Kelly (liquidator), in the matter of Australian Institute of Professional Education Pty Limited (in liq)

Case [2018] FCA 780

FEDERAL COURT OF AUSTRALIA

Kelly (liquidator), in the matter of Australian Institute of Professional Education Pty Limited (in liq) [2018] FCA 780

File number: NSD 650 of 2018
Judge: GLEESON J
Date of judgment: 1 June 2018
Catchwords: BANKRUPTCY AND INSOLVENCY – judicial advice as to conduct of proceedings
Legislation:

Corporations Act 2001 (Cth), Sch 2 item 90-15

Trustee Act 1925 (NSW) s 63

Cases cited:

Australian Competition and Consumer Commission v Australian Institute of Professional Education Pty Ltd (in liq) [2017] FCA 521

Cosmoluce v Tsagaris [2010] NSWSC 1115

In the matter of Ansett Australia Ltd and Korda (No 3) [2002] FCA 90; (2002) 115 FCR 409

Re Addstone Pty Ltd (in liq) (1997) 25 ACSR 357

Re MF Global Australia Limited (in liq) [2012] NSWSC 994; (2012) 267 FLR 27

Reidy, In the Matter of eChoice Limited (Admin Apptd) [2017] FCA 1582
Date of hearing: 3 May 2018
Registry: New South Wales
Division: General Division
National Practice Area: Commercial and Corporations
Sub-area: Corporations and Corporate Insolvency
Category: Catchwords
Number of paragraphs: 49
Counsel for the Plaintiffs: Ms K Morgan SC and Ms C Hamilton-Jewell
Solicitor for the Plaintiffs: Minter Ellison

ORDERS

NSD 650 of 2018

IN THE MATTER OF AUSTRALIAN INSTITUTE OF PROFESSIONAL EDUCATION PTY LIMITED (IN LIQUIDATION) (ACN 126 628 215)

MORGAN KELLY, GEORGE GEORGES AND RYAN EAGLE IN THEIR CAPACITY AS JOINT AND SEVERAL LIQUIDATORS OF AUSTRALIAN INSTITUTE OF PROFESSIONAL EDUCATION PTY LIMITED (IN LIQUIDATION) (ACN 126 628 215)

First Plaintiff

AUSTRALIAN INSTITUTE OF PROFESSIONAL EDUCATION PTY LIMITED (IN LIQUIDATION) (ACN 126 628 215)

Second Plaintiff

JUDGE:

GLEESON J

DATE OF ORDER:

1 JUNE 2018

THE COURT ORDERS THAT:

1.The first plaintiffs are justified in causing the second plaintiff to file in Federal Court proceeding NSD453/2016 (“ACCC proceeding”) the amended response to concise statement in the form, or substantially the same form, as the proposed amended response set out at pages 392 to 401 of exhibit “MJK-1” to the affidavit of Morgan Kelly sworn 20 April 2018.

2.The first plaintiffs are justified in defending the ACCC proceeding on the basis set out in the amended response.

3.The first plaintiffs are justified in using the resources of the second plaintiff to pay the costs of defending the ACCC proceeding.

4.The first plaintiffs are justified in making this application.

5.The first plaintiffs’ costs and expenses in relation to this application be paid out of the assets of the second plaintiff.

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


REASONS FOR JUDGMENT

GLEESON J:

  1. By originating process filed on 20 April 2018, the first plaintiffs (“liquidators”) applied for directions pursuant to item 90-15 of Sch 2 (“Insolvency Practice Schedule”) to the Corporations Act 2001 (Cth) and ancillary orders. The application was heard ex parte on 3 May 2018.

  2. The principal relief concerns the liquidators’ proposed conduct in a proceeding brought by the Australian Competition and Consumer Commission (“ACCC”) and the Commonwealth of Australia (“Commonwealth”) against the second plaintiff…

Details
AGLC
Kelly (liquidator), in the matter of Australian Institute of Professional Education Pty Limited (in liq) [2018] FCA 780
Case
[2018] FCA 780
Decision Date

CaseChat Overview and Summary

The case before the court involved the liquidators of Australian Institute of Professional Education Pty Limited, who were seeking approval to defend proceedings brought by the Australian Competition and Consumer Commission (ACCC). The liquidators had identified substantial payments made by the company that might be recoverable and were seeking guidance on the appropriate defence strategy in the ACCC proceeding. The central issue was whether the liquidators' decision to follow legal advice in filing an amended response and defending the ACCC proceeding was reasonable and justified. This required the court to assess the propriety of the liquidators' actions in light of the legal advice they had obtained and the circumstances of the case.

The court examined the legal advice provided to the liquidators and considered whether it was reasonable for them to rely on this advice in their decision-making process. It noted that the liquidators had obtained detailed legal advice from senior counsel, which assessed the material available to them and recommended a course of action. The court found that the advice was thorough and applied the relevant legal principles correctly, with no obvious defects or issues that would call into question its propriety. The liquidators had chosen to act on this advice, and the court concluded that their decision to do so was reasonable and justified. Therefore, the liquidators were approved to file the amended response, defend the ACCC proceeding on the basis of this response, and use the company’s resources to pay the costs of the defence.

The court's decision affirmed the liquidators' right to follow professional legal advice in managing the company's affairs and defending proceedings brought against it. It reinforced the principle that the court respects the commercial judgment of liquidators, provided that it is made in good faith and based on sound legal advice. The court's approval enabled the liquidators to proceed with their defence strategy as recommended by their legal counsel.

Orders

Orders of the court

1. The first plaintiffs are justified in causing the second plaintiff to file in Federal Court proceeding NSD453/2016 (“ACCC proceeding”) the amended response to concise statement in the form, or substantially the same form, as the proposed amended response set out at pages 392 to 401 of exhibit “MJK-1” to the affidavit of Morgan Kelly sworn 20 April 2018.

2. The first plaintiffs are justified in defending the ACCC proceeding on the basis set out in the amended response.

3. The first plaintiffs are justified in using the resources of the second plaintiff to pay the costs of defending the ACCC proceeding.

4. The first plaintiffs are justified in making this application.

5. The first plaintiffs’ costs and expenses in relation to this application be paid out of the assets of the second plaintiff.

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

Background

Background to the litigation

At the hearing of the application, the liquidators sought, and I made an order of the kind envisaged by the consent order. I also made a confidentiality order in relation to exhibits marked “MJK-2” and “MJK-4” which contained confidential legal advice.FACTUAL BACKGROUND TO APPLICATION On 6 October 2016, the liquidators were appointed following a resolution to wind up the company voluntarily under s 491 of the Corporations Act. According to ASIC’s records, the directors of AIPE at this time were Amjad Khanche and Ajay Valanju. Those records show that Tej Preet Dugal (“Dr Dugal”) ceased to be a director on 9 September 2016. The liquidators have identified payments just in excess of $62 million which may be recoverable by the liquidators or the company. The impugned transactions pursuant to which these payments were made are summarised in Mr Kelly’s 20 April 2018 affidavit. They include:(1)A transfer of $35 million from the company to its then sole shareholder, International Education Management Pty Ltd (“IEM”), in September 2016 (that is, in the month before the appointment of the liquidators). The transfer was in payment of a purported dividend of $34 million, declared by the directors of the company on 11 August 2016. The amount of $1 million was returned by IEM to the company on 5 October 2016.(2)Payments totalling $15 million to Dr Dugal in his capacity as trustee for the Memon Valanju Dugal Trust and Khanche Investments Pty Ltd (“Khanche Investments”) in its capacity as trustee of the Khanche Family Trust on 31 March 2016 (“$15 million transaction”). The $15 million transaction is said by Mr Kelly to have been in payment of a purported dividend in the amount of $15 million, declared by the directors of AIPE on 25 March 2016. On 20 October 2017, IEM commenced a proceeding in the Supreme Court of New South Wales seeking declarations to the effect that the $34 million does not form part of the assets of AIPE (“IEM proceeding”). In February 2018, the liquidators conducted examinations of the directors and former directors of the company, and other staff and advisors of the company. Subsequently, the liquidators obtained legal advice from senior counsel in relation to the recoverability of the payments the subject of the impugned transactions. In March 2018, the liquidators obtained injunctions from the Supreme Court of New South Wales preventing IEM’s disbursement of $34 million, as well as freezing orders against Mr Khanche and Khanche Investments. On 24 April 2018, those orders were extended to a date that was not identified in the evidence. On 8 March 2018, Bromwich J made orders that gave the liquidators an opportunity to consider:(1)whether to amend the response to the concise statement filed by the ACCC and the Commonwealth (“ACCC’s concise statement”); and(2)whether to serve any evidence in the ACCC proceeding. The ACCC’s concise statement sets out the key claims made against AIPE in the ACCC proceeding.

Evidence

Evidence Before The Court

The ACCC proceeding has been fixed for a final hearing commencing on 10 September 2018.EVIDENCE The application was supported by two affidavits of Morgan Kelly, the second-named first plaintiff, sworn 20 April 2018 and 1 May 2018. The affidavits were accompanied by four exhibits marked, respectively, “MJK-1” to “MJK-4”. On 2 May 2018, Bromwich J made the following order in the ACCC proceeding by consent:The respondent be released from the implied obligation not to make use of documents filed in these proceedings for the purpose other than those of the proceedings, so far as is necessary to enable the respondent to seek judicial advice in proceedings NSD650/2018 on condition that the respondent seek orders as may be necessary to preserve the confidentiality of any information identifying or disclosing personal information concerning any student enrolled with the Australian Institute of Professional Education Pty Ltd (In Liquidation) or any witness in these proceedings, or the respondent otherwise deal with documents filed in this proceeding in a fashion which does not disclose that information. At the hearing of the application, the liquidators sought, and I made an order of the kind envisaged by the consent order. I also made a confidentiality order in relation to exhibits marked “MJK-2” and “MJK-4” which contained confidential legal advice.FACTUAL BACKGROUND TO APPLICATION On 6 October 2016, the liquidators were appointed following a resolution to wind up the company voluntarily under s 491 of the Corporations Act. According to ASIC’s records, the directors of AIPE at this time were Amjad Khanche and Ajay Valanju. Those records show that Tej Preet Dugal (“Dr Dugal”) ceased to be a director on 9 September 2016. The liquidators have identified payments just in excess of $62 million which may be recoverable by the liquidators or the company. The impugned transactions pursuant to which these payments were made are summarised in Mr Kelly’s 20 April 2018 affidavit. They include:(1)A transfer of $35 million from the company to its then sole shareholder, International Education Management Pty Ltd (“IEM”), in September 2016 (that is, in the month before the appointment of the liquidators). The transfer was in payment of a purported dividend of $34 million, declared by the directors of the company on 11 August 2016. The amount of $1 million was returned by IEM to the company on 5 October 2016.(2)Payments totalling $15 million to Dr Dugal in his capacity as trustee for the Memon Valanju Dugal Trust and Khanche Investments Pty Ltd (“Khanche Investments”) in its capacity as trustee of the Khanche Family Trust on 31 March 2016 (“$15 million transaction”). The $15 million transaction is said by Mr Kelly to have been in payment of a purported dividend in the amount of $15 million, declared by the directors of AIPE on 25 March 2016. On 20 October 2017, IEM commenced a proceeding in the Supreme Court of New South Wales seeking declarations to the effect that the $34 million does not form part of the assets of AIPE (“IEM proceeding”).

Decision

Reasons for decision

Full text does not contain this section.

Ratio Decidendi

Legal Principle Established

In Cosmoluce v Tsagaris [2010] NSWSC 1115, McDougall J said (at [15]):In considering whether or not to grant approval, or to give directions, the Court does not attempt to second guess the liquidator. It pays appropriate respect to the commercial judgment of the liquidator, without going so far as rubber stamping it. As Giles J said in Re Spedley Securities Ltd (In Liquidation) (1992) 9 ACSR 83 at 85-86, the Court respects the liquidator’s decision, and generally will not interfere unless there is some apparent want of good faith (I say straight away that there can be no suggestion of that in this case) or some error of law or principle apparent on the face of the material, or some real ground of doubt as to the prudence of the settlement. The Court does, as his Honour made clear, undertake some assessment, on a legal basis, of the merits of the claim, and it expects a liquidator to obtain advice from the lawyers that he or she has retained.CONSIDERATION I accept that the plaintiffs do not seek any direction or order that could be characterised as a business decision. Rather, the plaintiffs are confronted with assessing their obligations concerning the defence of the ACCC proceeding in the context of challenges by Mr Khanche and Dr Dugal to the liquidators’ decisions in connection with it. On 19 April 2018, Ms Morgan SC and Ms Hamilton-Jewell provided the liquidators with detailed advice concerning the proper form of an amended response to the ACCC’s concise statement, and whether judicial advice should be sought in relation to this proposed amended response. The advice received from counsel is based on an assessment of the material currently available to the applicants, comprising:(1)the evidence filed in the ACCC proceeding;(2)the documentary material provided by the applicants in the ACCC proceeding;(3)the testimony given in the examinations; and(4)the evidence filed by AIPE in proceedings brought in the Administrative Appeals Tribunal for a review of a decision by the Australian Skills Quality Authority to cancel AIPE’s registrations as a VET provider under the National Education and Training Regulation Act 2011 (Cth) and under the Education Services for Overseas Students Act 2000 (Cth) as a provider of VET or ELICOS courses for overseas students. I have read the 19 April 2018 advice. I am satisfied that detailed consideration has been given to the elements of the causes of action, the material available to the plaintiffs to assess the Company’s prospects and the appropriate defence to be mounted in the ACCC proceedings. The advice appears to refer to and apply the relevant principles. There is no obvious defect in the advice, or any matter which raised a question in my mind about the propriety and reasonableness of the liquidators acting on the advice. Further, I am satisfied that the liquidators have chosen to act on the 19 April 2018 advice. Accordingly, I am satisfied that the liquidators’ decision to follow the 19 April 2018 advice is proper and reasonable and that the liquidators are justified in continuing to defend the ACCC proceeding and in narrowing the issues in dispute in accordance with the proposed amended response to the ACCC’s concise statement.