ASIC v Karl Suleman Enterprizes Pty Ltd

GLEESON J: 1 On 22 November 2019, I made an order pursuant to s 588FF(3)(b) of the Corporations Act 2001 (Cth) (Act), extending the time for the plaintiff (liquidator) to make an application under s 588FF(1) of the Act up to and including 1 June 2020 with respect to any voidable transaction involving Australian Vocational Learning Institute Pty Ltd (in liquidation) (AVLI) and each or any of: (1) Paul Lange; (2) International Training and Development Private Limited; (3) Accredited Online Training Pty Limited; (4) LFI Holdings Pty Limited; (5) LFI Trading Pty Limited; and/or (6) LFI Ventures Pty Limited (together, prospective defendants). 2 Without the order, the time by which an application under s 588FF(1) could be made expired on 1 December 2019. 3 These are my reasons for making that order, together with ancillary orders.

Background facts 4 In September 2019, the Court granted approval pursuant to s 477(2B) of the Act for AVLI and the liquidator to enter into a funding agreement to facilitate further investigations into the affairs of AVLI, particularly related party transactions between AVLI and the prospective defendants: Carter, in the matter of Australian Vocational Learning Institute Pty Ltd (in liq) [2019] FCA 1638. 5 The liquidator has now entered into the funding agreement. 6 A brief summary of the nature of AVLI's business prior to its external administration, the course of its external administration and the investigations conducted by the liquidator up to September 2019 is set out at [2]-[14] of the Court's reasons for granting approval. 7 In summary: (1) prior to its external administration, AVLI was eligible to provide courses that were funded by the Commonwealth under a scheme known as the "VET FEE-HELP scheme"; (2) AVLI entered into a members' voluntary winding up on 2 December 2016. The liquidator took over the liquidation of AVLI (having been appointed by the Australian Securities and Investments Commission to replace the previous liquidator) on 19 June 2018; (3) soon after her appointment, the liquidator reviewed the books and records of AVLI but found that they were limited in scope and inadequate to properly explain AVLl's affairs; (4) based upon (amongst other things) correspondence between AVLI's officers and the Department of Education and Training (Department) and an audit report obtained by the Department with respect to AVLI's entitlement to VET FEE-HELP payments, the liquidator determined to admit a proof of debt lodged on behalf of the Department in the winding up of AVLI in the amount of $28,985,159.00; and (5) other than through any recoveries that might be obtained upon further investigations being conducted by the liquidator, there is no prospect of a distribution being made to creditors, including the Department. 8 On 15 October 2019, the liquidator filed an application for summonses and orders for production that have now been issued in respect of the examinable affairs of AVLI. The earliest available dates have been sought for the return of the summonses. Examinations are to commence on 10 February 2020. 9 The summonses and orders for production have been served on the parties to whom they are addressed, other than Ajit Ghanekar. 10 Notice of the liquidator's application for the extension of time was given to the prospective defendants in an email and letters sent on 15 November 2019. The liquidator's solicitor did not receive any written objection in response, and none of the prospective defendants sought to appear at the 22 November 2019 hearing.

Legal framework 11 Subsection 588FF(1) of the Act permits a company's liquidator to apply to the Court for a range of remedies in respect of voidable transactions. 12 Subsection 588FF(3) of the Act provides that: An application under subsection (1) may only be made: (a) during the period beginning on the relation-back day and ending: (i) 3 years after the relation-back day; or (ii) 12 months after the first appointment of a liquidator in relation to the winding up of the company; whichever is the later; or (b) within such longer period as the Court orders on an application under this paragraph made by the liquidator during the paragraph (a) period. 13 In exercising the discretion under s 588FF(3)(b), the Court is required to consider what is fair and just in all the circumstances: BP Australia Limited v Brown & Ors [2003] NSWCA 216; (2003) 58 NSWLR 322 (BP Australia) at [187]. The applicant for the extension must satisfy the Court that it should be granted: BP Australia at [183]. 14 The matters that ordinarily inform the exercise of the Court's discretion are: (1) the liquidator's explanation for the delay in taking action within the three year period provided for by the statute; (2) the merits of the foreshadowed proceeding, assessed by a "preliminary review"; and (3) any likely prejudice that would be suffered if the extension of time is granted: Parker, in the matter of Worldwide Specialty Property Services Pty Limited (in liq) v Worldwide Specialty Property Services Pty Limited (in liq) [2017] FCA 687 at [15]-[16]; Walker and Moloney v CBA Corporate Services (NSW) Pty Limited [2012] FCA 328; (2012) 88 ACSR 153 (Walker) at [43]. 15 In Marsden (liquidator) v CVS Lane PV Pty Limited, in the matter of Pentridge Village Pty Limited (in liq) (receiver and manager appointed) (controller appointed) [2018] FCA 102 at [60]-[61], I noted: [60] Concerning merits, what is required is "an investigation as to whether such proceedings would be so devoid of prospects that it would be unfair, by granting an extension, to expose the other party to the continuing prospect of suit": Walker at [44] citing Green v Chiswell Furniture Pty Ltd (in liq) [1999] NSWSC 608 at [15]. However, a review of the merits may be unnecessary if the purpose of the application for an extension of time is to allow the liquidator time in which to properly decide whether or not to bring the proposed proceedings: Walker at [44]. In Taylor v Woden Constructions Pty Ltd [1998] FCA 1228, Finn J said: Where the liquidator is not in a position to consider the merits but has proper grounds for inquiring into the matter because of suspicion it invites (or that is cast on it) or of the explanation it requires, then provided he can satisfactorily explain his delay in inquiring sufficiently into the matter, he should not be closed out from an extension because he is unable to say he has a meritorious claim. In some instances ... it will be sufficient if he can say "I do not know if I do, but there is reason to inquire". 16 The principles of natural justice require that, if potential defendants to a s 588FF(1) application have been identified by the liquidator, they ought to be given an opportunity to be heard on the application for an extension of time under s 588FF(3): ASIC v Karl Suleman Enterprizes Pty Ltd (In Liq) [2004] NSWSC 1244; (2004) 52 ACSR 103 at [7].

Consideration and conclusion 17 The liquidator provided an acceptable explanation for the delay in taking action under s 588FF(1) within the specified time period. In particular: (1) the liquidator has been appointed for a significantly shorter period than the length of the winding up. The investigations into the affairs of AVLI that had taken place prior to the appointment of the current liquidator were of a preliminary nature only; (2) upon her appointment, the liquidator discovered that the books and records of AVLI were inadequate to enable her to ascertain the strength of any application against the prospective defendants; and (3) it has taken time to negotiate and obtain approval to enter into a funding agreement. 18 The liquidator is not presently in a position to assess the merits of any application which may be brought under s 588FF(1). The purpose of conducting examinations is to ascertain the strength of any claim that may be brought. I have previously concluded further investigations into AVLI's affairs are warranted and that that entry into a funding agreement should be approved so that the liquidator may conduct further investigations. That approval would be rendered nugatory if the liquidator were not now granted an extension of time to pursue proceedings on the basis of such information as might be gathered through the public examination process. 19 The likely prejudice consequent upon the extension of time is limited because the liquidator sought an extension of time of only six months, and the liquidator did not identify any particular prejudice that might result from the extension of time. As the liquidator observed, the prejudice that might otherwise attend an extension of time is limited given that: (1) the prospective defendants will have the commercial certainty associated with knowing the liquidator's position relatively quickly; and (2) the risk, which always attends an extension of a limitation period, that evidence might be lost, memories may fade and the ability to adduce evidence may be reduced, will be mitigated to some degree by virtue of the examination process itself because documents ought to be obtained and protected, and available evidence gathered, through the examination process. 20 The following matters provided further reasons for exercising the discretion to extend time: (1) The Department has been admitted as a creditor in the winding up of AVLI in respect of a significant debt. The liquidator has satisfied the Court, both on an application for approval to enter into a funding agreement and on the application for the issue of summonses for examination and orders for production, that the facts, matters and circumstances leading up to AVLI's entry into external administration warrant further investigation by the liquidator. Having regard to the advances of Commonwealth funds that underpin the Department's debt, there is a public interest in those investigations being undertaken and in recoveries being pursued if those examinations reveal a proper basis to do so. (2) Orders have been made which will ensure that the examinations proposed to be conducted by the liquidator can occur quickly. In turn, the liquidator should be able to form a view as to whether to bring claims under s 588FF(1) within a relatively short timeframe. (3) As earlier noted, the purpose of the funding agreement is to facilitate further investigations. In my earlier reasons for judgment, I found that the funding agreement was the only mechanism by which prospective recoveries may be pursued. If an extension of time was not granted, there was no prospect of any recoveries for creditors. 21 Taking into account all of the matters set out above, I accepted that, in the circumstances of this case, it was fair and just to make the order which I made.

Confidentiality 22 I was satisfied that it was appropriate to make an order pursuant to s 37AF of the Federal Court of Australia Act 1976 (Cth) in respect of the documents identified in order 1 on the basis that: (1) There is likely to be a forensic advantage to the liquidator in not disclosing her findings in relation to the transactions concerning the prospective defendants at this stage. It is desirable that the prospective defendants give an account of those transactions, through the examinations process, that is not affected by the liquidator's current views. (2) The funder wished to be able to express its position to the Court whilst its identity and concerns remain confidential. I certify that the preceding twenty-two (22) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Gleeson.