New South Wales Supreme Court CITATION : Desmond Henry Randall v Aristocrat Leisure Limited (ACN 002 818 368) [2004] NSWSC 411 HEARING DATE(S) : 03/05/04, 04/05/04, 05/05/04, 06/05/04, 07/05/04, 11/05/04, 12/05/04, 13/05/04 JUDGMENT DATE : 8 June 2004 JURISDICTION: Equity Division Commercial List JUDGMENT OF : Einstein J DECISION : Summary dismissal justified. Plaintiff entitled to bonus in respect of 2002 year [approximately $900,000] and to certain relocation out of pocket expenses. CATCHWORDS : Contract - Master and servant - Summary dismissal - Appointment of plaintiff by written contract of employment as chief executive officer and director of defendant - Defendant listed company operates in Australia and worldwide through subsidiaries - Contract stipulates that chief executive officer to perform all normal duties associated with the position held by a chief executive officer of a public company, to faithfully serve defendant and to competently exercise all skills as would be normally expected of persons holding the position of chief executive officer and director of a public company - Clause giving defendant entitlement to terminate the contract and the services of plaintiff without prior notice in the event that he commits any act of dishonesty, fraud, wilful disobedience, misbehaviour or breach of duty which might detrimentally affect defendant or wilfully, persistently and materially breaches any of the provisions of the contract and if the breaches are remediable, does not remedy them within 14 days after receiving notice in writing - Summary dismissal of plaintiff pursuant to clause - Plaintiff asserts that termination of his employment constitutes a repudiation of the contract and purports to accept repudiation - Proceedings concern events before and aftermath of 7 February 2003 profit downgrade announcement resulting in a decrease in the defendant's share price from $4.22 being the last price immediately before announcement released to low of $2.25 after the release and closing price of $2.40 on the day - Clarification announcements issued on days following initial announcement - Defendant claims that post 7 February events involved plaintiff making [or causing to be made] a series of public statements - Effect of public statements said to be to assert that he had had no warning of the possibility of a profit downgrade before 4 or 5 February 2003 - that he had been confident of a strong US profit result at the end of 2002 - that it was not clear to him before 4 and 5 February 2003 that Aristocrat had a problem with its profit margins in its North American business - Claimed conduct said to justify summary dismissal under contract - Defendant contends that these statements were false and false to the knowledge of plaintiff - Defendant contends that plaintiff failed to make full disclosure of his knowledge to the board - Defendant relies upon ASX continuous disclosure requirements and statutory obligations including obligations to use reasonable care and diligence and to act in good faith and in the best interests of the company - Plaintiff contends that he and defendant had only become aware of particular material information in early February 2003 and that this information had then been promptly released to the market - Plaintiff contends that there was no failure of disclosure of his own knowledge to the board - Line of defences include defences raising technical issues, as for example whether contract provisions unenforceable by reason of particular sections of the Corporations Act requiring shareholder approval - Examination of performance/standard of performance of the duties of a director and chief executive officer - Duties of disclosure of chief executive officer to board - Principles concerning fraudulent representations, wilful disobedience, misbehaviour/misconduct justifying summary dismissal at common law - Content of statutory duties to use reasonable care and diligence (section 180), to act in good faith and in best interests of company (section 181) and not to use position improperly to gain an advantage to himself (section 182) Corporations Act 2001 (Cth) LEGISLATION CITED : Corporations Act 1989 (Cth) Corporations Legal and Economic Reform Plan Act 1999 (Cth). Abeles v PA (Holdings) Pty Ltd (2000) 18 ACLC 867 Adami v Maison de Luxe Ltd (1924) 35 CLR 143 Ashton Mining Ltd v Commissioner of Taxation [2000] FCA 590 Atlantic Shipping and Trading Co. v Louis Dreyfus & Co [1922] 2 AC 250 Australian Colliery Staff Association v Queensland Mines Rescue Service [1999] FCA 395 Bettini v Gye (1876) 1 QBD 183 Blyth Chemicals Ltd v Bushnell (1933) 49 CLR 66 Boston Deep Sea Fishing & Ice Co v Ansell (1888) 39 Ch D 339 Brackenridge v Toyota Motor Corporation Australia Ltd (1996) 142 ALR 99 Bruce v AWB Ltd (2000) 100 IR 129 Clouston & Co Limited v Corry [1906] AC 122 Commissioner of Stamp Duties (NSW) v Bone and Others (1976) 135 CLR 223 Commonwealth v Verwayen (1990) 170 CLR 394 Courtaulds Northern Spinning Ltd v Sibson [1988] ICR 451 Crabtree-Vickers Pty Ltd v Australian Direct Mail Advertising & Addressing Company Pty Ltd (1975) 133 CLR 72 Daniels t/as Deloitte Haskins and Sells v Anderson (AWA case) (1995) 37 NSWLR 438 Derry v Peek (1889) 14 App Cas 337 Dovey & Metropolitan Bank (of England & Wales) Ltd v Cory [1901] AC 477 Elcom v Electrical Trades Union of Australia, New South Wales Branch (1983) 5 IR 267 Farley v Lums (1917) 19 WALR 117 Federal Commissioner of Taxation v Orica Limited (1998) 194 CLR 500 Fox v GIO Australia Limited [2002] NSWIRComm 318 Freeman & Lockyer (a firm) v Buckhurst Park Properties (Mangal) Ltd & Anor [1964] 2 QB 480 Galipienzo v Solution 6 Holdings Limited (1998) 28 ACSR 139 Gooley v Westpac Banking Corp (1995) 129 ALR 628 Grundt v Great Boulder Pty Gold Mines Ltd (1937) 59 CLR 641 CASES CITED : Harmer v Cornelius (1858) 5 CBNS 236 Harold Holdsworth & Co (Wakefield) Ltd v Caddies [1955] 1 WLR 352 Hawker Pacific Pty Ltd v Helicopter Charter Pty Ltd (1991) 22 NSWLR 298 John McGrath Motors (Canberra) Pty Ltd v Applebee (1964) 110 CLR 656 Jones v Associated Tunnelling Co Limited [1981] IRLR 477 Jupiter General Insurance Co Ltd v Shroff [1937] 3 All ER 67 Krakowski v Eurolynx Properties Ltd (1995) 183 CLR 563 Larratt v Bankers & Traders Insurance Co Ltd (1941) 41 SR (NSW) Laws v London Chronicle (Indicator Newspapers) Ltd [1959] 2 All ER 285 Legione v Hateley (1983) 152 CLR 406 Lewis v Cook (2000) 18 ACLC 490 Marchesi v Barnes [1970] VR 434 Meyrick v Stirling Bros Ltd (1899) 1 WALR 51 Mulcahy v Hoyne (1925) 36 CLR 41 Newbon v City Mutual Life Assurance Society Ltd (1935) 52 CLR 723 North v Television Corporation Ltd (1976) 11 ALR 599 O'Brien v Associate Fire Alarms Limited [1969] 1 All ER 93 Orr v University of Tasmania (1957) 100 CLR 526 Quinn v Jack Chia (Australia) Limited [1992] 1 VR 567 Rowbotham v Arthur Lee & Sons Ltd (1974) IRLR 377 Sheldrick v WT Partnership (Aust) Pty Ltd (1998) 89 IR 206 Shirlaw v Southern Foundries (1926) Ltd & Anor [1939] 2 All ER 113 Tallerman & Co Pty Ltd v Nathan's Merchandise (Vic) Pty Ltd (1957) 98 CLR 93 Thompson v Palmer (1933) 49 CLR 507 Turner v Mason (1845) 14 M & W 112 Vardy v Cuthbert (1872) 3 AJR 25 Waltons Stores (Interstate) Ltd v Maher (1988) 164 CLR 387 PARTIES : Desmond Henry Randall (Plaintiff) Aristocrat Leisure Limited (ACN 002 818 368) (Defendant) FILE NUMBER(S) : SC 50066/03 COUNSEL : Mr B Coles QC, Mr A Fernon (Plaintiff) Mr G Lindsay SC, Mr A McGrath (Defendant) SOLICITORS : Toomey Pegg Drevikovsky (Plaintiff) Phillips Fox (Defendant) IN THE SUPREME COURT OF NEW SOUTH WALES EQUITY DIVISION COMMERCIAL LIST Einstein J Tuesday 8 June 2004 50066/03 Desmond Henry Randall v Aristocrat Leisure Limited JUDGMENT Overview of the proceedings 1 These proceedings are brought by Mr Desmond Henry Randall for damages arising from the termination on 14 April 2003 of his employment as chief executive officer and director with the defendant, Aristocrat Leisure Limited ["Aristocrat"]. That employment was pursuant to a written contract of employment entered into on 19 June 1998 and entitled 'Agreement for Appointment of Chief Executive Officer and Director' [later varied on 11 May 2001 and on 7 December 2002] [the "contract"]. Mr Randall purports to accept the termination as a repudiation 2 On or about 10 April 2003 by letter [from Mr Randall's solicitors to the solicitors of Aristocrat] Mr Randall asserted that the termination of his employment constituted a repudiation of the contract which he purported to accept as putting an end to the contract. Aristocrat seeks to justify the summary dismissal 3 Aristocrat has sought to justify the summary dismissal of Mr Randall by two routes: · alleged breaches of contract provisions which if breached entitled Aristocrat to summarily terminate the contract; · sundry defences raising technical issues, as for example whether contract provisions are unenforceable by reason of particular sections of the Corporations Act 2001 (Cth) [the "Act"] requiring shareholder approval. Clause 5.1 of the contract 4 Clause 5.1 of the contract is relied upon in terms of giving Aristocrat an entitlement to terminate the contract and the services of Mr Randall under the contract without prior notice in the event that he: · committed any act of dishonesty, fraud, wilful disobedience, misbehaviour or breach of duty which might detrimentally affect Aristocrat [clause 5.1 (a)]; or · wilfully, persistently and materially breached any of the provisions of the contract and, if the breaches were remediable, did not remedy them within 14 days after receiving notice in writing from Aristocrat [clause 5.1 (b)]. 5 Aristocrat pleads particular contractual provisions by which Mr Randall is said to have been obliged inter alia: · to use his best endeavours to be aware of, and to understand, all regulations applicable and relevant to directors of Aristocrat; · to comply with such regulations; · to serve Aristocrat well and faithfully; · to exercise competently all skills as would be normally expected of persons holding the position of chief executive officer and director of a public company. 6 Whilst there are a number of allegations pleaded by Aristocrat, the heart of its breach of contract case concerns Mr Randall's conduct during the aftermath of an announcement made by Aristocrat to the Australian Stock Exchange ["ASX"] on Monday 7 February 2003. This announcement: · referred to previous indications by Aristocrat that it was confident of meeting market consensus earnings forecasts of $109 million for the full year net profit after tax; · gave detail with respect to a South American transaction said to have involved the sale of a significant number of electronic gaming machines, in relation to which contract the customer had failed to fulfil a number of obligations, in consequence of which it was said that the board and management of Aristocrat had decided that it was not prudent to recognise that revenue in the 2002 full year result; · made clear that in consequence of this decision, net profit after tax for the full year to 31 December 2002 would not meet consensus market forecasts and was expected to be $80.2 million, subject to final audit. 7 A draft profit downgrade announcement referring to the failure to complete a major South American contract scheduled for completion prior to 31 December 2002 had been prepared in late December but was not released. 8 The immediate result of the announcement was a decrease in the company's share price from $4.22 at the close of trade on 5 February 2003, being the last trading price immediately before the announcement was released, to a low of $2.25 after the release and a closing price of $2.40 on the day. 9 Following the announcement there was a flurry of activity on the part of Aristocrat. Announcements were made on Monday 10 February and Tuesday 11 February 2003. Other February events included an apology by Mr Randall to the board of Aristocrat on 17 February 2003; a media briefing presentation on the morning of 18 February and a presentation to market analysts by Mr Randall on the afternoon of 18 February 2003. The 2002 annual report was issued. 10 The central propositions which have been litigated concern Aristocrat's allegation that the post 7 February events involved Mr Randall making [or causing to be made] a series of public statements [as well as causing or permitting the annual report to be published]: · the effect of which conduct is said, in general terms, to assert that: - he had had no warning of the possibility of a profit downgrade before 4 or 5 February 2003; - he had been confident of a strong US profit result at the end of 2002; - it was not clear to him before 4 or 5 February 2003 or thereabouts that Aristocrat had a problem with its profit margin in its North American business. · without full disclosure of his knowledge to the board. 11 Aristocrat also seeks to rely upon what is said to be an allied assertion by Mr Randall [expressly reflected in the ASX 11 February 2003 announcement and in the annual report] that the results of an analysis conducted by the company on 8 - 9 February 2003 were "inconsistent with information previously provided by American management". This assertion is said to have been untrue and untrue to the knowledge of Mr Randall. 12 The position which Mr Randall took in relation to each of these events provides the central factual focus of these proceedings. His position was to deny the allegations as to matters said to have been known to him; to contend that Aristocrat had only become aware of particular material information in early February 2003 [on 5 February] and to assert that this information had then been promptly released to the market. Further that there was no failure of disclosure of his own knowledge to the board. 13 Mr Randall's position had been very carefully worked out in advance of the two presentations which he gave on 18 February 2003. In preparation for those presentations he had prepared a set of speaking notes. The notes included an answer to one of the main questions which Aristocrat had received from the market, namely why had there been no warning on the $109 million downgrade in profit after tax to $80 million. The answer was "We could not tell you what we did not know. We were confident of meeting the market expectation at year end". 14 This answer was effectively then communicated at each of the above described presentations: · "We didn't know. Be assured, as soon as Aristocrat knew, the market knew… We could not tell you what we did not know. We were confident of meeting the market expectation at year's end" [10.35 am media presentation at page 5]; · the same answer was generally repeated in substance in the 2.48 pm analysts presentation (at page 6 [including at page 5, "We went to the market two days after we learned the problem"]). 15 A strong focus has been placed upon the precise words used by Mr Randall in the media briefing and in the analysts briefing. The focus is for the reason that the defendant contends, but the plaintiff denies, that the statements made in these briefing sessions properly construed amount to statements of the above-described characterisation ultimately pressed by the defendant in final address. 16 Aristocrat has contended in these proceedings that these statements were not only clearly made but further were false and were false to the knowledge of Mr Randall. The core contention is that Mr Randall had at some time earlier [generally in December 2002 as well as in early 2003] been put in possession of information from which it was, or ought to have been clear to him that: · the company had a substantial problem with profit margins in its North American business; · Aristocrat would not, or might not, report a strong US financial result, or exceed its profit expectations, for 2002; 17 During final address there was a shift from the allegation that Mr Randall at those times had been put in possession of information from which it was or ought to have been clear to him that Aristocrat's net profit after tax for the year ended 31 December 2002 would not, or might not, meet Aristocrat's September 2002 forecast of $109 million but would be of the order of $80million. The matter is dealt with below. 18 The subject statements are said to have amounted to the commission by Mr Randall of one or more of the acts identified in clause 5.1 (a) of the contract, being acts which might detrimentally affect Aristocrat. 19 Hence this segment of the matters which were litigated requires a close analysis of what constitutes the proper performance of the duties of a director and chief executive officer of a listed company. Submissions on this question and as to whether or not Mr Randall was in breach of the contractual provisions justifying summary termination of the contract and his services extended into: · a consideration of the material ASX continuous disclosure requirements; · an examination of the pleaded statutory obligations which include the obligations to use reasonable care and diligence and to act in good faith and in the best interests of the company. 20 A central contention of Mr Randall's counsel has been that it is necessary to look at the performance/standard of performance of the duties of a director and chief executive officer in the context of: · the financial /commercial environment in which the activities were being undertaken; · the particular position of the officer concerned [bearing in mind his overall responsibilities, here as the chief executive] going beyond the mere evaluation of financial data [the raw materials for which were being processed by others]; · the personal circumstances of the officer concerned [here the relocation to another country]; · not only the reactions of the particular chief executive officer to the financial data but also the reaction of all other persons whose access to, and comprehension of that same data are said to have mirrored that of the chief executive officer and in some cases to have been more focused. [Transcript 29]. 21 A convenient course is to move from the above relatively general overview and to examine the background, the evidence and the submissions in order to be in a position to hand down findings on each of the disparate issues pleaded and litigated. What was Aristocrat? 22 Aristocrat was a leading global provider of gaming machines and associated products [termed "gaming solutions" in its 2002 annual report.] It operated in Australia and through its subsidiary companies in many parts of the world including the United States, the United Kingdom, New Zealand, Japan, South Africa and elsewhere. It was publicly listed in 1996. During the period since the appointment of Mr Randall its market capitalisation had increased sixfold to $2.5 billion and the expansion of its business globally had resulted in over 33 percent of revenue being sourced outside Australia. In its 2001 annual report it was ranked fourth in one review of Australia's top 100 companies and it had been ranked fifth in another review of Australia's largest 50 companies. 23 It is common ground that the nature of the industry/business in which Aristocrat participated was heavily regulated by gaming authorities and their analogues in the various countries in which it operated. Strict compliance was of the essence. The company was administratively based in Sydney with a head office in Lane Cove and manufacturing facilities in Rosebery. Australia was plainly the nerve centre of the company and it is common ground that there was a very substantial flow of information from its overseas subsidiaries and associated entities into the Sydney head office. 24 The evidence bears out the proposition put forward by Mr Coles QC in his opening address to the effect that Aristocrat, blossoming under the attentions of Mr Randall, was the subject of accolades afforded to it by the marketplace from time to time, the result being that in general terms for each year under Mr Randall's stewardship, there was general confirmation that by reason of the operations of the company's business, the management, the directors and the marketplace entertained high expectations of the profitability of the company. Most particularly those expectations were that in each successive year the company would not only generate a profit after tax and other expenses but would generate a profit which was a considerable/appreciable one or one that stood out to proclaim the company an attractive industry yield. Differentiation between contracts 25 From time to time it is necessary to differentiate between the versions of the contract although it is accepted by all parties that the subsequent agreements varied the original agreement. The convenient course is: · to refer to the original contract as the "1998 Contract"; · to refer to the subsequent contracts as respectively the "2001 Contract" and the "2002 Contract"; · where it is not necessary to differentiate between the original contract and the contracts which varied it, to simply describe the varied contract as the "contract". Broad terms statement of questions in dispute 26 In very broad terms, the main questions in dispute turn on: · whether Aristocrat was justified in terminating Mr Randall's employment; · independently of that question, whether Mr Randall has an entitlement to a bonus payment for his employment in 2002, and to other entitlements; · whether Aristocrat is entitled to recover from Mr and Mrs Randall (or at least Mr Randall) interest on moneys lent to them in connection with a house bought in their names (in Nevada, USA) in mid-2002. Detail of particular claims to entitlements pursued 27 The particular claims to entitlements which are pursued, and the contractual provisions upon which the claims are based are identified below. The defences Defences raising sections of the Corporations Act 2001 (Cth) 28 Without being exhaustive it may be noted that these defences allege inter alia: Retirement benefit - that the 2002 Contract gave Mr Randall a benefit in connection with his retirement within the meaning and subject to the provisions of section 200B (1) of the Act requiring that they be approved by members of Aristocrat. Financial benefit - that the 1998 Contract gave Mr Randall financial benefits said to have constituted "financial benefits to a related party" within the meaning and subject to the provisions of sections 208 (1) (a) (i), 228 (2) and 228 (5) of the Act requiring that they be approved by the members of Aristocrat; - that no such approvals were given. 29 The sections relied upon are as follows: Section 200 B (1) which essentially provides that a company "must not give a person a benefit in connection with that person's… retirement from a board or managerial office in a company, or a related body corporate, without member approval under section 200E". Section 208 which provides that: "(1) For a public company or an entity that the public company controls, to give a financial benefit to a related party of the public company: (a) the public company or entity must: (i) obtain the approval of the public company's members in the way set out in sections 217 to 227; and (ii) give the benefit within 15 months after the approval; or (b) the giving of the benefit must fall within an exception set out in sections 210 to 216; (2) If: (a) the giving of the benefit is required by a contract; and (b) the making of the contract was approved in accordance with sub paragraph (1) (a) (i) as a financial benefit given to the related party; and (c) the contract was made: (i) within 15 months after that approval; or (ii) before that approval, if the contract was conditional on the approval being obtained; member approval for the giving of the benefit is taken to have been given and the benefit need not be given within 15 months." Section 210 which provides that: "Member approval is not needed to give a financial benefit on terms that: (a) would be reasonable in the circumstances if the public company or entity and the related party were dealing at arms length; or (b) are less favourable to the related party than the terms referred to in paragraph (a)." Section 211 (1) which provides inter alia that: "Member approval is not needed to give a financial benefit if: (a) the benefit is remuneration to a related party as an officer or employee of… (i) the public company; and (b) to give the remuneration would be reasonable given: (i) the circumstances of the public company or entity giving the remuneration; and (ii) the related party's circumstances (including the responsibilities involved in the office or employment)." 30 An important parameter raised by the defendant's pleading in relation to financial benefits concerns the issue as to whether or not exceptions to the requirement for member approval were engaged by reference to sections 210 and 211 of the Act. The special focus here is upon whether or not the remuneration would be reasonable in terms of the parameters stipulated by the above-described provisions. The plaintiff's responses to the Corporations Act claims 31 The plaintiff's overview submissions put its responses to the suggested application of the Act as follows: · "the payment of the 3 year severance payment pursuant to clause 5.5 of the Contract is exempt from the provisions of section 200B of the Act because of sections 200F(a)(iii) and 200G of the Act; · the exemption under section 200F(a)(iii) of the Act (see paragraph 34 above) applies as the severance payment was agreed to by Aristocrat in consideration of Mr Randall agreeing to hold the office of CEO, based in the United States; · by agreeing to relocate to the United States and assume supervisory responsibility for the United States operations, Mr Randall's employment position changed substantially causing a new contract of employment to be entered into on 7 December 2002. (see O'Brien v Associate Fire Alarms Limited [1969] 1 All ER 93, Jones v Associated Tunnelling Co Limited [1981] IRLR 477, Australian Colliery Staff Association v Queensland Mines Rescue Service [1999] FCA 395, Quinn v Jack Chia (Australia) Limited [1992] 1 VR 567, Brackenridge v Toyota Motor Corporation Australia Ltd (1996) 142 ALR 99 at 106); · the second relevant exemption, section 200G, requires two figures to be calculated for use in the stated formula (see paragraph 36 above), namely: (a) the length of Mr Randall's employment; and (b) his total remuneration during the last three years of his employment. · Mr Randall was employed from 19 June 1998 to 4 April 2003. This is a period of 4.8 years; · the last three years of his employment are therefore calculated from 4 April 2003. His remuneration during that period was as follows: Period of employment Total remuneration 5/4/00 - 31/12/00 $2,532,347.65 (being a pro rata 271 days of the full year emoluments disclosed in the 2000 annual report of $3,420,071) 1/1/01 - 31/12/01 $3,649,588 See 2001 annual report 1/1/02 - 31/12/02 $3,895,056 See 2002 annual report 1/1/03 - 4/4/03 $2,141,426 See 2003 annual report TOTAL $12,218,417.65 · on the application of these figures to the formula set out in section 200G, the severance payment claimed by Mr Randall is substantially less than that allowed by the section 200G and is therefore exempt from section 200B of the Act; · moreover, clause 20 of the Contract (at page 1787 of the bundle) provides: "In the event of any severance payment or other payments in respect of the retirement from office becoming payable pursuant to this Agreement for an amount which is not an exempt benefit pursuant to either s200F or s200G of the Corporations Act 2001, then the CEO will be entitled to require Aristocrat to promptly seek the approval of its shareholders to such payment. Pending the giving of such approval, the CEO will be entitled to receive a severance payment equal to the maximum amount he would be entitled to receive as an exempt benefit pursuant to such sections, and if approval is given by the shareholders of Aristocrat, he will be entitled to be paid the difference between the exempt benefit received by him, and the payment approved by the shareholders of Aristocrat in respect of his retirement from office" · section 208(1)(a)(i) of the Act does not apply to Mr Randall because: (a) Section 209 of the Act provides that even if section 208 is applicable, a contravention of section 208 does not affect the validity of any contract or transaction connected with the giving of the benefit; and (b) sections 210 (relating to reasonable arms length transactions) and 211 (relating the remuneration and reimbursement that is reasonable in the circumstances of the public company) provide in essence that Mr Randall's entitlement under the Contract are exempt. · the terms of Mr Randall's remuneration and relocation assistance were the subject of discussion and recommendations from Aristocrat's internal board appointed Compensation Committee, including a written proposal and recommendation from Mr Tony Gibbs (Aristocrat's human resources chief) in a memorandum of 12 November 2002 (at page 1503 of the agreed bundle). Mr Gibbs has not given a statement in these proceedings. The terms of Mr Randall's remuneration and relocation assistance was approved by the board and his contract, prepared by external solicitors, was signed for the board by Mr Pascoe and Mr Bush. All negotiations with the company were at arms length; · where parties have negotiated at arms length and enter into a contract following those negotiations, the conclusion is readily drawn that the terms of that contract are reasonable; · moreover, given the seniority of Mr Randall's position, the international nature of his duties, the ongoing success of Aristocrat under Mr Randall and the onerous obligation of relocating from Australia to the United States, the benefits provided are reasonable; · as Aristocrat is asserting a statutory defence to an otherwise enforceable contract, it is for Aristocrat to establish that such defence is available and that none of the exemptions within the Act apply." Sundry defences dealing with detailed provisions of the contract 32 A suite of disparate defences deal with a number of particular clauses of the contract including the proper construction of certain clauses and the claim that Aristocrat was entitled to terminate the contract and the services of Mr Randall under the contract by virtue of particular provisions of the contract. The estoppel defence to the year 2002 bonus claim 33 A number of particular defences are put forward in answer to Mr Randall's claim for the year 2002 bonus. One of these defences relies upon an estoppel said to have arisen by a letter from Mr Randall to Aristocrat of 12 February 2003 whereunder he is said to have represented that he had forever released the company from any entitlements he might otherwise have had to a performance bonus referable to 2002. The allegation is that acting on the face of that representation and encouraged by Mr Randall to assume that Aristocrat was and would be under no legal liability to him for such a performance bonus, Aristocrat, as Mr Randall knew or to have known, submitted its accounts for auditing, had its accounts audited and reported to the members of the company in its 2002 annual report, upon the basis that the company was and would be, under no legal liability to Mr Randall for a performance bonus for that year. 34 The defences also include claims that upon the proper construction of the contract and in the events which happened, Mr Randall never acquired a legal entitlement to a performance bonus for the year 2002. Defendant's answer to the plaintiff's contentions generally 35 This suite of defences commences with the alleged consequences of what is said to have been non-compliance with the Act. One allegation pleaded is that the 1998 Contract as varied by the 2001 Contract was, in law, discharged upon the parties entry into the 2002 Contract. The proposition is that by virtue of the Act, the 2002 Contract could not bind Aristocrat unless and until it was approved by the members of the company, which approval never occurred. It is said to follow that Mr Randall was therefore employed by Aristocrat on and after 7 December 2002 under an implied contract of service said to have been: · determinable by Aristocrat either at will or alternatively in the event of misconduct by him; · an implied contract which did not confer upon Mr Randall any of the sundry entitlements which he claims to have had pursuant to the express terms of the contract. 36 An alternative pleading is that Mr Randall can have no entitlements against Aristocrat (if he has any entitlements at all against the company) more favourable to him than the provisions of the 1998 Contract as varied by the 2001 Contract. Contractual provisions 37 There are then pleaded the particular contractual provisions earlier described. 38 In answer to the claims under clauses 5.4, 5.5 and 3A.8 of the contract, Aristocrat asserts that it was entitled, pursuant to clause 5.1(a) and (b) of the contract, to summarily terminate Mr Randall's employment. 39 In considering whether a right under either of clauses 5.1(a) or (b) arose, Aristocrat raises Mr Randall's various duties and obligations imposed by the contract and otherwise at law by virtue of his position as chief executive officer and director of Aristocrat. Statutory obligations 40 Statutory obligations under the Act are pleaded as imposing upon Mr Randall inter alia the following obligations: · an obligation that he exercise his powers and discharge his duties with a degree of care and diligence that a reasonable person would exercise in the same circumstances; · an obligation that he exercise his powers and discharge his duties: - in good faith in the best interests of Aristocrat, - for a proper purpose; · an obligation not to use his position improperly to gain advantage for himself. ASX Listing Rules 41 Aristocrat contends that it was, to the knowledge of Mr Randall, obliged to comply with the ASX Listing Rules including rule 3.1 (said to be enforced by section 674 of the Act) providing that once Aristocrat was, or became aware, of any information that a reasonable person would expect to have a material effect on the price or value of the company's securities, the company was required immediately to tell ASX of that information. Aristocrat's code of ethics 42 Aristocrat claims that at all material times to the knowledge of Mr Randall all directors, employees and consultants of the company, including Mr Randall, were obliged to comply with a code of ethics relevantly imposing duties upon Mr Randall: · to act honestly, fairly and without prejudice in all commercial dealings; · to conduct business with professional courtesy and integrity; · to understand applicable laws and regulations and to treat compliance with them as essential; · not knowingly to make any misleading statements to any person or to be a party to any improper practice in relation to dealings with or by Aristocrat or related companies of Aristocrat; · to ensure that the resources and property of Aristocrat and its related companies were used properly. 43 In short the duties and obligations said to have been imposed upon Mr Randall under the contract and otherwise at law by virtue of his position as chief executive officer and director of Aristocrat as summarised by the plaintiff in overview submissions, are alleged to be: "(a) To exercise care and diligence (section 180 of the Act); (b) To act in good faith and for a proper purpose (section 181 of the Act); (c) Not to use this position improperly to gain an advantage (section 182 of the Act); (d) To comply with ASX listing Rule 3.1 and section 674 of the Act relating to the provision of information materially affecting the price of the company's shares; (e) To abide with Aristocrat's code of ethics and clause 2 of the Contract, in particular to: (i) use his best endeavours to be aware of, and to understand, all regulations applicable and relevant to directors of Aristocrat, and to comply with such regulations; (ii) well and faithfully serve Aristocrat; (iii) exercise competently all skills as would be normally expected of persons holding the position of CEO and a director of a public company; (iv) act honestly, fairly and without prejudice in all commercial dealings and to conduct business with professional courtesy and integrity; (v) understand applicable laws and regulations and to treat compliance with them as essential; (vi) not knowingly make any misleading statements to any person or to be a party to any improper practice in relation to dealings with or by Aristocrat or related companies of Aristocrat; and (vii) ensure that the resources and property of Aristocrat and its related companies were used properly." 44 These duties and obligations are said to have a relevant nexus with the contract for the reason that the contract stipulated [in clauses 2.5 and 2.6] that the chief executive officer would perform all normal duties associated with the position held by a chief executive officer of a public company, would faithfully serve Aristocrat and would competently exercise all skills as would be normally expected of persons holding the position of chief executive officer and director of a public company. Breaches of contract 45 Reference has already been made to matters relied upon as constituting alleged breaches of the contract: · claims were pleaded concerning a series of matters in relation to which the allegation is that Mr Randall failed to inform the board of directors of his personal knowledge. These claims allege that Mr Randall: · knowingly caused or permitted particular announcements [and thereafter 'clarifying' announcements] to be released to the ASX; · later made an apology to the Aristocrat board of directors; · made particular statements to the public; · was relevantly involved in the preparation and causing to be published of the 2002 annual report in a form including particular statements. · in causing or permitting the ASX announcements to be released, making the apology to the board, making public statements and causing or permitting the annual report to be published, failed to make full disclosure of relevant parameters of his then knowledge to the board. 46 It is particularly important to bear in mind that by the time final addresses were taken, as opposed to a very wide-ranging set of pleaded allegations of conduct said to constitute breaches of the contract, Aristocrat had confined its case very considerably indeed. Whilst the overview opening submissions remained in place in part, the now focus and suggested wrongful conduct the subject of final address was limited to the following matters, extracted from the defendant's final written submissions: " Mr Randall's conduct of 7-18 February 2003 In February 2003 Mr Randall made or caused to be made a series of statements the effect of which was, in general terms, to assert that: (a) he had had no warning of the possibility of a profit downgrade before 4 or 5 February 2003; (b) he had been confident of a strong US profit result at the end of 2002. (c) it was not clear to him before 4 or 5 February 2003 that Aristocrat had a problem with its profit margin in its North American business. See Aristocrat's Case Outline paragraph 23. Allied with these assertions was Mr Randall's proposition (expressly reflected in Aristocrat's ASX Announcement of 10 February 2003 and in the Annual Report at Exhibit DX page 211) that the results of an analysis conducted by the company on 8-9 February 2003 were "inconsistent with information previously provided by American management" (Exhibit DX page 79)." 47 As senior counsel for Aristocrat put the matter [transcript 552.42] "those four points … are the focus of conduct that we say was wrongful conduct on the part of Mr Randall". 48 It is an understatement to note that confining the final address to these matters meant that a great deal of what had been otherwise litigated fell away. Of course a deal of the evidence material to the now pressed parameters of suggested misconduct was submitted as still to be found in many of the facts said to have been proved during the course of the hearing. 49 Evidence adduced had sought to prove allegations that Mr Randall, who was said not to have informed the board of his state of personal knowledge or belief, had been guilty of: · on or about 7 February 2003, knowingly causing or permitting an announcement to be released to ASX to the effect that: · Aristocrat's profit after tax for the year ended 31 December 2002 would fall from a forecast of $109 million to $80.2 million subject to final audit; · the profit downgrade was a consequence of the Board's decision not to recognise revenue after a Columbian customer had failed to fulfil a number of obligations under a contract; and · Aristocrat's financial results of the 2002 year when released on 18 February 2003 would demonstrate strong growth in the USA. (paragraphs 59, 78 and 79 of the defence) · On or about 10 February 2003, knowingly causing or permitting an announcement to be released to the ASX that included statements to the effect that as a result of analysis conducted after Aristocrat's announcement of 7 February 2003: · Aristocrat had discovered that the financial performance of its American business was 'inconsistent with information previously provided by the Americas' management' in that the analysis, inter alia, spelt out the extent to which (profit) margins had deteriorated in the second half of 2002; · while margin pressure was known to exist, the extent to which this had occurred was not known; and · Aristocrat had initiated a full review of its American businesses which was to be led by Mr Randall (paragraphs 60, 78 and 79 of the Defence). · On or about 11 February 2003, knowingly causing or permitting an announcement to be released to the ASX that included a statement to the effect that the full extent of the lower volumes of sales and profit margins in the North American business had only become apparent following analysis conducted on the weekend of 8 and 9 February 2003 (paragraphs 61, 78 and 79 of the defence). · On or about 17 February 2003, Mr Randall (as CEO) made a statement to the Board that he had not seen coming a problem with the profit margins of Aristocrat's North American business and did not have sufficient controls in place to understand the situation in North America early enough to take action and inform the Board (paragraphs 62, 78 and 79 of the defence). · On or about 18 February 2003, Mr Randall as CEO made statements to the public to the effect that: · He had no warning before 5 February 2003 about the profit down grade; · until 5 February 2003 he was confident that Aristocrat would report a strong US financial result; and · it was not clear to him before 5 February 2003 that Aristocrat had a problem with its profit margins in its North American business (paragraphs 63, 78 and 79 of the defence) · Between 18 February 2003 and 13 March 2003, preparing or causing the 2002 annual report of Aristocrat to be prepared and knowingly causing or permitting a statement to be made by the Chairman Mr Ducker) to the effect that the company became aware of information about problems in the United States and properly released it to the markets on 7,10 and 11 February 2003 (paragraphs 64, 65, 78 and 79 of the defence). · On or about 11 December 2002, failing to inform the Board that he had received email messages concerning problems with the United States' profit margin (paragraphs 66, 68, 78 and 79 of the defence)… · On or about 17 February 2002, delivering to Aristocrat a promissory note… to secure the sum of US$1.665 million lent by Aristocrat to Mr and Mrs Randall (paragraphs 73, 74, 75, 85 and 86 of the defence). · On or before 9 January 2003, Mr Randall failed to disclose to the board his knowledge that Aristocrat had a substantial problem with profit margins in its North American business, that Aristocrat would not or might not report a strong US financial result or exceed its profit expectations and that the profit after tax would not or might not meet Aristocrat's September 2002 forecast of $109 million but would or might be substantially less than that amount (paragraphs 68A to 68H, 78 and 79 of the defence). To substantiate the alleged knowledge that Mr Randall had or ought to have had, Aristocrat rely on: · Mr Randall's involvement in a video conference on 18 or 19 December 2002 in which Mr Randall was allegedly informed that gross margins for the North American business was low and that no recovery could reasonably be expected in December 2002. · The preparation of a draft ASX announcement by Mr Alan Jury (the General Manager Global Communications) at the end of December 2002 announcing Aristocrat's anticipated failure to meet the market's profit after tax expectation of $109 million. · An email message sent to Mr Randall by Mr Khin on or about 31 December 2002 that there had been a decline in the estimated total revenue, profit and gross margins of Aristocrat because of the results in the Americas and that upon favourable assumptions, Aristocrat's profit after tax would be $91 million. · An email message sent to Mr Randall by Mr Jeyaraj on or about 5 January 2003 concerning a number of "alarm bells" which Mr Newburg agreed with. · On or about 9 January 2003 Mr Randall attended a meeting of the executives in the US when the issue of gross margins in the Americas was allegedly discussed. [emphasis added] 50 All or some of these and certain other matters had been pleaded as constituting one or more of the following categories of conduct by Mr Randall: · misbehaviour within the meaning of clause 5.1 (a) of the contract; · a breach of duty which might detrimentally affect Aristocrat within the meaning of clause 5.1 (a) of the contract; · acts of dishonesty within the meaning of clause 5.1 (a) of the contract; · fraud within the meaning of clause 5.1 (a) of the contract; · breaches of clause 2 of the contract; · irremediable, wilful, persistent and material breaches of the contract [clause 5.1(b) of the contract]. Aristocrat's cross-claim 51 Aristocrat has cross claimed against Mr Randall and Mrs Randall seeking repayment of interest on a loan of US $1,665,000 plus interest paid to acquire a home in Nevada USA for Mr and Mrs Randall, following their relocation to the USA at the end of 2002. 52 Aristocrat has also sought payment of an unspecified amount of damages being the costs incurred by Aristocrat in respect of an Australian Securities and Investments Commission ["ASIC"] investigation into Aristocrat following the downgrading of Aristocrat's 2002 profit after tax. The disputed questions of fact 53 The substantial contest at the level of primary fact was confined to the events leading up to and involving the announcement by Aristocrat released to the market on 7 February 2003 and the aftermath which followed that announcement. 54 Dealing with the factual issue concerning the deteriorations in profit margins and revenue shortfalls in the United States market which apparently affected the profit downgrade has required the adducing of detailed evidence: · including many documents and reports providing projections of actual financial results during 2002 and early 2003, including forecasted profit after tax for 2002; · including many e-mails passing between those responsible for preparation of these documents and reports and those to whom the documents and reports were provided. 55 As will appear from the detailed examination of the evidence, Mr Randall under cross-examination put forward a line of answers to the propositions that: · he had become aware no later than December 2002 from information imparted to him that there was a substantial risk that the Aristocrat group would not make its market consensus profit figure of $109 million. · it was not true for him to have asserted [as at the 18 February 2003 analysts presentation DX 141] that as at year's end "we believed we would report a strong US and strong South American result" and that "we couldn't tell you what we did not know." 56 The answers were essentially: · that he was aware as at December 2002 that there was a risk that the group would not make its market consensus profit figure of $109 million [transcript 158.39]; · that this awareness did not amount to knowledge; · that where he had used the words "no warning on the $109 million down to $80 million" it was true that he was intending to convey that he had received no warning on the possibility of the reduction from $109 million down to $80 million but that this was neither false nor false to his knowledge [transcript 160.19]; · that it was true that he had received repeated warnings from Mr Khin that there was a possibility that there would be a profit markdown and that this could be a markdown to $80 million but that in fact Mr Khin had said to him that the company could make between $80 million and $140 million [transcript 160.22]; · that although he was aware that there had been erosion in the planned margin from the Americas, Aristocrat as he had understood it, had enough edge between the country numbers and the market numbers to mean that it was confident with the $109 million market consensus being achieved [transcript 156.45,157.12]; · that Aristocrat was assured by the United States organisation that the margin erosion in North America would be made up in the December month; · that it was incorrect to say that he knew no later than 11 December 2002 that there was a margin problem in North America which could not be rectified by the end of the year because this had simply been a question put by Mr Jeyaraj to Mr Newburg and that Mr Jeyaraj had received no answer to that question [transcript 157.30]; · that whilst particular officers and employees within the Aristocrat group may have had particular opinions [instance for example Mr Khin], unless a formal meeting was held between the responsible persons which agreed to a position it was not possible to make a market announcement: to do so would amount to reporting no more than rumour; · that he had been reliant upon the responses given to head office by Mr Newburg who had made the point that the Columbian deal had been obtained so that the numbers would change for the good which meant that Mr Randall was not concerned; · that to the extent that Mr Jeyaraj had communicated in terms such as: "The gross margin fallout in the Americas have had a very real impact to the whole group results. The miss in the America's gross margin for the month of November is over US $6 million and there is no catch up planned in December… Given the above, in order for the group to meet expectation we now need: - Both Columbia and Brazil 2 to be recognised this month…" [e-mail of 10 December 2002 12.18 AM] this was simply an example of Mr Jeyaraj asking for more commitment than the group in fact needed in a document which was not intended to alarm Mr Randall, [as Mr Jeyaraj was telling Mr Randall at the very same time that Aristocrat was across the line and not to worry] · that he had telephoned Mr Jeyaraj and had asked whether Aristocrat had made the margin expectation to be told that they had as "Columbia got across the line" [transcript 187.17]. The way forward 57 The convenient course is to proceed: · by first outlining some general matters concerning lines of authority, reporting practices and aspects of business patterns; · then proceeding to chronicle [in a 'timeline' document] portions of the evidence; · then dealing with the findings on the disparate claims. The hierarchy and job responsibilities within head office The board of directors 58 As chief executive officer, Mr Randall reported directly to the board of directors. At the time Mr Randall commenced employment, the board consisted of Mr Burke as chairman, Mr Stephen Cohn, Mr Mark Ainsworth, and Mr Les McAvinue. At the time of the termination of his employment, the members of the board of directors were: · Mr John Ducker as chairman of the board · Mr William Baker · Mr Peter Draney · Mr Alan Steelman · Mr John Pascoe 59 The board had three committees to which it delegated certain functions to discharge the board's obligations. The three committees were chaired by non-executive directors and reported directly to the board. As a consequence of his position as chairman, Mr Ducker was a member of each committee. The name and purpose of the committees were: · The audit committee, chaired by Mr Draney, to assist the board in fulfilling its responsibilities relating to the accounting and reporting practices of the group; · The compensation and nomination committee chaired by Mr Pascoe, to review the structure and operation of the board, and to make recommendations to the board about selection and appropriate levels of remuneration for work carried out by board members, the chief executive officer and his direct reports; and · The regulatory compliance committee, chaired by Mr Baker, to oversee Aristocrat's compliance programme and to proactively keep the board informed as to any business or personnel issues that might impact the company's reputation or licences. 60 To assist the board, its committees, and management in the delegation of roles and responsibilities, the board adopted a set of corporate governance principles. Reporting financial results to the board of Aristocrat 61 Since the commencement of Mr Randall's employment in 1998, the board of Aristocrat had set an annual budget which sought to take into account region-specific market indicators and foreseeable risks to Aristocrat's financial performance during the upcoming year. This was the budget against which management's performance was measured, and bonuses were paid, including Mr Randall's annual performance bonus. The board's budget for 2002 was as follows: · revenue: $907.5 million · profit before tax: $121 million · profit after tax: $80.0 million 62 It was Mr Randall's usual practice to provide each member of the board of Aristocrat with a monthly chief executive officer report, which included information regarding: · the previous month's financial results; · the impact of the financial results on the board budget; · outlooks against the board budget (by both country and product line); and · operational highlights and any forward looking operational issues for board discussion. 63 In the months where a board meeting was scheduled, a chief executive officer report was provided to the directors of the board in advance of the meeting so that they would have time to study the material and formulate any questions prior to the meeting. Mr Jeyaraj, the chief financial officer, also attended all the board meetings to present the financial results. At each board meeting, Mr Jeyaraj and Mr Randall spoke to the CEO report and took questions from the board. In the months where a board meeting was not scheduled, a CEO report containing this information was still provided to each director of the board. All directors were invited to ask questions or seek clarification directly from either Mr Randall or Mr Jeyaraj about these CEO reports. The manner in which information was received and processed by head office 64 The financial information contained in these monthly CEO reports was provided to Mr Randall by Mr Jeyaraj and/or Mr Khin, the group financial controller. Mr Khin reported to Mr Jeyaraj. Mr Jeyaraj and Mr Khin consolidated the group financial information received from each country and then provided Mr Randall with the consolidated result, which was also reported to the board of Aristocrat without any alteration. 65 Mr Jeyaraj had responsibilities for the Australian operations of Aristocrat. Those responsibilities included the management of accounts, quality, tax, treasury and business services. 66 As chief financial officer of Aristocrat, the following areas reported to him: · Information Technology; · Employee Services; · Corporate Finance; · the Controller's Department; · Quality Assurance; · Tax; and · Treasury. 67 In his position as chief financial officer, Mr Jeyaraj also had responsibilities for the group operations of Aristocrat, including the following: · consolidation of overseas reporting; · global tax planning; · global treasury planning; and · board reporting. 68 As group financial controller Mr Khin had a team of approximately 30 employees reporting to him. This team was responsible for the consolidation of group financial results, the compilation of reports of consolidated financial results, the distribution of those reports to senior management, the analysis of those financial results, the preparation of board reports and overall group financial planning and budgeting functions. 69 Mr Khin gave the following evidence: "Monthly Financial Reporting at Aristocrat 9. From the time I commenced at Aristocrat in March 2002, I was responsible for the compilation of various regular monthly financial reports, including the following. 9.1 Consolidated group 'flash' reports: Approximately one week before the end of each accounting month, each Financial Controller responsible for the geographical regions in which Aristocrat had operations (being Australia, the United States of America ( USA ), New Zealand, South Africa, Europe, Japan and Asia Pacific) sent to my team a preliminary indication of the financial performance of that region in terms of revenue, gross margin, expenses and profit for that month. From that information my team produced a monthly 'flash report' for Aristocrat on a consolidated basis, for distribution to Aristocrat's senior management. 9.2 Board Report: It was my responsibility to prepare a Board Report each month to be distributed to each member of Aristocrat's Board. Each Board Report comprised the following sections: 9.2.1 'Financial Results at a Glance': Summarising the actual financial results for a month against the budget for that month and the actual financial results for the same month in the prior year; 9.2.2 'Group Financial Summary': Summarising the actual financial results for each geographical region for the month against the budget for that month and the actual financial results for the same month in the prior year; 9.2.3 Various 'Financial Snapshots': Setting out in more detail for each region the monthly and year to date financial performance in terms of revenue, gross margin, local contribution profit, profit before tax and units sold; 9.2.4 'Outlook Summary': Summarising actual or forecasted financial results for each quarter of the year, each half of the year and for the full year compared to the budget and to the equivalent period in the prior year; 9.2.5 'Group Balance Sheet': Providing a balance sheet for the Aristocrat Group as at the end of the month; and 9.2.6 'Cash flow': Providing a cash flow statement for the Aristocrat Group for the month. 9.3 Financial Results in CEO Report: It was my responsibility to prepare that part of a report entitled 'CEO Report' (which was provided by Mr Randall to the Board of Aristocrat) for each month which sets out the actual financial results for the Aristocrat Group for that month and the year to date. That part contains comparisons between those actual results and the budget for the month and the equivalent month in the prior year. Whenever I did not have the actual results available to me at the time, I drafted this part of the CEO Report with the use of the preliminary results which I had available to me in the form of the 'flash' reports, and expressly referred to the use of such 'preliminary' or 'flash' results. 9.4 Leadership Team Reports: Each month my team prepared documents which formed a package known as 'Leadership Team Reports', which were distributed to Mr Randall, Mr Jeyaraj, and others. I personally provided this document to Mr Randall or Mr Randall's secretary on each occasion because of the confidential nature of the reports. Included as part of each of the Leadership Team Reports was a whole range of financial data, including comparisons between the actual results in respect of the previous year, the actual results in respect of the current year, the forecast result in respect of the current year and the variation of those actual figures to the forecasts." [Paragraph 9 of Mr Khin's statement of 16 October 2003] Aristocrat's global operations 70 Mr Jeyaraj gave evidence that: · globally, Aristocrat is divided as follows: - the Americas, headquartered in Las Vegas; - Europe, headquartered in the United Kingdom; - Africa and the South East, headquartered in South Africa; - Japan; - New Zealand; - Australia; and - Asia Pacific. · each region or country (as the case may be) has a chief financial officer or controller who reports to the country or region manager. Thereafter, the country or region manager reports directly to the chief executive officer in Sydney; · each country or region is autonomous. It is responsible for preparing, having approved by the board of Aristocrat, and implementing a business plan for each financial year. Aristocrat's financial reporting year is the same as the calendar year; · an annual field plan is also prepared by each country or regional manager based on the specific business environment. The field plans are based on stretched targets of each country or region and set the outer limits of the year's performance of Aristocrat; · the annual budget for the financial year as approved by the board is extracted from the country business plans; · each country or region provides monthly accounting reports to Aristocrat's head office in Sydney, through files and documents such as outlooks and flash reports. These reports are forwarded to the controller's department in Sydney which is responsible for monitoring Aristocrat's performance locally and internationally. The country or region's performance is monitored by the controller against the field plan, as well as against the budget approved by the board. 71 His further evidence was that the interpretation of monthly reporting from each region or country required to be seen in the context of Aristocrat's performance worldwide, the markets in which it was trading, and the idiosyncrasies of the markets. Without the inherent knowledge of the markets and Aristocrat's performance in those markets, the financial reporting was on his evidence, a limited tool for monitoring performance. Aristocrat's sales patterns 72 Further evidence given by Mr Jeyaraj was: · that in his experience, the business of Aristocrat and its performance against targets had its own idiosyncrasies. In particular, a high level of sales generally occurred in June prior to the close of the half yearly accounts. Sales in December were extremely high but in the months immediately preceding December, in particular September, sales were lower; · that one reason for reduced sales in September and increased sales in December is that in September and October, each country or region prepares its financial plan for the following year. That plan is then submitted for approval by the board in late November. In preparing the plan, the countries and regions often hold back or do not 'book in' proposed sales. This lowers expectations for the following financial year. As sales are lower at the relevant time, the plan is also less onerous. Once the plan has been submitted and approved, sales are generally booked in for the last month of the year to ensure the year's targets are achieved as closely as possible; · that in September each year in America, the annual gaming convention takes place. Sales in the months leading up to the convention are lower as customers wait for the convention to review new games prior to the peak season of New Year and Thanks Giving. The demand created as a result of the convention contributes to the high level sales in December; · that these idiosyncrasies, particularly in the Americas, were further complicated by gaming legislation changes for each jurisdiction, new licences, new games hits, new alliances and acquisitions, and re-alignment of sales territories. These were a direct consequence of Aristocrat's acquisition of Casino Data Systems ["CDS"] in Las Vegas (being a company which specialises in technology driven products for the gaming industry) with significant merger activity and cost reduction programs being implemented at the same time. 73 Accordingly, it was the evidence given by Mr Jeyaraj that Aristocrat's final performance for the year against the field plan and budget could not be determined until the accounts for December had been audited accurately. Financial reporting by Aristocrat Technologies Inc. 74 Mr Jeyaraj gave evidence that throughout his employment as chief financial officer, the various functional departments at Aristocrat's head office experienced problems with the poor quality of information, including financial reporting, being received from Aristocrat's American subsidiary Aristocrat Technologies Inc. ["ATI"]. These problems included inconsistent reporting from CDS' legacy systems and reports, and the need to continually question the accuracy of reporting provided by ATI. In due course and after months of discussions, this led to a change in the controller for Americas in December 2002. 75 His further evidence was that during the period from October 2002 to December 2002, head office continued to question the information being received from the American operations, with some help from himself as chief financial officer. Timeline - the evidence 76 The convenient course is to treat with the sundry evidence which requires to be identified in timeline fashion. 77 In reciting portions of the evidence it should be made clear that all of the evidence has been taken into account in the findings to be found in this judgment. It is neither practicable nor possible to set out all of that evidence. The fundamental search and the critical findings concern the nature of the information received by Mr Randall [or of which he became aware], what he drew from that information and whether or not the pleaded breaches of contract have been proven [in terms of his suggested failure to take particular action in relation to that information and in terms of the allegation that he later played the or a central part in disseminating false or misleading or inaccurate information]. 78 Initially a short reference to reliability of particular witnesses is in order. Reliability of material witnesses Mr Randall 79 Mr Randall cannot be regarded as a reliable witness save where his version of events is consistent with contemporaneous documents or with versions of events corroborated by witnesses who may be regarded as reliable. This is not to say that Mr Randall did not give a deal of evidence which was consistent with contemporaneous documents or with versions of events, or confirmed by other witnesses. The problem was that on many occasions Mr Randall clearly took the opportunity to press his own case: hence the extent to which an entirely partisan picture emerges from his evidence must always be kept in mind in weighing up the evidence. In certain areas his evidence is clearly rejected. The court's clear finding rejects his evidence that: · he had not asked to see a copy of Mr Khin's draft e-mail prepared during the morning of 10 February 2003; · that it was not until discovery that he had ever seen that e-mail or the draft announcement prepared by Mr Khin and Mr Jeyaraj. 80 These were important pieces of evidence. The significance of the unreliability of the evidence given by Mr Randall on these matters points up the need for very great care in assessing other evidence given by him. 81 There are a number of other examples of the unreliability of particular evidence given by Mr Randall. One only of those matters was Mr Randall's version of the boardroom meeting of 10 February 2003 where he asserts that he said to Mr Khin "You may have been aware of [particular information from the US] in part, but you did not report it to me." Mr Randall's contention before this court that it had not been his intent in this piece of evidence, to make the point that Mr Khin may have had information but Mr Randall did not have any information, is rejected. 82 As the judgment will make plain his further evidence as to his state of mind on certain matters in December 2002 and on some later dates is also rejected. One example is his evidence that he had not felt pressure before departing from Australia on 16 December 2002 believing that there were "no issues". 83 There is no doubt but that Mr Randall for obvious reasons feels extremely strongly about what he regards as the unconscionable conduct of Aristocrat in relation particularly to his dismissal. These high emotions no doubt play a considerable part probably in leading to a tendency, perhaps sometimes subliminal, to overstate the positives in his own case and to put a slant upon events which may assist the case of Aristocrat. It is a common experience of the courts to find that with the passage of time, witnesses and particularly litigants, will come to unconsciously believe that particular events were otherwise than are in fact proven by contemporaneous documents and reliable evidence given by other witnesses. This may have been a cause of some of the more unreliable evidence given by Mr Randall. The simple fact is that the events in issue cover a relatively small period in the life of his position as chief executive officer. And for an important part of the critical days from about 16 December 2002 he was very involved in the United States with the relocation of his family and no doubt can justifiably claim a substantial degree of disruption from daily routine in that regard. Mr Jeyaraj 84 Broadly speaking the degree to which and reasons for which certain of the evidence given by Mr Jeyaraj cannot be accepted as reliable is set out in the judgment. It is unnecessary to go further presently except perhaps to point out that there is a significance in paying close attention to the form of draft announcement prepared by both Mr Jeyaraj and Mr Khin on 9 February 2003 [later closely examined in the judgment]. The part played by Mr Jeyaraj in that exercise substantiates the proposition that both men were, for good reason, not prepared to go along with the formal announcement which had been prepared for release where it had referred to sections of information not having been available prior to the 7 February announcement and had referred to information only received on the Friday. They had not been content with the reference to information received on the Friday having been "inconsistent with information previously provided". Barring exceptional circumstances it is usually not possible to move away from a contemporaneous document. And even though this was not the subject of cross-examination of Mr Jeyaraj, it is an example of why it is that the court relies upon all of the evidence in reaching findings and here in assessing reliability. Mr Khin 85 Mr Khin is accepted by the court as having given reliable evidence. His evidence was consistent with contemporaneous documents. He had no difficulty in recalling the events which occurred. He had previously given evidence during the ASIC inquiry. His evidence before the court was consistent with that other evidence. On one occasion referred to below when he was particularly disturbed by what he regarded as a proposed ASX announcement which he saw as failing to state the truth, he took the significant precaution of preparing a draft e-mail to record where he stood on the issue. Although it was never sent it survived to see the light of day in the courtroom and bespeaks the reliability of the witness. He gave his evidence carefully and quietly. On an important issue as to whether or not the evidence given by Mr Khin or by Mr Randall should be accepted [the tearing up by Mr Randall of the draft e-mail prepared by Mr Khin] the evidence of Mr Khin is accepted as reliable and that of Mr Randall is rejected. Mr Newburg 86 Mr Newburg had some difficulty in recalling a number of the events which were put to him. In some areas he appeared confused, as for example when a conversation was put to him as having occurred where it was suggested that he had said to Mr Jeyaraj and Mr Khin that there was no need to worry about the December flash report for various reasons. He responded that this discussion would have taken place in the first part of December and not at the end of December. However as the evidence disclosed, the first of the two flash reports for December was sent on 23 December. Subject to some particular matters, his evidence can only be accepted where it is consistent with contemporaneous documents or corroborated by the evidence of another witness who may be taken as reliable. The findings make clear where his evidence is accepted. 87 His evidence is accepted as reliable in relation to the conversation which he had with Mr Randall of 7 February 2003 [referred to below] where he was told by Mr Randall that even if Aristocrat had made the profit numbers its share price would still have been crucified because it did not tell anyone how much it had depended upon South America. The findings otherwise make clear where on some matters his evidence is accepted. Evidence given by other witnesses 88 Evidence was given by a number of other witnesses, many of whom were not cross-examined. It has been unnecessary to chronicle that evidence but it has been taken into account where appropriate. Some of the evidence went to issues such as experiences in the gaming industry and knowledge of and dealings with Mr Randall. The evidence clearly establishes that Mr Randall had a strong record of encouragement of employees engaging in regular networking and for example participating in industry golf days where funds were donated to charities and similar. He had been a director of the Australian Gaming Council. 89 Other evidence adduced went to the relevant exchange rates as between the US and Australia at particular times and to matters such as costs of travel to and from the United States. Mr Jury had been the general manager, global communications, reporting to Mr Randall and gave evidence in relation to some of the material events which has been taken into account as necessary. His role had included managing communications with the media as well as internal communications. The judgment refers to his involvement in the preparation of the draft announcement in late December which was never ultimately released. Other evidence which he had given is taken into account in the findings, as for example where his evidence is held to be more reliable than that of Mr Randall in relation to a conversation which they had on 8 February 2003. 90 Other evidence was given relating to communications with the ASX, where for example in September 2002 Mr Greenslade was asked by the ASX to halt trading in Aristocrat's shares pending release of a particular announcement. Mr Carr-Gregg was the commercial manager of Aristocrat with duties including the preparation of drafts of the company's annual report and half yearly report. His evidence covered the steps taken leading to the preparation and then release of the 2002 annual report. 91 Other evidence dealt with conveyancing figures, relevant dates and matters concerning relocation costs and detail. 92 Mr Bush was the company secretary of all of the Australian companies in the group and a director of ATI. His evidence covered a number of matters including events which had taken place at board meetings and the extent of his responsibilities. His evidence included some detail with respect to the relocation arrangements and discussions. The judgment deals with the promissory note issue and communications. His evidence covers the drafting of the draft profit downgrade announcement in relation to which he had first [in his statement and in his sworn evidence before the ASIC inquiry] said that he could not recall whether he had drafted the original version or whether Mr Jury had drafted it. Under cross-examination he contended that it had been himself who had drafted the document. The matter is ultimately of small moment as it is obvious that he and Mr Jury were in close communication about the matter. His version of events was that Mr Jeyaraj had told him that the draft announcement was no longer required after Christmas Eve as "the Americas were confident they would meet their targets". He did have particular difficulty in answering questions relating to some disconformity as between his handwritten notes and what precisely had occurred at the board meeting on 17th February 2003 as compared to what had occurred at the later board meeting of 14 April 2003. It was put to him that the board had determined that the earlier minutes should be doctored and that the board minutes were doctored. It is unnecessary for present purposes to reach findings on these issues but it has to be said that Mr Bush clearly had had difficulties in recalling the events surrounding the drafting of announcement which was never released. The evidence of Mr Jury is accepted as the more reliable where inconsistent with that given by Mr Bush on this matter. The two men did work closely together. Clearly Mr Jeyaraj was also in close communication with each of them. It is not inconsistent with Mr Jury's evidence to find that the draft announcement was on Mr Bush's computer. It could easily have been on the computers of both gentlemen. Mr Jury gave evidence that he had deleted the draft announcement from his own computer system. November 2001 93 The market expectation (established independently of the defendant) of the defendant's performance during 2002 is determined to be as follows: · Revenue: $934 million · Profit Before Tax $257.9 million · Profit After Tax: $109 million [DR 3/12/03 p188] December 2001 94 The defendant commences litigation against International Gaming Technology [the "IGT litigation"]. February 2002 13 February 2002 95 The defendant's audit committee holds a meeting to discuss, inter alia, the report prepared by PriceWaterhouseCoopers ["PwC"] dated 11 February 2002. During that meeting, PwC acknowledge that approximately 56% of the group pre-tax result arose in the last month of the year, and substantial profit had been booked in December 2001. This is observed as a regular trend. 96 PwC also recommend that the defendant review its revenue recognition policies to reflect that some business now being done in South America, for example in Peru, had a higher risk profile than in the past. [Doc 37, Doc 38] Three or four months before June 2002 97 Mr Randall's evidence was not altogether consistent in terms of precisely when he first learned of various South American prospects. His evidence appears to be that some three or four months prior to June 2002, board approval was given to Mr Newburg to endeavour to access South American markets. Mr Newburg had stated that there were two zones in South America which operated basically as free trade zones within each other and that it was necessary to open up both markets. On the evidence of Mr Randall, presumably reflecting what he had been informed by Mr Newburg, the key to the southern market was Colombia. Mr Newburg wanted to open up that market. The key to the northern market was Brazil which would be a master dealer. [Transcript 124] April 2002 15 April 2002 98 The defendant holds a board meeting, during which reports are given by the plaintiff and the chief financial officer, Mr Jeyaraj, regarding the defendant's performance for the month of March 2002, the year to date results, and operational highlights. May 2002 99 Negotiations between Mr Carlos Quintero and ATI commence for the sale of 12,000 units and a master distributorship in Columbia (the "Columbia Transaction"). 100 Mr Randall acknowledged that from May 2002 his personal belief was that the market considered the United States of America to be "the growth engine" of Aristocrat. [Transcript 112] [cf the 13 August 2002 presentation to analysts referred to below] Extent of direct communications between Mr Randall and Mr Newburg 101 Mr Newburg in his statement [14, 15] gave evidence, which in this respect is accepted as reliable, that he talked to Mr Randall on average at least three times a week from the commencement of his employment, in the main on most Sunday afternoons by telephone. Apart from those weekly telephone calls he and Mr Randall spoke a few times during the course of the week. Over 90 percent of the time his telephone calls with Mr Randall included a discussion about whether or not the American subsidiary would make its profit forecasts. From at least mid 2002 in his conversations with Mr Randall in which the topic arose of whether or not the American subsidiary would make its profit forecasts, he invariably said to Mr Randall words to the effect "whether we make the numbers will depend on whether we get the South American deals". Mr Randall accepted under cross-examination that in many conversations which he had with Mr Newburg during the second half of 2002, Mr Newburg had said words to that effect. [Transcript 117] Chief executive report to the board - June 2002 102 Mr Randall in his June 2002 board reports [DX 611] provided preliminary financial results for May 2002 and in the course of providing other information included the following: "Visit to the USA A positive visit with many large deals close to finalisation. The larger the opportunity the more difficult it is to cross the line. South America in particular holds the key to our first half with large contracts in Brazil, Venezuela, Peru and Colombia." The Brazil 1 transaction takes the company over the 1st half-year market forecast line 103 Mr Randall's evidence [transcript 124] was that at this time "there was only one deal on the table and that was in Brazil". Apparently this transaction became known as the Brazil 1 deal. It was the securing of that Brazil 1 deal which essentially enabled the company to cross its line by way of market forecast for the first half of 2002: "Q. And is it your evidence that it was the securing of the Brazil 1 deal which did get the company across the line? A. And plus some, yes. Q. Well, without that deal the company would not have got across the line? A. Without that deal I am not sure if we would have just made market forecast for the first half or just missed it. It probably would have been within the range. I think we achieved something like 40 percent growth in the first half over the prior year. It was a very very good half." [Transcript 124] 5 August 2002 104 The defendant's audit committee holds a meeting to discuss, inter alia, the report prepared by PwC dated 1 August 2002. During that meeting, PwC acknowledge that, similarly to the previous half year result, profit after tax had risen by 32% over the previous year, and approximately 116% of the group pre-tax result arose in the last month of the reporting period. This is a continuing trend. 105 PwC also recommend that, due to the different risk profile in South America, procedures surrounding significant transactions in emerging markets should be strengthened. 6 August 2002 106 The plaintiff informs Mr Newburg of PwC's recommendations during the audit committee meeting on 5 August 2002 and delegates responsibility to Mr Newburg and Mr Rowan (the US financial controller) to implement those recommendations. 8 August 2002 107 Following negative market feedback, the plaintiff sends a memorandum to Mr Newburg regarding his overly optimistic comments made to analysts during the presentation on 22 May 2002. 12 August 2002 108 The defendant holds a board meeting, during which Mr Ducker acknowledges that the defendant's "current strong position reflects a new drive and vision brought to the company by Des following his appointment in 1998. The business has been refocussed, its strategies redrawn, its products and processes updated and its management team strengthened. Along the way, Des has delivered eight consecutive record periods of profit." 109 The plaintiff and Mr Jeyaraj present reports to the board regarding the defendant's performance for the month of July 2002, the year to date results, and operational highlights. 110 PwC also make a presentation to the board regarding the matters discussed at the audit committee meeting on 5 August 2002, with an emphasis on potential business risks in South America. 111 The plaintiff writes to Mr Newburg regarding various concerns regarding the US business, including the implementation of the recommendations by PwC during the audit committee meeting on 5 August 2002 and the board meeting on 12 August 2002. 13 August 2002 112 The plaintiff gives a presentation to market analysts regarding the defendant's performance during the first half of 2002. The financial information contained in that presentation was provided by the controller's department and written by the investment relations department. From those results, it appears that: · total revenue for the six months to 30 June 2002 is $439.4 million, an increase of $164 million over the equivalent period for 2001; · profit after tax for the six months to 30 June 2002 is $41.6 million, an increase of 32% over the equivalent period for 2001; and · the operations in the United States make a significant contribution to the group's half-year results. 113 The plaintiff also presents analysts with a lengthy explanation of the then current South American contracts. 114 During the presentation, the plaintiff says words to the effect of: "As we have indicated to the market we have been confident with the consensus forecast of $109 million for the full year net profit after tax, and we continue to be confident of meeting that." 14 August 2002 115 On 14 August 2002 Aristocrat made an announcement to the ASX correcting newspaper reports that the company had forecast a profit of $109 million after-tax for the 2002 year. The announcement made plain that the chief executive officer in announcing the results for the six months ended 30 June 2002, had in fact said that the company was comfortable with the market consensus of an after-tax profit of around $109 million for the full year and that the company was on track to meet the market's consensus. The announcement made plain that the company had not itself released a forecast of its 2002 results. [DX 64]. These were views which Mr Randall accepted he had held at the material time. [Transcript 120.25] Late August or September 2002 116 Mr Randall also gave evidence that he first became aware of the prospect of there being a Colombian contract in about late August/early September 2002-probably at a meeting in September 2002 with Mr Newburg. He did not believe that he was aware of the prospect of there being such a contract much earlier. [Transcript 121] [Statement 100] September 2002 117 Mr Jeyaraj gave evidence that the September 2002 board report [NRK20 to Mr Khin's statement] identified that revenue in America was below budget mainly due to lower platform sales. He was not concerned by this as lower sales leading up to and during September was consistent with the idiosyncrasies for this period. He also referred Mr Khin to the number of units built and forecasted by the US in the sales and operations report and he believed that the US had approximately 3000 units not counted for in its forecast. This amounted to approximately US$24million in revenues and US $10 million in profit before tax (US$6m in profit after tax). Mr Jeyaraj gave evidence that similarly, Europe had another 400 units not counted in its forecast, being approximately AUD$6million in revenue and AUD $2million in profit before tax (AUD$1.4million in profit after tax). These figures also excluded any South American factoring and there were other regions with smaller upside on the sales and operations report. His evidence was that he had understood from Mr Khin that this would be shown in the sensitivity report. 12 September 2002 118 The plaintiff participates in a leadership council meeting, during which his functions for the management of the defendant's Australian business, and the global functions based in Australia, are delegated to Mr Jowett and Mr Jeyaraj respectively. At that meeting, Mr Newburg presents very positive outlooks for both the North American and South American business. 119 Mr Jeyaraj gave evidence that the leadership team report for September 2002 [NRK 21 to Mr Khin's statement] recorded projected sales and operations sales in the Americas for October at 1,785 units, November at 2,000 units and December at 8,487 units. His evidence was that whilst the figures for September disclosed a reduced revenue margin and profit, particularly in the Americas, this was not unexpected or out of character. The overall sales projections were, on his evidence, consistent with forecasts and the idiosyncrasies which he had earlier described. 15 or 16 September 2002 16 September 2002 120 The plaintiff attends a presentation given by Mr Newburg to market analysts in Las Vegas. 121 During the presentation, Mr Newburg tells analysts that "meeting our forecast market share in North America will be challenging, however we are on track to achieve the goals as I outlined during the briefing in Sydney in May." 122 The plaintiff then tells analysts that "the company remains confident that it will be able to achieve the market consensus of $109 million for the 2002 year. The company's goal remains unchanged and is to achieve 20 percent market share by the end of 2005. Mr Newburg's goal is more aggressive, however that is his personal goal, not Aristocrat's." 123 The defendant also holds a board meeting in Las Vegas. The board: · approves the delegation of the plaintiff's management functions for the Australian business to Mr Jeyaraj and Mr Jowett; · note the reports presented by the plaintiff and Mr Jeyaraj regarding the defendant's performance for the month of August 2002, the year to date results, and operational highlights; and · commend Mr Newburg for his presentation on the US and South American business plan for 2003, which is consistent with Mr Newburg's previous presentations to market analysts. 124 During the course of the ATI meeting on 16 September 2002 a conversation took place in front of many persons. On the version of Mr Newburg [45] which is accepted as reliable on this issue, the following was said: Mr Randall: 'You will never get these numbers. It looks very risky to me'. Mr Newburg: 'It all depends on South America. If we get the South American deals we will be okay. If we don't get them we will not achieve the numbers.' Mr Randall: 'Are these real deals or ones you hope to be able to get?' Mr Newburg: 'They are deals we are working on. The second Brazil deal is contingent on Sydney fixing the shipping problems on the first Brazil deal. In relation to Colombia, Carlos Quintero is here. You will meet him and I expect preliminary approval from the Compliance Committee within the next few days. You will see all of these customers at the gaming show in the next few days.' Securing Brazil 2 and Columbia? 125 Mr Randall's evidence is that he asked whether Mr Newburg would get the numbers and was doing everything necessary to make it happen and was told that it depended upon South America. His further evidence was that he did ask whether these were real deals or ones which Mr Newburg was hoping to get and that Mr Newburg said that they were real deals that they were working on. Under cross-examination [Transcript 118] Mr Randall accepted that he had understood Mr Newburg to be saying that if the Americans were to get the numbers it was necessary for them to secure both the Brazil 2 deal and the Colombian deal to achieve the forecasts being put forward by Mr Newburg. However according to Mr Randall's evidence, at the time [transcript 119.20], Mr Randall did not believe that Mr Newburg needed to get both the deals to make the company's numbers. He believed that it was only necessary to procure one of the contracts to make the numbers. [Transcript 158.4, 158.10, 167.34] 19 September 2002 126 An article appears in the Sydney Morning Herald misquoting the plaintiff from the presentation on 16 September 2002. The plaintiff receives a telephone call from Ms Kailofer regarding an inquiry from the ASX as to the accuracy of the article. The ASX demand an immediate response or will require an immediate trading halt. The defendant releases an announcement to the market correcting the article. October 2002 127 Mr Khin confirms the significant sales forecasts with US management, and the need for manufacture of large number of units. 15 October 2002 128 Mr Khin gives a presentation to the plaintiff and Mr Jeyaraj concerning the current full year outlook. Based on his discussions with US management, Mr Khin reports that the current outlook is a profit after tax of $100.9 million, with possible upside of up to $39.7 million and possible downside of $42.1 million. 129 Mr Jeyaraj's evidence was that the outlook report for October 2002 identified that revenue for America was down $17.5 million and that revenue had "slipped" into November and December. He made the point that the term "slipped" meant that sales had been delayed or put off until the following month. It did not mean, however, that the sales were lost. 130 In accordance with Mr Jeyaraj's practice, upon receiving information relating to reduced sales he made enquiries of American management to ascertain the reason for the problems. His evidence was that after receiving the outlook report for October 2002, he had a conversation with Mr Newburg in words to the following effect: Mr Jeyaraj: "Mark, what is the cause of the revenue reduction, is it slippage or something else?" Mr Newburg: "Lionel, it's slippage. Some sales weren't made this month but they will be made next month. We will make up the sales in November. I have always made my numbers, so why the insult?" 131 Mr Newburg accepted in the witness box that he had made this statement. [Transcript 434 .33-44] 132 Mr Randall gave evidence that he had commented to Mr Jeyaraj that it was impossible to do anything meaningful in terms of an outlook discussion when one had a range of $80 million in the outlook. [3 December 2003 statement [151]]. Mid October 2002 133 Mr Jeyaraj and Mr Khin provide the plaintiff with an update of the defendant's financial forecast for the remainder of the year as at 30 September 2002. According to that report, the defendant's forecasted figures are as follows: · revenue: $992.2 million · profit before tax: $154.80 million · profit after tax: $101 million 134 After receiving that report, the plaintiff [statement 42(b)] has a conversation with Mr Jeyaraj regarding the forecast, and is told that: · Japan didn't perform well but has plans to make it up; · there was some abnormal head office accounting that will get corrected, and that will improve the profit after tax number back to about $110 million; · several of the big deals in the US are not included in the forecast, because they are being tracked separately; and · the defendant is "in great shape". 135 On the evidence given by Mr Jeyaraj his conversation with Mr Randall concerning the October outlook report was to the following effect: Mr Jeyaraj: "Des, the figures are in for October. The figures are down for America and Japan. America is due to margin slippage into November and December. Japan relates to the take up of a new game." Mr Randall: "Is there anything to worry about?" Mr Jeyaraj: "No. I have spoken to Mark (Newburg) and he assures me that the sales will be made. Japan says that sales will pick up. I have spoken to Nick (Khin) and confirmed that the US is using the gap in the S&OP reports which show the expectation of significant number of units to be produced for the last quarter. The US has taken a hedge on the forecast submitted but has ordered more units to be built by the factory. The gap is being maintained for about 3000 units. We should also have good amount of over-absorption arising and added back to margins when the manufactured units are shipped. I believe that the numbers will show you the upside in North America for a possible $10million to bottom line which has been committed in the S&OP. The sensitivity analysis will give you possible ranges, when prepared later this month by Nick." 136 Mr Jeyaraj gave evidence that the information from America contained in the October outlook report did not signal any critical issues. Additionally, the explanation (margin slippage) was plausible and within business expectations. In his experience, margin slippage was a regular problem for Aristocrat. 137 This information is then reported to the board by the plaintiff and Mr Jeyaraj in the October board report and chief executive officer report, along with the defendant's performance for the month of September, the year to date results, and operational highlights. 28 October 2002 138 The plaintiff provides Mr Newburg with a copy of a presentation given to the market concerning risk management and revenue recognition for deals in South America. The presentation includes details of the requirements for revenue recognition of each South American transaction. 29 October 2002 139 The sensitivity analysis report prepared by Mr Khin [PX 4/1183] was apparently given to Mr Randall on 29 October 2002. This analysis gave an outlook for profit after tax for the year at $100.9 million. It refers to other opportunities totalling $70 million and major risks of $33 million. Therefore a total range of profit after tax of $100 million around the profit after tax figure of $100.9 million is set out by Mr Khin. November 2002 140 Mr Khin gave evidence [statement 50] that by early November 2002 it was plain to him that ATI's business in North America was missing its profit forecasts and reporting a large fall in its gross margins. This had become apparent to him through the actual results compared to forecasts being submitted to his team on a monthly basis from America. 141 Mr Jeyaraj also gave evidence of his concern at these matters and at his concern of margin slippage into December 2002. His evidence [Statement 59] was that he was informed by Mr Newburg and Mr Rowan that the reason for the reduced revenue was that it was a "one off expense" and that there was no reason to be concerned. His own opinion was expressed as follows: "In addition, the S&OP report, which forms part of the leadership team reports for October 2002 (NRK31), shows total projected US sales for November and December to be 2,111 and 9,900 respectively. These figures were consistent with the comments made by Mr Newburg that " contracts are being entered into for the delivery of machines at the end of the year", which has always been historically busy for Aristocrat . Due to the inclusion of the projected sales in the S&OP process, the revenue, although delayed, was expected to be forthcoming through sales in December. This would have resulted in what is called "over absorption" and a margin write back that would have addressed the margin slippage (and margin reduction) identified. In all regards, the explanations provided by the Americas and the documentation were consistent with Aristocrat's outlook and historical performance." Early November 2002 142 Mr Jeyaraj and Mr Khin provide the plaintiff with an update of the defendant's full year financial forecast as at 30 October 2002. According to that report, the defendant's forecasted figures are as follows: · revenue: $1,044.5 million · profit before tax: $173.4 million · profit after tax: $112 million 143 The forecasted result in respect of revenue and profit exceed the market expectation. However, the actual results for the US business in October show revenue miss and margin erosion. The US explain the revenue miss as delay in mark VI approval, and are confident to make it up in November and December. Despite the miss in October, the US increases its forecast for the full year. 8 November 2002 144 A report on Columbia and Mr Quintero is submitted by US management to the defendant's regulatory compliance committee for consideration. The report contains statements by independent investigators to the effect that: · Mr Quintero had been the subject of two criminal investigations in Columbia concerning the illegal exercise of monopolistic activities; · the investigators were suspicious of other activities that Mr Quintero was involved with, due to his telephone contact with areas known for drug trafficking and money laundering; · through local sources, the investigators were advised that Mr Quintero's professional reputation and credibility was controversial; and · there are enough red flags to abstain from doing business with Mr Quintero. 145 The committee stands over the decision regarding the Columbia deal to a further meeting. Neither the board nor Australian management are advised of the derogatory findings. 11 - 13 November 2002 146 Mr Jeyaraj raises concerns with US management about significant falls in the US forecasts. Mr Jeyaraj is advised by the US that the sales have slipped into November and December, but they expect to meet their forecasts. 18 November 2002 147 The defendant's compensation committee holds a meeting during which the recommendations set out in Mr Gibb's memorandum dated 12 November 2002 are approved. November 2002 board report 148 Mr Khin had drafted the financial section of the CEO's board report which appears at PX 1565. [Transcript 268.31]. The financial section includes the following: "Preliminary – October Results · We have received the October flash results from the countries. Preliminary revenue for the month of October is $65m. This is $26.2m lower than the budget and $13.4m higher than prior year. Most of the budget shortfall ($17m) is in the Americas where revenue has slipped into November and December. Australia is $4.5m short of the budget target and this is once again due to the delays we are experiencing in obtaining game approvals. · Profit Before Tax (PBT) for the month was $700k, which is $17.4m lower than budget but $7.2m higher than prior year. Majority of the shortfall in profit is related to the October revenue miss discussed above. Gross margins in the Americas were also lower than budget primarily as a result of additional one-off air freight & patent costs incurred in the Americas. Preliminary Year To Date Results · YTD Revenue stands at $678m, this is below budget by $43.5m and above prior year by $154.7m. · Profit/(loss) before tax for the YTD is $50m, this is below budget by $30.1m and above prior year by $10m. In order to achieve the Board revenue budget of $907m we will need to achieve revenues of $229m in the next 2 months. Although this will be very challenging on all fronts (manufacturing, sales and administration) I am confident that we will be able to meet both this and the $121m full year PBT target." [PX 1565] 149 At the time Mr Khin accepted the explanation given to him by the financial controllers in America that revenue had slipped which explanation he accepted having no basis for supposing it to be inaccurate [Transcript 269]. 150 Mr Jeyaraj gave evidence that he had participated in a telephone conversation with Mr Newburg during which he asked what was the problem with unit sales and what was going on. The answer was: "There is a problem with the file. It's a mistake. We are trying to work it out. Things are on track. There has been margin slippage into November and December, some sales didn't go through. We're also working on other deals." 151 During the monthly board meeting, the plaintiff and Mr Jeyaraj inform the board that, inter alia, the US would have to close the Brazil or Columbia deal in South America to make the market expectation, but that Mr Newburg remains confident that this could be achieved. The units for America to achieve their revenue forecasts have been ordered through the sales and operations process, and have been built, which relates to the significant increase in holding inventory of approximately $30 million. 26 November 2002 [Flash result for November] 152 A Flash result for November 2003 was sent by Mr Khin to Mr Randall [PX 5/1594]. The report reads as follows: " Revenue: Actual $94.1m v LMF $111.9m v Plan $108.8m v Prior $74.2m Both Australia and the Americas have reported a shortfall in revenue against the forecast for the month of November. The revenue shortfall in Australia ($4.2m) is a result of continued delays in product approvals in particular Queensland Cashman and Jackpot Carnival. Approved for Jackpot deluxe has slipped into 2003 adding greater risk to the overall 2002 Australia forecast. The Americas revenue shortfall against forecast is $12.5m and is due to unit sales of $11m slipping into December for a variety of reasons . The remainder of the shortfall is in Systems revenue which has been pushed out to December. Asia Pacific flash is down on forecast by $2.5m and is largely due to not yet receiving the forecasted and anticipated PAGCOR order. The order needs to be received in the next couple of weeks if it is to be included in our 2002 results. All other countries have reported revenue to be at forecasted levels for the month of November. Gross Margin Actual $45m v LMF $55.3m v Plan $56.8m v Prior $32.4m Almost all of the Gross Margin shortfall is due to the revenue items discussed above. The overall GM% is 1.6 points below forecast and is mainly driven by the US due to higher freight charges (air) and no-charge conversions. Profit Before Tax: Actual $14.7m v LMF $24.5m v Plan $32.9m v Prior $12.2m All of the PBT shortfall is due to the miss in Gross margin. SMG&A expenses are flat on forecast. Given the flash results above our November YTD revenues would be $767.7m with an associated PBT of $63.2m . In order to meet market expectation, we would need to achieve a PBT in the month of December of $102m (in revenue terms that would represent a minimum December revenue number in the range of $277-$280m)." [5/1594] 153 Mr Khin gave evidence that the 26 November 2002 Flash Report for the month ended November 2002 indicated that there was a significant shortfall in revenue, gross margin and profit before tax attributable to Australia and the Americas [Statement 55]. 154 Mr Khin gave evidence that he was very concerned at the time as he knew that December had to be a "very big month" in order for Aristocrat to meet expectations. [Transcript 264.40] He had however been informed of the fact that December was going to be a very very big month both in revenue and profitability from reporting countries feeding information into the controller's officers [Transcript 267.35]. This was to be his first December with the company [Transcript 268.4]. 155 Mr Jeyaraj on the other hand gave evidence that: · he saw a copy of the November flash report late in November; · the report recorded a short fall in revenue in Australia and America for November; · the short fall for America was $12.5 million, which was due to unit sales of $11 million slipping into December for "a variety of reasons". 156 It was his evidence that after he had checked the sales and operations report, he believed that there was no cause for alarm as ATI did not reduce its production requirements. 157 The precise evidence given on this topic by Mr Jeyaraj [statement 41] was that after he received the November flash report, he had a telephone conversation with Mr Newburg during which words to the following effect were said: Mr Jeyaraj: "Mark, what is the problem with the figures from America?" Mr Newburg: "Lionel, there must be an error in the November gross margin number . The American total gross margin is 17% but if you exclude the manufacturing under absorption cost, it would be 27.7%. We will make the sales in December. We have big sales to go in the US, Harrahs, Titan and others. There are two deals in South America that we will get also. As you know, we are well on our way to getting these factored in as well. We will make the numbers." 158 Further that at about that time, Mr Jeyaraj [statement 42] had a conversation with Mr Randall in words to the following effect: Mr Jeyaraj: "Des, as you have probably seen, the figures for November are in. The US is down on the figures." Mr Randall: "Is there a problem with the numbers?" Mr Jeyaraj: "The US is confident that they will make up unit sales in December. There are a number of large orders from Harrahs and Titan and others. The S&OP reports showed a similar level of unit sales. The two big deals in South America are well on the way being factored or Guarantee obtained. They are working to factor these deals in. The problem is that we are still not getting assistance from the US in understanding the margin problem. It would be good if you could follow this up with Mark." Mr Randall: "Okay." 159 Mr Jeyaraj gave evidence [Statement 62] that the revenue shortfall in the Americas was due to slippage into December and not lost revenue and that he had expected that the revenue would be recovered and "booked" in December through expected sales. On his evidence [statement 23]: "One reason for reduced sales in September and increased sales in December is that in September and October, each country or region prepares its financial plan for the following year. That plan is then submitted for approval by the Board in late November. In preparing the plan, the countries and regions often hold back or do not "book in" proposed sales. This lowers expectations for the following financial year. As sales are lower at the relevant time, the plan is also less onerous. Once the plan has been submitted and approved, sales are generally booked in for the last month of the year to ensure the year's targets are achieved as closely as possible." 160 The evidence was that during this month following complaints by Mr Khin and Mr Jeyaraj to the plaintiff that they are frustrated with US management because they cannot get from them specific reasons for the margin slippage, Mr Randall subsequently telephones Mr Newburg regarding the margin slippage and is assured that the margins will come back very quickly, that the US business is not discounting, and that the causes are "one off". 161 The plaintiff then informs Mr Bush that there had been some revenue and margin slippage occurring in the American business but that Mr Newburg is confident of recovering it. November 2002 team leadership report [PX 6/1841] 162 This team leadership report had been prepared by Mr Khin who had inter alia made the points: "As to revenue · Revenue shortfall against Plan of $17.7 million during the month is due to the Americas (-$22.7 million) and Australia (-$5.7 million), partly offset by Japan (+$9.5 million). · Revenue in the Americas during the month was below plan due to lower platforms, Games Systems and recurring Revenue sales. As to Gross Profit percentage · Group and gross profits percentage was (- 4.8) points down on Plan for November due to lower EGM Sales and Systems margins in the Americas. As to Gross Margin · Despite the lower margin percentage's the new forecasted full-year gross margin of $499.8 million is $1.4 million higher than last month forecast due to the above increase in revenue." 163 Mr Khin was cross-examined as to paragraph 62 of his 16 October 2003 statement where he had referred to his having noted "the Americas was again significantly underperforming in relation to revenue, gross profit and gross margin at this time". The cross-examination includes: "Q. The report contains a lot of information but you have offered one comment only by reference only to the Americas significantly under performing, whereas you have in the report referred to other significant under performances or at least another significant under performance, haven't you? A. Yes, I have. Q. Why did you select one item from the report where significant under performance was not used as an expression and assert the matters you have set out in paragraph 62? A. Well the miss in revenue and margins in the Americas is much more significant than a miss in revenue and margins for New Zealand because the Americas is a much bigger country for Aristocrat than New Zealand is. [Transcript 286-287] 164 In relation to the same report Mr Khin referred particularly to 6/1847 where one finds forecasts against the last month forecast to make the point that when one looks at the Americas for example as opposed to New Zealand, a very different picture emerged: "…you look at the box gross margin, which is the second box on the left hand side, the column forecast 2002 is the new forecast that the American organisation has submitted. The column next to that, that has the initials LMF which stands for last month forecast. If you look at the Americas row, the next in the new forecasts, the gross margin is 183.8 million dollars. In last month's forecast the gross margin is 194.6 million dollars so the new forecast has come down. The box underneath gross margin shows the gross margin percentage as a percentage of revenue. If you look at the Americas line the Americas is now forecasting a gross margin percentage of 41.8 percent and in the last month forecast they were forecasting a gross margin percentage of 43.7 percent." [Transcript 288] 28 November 2002 - Mr Khin e-mail to Mr Newburg [PX 1602] 165 This e-mail was sent in order to respond to Mr Newburg who had asked what was needed to get over the line essentially in order to meet market expectation. [Transcript 271] November 2002-March 2003 166 The evidence establishes that there were no board meetings between the meeting of 18 November 2002 and the meeting of 17 February 2003 [Statement Mr Bush 6 November 2003 at [9]] December 2002 3 December 2002 167 The plaintiff releases an announcement to all staff of the defendant regarding the delegation of authority to Mr Jeyaraj and Mr Jowett. 168 Mr Khin had in about early December received a document entitled 'Quarterly Outlook November 2002 for the Americas' [NRK 39]. He noted from reading the document at the time that ATI's actual gross margin percentage for November 2002 had fallen to 15.2 per cent against a forecast of 42.7 per cent which he regarded as another very significant 'miss' of the forecasts. [Statement 61]. Upon receipt of the same document Mr Jeyaraj gave evidence that he had telephoned Mr Newburg and Mr Rowan asking what was the cause of the reduction in margin to be informed that it was likely to be a one off problem which would not affect the four year's performance and that the US would have to investigate and respond to Mr Khin [Statement 64]. 6 December 2002 169 The plaintiff provides a report to the board regarding the defendant's performance for the month of November 2002, the year to date results, and operational highlights. 170 Mr Jeyaraj gave evidence that during December 2002 he had said to Mr Randall that he had been assured by the US that they had sufficient sales for December to meet forecast [statement 43]. 8 - 10 December 2002 171 The controller's department raises concerns with US management about significant falls in the US margins for November 2002. No substantive response is received from the US. 172 On 8 December 2002, Mr Khin sent an e-mail to Ms Baker and Mr Rowan [NRK 46] seeking information in relation to what Mr Newburg had indicated to Mr Jeyaraj "may be" an error in the November gross margin number and, if there was no such error, as to what was the explanation for the low margins. 9 December 2002 173 On 9 December 2002 Mr Khin received an e-mail [PX 6/1796] from Ms Baker of ATI enclosing forecasts and detail. In the covering e-mail she stated that the margin for November was unusually low and that they had someone analysing the detail to provide "an explanation for the aberration". Attached to the e-mail was ATI's revenue summary, the bottom line of which showed the reduction in margins which had occurred in October (27%) and November (17%). 174 In the 9 December 2002 e-mail from Ms Baker to Mr Khin [NRK 44] enclosing the CEO report month and quarter shortfall, Ms Baker referred to the margin compression in the forecast, the fact that ATI was continuing to evaluate the margins in the December sales final and carrying out a full analysis of November which she described as "an aberration". 175 By his e-mail [of the same day] to Ms Baker, Mr Khin said: "I need to understand what is causing the margin erosion . North American Games GM forecast is coming in at 32.7 percent-extremely low especially when compared to last month's forecast which was in the mid 40's. This has basically fallen straight through to the bottom line and the only way it appears we can cover it is through additional South American recognition or sales . We have seen the last two months very low North American Games margins." [PX 6/1803] 176 Mr Khin gave evidence that he received a reply indicating that the Americans were working on some kind of analysis. Ms Baker informed Mr Khin by e-mail of 10 December 2002 [NRK 47] that ATI was still working on the margin analysis which should probably be available at the end of the following day stating "we will let you know what the heck we find-believe me, we're very frustrated with the results". He also had conversations with Ms Baker as well as with the chief financial officer of the American organisation. Prompted by his evidence given at the ASIC examination he recalled that the detail of the response was to the effect that these were one-off charges to costs of revenue [Transcript 292]. He had also been told: "we were going to have a catch up in December; December was going to be a big month for the American organisation, both in revenue and margin." 177 His cross-examination continued: "Q. "We" being Aristocrat and those officers of Aristocrat, including yourself, to whom we have previously referred? A. Yes. Q. And then you go on to say, "I think the other thing I would like to point out on that is, you know, these margin numbers are on very low volume in the American organization, low revenue numbers"? A. That's correct. Q. So what you are saying is, no-one should get too excited about variances in the gross profit margins because you were selling with relatively low revenue. That is what you are saying, isn't it? A. I am indicating net gross margin percentages being distorted by the low revenue volume. Q. So what you were inviting ASIC to accept was that no-one should be too worried about gross margin forecasts coming in at the relatively low figure of 32.7 percent, for the reason that the margin numbers were applicable to relatively low volume revenue? A. I didn't say nobody should be worried. Q. But that is the message you were trying to convey, wasn't it? A. I was just saying that the low margin there was low margin on low revenue. [Transcript 293] 10 December 2002 178 Mr Rowan responded to the e-mail sent by Mr Khin on 8 December 2002 by e-mail of 10 December 2002 [NRK 46] stating that there had been several items of unusual non standard costs of sales and that follow-up work was being done and that the information would be communicated as soon as it was obtained in terms of an adjustment or an explanation. 179 Mr Jeyaraj [statement 67] gave evidence of a conversation which he had had in about early December 2002 with the United States to the following effect: Mr Jeyaraj: "Mark, what is the problem with the figures in America?" Mr Newburg: "There may be an error in the November gross margin number. The Americas total gross margin is 17% but if you exclude the manufacturing under-absorption costs it would be 27.7%." 180 On 10 December 2002, on the evidence of Mr Khin, he told Mr Jeyaraj that there was a significant risk of Aristocrat not reaching its profit target of $109 million for the year-end due to the performance in North America and that he had tried to get an explanation from the US office but that nothing had been provided yet. Mr Jeyaraj asked him to draft an e-mail to send to ATI which was done and sent from the computer of Mr Jeyaraj [NRK 48]. 181 The 10 December 2002 e-mail [which had been sent after an e-mail from Mr Khin to Ms Baker and others seeking their commentary on the attached CEO report] - had been sent with a view of keeping pressure on the American organisation to make sure that they came through with what they had committed themselves to [Transcript 295 - 296]. 182 The 10 December 2002 joint e-mail was in the following terms: "Mark, I have been through the latest rollup for the group. Not good news. The gross margin fallout in the Americas have had a very real impact to the whole group result . The miss in the Americas gross margin for the month of November is over USD$6m and there is no catch-up planned in December. Your GM% for the month of November is below 17%!!! And Dec is forecasted at 46.8% which I cannot understand and in addition Oct GM was 29.7%. On our call you confirmed that there was no discounting. What is driving this reduction in margins? Given the above, in order for the group to meet expectation we now need: - Both Colombia and Brazil#2 to be recognised this month - We need Braxil#1 and Colombia factored up to 18 months - We absolutely cannot miss the North America unit sales forecasted for December (participation units was down) Mark, I also need to get to the bottom of the gross margin issue . Nick is working with Rons team on it, but I cannot understand how we can get this last minute surprise to the bottom line . I need to update Des so please give me a call in the morning. Please have Ron contact Nick. Lionel" [6/1831] 183 This was an important e-mail because it made the point that the gross margin fallout in the Americas had had a very real impact on the whole group result, there being no catch up planned in December. Urgency was indicated in the request for information as to what was driving the reduction in margins. Urgency was demonstrated in the sentence "We absolutely cannot miss the North America unit sales forecasted for December" as well as in the sentence that Mr Jeyaraj also needed to get to the bottom of the gross margin issue. 184 Mr Jeyaraj [statement 68] gave evidence that after he had sent the e-mail to Mr Newburg he had a telephone conversation in which Mr Newburg said words to effect that he had never failed to deliver on sales in his whole career and that it was unnecessary to worry about the matter: "We will deliver the sales". 185 The cross-examination of Mr Khin on this topic took him to his evidence given in the ASIC examination which is repeated hereunder together with what he accepted before this court: "Q. … [T]here's a statement in their "there is no catch-up planned in December". What does that mean? A. … what that means is basically the margins that we'd lost in October and November in terms of the differential between what we were expecting as a standard margin on what they came in at, we weren't expecting to catch that particular piece up in December, but they were expecting a big month in December revenue at normal margins." [ Mr Khin accepted in cross-examination that this recorded a correct statement of his understanding at the time ] [Transcript 297] "Q … I noticed that in the last sentence of that paragraph there's, " On our call you confirmed that there was no discounting"…. That's consistent with what you said? A. I can tell you they were swearing back and blue there was no discounting. Obviously there was… " [ Mr Khin accepted under cross-examination that this had been a correct statement and that he believed that it was possibly early 2003 when he had become aware that there had been discounting. He accepted that discounting was a matter which itself would affect adversely a gross margin being part of the cost of sales and further gave evidence that Aristocrat had pretty much been told throughout 2002 that there had been no discounting ] [Transcript 297-298] "Q. .. Then the next paragraph goes on to say: … in order for the group to meet expectations we now need: - Both Colombia and Brazil 2 to be recognised this month.. Can you explain that for us? A. [ Mr Jeyaraj ]…always wanted to make sure that we were well covered in terms of meeting the market expectation, so if they had been able to achieve these things, we would have been reporting a result well over market expectation, I would imagine. There would be a bit of a buffer in there. The Colombia one we already talked about, we need Colombia recognise, obviously. Brazil 2 was another deal that we were talking to Neuevastar about, about the second deal. Neuevastar was a transaction that we did in June 2002. We were talking to them about doing possibly a second transaction, but that, of course, didn't eventuate We were also talking to the American organisation about factoring the current receivables that we had for Brazil No 1, which is the June transaction, and also Corp Meier. We were looking at possibly factoring Corp Meier. They were fairly confident they would be able to do that and unfortunately, once again, they couldn't deliver on that." [ The cross-examination of Mr Khin included that his own understanding had been that Mr Jeyaraj always wanted to make certain that Aristocrat were well covered in terms of meeting the margin expectation and generally accepting as correct his answers to the ASIC investigators. He further accepted under cross-examination that his understanding of Mr Jeyaraj's e-mail was that he was not talking only about profit expectation but was also talking about cash flow ] [Transcript 298] 11 December 2002 186 Mr Newburg responded to Mr Jeyaraj's e-mail by an e-mail of 11 December 2002 [copied to Mr Khin] [NRK 49], stating that the issues were being worked on every day and that there should be information on the margin in the next one or two days. Mr Jeyaraj's evidence [Statement 69] in relation to this response was: "The reply that I received from Mr Newburg was consistent with the discussions that had taken place. The response received from Mr Newburg, an email dated 11 December 2002 (which is exhibited to Mr Newburg's statement as document MRN29) was to me an answer to the problems identified in the exchange of emails as it identified that a letter of guarantee was expected to be provided by Bank Santanda in relation to the Columbia transaction. Consistent with the 12 December email, on about 12 December 2002 Mr Newburg said to me words to the effect that "I have concluded the Columbia deal". " 187 At transcript 164 - 168 Mr Randall accepted that at the time he had sent his e-mail [at 1.45pm on 11 December 2002 to Mr Newburg which was copied to Mr Jeyaraj and appears at DX256] he had read the e-mails that preceded in the stream of e-mails to be found at DX 257-256. 12 December 2002 188 The contract in relation to the Columbia Transaction is executed and US management advise Australian management that everything is in order for the transaction to proceed, including insurances in place, deposits paid, and bank guarantees on track, so that revenue could be recognised in the 2002 accounts. 189 Possibly on 12 December 2002 Mr Khin prepared a sensitivity analysis document which he gave to Mr Randall [PX 6/1889]. His cross-examination on this document included his acceptance of the propositions that: · its starting point is recorded at the top of the page, "starting outlook, starting point 11 plus 1"? · that meant 11 months under the belt actual and one month to go? · the country forecast at that stage for revenue was 1 billion and 67.4? · that number was consolidation of the country forecasts · the information was the result of his calculating from various financial inputs which the controller's department were receiving? · having done so, his starting point was a revenue of a little over a billion dollars for the year, is that right? · that meant a billion dollars for the full year. [That is to say, "Bearing in mind the 11 months we have under our belt at the minute and taking into account our forecasts for the remainder of this very good month of December, this is what we expect - a little over a billion dollars for the year". Is that the way we read it?] · that produced, in turn, from as a starting point, a profit after tax of 106 and a half million dollars? · as with the previous types of analysis, he then proceed to add on to it those opportunities and risks which he recorded on the document? 190 His further evidence included: "Q. Your first subtotal of the opportunities collects together what you have described as total opportunities, medium to high probabilities, see that? A. Yes. Q. And that reflects your or the Controller's Department's assessment that that group of opportunities which you were adding on to the outward starting point, were medium probabilities or even perhaps high probabilities? A. That's correct. Q. And then you go on to deal with lesser probabilities, is that right? And you go on to deal with risks? A. No, I deal with risks after that and then the risk opportunities. Q. So you have broken up these other opportunities into medium to high probabilities? A. Yes. Q. And less likely ones? A. That's correct. Q. But what this document indicates, I suggest to you, is that when you take the starting outlook and the aggregation of those opportunities which you expressed as being of medium to high probability, you achieve, as the middle of the page records, a gross - I am sorry - a profit after tax figure of 108.8 million dollars? A. Yes. Q. Nearly 109 million dollars? A. Rounded up, yes. Q. Pretty spot on for the market expectation? A. Yes." [Transcript 300-301] 191 Under cross-examination [transcript 299 et seq] Mr Khin explained that the same document included under the heading "Major Risks in the Outlook", two items which added together would have a substantial impact on profit after tax. Both items related to "Americas". The first item [accounting for an impact on profit after tax of $17.1 million], referred to "Columbia revenue recognition" and gave a description "medium risk". The second item accounting for an impact on profit after tax of $17.2 million, referred to "Brazil revenue recognition" and gave a description "high risk". Hence if these major risks were realised the estimated profit after tax of $108.8 million would be reduced by $34.4 million. 192 On 12 December 2002 Mr Khin handed to Mr Randall the 'Sensitivity Analysis' [NRK 50]. Mr Jeyaraj's evidence in relation to this sensitivity analysis was that it identified a profit after tax as $106.5 million. His further evidence [statement 70] was: "This was, in all the circumstances, consistent with expectations prior to the Columbian contract being executed. After the entry into the contract and bank guarantee, I expected that the $106.5 million profit after tax amount would be superseded by the inclusion of revenues from the Columbian contract. Shortly after the Columbian contract was executed, I had a telephone conversation with Mr Newburg in words to the following effect: Newburg: "Lionel, I delivered. I told you I would deliver. You don't know what you are talking about. Stop sending me emails and copying them to Des. You and Nick should know better. I told you I would make the numbers and the good news is that we also have shipments for Harrahs and Titan and we will deliver those shipments in North America. I will deliver on the North American results and the margin issue will be addressed through manufacturing over absorption based on units shipped." 193 In about mid December Mr Khin had handed a copy of the Leadership Team Reports for November 2002 to Mr Randall's secretary [NRK 40]. As he had noted in the Monthly Commentary Sheet, the Americas were significantly again underperforming in relation to revenue, gross profit and gross margin at that time [Statement 62]. Mr Jeyaraj's evidence [statement 65] in this regard was as follows: "The leadership team report (NRK40), shows that America expected to sell 9,200 units in December 2002. It also shows that production of units had been set at 6,000 for December 2002. The large demand for sales in December 2002 as identified in the leadership team report was consistent with the large demand experienced by Aristocrat in December 2001, and to a lesser degree in June 2002. I recall conversations with Mr Newburg during his period in terms set out … above." 194 In about mid December 2002, Mr Jeyaraj and Mr Khin provide the plaintiff with an update of the defendant's financial forecast for the remainder of the year. According to that report, as at 30 November 2002 the defendant's forecasted figures are as follows: · Revenue: $1,067.4 million · Profit Before Tax: $165.1 million · Profit After Tax: $106.5 million 195 During December, Mr Jeyaraj tells the plaintiff that the US business has more than sufficient sales booked in for December to meet their forecast, and has increased their unit forecast through the sales and operations planning process. In addition, Mr Newburg is confident of closing the Columbian deal before the end of the year. 196 On 13 December 2002 Mr Khin sent an e-mail to ATI identifying a number of matters which were sought by the Sydney office, including an explanation and analysis on the ATI November gross margin [NRK 55]. 17 December 2002 197 The shipment of machines to Columbia from Sydney, Las Vegas and direct from suppliers commences. 198 No response had been received by Mr Khin to his 13 December 2002 e-mail as at 17 December 2002. 199 On 17 December 2002 Mr Khin sent an e-mail to the American subsidiary to the attention of Ms Baker and others [6/1930] summarising the various things which the Sydney head office was needing and which he understood he said were being worked on. 200 On the same day Mr Khin sent a further e-mail to the American Finance and Logistics congratulating them on securing the Colombian order. In this e-mail he made the point that there were a number of items still required to be attended to by way of documenting the transaction in order to "cross the line with PwC Team" [66/1931]. He had received an e-mail from Mr Newburg to the effect that the Colombian order had been secured. [Transcript 302]. The items to which he had drawn attention as requiring attention included such matters as evidence that the deposit moneys had been collected, evidence of the customer taking freight insurance from Sydney, documentation proving the dispatch of the units from Sydney, the bank guarantee and like items. 201 Mr Khin gave evidence before the court that he did not know until late January that the criteria for recognition of this revenue during the 2002 year could not all be attained. [Transcript 303] He had given evidence before the ASIC investigation that the last nail in the coffin on revenue recognition was the fact that the deposit cheques did not clear. His evidence before the court was that the cheques had been received before 31 December and were banked in January 2003 but that Aristocrat was notified that they were dishonoured in the beginning of February 2003. [Transcript 304]. 202 Mr Khin was further cross-examined before the Court by reference to the transcript of his ASIC investigation [Transcript 304 - 308]. This cross-examination as well as his evidence before the Court establishes that: · Mr Khin was the main and key point of contact who dealt with the auditors on these issues both before and after 31 December 2002; [Transcript 309] · he had spoken to the auditors about the Colombian transaction and had provided a copy of the contract to them when it was signed on or about 12 December 2002; · Mr Khin had known that it was going to take quite a long time for the auditors to audit the contract and to gather up the necessary documentation; · Mr Khin continued to endeavour to monitor progress on the 9 items which required attention through January. It was not until mid to late January that he received an e-mail indicating that the customer was only in the process of obtaining insurance and could not insure the goods because they were already on the water. The American operation had constantly told the Sydney operation that all of the items could be completed so that the revenue could be recognised. The American operation was informing the Sydney operation that the bank was meeting with the American operation and it hoped to get a letter of comfort or a guarantee or some kind of financing arrangement with them and was constantly being given assurances that the hurdles which had to be jumped over in order to satisfy the transaction for 2002 revenue could easily be jumped over. It would have been Mr Newburg who made the statements about the bank meeting with the American operation and hoping to obtain the letter of comfort or guarantee or some kind of financing [Transcript 305]. As Mr Khin informed the ASIC examiners his understanding had been that in order to recognise the revenue, all of those 9 items would require to have been in action. His evidence then includes: "Q. Alright, that is true. And you were involved, weren't you, in discussions with the auditors, really, throughout the month of January and the first week or so of February in relation to their enquiries about these revenue recognition matters? A. Yes. Q. Indeed, it was your hope at least, or your expectation that you would be able to satisfy the auditors in relation to their enquiries so that they would recognize the revenue? A. Yes, I was working towards that, yes. Q. You tried hard to get the auditors to recognize the revenue, didn't you? A. Yes. Q. And it was only, as you say, is that correct, that on the 3rd, 4th or 5th February or thereabouts, when the deposit cheque wasn't cleared in relation to the Colombia shipment, that the revenue recognition for the Colombia deal was a dead duck? A. Completely dead, yes. Q. And another revenue recognition item you worked fairly hard upon concerned the IGT settlement revenue? A. Yes. HIS HONOUR: Q. Can I ask, when you say "completely dead", are you meaning to give us some type of "partly dead" as in "partly pregnant", some notion? What did you mean by that comment? A. There were still a couple of items they had not actioned out of the list of nine. When I found out the cheques had not cleared, then there was no point continuing on trying to close out the other nine items." [Transcript 307 - 308] 203 The subsidiary's accounts had in effect brought to account as revenue for the 2002 year of the American subsidiary, the Colombian transaction revenue. [Transcript 310] 18 December 2002 204 On 18 December 2002 Ms Baker sent an e-mail to Mr Khin attaching the "Chief Executive Report Q4 Probable". This demonstrated the large margin drop for the North American business 205 On 18 December 2002 a video conference took place between Sydney and ATI's office in Las Vegas during the course of which either Mr Jeyaraj or Mr Khin asked for any explanation which could be given for the low margins which were being experienced "on the North American business", to be told, [on the evidence of Mr Khin], by Mr Rowan, that there were a number of one off items which were still being looked into and that the Americans would get their analysis to Sydney as soon as they could. Mr Randall in United States 206 Mr Randall was away from Australia from 16 December 2002 until 30 January 2003. This period saw his close attention to the relocation in the United States. He was not however 'off the air' and during most of this period was able to be communicated with, having access to a mobile telephone. [Transcript 153]. His evidence included: "Q. It was, for you personally, a very important time? A. Yes. Q. And you knew that it was a very important time in the life of the Aristocrat group? A. Yes. Q. And it was a very important time in the life of the Aristocrat group because whether or not the group was to make the forecast figure of $109 million was at best going to be a close run thing ? A. Yes. Q. And that was something of which you were conscious before you went over to the US on 16 December? A. Yes. Q. And that was something you were conscious of throughout that period until your return on 30 January? A. Yes, I think so, though before departing I met with the finance team and was assured we were across the line, there were no issues. Immediately the end of the year occurred, I checked with the appropriate people and was assured that had happened. So I didn't feel pressure in that period because the ducks were lined up, so to put it. The CEO's role is done, if the countries and so on can't execute in December there is not much you can do. [Transcript 154] 207 By 19 December 2002 Mr Khin received an e-mail from Ms Baker attached to which was the 'Chief Executive Officer Report-Q 4-Probable" [NRK57]. 208 On 20 December 2002 Mr Khin received a further e-mail from Ms Baker being a reordering of the columns which had appeared in the e-mail from her of the previous day [NRK 58] 209 On 20 December 2002 Mr Khin sent an e-mail to Mr Randall's secretary in the United States [which was copied to Mr Jeyaraj] to which was attached a document entitled "Full Year Sensitivity Analysis (3 Scenarios)' [NRK 59]. Mr Randall's responsive e-mail of 20 December 2002 said "Great report. Thank you" [NRK 60]. 210 Upon receiving the same Full Year Sensitivity Analysis Mr Jeyaraj gave evidence [Statement 73] that he had had a conversation with Mr Khin as follows: Mr Khin: " Lionel, US now have all the units they built as we air freighted quite a few. The Columbian deal needs some work and we should be able to recognise more revenue if we get a bank guarantee or even more profit if factored. There is further upside if US delivers on Harrahs and Titan, which they said they will by year end." 211 Mr Khin accepted [statement 23 March 2004-paragraph 25] that this conversation had taken place but denied using the word "more". 23 December 2002 212 On 23 December 2002 Mr Khin and Mr Jeyaraj were sent by Mr Ward Aristocrat's Assistant Group Controller, the first of two flash reports for the month ended December 2002 [NRK 62]. 213 Mr Jeyaraj gave evidence [statement 74] that the December flash report (NRK 62) does not include any factoring for the South American deals nor does it include the expected sales which Mr Newburg had told us would take place (including Harrahs and Titan). It also does not include the IGT settlement amount. As a consequence, his evidence was that he had expected the final figures for December to be much higher than the figures contained in the December flash report. He gave evidence in his statement in two places as to his telephone conversations after receipt of the flash reports for December. 214 Mr Jeyaraj gave evidence that after he received the December flash report from Mr Khin he had inquired of Mr Newburg as to what was the problem with the figures which were showing a big shortfall in revenue to be told that there was a problem with the figures and that ATI needed further time to investigate the error. Mr Jeyaraj was assured that ATI "will have more than enough sales booked to meet forecasts". He was told that there were still sales in America to come into the figure "a couple of big deals" and that ATI would make the figures [statement 44]. 215 His evidence [Statement 74] was that Mr Khin was with him when the telephone conversation with Mr Newburg included words to the following effect: Mr Newburg: "Lionel, don't worry about the December flash, the flash does not include any factoring for South America nor does it include Harrahs and Titan for December and the IGT settlement is progressing. Once those figures are in, the figures will change for the better. You can count on me, remember Colombia." Draft Announcement – Late December 2002 216 Mr Jury gave evidence which is accepted as reliable that: · some time just before Christmas 2002, Mr Randall telephoned him from the USA and said: 'Please prepare a contingent profit downgrade announcement. Talk to Lionel Jeyaraj and Frank Bush about this. Hopefully we will not need it. We better have it though in case we do need it'. · within a few hours of that conversation Mr Jeyaraj and he had a conversation: Mr Jeyaraj: 'Have you spoken to Des?' Mr Jury: 'Yes. He rang me this morning. I am surprised. At no stage during the investor meetings and broker briefings has there been a suggestion that we might not be in the ballpark on the numbers. What is going on?' Mr Jeyaraj: 'There may be a problem with recognising revenue from the Colombia transaction. The deal is okay. It is just a question of whether it can be completed in time for this year's results. We are just not sure whether it can be rated to be included as revenue. If it is not included our inventory will be higher and that will show up on the balance sheet. We are also close to settling the legal dispute with IGT. We may receive a payment from IGT in relation to that. IGT may be available as a potential off set to Colombia.' [Mr Jeyaraj's evidence included: · that he asked Mr Jury to assume that the Columbian deal 'does not go ahead'; · that IGT was not mentioned.] · following that conversation, Mr Jury worked with Mr Bush to prepare a draft announcement based on information provided by Mr Jeyaraj. · Mr Jury sent the draft announcement to Mr Randall on 23 December 2002. [Mr Randall could not recall seeing a copy of the announcement] · The text of the draft announcement was as follows: "CONFIDENTIAL DRAFT ANNOUNCEMENT – PREPARED FOR CONTINGENCY PURPOSES ONLY FULL YEAR PROFIT UPDATE Aristocrat has previously indicated it was confident of meeting market consensus earnings forecasts of $109m for the full year NPAT, + 26% on pcp. Indications are that all of the company's major jurisdictions, Australia, Japan North America and Europe, will meet their budgeted targets. However, completion of a major contract in South America did not take place as scheduled prior to 31 December. This contract is expected to be completed shortly, and will be included in the results for the six months to 30 June 2003. This has three ramifications: · NPAT for the full year to 31 December 2002 is not now expected to meet consensus market forecasts, but will still be slightly higher than 2001. (NOTE – THIS WILL IMPLY LESS THAN 5% HIGHER THAN 2001 SO A$88-90M – ASX MAY WELL REQUIRE MORE PRECISION) · Inventory as at 31 December 2002 will be higher than normal, reflecting the undelivered machines for this contract. · Together with other one-off events, none of which are material in their own right, this will impact on the Company's ability to meet market expectations with respect to certain working capital ratios since growth in operating cash flow will not match the growth rate of revenue; operating cash flow will nevertheless be positive and higher than last year. The Board and Management of Aristocrat are confident of meeting the Company's long-term goals. Results for the 2002 year, when released on 18 February, should demonstrate the extreme resilience of the Company's Australasian businesses and the strong results being achieved in all overseas jurisdictions." [Statement of AR Jury tab 2 page 2] 217 Mr Jury's further evidence, which is accepted as reliable, was that either at the end of December 2002 (after Christmas) or in early January 2003, Mr Jeyaraj attended his office and said words to the following effect: "We have good news. The announcement will not be required as the Colombian contract is good to be rated for revenue recognition. Also, it appears that the legal dispute with IGT has been settled and that a payment by IGT has been made." 218 Mr Jeyaraj denied having this conversation. 219 Following that conversation Mr Jury deleted the draft announcement from his computer system. 220 Mr Jeyaraj gave further evidence that in late December, he had a conversation with Mr Randall in words to the following effect: Mr Randall: "Nick sent me the email with a number of scenarios (referring to the document marked NRK59 to Mr Khin's statement), what is the likely outcome for the year?" Mr Jeyaraj: "Mark assures me that the US will make the figures. The Columbia deal is done and with compliance approval he expects that the revenue will be recognised. The deposit cheque has been received and there should be a bank guarantee. Additionally, there are still a number of US sales that he expects to make. The email was prepared by Nick to keep everyone focused. He's going on leave and wants to ensure everyone is working on the figures while he's away." 221 Mr Bush's evidence in relation to the draft announcement has been referred to earlier in the judgment. [cf 'Evidence given by other witnesses'] Late December 2002 222 The evidence was that the IGT settlement emerged very late in the piece in December and that Mr Randall had no knowledge of it: "Q. So do you say that the IGT settlement just came out of the blue so far as you were concerned? A. It was a bonus. Q. And when do you say that you were first aware of this bonus? A. About the 30th or 31st probably, somewhere around there, of December. I received a call from the US lawyer while on vacation telling me that we had the settlement and the impact of it." [Transcript 174-175] 223 Mr Khin had been aware during the second half of 2002 of the fact that there was litigation between ATI and IGT but did not have any details of that litigation [Statement 89]. He was in New Zealand on holidays between 21 and 23 December 2002. During one of the telephone calls, which related to possible settlement of the IGT proceedings, being telephone calls between Mr Khin, Mr Jeyaraj and Mr Newburg respectively which took place during those three days, Mr Newburg said that he thought that they had reached an agreement with IGT. 224 The defendant enters into an agreement to settle the IGT litigation. 27 December 2002 - 2 January 2003 225 The plaintiff takes annual leave. 29 December 2002 226 The deposit cheques from Mr Quintero are received and banked by the US. 227 Mr Jeyaraj also [statement 74] gave evidence that in about late December he recalled a conversation with Mr Khin to the following effect: Mr Jeyaraj: "The first flash report for December does not include any factoring for South America, expected additional sales for North America or the IGT settlement. '' Mr Khin: " Yes, if we get the IGT settlement alone we will make it ." Mr Jeyaraj: "We should be clear on IGT soon. I was also told by Mark that they will ship the Harrah's units soon." 228 Mr Khin in his responsive statement [23 March 2004-paragraph 26] took issue only with the suggestion that he had in this conversation said words to the effect: "Yes, if we get the IGT settlement alone we will make it". Rather on his evidence, which is accepted as reliable, he had said words to the effect: "Providing we can recognise South America, we should make it with the IGT settlement alone." 229 Mr Jeyaraj gave evidence that at about the same time he generally repeated this information to Mr Randall making the point that not only was the Columbia deal done so that Mr Newburg expected that the revenue would be recognised, but that additionally there were still a number of US sales that Mr Newburg expected to make [statement 45]. 230 On 30 December 2002 Mr Khin returned from his annual leave. On 31 December 2002 at 2.32pm he sent an e-mail to Mr Randall and Mr Jeyaraj being the second Flash Report for December 2002. [NRK 63]. 231 This stated inter alia that the decline in revenues was mainly driven by the Americas, and that upon assumptions favourable to Aristocrat, its profit after tax for 2002 could be $91million. It was in the following terms: "HIGHLY CONFIDENTIAL & MARKET SENSITIVE FLASH 2 REULTS: We have received the second flash from the countries. Unfortunately total Revenue and Profit has decreased from the first flash submission – the decline was mainly driven by the Americas. The results are as follows: Full Year Revenue: Flash2 $1009.1 v Flash 1 $1016.9m v LMF $1067.4m v Prior $766.8m The revenue drop between the second and first flash was driven almost entirely by North America, which dropped $9.6m largely in unit sales. New Zealand also dropped $900k due to non approval of venues. Japan revenue increased on the last flash by $3.4m due to further sales of Kyojin-no-hoshi. All other countries were either on their last flash or very close to it. Full Year Margin: Flash2 46.8% v Flash1 47.1% v LMF 46.8% v Prior 45.6% Margins came down slightly driven by the Americas (off by 1.7 points) and Japan (off by 2.3 points). This was partially offset by slightly higher margins in Australia and a lower revenue denominator. Full Year PBT: Flash 2 $137.6m v Flash1 $144.8m v LMF $165.1m v Prior $127.8m Total expenses are flat on flash and last month forecast. The lower PBT is almost exclusively driven by the lower revenue in the Americas which had a $5.9m impact on the bottomline. The revenue decline in New Zealand resulted in a 500k impact to PBT. Full Year PAT : Assuming a Full Year effective tax rate of 35%, this would give us a PAT number for the year of $91m. No news yet on the IGT settlement. The last update we had was that there were a number of last minute issues which have occurred which may prevent us from concluding the transaction before the 31st-December. If the transaction/contract is not concluded in the next 24 hours it will not form part of our 2002 result. The PAT number also assumes we will be able to recognise 50% of Colombia and this could be an audit issue. Full Year Cashflow: We will be looking at the bottom range of our cashflow estimates given the non factoring of South America, non collection of outstanding South American receivables and non factoring of Harrahs. Operating cashflow as a % of revenue is in the range of 6%-7% for the full year. The final results will not be in from the countries until 9th January and we will not have a complete consolidation until around the 11/12th (depending on the quality of the country submissions). Thanks Nick" [NRK 63} 232 Mr Jeyaraj further gave evidence [statement 76] in relation to the December 2002 Flash Report to the effect that it did not include allowances for the IGT settlement nor did it include allowances in relation to the expected increase in North American sales and margins. 233 Mr Khin had earlier on 31 December (at 10.35am) sent an e-mail [NRK 64] to Mr Jeyaraj dated 31 December 2002 in which he had set out a number of 'bad news' issues on the year end result including a drop in North American sales and the unlikely settlement of the IGT litigation which "is now in jeopardy. IGT have re-opened a lot of the issues we thought were already closed". He stated that these maters and the failure to collect any money on a number of South America transactions would put into jeopardy the recognition of revenue on the Columbia contract. He added: "I am personally very disappointed with all of the above namely because we had been given a lot of assurances, commitments and promises which have not eventuated. I also understand from indirect sources that we could be facing additional gross margin erosion in the US in December (which have not yet been quantified). The failure to collect the South American amounts will put in jeopardy Colombia recognition. We can fight it as hard as we can but it will be big battle as we have failed to establish a track record – and if anything demonstrated that previous FOB shipments have been more cumbersome than originally thought and maybe the earnings process had not been completed. Anyhow – its probably best to end 2002 with the above news – it can only get better in 2003 (right1)." [NRK 64] 234 Generally in this regard Mr Jeyaraj gave evidence of a telephone call he had received from Mr Khin on the morning of 31 December 2002 where a conversation to the following effect is said to have taken place: Mr Khin: "I have checked with the US again in relation to the IGT settlement. It looks like it will go through." Mr Jeyaraj: "If this is true, then we better get a hold of Frank Bush immediately and get to the office. We will discuss your email when I meet you." Mr Khin: "OK." 235 Thereafter Mr Jeyaraj on his evidence had a telephone conversation with Mr Bush in words to the following effect: Mr Jeyaraj: "It is highly likely that the IGT settlement collection will be made today and we need to facilitate a power of attorney to allow the monies to be collected. Robert (Postema) is away in Germany but has managed the closure with the US lawyers. You are the company secretary and a lawyer and you need to approve and arrange the necessary paper work." Mr Bush: "Yes, I will need approval from the Board before we can provide the power of attorney. Robert has discussed with me the legal aspects and we should go ahead. It will be good for the shareholders to have the litigation behind us.'' 236 Thereafter Mr Jeyaraj went to Aristocrat's office and met with Mr Khin and Mr Bush. During that meeting a power of attorney was prepared to facilitate the payment of the IGT settlement. The IGT settlement, an amount of approximately US $8 million, was in fact paid and banked on 31 December 2002. 237 Further in relation to the e-mail from Mr Khin to Mr Jeyaraj of 31 December 2002 [NRK 64] Mr Jeyaraj's evidence was [statement 77]: "Mr Khin's email was superseded by the payment of the IGT settlement figure as set out in paragraph 75 above. Upon receipt of the email later on that day in the afternoon, I met Mr Khin at his office and had a conversation with Mr Khin in words to the following effect. Mr Khin: "It's disappointing that America promised us additional sales in December and now look like they haven't delivered what we expected. Every time we spoke to Mark and Ron they promised that they would make the numbers." [I interpolate that Mr Khin denies having said the above words. On his evidence he said, "it is disappointing that the Americans did not deliver what was expected"] [Statement 23 March 2004 paragraph 27] Mr Jeyaraj: "Nick, I believe that it's too early to tell. They did this in June and also last year end . I want to deal with validated numbers for the US. I expect the figures to increase once the systems sales came through. Our systems are not robust enough to close the books immediately. Mark confirmed that we shipped Harrah's and there are others which are not in as yet like Titan that normally come good as it did in all previous half and year end. Why will this be different?'' [I interpolate that Mr Khin gave evidence that he did not recall whether Mr Jeyaraj said all of these words but he did recall Mr Jeyaraj saying the words which I have underlined] Mr Khin: "Now that we will receive the IGT monies, perhaps Mr Newburg may come good on his promises like Colombia." 238 It was Mr Jeyaraj's evidence that his understanding was that the comments made by Mr Khin in his email in relation to assurances, commitments and promises, related to the discussions with Mr Newburg and Mr Rowan. 31 December 2002 239 The defendant's compliance committee confirms its approval for the Columbia Transaction to proceed with the change to customer details. Events during January 2003 3 January 2003 240 Mr Khin gave evidence, which is accepted as reliable, [statement paragraph 96] of a meeting he had with Mr Jeyaraj on 3 January 2003 in which he made clear that he had a number of major concerns in relation to a number of the South American contracts and Mr Jeyaraj asked him to put it into an e-mail to Mr Jeyaraj "so that I can then send it to Mark Newburg and Des Randall". 241 Mr Jeyaraj [statement 78] had denied having ever had this conversation. His evidence was: "I recall a conversation in relation to collections and cash flow with Mr Khin at that time which centred upon the ability to increase the cash flow from America, in reference to Mr Khin's email of 31 December 2002. During the conversation I made notes on butcher's paper as to what we could do to increase cash flow. At the end of the conversation Mr Khin took the notes away and prepared the draft email to Mark Newburg (NRK66). I recall I said words to the following effect: Mr Jeyaraj: "Our cash flow in South America needs to be addressed. We might be able to do a number of things to raise cash flow and to get Mark Newburg's attention." Thereafter, the points which form paragraphs 2, 3 and 4 of the email were discussed. " 242 Mr Jeyaraj gave evidence that in early January 2003 he had a conversation with Mr Randall generally advising him that the numbers were in, the Columbia deal was done, the units were shipped, the number was safe. [Statement 46] Early January 2003 243 The plaintiff is advised by Mr Newburg that PwC have approved the recognition of revenue from the IGT litigation in the 2002 accounts. 5 January 2003 – Alarm bells starting to ring 244 On 5 January 2003 Mr Randall was copied in on an email from Mr Jeyaraj to Mr Newburg of that date with clear warnings that unless a number of steps were achieved Mr Jeyaraj did not see how the company could cross the line in terms of being able to rate Colombia reading inter alia: "Mark A number of "alarm bells" are starting to ring with regards to the South American transactions and I need your help to address these – as when you look at them combined the company is in a very exposed position and they have significantly increased the risk profile of the company. In addition unless we resolve them we will be very hard pressed to recognise any revenue for Colombia or any future South American business. Alarm 1: The level of difficulty collecting from any of our South American customers. I am not just talking about Brazil 1, but also now Corp Meier and even Jade & Dakota who have not even paid us all of the deposit they had originally committed to. Risk Level: AUD$42m Alarm 2: The big issues we are having with Brazil #1. The customer is making a level of noise about not paying until March, possible legal action, and we have not delivered everything required (someone could make the argument that the earnings process is no where complete and revenue has been recognised too early in America). Risk Level: AUD$21m Alarm 3: Colombia credit assessment is very very weak, and obtaining a bank guarantee (as previously committed) looks extremely unlikely. I am not able to sign off on the credit assessment the way it stands. We seem to do everything backward – the credit assessment should have been done upfront prior to the contract being signed and order placed. Risk Level: AUD $49.3m Total Risk Level of all deals: AUD$112.4m on Americas (and corporate) results are SIGNIFICANT." [MRN 40] 6 January 2003 245 On 6 January Mr Newburg responded [MRN 40] to Mr Jeyaraj's email (the response being copied to Mr Randall). His response was that he agreed and would do all that he could. 246 US management hold a meeting with Bank Santanda regarding negotiations for a bank guarantee on the Columbia Transaction. 10 January 2003 247 The plaintiff receives an email from Mr Khin [NRK 68] attaching an update on the likely full year result. According to the report, the figures are as follows: · Revenue: $1,034 million · Profit Before Tax: $161 million · Profit After Tax: $106 million 248 The forecasted results exceed the market expectation in regards to revenue and remain within an acceptable range of the market expectation in respect of profit after tax. 249 Mr Jeyaraj gave evidence [statement 79] of a conversation which he said took place with Mr Khin after Mr Jeyaraj had received the Full Year Preliminary Results to the following effect: Mr Jeyaraj: "Nick, how do the figures look?" Mr Khin: "Lionel, the figures look okay. The Columbian deal should be backed by a bank guarantee and will be included. I believe that the US have sorted out the problem with Nuevastar and should get paid. IGT has been passed by US audit and looks good for PwC Sydney. I see little risk for IGT." Mr Jeyaraj: " I expect to see increased sales from the flash for Americas based on the promised sales by Mark . Also when we get the bank guarantee done we will need to recognise more than 50% of the revenue for Colombia.'' Mr Khin: Yes we have only received the files and we are working with the US to establish the actual number of units sold and we can then validate if the North America revenues makes sense. " 250 Mr Khin [statement 29], whose evidence is accepted as reliable on this issue, denied that any such conversation to that effect had taken place but recalled a conversation with Mr Jeyaraj shortly after 10 January 2003 in words where Mr Jeyaraj asked him how the figures looked and Mr Khin responded by saying: "If the Columbian deal is backed by non-recourse bank guarantee, it can be included. However, I remain concerned about Colombia. It is high risk" 251 The precise evidence given by Mr Jeyaraj was that his conversation in mid January with Mr Randall was in words to the following effect: Randall: "Nick has sent an email setting out audit risks (referring to the document marked NRK68 to Mr Khin's statement) - is there a problem with the Columbia contract?" Mr Jeyaraj: "I believe not, I spoke to Nick and he confirmed that the auditors are working on it. I spoke to David Wiadrowski and he had no issues to raise on the Colombian deal as they were in the midst of the audit. I was encouraged that he independently met the Peter Draney (Chair of the audit committee) and no issues were raised. PwC need to complete their audit of Colombia before they give the green light. They are also waiting for the bank guarantee as committed by the Americas. There are risks but given the above, it should come through.'' Mr Randall: "What about Nuevastar and IGT?" Mr Jeyaraj: "Mark has told me that the issues for Nuevastar have been fixed and we will get paid. I have not heard anything else to the contrary. IGT monies have been received and initial indications from PwC are that it should stand. I was told that it had been approved by the US PwC risk committee and the auditors in the US and Australia. We've got the cash in the bank on the thirty first of December. Robert Postema also confirmed from the legal perspective that all is fine.'' Mid January 2003 252 On 14 January 2003 Mr Khin sent an e-mail to Mr Randall and Mr Jeyaraj attaching a document entitled "Draft Split of North and South America-2002" [NRK 69]. 253 Mr Jeyaraj gave evidence that in mid January he had a conversation with Mr Randall which generally involved questions of whether or not there was a problem with the Columbia contract. 254 According to the report received by Mr Randall from Mr Jeyaraj and Mr Khin with an update of the defendant's financial forecast for the full year, as at 31 December 2002, the defendant's actual figures are as follows: · Revenue: $1,034.7 million · Profit Before Tax: $161.2 million · Profit After Tax: $105.6 million 255 The forecasted results exceed the market expectation in regards to revenue and remain within an acceptable range of the market expectation in respect of profit after tax. The plaintiff then reports these results to the board of the defendant. 22 January 2003 256 Mr Jeyaraj raises concerns with US management about significant concerns he has with the operation of the US business, including the failure to adhere to company policy and procedures, and lack of communication. 24 January 2003 257 On 24 January 2003 Mr Khin sent an e-mail to Mr Randall and Mr Jeyaraj entitled "Important: Audit Update and 2002 Full Year Results" in which he made the point amongst other things, that the Columbia contract was being referred to the auditors technical committee and that the indications were not good and that it was highly likely that adjustments to profit after tax to reduce it to $90 million would be required [NRK74]. 258 Mr Jeyaraj gave the following evidence [Statement 82] in relation to this e-mail: "The revenue from the Columbia deal had been included in Aristocrat's revenue by Mr Rowan when the Columbia contract was executed in December 2002. As a consequence, good progress had been made in putting together the 3,000 "kits". … As at 24 January 2003, no steps had been taken by Mr Newburg, Mr Rowan, Mr Khin or PwC to reverse the inclusion of the revenue from the Columbian contract from the figures as they were waiting on the US to provide evidence of the bank guarantee. Additionally, as the document marked NRK74 discloses, Mr Khin was of the opinion that PwC was a lot more comfortable with the inclusion of the IGT settlement." 259 Generally in response to Mr Khin's evidence [Statement paragraph 127] that he had known about the extent of margin pressure since at least October 2002 and had been involved in numerous e-mail exchanges and discussions in November and December 2002 about that topic with Mr Randall, Mr Jeyaraj, Mr Newburg, Mr Rowan and Ms Baker, Mr Jeyaraj gave the following evidence: "I do not agree that anyone could conclude that Mr Khin had known about the final outcome and extent of margin pressure since October 2002. Mr Khin provided financial outlooks based on the information provided from countries. That information was not audited and was subject to change. Additionally, the American margin pressure was consistently identified as margin slippage from month to month and this was confirmed by the S&OP documentation which showed large orders booked and delivered to America, consistent with large sales in December 2002." [Statement paragraph 86] Late January 2003 260 The plaintiff is advised by Mr Jeyaraj that PwC have approved the recognition of revenue from the IGT litigation in the 2002 accounts. 28 January 2003 261 Australian management are advised by US management that Bank Santanda has suspended all new gaming sector loans (including talks regarding the bank guarantee for the Columbia transaction). 30 January 2003 262 On arrival in Australia from the US, the plaintiff is informed that the bank guarantee in respect of the Columbia transaction has been withdrawn and that ATI will need to arrange alternate financing in order for the revenue from the Columbia transaction to be recognised in the defendant's 2002 accounts, and attends a meeting with PwC regarding revenue recognition issues. 31 January 2003 263 The plaintiff has discussions with Mr Newburg regarding the arrangement of alternate financing for the Columbia transaction. The plaintiff also seeks to address the communication problems between Head Office and US management with Mr Newburg. 31 January - 10 February 2003 264 Mr Newburg undertook steps to obtain a personal guarantee from Mr Quintero and to restructure the transaction. 265 Mr Randall had given evidence that it was his usual practice to provide each member of the board of Aristocrat with a monthly CEO Report and that in the months where a board meeting was scheduled such a report was provided to the directors of the board in advance of the meeting so that they would have time to study the material and to formulate any questions before the meeting. In the months where a board meeting was not scheduled a CEO Report containing the information was still provided to each director. [Statement 3 December 2003-paragraphs 31, 33] 266 A copy of what was described as "January 2003 Board Report" was entitled "Highly Confidential and Market Sensitive information: Preliminary - Full Year 2002 Results (pre-audit)". It included: · "Based on key assumptions made by our finance team, anticipated full year 2002 results are as follows: A$'M %Growth over Prior Year Revenue $984m - $1034m 26% - 32% Profit Before Tax $138m - $160m 9% - 25% Profit After Tax $90m - $105m 5% - 22% · The above numbers are an indication only ($ unaudited) and there are a number of items to be closed out with our auditors PwC before I can confirm to you the official 2003 results. There is one large South American transaction which will need to be referred to PwC's technical committee before we can confirm the numbers, this explains the above result range." [8/2555] February 2003 4 February 2003 267 Mr Khin gave evidence as follows: "On 4 February 2003, Mr Rowan, who at that time was in Sydney, had a discussion with me in words to the following effect: Mr Rowan: 'I have got some bad news. The bank has indicated that the Colombian deposit cheques will not clear.' Mr Khin: 'That is the final nail in the coffin.' I immediately informed Mr Jeyaraj of my conversation with Mr Rowan. I then told Mr Dow of my conversation with Mr Rowan. On 4 February 2003, a further meeting was held with Mr Wiadrowski and Mr Dow. Also in attendance at this meeting were Mr Newburg, Mr Jeyaraj, Mr Robert Postema (Aristocrat's General Counsel), and me. At the outset of the meeting Mr Wiadrowski said words to the following effect: Mr Wiadrowski: 'I think we all know where we stand on Colombia.' There was no disagreement with Mr Wiadrowski's statement. Most of the balance of the discussion at the meeting involved a debate about whether or not the settlement of the IGT litigation could be recognised." [120-122] 6 February 2003 268 Mr Khin gave evidence as follows: "On 6 February 2003, I attended a meeting with Mr Randall, Mr Bush and Mr Jeyaraj. Either before or during the meeting, I was given a draft of an announcement which I was told was to be made to the Australian Stock Exchange ( ASX ) by Aristocrat. During this meeting, a conversation took place to the following effect: Mr Jeyaraj: 'Nick, please check the numbers in the draft announcement.' I then reviewed the draft announcement. The conversation continued in words to the following effect: Mr Khin: 'How far off the profit target does Aristocrat have to be before we need to make an announcement?' Mr Bush: 'There is no hard and fast rule, but usually between 10% and 15%.' Mr Khin: 'Okay, so if someone was to ask what the difference between $109 million and $80 million was, we could say that we were going to be closer to the $100 million mark not the $109m, and we have come off the $100m mark due to the non recognition of the Colombia deal which was worth $16 million in after tax profits?' Mr Bush: 'Yes, that's right.' During the course of the meeting, I observed Mr Randall writing on large sheets of paper on a flip chart in the room. To my observation, Mr Randall appeared angry, agitated and raised his voice several times during the meeting." [123] The three ASX announcements - February 7, 10 and 11 269 The three announcements were in the following terms: " 7 FEBRUARY 2004 ASX ANNOUNCEMENT 2002 FULL YEAR PROFIT UPDATE Aristocrat has previously indicated it was confident of meeting market consensus earnings forecasts of $109m for the full year NPAT. Initial post balance date indications were that all of the company's jurisdictions would meet their budgeted targets. A large transaction in South America, involving the sale of a significant number of electronic gaming machines, was concluded in December after several months of negotiations. Subsequently, the customer has failed to fulfil a number of obligations in relation to this contract. The Board and Management of Aristocrat have now decided that it wouldn't be prudent to recognize this revenue in the 2002 full year result, although the Company is continuing to negotiate with the customer. This decision has two ramifications: · NPAT for the full year to 31 December 2002 will not now meet consensus market forecasts, and is expected to be $80.2 million, subject to final audit. · Inventory at 31 December will be higher than planned due to the taking back of the machines in question. Results for the 2002 year, when released on 18 February, will demonstrate the extreme resilience of the Company's Australian businesses and the strong growth being achieved in the USA, Japan and the Company's traditional overseas jurisdictions. The Company's dividend will be maintained at an annual rate of 12.0c per share, and will be fully franked. The Dividend Reinvestment Plan will remain in force. The Board and Management of Aristocrat remain confident of meeting the Company's long term goals. Further information: Alan Jury +(612) 9413 6406" [DX 74] " 10 FEBRUARY 2004 FOR RELEASE TO THE MARKET SUPPLEMENTARY STATEMENT ON 2002 FULL YEAR RESULT Aristocrat's market update of last Friday was intended to comply with our continuous disclosure obligations. While we believed it would be inappropriate to release further financial information pending completion of final audit of the full 2002 result, we would now like to provide the following information to clarify any confusion. This information is based on analysis conducted after our announcement, and examines the Company's North and South American businesses. The results are inconsistent with information previously provided by Americas' management in that they spell out the extent to which margins deteriorated in the second half, and there were higher overall costs than previously indicated. While margin pressure was known to exist, related to discounting and warranty costs resulting from MK V product performance, manufacturing overruns and a specific trade in program for old CDS equipment, the extent to which this had occurred was not known. Although the US achieved platform unit volume growth of 46% for the full year, this was less than expected. The South American contract referred to on Friday therefore assumed a greater significance within the combined North and South American business unit (although the Company commenced segregating North and South America for reporting purposes in 2002, they are managed as a single unit). This contract, which was for 3,000 new MK V electronic gaming machines and which was intended to be guaranteed by a major international bank, was expected to assist the company in meeting market earnings forecasts. A decision was made by the bank in late January to suspend lending activities in the gaming sector, resulting from events unrelated to either Aristocrat or the contract in question. This caused the Company and the customer to attempt to renegotiate the terms of payment. The customer withdrew its deposit while continuing to require the machines and while renegotiating the contract. This occurred on Tuesday 4th February, and a statement informing the market made as soon as possible thereafter. As mentioned in that statement, discussions between the Company, the customer and the bank are continuing. As a result of the above, the Board has initiated a full review of its North and South American businesses with particular reference to management and financial systems and risk assessment and controls. The CEO, Des Randall, is leading this. Where appropriate, the Company will also engage expert assistance. Additional senior management resources are being transferred to the USA to assist in this process, and some restructuring will occur. The Company's detailed 2002 result is scheduled for release on Tuesday 18th February, and, as previously indicated to the market, will contain a greater level of financial disclosure about the Company's operations. It is anticipated that this will be released prior to the commencement of trading, and will be posted on the Company's website ( www.aristocrattechnologies.com.au ) following confirmation of receipt by the ASX. A press conference will be held as soon as possible thereafter, and a detailed analysts' briefing will be held at the Company's headquarters in Lane Cove at 2.45pm. Contact: Alan Jury, (612) 9413 6406" [DX 79 & 80] "11 FEBRUARY 2004 QUANTIFICATION OF EARLIER STATEMENTS The South American contract referred to in earlier announcements was for 3,000 units, and the Company had planned to book A$16m of profit after tax in relation to this contract for the 2002 year. With bank guarantees, there was potential for additional profit to be booked in 2002, although this was not the Company's intention. A further A$14m bottom line impact results from lower volumes and margins in the North American business. As previously mentioned, the full extent of these has only become apparent following analysis conducted last weekend. Segment contribution profit from all regions other than North and South America were either in line with or ahead of management forecasts. This includes the contribution from Australia, which, although showing a small decline compared to 2001, was not expected to increase due to market conditions. The decline was in the Services business, while the Sales business performed according to plan. In the interest of further informing the market, we would also like to release the following information ahead of our detailed results release, scheduled for Tuesday 18 February. It is based on unaudited results." [DX 82] Friday 7 February 2003 270 Mr Newburg gave evidence of a conversation with Mr Randall of 7 February 2003 where Mr Randall is alleged to have said: "even if we had made the profit numbers our share price would still have been crucified because we did not tell anyone how much we depended upon South America". [Transcript 126.2] The Court's finding is that these words were said. Mr Randall although giving evidence that he was unable to recall saying these words, did not deny saying them and accepted that the conversation may have happened [transcript 125 – 126]. 271 During the afternoon of 7 February 2003, Mr Bush told Mr Randall that he had received a letter from the ASX setting out a number of questions about the timing of the 7 February announcement and what Aristocrat had known and when, apparently suggesting that Aristocrat did not comply with the Listing Rules. Mr Randall gave evidence that on the 7th and 8th February 2003 he had spoken to Mr Ducker on a number of occasions making the point that the market had reacted very badly to the announcement and that the real problem was the lateness of the announcement. Mr Ducker had said that it was obvious that the ASX/market wanted more information and Mr Randall had said that work was being carried out to give them that. Saturday 8 February 2003 272 Mr Randall was cross-examined [transcript 127] in relation to the evidence given by Mr Jury (statement [32]) of a conversation he had with Mr Randall on 8 February 2003 where on his version, Mr Randall, in discussing a statement for release on the Monday, said that he particularly wanted the statement to say that "head office had been misled by the US management about the extent of margin erosion and cost overruns". Mr Randall's version is in his second statement [66] but he denies having made this statement in the conversation. [Transcript 128.10]. The Court's finding is that on the balance of probabilities that statement was in fact made. Mr Jury gave evidence that he was quite sure that the conversation had taken place. On this issue to my mind his evidence is more reliable than that given by Mr Randall. 273 Mr Randall accepts that as at the afternoon of Saturday 8 February 2003, he had the view that head office had been misled by United States management. [Transcript 128.40] 9 February 2003 274 Mr Khin gave evidence that on Sunday 9 February 2003, he went to Aristocrat's offices. Mr Jeyaraj was also there. Whilst Mr Khin was there late in the evening he received a further draft announcement by e-mail from Mr Jeyaraj who had received it from Mr Jury (Aristocrat's General Manager of Communications) which took the form of a document entitled 'Supplementary Statement on 2002 Full Year Result'. ['NRK1'] [125] 275 Whilst Mr Khin was at Aristocrat's offices on 9 February 2003 he also received an e-mail dated 8 February 2003 from Mr Rowan. ['NRK1'] [126] 276 Mr Khin's evidence was: "I was not happy with the form of the draft supplementary announcement which Mr Jury had prepared as I did not believe it to be correct in many respects. It was certainly not the case that Aristocrat had received inconsistent information on the North and South American businesses, or that the extent of margin pressure in North America was not known. I had known about the extent of margin pressure since at least October 2002, and had been involved in numerous e-mail exchanges and discussions in November and December 2002 about that topic with Mr Randall, Mr Jeyaraj, Mr Newburg, Mr Rowan and Ms Baker. I discussed those concerns with Mr Jeyaraj on 9 February 2003, who told me that he agreed with them. On 9 February 2003, Mr Jeyaraj and I rewrote the draft supplementary announcement, marking up the changes we wanted to make to it, and sent it to Mr Jury by e-mail….' NRK2' is a copy of that e-mail and the attached marked up draft supplementary announcement." [127,128] Monday 10 February 2003 277 Mr Khin's evidence was that: "On the morning of 10 February 2003, Mr Jury and I had a conversation in words to the following effect: Mr Khin: 'I would feel more comfortable with the form of the announcement which Lionel and I prepared.' Mr Jury: 'Ultimately, it is Des's call.' Later in the morning on 10 February 2003, I met with Mr Jury and Mr Jeyaraj. I said words to the effect: Mr Khin: 'I am not happy with the draft announcement to the ASX as it stands. It's not true that the financial results are inconsistent with information provided by the US, or that this only came up after an analysis of figures after Friday's announcement.' Subsequently during the morning of 10 February 2003, I had a meeting in Mr Jeyaraj's office with Mr Jeyaraj and Mr Randall. Mr Randall had in his hands copies of both the draft supplementary announcement prepared by Mr Jeyaraj and me and the draft supplementary announcement prepared by Mr Jury. Mr Randall said words to the following effect: Mr Randall: 'I have looked at both drafts and I prefer Alan's draft. I'm going with Alan's draft.' I then went back to my office and drafted an e-mail to Mr Jury [ ' NRK3]' which details my concerns about the inaccuracies in the draft announcement which Mr Randall told me he wanted to make. I did not send this draft e-mail, but printed it off and gave it to Mr Jury. Mr Jury read this draft e-mail, and immediately went to Mr Randall's office with it. Shortly afterwards, I was called by Mr Randall to a meeting with him in Aristocrat's board room at its Lane Cove offices. When I arrived, Mr Jury and Mr Jeyaraj were also present. I saw that Mr Randall had in his hands the e-mail I had drafted to Mr Jury referred to in the preceding paragraph. A conversation took place in which we spoke words to the following effect: Mr Randall: 'Nick, I hear that you have got some concerns. Let's put them on the table. I'm not wanting to tell any fibs.' Mr Khin: 'Yes, I'm uncomfortable with the third paragraph about the result being inconsistent with information from the US.' Mr Randall: 'I feel that I was told inconsistent information from the Americans. I've only now realised the true extent of the issues in the Americas. You may have been aware of it, but I've only just become aware of it.' I observed Mr Randall changing some words on the draft announcement. However, I cannot recall exactly what Mr Randall changed. I can remember that I was still unhappy with it. A conversation with Mr Randall then took place to the following effect: Mr Randall: 'That's what I want to send out. Do you still have a problem with it?' Mr Khin: 'I suppose I can live with it.' Mr Randall: 'Okay, so that's the end of it.' Mr Randall then ripped up my draft e-mail to Mr Jury, and continued: Mr Randall: 'You've deleted this e-mail, haven't you? You haven't sent it to anyone?' Mr Khin: 'No, I have not sent it to anyone.' Exhibited and marked ' NRK4 ' is a copy of the final form of Aristocrat's supplementary announcement which was made on 10 February 2003 to the ASX. I was not happy with the final form of it, for the same reasons which I had set out in my draft e-mail to Mr Jury and told to Mr Randall as set out above. I still considered that the draft announcement which Mr Jeyaraj and I had prepared was a true reflection of the position. On 10 February 2003, Mr Bush came to see me and said words to the following effect: Mr Bush: 'I have received a request from the ASX to answer some more questions.' Mr Bush then handed me a copy of a letter from the ASX to Aristocrat, and said words to the following effect: Mr Bush: 'I need your help in answering the questions. I have prepared some draft answers.' Mr Bush gave me the draft answers. I read the draft answers. I then provided to Mr Jury the pages which are entitled 'Working Capital and Cash Flow' and 'Geographical Segmental Analysis' and which became attachments to Aristocrat's announcement made on 11 February 2003 to the ASX, a copy of which is exhibited and marked ' NRK5 ' . Apart from providing these attachments, I cannot recall whether I was otherwise involved in the drafting of the announcement made on 11 February 2003." [129-137] 278 Reasonably extensive cross-examination covered the events of the morning of Monday 10 February 2003. 279 The evaluation of evidence concerning the above described board room meeting where Mr Randall had changed some words on the draft announcement and after some discussion Mr Khin said "I suppose I can live with it" requires very close attention to the cross-examination on this topic which includes an assessment of the demeanour of the witnesses and the probabilities. This is an area where reading between the lines of what was said and what was meant becomes all-important. 280 It is plain from the transcript of evidence given by Mr Khin that it is incorrect to conclude that he did not speak up for himself. He did make clear during the meeting that he was unhappy with the wording. To his perception it was simply not true to state that the financial results were inconsistent with information provided by the US, or that this only came up after an analysis of figures after the announcement of 7 February 2003. That anxiety had led him · on Sunday to rewrite together with Mr Jeyaraj the draft supplementary announcement; · to inform Mr Jury on the morning of Monday that he would feel more comfortable with the form of announcement which he and Mr Jeyaraj and prepared on the previous day; · later on the same morning to clearly make the point when together with Mr Jeyaraj he had spoken to Mr Jury; · following Mr Randall stating in Mr Jeyaraj's office that Mr Randall having read both drafts preferred that prepared by Mr Jury and "[was] going with [that] draft", to immediately draft an e-mail to Mr Jury [which should be very carefully noted] in the following terms: "Subject: Market Release Feedback Alan I wanted to inform you of a number of items you should consider when you prepare the market release. 1. We (my group) received no subsequent information post the Friday announcement. All information and financials were received in accordance with the year end calendar. The only thing that did happen last week was we received a final decision from our auditors that IGT and Colombia cannot be recognized. This was backed out of the accounts and a new set of accounts was prepared and distributed. 2. Prior to Lionels trip to the US a document was prepared showing the split between North and South America and the impact on contribution profit. I believe this was also shared with Des (but I cannot confirm that). 2. The Americas group gross margin issue was known and highlighted as an issue in November and early December. It came to a head in early December when the Americas reported a 15% gross margin number for the month of November and Des specifically asked the Americas for an explanation. 3. It became apparent around August, that the Colombian contract was absolutely required in order for the Americas to make their total target. A number of best case and worst case scenarios were developed and presented. The worst case scenario (which was without South America) indicated that we would not make the market expectation. This is already documented. 4. Discussion were not being held around the factoring of Colombia – but rather obtaining a "bank guarantee" for the deal. The factoring discussion was surrounding the Brazil contract. I think it is very important that you consider the above when preparing the market release. Any questions please do not hesitate to contact me, Thanks Nick" [NRK 83] 281 The preparation of this draft e-mail in the context in which it was prepared speaks volumes in relation to the then anxiety and degree of anxiety of Mr Khin. It has to be recalled that the context leading up to the board room meeting included: · the evidence given by Mr Khin that at the meeting of 6 February 2003 Mr Randall had appeared angry and agitated and had raised his voice several times [Mr Khin Statement [124]]; · Mr Randall in Mr Jeyaraj's office in the presence of Mr Khin having already announced that having looked at both drafts he was "going with [Mr Jury's] draft" - a statement of seeming decision. 282 The apparent occasion for the boardroom meeting appears to have been Mr Jury having taken into Mr Randall's office the draft e-mail prepared by Mr Khin. To have such an e-mail sent in this environment could indeed prove of high embarrassment. 283 The fact that during the boardroom meeting Mr Khin: · having again repeated why it was that he was uncomfortable with the paragraph dealing with the result being inconsistent with information from the US; · ultimately when told by Mr Randall that [certain words having been changed on the draft announcement] that was what he wanted to send out and being asked whether he still had a problem with it, responded: "I suppose I can live with it", is explained to my mind by Mr Khin's position in the hierarchy, his having ultimately albeit still unhappy with the announcement, having bowed to what appeared to be the acceptance of the other persons present to the wording of the document. This was a time of very high tension and Mr Khin had not been with Aristocrat for more than almost a year. When repeatedly tested with why he had said " I suppose I can live with it " in answer to the question put to him by Mr Randall, at one stage when asked why he had not made it known to Mr Randall that he was still unhappy, said " Maybe he can be a bit intimidating at times, I don't know " [transcript 323.58]. Although there is no suggestion in his evidence, as he readily accepted, about any such intimidation, the Court's assessment of Mr Randall from all of the evidence is that he was a domineering character with firm points of view and would not have had and did not in fact have the slightest difficulty in getting across to Mr Khin that he had made his mind up on the issue. The courts finding is that he succeeded in so doing. It was expressly put to Mr Randall that he was in effect, telling Mr Khin, that he had determined that he would proceed in the way that suited him. Although he denied this proposition [transcript 138] in my view that was precisely what, reading between the lines, Mr Randall was doing. 284 Mr Randall was clearly very anxious about the e-mail. That is the courts finding. The further finding is that he tore up the hard copy of the draft e-mail. Indeed he stated to Mr Khin "You've deleted this e-mail haven't you?", suggesting that this must have been his state of mind. At the same time he took the trouble to make certain that the e-mail had not been sent to anyone. 285 A close reading of the transcript of evidence given by Mr Khin makes clear how uncomfortable he was in the witness box with his answer then given "I suppose I can live with it". See for example: "Q. Your answer was I can live with it? A. No, I told him the problem I had with the document." [Transcript 323.8] 286 Ultimately the issue concerns the state of mind of Mr Randall. The Court's finding is that notwithstanding that Mr Khin ultimately, having been asked whether he still had a problem with the draft announcement, said that he supposed he could live with it, Mr Randall remained acutely aware of the degree of anxiety which Mr Khin had exhibited. He was well aware that what was being said in the announcement remained borderline as a statement of the full truth. He was well aware of the significance of being accurate in the announcement. For the draft e-mail to be available to ever see the light of day would have been an accident waiting to happen. 287 The Court's finding rejects as unreliable Mr Randall's evidence that he did not ask to see a copy of Mr Khin's e-mail [Transcript 137.6] and his evidence that it was not until discovery that he had ever seen the e-mail or the draft announcement prepared by Mr Khin and Mr Jeyaraj [Transcript 136.50.] 288 Further it is to be noted that Mr Randall's version of the board room meeting includes evidence that after Mr Khin had stated that he was not comfortable with the draft announcement because it was not entirely accurate that the financial results were inconsistent with information provided by the US, or that [Aristocrat had] only just learned of this problem, Mr Randall went on to say inter alia: " You may have been aware of it in part , but you did not report it to me other than as revenue delay and margin erosion in October and November, which the US told you and you told me were one time misses. Clearly the actual US result was hidden by the IGT inclusion. It's now February and we are only learning of the extent of their volume miss and margin erosion. It's important that we all agree that what's going out in the announcement is a true reflection of what we believe the facts to be..." 289 The cross-examination of Mr Randall included: "Q. Is it a fair summation of a point that you were endeavouring to make there that, even if Mr Khin was aware, you personally were not aware? A. No, that's not the point I was trying to make. Q. Is it not a fair reading of the first sentence of the attribution to you that you were saying to him, "You may have been aware, but you did not report it to me"? A. No, it says, "You may have been aware of it in part, but you did not report it to me". That's accurate Q. So that is it a fair reading of what you intended to say that Mr Khin may have had information but you did not? A. No, that's not what it says and it's not my intent. Q. What did you intend to convey? A. What happened is he received the detailed report from the United States for - I think it started in September, but there was no erosion in September I don't think, but he got it in September. He wanted more information and the US were unable to give him the information. He then got a detailed report in October from the United States which clearly documented margin erosion in the United States in that month and they gave specific reasons for that erosion and said that it was one time misses and that it wouldn't be repeated and Mr Khin shared that with me and the board in detail." [Transcript 131] 290 I do not accept as reliable the evidence by Mr Randall that his own sentence: "you may have been aware of that in part, but you did not report it to me…" is not a statement in which he intended to say that Mr Khin may have had information that he did not. [Transcript 131] 21 February 2003 – 25% gap between prediction and performance 291 On or about 21 February 2003 Mr Khin prepared an analysis which in effect collected together and tabulated the material recording on the one hand, what America had been forecasting and on the other hand, what the Americas had produced by way of final result. The document was admitted into evidence as exhibit P11 and the cross-examination of Mr Khin on these documents is to be found at transcript 314 et seq. The document repays close analysis albeit produced after the event. Some of the highlights thrown up by the document record a 25% gap between prediction and performance and the financial contribution of the profit from the particular countries before tax having been out by the sum of $33 million. The vital issue - what was the information imparted to Mr Randall and what was his state of mind 292 In examining this issue there is often some difficulty because Mr Randall was in the habit of using the first person plural nominative pronoun "we" particularly when as for example giving presentations to media and the analysts on 18 February 2003. One may certainly assume that he intends generally by use of this word to include himself. But from time to time the word is used to include a group of innominate individuals generally taken to mean the persons within the Aristocrat hierarchy in receipt of the relevant information and having the ability to process the information. Dealing with the breach of contract case The pleaded case and departures therefrom 293 As is so often the case it is extremely important to look with precision at what the defendant has pleaded. 294 The material allegation the subject of special focus in final address dealt with Mr Randall's public statements at the media and analysts briefing sessions on 18 February 2003. The allegations pleaded [second further amended defence] were as follows: "63 On or about 18 February 2003, and purportedly in his capacity as Chief Executive Officer of Aristocrat, Mr Randall made statements to the public to the effect that: 63.1 he had no warning before 5 February 2003 or thereabouts that Aristocrat's net profit after tax for the year ended 31 December 2002 would not meet the September 2002 forecast of $109 million but would be of the order of $80 million. 63.2 until 5 February 2003 or thereabouts he was confident that Aristocrat would report a strong US financial result, and exceed its profit expectations, for 2002. 63.3 it was not clear to him before 5 February 2003 or thereabouts that Aristocrat had a problem with its profit margins in its North American business." 295 The defendant's overview opening of its case had expressly repeated the pleaded paragraphs 63.1 63.2 and 63.3. [23] 296 In final address the defendants written submission essentially repeated paragraph 63.3 of the pleading [although now giving the dates "before 4 or 5 February 2003"]. 297 However the departures were: · in the place of paragraph 63.1 the allegation was that the statements had been to the effect that: - Mr Randall had had no warning of the possibility of a profit downgrade before 4 or 5 February 2003 [a clear movement away from the far more precise formulation in the pleaded paragraph 63.1 which dealt with Mr Randall having had no warning that the company's net profit after tax for 2002 would not meet the particular prediction of $109 million but would be of the order of $80 million] · in the place of paragraph 63.2, the allegation was that the statements had been to the effect that: - Mr Randall had been confident of a strong US profit result at the end of 2002 [a clear movement from the far more precise formulation in the pleaded paragraph 63.2, now focusing on the suggestion of what Mr Randall had said he had been confident about at the end of 2002 and no longer including any reference to his alleged statement of confidence that the company would exceed its profit expectations for 2002]. 298 Whilst in certain cases some movement in formulation may be permissible depending upon how a matter has been litigated, it must be remembered that there is at least one present claim for breach of contract said to be constituted by fraudulent conduct. Particularity is of the essence in relation to that form of allegation. 299 It has to be said that to a very large extent the matter had been litigated in terms of the particular focus upon the allegation that statements by Mr Randall to the public [to the effect that he had no warning before 5 February 2003 or thereabouts that Aristocrat's net profit after tax for the year ended 31 December 2002 would not meet the September 2002 forecast of $109 million but would be of the order of $80 million] were known to be untrue and/or were known to be incorrect. 300 The issues ultimately pressed in final address are of some difficulty because they raise: · an issue as to timing; · an issue as to when the falling over of the Columbia transaction first became quite clear; · an issue as to how Mr Randall treated with information imparted to him regarding promises of Mr Newburg [concerning additional sales; the furnishing of information which had been urgently sought but not supplied by ATI qua the gross margin issue; discrepancies and the failure to identify what was driving the reduction in margins]; · the last minute and unexpected appearance 'from left-field' of the IGT settlement. 301 If it is permissible to look at the picture along the narrow timeline from very late in December through January 2003, the evidence clearly established that the Columbia transaction and the possibility of revenue from it being included in the 2002 revenue, as well as the hoped for utilisation of the IGT settlement revenue also as 2002 revenue, were being closely examined over this period. There were a number of particular factors requiring to be worked through and the final decision was in fact one made by the auditors very shortly before the 7 February 2003 announcement: cf the following letter from PriceWaterhousCoopers written to Aristocrat on 21 February 2003: "You have initiated an investigation into your North & South American businesses with particular reference to your financial systems and risk assessment controls, after your recent profit downgrade announcement. Also, we understand ASIC has requested you to produce books and records relating to, among other things, that announcement. We are ready to assist with your investigation and any that ASIC may choose to make. In the meantime, as you requested, I can confirm in respect of the South American contract referred to in the announcement: · until 30 January, 2003, all discussions between myself and executive management proceeded on the basis that profit after tax of A$16m from the AMCSA South American contract, would be included in the results for 2002; · on 30 January 2003, management and I discussed matters which had come to light regarding the contract because of the possible impact on the company's ability to recognise revenue from that contract in the 2002 results; · discussions between myself and management continued until 4 February 2003, when a decision was made by executive management not to recognise revenue from the contract when additional information requested on 30 January 2003 could not be provided by management. In addition deposit cheques in respect of the contract were not honoured by the bank the day before. I can also confirm that it was not until after 5.00pm on 5 February 2003, that I communicated to executive management that revenue from certain patent licences fees, that previously had been included as revenue in the expected 2002 results, could no longer be recognised as revenue. This had a profit after tax impact of A$14m…" [PX9/2965] The claim now sought to be pressed as permissibly falling within defence paragraph 63.1 302 It is convenient to presently deal with this defence. Was the statement made? 303 The first question is as to whether or not as a matter of fact Mr Randall had made any such statement at either of the presentations on 18 February 2003. 304 To answer this question requires one to examine the transcripts of the media and analysts presentations very closely. The context was as follows: · there was a board meeting on 17 February 2003 during which careful attention was given to the proposed presentations to be given on the following day by Mr Randall. The speaking notes [DX 87 and following] were looked at and accepted as appropriate. Those speaking notes included the wording of the slides which would be shown at the time when the speaking notes were spoken to; · the transcript of the presentations generally identifies the time when the particular slides were being referred to; · the morning presentation follows some discussion and then in part proceeds: "I have deliberately taken some of the material out so that it is not too long and drawn out. That will give you a good chance to ask your questions. The first thing I am going to do is share with you – we had a board meeting yesterday and with all that is happening I have prepared a statement that I made to the board and the board actually thought, and I asked their agreement, to share that statement with you. I am going to do that several times today. We have had some discussion – I in fact left the board – the non-executive board was left on its own and discussed the state of the business and so on. When I returned, they gave me a statement that it then asked if I would read out following my statement, so we will start with giving you these two statements. The first is the one that I made to the board. In the four and a half years I have been with Aristocrat I have given the company 100 per cent commitment, dedication and loyalty and up to this point Aristocrat has enjoyed a lot of success. The fact is we have a good management team at Aristocrat. We have many good businesses consolidated into a good company. Aristocrat is a very good company. What we got wrong in this recent event was a lack of rigor in terms of control. I do not believe we have a lack of control – perhaps a lack of rigor, perhaps a lack of judgment and perhaps not really good communication. We did not have sufficient controls or judgment communication in place to understand the situation early enough to take action and to inform the board and the market. The market has censured us and now we have to earn the market's confidence back. I should have seen this coming. I did not. For that I apologise, and I apologise to the board, and to all stakeholders, particularly shareholders and employees of Aristocrat. I assure you, I understand apologies are not enough, and action will be taken to rectify this situation. I am now determined to remedy this situation with every means available to this company. Many of you here know me, certainly the board does, and I said to them that you know me well enough to know that I take this responsibility personally. With the board's endorsement and support, following market briefings I will return to the US immediately, and in fact I have only been back in this country two weeks. I arrived here on 30 [January]. With the CFO and other management and expert support we will conduct a full investigation and we will take the appropriate action. The good news for our company is this problem is contained in one operation, the Americas. It is not endemic, it is restricted to one operation, and we will fix it. The lack of growth and margin issues in the United States clearly indicates our US business is not where we would like it to be. This is a setback in our US strategy. However, this is also not just about fixing a problem but about building a continuing profitable business, a sustainable profitable business, in the United States. That was the statement I made to the board and I would now like to share the statement the board asked me to share with you , which is that the board of Aristocrat Leisure Limited has implemented a thorough investigation through the Chief Executive Officer and senior management to determine how the problems in the United States arose and to ensure that similar problems do not occur in the future. The non-executive members of the board will be actively involved in the review. The board has authorised the retention of PricewaterhouseCoopers, the company's auditors, to assist the board in reviewing the results of the investigation. The board has scheduled a special meeting in mid-March to review progress of this investigation. I think I have indicated before that the results of this investigation will be made public. Before staring the formal briefing, I would like to share two slides that explain the recent history of this situation that has just occurred. The first slide shares Aristocrat's matrix management structure, how we run the business. This is there to endeavour to explain the philosophy of how Aristocrat runs its business. Each country and each market is unique in terms of product and business opportunities. Also, each market is tightly regulated by the State Government, the local jurisdiction, and by the local regulators. This means we also have to have, and we do have, very different internal systems that support each business. You would appreciate our American business has very different systems than our Australian business and, of course it is obvious our Japanese business is very, very different again and so on. The model that shares – it talks about the philosophy of running the business – it shows that the countries take the lead and the responsibility in the running of their businesses. Our head office functions provide overall direction, leadership and support for the businesses to operate. We can't call the shots centrally in this type of business. The decisions have to be made locally in each country. This explains I think, or helps explain, two things. First of all, the business runs with everyone helping to facilitate the country's business. Clearly we have systems and controls in the case of a large opportunity where the company has a checksheet that all of the compliance work has been done, all of the regulatory approvals are in place, all of the finance checks are done, and head office makes sure that is done. Once that is done, the contract is signed and everyone at head office works very hard to help fulfill that contract, providing product on time, with quality, correct configurations, meet all the legal requirements and so on. In the situation that occurred at the end of the year, and timing was against us, it was the middle of the year, you have a lot of time to fix things but when it happens essentially at the end of the year it is very hard to try to get information out into the market ahead of time. There were not enough checks and balances in this particular case . I talked about all the different systems that we have to run the business. I think this is no different to any global company, but it takes about four weeks to receive and consolidate and understand each of the country's accounts . Hence the timing and the perceived lack of transparency from the market, "why didn't you tell us earlier". "We didn't know". Be assured, as soon as Aristocrat knew, the market knew. Next is a summary, and I think you have all been reporting this fairly consistently, these are the main questions we received from the market, on the next overhead. The first question, no warning on the $109m down to $80m. We could not tell you what we did not know. We were confident of meeting the market expectation at year's end . Secondly, no early advice on the South American contract. This contract was never finalised. The first we knew that this contract would not be finalised was on 27 or 28 January when the Spanish bank put a hold on the bank guarantee for this contract. Third, no warning on the contribution mix. As I have said, we believed we would report a strong US and strong South American result. Fourth, we were late and the announcement was incomplete. When the situation was identified, we immediately put a trading halt in place and we advised the market what we knew the next day. We were still obviously working with the account detail, so everything didn't come out the first day . We stumbled in terms of the market announcement. If we delayed another day or two we could have made a complete announcement, so we did stumble with the announcement, that is a fact of history ." [DX108 –111] 305 The plaintiff's submission is that nowhere in this section of the transcript can one find a statement that Mr Randall personally had no warning of the possibility of a profit downgrade before 4 or 5 February 2003. The proposition is that in answering the interrogative question on the second slide "What happened? - No warning on $109 million", the essential question being answered was 'why was the market not warned on the profit downgrade from $109 million down to 80 million?' 306 In answering that question Mr Randall stated: "We could not tell you what we did not know. We were confident of meeting expectation at year-end". 307 The plaintiff's submission is that all of these were questions being asked by media representatives essentially baying for blood and asking questions as to why the market was not informed of these matters. This is said to be clear from Mr Randall's reference [DX 110.47 - 111.1] to the period of time which it took to receive and consolidate and understand each country's accounts, and the following words "Hence the timing and the perceived lack of transparency from the market…". 308 The plaintiff's submission [transcript 622] was put as follows: "it is… a total misconstruction and an entire textual excision of what is there recorded, bearing in mind the speech and the accompanying slides, to interpret that or to say that anybody reasonably at that meeting would have understood Mr Randall as saying "I had no warning personally" - as it is now put, your Honour - "of the possibility there would be a profit downgrade". What he is dealing with is the market's question: Why wasn't there a warning of the 109 to the 80? That's all. Our learned friends have done several things. They, in effect, anthropomorphically attributed the proposition to Mr Randall personally as if he were making a statement of his own knowledge. Secondly, they have wholly turned around the meaning of the word "warning" from the market's question, "Why weren't we warned", to the internal question: What indicators or what grounds of suspicion were available to anybody in Aristocrat, including all of its directors, and that is not a proper transposition of the meaning of the word "warning" when used in that context, and of course, thirdly, what our learned friends have done is taken the word "warning", which is put in the context of a drop from 109 down to 80 [and the part of the warning they didn't have was a warning the profit was going to be downgraded to 80 million] and they have transposed that into a proposition that what Mr Randall was really doing was musing about the progressive state of the North American market. That is just not a fair meaning to be derived, in our respectful submission, from a tolerably plain recording of what Mr Randall actually said." 309 Can it then be said that Mr Randall represented that he had had no warning of the possibility of a profit downgrade before 4 or 5 February 2003? 310 It seems to me that a fair reading of his comments: · amounted to an implicit representation that he had had no warning of a significant possibility of a profit downgrade before 4 or 5 February 2003; · did not amount to an implicit representation that he had had no warning of any possibility of a profit downgrade before 4 or 5 February 2003. 311 The defendant has now sought to rely on the representation that Mr Randall had no warning of the possibility of a profit downgrade before 4 or 5 February 2003. Once one takes into account the distinction to which I have referred, the proper finding is that at least on these particular pages [upon which the defendant so strongly relies] Mr Randall cannot be said to have so represented. 312 I do not accept as of substance the submission that his use of the word "we" was not intended [nor reasonably taken by the listener] to be inclusive of a reference to his own state of mind. The greater included the lesser. The scattered references to himself ["I should have seen this coming. I did not"] confirm this proposition. And at least at one stage of his cross-examination Mr Randall conceded the point [transcript 163.50]. 313 But what Mr Randall expressly said was that there had been no warning on the $109 million to $80 million downgrade. He did not deal with whether or not there had been any warnings of the possibility of a profit downgrade before 4 February 2003. Whilst to some the statement - we were confident of meeting the market expectation at year-end may perhaps be said to be synonymous with saying that Mr Randall had had no warning of the possibility of a profit downgrade, the fact is that there is an inconsistency. One could have confidence of meeting the market expectation as one's state of mind even though notwithstanding such confidence, one may have believed that there was a [for example, slender or outside] possibility of a profit downgrade. In Mr Randall's case he had accepted under cross-examination: · that he was conscious before 16 December 2002 that whether or not the group was to make the forecast figure of $109 million was at best going to be a close run thing [transcript 154]; · that he was aware as at December 2002 that there was a risk that the group would not make it's market consensus [after tax] profit figure of $109 million [transcript 158.39]. 314 In short as Mr Coles submitted: ".. what he is saying is "[t]here was no warning to give you and we couldn't give you any warning that there was going to be 109 down to 80 because we did not know that fact". "We did not know", is all he is saying. "We did not know that the profit after tax would be 80 million ". He is not making any statement about whether he might have suspected something or whether he might have entertained a possibility about it ." [Transcript 622] 315 In any event the simple fact is that the defendant has moved outside of its pleaded case in its now contention. Having as the Court finds, failed to establish the pleaded paragraph 63.1 allegation, the defendant has no entitlement to move outside of the wording of paragraph 63.1 of the present defence. The claim now sought to be pressed as falling within defence paragraph 63.2 316 There is then the further movement away from the pleadings already mentioned in relation to this paragraph of the defence. The words used were in answer to the rhetorical question "No warning on mix of contributions between North and South America": properly read as 'why was there no such warning?' Mr Randall in fact said "[w]e believed we would report a strong US and strong South American result." Here again use of the word "we" would properly have been heard and is to be regarded as inclusive of the speaker. The express words did not refer to a strong US profit result but it seems to me properly implicitly reflected and was intended to be taken to reflect that notion. 317 I do not see any particular problem with the movement away from the pleaded reference to the period "until 5 February 2003". This clearly in context includes the period up to the end of 2002: Mr Randall had referred to "the situation that occurred at the end of the year" [18 February morning media presentation [DX 110.35]]. He had said that the problem occurred "right at year-end" [18 February afternoon media presentation DX 140.17] 318 Hence one must look at the evidence on the issue. And it must always be appreciated that one is examining whether or not the statement was true insofar as Mr Randall was inter alia speaking about his own belief and testing the substance of the allegation that if such a belief was not held, he had failed to disclose knowledge of his relevant beliefs to the board. Findings on the evidence Mr Randall made the statement 319 In my view the evidence does establish that Mr Randall made the statement that he had been confident of a strong US [meaning North American] profit result at the end of 2002. The morning media briefing presentation of 18 February 2003 included his statement "we believed we would report a strong US [meaning North American] and a strong South American result". [DX 111.13 -111.19] Did the statement reflect Mr Randall's view? The sense in which the word "strong" was used 320 Firstly it is necessary to reach a decision as to the sense in which the word "strong" was used in the reference to confidence as to a strong US profit result. The word was not used in the sense of representing a belief of confidence meaning that market expectation would be achieved. Nor was it used in the sense of representing a belief of being able to report a US profit result which could properly be characterised as a poor profit result. Nor was the word used in the sense of representing a belief of being able to report a US profit result which could be properly characterised as only marginally/slightly better than a poor profit result. The word was used to suggest a US profit result of significance in the sense of real strength, even though that result may not have achieved the market expectation. Without being too precise the word 'strong' puts a context of relativity and brings to mind the indication of lack of real materiality in the result as compared with market expectation. Evaluating parameters of the evidence given by Mr Randall 321 Importantly it is also necessary to evaluate the reliability of Mr Randall's evidence of having over an extended period of time received positive and optimistic reports: · from Mr Jeyaraj [who in turn was receiving information from ATI/ Mr Newburg and was also in close communication with Mr Khin]; · from Mr Newburg [on those occasions when Mr Randall and Mr Newburg communicated directly]. 322 Those reports covered a number of topics most of which [on the evidence given by Mr Jeyaraj and often corroborated by Mr Randall], are said to have been communicated by Mr Jeyaraj directly to Mr Randall. These topics were principally concerned: · with explanations as to the America's revenue shortfall and slippages; · with suggested errors in the relevant gross margin numbers being reported [excuses being given by ATI include that there was a problem with a file, that it was a problem with the figures, that it was a one off problem, that the problem was being looked into]; · with suggestions that the margin issue would be addressed through manufacturing over absorption based on units shipped; · with claims that North America had sufficient sales booked in for December to meet their forecasts and had increased their unit forecasts through the sale and operation planning process. [particular reference was made to Harrahs and Titan as well as to units having been airfreighted to the United States]; · with claims that "the US will make the figures". Failure to cross-examine Mr Jeyaraj save for a very few questions 323 A particular difficulty faced by the court in evaluating the defendant's claims [that Mr Randall had not been confident of a strong US profit result at the end of 2002] arises by reason of the defendant electing to confine its cross-examination of Mr Jeyaraj to approximately 2 1/2 pages of transcript. 324 This forensic decision means that the Court is asked to evaluate and pass judgment on the state of mind of Mr Randall [who himself was strenuously cross-examined], albeit that an extremely important primary source of communication to Mr Randall [being a witness who at virtually every stage corroborates what Mr Randall has sworn was said to him by the witness], is simply not tested on those communications at all. As has already been seen, Mr Jeyaraj was quite often the conduit for the passing to Mr Randall of information received from Mr Newburg. 325 There is more at stake than simply a requirement to test the communications. It is what lies behind these communications and the topics discussed between Mr Randall and Mr Jeyaraj which may be thought to have required testing of Mr Jeyaraj in cross-examination. 326 Further to leave in place and untested, Mr Jeyaraj's written evidence that for the reasons which he gave: · demand created following the September American annual gaming convention, contributed to high-level sales in December; · it was not possible to determine Aristocrat's final performance for the year against the field plan and budget until the accounts for December had been audited accurately; · he had expected that the revenue shortfall would be recovered and "booked" in December through expected sales, places the court in the particular difficulty of being asked to make a finding that this form of expectation was not only unfounded, but was known to be incorrect. Inferentially such a finding would mean that the evidence given by Mr Jeyaraj must not have been reliable. 327 Take for example Mr Jeyaraj's evidence that he recalled a conversation with Mr Khin which took place in about late December to the following effect: Mr Jeyaraj: "The first flash report for December does not include any factoring for South America, expected additional sales for North America or the IGT settlement. '' Mr Khin: " Yes, if we get the IGT settlement alone we will make it ." Mr Jeyaraj: "We should be clear on IGT soon. I was also told by Mark that they will ship the Harrah's units soon." 328 Mr Khin in his responsive Statement [23 March 2004-paragraph 26] took issue only with the suggestion that he had in this conversation said words to the effect: "Yes, if we get the IGT settlement alone we will make it". Rather on his evidence he had said words to the effect: "Providing we can recognise South America, we should make it with the IGT settlement alone." 329 In other words the Court can accept, from Mr Khin, being a witness whose evidence is accepted as reliable, that at this point in time Mr Jeyaraj was referring to the expected additional sales and making the point that he has been told by Mr Newburg that ATI would be shipping the Harrahs units soon. 330 Likewise Mr Jeyaraj gives evidence by statement in relation to the e-mail which he received from Mr Khin dated 31 December 2002 that he had a conversation with Mr Khin. Mr Khin recalled that the conversation had included the following: Mr Khin: It is disappointing that the Americans did not deliver what was expected Mr Jeyaraj: "Nick, I believe that it's too early to tell. They did this in June and also last year end. 331 This conversation is accepted as having included this exchange. 332 Here again if one is endeavouring to test the credit of Mr Jeyaraj who was not cross-examined on any of this, it seems reasonably clear that if Mr Jeyaraj said these words to Mr Khin at about this time, he likely believed that it was too early to tell whether or not the Americans would be shown to have delivered what was expected. And if Mr Randall's state of mind was fairly made up of information received from a number of quarters, one of the very significant quarters being Mr Jeyaraj, then why should not the Court find that Mr Randall shared this belief of Mr Jeyaraj? 333 Then during December once he had received the December flash report from Mr Khin, Mr Jeyaraj gives evidence of two conversations, the first with Mr Newburg and the second with Mr Randall. Conversation 1 Mr Jeyaraj: "Mark, what is the problem with the figures, they are showing a big short fall in revenue." Mr Newburg: "Lionel, there's a problem with the figures. This is why we moved Sharon Baker (the then controller of ATI) off the controllership and we are now transitioning Ron (Dufficy) into the role. Give us some time to investigate this error and I can assure you that we will have more than enough sales booked to meet forecasts. The Columbia contract has been finalised and we have received the deposit. We will also get a bank guarantee for the deal. There's still sales in America to come into the figure, a couple of big deals. We will make the figures." Conversation 2 Mr Randall: "Nick sent me the email with a number of scenarios (referring to the document marked NRK59 to Mr Khin's statement), what is the likely outcome for the year?" Mr Jeyaraj: "Mark assures me that the US will make the figures. The Columbia deal is done and with compliance approval he expects that the revenue will be recognised. The deposit cheque has been received and there should be a bank guarantee. Additionally, there are still a number of US sales that he expects to make. The email was prepared by Nick to keep everyone focused . He's going on leave and wants to ensure everyone is working on the figures while he's away." Finding 334 I have taken all of the above considerations into account in what follows. Notwithstanding those considerations the Court's finding based upon all of the evidence is that Mr Randall was not confident of a strong US profit result at the end of 2002. 335 The word "confident" is significant in the context of Mr Randall's statement now under examination. 336 The general evidence of the events of the last three months of 2002 are simply not such as to permit a finding that Mr Randall could be said to have been confident of a strong US profit result at the end of 2002 or thereabouts. There were simply too many imponderables. He well knew this. He had known this for some time – witness the 12 December 2002 sensitivity analysis earlier referred to. 337 Notwithstanding the several attempts in the evidence given by Mr Randall to downplay the significance of the 10 December 2002 e-mail, the document simply speaks for itself. Indeed all of the e-mails [to be found at DX 256,257] bespeak the urgency. They are all headed "URGENT: US Outlook Production". This was two weeks before Christmas. There were only so many working days left in the year. The point being made was that the gross margin fallout in the Americas had had a very real impact to the whole group result. Urgency was indicated in the request for information as to what was driving the reduction in margins. Urgency was demonstrated in the sentence "We absolutely cannot miss the North America unit sales forecasted for December" as well as in the sentence that Mr Jeyaraj also needed to get to the bottom of the gross margin issue. 338 In Mr Randall's own evidence he accepted that in his many conversations with Mr Newburg throughout the second half of 2002, Mr Newburg had said to him words to the effect "Whether we can make the numbers will depend on whether we get the South American deals…." and had gone on to indicate his confidence that they would make the numbers [statement 3 December 2003 (at [111])]. To the same effect in his own evidence Mr Randall accepted that at the 15 or 16 September 2002 Annual Planning Meeting in Las Vegas he had put to Mr Newburg that he would never get the numbers, to be informed that it all depended upon South America and that if they achieved the South American deals "they would be OK" but if they did not achieve those deals they would not achieve the numbers [statement 3 December 2003 (at [125])]. Mr Randall positively conceded as much under cross-examination: "Q. In paragraph 111 of your statement you say that you had many conversations with Mr Newburg throughout the second half of 2002? A. Yes. Q. And during the course of those conversations he said to you words to the effect, and you set out some words, "Whether we can make the numbers will depend on whether we get the South American deals. However, I am very confident that we will make the numbers. I have never missed a goal in my career yet". That is what you attribute to him? A. Yes. Q. But you seem to be agreeing, at least in relation to the first sentence, with the substance of what Mr Newburg set out in his paragraph 15, do you not? A. It is not dissimilar. Q. Well, do you accept that in many conversations you had with Mr Newburg throughout the second half of 2002 he said to you words to the effect, "Whether we can make the numbers will depend on whether we get the South American deals"? A. Yes, I think so. " [Transcript 116] 339 Further, Mr Randall under cross-examination in relation to what was said at the meeting of 9 January 2003 in Las Vegas included the following in an answer: "That's why I made the rhetorical statement I believe, you know, without knowing the numbers, because we didn't know the numbers, but "if you took out the windfall from IGT and if you took out one large contract in South America, the result from America wouldn't be very good, we would be losing money and we have to do something about it, guys. Now, it is up to you to figure out what to do as a team. You run this business, and Mr Jeyaraj and Mr Parker and several other people from head office will be coming here next week to build a new plan for the United States with you guys. So think about it." [Transcript 179] 340 The court's finding is that Mr Randall did say to Mr Newburg during the course of 7 February 2003 words to the effect: "Even if we had made the profit numbers our share price would still have been crucified because we did not tell anyone how much we depended on South America " [cf Mr Newburg's affidavit D13 [1 and 25] 2: cross-examination of Mr Randall at Transcript 125.52-126.9] 341 It is necessary to differentiate between · the date when Mr Randall first heard of the IGT settlement; and · the position anterior to his receipt of that information. 342 The court's finding from the whole of the evidence is that it was not until 30 or 31 December 2002 that Mr Randall first heard of the IGT settlement. 343 The windfall, or as he put it "bonus", meant that now for the first time, achieving the Columbia transaction and the IGT settlement revenue would enable the group to cross the line [in terms of satisfying the market expectation] even without Mr Newburg's promises [additional sales/the margin issue being addressed through manufacturing over absorption based on units shipped] coming good. 344 But would the integers underpinning such a result in effect be simply masking/papering over the reality? In my view on the evidence the answer to this question is in the affirmative: cf Mr Jeyaraj having joined in the proposed redrafted announcement which stated: 'We were expecting a significant portion of the shortfall to be offset by the South American contract'. But the mere fact that this question would be asked and may possibly be so answered was itself at the material time a matter for legitimate concern. It was a matter of concern for Mr Randall. 345 Even if the IGT settlement were permissible to be regarded as part of a US profit result, the Columbia transaction could never be so regarded. 346 To a certain extent the proposition that Mr Randall is shown to have been confident of a strong US profit result at the end of 2002 is dependent upon a finding in Mr Randall of real confidence in Mr Newburg's several promises being honoured. That finding is not made. Such a finding is not consistent with the general evidence before the court. Evidence has already been referred to in terms of Mr Randall having to caution Mr Newburg against making over commitments [Statement 113]. [Transcript 112.43]. 347 The finding that Mr Randall was not confident of a strong US profit result at the end of 2002 reflects the Court's rejection of Mr Randall's evidence of his acceptance at face value of what he had been told about additional sales that Mr Newburg expected to make concerning inter alia Harrahs units and Titan. The finding is that he continued to have a considerable degree of scepticism with respect to Mr Newburg's promises. That scepticism had been demonstrated only a few months earlier at the ATI meeting on 16 September 2002 when Mr Randall had volunteered the comment addressed to Mr Newburg: 'You will never get these numbers. It looks very risky to me' and had gone on to query whether the deals which Mr Newburg was talking about were "real deals" or on the other hand, ones which Mr Newburg only hoped to be able to get. Earlier in August 2002 Mr Randall had sent a memorandum to Mr Newburg regarding his overly optimistic comments made to analysts during the May 2002 presentation. 348 Notwithstanding the evidence given by Mr Jeyaraj, the preponderance of all of the evidence before the court including the documentary material and the clear probabilities mandate the finding that Mr Randall had not been confident of a strong US profit result at the end of 2002. Even assuming that he shared with Mr Jeyaraj the opinion that it was not possible to determine Aristocrat's final performance for the year against the field plan and budget until the accounts for December had been audited accurately, this would not mean that in late December 2002 he had had confidence in there being a strong US profit result once that exercise had been completed. Defence paragraph 63.3 The statement was made 349 The words used in the afternoon presentation to the analysts [DX 141] include: "What you have told us bothered you, upset you. Regarding the situation, what happened? First, no warning on the $109m down to $80m. We couldn't tell you what we did not know. We were confident of meeting the market expectation at year end. I arrived in the country on 30 January and I was confident that we would exceed all our numbers. Second, there was no early advice on the South American contract. This contract was never finalised. Obviously, if we had pre-announced this contract it would have been horrific for Aristocrat when the contract fell over. I am going to share a timeline with you that shows exactly when these things occurred. Third, there was no warning on the contributions mix. We didn't tell you early on that the US was slipping and the Americas was going to exceed and that South America was going to make it up. [Note there was no concession that this had been his belief from clear information to this effect] As I said, we believed we would report a strong US and strong South American result. The Americas for us reports as a consolidated entity. It is a single company. We break the results up for the transparency of the market with all the corresponding costs and so on as a separate exercise. We see the result from the Americas when it comes in as a consolidated result. It wasn't clear to us that we had a margin problem. Fourth, we were late and the announcement was incomplete. When the situation was identified we immediately asked for a trading halt, informing the market, and we began our investigations. We didn't have all the facts when we came out on the Friday to the market initially and we bungled the announcement. It wasn't very professional and I apologise for that. I hope this helps to clarify what happened and I'm sure you will ask a few questions about that later on." [DX141.4 – 141.37] 350 The slide bullet point being referred to in the passage which leads to the critical sentence had read: " No warning on mix of contributions between North and South America ". 351 Here again the use of the word "us" in the critical sentence: " It wasn't clear to us that we had a margin problem", included and was intended to include a reference to the state of mind of Mr Randall personally. 352 The plaintiff has submitted that the emphasis should be seen in the use of the words "clear" and "problem". The submission is that the defendant has transposed the words "a margin problem" putting a gloss upon the sentence as if it had read "[I]t wasn't clear to us that Aristocrat had a problem with its profit margin in its North American business". To my mind a global reading of the whole of the particular presentation does yield the content pleaded in the defence (at [63.3]). The representation had earlier been made as for example see the reference to the "A$ 14 million bottom-line impact [resulting] from lower volumes and margins in the North American business". The representation had earlier been made as he well knew: as for example see the reference to "[The] further A $14 million bottom-line impact [resulting] from lower volumes and margins in the North American business. As previously mentioned, the full extent of these has only become apparent following analysis conducted last weekend". [Announcement 11 February 2004, Mr Randall having been involved in the process which culminated in this announcement] [Transcript 142] 353 Hence one must again look at the evidence on the issue. And again examine whether or not the statement was true insofar as Mr Randall was inter alia speaking about his own belief and looking to the substance of the allegation that if such a belief was not held, he had failed to disclose his state of mind to the board. 354 The Court's finding here is based upon all of the evidence. The finding is that it was certainly clear to Mr Randall before 5 February 2003 that Aristocrat had a problem with its profit margins in its North American business. Of course 5 February was some 36 days after the end of December. Quite some water had passed under the bridge over that further interval. 355 Mr Jeyaraj's concession under cross-examination was that throughout the second half of 2002 it was his perception that there was a persistent difficulty in obtaining assistance from the management of Aristocrat in North America about their margin problem, which problem continued until at least January 2003. His perception was that this was one of the difficulties with Aristocrat's business in North America. Mr Jeyaraj clearly did regard the matter and "problems with the figures" [statement paragraph 44] as of concern. It is a short step to infer that he made his view known to Mr Randall who shared the same view. That inference is drawn and a finding is made accordingly. To the extent that this finding contradicts evidence given by Mr Jeyaraj and Mr Randall, their evidence is rejected as unreliable. 356 Actual gross margin percentages had fallen dramatically against forecasts. The cause of the reduction in margins had not been explained. The gross margin fallout was perceived as having a significant impact to the whole of the group result. Confirmation that there had been no discounting removed the possibility that this might have adversely affected the gross margins (being part of the cost of sales). 357 The finding repeats some of the findings already made. The finding is that the evidence given by Mr Randall, generally of his confidence in the North American profit margin slippage being of no particular moment for reasons including: · advice as to more North American revenue, as from the US delivering on Harrahs and Titan; · advice that the margin issue would be addressed through manufacturing over absorption based on units shipped; · advice that North American margin pressure appeared to be because of an error in figures which was still being looked into in terms of a number of 'one offs'; is in large measure unreliable. 358 This evidence is generally inconsistent with the tenor of the avalanche of contemporaneous e-mails being sent from the Sydney head office to ATI over an extended period. It is also inconsistent with the passage of time in the sense that as the month of December flew by, the continued failure of ATI to come up with the promised explanations, on the balance of probabilities, had led to ever increased anxiety in the Sydney office about just what was happening. The finding is that that anxiety was passed on to Mr Randall through the many communications including e-mails and copy e-mails. Although Mr Randall himself had a number of direct communications with Mr Newburg through this month, the court's finding is that he had and continued to have considerable scepticism in relation to the reliability of the promises of Mr Newburg, who had already required to be counselled about making predictions which could not be kept. 359 It should be recalled that the statement Ms Baker made to Mr Khin [by e-mail of 10 December 2002] that ATI was still working on the margin analysis which should probably be available at the end of the following day including 'we will let you know what the heck we find - believe me, we're very frustrated with the results", attended by no such clarification, is an example of what was coming forward from ATI. There is no lack of evidence of close communication between Mr Khin and Mr Jeyaraj during this period and on the clear balance of probabilities, the information as to the continuing failure of ATI to do much more than offer excuses was well known to both gentlemen. 360 Insofar as Mr Jeyaraj gave evidence [generally also to be found in the evidence given by Mr Randall] of having passed on to Mr Randall that which Mr Jeyaraj had been told by those in the ATI office, the court certainly accepts that there was close communication between these two officers of Aristocrat, but does not accept as reliable their respective evidence of having, as it were, taken at face value what they were being told, particularly by Mr Newburg of the sales in America which were still to come into the figure: "a couple of big deals"; and/or or including "the Harrahs and Titan deals". Neither Mr Randall nor Mr Jeyaraj were babes in the woods in terms of this industry or this company. The court is unable to accept that on the balance of probabilities in the environment shown by all of the evidence to have existed, either Mr Jeyaraj or Mr Randall placed particular faith in the fact that the sales and operations documentation showed large orders booked and delivered to America, consistent with large sales in December 2002. 361 The truth is that on the balance of probabilities, both of them were well aware that the high probability was that the profit margins in the company's North American business comprised a considerable problem which, as December wore on, they believed would hopefully, at least in part, be generally papered over or minimised if all outstanding matters requiring attention in relation to the Colombian transaction were achieved within time, with auditor acceptance of the revenue as 2002 income appropriate. But certainly Mr Randall believed, what he later said on 7 February 2003: "Even if we had made the profit numbers our share price would still have been crucified because we did not tell anyone how much we depended on South America " [cf Mr Newburg's affidavit D13 [1 and 25] 2: cross-examination of Mr Randall at Transcript 125.52-126.9] 362 Of course the IGT settlement did not float in from left-field and was not a part of anyone's considerations until the last days of December. 363 Mr Jeyaraj and Mr Randall generally in their evidence, sought to downplay the significance of the profit margin slippage. But the contemporaneous materials are the more reliable. Margin pressure had been known to exist for some months and had been raised with the Americans in e-mails and orally. The significant e-mail exchanges included the important e-mails at [DX 256-257]. The emails, as the subject-heading to them suggests, were far more than the mere inquiries for information by Mr Jeyaraj, which is how Mr Randall would have them thumbnail sketched. Knowing that both Colombia and Brazil 2 were needed to make the numbers, to be told by Mr Newburg that Brazil 2 was no longer going ahead, was a major blow, particularly in the context of the main message that there was a major margin miss in November with no catch-up planned for December, [and that both Colombia and Brazil 2 were required to be recognized in December for the group to meet expectations]. 364 Mr Jeyaraj had stated to Mr Newburg that the gross margin fallout in the Americas had had a very real impact to the whole group results and that the miss in the Americas gross margin for the month of November was over US $6 million and that there was no catch up planned in December. He had sought information as to what was driving the reduction in margins. The case concerning the 11th February 2003 announcement 365 This case is pleaded in the defence (at [61] [79]) 366 The allegation is that on or about 11 February 2003 Mr Randall knowingly caused or permitted an announcement to be released to the ASX that included a statement to the effect that the full extent of lower volumes (of sales) and (profit) margins in the North American business had only become apparent (to Aristocrat) following analysis conducted on the weekend of 8-9 February 2003. 367 Here again it is necessary for the defendant to establish its pleaded case that the conduct of Mr Randall in causing or permitting this announcement to be released occurred without full disclosure of his knowledge to the board. 368 This matter is really one in small compass from an evidentiary point of view. It does however turn upon an extremely fine/close analysis of the events which occurred. In particular it is important to focus upon: · what was the precise form of the relevant sentences in the proposed announcement which Mr Khin and Mr Jeyaraj had taken exception to when they on 9 February re-drafted the statement? [The answer is clear from NRK 80 as well as NRK 82: "While we believed it would be inappropriate to release further financial information pending completion of final audit of the full 2002 result, we would now like to clarify the confusion we created by providing the following information, some of which was not available prior to Friday's statement . In particular, this includes a detailed segmental analysis. Information received on Friday with respect to the Company's North and South American businesses was inconsistent with information previously provided in that it spelt out the extent to which margins deteriorated in the second half, and higher overall costs than previously indicated. Whilst margin pressure was known to exist, principal related to MK V product performance , the extent to which this had occurred was not known. Although unit volumes in the US achieved growth of 46% (platforms) and 35% (games and convergence), this was less than expected"] [emphasis added] · what was the proposed replacement which Mr Khin and Mr Jeyaraj suggested in their re-drafted form of statement? [The answer is clear from NRK 82 which inter alia removed the references to sections of information not having been available prior to Friday's announcement and to information only received on the Friday: "While we believed it would be inappropriate to release further financial information pending completion of final audit of the full 2002 result, we would like to respond to those questions and also provide further clarification. After consolidation of the Group result in January it became apparent that we were not going to meet the market forecast of $109 million NPAT. However, we would be within 10 percent of the expectation and this was considered not material enough to inform the market at that point in time in January. Platform and games unit sales & margins in our North American region were lower than that expected, which is principally related to the MK V product performance. We were expecting a significant portion of the shortfall to be offset by the South American contract."] · what was the essential point raised by Mr Khin in his draft e-mail to Mr Jury [which he handed across the next morning] after he had learned in the office of Mr Jury that Mr Randall, having read both drafts was going with that prepared by Mr Jury? [The answer is tolerably clear from the first section of the draft e-mail: "1 We (my group) received no subsequent information post the Friday announcement . All information and financials were received in accordance with the year end calendar. The only thing that did happen last week was we received a final decision from our auditors that IGT and Colombia cannot be recognized. This was backed out of the accounts and a new set of accounts was prepared and distributed. 2. Prior to Lionels trip to the US a document was prepared showing the split between North and South America and the impact on contribution profit. I believe this was also shared with Des (but I cannot confirm that). 2. The Amercas group gross margin issue was known and highlighted as an issue in November and early December. It came to a head in early December when the Americas reported a 15% gross margin number for the month of November and Des specifically asked the Americas for an explanation…"] · The burden of what Mr Khin was about was correcting what he saw as incorrect in terms of the statement which he had seen large as life in the announcement which he and Mr Jeyaraj had redrafted the previous night: that statement had focused upon information said not to have been available prior to the Friday announcement. It had purported to set out such information. In particular it had: - purported to identify that information as having included a detailed segmental analysis: - had stated that information received on the Friday was inconsistent with information previously provided in that it spelt out the extent to which margins deteriorated in the second half, and higher overall costs than previously indicated. · Mr Khin was making the point that his group had received no subsequent information post the Friday announcement. His point was to make quite clear that information and financials were received in accordance with the year end calendar. · Acceptance of the credit of Mr Khin and of his general reliability as a witness carries with it an acceptance that what he committed to writing on this day in this draft e-mail was correct insofar as the reference to no subsequent information having been received after the Friday announcement was concerned. · It was not put to Mr Khin that the 8 February 2003 e-mail from Mr Rowan [NRK 81] constituted any such subsequent information. · On the other hand Mr Jeyaraj gave evidence [Statement paragraph 85] that receipt of this e-mail represented the first occasion when he was able to obtain detailed information from the America's in relation to the margin analysis. Yet he had, as already pointed out, been a party to the preparation of the 9 February redraft of the announcement, which had carefully omitted the incorrect statement that information received on the Friday was inconsistent with information previously provided and the statement that some information to be provided was not available prior to the Friday announcement; · The Court's finding is that this e-mail did not take the matter further in terms of information generally previously provided. And if there was, contrary to this finding, any further information in this e-mail, it was not significant such that it could be put forward as inconsistent with information as to facts and figures and financials previously provided. 369 But what was the form of the ultimate Monday announcement which did go out. It relevantly said that additional information was being now provided to clarify any confusion and went on: "This information is based on analysis conducted after our announcement, and examines the Company's North and South American businesses. The results are inconsistent with information previously provided by Americas' management in that they [ie the results] spell out the extent to which margins deteriorated in the second half, and there were higher overall costs than previously indicated. While margin pressure was known to exist, related to discounting and warranty costs resulting from MK V product performance, manufacturing overruns and a specific trade in program for old CDS equipment, the extent to which this had occurred was not known. Although the US achieved platform unit volume growth of 46% for the full year, this was less than expected." [Emphasis added] 370 It was certainly the case that an analysis had been conducted after the Friday announcement. It was also the case that whilst margin pressure had been known to exist, the extent to which it had occurred had not been known. Each of these propositions was expressly conceded by Mr Khin at the ASIC investigation [PX 4533-4535]. 371 A fair reading of those sections of the ASIC examination of Mr Khin makes clear that the whole of the Sunday was spent by himself and Mr Jeyaraj in looking at the North American results, having now backed the South American transaction as well as the IGT transaction out of contention. 372 Mr Khin's concern was centered upon his knowledge that his group had had the relevant information. He made the point that the information had existed [meaning had been received in Australia] in his ASIC examination [PX 4533.24]. 373 But it has to be noticed that the form of the final Monday announcement had been relevantly altered. Where it now referred to results being inconsistent with information previously provided by the Americas management, the subject matter of the sentence concerns the results of the weekend analysis. Importantly it gave a context to this proposition in terms of the inconsistency being thrown up in that the analysis now spelled out the extent to which margins had deteriorated in the second half of the year and there were higher overall costs than previously indicated. Clearly of course, the reference to "information previously provided" still had to have been a reference to anterior information provided by the American management 374 Were there any and if so what segments of information previously provided by the Americas management which could be identified as inconsistent with the results of the weekend analysis to the extent described in the Monday announcement? The answer based on the evidence is in the negative. The finding is that all relevant information had already been provided prior to the weekend analysis. All that the analysis appears to have achieved [with a special focus upon the North American results, and in a situation in which the Colombian transaction and the IGT transaction were backed out of the American results] was to identify the extent to which the margin pressure had occurred up to and including the December results: an analysis able to be carried out with the benefit of the exclusion of those two transactions but reliant only upon materials received from ATI prior to the Friday announcement and not fairly described as being materially contributed to by information [suggested as 'fresh' information] to be found in the 8 February 2003 e-mail from Mr Rowan. 375 An important finding of the court is that Mr Randall had been made aware by Mr Khin on Monday 10 February 2003 that his group had received no subsequent information after the Friday announcement. The Court's finding is that Mr Randall well knew prior to the making of the 10 February 2003 announcement, that Mr Khin's group had, through Mr Khin, made clear to Mr Randall that the group had received no subsequent information after the Friday announcement. The final fine tuning of the draft announcement which appears to have been achieved in the boardroom, certainly emphasised that what was being said was that the results of the analysis conducted after the 7 February announcement spelled out the extent to which margins deteriorated in the second half of 2002. Now the final form of the announcement no longer said that information which had been received on the Friday was inconsistent with information previously provided. It still used the words "information previously provided" but did not give a timeframe as to when that information had been previously provided by the America's management. This was a subtle shift because now the focus was squarely on what had been the information provided by Americas' management in the months before 7 February making the point that that information had failed to spell out the full extent to which margins had deteriorated in the second half of the year. 376 The fact is that the information which had been forthcoming earlier had clearly pointed up the existence of margin pressure. Questions asked from Australia had not been answered and there had been a masking of the truth from America. But the facts had come forward in the information and financials received in accordance with the year end calendar. 377 To my mind the final form of the announcement, although coming very close to the line and being capable of being construed as suggesting recency in the receipt from America of relevant material information able to be analysed over the weekend of 8-9 February 2003, cannot be said to have been false or false to the knowledge of Mr Randall. There is too much play [ie room for flexible interpretation] in the use of the words "full extent" and the words "became apparent" to enable such a finding. The announcement had indeed been carefully drawn. Again I repeat that Mr Khin conceded at the ASIC investigation that whilst margin pressure had been known to exist, the extent to which it had occurred had not been known. That extent, so he swore on his ASIC examination, became known following the weekend analysis. 378 It follows that the 11 February announcement case fails. Duties of disclosure to the board The questions 379 The questions, which arise, are as to whether Mr Randall had an obligation to disclose the matter of which he had knowledge [which I read as inclusive of his own state of mind drawn from those matters] to the board and if so what is the evidence as to whether that disclosure took place? Duties of chief executive officer to make disclosure 380 It is convenient to commence with an examination of the duties of the chief executive officer to make disclosure to the board. As will appear from what follows the issue is more one of timing than of content of the duty to make disclosure. 381 The position of chief executive officer, or managing director as per the former nomenclature, "is of a very special kind." As Sir Wilfred Greene MR said in Shirlaw v Southern Foundries (1926) Ltd and Federated Foundries Ltd [1939] 2 All ER 113 at 118: "A managing director is…a director to whom the board, being empowered to do so by the articles of association, delegates its powers of management, or some of them, and this delegation is usually, if not invariably, made subject to the overriding authority of the board. Management here means management of the company's business, or part of it, as the case may be." 382 The breadth of the managerial powers delegated to the chief executive officer by the board is ultimately contingent on the former's terms of appointment. In Harold Holdsworth & Co (Wakefield) Ltd v Caddies [1955] 1 WLR 352, the respondent was appointed managing director of the appellant company on terms vesting him with authority to exercise powers "which may from time to time be assigned or vested in him by the board of directors of the company." Upon the board confining such duties to the management of a small subsidiary, the respondent claimed breach of contract on the basis that, notwithstanding the terms of his appointment, there were certain functions which inherently fell within "the ordinary scope of duties of a managing director" (at 367, per Lord Reid) and from which the board could not derogate. This submission was promptly rejected by the House of Lords, Viscount Kilmur LC stating (at 356) that: "the respondent is appointed managing director. If one then asks what are the duties which he shall perform and what are the powers he shall exercise, the answer, from the words of the clause, is, the powers and duties which may from time to time be assigned to or vested in him by the board of directors. If one then asks how shall he perform and exercise them, the answer is, in relation to the business of the company. " 383 However, subject always to the terms of appointment, it is evident that the law tends to assume that where the board resolves to appoint a chief executive officer, his or her powers to control the operational and managerial aspects of the company's business will be broad indeed. In the seminal case of Freeman & Lockyer (a firm) v Buckhurst Park Properties (Mangal) Ltd & Anor [1964] 2 QB 480, for example, Lord Diplock held (at 505) that where a board permits a person to "act in the management or conduct of the company's business", that delegation of executive authority alone is sufficient to vest that person with ostensible authority to bind the company to transactions usually entered into "in the course of such business" by such managers. (See also: Crabtree-Vickers Pty Ltd v Australian Direct Mail Advertising & Addressing Company Pty Ltd (1975) 133 CLR 72 at 79-80, per the Court (Gibbs, Mason and Jacobs JJ). Moreover, and equally facilitative of the exercise by a chief executive officer of broad powers of company management, is the replaceable rule in s 198C(1) of the Act, which provides that "[t]he directors of a company may confer on a managing director any of the powers that the directors can exercise." 384 Thus it is apparent that the description of the position of chief executive officer by Sir Wilfred Greene MR in Shirlaw as being of a 'very special kind' refers to the sheer degree of discretion that the law permits the board to delegate to such a person. Unique amongst other corporate officers, the chief executive officer stands at the apex of the operational and managerial structures of the company, and whose authority is qualified only by any residual power left in the board. 385 Standing back for a moment from the particular contractual position of Mr Randall and from the particular circumstances of Aristocrat, it is convenient to recall, as was emphasised by Clarke and Sheller JJA in Daniels t/as Deloitte Haskins and Sells v Anderson (AWA) (1995) 37 NSWLR 438, that directors are under a continuing obligation to keep informed about the activities of the corporation, but this requires general monitoring of corporate affairs and policies rather than a detailed inspection of day-to-day activities. The judgment there on appeal from Rogers J [1992] 7 ACSR 759 had included the following statement (at 832-833): "Foremost among [the difficulties which arise in the allocation of liability to directors, officers and auditors]… is the failure to recognise and to admit that many companies today are too big to be supervised and administered by a board of directors except in relation to matters of high policy. The true oversight of the activities of such companies resides with the corporate bureaucracy. Senior management and, in the case of mammoth corporations, even persons lower down the corporate ladder exercise substantial control over the activities of such corporations involving important decisions and much money. It is something of an anachronism to expect non-executive directors, meeting once a month, to contribute anything much more than decisions on questions of policy and, in the case of really large corporations, only major policy. This necessarily means that, in the execution of policy, senior management is in the true sense of the word exercising the powers of decision and of management which in less complex days used to be reserved for the board of directors". 386 As the authors of Ford's Principles of Corporations Law, Butterworths point out [7.060], on appeal Clarke and Sheller JJA further emphasised that: · directors must take reasonable steps to place themselves in a position to guide and monitor the management of a company; · the board should meet as often as it deems necessary to carry out its functions properly in the particular circumstances of the company - it is not a matter of tailoring the extent of the duty or function to pre-fixed intervals between board meetings; · while it would be unreasonable to expect every director to have equal knowledge and experience of every aspect of a company's activities, courts have rejected the argument that a lower standard of care should apply to non-executive directors than to executive directors · the old law, according to which a director is justified in delegating to and trusting the officers of the company unless he or she is aware of circumstances so plain that no-one with any degree of prudence would rely on the judgment, information or advice of the officer concerned, does not accurately state the duty of directors whether non-executive or not in modern company law; · a director may not rely on the judgment of others where there is notice of mismanagement or an investment poses an obvious risk, and if the director knows or should know of facts which would awaken suspicion and put a prudent person on guard, then a degree of care commensurate with the evil to be avoided is required. 387 As the authors of Ford's Principles of Corporations Law then observe: "[w]hile these observations appear to imply a more onerous duty of care with respect to delegation than Rogers J had contemplated, they are strictly consistent with Rogers J's commonsense approach to the functions of the board of a large company. In assessing whether a director of a large company has discharged the duty of care, the court can be expected to take into account the fact that the company is too big to be supervised and administered by its board except in relation to matters of high policy. The factual content of the duties of guiding and monitoring management must be set having regard to the company's size , and to do so is consistent with the Court of Appeal's views". [emphasis added] 388 Rogers J at 865-867 had continued: "Companies legislation has not sought to determine the proper division of functions between the board and management. Instead it evolved in response to the demands of changing company structures and commercial practices … A board's functions, apart from statutory ones, are said to be usually four-fold: (1) to set goals for the corporation; (2) to appoint the corporation's chief executive; (3) to oversee the plans of managers for the acquisition and organisation of financial and human resources towards attainment of the corporation's goals; and (4) to review, at reasonable intervals, the corporation's progress towards attaining its goals: cf Ford and Austin "Ford's Principles of Corporations Law" 6th ed, 1992, p 429; Brown & Grogan Company Director 3rd ed, 1974, p 6. The board of a large public corporation cannot manage the corporation's day to day business. That function must by business necessity be left to the corporation's executives. If the director of a large public corporation were to be immersed in the details of day to day operations the director would be incapable of taking more abstract, important decisions at board level: Dovey v Cory [1901] AC 477 at 488." [It may be noted that these passages were not subject to adverse comment on appeal] 389 Hence it is appropriate to approach the question of obligation to disclose taking as a given that the board of Aristocrat could not be expected to manage the company's business. For that reason successful company management called for the appointment of a chief executive officer to deal with everyday matters. Mr Randall was appointed to that position and also as a director. 390 His contract of appointment as chief executive officer and director required him "to well and faithfully serve Aristocrat" and "to competently exercise all skills as would be normally expected of persons holding the position of chief executive officer and director of a public company". 391 To assist the board, its committees, and management in the delegation of roles and responsibilities, the board had adopted a set of Corporate Governance Principles. This document [in its form as amended as at 2 December 2002] is to be found at page 112 of the exhibit to Mr Randall's 10 October 2003 statement. It identifies [2.2] the role of Chief Executive as: · to develop strategies for adoption by the board; · to implement the strategies adopted by the board and to communicate them to management; · to carry out the ongoing management of the company, including making the necessary appointments and separations; · to ensure that proper internal controls, risk management systems and reporting mechanisms are in place; · to report to the board on his implementation of the foregoing; · to act as the spokesperson for the Company except on matters relating to the board, on corporate governance issues and in direct written communications with shareholders-these are the responsibility of the Chairman, as authorised by the board. 392 The same document included a formal delegation by the board to the Chief Executive of inter alia: · the powers normally or customarily exercisable by a managing director; · the powers necessary to implement the strategies, business plans and budgets for the Company as adopted by the board from time to time; · the powers necessary for the efficient management of the Company. 393 The same document in Appendix 2 entitled "Charter of the Board of Directors of Aristocrat Leisure Limited" identified the functions of the board in terms which included: · to oversee the conduct of the Company's businesses; · to select, appoint, regularly assess the performance of, determine the remuneration of and plan for the succession of, the Chief Executive and put in place clearly defined delegations of powers to the Chief Executive to enable him to carry out his responsibilities; · to review and approve the Company's strategy, business plans and annual budgets and financial objectives; to agree with management appropriate performance indicators and monitor performance against those indicators and against the plans and budgets; · to identify the principal risks of the Company's businesses and ensure the implementation of appropriate risk management and reporting systems; · to establish and monitor policies to ensure compliance with the legal and regulatory regimes to which the Company is subject and to ensure corporate conduct of the highest standards of corporate behaviour. Returning to the facts 394 As always it is necessary to return to the precise facts. And as earlier indicated a question of timing does arise. The context is of course the findings upholding: · the defendants paragraph 63.2 claim to the making of the material statement that Mr Randall had been confident of a strong US profit result at the end of 2002 and as to Mr Randall not having held this view at the time the statement was made; · the defendants paragraph 63.3 claim to the making of the material statement that it was not clear to Mr Randall before 5 February 2003 or thereabouts that Aristocrat had a problem with its profit margins in its North American business when this had in fact been clear to him before that date. 395 The matter has been approached by Aristocrat in its contentions that the evidence establishes that Mr Randall failed to disclose his relevant state of mind to the board. Reliance is placed upon: · concessions to this effect said to be found in the 18 February 2003 morning media presentation; · concessions to this effect said to be found in the pleadings; · the evidence as to there not having been any board meetings between 18 November 2002 and 17 February 2003; · the content of what was reported to the board. 396 In short Aristocrat commences by endeavouring to prove what happened. 397 Of course a board meeting could have been called and presumably at short notice had there been sufficient urgency in this respect. 398 To my mind it is convenient to follow the Aristocrat route of looking at what happened and then to return to what if anything is shown to have been a particular obligation of Mr Randall to make a disclosure to the board and when should that disclosure have been made and what should have been the content of the disclosure. The 18 February 2003 morning media presentation 399 During the 18 February 2003 morning media presentation Mr Randall conceded as follows: "We did not have sufficient controls or judgment communication in place to understand the situation early enough to take action and to inform the Board and the market. The market has censured us and now we have to earn the market's confidence back. I should have seen this coming. I did not. For that I apologise, and I apologise to the Board, and to all stakeholders, particularly shareholders and employees of Aristocrat." [DX 108.36] 400 At the board meeting of Aristocrat held on 17 February 2003 Mr Randall apologised. The minutes [9/2851] record the apology as: "The Chief Executive apologised to the Board and to all stakeholders for the events in the United States and South America which had led to the Company falling short of market expectations for the 2002 year. He tabled a timeline of events relating to the South American contract and confirmed his belief that the company had made its disclosure to the market at the earliest possible time . The sequence of announcements was not well handled but this was partly a product of rapidly emerging and changing information." The pleadings 401 The defence had at the material time pleaded: "[66] On or about 11 December 2002 Mr Randall received a copy of an email message addressed by Lionel Jeyaraj (the Chief Financial Officer of Aristocrat) to Mark Newburg (the President of Aristocrat Technologies Inc, a subsidiary of Aristocrat in the United States of America) and Ron Rowan (the Chief Financial Officer of Aristocrat Technologies Inc) on or about 10 December 2002 that included statements to the effect that: Mr Jeyaraj had been through the latest 'roll up' (accounts) for the (Aristocrat) Group and it was not good news. The gross margin (profit) fallout in the Americas had had a very real impact on the whole Group result . The 'miss' (ie, the failure of Aristocrat to achieve its objectives) in the Americas gross margin for the month of November (2002) was over US$6 million and there was no catch-up planned in December (2002). Particulars Mr Jeyaraj's email (headed 'Urgent: US Outlook Reduction' and marked as having 'high' importance) was sent at about 12.18 am on 10 December 2002. By an email sent at about 4.57am on 11 December 2002 Mr Newburg responded to Mr Jeyaraj. By an email sent at about 7.44am on 11 December 2002 Mr Jeyaraj sent to Mr Randall a copy of his email to Messrs Newburg and Rowan together with a copy of Mr Newburg's response. By an email sent at about 1.45 pm on 11 December 2002 Mr Randall responded to Mr Newburg in the following terms: 'Mark, I'm sure you know the importance of this immediately you return to Las Vegas'. At or about 3.48 pm on 11 December 2002 Mr Randall received a response to his email from Mr Newburg. [68] At no material time did Mr Randall disclose to the Board of Directors of Aristocrat, or report to the Board, that: · he had received the email messages of 10 and 11 December 2002 pleaded in paragraph; · his state of awareness of Aristocrat's profit margin problem in its North American business in or about December 2002 was as pleaded in paragraph. 402 The amended reply had pleaded inter alia: "In reply to paragraph 68 of the Defence, Mr Randall: · admits that he did not inform the Board that he had received the emails of 10 and 11 December 2002; · says that given Mr Newburg's response to the emails (which is not contained in the Defence), there was no obligation to disclose to the Board the contents of the email." The content of what was reported to the board 403 It is necessary to follow the scheme of what was reported reasonably closely. 2002 Board Budget 404 The Aristocrat 2002 Annual Budget (also referred to as the 2002 board budget) appears at pages 32 to 49 of FWEB1 to Bush Ex 10. It is this document which was before the Aristocrat board at their meeting on 19 November 2001, and which the board resolved to adopt and authorise Mr Randall to implement (Ex PX 1 – 267 at 270). 405 The critical portions of the 2002 Board Budget are the amounts for the following in the "Budget 2002" column on page 33 of FWEB1 to Bush Ex 10 (all of which are expressed as A$ million). Revenue $907.3 Profit before tax $120.9 Profit after tax $75.8 406 Mr Randall accepted these amounts for revenue and profit before tax as being established in the 2002 Board Budget but differed as to the amount for profit after tax, which he asserts, was $80 million rather than $75.8 million [Randall Ex D2, para 30]. Mr Khin also agreed that these revenue and profit before tax amounts were part of the 2002 Board Budget [T342 lines 9 – 24]. Board Reports 407 All of the monthly Board Reports and CEO Reports to the board are reports comparing the actual results against the Board Budget, not the actual results against the management plan or the actual results against the market expectations. As the defendant has submitted this is important when one considers the large difference between the amounts for revenue, profit before tax and profit after tax in the Board Budget and the amounts for revenue, profit before tax and profit after tax in the market expectations which were as follows: Board Budget Market Expectations Revenue $907.3 million $934 million Profit before tax $120.9 million $257.9 million Profit after tax $75.8 million $109 million 408 In the circumstances where it was reported to the board that there were shortfalls between actual revenue, profit before tax or profit after tax and the Board Budget for those items, clearly those shortfalls were even greater with respect to the market expectation amounts for revenue, profit before tax and profit after tax. As the defendant has submitted the shortfalls to market expectations were not, however, reported by Mr Randall to the board. Leadership Team Reports 409 The reports shared between senior management were far more extensive, and did in fact track the actual results and forecasts against the management plan (which was substantially different to the Board Budget as Mr Randall agreed in cross-examination: T192 line 40 – T 194 line 8). These management reports are to be found in the following: · Aristocrat Group Leadership Team Report September 2002: Ex PX 3 – 1081 · Aristocrat Group Leadership Team Report October 2002: Ex PX 5 – 1512 · Aristocrat Group Leadership Team Report November 2003: Ex PX 6 – 1840 410 In the commentary of each such report, the Americas are identified as having large revenue, gross profit percentage and gross margin shortfall issues. These issues were significant throughout this period. Flash Reports 411 The "Flash reports" were provided by Mr Khin to Mr Randall and Mr Jeyaraj by way of monthly emails based on flash results provided by each country to Aristocrat Head Office in Sydney within 7 days prior to month end, with the actual results for a month not available until 5 working days into the next month (T249 lines 52 – 55, T251 lines 21 – 26). 412 The Flash Reports are to be found as follows: · 24 June 2002: Ex PX 2 – 613 to 615 (NRK 2) · 26 July 2002: Ex PX 2 – 641 to 643 (NRK 4) · 26 August 2002: Ex PX 3 – 746 to 748 (NRK 15) · 24 September 2002: Ex PX 3 – 1068 to 1070 (NRK 18) · 25 October 2002: Ex PX 4 – 1164 to 1166 (NRK 24) · 26 November 2002: Ex PX 5 – 1594 (NRK 35) · 23 December 2002: Ex PX 7 – 2192 (NRK 62) · 31 December 2002: Ex PX 7 – 2225 (NRK 63) 413 All of the flash reports compare the flash results against the previous month's forecast and the management plan. In all of the flash reports listed above (save for 24 June and 24 September 2002) a significant item in reported misses between the flash results and the forecasts and plans are attributed to the Americas. 414 The Court accepts as correct the defendant's submission that although flash results were reported to the board in the form of the CEO Reports for April 2002, August 2002, September 2002, October 2002 and November 2002, none of those reports contained a comparison of those results to the forecasts of the management plan, only the Board Budget. 415 The plaintiff asserts that there was a reasonably considerable and consistent furnishing of information to the board [or to board members] in late 2002 as to the American revenue having been down with revenue slippages from month-to-month. October 2002 416 Commencing with October there was the flash report for October 2002 dated 25 October 2002 (AB 4/1164) which stated that American revenue was down $17.5 million with revenue slipping into November and December. In relation to gross margin, Mr Khin had commented that the revenue short fall in the Americas was likely to explain the missing gross margin. 417 In Mr Khin's presentation to Mr Randall (AB4/1102) Mr Khin provided a forecast for profit after tax of $100.9 million. This included a United States' half yearly revenue of $125 million with an associated local contribution to profit of $30 million. This report also notes that: "the US has suggested that North American units which are in the outlook at 1695 for Q4 can increase to 4000 (up 2300) and possibly even 5500 (up 3800)…all up, the US could at end at (best case) $161 million revenue and $41.6 million - this is after taking a $6 million hit for stock loss, conversions costs…total North American units (in the forecast) stand at 6400 and S/America at 11800." 418 The October flash report (AB 4/1164) disclosed that revenue for the month exceeded the equivalent time in 2001 by $15.3 million, the gross margin exceeded the equivalent time in 2001 by $8.3 million and profit after tax exceeded the performance in the equivalent time in 2001 by $8.1 million. 419 The sensitivity analysis report prepared by Mr Khin (AB 4/1183) was apparently given to Mr Randall on 29 October 2002 . This sensitivity analysis again gives an outlook for profit after tax for the year at $100.9 million. It refers to other opportunities totalling $70 million and major risks of $33 million. Therefore, a total range of profit after tax of $100 million around the profit after tax of $100.9 million is set out by Mr Khin. 420 The CEO report prepared by Mr Rowan and forwarded to Mr Khin on 25 October 2002 (AB 4/1167) identifies a commitment of local contribution profit from the US for the fourth quarter of $40.55 million and identifies potential opportunities of $77.527 million. November 2002 421 The CEO report (being part of the Leadership Team Report for October 2002 that Mr Khin prepared - (AB 5/1512)) noted a revenue shortfall in the Americas of $26.5 million. It nevertheless commented that the full year forecast had: "Increased by $52.2m against last month's forecast mainly due to improvements in the Americas (+ $42.2m)…revenue in the Americas during the month was below plan due to delays in MK5 approval against the Plan Assumption. The Plan also assumes stronger NVP500 in hyperlink sales. Systems sales in the Americas continues to be lower due to competitive pressures. Full year forecast in the Americas has improved against last month's forecast due to stronger forecast in North American sales." 422 The CEO report also recorded that: · "Full year forecast gross margin is $79.4m below plan but has improved against last month's forecast by $21.8 m due to the flow-through from higher revenue in November and December in the Americas…(as outlined above)." · "Full year forecast units of new platforms has increased by 7,164 against last months forecast mainly due to improvements in the Americas and Japan. The Americas unit sales are 4,781 higher due to expected stronger sales to North America." 423 The CEO report also reported that cash flow was reduced because: "Approximately $30m in deposits and factoring on South American transactions" had been removed. Any success in obtaining a sizeable deposit or debt factory would therefore be an upside from this position." 424 In Mr Khin's November 2002 CEO Report (see AB 5/1565 and paragraph 56 of his 16 October 2003 statement), he commented that, in respect of preliminary year to date results; "In order to achieve the board revenue budget of $907 million we will need to achieve revenues of $229 million in the next two months. Although this will be very challenging on all fronts (manufacturing, sales, administration) I am confident that we will be able to meet both this and the $121 million full year PBT target." 425 Further, the sensitivity analysis prepared by Mr Khin on 20 November 2002 referred to in paragraph 54 of his report (AB 5/1574) provides an outlook starting point for profit after tax of $111.9 million. This is to be compared with the starting outlook point for the previous sensitivity report (AB 4/1183) of $100.5 million. 426 That report also identifies possible further opportunities of $62.1 million and risks of $33.1 million. Again this involves a range of profit after tax of $90 million around a stated profit after tax of $111.9 million. 427 Hence whilst the November figures recorded low gross margins, there is certainly a basis to suggest that Australian management had been told by America that it was still expecting a substantial December month in accordance with previous years and the December phenomena. December 2002 428 There was no form of disclosure made during this month nor in January 2003 of the fact of the important e-mails, especially that from Mr Jeyaraj to Mr Randall of 11 December 2002 enclosing copies of Mr Jeyaraj's e-mail to Mr Newburg and Mr Rowan together with a copy of Mr Newburg's response. In the following days the responses remained entirely unsatisfactory. What should have been disclosed if anything and when? 429 These proceedings have their essential genesis in the massive after-tax profit shortfall announced in early February 2003. But the questions squarely raised for consideration are: · when should Mr Randall have made a disclosure to the board? · what should the content of the disclosure have been? 430 Answering these questions is a matter of some difficulty bearing in mind the particular circumstances of December. 431 It cannot be assumed that a chief executive officer is obliged to convene an urgent board meeting whenever particular problems even of real difficulty manifest themselves. The question is always one of judgment. There are a panorama of possible business judgment decisions which require to be made by a chief executive officer and often on very short notice. 432 I return to the contemporaneous position. 433 The Court is able to discern from the above-described important e-mails a picture disparate from that which was the subject of the evidence given to the Court by both Mr Jeyaraj as well as Mr Randall [generally of acceptance of the promises of Mr Newburg at every stage]. In fact there was no such quiet assurance at all. Mr Randall much later sought to explain this in terms of the failure to have sufficient controls or judgment communication in place to understand the situation early enough to take action and to inform the board as well as the market [see 18th February 2003 morning media presentation]. 434 Nor was there quiet assurance in terms of the Columbia contract being rated as 2002 revenue; witness Mr Jury being asked before Christmas to prepare the draft profit downgrade announcement. 435 By no later than 11 December 2002 to the eyes of the chief executive officer, the situation had become acute. The contemporaneous e-mails tell the story. Aristocrat was gambling on the Colombian contract to offset a significant portion of unexpected shortfall. The Sydney head office had become reliant upon Mr Newburg and his team to come up with explanations for the causes of the reduction in margins, having pressed for those explanations for some real time. No such explanations had come forward. It had become reliant upon Mr Newburg to come good with his promises in relation to sales said to be booked in for December to meet forecasts. As far as the US profit result for the end of 2002 was concerned Mr Randall was not confident of a strong North American profit result. Up until December 30 or 31, he had not even known of the IGT settlement nor considered the issue in any form. These were matters which were of high moment. The significance of the many significant loose ends pointing up the state of mind of Mr Randall is ultimately clearly proven by the draft profit downgrade announcement which in the end was never put out. 436 So much for the facts. But should the board have been relevantly put into the picture in December? Did the particular position of Mr Randall oblige him on some date in December to report the facts and his state of mind to the board bearing in mind the fact that Aristocrat was approaching year-end on a knife-edge of uncertainties with dramatic possible adverse consequences to the company? 437 It has to be remembered that Mr Randall later in the piece demonstrated what on the Court's findings had been appreciated by him much earlier, when he made the point that even if Aristocrat had made the profit numbers its share price would still have been crucified because it did not tell anyone how much it depended on South America. 438 The answer to the questions asked above is essentially a judgment call. It is a close judgment call. One presently has the benefit of hindsight in that regard. Notwithstanding that circumstance, in my view on the evidence Mr Randall was during December facing difficulties of a kind and dimension which did warrant the urgent calling of a board meeting as soon as practicable. At the least the board was entitled to be informed of the problems. That the board may have been essentially powerless to take any particular action as events unfolded may have been the case. Given that December was often an idiosyncratic month for Aristocrat and the fact that in the previous year a very significant part of the group's revenue was earned in that month, it is legitimate to enquire as to what precisely Mr Randall ought to have told his directors? Whether it be that a board meeting should have been called during the second half of December or during January is a further judgment call. The fact however is that the board was entitled during that period to be placed into the relevant picture and it was not. 439 In any event and even if it be incorrect to find that a board meeting should have been called earlier than 17 February 2003, it remains correct to be observed that on that day Mr Randall failed to disclose the above described matters to the board. To the contrary what he put forward as intended to be part of the presentations for the following day and as intended to be a correct statement of his state of mind [at the material time] was incorrect. He had not been confident of a strong US profit result at the end of 2002. It was not true to represent that he was so confident. 440 It had also been clear to him before 5 February 2003 that Aristocrat had a problem with its profit margins in its North American Business. That was not disclosed to the board. Returning to the contract clause 5.1 441 The submissions of the plaintiff on a number of matters are adopted as of substance. 442 Aristocrat must prove that Mr Randall either committed an act of: "dishonesty, fraud, wilful disobedience, misbehaviour or breach of duty which may detrimentally affect Aristocrat." (clause 5.1(a) of the contract) or "wilfully persistently and materially breaches any of the provisions of the contract, and, if the breaches are remediable, does not remedy them within 14 days after receiving notice in writing from Aristocrat." (clause 5.1(b) of the contract) Fraudulent misrepresentations 443 For Mr Randall to have made fraudulent misrepresentations, Aristocrat must prove that Mr Randall had actual knowledge that the representation was untrue or that it was made recklessly, not caring whether it was true or false. Accordingly, Mr Randall's subjective state of mind is essential. "Actual dishonesty, that is knowledge that the representation was untrue, is the hallmark of fraud. Such dishonesty is a necessary element..." (Contract Law in Australia 3rd ed. - Carter and Harland at [1025]) See Derry v Peek (1889) 14 App Cas 337, Contract Law in Australia 3rd ed. - Carter and Harland at [1025] - [1026], John McGrath Motors (Canberra) Pty Ltd v Applebee (1964) 110 CLR 656, Krakowski v Eurolynx Properties Ltd (1995) 183 CLR 563 at 577. Wilful disobedience 444 To establish "wilful disobedience", Aristocrat must prove that Mr Randall acted with a "deliberate design or purpose to derogate from duty" (see Isaacs ACJ in Adami v Maison de Luxe Ltd (1924) 35 CLR 143). 445 Disobedience connotes a refusal to follow orders. There is no evidence served of any deliberate refusal on the part of Mr Randall to follow any orders. Mr Randall is answerable only to the board. There is no evidence of any board directive not followed by Mr Randall. Misbehaviour 446 The concept of "misbehaviour" used in the contract is not a concept that appears to have been the subject of judicial consideration in respect of the right of summary dismissal. 447 However "misbehaviour" is analogous to "misconduct" at common law. In North v Television Corporation Ltd (1976) 11 ALR 599 at 608 - 9 Smithers and Evatt JJ of the Australian Industrial Court held: "It is of assistance to consider the expression "misconduct" by reference to subject matter to which it is related and the context in which it appears. The subject matter is the termination by one party against the will of another of a continuing contract of employment on the ground of breach of one of the terms of the contract. And the context is such as to indicate that certain breaches of a non-serious nature, some of which would be within the connotation of misconduct, are not regarded as grounds for termination. In such a situation it is reasonable to interpret the expression "misconduct" as referring to conduct so seriously in breach of the contract that by standards of fairness and justice the employer should not be bound to continue the employment ." (Emphasis added) [This passage was cited with approval by the Full Industrial Court in Brackenridge v Toyota Motor Corporation Australia Ltd (1996) 142 ALR 99 at 107, Wilcox CJ in Gooley v Westpac Banking Corp (1995) 129 ALR 628 and Young J in Galipienzo v Solution 6 Holdings Limited (1998) 28 ACSR 139. Also see Einfeld J in Sheldrick v WT Partnership (Aust) Pty Ltd (1998) 89 IR 206] 448 Revisiting the common law situation is of utility, remembering always that the Court is of course presently dealing with a question of contract construction: · It is trite law to state that, since the early nineteenth century, a defined spectrum of classes of conduct have developed within the common law of employment which justify the summary dismissal of an employee. Such behaviours include: - 'Misconduct', being a general term encompassing (without restriction) insolence ( Vardy v Cuthbert (1872) 3 AJR 25), abusive language ( Farley v Lums (1917) 19 WALR 117), drunkenness ( Meyrick v Stirling Bros Ltd (1899) 1 WALR 51), physical assault ( Brackenridge v Toyota Motor Corp Australia Ltd (1996) 142 ALR 99) and sexual impropriety ( Orr v University of Tasmania (1957) 100 CLR 526). - 'Disobedience', being the wilful disregard of instructions lawfully and reasonably made: Turner v Mason (1845) 14 M & W 112; Adami v Maison de Luxe Ltd (1924) 35 CLR 143. - 'Incompetence', being the failure by an employee to afford an employer of the degree of skill expressly or impliedly warranted: Harmer v Cornelius (1858) 5 CB (NS) 236. · Notwithstanding the plethora of authorities bearing upon the question of the circumstances in which a summary dismissal will be justified, there are no rules of law which dictate either, first, the precise nature of the manifold behaviours that potentially give rise to a right of summary dismissal or, second, the degree of such conduct required before that right is enlivened. That is to say, as put by Lord James of Hereford, speaking for the Privy Council on appeal from the New Zealand Court of Appeal in Clouston & Co Limited v Corry [1906] AC 122 at 129, the resolution of this question is a matter of fact alone in that "[t]here is no fixed rule of law defining the degree of misconduct which will justify dismissal." Alternatively expressed by Starke and Evatt JJ in Blyth Chemicals Limited v Bushnell (1933) 49 CLR 66 at 73, "[t]he degree of misconduct that will justify dismissal is usually a question of fact." · Since the progressive repeal of the cognate Masters and Servants Acts in the late nineteenth century, the common law has posited the employment relationship as, at least in form, merely a species of commercial exchange governed by general principles of contract law. Consistency with this conception demands that the question of whether conduct justifying summary dismissal has occurred be determined by reference to the ordinary principles regarding the repudiation of contracts. In an early exposition of such an approach, Blackburn J in Bettini v Gye (1876) 1 QBD 183 at 188 posited as concerning whether the breach in question was of a term: "going to the root of the matter, so that a failure to perform it would render the performance of the rest of the contract by the plaintiff a thing different from what the defendant has stipulated for." · As explained by M.R. Freeland in his 1976 work The Contract of Employment (Clarendon Press, Oxford), to approach summary dismissal from a general contractual rather than sui generis employment perspective is significant, given that the former eschews a myopic focus on the precise nature of the conduct in question in favour of consideration being given to the totality of the relationship between the parties. Of the above Bettini test, the author states at 215-216 that it: "enabled the courts to consider the importance of the breach of contract in the context of the relationship as a whole. It was thus less harsh towards the employee than the rules concerned with 'misconduct, disobedience or neglect'; and it was much closer to the general contract principles concerning recission [in terms of a prospective termination] for breach of contract or in response to repudiation- so much closer indeed that Lord James in Clouston & Co Ltd v Corry was able [at 129] to combine the test of 'incompatibility' with that of breach of condition and to state that 'misconduct inconsistent with the fulfilment of the express or implied conditions of service will justify dismissal." Commensurate with this reasoning, Freeland concludes (at 219) that it would be "retrograde" to confine the analysis to those accepted grounds of summary dismissal detailed above without further asking whether, in substance, the employee has repudiated his or her obligations under his or her specific contract of employment. · The above test propounded in Bettini and favoured by Freeland is presently the correct approach, in that to stand as a justifiable ground of summary dismissal the conduct of the employee must "constitute a repudiation of the contract or one of its essential conditions": Bruce v AWB Ltd (2000) 100 IR 129 (FCA) at 140, per Sundberg J. Similarly for Harman LJ in Pepper v Webb [1969] 1 WLR 514 at 517: "Now what will justify an instant dismissal?- something done by the employee which impliedly or expressly is a repudiation of the fundamental terms of the contract." · In Laws v London Chronicle (Indicator Newspapers) Ltd [1959] 2 All ER 285, the appellant was summarily dismissed after she left the office of the managing director against the latter's express instructions. In a passage critical for the purposes of present discussion, Lord Evershed MR said (at 287): "Since a contract of service is but an example of contracts in general, so that the general law of contract will be applicable , it follows that, if summary dismissal is claimed to be justifiable, the question must be whether the conduct complained of is such as to show the servant to have disregarded the essential conditions of the contract of service." [Emphasis added] Accordingly, it was held that the single instance of disobedience alleged fell well short of conduct repudiatory of such essential conditions of service. · Hence at common law a right of summary dismissal will only accrue to an employer in situations wherein the conduct of the employee has been so inconsistent with his or her specific conditions of service that it has become impossible for the relationship to continue upon its former bases. Such impossibility would arise if the employee's conduct has destroyed all the necessary confidence subsisting between the parties to an employment relationship, where the essential conditions of service have been disregarded or where an intention no longer to be bound has been objectively evinced. 449 To my mind both in terms of determining at common law whether or not the conduct of an employee is to be regarded as repudiatory or not such as to justify summary dismissal, as well as in terms of endeavouring to assess whether or not misbehaviour or breach of duty as used in clause 5.1 (a) which here requires construction and application, the following considerations remain of particular significance: · Emphasis on the whole of the relationship: As noted above, the most important consequence of the modern shift towards the application of general principles of contract law to the summary dismissal context is that the conduct of the employee must be viewed in the context of the employment relationship as a whole. Rather than merely quantify the 'seriousness' or otherwise of the misconduct, the question must be considered in light of the employee's length of service, their demonstrated ability and their standards of prior conduct. Thus in Sheldrick v WT Partnership (Aust) Pty Limited & Ors (1998) 89 IR 206 (FCA), an engineer employed by the respondent broke into a colleagues office by removing a pane of glass and inspected confidential memoranda in the course of an ongoing dispute as to management structures. While Einfeld J was of no compunction (at 235) in deeming such behaviour "thoughtless, immature and unwise", it was "certainly not grounds for the summary dismissal of a dedicated, loyal and longstanding employee who had proved his commitment to his employer by relocating to Asia from Australia with his entire family and agreeing to remain there for a significant period." · Approach when misconduct isolated: There are authorities suggesting that the "contract of employment cannot be brought to an end by a single act of misconduct unless such single act of misconduct is of such aggravated character that it strikes the employment contract down immediately, completely and permanently": Elcom v Electrical Trades Union of Australia, New South Wales Branch (1983) 5 IR 267 (NSW Industrial Commission) at 270, per Macken J. My own view is that no such rule of thumb exists. I note however that in Jupiter General Insurance Co Ltd v Ardeshir Bomanji Shroff [1937] 3 All ER 67, and in consideration of the fact that "the immediate dismissal of an employee was seen as a strong measure", Lord Maugham stated (at 73-4) that: "it can be in exceptional circumstances only that an employer is acting properly in summarily dismissing an employee on his committing a single act of negligence." · Motives of the employee relevant: Commensurate with the position that it will ordinarily be necessary to demonstrate that the employee has intended to repudiate his or her obligations under the contract of employment, the motives laying behind the conduct in question will be of relevance. Thus in Blyth Chemicals, it was stated by Dixon and McTiernan JJ (at 82) that "the effect to be given to all the acts combined, which have been established against the respondent, must in the end be governed by an estimate of his honesty and motives." (See also Boston Deep Sea Fishing and Ice Company v Ansell (1888) 39 Ch D 339 at 358, per Cotton LJ. Specifically, it will ordinarily be fatal for an employee to have acted contrary to the interests of the employer for his or her own personal pecuniary gain, given that such actions are inherently repugnant to the former remaining in a relationship of personal service with the latter." 450 Dixon and McTiernan JJ in Blyth at 81 spoke of: "conduct which in respect of important matters is incompatible with the fulfilment of an employee's duty, or involves an opposition, or conflict between his interest and his duty to his employer, or impedes the faithful performance of his obligations, or is destructive of the necessary confidence between employer and employee." as being a ground of dismissal and at p 83 held that: "In the view we take of the circumstances of the case, the motives and intentions of the respondent [employee] become all-important; for the significance and sufficiency as a justification of the other items of misconduct relied upon appear to us to depend upon the truth of his explanation or the bona fides of his acts. Further, the effect to be given to all the acts combined, which have been established against the respondent, must in the end be governed by an estimate of his honesty and motives." 451 Significantly, the High Court held in that case that the burden of justifying the basis for a summary dismissal rests with the employer. 452 In the result "misbehaviour" in terms of clause 5.1 (a) means substantial wrongful conduct such as to constitute an act of repudiation of the employment contract, being conduct inconsistent with the fulfilment of the employee's obligations to the employer. In that regard, Mr Randall's intentions in conducting himself in relation to the matters that are the subject of the dispute are important in determining the existence or otherwise of "misbehaviour". Statutory duties – Corporations Act 2001 (Cth) 453 The specific statutory duties alleged against Mr Randall are to use reasonable care and diligence (section 180), to act in good faith and in the best interests of the company (section 181) and not to use his position improperly to gain an advantage to himself (section182). 454 The duty under section 180 is no different from the common law test enunciated in Daniels at 505. It must be considered in the facts of every case, the size of the operations and the skills of the particular director. 455 The content of the duty is also impacted by section 180(2), which provides: "a director or other officer of a corporation who makes a business judgment is taken to meet the requirements of sub-section (1) [ie. to act with reasonable care and diligence] and the equivalent duties of common law and in equity, in respect of the judgment if they: (a) make the judgment in good faith for a proper purpose; (b) do not have a material personal interest in the subject matter of the judgment; (c) inform themselves about the subject matter of the judgment to the extent they reasonably believe to be appropriate; and (d) rationally believe that the judgment is in the best interests of the corporation. The director's or officer's beliefs that the judgment is in the best interests of the corporation is a rational one unless the belief is one that no reasonable person in their position would hold." 456 The concept of "business judgement" is defined in section 180 (3) of the Act to be "any decision to take or not take action in respect of a matter relevant to the business operations of the corporation". 457 The duty under section 181 to act with good faith was considered in Marchesi v Barnes [1970] VR 434 at 438 in which the court held that: "a breach of the obligation to act bona fide in the interests of the company involves a consciousness that what is being done is not in the interests of the company, and deliberate conduct in disregard of that knowledge." [cited with approval by Young J in Galipienzo v Solution 6 Holdings Limited ( 1998) 28 ACSR 139] 458 In relation to section 182, there is no evidence or suggestion that Mr Randall received any benefit or caused any detriment to Aristocrat by any improper conduct, in the sense of being "improper or collateral to his duty as a director" of Aristocrat (see Abeles v PA (Holdings) Pty Ltd (2000) 18 ACLC 867 at 875 per Bergin J). 459 It is also true that it is necessary to look at the performance/standard of performance of the duties of a director and chief executive officer in the context of: · the financial /commercial environment in which the activities were being undertaken; · the particular position of the officer concerned [bearing in mind his overall responsibilities here as the chief executive] going beyond the mere evaluation of financial data [the raw materials for which were being processed by others]. Ultimate finding 460 What then is the proper finding in relation to the claimed breach of clause 5.1 (a) or (b)? 461 The case suggesting an affirmative answer in terms of the claimed breach of clause 5.1 (a) would stress the following proposition: Standing back from the matter the defendants have proven that after: · the earth-shattering 7 February announcement with the consequential dramatic fall in share price; · the embarrassment of having to issue clarifying announcements on the next two business days, 9 and 10 February; · the considerable loss of market faith in the company; Mr Randall, during the very important period when it was necessary to endeavour to restore that market confidence by being entirely "upfront" in terms of making full disclosure of what had been his own subjective state of mind and beliefs, failed to do just that. He later stated that he had been confident of a strong US profit result at the end of 2002, when to say that was simply incorrect. He later stated that it was not clear to him before 5 February 2003 or thereabouts that the company had a problem with its profit margins in its North American business, when to say that was simply incorrect. 462 Further he had importantly failed to make disclosure to the board of the matters known to him where, as year-end approached, Aristocrat teetered on the knife-edge of a dramatic after-tax profit downgrade having also failed to announce its dependence upon South America. Nor had he made full disclosure to the board in January after the "alarm bells" had begun to ring. Nor was full disclosure made during the aftermath of the announcements and in particular at the board meeting of 17 February 2003. The board had been informed by Mr Randall at the board meeting that the proper answer to the question received from the market as to why there had been no warning on the contribution mix was "we believed we would report a strong US and South American result" [DX 90]. The intention of the board had been to vet and to approve that which Mr Randall was proposing to communicate at the presentations on the next day. Mr Randall by his speaking notes and slides was to communicate, with the board's approval, what were the answers to the questions put by the market. But it was wrong for him to have said to the board and on the next day at the presentations, that Aristocrat [including himself] had believed that the company would report a strong US result. That had not been his belief. The truth had been that what Mr Randall had believed was that the Columbia contract [even if the parameters requiring completion to permit it to be included as 2002 revenue were achieved in time] would mask the fact that the result from the US "wouldn't be very good", that is to say would not represent a strong US result [cf his 9 January 2003 Las Vegas statement]. 463 Likewise it had been clear to him before 5 February 2003 or thereabouts that Aristocrat had a problem with its profit margins in its North American business. That he did not know it's full extent may have been another matter. At least in this regard, he had said to the board that there was a lack of rigor in terms of control and that Aristocrat did not have sufficient controls in place to understand the situation early enough. 464 The duty not to state that which was incorrect when formally addressing the media or analysts was a pervasive duty. This was no occasion for ducking and weaving with what had really happened. 465 The case suggesting a negative answer in terms of the claimed breach of clause 5.1 (a) would look at the matter as comprising a serious lack of judgment at an important time but would stress that no announcement made to the ASX has been proven before this Court to have been false and that at the end of this very strongly contested litigation, the defendant has in very large measure failed to prove much of the case which was opened. It would stress that the evidence has not established relevant misconduct concerning statements made by Mr Randall that he had had no warning before 5 February 2003 that the company's net profit after tax for the 2002 year would not meet the September 2002 forecast of $109 million but would be in the order of $80 million. 466 There were conflicting pieces of information being received by Mr Randall. He was quite obviously not in possession of information as to precisely what had been driving the profit margin reductions. He stood at the apex of a leading global provider of gaming machines operating through subsidiary companies in many parts of the world. There was evidence that for an extended period [covering the period of the employment of Mr Jeyaraj as chief financial officer] the various functional departments at the company's head office had experienced problems with the pool quality of information, including financial reporting, being received from ATI. And it was only approximately five days before Mr Randall's departure to the United States when the 10/11 December e-mails were received. Finding 467 As always the finding must take into account the particular facts. One of the real difficulties which the Court presently faces, bearing in mind the way in which the defendant has ultimately put its case, concerns the subjectivity of much of the exercise. The Court has on the evidence held that Mr Randall ought to have reported particular matters to the board and did not. The very environment in which the Court is dealing with a breach of an obligation by a chief executive to report a particular state of mind of that executive to the board is one of special sensitivity particularly where one takes into account the dynamics in operation on the ground at the material point in time. Things move rapidly. The object of appointing a chief executive officer is to ensure that as effective captain of the enterprise, he/she keeps a weather eye open for a storm. Does a momentary lapse then constitute an act of repudiation of the employment contract, being conduct inconsistent with the fulfilment of relevant obligations to one's employer and to the board? Was this no more than a momentary lapse? 468 As will appear from what follows a careful line requires to be drawn between on one hand, the entitlement of Mr Randall to make judgment calls even though they ultimately, with the benefit of hindsight, turn out to have been incorrect and on the other hand, his continuing obligations both of candour as well as of full disclosure to the board. Misbehaviour or breach of duty 469 It is convenient to commence with an examination of whether or not there was misbehaviour or breach of duty within the meaning of clause 5.1 (a) of the contract. 470 To the extent that there was misbehaviour or breach of duty, the content of these descriptions is necessarily informed by the summary dismissal context. The employment law institution of summary dismissal, which informs clauses 5.1(a) and 5.1 (b), necessarily and for good reason imposes a heavy onus on the employer to establish that its conduct is justifiable in accordance with a line of legal authority over 150 years long. The focus of attention is placed on the whole of the employment relationship, the conduct of the parties throughout its duration, the past performance and dedication of the employee concerned and, of course, the particular acts of misconduct alleged 471 The word "misbehaviour" should be read as one would read the expression "misconduct" as referring to conduct so seriously in breach of the contract that by standards of fairness and justice the employer should not be bound to continue the employment. 472 Was the conduct of Mr Randall such as to be so described? When one examines the matter in terms of the dynamics on the ground and the result he is seen to have misjudged the ultimate call. Neither IGT nor Columbia had come through. No January announcement of the possibility of a profit downgrade had been made. That is not pleaded as a clause 5.1 breach. And in any event, what was the content of the "information" on the basis of which such a profit downgrade announcement could have been made? Differences of opinion may be held in terms of the question as to whether or not the information could be said to be sufficiently definite to require disclosure [cf the ASX Continuous Disclosure Listing Rules]. But the error was one of judgment where Mr Randall did not have the benefit of knowing what would happen. Had both Columbia and the IGT settlement come through, Aristocrat would have "made the numbers" or come sufficiently close. There is a reasonably strong case which has been demonstrated to the effect that the sheer uncertainty of the situation as it evolved was such that whilst clearly the board's attention should have been drawn to that very uncertainty, such a disclosure may very well not have led to a decision to put out a possible profit downgrade warning announcement prior to the February announcement. 473 Particularly significant is the simple proposition that the board was entitled to but did not receive absolutely candid information from its chief executive officer as to what had been his state of mind at the material time. He had made the statement that he had been confident of a strong US profit result at the end of 2002, not having held this view at the time the statement was made. He had not disclosed this view to the board. He had made the statement that it was not clear to him before 5 February 2003 or thereabouts that Aristocrat had a problem with its profit margins in its North American business when this in fact had been clear to him before that date and when he had not disclosed this view to the board. He had clearly misstated the position at the presentations. 474 Very high standards of corporate governance and disclosure are essential elements of the commercial environment. Mr Randall had said that he was "[sharing] the statement the board asked me to share with you" [cf the morning presentation]. Even though the presentations relevantly dealt with anterior events and an examination of their explanation, the board on behalf of the company was, in the particular environment as it obtained on 17 and 18 February, entitled [both in terms of proper disclosure to itself as well as in terms of Mr Randall - the face and mouthpiece of the company - making proper disclosure to the media and to the analysts] to expect performance to the letter by the chief executive officer of his contractual obligations "to well and faithfully serve the company" and "to competently exercise all skills as would be normally expected of persons holding the position of chief executive officer and director of a public company". 475 The board [and hence the company] did not receive performance to the letter by the chief executive officer of those contractual obligations. In context and viewed objectively, Mr Randall's said conduct was indeed destructive of the necessary confidence between the company and himself as employee/chief executive officer and director. This was "misbehaviour [and] breach of duty which may detrimentally effect the company" within the meaning of clause 5.1 (a) of the contract. 476 In terms of the fundamentals he had failed. His conduct was simply incompatible with fulfilment of his contractual obligations. He misstated the position at the presentations. This in itself constituted misbehaviour as well as breach of duty within the meaning of clause 5.1 (a). But as the judgment has made plain, he had also failed to make disclosure of his views to the board and in the particular circumstances this also constituted misbehaviour as well as breach of duty within the meaning of the clause. Either integer would fall within clause 5.1 (a). Hence plainly the combination of both integers is seen to satisfy the description "misbehaviour" as well as "breach of duty" within the clause. The conduct viewed separately and/or cumulatively is appropriately described as conduct destructive of the necessary confidence between himself and the company. It was conduct so seriously in breach of his contract that by standards of fairness and justice in the particular circumstances his employer should not be bound to continue his employment. 477 In my view and for the reasons given Aristocrat has discharged the onus of proving that the employer employee relationship was finally, irrevocably and permanently destroyed by the actions of Mr Randall as found. Remaining claims of breach of contract 478 It is unnecessary for the court, given the above findings, to deal with the claim of Aristocrat to have established any of the other alleged breaches of clause 5.1 (a) or of clause 5.1(b). The Corporations Act 2001 (Cth) defences 479 Aristocrat claims that pursuant to sections 200B(1) and 208(1) of the Act, certain provisions of the contract were not enforceable until the contract was approved by the members of Aristocrat. 480 The findings with respect to the justification for the summary dismissal have the result that all or most of the Act defences fall away. In deference, however, to the careful and comprehensive submissions on those defences the convenient course is to deal fully with them. Leave is reserved to the parties to address further submissions before short minutes are brought in going to whether and, if so, where the Act analysis and findings may be said to be engaged. 481 The relevant sections relied upon by Aristocrat are sections 200B(1) and 208(1) of the Act. These sections refer or relate to various other sections of the Act. These and the other relevant sections and accounting standards are set out below. 482 Section 200B(1) of the Act provides: "The following must not give a person a benefit in connection with that person's, or someone else's, retirement from a board or managerial office in a company, or a related body corporate, without member approval under section 200E: (a) the company; …" 483 Section 200E (1) of the Act provides: "If section 200B… requires member approval for giving a person a benefit, it must be approved by a resolution passed at a general meeting of: (a) the company;..." 484 Section 200F of the Act provides: "Subsection 200B(1) does not apply to: (a) a benefit given in connection with a person's retirement from an office in relation to a company if the benefit is: … (iii) given to the person under an agreement made between the company and the person before the person became the holder of the office as the consideration, or part of the consideration, for the person agreeing to hold the office;…" 485 Section 200G(1) of the Act provides: "Subsection 200B(1) does not apply to a benefit if: (a) the benefit is a payment in connection with a person's retirement from a board or managerial office (the relevant office ) in a company or a related body corporate; and (b) the payment is for past services the person rendered to: (i) the company;… (c) the value of the benefit, when added to the value of all other payments (if any) already made or payable in connection with the person's retirement from board or managerial offices in the company and related bodies corporate does not exceed the payment limit set by subsection (2). In applying paragraph (c), disregard any pensions or lump sums that section 200F applies to. " 486 Section 200G(2) of the Act provides that the payment limit is: "(a) the amount worked out under subsection (3) if the person: (i) was an eligible employee in relation to the company at the time when the person retired from the relevant office; and (ii) has been an eligible employee in relation to the company throughout a period (the relevant period ), or throughout periods totalling a period (also the relevant period ), of more than 3 years; or (b) otherwise - the total remuneration of the person from the company and related bodies corporate during the period of 3 years ending when the person retired from the relevant office." 487 Section 200G(3) of the Act provides: "The amount worked out under this subsection is the amount worked out using the formula: Total remuneration x Relevant period 3 where: relevant period is the number of years in the relevant period or 7, whichever is the lesser number. total remuneration is the amount of the total remuneration of the person from the company and related bodies corporate during the last 3 years of the relevant period." 488 Section 200G(5) of the Act provides that for the purposes of sub-paragraph (2)(a): "…a person is taken to have been an eligible employee in relation to a company at a particular time if: (a) the person was a genuine full-time employee of the company at that time; …" 489 Section 200G(6) of the Act provides that: "…payment means a payment by way of pension or lump sum and includes a superannuation, retiring allowance, superannuation gratuity or similar payment." 490 Section 9 of the Act provides that remuneration is remuneration if and only if: "…were it received by a director of the corporation, would be remuneration of the director for the purposes of an accounting standard that deals with disclosure in companies' financial reports of information about related parties…" 491 Accounting Standard AASB 1017 (clause 4.2) requires disclosure of the aggregate of income paid or payable to a director, directly or indirectly by the entity. "Income" is defined in clause 4.5 and 4.6 of AASB to be any money, consideration or benefit in connection with the management of the affairs of the entity. 492 Part 2E.1 of the Act relates to the need for member approval for related party benefits. 493 Section 208(1) of the Act provides: "For a public company, or an entity that the public company controls, to give a financial benefit to a related party of the public company: (a) the public company or entity must: (i) obtain the approval of the public company's members in the way set out in sections 217 to 227; and (ii) give the benefit within 15 months after the approval; or (b) the giving of the benefit must fall within an exception set out in sections 210 to 216." 494 Section 228(2) of the Act defines "related party" to include directors of the public company, spouses and de-facto spouses of such a director. 495 Section 229 of the Act provides details of what constitutes a giving of a financial benefit. Sub-section 3 gives examples including giving or providing the related party finance or property, etc. The concept of remuneration for services is not included as an example. 496 Section 208(2) of the Act provides: "If: (a) the giving of the benefit is required by a contract; and (b) the making of the contract was approved in accordance with subparagraph 1(a)(i) as a financial benefit given to the related party; and (c) the contract was made: (i) within 15 months after that approval; or (ii) before that approval, if the contract was conditional on the approval being obtained; member approval for the giving of the benefit is taken to have been given and the benefit need not be given within the 15 months." 497 Section 209 of the Act provides: "(1) If the public company or entity contravenes section 208: (a) the contravention does not affect the validity of any contract or transaction connected with the giving of the benefit; and (b) the public company or entity is not guilty of an offence. (2) A person contravenes this subsection if they are involved in a contravention of section 208 by a public company or entity. (3) A person commits an offence if they are involved in a contravention of section 208 by a public company or entity and the involvement is dishonest." 498 Section 210 of the Act provides: "Member approval is not needed to give a financial benefit on terms that: (a) would be reasonable in the circumstances if the public company or entity and the related party were dealing at arm's length; or (b) are less favourable to the related party than the terms referred to in paragraph (a)." 499 Section 211(1) of the Act provides: "Member approval is not needed to give a financial benefit if: (a) the benefit is remuneration to a related party as an officer or employee of the following: (i) the public company; … (b) to give the remuneration would be reasonable given: (i) the circumstances of the public company or entity giving the remuneration; and (ii) the related party's circumstances (including the responsibilities involved in the office or employment)." 500 Section 211(2) of the Act provides that: "Member approval is not needed to give a financial benefit if: (a) the benefit is payment of expenses incurred or to be incurred, or reimbursement for expenses incurred, by a related party in performing duties as an officer or employee of the following: (i) the public company; … (b) to give the benefit would be reasonable in the circumstances of the public company or entity giving the remuneration. " Application of the Act 501 In what follows I have generally adopted the submissions of the plaintiff on the application of the Act. Section 200B(1) 502 Section 200B(1) prohibits the giving of a benefit in connection with a person's retirement from a company's board or managerial office without first obtaining member approval. 503 "Retirement" for the purpose of section 200B(1) is defined in section 200A(1)(e) to include "loss of the office". 504 It is at least arguable that the termination of Mr Randall's employment in this case constitutes a "retirement" for the purpose of section 200B(1). 505 Under section 200A(1)(a)(i) of the Act, compensation for, or otherwise in connection with, the loss by Mr Randall of his offices as director and chief executive officer of Aristocrat would fall within a benefit given in connection with Mr Randall's retirement from those offices. The fact that Aristocrat might be obliged under the contract to give Mr Randall those benefits does not prevent such compensation being regarded as the giving of benefits [section 200A(1)(c) of the Act]. 506 The contract makes specific provision for Mr Randall to be compensated for, or in connection with, the loss of his office. The relevant provisions are those contained in clauses 5.4 and 5.5. Clause 5.4 gives Aristocrat the right to give three month's notice of termination of the contract and elect to pay Mr Randall three month's salary, superannuation and benefits allowance in lieu of notice. Clause 5.5 provides that if Aristocrat gives such a notice of termination pursuant to clause 5.4, Mr Randall is to be paid a severance payment equal to three year's of 'Target Salary' in addition to the payment in respect of the three month's notice period. The 'Target Salary' is defined in clause 1 of the contract as the aggregate of the salary, benefits allowance and superannuation payable annually to, or on behalf of, Mr Randall at the relevant time, together with the amount of the bonus that would be earned by Mr Randall in the then current year, if Mr Randall had achieved 100% of the objectives stipulated for the calculation of his bonus. As a result of clause 3A.5 of the contract, any such severance payment is to be made in United States of America dollars. 507 However, section 200B(1) cannot apply to Mr Randall's claims under clause 5.4 (three month's notice payment) and 3A.8 of the contract (one month's salary relocation allowance and payment of relocation expenses). Nor can the section affect Mr Randall's claim for a bonus. 508 The three month's notice payment is not a payment to compensate Mr Randall for loss of office or otherwise in connection with his retirement from that office. Rather, it is a payment made in lieu of the three month's notice of termination required to be made under clause 5.4 to bring about the effective termination of Mr Randall's employment at the option of Aristocrat. 509 Equally, the payment of the one month's salary relocation allowance and the payment of expenses made in connection with the relocation of Mr Randall back to Australia are not to compensate him for his loss of office nor are they in connection with his retirement from office. They are a contractual entitlement intended to reimburse Mr Randall for the costs and associated difficulties of moving from one country to another as part of his employment with Aristocrat. 510 In so far as section 200B(1) applies to Mr Randall's claim under clause 5.5 (the severance payment) two exceptions apply, sections 200F(a)(iii) and 200G of the Act. Section 200F(a)(iii) 511 Section 200F(a)(iii) of the Act exempts from the need to obtain member approval, retirement benefits given under an agreement made before the person became the holder of the office as the consideration, or part of the consideration, for the person agreeing to hold the office. 512 By agreeing to relocate to the United States and to assume the role of CEO based in that country, Mr Randall's previous contract was terminated (or varied) and Mr Randall assumed a new office pursuant to a new (or varied) contract entered into on 7 December 2002. 513 Further, by undertaking substantially different duties in connection with his relocation to the United States, Mr Randall's previous contract was terminated (or varied) and Mr Randall assumed a new office pursuant to a new (or varied) contract entered into on 7 December 2002. 514 Accordingly, the obligation to make the severance payment formed part of the consideration given to him for agreeing to hold the office of the CEO based in Las Vegas. 515 The "agreement" for the purposes of section 200F(a)(iii) may be an agreement that varies or replaces an existing agreement. 516 The proper meaning of the expression "office" used in the sub-section is the aggregation of responsibilities and duties to be performed by the office holder. The word derives from the Latin phrase "officium" meaning "duty". It is not be understood as simply a reference to a person's title. 517 There are various authorities and academic texts that support the proposition that where an employee is required to work in a new location that is outside the terms of the previous employment or where the duties of an employee have substantially changed, a new contract of employment is entered into and is not simply a variation of an old contract. 518 In The Law of Employment (Lawbook Co, fifth edition, 2002) the authors state [at p 249]: "A series of difficulties can arise where the employer or employee seeks to change something about the work or its performance. Say an employer wishes to send an employee to a different location, or to have that employee perform different work and the employee objects. The first question is whether the changes are permissible under the agreement by which the employee was engaged. If so, the employee is obliged to implement them; they are lawful orders. If not, they are attempts at unilateral variation. Often the employee does not object to this and there is a change, by agreement, in the employee's duties, pay etc. Whether the changes result in a new contract being created or the old contract continuing as varied, is a question of fact. [citing Quinn v Jack Chia (Australia) Ltd [1992] 1 VR 567 at 575] The parties may intend a variation but succeed in achieving a termination (or vice versa). [citing Tallerman & Co Pty Ltd v Nathan's Merchandise (Vic) Pty Ltd (1957) 98 CLR 93 and Quinn's case]". 519 In Quinn, Ashley J held [at p 576]: "where employer and employee agree to an alteration in the employee's duties and responsibilities which is profound, a court should be more ready to hold (unless the original contract of employment provided for the contingency) that a new contract has replaced the old; or at least that the old contract, as varied contained terms objectively appropriate to the new relationship created." 520 Ashley J then held (at pp 577-578) that the change in the employee's situation (being a change of duties from assistant to the construction manager to the construction manager himself) was exceptional, far reaching, not within the original contemplation of the parties and not comprehended by the contract initially made between them, and that it did give rise to a fresh contract of service between the employee and employer rather than merely a variation of the earlier agreement. 521 A similar approach was taken by the Industrial Court of Australia in Brackenridge v Toyota Motor Corporation Australia Ltd (1996) 142 ALR 99 at 106 (concerning the demotion of an employee). 522 In relation to the relocation of an employee, in the absence of an express or implied term permitting an employer to direct an employee to work at a new location, if an employee does subsequently work at that new location, a new contract has been held to have been entered into [see Australian Colliery Staff Association v Queensland Mines Rescue Service (1999) FCA 395 per Cooper J]. 523 An implied term of mobility will be implied if necessary as a matter of business efficacy and if reasonable [see Jones v Associated Tunnelling Co Limited [1981] IRLR 477; Courtaulds Northern Spinning Ltd v Sibson [1988] ICR 451; Rowbotham v Arthur Lee & Sons Ltd [1974] IRLR 377; O'Brien v Associate Fire Alarms [1969] 1 All ER 93]. In these cases, reasonableness of relocation related to how close the proposed new location was to the employees' homes. 524 Clause 2.5 of the contract (as effective from May 2001) required Mr Randall to undertake travel and to perform such duties in relation to Aristocrat or an associated company or business as was assigned or delegated by the board of Aristocrat. It was neither reasonable nor necessary as a matter of business efficacy to be able to require Mr Randall, pursuant to the terms of his existing contract, to relocate to the USA. 525 Prior to his relocation, Mr Randall's employment was based in Sydney at the head office of Aristocrat and he was paid in Australian dollars. Whilst frequent overseas travel was required because of the company's international operations, his base was in Sydney. As a matter of practicality, he maintained his home and family in Australia including his own personal and financial affairs. 526 By relocating to the USA, Mr Randall was fundamentally changing his place of employment with Aristocrat. Relocation of the CEO was apparently first formally raised in Mr Randall's letter to Mr Ducker of 17 September 2001 (AB 1/148). In that letter, Mr Randall envisaged that he would be based in the United States for 7-8 months of the year (including travel), and in Australia for 5 months of the year. The basis for the change, as set out by Mr Randall, was to focus the growth of Aristocrat's business in the Northern Hemisphere and therefore leadership of the company was best placed in Las Vegas, close to other main industry participants. Mr Randall concluded: "I'll expect that the 100% international focus of my role and my US location would be reflected in an appropriate remuneration paid 100% in US dollars at senior industry level." 527 The relocation proposal was accepted by the board of Aristocrat at its meeting on 19 November 2001 (see minutes commencing at AB 1/267). At that meeting, the board resolved that it was logical and in the shareholders' interests for the CEO to be based in Las Vegas from the end of 2002. 528 The need for a resolution of the board for Mr Randall's relocation and a special relocation package is indicative enough that it was not intended as part of the original contract between Mr Randall and Aristocrat that he could be required to relocate to the USA. 529 In paragraphs 17-19 of Mr Randall's statement of 10 October 2003, he set out the substantial matters that were undertaken for him and his family to relocate to the USA. None of this was challenged by Aristocrat. 530 The fundamental changes made on 7 December 2002 to the contract (in particular clause 3A) were so widespread in terms of assistance so as to indicate the fundamental changes to Mr Randall's ongoing employment with Aristocrat. 531 Further, Mr Randall's duties substantially changed on relocation to the USA. Previously, he maintained ultimate control of the day-to-day operations of the Australian business of Aristocrat. Those duties were transferred to Mr Jowett. Mr Jeyaraj was put in charge of Aristocrat's global operations, which were based in the Sydney office [see paragraphs 78 to 83 of Mr Randall's statement of 3 December 2003, including the copy presentation he gave at Las Vegas on 12-14 September, AB 3/1017, and Mr Randall's memorandum to staff dated 3 December 2002 at AB 5/1743]. 532 Mr Randall also gave evidence concerning his presentation to the US staff of Aristocrat concerning his new responsibilities in the USA. Those responsibilities were set out in the document headed 'Overview of key responsibilities CEO and Americas President' at AB 7/2372. Those duties were stated to assist the President in the running of the North American and South American businesses in which Mr Randall expected to spend approximately 30% - 50% of his time, balanced with the time to be spent on long term and short term strategies for the global company. 533 The change in location itself is such a fundamental change that notwithstanding that it was described as a varied contract, the 2002 Contract was in truth a completely new contract for a new office. 534 The change of duties also, being largely focussed on the development of the US business, rather than, as previously, the Australian business, was so fundamental as to constitute the creation of a new office. 535 In those circumstances, the severance payment provided for under clause 5.5 of the contract is exempt from the provisions of section 200B (1). Section 200G 536 The second relevant exemption, section 200G, relevantly provides that: "(1) Subsection 200B(1) does not apply to a benefit if: (a) the benefit is a payment in connection with a person's retirement from a board or managerial office (the relevant office ) in a company or a related body corporate; and (b) the payment is for past services the person rendered to: (i) the company;…" 537 As the severance payment satisfies sub-paragraph (a), being a payment in connection with Mr Randall's retirement from his position as CEO, the only real issue is whether the payment is for 'past services'. 538 The Act does not contain a definition of what is meant by a payment for 'past services'. There are no relevant authorities on section 200G. Nevertheless, as a matter of common language usage, a severance payment made pursuant to an express contract of employment is clearly a payment for past services, being a payment made as part of the consideration for the services rendered to the employer by the employee in the course of his employment, as opposed to a voluntary or gratuitous payment. 539 Clause 5.5 was a negotiated provision which had effect from 7 December 2002. It was referred to in the memorandum from Mr Gibbs to the Compensation Committee of 12 November 2002 [AB 5/1503] as follows: "…currently, if Des' employment is terminated by the Company he is entitled to a severance payment of 18 months remuneration. Given the significant family dislocation and the additional costs and difficulties that would arise if he were terminated in the USA, Des has requested that the severance entitlement be increased to three years target remuneration. This entitlement would also apply if the termination was initiated by Des during the term of the contract and accepted by the Board as mutually agreed…" 540 The 18 month's severance payment was inserted into the contract as part of the May 2001 contract variations [see AB 1/114]. As set out in Mr Gibbs memorandum dated 29 January 2001 relating to that contract [AB 1/99], it was recommended that the three year severance payment be included as part of that contract. Obviously, that recommendation was not accepted and the 18 month figure was ultimately agreed to. 541 In the original form of the contract [clause 5.3 - AB 1/7] a 12 month notice period was provided for with no severance payment. 542 Clearly, the new three year severance payment was negotiated as part of Mr Randall's overall remuneration package for the services he had provided and was to provide to Aristocrat. The three year severance payment was negotiated in part because of his prior services in successfully growing the company. 543 Indeed, it would be a strange result if Mr Randall lost the benefit of a 12 month notice period in consideration for accepting a three month notice period and the severance payment if that severance payment was not intended to be for past services and enforceable as part of the overall remuneration package. 544 Clearly, by the inclusion of clause 20 in the contract, the draughtsman of the contract was conscious of the effect of section 200G and intended it to apply, subject only to the application of the stated formula. 545 Clause 5.5 was also negotiated as part of Mr Randall's remuneration package for agreeing to relocate to the USA and for agreeing to continue to undertake his duties as CEO of Aristocrat, albeit that such duties had now changed in scope. 546 Pursuant to the contract, Mr Randall continued to fulfil his duties in return for the promise of receiving remuneration, which included not only salary and other benefits, but also that if his employment was to be terminated, he would receive the severance payment. 547 The severance payment is clearly part of the remuneration that Mr Randall was entitled to receive for carrying out his duties, which he did. 548 There appears to be only one case that has considered section 200B(1), Fox v GIO Australia Limited [2002] NSWIRComm 318. 549 In seeking to interpret the section in the context of whether a payment pursuant to a settlement of a section 106 claim was caught by section 200B(1), Walton J held [at [55]]: "If one looks to the purpose behind the section of the Corporations Act regulating termination payments, it is clear that s200B seeks to counter the obvious potential abuse by those who control a company in relation to what are colloquially known as "golden handshakes". The section is virtually unchanged from its predecessor, s200B of the Corporations Act 1989, and the Explanatory Memorandum to the earlier Act which provides a discussion of the section (at para 858)." 550 Section 200B was inserted into the Corporations Act 1989 (Cth) by reason of the Corporations Legal and Economic Reform Plan Act 1999 (Cth). 551 Clearly, the prevention of "golden handshakes" is what the section is seeking to avoid. That is, voluntary payouts to directors and officers who have announced their retirement from office without any prior entitlement to a severance or other retirement payment. In those circumstances, any such payment could not be made by reference to past services. Rather, it is a gratuity, over and above what the director or officer was entitled to as part of his remuneration package. 552 That is not the case with Mr Randall. The severance payment is a fundamental part of his remuneration package. 553 On the basis that the severance payment is for past services, the formula set out in section 200G requires two figures to be calculated, namely: · the length of Mr Randall's employment; and · his total remuneration during the last three years of his employment. 554 Mr Randall was employed from 19 June 1998 to 4 April 2003, a period of 4.8 years. 555 The last three years of his employment are therefore calculated from 4 April 2003. His remuneration during that period was as follows: Period of employment Total remuneration 5/4/00 - 31/12/00 $2,532,347.65 Being a pro-rata 271 days of the full year emoluments disclosed in the 2000 annual report of $3,420,071 [AB 11/3716] 1/1/01 - 31/12/01 $3,649,588 See 2001 annual report [AB 11/3792] 1/1/02 - 31/12/02 $3,895,056 See 2002 annual report [AB 12/3881-2] 1/1/03 - 4/4/03 $2,141,426 See 2003 annual report [AB 12/3962] TOTAL $12,218,417.65 556 On the application of these figures to the formula set out in section 200G, the severance payment claimed by Mr Randall is substantially less than that allowed by section 200G and is therefore exempt from section 200B (1) of the Act. 557 The relevant formula is: 4.8 x $12,218,417.65 = $19,549,468.24 3 558 On the basis of these calculations, Mr Randall was entitled to receive a retirement benefit under section 200G equivalent to $19,549,468.24. The retirement benefit claimed by Mr Randall is considerably less and is within the scope of section 200G. 559 It should be noted that, to the extent that sections 200F(a)(iii) and 200G of the Act do not apply, the plaintiff also sought to rely on clause 20 of the contract. 560 Clause 20 of the contract provides: "In the event of any severance payment or other payments in respect of the retirement from office becoming payable pursuant to this Agreement for an amount which is not an exempt benefit pursuant to either s200F or s200G of the Corporations Act 2001, then the CEO will be entitled to require Aristocrat to promptly seek the approval of its shareholders to such payment. Pending the giving of such approval, the CEO will be entitled to receive a severance payment equal to the maximum amount he would be entitled to receive as an exempt benefit pursuant to such sections, and if approval is given by the shareholders of Aristocrat, he will be entitled to be paid the difference between the exempt benefit received by him, and the payment approved by the shareholders of Aristocrat in respect of his retirement from office." Section 208(1) 561 Aristocrat also relies upon section 208(1) in relation to the financial benefits to Mr Randall for which provision is made under the contract. Those provisions are found in clauses 3.1 (salary), 3.2 (superannuation), 3.3 (benefits allowance), 3.4 (performance bonus), 5.4 (three month's salary, superannuation and benefits allowance in lieu of notice), 5.5 (severance payment), 3A.6 (relocation assistance), and 3A.8 (similar relocation benefits) of the contract and, to the extent it was a term of the contract, past relocation costs including taxes associated with the home in Las Vegas. 562 Section 208(1) requires a public company to obtain member approval to give a financial benefit to a related party (defined to include a director). Clearly Mr Randall is a related party for the purposes of section 208(1). 563 However, whether or not the benefits provided under Mr Randall's contract constitute the giving of a financial benefit for the purposes of section 208(1) (and in light of section 211 they probably are), the clear answer to Aristocrat's contention is section 209(1) of the Act. 564 Section 209(1) of the Act provides that a contravention of section 208 does not affect the validity of any contract or transaction connected with the giving of the benefit. Mr Randall is still entitled to enforce the terms of his contract. 565 Aristocrat submits that as there has not been any payment made under the contract of the amounts which Mr Randall claims in the proceedings, any breach of section 208(1) in relation to those amounts is therefore prospective such that section 209(1) appears to have no direct operation. However, whether or not that submission is correct, section 216 of the Act provides that member approval is not needed to give a financial benefit under an order of a court. 566 Two exceptions to section 208(1) of the Act also apply. They are sections 210 (relating to reasonable arm's length transactions) and 211 (relating to remuneration and reimbursement that is reasonable in the circumstances of the public company). 567 If Aristocrat seeks to rely on section 208(1), to exclude liability to Mr Randall, the onus is on it to establish that that section, and none of its exemptions, apply. 568 Aristocrat has lead no evidence to seek to establish any unreasonableness in Mr Randall's remuneration. 569 The severance payment is implicitly reasonable in light of the application of section 200G and the statutory formula that applies. It could not be the case that a payment that is in essence deemed by section 200G to be reasonable, as falling within the scope of the formula, could be held to be unreasonable by virtue of the application of section 208(1). 570 In relation to section 210, Mr Bush appears to concede that the terms upon which Mr Randall was employed (other than the interest free loan) are at arm's length. At least this is implicit in his memorandum of 9 December 2002 to Mr Randall [see AB 6/1805]. Mr Bush took care to obtain documentation for that part of the transaction that he considered not to be at arm's length and on commercial terms, with a view to obtaining member approval, but took no other steps to obtain member approval for any other aspect of Mr Randall's remuneration. 571 Clearly the terms of employment were not dictated by Mr Randall. They required approval by the Compensation Committee and the board of Aristocrat and were also subject to a recommendation by Mr Gibbs in his memorandum of 12 November 2002 [at AB 5/1503]. 572 By virtue of the remuneration being negotiated at arm's length, it can be confidently implied that such terms are reasonable. 573 The level of remuneration and benefits provided must also be considered in light of the undoubted success that Mr Randall had had at the helm of Aristocrat since 1998, its substantial increase in profit and revenue over that period, and the obvious desire of Aristocrat to retain Mr Randall as its CEO [see paragraphs 10-11 of Mr Randall's statement of 10 October 2003]. 574 Aristocrat had the benefit of its own lawyers in preparing the terms of the contract. Cutler Hughes and Harris (as appears on the contract) was retained for the purposes of drafting the amended contract on behalf of Aristocrat. 575 The contract was not imposed or dictated to Aristocrat by Mr Randall. This aspect of the defendant's defence has been abandoned. 576 It was negotiated in accordance with the Corporate Governance principles of Aristocrat. 577 The determination of reasonableness should also be by reference to comparative remuneration paid to other CEO's in either Australia or the United States. 578 In Mr Gibb's memorandum of 29 January 2001 [AB 1/99], he recorded market analysis of the remuneration that other CEOs were earning. Those comments include that Mr Randall's annual remuneration at that time was 35% less than the average of the other top industry CEOs and that Australian CEOs with global responsibility attract a premium of up to 50% when compared to those with Australian only responsibilities. 579 Whilst no similar review appears to have been done by Mr Gibbs in relation to the review of Mr Randall's remuneration prior to his relocation [see Mr Gibbs's memorandum of 12 November 2002 at AB 5/1503], clearly Aristocrat did not consider it necessary in the circumstances. 580 It is then convenient to deal with the particular claims. Summary of Mr Randall's claims Outline of Mr Randall's claims 581 Mr Randall's principal claims arise under the terms of the contract. 582 Mr Randall seeks payment of termination and unpaid bonus entitlements together with the re-imbursement of some out-of-pocket expenses. The total value of Mr Randall's claim is A$12,896,413.71 set out as follows: US$ claims · Three month's notice (clause 5.4 of the contract) US$ 349,360.75 · Three year's severance pay (clause 5.5 of the contract) US$ 6,742,329.00 · One month's salary (clauses 3A.6 and 3A.8 of the contract) US$ 85,402.00 · Out-of-pocket expenses (clauses 3A.6 and 3A.8 of the contract) US$ 318.77 · Property taxes (costs of US housing per Mr Gibbs) US$ 11,085.00 US$ 7,188,495.52 [At the USD/AUD exchange rate of 1.66417 at 4 April 2003 (per affidavit of Ms Flinn), this is equivalent to A$11,962,878.59] A$ claims · Bonus (clause 3.4 of the contract) A$ 907,640.00 · Shipping costs (clauses 3A.6 and 3A.8 of the contract) A$ 8,695.12 A$ 17,200.00 · Air fare expenses (clauses 3A.6 and 3A.8 of the contract) _________________ A$ 933,535.12 A$ 11,962,878.59 TOTAL CLAIMS A$ 933,535.12 A$ 12,896,413.71 Basis of Mr Randall's claims 583 Mr Randall's claims arise from the express clauses in the contract set out below. Clause 5.4 claim – three month's notice 584 Clause 5.4 of the contract provides: "The employment of the CEO will terminate on 1 January 2006, unless the parties have mutually agreed to extend the period of the CEO's employment, in which case termination will take place on 1 January 2008, unless the parties agree otherwise. Notwithstanding the period of appointment specified in this Agreement for the CEO's employment, Aristocrat may give 3 months' notice of termination of this Agreement, and Aristocrat may elect to pay 3 months' salary, superannuation and benefits allowance in lieu of notice. ..." 585 Pursuant to the contract, Mr Randall's annual: · salary was US$1,024,823 (clause 3.1); · superannuation contributions allowance was US$100,000 (clause 3.2); and · benefits allowance was US$272,620 (clause 3.3). 586 The total of those amounts is US$1,397,443 per annum. 587 One quarter of that sum (being three month's notice) is US$349,360.75, which is the amount claimed by Mr Randall pursuant to clause 5.4 of the contract. Clause 5.5 claim – three year's severance pay 588 Clause 5.5 of the contract provides: "If Aristocrat gives notice of termination pursuant to subclause 5.4, the CEO will be paid a severance payment equal to 3 years of the Target Salary payable to him pursuant to this Agreement, in addition to payment in respect of the 3 months' notice period. ..." 589 'Target Salary' is defined in clause 1 of the contract to mean: "…the aggregate of the salary, benefits allowance and superannuation payable annually to, or on behalf of, the CEO at the relevant time, together with the amount of bonus that would be earned by the CEO in the then current year, if the CEO achieved 100% of objectives stipulated for purpose of calculation of his bonus." 590 Clause 3.4 of the contract sets out Mr Randall's bonus entitlements. Pursuant to that clause, if Mr Randall achieved 100% of the objectives stipulated, he was to receive US$850,000. 591 The total Target Salary in 2003 was US$2,247,443. Three year's Target Salary is US$6,742,329, which is the amount claimed by Mr Randall pursuant to clause 5.5 of the contract. 592 Mr Randall's claims under clauses 5.4 and 5.5 of the contract fall away by reason of the finding on summary dismissal. Clauses 3A.8 and 3A.6 of the contract - relocation related expenses 593 Clause 3A.8 of the contract provides: "At such time as the CEO returns to Australia on a permanent basis, Aristocrat will provide similar relocation benefits to the CEO as set out in 3A.6 above, as will be appropriate to a move back to Australia." 594 Clause 3A.6 of the contract provides: "The CEO will be entitled to be reimbursed by Aristocrat for the reasonable cost of the following relocation assistance: · Total cost of relocation visit to Las Vegas by the CEO and his family. ... · Shipping and storage of furniture and personal effects. .... · All costs and disbursements, including legal fees, agent's commission, insurance costs, advertising expenses, stamp duty and all government fees incurred in respect of the sale of the CEO's home in Sydney, and the purchase of a home in Las Vegas. · Relocation disturbance allowance equal to one month's salary net of tax...." 595 Mr Randall claims that, following the termination of his employment, he and his wife incurred expenses associated with returning and relocating to Australia, including: · shipping and storage expenses of A$8,695.12; · airfare expenses of A$17,200; and · other out-of-pocket expenses of US$318.77. 596 One month's salary under the contract was US$85,402. 597 Mr Randall claims an entitlement to be paid each of these sums pursuant to clause 3A.8 of the contract. 598 It is unclear whether or not the plaintiff pressed the additional expenses claim set out in paragraphs 68-70 of the Amended Reply. Leave is reserved to the parties to clarify this issue and to further address if the claim is pursued. 599 Aristocrat defends those relocation related expense claims on a number of disparate grounds. Aristocrat asserts, inter alia, that Mr Randall's claims under clause 3A.8 fall away if Aristocrat is justified in summarily dismissing Mr Randall. 600 A somewhat difficult question has arisen in terms of whether or not clause 3A.8 of the contract survives a circumstance where, as presently, a summary dismissal of Mr Randall has been effected. The matter is one of inference as there was no express provision in that regard. The proposition contended for by the plaintiff has been that the clause was intended to be engaged, inter alia, following the effluxion by time of Mr Randall's appointment. My own view is that in all the circumstances the parties should be taken as having intended this clause to operate in any circumstances, the clause only having been inserted as a quid pro quo for Mr Randall's agreement to having relocated to the United States in the first place. The clause remains part of the anterior agreement albeit being triggered by the later event always anticipated that at some time Mr Randall would be returning to Australia on a permanent basis. 601 The same finding and reasoning obtains with respect to clause 3A.6 of the contract which is simply the detailed complement of clause 3A .8. 602 Mr Randall claims that, pursuant to other arrangements concerning his relocation (as set out in a memorandum dated 2 December 2002 from Mr Gibbs, Aristocrat agreed to meet the cost of any taxes paid in respect of the Nevada home acquired in Mr and Mrs Randall's name. Mr Randall claims that he and his wife paid taxes totalling US$11,085 in respect of that home and are entitled to re-imbursement. 603 Mr Randall also seeks a declaration that, under clause 3A.8 of the contract, he is entitled to be indemnified by Aristocrat for all costs and disbursements, including legal fees, agent's commission, insurance costs, stamp duty and all government fees that will be incurred in respect of purchasing a home in Sydney (or elsewhere in Australia). Mr Randall is yet to acquire such a home. 604 Leave is granted to the parties to address further submissions in relation to the matters referred to in the last two paragraphs, before short minutes are brought in. Clause 3.4 claim - 2002 bonus 605 Clause 3.4 of the contract [as at 1 January 2002] provides: "The CEO will be entitled to receive a performance bonus for each calendar year of his employment from 1 January 2001. The amount of such bonuses to be dependent on him completing specific objectives and programmes, and dependent on attainment of agreed financial results by Aristocrat, for each year of his employment. … Entitlement to bonus for the purpose of the table set out at the end of this sub-clause, will be assessed on the basis of 70% of achievement standard related to financial goals, and 30% of achievement standard related to non-financial goals. Non-financial goals will be as set in documentation confirming the year 2001 CEO objectives documentation. Financial goals will be related to achievement of revenue and profit before tax…." 606 Clause 3.4 also provides that for achieving 100% to 130% of financial and non-financial objectives, Mr Randall would receive A$600,000 plus A$13,333.33 for each 1% or part 1% achieved over 100%. However the figure A$600,000 was varied by the Aristocrat board at its meeting on 18 February 2002 to A$850,000 for the 2002 year (as per Mr Ducker's memorandum to Mr Randall of 1 March 2002). 607 The financial goal set for the 2002 calendar year was a profit before tax of A$121 million. The non-financial goals included a number of criteria (each with a maximum of 7%) relating to customer relationships, harm minimisation, investor relations, USA and Japanese businesses, logistics facilities, personnel, international and software growth, Australia and New Zealand growth and Mr Randall's relocation. 608 The actual profit before tax for Aristocrat for 2002 was A$120.24 million. Accordingly, Mr Randall claims an entitlement to an equivalent pro - rata of 70% of the stated bonus figure. 609 Mr Randall claims that he achieved a total of 106.76% of his objectives (both financial and non-financial) and is therefore entitled to a bonus of A$907,460. This is the amount claimed by Mr Randall pursuant to clause 3.4 of the contract. This claim which is not affected by the summary dismissal finding is dealt with below. Bonus claim Contractual basis for claim 610 Mr Randall's claim is for a bonus for the 2002 calendar year. Whilst there was no concession in this regard [transcript 527] no submissions to the contrary came forward from the defendant. As will appear from what follows the claim was clearly made out. A deal of what follows accepts and adopts the plaintiff's relevant submissions. 611 The relevant form of the contract is that which applied as at 1 January 2002, subject to any variation prior to 31 December 2002. 612 The contract, which applied as at 1 January 2002, appears at AB 1/114, namely the 2001 Contract. Clause 3.4 of that contract provided for a bonus in "each calendar year of his employment from 1 January 2001", with the amount of the bonus "dependent on [Mr Randall] completing specific objectives and programmes, and dependent on attainment of agreed financial results by Aristocrat, for each year of his employment." 613 The 2001 Contract set out the entitlements for the 2001 calendar year, but provided for nominated representatives of the board, including the chairman, to discuss the financial budgets and "specific objectives and programmes to be completed during the ensuing year". 614 The amount of the bonus "will be assessed on the basis of 70% of achievement standard related to financial goals, and 30% of achievement standard related to non financial goals." 615 The 2001 Contract provided that for the 2001 calendar year, the amount of the bonus would be calculated in accordance with the following table: Percentage of financial objectives and non-financial objectives achieved AMOUNT OF BONUS Less than 80% $100,000 80% to 100% $200,000 plus $20,000 for each 1% or part 1% achieved over 80% 100% to 130% $600,000 plus $13,333.33 for each 1% or part 1% achieved over 100% 130% or more $1,000,000 616 Mr Randall earned the maximum bonus ($1,000,000) for the 2001 year. 617 Pursuant to appendix 2 and the schedule of Aristocrat's internal corporate governance principles as amended on 17 October 2001 (commencing at AB 1/220), Aristocrat's board was responsible for Mr Randall's remuneration (see AB 1/246-248). However the company's Compensation & Nomination Committee was empowered to review recommendations for Mr Randall's remuneration, including bonuses. (See Appendix 3B at AB 1/255) 618 The terms of the bonus for the 2002 year were agreed to by the Compensation and Nomination Committee of Aristocrat on 17 February 2002 (see minutes commencing at AB 1/333). The members of that committee were Mr Pascoe, Mr Steelman, Mr Randall, Mr Ducker, Mr Gibbs (the General Manager of Human Resources) and Mr Bush (the Company Secretary). Whilst Mr Randall was a member of that committee, as the minutes record he withdrew from the meeting when his own remuneration was discussed. At p AB 1/335, the minutes record: "It resolved to recommend to the board a... bonus range of A$300,000 - $1,500,000 with a target for achievement of KPI's of $850,000. It then adjourned further discussion of this subject to 9.15 am the following day to review the proposed KPI's against the Strategic Plan." 619 'KPI's' refer to key performance indicators. 620 There are no minutes pertaining to the Compensation and Nomination Committee of Aristocrat on 18 February 2002 at 9.15am, however the board met at 10.00 am on that day. The minutes of that meeting commence at AB 2/368. At AB 2/373, the minutes record that the board resolved to adopt the Compensation and Nomination Committee's recommendation concerning Mr Randall's remuneration for 2002, including the bonus payment (and the terms of his relocation to the United States). 621 By memorandum dated 1 March 2002 (AB 2/382), the board's chairman, Mr Ducker, advised Mr Randall that his bonus entitlements for 2002 involved an increased minimum payment of $300,000 for achievement of 80% of a profit before tax goal of $121 million and achievement against specified non- financial goals, $850,000 for achieving 100% of the profit before tax goal and achievement against non financial goals and $1,500,000 for achieving 125% of the profit before tax goal and achievement against non financial goals. 622 The memorandum also provided that the bonus would be split 70% for achieving financial goals and 30% for achieving non-financial objectives. The bonus reward for financial goals was set as "linear reward for achieving financial goals between 80% and 100% and between 100% and 125%". The bonus award for non-financial goals was to be as per "2002 CEO objectives documentation." 623 The 2002 chief executive officer objectives documentation was attached to Mr Ducker's memorandum at AB 2/385. This confirms the profit before tax goal of $121 million. It sets out 9 non-financial objectives, each to have a maximum entitlement of 7 points based on quantitative and qualitative results. A total of 63 points (each equivalent to 1 percentage point) were available to Mr Randall. The 9 criteria were: · customer relationships; · harm minimisation; · investor relations; · USA and Japanese business; · logistics facilities; · our people; · international and software growth; · Australia and New Zealand growth; and · Mr Randall's relocation to the United States. 624 In relation to the financial objectives, the 2002 Annual Report of Aristocrat (commencing at AB 12/3845) records (at AB 12/3896) that Aristocrat's profit before tax was $120,243,000 for 2002. This is 99.37% of the profit before tax target of $121 million. This is equivalent to 69.56% of the 70% bonus target relating to financial goals as set out in the 2002 bonus objectives. 625 In relation to the non-financial objectives, it is conceded by Aristocrat in its Second Further Amended Defence (para 5.12.2) that Mr Randall had relocated to the United States as at 1 January 2003. Also see Aristocrat's Notice of Admissions dated 6 November 2003 to the same effect. Mr Randall is therefore entitled to the maximum score of 7 points for this alone. 626 In relation to the other non-financial objectives, Mr Randall's evidence of his satisfaction of each these criteria appears in paragraphs 94 - 101 of his 10 October 2003 statement. This evidence was not challenged in cross-examination nor was any evidence to the contrary lead by Aristocrat. 627 To support Mr Randall's evidence in these paragraphs, further statements and documentation was tendered in chief and as part of the agreed bundle. This material is as follows: · to support paragraph 94(a) of Mr Randall's statement concerning customer relations, is the evidence from Mr Ian Ross Wilson in his statement dated 18 December 2003, Mr James Henry in his statement dated 11 December 2003, Mr David Frederick Barnett in his statement dated 4 December 2003, and Mr Mark Lane Robertson in his statement dated 3 December 2003. These statements confirm the high regard that these customers held for Mr Randall and his close involvement in customer relations. None of this evidence was challenged in cross-examination. · to support paragraph 94(b) of Mr Randall's statement concerning the maintenance of 50% shipshare for Australian customers, as set out in the chief executive officer report of the 2002 Annual Report (AB 12/3859) Aristocrat improved its market share in every Australian jurisdiction. More detail concerning the Australian performance and its increase of market share appears in the 2002 annual report at AB 12/3875-6. · to support paragraph 94(c) relating to relationships with United States customers, at AB 16/5595-5615 is a document entitled 'First Amendment to National Gaming Machine Purchase Agreement' between ATI and Harrah's Operating Co. Harrah's is one of ATI's major United States customers. · to support paragraph 95(b) of Mr Randall's statement concerning submissions to state governments on responsible gambling, Mr Ian Wilson's statement of 18 December 2003 refers to Mr Randall's role as a director of the Australian Gaming Council and representing the gaming industry in the community with the goal of influencing policy makers of the benefits of gaming to the community. He was also involved in the development of a code of conduct for the industry. · to support paragraph 96 of Mr Randall's statement concerning his involvement in road shows and presentations to analysts there are: - the evidence in paragraph 9 of Mr Jury's statement of 6 November 2003 of Mr Randall's attendance, with Mr Jury, at analysts meetings, - the evidence in paragraphs 17-23 and 47-48 of Mr Newburg's statement of 15 October 2003 of Mr Randall's involvement in presentations to analysts in May and September 2002, both in Australia and the United States. - the presentation at AB 7/2156 entitled 'Positioned for Growth' for the year ending 31 December 2002, - the presentation at AB 8/2571 entitled 'Time to Get Serious' at global sales conference; - the presentation at AB 8/2578 entitled 'Doing the Hard Yards' at global sales conference · to support paragraph 97(a) of Mr Randall's statement concerning the growth in the United States and Japanese businesses are the audited financial results recorded in the 2002 Annual Report. At AB 12/3873 and 12/3896 and 3893, the Annual Report records that revenue from the North American business grew from $163 million to $294 million, growth in excess of 80%. Japan's revenue (recorded at AB 12/3874 and 12/3896 and 3893) grew from $136.2 million to $181.3 million, growth of 33%. Also see AB 16/5436 being a document entitled 'Aristocrat Group Business Unit Japan Region' which records that total revenue for 2001 was A$136,086,772 and the planned revenue for 2002 was A$180,208,804. · to support paragraph 97(b) of Mr Randall's statement concerning Aristocrat's relationships with its competitors, is the IGT dispute settlement documentation at AB 7/2259 - 2306. · to support paragraph 97(c) of Mr Randall's statement concerning the integration of CDS and Hansons distributing into the United States business, a report on the acquisition of each of these businesses is included in the 2002 Annual Report at 12/3872-3. · to support paragraph 97(d) of Mr Randall's statement concerning the development of United States and Japanese businesses, and the evaluation of the potential purchase of the Acres, Scientific Games and Bally businesses are documents at AB 16/5616 and 16/5663 entitled 'Project Gorilla - Executive Overview - October 18, 2002' and 'Project Gorilla Summary' Vol 16, P 5663 concerning Bally. · to support paragraph 97(e) of Mr Randall's statement concerning the independence of the Japanese business is the report in the 2002 Annual Report at AB 12/3874 reporting on the growth of the Japanese business, including the expansion of the local research and development team and a new direct sales team. · to support paragraph 97(f) of Mr Randall's statement concerning the appointment of a chief financial officer and direct sales force for the Japanese business, is a list of employees recruited in Japan in 2002 (AB 16/5435). This list was provided by Aristocrat as part of the discovery process, instead of producing original documents pertaining to their employment. · to support paragraph 97(g) of Mr Randall's statement concerning distribution through the Hanbai company, is the 2002 Annual Report at 12/3874, reporting on the acquisition of the final 40% of this company from Sammy Corporation in June 2002. · to support paragraph 97(h) of Mr Randall's statement concerning the development of the Japanese research and development team is the 2002 Annual Report at 12/3874, reporting on the expanded research and development team. · to support paragraph 98(d) of Mr Randall's statement concerning the manufacturing facility at Botany are: - a memorandum dated 11 April 2002 from Mr Randall to Messrs Jeyaraj, Hogg, Neal and Powell concerning 'Real Estate – Manufacturing' (AB 16/5507) concerning options and planning relating to Aristocrat's manufacturing plant, - a document entitled 'Rosebery Recommendation' (AB 16/5509 - 5519) concerning manufacturing plant possibilities; - a document entitled 'Real Estate Overview' dated 2 August 2002 at AB 16/5454 - 5506 concerning a review of all of Aristocrat's real estate. · to support paragraph 99(a) of Mr Randall's statement concerning Aristocrat's graduate recruitment program is - a document at AB 16/5520 entitled 'Graduate Data 2000-2003' recording the hiring of graduates for Aristocrat ; - a document at AB 16/5521 entitled 'Aristocrat Development Program – Marketing'; - a document at AB 16/5530 entitled 'Aristocrat Graduate Development Program B&FS'; - a document at AB 16/5539 entitled 'Aristocrat Graduate Development Program – Manufacturing'; - a document at AB 16/5553 entitled 'Aristocrat Graduate Development Program - R&D Hardware'; - a document at AB 16/5536 entitled 'Aristocrat Graduate Development Program - R&D Software'; and - a document at AB 16/5578 entitled 'Aristocrat Graduate Development Program- Sales'. · to support paragraph 99(d) of Mr Randall's statement concerning the development of a talent pool for high achievers is a document at AB 17/5703 entitled 'Talent Pool Status'. · to support paragraph 99(e) of Mr Randall's statement concerning the termination of the bottom 5.2% of Australia and 18.9% of United States employees is a document at AB 17/5733-4, being a list of termination employees in Australia and the United States. · to support paragraph 99(f) of Mr Randall's statement concerning the 4 Quadrant Assessment tool is a document at AB 17/5735 entitled '4 Quadrant Matrix - Managers Guide'. · to support paragraph 100 of Mr Randall's statement concerning the growth of Aristocrat's international business and software business is the general report on such business in the 2002 Annual Report at AB 12/3859-60, at AB 12/3872 and 3877 (reporting a growth in international revenue from $420.1 m to $611.8 m, being 62.8% of total segment revenue; · to support paragraph 101 (a) of Mr Randall's statement concerning the growth of the Australian and New Zealand businesses, see the reports on these businesses in the 2002 Annual Report at 12/3874-7 recording the maintenance of Aristocrat's market leader position in both countries. · to support paragraph 101(b) of Mr Randall's statement concerning Australia's local contribution profit of $87 m exceeding by $4 million, the budgeted profit, is the audited financial results recorded in the 2002 Annual Report (see 12/3896). 628 None of the above documents or information was challenged by Aristocrat during the trial. 629 On the evidence of Mr Bush in paragraph 59 of his 6 November 2003 statement, Mr Wiadrowski of PwC said: "The situation is that Des Randall is entitled to a bonus in terms of his package for 2002 - he has met most of his key performance indications for 2002." 630 Mr Bush at paragraph 62 of his 6 November 2003 statement admits that Mr Randall was entitled to at least $850,000 [subject of course to the waiver and estoppel argument] when he says to Mr Randall: "Des, I have here a draft letter waiving any entitlement you have to a bonus for 2002. If you don't waive the bonus, we will have to make provision of $850,000 for the bonus amount in the company's accounts." 631 Clearly, if Mr Randall had not earned his bonus, there would be no need for the provision in the accounts, nor the waiver letter. 632 Mr Bush at TP 397.45 - 398.6, conceded that Aristocrat was obliged to pay Mr Randall his bonus. He gave the following evidence: "Q. Thus far, as I follow the sequence of events you describe, you haven't had any conversation at all with Mr Randall about this? A. No, that's right. Q. So you then go to Mr Randall, is this right, and say well here is a draft, here is a letter I have drafted? A. Yes. Q. And I want to suggest to you that whatever the details of the conversation, about which you and Mr Randall may differ, Mr Randall made it perfectly plain to you that his position was that he had earned his bonus? A. Yes. Q. He felt he was entitled to his bonus? A. Yes. Q. The Company was obliged to pay it to him? A. Yes." 633 In his memorandum dated 21 March 2003 (AB 9/3152) to Mr Pascoe, Mr Randall provided an assessment of the non-financial goals. He set out in detail the achievements in relation to each criteria and provided a score as follows: "(a) Customer Relationships - 7/7; (b) Harm Minimisation - 7/7; (c) Investor Relations - 6/7; (d) USA and Japanese Business - 5/7; (e) Logistics Facilities - 5/7; (f) Our People - 6/7; (g) International and Software Growth - 6/7; (h) Australia and New Zealand Growth - 7/7; and (i) Mr Randall's relocation to the United States - 7/7 being a total 56 points" 634 No reply or any other response was sent to Mr Randall seeking to take issue with this claim. The letter was clearly one which could have expected to have evoked a response if its contents were in dispute. 635 Moreover, no evidence was led in response and Mr Randall was not challenged in cross-examination as to his entitlement (other than in respect of waiver and estoppel) nor the calculation of his claim. 636 Mr Randall himself gave evidence at TP 86, in responding to cross examination concerning the impact of the 2002 results on his bonus. At TP 86.13 - .25 he gave this evidence: "Q. Right. How was it, in your understanding, as at the time of this media presentation, that you were to be impacted as you say at page 129? A. If I may, if I'd have thought I gave up my bonus, I would have been delighted to tell the market, you know, that I'd done that. Specifically what I was referring to here, that I will be impacted, is I knew because the board budget was already set for 2003, we had no chance to make it and I would get no bonus because the board would not reset the objectives, so I would get no bonus in 2003. I knew that at this time. I also at this time knew that because of the events that overtook us in February that I'd missed out on $600,000 of bonus for 2002. " 637 Similar scoring and assessment of Mr Randall's bonus occurred in 2000 and 2001 (see paragraphs 81 - 87 of Mr Randall's statement of 10 October 2003). None of these assessments were ever challenged or changed by the board. 638 On the basis of this scoring, Mr Randall's bonus is calculated as follows: · 69.56% (of a total 70%) for achievement of financial goals; and · 37.2% (of the 30%) for the over achievement of non financial goals (calculated as 56/45 x 30%) This represents a total of 106.76% achievement. This entitles him to: a bonus of $850,000 x 1.0676 which = $907,460 Aristocrat's defence 639 Aristocrat allege the bonus is not payable because: · Mr Randall waived his bonus by virtue of his letter dated 12 February 2003 (AB 8/2775); and · Mr Randall is estopped from claiming the bonus by reason of Aristocrat's reliance on such waiver in removing the provision for the bonus from the 2002 accounts. The evidence 640 In early February 2003 a conversation took place between Mr Khin and Mr Dow in which Mr Dow says that PWC need a letter from Mr Randall in which he gives up any right to a bonus for 2002 and acknowledges that any bonus to be paid to him will be at the sole discretion of the board. Mr Khin tells Mr Jeyaraj of this conversation. 641 On 12 February 2003 a conversation took place between Mr Bush and Mr Wiadrowski in which Mr Wiadrowski says that Mr Randall is entitled to a bonus in terms of his package for 2002 and whether or not the board approves the payment, Aristocrat needs to accrue a liability for the entitlement. Mr Wiadrowski says that the only alternative to accruing that liability would be if Mr Randall waives his entitlement to a bonus. Mr Bush says that he thinks shareholders would be very angry if they accrued a liability for a bonus after the results they have foreshadowed and says that he will talk to Mr Randall about a waiver of the bonus. 642 On 12 February 2003 a conversation took place between Mr Bush and Mr Dow in which Mr Dow says that he understands that Mr Bush has spoken to Mr Wiadrowski about the bonus accrual and asks whether Mr Bush has worked out what he is going to do about it. Mr Bush responds that he understands there has to be an accrual for the bonus or Mr Randall has to waive his entitlement. Mr Dow responds affirmatively and says that if Mr Randall is going to waive the bonus, it needs to be in writing and that PWC will not be happy to sign the accounts unless there is a document from Mr Randall which waives the bonus. 643 On 12 February 2003 Mr Bush drafts a letter to be signed by Mr Randall waiving his entitlement to a bonus. It is in the following terms and following a discussion with Mr Randall is signed in those terms: "12 February 2003 Mr John Pascoe Chair Compensation & Nomination Committee Aristocrat Leisure Limited Dear John I believe that it would be appropriate in the current climate for me to waive my formal entitlement under my service agreement to a bonus in respect of the 2002 financial year and to leave that matter entirely to the Board's discretion. Kind regards DH Randall Cc John Ducker" [DX 278] 644 The Court's finding in relation to the conversation between Mr Bush and Mr Randall which led to the signing of the letter is as follows: · Mr Bush said that he had a draft letter waiving any entitlement Mr Randall has to a bonus for 2002. He said that if Mr Randall did not waive the bonus, Aristocrat would have to make provision for $850,000 for the bonus amount in the accounts. He said that the auditors had said that they would not sign off on the accounts unless the accrual for Mr Randall's bonus was included or Mr Randall signed the waiver. · Mr Bush said that there might be problems with shareholders if the bonus is included in the accounts having regard to Aristocrat's performance. · Mr Randall said words to the effect: "Hey, I'm not giving up my rights to the bonus. Every manager in the company got their bonus this year. I won't get one next year so, you know, I want to be sure to get my bonus this year". [Transcript 78] · Mr Bush said, "Don't worry about that, talk" - you know, "Your bonus will be okay, Des, just sign the letter. All we're doing is taking the reserve. We need it in this format, all we're doing is taking the reserve [of $850.000] off the books". [Transcript 78] 645 On 17 February 2003 Mr Randall attended a board meeting and resolved (unanimously with the board) to approve Aristocrat's financial statements for the year ended 31 December 2002. No amount was provided in the financial statements for any accrued liability to pay a bonus for 2002 to Mr Randall, a matter which Mr Randall knew about. The notes include a disclaimer of "off balance sheet" assets and liabilities. [DX 243] 646 Before proceeding further it is appropriate to note a submission which came forward from the defendant concerning the proper construction of clause 15 of the contract which was in the following terms: "A provision of, or a right created under, this Agreement may not be: (a) waived except in writing signed by the party granting the waiver, or (b) varied except in writing signed by the parties. 647 In my view the provision concerning waiver required to be in writing simply imposes a minimum gateway on the parties as opposed to be regarded as a mandatory permissive circumstance. Contrary to the submission which came forward from the defendant the clause is not inconsistent with the proposition that a waiver must be supported by valuable consideration in order to be enforceable. Release of a debt 648 "A debt can only be truly released and extinguished by agreement for valuable consideration or under seal" [per the Privy Council in The Commissioner of Stamp Duties for NSW v Bone and Ors (1976) 135 CLR 223 at 229. Also see Lewis v Cook (2000) 18 ACLC 490 at 493 (per Austin J); Ashton Mining Ltd v Commissioner of Taxation [2000] FCA 590 per Merkel J at [34]; The Federal Commissioner of Taxation v Orica Limited (1998) 194 CLR 500 at 544 per Gummow J; and Meagher Gummow & Lehane - Equity Doctrines and Remedies 4th ed. at [35-010]]. No consideration was given by Aristocrat 649 There was no consideration given by Aristocrat to Mr Randall for the waiver. It was not given under seal. Mr Bush's evidence at TP 398 was that Mr Randall believed he was entitled to his bonus and that the other executives within Aristocrat had also received a bonus for 2002, including Mr Bush. There was no evidence provided of any compensation or alternative consideration given to Mr Randall for him to forego his bonus. Principles concerning doctrine of waiver 650 The continued scope of the doctrine of waiver was considered by the High Court's decision in Commonwealth v Verwayen (1990) 170 CLR 394. Mason CJ (at 406) held: "It has been doubted that waiver exists as a defence or answer in any case except where it is used as an alternative designation for some other defence or answer, for example, election, estoppel or new agreement.... Generally speaking, as Jordan C.J pointed out in Larratt (1941) 41 A.R. (N.S.W.) at pp 226-227, an existing legal right is not destroyed by mere waiver in the sense of an express or implied intimation that the person in whom the right is vested does not intend to enforce it: see Mulcahy v Hoyne , per Isaacs J; Atlantic Shipping and Trading Co. v Louis Dreyfus & Co per Lord Sumner. In these cases, unless consideration is present, something in the nature of an election or an estoppel is required." 651 Those limited fields involved an election between inconsistent rights, abandonment of a defence to a claim or the abandonment of a statutory right. 652 Mason J's judgment (at 404-406) in Verwayen was followed by Austin J in Lewis v Cook (supra) (at 495) when he held that: "...'an existing legal right is not destroyed by mere waiver, in the sense of an express or implied intimation that the person in whom the right is vested does not intend to enforce it' and said that in such a case something in the nature of an election or an estoppel is required in the absence of consideration. As I read the judgments, none of the other judges in the Verwayen case disagreed with those propositions. A law of waiver survives Verwayen's case only in limited fields..." 653 On the face of his 12 February 2003 letter, Mr Randall purported to release or waive an indebtedness of Aristocrat for his bonus but expressly left it to the discretion of the directors. The finding is that such a letter could not, without more, constitute a binding forgiveness of the bonus. Estoppel 654 Estoppel from claiming a purportedly forgiven debt was considered by Austin J in Lewis v Cook (at 493-494). At [24], after citing Verwayen's case (supra at 444-6 per Deane J) and Waltons Stores (Interstate) Ltd v Maher (1988) 164 CLR 387 at 404, 428-9, he held: "The doctrine of estoppel is concerned with real reliance on the real representations of other people (or conduct inducing reliance), in the circumstances which make it unconscionable for the representor to resile. Equity's concern is with unconscientious conduct." 655 In Legione v Hateley (1983) 152 CLR 406, at 437, Mason and Deane JJ held that: "A person will not be estopped from departing from a representation 'unless, as a result of adopting it as the basis of action or inaction, the other party will have placed himself in a position of material disadvantage if departure from the assumption be permitted'" (per Dixon J. in Thompson v Palmer (1933) 49 CLR 507 at 547) [cf Dixon J in Grundt v Great Boulder Gold Mines Pty Ltd (1937) 59 CLR 641 at 674] 656 Deane J in Verwayen (supra at 444) spoke of the need for a "significant disadvantage" on the part of the relying party, if the assumption or reliance founding the estoppel is departed from. Deane J further held (at 445): "Ultimately, however, the question whether departure from the assumption would be unconscionable must be resolved not by reference to some preconceived formula framed to serve as a universal yardstick but by reference to all the circumstances of the case, including the reasonableness of the conduct of the other party in acting upon the assumption and the nature and extent of the detriment which he would sustain by acting upon the assumption if departure from the assumed state of affairs would be permitted." 657 Mason CJ in Verwayen (at 416) referred to the need for substantial and irreversible detriment flowing from the reliance on the representation. 658 Handley JA in Hawker Pacific Pty Ltd v Helicopter Charter Pty Ltd (1991) 22 NSWLR 298 at 307-8 held, after referring to the use of the phrases "material disadvantage", "material detriment" and "significant disadvantage" by, respectively Dixon J in Thompson v Palmer (1933) 49 CLR 507 at 547, Rich, Dixon and Evatt JJ in Newbon v City Mutual Life Assurance Society Ltd (1935) 52 CLR 723 at 734, and by Deane J in Verwayen (supra) held: "While a single peppercorn may constitute valuable consideration which can support a simple contract it seems to me that the loss of such an item would not constitute a "material detriment, "material disadvantage", or a "significant disadvantage" for the purposes of the law of estoppel. It may seem strange that there should be such a distinction. However in the first case the consideration has been accepted as the price of a bargain which the law strives to uphold. Promissory estoppels and estoppels by representation lack this element of mutuality, and the relevant detriment has not been accepted by the party estopped as the price for binding himself to the representation or promise." 659 In this case, even assuming Aristocrat's case at its highest, namely that in signing the waiver letter, Mr Randall intended it to be relied upon and it was in fact relied upon for the purpose of finalising the 2002 accounts, it was clearly given in circumstances where Mr Randall assumed his employment to be ongoing with the company and the bonus would be considered later in good faith by the board. There is nothing unconscionable on Mr Randall's behalf in seeking to recover the bonus consequent upon the termination of his employment shortly thereafter and in circumstances where no material disadvantage has been suffered by Aristocrat. 660 On the facts of this case, Aristocrat must be able to point to some material or significant disadvantage if Mr Randall is now entitled to claim his bonus. It cannot. 661 Aristocrat refers only to the preparation of the 2002 accounts without reference to Mr Randall's bonus as the act of reliance or detriment to found an estoppel. One simple accounting entry in the consolidated entries of an international billion-dollar enterprise cannot constitute a material disadvantage. To include a further accounting entry in relation to the 2004 accounts would also not constitute a material disadvantage. Aristocrat has lead no evidence to substantiate a claim that the changing of an accounting entry in its books of account would cause it any disadvantage, let alone a material or significant disadvantage. No evidence was adduced to the effect that Aristocrat may suffer disadvantage at the hands of a shareholder or shareholder group who had acted upon the basis of the 2002 accounts as being misleading or deceptive or incomplete or inaccurate. Nor [despite the Court taking counsel for the defendant to the question of how detriment was pleaded -transcript 533] was the matter pleaded in this way in terms of suggested detriment. 662 Nor is it self evident that the non-recording of the bonus is a detriment. If Aristocrat did not in fact pay the bonus in 2002, there is no clear or proper evidence as to how the accounts may be differently prepared had the bonus been recorded. No payment could have been recorded as no payment was made. All that existed was a contingent liability to pay the amount in 2003. 663 The estoppel case fails. The Promissory Note issue The claim made 664 By its second further amended cross-claim, Aristocrat seeks from both Mr and Mrs Randall repayment of a loan in the sum of US$1,665,000, plus interest said to be US$50,821.23 calculated to 28 July 2003 (from an unspecified date) and continuing to accrue daily. The loan was used to acquire the Las Vegas home used by Mr and Mrs Randall on their relocation to that city. 665 Whilst the sum referred to in the cross-claim is the full amount of the original loan, Aristocrat admits that it has received at least US$1,411,098.90 from the sale of the Las Vegas home in reduction of the original loan. 666 By paragraph 4A of the cross-claim, Aristocrat bases the alleged estoppel on the delivery to it on 17 February 2003 by Mr Randall of the executed promissory note. By reason of that delivery it alleges (paragraph 4A.1) that Mr and Mrs Randall jointly and severally represented to Aristocrat and encouraged it to conduct its affairs upon such an assumption, that: · the Promissory Note was jointly and severally binding on Mr and Mrs Randall; · Mr Randall gave up his right to any entitlement to an interest free loan; · Mr and Mrs Randall would repay to Aristocrat the loan amount plus interest in accordance with the terms of the Promissory Note. (the "representations") 667 It is further alleged (paragraph 4A.2) that Aristocrat acted on the faith of the representations, and was encouraged to assume the subject matter of the representations, and: · submitted its accounts for auditing; · had its accounts audited; · reported to the members of the company in its 2002 Annual Report upon the basis that the Promissory Notice governed the loan. 668 It is further alleged (paragraph 4A.3) that Mr and Mrs Randall are estopped from asserting that: · the Promissory Note is not binding on them jointly and severally; · the loan was interest free; and · Mr Randall was entitled to rely on clauses 3A.7 and 3A.8 of the contract. The terms of the loan 669 On Sunday 17 February 2002, the Compensation and Nomination Committee considered the terms of Mr Randall's relocation package (see minutes of meeting commencing at AB 1/333). The Committee comprised of Mr Pascoe (as Chairman), Mr Steelman, Mr Randall, Mr Ducker (as Chairman of Directors), Mr Gibbs (the General Manager of Human Resources) and Mr Bush as the Committee Secretary. 670 Paragraph 6 of the minutes of the meeting refers to the recommendations by Mr Gibbs for the terms of the relocation and it was resolved to recommend them to the board. There is no copy of any document in evidence that went before the Committee setting out such recommendations. 671 The Committee also recognised that issues may arise and require determination during the process and recommended that any issues requiring resolution be agreed with either the Chair of the Committee (Mr Pascoe) or the Chairman of the Board (Mr Ducker). It also recommended that Mr Gibbs and Mr Jeyaraj jointly should agree each step in the relocation in terms of detail. 672 In other words, the Committee recommended that further matters in relation to Mr Randall's relocation be delegated to Mr Pascoe or Mr Ducker for approval and that final detail of the relocation package be delegated to both Mr Gibbs and Mr Jeyaraj. 673 The recommendations of the Committee were adopted as resolutions of the board on 18 February 2002 (see minutes of that meeting commencing at AB 2/368, in particular at AB 2/373). 674 The substance of Mr Randall's relocation package as approved by the board was attached to Mr Ducker's memorandum to Mr Randall dated 1 March 2002 (AB 2/382). Under the heading relocation assistance, is provision for "Interest free loan (up to US$2 million) for Las Vegas house purchase". 675 The interest free loan was expressly included in clause 3A.7 of Mr Randall's contract of 7 December 2002 (AB 5/1771). 676 By memorandum dated 30 April 2002 (AB 2/431) from Mr Randall to Mr Pascoe as Chairman of the Compensation Committee, Mr Randall set out various propositions in respect of the USA housing aspect of his relocation. In that memorandum Mr Randall sought to agree an approach for the subsequent sale of the Las Vegas house following the end of his career with Aristocrat that minimises the risk for both Aristocrat and his family. Mr Randall referred to the sale of the house being effected through a specialist housing sale company that apparently operate in the US and the "company would then receive the house sale proceeds as a full offset to the advance provided. The company's overall exposure will therefore be limited to the carrying cost of the loan and any capital depreciation on sale" As the memorandum stated, it was considered more likely that the company would benefit from capital appreciation. 677 The Compensation Committee approved this proposal on 20 May 2002, as indicated by Mr Pascoe's signature on the 30 April 2002 memorandum. Such approval was within the scope of Mr Pascoe's delegated authority on relocation matters provided at the 18 February 2002 board meeting. 678 This approval was further confirmed in Mr Gibbs Memorandum of 6 September 2002 to Mr Randall (see AB 3/779). 679 Mr Gibbs further set out the detail of Mr Randall's relocation assistance in his memorandum of 2 December 2002 to Mr Randall and Mr Jeyaraj (AB 5/1689). At AB 5/1691, the schedule concerning housing costs and payment responsibilities states that Aristocrat bore responsibility for the purchase and the loan both pre and post relocation and that Aristocrat was to sell the home on assignment end through a third party specialist firm, with the proceeds to go to Aristocrat. 680 By virtue of Mr Randall's memorandum of 30 April 2002 (AB 2/431) which was approved by the Compensation Committee on 20 May 2002, and the 2002 Contract (AB 5/1771) it is a clear term that the housing loan was subject to the following terms: · it was interest free; and · it was to be satisfied (even assuming Aristocrat's case at its highest with interest being payable) on receipt of the proceeds of sale from the Las Vegas home. Mrs Randall 681 Subject to the promissory note (discussed below), there is no evidence that the loan was made to Mrs Randall. The fact that the Las Vegas home was acquired in the names of Mr and Mrs Randall does not mean the loan funds were paid to or on her behalf. Even if they were, that is not enough to make her liable for repayment of the loan. Rather reference must be had to the express terms of the agreement. 682 The relocation assistance documents referred to above, and in particular the 2002 Contract, provide that the loan was to be to Mr Randall. Mrs Randall was never a party to the contract or other negotiations or agreements involving the relocation package. 683 The 2002 Annual Report (commencing at AB 12/3845) referred to by Aristocrat in its Further Amended Cross Claim, clearly state that the loan was to Mr Randall only. Page 69 of the Annual Report (AB 12/3915) under Note 37 to the audited 2002 accounts states that the loan was to Mr Randall only. There is no reference to Mrs Randall. 684 It is not disputed that Mrs Randall signed the promissory note (AB 5/1643). It is disputed however that it has any effect to bind Mrs Randall. The inconsistency between the documents 685 The particular problem concerns what appears to amount to a clear inconsistency between the two documents which were signed. The 2002 Contract clearly provided in clause 3A .7 that Aristocrat would arrange for the chief executive officer to have the benefit of an interest free loan of up to US$2 million "for the purpose of purchasing a home in Las Vegas, such loan to be secured by a first mortgage over such home". The secured promissory note however included a joint and several promise by Mr and Mrs Randall to pay to the order of Aristocrat the principal sum of US $1,665,000 together with interest on the unpaid principal balance "in accordance with the following terms and provisions and Desmond Randall's Service Agreement with Holder [DX 279]…" 686 Plainly enough a representation to ground an estoppel must be clear and unambiguous (Legione v Hatelely (1983) 152 CLR 406 at 435-7 and Foran v Wright (1989) 168 CLR 385 at 410-411, 435-6). 687 Here Aristocrat alleges that the representations derive from the act of delivery of the signed promissory note. No oral or written representation is alleged. Aristocrat relies on implied representations based on conduct. In those circumstances, the need for clarity and the lack of ambiguity is paramount. As Deane J held in Foran v Wight at 435-6, a "representation can found an estoppel by conduct only to the extent that it is clear." 688 Accordingly, in considering the conduct, namely the delivery of the promissory note, consideration must be given to the circumstances in which delivery occurred. 689 An essential factual issue concerns whether or not, as Mr Randall contended, Mr Bush had represented to him that the loan was to remain interest free or that a particular change made to the promissory note was made in order to ensure that the loan remained interest free. 690 Mr Randall had given evidence [Statement 3 December 2003] as follows: · in early December 2002, whilst in Sydney I received a telephone call from Mr Frank Bush, the Company Secretary of Aristocrat and we had a conversation in words to the following effect: Mr Bush: "Des, the home loan has been given without any paper work. A loan agreement needs to be signed. This document will have no meaning. The current Board agreement with you will override this agreement and you will be protected." Myself: "Frank, I will consider doing this if the company needs it and provided it is legal and that I won't have to pay anything against the loan in conformity with the original arrangement with the Board." Mr Bush: "I will send a draft of the agreement." · from between 9 December 2002 to 16 December 2002, I received from Mr Bush a document titled "Short Form Deed of Trust and Assignment of Rents" and a number of versions of a document titled "Secured Promissory Note" dated 29 July 2002. I would not sign the Promissory Note, as I had a board approved interest free loan of up to US$2 million for a property which had already been purchased, and the Promissory Note did not recognise the agreement that the loan be interest free, as referred to .. above. · on or about 17 December 2002, whilst I was in Las Vegas I telephoned Mr Bush and we had a conversation in words to the following effect: Myself: "Frank, as we previously discussed, its crazy for Vivienne and myself to sign this document. There's no protection for us. It commits us to paying interest when I have a Board approved interest free loan, and we already have the house. I want the interest terms removed, or a paragraph added that says that the Board approved agreement overrides the terms of the document." Mr Bush: "I'll do what I can." · on 19 December 2002, I received an email from Mr Bush enclosing an amended version of the Promissory Note. The recital to the Promissory Note was amended to include a reference to my relocation agreement with Aristocrat. · on receipt of the email, I telephoned Mr Bush and we had a conversation in words to the following effect: Myself: "I'm still uncomfortable with the document as I don't understand the subtle differences compared to the earlier versions." Mr Bush: "Bring it back and we will fix it up when you return to Sydney." · on or about 16 February 2003, while in my Sydney offices I had a conversation with Mr Bush in words to the following effect: Mr Bush: "Des, have you signed the loan agreement? The agreement has to be signed ASAP." Myself: "Frank, with everything that's happening I haven't had time to read it." Mr Bush: "Des, you don't have to worry about it, your agreement with the Board and your contract override the agreement anyway." 691 At transcript 91.55-92.32, Mr Randall gave evidence as follows: Q. Well, why did you think that you were signing this document? A. It was stated to me in December by Mr Bush that I had 1.665 million US dollars of the company's money and I had bought a house in Las Vegas in my and my wife's name and the board had forgotten or overlooked getting even a letter from me, nothing, that there was no agreement to cover this large amount of money that had been - the company's money that had been given to Vivienne and I, and we had to get something done, and we needed a document on the file. Q. And you were a member of the board throughout the period-- A. Yes. Q. --between 29 July 2002 and 17 February 2003? A. Yes. Q. You read this document before you signed it? A. I read it - I read it, the proof letter. There were about three or four such documents which I wouldn't sign over that period December through February, and finally in February I recall Frank saying, yeah, "We've got to get the document. Please don't worry about it, Des. It's the same deal. You're protected. There are agreements in place", and certain changes were made to this document to our satisfaction in order for us to sign it, notably at the bottom of the first paragraph, "In accordance with the following terms and provisions in Desmond Randall's service agreement with the holder". We wouldn't sign it until this clause was put in there, and the explanation from Frank was that that would protect us for the interest free loan. That is why it was added. Frank also, in that period December to February, went to the lawyers in the United States and asked them to change the agreement to reflect my service agreement and they said it wouldn't be then a legal agreement in the United States, it has got to have this arms length interest business in it, "But Des, we put that in. You're protected." There were a couple of other changes made to the document and I then signed it. 692 At transcript 389.39 - 391.28, in particular commencing at TP 390.41, Mr Bush gave this evidence: Q. I direct your attention to clause 3A.7, that says CEO has the benefit of the interest free loan up to USD 2 million. That was the purpose to secure as first mortgage over the home? A. Yes. Q. That clause reflected your understanding of what was intended to be recorded on the contract on that subject matter? A. Yes. Q. That, of course, was your understanding when in December 2002 you were giving consideration to drafts of various forms of documentation to reflect the transactions, is that right? A. Yes, that's right. Q. In your discussions in 2002 did Mr Randall make it clear to you that he regarded the operative obligation in regard to interest so far as the Nevada home loan was concerned as the employment contract record of it? A. He regarded it as interest free, yes. Q. He pointed that fact out to you? A. Yes. Q. …it was your belief that the promissory note document would be itself subject to whatever it was within Mr Randall's service agreement? A. Yes. Q. And you made that clear to Mr Randall that was your own belief, did you ? A. Yes . Q. I think you, in other words, you accepted, I suggest to you that the loan arrangements in connection with the Nevada property would be in conformity of the service agreement that Mr Randall and the company had maintained ? A. Yes. Q. And Mr Randall's obligations would be covered by the service agreement? A. Yes. 693 At transcript 392.10-. 58, Mr Bush also gave evidence as follows: Q. The next document I would like to show you is the secured promissory note... The secured promissory note is the form of this document, the consequence of the input of the Nevada lawyers? A. Yes, it is. Q. Page volume 5, page 1643 and behind tab 51 in the first full paragraph there is a reference to the principal sum of $1,665,000 US. Do you see that by the words "together with interest from the date hereof on the unpaid principal balance". Then the word "In accordance with the following terms and provisions and Desmond Randall's service agreement with holder", holder being Aristocrat? A. Yes. Q. Do you recollect how the words "and in accordance with" and then the words "and Desmond Randall's service agreement" came to be....added to the document, Mr Bush? A. Following discussions with Mr Randall, and his desire to have the document make clear that the terms of the loan were subject to what is set out in the service agreement. 694 At transcript 389.21 - 390.8, Mr Bush gave evidence of his concern that the loan monies had been paid without paperwork and that he was anxious to have the documents recording the loan and Aristocrat's interest in the Nevada property put in place. This also is consistent with Mr Randall's evidence concerning the need for the promissory note. 695 Whilst Mr Randall did accept under cross-examination that he knew that it was important that the Nevada loan be an arms length transaction and accepted that he may have told Mr Bush that he did not want Aristocrat to have to obtain shareholder's approval, to my mind this does not mandate a finding different from that already indicated as to the conversations which preceded the execution of the promissory note. 696 That factual finding results in the defendants estoppel claim failing. 697 The finding amounts to accepting the evidence given by Mr Randall where inconsistent on this issue with the evidence given by Mr Bush. 698 The following matters are also noted: · the terms of the memorandum from Mr Bush to Mr Randall of 9 December 2002 including: "The documents provide for the payment of interest… I propose to ask the Chairman for a letter waiving the payment of interest." · Mr Randall having given evidence that Mrs Randall had signed the promissory note in circumstances in which he had represented to her that the promissory note "has no meaning as my contract overrides it" [neither Mr nor Mrs Randall were challenged in relation to this evidence]. 699 That the loan was intended to be interest free and that the promissory note was to be read subject to Mr Randall's employment contract, is also evident from: · Mr Bush's email of 26 July 2002 to Mr Nakhoul, Mr Jeyaraj and Mr Rowan (AB 2/640) referring to the intention that the loan be interest free and that shareholder approval be obtained; · Email of 31 August 2002 from the Nevada lawyer, Ms Otto to Mr Bush (AB 3/772) concerning the loan to Mr Randall being interest free. The email states, inter alia: "whether or not the stockholder waives/forgives the payment of interest, we do not believe it needs to be set forth in the loan documents since Aristocrat has that right regardless of what the loan documents say." [Mr Bush's evidence in relation to this document was given at tp 387-8 as follows: Q. Was Angela Otto an American lawyer? A. I understand so. I have never actually met her. Q. Where you dealing with her in connection with the arrangement, financial arrangement for the acquisition of the Nevada residence? A. I was dealing with her securing the company's loan on the property. Q. Was one of the matters you raised with her the issue of how the American documentation might record the non-payment of interest? A. Yes. Q. Was this e-mail received by you from her as you understand it responding in part to inquiries of that kind? A. Yes.] · Aristocrat was paying FBT in respect of the interest free aspect of Mr Randall's loan (see email of 5 September 2002 from Mr Jeyaraj to Mr Bush, (AB 3/778), Mr Randall's evidence at tp 103.4-.14 and Mr Bush's evidence in cross examination at tp 388). · Mr Randall's 2002 Contract providing for the interest free loan was signed after the loan had already been provided and after Mr Bush had already commenced discussions with external lawyers for the recording of interest in the promissory note. 700 Given this evidence, the mere delivery of the promissory note to Aristocrat did not constitute conduct that gave rise to the representations alleged by Aristocrat. The clear weight of the evidence was that the interest terms of the promissory note were not intended to be relied upon by either Mr Bush (on behalf of Aristocrat) or Mr Randall and that the interest free provisions continued to apply as in accordance with Mr Randall's 2002 Contract. 701 Nor was there any evidence adduced to the effect that Mr Bush had discussed the entry of the promissory note with any other Aristocrat officer or board member (other than Mr Randall). The interest free aspect of the loan was part of Mr Randall's board approved package for his relocation to Las Vegas. That approval was first given by the board at its meeting in February 2002. There was no evidence to suggest that Mr Bush had any authority to revoke or to seek to revoke what the board had already approved and for which a signed contract had been entered into. 702 Even if the finding in relation to representations were incorrect, I accept that there are a number of difficulties with Aristocrat's case in terms of reliance upon the delivery of the promissory note for the purpose of the preparation of its annual accounts and 2002 annual report. The plaintiff has put forward the following propositions which seem to me to be of substance: · The accounts that were considered and approved by the board had already been considered and approved by Aristocrat at its Audit Committee meeting on 10 February 2003 (see minutes of that meeting commencing at PX 8/2699). Mr Draney, Mr Ducker (both directors) and Mr Cohn (a former director) constituted the Committee. Mr Randall, Mr Jeyaraj, Mr Wiadrowski, Mr Dow (both of PWC), Mr Nakhoul, Mr Khin, Mr Abreu and Mr Bush were all present by invitation. · As recorded in the minutes of that meeting (at AB 8/2701), the financial statements were recommended at that meeting for approval by the board, subject to "minor adjustments and corrections". There is no evidence before the Court as to the form of the accounts considered by the Audit Committee or what the "minor adjustments and corrections" were. · The "related party" transactions recorded on the same page as the minutes, do not include any reference to the loan to Mr Randall. · On the evidence of Mr Bush, the promissory note was not provided to Mr Randall until 14 February 2003 (see paragraph 74 of Mr Bush's 6 November 2003 statement). · On the evidence of Mr Randall, the promissory note was signed the day before, being 16 February 2003 (see paragraphs 14-16 of Mr Randall's statement of 3 December 2003). · The promissory note was then delivered to Mr Bush on 17 February 2003, the same day as the board meeting at which the annual accounts were considered and approved. · Accordingly, it seems highly improbable that the promissory note or its signing and delivery was or could have been the subject of discussion or consideration at the Audit Committee meeting on 10 February 2003. · As: - neither delivery nor signing of the promissory note had occurred, - there is no evidence of the form of the accounts considered at the Audit Committee meeting; and - no reference is made to the promissory note in the minutes, the proper inference available is that the promissory note was neither discussed nor considered at the audit meeting nor the "minor corrections or adjustments" to be made to the accounts. · No witness from PWC or the audit committee was called to give evidence as to whether the promissory note was considered at the Audit Committee meeting or was included in the form of the accounts considered at that meeting. · Further, it is apparent that the promissory note was not referred to by PWC as part of the audit process relied upon as part of the acts of reliance. As recorded in the Audit Committee minutes (at AB 8/2700-1), subject to 7 specified issues (none of which included the promissory note), PWC was "satisfied with the conduct of the audit and would be happy to sign an unqualified audit report on the basis of the figures present to the Committee." · Accordingly, the representations could not have been relied upon as part of the audit process or the finalisation of the accounts, at least as at 10 February 2003. · Mr Bush gave no evidence as to what he did with the promissory note after he received it. It is highly improbable for the fact of its signing and delivery to have been included as an amendment to the financial accounts for consideration at the board meeting on 17 February 2003. · The board meeting on 17 February 2003 commenced at 10.00 am that day (see minutes commencing at AB 9/2850). There is no evidence as to whether the promissory note was delivered before or after the board meeting occurred. · Even if it was before, there was clearly insufficient time to have it included in the draft accounts before the meeting. The minutes record (at AB 9/2852) that Mr Bush presented to the board a "marked up version" of the accounts showing corrections since the version provided to the Audit Committee. It is unlikely that such a marked up version could have been prepared including the reference to the delivery of the promissory note prior to the board meeting if the promissory note had only been delivered that morning. · There is no evidence of what accounts were before the board meeting on 17 February 2003 or whether it included a note relating to the promissory note. No member of the board or PWC has been called to give such evidence. Even Mr Bush gave no evidence on this issue. · The auditor's certificate that appears in the 2002 Annual Report (AB 12/3920) is dated 18 February 2003, the day after the board meeting and the day after the promissory note was provided. · Aristocrat's submission is that because the final accounts included a reference to the promissory note, it must have been included in the accounts approved by the board on 17 February 2003. That is not necessarily the case. Paragraph 17 of Mr Bush's 26 March 2004 statement records that the Annual Report was not "in its final form at the time of the board meeting on 17 February 2003". This accords with the evidence of Mr Carr-Gregg in his statement of 5 November 2003 (see paragraphs 17-20). In none of the draft Annual Reports referred to and exhibited to his statement, were the financial accounts attached. · Further, in paragraph 59 of Mr Bush's 26 March 2004 statement, he refers to continuing discussions with Mr Khin on about 17 February 2003 concerning the notes to the accounts referring to the promissory note. The conversation with Mr Khin referred to in that paragraph was in the context of the promissory note having been signed by both Mr and Mrs Randall. Accordingly the conversation referred to could only have occurred on or after 17 February 2003 and therefore probably after the board meeting (Mr Khin was not present at the 17 February 2003 board meeting). 703 Ultimately these matters would in any event have occasioned very considerable difficulties to the defendant's reliance case. 704 Insofar as the evidence discloses that the Las Vegas property was sold at a purchase price in excess of the principal of the loan [and Aristocrat received those proceeds], the finding is that the anterior obligation to repay the principal has been discharged. Insofar as the defendant alleged that by reason of certain ancillary costs [such as agents fees and similar], it was proper to subtract those costs from the proceeds, those submissions are not of substance and are rejected. It is of use to recall that clauses 3A .6 and 3A .8 of the 2002 Contract read together provide as follows: "All costs and disbursements, including legal fees, agent's commission, insurance costs, advertising expenses, stamp duty and all government fees incurred in respect of the sale of [the Las Vegas home on Mr Randall's return to Australia] shall be to the cost of Aristocrat." 705 There is plainly therefore no basis for deducting any such costs from the proceeds of sale in determining what funds go to the repayment of the principal of the loan. Rulings as to admission of ASIC transcript 706 There was some dispute as to the entitlement of the plaintiff to tender all of the pages of ASIC transcript which it sought to have admitted into evidence. Only some of those pages were put to relevant witnesses. Ultimately I am persuaded that fairness dictates the admission into evidence of all of the materials sought to be admitted by the plaintiff subject to one matter. I refer hereto PX 13/4488. This page forms part of two preceding pages and is said to be admissible as it goes to the views of Mr Khin concerning discounting. So much may be accepted. But to allow 13/4488 beyond line 14 would be inappropriate for the reason that one cannot follow the references in the balance of that page unless 13/4489 also went into evidence and the plaintiff does not tender this page. In the result 13/4488 will be admitted only up to but not beyond line 14. 707 The remaining pages ASIC investigation pages which will go into evidence are PX 14/4441-4448,4456-4458,4459-4462,4464,4465-4472,4473-4475,4476-4477,4479,4480-4483,4486-4487,4505,4519-4522,4526-4530,4533-4535 and 4539-4541. Also admitted are PX 14/4781-4790,4797-4799,4805-4809,4814-4815,4816-4818. Short Minutes of Order 708 It is appropriate by reason of the many issues raised on the pleadings to reserve leave to the parties to address submissions upon any claim which it is suggested has not been dealt with in the judgment. The judgment has also pointed up some limited areas in respect of which such leave has been granted. There may also be questions of mathematical calculations requiring to be updated, hopefully consensually. 709 Short Minutes of Order should be brought in by the parties and at the same time submissions as to costs will be taken. I certify that paragraphs 1 -709 are a true copy of the reasons for judgment herein of the Hon. Justice Einstein given on 8 June 2004 ___________________ Susan Piggott Associate 8 June 2004 Last Modified: 06/08/2004 DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated.