ABC Learning Centres Limited, in the matter of ABC Learning Centres Limited; application by Walker (No. 9) [2009] FCA 1462

REASONS FOR JUDGMENT 1 I have before me another interlocutory application in connection with the administration of ABC Learning Centres Limited and its associated companies (the ABC Group). Much of the background to this administration has been set out in earlier reasons. I shall recap them very briefly. 2 On 6 November 2008, Messrs Peter Walker and Gregory Moloney were appointed administrators of the ABC Group (the Administrators). Immediately after that appointment, Messrs Christopher Honey, John Cronin and Murray Smith were appointed receivers and managers by a syndicate of banks (the Receivers). The Receivers took control of the businesses and assets of the companies in the ABC Group. On several occasions, the Court has made orders extending the convening period for the second meeting of creditors of the ABC Group. The last of those was on 21 August 2009, when the Court ordered the period be extended to 31 March 2010. 3 The Receivers' review of the operations of the centres conducted by the ABC Group identified some 262 centres that they believed were unviable. Subsequently, on 18 December 2008 Messrs Stephen Parbery and Daniel Bryant (the Court Receivers) were appointed receivers of a number of companies in the ABC Group by the Supreme Court of New South Wales. The assets of the ABC Group remain subject to the control either of the Receivers or the Court Receivers. 4 On 13 November 2008 the Court ordered that there be one committee in respect of all of the companies in the ABC Group. That order was varied on 27 November 2008. The first meeting of creditors of the ABC Group was held on 18 November 2008. At that meeting creditors appointed a committee of creditors to represent them for the purpose of advising and assisting the Administrators in the administration. 5 The Administrators have no funds available to them other than those that are made available by the Receivers. The Receivers have provided funds on a number of occasions, although those funds have been earmarked for particular expenses. Similarly, Commonwealth funding has been provided in respect of employees, but that funding has been earmarked for particular purposes. 6 The Administrators secured limited funding from IMF (Australia) Limited (IMF) to permit the preparation of a preliminary report on the solvency of the ABC Group as at 25 June 2008. The committee of creditors approved the Administrators' entering into that funding agreement for the purpose of preparing that report. The Administrators finalised a preliminary solvency report on 5 May 2009. That report involved substantial work and investigation. The issue of solvency is crucial to any action that may be available to the Administrators or any liquidators of the ABC Group. The report, however, is preliminary because of the complexity of the ABC Group and further analysis is necessary before a final view on the question of solvency could be reached. 7 The Administrators provided a copy of the preliminary solvency report to Australian Securities and Investment Commission (the Commission) pursuant to s 438D of the Corporations Act 2001 (Cth) (the Corporations Act). Section 438D(1) relevantly provides as follows: (1) If it appears to the administrator of a company under administration that: (a) a past or present officer or employee, or a member, of the company may have been guilty of an offence in relation to the company; or (b) a person who has taken part in the formation, promotion, administration, management or winding up of the company: … (ii) may have been guilty of negligence, default, breach of duty or breach of trust in relation to the company; the administrator must: (c) lodge a report about the matter as soon as practicable; and (d) give ASIC such information, and such access to and facilities for inspecting and taking copies of documents, as ASIC requires. 8 The Administrators have formed the view that it would be appropriate to seek orders permitting them to conduct examinations pursuant to ss 596A and 596B of the Corporations Act. In order to obtain funding for such examinations, the Administrators have prepared a comprehensive public examination proposal and costings. The public examination proposal includes a detailed consideration of potential issues and possible causes of action that may ultimately be available to the Administrators or any liquidator of the ABC Group to pursue. The primary issues that have been identified are as follows: (1) Trading of the ABC Group and whether any claim for insolvent trading may be made. (2) The circumstances surrounding the granting of security that was provided by the ABC Group within six months prior to the appointment of the Administrators. (3) Possible breaches of duties by directors of members of the ABC Group. (4) Possible breaches of duties by former auditors. (5) Possible voidable transaction claims that may be made if the ABC Group members are placed into liquidation. The Administrators expect that such public examinations may require several weeks to complete. 9 It appears that, in the course of investigating the ABC Group, the Commission conducted a number of examinations of persons who may be able to provide information to the Commission in relation to those investigations. On 14 August 2009 the Administrators' solicitors wrote to the Commission requesting that the Administrators be provided with a copy of the written records of the Commission's examinations, and the books and records produced in the course of those examinations. However, on 8 September 2009 the Commission declined the Administrators' request. 10 As I have said, the Court made orders for the creation of a single committee of creditors for the ABC Group. The committee that was established comprises 14 members. The third and fourth meetings of the committee occurred on 12 May 2009 and 19 June 2009. Following those two meetings, two creditors represented on the committee, being the Department of Education, Employment and Workplace Relations (the Department) and Morgan Stanley Private Equity Asia (Morgan Stanley), expressed possible interest in providing funding to the Administrators for public examinations. However, following negotiations between the Administrators on the one hand, and the Department and Morgan Stanley, on the other, neither has been prepared to fund any public examination. 11 In addition to pursuing funding by creditors, the Administrators have also approached litigation funders. An application to Litigation Lending Services Limited was unsuccessful. However, the Administrators have reached agreement, subject to certain conditions, with IMF on the terms of a funding agreement for the purpose of enabling the Administrators to conduct public examinations along the lines indicated. At a meeting of the committee of creditors held on 12 October 2009, the committee approved the Administrators' proposal to enter into the funding agreement with IMF. 12 The proposed funding agreement is expressed to be subject to a condition precedent that the Administrators obtain approval of the Court and the committee of creditors to the entry into the agreement. This application has now been brought by the Administrators for orders that would be regarded as satisfying that condition. 13 The main provisions of the proposed funding agreement may be summarised as follows: (1) IMF will provide funding to the Administrators for the purpose of funding the proposed public examinations in accordance with the public examination proposal prepared by the Administrators. (2) The Administrators and the ABC Group will pay to IMF, from any Resolution Sum, as that term is defined in the proposed agreement, amounts provided for in the proposed agreement. "Resolution sum" is defined generally as the amount or amounts of money, for which any claims in any proceedings are settled, or for which judgment is given in favour of the ABC Group or the Administrators. 14 As consideration for the funding by IMF, IMF would be paid, from any Resolution Sum, upon its receipt, after payment of certain expenses, reimbursement of various expenses, together with a proportion of the Resolution Sum. The details of those expenses and the proportion are confidential. Under the proposed agreement, the amount payable to IMF is to be treated as a liability incurred by the Administrators under s 443A of the Corporations Act for which the Administrators are entitled to be indemnified pursuant to s 443D of the Corporations Act. 15 The proposed funding agreement provides for the priorities with respect to the payment of amounts payable to the Administrators and to IMF. The liability of the Administrators arising under or in connection with the proposed agreement is limited to, and can be enforced against the Administrators personally, only to the extent to which it can be satisfied out of the property of the ABC Group, out of which the Administrators are actually indemnified for any liability under s 443D of the Corporations Act or otherwise at law. Otherwise, the Administrators are to have no personal liability to IMF. 16 The proposed agreement provides that the Administrators are to keep IMF fully informed of all matters concerning the public examinations, including any mediation and settlement decisions. Finally, the Administrators are bound to ensure that IMF is given all necessary information in order to enable IMF to provide "examination project management" services as defined in the proposed agreement, including access to documents that are produced to the Court and provided to counsel. Examination project management services is defined as services to be provided by IMF consisting of advising the Administrators on strategy, assisting the lawyers retained to update a budget and a timeline for the examinations on a regular basis, and considering the advice of lawyers and assisting the Administrators to provide instructions to the lawyers involved in the examination. However, the agreement makes clear that lawyers are retained by and owe their duty solely to the Administrators and the ABC Group. 17 The Administrators at present are unable to estimate whether funds may become available to unsecured creditors from any recovery under causes of action that may follow from the public examinations. A fortiori, they are unable to estimate the likely quantum of such funds. Any action that may be available to a liquidator of the ABC Group will be supported by, inter alia, evidence resulting from any public examinations that may be conducted. Further, any funds that may become available from a successful challenge to the securities given to the syndicate of banks will be dependent upon the realisation of assets presently being undertaken by the Receivers. 18 IMF has indicated that it will enter into the proposed funding agreement if the conditions precedent are satisfied, and, as I understand the position, the Administrators are willing to enter into the agreement and propose to do so on behalf of the ABC Group subject to the making of orders by the Court. The Administrators consider that entry into the proposed funding agreement is necessary to enable them to conduct the public examinations as proposed. They hope that the public examinations will result in their obtaining sufficient information to enable them to obtain advice and to form a view as to whether they or any liquidators of the ABC Group have causes of action along the lines that I have already described against the parties to which I referred. 19 Ordinarily, public examinations would have been conducted by a liquidator or liquidators of the ABC Group. However, as I have said, the convening period for the ABC Group has been extended for what is almost an unprecedented lengthy period. The reasons for the extension have been given on earlier occasions. However, time is running so far as limitation on the commencement of such proceedings. One of the reasons why the Administrators supported the extension, and made the application for it, was that public examinations could be conducted prior to the end of the convening period. 20 It is unlikely that the assets of the ABC Group will realise sufficient funds for any creditors other than the present secured creditors unless there is a successful challenge to the securities, or funds are generated from litigation along the lines to which I have referred. The Administrators consider that it is in the best interests of the ABC Group and the creditors that the proposed funding agreement with IMF be entered into and performed. The Administrators propose to make the necessary applications for summons for examination once funding is available. 21 Clearly enough, the funding agreement will not be performed and completed within three months. If liquidators were appointed to the ABC Group, they would be prevented from entering into an agreement on behalf of the companies if obligations under the agreement were to be discharged by performance more than three months after the agreement was entered into without the approval of the Court or the committee of inspection, or of a resolution of creditors. That is the effect of s 477(2B) of the Corporations Act. The Administrators, of course, are not liquidators and they exercise the powers of the ABC Group for so long as the administration continues. Nevertheless, given the fact that such agreements by liquidators require Court supervision, the Administrators consider that it is prudent at least to inform the Court of the proposal and to seek directions from the Court in relation to the proposal pursuant to s 447D of the Corporations Act. 22 Under s 447D the administrator of a company under administration may apply to the Court for directions about a matter arising in connection with the performance or exercise of any of the administrator's functions and powers. While it is not necessary for the Administrators to obtain directions or approval from the Court in relation to the proposed funding agreement, it is no doubt in their interests to seek such direction as the Court is in a position to give. While it would not normally be one of the functions of administrators to conduct examinations, in the circumstances of this case, for the reasons that I have briefly adverted to and given on earlier occasions, it is appropriate for the Administrators to consider the application that they have in mind for the conduct of public examinations. 23 The application presently before the Court is for an order that the Administrators are justified in entering into a funding agreement with IMF to fund public examinations and are justified in providing access to IMF documents that are in the possession of the Administrators and the ABC Group, and to documents that are produced to the Court or to the ABC Group, or provided to counsel in relation to the proposed public examinations. I do not consider that it is appropriate, in the exercise of the power conferred by s 447D, to approve a specific funding agreement. There is no material presently before the Court to indicate one way or the other as to whether the terms of the proposed funding agreement are fair or reasonable, or are similar to funding agreements entered into in the marketplace generally. That is a matter for the Administrators to consider and upon which to form their own commercial judgment. 24 However, the proposal for the Administrators to conduct public examinations is out of the ordinary for the reasons I have indicated. It would certainly be prudent of the Administrators to seek a direction that they would be justified in entering into a funding agreement along the lines of that which has been proposed. It would only be possible for the funding agreement to be performed if IMF is provided with the information necessary to enable it to provide the examination project management services to which I have referred. 25 Ultimately, as I have indicated, the question of resolution of any claims is a matter for the Administrators and the ABC Group and their lawyers. So long as the material provided to IMF in connection with the funding agreement is kept confidential, so as to ensure that there is no harmful consequence for the Administrators or the ABC Group by its disclosure, I consider that the Administrators would be justified in providing the access that IMF requires under the proposed agreement. Appropriate confidentiality deeds would be entered into between IMF and the Administrators, and the ABC Group in that regard. 26 In all of the circumstances, I consider that it is a proper case in which the Court should give the Administrators a direction, pursuant to s 447D of the Corporations Act, that they are justified in entering into a funding agreement with IMF for the purposes of funding public examinations and are justified in providing access to IMF of documents in the possession of the Administrators and the ABC Group, and to documents that are produced to the Court or the Administrators and the ABC Group, or provided to counsel in connection with such public examinations. I certify that the preceding twenty-six (26) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Emmett.