Federal Court of Australia

Phoenix Institute of Australia Pty Ltd (in liq), in the matter of Phoenix Institute of Australia Pty Ltd (in liq) [2021] FCA 1203

ORDERS

THE COURT ORDERS THAT:

1.    Pursuant to section 60-10(1)(c) of the Insolvency Practice Schedule (Corporations) (IPSC) being Schedule 2 to the Corporations Act 2001 (Cth) (Corporations Act) the second and third plaintiffs (the Special Purpose Liquidators (SPLs)) are entitled to receive remuneration of $89,930 (excluding GST) for work performed in the liquidation of the first plaintiff (Phoenix Institute of Australia Pty Ltd (in liquidation) (Company)) for the period from 28 May 2021 to the conclusion of the SPLs' appointment to the Company.

2.    Pursuant to section 90-15(1) and / or (3)(b) of the IPSC that upon lodgement with the Australian Securities and Investments Commission (ASIC) of ASIC Form 5603 (End of administration return) and ASIC Form 505 (Notification of appointment or cessation of an external administrator), the SPLs cease their appointment as the additional liquidators appointed to the Company.

3.    The requirement pursuant to rule 9.2(2) of the Federal Court (Corporations) Rules 2000 (Cth) to notify certain parties of this application be dispensed with to the extent that the SPLs have not already complied with the requirement.

4.    The second and third plaintiffs' costs of this application be costs in the liquidation of the Company.

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

REASONS FOR JUDGMENT

CHEESEMAN J:

INTRODUCTION

1    By Originating Application filed on 10 September 2021, the second and third plaintiffs, the Special Purpose Liquidators (SPLs) apply for:

(a)    an order approving the remuneration of the SPLs in respect of their work performed in the winding up of the first plaintiff (Phoenix). Approval is sought in respect of remuneration in an amount of $89,930 (excluding GST) for work performed during the period from 28 May 2021 to the cessation of the SPLs’ appointment, such work having been performed following entry into a second funding agreement, which agreement was approved by the Court on 27 May 2021: Langdon, In the matter of Phoenix Institute of Australia Pty Ltd (in liq) (No 2) 2021 FCA 571 (Phoenix (No. 2));

(b)    an order permitting the cessation of the SPLs' appointment to Phoenix; and

(c)    ancillary orders, dispensing with certain notice requirements, in connection with the SPLs' cessation of appointment, to the extent that the SPLS have not already so notified.

2    The SPLs rely on affidavits of Jennifer Nettleton, one of the SPLs, and of Sharon Burnett, the solicitor with carriage of this matter for the SPLs. In addition, the SPLs tendered a circular to creditors notifying of the imminent cessation of their appointment dated 16 August 2021.

3    The SPLs have notified the Australian Securities and Investments Commission (ASIC) of this application and the hearing scheduled today. ASIC confirmed by email this morning that it does not propose to intervene in the proceedings.

4    For the reasons which follow I am satisfied that orders should be made substantially in the form sought by the SPLs.

FACTUAL BACKGROUND

5    Phoenix has been subject to various forms of external administration since 2016. The SPLs were appointed to Phoenix on 4 June 2020 on the application of the Commonwealth of Australia, acting through the Department of Education, Skills and Employment.

6    The background to the operations of Phoenix and its entry into external administration is set out in the Court's reasons for judgment on the application to appoint the SPLs: Commonwealth of Australia (Department of Education, Skills and Employment) v Phoenix Institute of Australia Pty Limited (in liq) [2020] FCA 937 (Phoenix (No. 1)) at [4] to [61]. Familiarity with that detailed background is assumed for the purpose of these reasons. For the purpose of this application the following summary will suffice.

7    Phoenix was a vocational education and training (VET) provider. It had been incorporated in 1998 and from 2015 was a wholly owned subsidiary of Australian Careers Network Limited which itself is now in winding up: Phoenix (No. 1), [4], [28], [29].

8    In 2015, Phoenix accessed funding through a Commonwealth government scheme known as the VET FEE-HELP scheme: Phoenix (No. 1), [5] - [13]. In broad compass, the Commonwealth provided funding in advance to VET providers in respect of the fees payable by students enrolled in the provider's recognised courses and who elected to pay their fees by way of VET FEE-HELP assistance. Once funds were advanced to meet a student's fees to the relevant VET provider, the student then became liable to repay the Commonwealth the amount of VET FEE-HELP funding assistance received by their VET provider on their account. Repayment was required once the student's income reached a particular threshold.

9    In the 2015 calendar year, Phoenix received VET FEE-HELP advance payments in the amount of $106,598,509.48: Phoenix (No. 1), [15].

10    On about 11 September 2015, the relevant regulator, Australian Skills Quality Authority (ASQA), issued an audit report in relation to Phoenix's compliance with the Standards for Registered Training Organisations 2015. In that report, ASQA concluded that Phoenix was non-compliant in a number of respects: Phoenix (No. 1), [17]. On 12 October 2015, ASQA issued Phoenix with a notice of intention to make a decision to cancel Phoenix's registration and the Department issued Phoenix with a notice of intention to suspend Phoenix's approval as a VET provider: Phoenix (No. 1), [18].

11    On 23 November 2015, ASQA cancelled Phoenix's registration as a training organisation and, on 23 March 2016, a delegate of the Minister for Vocational Education and Skills revoked Phoenix's approval as a VET provider: Phoenix (No. 1), [20] - [22].

12    On 21 March 2016, Phoenix entered into voluntary administration: Phoenix (No. 1), [28]. On 24 May 2016, the creditors of Phoenix approved it entering into a deed of company arrangement (DOCA), as did all but one other entity in the corporate group within which Phoenix was held: Phoenix (No. 1), [32].

13    On 13 March 2020, a meeting of creditors resolved to have the DOCA which Phoenix had entered (along with other entities in its corporate group) terminated and for it to be placed into liquidation. Phoenix entered into liquidation on 18 March 2020: Phoenix (No. 1), [40] - [41].

14    In appointing the SPLs to Phoenix, the Court was satisfied that (Phoenix (No. 1), at [56] - [64]):

(a)    the Department had standing to make the application;

(b)    there were matters in relation to the affairs of Phoenix which required investigation by a liquidator with a view to possible recovery for creditors which had not been investigated by the previous external administrators;

(c)    the existing liquidators did not have funding to carry out such investigations and the Department was not willing to fund investigations by those liquidators but had agreed to fund investigations by the SPLs (the relevant funding agreement was before the Court); and

(d)    the appointment of the SPLs would be beneficial to the winding up of Phoenix as a whole. If the SPLs' investigations resulted in recoveries, such recoveries would be available to creditors generally. Absent recoveries, it would be the Department alone that would bear the cost of the investigations.

15    Accordingly, on 4 June 2020, the Court appointed the SPLs to perform investigations in accordance with a Scope of Works annexed to the Court's orders. In order to facilitate those investigations being undertaken by the SPLs, the Court approved the entry by the SPLs and the Department into the First Funding Agreement: Phoenix (No. 1), [69] - [72].

16    Subsequently, on 27 May 2021, the Court approved entry into a Second Funding Agreement: Phoenix (No 2), [7]. This application was necessary because s 477(2B) of the Corporations Act 2001 (Cth) limits the power of a liquidator to enter into agreements where the term of the agreement, or the time for performance under it, extends beyond three months. The Second Funding Agreement was of that kind. The Court was satisfied that entry into the Second Funding Agreement was a proper and bona fide exercise of the SPLs' powers having regard to the background against which the application was brought, the reason and purpose for the appointment of the SPLs, and the Further Scope of Works proposed to be undertaken: Phoenix (No. 2), [7]. The SPLs entered into the Second Funding Agreement with the Department on 28 May 2021. The work undertaken after entry into the Second Funding Agreement is described later in these reasons.

17    On 9 August 2021, the Department gave notice terminating the Second Funding Agreement.

18    On 3 September 2021, the SPLs provided a remuneration report to the Department. The remuneration report identifies that the SPLs seek approval of their remuneration in the amount of $84,480 (exclusive of GST) for undertaking additional examinations following entry into the Second Funding Agreement, attending to their reporting obligations and completing the administrative tasks of the winding up that were within their remit. A further $5,450 (exclusive of GST) is sought in respect of the work the SPLs will perform in order to finalise their appointment to Phoenix. The Department has confirmed that it has no issues with, or questions in relation to, the SPLs' remuneration report.

THE SPLS' SCOPE OF WORK AND PERFORMANCE OF THAT WORK

19    The work required to be performed by the SPLs is prescribed in:

(a)    the Initial Scope of Works which was annexed to the Court's orders appointing the SPLs; and

(b)    the Further Scope of Works which was incorporated as Schedule 1 to the Second Funding Agreement.

20    The Initial Scope of Works required the SPLs to undertake investigations into the affairs of Phoenix, including by conducting examinations into the examinable affairs of the company pursuant to sections 596A and 596B of the Corporations Act, and to obtain an opinion as to the prospects of any claims, or potential claims, that may be available to be pursued by the SPLs of Phoenix or other officers of the company, or directly by Phoenix itself. By the Initial Scope of Works, the SPLs were empowered to pursue claims, including by commencing proceedings that may be available to Phoenix or the SPLs in relation to matters including those arising out of the SPLs' investigations.

21    The Further Scope of Works required the SPLs to undertake further examinations into the affairs of Phoenix and commence, conduct and continue legal proceedings against the former directors and officers of Phoenix. The Further Scope of Works was agreed following discussions between the SPLs and the Department and having regard to the Department's desire to further consider its position in respect of two claims which had been identified as able to be brought against the directors and officers of Phoenix and to enable the SPLs to consider the position of Phoenix in light of the results of further investigative work.

22    In fulfilment of the requirement of the Initial Scope of Works and the Further Scope of Works, the SPLs performed the following tasks:

(a)    documents were obtained pursuant to orders for production and summonses for examination that the SPLs caused to be issued to directors, officers and former employees of Phoenix as well as entities which engaged with Phoenix prior to its entry into external administration;

(b)    an extension of the time in which proceedings for recoveries of voidable transactions may be brought was obtained by the SPLs in order to preserve the position while their investigations were continuing;

(c)    examinations were conducted in two stages: during February and March 2021 an initial set of examinations took place involving eight examinees (including directors and officers, the former auditor and former employees of Phoenix) and then in July 2021, following entry into the Second Funding Agreement, further examinations were conducted;

(d)    a legal opinion was obtained by the SPLs and they reported to the Department in respect of claims which may be available to them or Phoenix and the likely costs of pursuing such claims;

(e)    proceedings were commenced against former directors and officers of Phoenix in order to preserve those claims while the Department further considered its position. The proceedings were not served, in order to avoid incurring costs at a time during which a final decision had not been made as to whether to proceed with those claims. Instead, an extension of time in which to serve the proceedings was obtained;

(f)    advice was obtained from a forensic accounting expert and counsel; and

(g)    the SPLs conferred with the Department.

23    As noted earlier, on 9 August 2021, the Department gave notice terminating the Second Funding Agreement. Accordingly, the SPLs discontinued the proceedings they had commenced against the former directors and officers of Phoenix as funding was not available to enable the claims to be pursued.

24    Ms Nettleton is chartered accountant, registered liquidator and executive director of KordaMentha, a professional services firm operating in the area of corporate restructuring and insolvency. She has practised for more than 20 years as an accountant specialising in corporate restructuring and insolvency matters in Australia and as a registered liquidator since 2001.

25    Ms Nettleton has deposed to the work performed in respect of which approval of the SPLs' remuneration is now sought. She considers that the work has been properly performed and by persons of appropriate seniority. Her conclusion in that regard is supported by the detailed remuneration report that is in evidence. Ms Nettleton further deposes to the necessity of the work performed having regard to: the terms of the Further Scope of Works; the absence of other investigations into the issues considered by the SPLs; the desirability that the very significant sum of funds obtained by Phoenix from the Department be accounted for; the absence of any readily available explanation for the extraordinary growth in, and then rapid failure of, Phoenix's business during 2015; the Department's desire to better understand its position and that of Phoenix; and the need for the SPLs to determine whether litigation would be in Phoenix's best interests, having regard to the likely costs, risks and benefit of such litigation.

LEGISLATION AND PRINCIPLES

Approval of remuneration

26    Section 60-5 of the Insolvency Practice Schedule (Corporations) (IPSC) provides:

An external administrator of a company is entitled to receive remuneration for necessary work properly performed by the external administrator in relation to the external administration, in accordance with the remuneration determinations (if any) for the external administrator.

27    In the absence of a determination by members, creditors, or a committee of inspection, the burden lies with the liquidator to establish that the remuneration claimed is fair and reasonable: Re Sallway, Mossgreen Pty Ltd (in liq) (remuneration of liquidators) [2019] FCA 1771 (2019) 140 ACSR 331, [9] (Perram J); Sanderson as Liquidator of Sakr Nominees Pty Ltd (in liq) v Sakr [2017] NSCA 38; (2017) 93 NSWLR 459, [54] (Bathurst CJ). The court's function is to determine that remuneration by reviewing the relevant material and bringing an independent mind to bear on the relevant issues: Sanderson, [54].

28    In determining an application, it is not necessary for the court to undertake an item by item assessment, but the court may have regard to the rates of charge put forward by an external administrator, the times taken by employees and that external administrator in undertaking the administration and the total remuneration claimed: Re Owen; RiverCity Motorway Pty Ltd (admins apptd) (recs and mgrs apptd) v Madden (No 2) [2012] FCA 312, [22] - [23] (Logan J).

29    Each of the relevant factors in subsection 60-12 of the IPSC must be considered: Sanderson, [53]. The section 60-12 factors are:

(a)    the extent to which the work by the external administrator was, or is likely to be, necessary and properly performed;

(b)    the period during which the work was, or is likely to be, performed by the external administrator;

(c)    the quality of the work performed, or likely to be performed, by the external administrator;

(d)    the complexity (or otherwise) of the work performed, or likely to be performed, by the external administrator;

(e)    the extent (if any) to which the external administrator was, or is likely to be, required to deal with extraordinary issues;

(f)    the extent (if any) to which the external administrator was, or is likely to be, required to accept a higher level of risk or responsibility than is usually the case;

(g)    the value and nature of any property dealt with, or likely to be dealt with, by the external administrator;

(h)    the number, attributes and conduct, or the likely number, attributes and conduct, of the creditors;

(i)    if the remuneration is worked out wholly or partly on a time-cost basis, the time properly taken, or likely to be properly taken, by the external administrator in performing the work;

(j)    whether the external administrator was, or is likely to be, required to deal with one or more controllers, or one or more managing controllers;

(k)    if:

(i)    a review has been carried out under Subdivision C of Division 90 (review by another registered liquidator) into a matter that relates to the external administration;

(ii)    the matter is, or includes, remuneration of the external administrator, the contents of the report on the review that relate to that matter; and

(l)    any other relevant matters.

30    The work done must be proportionate to the difficulty and importance of the task in the context in which it needs to be performed: Sanderson, [55]. Even where work is undertaken in an unsuccessful attempt to recover assets, provided it was reasonable to carry out the work and the amount charged is reasonable, a liquidator is entitled to remuneration for that work: Sanderson, [58].

31    As explained in In the matter of Fearndale Holdings Pty Ltd (admin apptd) (recs & mgrs apptd) [2020] NSWSC 901 at [38], Black J stated:

It is not the Court's role… to undertake a line by line review of the relevant narratives in an insolvency practitioner's billing record, but the Court will generally review the relevant narratives in a broad way in order to satisfy itself that they support the other evidence led in respect of the claimed remuneration.

Cessation of appointment

32    The Court's power under section 90-15 of the IPSC is broad - the provision empowers the Court to make such orders as it sees fit in relation to the external administration of a company and includes the power to order that a person cease to be an external administrator of a company.

33    As an officer of the company, the external administrator has standing pursuant to section 90-20 of the IPSC to apply for an order under section 90-15.

CONSIDERATION

Approval of SPLs’ Remuneration

34    On this application, consideration of the necessity and reasonableness of the work performed by the SPLs is aided by the fact that much of the work the SPLs were obliged to perform (that is, outside of administrative work) was identified in the Initial Scope of Works and Further Scope of Works. Approval is sought only in respect of the work performed under the Further Scope of Works for the reason that approval has already been obtained in respect of the work performed under the Initial Scope of Works. The SPLs submit, and I accept, that consideration of the whole of the work undertaken is relevant to the Court's consideration of the present remuneration application.

35    The Initial Scope of Works and Further Scope of Works have already been the subject of consideration by the Court in Phoenix (No. 1) and Phoenix (No. 2). By those decisions, the Court has determined it appropriate that the First and Second Funding Agreements be entered into in order to facilitate the work the subject of the Initial Scope of Works and Further Scope of Works being undertaken. Given the funding agreements in place, and the acknowledgement that if the work had resulted in any recovery, that recovery would have been for the benefit of all creditors, it was in the interests of all creditors that investigations be carried out by the SPLs and in this way the appointment of the SPLs was beneficial to the winding up of Phoenix as a whole.

36    Upon entry into the First and Second Funding Agreements, the SPLs were obliged to investigate the affairs of Phoenix. They have done so by examining the directors and officers, former employees and the auditor of Phoenix as well as officers of the peak representative body to which Phoenix belonged whilst it traded. Additionally they have obtained documents from a broad range of related and third party entities who had dealings with Phoenix.

37    On the basis of their investigations, the SPLs identified claims and caused Phoenix to commence proceedings against its former directors and officers in respect of those claims. In doing so, the SPLs acted sensibly in seeking to curtail costs by delaying service of the proceedings. They obtained with the sanction of the Court to extend the time for service.

38    By reference to the section 60-12 factors which are relevant to the present application, I am satisfied that:

(a)    the work performed by the SPLs was necessary in order to comply with their obligations under the First and Second Funding Agreements. On the evidence before me there is no reason to doubt the work was properly performed: summonses for examination were obtained by way of application and the examinations were conducted under the supervision of the Court, no applications were made to set aside any summons or order for production obtained by the SPLs and the examinations were undertaken in short order according to the Court's availability;

(b)    the work which the SPLs have to identified as remaining to be performed by them following this application comprises the necessary steps to complete the formalities of their administration;

(c)    the period during which the work was, or is likely to be, performed by the SPLs has been relatively short and a significant amount of work has been undertaken in the available time;

(d)    the quality of the work performed by the SPLs is apparent from the short time frame within which they obtained funding from the Department, undertook investigations, applied for orders and commenced proceedings in order to preserve causes of action and in their liaison and reporting to the Department;

(e)    the work performed by the SPLs was relatively complex - it required the SPLs to gain an understanding of the VET FEE-HELP environment in which Phoenix operated and undertake an investigation into events which had transpired some time ago, in the absence of earlier investigations by those external administrators who had had control of Phoenix prior to the SPLs' appointment;

(f)    the SPLs were required to gather information, assess risk and make decisions quickly against impending expiration of limitation periods; and

(g)    Ms Nettleton’s evidence and the remuneration report reflect that work has been delegated to persons of suitable seniority, detailed summaries of the time spent on the work performed by the SPLs have been supplied to the Department and the Department has confirmed it does not take issue with the SPLs' costs.

39    I also take into account that the work performed had a public interest dimension insofar as it assisted the Commonwealth, acting through the Department, to investigate the use of public funds by Phoenix; that the fees charged by the SPLs have been agreed by the Commonwealth acting through the Department; and that those fees have been and will be met under the First and Second Funding Agreements such that, consequently, there is no adverse impact on any creditor in the winding up of Phoenix.

40    I am conscious that the work undertaken by the SPLs has not led to any recoveries, indeed the proceedings that were instituted but not served have been discontinued. The SPLs submit, and I accept that, despite this, the work performed by the SPLs has been proportionate to the issues they were appointed to investigate. In excess of $100,000,000 in Commonwealth funding was made available to Phoenix. It was appropriate for the Department, through the work of the SPLs, to seek to understand how those funds were disbursed and the events which had led to the collapse of Phoenix. Prior to the SPLs undertaking examinations, the directors of Phoenix had not provided any detailed account of the events which led to the company's collapse.

41    I am satisfied that the SPLs’ remuneration should be approved.

42    The SPLs seek dispensation from the requirement to give notice of the application to the persons specified under rule 9.2(2)(c) of the Federal Court (Corporations) Rules 2000 (Cth) to the extent that such notice has not already been given. I am satisfied it is appropriate to provide that dispensation given that the SPLs' remuneration is to be met by the Department and not from the assets of Phoenix. Accordingly, the persons identified in rule 9.2(2) will not be affected by approval of the SPLs' remuneration which is the subject of this application. The additional time and cost that will be incurred in fully complying with rule 9.2(2) is not warranted in this matter.

Cessation of the appointment of the SPLs

43    The work described in the Initial Scope of Works and Further Scope of Works has been performed. The Second Funding Agreement has been terminated. There is no further funding in place. Upon finalising the confined remaining administrative tasks that have been identified in Ms Nettleton’s affidavit and filing the appropriate documentation with ASIC, it is appropriate that Ms Nettleton and Mr Langdon cease to act as SPLs. Accordingly, I make orders in the form sought by the SPLs.

Associate:

Dated:    6 October 2021