FEDERAL COURT OF AUSTRALIA

Australian Securities and Investments Commission v Vocation Limited

(In Liquidation) [2019] FCA 807

ORDERS

THE COURT ORDERS THAT:

The proceeding be fixed for a case management hearing at 9.30am on 6 June 2019 for the purpose of:

(a)    appointing a date for the hearing of all remaining questions including those arising under s 1317S and s 1318 of the Corporations Act 2001 (Cth), the form of any declaratory relief, all questions of penalty, and all questions of costs; and

(b)    to make any ancillary directions in relation to that hearing.

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

REASONS FOR JUDGMENT

NICHOLAS J:

Introduction

1    In this proceeding the plaintiff (“ASIC”) seeks declaratory relief against all four defendants and orders imposing pecuniary penalties on each of the second, third and fourth defendants for alleged contraventions of various provisions of the Corporations Act 2001 (Cth) (“the Act”). ASIC also seeks orders prohibiting each of the second, third and fourth defendants (“the individual defendants”) from managing a corporation for such period as the Court considers fit.

2    The first defendant (“Vocation”) is a public company, now in liquidation, that was incorporated on 6 November 2013. On that date the second defendant (Mr Mark Hutchinson) was appointed Vocation’s Chief Executive Officer and Executive Director and the third defendant (the Honourable Mr John Dawkins AO) was appointed Non-Executive Chairman. The fourth defendant (Mr Manvinder Gréwal) was appointed as Chief Financial Officer on 6 November 2013 and Company Secretary on 6 December 2014. Mr Douglas Halley, Mr Stephen Tucker and Ms Michelle Tredenick were also appointed Non-Executive Directors of Vocation on 6 November 2013. None of them is a party to this proceeding.

3    Shortly after its incorporation, Vocation made an initial public offering (“the IPO”) of fully paid shares at a price of $1.89 in accordance with a prospectus issued on 27 November 2013 (“the Prospectus”). The total number of shares issued on completion of the IPO was 200 million, giving Vocation a market capitalisation of $378 million at first listing.

4    As part of the IPO, Vocation acquired ownership of various other companies (“the merged entities”) that became its wholly owned subsidiaries. The most significant of these were:

    AVANA Group Pty Ltd (“AVANA”), which was founded by Mr Hutchinson;

    BAWM Pty Ltd (“BAWM”), which was founded by Mr Ben Gillingham, Ms Amanda King, Ms Wendy Bonnici and Mr Michael Langtree in 2010;

    Aspin Pty Limited (“Aspin”), which was founded by Mr Brendan Morrissey; and

    Customer Services Institute of Australia Pty Ltd and CSIA Education Services Pty Limited (together “CSIA”), which were founded by Mr Brett Whitford.

5    The consideration received by the vendors of the shares in these entities (including Mr Hutchinson, Ms Bonnici, Mr Langtree and Mr Whitford or their associates) was partly in cash and partly in Vocation shares. A total of 66 million shares was issued to the vendors and Vocation’s directors, managers and employees. A significant proportion of these shares was subject to voluntary escrow arrangements described in the Prospectus.

6    Through its acquisition of these subsidiaries, Vocation became a private provider of vocational education and training (“VET”) engaged in student recruitment, education and training delivery. It also provided related services to other VET providers and learning and development businesses. Vocation was listed on the Australian Securities Exchange (“ASX”) and the Chi-X Australian Exchange with trading in its shares commencing on 9 December 2013.

7    On 10 September 2014 Vocation announced that it would undertake a fully underwritten institutional placement (“the Placement”) of its shares to raise approximately $74 million which occurred that day (“the 10 September Announcement”). Vocation’s shares entered a trading halt which remained in place throughout that day. On 11 September 2014, before the market opened, Vocation announced that the Placement had been completed with approximately $74 million raised. The Placement was fully underwritten by the Australian Branch of UBS AG (“UBS”).

8    The steps that were taken by Vocation in connection with the Placement included the provision by Vocation to UBS of a due diligence questionnaire dated 10 September 2014 (“the DDQ”) completed and signed by Mr Hutchinson and Mr Gréwal on that date and the provision by Vocation to the ASX on 16 September 2016 of a notice under s 708A(5)(e) of the Act (“the Cleansing Notice”) signed by Mr Gréwal on that date.

9    Briefly stated, ASIC’s case against the defendants is as follows:

(1)    The 25 August Announcement: An announcement was made by Vocation to the ASX on 25 August 2014 (“the 25 August Announcement”) that was approved by Mr Dawkins and Mr Hutchinson (and the other directors) prior to its release. ASIC alleges that the 25 August Announcement was misleading or deceptive or likely to mislead or deceive and that, by making it, Vocation contravened s 1041H of the Act. ASIC also alleges that Mr Hutchinson and Mr Dawkins contravened s 180 of the Act by causing or permitting Vocation to make the 25 August Announcement.

(2)    The DDQ: ASIC contends that the DDQ conveyed representations that were misleading or deceptive or likely to mislead or deceive and that, by providing the DDQ to UBS, Vocation contravened s 1041H of the Act. ASIC further alleges that Mr Hutchinson and Mr Gréwal contravened s 180 of the Act by causing or permitting Vocation to contravene s 1041H of the Act.

(3)    ASX Listing Rule 3.1: ASIC alleges that Vocation contravened s 674(2) of the Act during the period from 28 August 2014 to 18 September 2014 (“the relevant period”) by failing to disclose certain information relating to various funding contracts to which certain of Vocation’s wholly owned subsidiaries were party in accordance with ASX Listing Rule 3.1. ASIC alleges that Mr Hutchinson and Mr Dawkins were directly or indirectly knowingly concerned in Vocation’s contravention of s 674(2) and that they are therefore liable under s 674(2A) of the Act. ASIC also alleges that Mr Hutchinson and Mr Dawkins contravened s 180 of the Act by causing or permitting Vocation to contravene s 674(2) of the Act.

(4)    The Cleansing Notice: ASIC alleges that the Cleansing Notice was defective within the meaning of s 708A(10) of the Act and that Vocation contravened s 708A(9) of the Act by failing to correct the defective Cleansing Notice. ASIC alleges that each of Mr Hutchinson, Mr Dawkins and Mr Gréwal contravened s 180 of the Act by causing or permitting Vocation to contravene s 708A(9) of the Act.

10    The individual defendants deny that Vocation contravened s 1041H, s 674(2) or s 708A(9) of the Act, that they are liable under s 674(2A), or that they breached their duties under s 180 of the Act. Alternatively, in the event they are found liable under s 674(2A) or s 180 of the Act, they seek relief under s 1317S and s 1318 of the Act.

11    After the close of the evidence and the exchange of written closing submissions, ASIC made clear that it did not contend that Mr Hutchinson, Mr Dawkins or Mr Gréwal had actual knowledge that the information which ASIC alleges Vocation wrongly failed to disclose was material in the relevant sense. ASIC also made clear that it did not contend that they were “wilfully blind” to the materiality of the information: cf. Giorgianni v The Queen (1985) 156 CLR 473 at 482. For its part, ASIC contends that Mr Hutchinson and Mr Dawkins may be found liable under s 674(2A) even though they did not know at relevant times that the information in question was material, provided that they had knowledge of circumstances that would lead a reasonable person in their position to conclude that it was material. For reasons I will come to Mr Hutchinson and Mr Dawkins contend that it necessarily follows that the knowledge requirements under s 674(2A), when read with s 79 of the Act, cannot be satisfied.

Principal Conclusions

12    For the reasons set out below my principal conclusions are as follows:

    Vocation engaged in conduct that was misleading or deceptive or likely to mislead or deceive in contravention of s 1041H of the Act by providing the DDQ to UBS.

    Vocation contravened s 674(2) of the Act by failing to disclose the “Withholding and Suspension Information” in accordance with the requirements of ASX Listing Rule 3.1.

    Vocation engaged in conduct that was misleading or deceptive or likely to mislead or deceive in contravention of s 1041H of the Act by making the 25 August Announcement.

    Mr Hutchinson and Mr Dawkins contravened s 180 of the Act by causing or permitting Vocation’s contravention of s 674(2) of the Act.

    Mr Hutchinson contravened s 180 of the Act by causing or permitting Vocation’s contravention of s 1041H in relation to the 25 August Announcement and the DDQ.

    Mr Gréwal contravened s 180 of the Act by causing or permitting Vocation’s contravention of s 1041H in relation to the DDQ.

    None of the other contraventions of the Act alleged by ASIC have been established.

The Defendants

The First Defendant – Vocation Limited

13    I have already given a brief overview of the corporate history of Vocation from the time of its incorporation up to and including 18 September 2014. The evidence tells me little, if anything, of what became of Vocation after that date except that it was placed into voluntary administration less than two years after it was listed on the ASX. Vocation was not represented at the hearing of this proceeding. Leave to proceed against the company for declaratory relief only was granted on 13 October 2016. Vocation submitted to any order made in the proceeding save as to costs.

The Second Defendant - Mark Edward Hutchinson (Chief Executive Officer and Executive Director)

14    Mr Hutchinson holds a Bachelor of Economics from the University of Sydney and a Master of Business Administration from the INSEAD Business School in France. In 2001, whilst completing his final year of undergraduate study, Mr Hutchinson started a business taking people on trips to the Northern Territory as a host and guide. The following year, Mr Hutchinson founded Untamed Tracks Pty Ltd (“Untamed Tracks”) which became a high-end travel and training business. Through Untamed Tracks, Mr Hutchinson developed the Green Skills Institute, a Registered Training Organisation that trained guides in the Northern Territory.

15    By 2011, Mr Hutchinson had sold the travel component of the business to focus on the training aspect of the business. Mr Hutchinson changed the name of Untamed Tracks to AVANA in 2011. AVANA became a Registered Training Organisation offering a number of certificate qualifications in tourism. At that time, the AVANA group consisted of three Registered Training Organisations: AVANA Learning, Green Skills Institute and Training and Development Australia Pty Ltd, all of which became subsidiaries of Vocation.

16    As a Registered Training Organisation, AVANA had funding contracts with the various State and Territory government VET funding bodies. Through AVANA, Mr Hutchinson gained experience as a director of a Registered Training Organisation interacting with government VET funding bodies. However, Mr Hutchinson had never run a Registered Training Organisation that was regulated by the Victorian Regulation and Qualifications Authority (“VRQA”).

17    Mr Hutchinson’s appointment as Vocation’s CEO and Executive Director in 2013 was his first as a director of a listed public company. Mr Hutchinson gave evidence that he was initially reluctant to accept the role of CEO of Vocation due largely to his limited experience in the highly regulated industry in a market of which Mr Hutchinson said he had very little knowledge.

The Third Defendant - The Hon John Sydney Dawkins AO (Non-Executive Chairman)

18    Mr Dawkins holds a Diploma in Agriculture from Roseworthy Agricultural College and a Bachelor of Economics from the University of Western Australia.

19    Mr Dawkins was a Labor Party Member of the Australian Federal Parliament for the majority of the period between 1974 and 1994, representing the West Australian seats of Tangney and Fremantle. From 1983 to 1993, Mr Dawkins held Ministries in the Commonwealth Government for Finance, Trade, Employment, Education and Training and Treasury.

20    In 2000, Mr Dawkins was made an Officer of the Order of Australia for service to the reform of international trade in 2000.

21    Mr Dawkins has extensive knowledge of and experience in the VET system. Much of his later career was spent in roles that shaped the sector. Relevantly, Mr Dawkins:

    Led reform in his capacity as Minister for Employment that established a nationally consistent system of regulation and introduced competency based training to apprenticeships;

    Chaired the National Quality Council which advised Commonwealth and State Ministers on regulatory issues involving the VET sector, including the management of the Australian Quality Training Framework (“AQTF”), and endorsed “Training Packages” developed by the Industry Skills Council;

    Chaired the Australian Qualifications Framework Council (“AQFC”) which reviewed and managed the Australian Qualifications Framework that applied to secondary schools and universities;

    Chaired VET Australia, a company nominally owned by the Commonwealth, State and Territory Ministers, with responsibility for vocational training and education across state borders; and

    Chaired the National Skills Standards Council (“NSSC”), which was commissioned by the Tertiary Education, Skills and Employment Ministers from all Australian jurisdictions to undertake a review of the standards for the regulation of vocational education and training, focusing on issues of quality.

22    Following his retirement from politics, Mr Dawkins joined numerous boards of listed and unlisted companies as a director, several of which he chaired. This included publicly listed companies in the energy and resources sectors, property development, school management and medical diagnostics sectors.

23    Between 1998 and 2002, Mr Dawkins attended several training sessions for directors offered by the Australian Institute of Company Directors as well as a short course offered by Harvard University that focused on Board decision making and responsibilities.

The Fourth Defendant - Manvinder Gréwal (Chief Financial Officer and Company Secretary)

24    Mr Gréwal was awarded a Bachelor of Accounting and Financial Management in 1991 from the University of Sheffield in the United Kingdom and qualified as a Chartered Accountant in 1994.

25    In 1991, Mr Gréwal commenced working with KPMG in the Audit Department. Mr Gréwal was in this role across various offices until 2000 when he transferred to the Transaction Services Department in Leeds. In this role, Mr Gréwal was primarily working on financial due diligence projects for clients undertaking acquisitions, divestments and initial public offering projects. Between 2000 and 2004, Mr Gréwal held the position of Manager of the Transaction Services Department, first at KPMG and later at PricewaterhouseCoopers (“PwC”).

26    In late 2004, Mr Gréwal was promoted to Associate Director at PwC. Two years later, he moved with the company to Sydney to undertake a similar role. In 2012, Mr Gréwal left PwC.

27    Between 2012 and 2013, Mr Gréwal worked first as a consultant advising on a private capital raising before joining a boutique advisory group where he advised on several corporate projects, including the Vocation IPO. On 6 November 2013, following the completion of Vocation’s IPO, Mr Gréwal joined Vocation as CFO and Company Secretary.

28    Before his involvement with Vocation, Mr Gréwal had no prior experience with Australian education sector regulators, government departments or the VET sector, though he did advise an American private equity firm on its acquisition of an international education business in 2010. Mr Gréwal gave evidence that as CFO, he did not receive any formal training or briefing on that aspect of Vocation’s business though he “did pick some things up as [he] went along as to how the education and VET sector operated”.

Independent Directors Who Are Not Defendants

29    At all relevant times, there were three other independent directors on the Vocation board, none of whom gave evidence. The fact that these three independent directors participated in, and agreed with, various board decisions relating to the 25 August Announcement and the Withholding and Suspension Information (as defined below) during the relevant period is a matter upon which Mr Hutchinson and Mr Dawkins placed considerable reliance when resisting ASIC’s case against them under s 180. That is a matter I will return to later in these reasons.

Douglas Halley (Non-Executive Director)

30    Mr Halley holds a Bachelor of Commerce, a Master of Business Administration and is a fellow of the Australia Institute of Company Directors. Mr Halley has 30 years’ experience in CFO and CEO positions with major entities across a range of industries. Mr Halley has experience as a director of listed companies including as a director of Fairfax, Corum Group, Kollakorn Corporation and Television & Media Services. In the seven years prior to his involvement with Vocation, Mr Halley also held non-executive positions in a variety of listed, private and not-for-profit organisations. He has also served as chair on several Audit and Risk Committees and was chairman of DUET Group and Foyson Resources Limited while also on the board of Vocation.

Michelle Tredenick (Non-Executive Director)

31    Ms Tredenick holds a Bachelor of Science from the University of Queensland and is a Fellow of the Australian Institute of Company Directors. Ms Tredenick has over 30 years’ experience as a company director and corporate advisor. At the time of her appointment to the Vocation Board, Ms Tredenick was a director of Bank of Queensland Limited, Chair of IAG NRMA Corporate Superannuation and Chair of Comparehealth Pty Ltd. Ms Tredenick has formerly held various executive roles including as a member of the Executive Committee of National Australia Bank, MLC and Suncorp. Ms Tredenick also operates her own consulting business advising boards and CEOs on strategy and technology and on the successful management of large investment and transformation programs.

Stephen Tucker (Non-Executive Director)

32    Mr Tucker holds a Bachelor of Economics from the University of Western Australia. Mr Tucker was the CEO of MLC between 2004 and 2013, a Group Executive of the National Australia Bank Wealth Division and a member of the NAB Group Executive Committee from 2010 to 2013. Mr Tucker has been a director on a number of NAB Group Boards, including MLC Ltd, MLC Investments Ltd, JBWere Limited and National Wealth Management Holdings and has also been a non-executive director of two smaller ASX listed companies since June 2014. Mr Tucker was also a board member and minority shareholder of AVANA.

Factual Background

Business Structure and Board Policies

33    The board of directors of Vocation first met in November 2013 and, at about this time, established its procedures and policies. Mr Gréwal was appointed Company Secretary and Company Matters Pty Ltd, for whom Ms Emma Lawler worked, provided administrative support. The board decided that CSIA, BAWM (including its subsidiary Aspin) and AVANA would not be fully integrated until after the end of the 30 June 2014 financial year. As a result, BAWM (and Aspin), CSIA and AVANA continued to be run as separately managed businesses.

34    The management of BAWM (and Aspin) was based in Melbourne, and AVANA and CSIA in Sydney. It was decided that Ms Bonnici would report to Mr Hutchinson while she continued to manage the BAWM and Aspin businesses as she had prior to the IPO. The BAWM team continued to manage the Victorian business and maintained BAWM’s and Aspin’s relationship with the Victorian Department of Education and Early Childhood Development (“DEECD”), including the management and administration of their funding contracts with DEECD.

35    Ms Bonnici led the Executive Team as Vocation’s Chief Operating Officer. Mr Langtree was in charge of acquisitions of students by Vocation entities and notifying DEECD of enrolments, which notification was then treated as a claim for, and triggered, funding payments. Ms King’s responsibilities included compliance and quality control. Mr Langtree and Ms King also reported to Mr Hutchinson.

36    According to Mr Dawkins’ evidence, it was his view, and his practice, that the board collectively should set strategy and not get into the detail of management. It was also his practice at board meetings where a decision was required, to ask the other members of the board if there was any dissent from the decision proposed. If there was no dissent he regarded the decision as unanimous. To the extent there were questions in relation to a decision, no decision was taken until those questions were resolved. He said that to the best of his recollection, there was never a majority decision taken at a Vocation board meeting. None of that evidence was challenged and I accept it.

37    At an early meeting of the board, the directors adopted a number of policy documents including a Board Charter, a Risk Committee Charter and a Continuous Disclosure Policy. I refer to these documents in more detail later in these reasons.

38    A Registered Training Organisation (“RTO”) is an entity registered with the federal regulator, or a state regulator, to provide VET services. In 2014 an organisation that wished to offer VET courses and qualifications in Victoria was required to be registered with either the federal body known as the Australian Skills Quality Authority (“ASQA”) or the VRQA. VRQA registration was limited to RTOs domiciled and conducting vocational education and training wholly in Victoria. An organisation that wished to provide such services in other States or Territories of Australia was required to be registered with ASQA.

39    RTOs typically provide VET courses at a Certificate or Diploma level that are nationally recognised within the AQTF which was managed by the AQFC. The AQTF is a national regulatory scheme that regulated the activities of private training providers, the public TAFE system and certain dual sector universities that combine traditional higher education and VET. Only RTOs can apply for government funding to provide VET courses.

40    In 2014, Victoria adopted a direct funding model for VET known as the Victorian Training Guarantee (“VTG”) which paid subsidies for training of students directly to RTOs. Victoria was the only State that employed such a model. In other States and Territories, RTOs’ clients tended to be corporate clients paying for the training of their employees, with some individual fee-paying students.

41    The VTG provided for the State of Victoria, acting through its relevant government department, to enter into contracts with RTOs to fund the provision of vocational training by the RTOs to persons seeking an initial or higher level of qualification. The relevant department was DEECD which administered the VTG through its Higher Education and Skills Group (“HESG”). RTOs were paid based on notification to HESG of their enrolments. Payments were made by DEECD to the RTOs with which students were enrolled.

42    At the time of the IPO Vocation owned a total of eight RTOs including AVANA, Aspin, CSIA, and BAWM. BAWM was the only Vocation RTO registered with the VRQA and the only one that operated solely in Victoria. The other seven RTOs were all registered with the ASQA. Each of the eight RTOs had a different list of courses and qualifications (sometimes referred to as a “scope”) that it was allowed to offer in accordance with its conditions of registration. However, there was a considerable overlap in the courses that RTOs were qualified to provide.

43    BAWM carried on business in Victoria under the names “Buildit Learning”, “RTO Edge” and “Diverse Learning” and derived most of its revenue by direct funding model under the VTG. By 2013, BAWM was the largest RTO operating in the Victorian market. Aspin also carried on business in Victoria but on a considerably smaller scale than BAWM.

44    Ms Bonnici was the Managing Director of BAWM and the Chief Operating Officer of Aspin. She was also the Chief Operating Officer of Vocation until around July 2014 when her title changed to Chief Executive Officer of Vocational Education. She had considerable experience in dealing with VRQA and DEECD as a founder and managing director of BAWM.

45    During 2014 BAWM conducted trading courses that were funded by DEECD pursuant to a funding contract entered into between DEECD and BAWM for the 2014-2016 calendar years which commenced on 1 January 2014. Aspin also conducted training courses during 2014 that were funded by DEECD pursuant to a funding contract made between Aspin and DEECD for the 2014-2016 calendar years which also commenced on 1 January 2014. The terms and conditions of the two funding contracts (“the Funding Contracts”) were relevantly identical.

46    At the time of the IPO, BAWM had annual revenue of around $30.0 million to $35.0 million and AVANA and CSIA each had annual revenues of around $10.0 million to $12.0 million. The significance of BAWM to Vocation’s operations was reflected in the proportion of Vocation shares which were issued to acquire BAWM. At the offer price, those shares were worth $165 million of a total market capitalisation of $378 million. When Vocation listed on the ASX, more than two-thirds of Vocation’s annual revenue was generated by the BAWM and Aspin businesses. For the financial year ending 30 June 2014, approximately 80% of Vocation’s revenue was received from DEECD.

47    Soon after the IPO the directors of Vocation decided that they would not fully integrate the merged entities until after the end of the 2014 financial year. Consequently, in 2014 BAWM (including Aspin), CSIA and AVANA continued to operate their separate businesses. The senior management of BAWM (including Ms Bonnici, Mr Langtree and Ms King) was based in Melbourne, while senior management of AVANA and CSIA was based in Sydney. Mr Hutchinson, to whom Ms Bonnici reported, was based in Sydney.

48    In May 2014 Vocation acquired another education and training provider known as “Real Institute” (“Real Institute”) for $40.0 million in cash and $7.0 million in Vocation shares with an additional $7.0 million in Vocation shares payable if Real Institute met its 2014 financial year forecast results. Real Institute was a national vocational education provider operating in the logistics and labour hire industries. The acquisition of Real Institute was completed on 31 May 2014.

49    In June 2014 Vocation entered into an agreement to acquire Endeavour Learning Group (“Endeavour”) which was a provider of vocational and teaching education of national health, wellness, fitness and beauty disciplines. The acquisition of Endeavour was completed on 1 July 2014 for approximately $84.0 million in cash.

50    The $124 million cash component of Vocation’s acquisition of Real Institute and Endeavour was funded from cash reserves and a debt facility for $123 million that Vocation established with a syndicate of three banks in May 2014. The three banks in the syndicate were Westpac Banking Company (“Westpac”), National Australia Bank (“NAB”) and Commonwealth Bank of Australia (“CBA”).

51    Vocation made a number of further acquisitions in 2014. In April 2014 it acquired a 50% shareholding in Australian School of Management (“ASM”) and a 100% shareholding of the Australian College of Applied Education for a total consideration of $2.125 million. In September 2014 Vocation acquired the remaining 50% of ASM’s shares.

52    The Vocation board of directors performed a number of functions through various committees including the Audit and Risk Committee of which Mr Halley was Chairman and Mr Dawkins, Ms Tredenick and Mr Tucker were members, and the Investment Committee, of which Mr Tucker was Chairman and Mr Halley a member.

53    During the first half of 2014 the directors of Vocation were also investigating a possible acquisition of the Acquire Learning Group (“Acquire”). The proposed acquisition was referred to in Vocation’s board minutes as “Project Aspen”. Acquire was not an RTO but was in the business of training and recruitment. At a board meeting held on 22 July 2014 (discussed below) the board resolved to make a non-binding indicative bid for Acquire in the amount of $800 million.

Funding Contracts between DEECD, BAWM and ASPIN

54    In 2013-2014, the VET sector was comprised of both government-run and privately-operated RTOs, funded primarily by the Commonwealth, State and Territory governments. RTO access to State government funding was generally made available through funding contracts. In Victoria, pursuant to the Education and Training Reform Act 2006 (Vic), the Secretary of DEECD was authorised to enter into “VET funding contracts” with RTOs for the delivery of such courses.

55    The breakdown of enrolments by State in Vocation’s Prospectus demonstrated the central significance of Victoria to Vocation’s business. As disclosed in Vocation’s 2014 financial year results presentation, Victorian government funding represented 80% of revenue in the 2014 financial year, albeit that this was estimated to reduce to 40% in the 2015 financial year. In the period between November 2013 and June 2014, BAWM was the largest government-funded provider of VET services in Victoria.

56    In December 2013, BAWM and Aspin each accepted the terms of the Funding Contracts. The Funding Contracts stipulated general (cl 3) and specific (cl 4) obligations of an RTO with respect to its delivery of Training Services (as defined) to Eligible Individuals (as defined). “Eligible Individual” was defined to mean “an individual who is eligible for governmental subsidised training in accordance with eligibility requirements set out in this VET Funding Contract and related guidelines.” The definition of “Training Services” included relevantly:

…

(b)    all related requirements under this VET Funding Contract including but not limited to:

i)    determination of eligibility,

ii)    completion of student enrolment forms,

    … [and]

v)    matters that reasonably relate to providing the Training Services.

I do not think there could be any doubt that the requirements with respect to the Pre-Training Reviews were “related requirements” for the purpose of the definition of “Training Services”.

57    The general obligations in cl 3 of the Funding Contract relevantly included an obligation to comply with the AQTF “and/or the VET Quality Framework including the Standards for NVR Registered Training Organisations as applicable”: cl 3.1(e). Standard 2.1 of the AQTF required an RTO to “establish the needs of clients, and deliver services that meet these needs” while Standard 2.5 stipulated that learners were to “receive training, assessment and support services that meet their individual needs”. Standards 16.1 and 16.5 of the Standards for NVR Training Organisations 2012 (Cth) (“SNVR”) were formulated in the same terms.

58    In addition to incorporating the obligations of the AQTF and SNVR into the Funding Contract, cl 3.4(b) required an RTO to comply with all requirements in Sch 1 which described “important processes and requirements with which RTOs must comply in delivering government subsidised training under the VET Funding Contract”. These included:

    a requirement that for each Eligible Individual, the RTO conduct a Pre-Training Review which must “ascertain the most appropriate qualification for that student to enrol in, including consideration of the likely job outcomes from the development of new competencies and skills” (cl 4.6(b));

    a requirement that the RTO have a clear and documented business process for conducing the Pre-Training Review “that demonstrates how the RTO determined which qualification/s the student enrolled in and why this was the most appropriate training option for the student” (cl 4.7); and

    a prohibition on the RTO enrolling an Eligible Individual “in a course or qualification that is at an inappropriate level for that student, including but not limited to enrolling students in the Foundation Skills List that would not provide additional relevant competencies” (cl 4.9).

I refer to some of these requirements in more detail later in these reasons.

59    Clause 3.3(c)(iii) of the Funding Contract required that the RTO know and comply with all policies, procedures and guidelines related to the performance by the RTO of its obligations under the Funding Contract, including the “Statement of Expectations”. The latter document is a document published by DEECD in April 2013 entitled “Statement of Expectations: Principles and Obligations for Government Contracted Training Providers in Victoria”. It included a clause (cl 3.3) headed “Co-operating with the Department to Demonstrate and Verify Compliance” which (inter alia) required the RTO to ensure that appropriate compliance, reporting and auditing controls and systems were in place to meet DEECD’s compliance requirements.

60    By cl 7.2 of the Funding Contract, the RTO agreed that DEECD’s payment of funds to the RTO was conditional on DEECD being satisfied (and continuing to be satisfied) that the Training Services are being provided by the RTO in accordance with the Funding Contracts.

61    The Funding Contract also conferred on DEECD a right to “direct the RTO to suspend part or all of the provision of Training Services under this VET Funding Contract” (cl 16.2(a)); and to “withhold, suspend, cancel or terminate payment of any part of the Funds as [DEECD] determines is appropriate until [DEECD] is satisfied the issue has been satisfactorily resolved” (cl 16.2(b)). DEECD could take such action on a number of bases, including, relevantly, if “the RTO has breached, or DEECD reasonably suspects that the RTO has breached, or may breach, a clause of this VET Funding Contract” (cl 16.1(a)).

62    The Funding Contract included a provision (cl 17.3) entitling DEECD to terminate the contract in various circumstances including, relevantly, if “the RTO commits a Material Breach of this VET Funding Contract”. “Material Breach” was defined to include:

a)    failing to meet its obligations regarding:

i)    the application of all eligibility criteria to determine Eligible Individuals prior to enrolment;

ii)    the application of fees, including as required under any ministerial directions, orders, regulations or guidelines about fees;

iii)    the application of fee concessions, fee waivers/exemptions;

iv)    specific requirements for all Training Services including Pre-Training Review; Training Plan, and Evidence of Eligibility, Evidence of Concession/Waiver/Exemption, Evidence of Participation, in relation to each Eligible Individual;

v)    specific requirements for apprenticeship/traineeship Training Services; and

vi)    acting ethically, and not doing or omitting to do anything which may damage, ridicule, bring into disrepute or be detrimental, to the Department, the VET sector, the Victorian government subsidised training market, the Department or the State's name or reputation. A determination in this regard will be made at the absolute discretion of the Department, giving due regard to the obligations of the Department under Statute or otherwise; and made in good faith,

    as specified in

vii)    this VET Funding Contract;

viii)    any ministerial directions, ministerial orders, or regulations in relation to fees issued pursuant to the Act; or

ix)    any directions, policies, procedures or guidelines as issued by the Department from time to time; and

63    The Funding Contract refers to the Market Monitoring Unit (“MMU”) within the Regional Support Group of DEECD. The RTO agreed that the MMU’s purpose was to monitor, analyse and report on matters relating to the efficiency of the government subsidised VET market in Victoria, including competition, price, the quality of training outcomes, and to conduct reviews or investigations into the practices of a particular government subsidised body, including the RTO, through a rapid response team (cl 11.1). The MMU was described in the evidence as an independent division of DEECD.

64    Apart from BAWM and Aspin, various other Vocation RTOs also had funding contracts with the Victorian government during the 2014 calendar year. These were Learning Verve, Green Skills Institute (“Green Skills”), Training and Development Australia Pty Limited (“TDA”), Real Institute and CSIA Education (“CSIA”). Ms Watts’ oral evidence suggested that CSIA may not have held a Victorian government funding contract during the 2014 calendar year. I am satisfied that CSIA did hold such a contract. There are payment records in evidence that show CSIA was in receipt of VTG funding during that period.

65    DEECD made payments to BAWM and Aspin monthly and in arrears, with the amount depending on the volume of training delivered and the claims made in respect of eligible individuals. In the six-month period between January 2014 and June 2014, BAWM and Aspin claimed from DEECD in excess of $32.0 million in respect of training delivery under the Funding Contracts.

66    The evidence shows that approximately 50% of the amount paid by DEECD to BAWM from January to June 2014 (the total paid was approximately $12.0 million) was for the delivery of two courses known as Certificate III in Competitive Systems and Practices (“CSP”) and Certificate III in Warehousing Operations (“Warehousing”) and that approximately 90% of the amount paid by DEECD to Aspin from January to June 2014 (the total paid was approximately $8.3 million) was for the delivery of the Certificate II in General Education for Adults (“CGEA”) qualification.

The MMU Investigation

67    In June 2014 the MMU carried out an investigation into the course length and structure of various dual programs. As part of that investigation, the MMU reviewed BAWM’s delivery of CSP and Warehousing. This investigation followed a referral by Ms Watts who had identified a significant increase in training delivery by BAWM (and associated funding) for those two qualifications. The researcher who prepared the report consulted with various individuals involved in the marketing and delivery of the CSP and Warehousing program together with Ms Bonnici and Ms King who were respectively described in the report as the Chief Operations Officer, and the Group Executive Education for BAWM.

68    The MMU report was not relied upon by ASIC as evidence that would justify a finding that BAWM had in fact breached any provision of the Funding Contract. In its submissions ASIC made clear that its case against the defendants did not depend upon it establishing that there had been any breach of the Funding Contract. Rather, as explained by Mr Halley SC, Senior Counsel for ASIC, it did not put this aspect of its case any higher than contending that the evidence established that DEECD had a genuine and reasonable belief that such breaches had occurred and may occur in the future. This was said by the individual defendants to have significant implications for ASIC’s case, a matter about which I will say more later in these reasons.

69    CSP and Warehousing were delivered by BAWM as a dual program, meaning that units in both courses were taught as part of a single program that resulted in the award of both qualifications upon completion of the program. The dual program as delivered by BAWM was conducted over eight weeks, the first two of which consisted of an intensive two week (10 days) phase of classroom learning, followed by a further six weeks of workplace based learning that was intended to be delivered upon the student entering the workforce upon completion of the intensive phase.

70    The MMU report raised various issues concerning the length and structure of the CSP and Warehousing dual program. The MMU report stated:

The dual Certificate III in Warehousing and Certificate III in Competitive Systems and Practices is conducted over eight weeks. According to the trainers and the executive staff interviewed students are provided with an intensive two week program (10 days), where students complete a range of units, including the occupational health and safety units required to work in industry.

Number of units delivered

The number of units included in the dual program varies, according to the group, according to the Group Executive Education but the five student files sampled all shared the same program, comprising 38 units. Students in this program were undertaking 27 units in the Certificate III in Warehousing (820 nominal hours), which was nine units more than required to gain a qualification. They were undertaking 11 units in the Certificate III [sic] in the Certificate III in Competitive Systems and Practices, where 10 were required (420 nominal hours). In total the nominal hours being delivered is 1240.

While the RTO Management asserted that industry guided the selection of units and the use of extra units in a qualification, it would appear that quality has been overlooked. Evidence was provided that students attended classes for two weeks (up to 80 hours delivery). There was not a strategy for training and assessment in place that described how the two qualifications are delivered together to ensure that the requirements of the qualifications are met. There was no evidence on the files reviewed that students had completed self-paced learning […] or structured workplace based learning, to explain how the hours claimed by the RTO were justified.

Two full qualifications are awarded at the end of the program.

Time allocated to training and opportunity for practice and consolidation

The training plans provided for the students stated that the scheduled hours allocated to the units were the same as the nominal hours. The lesson plans for the two units of competency reviewed did not substantiate the claim of scheduled hours for each unit. One unit of competency, Apply fatigue management strategies (30 scheduled hours) allocated 30 minutes in the lesson plan. There was no guidance to the trainer or to the student in the resources reviewed regarding activities for the development of skills and knowledge subsequent to the 30-minute training session. A similar picture emerged for the unit Undertake root cause analysis, which is quite a complex unit in the Certificate III in Competitive Systems and Practices. Fifty hours is allocated to this unit in the training plan but delivery in the lesson plan equates to less than four hours. Assessment is carried [sic] in the classroom for the two units.

Workplace based training

The majority of students enter employment after the two weeks, where they continue with their programs. The trainer stated that students might be visited from one to five times during the six weeks they are in the workplace.

There was no evidence in the student files that students were visited at their workplaces or completed training and/or assessment at the workplace. There was no evidence in student files that employers were briefed about their responsibilities for providing learning opportunities at the workplace or that they provided these opportunities.

The program, as described, commences as an Institute based program and then appears to change to a workplace based program. However the RTO did not provide evidence that it is meeting its responsibilities for providing a supportive workplace based program under the AQTF/SNR.

71    With respect to program design and execution, the MMU report said:

In summary program design and execution does not address the requirements of the qualifications being delivered, from the suitability of students for one program, to insufficient opportunity to develop, practice and consolidate learning, to poor assessment.

The MMU report also contains a section relating to assessment. Assessment for the two units was said to be poor.

72    The MMU report also included a discussion concerning factors influencing the length of the dual qualification which (according to the report) the RTO acknowledged was delivered in a shorter timeframe in 2014 than in 2013. As to the rationale for delivering the two courses in the form of a dual program, the report said:

Rationale for dual delivery

The dual program arose from a contention that the combination of the two certificates provided greater employment opportunities for students. The RTO management asserted that there was no particular financial advantage in offering the certificates in an integrated program. Instead, it was suggested that because the Certificate III in Competitive Systems and Practices was a complex program that this made the program harder to deliver. However, the evidence reviewed at audit did not suggest that the delivery of this program as delivered by this RTO was particularly complex.

There would appear to be some educational value in combining the two programs as many if [sic] the units chosen complement each other. Some units, however, seemed too similar to offer value to the students. The RTO personnel interviewed stated that this had been identified at a validation session in April 2014 and it was planned to alter the training strategy to remove duplication.

73    It is important to note that the MMU report also includes some discussion, mostly in the introductory section, concerning the background of students who entered the dual program. The report states:

The students entering this dual program are typically unemployed, either recent school leavers or redundant workers seeking re-training and employment. Their level of experience in logistics or warehousing is not considered when they enter the program. This is problematical for one of the programs - the Certificate III in Competitive Systems and Practices. This qualification has no formal entry requirements but as the qualification description states, ‘This qualification assumes that a learner has current or past work experience where operational or technical skills have already been gained and a supervisory, facilitation or similar level of responsibility exists. The qualification is not suitable for direct entry from school’ (source training.gov.au). The CEO staff confirmed that students were unlikely to be placed in supervisory positions when they first started work. Given this, the qualification is unsuitable for the cohort.

74    While this passage indicates that the recruitment of students into courses not suitable to their needs was a matter raised in the report, most of the report is concerned with the design, structure and delivery of the dual program. It is apparent that one of the principal concerns MMU had with the dual program was the fact that it involved 10 days of intensive work followed by self-paced learning or workplace based learning, with the latter being relied upon by the RTO to justify funding claims made in respect of a large proportion of the total training hours said to have been delivered. In my view the MMU report was principally focused on the design and the quality of the training delivered in the dual program.

DEECD’s 3 July 2014 Letter to BAWM

75    On 3 July 2014 Ms Lee Watts wrote to Ms Bonnici. Ms Watts’ letter was headed “Suspected Breach of 2014-16 VET Funding Contract – Withholding Payment of Funds”. The letter, which was addressed to Ms Bonnici in her capacity as Managing Director of BAWM, relevantly stated:

I am writing to advise that, effective immediately, the Department is withholding the payment of Funds to BAWM … under Clause 16.2(b) of your 2014-16 VET Funding Contract.

The right to withhold payment is being exercised in accordance with Clause 16.1(a), as the Department reasonably suspects that the RTO has breached or may breach a clause of the 2014-16 VET Funding Contract.

The Department is taking this action based [sic] a range of information, including information identified by the Market Monitoring Unit, and complaints regarding the marketing, student recruitment, enrolment, pre-training review and training delivery practices of BAWM.

The withholding of payment will continue until such time as the Department is satisfied that the issues identified have been satisfactorily resolved. To this end, I seek to meet with representatives of BAWM to discuss this matter further and confirm your organisation’s obligations under its contracts to deliver government subsidised training.

The letter stated that DEECD reserved all its rights under the 2014-16 Contract.

The Meeting of 10 July 2014

76    On 10 July 2014 Ms Watts and her colleagues, Mr Peter Graham and Ms Georgina Sneddon, attended a meeting with Ms King and Mr Langtree. Ms Bonnici attended the meeting by telephone. Mr Graham prepared minutes of the meeting at which the findings of the MMU’s Rapid Response Investigation into CSP and Warehousing were discussed.

77    The minutes indicate that DEECD sought information from BAWM in relation to a number of matters relevant to CSP and Warehousing including course recruitment, marketing, eligibility, pre-training reviews, students’ suitability, mode of training delivery and assessment. The minutes provide an indication of various areas of concern to DEECD with respect to CSP and Warehousing. It is apparent that DEECD expressed its concerns as to whether those courses were appropriate for all of the students who were enrolled in them. In particular, some of the students enrolled in CSP were school leavers for whom it was not considered suitable. It is apparent that it was DEECD’s view that CSP was designed for people who have worked in manufacturing for an extensive period and who are seeking supervisory roles.

78    DEECD also raised concerns as to the mode of training delivery which included some intense training followed by a lengthy period of “self-directed learning”. DEECD was particularly concerned with the level of support provided to students during that period. Other concerns raised by DEECD related to the suitability of the training provided and assessment and whether this had occurred to an appropriate standard and within relevant timelines.

79    The minutes conclude with a record of information that DEECD sought from BAWM on the issues raised in the meeting, specifically, what practices were in place to ensure that delivery was relevant to the individual student; what practices were in place to ensure that delivery could be achieved in the time frames outlined; and whether BAWM had sufficient controls in place to ensure the training assessment was thorough and met all requirements.

The 21 July 2014 Response

80    Ms King wrote to Ms Watts on 21 July 2014. Her letter enclosed a lengthy report that purported to address issues raised by DEECD at the 10 July 2014 meeting.

81    In his written evidence Mr Hutchinson said he was not involved in preparing the report sent to Ms Watts on 21 July 2014. He said he read it sometime after it was sent and thought that it provided a sufficient answer to DEECD’s concerns. In cross-examination he was asked how it was he came to that view. His response was that he had relied on Ms King’s expertise and assumed that she would have provided a sufficient answer to DEECD’s concerns. It is apparent from this evidence that he had by this stage not made any independent assessment as to the scope or significance of DEECD’s concerns or the adequacy of BAWM’s response.

The Investment Committee and Board Meetings of 22 July 2014

82    A meeting of the Investment Committee was held on 22 July 2014. In addition to Mr Tucker and Mr Halley, Mr Dawkins, Mr Hutchinson, Ms Tredenick and Mr Gréwal were also present. The minutes record that there was a lengthy discussion concerning Project Aspen which covered various topics including the potential impact of what was referred to as “Victorian Government audits”.

83    There was also discussion concerning alternatives to Project Aspen. Mr Hutchinson advised the meeting, according to the minutes, that there was no similar acquisition opportunity available and that organic growth through “My Vocation”, a new business line then being developed by Vocation, would take three to four years to develop.

84    The minutes record that the Committee noted Mr Hutchinson’s advice on (inter alia) the withholding of payments by DEECD. The minutes also record that Mr Hutchinson updated the Committee on the audit and that the Committee discussed the “key risks” identified by Mr Hutchinson. However, the minutes do not state what the risks identified by Mr Hutchinson were.

85    The minutes also record that Mr Hutchinson advised that payments were being withheld pending the provision of further information which was provided on 22 July 2014. They also record that he advised the meeting that “payment is expected to be unblocked by end of July” and that a further update would be provided at the 29 July 2014 board meeting.

86    Mr Hutchinson gave evidence that his expectation that funds would be released to Vocation by the end of July was based on what he referred to as “conversations with the Victorian senior management team” including a telephone conversation with Ms Bonnici on 10 July 2014. He also gave evidence that although he considered the outcome and potential impact of the Victorian audits to be uncertain, he expected that their impact on Vocation’s business was likely to be minimal. In cross-examination Mr Hutchinson said that he was only expecting a partial release of funds, and that he believed DEECD would permanently withhold about $2.0 million and pay the balance of the withheld amount to BAWM by the end of July.

87    There was a full board meeting held shortly after the meeting of the Investment Committee concluded. The minutes of that meeting noted that a further update on the Victorian Government Audits would be provided at the 29 July 2014 board meeting and that the Chairman would meet with the CEO and relevant senior departmental staff of DEECD if required.

88    The minutes stated that “the potential challenges regarding the Victorian Government audits” should be shared with Acquire (ie, the target company) “at a high level for transparency and to accord with any representations and warranties that may be required to potential vendors, noting that the outcome and potential impact is uncertain at this time”. The indicative offer was subsequently rejected by Acquire.

89    It is necessary to say a couple of things about Mr Hutchinson’s evidence concerning the 22 July 2014 meetings. According to Mr Hutchinson, he had been told by Mr Langtree in early July 2014 that the largest amount of the money that had ever been forfeited to the Victorian government by an RTO was $2.0 million, and that the $2.0 million had been repaid to the RTO after a court settlement. He said that this gave him additional comfort that DEECD’s suspensions of funds would be temporary. His account of his conversation with Mr Langtree provides no information as to which RTO was involved, the nature of the problems that led to the forfeiture, the total amount that had been at stake, or the nature of the legal action.

90    Mr Hutchinson said in his written evidence that Ms Bonnici told him after the 10 July 2014 meeting with Ms Watts that she expected DEECD to release the suspended funds shortly after Vocation had provided its response. There is no indication in Mr Hutchinson’s evidence as to how Ms Bonnici could have come to the view that all of the suspended funds would be released.

DEECD 24 July 2014 Letter to BAWM

91    Ms Watts wrote to Ms Bonnici again on 24 July 2014 in response to Ms King’s letter of 21 July 2014 and the enclosed report. Ms Watts’ letter was forwarded to Ms Bonnici by email at 5.44pm on 24 July 2014.

92    Ms Watts’ letter relevantly stated:

2014-2016 VET FUNDING CONTRACT - CONTINUED WITHHOLDING OF FUNDS AND SUSPENSION OF COMMENCEMENTS

Thank you for your correspondence of 21 July 2014 in response to the meeting between the Department of Education and Early Childhood Development (the Department) and BAWM Pty Ltd (BAWM) of 10 July 2014.

As you are aware, the meeting was held to discuss issues relating to the findings of the Market Monitoring Unit’s (MMU’s) Rapid Response Investigation into course length and dual enrolments.

The Department has now reviewed BAWM’s response and continues to have ongoing concerns in respect to BAWM’s compliance with the terms of its 2014-2016 VET Funding Contract (the Contract).

Continued withholding of Funds

Accordingly, the Department will continue to withhold the payment of Funds to BAWM under Clause 16.2(b) of the Contract. As previously advised, the right to withhold payment is being exercised in accordance with Clause 16.1(a), as the Department reasonably suspects that the RTO has breached or may breach a clause of the 2014-16 VET Funding Contract.

You are reminded that, the Department is taking this action based a [sic] range of information, including information identified by the Market Monitoring Unit (MMU), and complaints regarding the marketing, student recruitment, enrolment, pre-training review and training delivery practices of BAWM.

Suspension of commencements and new enrolments

In light of the Department's ongoing concerns, and noting that the Certificate III in Competitive Systems and Practices (CSP) and the Certificate III in Warehousing Operations (Warehousing) (being the subject of the MMU report) make up approximately 50 per cent of BAWM’s claims (and payments) for training delivery in 2014, effective immediately, the Department directs BAWM:

•    to suspend the acceptance of all future enrolments of Eligible Individuals, and

•    to suspend the commencement of training delivery to Eligible Individuals that have enrolled but not yet commenced at the date of this notification.

This direction is made in accordance with clauses 16.1 (a) and 16.2 (a) of Contract.

The above suspensions and withholding of payment will remain in place until such time as the Department has conducted its investigations and is satisfied that the issues identified have been satisfactorily resolved. To this end, I seek your response to the matters outlined below.

Response to meeting of 10 July 2014

On review of the material provided under cover of letter dated 21 July 2014, the Department considers that a number of pertinent matters raised by the Department in the 10 July 2014 meeting have either not been adequately addressed or have otherwise been altogether omitted.

93    The general focus of the balance of the letter was on information said to have been sought by DEECD from BAWM that was not contained in Ms King’s letter of 27 July 2014. There were a number of specific matters referred to by Ms Watts.

94    First, Ms Watts raised concerns about the lack of information about the guidance provided to BAWM’s authorised representatives to assist them to determine whether the relevant course was appropriate for the student. Ms Watts noted that this information was specifically sought but not provided.

95    Ms Watts’ letter referred to the delivery of CSP to students under 21 years of age noting that a review of the training delivery data provided by BAWM showed that approximately 30% of training delivery (by funding volume) for 2014 commencements in CSP had been to students aged 21 and under. She noted that the training package for this qualification stated that it is designed for those with experience in the industry and not suitable for direct entry from school. Ms Watts noted that DEECD sought assurances from BAWM that the enrolment of school leavers in this qualification was not the usual practice and that an assessment was made by BAWM as to the appropriateness of this qualification for each student. Ms Watts sought more information concerning BAWM’s enrolment practices.

96    Second, Ms Watts referred to concerns raised at the 10 July 2014 meeting in relation to the mode of delivery for CSP and Warehousing “including clustered delivery over an intensive training period at the beginning of the student’s qualification, and the self-paced learning component” which she said represented “a particularly compressed arrangement for delivery of these qualifications”. Ms Watts said DEECD sought assurances from BAWM about the steps that had been taken to determine whether the courses could be delivered to the standards outlined in the training package within the relevant timeframes. Further issues were raised concerning the level of support provided to students during the self-directed learning component of the courses.

97    Third, with regard to CSP, Ms Watts indicated that the training package for this course required that an assessment occur in a variety of contexts over a period of time. She said that the MMU report raised concerns with respect to assessment, that BAWM had been requested to address this matter in writing, and that it had not done so.

98    The last matter I should mention in relation to this letter concerns the difference between “new enrolments” and “commencements”. The evidence shows that DEECD was concerned that if it only suspended new enrolments, BAWM might consider itself free to proceed with the training of students who had already been enrolled but not yet commenced their training, which was something DEECD wished to avoid particularly in circumstances where it had concerns about the quality of BAWM’s pre-training reviews.

Mr Hutchinson’s Email of 25 July 2014

99    On 25 July 2014 Mr Hutchinson sent an email to members of the board which was copied to Mr Gréwal and Ms King. In his email he indicated that the Aspin audit was “… actually fairly routine and not as painful as we thought” and that the auditors were reviewing 40 files per day “with no issue so far with the audit to conclude by mid next week”. He also referred to Ms King’s letter and enclosed report of 21 July 2014 and stated:

A 17-page detailed response went to the Department regarding the student cohorts in question (the reason for our payment delay) and we expect to hear back today or Monday – Amanda [King] will be following up with a call this afternoon and will also be joining the Board at its meeting the following week to provide a further update.

100    It was clear from Ms Watts’ letter of 21 July 2014 that DEECD’s concerns were not confined to any particular student cohort. DEECD’s concerns, as explained in Ms Watts’ letter of 24 July 2014, extended not only to course suitability but also to course structure, delivery, assessment and support.

The 29 July 2014 Board Meeting

101    Another board meeting occurred on 29 July 2014. All directors were present. Also in attendance was Mr Gréwal and Ms King. The minutes state that Ms King provided the board with an update on progress and issues to date in relation to the Victorian Government audits and “lessons learnt so far”. The minutes record that the board discussed the next steps, including likely resolution of withheld payments. The next steps were said to be:

    Wendy Bonnici discuss status and any outstanding matters with Victorian Government today;

    CEO and Wendy Bonnici meet and discuss issues, if required;

    Seek legal advice on position regarding withheld payments and any remedies; and

    Engage at other levels of Government if required.

102    The minutes also record that “[i]t was agreed that there were no matters the board was aware of that required disclosure”.

103    Mr Dawkins and Mr Hutchinson gave an account of the oral report Ms King gave to the board during the course of the 29 July 2014 meeting. According to Mr Dawkins, whose evidence regarding this meeting I accept, Ms King told the board that she thought the MMU report exaggerated the issues of concern and that once BAWM responded to the issues raised, and where necessary took corrective action, payment would be restored. She also advised the meeting that there had been problems with some brokers who had been or would be terminated because they had been “enrolling the wrong students”.

104    Mr Hutchinson also gave an account of what was said by Ms King at the same meeting. He said that Ms King told the board that DEECD’s actions were unwarranted, not proportionate to any issue identified in relation to the quality of courses, and that DEECD was withholding all funds by BAWM even though only about 20% of the funds withheld was actually in dispute. I prefer Mr Dawkins’ account of what was said at this meeting which in my view is likely to be the more reliable.

105    It was put to Mr Hutchinson in cross-examination that he knew DEECD’s concerns extended beyond the recruitment of school leavers into CSP. He did not accept that and gave the following evidence as to his state of mind as at 29 July 2014:

But you were aware that the department’s concerns extended beyond school leavers as at 29 July, from what you had read? ––– No, I don’t believe I did know it extended beyond school leavers, or that was certainly the majority of the concerns.

You know it wasn’t limited to school leavers as at that time, don’t you? ––– No.

[…] No, meaning you don’t know that? ––– No, I don’t know that. No, my – my belief at this time was that the school leavers were the majority of the concern based on what BAWM management had been telling me, your Honour.

What were the other concerns, as best you can recall? ––– The concerns as best I can recall were based around a pre-training review inadequacy where school leavers – and the definition is fairly loose on that, but 18 to 21, for example – were being brokered into courses where they didn’t have the – in had the department’s view – the adequate prerequisites to get in. That would seem to be a consistent theme and major flaw in the broker pre-training review. And then, secondly, carrying on that theme, the – you know, the education standard of those school leavers in order to complete a certificate III program. That was my – that was my understanding of what the major issues were.

106    One of the matters that neither Mr Dawkins nor Mr Hutchinson referred to in their evidence in any detail was what appears to have been a direction given by the board to “[s]eek legal advice … regarding withheld payments and any remedies”. Legal advice on this topic does not appear to have been sought from JWS and legal advice later provided by Landers & Rogers was not obtained until about two or three weeks later.

BAWM 4 August 2014 Letter to DEECD

107    On 1 August 2014 Ms Bonnici sent an email to Mr James Rozsa of JWS seeking “urgent assistance” in relation to her proposed response to Ms Watts’ letter of 24 July 2014. In her email to Mr Rozsa, Ms Bonnici explained:

Background

-    they have suspended payment to [sic] under the contract as they would like to investigate a suspected breach. They have also applied a sanction in that we cannot enrol students into the dual qualification that they have concerns with. (we have complied)

-    we have provided them with information – they continue to have queries and require us to respond to further questions by end today.

-    we have identified a systemic weakness in our pre training review (the main cause of concern for govt) which has resulted in participants enrolling into a program which is not suited to them (in accordance with the training packaging rules)

-    in my discussion with Lee Watts I sense that they are keen too [sic] understand how we might rectify this issue for the students and ‘make good’

Advice required

We have drafted the response and we would like to inform her that as an ASX listed business we will have to disclose should their investigation result in either material repayment or cancellation/suspension of contract. I would like for us to put this in writing as part of our response and would like your direction on wording.

I get the impression that the sanctions that they will expect will be some level of repayment (I presume the amount will determine whether it is material) and make good for the students.

108    Ms Bonnici responded to Ms Watts’ letter of 24 July 2014 by letter dated 4 August 2014. Ms Bonnici’s letter stated:

Re: 2014-2016 VET Funding Contract - continued withholding of funds and suspension of commencements

Thank you for your correspondence dated 24 July 2014 which details the ongoing concerns of the department in respect to BAWM’s compliance with the terms of our 2014-2016 VET Funding Contract (the Contract).

We note and confirm our compliance with your direction in relation to the Certificate III in Competitive Systems and Practices (CSP) and the Certificate Ill in Warehousing Operations (Warehousing) that BAWM:

•    Suspend the acceptance of all future enrolments of Eligible Individuals; and

•    Suspend the commencement of training delivery to Eligible Individuals that have enrolled but not yet commenced training as at 24 July 2014.

The information below is provided in response to your specific queries.

109    This was followed by some five pages in which Ms Bonnici sought to respond to the specific matters raised by Ms Watts’ letter of 24 July 2014. In her letter Ms Bonnici made some significant concessions as to the lack of quality control with respect to the enrolment process.

110    In her letter Ms Bonnici described information sessions at which prospective students were provided with information about a particular course and its potential benefits. Those applicants wishing to proceed were then required to undertake a “pre-training review” discussion with an authorised representative. Ms Bonnici states in her letter:

4. Assessment of Pre-Training Review discussion and determination of suitability

The Authorised Representative will assess the Pre-Training Review discussion in order to determine the suitability of the applicant to proceed into the program. This assessment is conducted using a suitability matrix drawing on pre-determined –parameters established by BAWM’s quality team. A specific suitability matrix is used for each qualification and makes reference to the unique characteristics of the program. […]

5. Internal/Quality Assurance

BAWM employs a team of Quality Assurance officers who are responsible for validating and checking the pre-training review and enrolment documentation to ensure the accuracy of the determination of eligibility as well as validating that the participants’ suitability for enrolment has been assessed within their pre-training review.

Following the review by our Quality Assurance officers, a further review is undertaken by our Data Specialist team to confirm the outcome of the determination of eligibility and validate that the participants suitability for enrolment has been assessed within their pre-training review.

We have identified a weakness within this system whereby currently we do not specifically test the substance of the pre-training review and how this resulted in the determination of the applicant as being suitable for entry into the chosen qualification.

That is, our internal checks did not independently validate the detail of the conversation held with the participant, rather they simply confirmed that the pre-training review occurred. To this point we have included a recommendation at the end of this response which we believe addresses this weakness.

Delivery of CSP to students under 21

Provide the Department with a detailed response regarding your enrolment practices in relation to this cohort of students.

While we believe that some participants within this cohort can receive benefit from this qualification, the level of representation amongst this cohort is disappointing to us and highlights a weakness within our control systems.

BAWM actively targets this cohort within its broader direct and brokered marketing activities. Within the aims of this marketing activity, BAWM has a wide range of qualification offerings which have varying degrees of suitability for each of the demographics to which we actively market.

It is not our intention that this course be the primary focus of options provided to this target group.

As highlighted above, the pre-training review and subsequent quality assurance processes did not identify students who may have been inappropriately enrolled into the CSP program.

We have ascertained that our current practice with respect to pre-training review does not enable an independent review of the conversation conducted between the participant and the authorized representative that was used in the determination of suitability.

Further analysis of this data has identified that the entirety of referrals of participants who belonged to this cohort have had their suitability determined by Authorised Representatives employed through our Broker channels. We had relied on the Authorised Representative induction training, our documented policies and procedures and broker contract to ensure that determination of suitability would be completed in accordance with our policies and procedures and clause 4.9 of the Contract.

We have identified that this control is not sufficient. To this point we have included a set of actions at the end of this response that we believe will rectify this control.

…

111    The proposed changes referred to by Ms Bonnici were:

Pre-training Review – Process and Procedure Changes

As a consequence of our review and accepting that we have a systemic weaknesses in our pre training review processes and procedures, we have developed an action plan as set out below. The main driver for this change is that we did not have the visibility of the details of the pre-training review conversation and therefore could not independently validate whether it had been completed in accordance with our policies and procedures. The following has been implemented with effect from August 2014:

1.    The pre-training review form has been amended to include a requirement for the authorised-representative to document the detail of the pre-training review conversation. This conversation is tailored to the specific qualification and eligibility/training package requirements. […] This has been implemented across all RTO’s under Vocation Limited.

2.    We have implemented an additional quality assurance mechanism whereby all pre-training reviews will also undergo a quality assurance check to ensure that the documented conversation aligns to an appropriate qualification enrolment.

Additional items identified in Section B of our correspondence dated 21st July 2014 are continuous improvement activities set to be implemented over the next 3 months. The main drivers for these enhancements is to increase employment outcomes for the participants and to be able to provide evidence by way of reporting on these.

In conclusion, it is disappointing to us that we have uncovered that a number of participants have accessed their entitlement to a government funded qualification whereby the training package states that they would not be suitable.

112    With regard to the delivery of CSP to students under 21 years of age, Ms Bonnici acknowledged that some students had been inappropriately enrolled in this course, that there were deficiencies in quality assurance, and that various “brokers” were responsible for determining whether the course was suitable for students who were to be enrolled in it. She also acknowledged that some students were inappropriately enrolled in CSP by various brokers which had failed to determine the suitability of students in accordance with Vocation’s policies and procedures. Ms Bonnici advised that the contracts of the four brokers in question had been terminated. Ms Bonnici’s letter also included information in relation to the matters of mode of delivery (ie. course structure) and assessment.

113    It is important at this point to examine what Ms Bonnici said in this letter in light of the relevant contractual provisions. Clauses 4.6 – 4.10 of the Schedule to the Funding Contract required that:

Pre-Training Review

4.6    For each Eligible Individual, the RTO must conduct a Pre-Training Review of current competencies including literacy and numeracy skills prior to commencement in training. The Pre-Training Review must:

(a)    identify any competencies previously acquired (Recognition of Prior Learning (RPL), Recognition of Current Competency (RCC) or Credit Transfer);

(b)    ascertain the most appropriate qualification for that student to enrol in, including consideration of the likely job outcomes from the development of new competencies and skills; and

(c)    ascertain that the proposed learning strategies and materials are appropriate for that individual.

4.7    The RTO must have a clear and documented business process for conducting the Pre-Training Review that demonstrates how the RTO determined which qualification/s the student enrolled in and why this was the most appropriate training option for that student.

4.8    The business process and related documentation used by the RTO to conduct the Pre-Training Review must be made available to the Department (or persons authorised by the Department) for audit or review purposes.

4.9    The RTO must not enrol an Eligible Individual in a course or qualification that is at an inappropriate level for that student, including but not limited to enrolling students in courses on the Foundation Skills List that would not provide additional relevant competencies.

    For example, it would be inappropriate to enrol a student assessed at Australian Core Skills Framework Level 3 in all core skills areas in either Certificate I in General Education for Adults or Certificate II in Skills for Work and Vocational Pathways.

4.10    The Pre-Training Review must be completed, and the outcomes known and documented, prior to the student's commencing training.

114    Ms Bonnici’s letter indicates that the pre-training reviews that had been conducted did not enable an independent review of the conversation between the participant and BAWM’s authorised representative who determined the participants’ suitability for enrolment in a particular course. That suggests that there had been a failure to comply with cl 4.6(b), 4.7, 4.8, 4.9 and 4.10 by BAWM generally and that any breach of those provisions would apply to all of BAWM’s VET funded enrolments, not merely those for CSP and Warehousing.

115    Ms Bonnici’s letter also appears to assume that the sole purpose of the pre-training review was to ensure that students were not enrolled in a course which the training package indicated would be unsuitable for that student. But this reflects a misunderstanding of the purpose of pre-training reviews which was not nearly as limited as Ms Bonnici’s letter implied. In my view her letter reflects a misunderstanding of the obligations imposed on the RTO under the Funding Contracts including those arising under cl 4.6(b), 4.7, 4.9 and 4.10.

DEECD 5 August 2014 Letter to Aspin

116    In June 2014, DEECD and Aspin engaged in correspondence in relation to the delivery of CGEA by National Employment Institute (“NEI”) a broker that had a business relationship with Aspin. The delivery of the CGEA (which was on the Foundation Skills List) was reliant on VET funding provided to Aspin under its Funding Contract. In a letter to Ms Bonnici dated 5 June 2014, Ms Watts stated:

The Department is advised that an organisation known as the National Employment Institute (NEI) is advertising job vacancies in hospitality on seek.com.au. Job seekers responding to the advertisement are called for an interview to Eve Bar. Once there, large numbers of applicants are required to provide identification and complete a Certificate II In General Education for Adults as a necessary part of the interview process.

The Information provided to the Department further indicates that applicants may have been instructed to write their name on but not date their materials; some training delivery has consisted of bar tending work only; some applicants were required to undertake assessment only; Certificates have not been issued; training has not resulted in job placement.

In addition to the above, the Department has reviewed training delivery data reported by Aspin for students trained in Southbank and with a reported delivery location containing ‘NEI’. The review has identified that almost all Certificate II in General Education for Adults students claimed by Aspin hold at least a year 12 qualification. This strongly suggests that students already have literacy and numeracy skills beyond those attained in a Certificate II In General Education for Adults.

Of primary concern to the Department is the appropriateness of marketing/brokering practices, that students are enrolled in the most appropriate qualification, and whether training delivery has occurred for funds claimed.

117    Ms Bonnici responded to Ms Watts’ letter on 11 June 2014. Essentially, while acknowledging that NEI was a broker for Aspin in relation to the CGEA, Ms Bonnici rejected the substance of Ms Watts’ complaint, noting that applicants were required to complete a pre-training review. However, she did not provide any details of how such reviews were conducted or documented.

118    On 5 August 2014 Ms Watts wrote to Ms Bonnici in her capacity as Chief Executive Officer of Aspin. Ms Watts’ letter included the following:

Withholding payment of Funds

I am writing to advise that, effective immediately, the Department is withholding the payment of Funds to Aspin under Clause 16.2(b) of your 2014-16 VET Funding Contract (the Contract).

The right to withhold payment is being exercised in accordance with Clause 16.1(a), as the Department reasonably suspects that Aspin has breached or may breach a clause of the Contract.

The Department is taking this action based a range of information and ongoing reviews following complaints/feedback regarding marketing, student recruitment, enrolment, pre-training review and training delivery practices of Aspin.

Suspension of commencements and new enrolments

In light of the Department’s ongoing concerns and noting that Aspin’s claims (and payments) for training under the Contract are almost exclusively constituted by delivery of the CGEA, effective immediately, the Department directs Aspin to suspend:

•    the acceptance of all future enrolments of Eligible Individuals, and

•    the commencement of training delivery to Eligible Individuals that have enrolled but not yet commenced at the date of this notification.

This direction is made in accordance with clauses 16.1(a) and 16.2(a) of the Contract.

Next Steps

The above suspensions and the withholding of payment will remain in place until such time as the Department is satisfied that the issues identified have been satisfactorily resolved. To this end, I seek to meet with representatives of Aspin next Tuesday, 12 August 2014 to discuss this matter further and confirm your organisation’s obligations under its contracts to deliver government subsidised training.

…

The 11 August 2014 Board Meeting

119    Another meeting of directors was held at 11.00am on 11 August 2014 by way of teleconference. All directors were present and Mr Gréwal was also in attendance.

120    The minutes of the meeting, which were signed by Mr Dawkins on 19 August 2014, record that Mr Hutchinson updated the board on the progress with the “Victorian audits” and that he agreed to update the board once more information was available. The minutes also note that Mr Hutchinson “has received advice from JWS that disclosure to the market is not required regarding the withholding of payments at this stage as it is a debtor timing issue.”

121    In his evidence Mr Dawkins said he recalled the board discussing the withheld payments at this meeting as being similar to “an unpaid invoice”. He also said that he accepted the views relayed to him at this meeting by Mr Hutchinson as those of Mr Hutchinson and Ms Bonnici (who did not attend this meeting) to the effect that the amounts at risk were small and that the bulk of the withheld payments were likely to be paid. I accept that was Mr Dawkins’ view based on what he had been told by Mr Hutchinson.

122    While I also accept that Mr Hutchison believed that the bulk of the withheld funds would in time be paid, I have significant reservations as to the extent that either he or Ms Bonnici provided the board with a realistic, balanced or considered view as to the scope or substance of DEECD’s concerns, the relative strengths and weaknesses of the parties’ rights and obligations under the Funding Contracts, or the magnitude of the risk of a substantial portion of the withheld funds being permanently lost.

DEECD/ASPIN Meeting of 12 August 2014

123    A meeting was held on 12 August 2014 between Ms Watts and other departmental officers with Ms Bonnici, Ms King and Mr Langtree of Aspin. A detailed set of notes was prepared by Ms McInnis which was later submitted to Aspin for review. I do not see any basis for doubting the accuracy of Ms McInnis’ notes of this meeting.

124    The notes confirm that the purpose of the meeting was to discuss issues as between DEECD and Aspin, but not BAWM. They also contain a list of further information that was sought by DEECD from Aspin relating to the marketing practices of Aspin’s brokers and authorised representatives, the quality of pre-training reviews used to assess the appropriateness of the CGEA for students with a Year 12 qualification or higher, the appropriateness of the mode of training delivery and assessment, and the appropriateness of a bar (the Eve Bar) as a location for both enrolment and training delivery.

125    The notes record discussion concerning pre-training reviews and appropriateness of the CGEA qualification for students who were enrolled in that course. Amongst other matters the notes record:

Aspin stated that it recognises it has systemic weaknesses across the business in relation to Pre-Training Review (PTR). It indicated it was disappointed and concerned and taking the matter very seriously. Aspin clarified that words ‘across the business’ were used to describe contracted Vocation Ltd RTOs. Aspin advised that it has taken significant action right across the business, ‘not isolated to Aspin or BAWM’, including improvements to the PTR process, termination of broker relationships and sanctions to other brokers.

…

The Department sought Aspin's response to why the CGEA was appropriate for students with a year 12 qualification or higher. Aspin stated that while the CGEA was not the most suitable qualification for some of these students, others received a good outcome.

Aspin stated that it found the issue around PTR and appropriateness was more pronounced with some brokers - NEI, Rise Employment and Training Solutions (Rise), Cutting Edge - this is 3 of 15.

The Department pointed to the purpose of the CGEA contained in Aspin’s own course material and largely taken from the curriculum: this program is designed to address the Education and Training needs of adults who have left school early or whose life experiences have inhibited access to education, training and employment and who need to improve their literacy, basic maths and general education skills.

Aspin stated that there would be a minority of year 12 graduates that need the CGEA. The Department noted that on data reported by Aspin to the Department it appeared that approximately 61 per cent of CGEA students claimed by Aspin under the contract held a year 12 qualification or higher - and that this was not limited to the 4 February 2014 cohort referred by NEI.

126    The notes also record discussion concerning marketing and student recruitment practices including the following:

Aspin confirmed that it has more sales channels in 2014 than 2013 and that it didn't consider that the conversion from training of the Authorised Representatives to practice by them wouldn't be as good. Aspin confirmed that there has been a focus on growth and integration – Ms Bonnici said that ‘this is not a good explanation but it is the explanation’.

Aspin advised that it was still going through the process of assessing the brokers and that factors of growth together with other challenges have prevented Aspin from not delving into some of these issues as much as it should have. Aspin confirmed that some of the trainers are NEI personnel with whom Aspin has a combination of subcontractor and employee relationships.

127    The notes also record the following discussion concerning rectification:

Aspin sought the Department's guidance on what Aspin needs to do going forward in terms of rectification. Aspin stated that claims have been clearly inappropriate. The Department stated that it was happy for Aspin to consider what this rectification might be and that the Department did not want to pressure Aspin to have that conversation today.

Aspin stated that the systemic weaknesses related only to PTR. The Department disagreed with this and noted that there appears to be a significant disconnect between the Aspin training materials and the student experience.

…

The Department noted that the Contract, Statement of Expectations, Compliance Framework and CGEA Curriculum set a level of expectation and that it had looked at this matter with regard to these documents. It noted that Aspin has stated that there has been a Material Breach and that the Department is concerned to ensure that there is appropriate and suitable training with respect to Government Funds.

Aspin stated that its primary concern was for the students - to remedy any VTG entitlement potentially lost by a student due to inappropriate claims. Aspin queried whether it was appropriate to suggest rectification in respect to funds paid. The Department stated that it routinely recovered funds in circumstances where training has been inappropriate and not of a quality expected. Aspin stated that it thought it could come back with a proposal which included this. It also stated that it routinely manages this type of issue through data uploads.

…

The Department concluded that it was looking for an effective and efficient way forward. Aspin stated that it recognises and appreciates the risk posed to the Victorian Government by the Vocation Ltd RTOs on account of size and market share.

…

It was agreed that Aspin would come back to the Department, in writing, within 5 business days, being Tuesday 19 August 2014 with suggested forward actions, including proposed rectification opportunities. This response is required to include, but not be limited to the number of students to whom the systemic breaches apply.

The Board Pack

128    On 13 August 2014 a “board pack” containing material for consideration by the directors at or prior to the 19 August 2014 board meeting was distributed. The board pack included a report prepared by Mr Hutchinson dated 19 August 2014 which included information relevant to the Victorian audits.

129    Mr Hutchinson stated in his report that “through our audit findings we now have limited use of certain qualifications (eg. competitive systems and warehousing) that has taken out another $8-10 million”. The reference to “another” relates to other matters (including VET pricing changes) unrelated to the Victorian audits which took another $15.0 million out of the $68.0 million of revenue previously forecast for Victoria. In Mr Hutchinson’s words, “[i]n total we estimate that our VIC FY15 budget has taken a revenue hit of $25m – essentially we are ex-growth in VIC”. Mr Hutchinson also referred to the termination of four brokers and said that he expected to know the final outcome of the Victorian audits by the end of the week.

130    In his oral evidence, Mr Hutchinson accepted that the $8.0 million to $10.0 million referred to in his report reflected his understanding of the impact that the enrolment suspensions imposed by DEECD would have on Vocation in the budget for the financial year ending 30 June 2015. That is to say, his estimate as at 19 August 2014 was that these suspensions would cost Vocation about $8.0 million to $10.0 million of the revenue forecast for the current financial year. It is not apparent from the evidence how Mr Hutchinson arrived at that estimate. But his evidence clearly indicates that he understood (presumably based on what he had been told by Ms King, Ms Bonnici or Mr Langtree) that this estimated loss of revenue was on top of any amount that may have been permanently withheld by DEECD from the funds that it retained as at 19 August 2014.

131    In his report Mr Hutchinson referred to some action that would be taken by Vocation to help off-set the $25.0 million in lost revenue from Victoria (eg. cost cutting and increased sales in other States). However, the only figure specified in respect of these revenues was a potential $1.25 million increase in net revenue from the accelerated investment in “VET Fee Help Diplomas”.

132    In his report Mr Hutchinson also said that Vocation would know the final outcome of the Victorian audits (excluding any audit into Learning Verve) “by the end of this week”. In cross-examination he said this statement was based on information obtained from the Victorian management team but could not say whether it came from any one or more of Ms King, Ms Bonnici and Mr Langtree. He said in his evidence that he had full confidence in their ability to provide him with an accurate estimate as to when the Victorian audits would be complete.

133    Mr Hutchinson also stated in his report:

•    Although payments for BAWM are still on hold (as of 11th August) there is no reason to suspect payment will not be granted, as the student cohort concentration under review is less than 300 school leavers

•    Due to the payment system the government can only suspend the entire payment to an RTO and not partial

•    The delay is therefore purely a debtor issue in our opinion and a matter of timing

•    We have actioned all of the requests from the government and remain in good favour

•    Learning Verve remains an unknown with the audit only occurring week of the 18th August. All new enrolments post December 9th 2013 have been cancelled and will be making several repayments over the course of the next few months for incorrect claiming issued by this RTO (a provision of $1m has been put aside)

•    Please see Education report for further detail

134    Mr Hutchinson was cross-examined in relation to the first of those statements. He said that it was also based on what he had been told by Victorian management. He denied that he knew that DEECD’s concerns extended beyond “300 school leavers”, even though he accepted that he had by this time read Ms Watts’ letter to Ms Bonnici dated 24 July 2014.

135    As to the reference in the minutes to “the payment system” not preventing partial payment, the language used suggests that there was some operational reason that prevented DEECD from making a partial payment of VET Funding. However, in his oral evidence, it became clear that Mr Hutchinson believed that the Funding Contracts did not permit DEECD to withhold only part of the withheld funds, an understanding he said he obtained from one or more of Ms Bonnici, Mr Langtree and Ms King. He also agreed that by 20 August 2014, this was no longer his understanding.

136    As to the statement that the delay “is therefore purely a debtor issue”, Mr Hutchinson adhered in cross-examination to the view that the withheld payments were, in effect, in the nature of outstanding debts that would in due course be paid. This view of the matter suggests that there was in fact no question that the outstanding amount (or almost all of it) would be paid to Vocation, but that the delay was attributable to a quirk of the Funding Contracts that prevented DEECD from making any part payment. Even if Mr Hutchinson’s analogy was otherwise apt, it seems to have been based on a false premise. The Funding Contracts make clear that DEECD had a right to withhold payment of either the whole or a part of the funds in the event that it suspected there had been, or may be, a breach until such time as the issue had been resolved to its satisfaction.

137    Of course I accept that the power to withhold payment under the Funding Contracts was a power that DEECD was required to exercise honestly and reasonably. That said, none of the defendants submitted that the withholding of funds by DEECD was, in a legal sense, unreasonable or otherwise in breach of contract.

138    Vocation’s explanation for the delay in receiving payment of the withheld funds from DEECD on the basis that it was a “debtor timing issue” ignored the fact that the funds were being withheld by DEECD pursuant to contractual provisions which entitled it to suspend payment (potentially for a lengthy period of time) pending resolution of relevant issues rather than a situation in which a debtor was taking longer than expected to make a payment of a debt that the debtor acknowledged was owing.

139    The board pack also contained a report by Mr Gréwal and a draft presentation to be used in connection with the release of Vocation’s financial results for the 2014 financial year. Mr Gréwal’s report noted that the draft 2014 financial year results and 2015 budget had been impacted by Victoria.

140    The board pack also included a report from Ms King entitled “Education report” that included a section on the Victorian audits. Under the heading “Marketing/Monitoring Units (MMU)” Ms King stated:

Key takeaways:

•    Focus from VIC Government on dual qualifications and duration of training programs

•    Need to ensure support mechanisms are in place for students to support them to completion particularly in blended and online delivery models

•    Focus on information sessions and onboarding of students into suitable qualifications to reach outcomes/career goals

•    Focus on tracking how many applications received versus enrolments, completions and then outcomes (total student lifecycle tracking)

Current status:

•    Aspin audit of 308 student files has almost concluded as it due to be completed by the 15th August

•    Both BAWM and Aspin have their payments suspended and are unable to enrol students into Cert III in Warehousing/CSP and Cert II in CGEA

Ms King’s “Key takeaways” suggest that DEECD was focused on the structure of the CSP and Warehousing dual qualification support mechanisms for students, and the quality of information sessions and pre-training reviews conducted by or on behalf of the RTO. It is not suggested by Ms King in her report that DEECD was focused on any particular cohort of students and certainly not a cohort of “less than 300 school leavers”. Other “Key takeaways” referred to by Ms King in the section of her report headed “Higher Education and Skills Group (HESG)” included:

Key takeaways:

•    Focus on pre-training review and suitability of students enrolling and utilising a funded training place

•    Need to ensure that pre-training review (career planning) conversation is documented to support reason for enrolment into a suitable training program

141    These last two points are important because they highlight that Ms King (who was familiar with the relevant correspondence and present at the 12 August 2014 meeting) understood that DEECD was also focused on pre-training reviews and the need for BAWM and Aspin to ensure that these were properly conducted and documented. She believed, it may be inferred from her report, that DEECD’s focus was on dual qualifications and the duration of training programs, the need for student support mechanisms (particularly in blended and online delivery models) and properly conducted and documented pre-training reviews. Ms King’s report is inconsistent with any understanding on her part that the only issue as between DEECD and BAWM related to the enrolment of school leavers or unemployed into CSP.

142    Also forming part of Ms King’s report was a page headed “Risk Register” that contained the following entry:

(The layout of information has been re-arranged for inclusion in the judgment.)

143    I note that Mr Hutchinson’s report included a cross-reference to Ms King’s education report.

144    In his written evidence Mr Hutchinson drew attention to the key to the Risk Register attached to an email of Ms King dated 11 August 2014. This key indicates that the reference to “Likelihood” covers a range of four possibilities (ie. unlikely, possible, likely, almost certain). This indicates that Ms King assessed the likelihood of the continued suspension of payments to BAWM and Aspin and enrolments as something that was likely to continue. The key also refers to a range of consequences that would follow in the event the risk materialised (ie. minor, serious, severe, major or catastrophic). It can be seen that the consequences that would follow in the event that either the payment or enrolment suspensions were to continue were classified by Ms King using this scale as “major”. The key also indicates that the reference to “extreme” refers to “extreme risk – detailed research and management planning required at senior levels.”

145    In his written evidence Mr Hutchinson said that nothing in the Risk Register caused him to question what he had been told by Ms King, Ms Bonnici and Mr Langtree about the likely outcome of the audits. I have difficulty accepting this evidence. The entries included in the Risk Register that form part of the board pack seem to indicate that the measures imposed by DEECD against BAWM and Aspin had the potential to inflict serious damage on the business, and that the risk of such damage occurring was significant.

146    As to Mr Dawkins, he gave evidence that he did not recall reading the Risk Register nor any discussion concerning it at the 19 August 2014 board meeting. In closing submissions it was suggested on behalf of Mr Dawkins that the Risk Register was cryptic and far from self-explanatory. I accept that submission up to a point. However, it seems to me that the Risk Register did reflect the view, on the part of Ms King at least, that the measures that had been imposed by DEECD on BAWM and Aspin up to that time (at least in so far as they were understood by Ms King) had the potential to cause Vocation significant harm if they were to continue unabated. It was on this basis, I infer, that Ms King understood that the dispute with DEECD required “detailed research and management planning at senior levels”.

147    It is apparent from Vocation’s 2014 Annual Report (which included a chairman’s letter signed by Mr Dawkins on 2 September 2014) that Vocation had a “Risk Management Policy” which was said to set out the requirements, roles and responsibilities for managing risks across the organisation. According to the Annual Report the Risk Management Policy required the owner of the relevant risk to identify the risk and review it at the monthly meeting which reviews the Risk Register. According to the Annual Report:

The Vocation Corporate Risk Register is used for tracking and management of all strategic and operational level risks and is used to generate reporting to senior management and the Audit and Risk Committee.

…

Each risk has an owner, who is a senior manager in the relevant functional or business unit. In addition each risk is assigned to an employee, a person with the right skills, knowledge and a member of the functional area responsible to track probability and impact as well as define and implement risk response plans.

Management are responsible for identifying and evaluating risks within their area of responsibility, implementing agreed actions to manage risk and for reporting as well as monitoring any activity or circumstance that may give rise to new or changed risks.

148    The Annual Report goes on to identify various key risks for Vocation which included (at the top of the list) State and Federal funding. In another section of the Annual Report headed “Risks” the following appears:

Regulatory and government funding – Vocation operates in a highly regulated sector and a significant proportion of Vocation’s revenue is derived from Commonwealth, State and Territory government funding. Funding from various Governments accounted for approximately 80% of Vocation’s pro forma consolidated revenue in FY13 with a similar percentage in FY14. Vocation continues to actively engage with the various regulatory and funding bodies that are relevant to its operations to manage any changes to policy. Vocation has also made significant progress towards diversifying its revenue channels away from government funding since IPO.

149    I am satisfied that the part of Ms King’s report headed “Risk Register” was a document prepared by her in accordance with the risk management policy described in the Annual Report.

150    Mr Dawkins said that he recalled Mr Hutchinson making statements during the course of the 19 August 2014 board meeting to the same general effect as those included in Mr Hutchinson’s report in the board pack. These included a statement to the effect that the student cohort under review concerned less than 300 school leavers, that the payment system only allowed DEECD to suspend the entire payment to an RTO, that the delay in obtaining payment was a debtor timing issue, and that BAWM had actioned all requests from DEECD. I accept that Mr Hutchinson made statements to this effect to the board at the meeting on 19 August 2014. But I am also satisfied that Mr Hutchinson informed the meeting that the suspensions would cost Vocation between $8.0 million and $10.0 million in lost revenue on top of whatever amount might be permanently withheld by DEECD. Importantly, those figures assumed that the suspensions on enrolments and payments would be lifted within the very near future (possibly within a couple of days).

151    Assuming that Mr Hutchinson believed at the time that the amount of revenue that might be permanently withheld was about $2.0 million, this would equate to a total loss of revenue of between $10.0 million and $12.0 million in respect of both the enrolment and payment suspensions. Such a loss of revenue could be expected to result in a decrease in earnings before interest and tax (EBIT) of approximately $2.5 million to $2.7 million, at a time when (according to evidence that I will come to) Vocation’s consensus estimated EBIT for the financial year ending 30 June 2015 was approximately $64.0 million. On the basis of these figures, the enrolment and payment suspensions had the potential to reduce Vocation’s forecast earnings by about 5%. Of course, this assumes that the figures quoted by Mr Hutchinson were reliable. For reasons which I will explain I think these figures were highly unreliable.

152    It is convenient at this point to refer to some of the evidence given by Mr Hutchinson concerning assurances he said he was given by Ms Bonnici, Ms King and Mr Langtree. He said that during the updates given to him in relation to the Victorian audits, he was repeatedly told by them that all or nearly all of the funds withheld by DEECD would be released, that there was no serious breach by either BAWM or Aspin of their funding contracts, and that there was no serious problem with delivery of training by either of them. Mr Hutchinson also said in his written evidence:

From around 11 or 12 August 2014 onwards, Ms King and Mr Langtree repeatedly said words to the effect that the rectifications BAWM and Aspin had implemented addressed all of the concerns that had been raised by the Department.

153    My sense is that Mr Hutchinson has exaggerated the statements he said were made to him by Ms Bonnici, Ms King and Mr Langtree around this time. In particular, I find it difficult to accept given the concessions made by them on behalf of Aspin at the 12 August 2014 meeting that they would have told Mr Hutchinson that there was no serious breach by Aspin of its Funding Contract, or that there was no serious problem with delivery of training by Aspin. I am satisfied based on the notes of that meeting that Ms Bonnici, Ms King and Mr Langtree acknowledged that Aspin had committed serious breaches of the Funding Contract.

DEECD Letters to BAWM and Aspin of 15 August 2014

154    Ms Watts wrote two letters to Ms Bonnici on 15 August 2014, the first to BAWM and the second to Aspin.

155    The first of the letters refers to the withholding of funds and the suspension of commencements and new enrolments of eligible individuals. In her letter Ms Watts referred to an enquiry apparently made by Ms Bonnici as to whether or not those measures related to only a one month period. Ms Watts confirmed that this was not correct and that the measures would continue to apply until such time as DEECD was satisfied that they should be varied or that they can be replaced by appropriate final measures under the contract. She also indicated that DEECD was considering varying the measures so that the withholding of funds was confined to CSP and Warehousing. She indicated DEECD was considering its position. She also sought information in relation to a fifth broker whose services have apparently not been terminated but were only the subject of a warning by BAWM.

156    In her letter Ms Watts also requested copies of documents pursuant to cl 9 of the Funding Contract including signed copies of contracts with all brokers who had delivered training services on behalf of BAWM in 2014.

157    Ms Watts’ letter also refers to a conversation that occurred between Ms Watts and Ms Bonnici on 8 August 2014. In her letter Ms Watts states:

I refer to our telephone conversation of last Friday during which you raised the question of Vocation Limited’s continuous disclosure obligations with respect to the ASX in respect of recent measures imposed by the Department.

The Contract is with BAWM and not with Vocation Limited. We assume that the obligations you mentioned, are obligations of Vocation Limited not obligations of BAWM per se. The Department has not formed a view as to whether any failure by Vocation Limited to comply with obligations of this kind would raise an issue concerning compliance by BAWM with the Contract, but this seems unlikely to be the case.

Of course, if Vocation Limited is aware that it has a particular obligation then it is to be expected that Vocation Limited will meet that obligation. To the best of the Department's knowledge; at the time of writing this letter it does not appear that Vocation Limited has made any disclosure about the measures imposed on 5 August 2014 to the ASX. In the interests of expediting consideration of this issue by Vocation Limited, we have copied this letter to the CEO and Company Secretary of Vocation Ltd so that they become aware as promptly as possible of its contents and their bearing on the ongoing measures that were imposed on BAWM on 3 and 24 July 2014.

158    Ms Watts’ letter was copied to Mr Hutchinson and Mr Gréwal.

159    Ms Watts’ second letter of 15 August 2014, addressed to Aspin, also made clear that the measures taken against Aspin applied indefinitely and not for a one month period only. Statements concerning the conversation on 8 August 2014 and Vocation’s continuous disclosure obligations, were repeated in this letter.

Request for Increase in Banking Facility

160    On 18 August 2014 Mr Gréwal forwarded an email to Mr Christopher Foote, of Westpac, and other officers of the banks who had provided the $102 million debt facility to Vocation requesting an increase in that facility by $10 million for, it was said, funding working capital and capital expenditure associated with the VET Fee Help product that Vocation was said to be “in the early phase of ramp up.”

161    In his evidence Mr Hutchinson said he was aware of Mr Gréwal’s email of 18 August 2014 and that Mr Gréwal was seeking the $10.0 million extension of Vocation’s existing facility, which would, according to Mr Hutchinson’s written evidence, provide Vocation with the extra cash needed while the Victorian audit continued.

162    In his written evidence, Mr Hutchinson acknowledged receiving a copy of this email on 18 August 2014 and gave evidence of a conversation he said he had with Mr Gréwal in relation to it. As I will later explain, the debt facility that Vocation had was not a general purpose facility that could be used to manage general cash flow problems.

The 19 August 2014 Board Meeting

163    All the directors were present at a meeting of directors held on 19 August 2014. Mr Gréwal was also in attendance.

164    The board minutes included the following entry in relation to “Update on Victorian Government audits”:

The Board noted the CEO and Wendy Bonnici had provided a detailed briefing prior to the Board Meeting on the Victorian Government Audits, including:

•    Status of audits;

•    Withholding of funding by DEECD;

•    Implications for the current business model in Victoria; and

•    Possible impacts on the FY15 budget and cash flow.

The Board discussed the potential impact of the audits and agreed that, given the expected outcome of the investigation is that only a relatively small amount of funding is expected to be affected which is not material in Vocation’s context, the matter is not material for disclosure at this stage under Listing Rule 3.1.

The Board agreed that it needed to be kept informed of developments.

165    Ms Bonnici wrote to Ms Watts on 19 August 2014 referring to Ms Watts’ letters of 15 August 2014 and the meeting of 12 August 2014. She did not suggest in her letter that the meeting notes previously sent to her were in any respect inaccurate. She enclosed with her letter a document headed “Responses sought” which include a range of responses to issues raised at the meeting of 12 August 2014.

166    The measures outlined in Ms Bonnici’s document included termination by Aspin of its agreements with two brokers and the issue of formal warnings to two others.

167    Under the heading “Proposed rectification” Ms Bonnici states:

We acknowledge that due to the systemic nature of the issues outlined over our past correspondence with you, Aspin has processed claims for payment in relation to the CGEA that should not have been processed. In spite of some invalid claims being made, we believe that all participants have gained a level of benefit from participating in the CGEA through Aspin as evidenced by job outcomes and further training.

In relation to our proposed approach regarding rectification and given the high volume of funded enrolments processed by Aspin during 2014 we have taken an approach which we believe overstates the claim reversal and minimizes impact on participants with regard to their eligibility for government subsidised training places in the future.

As mentioned above, we understand that participants received some benefit through training delivery, however in the best interests of the participant and in support of the intent of the VET Funding Contract we are not proposing a detailed examination of the claim details for each individual. Rather, we propose to take a cohort-based approach for calculation of the amount of the claims reversal.

This approach has the following benefits:

•    Aspin would avoid the need to directly investigate each of the 4,867 funded enrolments with regards to suitability and appropriate funding levels (if reduced claims should have applied)

•    Over 2,700 participants will re-gain eligibility under the Victorian Training Guarantee to a government subsidized training place

•    Claims of approximately $4.5M will be reversed

•    Participants will not be adversely impacted by an investigation at the individual level

•    Swift resolution of the issue and processing of reversed claims

•    Assurance that all participants are captured as a result of the broad nature of the approach.

In recognition of our mutual desire to find an effective and efficient way forward, and to highlight to the Department that Aspin appreciates that claims for funding have been processed incorrectly, Aspin will undertake the following rectifications within the next 3 weeks:

•    Conversion of 915 participants brokered by NEI from funded to fee for service (FFS). We estimate this would result in a claim adjustment of just over $1.8M.

•    This will capture all participants trained at Eve nightclub as well as those participants who received the shortened course duration

•    Conversion of 1,142 participants who are under the age of 20 and have completed year 12 from funded to FFS. This equates to just over $2.6M

•    Conversion of 76 participants who have completed a prior Certificate III or higher qualification from funded to FFS. This equates to just over $66,000.

The above steps result in over 2,700 enrolments being converted from government subsidised to FFS and a reversal of current claims (paid and pending) to the value of over $4.5M. Taking into account the monies already withheld by the Department, it is our estimation that it would take 3 claim periods before positive claims for Aspin would be made.

168    Ms Bonnici forwarded copies of the correspondence between DEECD and Aspin of 15 August 2014 and 19 August 2014 to Mr Gréwal.

169    Aspin’s proposed rectification was initially said to have led to the creation of a provision of about $4.0 million in Vocation’s accounts for the financial year ending 30 June 2014. A correcting affidavit filed by Mr Gréwal indicated that there was in fact no provision created and that revenue in the relevant period was written down by $4.0 million. That evidence is consistent with the financial statements in that they do not make reference to any provision or other entry (eg. a liability in respect of deferred revenue) that reconciles with the $4.0 million figure.

170    As I previously mentioned, ASIC did not invite me to make any finding that either BAWM or Aspin breached their Funding Contracts. While I do not make any such findings in this judgment, the meeting notes and correspondence relating to Aspin clearly show that DEECD had reasonable grounds to believe that Aspin committed serious breaches of its Funding Contract.

171    There seemed to be an assumption in the defendants’ submissions that based on the so-called provision made in respect of Aspin in Vocation’s accounts for the financial year ending 30 June 2014, Vocation was somehow justified in ignoring any further revenue impact of the contractual measures imposed on Aspin in the financial year ending 30 June 2015. The difficulty with this is that the total amount paid and claimed to Aspin in respect of the CGEA course (a course on the Foundation Skills List) by 19 August 2014 was almost $10.0 million (excluding GST). That means that the proposed reversal applied to less than half of all enrolments in CGEA under Aspin’s Funding Contract. The idea that there would be a permanent withholding and repayment to a total of $4.0 million or $4.5 million in respect of Aspin could hardly have been said to constitute a “worst case scenario” for Aspin.

Ms Bonnici’s and Ms Watts’ Correspondence of 20 August 2014

172    Ms Bonnici wrote to Ms Watts on 20 August 2014 referring to Ms Watts’ letter of 15 August 2014. In the letter Ms Bonnici provides some of the information sought by Ms Watts indicating that further information and copies of contracts with brokers would be supplied by 25 August 2015.

173    Ms Bonnici also states:

Variation to withholding payment of funds

Further to your request for additional detail regarding the five brokers, we can confirm that the unnamed broker is National Employment Institute (NEI) and that NEI also referred students to TL141810 - Certificate IV in Warehousing (250 enrolments) and BSB30412 - Certificate III in Business Administration (60 enrolments).

We appreciate the opportunity to provide the Department with information with respect to the ongoing effect of the imposition of these measures. We provide the following information for your consideration:

•    We note that of the current amount withheld (approx. $18.7M), just over $2M (10.7%) relates to participants referred by the five brokers in question.

•    While the suspension is due to a small number of programs overall, it applies to all programs conducted by BAWM and we continue to fully service these programs.

•    However, given the size of the monies currently withheld and the potential for ongoing claims to be withheld, we anticipate a cash flow impact as BAWM continues to incur significant operational overheads in the employment of more than 1,000 staff and trainers to fully service all its programs.

•    We believe that the proposed variation would provide relief against the cash flow impact given the number of programs we are currently operating.

174    Ms Bonnici’s letter concludes:

Again, we appreciate the consideration that the Department is giving to varying the current measure as it applies to the withholding of funds and we look forward to your response in this regard.

175    Ms Watts replied to Ms Bonnici’s letter on the same day. Her email attaching her letter in response was sent to Ms Bonnici, Mr Hutchinson and Mr Gréwal at 7.04pm on 20 August 2014. In her letter Ms Watts referred to information requested in her letter dated 15 August 2014 concerning the five brokers. In particular, she repeated her request for an indication as to whether any training services for qualifications other than CSP and Warehousing conducted in 2014 were provided by any of the five brokers. She stated that, according to Ms Bonnici’s letter of that day, NEI (which was referred to in previous correspondence between DEECD and Aspin) had also enrolled students in Certificate IV in two other courses, Warehousing and Certificate III in Business Administration (“Business Administration III”). Ms Watts sought information as to whether any of the other four brokers had enrolled students in any courses besides CSP and Warehousing and whether NEI had done so in relation to any courses other than CSP, Warehousing, Certificate IV in Warehousing and Business Administration III.

176    Ms Watts’ letter continued:

In the circumstances, and in light of the information as to practices in relation to BAWM and Aspin which has been the subject of correspondence between us, the Department does not presently have the appropriate level of confidence in order for it to consider varying the measures that are currently in place under clause 15.2(a) and (b) of BAWM’s Contract.

In particular, the Department is seeking to know whether student cohorts other than the students awarded the CSP and Warehousing qualifications were referred to BAWM by any of the five relevant Brokers or otherwise received Training Services from any of them. Until the Department receives clear and verifiable information on this issue, the Department does not propose to consider varying the current measures.

Further, please note that my request for signed copies of contracts, included in my letter of 15 August, was not restricted to signed contracts with Brokers but extends to all persons (other than employees of BAWM) who have delivered Training Services on behalf of BAWM in 2014. Your letter this afternoon refers to individuals from Brokers who deliver Training Services as “authorised representatives” of the RTO. Any contract with such a person must be provided. You also make a definitional point, by which you treat “independent contractors” as “employees”. We do not accept this definitional point. Contracts with independent contractors must be provided. You go on to write that Training Services are delivered by independent contractors who are contracted directly with Vocation or via a training labour hire business. You are required to produce include all signed contracts whether they be signed by the independent contractors and/or by labour hire businesses on their behalves.

As you will appreciate, we continue to have concerns relating to the delivery of training in Warehousing and CSP generally, and irrespective of which Broker might have referred the particular student cohort, and I refer to my correspondence of 15 August which outlined our concerns in this regard.

I am copying this letter to the CEO and Company Secretary of Vocation Limited (as I copied my letters of 15 August 2014 also) so that they are apprised as soon as possible about its contents, and can appropriately and promptly assess them in light of Vocation Limited’s continuous disclosure obligations to the ASX.

177    It is apparent from this letter that DEECD was at this time unwilling to vary any of the measures that had been imposed on either BAWM or Aspin. After referring to the five brokers, and the need for BAWM to provide clear and verifiable information in relation to their involvement in other courses apart from CSP and Warehousing, Ms Watts went on to confirm that the Department had concerns relating to the delivery of training in Warehousing and CSP generally, irrespective of which broker was involved in the enrolment or training of particular students. Ms Watts is referring here, I infer, to perceived problems in the structure and delivery of the CSP and Warehousing dual qualification which had been raised in prior correspondence. There can be no doubt that DEECD’s concerns extended beyond the recruitment of school leavers or unemployed into CSP and Warehousing.

178    Ms Bonnici responded to Ms Watts’ letter later that evening by an email sent at about 9.30pm. In that email she confirmed that NEI had not provided training services in relation to any other qualification for BAWM or any other Vocation related RTO. She also confirmed her previous advice in relation to the four other brokers and advised that they had not provided training services in relation to any other qualifications for BAWM or any other Vocation related RTO.

179    At around this time there was also extensive correspondence between DEECD and Vocation concerning Vocation’s continuous disclosure obligations and whether, as asserted by DEECD, Vocation was required to make an ASX announcement detailing the measures that had been taken by DEECD against Vocation under the Funding Contracts. The correspondence on this topic appears to have been initiated as a result of a telephone conversation between Ms Bonnici and Ms Watts on 8 August 2014 in which Ms Bonnici sought an indication as to DEECD’s attitude to the matter of disclosure, something which Mr Hutchinson’s evidence suggested she did without reference to him. The correspondence on this topic intensified after Ms Watts was contacted by a journalist in the afternoon of 20 August 2014 asking questions about (among other things) the payments that had been withheld. For its part, Vocation reiterated in its correspondence with DEECD that it was not required to make any disclosure in relation to either the withholding of funding or the suspension of enrolments on the grounds that these matters were not material.

180    In the early evening of 21 August 2014 DEECD wrote to the ASX complaining about what was alleged to be a failure on the part of Vocation to comply with its continuous disclosure obligations. It is not necessary to refer to DEECD’s letter to the ASX in detail except insofar as it indicates what contractual measures had been imposed by DEECD on BAWM which were said to be:

The Department has recently taken the following interim action, pending further investigation and consideration, in relation to the two subsidiaries of Vocation Ltd under the irrespective VET Funding Contracts 2014-16:

•    measures were imposed on BAWM Pty Ltd on 3 and 24 July 2014 under clauses 16.l(a) and l6.2(a) and (b) of BAWM Pty Ltd’s Contract; and

•    measures were imposed on Aspin Pty Ltd on 5 August 2014 under clauses 16.l(a) and 16.2(a) and (b) of Aspin Pty Ltd’s Contract.

The measures currently in place in relation to BAWM Pty Ltd are, since 3 July 2014, a withholding of payments of Funds (calculated as at 8 August 2014: $18,819,387.56 inclusive of GST) and, since 24 July 2014 a direction to suspend new enrolments of Eligible Individuals and commencements of delivery of Training Services to Eligible Individuals.

The measures currently in place in relation to Aspin Pty Ltd are, since 5 August 2014, a withholding of payments of Funds (calculated as at 8 August 2014: $1,858,789.03 inclusive of GST) and a direction to suspend new enrolments of Eligible Individuals and commencements of delivery of Training Services to Eligible Individuals.

181    The letter was signed by the Deputy Secretary of DEECD, Ms Kym Peake, and copied to Mr Dawkins, Mr Hutchinson, Mr Gréwal and Ms Bonnici. As indicated in the letter, the total amount withheld as at 8 August 2014 was approximately $19.0 million for BAWM and approximately $2.0 million for Aspin or about $21.0 million in total.

Release of Appendix 4E

182    At around 6.00pm on 20 August 2014 a board committee, acting in accordance with a delegation of authority from the full board, approved Vocation’s preliminary final report for the financial year ending 30 June 2014 (“Appendix 4E”) and authorised its lodgement together with a media release and investor presentation with the ASX prior to the market opening on 21 August 2014.

183    On the same morning that the Appendix 4E statement and related material was released to the market, an article appeared in the Sydney Morning Herald (“SMH”) entitled “Sharemarket darling Vocation hits some speed bumps” (“the SMH article”).

184    The SMH article of 21 August 2014 included the following commentary:

There’s good money in government grants. Of the $7 billion which Australian governments shell out for vocational education and training, Vocation Limited expects to pick up around $100 million this year.

Vocation is a sharemarket darling. Having floated last December at an issue price of $1.89 its share price has shot up to $3 as the company embarked on a fast-growth “roll-up” strategy; that is, snapping up rival businesses in the vocational education and training (VET) sector across the nation.

…

Vocation is a rollup of Registered Training Organisations (RTOs) and its earnings come by wringing every drop out of government policies to invest in a job-ready population. In Victoria, student fee contributions are low – sometimes approaching zero – and the state chips in the lion’s share of course costs when students sign up.

Government payments are received monthly pro rata with completion of modules. It makes for an enticing working capital profile.

Key to the IPO pitch was that stellar growth from Vocation’s star Victorian business, BAWM – itself a roll-up of three VET businesses – could be replicated across the country as other states followed the Victorian contestable ‘driven’ funding model. That there were some 560 vocational training businesses receiving government funding in Victoria alone presented endless acquisition opportunities.

Under the Victorian model, government-supported places in vocational training courses such as warehouse operations and process manufacturing are uncapped, students can take up to two vocational education courses to improve their employment prospects, largely funded by the taxpayer.

Thanks to government funding contracts, the BAWM business has grown exponentially in recent years. It seemed the only constraint on growth was the business’s ability to persuade students to fill out their enrolment forms – not a herculean ask when students didn’t have to reach into their own pockets.

In 2012 alone BAWM increased Higher Education and Skills Group (HESG) and Victorian Training Guarantee revenues from $2 million to $27 million. Since then this number may have more than doubled. The business delivers substantial operating leverage with very fat margins as revenues ramp up, particularly without the need for heavy investment in headcount and infrastructure.

Despite the stellar growth the chatter in the Victorian training sector is that BAWM’s founders led the industry with their extensive knowledge of how to get the best out of government regulations and subsidies – there is speculation the group may be encountering some speed bumps.

The HESG put in place new rules during 2013 and early 2014 to try to improve the quality of outcomes for students undertaking courses which were largely funded by the taxpayer. A massive blow out in the Victorian government’s budget for funded vocational training was also a concern along with ‘tick and flick’ and ‘channelling’ by savvy providers knowing how to game the system.

In 2012 Victorian funding contracts allowed “auspicing” (subcontracting) arrangements which meant BAWM could essentially rent its funding contracts to non-Registered Training Organisations (RTO) which would conduct the training courses. The RTO holding the funding contract and the service provider – many of these being non-RTO’s would share the spoils of the government subsidy. In doing so, BAWM would not incur large fixed costs as its revenues ramped up. Auspicing allowed BAWM to expand its business and grow revenue far more quickly than would otherwise have been possible if it had to provide the training courses itself internally.

According to the Vocation prospectus, Auspicing was expected to deliver 36 per cent of the group’s earnings in financial year 2014. Interestingly, auspicing (in the funded VET sector) is banned in South Australia while NSW and QLD have adopted a cautious stances towards the practice.

The rules on auspicing in Victoria however have since been tightened. From 2014, the HESG closed a loophole that allowed unlimited subcontracting to non-RTO’s. Now, prior written approval of the HESG is required for any non-RTO providing a course that was supported by taxpayers funded subsidy.

But with Vocation delivering its first full-year result as a listed company today, investors would do well to ask how the rule-changes around auspicing are affecting BAWM and whether BAWM’s auspicing has been compliant. Shareholders are likely to ask for certainty as to whether there has been any investigation into the practice and whether any of BAWM’s funding contracts have been suspended. The informed speculation in the sector is that there may be issues with BAWM’s auspicing.

185    Another article appeared in the Australian Financial Review (“AFR”) on the same day which made a brief reference to changes to the funding model and licensing process and their effects upon BAWM’s four key brands. The article states that “Vocation has said little publicly about the changes. And some of the shareholders are getting restless.”

186    An investor conference call was held on 21 August 2014 in which Mr Hutchinson, Mr Gréwal and Mr Langtree responded to questions from analysts in relation to Vocation’s results for the financial year ending 30 June 2014. Toward the end of the conference there were a number of questions asked by Mr Pendlebury that were fielded by Mr Gréwal. The relevant exchange as recorded in the transcript of the call as agreed by the parties was as follows:

Ed Pendlebury:    Oh, thank you and look, I was, you’ve made the prospectus forecast and I congratulate you on that, but I suppose my question relates to the outlook for FY15 and look, particularly considering, I don’t know, you probably are not aware that there was an article in the Sydney Morning Herald this morning relating to the current funding status of Baum in the Victorian market and I suppose in your presentation, you expect Victorian revenue to decline by about approximately 40, well represent 40% of the overall revenue and I appreciate that you have recently acquired some substantial non-Victorian revenues in Real and Endeavour but could you provide some colour on the outlook for Baum since the June 30 balance date and appreciating that, you know, at the time of the IPO Baum was your most significant business and what’s the status with the funding situation there?

Manvinder Gréwal:    Yeay, thanks, I guess, the preface here is that we don’t, we no longer analyse and report on the forming companies. We look at the activities the business units and the channels that, so obviously, the play in Victoria is something that we regard and we have spoken about this at length through the presentation, something that is a more stable platform across the next year and the growth will certainly come from other areas, so it will come from outside of Victoria. I guess, we don’t provide, there’s no specific information we provide about what is happening in Victoria itself, there’s nothing to sort of update specifically other than, you know, it’s been a fantastic year in terms of that growth, but that growth in that State is not what we regard as sustainable and it certainly.

Ed Pendlebury:    But I suppose to cut to the chase, has there been any change in the Baum funding arrangements with the government since the June 30 balance date?

Manvinder Gréwal:    No. There was ... there was a pricing change on the 1st of July that was put out by the government so that, that has been a change that’s come through. Yes, the price list revised.

Ed Pendlebury:    Right, but there has been no material change in the funding arrangements with the Baum group since the June 30 balance date. Correct?

Manvinder Gréwal:    Correct.

Ed Pendlebury:    Thank you.

187    The agreed transcript of the conference call held on 21 August 2014 shows that it was Mr Gréwal (not Mr Hutchinson) who answered Mr Pendlebury’s questions. Of course, Mr Hutchinson was an active participant in the conference call. He did not contradict or qualify what Mr Gréwal said in response to Mr Pendlebury’s questions. One of those questions was whether there had been any change in the BAWM funding arrangements with the government since 30 June 2014. Mr Gréwal’s answer to that question was that there had been no change other than a price list revision. Both Mr Gréwal and Mr Hutchinson knew that since early July 2014 DEECD was exercising powers under BAWM’s Funding Contract to withhold funding payments. To say that there had been no change in BAWM’s funding arrangements after 30 June 2014 was incorrect. Mr Pendlebury went on to introduce the issue of “materiality” in his next question but the earlier question to which I have referred was not limited in its terms to changes in funding arrangements of a material kind.

Email Correspondence of 21 August 2014

188    At around 10.00am on 21 August 2014 Ms Watts sent an email to Ms Bonnici asking a number of questions and also referring to the possibility of limiting the withholding of funds and the suspensions to particular courses and particular referrals. After referring to the email sent to Ms Watts by Ms Bonnici at about 9.30pm the previous evening, Ms Watts responded:

The email states that RISE, Community Training Initiatives, Australian Careers Advisory and BSL Learning did not provide Training Services in 2014 in relation to any student to whom BAWM awarded a qualification other than Certificate III in Competitive Systems and Processes (CSP) and Certificate III in Warehousing Operations (Warehousing). Is it also true to say that no student to whom BAWM awarded a qualification other than CSP and Warehousing was referred to BAWM by any of these four entities?

The email states that NEI did not provide Training Services in 2014 to any student to whom BAWM awarded a qualification other than CSP, Warehousing, Certificate IV in Warehousing and Certificate III in Business Administration. Is it also true to say that no student to whom BAWM awarded a qualification other than these four qualifications was referred to BAWM by NEI?

Assuming the answers to these two questions are yes, and assuming you can provide clear and verifiable evidence supporting the information in the email, the Department will prepare a brief for consideration as to whether to vary the measures currently imposed on BAWM to limit the current withholding of Funds and suspensions to:

(a)    all Funds and enrolments and commencement of Training Services in relation to CSP and Warehousing; and

(b)    all Funds and enrolments and commencement of Training Services in respect of identified students who were referred by, or otherwise were the subject of Training Services provided by, any of RISE, Community Training Initiatives, Australian Careers Advisor, BSL Learning and NEI.

In order for this next step to occur, we will require you to identify by student ID number all such students referred to in (b) above.

189    Ms Watts’ email is significant for at least three reasons.

190    First, Ms Watts’ reference to the possibility of limiting suspensions to enrolments and commencements to CSP and Warehousing is inconsistent with any understanding on her part that these were the only courses to which the existing suspensions applied.

191    Secondly, Ms Watts makes clear that any payment of withheld funds or removal of suspensions would not extend to CSP, Warehousing, Business Administration III or any course in respect of which students were referred by, or had training services provided by, any of the five brokers identified in the prior correspondence.

192    Thirdly, Ms Watts identified further evidence and information that would need to be provided before a brief was prepared for consideration (presumably by the Secretary of DEECD or the Minister) as to whether to vary any existing measures previously imposed on BAWM. Importantly, Ms Watts’ email makes clear that any such variation would not involve the making of any payment, or the lifting of any suspension, in relation to CSP, Warehousing and Business Administration III. This is significant because the evidence shows that about half of the money that had been withheld from BAWM related to the CSP and Warehousing dual qualification.

193    Mr Hutchinson’s written evidence addressed his understanding of Ms Watts’ email to Ms Bonnici of 21 August 2014 directly. Mr Hutchinson said:

On 21 August 2104 [sic] at 9.57am, Ms Watts sent an email to Ms Bonnici, copied to Mr Gréwal and me. I recall receiving the email but I do not recall precisely when I read it. (It was sent while I was attending the investor conference call on that day.) I also recall having a conversation about the email with Ms Bonnici or Mr Langtree (who was with me in Sydney for investor presentations), although I do not recall the detail of the conversation. When I read the email, I noted that the email stated that, assuming the answers to questions in the email was ‘yes’ and there was clear and verifiable evidence of matters in Ms Bonnici’s earlier email, the Department would consider releasing withheld funds that did not relate to CSP, Warehousing or enrolments from the five brokers referred to in the email. Based on my conversation with Ms Bonnici or Mr Langtree, I understood that those requirements would be met. In light of that, the email generally reaffirmed my expectation that there was likely to be a resolution of the BAWM audit and the release of the bulk of its funds within the next few weeks.

194    Mr Hutchinson’s oral evidence in relation to his understanding of Ms Watts’ email was at times slightly confused, but ultimately did not depart from his written evidence on the topic. I am satisfied that he understood from Ms Watts’ email that any variation of the measures in place would not involve the payment to Vocation of any amounts in respect of CSP and Warehousing.

195    Mr Hutchinson’s attention was drawn to the last sentence of the relevant portion of his written evidence in which he stated that Ms Watts’ email generally reaffirmed his expectation that there was likely to be a resolution of the BAWM audit and the release of the bulk of its funds in the next few weeks (ie. some days prior to 12 September 2014) when BAWM’s next VET monthly payment would usually be received. He was asked about whether he had any understanding of the proportions of the withheld funds that related to CSP and Warehousing relative to the total amount that had been withheld from BAWM. His evidence was as follows:

No, my reference was always the anticipated outcome from the Victorian management team that they thought was likely to be permanently withheld. So to answer your question, I didn’t cross-reference a specific bulk of CSP and warehousing in the greater context.

He went on to repeat that his expectation was based on the analysis from the Victorian management team and what they thought was at risk. It is apparent that Mr Hutchinson did not understand, as at 21 August 2014, that even if DEECD were to release some of the funds withheld from BAWM, it would continue to retain most of the $19.0 million withheld on the basis that those funds related to the CSP and Warehousing dual qualification.

196    At 8.17pm on 21 August 2014 Mr Langtree forwarded an email to Mr Hutchinson (copied to Ms Bonnici and Mr Gréwal) providing what he referred to as background information regarding disclosure. According to Mr Hutchinson’s evidence, he had asked Mr Langtree to compile information for him regarding the Victorian audits to further inform his “consideration of the potential materiality to Vocation of their outcome”. He was no doubt aware that he would be questioned by the board about that matter at a board meeting that was held the next day.

197    In his email Mr Langtree said:

…

-    On 15 August, 2014 HESG indicated that they were considering varying the measure taken on 3 July, 2014 to withhold funds such that only Funds attributable to CSP and Warehousing would continue to be withheld. This correspondence also sought to understand whether any other qualifications were connected with the brokers named by BAWM in relation to CSP and Warehousing (namely Rise, Community Training Initiatives, Australian Careers Advisory, BSI Learning and National Employment Institute who had not yet been named by BAWM but was clarified in future correspondence). Within this correspondence, HESG invited BAWM to provide any further information which may be relevant to this consideration.

-    On 20 August, 2014 BAWM provided a written response to HESG which included further information regarding the consideration to vary the measure taken on 3 July, 2014 to withhold funds such that only Funds attributable to CSP and Warehousing would continue to be withheld. In that correspondence we noted that of the current Funds withheld, just over $2M (or 10.7%) related to participants referred by the five brokers under discussion.

-    On 21 August, 2014 HESG sought further clarification from BAWM regarding the variation being considered by HESG. This email stated that if BAWM confirmed the statements in the email (which we predominantly do) the Department would prepare a brief for consideration.

…

198    It is apparent from this email that Mr Langtree was familiar with the correspondence from DEECD of 15 August 2014 and 21 August 2014, both of which indicated that any variation of the measures imposed on BAWM would not involve the release of funds referable to CSP and Warehousing which DEECD would continue to withhold.

199    Mr Langtree’s email concluded with his summary which was as follows:

At all times during our engagement with HESG we have cooperated fully to further their understanding of the programs in question. Each step has provided a progressive indication that this matter continued to be under review, however no action has been taken in relation to qualifications other than CSP and Warehousing. In addition, the later correspondence has continued to confirm that HESG would consider a variation to their measure taken to withhold funds. The extent of this variation would see approximately $10M in active payments processed to BAWM, which (in my opinion) would easily cover our required level of ongoing working capital.

I am confident that our response in relation to Aspin Pty Ltd should more than adequately address the issues identified in relation to CGEA and that this matter would be resolved in a speedy fashion.

For the above reasons, I concur that it does not currently appear prudent to release information to the ASX, as anything we might currently release would be incomplete in nature and in substance, and that this may actually cause our shareholders to be misinformed of our current status given the complexity and continuing status of these issues.

200    Mr Langtree’s calculations at this date made no allowance for the possibility that DEECD would seek to justify the withholding by reference to prior claims made by BAWM in respect of CSP and Warehousing which BAWM had already paid in the period January to June 2014. I will return to this topic later in these reasons when referring to correspondence exchanged between Vocation and DEECD on 25 and 26 August 2014.

201    Any hope that there would be a quick release of approximately $10.0 million to BAWM or a quick acceptance of the Aspin offer was dashed by Ms Watts’ letter to Ms Bonnici of 26 August 2014. I will come to that letter shortly.

202    There is another important point to make concerning Mr Langtree’s email. It repeats the same “just over $2.0M (or 10.7%)” figure quoted in Ms Bonnici’s letter to Ms Watts of 20 August 2014. As that letter and Mr Langtree’s email makes clear, that was said to constitute the proportion of the withheld funds that related to enrolments by five nominated brokers who enrolled students into courses run by or on behalf of BAWM in respect of which payments had been withheld (ie. about 10.7% of approximately $18.7 million).

The 22 August 2014 Board Meeting

203    The Vocation directors met the next morning at 11.00am on 22 August 2014. All directors were present and Mr Gréwal and Mr Bryan Koster of JWS were also in attendance. The principal matter discussed at the board meeting was the Victorian audits. During the course of the meeting there was a discussion concerning the letter of complaint written by DEECD to the ASX on 21 August 2014 concerning Vocation’s continuous disclosure obligations. The minutes of the meeting of 22 August 2014 (which were not signed by Mr Dawkins until 25 September 2014) record the following:

JD advised communications have been initiated with the ASX following the Department of Education and Early Childhood Development’s (DEECD) letter of 21 August 2014 to the ASX, also copied to MH (21 August Letter). The Board noted a copy of the 21 August Letter had been circulated to all Directors.

The Board noted the 21 August Letter was a complaint to the ASX regarding Vocation’s continuous disclosure obligations and notified the ASX of:

•    The withholding of payments to BAWM and Aspin;

•    The suspension of certain new enrolments.

BK updated the Board on discussions he has held with Vocation’s Listing Advisor at the ASX, including:

•    ASX is aware of the media on the Victorian audits but has not yet received the 21 August Letter;

•    That it is the view of Vocation that there is no material information for disclosure to the market as the investigation is in progress, payments are being withheld but the amount of funds expected to be affected are not material;

•    ASX has requested an email be sent explaining the background and Vocation’s position regarding disclosure. BK noted that a letter for this purpose has been drafted and circulated to Directors.

The Board discussed disclosure and the reasons for concluding that disclosure is not required under Listing Rule 3.1.

BK advised, that after discussions with MH, MG and Wendy Bonnici, and a review of relevant correspondence, it is envisaged that the expected outcome of the investigation is that only a relatively small amount of funding is expected to be affected which is not material in Vocation’s context. BK also advised that management has advised that:

•    these investigations are not uncommon;

•    although it appears the dispute is escalating with the 21 August Letter to the ASX, at this stage it continues to look like the underlying matters are being resolved; and

•    management has reviewed the estimates of revenue impact of students likely to be affected and reconfirmed the $2 million estimate

MH explained the issues the DEECD has raised, the effect on Aspin and BAWM and the matters to be responded to within 7 days. MH advised that no contracts have been suspended although funds continued to be withheld. The Board asked what proportion of continuing enrolments were affected and MH responded that less than 20% of BAWM enrolments and most of Aspin, albeit Aspin was quite small relative to BAWM.

MH confirmed that, as far as he is aware, the majority of the withheld payments will be released and that there has been no discussion of further enrolments being suspended. MH advised he has asked for confirmation from DEECD that only part of the withheld payments are at risk but has not received a response. The Board requested copies of the parts of the correspondence that indicate that only part of the withheld payments are at risk.

…

After extensive discussion and advice from JWS regarding disclosure requirements, the Board concluded that disclosure is not required at this stage under Listing Rule 3.1, as the expected outcome of the investigation is that only a relatively small amount of funding ($2 million) is expected to be affected which is not material in Vocation’s context and the outcome would not be expected to have a material effect on the price or value of Vocation’s securities. JWS confirmed their view that this approach was appropriate.

The Board noted, that despite the matter not being required to be disclosed under Listing Rule 3.1, a response to media speculation may be helpful.

The Board discussed the current draft form of market release that has been prepared should an announcement be required to respond to media speculation.

The Board agreed:

1.    Discussions with the ASX should continue regarding potential disclosure;

2.    If a market release is required today, the form of the announcement is as discussed during this meeting, with MH delegated to finalise the form of the announcement, in consultation with legal advisors; and

3.    Further discussion should be held with the Board if a more detailed market release is required.

204    Later that day, Mr Hutchinson forwarded to Mr Simon Daniels of the ASX a letter dated 22 August 2014 responding to DEECD’s letter of complaint. It is apparent that Mr Koster approved that response.

205    Mr Hutchinson’s letter to the ASX of Friday, 22 August 2014 refers to correspondence between BAWM and DEECD in which BAWM sought a partial release of funds. The letter includes the following:

•    On 20 August 2014 BAWM provided a written response to HESG, which included further information regarding the potential variation of the measure taken on 3 July 2014 to withhold all payments of funds to BAWM. The response provided reasons why only the funds attributable to the CSP and Warehousing courses should continue to be withheld. In that correspondence BAWM noted that of the $18.8m (inclusive of GST) of current funds withheld, just over $2m (or 10.7%) (inclusive of GST) related to participants trained by the five brokers noted above that are of interest to HESG.

•    On 21 August 2014 in an email to BAWM, HESG sought further clarification from BAWM regarding the variation being considered by HESG. The email stated that if BAWM confirmed certain matters stated in the email the HESG would seek internal approval for the variation of the measure taken to withhold all funds from BAWM. If this variation is approved then approximately $10m in payments will be paid to BAWM with a further approximately $6m to follow.

•    On 22nd August 2014 in an email to HESG, BAWM confirmed these matters, and provided additional information including a report of Student data that HESG had requested.

Conclusion re BAWM

We consider that:

•    Given the HESG investigation relates to only 2 specific qualifications (CSP and Warehousing) and the current focus of HESG relates to referrals from 5 specific brokers into other qualifications (where these referrals equate to approximately 15% of the current outstanding claims); and

•    Given that the suspension of enrolments only relates to CSP and Warehousing,

none of:

•    the investigation being conducted by HESG into BAWM;

•    the withholding of funds and suspension of enrolments implemented in connection with the investigation; nor

•    the expected outcomes of the Investigation,

constitute material information that should be disclosed on ASX.

In addition, given the complexity and continuing status of the matters being investigated, any disclosure of the investigation or measures implemented in connection with it is likely to mislead our shareholders as to the significance of the investigation.

206    As to Aspin, Mr Hutchinson’s letter indicated that the payments withheld from Aspin were for an amount of $1.86 million inclusive of GST and that Aspin had proposed an “approach to be taken by Aspin regarding the issues raised” which Vocation believed could see the issue fully resolved within a few days. It was also asserted that the investigation into Aspin, the withholding of funds and suspension of enrolments, and the expected outcomes of the investigation did not constitute material information that should be disclosed to the ASX.

207    There are a number of points to make at this stage in relation to the board meeting of 22 August 2014.

208    First, the minutes record that the board noted both the withholding of payments to BAWM and Aspin and “[t]he suspensions of certain enrolments”. The directors (as with Ms Bonnici and Mr Langtree) did not appreciate that the suspensions extended to all new enrolments. The letter to the ASX made the same mistake, asserting that “the suspension of enrolments only relate to CSP and Warehousing”. A careful review of the correspondence imposing the suspension would have indicated to the directors that they extended to all VET courses offered by BAWM and Aspin.

209    Secondly, the minutes indicate that management confirmed that the estimated effect on revenue was $2.0 million. This is a figure mentioned in Mr Langtree’s email sent late the previous evening. However, Mr Langtree’s reference to $2.0 million was not an estimate of what amount might be permanently withheld, but his estimate of what portion of CSP and Warehousing revenue related to enrolments by the five brokers. As I will explain, Mr Langtree’s later calculations indicate that the Vocation’s exposure was greater than this.

210    Thirdly, Mr Hutchinson was asked what proportion of enrolments was affected by the suspensions: he responded less than 20% for BAWM, and most for Aspin. This significantly understated the effect of the suspensions that were then in place against BAWM and Aspin in two respects. In the first place, the evidence shows that approximately 50% of BAWM’s revenue came from enrolments in CSP and Warehousing. In the second place, Mr Hutchinson misunderstood the scope of the suspensions which in fact applied to all enrolments by BAWM and Aspin.

211    Fourthly, only a few days before this meeting, Mr Hutchinson had informed the board at the board meeting of 19 August 2014, that the suspensions were likely to negatively affect Vocation’s earnings in the range of $8.0 million to $10.0 million. This information is not referred to in the minutes of the meeting held on 22 August 2014. There is no evidence to suggest that any director asked Mr Hutchinson whether his previous estimate had changed and, if so, why. In fact, the evidence given by Mr Dawkins suggested that nothing had changed. When questioned about Mr Hutchinson’s estimate, Mr Dawkins’ said:

Do you see that’s, in context, a reference to a further eight to 10 million dollars out of the financial year 2015 budget; would you agree? ––– That’s what he’s saying.

Yes. Now, I take it you regarded that as a significant amount of money that was going to be removed from the FY15 budget? ––– Well, these were issues which had to be taken into account. I’m not sure that they were settled issues.

But his best estimate, would you accept, as at 13 August, when this report was circulated, that the effect of the audit findings to date was that Vocation would have limited use of certain qualifications, for example competitive systems and warehousing? ––– There was no – there was no concrete information. That was his best guess.

And when you say best guess, he was employed as the chief executive officer to provide considered advice to the board on future events and prospects for the company, wasn’t he? ––– Yes.

Were you aware of any alternative information from Mr Hutchinson to the effect that that estimate that he provided was inappropriate? ––– No.

212    Fifthly, the ASX requested that Vocation send it an email explaining Vocation’s position. The response ultimately provided to this request was Mr Hutchinson’s letter sent the same day which had been approved by Mr Koster and by the directors. That letter was incorrect insofar as it asserted that the suspension of enrolments only related to CSP, Warehousing and CGEA.

213    Mr Hutchinson’s letter also indicated that the “just over $2.0m (or 10.7%)” figure quoted by him in the letter related to referrals from five specific brokers into courses other than CSP and Warehousing. That implies that Ms Bonnici’s and Mr Langtree’s $2.0 million figure did not take into account the potential for any permanent withholding of funding claimed in respect of CSP and Warehousing. Further, according to Mr Hutchinson’s letter, the referrals by brokers into other courses equated to approximately 15% of currently outstanding claims and although he does not specify the relevant figure, 15% of $18.8 million is $2.9 million. In short, the letter is confusing, suggesting that the risk of permanent loss might be $2.0 million or $2.9 million plus an additional amount in respect of CSP and Warehousing.

214    There was a noticeable shift in the advice given to the board by Mr Hutchinson between 19 August and 22 August 2014. At the earlier meeting on 19 August he gave what was, in my opinion, a relatively frank assessment of the revenue impact of the suspensions. However, at the 22 August meeting he referred to the impact on numbers of enrolments rather than any revenue impact. One possible explanation for this change in position may be the conference call held on 21 August 2014 discussing Vocation’s financial results for the first year ending 30 June 2014, at which Mr Hutchinson and Mr Gréwal had effectively committed Vocation to the position that changes to the VTG funding arrangements since 30 June 2014 were not material. I think it likely that from that point forward Mr Hutchinson felt quite constrained by what had been said during the conference call in relation to the funding arrangements with DEECD.

215    There were some email communications between Mr Koster, Ms Keenan, Mr Hutchinson, Mr Gréwal and Mr Dawkins in the afternoon of Sunday, 24 August 2014 in relation to a possible ASX announcement by Vocation. In one email, Mr Gréwal suggested that Vocation might issue an ASX announcement providing information on some “post balance sheet events” which would include (I infer) information concerning the withholding of funds by DEECD. In response, Ms Keenan expressed her concern that disclosing more information on the status of funding contracts in an ASX announcement would not look good given the answers given to Mr Pendlebury’s questions during the investor conference call. She suggested that Vocation issue an ASX announcement stating:

Vocation has become aware of misinformation in the market regarding the funding contracts that Vocation has with the Department of Education and Early Childhood Development in Victoria. Vocation takes its disclosure obligations seriously. It is the view of Vocation’s Board, having consulted with the company’s external legal counsel [and ASX], that all material information has been disclosed and that the Company has discharged its disclosure obligations.

216    In another email sent that afternoon, Mr Koster asked Mr Hutchinson how high the level of confidence was that DEECD would release most of the withheld money and whether there were any expected negative consequences from the review. According to his email Mr Koster was “just trying to confirm the statement that the review and its expected outcomes are not material to Vocation.” Later in the day he advised the recipients (Mr Hutchinson, Mr Dawkins and Mr Gréwal) that such a statement was “… from a legal perspective … fine provided Vocation is confident of getting most of the withheld money and also confident there will not be other material adverse consequences to revenue from DEECD that have not otherwise been anticipated.”

The 25 August AFR 2014 Article

217    The next business day, Monday, 25 August 2014, there was another article column concerning Vocation in the AFR, this time in the “Rear Window” column. The article included the following:

Still, around 80 per cent of Vocation’s revenues in the 2014 financial year came from Victorian subsidiary BAWM, which has achieved stratospheric revenue growth - from $2.4 million in FY11 to $110 million in FY14. Around 90 per cent of that revenue is in training contracts with the Victorian government.

On Thursday, Vocation posted its full-year results, which maintained the company’s “current government support” in Victoria is “$1.2 billion of funding over the next three years”. But just the day before, Victoria’s Education Department advised BAWM its funding was being suspended pending the outcome of a full audit.

We hear government auditors had been crawling over BAWM’s books for the previous six weeks.

One analyst asked Hutchinson on Thursday about BAWM’s Victorian government funding, and the Vocation chief said there was no change to any funding arrangements as of July 1. But what about after that date? “Vocation takes its continuous disclosure obligations extremely seriously and is comfortable that it has at all times fulfilled these obligations,” said a company spokesperson.

218    None of the newspaper articles was relied on by ASIC to prove the truth of any of the statements made in it. There is good reason for that. The articles contained errors (some minor, others not). For example, it was not Mr Hutchinson who was asked about changes to funding arrangements during the conference call on 21 August 2014 but Mr Grewal. Nor was Mr Hutchinson asked whether there had been a change to any funding arrangements as of 1 July 2014. On the contrary, they were in fact asked the very question that the journalist raised in the article (ie. Had there been any changes to BAWM’s funding arrangements since the 30 June 2014 balance date?). However, the publication of the AFR article on 25 August 2014 provides context for the Vocation board meeting that was held on that morning, and the ASX announcement that Vocation issued prior to the market opening.

The 25 August 2014 Board Meeting

219    At about 8.00am on Monday, 25 August 2014, a meeting of the Vocation directors was held by way of teleconference. The meeting concluded at about 10.00am. The directors who participated were Mr Dawkins (JD), Mr Hutchinson (MH), Mr Tucker (ST), Ms Tredenick (MT) and Mr Halley. Others in attendance included Mr Gréwal (MG), Mr Bryan Koster (BK) and Mr James Rozsa (JR) of Johnson, Winter & Slattery (JWS). The relevant minutes of the meeting (extracted below) refer to participants by reference to their initials.

220    There were four topics discussed at the directors’ meeting. However, the principal topics that were discussed were the funding contracts with DEECD, whether Vocation needed to make an ASX announcement concerning that matter and, if so, in what terms. Mr Koster and Mr Rozsa of JWS were there to provide advice. The minutes of the directors’ meeting (which were also not signed by Mr Dawkins until 25 September 2014) relevantly state:

VICTORIAN AUDITS

The Board was updated on events since 22 August 2014, including:

…

•    following discussions on 24 August and advice received by the Company’s Melbourne lawyers, a letter has been prepared by the Company’s legal advisors in Melbourne to send to the Department of Education and Early Childhood Development (DEECD) requesting that withheld payments that are not subject to dispute be released under the contract, with an email sent by Wendy Bonnici in advance last night (email was circulated) to prepare the department for the letter. It was agreed to circulate the letter to DEECD to the Board; and

•    ASX has not responded to the letter sent on 22 August 2014 by MH in response to the disclosure issue but is expected to respond today.

BK reconfirmed that ASX had not required disclosure on 22 August 2014 and were satisfied with Vocation’s response to date. The Board noted JWS continues to maintain contact with the ASX and confirmed JWS saw no additional issues in what was raised in the press.

The Board noted however the ASX may require a market release as a response to the increased media coverage.

MH advised the next payment from the Victorian Government is due on 12 September and that there is no reason to believe that payment will be withheld.

MG updated the Board on the Company’s cash position:

•    cash to meet commitments is available beyond 12 September;

•    a further facility from the banks is being negotiated as an amendment to the current facility agreements and as a contingency. MG advised he would expect this to be in place within 10 days.

MH also advised that payments to RTO Edge contractors can be held if payments to Vocation continue to be withheld as our liability to pay only commences once we receive the funds ourselves. To date (July and August) we have however made these payments.

The Board asked that the cash flow projections be updated and account for a number of possible scenarios

After lengthy discussion of the updates provided and issues raised, the Board:

•    noted the update on the cash position; and

•    confirmed the previous view that the matter is not material for disclosure at this stage under Listing Rule 3.1, as the expected outcome of the investigation is that only a relatively small amount of funding is expected to be affected which is not material in Vocation’s context and the outcome would not be expected to have a material effect on the price or value of Vocation’s securities.

The Board agreed to discuss the issue again once a response is received from DEECD regarding the letter requesting partial payment.

…

Cash flow

MH/MG advised the Board that they had initiated running various cash flow scenarios and would circulate later in the week.

ASX Discussions

BK updated the Board on his discussions with ASX and advised that, while ASX agrees that disclosure is not required under Listing Rule 3.1 based on information provided by Vocation, in the light of media speculation ASX thinks it is in Vocation’s interests to put out a response, noting that the article in Rear Window was different to information referenced in the letter received on Friday.

The Board agreed that a market release be issued noting that:

-    Contracts have not been suspended

-    Recent payments are withheld pending review

-    Anticipating [sic] outcomes will not be material

A final draft copy was circulated and agreed for MG to release to the ASX.

JR advised he received an email from the ASX asking Vocation to lodge an announcement providing a clarification of the Victorian Education Department investigation and the effect on VET revenues and contracts quantum. The Board agreed that the draft approved by the Board covered those aspects adequately.

The Board agreed that:

-    ST (or maybe MT) would be available to join WB for a call with the department (as referenced in WB email yesterday);

-    DH to review cash flows with MG/MH; and

-    JD to be kept in reserve for possible escalation (noting JD is in Melbourne tomorrow)

221    The minutes record that Mr Koster reconfirmed that the ASX had not required disclosure on 22 August 2014 and was satisfied with Vocation’s response to date. To the extent it is suggested by this minute that Mr Daniels had previously advised Mr Koster that no disclosure was required, I very much doubt that it is accurate. The minutes of 22 August 2014 do not suggest Mr Daniels provided any such advice. On the contrary, they note that an announcement may be required. Moreover, Vocation’s written response to DEECD’s letter of complaint was not sent to the ASX until 4.21pm on Friday 21 August 2014 by which time the market had closed. There is nothing in the evidence to suggest that Mr Koster was communicating with Mr Daniels at any time between then and 9.47am on 22 August 2014. Mr Daniels’ file note of 25 August 2014 suggests that he was not contacted again until about 9.20am on that date when Mr Koster telephoned him. It also suggests that there was one relevant telephone communication between them in which Mr Daniels suggested that an announcement be made and that:

VET [ie. Vocation] should clarify its position wigiven [sic] the article appeared to overstate the impact on VET [and] a clarification [on] … the Victorian Education Department and its affect [sic] on revenues.

222    Mr Hutchinson advised the board, as recorded in the minutes, that there was no reason to believe that payment would not be received from DEECD by 12 September 2014 when he said the next DEECD payment was due. The clear implication was that there was no reason to expect that DEECD would not pay to BAWM on that date an amount in the vicinity between $10.0 million and $16.0 million. I say this because Mr Hutchinson had told the ASX in his letter of 22 August 2014 that DEECD was considering a possible variation of the measures taken against BAWM which, if approved, would result in approximately $10.0 million being paid to BAWM, with a further $6.0 million to follow. The inference I draw is that the board was informed by Mr Hutchison on 25 August 2014 that BAWM could expect to receive an amount in the vicinity of between $10.0 million and $16.0 million on or about 12 September 2014. That advice appears to have reflected his understanding at around this time that a substantial portion (but not necessarily the bulk) of the funds withheld from BAWM would be released within a few weeks.

223    The minutes record that the board confirmed its previous view that the matter (presumably the matter of the contractual measures and their impact) was not material as the expected outcome would result in the withholding of a “relatively small amount”.

224    The board agreed to discuss the matter again once BAWM received a response from DEECD to its request for partial payment.

225    The board minutes indicate that Mr Gréwal provided an update to the board on Vocation’s cash position. He advised that a further facility from the banks was being negotiated as a contingency which he expected to be in place within 10 days (ie. by 4 September 2014).

226    The board’s minutes of 25 August 2014 also indicate that the board requested updated cash flow projections. They also record that later in the meeting (which appears to have lasted about 2 hours including a 30 minute break) Mr Gréwal advised the board that cash flow projections were being prepared and would be circulated later in the week.

The 25 August 2014 ASX Announcement

227    As agreed during the course of the board meeting, an ASX announcement headed “Response to press speculation” was issued on 25 August 2014 by Vocation before trading commenced. This announcement was made notwithstanding the board’s view (as recorded in the minutes) that no disclosure was required. The announcement relevantly stated:

Vocation is aware of press speculation regarding the Company’s Victorian funding contracts.

Vocation would like to reiterate that it takes its disclosure obligations extremely seriously and is comfortable it has complied with these obligations at all times. However in light of the speculation referred to above, Vocation considers it prudent to make the following points:

•    Vocation’s funding contracts with the Victorian Department of Education and Early Childhood Development (DEECD) have not been suspended and are continuing.

•    The DEECD is undertaking a review of three of the courses conducted by Vocation for which Vocation receives funding under those contracts. As part of the review process, the DEECD has withheld recent payments under the funding contracts.

•    Vocation considers that neither the review nor its anticipated outcomes are material to Vocation.

Vocation has had a longstanding and constructive relationship with the DEECD. Vocation is working with DEECD to bring the review to an early conclusion.

The operation of funding contracts and the audit and review processes that accompany those are part of Vocation’s normal business activities.

228    Mr Daniels sent an email to Mr Koster at around 10.02am confirming the advice he had given Mr Koster in their conversation earlier that day. This included his advice that Vocation issue a clarification as to DEECD’s investigation and the effect on Vocation’s “revenues and contract quantums”. The ASX announcement of 25 August 2014 was released at around 10.05am just minutes after Mr Daniels sent his email to Mr Koster.

229    Mr Dawkins gave evidence that there was discussion at the 25 August 2014 board meeting:

… saying or agreeing, that if any mention was made of $20 million being withheld, that could cause a misunderstanding in the public that $20 million was really at risk, even if the statement went on to say that in Vocation’s view $20 million was withheld but only $2 million was at risk.

230    Mr Dawkins also gave evidence, which I accept, that Mr Koster had suggested that instead of referring to a dollar amount, “we could mention that funding had been withheld, and the fact that it was not material would communicate that the amount at risk will be a small figure.”

231    Mr Dawkins was cross-examined in relation to why he considered that it would be misleading for Vocation to include in its ASX announcement a reference to the amount of money withheld by DEECD coupled with a statement to the effect that only $2.0 million was at risk. In the course of Mr Halley SC’s cross-examination of Mr Dawkins on this issue, I asked Mr Dawkins several questions the answers to which were as follows: