Carter, in the matter of Australian Vocational Learning Institute Pty Ltd (in liq)
[2019] FCA 1638
•20 September 2019
FEDERAL COURT OF AUSTRALIA
Carter, in the matter of Australian Vocational Learning Institute Pty Ltd (in liq) [2019] FCA 1638
File number: NSD 1384 of 2019 Judge: GLEESON J Date of judgment: 20 September 2019 Date of publication of reasons: 3 October 2019 Catchwords: CORPORATIONS – application by a liquidator for approval under s 477(2B) of the Corporations Act 2001 (Cth) to enter into a funding agreement on behalf of the company in liquidation – factors relevant to the Court’s assessment of an application under s 477(2B) – application granted
PRACTICE AND PROCEDURE – application by a liquidator for a suppression order under s 37AF of the Federal Court of Australia Act 1976 (Cth) to protect information concerning a funding agreement – whether order is necessary to prevent prejudice to the proper administration of justice – suppression orders made
Legislation: Corporations Act 2001 (Cth) s 477(2B)
Federal Court of Australia Act 1976 (Cth) s 37AF, s 37AG
Cases cited: Buiscex Ltd v Panfida Food Ltd (1998) 28 ACSR 357
Hall v Poolman [2009] NSWCA 64; (2009) 71 ACSR 139
Krecji (liquidator), in the matter of Community Work Pty Ltd (in liq) [2018] FCA 425
Robinson, in the matter of Reed Constructions Australia Pty Ltd (in liq) [2017] FCA 594
Stewart, in the matter of Newtronics Pty Ltd [2007] FCA 1375 at [26]
Date of hearing: 20 September 2019 Registry: New South Wales Division: General Division National Practice Area: Commercial and Corporations Sub-area: Corporations and Corporate Insolvency Category: Catchwords Number of paragraphs: 28 Counsel for the Plaintiffs: Z Hillman Solicitor for the Plaintiffs: Clayton Utz ORDERS
NSD 1384 of 2019 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
JUDGE:
GLEESON J
DATE OF ORDER:
20 SEPTEMBER 2019
THE COURT ORDERS THAT:
1.Pursuant to s 477(2B) of the Corporations Act 2001 (Cth), the first and second plaintiffs are granted approval to enter into the funding agreement in the form exhibited to the confidential affidavit of Moira Kathleen Carter sworn on 20 August 2019.
2.Pursuant to s 37AF of the Federal Court of Australia Act 1976 (Cth), on the ground that the order is necessary to prevent prejudice to the proper administration of justice, the contents of the following documents and information be suppressed until the conclusion of the liquidation:
(a)paragraphs [20] to [25] and [27] to [41], including headings of those sections, in the affidavit of Moira Kathleen Carter sworn on 20 August 2019;
(b)the documents behind tabs 10, 12, 16 and 17 contained in the exhibit to the affidavit of Moira Kathleen Carter sworn on 20 August 2019; and
(c)the plaintiffs’ confidential submissions dated 16 September 2019.
3.The plaintiffs’ costs of the proceedings be costs in the liquidation of the first plaintiff.
Note: Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.
REASONS FOR JUDGMENT
GLEESON J:
On 20 September 2019, I granted approval pursuant to s 477(2B) of the Corporations Act 2001 (Cth) to the first plaintiff (AVLI) and the second plaintiff (liquidator) to enter into a funding agreement, and ancillary orders. The purpose of the agreement is to facilitate further investigations into the affairs of AVLI. My reasons for my orders are as follows.
BACKGROUND FACTS
AVLI’s business prior to external administration
AVLI was registered as a company in July 2001 and operated a “Registered Training Organisation”.
In August 2010, the sole current director of AVLI, Paul Lange, purchased the company along with its “RTO” registration. From 3 April 2013 AVLI 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”.
Based on AVLI’s financial records, by 2016, it was a company with significant assets and in receipt of substantial income. AVLI’s financial records indicate that as at 30 June 2016 it had:
(1)total current assets of $14,056,559 and net assets of $6,413,103; and
(2)had 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 closed as a VET provider.
AVLI’s external administration from 2 December 2016 to 19 June 2018
In December 2016, Justin James Cadman was appointed as liquidator of AVLI pursuant to a members’ special resolution passed on 2 December 2016. By that resolution, AVLI was to be wound up by way of members’ voluntary liquidation. A declaration as to AVLI’s solvency had been passed by Mr Lange on 16 September 2016. AVLI’s balance sheet, as lodged with the Australian Securities and Investments Commission (ASIC) on 19 September 2019, recorded that the company held assets of $12,187.28 and had liabilities of $2,987.40 as at 16 September 2016.
On or about 5 December 2016, Mr Cadman signed a “Request for correction” form which was then lodged with ASIC. The ‘correction’ sought was that his appointment be recognised as having been in the course of a creditors’ voluntary winding up rather than a members’ voluntary winding up. The request for correction appears to have been lodged on about 19 December 2016.
According to the liquidator, the creditors of AVLI who had lodged proofs of debt prior to the first meeting of creditors of the company included:
(1)the Commissioner of State Taxation (South Australia);
(2)AVLI’s accountant, David John Williams;
(3)LFI Ventures Pty Ltd (the sole shareholder of AVLI);
(4)the Office of State Revenue (Queensland); and
(5)Mr Lange.
On 12 December 2016, Mr Cadman sent the first report to creditors and notice of meeting by post to the following persons he had identified as creditors of AVLI:
(1)Mr Williams;
(2)LFI Ventures Pty Ltd;
(3)Mr Lange;
(4)the Australian Tax Office;
(5)the Department of Education and Training; and
(6)Whittens & McKeough.
According to the Report as to the Affairs of AVLI (RATA) provided by Mr Lange and annexed to the first report to creditors, as at 2 December 2016, AVLI had:
(1)current assets, comprising cash at bank, in the amount of $22,388.00;
(2)contingent assets in an amount of $20 million, comprising unpaid student fees (but with an estimated realisable value of “Nil”); and
(3)contingent liabilities of $29 million (but with an estimated realisable value of “Nil”).
Mr Cadman’s first report to creditors recorded relevantly:
(1)The contingent asset of approximately $20 million recorded in the RATA was in relation to unpaid student fees but conversely, the RATA also recorded a potential liability of approximately $29 million in relation to overpaid student fees.
(2)The contingent amounts were, as at December 2016, subject to “departmental audits etc.” and “[t]he director has advised that to date the Company has complied with all audits and responded to any departmental claims in relation to this matter”.
(3)“Normally, I would provide a summary of the historic Profit Loss and Balance Sheet data, however as I have not been provided with any books and records, including copies of the Computerised accounting system data I am unable to do so at this time. I will be collecting the Company’s records in the near future and will provide an update to creditors on the historical performance of the Company in future reports.”
On 19 June 2018, following Mr Cadman’s disqualification by ASIC, the present liquidator was appointed as liquidator of AVLI.
Current liquidator’s investigations into the affairs of AVLI
Having reviewed the books and records provided to her by Mr Cadman (which are limited), the liquidator has formed the view that Mr Cadman did not undertake significant investigation into the affairs of AVLI.
The liquidator has formed the view that further investigations into AVLI’s affairs are warranted. The basis for the liquidator’s opinion is set out in detail in written submissions entitled “Plaintiffs’ Confidential Submissions” but includes the limited investigations undertaken to date, the inadequacy of the books and records of the company received from Mr Cadman, and particular transactions that the liquidator has identified. The proposed investigations principally concern the nature of the contingent liability identified by Mr Lange and the identified transactions.
Funding agreement
The liquidator considered that it is in AVLI’s interests to enter into the proposed funding agreement to facilitate further investigations. The basis for the liquidator’s opinion is set out in portions of her affidavit over which I made a suppression order pursuant to s 37AF of the Federal Court of Australia Act 1976 (Cth) (Federal Court Act).
The application for approval of the funding agreement was not served on creditors of AVLI or any other person for reasons explained by the liquidator in other portions of her affidavit covered by the s 37AF order.
The liquidator gave evidence that the terms of the funding agreement are attractive. In particular, no funder’s premium is charged under the agreement and the liquidator has control over the work to be undertaken pursuant to the agreement subject only to various reporting requirements and specific restrictions that the liquidator considers to be reasonable.
LEGAL FRAMEWORK
Section 477(2B) of the Corporations Act 2001 (Cth) provides:
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.
In Robinson, in the matter of Reed Constructions Australia Pty Ltd (in liq) [2017] FCA 594 at [33] to [37], I set out the following relevant principles:
[33] In Fortress Credit Corporation (Australia) II Pty Ltd v Fletcher [2011] FCAFC 89; (2011) 85 ACSR 38 (“Fortress”) at [40], the Full Court observed that, in considering whether to give approval under s 477(2B), the Court must consider the purposes for which the powers of a liquidator exist. Those purposes include the recovery of funds for the benefit of creditors: McGrath and Another (in their capacity as liquidators of HIH Insurance Limited and Others) [2010] NSWSC 404; (2010) 266 ALR 642 at [13]; Pascoe; re Brentwood Village Ltd (in liq) [2014] FCA 1295, [44].
[34] The standard imposed under s 477(2B) concerns an assessment by the Court that entry into the agreement is a proper exercise of power and not ill-advised or improper on the part of the liquidator, rather than involving the exercise of commercial judgment: Re Gerard Cassegrain & Co Pty Ltd (in liq) [2013] NSWSC 257 (“Cassegrain”) at [11] per Black J citing Re McGrath (in their capacity as liquidators of HIH Insurance Ltd) [2010] NSWSC 404; (2010) 266 ALR 642.
[35] In Pascoe; re Matrix Group Ltd (in liq) [2011] FCA 1117 (“Pascoe”) at [7], Jacobson J cited with approval the following statement by Austin J of the relevant test in Leigh; Re AP and PJ King Pty Ltd (in liq) [2006] NSWSC 315 at [23]:
Although the court has the statutory task [under s 477(2B)] of giving “approval” to a liquidator’s agreement that may end more than three months after it is entered into, the case law shows that the court undertakes something less than a complete “merits review”. As Giles J said in Re Spedley Securities Ltd (in liq) (1992) 9 ACSR 83 at 85-6:
... the court is necessarily confined in attempting to second guess the liquidator in the exercise of his powers, and generally will 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.
[36] 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: Corporate Affairs Commission v ASC Timber Pty Ltd (1998) 29 ACSR 109 at 118; Stewart, re Newtronics Pty Ltd [2007] FCA 1375.
[37] In Fortress, at [24], the Full Court endorsed the following comprehensive list of factors (identified by Austin J in Leigh re AP& PJ King Pty Ltd (in liq) [2006] NSWSC 315 at [25] and Re ACN 076 673 875 Ltd (rec’r & mgr apptd) (in liq) [2002] NSWSC 578; (2002) 42 ACSR 296 at [17]-[34]) relevant to the Court’s assessment of a proposed litigation funding agreement:
(1) the prospects of success of the proposed litigation;
(2) the interests of creditors other than the proposed defendant;
(3) possible oppression;
(4) the nature and complexity of the cause of action;
(5) the extent to which the liquidator has canvassed other funding options;
(6) the level of the funder’s premium;
(7) consultations with creditors; and
(8) the risks involved in the claim.
The court does not simply “rubber stamp” whatever is put forward by a liquidator: Stewart, in the matter of Newtronics Pty Ltd [2007] FCA 1375 at [26].
The public interest may be a relevant consideration in deciding whether to grant approval of a litigation funding agreement: Buiscex Ltd v Panfida Food Ltd (1998) 28 ACSR 357 at 364; Hall v Poolman [2009] NSWCA 64; (2009) 71 ACSR 139 at [125] and [126].
CONSIDERATION
Approval to enter into the funding agreement
I accepted that the order approving the plaintiffs’ entry into the funding agreement should be made for the following reasons:
(1)According to its own books and records, in its last year of operations AVLI received substantial income and had substantial assets. As at 2 December 2016, its director and shareholder were prepared to place AVLI into a members’ voluntary winding up on the basis of a declaration of solvency.
(2)Yet, within days of AVLI being placed into external administration, its then liquidator applied to correct the record such that AVLI was to be recognised as being in a creditors’ voluntary winding up. The debts of AVLI were understood to be substantial, including a contingent liability of $29 million that had not been accounted for in the company’s earlier financial reports. De minimis cash at bank was the only asset available to AVLI.
(3)At present, relatively little is known about the circumstances in which a declaration of solvency of the company was given on 16 September 2016 but, on 5 December 2016, Mr Cadman sought a “correction” that his appointment be recognised as having been in the course of a creditors’ voluntary winding up, indicating a conclusion that the company was not solvent at the time of his appointment.
(4)To date, the investigations into the affairs of the company have been limited and further investigation is warranted. It is in the interests of creditors generally to have such investigations undertaken, if only so that they may know that the winding up has addressed serious questions that arise in relation to the financial state of AVLI.
(5)Entry into the funding agreement will permit the liquidator to undertake those investigations, which otherwise will not occur. The liquidator has identified particular matters which she wishes to investigate.
(6)It is plain having regard to the limited assets in the liquidation and the sizeable contingent liabilities of AVLI that, absent the investigations leading to recoveries by the liquidator, there will be no distribution to creditors. The funding agreement is now the only mechanism by which prospective recoveries may be pursued.
(7)The funding agreement does not contain any unusual or onerous terms.
(8)Having regard to the terms of the funding agreement under consideration in this case, I accept that the likelihood of the liquidator being able to obtain funding on better terms than is presently offered is low. There is no real risk of the liquidator incurring liabilities that would have to be met out of funds that could otherwise be distributed to creditors.
(9)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 nothing to suggest that entry into the funding agreement would be outside of the proper exercise of the Liquidator’s powers.
I also note that there is a strong public interest in the investigation of the affairs of the company arising from the fact that it received significant Commonwealth government funds.
Finally, there is no reason to believe that any person will suffer relevant prejudice as a result of the approval of the funding agreement.
CONFIDENTIALITY
Section 37AF of the Federal Court Act provides:
(1)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)information tending to reveal the identity of or otherwise concerning any party to or witness in a proceeding before the Court or any person who is related to or otherwise associated with any party to or witness in a proceeding before the Court; or
(b) information that relates to a proceeding before the Court and is:
(i)information that comprises evidence or information about evidence; or
(ii) information obtained by the process of discovery; or
(iii) information produced under a subpoena; or
(iv) information lodged with or filed in the Court.
(2)The Court may make such orders as it thinks appropriate to give effect to an order under subsection (1).
By s 37AG(1)(a), the Court may make a suppression order or non-publication order on the ground that the order is necessary to prevent prejudice to the proper administration of justice. By s 37AG(2), a suppression order or non-publication order must specify the ground or grounds on which the order is made.
In Krecji (liquidator), in the matter of Community Work Pty Ltd (in liq) [2018] FCA 425 at [61]-[62] and [64], I noted the following:
[61] An application for approval of a funding agreement of this kind, which will permit the liquidator to decide whether or not to commence litigation, is not relevantly different from an agreement which provides for the funding of litigation. Similar protection of information concerning the funding arrangements the subject of this proceeding is warranted: cf. Onefone Australia Pty Ltd v OneTel Ltd [2010] NSWSC 498; (2010) 8 ACSR 163 at [2] (“Onefone”).
[62] 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 in this case: see Onefone at [3].
…
[64] In my respectful view, the approach taken by Black J in Re Octaviar Administration Pty Ltd (in liq) [2014] NSWSC 344 at [14]–[21] is a useful guide in cases of this kind. That is, in my view, it would not serve the interests of justice to require the liquidator to expend time and money in identifying particular material within his affidavits that should be redacted because it is confidential, recognising that this may be necessary in the event that an application is made by a person with sufficient interest for access to materials presently within the scope of the s 37AF order.
I was satisfied that it was appropriate to make an order of the kind sought to preserve the confidentiality of the terms of the funding agreement and also to ensure that the liquidator’s proposed investigations are not prejudiced by becoming known to their subjects.
I certify that the preceding twenty-eight (28) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Gleeson. Associate:
Dated: 3 October 2019
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