Federal Court of Australia

Ford v Commissioner of Taxation, in the matter of Careers Australia Group Limited (in liq) (No 2) [2022] FCA 1151

ORDERS

THE COURT NOTES THAT:

A.    Directions in the same terms have been made in proceeding VID 749 of 2021, with the intention that the parties will confer in both proceedings and the same orders will be made in both proceedings.

THE COURT DIRECTS THAT:

1.    The parties are to confer with respect to orders for the completion of discovery by all parties on the issue of insolvency as contemplated by the Court’s reasons dated today and, by 28 October 2022, file and serve:

(a)    agreed or, failing agreement, competing orders with respect to such discovery; and

(b)    in the case of competing orders, accompanying outline submissions of no more than 2 pages.

2.    The parties are to confer with respect to the following matters concerning a referral of the question of the insolvency of the plaintiff companies to a referee as contemplated by the Court’s reasons dated today:

(a)    the selection of a referee;

(b)    the questions to be answered; and

(c)    the date on which the reference is to commence and the date by which the referee is to report,

and, by 28 October 2022, file and serve:

(d)    agreed or, failing agreement, competing orders with respect to the referral; and

(e)    in the case of competing orders, accompanying outline submissions of no more than 3 pages.

3.    The parties are to confer with respect to orders for the completion of discovery by all parties on issues arising in the proceeding (other than the issue of insolvency) as contemplated by the Court’s reasons dated today and, by 25 November 2022, file and serve:

(a)    agreed or, failing agreement, competing orders with respect to such discovery; and

(b)    in the case of competing orders, accompanying outline submissions of no more than 6 pages.

4.    Subject to further order, any dispute with respect to the further orders contemplated by directions 1, 2 and 3 above will be determined on the papers.

5.    There be liberty to apply.

6.    Costs be reserved.

7.    The proceeding be listed for further case management on a date to be fixed.

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

ORDERS

THE COURT NOTES THAT:

A.    Directions in the same terms have been made in proceeding VID 238 of 2020, with the intention that the parties will confer in both proceedings and the same orders will be made in both proceedings.

THE COURT DIRECTS THAT:

1.    The parties are to confer with respect to orders for the completion of discovery by all parties on the issue of insolvency as contemplated by the Court’s reasons dated today and, by 28 October 2022, file and serve:

(a)    agreed or, failing agreement, competing orders with respect to such discovery; and

(b)    in the case of competing orders, accompanying outline submissions of no more than 2 pages.

2.    The parties are to confer with respect to the following matters concerning a referral of the question of the insolvency of the plaintiff companies to a referee as contemplated by the Court’s reasons dated today:

(a)    the selection of a referee;

(b)    the questions to be answered; and

(c)    the date on which the reference is to commence and the date by which the referee is to report,

and, by 28 October 2022, file and serve:

(d)    agreed or, failing agreement, competing orders with respect to the referral; and

(e)    in the case of competing orders, accompanying outline submissions of no more than 3 pages.

3.    The parties are to confer with respect to orders for the completion of discovery by all parties on issues arising in the proceeding (other than the issue of insolvency) as contemplated by the Court’s reasons dated today and, by 25 November 2022, file and serve:

(a) agreed or, failing agreement, competing orders with respect to such discovery; and

(b) in the case of competing orders, accompanying outline submissions of no more than 6 pages.

4.    Subject to further order, any dispute with respect to the further orders contemplated by directions 1, 2 and 3 above will be determined on the papers.

5.    There be liberty to apply.

6.    Costs be reserved.

7.    The proceeding be listed for further case management on a date to be fixed.

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

REASONS FOR JUDGMENT

O’BRYAN J:

Introduction

1    On 25 May 2017, Martin Francis Ford and David Laurence McEvoy were appointed as administrators of Careers Australia Group Limited (CAG) and certain of its subsidiaries (collectively, the Careers Group) pursuant to s 436A of the Corporations Act 2001 (Cth) (the Corporations Act). At meetings of the creditors of each of CAG and the subsidiaries convened on 30 June 2017 under Div 5 of Pt 5.3A of the Act, the creditors resolved that CAG and the subsidiaries be wound up and Messrs Ford and McEvoy were appointed as liquidators of the companies. On 31 May 2021, Mr McEvoy retired as liquidator.

2    Prior to its external administration, the Careers Group conducted a business of providing education and vocational services in Australia. The Careers Group derived the majority of its income from Commonwealth funding schemes associated with higher education and vocational education and training being:

(a)    in respect the higher education, the “FEE-HELP” Scheme pursuant to the Higher Education Support Act 2003 (Cth); and

(b)    in respect of vocational education and training, prior to 1 January 2017 the “VET FEE-HELP” Scheme pursuant to the Higher Education Support Act 2003 (Cth) and from 1 January 2017 the VET Student Loans Scheme pursuant to the VET Student Loans Act 2016 (Cth).

3    The liquidator has commenced two proceedings in this Court seeking to recover moneys for the benefit of creditors. The first proceeding (VID 238 of 2020, which I will refer to as the Preference Proceeding) was commenced on 8 April 2020. The second proceeding (VID 749 of 2021, which I will refer to as the Directors Proceeding), was commenced on 16 December 2021. There is substantial overlap in the plaintiff companies. The following broad observations can be made about the proceedings:

(a)    first, while the Preference Proceeding was commenced some 20 months ahead of the Directors Proceeding, it has not advanced far;

(b)    second, both proceedings, but particularly the Directors Proceeding, raise a large number of disputed factual allegations and the determination of those matters at trial can be expected to involve a very large body of evidence and a lengthy hearing;

(c)    third, both proceedings raise a common question concerning the date on which the relevant Careers Group companies became insolvent;

(d)    fourth, the defendants in the Directors Proceeding are represented by six different legal teams which will result in very substantial legal expenses in the defence of that proceeding.

4    At a concurrent case management hearing for both proceedings conducted on 28 March 2022, the Court determined that the overarching purpose of the civil practice and procedure provisions would be best promoted by case managing the two proceedings together, with a view to determining in due course whether the whole of, or any question arising in, the proceedings should be tried and determined concurrently. At that time, orders were made in each proceeding for the finalisation of pleadings and a timetable for applications for discovery.

5    Since that case management hearing, pleadings in both proceedings have been finalised but formal applications for discovery have not been made. The parties remain apart on the manner in which the two proceedings should be progressed toward trial.

6    At a further concurrent case management hearing conducted on 21 September 2022, the parties had opposing views concerning the scope and timing of discovery and whether standard orders should be made for the sequential filing of lay and expert evidence or whether the issue of insolvency should be referred to a referee for inquiry and report in accordance with s 54A of the Federal Court of Australia Act 1976 (Cth) (FCA Act). In summary, the liquidator proposed (in respect of both proceedings) that discovery be given on the issue of insolvency with that issue then being the subject of a referral. The position of the defendants was not entirely uniform, but in general the defendants favoured standard orders for the completion of discovery followed by the filing of evidence by the liquidator. Many of the defendants proposed that the referral of any questions in the proceeding to a referee could be revisited once evidence had been filed by the liquidator or by all parties.

7    For the reasons explained below, I consider that the overarching purpose of the civil practice and procedure provisions in s 37M of the FCA Act would be best promoted by:

(a)    as a first step, requiring all parties to give discovery on the issue of insolvency; and

(b)    as the second step, referring the issue of insolvency to a referee for inquiry and report in accordance with s 54A of the FCA Act.

Overview of the proceedings

The Preference Proceeding

8    In the Preference Proceeding, the plaintiffs are CAG, its subsidiaries Australian School of Management Pty Ltd (In Liquidation) (ASM), Global Learning Support Group Pty Ltd (In Liquidation) (GLS) and ACN 097 871 933 Pty Ltd (In Liquidation) (formerly Workstar Pty Ltd) (Workstar) and the liquidator of CAG and those subsidiaries, Mr Ford. The plaintiffs seek orders against the defendant, the Commissioner of Taxation (Commissioner), under s 588FF(1)(a) of the Corporations Act to recover sums received by the Commissioner from CAG, ASM, GLS and Workstar in a series of transactions which, the liquidator alleges, were unfair preferences within the meaning of s 588FA(1) of the Corporations Act, insolvent transactions within the meaning of s 588FC of the Act and voidable transactions under s 588FE(2) of the Act. In that regard, the plaintiffs allege that each of CAG, ASM, GLS and Workstar was unable to pay all of its debts as and when they became due and payable on 31 October 2016 and from that day until 25 May 2017 (when the administrators were appointed). By way of particulars of the allegation of insolvency, the plaintiffs rely on the presumption under s 588FE(3) of the Corporations Act and the liquidator’s solvency report dated February 2019 (Liquidator’s Report). The amounts of the alleged voidable transactions are:

(a)    $7,936,037 in respect of CAG;

(b)    $223,455 in respect of ASM;

(c)    $207,401 in respect of GLS; and

(d)    $136,855 in respect of Workstar.

9    By its defence, the Commissioner disputes that CAG and its subsidiaries were insolvent from 31 October 2016 through to 25 May 2017. The Commissioner contests a number of aspects of the Liquidator’s Report including:

(a)    the calculation of the indebtedness to the Australian Tax Office (ATO), including whether a credit balance to the ATO should be taken into account; and

(b)    whether an alleged debt to the Department of Education should be taken into account in circumstances where the Department had not demanded repayment or issued a debt notice; and

also relies on the ability of the Careers Group to raise debt and equity capital between September 2016 and May 2017.

10    The Commissioner also disputes aspects of the alleged transactions between CAG and its subsidiaries and the Commissioner, including whether the application of a tax credit toward a tax liability constitutes a “transaction” within the meaning of s 9 of the Corporations Act for the purposes of s 588FA.

11    The Commissioner joined Patrick McKendry, a director of CAG (and former Managing Director), to the proceeding seeking the following relief:

(a)    a declaration that the Commissioner is entitled to be indemnified by Mr McKendry pursuant to s 588FGA(2) of the Corporations Act in respect of any loss or damage resulting from any order made by the Court in this proceeding against the Commissioner under s 588FF of the Corporations Act, to the extent that such order relates to payments made by CAG; and

(b)    pursuant to ss 588FGA(2) and (4) of the Corporations Act, an order that Mr McKendry pay the Commissioner the amount of $6,215,901.38, or any other sum, plus interests and costs, being the amount of the Commissioner’s loss or damage resulting from any order made by the Court in this proceeding against the Commissioner under s 588FF of the Corporations Act.

12    By his defence, Mr McKendry does not admit the principal allegations made against the Commissioner and also contends that, at the time of the alleged CAG transactions with the Commissioner, he had reasonable grounds to expect, and did expect, that CAG was solvent (as per s 588FGB(3)).

The Directors Proceeding

13    In the Directors Proceeding, the plaintiffs are CAG, its subsidiaries ASM, GLS, Workstar, Careers Australia Education Institute Pty Limited (in Liquidation) (CAEI) and Careers Australia Institute of Training Pty Limited (in Liquidation) (CAIT) and the liquidator of CAG and those subsidiaries, Mr Ford. The plaintiffs seek damages, equitable compensation or compensation against former directors and officers of CAG and two corporations pursuant to ss 588M, 598 and 1317H of the Corporations Act. The first to eighth defendants (the director defendants) were the directors of CAG at various relevant times. The ninth defendant was the Company Secretary of CAG and a director of certain of its subsidiaries and the tenth defendant was the Chief Financial Officer of CAG and a director of certain of its subsidiaries (together, the officer defendants). The eleventh defendant and the twelfth defendant (together, the shareholder defendants) are United Kingdom domiciled corporations which were associates of the major investors in CAG (through its principal shareholder, Cirrus Business Investments Ltd (Cirrus)).

14    By their statement of claim in the Directors Proceeding, the plaintiffs allege (in summary) that:

(a)    each of the director defendants breached his or her duties to CAG (imposed at common law, in equity and under the Corporations Act) by causing or permitting CAG to declare and pay a dividend of $40 million to Cirrus in December 2015 (the 2015 Dividend) when that payment, amongst other things, was in contravention of CAG’s Constitution and/or materially prejudiced the company’s ability to pay its creditors in contravention of s 254T(1)(c) of the Corporations Act, thereby causing loss to the creditors of CAG;

(b)    the shareholder defendants were involved (within the meaning of s 79 of the Corporations Act) in the contraventions by the director defendants with respect to the payment of the 2015 Dividend;

(c)    each of the director defendants breached his or her duties to CAG by paying a dividend of $1,736,521 in July 2016 (the 2016 Dividend) when that payment, amongst other things, materially prejudiced the company’s ability to pay its creditors in contravention of s 254T(1)(c) of the Corporations Act, thereby causing loss to the creditors of CAG;

(d)    each of the director defendants and the officer defendants breached their duties, inter alia, with respect to monitoring the financial position of the Careers Group, responding to operational challenges facing the Careers Group, and permitting relevant companies within the Careers Group to trade and incur debts, such contraventions occurring as early as 1 January 2016; and

(e)    each of the director defendants contravened s 588G of the Corporations Act by failing to prevent CAG and other companies in the Careers Group from incurring debts when those companies were or became insolvent in the period from 31 October 2016 onwards (being debts totalling $35,312,576.12), alternatively from 28 February 2017 onwards (being debts totalling $31,887,732.45), until 25 May 2017 (when the administrators were appointed).

15    The statement of claim contains detailed factual allegations concerning the commercial activities and financial position of the Careers Group principally relating to the period from 1 July 2015 until the administrators were appointed on 25 May 2017. It consists of some 334 paragraphs and 129 pages. Many of the detailed factual allegations concern the breach of duty claim summarised at paragraph (d) above. In contrast, the factual allegations that underpin the claims summarised at paragraphs (a) to (c) and (e) above are more confined. It should be noted that the loss and damage sought to be recovered by the plaintiffs by the breach of duties claim made in paragraph (d) above is the amount of the debts sought to be recovered by the claims made in paragraph (e) above (statement of claim [312]).

16    For the purposes of these reasons, it is relevant to note some further matters concerning the claims with respect to the payment of the 2015 Dividend (summarised in paragraphs (a) and (b) above) and insolvent trading (summarised at paragraph (e) above).

17    First, the claims are based in part on alleged objective facts concerning the financial position of the Careers Group in relatively confined periods.

18    In respect of the claim concerning the 2015 Dividend, the plaintiffs advance the following allegations concerning the financial position of the Careers Group at various points in time:

(a)    as at 30 June 2015, CAG’s total accumulated profits were $6,639,000 (statement of claim [104]);

(b)    for the period from 1 July 2015 to 31 October 2015, the consolidated operating profit of the Careers Group was approximately $25.2 million (statement of claim [98(d)]);

(c)    as at 31 October 2015, the cash balance of the Group on its consolidated balance sheet was $11.8 million (statement of claim [98(e)]); and

(d)    as at 31 October 2015, the cash position of the Group at the end of December 2015 was forecast to be approximately $9.5 million (statement of claim [98(f)]).

19    In respect of the insolvent trading claims, the plaintiffs rely on a range of alleged financial and commercial indicators by way of particulars (at statement of claim [323]) including:

(a)    from 31 July 2016 onwards, the Careers Group had a negative net asset position;

(b)    from 31 July 2016 onwards, the Careers Group had a liquidity (or current) ratio below 1.00;

(c)    from 31 July 2016 onwards, the Careers Group had a quick ratio between 0.44 and 0.51;

(d)    as at 31 July 2016 onwards, outstanding debts to trade creditors due over 60 days past due date was approximately $1.75 million (representing 27.9% of all debts by value) and outstanding debts to trade creditors due over 90 days past due date was approximately $1.67 million (representing 26.6% of all debts by value);

(e)    in the period September 2016 until March 2017, the average outstanding debts to trade creditors due over 90 days past due date was approximately $1 million (representing approximately 12% of all debts by value on average);

(f)    as at 31 October 2016, CAEI had been overpaid the sum of $45.867 million by the Commonwealth pursuant to the VET FEE-HELP Scheme and was obliged to repay that amount as a debt to the Commonwealth (and did not have sufficiently realisable assets to do so at that time);

(g)    from at least 8 October 2016, the Careers Group was subject to instalment arrangements with the ATO in respect of payment plans to meet outstanding Commonwealth tax liabilities instalment arrangements;

(h)    from at least 31 October 2016, the Careers Group was unable to generate sufficient cash flow from its operations to satisfy its obligations to its creditors when they fell due and payable;

(i)    from at least 31 October 2016 onwards, the Careers Group was in breach of its banking covenants;

(j)    as of 31 October 2016, the Careers Group had no realistic prospect of being able to repay the sum of $55 million owing to Westpac which was due to be paid on or by 4 March 2017, or at any time thereafter (and which debt was never ultimately paid);

(k)    from at least November 2016, the Careers Group received payment demands from various creditors who had outstanding unpaid invoices;

(l)    from at least November 2016, various suppliers and trade creditors of the Careers Group placed the Group on stop supply;

(m)    from at least December 2016, the Careers Group made part payments and payments in round amounts, not referable to specific invoices, to various creditors and sought to enter into payment plans with suppliers and other trade creditors;

(n)    the Careers Group reported losses in each month from October 2016 to March 2017 (except for February 2017 which reported a profit) with average monthly losses over the period of $2.74 million ($3.7 million on an adjusted basis);

(o)    between December 2016 and April 2017, the Careers Group raised equity capital or hybrid capital but there was never at any time an unconditional offer of funding by, or assured source of capital from, any of Cirrus, the major shareholders, other shareholders of CAG or Cirrus, or any third party potential investor;

(p)    in January and February 2017, the Careers Group raised additional debt finance but was only able to do so by granting security over the assets of multiple other companies in the Group and the further debt capital remained insufficient to address the Group’s inability to pay its debts as and when they fell due;

(q)    from at least 28 February 2017 onwards, the Careers Group was unable to borrow sufficient funds from any source on acceptable terms; and

(r)    there was a deficiency in the winding up of the Group of approximately $166.9 million.

20    Second, the claims are also necessarily based in part on allegations concerning what the defendants knew or ought reasonably have known about the financial position of the Careers Group and its solvency.

21    The defences filed by the defendants contain a mixture of admissions, non-admissions and denials across the wide range of factual allegations made in the statement of claim. Each of the defendants disputes liability in respect of the claims made by the plaintiffs. Relevantly for present purposes, each of the director defendants denies the allegation of insolvency, that there were reasonable grounds to suspect insolvency and that the director knew there were such reasonable grounds or ought reasonably have known. The director defendants also contend that:

(a)    at all relevant times, they had reasonable grounds to expect, and did expect, that the companies of which they were a director were and would remain solvent (as per s 588H(2)); and

(b)    further and alternatively, they had reasonable grounds to believe and did believe that a competent and reliable person was responsible for providing them with information about whether the companies of which they were a director were solvent and were fulfilling that responsibility and expected on the basis of information provided by that person that the companies of which they were a director were and would remain solvent (as per s 588H(3)).

Discovery in the proceedings

22    On 30 September 2021, a Judicial Registrar made orders for non-standard discovery in the Preference Proceeding. Broadly, the discovery categories were directed to the financial position of the plaintiff companies in that proceeding, relevant to the question of insolvency (amongst other issues).

23    The evidence indicates that the plaintiffs have given substantial discovery pursuant to those orders (in excess of 33,000 documents), but discovery is not complete. When discovery was first ordered, the liquidator was unable to access certain hard drives of the plaintiff companies that potentially contained relevant documents. The evidence before the Court indicates that there has been ongoing disputation in the Preference Proceeding concerning the completion of discovery.

24    As noted earlier, at the case management hearing on 28 March 2022, the Court made orders in each proceeding for the finalisation of pleadings and a timetable for applications for discovery. No proper application for discovery was made by any party prior to the case management hearing on 21 September 2022. Whilst solicitors’ letters have been exchanged, it appears that little in the way of practical progress has been made.

25    In liquidation proceedings of this kind, relevant documents relating to the financial position of the plaintiff companies will largely, if not exclusively, be in the possession of the plaintiffs. Such documents are critical to the determination of issues concerning the solvency of the plaintiff companies and the financial transactions entered into during the relevant period. Whether the proceedings are to progress by way of the sequential filing of evidence or a referral of questions to a referee, discovery of such documents by the plaintiffs should be completed as soon as possible in both proceedings. I propose to make an order to that effect after hearing from the plaintiffs as to the time required to complete that discovery. In my view, it is also desirable that the defendants give discovery of documents relating to the financial position of the plaintiff companies at least in the period from 1 July 2015 to the appointment of the administrator, so that there is full disclosure of documents relating to that central issue. I propose to make an order to that effect after hearing from the parties as to the time required to complete that discovery and the appropriate form of orders.

26    As discussed above, the pleadings raise a large number of issues concerning the plaintiff companies, their business dealings and their management in the period from 1 July 2015 to the appointment of the administrator. One such issue that was the subject of submissions at the case management hearing concerned the question whether the directors sought and obtained legal advice with respect to the declaration and payment of the 2015 Dividend. It is likely that the majority of relevant documents will be in the possession, custody or control of the plaintiffs. Having brought the Director Proceedings with expansive allegations, the plaintiffs will be required to provide discovery of documents relevant to those allegations. In my view, such discovery should be given in an efficient manner following discovery relating to the financial position of the plaintiff companies. The parties should confer about a program and form of orders to enable that to occur. If the parties remain in dispute, an appropriate application should be made to the Court to resolve the dispute.

Use of a referee

Plaintiffs’ submissions

27    The plaintiffs contend that the issue of insolvency of the plaintiff companies should be referred to a referee for inquiry and report. The plaintiffs submitted that the exercise of the Court’s power to appoint a referee is “quintessentially a case management decision” in which consideration of the overarching purpose will likely be significant, if not determinative (Jahani (liquidator) v Commissioner of Taxation, in the matter of Delta Coal Mining Pty Ltd (in liq) [2020] FCA 1642 (Delta Coal) at [23]). Flexibility and substantial cost savings can be achieved by the early adoption of references (Kadam v MiiResorts Group 1 Pty Ltd (No 4) (2017) 252 FCR 298; (Kadam) at [35]; Sheehan v Lloyds Names Munich Re Syndicate Ltd [2017] FCA 1340 at [13]). Parties have no entitlement to the determination by a judge of all issues of fact or law (Super Pty Ltd v SJP Formwork (Aust) Pty Ltd (1992) 29 NSWLR 549 (SJP Formwork) at 558 per Gleeson CJ, Mahoney and Clarke JJA agreeing). There is no predisposition to the determination of the issue of solvency in “the usual way” involving the parties adducing evidence, testing that evidence in cross-examination, and making submissions on that issue at the final hearing (Delta Coal at [22]).

28    The plaintiffs argued that a reference of the insolvency question is appropriate and most consistent with the overarching purpose in s 37M of the FCA Act in the circumstances of these proceedings for the following reasons:

(a)    First, having regard to the large number of differently represented defendants (in both proceedings), there is an obvious efficiency and likely cost savings in having the solvency of the plaintiff companies determined by an investigative inquisitorial process undertaken by a referee. The alternative to a reference – being a full adversarial process involving the parties each leading their own expert evidence on solvency and cross-examining the different expert witnesses – would otherwise occur and be productive of costs and delays. The prospect of a multitude of different expert reports is especially likely in these proceedings given the differing forensic considerations of the various defendants. It is desirable from the perspective of the reduction of the length of any final hearing, and in terms of the cost to the parties, that the Court is not burdened with multiple experts opining separately and each having to be cross-examined.

(b)    Second, a determination of the insolvency date as part of a reference will narrow the issues in dispute at a relatively early stage of the proceedings. Depending on the determination of the insolvency date, this may dispose of or reduce the nature and quantum of the claim against certain of the defendants. At the very least, a reference of the solvency issue will crystallise the quantum of the claims against the defendants in both proceedings. That consequence will be of real utility to the parties in exploring potential resolution of the dispute consensually.

(c)    Third, objections raised by the defendants are misplaced. The financial position of the companies does not depend on the state of mind of witnesses (such as the directors of CAG) or the credibility of those witnesses. Whether a company is solvent (within the meaning of s 95A) is a question of fact based on its financial position at a particular point in time. The analysis is, for the most part, an accounting exercise taking into account the commercial realities of the companies at the relevant time (Delta Coal at [34]). Matters to be considered as part of an assessment of the solvency of the plaintiff companies, such as when debts were due and payable and the extent of financial support from shareholders, are routinely taken into account by insolvency practitioners in their assessment of a company’s solvency.

(d)    Fourth, a referral of the question of a company’s solvency (to an insolvency practitioner as referee) has been undertaken in other cases in this Court with respect to claims under Pt 5.7B of the Corporations Act, including unfair preference claims, uncommercial transaction claims and insolvent trading claims (Weston in his capacity as liquidator of Starcom Group Pty Ltd (In Liq) v Rajan [2019] FCA 1455 (Starcom); Stone in his capacity as liquidator of Cardinal Group Pty Ltd (In Liq) v Ebeid [2020] FCA 343 (Cardinal); and Delta Coal).

(e)    Fifth, the reference orders can be framed to provide a mechanism by which the referee can navigate issues such as to the nature and quantum of the Career Group’s liability to the Commonwealth with respect to advances under the VET FEE-HELP scheme (to the extent that they bear on the referee’s ultimate conclusion). For example, the orders may permit the referee to submit any question arising on the reference for the decision of the Court and provide alternative opinions, depending upon how the Court determines any such question submitted.

Defendants’ submissions

29    Although there were some differences between the defendants about the next steps that should be taken in the proceeding, the defendants uniformly opposed the referral of the issue of insolvency to a referee at this stage. The opposition was principally for three reasons:

(a)    First, the defendants submitted that the usual approach to determining a question of insolvency, by which the parties each adduce expert accounting evidence, need not create inefficiencies. In the ordinary course, the Court will require the experts to confer and produce a joint report which should enable the matters in dispute to be confined.

(b)    Second, the defendants submitted that the question of insolvency in these proceedings will depend on certain factual matters which should be determined by the Court on the basis of witness testimony, in particular the extent of financial support to the Careers Group companies from the shareholders or others.

(c)    Third, the defendants submitted that the question of insolvency in these proceedings will also depend on certain legal matters which must be determined by the Court, in particular whether a tax credit is an asset and whether and at what time there were amounts owing to the Commonwealth Department of Education.

30    The defendants submitted that the proceedings should be progressed by the plaintiffs filing and serving their lay and expert evidence. The defendants argued that the question whether any issue should be referred to a referee would be more appropriately considered after evidence has been filed and served by both sides.

Consideration

31    Section 54A of the FCA Act provides as follows:

Referral of questions to a referee

(1)     Subject to the Rules of Court, the Court may by order refer:

(a)     a proceeding in the Court; or

(b)     one or more questions arising in a proceeding in the Court;

to a referee for inquiry and report in accordance with the Rules of Court.

(2)     A referral under subsection (1) may be made at any stage of a proceeding.

(3)     If a report of a referee under subsection (1) is provided to the Court, the Court may deal with the report as it thinks fit, including by doing the following:

(a)     adopting the report in whole or in part;

(b)     varying the report;

(c)     rejecting the report;

(d)     making such orders as the Court thinks fit in respect of any proceeding or question referred to the referee.

32    The background to that provision, including the history of references in civil proceedings, was discussed in some detail by Rares J in Optiver Australia Pty Ltd v Tibra Trading Pty Ltd (2012) 203 FCR 520 and by Lee J in Kadam. I respectfully agree with the following views expressed by Lee J in Kadam:

(a)    the appointment of a referee is quintessentially a case management decision, which is necessarily dependent upon a multifactorial assessment, informed by the circumstances of the case and, in particular, the overarching purpose provisions in s 37M (at [60]);

(b)    it is necessary that there be precision as to what is referred to a referee although, in appropriate circumstances, this does not require only granular questions to be referred (at [61]);

(c)    an overlap in the matters to be determined by the Court and by the referee can be avoided by careful calibration of the orders for reference (at [61]); and

(d)    although the attitude of the parties may be a relevant consideration, a reference may be made notwithstanding the opposition of one or more parties (at [61]).

33    The referral process is governed by Div 28.6 of the Federal Court Rules 2011 (Cth). The Court retains control of the referral process. In particular:

(a)    The Court may appoint a person that it considers appropriate as referee: r 28.62.

(b)    A party may apply to the Court, before or after an inquiry has started, for directions about how the inquiry should be conducted or any matter arising in relation to the inquiry: r 28.65(1).

(c)    The referee must conduct the inquiry in accordance with any directions made by the Court: r 28.65(2).

(d)    If the Court has not made any directions about how the inquiry should be conducted, the referee may conduct the inquiry in any way the referee thinks fit: r 28.65(3).

(e)    A referee is not bound in the inquiry by the rules of evidence but may be informed in any way that the referee thinks fit: r 28.65(4).

(f)    Evidence before a referee in an inquiry may be given orally or in writing and must, if the Court requires, be given on oath or by affirmation or by affidavit: r 28.65(5).

(g)    A party to an inquiry must do all things required of the party by the referee to enable the referee to form an opinion about the matter and not wilfully do, or cause to be done, any act to delay or prevent the referee forming an opinion: r 28.65(8).

(h)    The referee must give to the Court a written report setting out the referee’s opinion on the matter referred and the reasons for the opinion: rr 28.61 and 28.66.

(i)    After a report has been given to the Court, a party may, on application, ask the Court to do any of the following:

(i)    adopt, vary or reject the report, in the whole or in part;

(ii)    require an explanation by way of a further report by the referee;

(iii)    remit on any ground, for further consideration by the referee, the whole or any part of the matter that was referred to the referee for inquiry and report;

(iv)    decide any matter on the evidence taken before the referee, with or without additional evidence;

(v)    give judgment or make an order in relation to the proceeding or question: r 28.67.

34    As submitted by the plaintiffs, the question of insolvency, arising in proceedings brought under Pt 5.7B of the Corporations Act (including insolvent trading proceedings under Div 3), has been the subject of referral in a number of cases including Starcom, Cardinal and Delta Coal. The latter case, Delta Coal, was an unfair preference claim brought against the Commissioner of Taxation. Justice Stewart concluded that it was appropriate to refer the issue of insolvency to a referee for reasons that included:

(a)    the same question of insolvency arose in the proceeding against the Commissioner and in a second proceeding brought by the liquidator (that was subsequently consolidated) involving unfair preference claims against 14 other defendants represented by 12 different legal teams (at [24]);

(b)    each of the 15 different defendants across the two proceedings had different emphases in the six-month time period under consideration in respect of insolvency with the result that adjudication through a trial process involving multiple cross-examiners was likely to be lengthy and messy (at [26]);

(c)    because of the many defendants across the two proceedings, the insolvency questions would be most efficiently, effectively and justly determined in an investigative inquisitorial process undertaken by a referee rather than in an adversarial adjudicative process of a trial (at [26]); and

(d)    whilst the determination of the insolvency questions may not require any particularly advanced skill in the areas of accounting and bookkeeping, it is for the most part an accounting exercise whilst also taking into account the commercial realities of the companies at the relevant time, being matters very much within the expertise and experience of an accountant who is an insolvency practitioner (at [34]).

35    Subsequent to the referral by Stewart J, the liquidators in the Delta Coal liquidation brought a third proceeding against former directors alleging insolvent trading. That proceeding raised the same insolvency question. The liquidators did not bring the third proceeding to the attention of Stewart J and did not seek to have the referral expanded such that the insolvency question in the third proceeding could be determined by the referee in all three proceedings at the same time. The third proceeding came before Stewart J for case management in August 2021, after the referee had reported to the Court in the other two proceedings: see Jahani (liquidator) v Alfabs Mining Equipment Pty Ltd, in the matter of Delta Coal Mining Pty Ltd (in liq) (No 2) [2021] FCA 927 (Delta Coal No 2) at [13]-[14]. His Honour had to determine whether the third proceeding should progress entirely separately from the first two proceedings or whether the reference to the referee should be reopened to enable the referee to take evidence and submissions from the director defendants in the third proceeding. His Honour concluded that the third proceeding should progress separately from the first two proceedings notwithstanding the risk of conflicting outcomes and wasteful duplication. In reaching that conclusion, his Honour took into account a range of case management factors (see at [17]-[32]). One such factor concerned the issues that must be proved in an insolvent trading case. His Honour recorded (at [22]), with apparent approval, a submission to the effect that, in an insolvent trading case, the liquidator must prove that the company was insolvent at the relevant time, or became insolvent by incurring the debt in question or by incurring at that time debts including that debt, and, at that time, there were reasonable grounds for suspecting that the company was insolvent, or would so become insolvent (s 588G(1)). If insolvency were determined by a referee process, evidence would still have to be led by the liquidators in order to discharge their onus to show that there were reasonable grounds for suspecting that the company was insolvent at the relevant time, and such evidence might contradict findings made in the referee process. Justice Stewart expressed the following conclusion (at [33]):

… My decision in the present case is not one of principle with regard to all insolvent trading proceedings, but is rather directed to the particular circumstances of the proceedings before me. I am nevertheless mindful that a notable distinction between preference proceedings and insolvent trading proceedings which is relevant to the question whether the question of solvency can or should be decided as a preliminary issue is that in a preference proceeding (whether by way of referee or otherwise) the defendants would generally be strangers to the company so the evidence that they would be expected to rely on in proof of their “good faith” defences (s 588FG) is not likely to overlap, at least not significantly, with the evidence on actual insolvency. In contrast, the directors’ “reasonable grounds” defences (s 588G) are likely to rely on evidence internal to the company which is likely to overlap very considerably with the evidence on actual insolvency.

36    Although the present proceedings involve both unfair preference and insolvent trading claims, in my view the overarching purpose will be best promoted by referring the question of insolvency of the plaintiff companies, which arises in both proceedings, to a referee for inquiry and report following the completion of discovery by all parties on that question. There are three factors that weigh in favour of a referral following discovery.

37    First, as observed by Stewart J in Delta Coal, the determination of the insolvency issue is for the most part an accounting exercise, whilst also taking into account the commercial realities of the companies at the relevant time, being matters very much within the expertise and experience of an accountant who is an insolvency practitioner. The question of insolvency is therefore suitable for determination by a referee who is an insolvency practitioner.

38    Second, as in Delta Coal, there are a large number of defendants across the two proceedings, many of whom are separately represented. The determination of the solvency issue by the Court through a trial process would require the preparation of lay and expert evidence on behalf of each of the defendants. Such a process will involve the incurring of substantial expense by the parties. While the range of factual issues to be resolved by the Court may ultimately be narrowed through expert conferral, that is far from certain. The Court may be required to resolve numerous disputes concerning historical financial transactions and their recognition in the accounts of the plaintiff companies. It is likely to be more cost-effective for disputes relating to historical accounting matters to be investigated and determined (in the form of a referee’s report) through an investigative inquisitorial process undertaken by a referee rather than in the adversarial process of a trial.

39    Third, the determination of the insolvency issue (in the form of a referee’s report) is likely to assist the parties in their assessment of the proceedings and promote earlier resolution of the proceedings. While insolvency is only one element in the causes of action alleged, it is an important element. Further, a referee’s report on the insolvency issue will inevitably provide a framework, or a platform, from which the other issues in the proceeding can be more clearly assessed. In that way, the referral process can be expected to result in a narrowing of the issues that will need to be determined at trial.

40    I am not persuaded that the concerns raised by the defendants are an impediment to a referral. First, it can be accepted that the question of insolvency may depend on certain factual matters such as the extent of financial support to the Careers Group companies from the shareholders or others. However, that in itself is not an impediment to a referral. An inquiry by a referee is undertaken on the basis of evidence, and the Court may require that evidence be given on oath or by affirmation or by affidavit. As observed by Gleeson CJ in SJP Formwork, there is no entitlement to the determination of issues of fact or law by a judge. Second, it can also be accepted that the question of insolvency in these proceedings may also depend on certain legal matters such as whether a tax credit is an asset and whether and at what time there were amounts owing to the Commonwealth Department of Education. However, referral processes are flexible and, as proposed by the plaintiffs, the orders referring the insolvency question to a referee can be framed to enable the referee to submit any question arising on the reference for the decision of the Court and/or to provide alternative opinions which depend upon the answer given by the Court to a question that arises.

41    I am also not persuaded by the defendants’ submission that the question of a referral should be revisited after the parties have filed lay and expert evidence. In my view, such an approach is unlikely to result in cost savings in the conduct of the proceedings and is more likely to result in added cost. Not only will the parties incur the expense associated with the preparation of their own lay and expert evidence, but they will then incur the expense of an inquiry by a referee followed by a hearing to determine whether the referee’s report is to be adopted. There is real potential for the costs associated with the preparation of lay and expert evidence to be wasted.

42    I have given consideration to the fact that the Directors Proceeding involves insolvent trading claims and it is necessary for the liquidator to prove both insolvency (as per s 588G(1)(b)) and that, at the relevant time, there were reasonable grounds for suspecting insolvency (as per s 588G(1)(c)). While this was a factor weighing against referral in Delta Coal No 2, Stewart J emphasised that his decision in that case was not one of principle with regard to all insolvent trading proceedings, but was directed to the particular circumstances of that case. In the earlier Starcom liquidation, the question of insolvency was referred to a referee notwithstanding the proceedings included insolvent trading claims. I do not consider that it is inappropriate to refer the question of insolvency to a referee in an insolvent trading proceeding. As the structure of s 588G(1) makes clear, the question whether a company is insolvent at a given point in time is distinct from the question whether there are reasonable grounds for suspecting that the company is insolvent. The insolvency question is able to be referred for inquiry and report, with the question of reasonable grounds for suspecting insolvency remaining for determination by the Court. While I accept that the parties may adduce further evidence on the latter question, I do not place significant weight on the prospect of such evidence contradicting findings made in the referee process.

43    Weighing all of the relevant factors, I consider that the overarching purpose will be best promoted by referring the question of insolvency of the plaintiff companies, which arises in both proceedings, to a referee for inquiry and report following the completion of discovery by all parties on that question.

Conclusions

44    For the reasons given above, the next step that should be taken in both proceedings is the completion of discovery by all parties on the issue of insolvency. I have not received submissions concerning the time required by the parties to complete that step or an appropriate form of orders. I will therefore direct the parties to confer and provide agreed or, failing agreement, competing orders to give effect to my conclusions regarding discovery.

45    Following the completion of discovery by all parties on the issue of insolvency, the next step that should be taken is the referral of the question of insolvency of the plaintiff companies, as alleged by the plaintiffs in their pleadings, to a suitable referee for inquiry and report. Prior to the case management hearing, the plaintiffs provided draft orders for a referral. However, the defendants did not direct detailed submissions to the form of those orders. Also, the timing of the referral will be dependent on the completion of discovery on the issue of insolvency. In the circumstances, I will direct the parties to confer in relation to the following matters concerning the referral:

(a)    the selection of a referee;

(b)    the questions to be answered; and

(c)    the date on which the reference is to commence and the date by which the referee is to report,

and provide agreed or, failing agreement, competing orders to give effect to my conclusions regarding a referral.

46    The orders proposed by the parties should include the following requirements:

(a)    that the parties will seek to agree a statement of agreed facts to be provided to the referee at the commencement of the reference;

(b)    that evidence must be given to the referee either orally on oath or affirmation or in writing by affidavit, but the referee is not bound to conduct the reference in accordance with the rules of evidence;

(c)    that the referee and the parties have liberty to apply to the Court for further directions in respect of any matter in relation to the reference; and

(d)    that the referee may submit any question arising on the reference for the decision of the Court and provide alternative opinions which depend upon how the Court determines any question submitted to the Court.

47    Finally, I will also direct the parties to confer in relation to discovery on other issues, and to make any application with respect to such discovery.

Associate:

Dated:    28 September 2022

SCHEDULE OF PARTIES