FEDERAL COURT OF AUSTRALIA

Kelly (liquidator), in the matter of Australian Institute of Professional Education Pty Limited (in liq) [2018] FCA 642

ORDERS

THE COURT ORDERS THAT:

1.    Pursuant to s 477(2B) of the Corporations Act 2001 (Cth), the first plaintiff on behalf of the second plaintiff is authorised to enter into an agreement which is in, or substantially to the effect of, the funding agreement set out at pages 20 to 39 of the confidential exhibit “MJK-2” to the affidavit of Morgan John Kelly dated 11 April 2018.

2.    Pursuant to s 477(2B), the first plaintiff on behalf of the second plaintiff is authorised to enter into agreements retaining MinterEllison to act and continue acting as the legal representatives for the plaintiffs which are in, or substantially to the effect of, the funding agreement set out at pages 40 to 70 of the confidential exhibit “MJK-2”.

3.    Pursuant to s 37AF of the Federal Court of Australia Act 1976 (Cth), until such time as any litigation (including any appeal) arising out of the winding up and affairs of Australian Institute of Professional Education Pty Ltd (in liquidation) is concluded or until otherwise ordered, the following documents be kept confidential and shall not be published or disclosed to another party on the ground that it is necessary to prevent prejudice to the administration of justice:

(a)    the documents in the confidential exhibit “MJK-2” to the affidavit of Morgan John Kelly dated 11 April 2018; and

(b)    the document contained in the confidential LPP exhibit “MJK-3”.

4.    The first plaintiff notify the creditors of the company in writing of the orders made today by no later than 24 April 2018.

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

REASONS FOR JUDGMENT

GLEESON J:

1    On 17 April 2018, I made orders approving the entry by the plaintiffs (“liquidators”) as joint and several liquidators of Australian Institute of Professional Education Pty Limited (in liquidation) (“AIPE” or “company”) into a litigation funding agreement and a solicitors’ retainer agreement on behalf of the company pursuant to s 477(2B) of the Corporations Act 2001 (Cth) (“Act”). The funding agreement is with Litigation Lending Services Limited (“LLS”), and will provide funding for Supreme Court of New South Wales proceedings numbers 2017/317853 (“IEM proceeding”) and 2017/328073 (“examination proceeding”). The retainer agreement is with MinterEllison and relates to the conduct of the IEM proceeding.

2    These are my reasons for making the orders pursuant to s 477(2B) and ancillary orders.

Background facts

3    Prior to the appointment of the liquidators, the company carried on business as a registered training operation providing predominantly vocational education and training courses. The company was registered as a registered training organisation (“RTO”) with the Australian Skills and Quality Authority and was an approved “VET Provider” for the purposes of the Higher Education Support Act 2003 (Cth) (“HES Act”) for students enrolled in its courses.

4    In the period 2013 to 2016, the company received approximately $211 million from the Commonwealth in payments under the VET FEE-HELP scheme, established under the HES Act.

5    The liquidators were appointed by a meeting of the members of the company on 6 October 2016.

6    At that time, AIPE held a combined cash at bank balance of $2,672,834.68. In addition to the cash at bank, the liquidators have realised a total of $1,681,797.32 from the assets of AIPE.

7    As at 11 April 2018:

(1)    the liquidators had made payments totalling $3,788,132.63, including payments for rent and other amounts under the leases of AIPE’s premises, wages, general operating costs, legal fees and appointee fees;

(2)    the amount of $1,426,896.62 had been returned from bank guarantees in relation to the leases;

(3)    the amount of $461,643.66 had been returned from one of the directors who received all his employee entitlements immediately prior to the liquidators’ appointment;

(4)    cash on hand was $1,391,278.64;

(5)    otherwise, the liquidators had not recovered any other amounts identified by the directors as “sundry debtors”; and

(6)    investigations as to what other assets may be available for the benefit of creditors were ongoing.

Proceedings and claims against the company

8    Since their appointment, the liquidators have been notified of potential claims by unsecured creditors in excess of $80 million. These include a claim by the Department of Education and Training for overpayments pursuant to the VET FEE-HELP scheme currently estimated to exceed $73 million. There is also a claim by the Tuition Protection Service for $1,078,911.23, of which $461,715.74 is alleged to be a “protected amount” under the Education Services for Overseas Students Act 2000 (Cth) in respect of which priority is claimed.

9    Proceedings have been commenced in this Court by the Australian Competition and Consumer Commission and the Commonwealth alleging that the company engaged in unconscionable conduct and misleading or deceptive conduct in the recruitment and enrolment of students. The relief sought in that proceeding includes pecuniary penalty orders and refunds. The liquidators expect that the refunds sought may exceed the Department’s $73 million figure. The liquidators currently estimate that the amount of debt incurred by AIPE students, which would be repayable to the Commonwealth if the proceeding is successful, is in excess of $149 million.

10    In May 2017, leave was granted to continue the proceeding pursuant to s 500(2) of the Act: Australian Competition and Consumer Commission v Australian Institute of Professional Education Pty Ltd (in liq) [2017] FCA 521. No claims for monetary relief will be enforceable against AIPE without further leave of the Court. The proceeding is listed for final hearing in September 2018.

Claims and investigations by the liquidators

11    The liquidators have identified payments just in excess of $62 million which may be recoverable by the liquidators or the company. The impugned transactions pursuant to which these payments were made are summarised in Mr Kelly’s affidavit.

12    One of the impugned transactions is a transfer of $35 million from the company to its then sole shareholder, International Education Management Pty Ltd (“IEM”), in September 2016 (that is, in the month before the appointment of the liquidators). The transfer was in payment of a purported dividend of $34 million, declared by the directors of the company on 11 August 2016. The amount of $1 million was returned by IEM to the company on 5 October 2016.

13    In October 2017, IEM commenced proceedings against the liquidators seeking declarations to the effect that the $34 million does not form part of the assets of AIPE.

14    In February 2018, the liquidators conducted examinations of the directors and former directors of the company, and other staff and advisors of the company. Subsequently, the liquidators obtained legal advice from senior counsel in relation to the recoverability of the payments the subject of the impugned transactions.

15    In March 2018, the liquidators obtained injunctions from the Supreme Court of New South Wales preventing IEM’s disbursement of the $34 million, as well as freezing orders against Amjad Khanche, the chief executive officer of the company, and Khanche Investments Pty Ltd.

16    On 9 April 2018, the liquidators served a statement of cross-claim in the IEM proceeding for recovery of the payments totalling $62 million made pursuant to the impugned transactions.

Mr Kelly’s evidence concerning proposed funding and retainer agreements

17    LLS has agreed to provide funding for the IEM proceeding and to reimburse the liquidators in relation to the costs of the examinations on the terms of the funding agreement. A substantially unredacted copy of the proposed funding agreement is included in the unconfidential exhibit to Mr Kelly’s affidavit.

18    MinterEllison has agreed to act on behalf of the liquidators in the IEM proceeding on the terms of the proposed retainer agreement. There is a separate retainer agreement concerning the costs of the liquidators’ examinations, for which s 477(2B) approval was not sought. LLS approves of the liquidators entering into both agreements.

19    Mr Kelly gave the following evidence:

(1)    The company does not have sufficient funds to prosecute the cross-claim to recover the payments made pursuant to the impugned transactions.

(2)    Between August and November 2017, the liquidators sought unsuccessfully to obtain funding from the Department of Education and Training.

(3)    In about October 2017, the liquidators sought litigation funding from LLS and Harbour Fund III, LLP.

(4)    After considering funding offers from both litigation funders, the liquidators decided that offer from LLS was preferable because it provided greater certainty in the amount that LLS would be able to recover if the liquidators and the company are successful in the IEM proceeding.

(5)    Mr Kelly considers that the premium which LLS proposes to recover should the IEM proceeding be successful is both in accordance with market rates and is reasonable.

(6)    If the liquidators and the company do not recover part or all of the impugned transactions, or the company is not awarded compensation or damages pursuant to its cross-claim in the IEM proceeding, there is unlikely to be any distribution to the creditors of the company. Conversely, if the cross-claim is entirely successful, the company is likely to recover approximately $62 million, plus interest and costs. The liquidators have sought funding from LSS in relation to the February 2018 examinations and not yet paid counsel or solicitors’ fees in relation to them.

20    The funding agreement provides for a premium payable to LLS of 25% of the “resolution amount” for any such amount paid within 12 months of the date of the agreement and 30% of any such amount paid after that time.

Approval not sought from committee of inspection

21    The liquidators have not consulted with the committee of inspection in relation to the proposed funding agreement or sought their approval. The reason for this was that the liquidators consider that one member of the committee of inspection has a conflict of interest.

Legal framework

Section 477(2B)

22    Section 477(2B) of the Act provides:

(2B)    Except with the approval of the Court, of the committee of inspection or of a resolution of the creditors, a liquidator of a company must not enter into an agreement on the company’s behalf (for example, but without limitation, a lease or a an agreement under which a security interest arises or is created) if:

(a)    without limiting paragraph (b), the term of the agreement may end; or

(b)    obligations of a party to the agreement may, according to the terms of the agreement, be discharged by performance;

more than 3 months after the agreement is entered into, even if the term may end, or the obligations may be discharged, within those 3 months.

23    In Robinson, in the matter of Reed Constructions Australia Pty Ltd (in liq) [2017] FCA 594 (“Reed Constructions”) at [33] to [37], I set out the following relevant principles:

[33]    In Fortress Credit Corporation (Australia) II Pty Ltd v Fletcher [2011] FCAFC 89; (2011) 85 ACSR 38 (“Fortress”) at [40], the Full Court observed that, in considering whether to give approval under s 477(2B), the Court must consider the purposes for which the powers of a liquidator exist. Those purposes include the recovery of funds for the benefit of creditors: McGrath and Another (in their capacity as liquidators of HIH Insurance Limited and Others) [2010] NSWSC 404; (2010) 266 ALR 642 at [13]; Pascoe; re Brentwood Village Ltd (in liq) [2014] FCA 1295, [44].

[34]    The standard imposed under s 477(2B) concerns an assessment by the Court that entry into the agreement is a proper exercise of power and not ill-advised or improper on the part of the liquidator, rather than involving the exercise of commercial judgment: Re Gerard Cassegrain & Co Pty Ltd (in liq) [2013] NSWSC 257 (“Cassegrain”) at [11] per Black J citing Re McGrath (in their capacity as liquidators of HIH Insurance Ltd) [2010] NSWSC 404; (2010) 266 ALR 642.

[35]    In Pascoe; re Matrix Group Ltd (in liq) [2011] FCA 1117 (“Pascoe”) at [7], Jacobson J cited with approval the following statement by Austin J of the relevant test in Leigh; Re AP and PJ King Pty Ltd (in liq) [2006] NSWSC 315 at [23]:

Although the court has the statutory task [under s 477(2B)] of giving “approval” to a liquidator’s agreement that may end more than three months after it is entered into, the case law shows that the court undertakes something less than a complete “merits review”. As Giles J said in Re Spedley Securities Ltd (in liq) (1992) 9 ACSR 83 at 85-6:

... the court is necessarily confined in attempting to second guess the liquidator in the exercise of his powers, and generally will not interfere unless there can be seen to be some lack of good faith, some error of law or principle, or real and substantial grounds for doubting the prudence of the liquidator’s conduct.

[36]    The Court’s task is to satisfy itself, having regard to the liquidator’s commercial judgment, that there is no error of law, grounds for suspecting bad faith or any other good reason to intervene: Corporate Affairs Commission v ASC Timber Pty Ltd (1998) 29 ACSR 109 at 118; Stewart, re Newtronics Pty Ltd [2007] FCA 1375.

[37]    In Fortress, at [24], the Full Court endorsed the following comprehensive list of factors (identified by Austin J in Leigh re AP& PJ King Pty Ltd (in liq) [2006] NSWSC 315 at [25] and Re ACN 076 673 875 Ltd (rec’r & mgr apptd) (in liq) [2002] NSWSC 578; (2002) 42 ACSR 296 at [17]-[34]) relevant to the Court’s assessment of a proposed litigation funding agreement:

(1)    the prospects of success of the proposed litigation;

(2)    the interests of creditors other than the proposed defendant;

(3)    possible oppression;

(4)    the nature and complexity of the cause of action;

(5)    the extent to which the liquidator has canvassed other funding options;

(6)    the level of the funder’s premium;

(7)    consultations with creditors; and

(8)    the risks involved in the claim.

…

24    The court does not simply “rubber stamp” whatever is put forward by a liquidator: Stewart, in the matter of Newtronics Pty Ltd [2007] FCA 1375 at [26] (“Newtronics”).

25    In Re City Pacific Pty Ltd [2017] NSWSC 784 at [11] to [13], Brereton J said:

[11]    In Re One.Tel Ltd (2014) 99 ACSR 247; [2014] NSWSC 457 at [26], I referred, with approval, to the summary of the relevant principles by Gordon J in Re Stewart Newtronics Pty Ltd [2007] FCA 1375 and by Hasluck J in Re Bell Group Ltd [2009] WASC 235, in the following terms:

In reviewing the liquidator’s proposal, the court pays due regard to his or her commercial judgment and knowledge of all of the circumstances of the liquidation, but satisfies itself that there is no error of law or ground for suspecting bad faith or impropriety, and evaluates whether the proposal is consistent with the expeditious and beneficial administration of the winding up ... the Court’s approval is not an endorsement of the proposed agreement, but merely permission for the liquidator to exercise his or her own commercial judgment in the matter. Thus, the approval confers or completes liquidator’s power to enter into the transaction but does not amount to the court approving the transaction itself.

[12]    Unlike a direction under Corporations Act, s 479(3), an “approval” under s 477(2B) affords no protection or immunity to a liquidator in respect of complaint or criticism about the liquidator’s commercial judgment in entering into the transaction once given the power to do so. Although it is doubtful that litigation funding agreements were contemplated by those who drafted the original section, application for approval under s 477(2B) of litigation funding agreements has become commonplace, because typically the litigation to which those agreements relate and thus the funding agreements themselves, extend for periods well over three months. Agreements of this type are thus considered to fall within the terms of the section.

[13]    It has been said that relevant considerations, when application is made under s 477(2B) for approval of a litigation funding agreement, include, first, the liquidator’s prospects of success in the proceedings; secondly, the interests of creditors other than the proposed defendant; thirdly, any possible oppression in bringing the proceedings; fourthly, the nature and complexity of the cause of action; fifthly, the extent to which the liquidator has canvassed other funding options; sixthly, the extent of the funder’s premium, which should not be disproportionate to the risk; seventhly, the liquidator’s consultations with creditors; and eighthly, the risks involved in the claim. While it is true that those considerations can be identified from the authorities, they are, in my view, much more relevant where a direction is sought that the liquidator would be justified in entering into such an agreement. That is because those considerations are relevant to an evaluation of the propriety of the liquidator’s judgment, and whether it should receive the protection that flows from a s 479 direction. Although it cannot be said they are irrelevant in an application under s 477(2B), they are, in my view, of significantly less moment in that context. The real issue for the Court on an application under s 477(2B) is whether any prolongation of the liquidation that would be occasioned by the relevant agreement, is warranted by the offsetting benefits that would flow from it.

Consideration

Approval of proposed funding agreement

26    Based on the facts set out above, the liquidators made the following submissions in favour of the Court approving the funding agreement:

(1)    Absent approval of the funding agreement, the liquidators do not have sufficient available funds to conduct the IEM proceeding. Absent success in the IEM proceeding, there is unlikely to be any distribution to the creditors of the company. In those circumstances, the entry into the proposed funding agreement and the pursuit of the IEM proceeding is in the interests of creditors as a whole.

(2)    While prospects of the IEM proceeding can only be considered in the abstract, the liquidators have obtained advice from senior counsel in relation to the claims and recoverability in the IEM proceeding. The IEM proceedings appear to be relatively complex due to the number of parties and transactions. However, the nature of the claims, which include voidable transactions under the Act, voidable transactions under s 37A of the Conveyancing Act 1919 (NSW) and breaches of directors’ statutory and other duties are not themselves abnormally complex.

(3)    The IEM proceeding provides at least the prospect of a recovery to the creditors, after the costs of the premium and the funder have been paid. There is nothing unusual in the manner in which funding will be provided under the terms of the funding agreement.

(4)    The liquidators have explored other funding options and Mr Kelly has formed the view that the LLS funding agreement is preferable to the other offer that was received.

(5)    The funding premium is not excessive and is considered by Mr Kelly to be in accordance with market rates and reasonable.

(6)    The funding agreement does not impose any unusual control or influence over the liquidators in the pursuit of the IEM proceeding.

(7)    There is no identifiable oppression in pursuing the dispute. The funding agreement provides that LLS will indemnify the liquidators for any adverse costs orders in the IEM proceeding, including any order for security for costs. It also provides that LLS will indemnify the liquidators in relation to any undertaking as to damages concerning the IEM proceeding (including the undertaking provided in respect of the existing freezing orders and injunctive orders).

(8)    The primary risk under the funding agreement is that LLS is entitled to terminate the agreement without cause on 30 days’ notice. If that were to occur the liquidators would be liable for any costs incurred after the date of termination. In such an event, the liquidators could discontinue the IEM proceeding or seek alternative funding arrangements. The funding agreement also contains a clear and reasonable dispute resolution provision.

(9)    The proposed funding agreement delivers the liquidators the only real opportunity to continue the IEM proceeding and to seek recovery of funds for the purposes of a dividend to creditors.

(10)    The funding agreement will also cover the costs of the liquidators’ examinations. The liquidators have yet to pay legal costs incurred in conducting those examinations. If entry into the funding agreement was not approved, the liquidators would need to pay the costs of the examinations from the assets of the company.

27    I was satisfied that I should approve the liquidators’ entry into the funding agreement, having regard to the matters identified in the liquidators’ submissions.

28    I saw no evidence of any lack of good faith or error of law on the part of the liquidators in entering into the agreement, or grounds for doubting their prudence in doing so. It is in the interests of creditors generally that the IEM proceeding be pursued and that LLS pay the costs of the liquidators’ examinations.

29    There was no reason to believe that the liquidators could have obtained funding on better terms. There was no reason to believe that any person will suffer relevant prejudice as a result of the liquidators’ entry into the funding agreement.

30    I was satisfied that there was no reason to conclude that the liquidators’ entry into the funding agreement would be other than a proper exercise of their power, or that it would be an ill-advised or improper act on the part of the liquidators.

Approval of retainer agreement

31    The liquidators submitted that, if the Court approved the entry into the funding agreement, it should also approve the liquidators’ entry into the proposed retainer agreement, noting that LLS are satisfied with its provisions and with the level of fees proposed to be charged. I accepted this submission: cf. Re 7 Steel Distribution Pty Ltd (in liq) [2013] NSWSC 669; (2013) 31 ACLC 13-021 at [25].

Confidentiality

32    Section 37AF of the Federal Court of Australia Act 1976 (Cth) provides:

(1)    The Court may, by making a suppression order or non-publication order on grounds permitted by this Part, prohibit or restrict the publication or other disclosure of:

(a)    tending to reveal the identity of or otherwise concerning any party to or witness in a proceeding before the Court or any person who is related to or otherwise associated with any party to or witness in a proceeding before the Court; or

(b)    information that relates to a proceeding before the Court and is:

(i)    information that comprises evidence or information about evidence; or

(ii)    information obtained by the process of discovery; or

(iii)    information produced under a subpoena; or

(iv)    information lodged with or filed in the Court.

(2)    The Court may make such orders as it thinks appropriate to give effect to an order under subsection (1).

33    By s 37AG(1)(a), the Court may make a suppression order or non-publication order on the ground that the order is necessary to prevent prejudice to the proper administration of justice. By s 37AG(2), a suppression order or non-publication order must specify the ground or grounds on which the order is made.

34    The material over which the confidentiality order was sought comprised:

(a)    the folder of documents marked exhibit “MJK-2” comprising Harbour Funding’s offer of funding, the unredacted proposed funding agreement and the two retainer agreements; and

(b)    senior counsel’s written advice in relation to the IEM proceeding (exhibit “MJK-3”).

35    The documents sought to be protected are of a commercially confidential and sensitive kind and related to the funding of litigation; they are documents of the kind that are typically protected by a confidentiality order in applications of this kind: cf. Reed Constructions at [57]-[60]. The liquidators tendered a redacted version of the proposed funding agreement, which conceals only the funding caps. In those circumstances, I was satisfied that the order sought was necessary to prevent prejudice to the proper administration of justice.

36    In relation to senior counsel’s advice, the liquidators submitted that tendering that advice on a subject to the liquidators’ claim for legal professional privilege was consistent with the approach that is often and desirably taken in applications of this kind, citing Re QC Resource Investments Pty Ltd [2015] NSWSC 2042 at [7]; cf. Hancock v Rinehart (Privilege) [2016] NSWSC 12 at [23]. It was not necessary for me to rule on the claim for legal professional privilege.

Other

37    It is conventional for applications under s 477(2B) to be brought on an ex parte basis: Elkerton, in the matter of South Head & District Synagogue (Sydney) (In Liq) [2017] FCA 1206 at [17] per Farrell J, citing Crosbie, in the matter of Hastie Group Limited (in liq) [2016] FCA 1289 at [2] per Moshinsky J.

38    While it was not necessary for the liquidators to give notice of the application for approval under s 477(2B), I directed the liquidators to notify creditors of the orders to ensure that they would become aware of them promptly.

Associate:

Dated:    8 May 2018