FEDERAL COURT OF AUSTRALIA
Australian Competition and Consumer Commission v Phoenix Institute of Australia Pty Ltd (Subject to Deed of Company Arrangement) [2016] FCA 1246
ORDERS
THE COURT ORDERS THAT:
1. Leave is granted to the applicants under s 444E(3)(c) of the Corporations Act 2001 (Cth) to proceed against the respondents on the condition that the applicants do not seek to enforce any pecuniary penalties, any injunction pursuant to s 232(6)(a) of the Australian Consumer Law requiring monies to be refunded, and any costs order in their favour, without further leave of the Court.
2. Subject to either party notifying the Court in writing by 4.00pm on 28 October 2016 that it wishes to be heard on costs, costs of and incidental to the interlocutory application shall be costs in the cause.
3. The matter be listed for directions on a date to be advised.
THE COURT NOTES THAT:
4. The parties are to confer regarding appropriate timetabling orders having regard to paragraph [6] of the Reasons for Judgment given on 21 October 2016.
Note: Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.
PERRY J:
1 By an Originating Application filed on 23 November 2015, the applicants, the Australian Competition and Consumer Commission (ACCC) and the Commonwealth, seek declarations, pecuniary penalties, refunds, and other orders, against the respondents, Phoenix Institute of Australia Pty Ltd (Subject to Deed of Company Arrangement) (Phoenix) and Community Training Initiatives Pty Ltd (Subject to Deed of Company Arrangement) (CTI). The applicants allege that between 19 January 2015 and November 2015, Phoenix and CTI engaged in conduct in connection with the supply of vocational education courses to consumers that was misleading or deceptive, or likely to mislead or deceive, and unconscionable, in contravention of ss 18, 21 and 29(1), and in breach of the unsolicited consumer agreement provisions, of the Australian Consumer Law (ACL).
2 Subsequently on 21 March 2016, the directors of the respondents with other companies in the Australian Careers Network (ACN Group) resolved to place the companies into voluntary administration. By virtue of s 435C of the Corporations Act 2001 (Cth) (Corporations Act), the administration ended on 24 May 2016 when a Deed of Company Arrangement (DOCA) was executed by companies in the ACN Group, including the respondents. By force of s 444E of the Corporations Act, a person bound by the DOCA cannot proceed with a proceeding against the respondents until the DOCA terminates, save with leave of the Court and in accordance with such terms (if any) as the Court imposes.
3 By an interlocutory application dated 29 August 2016, the applicants seek orders pursuant to s 444E(3)(c) of the Corporations Act that leave be granted (to the extent leave is required) to proceed against the respondents. The grant of leave is opposed by the respondents who have, at all times following their appointment, maintained the view that the proceedings should remain stayed.
4 The Commonwealth accepts that it is a person bound by the DOCA because it was a creditor of Phoenix when Phoenix went into administration on 21 March 2016. The Commonwealth therefore accepts that it requires leave to continue the proceedings. However, the ACCC does not accept that it is bound by the DOCA and submits that it does not require leave to continue with the proceedings. In the alternative, if it is required to seek leave, the ACCC also contends that leave should be granted.
5 For the reasons set out below, I consider first that the ACCC is a creditor of Phoenix and therefore requires leave to continue the proceedings under s 444E(3)(c) of the Corporations Act. Secondly, I consider that leave to proceed should be granted to both applicants on condition that they do not seek to enforce any pecuniary penalties, any injunction pursuant to s 232(6)(a) of the ACL requiring monies to be refunded, and any costs order in their favour without further leave of the Court.
6 I will hear from the parties as to timetabling orders and, in particular, whether any orders should be made requiring the respondents to take further steps in the proceedings pending notification by the Department of Education and Training (the Department) of its provisional views to the respondents on how it proposes to proceed based on the audit report and provision of a copy of the audit report to the respondents.
7 Finally, it is important to emphasise at the outset that this is an interlocutory application. Accordingly it is not appropriate for me to make any findings on the substantive issues which may be in dispute in the litigation.
8 The applicants relied upon the affidavit of Matthew Richard Garey affirmed 29 August 2016 in support of their interlocutory application, save for paragraph 26 which was not read and the confidential exhibit referred to in that paragraph. Mr Garey is a Senior Executive Lawyer employed by the Australian Government Solicitor (AGS) who acts for the applicants in these proceedings. His affidavit sets out the history of the proceedings, a description of the evidence which the applicants propose to lead in the substantive proceedings, and matters relating to the reconciliation and audit of Phoenix’s entitlements to amounts of VET FEE-HELP assistance.
9 The respondents relied upon two affidavits: the affidavit of George Georges affirmed on 12 September 2016; and the affidavit of Matthew Simon McCarthy affirmed on 4 October 2016. Mr Georges is a registered official liquidator and a partner of the firm Ferrier Hodgson. He is also an Administrator of the DOCA executed by the respondents together with Mr John Lindholm (the Deed Administrators). Mr McCarthy is a solicitor with the respondents’ solicitors.
10 No witnesses were required for cross-examination.
3.1 The VET FEE-HELP assistance scheme
11 Under the Higher Education Support Act 2003 (Cth) (the Higher Education Support Act), an eligible student who enrolled in one or more of the Phoenix courses and satisfied the criteria in cl 43 of Sch 1A to the Higher Education Support Act was entitled to a Commonwealth student loan known as ‘VET FEE-HELP’. By virtue of cl 55 of Sch 1A to the Higher Education Support Act, the amount of any such loan was paid directly to the provider of vocational education and training (VET) courses in discharge of the student’s liability to pay the VET tuition fees. As such, under the scheme a student entitled to a VET FEE-HELP loan incurred a debt to the Commonwealth for each unit of study in which she or he was enrolled (s 137-18(1) and (3), Higher Education Support Act). The debt amounted to 120% of the loan (s 137-18(2), Higher Education Support Act) and the student was liable to repay the debt even if she or he did not complete the course. However, the student would become liable to repay the debt only when her or his income exceeded the minimum income threshold (being $53,354 in the period 1 July 2014 to 30 June 2015).
12 In addition, under cl 61 of Sch 1A, the Secretary may determine that an advance is to be made to a VET provider of an amount “expected to become payable under a provision of this Schedule to the provider”. However, under cl 61(1A), the Secretary had power to vary or revoke a determination that an advance be made if satisfied that the provider had not complied with Sch 1A and the regulations, having regard to matters specified in cl 61(1B). Furthermore, under cl 61(2), if the advance exceeds the amount that becomes payable, an amount equal to the excess may be deducted from any amount that is payable or to be paid or recovered by the Commonwealth from the provider as a debt due to the Commonwealth.
13 Phoenix and CTI are subsidiaries of Australian Careers Network Ltd (ACN).
14 Phoenix was, until March 2016, a Registered Training Organisation and an approved VET provider under Div 3 of Part 1 of Sch 1A to the Higher Education Support Act. Phoenix was therefore eligible to receive funding from the Commonwealth for the course fees of students who enrolled with Phoenix to undertake accredited courses and borrow their tuition fees from the Commonwealth. Phoenix offered diploma level courses in business, leadership and management, early childhood education and care, and community services work. However, on 23 November 2015, the Australian Skills Quality Authority cancelled Phoenix’s registration as a registered training organisation under the National Vocational Education and Training Regulator Act 2011 (Cth) and the Education Services for Overseas Students Act 2000 (Cth). Phoenix was unsuccessful in an application for merits review of this decision in the Administrative Appeals Tribunal. Phoenix has not accepted any enrolments in its courses (or undertaken any marketing activities) since 16 December 2015 pursuant to orders made by the Administrative Appeals Tribunals to that effect, and has ceased trading (see [25] below). Finally, on 23 March 2016, a Notice to Revoke Approval as a VET provider was issued in relation to Phoenix.
15 CTI provided support services to Phoenix and other companies in the ACN Group, including the operation of telephone call centres and document processing services. CTI has also ceased trading.
3.3 Judicial review proceedings with respect to the decision to defer VET FEE-HELP payments to Phoenix
16 On 11 December 2015, Phoenix instituted judicial review proceedings in this Court against the Commonwealth, the Minister for Education and Training and the Secretary to the Department. By those proceedings, Phoenix alleged that a number of decisions by the Secretary to defer VET FEE – HELP payments to Phoenix were void, invalid and/or of no effect. Those proceedings were dismissed on 4 March 2016, together with an order that the costs of the proceedings be paid by Phoenix: Phoenix Institute of Australia Pty Ltd v Commonwealth of Australia [2016] FCA 190.
3.4 The audit under cl 26, Sch 1A, Higher Education Support Act
17 On 29 January 2016, the Department wrote to Phoenix’s legal representatives advising that it would be subject to an audit pursuant to cl 26 of Sch 1A to the Higher Education Support Act to determine the veracity of its enrolments. Specifically, it wrote that:
The department is now moving to the payments reconciliation phase, whereby the department will seek to verify the reported enrolment data that Phoenix has provided to the department for the 2015 calendar year.
In order to verify the enrolment data reported by Phoenix, the Department proposes to require Phoenix to be audited pursuant to clause 26(1)(b)(ii) to determine the veracity of enrolments. If the audit demonstrates that Phoenix is entitled to payment that has not yet been made in respect of a particular student, the Department intends to make that payment without delay. If the Department considers that the audit is inconclusive in relation to a particular student, the Department will undertake further investigation before making a decision whether Phoenix is entitled to payment in respect of that student.
18 Clause 26 of Sch 1A relevantly provides that:
(1) The Minister may require a *VET provider to be audited:
(a) about compliance with any or all of the following requirements:
(i) the *VET financial viability requirements;
(ii) the *VET fairness requirements;
(iii) the *VET compliance requirements;
(iv) the *VET fee requirements;
(v) other requirements for VET quality and accountability set out in the *VET Guidelines; or
(b) about any or all of the following matters relating to *VET courses of study provided by the VET provider:
(i) …
(ii) the veracity of enrolments in those courses of students who receive VET FEE-HELP assistance for VET units of study forming part of those courses;
…
(2) The audit must be conducted:
(a) by a body determined in writing by the Minister; and
(b) at such time or times, and in such manner, as the Minister requires.
…
(3) The provider must:
(a) fully co-operate with the auditing body in the course of its audit; and
(b) pay to the auditing body any charges payable for such an audit.
…
(The terms in cl 26(1)(a) are defined in Sch 1 to the Higher Education Support Act.)
19 The Department enclosed with the letter a notice given under cl 24 of Sch 1A to the Higher Education Support Act requiring Phoenix to provide copies of completed documents relating to the enrolment of 1500 students listed in the attachment to the notice by 12 February 2016.
20 On 4 February 2016, the Department appointed the accounting firm, McGrathNicol, to perform an audit of the reported enrolment data that Phoenix provided to the Department for the 2015 calendar year. The audit commenced on 8 February 2016 and was subsequently extended to cover students enrolled in a course of study with Phoenix during 2016. In a letter to the Deed Administrators from the Department dated 27 April 2016, the Department explained the reasons why it had appointed McGrathNicol to conduct the audit, namely:
… based on the evidence the department has received so far, the department cannot be satisfied that Phoenix’s 2015 reported student enrolments are bona fide. In particular, the department cannot be satisfied solely on the basis of properly completed Commonwealth Assistance Forms and Phoenix enrolment forms that its reported enrolments are bona fide.
For this reason the department appointed auditors, McGrathNicol, to conduct an audit to assist the Department to settle the payments issue for the 2015 calendar year. In this regard, the department sees the audit, and in particular the part of the audit focusing on student participation and engagement, as a way to get a picture of whether enrolments reported by Phoenix are bona fide.
21 The letter also expressed concerns that, despite repeated requests over the previous two months, McGrathNicol advised that they had not been provided with access to the information required to undertake the audit and enclosed a report prepared by McGrathNicol detailing the various requests for information by them and responses received. The letter concluded that:
I am concerned that there has now been an unacceptable delay in providing the access that McGrathNicol require for the purposes of carrying out its audit.
In those circumstances, the department does not intend to make any payments decision until it is satisfied that McGrathNicol has received full and unfettered access to all the information they have sought, including full access to IT systems, to complete the audit.
22 I do not have the information on the basis of which, nor would it be appropriate for me to decide whether, there has been any unacceptable delay by the Deed Administrators in responding to requests from the Department. However, Mr Georges gave evidence that since receiving the Department’s letter of 27 April 2016, he and his staff have been undertaking a significant amount of work directed to collating and producing information to McGrathNicol as part of its audit, including (but not limited to):
21. … the production of enrolment records relating to Phoenix’s 11,679 enrolled students. Given the very large number of students and enrolments involved, this has therefore required us to put in place detailed mechanisms to conduct reviews of Phoenix’s records, including undertaking forensic IT investigations, a detailed understanding of the various systems which Phoenix employed in connection with its enrolment procedures and course delivery (both from an engagement and participation perspective) and testing of those systems in the context of individual student enrolments.
22. In the course of undertaking the work described above, over the course of May, June and July 2016, my staff (in conjunction with various external service providers), have produced to McGrathNicol a substantial amount of material extracted from Phoenix’s records and from its ‘FinPa’ and ‘Wisenet’ electronic systems. In total, Phoenix has produced some approximately 35,785 files comprising approximately 65GB of data to McGrathNicol in response to its requests.
23. I estimate that over 400 hours have been spent attending to these tasks by Mr Lindholm and me, and our staff, over the course of the voluntary administration and DOCA period. The cost to the administration of the work performed is in excess of $200,000 (not including expenses, which include significant legal costs).
24. I have also corresponded extensively with the Commonwealth Department of Education and Training and with McGrathNicol about the audit and reconciliation processes.
23 Concerns have also been expressed in correspondence by the Deed Administrators about aspects of the Department’s reconciliation process and audit, including as to whether information being sought by McGrathNicol was relevant to Phoenix’s entitlements under Sch 1A to the Higher Education Support Act and as to whether all of the relevant information would be considered prior to finalisation of the audit.
24 The audit was ongoing at the time of the hearing.
3.5 Appointment of voluntary administrators on 21 March 2016
25 On 21 March 2016 George Georges and John Lindholm were appointed joint and several voluntary administrators to ACN and each of its subsidiaries, including the respondents. The respondents ceased trading, and Phoenix ceased training its enrolled students, immediately before the appointment of the voluntary administrators.
3.6 Agreement not to proceed before the second creditors’ meeting, and service of the applicants’ evidence
26 AGS wrote to the respondents’ legal representatives on 29 March 2016, seeking the administrators’ consent to the continuation of the proceedings under s 440D(1) of the Corporations Act. Following further correspondence between the parties, on 13 April 2016 the applicants agreed not to seek leave to proceed at that stage but to serve their expert and lay evidence on the respondents and that, on the basis of that evidence, the parties would engage in further discussions regarding the relief sought in the proceedings. However, in the event that no agreed position was reached before 4 May 2016 when the second meeting of creditors in accordance with s 439A was likely to occur, the applicants indicated their intention to apply for leave to proceed under s 440D of the Corporations Act. An email advising of that position was in due course provided to Justice Yates to whom the matter was then docketed. On 14 April 2016, the Associate to Justice Yates responded confirming that his Honour was content for the matter to proceed as proposed by the parties.
27 On 20 April 2016, the applicants’ legal representatives provided the respondents’ legal representatives with unsealed copies of its lay and expert affidavits.
3.7 The DOCA and admission of the Commonwealth’s proof of debt
28 On 26 April 2016, the administrators’ report pursuant to s 439A of the Corporations Act was provided to the creditors. The administrators’ opinion set out in the report was that it would be in creditors’ interests for the entities to execute a DOCA.
29 The Commonwealth, through the Department, submitted a proof of debt in the voluntary administration of Phoenix in the amount of $835,101.36, comprised of $287,511.36 being the costs allegedly incurred by the Commonwealth in the judicial review proceedings and $547,950.00 described as “overpayment of FEE-HELP monies 2015.” The proof of debt was submitted under cover of a letter from the Commonwealth’s solicitors dated 3 May 2016 which stated that “subject to a reconciliation process which is yet to occur, the Department may have an additional claim for overpayment of VET FEE-HELP amounts to Phoenix and the Department reserves all its rights in relation to this issue and generally.”
30 The second meeting of creditors in the voluntary administration of the respondents and other entities in the ACN Group was held on 4 May 2016. At that meeting, the respondents’ creditors resolved that the respondents and certain other entities in the ACN Group (the ACN Pooled Entities) would execute a DOCA in line with the administrators’ opinion. A representative of the Commonwealth attended the meeting while a representative of the ACCC attended as an observer by telephone.
31 The Commonwealth was admitted to proof at the meeting in the amount of $835,101.36. It abstained, however, from voting on the resolution that the ACN Pooled Entities execute a DOCA. The Commonwealth also abstained from the resolution approving the Deed Administrators’ remuneration. A representative of the Commonwealth was nominated and appointed to the Committee of Creditors relating to the DOCA.
32 Pursuant to the resolution at the second meeting of creditors, each of the respondents and the Deed Administrators executed the DOCA on 24 May 2016. The DOCA applies to “ACN Pooled Entities” as defined, which include the respondents.
33 The DOCA provides that the Deed Administrators will endeavour to realise the respondents’ property on such terms as they determine is in the best interests of the creditors of the ACN Group with the proceeds of such realisations to be paid into a fund from which the Deed Administrators will make distributions to the creditors of the ACN Group (cll 4 and 10, DOCA). It is not in dispute that the principal asset of the ACN Group which the Deed Administrators are endeavouring to realise is the amounts of VET FEE-HELP assistance relating to 2015 and 2016 student enrolments to which Phoenix asserted an entitlement under cl 55 of Sch 1A to the Higher Education Support Act. Nor is it in dispute that that entitlement was quantified by Phoenix at approximately $360 million relating to the enrolment by Phoenix of approximately 11,679 students in 21,713 courses of study, of which approximately $106 million has been paid to Phoenix by way of advances under cl 61 of Sch 1A and approximately $253 million remains unpaid. However, that entitlement is subject to the reconciliation and audit processes being undertaken at the time of the hearing by the Department and McGrathNicol respectively.
34 On 19 July 2016, the respondents’ solicitors wrote again to AGS setting out the reasons as to why the respondents were of the view that the proceeding should remain stayed.
35 On 18 August 2016, the Department wrote to the Deed Administrators advising that it expected to receive the final audit report by the end of August and anticipated that it would be able to provide the Department’s position regarding the reconciliation by mid to late September. The letter further stated that, once the Department has formed a view on how it proposes to proceed based on the audit report, the Department would provide the Deed Administrators with a copy of the report and a reasonable opportunity (anticipated to be 28 days) to comment on any proposed departmental action in relation to the reconciliation of the data. The likely date of completion of the audit and reconciliation processes has since been revised to mid-October.
3.9 The application for leave to proceed
36 Following correspondence between the parties about the status of the proceedings, on 12 August 2016 AGS wrote to the respondents’ legal representatives advising that they intended to file an application seeking an order pursuant to s 444E(3)(c) of the Corporations Act for leave to proceed with the proceedings against the respondents. That application was filed on 29 August 2016.
4.1 The alleged contraventions
37 The nature of the allegations made by the applicants in the substantive proceedings are summarised in the applicants’ statement of facts and issues as follows:
9. From January 2015 onwards, the Brokers and Agents, acting on behalf of Phoenix and within the scope of their actual or apparent authority, targeted potential students within low socio-economic communities across Australia by calling on them in their homes or the homes of relatives or friends, including in rural towns, remote communities and communities with significant Indigenous populations.
10. In the course of recruiting students, the Brokers and Agents made representations that:
10.1 the courses were free; and/or
10.2 if the prospective students elected to sign up for VET FEE-HELP, the debt would never have to be repaid; and/or
10.3 if the prospective students enrolled in a course they would receive a free laptop computer or iPad.
[In this regard, it is alleged that each course cost at least $18,000 and many students were enrolled in two courses.]
11. The Brokers and Agents, acting on behalf of Phoenix and within the scope of their actual or apparent authority, also offered cash payments to students to introduce other potential students.
12. The Brokers and Agents recruited the majority of students for more than one course without their knowledge or consent, and recruited them for online courses despite the student not having access to the internet.
13. The Brokers and Agents completed, on behalf of the student, or directed the students in the completion of, the literacy and numeracy forms which were ostensibly designed to determine the student’s ability to undertake a course. Most students did not have the necessary skills in order to complete the courses, including the mandatory work placement components.
14. The Brokers and Agents did not explain to students the nature of their VET FEE-HELP obligations if they enrolled in a course, so that most of the students did not know that they had incurred a debt to the Commonwealth or when that debt would have to be repaid.
15. The Brokers and Agents did not inform the prospective students of the fact that they could withdraw from a course, that any withdrawal had to be prior to the census date or when the census date was.
16. The Brokers and Agents did not routinely give the students copies of the enrolment forms or other documents comprising the agreement ultimately entered into with Phoenix, nor give them information that they could terminate the agreement or how they could terminate it.
….
19. Employees of CTI processed student enrolment forms procured by Phoenix, often (a) without telephoning prospective students to confirm their interest in the courses, or their capacity to speak and understand English; (b) without adequately checking that the literacy and numeracy forms had been completed by the students; (c) without regard for the fact that there were no work placements for students being enrolled in Early Childhood and Care, and Community Services courses; and (d) without properly verifying the students’ identification. They also enrolled the majority of students in more than one course. This was done to maximise revenue to Phoenix from VET FEE-HELP payments from the Commonwealth (together, the Enrolment Conduct).
38 It was accepted, however, that the Commonwealth paid $106 million directly to Phoenix not under cl 55 of Sch 1A, but as an advance pursuant to cl 61(1) of Sch 1A which provided that “[t]he Secretary may determine that an advance is to be made to a VET provider on account of an amount that is expected to become payable under a provision of this Schedule to the provider.” The applicants accepted this meant that no debt had yet been incurred by the students: see further below at [100]-[101].
39 The applicants accepted at the hearing that by reason of Phoenix having ceased trading and the changes in its status as referred to at [14] above, the prayer for relief would need to be amended in due course. Subject to that caveat, the relief presently sought by the first and second applicants can be summarised as follows:
(1) declarations under s 21 of the Federal Court of Australia Act 1976 (Cth) (Federal Court Act) that Phoenix and CTI contravened ss 18, 21 and 29(1)(i), 76 and 78 of the ACL by, among other things, engaging in misleading or deceptive and unconscionable conduct (paragraphs 1, 2, 3, 10, 11, 12 and 13, prayer for relief);
(2) an injunction under s 232 of the ACL restraining Phoenix from engaging in contravening conduct in the future (paragraph 4, prayer for relief);
(3) publication orders under s 246(2)(d) of the ACL, namely, that Phoenix publishes on its website, and prominently on its campus at all times that the campus is in operation, a notice advising of its false, misleading and unconscionable conduct (paragraphs 5 and 6, prayer for relief);
(4) a compliance program order under s 246(2)(b)(i) of the ACL requiring Phoenix to establish a compliance program for its employees, agents and others involved in its business which is designed to ensure awareness of their responsibilities and obligations in relation to the contravening conduct and revise its internal operations which led to the contravening conduct (paragraph 7, prayer for relief);
(5) pecuniary penalties under s 224 of the ACL requiring Phoenix and CTI pay to the Commonwealth such pecuniary penalties as the Court determines to be appropriate in respect of their respective contraventions of the ACL (paragraphs 8 and 14, prayer for relief);
(6) orders for non-party consumer redress pursuant to s 239 of the ACL (paragraph 9, prayer for relief);
(7) an injunction pursuant to s 232 of the ACL (paragraph 15, prayer for relief); and
(8) costs (paragraph 16, prayer for relief).
40 Specifically, by paragraphs 9, 10 and 15 of the prayer for relief, the applicants seek the following orders:
9. Orders for non-party consumer redress pursuant to s 239 of the ACL in respect of each consumer who:
(a) was enrolled in a Phoenix course between 1 January 2015 and the date of order;
(b) has incurred a debt to the Commonwealth under the VET FEE-HELP A Scheme in respect of that enrolment ;
and either:
(c) as at the date of order, has not completed any unit in the course in which they were enrolled; and
(d) does not inform Phoenix in writing within a period to be specified that they wish to remain enrolled in the course;
or:
(e) notifies Phoenix in writing within a period to be specified that they received false information from a Phoenix sales representative at the time of their enrolment in a course and that they wish to have their enrolment cancelled ;
that:
9.1 the Court declare any enrolment agreement between the consumer and Phoenix in respect of the course or any unit of study within the course to be void; and
9.2 the Court declare any agreement between the consumer and the Commonwealth under the VET FEE HELP Assistance Scheme in respect of the course or any unit of study within the course to be void;
to the extent necessary to achieve the following:
9.3 the consumer’s liability to pay a VET tuition fee for the unit or course (consumer’s VET liability) be annulled;
9.4 the Commonwealth’s loan to the consumer of an amount of VET FEE HELP assistance in respect of the consumer's VET liability be annulled;
9.5 the Commonwealth’s liability to pay the amount of the loan made to the consumer to Phoenix, in discharge of the consumer’s VET liability, be annulled;
9.6 Phoenix be liable to repay to the Commonwealth any amount paid by the Commonwealth to Phoenix to date in purported discharge of the consumer’s VET liability; and
9.7 any reference to the consumer's enrolment in the course be expunged from the consumer’s academic record.
10. A declaration pursuant to s 21 of the [Federal Court Act] to the effect set out in paragraph 9 above.
…
15. An injunction pursuant to s 232 of the ACL requiring Phoenix and/or CTI to refund to the Commonwealth within a specified period the amounts referred to in paragraph 9.6 above.
(emphasis added.)
4.3 Relevant provisions of the ACL
41 With respect to paragraph 15 of the prayer for relief, s 232 of the ACL relevantly provides that:
(1) A court may grant an injunction, in such terms as the court considers appropriate, if the court is satisfied that a person has engaged, or is proposing to engage, in conduct that constitutes or would constitute:
(a) a contravention of a provision of Chapter 2, 3 or 4; or
(b) attempting to contravene such a provision; or
(c) aiding, abetting, counselling or procuring a person to contravene such a provision; or
(d) inducing, or attempting to induce, whether by threats, promises or otherwise, a person to contravene such a provision; or
(e) being in any way, directly or indirectly, knowingly concerned in, or party to, the contravention by a person of such a provision; or
(f) conspiring with others to contravene such a provision.
(2) The court may grant the injunction on application by the regulator or any other person.
(emphasis added.)
42 Section 232(6) provides among other things that, without limiting subs (1), the Court may grant an injunction requiring a person to refund money.
43 With respect to paragraph 9 of the prayer for relief, s 239 confers power to make orders to redress loss or damage suffered by non-party consumers in the following terms:
(1) If:
(a) a person:
(i) engaged in conduct (the contravening conduct) in contravention of a provision of Chapter 2, Part 3-1, Division 2, 3 or 4 of Part 3-2 or Chapter 4; or
(ii) is a party to a consumer contract who is advantaged by a term (the declared term) of the contract in relation to which a court has made a declaration under section 250; and
(b) the contravening conduct or declared term caused, or is likely to cause, a class of persons to suffer loss or damage; and
(c) the class includes persons who are non-party consumers in relation to the contravening conduct or declared term;
a court may, on the application of the regulator, make such order or orders (other than an award of damages) as the court thinks appropriate against a person referred to in subsection (2) of this section.
Note 1: For applications for an order or orders under this subsection, see section 242.
Note 2: The orders that the court may make include all or any of the orders set out in section 243.
…
(3) The order must be an order that the court considers will:
(a) redress, in whole or in part, the loss or damage suffered by the non-party consumers in relation to the contravening conduct or declared term; or
(b) prevent or reduce the loss or damage suffered, or likely to be suffered, by the non-party consumers in relation to the contravening conduct or declared term.
(emphasis added.)
44 Section 243 of the ACL in turn provides that, without limiting relevantly s 239(1), the orders that a court may make under that section include:
(a) an order declaring the whole or any part of a contract made between the respondent and a person (the injured person) who suffered, or is likely to suffer, the loss or damage referred to in that section, or of a collateral arrangement relating to such a contract:
(i) to be void; and
(ii) if the court thinks fit—to have been void ab initio or void at all times on and after such date as is specified in the order (which may be a date that is before the date on which the order is made);
(b) an order:
(i) varying such a contract or arrangement in such manner as is specified in the order; and
(ii) if the court thinks fit—declaring the contract or arrangement to have had effect as so varied on and after such date as is specified in the order (which may be a date that is before the date on which the order is made);
(c) an order refusing to enforce any or all of the provisions of such a contract or arrangement;
(d) an order directing the respondent to refund money or return property to the injured person;
(e) except if the order is to be made under section 239(1)—an order directing the respondent to pay the injured person the amount of the loss or damage;
…
5. STATUTORY CONSEQUENCES OF ENTRY INTO THE DOCA FOR CREDITORS
45 Part 5.3A (ss 435A-451D) of the Corporations Act deals relevantly with the administration of a company’s affairs with a view to executing a DOCA and the consequences of entry into a DOCA.
46 Section 435A provides that the object of Pt 5.3A is:
… is to provide for the business, property and affairs of an insolvent company to be administered in a way that:
(a) maximises the chances of the company, or as much as possible of its business, continuing in existence; or
(b) if it is not possible for the company or its business to continue in existence--results in a better return for the company's creditors and members than would result from an immediate winding up of the company.
47 While a company is under administration, the administrator has control of the company’s business property and affairs and may carry on or terminate or dispose of the company’s business or property (s 437A(1)). The High Court held in in Patrick Stevedores Operations No 2 Pty Ltd v Maritime Union of Australia (1998) 195 CLR 1 (Patrick Stevedores) at 34 [40] that the predecessor provision to s 437A of the Corporations Act, s 437A of the Corporations Law, “reposes in the administrators the duty of determining whether, during the period of administration, the employer companies should attempt to continue to trade.” The powers conferred on the administrator under s 437A are exclusive of any officer of the company (ss 437C and 437D).
48 As noted earlier, under s 435C(2) of the Corporations Act, the administration of the respondents ended when the DOCA was executed by the company and the Deed Administrators.
49 By virtue of s 444D of the Corporations Act, a creditor of Phoenix is bound by the DOCA. That section provides that:
(1) A deed of company arrangement binds all creditors of the company, so far as concerns claims arising on or before the day specified in the deed under paragraph 444A(4)(i).
50 The DOCA specifies 21 March 2016 for the purposes of s 444D(1). It is not in dispute that creditors within the meaning of s 444D(1) of the Corporations Act are those persons who would be entitled to proof in a winding up of the company in accordance with s 553 of the Corporations Act (quoted below at [57]): Brash Holding Ltd (Administrator Appointed) v Katile Pty Ltd [1996] 1 VR 24 at 33, 37-39 (approved in International Air Transport Association v Ansett Australia Holdings Ltd (Subject to Deed of Company Arrangement) [2008] HCA 3; (2008) 234 CLR 151 at 171 [42]). It follows that the DOCA binds all those persons who, on 21 March 2016, had debts or claims that would have been provable in the winding up of any of the ACN Group of companies under s 553 of the Corporations Act on or before 21 March 2016. Furthermore, as the applicants submit, when administrators have been appointed to a company, whether followed by a DOCA or not, provable debts and claims are those where the circumstances giving rise to them occurred before the date of the commencement of the administration: see Environmental & Earth Sciences Pty Ltd v Vouris [2006] FCA 679; (2006) 152 FCR 510 (Environmental Sciences) at 518; and BE Australia WD Pty Ltd (subject to a deed of company arrangement) v Sutton [2011] NSWCA 414; (2011) 82 NSWLR 336 (BE Australia).
51 By virtue of s 444E(3) of the Corporations Act, a person bound by the DOCA cannot:
(a) begin or proceed with a proceeding against the company or in relation to any of its property; or
(b) begin or proceed with enforcement process in relation to property of the company;
except:
(c) with the leave of the Court; and
(d) in accordance with such terms (if any) as the Court imposes.
(emphasis added.)
52 The circumstances in which the DOCA may be terminated are set out in s 445C which provides that:
A deed of company arrangement terminates when:
(a) the Court makes under section 445D an order terminating the deed; or
(b) the company’s creditors pass a resolution terminating the deed at a meeting that was convened under section 445F by a notice setting out the proposed resolution; or
(c) if the deed specifies circumstances in which it is to terminate--those circumstances exist; or
(d) the administrator of the deed executes a notice of termination of the deed in accordance with section 445FA;
whichever happens first.
53 Pursuant to s 445C(c) of the Corporations Act, cl 20.1 of the DOCA specifies that:
Subject to Clause 21, this Deed will terminate in respect of an ACN Pooled Entity on the earlier of any of the following:
(a) when a Court makes an order under section 445D or otherwise terminating this Deed in respect of that ACN Pooled Entity;
(b) (if the Deed Administrators have distributed the Fund as required under Clause 13) on the date on which the Deed Administrators sign a certificate in the form of Schedule 2; or
(c) subject to section 445C of the Act, when the creditors of an ACN Pooled Entity pass a Resolution terminating this Deed in respect of that entity at a meeting of Creditors of that entity convened by the Deed Administrators in accordance with this Deed or otherwise convened pursuant to section 445F.
54 Clause 13 of the DOCA requires the Deed Administrators to distribute the Fund in order of priorities at such time as they determine in their absolute discretion without interest, and that a certificate signed by the Deed Administrators that an amount paid by them to (relevantly) an Admitted Creditor (as defined) constitutes its entitlement, is final and binding on the Admitted Creditor.
6.1 Matters not in issue on the interlocutory application
55 The Commonwealth has the benefit of the costs order made against Phoenix on 4 March 2016 in the judicial review proceedings prior to the administration (see above at [16]). As such, the Commonwealth accepted that, notwithstanding that the costs order was unassessed before the administration, it is nonetheless a provable debt incurred before the administration: Foots v Southern Cross Mine Management Pty Ltd [2007] HCA 56; (2007) 234 CLR 52 at 76 [67] (by analogy). Accordingly, the applicants accepted that the Commonwealth is a creditor of Phoenix within the meaning of s 444D(1) of the Corporations Act and therefore that, pending termination of the DOCA, the Commonwealth was bound by the DOCA and could not continue any part of the present proceedings against the respondents absent leave of the Court. This is so notwithstanding that only part of the relief sought in this proceeding correlates with the amount accepted as a provable debt. Nor was it in dispute that the proof of debt lodged by the Commonwealth was the subject of the claim for an injunction under s 232(6) of the ACL for moneys to be refunded.
56 No such concession was made, however, with respect to the status of the ACCC which denied that it was a creditor for the purposes of s 444D of the Corporations Act. In this regard I note that no proof of debt has been submitted by the ACCC although this is not, of course, determinative of the question of whether the ACCC is properly characterised as a creditor for these purposes.
6.2.1 Who is a creditor for the purposes of Pt 5.3A?
57 As earlier explained, a “creditor” is a person bound by a DOCA and cannot by reason of that status proceed with a proceeding against a company prior to termination of the DOCA without leave of the Court: see ss 444D and 444E of the Corporations Act. While there is no definition of “creditor” in the Corporations Act, the creditors of the company for the purposes of Pt 5.3A are those who would have been creditors had the company gone into liquidation and the relevant date for the purposes of s 553 had been the day specified in the DOCA: see above at [50]. Section 553(1) in turn provides:
Subject to this Division and Division 8, in every winding up, all debts payable by, and all claims against, the company (present or future, certain or contingent, ascertained or sounding only in damages), being debts or claims the circumstances giving rise to which occurred before the relevant date, are admissible to proof against the company
58 Clause 11.3 of the DOCA deals with admission of deed claims to proof in the following terms:
(a) All Deed Claims are admissible to proof under this Clause and entitled to be admitted to the Admitted List.
(b) Each person who notifies an Asserted Claim to the Deed Administrators must:
(i) provide the Deed Administrators with such further proof, evidence or information in support of their Asserted Claim as the Deed Administrators may reasonably require; and
(ii) if so required by the Deed Administrators, deliver to the Deed Administrators a statutory declaration verifying the Asserted Claim in such form as they may require.
59 Relevantly, a “Deed Claim” is defined in the DOCA as a “claim” which is, in turn, defined consistently with s 553 of the Corporations Act as follows:
Claim means a debt owing by, or a claim subsisting against, an ACN Pooled Entity (whether present or future, certain or contingent, ascertained or sounding only in damages), irrespective of whether the debt or claim arose by virtue of contract, at law (including by statute), in equity or otherwise, being a debt or claim which arose on or before 21 March 2016 and which would be admissible to proof against the ACN Pooled Entity had that entity been wound up pursuant to Part 5.6 of the Act.
(emphasis added.)
60 The question of whether the ACCC is a creditor for the purposes of Pt 5.3A of the Corporations Act therefore turns upon whether it had a “claim” as defined in s 553 and the DOCA.
6.2.2 The parties’ submissions
61 The issue between the parties focused upon whether paragraphs 9.5, 9.6, 10 and 15 of the prayer for relief make “contingent” claims for the purposes of s 553 of the Corporations Act and the DOCA, the circumstances giving rise to which arose before the relevant date, 21 March 2016. It was not contended that the claims bore the character of any other kind of claim falling within s 553. Nor was it submitted on this application that any of the other paragraphs of the prayer for relief were claims falling within s 553 of the Corporations Act and the definition of a “Deed Claim” under the DOCA.
62 It will be recalled that paragraphs 9.5 and 9.6 of the prayer for relief respectively seek orders under s 239 of the ACL to annul the Commonwealth’s liability to pay the amount of loans made to students to Phoenix and to require Phoenix to repay to the Commonwealth any amount paid by the Commonwealth to Phoenix in purported discharge of the students’ VET liability, while paragraph 10 seeks declaratory relief to the same effect pursuant to s 21 of the Federal Court Act. Paragraph 15 seeks an injunction pursuant to s 232 of the ACL requiring Phoenix and/or CTI to refund to the Commonwealth the amounts referred to in paragraph 9.6. It is not in dispute that ss 232 and 239 of the ACL and s 21 of the Federal Court Act confer a discretion upon the Court to grant relief. Nor is it in dispute that no relief is sought under s 236 of the ACL which confers a right upon a person to recover compensation where the person suffers loss or damage because of another person’s conduct in contravention of a provision of Chapter 2 or 3 of the ACL.
63 The applicants submit that the discretionary nature of the relief sought in paragraphs 9.5, 9.6, 10 and 15 mean that the ACCC had no more than a right to apply to the Court for the relief sought. On this basis, the applicants contend that that claim was not a contingent one and therefore that the ACCC is not a creditor bound by the DOCA and can pursue the proceedings without a grant of leave.
64 For the reasons set out below, however, in my view the respondents rightly contend that the relief sought in paragraphs 9.5, 9.6, 10 and 15 constitutes contingent claims because the relief sought is discretionary in nature and is founded upon alleged contraventions of the ACL which occurred before 21 March 2016.
65 It was not in dispute that the concept of a contingent claim accords with the equivalent concept considered by the High Court in Community Development Pty Ltd v Engwirda Construction Company (1969) 120 CLR 455 (Community Development). In that case, the High Court considered the meaning of “contingent creditor” under the then Companies Acts 1961 to 1964 (Qld) which empowered the court to make a winding up order on the petition of (among others) “any creditor, including a contingent or prospective creditor, of the company”. The respondent sought to petition the winding up of the appellant on the ground that the building contract between the parties imposed on the appellant a liability to pay monies to the respondent contingently upon the respondent doing the relevant work to the architect’s (or ultimately the arbitrator’s) satisfaction. The High Court unanimously held that the respondent was a contingent creditor under the provision. In this regard, Kitto J (with whose reasons Barwick CJ and Windeyer J agreed) held at 459 that:
In In Re William Hockley Pty Ltd [[1962] 1 WLR 555 at 558], Pennycuick J suggested as a definition of “a contingent creditor” what is perhaps rather a definition of “a contingent or prospective creditor”, saying that in his opinion it denoted “a person towards whom, under an existing obligation, the company may or will become subject to a present liability upon the happening of some future event or at some future date”. The importance of these words for present purposes lies in their insistence that there must be an existing obligation and that out of that obligation a liability on the part of the company to pay a sum of money will arise in a future event, whether it be an event that must happen or only an event that may happen.
66 Justice Kitto then continued to explain that:
A building contract creates, as soon as it is entered into, an obligation upon the building owner to pay the contract price, either as a whole upon a future event or, more usually, by progress and final payments each of which is to be made on a future event. The event or events may not happen, but if and when one of them does happen the building owner, by force of the contractual obligation, must pay the builder a sum of money. It is, I think, nothing to the point that the event may be complex, as where the payment is agreed to be made when the whole or some part of the work has been done to the satisfaction of an architect as expressed in a certificate or to the satisfaction of an arbitrator as expressed in an award: the building owner is bound from the time the contract is made to pay money to the builder upon a contingency; and that in my opinion makes the builder a contingent creditor of the owner.
67 The reasons of Owen J (with whom Windeyer J also agreed) were to like effect: Community Development at 461 – 462; see also, for example, National Bank of Australasia Ltd v Mason (1975) 133 CLR 191 at 201 (Barwick CJ); and Federal Commissioner of Taxation v Gosstray [1986] VR 876 at 878.
68 The question of whether a liability subject to the exercise of a discretionary power could constitute a contingent claim under the Corporations Act arose in McClellan v Australian Stock Exchange Ltd [2005] FCA 585; (2005) 144 FCR 327 (McClellan). In that case, fines were imposed upon a company by the Australian Stock Exchange Ltd (ASX) after the company had been placed into administration for breaches of the operating rules (then known as the Business Rules) which had occurred before the company was placed into administration. By s 793B of the Corporations Act, the operating rules had effect as a contract under seal between the ASX and each participant in the market. The question was whether the possibility which existed prior to the DOCA that the company would be fined meant that the ASX was a contingent creditor of the company at the appointment date for the purposes of the Corporations Act (McClellan at 329 [5]). Justice Finkelstein, citing Kitto J in Community Development, held at 330 [9] that:
…the question comes down to this: was ASX a contingent creditor of Terrain Securities when it went into administration, or did its claims only come into existence when the fines were imposed? In Australia it is accepted that for there to be a contingent liability there must be an existing obligation out of which on the happening of the contingency (an event that may or may not occur) there will arise a fixed obligation to pay a sum of money, which can be either liquidated or sounding only in damages…
69 The difficulty identified by Finkelstein J lay in the discretionary nature of the power to impose the fine. “Can”, his Honour asked, “such a power be treated as a contingency?” (McClellan at 331 [12]). In answering this question, Finkelstein J turned for assistance to a long line of English cases dealing with proofs of the costs of litigation involving a bankrupt. In this regard, his Honour explained that:
13. Under the early Bankruptcy Acts the rule was that costs were provable in a bankruptcy provided the judgment awarding those costs had been pronounced before the sequestration order, although the costs had not been taxed… Indeed, proof for costs was allowed even if final judgment had not been signed, provided the order for the payment of those costs had been made… On the other hand, the mere possibility of having to pay costs at the date of bankruptcy was not a provable debt… The reason was that there was no debt, contingent or otherwise, until the order for costs was made…
14. To this point, the position was that costs were not provable in the absence of an order because there was no underlying legal liability which would crystallise into a debt on the making of the order. It was the order itself that was the source of the liability. Moreover it was not yet clear whether the possibility of a costs order being made was a “contingency”...
70 After observing that the old rules continue to apply in England save that it may not now be necessary to source the contingent debt in an existing liability in light of the Court of Appeal decision in Glenister v Rowe [2000] Ch 76, Finkelstein J concluded at 333 [16] that:
The possibility that a costs order may be made is a contingency. So also, in my view, is the possibility that a fine may be imposed a relevant “contingency”; it is a future event which may or may not occur out of which a legal liability to pay money will arise. Nevertheless, in Australia, if not in England, it is still necessary to find an underlying legal liability which is the source of the obligation to pay the fine. That underlying liability exists. It is to be found in either the statutory contract with its implied term to pay the fine or in the private contract with ASX which would be the source for an obligation to pay damages suffered by ASX if the fine is not paid.
71 Nothing in that case suggests that the fact that the discretion to grant relief under ss 232 and 239 of the ACL is vested in a Court rather than an adjudicatory tribunal as in McLellan, and involves an exercise of judicial power, constitute relevant points of distinction. To the contrary, the reasoning in McClellan suggests that the relevant question is whether the future event which may or may not occur is founded in an underlying legal liability.
6.2.4 Are the discretionary claims for relief contingent claims for the purposes of s 553 of the Corporations Act?
72 Applying these principles, it follows that the claims made in paragraph 9.5, 9.6, 10 and 15 of the prayer for relief are properly characterised as contingent claims. It suffices to take the claims in paragraphs 9.6 and 15 as the example.
73 First, as the respondents submit, the possibility that an order will be made by the Court requiring a refund of the monies in question is a future event which may or may not occur out of which a liability to pay money will arise.
74 Secondly, the source of the obligation to pay those monies is to be found in the pre-existing obligation upon the respondents to comply with the relevant provisions of the ACL, which obligations are said to have been breached by conduct occurring before 21 March 2016. As such, and adopting the language of Finkelstein J in McClellan, there is an underlying legal liability which is to be found in the provisions of the ACL which would be the source of the obligation to pay the monies in question.
75 In this regard, I do not accept the correctness of the analogy sought to be drawn by the applicants with the decision in BE Australia. The issue relevantly in BE Australia was whether the filing of an application under s 106 of the Industrial Relations Act 1996 (NSW) (IR Act) constituted a “claim” falling within the meaning of s 553 of the Corporations Act. The applicant, Ms Sutton, had undertaken work as a taxation consultant for BE Australia Pty Ltd (BEA) pursuant to an arrangement subsequently terminated without prior notice or payment in lieu thereof. She commenced proceedings in the Industrial Relations Commission (IRC) against BEA alleging that the arrangements were unfair within the meaning of IR Act and that the arrangement should be varied pursuant to that provision so that her services could not be dispensed with save on reasonable notice and payment for the breach of the arrangement. Section 106 of the IR Act provided that the IRC may make an order declaring wholly or partly void, or varying, any contract whereby a person performs work in any industry if it found that the contract was an unfair contract either from the commencement of the contract or some other time. Shortly before the IRC proceedings were due to be heard and before any order was made under s 106, BEA was placed in voluntary administration and a deed of company arrangement approved by BEA’s creditors. Ms Sutton lodged a proof of debt in respect of her claim under s 106 of the IR Act which was rejected.
76 Campbell JA (McColl JA agreeing) held relevantly that Ms Sutton was not a “creditor” with a “claim”. The critical passages commence at [105] where Campbell JA held that:
…just because something is a “claim” in one sense of the word does not necessarily mean that it is a “claim” within the meaning of s 553. The particular shade of meaning that “claim” has in s 553 can be ascertained from the purpose of the section. That purpose is that all the legal obligations to which a company is subject should be ascertained, and each of them valued as at a common date, so that those obligations can be taken into account in a winding up or other administration that is under way. Someone has a “claim” within the meaning of s 553 if he or she has a basis, founded on an existing legal right, for asserting a right to participate in the division of the assets of the company. Ms Sutton did not have one of those.
(emphasis added.)
77 The reason why Campbell JA held that Ms Sutton’s “claim” was not founded on an existing legal right was because “an applicant for an order under s 106 has nothing more than a right to take proceedings” which did not result in there being any legal obligation of the defendant in such proceedings until such time as the IRC had made an order (BE Australia at [106]).
78 In so finding, Campbell JA declined to overrule the earlier decisions in Silbermann v One.Tel Ltd (No 2) [2002] NSWSC 295; (2002) 167 FLR 274 and Buckingham v Pan Laboratories (Australia) Pty Ltd (In Liq) [2004] FCA 597; (2004) 136 FCR 102 (Buckingham). Rather, as Jacobson J held in Buckingham at 111 [83]-[86], in refusing leave under s 500(2) of the Corporations Act to enable former employees of a company in liquidation to continue proceedings under s 106 of the IR Act (in a passage approved by Campbell JA in BEA at [99]):
The principle which underlies the whole of the law of insolvency is that upon the making of a winding up order the rights of all parties, including creditors, crystallise. The assets of the company are to be realised and distributed rateably among the creditors then existing.…
…[In Commercial Banking Co of Sydney Ltd v George Hudson Pty Ltd (In Liq) (1973) 131 CLR 605] Menzies J said at 613:
It is a deeply rooted principle of company law that, when liquidation is commenced, one creditor should not be assisted by the court to improve its position vis-a-vis other creditors.
It would be inconsistent with these fundamental principles for a claim under s 106 of the IR Act to be characterised as a “future claim” which may be admitted to proof in a winding up. The section gives the Commission a wide discretion to alter, retrospectively, substantive rights and liabilities... The power which is conferred would, if exercised, permit the Commission to alter retrospectively the rights of existing creditors which have already crystallised on liquidation. The power to alter those rights would flow from a finding of unfairness in a claim made by a person to whom no obligation is owed at the relevant date. It cannot have been the intention of the legislature that a claim to the exercise of such a jurisdiction would be a future claim admissible to proof against the company under s 553(1) of the Act
It is not to the point that the circumstances giving rise to the claim, that is to say, the employment of the applicants, occurred before the relevant date. The question is whether the claim is a future one in the sense referred to in s 553(1). For the reasons set out above, it is not.
(emphasis added.)
79 After summarising the relevant authorities, Campbell JA concluded that “[e]ach of those decisions required that there be an existing legal obligation that a company owed at the relevant date to someone before that person has a ‘claim’ that is provable in the winding up of the company.” (BE Australia at 364 [107]).
80 The respondents submitted that the reason why the Court in BE Australia held that an application for an exercise of the power in s 106 of the IR Act to vary a contract did not give rise to a provable debt is because the power in s 106 of the IR Act was a power to create new rights not based on a pre-existing obligation. I agree. As explained in the passage quoted above from Buckingham, s 106 did not confer power to grant relief sourced in a pre-existing right or obligation, but only upon the IRC forming a view that the contract was “unfair”. As such, before an order was made under s 106 of the IR Act, an applicant had nothing more than a right to take proceedings. That is not the case with respect to the application for relief here under ss 232 and 239 of the ACL. As I have explained, in contrast to BE Australia, here there were pre-existing obligations under the ACL which were allegedly contravened giving rise to the possibility that the Court may grant the relief sought under ss 232 and 239.
81 Thirdly, this broad construction of s 553 of the Corporations Act is confirmed in my view by the approach to the construction of this provision articulated in Sons of Gwalia Ltd (Subject to Deed of Company Arrangement) v Margaretic [2007] HCA 1; (2007) 231 CLR 160 (Sons of Gwalia). In that case, an investor bought shares in a company a few days before administrators were appointed to the company. The company subsequently entered into a DOCA. The investor claimed damages as a creditor on the ground that, by failing to comply with its continuing disclosure obligations to the ASX, the company had engaged in misleading and deceptive conduct in contravention of s 52 of the then Trade Practices Act 1974 (Cth) and breached the Australian Securities and Investments Commission Act 2001 (Cth). The deed administrators sought declaratory relief among other things that the investor’s claim was not provable under the DOCA. Justice Hayne (with whose reasons Gummow J at 189 [46], Heydon J at 255 [260] and Crennan J at 255 [265] generally agreed) noted that, while not directly put in issue, the company’s claims for declaratory orders required consideration of whether the circumstances giving rise to that claim arose before the relevant date. In this regard, his Honour found that the circumstances said to constitute the misleading and deceptive conduct had occurred before the appointment of administrators and therefore before the relevant date, even though the loss or damage was not then apparent to the investor (Sons of Gwalia at 223 [170]). In this context, his Honour explained that s 553 was to be widely construed in accordance with the language and purpose of the provision. Specifically, his Honour observed at 224 [172] that:
In construing the temporal limit that is imposed by s 553, it is important to recognise the generality of other expressions used in s 553 in defining what debts and claims are to be admissible to proof. The section speaks of “all debts payable by, and all claims against, the company”. It amplifies those expressions by the parenthetical reference: “present or future, certain or contingent, ascertained or sounding only in damages”. If the words of the section were not wholly sufficient (as they are) to indicate an intention to define provable claims very widely, the Report of the Australian Law Reform Commission on the General Insolvency Inquiry (the Harmer Report), read with the Explanatory Memorandum for the Bill that became the 1992 Act, puts the point beyond any doubt. The Harmer Report [Australia, The Law Reform Commission, General Insolvency Inquiry, Report No 45 (1988), vol 1, p 315 [774]] identified a basic aim of insolvency laws as being “to deal comprehensively with all of the debts and liabilities of the insolvent” and said that, “[i]n the case of a company, the aim is to deal with all the claims against a company so that its affairs can be fully wound up or so that it can resume trading” (emphasis added). The Harmer Report concluded that “[t]he categories of claims which are admissible should be as wide as possible so that the financial affairs of the insolvent are dealt with comprehensively”. Otherwise, as the Harmer Report pointed out, if the creditors are unable to make their claims in the insolvency, they are unable to recover at all (unless they have a basis for action against either directors of the company or a guarantor of the company's debts or unless the winding up is stayed)”. The Explanatory Memorandum for the Bill that became the 1992 Act [Explanatory Memorandum, Corporate Law Reform Bill 1992 (Cth) at [849]] said that the reforms embodied in the new provisions of ss 553 to 553E “reflect[ed] the recommendations of the Harmer Report”.
82 It follows that the ACCC is a creditor and must therefore seek leave to proceed, together with the Commonwealth.
6.3 Principles applicable to the exercise of discretion to grant leave for the proceedings to proceed
83 Principles relevant to the exercise of discretion to grant leave to proceed under s 444E(3) of the Corporations Act can be summarised as follows.
84 First, where leave to proceed is sought under s 444E of the Corporations Act, the applicable principles are those applied in determining applications for leave under s 471B of that Act in relation to liquidations: Meehan v Stockmans Australian Café (Holdings) Pty Ltd (1996) 22 ACSR 123 at 125 (Lehane J)(Meehan); Easey v Grosvenor Constructions (NSW) Pty Ltd [2005] NSWSC 878; (2005) 54 ACSR 820 (Easey) at 821 [4]; Young v Brachdale Pty Ltd (Subject to Deed of Company Arrangement) [2010] VSC 654 (Brachdale) at [16].
85 Secondly, it was not in dispute that the onus lies upon the applicants to establish that the ordinary procedure established by the DOCA should be displaced, namely, that the continued pursuit of this litigation should be substituted for the procedure whereby a claimant lodges a verified proof of debt with the deed administrators who admit or reject it wholly or in part and from whom an appeal lies to a court: Meehan at 127 (Lehane J). As, for example, Rein AJ explained in JF Keir Pty Ltd v Priority Management Systems Pty Ltd (Administrators Appointed) [2007] NSWSC 748 at [8] (quoted with approval recently in Re Pool & Spa Builders (Aust) Pty Limited (Subject to Deed of Company Arrangement) [2013] NSWSC 185 at [20]), relevant factors include:
…Whether there are good reasons for allowing a creditor to depart from the general intention of Part 5.3A which is that a creditor ought not be able to take action against the company in such circumstances.
86 Thirdly, the question of whether leave should be granted turns upon the exercise of discretion. In this regard, each application must turn upon its own particular facts and the question cannot be approached as a “shopping list” of factors: Australian Competition and Consumer Commission v ACN 135 183 372 (Administrators Appointed) (formerly known as Energy Watch Pty Ltd) [2012] FCA 586 (Energy Watch) at [5] (Marshall J). As Hammerschlag J held in Larkden Pty Ltd v Lloyd Energy Systems Pty Ltd [2011] NSWSC 1305; (2011) 285 ALR 207 (Larkden) at 215 [40]:
Every application must be considered on its own circumstances. There are infinite possible scenarios. There may be a flurry or a dearth of meritorious applications. Those circumstances need have no particular quality of rarity.
87 Fourthly, the exercise of discretion is informed by previous decisions as to the relevant factors to be considered and by the purposes of the ordinary rule in s 444E(3) of the Corporations Act prohibiting a creditor from pursuing litigation including that “without the relevant restriction, a company in liquidation would be subjected to a multiplicity of actions which would be both expensive and time-consuming, as well in some cases as unnecessary”: Re Gordon Grant and Grant Pty Ltd [1983] 2 Qd R 313 (Re Gordon Grant) at 316 (McPherson J (Campbell CJ and Sheahan J agreeing)) with respect to the equivalent provision dealing with companies in the process of being wound up under the then Companies Act 1961-1979 (Qld)); see also Secretary, Department of Health and Ageing v Prime Nature Prize Pty Ltd (In Liq) [2010] FCA 597 (Prime Nature Prize) at [15] (Stone J). Similarly, James LJ in Re David Lloyd & Co (1877) 6 Ch D 339 at 344 in a passage relied upon by the respondents in their submissions, said with respect to the relevant English Companies Act:
These sections in the Companies Act, and the corresponding legislation with regard to bankrupts, enabling the Court to interfere with actions, were intended, not for the purpose of harassing, or impeding, or injuring third persons, but for the purpose of preserving the limited assets of the company or bankrupt in the best way for distribution among all the persons who have claims upon them. There being only a small fund or a limited fund to be divided among a great number of persons, it would be monstrous that one or more of them should be harassing the company with actions and incurring costs which would increase the claims against the company and diminish the assets which ought to be divided among all the creditors.
(cited with approval in JJ Leonard Properties Pty Ltd v Leonard (WA) Pty Ltd (in liq) (1986) 11 ACLR 224 at 226 (Rowland J))
88 Reference has also been made to the “deeply rooted principle of company law” that the Court should not assist creditors to improve their position vis a vis other creditors: see at [78] above.
89 Finally, the intention that the promotion and enforcement of the standards prescribed by the ACL are matters in the public interest is evident from the object of the Competition and Consumer Act 2010 (Cth) in s 2, being “to enhance the welfare of Australians through the promotion of competition and fair trading and provision for consumer protection”: Energy Watch at [6] (Marshall J). It follows, as North J held in Australian Competition and Consumer Commission v Advanced Medical Institute Pty Ltd (Administrator Appointed) (No 3) [2011] FCA 348 (Advanced Medical) at [5]-[6], that a tension arises in cases such as the present between the public interest in the enforcement of the standards prescribed by the ACL by the ACCC as the independent regulator, on the one hand, and the regime applicable to the administration of companies (or in this case, the administration of a DOCA), on the other hand. The existence of that tension is not resolved by the admonition relied upon by Phoenix and CTI in Patrick Stevedores at 36 [43] that general laws (in that case, the Workplace Relations Act) should not be construed as intended to affect or modify the regime in Part 5.3A which affects the interests of third parties. In the exercise of the discretion to grant leave, plainly the public interest in enforcing contraventions of the ACL is a relevant consideration and the weight to be afforded to it will turn upon a consideration of all of the circumstances of the particular case.
90 The decision in Advanced Medical is an example in point and is similar in some respects to the present case, as I later explain. In Advanced Medical, the question was whether leave should be granted to the ACCC to proceed with litigation concerning alleged unconscionable conduct in the sale of medication and services for the treatment of male sexual dysfunction while the respondent company was in administration under s 440D of the Corporations Act. As such, the exercise of discretion, on one view, fell to be resolved in line with a more stringent approach to the grant of leave in such cases: see Meehan at 125; Easey at 821 [4]; cf. Larkden at [33]-[40]. In his reasons at [5]-[6], North J observed that:
This proceeding has been brought by the ACCC in its role as regulator, in order to promote the public interest and protect the public from unconscionable conduct. It is obvious from the nature of its role that, in most cases, proceedings brought by the ACCC should be free from impediment and administered by the courts with a degree of expedition, which recognises the concern of the public in preventing conduct in contravention of the [Trade Practices Act].
At the same time, the [Corporations] Act provides for the administration of companies. A jurisprudence surrounding the nature of administration has developed which demonstrates that the purpose of administration is to resolve an immediate problem quickly and allow the future course of the company to be chartered in accordance with the wishes of the creditors. As counsel for the respondents, Mr Aldridge SC, correctly contended, the application in this case itself represents a collision between the aims of two separate areas of the law. Whilst s 440D(1) places a statutory freeze on litigation for the purpose of advancing the administration, the proper administration of the trade practices law would suggest that the proceeding brought by the ACCC should proceed despite the present form of control of the company.
91 In that case, in holding that leave should be granted, North J held first at [20] that:
There is a strong public interest in stopping unconscionable trading as soon as possible and advancing the consideration of allegations of such conduct without significant delay. This is an element which distinguishes the present case from cases involving debts or civil claims, which have been the ordinary area of discourse for applications pursuant to s 440D(1)(b).
92 Secondly, his Honour found that, the proceedings having been on foot when the administrators were appointed, they had been required to become familiar with the operations in order to continue to conduct the business and engage in the negotiations with the ACCC.
93 Thirdly, while the administrators opposed leave, North J took into account that they had acknowledged that a resolution of the proceedings was vital to the future of the companies and his finding that much of the work which they had done would be relevant to preparing a defence.
94 Fourthly, the deed administrators led evidence that the preparation of a defence, including undertaking the necessary investigations, would take three months at a cost of $380,000.00 (Advanced Medical at [14]). The evidence was also that around $4 million was owed to priority creditors and $10.5 million to unsecured creditors, and that the costs involved in requiring the respondents to file a defence would disadvantage some creditors. Justice North, while not accepting that the costs would be as substantial as alleged, still found at [22] that the costs would be substantial. Nonetheless, his Honour found at [22] in granting leave to the ACCC to proceed that “[t]he impact of the cost of the respondent advancing their case, compared with the value of the creditors of the business, is not significant. It is not significant enough to outweigh the importance of proceeding with litigation aimed to vindicate the public interest.”
95 Finally, his Honour held at [23] that “[t]he primary impact of an order granting leave would be on the lawyers for the respondents. Their task would be specific. The argument that to grant leave would divert the attention of the administrators is reduced in the circumstances of this case.”
6.4 Relevant factors to the grant of leave to proceed
96 I have reached the view that leave to proceed should be granted to both the ACCC and the Commonwealth for the reasons explained below. In reaching that view, I set out the factors in favour of, and against, the grant of leave to proceed in detail as they are attended with a degree of complexity.
6.4.1 Serious question to be tried
97 First, the respondents concede for the purposes of the application that there is a serious issue to be tried in the proceeding. This is a factor which weighs in favour of the grant of leave at least when attended with other factors: Vagrand Pty Ltd (In Liq) v Fielding (1993) 41 FCR 550 at 556 (by analogy) (applied in the context of a deed of company arrangement in e.g. Brachdale at [21]); see also, for example, Prime Nature Prize at [16] (Stone J).
98 Secondly, the applicants submit that the non-monetary relief, including the declarations, is necessary in order to inform and protect customers, and the non-monetary and pecuniary penalties for promoting general deterrence (Australian Competition and Consumer Commission v Link Solutions Pty Ltd [2008] FCA 1790 (Link Solutions) at [11] and [16]). As to the latter, the fact that Phoenix is subject to a DOCA with potentially no capacity to pay a penalty and no longer trading, is no bar to imposing a penalty for general deterrence and indeed, to hold otherwise would undermine the significant public interest behind the deterrence function: Australian Competition and Consumer Commission v SIP Australia Pty Ltd [2003] FCA 336 at [59] (Goldberg J); Australian Competition and Consumer Commission v Leahy Petroleum Pty Ltd (No 2) [2005] FCA 254; (2005) 215 ALR 281 at [9] and [11]. The deterrence function to be served by declarations of contravening conduct and the imposition of penalties is directed not only to ensuring compliance with the ACL by the contravener, but also by others: see by analogy Prime Nature Prize at [23].
99 I accept that there is a significant public interest in the litigation for these reasons. Furthermore, in this case the public interest in pursuing this litigation and doing so in a timely fashion is heightened given the nature of the allegations that are made and the relief sought. Specifically, if the allegations made by the ACCC are established, the respondents sought to procure a very substantial sum of up to $360 million from public revenue through misleading, deceptive and unconscionable conduct perpetrated upon highly vulnerable and disadvantaged people to their potential detriment.
100 Furthermore, there is, as the applicants contend, a particularly strong public interest and pragmatic factor in this case in favour of permitting the applicants to pursue the declaratory relief under s 239 of the ACL that the enrolment contracts entered into by students are void. In this regard, the respondents submitted that there was no evidence of any third party (such as a person who had been enrolled in a course with Phoenix) whose interests would be prejudiced by delaying the proceedings pending the termination of the DOCA. Thus, it was said that third party consumers (students) would not be prejudiced by delay because their debts to the Commonwealth had not yet accrued as pending the outcome of the audit and reconciliation, monies had been advanced to Phoenix only under cl 61(1) of Sch 1A and not yet paid under cl 55: see above at [38]. Nor was there evidence that any individual who had accrued a debt to the Commonwealth to repay the VET loans had earnt a sufficient level of income so as to trigger that person’s liability to repay the debt.
101 With respect, however, this submission does not take account of the fact that until the issue is determined, students have, in effect, a contingent liability to the Commonwealth. (In this, I have not overlooked the fact that there is the further contingency before the debt would be payable to the Commonwealth in terms of the individual’s level of income.) As the applicants submitted, such contingent liabilities can still affect the financial position of students in, for example, applying for credit cards or equally, it can be inferred, for loans. Against this, the grant of relief sought by the applicants in paragraphs 9.5, 9.6 and 10 of the prayer for relief will have the effect of cancelling any debt or future liability that students may incur owed to the Commonwealth and clarifying their financial position, as well as resolving their former enrolment status with Phoenix. I do not accept that the position of such students would not be prejudiced by the delay likely to be occasioned by maintaining the statutory stay and that such delay would not be prejudicial to the public interest given the number of students potentially affected by uncertainty about these issues and the potential size of the debts to the Commonwealth to which they may be subject in the context of persons allegedly targeted within low socio-economic communities.
102 It follows in my view that there is a strong public interest in allowing the matter to proceed and not to be stayed indefinitely pending termination of the DOCA. This is particularly so where the evidence is to the effect that that delay is likely to be substantial unless the Department reaches a proposed favourable result in the audit and reconciliation processes, and therefore that the delay will inevitably impact on the quality of evidence from lay witnesses in particular. As McHugh J observed in Brisbane South Regional Health Authority v Taylor (1996) 186 CLR 541 at 551:
The enactment of time limitations has been driven by the general perception that “[w]here there is delay the whole quality of justice deteriorates”. Sometimes the deterioration in quality is palpable, as in the case where a crucial witness is dead or an important document has been destroyed. But sometimes, perhaps more often than we realise, the deterioration in quality is not recognisable even by the parties. Prejudice may exist without the parties or anybody else realising that it exists. As the United States Supreme Court pointed out in Barker v Wingo, “what has been forgotten can rarely be shown”. So, it must often happen that important, perhaps decisive, evidence has disappeared without anybody now “knowing” that it ever existed. Similarly, it must often happen that time will diminish the significance of a known fact or circumstance because its relationship to the cause of action is no longer as apparent as it was when the cause of action arose. A verdict may appear well based on the evidence given in the proceedings, but, if the tribunal of fact had all the evidence concerning the matter, an opposite result may have ensued. The longer the delay in commencing proceedings, the more likely it is that the case will be decided on less evidence than was available to the parties at the time that the cause of action arose.
103 This is not to overlook that the prejudice that may be suffered through delay may not be reduced, insofar as it can, by the fact that the affidavit evidence from a significant number of lay witnesses has already been compiled by the applicants. But that does not mean that the quality of those witnesses’ independent recollection subsequently will not deteriorate with the passage of time.
104 These considerations weigh heavily, in my view, in favour of a grant of leave to proceed. They are not outweighed, in my view, by evidence in the form of ACCC media releases advising of action taken against other educational institutions for similar alleged contraventions of the ACL which may, if they ultimately proceed to a judicial determination, also have deterrent effect.
105 Thirdly and related to the issue of the public interest, the applicants submitted even if that the ACCC was creditor, it was not an ordinary creditor in the sense of having a debt or private claim, but rather a regulator with an interest in ensuring accountability for contraventions of the ACL and advancing the consideration of allegations of such conduct without significant delay, as North J also observed in Advanced Medical at [20]. Nor, the applicants submitted, was the Commonwealth in the position of an ordinary creditor: the public monies sought to be recovered by the Commonwealth allegedly paid to Phoenix ($106 million by way of advances) were allegedly paid as a result of the alleged contraventions of the ACL; equally the basis of any claim for payments against the Commonwealth by Phoenix (the remaining $253 million) were allegedly based on conduct in breach of the ACL. The Commonwealth, in other words, is seeking to recover significant sums of public monies effectively wrongfully paid to Phoenix and to annul any pre-existing obligation to pay further monies allegedly incurred through wrongful conduct, rather than merely seeking to obtain payment for goods or services rendered as in the case of an ordinary creditor.
106 I accept the applicants’ submissions on this issue. As a consequence, there is no element of unfairness in this, that is, no advantage which the applicants seek to which they may not properly be entitled, because, if the applicants establish their claims, the monies in question ought not to be property of the respondents available to creditors: see by analogy Brachdale at [23(b)] and [16]. In this regard, I accept the respondents’ submission that Part 5.3A does not distinguish between different classes of debtors. However, that does not preclude the Court from taking such matters into account in the exercise of discretion.
107 Fourthly, as the applicants submit, many of the prayers for relief are not monetary claims and could not be claimed by way of proof of debt under cl 11.3 of the DOCA. Nor was it contended by either party that the pecuniary penalties could be claimed by way of proof of debt at least in the context of this application, although it is unnecessary for me to resolve this issue. While the unavailability of relief does not automatically entitle an applicant to leave, I accept the applicants’ submission that the fact that relief is not otherwise available in a proof of debt is a significant factor in favour of the exercise of discretion to grant leave to proceed: Link Solutions at [11] (by analogy).
108 In the fifth place, the claims are factually, if not also legally, complex being a compelling factor also in favour of a grant of leave: Meehan at 127 (following Re Gordon Grant at 316) and 128.
6.4.6 Prejudice to the creditors if leave is granted: costs
109 The Deed Administrators, however, point to the existence of limited funds to undertake their duties, the amount of funds available for the purposes of the DOCA being currently approximately $5 million.
110 I accept, and indeed it was not challenged, that in order to defend the proceedings, significant costs are likely to be incurred and that the costs of preparing the respondents’ evidence may exceed $500,000 as estimated by those advising the Deed Administrators, although that can be taken only to be a rough estimate. Some indication of the extent of preparation which the respondents may need to undertake is given by the applicants’ intention to lead evidence from 25 consumer witnesses as to the circumstances in which they were enrolled in online courses offered by Phoenix in their dealings with the respondents and their agents, an ex-employee of CTI, two staff members of the Department, and expert evidence, as well as by the evidence of Mr Georges as to the lay and expert evidence which the respondents in his view would need to prepare in general terms.
111 Clearly, as the respondents submitted, the fact that defending the proceedings is likely to involve significant expenditure of the funds otherwise available to creditors to their detriment is a significant factor against the grant of leave, as is the continuing cost and expense of responding to the audit and reconciliation processes (which I address below). Furthermore, the evidence establishes that the costs of any litigation will be borne by the Deed Administration as Phoenix’s professional indemnity insurer has denied indemnity to Phoenix: cf Wolstenholme v National Express Group Australia (Swanston Trams) Pty Ltd [2003] VSC 476 (Wolstenholme) at [34] (Hansen J).
112 However, as the respondents accepted, even in such a case the Court retains a discretion to grant leave. Contrary to the respondents’ submissions, it is not the case that leave has been granted only in cases where the costs likely to be incurred will be minimal, such as where the litigation is effectively at an end (as, for example, in Energy Watch where only the issue of final orders remained). The decision of North J in Advanced Medical relied upon by the applicants is an example in point, albeit in the context of granting leave under s 440D(1)(b) and not s 444E(3)(c): see above at [90]-[95]. In this case, I do not consider that the costs which may be incurred by the respondents defending this proceeding are sufficiently significant to outweigh the importance in enabling this litigation to proceed and to do so in a timely way given in particular the very significant public interest in that occurring. Moreover, as against the amounts estimated to be owed to creditors, and the amount in issue in the litigation which is the primary asset available potentially to meet those claims, the substantial legal costs that may be incurred in defending the proceedings assume a different complexion and ought not necessarily to determine the outcome of this application. In this regard, the amounts of money which are the subject of the relief sought ($360 million) significantly exceed the claims against the ACN Group estimated in the administrators’ report pursuant to s 439A(4) of the Corporations Act, namely unsecured creditors’ claims totalling $9.6 million which, together with contingent claims amounting to approximately $76.4 million (aside from the amount of $1.6 million potentially owed to the Commonwealth), give a total of approximately $86 million.
113 Furthermore, the Deed Administrators have known of the proceedings from the time of their appointment and have had to become familiar with the operations of the respondents in order to respond to the audit and reconciliation processes currently underway. While it is difficult to assess with precision the extent of overlap between responding to the audit and reconciliation processes, it is inevitable that there will be some overlap and it is reasonable to infer that the overlap will not be insignificant. The respondents have also had for some time the witness statements, lay and expert, already served on the respondents and to give some consideration to their position vis a vis the litigation.
6.4.7 Prejudice to the creditors: duplication of costs and potentially unnecessary involvement in defending the proceedings
114 In the circumstances where defending the proceedings would involve potentially significant costs, Mr Georges gave evidence that he did not consider it was in the interests of the creditors to undertake preparatory work for mounting a defence until such time as the audit and reconciliation processes, including any review or appeal processes, are complete and the Deed Administrators can make a decision on whether it is in the creditors’ interests for the respondents to defend the proceeding.
115 The respondents also rely upon the fact that not only do the applicants seek to substitute litigation for the ordinary processes under Part 5.3A of the Corporations Act. Rather, the Commonwealth both instituted the litigation and then notified of the commencement of a parallel statutory audit to inform the “payments reconciliation phase” – a process which is also directed to ascertaining the entitlement of Phoenix to retain, or refund, VET FEE-HELP payments made by the Commonwealth and to pay additional amounts in respect of further student enrolments. That audit process is ongoing and, it will be recalled, has involved a significant amount of time and costs by the Deed Administrators and their staff. The evidence is that the continuing burden of responding will be substantial: see above at [22] and below at [125].
116 The respondents therefore raise concerns as to the duplication in processes if the litigation is permitted to proceed. In this regard, it is not in dispute that the audit being undertaken by McGrathNicol is concerned with the same group of enrolments and VET FEE-HELP amounts payable in respect of enrolments that are the subject of prayers 9, 10 and 15 of the Originating Application. It follows that the audit and this litigation are concerned with the same group of students and the same entitlements and liabilities of Phoenix concerning amounts of VET FEE-HELP assistance. The interest of the Deed Administrators in defending these proceedings is to defend and protect that entitlement for the benefit of the creditors of the ACN Pooled Entities.
117 The respondents also rely upon the evidence of Mr Georges that, if the outcome of the audit and reconciliation processes (including any review and appeal) is that Phoenix has no entitlement to the amounts of VET FEE-HELP assistance under Sch 1A to the Higher Education Support Act:
(1) there will be no further liability of the Commonwealth of the kind referred to in paragraph 9.5 of the Originating Application; and
(2) there will be no utility in relief sought by paragraph 9.6 or paragraph 15 of the Originating Application, because Phoenix will have a separate and independent liability to pay to the Commonwealth amounts it has received to date by way of advances under cl 61 of Sch 1A to the Higher Education Support Act.
118 The respondents also rely upon Mr Georges’ evidence that in that event, he expected that he and Mr Lindholm would form the view that it is not in the interests of the creditors of the ACN Pooled Entities to defend this proceeding. So much, the respondents submit, follows from the fact that the respondents have ceased trading and that the only substantial asset of the administration is the entitlement to the VET FEE-HELP payments.
119 Mr Georges also gave evidence that:
47. Moreover, if the outcome of the audit and reconciliation processes described above (and any review and appeal process) is that Phoenix’s entitlement to amounts of VET FEE-HELP assistance is less than the approximately $106 million received by Phoenix by way of advances made under clause 61 of Schedule 1A to the [Higher Education Support Act], I expect that Mr Lindholm and I will form the view that it is not in the interests of the creditors of the ACN Pooled Entities to defend this proceeding. Depending upon the amount of any shortfall between the entitlement and the advance of approximately $106 million Mr Lindholm and I may also be called upon to determine the amount of any debt to the Commonwealth which we would admit to proof.
(emphasis added.)
120 Conversely, if the audit and reconciliation processes confirm Phoenix’s entitlement to the VET FEE-HELP payments, the respondents submit that it may be that the applicants’ claims have to be amended, having regard to the reasons for that conclusion.
121 Accordingly Mr Georges gave evidence that:
…until the outcome of the audit and reconciliation processes described above are known, Mr Lindholm and I are unable to form a view about whether it is in the interests of the creditors of the ACN Pooled Entities to defend this proceeding; and cannot determine whether the audit and reconciliation process may result in a requirement that we make a decision reviewable by this Court concerning a debt due to the Commonwealth.
122 Against this, however, the audit and the present proceedings raise different issues notwithstanding that they both concern the Commonwealth’s obligation to pay, and Phoenix’s liability to refund, the VET FEE-HELP payments for the 2015 enrolments. The audit and reconciliation processes are directed towards whether the enrolments are bona fide. However, as the applicants contend, the relief sought in these proceedings is much wider than any relief that could be obtained through the reconciliation process, and may resolve and overtake those processes. In particular as the applicants submitted:
The reconciliation process would not determine whether the conduct of Phoenix/CTI was unconscionable. No pecuniary penalties would be ordered as part of the reconciliation process, and thus there would be no deterrent factor. Most importantly, the reconciliation process does not achieve the remedies for the non-party consumers, namely the declarations that the enrolment agreements are void and that loan agreements between the Commonwealth and the student are void.
123 As the applicants further submitted:
In addition, if the Court in these proceedings declares the enrolment agreements between students and Phoenix/CTI void, that will determine the outcome of the reconciliation process in relation to those students (since it will follow that they were not enrolled). The reverse is not the case (since, even if enrolments were found not to be genuine for the purposes of entitlement to VET-FEE HELP, issues would still remain as to the relationship between the students and Phoenix/CTI). Further, if the reconciliation process were to determine that some or all of the further $253 million claimed by Phoenix/CTI is payable to it, success for the applicants in these proceedings would lead to that amount becoming prima facie recoverable by the Commonwealth. There is therefore no sound reason for these proceedings to be required to await the outcome of the reconciliation process; if anything, there is an argument for giving the present proceedings priority.
124 It is true that these submissions must now be read in light of the acceptance by the applicants at the hearing that no students have yet incurred any debts to the Commonwealth pending the outcome of the reconciliation process. Nonetheless as I have earlier found, maintaining the statutory stay would further delay a final resolution of the status of students’ enrolment agreements with Phoenix and of the question whether they were, or were liable to become, indebted to the Commonwealth to their potential detriment and to the detriment of the public interest. I note in this regard that under s 239(3)(b) of the ACL, the Court has power to make orders to prevent or reduce loss or damage suffered, or likely to be suffered, by non-party consumers, as well as to redress loss or damage in fact suffered.
125 Furthermore, it is apparent from the evidence of both parties that, if the present litigation remains stayed until completion of the audit and reconciliation processes (including any reviews or appeals arising therefrom), the stay is likely to delay any progress in, and resolution of, this proceeding for a substantial period of time unless the prospective position of the Department on the basis of the audit and reconciliation process is regarded as favourable to creditors’ interest by the Deed Administrators. In this regard:
(1) the Deed Administrators have indicated that if the proposed outcome of the audit and reconciliation processes is that Phoenix is not entitled to amounts of VET FEE-HELP assistance for all or a large number of its 2015 and 2016 enrolments on the basis of a view that the enrolments were not (or were not likely to be) bona fide, it would be necessary for them “to devote significant resources to gathering an ‘evidence base’ to establish the bona fides of the enrolments, to support Phoenix’s entitlement to amounts of VET FEE-HELP assistance, possibly on an enrolment-by-enrolment basis”. In those circumstances, Mr Georges gave evidence that they may also pursue such review or appeal rights as may be available to Phoenix. If it became necessary to build such an “evidence base”, Mr Georges considered that it would be necessary to retrieve and review records relating to each enrolled student from a variety of sources, with it taking on average approximately 45 minutes per student to retrieve and review all documents (including voice recordings) held by Phoenix relating to a student. The scale of the task is apparent from the fact, as explained earlier, that Phoenix had 11,679 students who were enrolled in 21,713 courses of study in 2015 and 2016.
(2) With respect to the position once the reconciliation is finalised, Mr Garey also gave evidence for the applicants that:
36. There is no right of merits review in relation to the reconciliation. If Phoenix is dissatisfied with the outcome of the reconciliation, the Department anticipates that Phoenix will seek to challenge the outcome of the reconciliation by commencing legal proceedings. The form that such a challenge might take is, at present, unclear. Given the substantial number of enrolments involved, any challenge would likely take a significant period of time (at least 12 months) to resolve.
(3) Mr Garey further explained that:
37. The outcome of the reconciliation and any challenge thereof will determine what amounts are properly payable to Phoenix by way of VET FEE-HELP in relation to the 2015 and 2016 years. However, those amounts may be affected if the relief sought in prayer 9 of the Originating Application in these proceedings, declaring contracts between Phoenix and students to be void, is granted.
No party took issue with this evidence of Mr Georges and Mr Garey.
126 In short, given: the uncertainty as to what the respondents may decide to do; the extent of possible further delay to these proceedings which have already been stayed for some seven months; the significant public interest in resolving the issues in this case expeditiously; and the fact that any such review or appeal process could not resolve the issues in this case; I accept that considerable weight should be given to the applicants’ submission that the Court should not maintain the stay so as to give, in effect, a “priority” (to use the applicants’ language) to the audit and reconciliation processes, including potential reviews and appeals with respect to those processes, over this litigation.
6.4.8 Undertaking/condition with respect to enforcement of penalties
127 At [37] of their written submissions and in oral submissions, the applicants’ communicated that they would give an undertaking (which they accepted could appropriately be a condition of leave) “not to enforce pecuniary penalties, the refund remedy pursuant to s 232(6)(a) of the ACL, and any costs order in their favour, without the further leave of the court, so as not to prejudice creditors.” Section 444E(3)(d) of the Corporations Act envisages that conditions may be imposed on a grant of leave and precedents exist for the imposition of such a condition: see by analogy Prime Nature Prize at [24] (Stone J); Wolstenholme at [37] (Hansen J). This ameliorates to some extent the detriment which the creditors will suffer if leave is granted. Against this, the respondents pointed to the substantial legal costs which would be required nonetheless to defend the proceedings – expenditure which may be unnecessary depending upon the results of the audit and reconciliation processes and any possible review and appeal proceedings with respect to any decisions made as a consequence of those processes. I have already considered that submission and reached the view that the public interest in the circumstances of this case outweighs that factor.
6.4.9 Delay and the temporary nature of the role of Deed Administrators
128 Finally, as in the case of Advanced Medical, underlying the respondents’ submissions was the proposition that the statutory stay imposed on the proceedings was temporary only and that it would be inconsistent with the nature of the administration to permit the litigation to continue. As North J accepted in Advanced Medical at [10], this proposition is reflected in the statutory presumption behind s 440D(1) that there will ordinarily be a freeze on proceedings. The same may be said in relation to s 444E, although the presumption under s 444E may be less strong than under s 440D(1) (see above at [90]). I agree, as did North J, that there is strength in that argument. Against this, however, is the fact that to permit the statutory freeze to continue may cause substantial delays depending upon what position the Deed Administrators take after receipt of the Department’s provisional position on the outcome of the audit and reconciliation processes. Any such delay would be significant given the strong public interest in advancing the consideration of allegations of the conduct alleged in this litigation without significant delay (see also Advanced Medical at [20]). Thus in Advanced Medical, North J granted leave having regard, among other things, to the fact that absent leave, the next step in the litigation could be delayed for three months or possibly more. True it is, on the one hand, that this is not a case where injunctions are still required to prevent the alleged contraventions from continuing because the respondents have ceased trading since the proceedings were commenced, in contrast to the position in Advanced Medical. However, the public interest does not stop with prevention of further contraventions but also with the timely adjudication of alleged contraventions and additional relief to protect third party consumers. Further, in this case, the evidence is that the delays are likely to be considerably longer than in Advanced Medical unless the proposed outcome of the audit and reconciliation is regarded as favourable by the Deed Administrators.
129 For the reasons set out above, both the ACCC and the Commonwealth require leave to proceed under s 444E(3)(c) of the Corporations Act in order to continue to pursue the present proceedings pending termination of the DOCA. In all of the circumstances, I consider in particular that the public interest in permitting the litigation to be pursued without further substantial delay outweighs the detriment to the creditors in granting leave to the applicants. Accordingly, leave will be granted under s 444E(3)(c) of the Corporations Act to the applicants to proceed on the condition that they do not seek to enforce any pecuniary penalties, any injunction pursuant to s 232(6)(a) of the ACL requiring monies to be refunded, and any costs order in their favour, without further leave of the Court. I will hear the parties as to the appropriate timetabling orders having regard among other things to the matters referred to at [6] above.
130 Subject to any submissions from, or different agreement reached by, the parties, I also foreshadow that I consider that the appropriate order is that costs shall be costs in the cause.
I certify that the preceding one hundred and thirty (130) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Perry. |
Associate:
