and provided to Concrete Supply. The second stage is a discount provided in March 2012 and evidenced in the March 2012 Statement of Account prepared by ABCL and provided to Concrete Supply. After March 2012, Concrete Supply considered that it was entitled to a permanent and continuing discount of between 30% and 40% on the price of cement supplied by ABCL and, under the regime of RCTIs prepared by Concrete Supply, it only paid invoices to the extent of 60% to 70% of the relevant amounts and that occurred without complaint from ABCL until October 2017.

173    I turn now to the details of Mr Morris’ evidence.

The March 2009 Statement of Account

174    All the monthly statements of account in issue in the case were prepared by ABCL and sent to Concrete Supply. The statements of account consist of a number of pages and they set out details of the dates and amounts of relevant invoices and a total amount outstanding. Various amounts which in total comprise the amount outstanding are identified in the statements as current, 30 days, 60 days, and 90 days or over.

175    In the case of the March 2009 Statement of Account, $223,672.86 is identified as current, $148,297.69 as 30 days, $91,476.36 as 60 days and $319,229.90 as 90 days or over. Someone has handwritten on the March 2009 Statement of Account “March” for current, “Feb” for 30 days, “Jan” for 60 days and for 90 days or over the following:

Ms Senanayake said that the handwriting was her handwriting.

176    The dates of the invoices in the March 2009 Statement of Account range from 18 November 2008 to 31 March 2009 and the amounts in each invoice are generally around the $4,000 to $6,000 mark.

177    Mr Morris refers to evidence given by Ms Senanayake by way of affidavit about what happened in relation to the March 2009 Statement of Account. Ms Senanayake is an employee of Concrete Supply who gave evidence in the case. I will examine her evidence later. She states that a number of cheques in respect of purchases between September 2008 and March 2009 had been prepared by Concrete Supply and they totalled $1,312,099.97, but these cheques had not been remitted to ABCL. They were kept in the safe in Concrete Supply’s premises. A working paper of Concrete Supply indicates that a conclusion was drawn of a final rebate received of $529,423.03 with GST.

178    As at 31 March 2009, Concrete Supply’s financial accounts recorded an outstanding balance of $1,312,099.97 owed by Concrete Supply to ABCL in respect of cement supplied. The difference between this amount and the outstanding amount which is shown in the March 2009 Statement of Account of $782,676.89, that is to say, an amount of $529,423.08 was equivalent to the total amount of invoices issued by ABCL to Concrete Supply in respect of part of September 2008, the whole of October 2008 and part of November 2008. The March 2009 Statement of Account did not show any invoices for the months of September and October 2008 or for the period from 1 November 2008 to 17 November 2008. Concrete Supply took the discount or rebate by cancelling nine cheques totalling $563,205.12.

179    Mr Morris carried out a reconciliation in order to determine whether the balance reported on the March 2009 Statement of Account was anomalous in the sense that it did not appear again, or was a permanent reduction in the debt as recorded on ABCL’s debtors ledger and reported on ABCL’s statements of account. He was handicapped to some extent by the fact that, as I have said when discussing Mr Hughes’ evidence, ABCL replaced its accounting software package on 1 August 2009. It replaced the Protean accounting package with the SAP system. Mr Morris said that this meant that he did not have complete accounting information for ABCL prior to August 2009. Nevertheless, his reconciliation exercise led Mr Morris to reach the conclusion that as at both 30 June 2009 and 31 October 2009, the reduction in the debt as recorded in ABCL’s debtors ledger and as reported in ABCL’s statements of account was permanent, in the sense that it did not reappear.

180    The amount of $529,423.08 is a 40% reduction of the amount of $1,312,099.97. I will address in due course whether or not this was a discount or rebate.

The Audit Confirmation Letter

181    On or about 2 December 2009, ABCL sent the following letter to Concrete Supply:

Dear Financial Controller

In connection with the audit of our financial statements, we are writing to you requesting that you confirm the following balance in our favour of $971,210.70 at 31 October 2009.

If your records are in full agreement with the above balance, please confirm this on the attached copy of this letter by signing and returning it directly to our auditors, PricewaterhouseCoopers, attention: Carly Waterman, GPO Box 418 Adelaide SA 5001. If your records are not in full agreement with the above balance, please provide PricewaterhouseCoopers with the amount shown in your records together with details of all differences, including balances on any accounts not listed above.

This letter is not a request for payment and accordingly please do not enclose cheques or other payments with your confirmation.

We thank you in advance for your cooperation in complying with this request and apologise for any inconvenience caused.

Yours faithfully

[signature]

Glenda Burgess

Credit Manager – Cement &Lime Division

Adelaide Brighton Cement

We are in agreement with the above mentioned balance of $971,210.70 in your favour at 31 October 2009

or:

We are not in agreement for the following reasons:

[signature]

(Signature)

Rino Obbiettivo – Director

(Name and title of customer official)

The letter was signed by Rino in the space provided at the bottom of the letter. In Mr Lemmon’s copy of the letter, the option, being the first chosen, is identified, whereas it is not identified in the copy of the letter produced by Rino.

182    Mr Morris investigated two matters in relation to this letter.

183    The first matter was whether the balance outstanding in favour of ABCL of $971,210.70 as at 31 October 2009 shown in the letter was consistent with ABCL’s books and records. He considered that it was and that is consistent with the conclusion he reached concerning whether the reduction in price in connection with the 2009 Statement of Account was a permanent reduction.

184    The second matter was whether the balance outstanding in favour of ABCL of $971,210.70 as at 31 October 2009 shown in the letter was consistent with Concrete Supply’s books and records. Mr Morris concluded that it was not. Even if Concrete Supply was entitled to the reduction, nevertheless, its books and records did not reflect an outstanding balance of $971,210.70, but rather reflected a larger sum outstanding. That follows from the way Concrete Supply accounted for the alleged discount or rebate. As I have said, once the cheques were written, Concrete Supply’s books and records were altered to reflect the incurring of a liability. It was only when the cheques were later cancelled that the “transaction” was reflected in the company’s books and records. Two of the nine cheques written for purchases in the period from September 2008 to November 2008 inclusive were cancelled and written back on or about 30 June 2009, and one cheque as at 31 July 2009. Concrete Supply continued to hold the remaining six cheques which totalled $360,315.88. Concrete Supply’s books and records showed an outstanding balance to ABCL as at 31 October 2009 of $1,296,107.43 which exceeded the amount in the audit confirmation letter by $324,893.73.

185    Mr Morris carried out an analysis of the position as at 31 October 2009 on the assumptions that Concrete Supply intended to cancel the cheques to the extent of the alleged discount or rebate (as was later done) and that it was appropriate for Concrete Supply to reflect that intention in the response to the audit confirmation letter. On those assumptions, Mr Morris expressed the opinion that the amount in the audit confirmation letter was understated by an amount of $35,419.15. Mr Morris said that to work on the basis that all nine cheques totalling $563,205.12 were or were to be cancelled would be to claim an amount of $33,782.09 in excess of the alleged discount or rebate of $529,423.08. Ms Senanayake carried out a similar analysis on the basis that it was appropriate to proceed on the basis that the discount or rebate had been given. She reached the conclusion that the amount in the audit confirmation letter overstated the amount owing by $1,637.06 because the July to October 2009 ($935,791.55) and a balance amount for November 2009 ($33,782.09) totalled $969,573.64.

186    Mr Morris agreed in cross-examination that, subject to an amount of $1,637.06, the audit confirmation letter was correct in recording what was in ABCL’s books and records and those of Concrete Supply on the following assumptions: (1) the amount of $33,782.09 is a balancing item as explained by Ms Senanayake; (2) the reduction of $529,423.03 in the March 2009 Statement of Account was a discount or rebate; and (3) it was not inappropriate for the purpose of the audit confirmation letter to treat the cheques Concrete Supply intended to cancel as having, in effect, been cancelled.

The March 2012 Statement of Account

187    The March 2012 Statement of Account was in a similar form to previous statements. It identified an amount outstanding of $1,428,588.16 which was comprised of “Current” $285,807.45 (with respect to which Ms Senanayake has handwritten “March”); 30 days $254,334.38 (“Feb”); 60 days $170,971.75 (“Jan”); and 90 days and over $717,474.58 (“Dec & prior”).

188    Ms Senanayake has handwritten the following notes on the last page of the statement:

189    The following matters are clearly established:

(1)    The February 2012 Account Statement showed an outstanding balance of $1,837,944.53.

(2)    Concrete Supply purchased cement to the value of $285,807.45 during March 2012.

(3)    Concrete Supply paid one cheque to ABCL in March 2012 and that was cheque number 006286 for $78,374.87.

(4)    On the foregoing analysis, Concrete Supply owed ABCL the amount of $2,045,377.11 as at 31 March 2012.

190    Mr Morris expresses the opinion that the payment of $78,374.87 was dealt with in ABCL’s debtors ledger as follows:

191    Mr Morris compared the March 2012 Statement of Account sent to Concrete Supply and a March 2012 statement of account “generated from the ABCL system” and produced by Mr Hughes.

192    Mr Morris said that the March 2012 Statement of Account sent to Concrete Supply treated the payment of $78,374.87 as if it was a payment of $695,163.82 resulting in the recorded outstanding liability of $1,428,588.16. Mr Morris said that a debit entry which was given a number of 2000047727 was created on 31 December 2011. That appeared in the February Statement of Account, but was not in the March 2012 Statement of Account sent to Concrete Supply. The difference between $2,045,377.11 and $1,428,588.16 is $616,788.95. The amount of $2,045,377.11 recognises the payment of $78,190.45 and credit of $5,223.01.

193    Mr Morris expresses the opinion that the “missing” entries in the March 2012 Statement of Account sent to Concrete Supply compared to the statement generated by ABCL’s system are as follows:

The aggregate of these amounts is $616,788.95.

194    Mr Morris notes that the amount of $616,788.95 is 30.16% of $2,045,377.11.

195    Mr Morris analysed the April 2012 Statement of Account with a view to determining whether the “error” in the March 2012 Statement of Account was anomalous or permanent in the same way he had done in relation to the March 2009 Statement of Account. I turn to the April 2012 Statement of Account.

The April 2012 Statement of Account

196    The April 2012 Statement of Account identifies a total amount outstanding of $1,837,982.31 comprised of current $570,457.69; 30 days $285,807.45; 60 days $254,334.38; and 90 days and over $727,382.79. There is an unusual debit entry in the statement for 17 April 2012 entitled “GIB 832” for $381,763.65.

197    Mr Morris’ analysis leads him to conclude that the April 2012 Statement of Account was prepared on the basis that the amount outstanding as at 31 March 2012 was $2,045,377.11, not the lesser sum of $1,428,588.16. Mr Morris concludes that the “provision” of a “discount” in the March 2012 Statement of Account was anomalous. Another way of putting the point is to say that the March 2012 Statement of Account was prepared in error. Mr Morris was not able to say how the erroneous March 2012 Statement of Account was created.

198    Mr Morris notes various handwritten annotations on the April 2012 Statement of Account. One relates to the liabilities which are identified as “current” where the amount is $188,694.04. By taking this figure and the figure relating to payments in March, one arrives at a starting figure for 31 March 2012 of $2,045,377.11. I refer to Mr Morris’ calculations which are set out in the document which became exhibit A6. I do not need to discuss any further the detail of those calculations because Mr Morris’ conclusions as to the basis upon which the April 2012 Statement of Account was prepared were not challenged.

199    In cross examination, Mr Morris was taken to the February 2012 Statement of Account and an entry for the date 31 December 2011 of a debit of $622,196.38. As to this entry, Mr Morris agreed that it was an unusual debit and probably hid a number of earlier invoices which had been cancelled. Mr Morris did not know for certain whether the debit entry cleared a number of earlier invoices or an earlier debit entry; either way, it made the debt look younger than it was and purchases in December 2011 higher than they in fact were. As I understood Mr Morris’ evidence, the debit was likely to be related to invoices earlier than the earliest invoice shown in the statement, that is, 7 October 2011. By reference to ABCL’s records, Mr Morris identified the entry on 31 December 2011 as one of the irregular transactions and likely to be a refreshing of debt. He agreed that the debit of $622,196.38 should never have appeared on the statement of account because its effect is to remove invoices or an earlier debt. He assumed the entry or the “transaction” which formed the basis of the entry was authorised.

200    Mr Morris was taken to the April 2012 Statement of Account and he agreed that the figure for “current” of $570,457.69 was in excess of the usual monthly amount for Concrete Supply and was unusual. In other words, it was inconsistent with Concrete Supply’s profile. Mr Morris agreed that the entry of $381,763.65 on 17 April 2012 was unusual and should not be “there at all”.

201    Mr Morris was cross-examined about the ABCL March 2012 Statement of Account. He agreed that it showed the amount that would have been on the March 2012 Statement of Account had the reduction not been made. It was put to Mr Morris that he overlooked a number of matters in concluding that the March 2012 Statement of Account was anomalous. The matters put to him and his responses were as follows: (1) both the relevant statements said to involve a discount or rebate were dated March (i.e. March 2009 and March 2012). Mr Morris said that he noticed this circumstance; and (2) the debts “removed” by the reduction related to old debts and the reductions were respectively 40% and 30% approximately. Mr Morris did not see any particular significance in those matters.

202    Mr Morris was taken to a customer balance display in ABCL’s records for 2012 for Concrete Supply which shows a balance for March of $2,045,377.11. This is taken from Mr Hughes’ affidavit. Mr Morris said that he presumed the customer balance display represented the position “today”.

203    Mr Morris agreed that there was an unusual entry in or with respect to 31 December 2012, namely, a credit in favour of Concrete Supply of $1.4 million approximately.

204    Mr Morris said that the facts of this case were unusual and it is helpful to set out his explanation of the reasons he considers that to be so given in response to questions in cross-examination:

MR DUGGAN: And, if so, how?

THE WITNESS: Well, the – the facts are unusual, insofar as the records that I’ve seen, in the period at least to April 2012, reflect some form of entries that are probably fraudulent that have disguised the age of the debt owed by Concrete Supply to Adelaide Brighton. The March 2009 anomaly suggests that somebody initiated transactions within the record of Adelaide Brighton that reduced the Concrete Supply debt by $500,000. The Hughes affidavit deposes to Adelaide Brighton discovering entries that reduced the debt by some $8.4 million. Remarkably, the – I have not been able to identify – and I’m probably not in a position to do so – how it is that the apparent fraudster benefitted from this behaviour. I find that most unusual. As a general rule, the frauds that I’ve investigated there has clearly been a benefit accruing to the fraudster. The fact that the transactions were unexplained and – and no one seems to have done anything other than to presume that – no one at Concrete Supply seems to have done anything but to presume that they were receiving the benefit of some strange undocumented rebate. I find that unusual. There are many aspects of this that are strange.

MR DUGGAN:     Yes. And it’s hardly the sort of thing that an administrator is going to be able to get to the bottom of within the time restrictions referred to in the Corporations Act, is it?

THE WITNESS: I agree that it is hardly the sort of thing that an administrator would get to the bottom of, and I don’t think I’ve ever put that as my view. It’s certainly the sort of thing that an administrator ought to be smart enough to see.

205    Mr Morris has not analysed the transactions or entries after December 2012 in ABCL’s books and records where other accounts were also involved. Nevertheless, Mr Morris said that if he analysed ABCL’s general ledger and, in particular, that part of it dealing with Concrete Supply, he would not conclude that the records establish a consistent rebate of 30%, but rather that they reveal, as he put it, fraudulent entries.

206    As I understood Mr Morris’ evidence in cross-examination, he agreed that he restricted his analysis of whether the alleged discount or rebate in the March 2012 Statement of Account was permanent largely due to the April 2012 Statement of Account which was the last statement of account sent to Concrete Supply by ABCL. As I understood the evidence, investigations into events later in the year, especially December 2012, will reveal some false entries of the nature described by Mr Hughes.

Concrete Supply’s Process or Method of Applying the Alleged Discount or Rebate

207    Concrete Supply recorded purchases of cement from ABCL in the “Suppliers” module of its Attaché accounting system. The entries recorded by Concrete Supply were based on the invoices issued by ABCL until February 2013 and on the RCTIs generated by Concrete Supply from and after March 2013. The entries that were brought to account in respect of purchases from ABCL were the basis for determining Concrete Supply’s indebtedness to ABCL, recording purchases of cement in the company’s general ledger, for the purpose of determining Concrete Supply’s profit and taxable income each year, and determining GST paid, or payable, by Concrete Supply for the purposes of its quarterly BAS and the payment of GST each quarter.

208    Concrete Supply would draw cheques payable to ABCL in respect of purchases made each month and the cheques were recorded in Concrete Supply’s Attaché general ledger system. There is no dispute that this had the effect of discharging the debt recorded as owed to ABCL in respect of cement purchases in Concrete Supply’s accounting records. The practice of Concrete Supply was to draw several cheques to pay the ABCL debt each month for amounts that, in aggregate, coincided with the purchases of the preceding month. Mr Morris examined the “Supplier Aged Trial Balance”, and he concluded that the entries made in it suggest that Concrete Supply would pay ABCL for cement purchases at or about the end of the month following purchase and, in the absence of further information, the cheques that were drawn would discharge the debt that arose in respect of the previous month’s purchases. The records suggested that Concrete Supply was paying ABCL on a timely basis. That is contradicted by Mr Morris’ examination of the statements issued by ABCL between June 2011 and April 2012. Mr Morris examined the statements ABCL sent to Concrete Supply in each of the months from June 2011 to April 2012 and by reference to the information on those statements as to how long the amounts had been overdue, he concluded that during this period Concrete Supply was indebted to ABCL in respect of debts that were incurred more than three months earlier.

209    It seems that Concrete Supply had a practice of withholding cheques for a period of time and that that caused the debt it owed to ABCL to become substantially overdue.

210    Mr Morris identified 179 cheques which were not remitted by Concrete Supply to ABCL. This figure comprised nine cheques aggregating $563,205.12 that had been drawn for purchases made during the 2009 financial year and a further 170 cheques that had been drawn in respect of purchases made in the financial years 2012 to 2018. Mr Morris also prepared an analysis of nine cheques drawn between 11 November 2008 and 19 January 2009, and relating to purchases by Concrete Supply of cement in September, October and November 2008, and cheques drawn by Concrete Supply between May 2009 and September 2017 for cement purchased between April 2009 and August 2017 comprising both cheques that were remitted to ABCL and cheques that were cancelled from and after 1 September 2009. He drew the conclusion from his analysis that there was no pattern to the conduct of Concrete Supply paying or not paying ABCL for purchases.

211    Mr Morris reiterated the comment that Concrete Supply would hold cheques for some time before remitting them to ABCL and that whilst the Supplier’s module suggested that Concrete Supply was settling its debt to ABCL within two months after the month of purchase, this was not the case as the cheques that had been drawn had not been sent. The 179 cheques that Concrete Supply had drawn during the period from 11 November 2008 and 18 September 2017, and which had not been sent to ABCL, totalled $10,045,106.79.

212    Mr Morris examined documents titled “Journals Report” from Concrete Supply’s general ledger system. He also examined documents titled “Transaction by Account” reports from Concrete Supply’s general ledger system in relation to purchases of cement. He prepared a table that summarised the total entries recorded on the Transaction by Account reports for each financial year. Mr Morris concludes that Concrete Supply’s “Transaction by Account” reports record Concrete Supply purchasing cement from ABCL over the period from July 2008 to October 2017 having a total value of $31.8 million, and Concrete Supply’s report of profit or loss each year and its taxable income being based on cement purchases of $24.3 million.

213    Mr Morris had a document which he considered had been in the possession of the administrators, titled “ABC Discounts 2018 (not processed to rebates yet)”. The document listed 39 cheques with dates commencing in August 2016 and concluding in August 2017. Mr Morris was able to state that the first four cheques had, in fact, been processed to rebates in late September 2017 in the case of two cheques, and late October 2017 in the case of the other two cheques. Thirty five cheques had not been processed and they totalled an amount of $1,757,336.25. Mr Morris said that whilst these cheques had the effect of reducing the debt recorded in Concrete Supply’s creditors system as owing to ABCL, entries had not been made in Concrete Supply’s accounting records to cancel the cheques and bring to account purported rebates.

214    Mr Morris was asked to provide an opinion on the way in which Concrete Supply dealt with the alleged discount or rebate in its accounting records on the assumption that it was entitled to the rebate. He said that the way in which Concrete Supply dealt with the alleged rebate was to account for the purchase of cement from ABCL as an expense of the month in which the cement was purchased, to draw cheques paying for that cement in a subsequent month, usually in the month following the purchase or the month after that, and the entries that were processed recording the cancellation of cheques were processed many months after the cheques had been drawn. To the extent of the cheques subsequently cancelled, the amounts that Concrete Supply recorded as cement purchases each year were overstated, the report of profit of Concrete Supply was understated, and the taxable income of Concrete Supply was understated. Mr Morris prepared a table setting out the extent to which profit had been understated during the period from the 2009 financial year through to October 2017 and his conclusion was that the manner in which Concrete Supply dealt with the rebate meant that it had understated its profits during that period by approximately $1.6 million. Furthermore, the accounting records portrayed the ABCL debt as if the cheques that had been drawn for cement purchases had been remitted to ABCL when that was not in fact the case. That meant that at all relevant times the debt recorded in Concrete Supply’s accounting records was understated to the extent of the cheques that were held. Furthermore, when Concrete Supply made entries in its general tax ledger system recording the cancellation and writing back the cheques that had not been remitted, it reduced the amounts recorded in its general ledger as cement purchases by the amount of those entries. The two practices meant, in the opinion of Mr Morris, that Concrete Supply’s accounting records failed to record correctly its cement purchases; the debt it owed to ABCL; its income tax liabilities; and its net asset position. Mr Morris expressed the opinion that Concrete Supply had not complied with the requirements of s 286 of the Corporations Act.

The Amount of the Alleged Discount or Rebate Taken

215    Mr Morris’ Appendix 3 sets out 179 cheques discovered by Concrete Supply. His Appendix 10 sets out details of cheque reversals. His Appendix 9 identifies 35 cheques which had not been reversed at the time of the administration. Mr Morris concludes that a total of 144 cheques were written back in the company’s accounting records between June 2009 and October 2017. They constituted, according to Concrete Supply, the alleged discount or rebate. The 144 cheques which had been discovered and which had been reversed in the company’s accounting records amounted to $8.287 million, and the 35 cheques which had been discovered which had not been written back at the date the administrators were appointed amounted to $1.758 million. Mr Morris notes that percentages vary from month to month after November 2011 and range from 0% where none of the cheques drawn in a particular month were cancelled to 100% where all of the cheques drawn were cancelled. Mr Morris summarised the annual totals and proportions from and after November 2011 in a table which I set out below:

216    He notes that the variations in the average value of cheques drawn that were unpaid each year varied between 28.7% for the eight months November 2011 to June 2012, and 53.2% for the 2014 financial year and that the average for this period was 41.7%. Mr Morris said that amounts described as “Reported Purchases” in the table set out below are the amounts recorded in the general ledger of Concrete Supply as cement purchases in each financial year which were included in its statement of profit and loss. The amounts recorded in the general ledger were the actual purchases made in each financial year reduced by the cheques that were cancelled in that year. The cheques that were cancelled each year comprise mainly cheques that have been drawn in earlier financial years in respect of purchases made in those earlier financial years. In order to determine Concrete Supply’s actual purchases in any financial year, it is necessary to add back the cheques that were written back each year. The table set out below illustrates the aggregate of cheques that were written back in respect of a particular year’s purchases. The table is as follows:

217    Mr Morris makes a number of points about this table. First, Concrete Supply wrote back cheques during the 2009 financial year which resulted in rebates that aggregated $120,323. These cheques represented 5% of Concrete Supply’s actual purchases for the 2009 financial year. Secondly, Concrete Supply also wrote back other cheques in respect of purchases in the 2009 financial year of $391,681. The cheques were written back during the 2010 financial year. The total of rebates taken in respect of purchases of the 2009 financial year was $512,005 which represented 23% of actual purchases for 2009. If one looks at the dates upon which the cheques totalling $391,681 were written back, the rebates taken in the 2010 financial year represented 14% of the purchases that Concrete Supply made in 2010. Thirdly, Concrete Supply took no rebates in respect of purchases made during the 2010 financial year. Fourthly, Concrete Supply took no rebates during the 2011 financial year, that is to say, no cheques were written back during that year. It took no rebates in respect of purchases during the 2011 financial year, and none of the cheques drawn in respect of purchases in the 2011 financial year were subsequently cancelled. Fifthly, Concrete Supply wrote back cheques in respect of purchases of $269,055 during the 2012 financial year which was equivalent to 9% of the purchases for that year. Sixthly, Concrete Supply also wrote back additional cheques that had been drawn in respect of purchases in the 2012 financial year of $296,576. The cheques were written back in the 2013 financial year. The total of the rebates taken in respect of the 2012 financial year purchases was $765,634 which were taken in cheques written back over the 2012 and 2013 financial years representing 27% of the cement purchased in the 2012 financial year. Seventhly, Concrete Supply wrote back cheques for purchases of $615,000 during the 2013 financial year of which $118,653 were in respect of the 2013 financial year, and $476,578 were for purchases in the prior year. The rebates taken during the 2013 financial year amounted to 22% of the purchases for the year. Eighthly, Concrete Supply also wrote back additional cheques drawn for purchases in the 2013 financial year of $843,196 resulting in total rebates taken in respect of purchases made in the 2013 financial year of $961,849 which amounted to 35% of the purchases of that year. Ninthly, the cheques that were written back in each of the financial years 2014 to 2017 were in respect of purchases during prior years. The value of purchases written back increased from $843,196 in 2014 to $1,789,794 in 2017 representing between 25% (2014) and 40% (2015) of the actual purchases made in each year. Finally, the rebates that were taken in respect of purchases in the financial years 2014 to 2017 were between $1,259,180 (2015) and $1,849,435 (2014) and range between 29% (2017) and 56% (2014) of the year’s cement purchases.

218    Mr Morris also said that the table showed three important matters. First, Concrete Supply had withheld cheques that had been drawn for purchases between 1 July 2008 and 31 October 2017 thereby taking or intending to take rebates of $9.13 million which represented 29% of purchases for that period. Secondly, the average value of rebates taken or to be taken during the financial years 2009 to 2017 was $954,806 which was equivalent to 29% of purchases. Thirdly, the average value of rebates taken or to be taken in the financial years 2012 to 2017 was $1,346,875 which was equivalent to 37% of the purchases of those years.

219    Mr Morris states that it is not said that ABCL provided a rebate to Concrete Supply between March 2009 and March 2012. If the alleged rebate or discount given in March 2012 is calculated as a percentage of purchases between April 2009 and March 2012, the percentage is approximately 6.5% of the cement purchased.

220    Mr Morris examined a number of management accounts of Concrete Supply and discovered that the alleged discount or rebate was described in those accounts as “Expendable Stores”. He also calculated the ratio in percentage terms between the discount or rebate on the one hand, and the purchases of cement on the other. The results are set out in an appendix to Mr Morris’ report which I set out in full: