Australian Vocational Learning Institute Pty Ltd (in liq), in the matter of Australian Vocational Learning Institute Pty Ltd (in liq)
[2022] FCA 319
•29 March 2022
FEDERAL COURT OF AUSTRALIA
Australian Vocational Learning Institute Pty Ltd (in liq), in the matter of Australian Vocational Learning Institute Pty Ltd (in liq) [2022] FCA 319
File number: NSD 103 of 2022 Judgment of: CHEESEMAN J Date of judgment: 29 March 2022 Catchwords: CORPORATIONS – application pursuant to section 477(2B) of the Corporations Act 2001 (Cth) for approval of entry into a funding agreement with the Commonwealth of Australia, acting through the Department of Education, Skills and Employment by the plaintiffs – where court proceedings have been commenced against the company in liquidation, the liquidator and the Commonwealth challenging the liquidator’s decision to admit the Commonwealth’s proof of debt and seeking the liquidator’s removal as liquidator on grounds of apprehended bias – where the funding agreement is sought to be entered to cover the costs of agreed work which includes defence of the said proceedings and the determination of an application by the Commonwealth to vary its proof of debt – where the liquidation is otherwise without sufficient funds to undertake the agreed work - whether entry into the agreements is in the interests of the administration – Held: application successful.
PRACTICE AND PROCEDURE – confidentiality orders sought in respect of part of the evidence and submissions supporting the application – where that material comprises the funding agreement and otherwise details the liquidator’s ongoing investigations into the affairs of the company – Held: confidentiality orders made.
Legislation: Corporations Act 2001 (Cth), s 477(2B)
Federal Court of Australia Act 1976 (Cth), ss 37AF(1)(b)(i), 37AF(1)(b)(iv) and 37AF(2)
Cases cited: Carter, in the matter of Australian Vocational Learning Institute Pty Ltd (in liq) [2019] FCA 1638
Carter (Liquidator), in the matter of Australian Vocational Learning Institute Pty Ltd (in liq) (No 2) [2020] FCA 729
Krejci (liquidator), in the matter of Community Work Pty Ltd (in liq) [2018] FCA 425
Re Kelly (liquidator), Australian Institute of Professional Education Pty Ltd (In Liq) [2018] FCA 642
Robinson, in the matter of Reed Constructions Australia Pty Ltd (in liq) [2017] FCA 594
Division: General Division Registry: New South Wales National Practice Area: Commercial and Corporations Sub-area: Corporations and Corporate Insolvency Number of paragraphs: 40 Date of hearing: 28 and 29 March 2022 Counsel for the Plaintiffs: Mr B Whitten Solicitor for the Plaintiffs: O’Connor Law ORDERS
NSD 103 of 2022 IN THE MATTER OF AUSTRALIAN VOCATIONAL LEARNING INSTITUTE PTY LTD (IN LIQUIDATION) ACN 097 453 828
AUSTRALIAN VOCATIONAL LEARNING INSTITUTE PTY LTD (IN LIQUIDATION) ACN 097 453 828
First Plaintiff
MOIRA KATHLEEN CARTER
Second Plaintiff
ORDER MADE BY:
CHEESEMAN J
DATE OF ORDER:
29 MARCH 2022
THE COURT ORDERS THAT:
1.Pursuant to s 477(2B) of the Corporations Act 2001 (Cth), the second plaintiff, Moira Kathleen Carter, be granted approval to enter into a funding agreement in her capacity as the liquidator of the first plaintiff, Australian Vocational Learning Institute Pty Ltd (in liquidation) ACN 097 453 828 (AVLI) and on behalf of AVLI, with the Commonwealth of Australia, acting through the Department of Education, Skills and Employment (formerly the Department of Education), in the form of the confidential document at Tab 11 of Exhibit MC-1 of the affidavit of Moira Kathleen Carter sworn 10 February 2022 (Funding Agreement).
2.Until further order, pursuant to ss 37AF(1)(b)(i), 37AF(1)(b)(iv) and 37AF(2) of the Federal Court of Australia Act 1976 (Cth), on the grounds set out in s 37AG(1)(a), the contents of the following documents and information be suppressed until the conclusion of the liquidation of AVLI or until the Court otherwise orders:
(a)paragraphs [3], [16] to [22], [25] to [28] and [31] to [47], including headings of those sections, in the affidavit of Moira Kathleen Carter sworn on 10 February 2022;
(b)the documents behind tabs 8, 9, 11, 12, 13, 14 and 15 of the exhibit MC-1 to the affidavit of Moira Kathleen Carter sworn on 10 February 2022;
(c)all of the affidavit of Joshua Andrew McDiarmid sworn 22 March 2022;
(d)the documents behind tab 2 of the exhibit JAM-1 to the affidavit of Joshua Andrew McDiarmid sworn 22 March 2022; and
(e)the plaintiffs’ confidential written submissions dated 22 March 2022.
3.The plaintiffs’ costs of the proceedings be costs in the liquidation of the first plaintiff.
4.The plaintiffs have leave to apply before 4 pm on 6 April 2022 for any confidentiality orders in respect of any part of the transcript of these proceedings on 28 or 29 March 2022, after which time and subject to the determination of any such application the transcript will be released. Any such application is to be considered on the papers in Chambers without the need for a hearing.
Note: Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.
REASONS FOR JUDGMENT
(Revised from transcript)CHEESEMAN J:
The plaintiffs, Australian Vocational Learning Institute Pty Limited (in liquidation) (AVLI), and, Moira Kathleen Carter in her capacity as liquidator of AVLI, apply to the Court for an order pursuant to s 477(2B) of the Corporations Act 2001 (Cth), granting approval to the plaintiffs to enter into a funding agreement with the Commonwealth of Australia, acting through the Department of Education, Skills and Employment (formerly the Department of Education). The application for approval arises because the term of the agreement and / or the obligations of the parties thereunder may exceed three months from the date of entry into the agreement.
The plaintiffs also seek an order that part of the evidence and submissions filed in support of the application be kept confidential until the liquidation of AVLI is concluded.
The plaintiffs relied on an affidavit of the liquidator sworn 10 February 2022 and exhibit
MC-1 and two affidavits of Joshua McDiarmid of 18 February 2022 and 22 March 2022.
The liquidator is a registered liquidator and principal of the firm trading as BRI Ferrier NQ. She has practiced as a registered liquidator since 2005.
For the reasons that follow, having read and considered the evidence relied on by the plaintiffs and with regard to the relevant principles, I am satisfied that it is appropriate to make orders under s 477(2B) of the Act. I am also satisfied that it is appropriate to make confidentiality orders in respect of parts of the evidence read in support of the application and the plaintiffs’ submissions on the application on the grounds that it is necessary to do so to prevent prejudice to the proper administration of justice.
BACKGROUND
Business of AVLI
AVLI was a provider of training courses. From 14 March 2013 it was approved as a Vocational and Education Training (VET) provider for the purposes of the Higher Education Support Act 2003 (Cth) and, as such, was eligible to offer courses to students funded by the Commonwealth under a scheme known as the “VET FEE-HELP scheme”.
At the time AVLI became a registered training organisation under the VET Scheme, Paul Lange served as its sole director and secretary. LFI Ventures Pty Ltd was the sole shareholder, holding 215,002 fully paid ordinary shares beneficially.
By 2016, AVLI had significant assets and was in receipt of substantial income. AVLI’s financial records indicate that as at 30 June 2016 it had total current assets of $14,056,559 and net assets of $6,413,103 and received income in the form of professional course fees for that financial year in the amount of $29,179,826.
On 16 September 2016, AVLI ceased to be a VET provider.
External administration
On 2 December 2016, AVLI was wound up by a members’ special resolution and Justin James Cadman was appointed liquidator. A declaration as to AVLI’s solvency was passed by Mr Lange on 16 September 2016.
In December 2016, Mr Cadman lodged a “Request for correction” form with the Australian Securities and Investments Commission (ASIC). The ‘correction’ sought was that his appointment as liquidator be recognised as having been in the course of a creditors’ voluntary winding up rather than a members’ voluntary winding up.
Prior to the first meeting of creditors of the company, recognised creditors of AVLI included the Commissioner of State Taxation, AVLI’s accountant, Mr Williams, LFI, Whittens & McKeogh and Mr Lange.
On 9 December 2016, in his first report to creditors, Mr Cadman noted that the Report as to the Affairs of AVLI provided by Mr Lange indicated that, as at December 2016, AVLI had current assets, comprising cash at bank, in the amount of $22,388; contingent assets in an amount of $20 million (comprising unpaid student fees); and contingent liabilities of $29 million (being owed to the Department in respect of overpaid student fees).
At the second creditors’ meeting on 22 December 2016 it was resolved that Mr Cadman remain as liquidator of AVLI with his remuneration fixed at $22,000 and that no committee ofinspection be formed.
On 19 June 2018, following Mr Cadman becoming a bankrupt and being disqualified from acting as a liquidator, the current liquidator was appointed to AVLI by ASIC.
On 6 June 2019, the Department submitted a formal proof of debt in the winding up of AVLI in the amount of $28,985,159 (the Commonwealth’s Proof of Debt). The liquidator admitted the Commonwealth’s Proof of Debt in full on 10 June 2019.
Relevant court proceedings and investigations
The liquidator sought and obtained approval to enter into funding agreements with the Commonwealth, acting through the Department, for the purposes of conducting public examinations (NSD1697/2019) and then commencing recovery proceedings against Mr Lange, LFI and others (NSD613/2020) (AVLI proceedings). The AVLI proceedings concern claims brought by the liquidator based on allegations including unreasonable
director-related transactions, the implementation of a dishonest and fraudulent scheme, and breach of director’s duties. The liquidator’s entry into the funding agreements with the Commonwealth for the purpose of funding examinations and the AVLI proceedings was approved by this Court under s 477(2B): Carter, in the matter of Australian Vocational Learning Institute Pty Ltd (in liq) [2019] FCA 1638; Carter (Liquidator), in the matter of Australian Vocational Learning Institute Pty Ltd (in liq) (No 2) [2020] FCA 729. The liquidator is represented in the AVLI proceedings by Clayton Utz.
Mr Lange and LFI have brought proceedings against the liquidator, AVLI and the Commonwealth challenging the liquidator’s decision to admit the Commonwealth’s Proof of Debt (LFI proceedings). In the LFI proceedings, Mr Lange and LFI assert that the Commonwealth is in fact a debtor, not a creditor, of AVLI. They also seek the removal of the liquidator of AVLI. In the LFI proceedings the liquidator and AVLI and the Commonwealth are separately represented. The liquidator and AVLI are represented in the LFI proceedings by O’Connor Law. The Commonwealth is represented in the LFI proceedings by Clayton Utz.
Mr Lange and LFI have recently raised concerns in respect of the fact that Clayton Utz advises the liquidator in the AVLI proceedings and also advises the Commonwealth in the LFI proceedings. Mr Lange and LFI contend that this creates an “apprehension of liquidator bias”. The liquidator has rejected this proposition on the basis that she has engaged separate independent solicitors in each of the proceedings and that she retains control over the proceedings despite being funded by the Commonwealth.
In addition to these proceedings, the liquidator is continuing her investigation into the affairs of AVLI, including considering an application made on 18 March 2022 by the Commonwealth seeking to vary the Commonwealth’s Proof of Debt, and if leave to lodge the variation is granted, adjudication of the varied proof of debt (POD variation application). The variation, in broad terms, is the addition of an alternative claim by the Commonwealth alleging unconscionable conduct against AVLI, which prima facie appears to be based largely on similar background facts as the original Commonwealth Proof of Debt.
The agreement which the liquidator proposes to enter into, subject to approval being given, is directed to funding certain agreed works which include liquidator’s defence of the LFI proceedings and the liquidator’s consideration of the POD variation application.
LEGAL PRINCIPLES
Section 477(2B)
Subsection 477(2B) of the Act provides that:
Except with the approval of the Court, of the committee of inspection or of a resolution of the creditors, a liquidator of a company must not enter into an agreement on the company’s behalf (for example, but without limitation, a lease or an agreement under which a security interest arises or is created) if:
(a)without limiting paragraph (b), the term of the agreement may end; or
(b)obligations of a party to the agreement may, according to the terms of the agreement, be discharged by performance;
more than 3 months after the agreement is entered into, even if the term may end, or the obligations may be discharged, within those 3 months.
The principles applicable to an application under s 477(2B) have been set out in Robinson, in the matter of Reed Constructions Australia Pty Ltd (in liq) [2017] FCA 594 at [33] to [39] (Gleeson J) and include (citations omitted) that:
(1)in considering whether to give approval under s 477(2B), the Court must consider the purposes for which the powers of a liquidator exist, including the recovery of funds for the benefit of creditors;
(2)the applicable standard is whether entry into the proposed agreement is a proper exercise of power and not ill-advised or improper on the part of the liquidator;
(3)in determining such an application, the Court undertakes something less than a merits review and will generally not interfere unless there can be seen to be some lack of good faith, some error of law or principle, or real and substantial grounds for doubting the prudence of the liquidator’s conduct; and
(4)the Court’s task is to satisfy itself, having regard to the liquidator’s commercial judgment, that there is no error of law, grounds for suspecting bad faith or any other good reason to intervene.
Factors relevant to the Court’s consideration of an application for approval for a liquidator to enter into a funding agreement include: the interests of creditors; the extent to which the liquidator has canvassed other funding options; the level of the funder’s premium; and consultation with creditors.
Confidentiality
Section 37AF of the Federal Court of Australia Act 1976 (Cth) (FCA Act) provides, relevantly:
The Court may, by making a suppression order or non-publication order on grounds permitted by this Part, prohibit or restrict the publication or other disclosure of:
(a) …
(b) information that relates to a proceeding before the Court and is:
(i) information that comprises evidence or information about evidence; or
(ii) …
(iii) …
(iv) information lodged with or filed in the Court.
The Court may make such orders as it thinks appropriate to give effect to an order under subsection (1).
Subsection 37AG(1)(a) of the FCA Act permits a confidentiality order to be made where the order is necessary to prevent prejudice to the proper administration of justice.
The clear public interest in the due and beneficial administration of the estates of insolvent companies for the benefit of creditors is a relevant consideration in favour of s 37AF orders: Krejci (liquidator), in the matter of Community Work Pty Ltd (in liq) [2018] FCA 425 at [62] (Gleeson J).
Funding agreements are documents of a kind that may be protected by a confidentiality order in an application for approval to enter into the funding agreement: Re Kelly (liquidator), Australian Institute of Professional Education Pty Ltd (In Liq) [2018] FCA 642 at [35] (Gleeson J).
CONSIDERATION
Approval under s 477(2B)
The funding agreement attracts the operation of s 477(2B) given that the term of the agreement may end, or the obligations of a party to the agreement may be discharged by performance, more than three months after entry into the agreement. Approval under s 477(2B) is also a condition precedent to the operation of the funding agreement.
I am satisfied, having considered the liquidator’s evidence and the terms of the funding agreement that there is a clear basis for the Court to approve the liquidator’s entry into the funding agreement in accordance with the principles outlined above. I am satisfied that the liquidator has demonstrated that notwithstanding the likely duration of the agreement, in all the circumstances it is reasonable in the interests of the administration of AVLI for the liquidator to enter into the agreement in her capacity as liquidator of AVLI and to cause AVLI to enter into the agreement.
The liquidator’s evidence sets out her view that it is in the interests of AVLI’s creditors to enter into the proposed funding agreement to enable the LFI proceedings to be defended and to provide the necessary funds for her to conduct her statutory obligations in respect of the POD variation application. The basis for the liquidator’s opinion is set out in her confidential affidavit and confidential submissions.
The liquidator submits, and I accept, that it is in the interests of creditors generally for her to be able to be properly advised and assisted in the complex factual and legal issues raised in the LFI proceedings, and also in respect of the POD variation application which she considers is highly likely to be the subject of challenge so as to end up being part of the LFI proceedings in any event.
The liquidator’s evidence demonstrates that there are limited assets available in the liquidation and sizeable contingent liabilities. The liquidator submits that as a consequence of the limited assets held by AVLI at the time of Mr Cadman’s appointment, without funding, the liquidator will be precluded from taking an informed and active role in the LFI proceedings. The funding agreement appears to be the only mechanism by which the liquidator may be put in a position to engage substantively in the LFI proceedings. The liquidator gives evidence that absent the successful defence of the LFI proceedings, the adjudication of the ACL claim the subject of the POD variation application and success in the AVLI proceedings instituted by the liquidator, it is unlikely that there will be a distribution to creditors.
One factor relevant to the exercise of the Court’s discretion to grant approval is that the liquidator has not canvassed other funding options. The liquidator deposes to the funding agreement being commercially attractive. The liquidator submits that having regard to the terms of the funding agreement, the likelihood of securing funding on better terms is low noting specifically that there are no other significant creditors other than the Commonwealth. Moreover the liquidator is of the view that there is no risk to the other unsecured creditors of AVLI by the liquidator incurring liabilities that would have to be met out of funds that are otherwise available to be distributed to creditors.
The funding agreement does not contain any unusual or onerous terms and otherwise properly reserves the conduct of the LFI proceedings and consideration of the POD variation application to the liquidator. The Commonwealth, as funder, maintains a right to terminate the agreement in certain circumstances, but does not have a power to direct the liquidator as to the conduct of the litigation or the liquidation generally. The rights conferred by the agreement on the Commonwealth do not encroach upon the liquidator’s authority and control over the work to be conducted.
There is presently no committee of inspection capable of approving the liquidator’s entry into the funding agreement. The liquidator has also not approached creditors for approval of her entry into the funding agreement. The liquidator’s reasons for not doing so are set out in her evidence. Those reasons are satisfactory having regard to considerations of efficiency and cost. Further, the evidence demonstrates that the Commonwealth, being the largest creditor in value, supports the present application.
I am satisfied that there is no evidence of a lack of good faith or error of law on the part of the liquidator in proposing to enter into the funding agreement and pursue investigations. There is no evidence of bias, notwithstanding the complaints made by the plaintiffs in the LFI proceedings. It is the role of the liquidator to ascertain what, if any, assets may be recovered and to facilitate distribution to creditors. Defending the admitted proof of debt, and determining applications to vary proofs of debt are part of that function. There is nothing to suggest that entry into the funding agreement is outside of the proper exercise of the liquidator’s powers or otherwise tainted by bad faith.
Accordingly, I will make an order approving entry into the funding agreement by the liquidator in her capacity as liquidator of AVLI and on behalf of AVLI under s 477(2B) of the Act.
Confidentiality
The plaintiffs submit that a confidentiality order over part of the evidence and submissions on the application is necessary to prevent prejudice to the proper administration of justice. I am satisfied having regard to the principles applicable to the making of suppression and
non-publication orders and in circumstances where there are presently a number of proceedings and investigations that are ongoing, that it is appropriate to make an order under s 37AF of the FCA Act on the ground set out in 37AG(1)(a). I am also satisfied that the public interest in the due and beneficial administration of insolvent companies for the benefit of creditors weighs in favour of an order being made under s 37AF of the FCA Act in the present proceedings.
I will make orders accordingly.
I certify that the preceding forty (40) numbered paragraphs are a true copy of the Reasons for Judgment of the Honourable Justice Cheeseman. Associate:
Dated: 1 April 2022
0
5
2