Australian Securities and Investments Commission v Letten

Federal Court of Australia|2023-08-10|Before: Halley J

Counsel for the Applicants: Ms C Hamilton-Jewell with Mr T O'Connor

Solicitor for the Applicants: MinterEllison

Solicitor for the Interested Person: Mr Khaled Metlej of Craddock Murray Neumann

AUSTRALIAN INSTITUTE OF PROFESSIONAL EDUCATION PTY LIMITED (IN LIQUIDATION) (ACN 126 628 215) Second Applicant

COMMISSIONER OF TAXATION Interested Person

order made by: HALLEY J DATE OF ORDER: 10 August 2023

A. The parties to the Deed, as defined in Order 1 below, include the persons and identities identified in Sch 1 to the Deed (Commonwealth Creditors). B. The Commonwealth Creditors have agreed to waive any rights that they might have otherwise had to rely on any failure of the first applicant to perform any obligation imposed on him pursuant to clauses 8.1 or 8.2.1 of the Deed.

Pursuant to s 90-15 of Sch 2 of the Corporations Act 2001 (Cth) (Corporations Act) the Court orders that: (a) the first applicant is justified in entering and causing the second applicant to enter into, and is justified in giving effect to, the deed set out at pages 281 to 304 of Exhibit RE-1 to the affidavit of the first applicant sworn on 17 July 2023 and filed in these proceedings (Deed) (or a deed in substantially the same terms as the Deed); (b) the first applicant is justified in making this application; and (c) the first applicant's costs and expenses in relation to this application be paid out of the assets of the second applicant.
Pursuant to s 477(2B) of the Corporations Act, the first applicant have leave to enter into the Deed on behalf of the second applicant. Note: Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.

INTRODUCTION 1 By an interlocutory process dated 18 July 2013, Mr Ryan Eagle, the Liquidator of Australian Institute of Professional Education Pty Limited (in liquidation) (Company) seeks orders and directions pursuant to s 90-15 of the Insolvency Practice Schedule (Corporations) (IPS), being Sch 2 of the Corporations Act 2001 (Cth) (Corporations Act), and pursuant to s 477(2B) of the Corporations Act. 2 The Liquidator seeks orders and directions pursuant to s 90-15 of the IPS that he is justified in entering into, and giving effect to, a deed proposed to be entered into between the applicants and four unsecured creditors of the Company (Deed), each of which is a department or agency of the Commonwealth of Australia (Commonwealth Creditors). 3 The Liquidator also seeks an order pursuant to s 477(2B) of the Corporations Act approving his entry into the Deed on the basis that the obligations to give effect to the Deed may last longer than three months. 4 The Liquidator relies on two affidavits that he swore on 17 July 2023 (First Affidavit) and 7 August 2023 (Second Affidavit) and the documents in exhibit RE-1 to the First Affidavit. 5 Counsel for the Liquidator, Ms C. Hamilton-Jewell, has provided comprehensive written submissions and addressed the Court orally today. I found those submissions to be of particular assistance in the timely resolution of this matter. 6 The application by the Liquidator was supported by the Commissioner of Taxation (Commissioner) who appeared at the hearing, by his counsel, Mr R. Metlej. 7 For the reasons that follow, I am satisfied that the orders and directions sought by the Liquidator in the interlocutory process should be made.

OVERVIEW 8 By the Deed, the Liquidator and the Commissioner seek to resolve: (a) proceedings commenced by the Liquidator and the Company against the Commissioner on 18 September 2020 in the Supreme Court of New South Wales seeking recovery of a payment in the amount of $6 million (Voidable Transaction Proceeding); (b) an objection lodged by the Company with the Commissioner dated 19 October 2020 in respect of the Commissioner's assessment of income tax payable by the Company for the financial years ended 30 June 2014 to 30 June 2016 inclusive seeking a refund of an amount up to $31 million (ATO Objection); and (c) a proof of debt lodged by the Commissioner in the liquidation of the Company on 19 October 2016, in the amount of $5,380,780.48, for a debt said to be due and payable by the Company to the Commissioner in relation to income tax for the financial year ending 30 June 2016 (the ATO Proof of Debt), (together, Ongoing Actions). 9 The Ongoing Actions overlap in part to the extent that they concern income tax paid, or payable, by the Company in the 2015/2016 financial year (FY16). 10 By the Deed, the Liquidator agrees to the Voidable Transaction Proceeding being dismissed and to withdraw the ATO Objection without making any actual recoveries. The Commonwealth Creditors agree to subordinate part of their claims in the winding up, to the extent necessary, to permit the Liquidator to pay ordinary unsecured creditors, that are not Commonwealth Creditors (Non-Commonwealth Creditors), a first dividend calculated at a rate that assumes that the Liquidator and Company had been wholly successful in the Ongoing Actions and had recovered the full amount sought of $31 million.

RELEVANT FACTUAL BACKGROUND 11 Prior to the appointment of the Liquidator, the Company: (a) had carried on a business as a registered training organisation providing vocational education and training (VET) courses approved by the Australian Skills and Quality Authority; (b) was approved as a VET provider and higher education provider by the (then) Department of Education and Training, now known as the Department of Employment and Workplace Relations (Department), for the purposes of the Higher Education Support Act 2003 (Cth); and (c) had received in excess of $210 million in the period from 2013 to 2016, from the Department in advances and payments under the VET FEE-HELP and FEE-HELP schemes in respect of students enrolled in its courses. 12 On 1 April 2016, the Australian Competition and Consumer Commission (ACCC) and the Commonwealth (on behalf of the Department) commenced proceedings against the Company in this Court seeking, inter alia, pecuniary penalty orders, orders for non-party consumer redress to annul students' VET FEE-HELP loans and consequential orders seeking repayment of the corresponding VET FEE-HELP payments paid to the Company (ACCC Proceeding). 13 The ACCC Proceeding has now been determined and findings and orders have been made against the Company, including, relevantly, orders that: (a) on 1 March 2021, the Company pay approximately $142 million in compensation to the Department; and (b) on 3 December 2021; (i) the Company pay the Commonwealth a pecuniary penalty in the amount of $153 million; (ii) the Company pay the Commonwealth's costs of and incidental to the ACCC Proceeding; and (iii) prevent the applicants in the ACCC Proceeding from seeking to enforce the orders for compensation, pecuniary penalties and costs against the Company without leave of the Court. The orders, however, also provide that the Commonwealth can prove for the compensation order and the costs order in the winding up of the Company without leave of the Court. 14 The Court also made declarations in the ACCC Proceeding that the contracts between the Company and the VET-FEE HELP students (being the contract pursuant to which the VET FEE-HELP payments had been received) were void ab initio. As those contracts were, in effect, unwound, the Company asserted that income tax paid on amounts received by the Company in respect of those void contracts was not payable. This formed the basis of the ATO Objection. 15 On 18 September 2020, the Liquidator commenced the Voidable Transaction Proceeding seeking a declaration that a payment of $6 million made by the Company to the Commissioner on or about 6 October 2016 (ATO Payment) be recovered as an uncommercial transaction within the meaning of s 588FB of the Corporations Act or, alternatively, an unfair preference payment within the meaning of s 588FA of the Corporations Act. 16 On 5 October 2016, being the day that the directors of the Company resolved that the Company should be wound up, the Company made the ATO Payment in circumstances where the Company's running balance with the ATO did not suggest any amounts outstanding by the Company as at that date. 17 On 14 October 2016, the ATO sent the Liquidators a Notice of Special Assessment issued to the Company in the amount of $11,429,384 for income tax liability during the period from 1 July 2015 to 30 June 2016. The Notice of Special Assessment refers to, and deducts from the amount of tax payable, income tax instalments paid by the Company during FY16 in the amount of $8,749,531. The Notice of Special Assessment did not refer to the ATO Payment. 18 The Voidable Transaction Proceeding has not been determined. The immediate next step, should it be necessary to progress the Voidable Transaction Proceeding, would be the filing of a statement of claim. 19 On 19 October 2016, the ATO lodged the ATO Proof of Debt in the amount of $5,380,780.48 for income tax payable by the Company during the period from 1 July 2015 to 30 June 2016. 20 The ATO Proof of Debt has not yet been formally adjudicated. 21 On 19 October 2020, the Company lodged the ATO Objection. The ATO Objection seeks that the notices of assessment in relation to income tax paid and payable by the Company for the financial years FY14, FY15, and FY16 should be cancelled, set aside, or withdrawn. If successful in relation to the ATO Objection, the Company claims it would be entitled to a refund of income tax amounts paid in those income tax years. 22 The covering letter to the ATO Objection refers to a potential refund in the amount of approximately $21 million. The Deed, however, refers to a refundable amount, if the ATO Objection is wholly successful in the Company's favour, of approximately $31 million: Deed clause 1.1, "Notional Assets". The difference in the amount is not material to this application as the amount included in the Notional Assets in the Deed is the higher of the two amounts (that is, the Deed assumes a greater recovery in favour of the Company than that which is set out in the covering letter to the ATO Objection). 23 The ATO has not yet determined the ATO Objection. 24 As the ATO Objection includes an objection in relation to income tax said to be payable for FY16, if successful in establishing that no (or less) income tax was payable for FY16, this would impact upon the ATO Proof of Debt (which relates to income tax payable in FY16) and the Voidable Transaction Proceeding (which relates to a payment alleged to be made in respect of, or applied towards, the Company's asserted FY16 income tax liability). 25 The Liquidator has taken various steps since his appointment on 6 October 2016 to pursue recoveries, including by commencing proceedings in the Supreme Court of New South Wales. With the exception of the Voidable Transaction Proceeding and the ATO Objection, the Liquidator has finalised all other viable recoveries. 26 As at 20 June 2023, the cash at bank held by the Company, including amounts recovered and realised by the Liquidator, is just under $25 million. 27 Proofs of debt lodged in the liquidation of the Company by ordinary unsecured creditors are in the amount of approximately $163 million. The Commonwealth Creditors have lodged claims in the amount of $161 million, just over 99% of the value of the total ordinary unsecured claims. 28 Once the Voidable Transaction Proceeding and the ATO Objection have been determined or resolved, the Liquidator will be in a position to (a) formally adjudicate on proofs of debt, (b) pay dividend(s) in the liquidation and (c) take steps to complete the winding up and deregistration of the Company.

Section 90-15 of the IPS 29 A liquidator is authorised to apply for directions under s 90-15 of the IPS by virtue of s 90-20(1)(d) of the IPS and paragraph (d) of the definition of "officer" of a corporation in s 9 of the Corporations Act. 30 The principles applied in determining applications for directions under the now repealed s 479(3) and s 511 of the Corporations Act provide useful guidance on applications of this kind, although it has been accepted that s 90-15(1) is more broadly expressed than the former s 511 of the Act: see GDK Projects Pty Ltd, in the matter of Umberto Pty Ltd (in liq) v Umberto Pty Ltd (in liq) [2018] FCA 541 at [33] (Farrell J); Walley, in the matter of Poles & Underground Pty Ltd (Administrators Appointed) [2017] FCA 486 at [41] (Gleeson J). 31 Generally, directions by the Court as to how a liquidator should act in carrying out their functions are only appropriate where there is some doubt or difficulty beyond what is commercially desirable: In the matter of Rubix Investments Group Pty Ltd (in liq) [2018] NSWSC 1184, at [31] Gleeson JA, citing HIH Insurance and related matters [2004] NSWSC 5 at [19] (Barrett J) . Such directions should only be made by the Court where there is a legal issue of substance or procedure, which may be an issue of power, propriety or reasonableness: Re Ansett Australia Ltd (No 3) (2002) 115 FCR 409; [2002] FCA 90 at [65] (Goldberg J). It is an insufficient basis to attract an order giving directions that the liquidator has a feeling of apprehension or unease about the business decision made and wants reassurance: Re Ansett at [65]. 32 Directions may be given on questions of legal procedure, such as whether a liquidator should settle a legal claim, and if so, on what terms: Sanderson v Classic Car Insurance Pty Limited (1985) 10 ACLR 115 at 117 (Young J). Whether a liquidator should enter into a settlement deed has been considered to be a legitimate subject for directions because such a question involves a legal assessment as well as a commercial assessment: Wingecarribee Shire Council v Lehman Brothers [2013] FCA 1350 at [95] (Jacobson J); Australian Securities and Investments Commission v Letten (No 24) [2014] FCA 1322 at [14] (Gordon J). 33 The role of the Court is to grant or deny approval of the liquidator's proposal and not to develop some alternative proposal: In the matter of City Pacific Limited [2017] NSWSC 784 at [10] (Brereton J); see also Hughes, in the matter of Sales Express Pty Ltd (in Liq) [2016] FCA 423 at [20] (Edelman J). 34 In considering whether to grant approval or give directions to a liquidator in relation to a settlement, a Court will not generally review a liquidator's commercial judgment or second guess their decision: Sales Express at [20]. The Court, however, will not "rubber stamp" whatever is put forward by the liquidator: HIH at [15]; Re Spedley Securities Ltd (In Liq) (1992) 9 ACSR 83 at 85 (Giles J). The Court respects the liquidator's decision and generally, will not interfere unless there is some apparent want of good faith, some error of law or principle apparent on the face of the material or some real or substantial ground of doubt as to the prudence of the liquidator's conduct: Cosmoluce v Tsagaris [2010] NSWSC 1115 at [15] (McDougall J); Spedley at 85-86 (Giles J); Fortress Credit Corporation (Australia) II Pty Ltd v Fletcher and Barnet (2015) 89 NSWLR 110; [2015] NSWCA 85 at [125] (Bathurst CJ, with Beazley P, MacFarlan, Meagher and Barrett JJA agreeing). 35 In considering whether to give approval to enter into agreements, the Court is to consider the purposes for which the powers of a liquidator exist, which includes the recovery of funds for the benefit of creditors: McGrath and Anor re HIH Insurance Ltd & Ors (2010) 266 ALR 642; [2010] NSWSC 404 at [13] (Barrett J); Pascoe, in the matter of Brentwood Village Limited (in liquidation) [2014] FCA 1295 at [44] (Gleeson J). 36 Section 563C of the Corporations Act provides: Debt Subordination (1) Nothing in this Division renders a debt subordination by a creditor of a company unlawful or unenforceable, except so far as the debt subordination would disadvantage any creditor of the company who was not a party to, or otherwise concerned in, the debt subordination. (2) In this section: debt subordination means an agreement or declaration by a creditor of a company, however expressed, to the effect that, in specified circumstances: (a) a specified debt that the company owes the creditor; or (b) a specified part of such a debt; will not be repaid until other specified debts that the company owes are repaid to a specified extent. 37 A liquidator may distribute the estate in accordance with an agreement between the parties where to do so could not adversely affect any creditor not a party to the agreement: Horne v Chester and Fein Property Developments Pty Ltd [1987] VR 913 at 922 (Southwell J); United States Trust Co of New York v Australia and New Zealand Banking Group Ltd (1995) 37 NSWLR 131 at 141-143 (Sheller JA, with Mahoney and Meagher JJA agreeing). Creditors may voluntarily divest themselves of any right to payment provided they do not injure other creditors: Bow Ye Investments Pty Ltd (in liq) v Director of Public Prosecutions [2009] VSCA 149 at [67] (Bowen CJ with Buchanan JA and Vickery AJA agreeing).

Subsection 477(2B) of the Corporations Act 38 Section 477(2B) of the Corporations Act provides: 477 Powers of liquidator (2B) Except with the approval of the Court, of the committee of inspection or a resolution of the creditors, a liquidator of a company must not enter into an agreement on the company's behalf (for example, but without limitation, a lease or an agreement under which a security interest is created) if: (a) without limiting paragraph (b), the term of the agreement may end; or (b) obligations of a party to the agreement may, according to the terms of the agreement, be discharged by performance; more than 3 months after the agreement is entered into, even if the term may end, or the obligations may be discharged, within those 3 months. 39 In considering an application under s 477(2B), the Court is to determine whether it is a proper or bona fide exercise of the liquidator's powers to enter the agreement, in contrast to the wider inquiry required by the granting of a direction under s 90-15 of the IPS: White, in the matter of Macro Realty Developments Pty Ltd and Macro Realty Pty Ltd (No 2) [2020] FCA 649 at [10]-[15] (McKerracher J). 40 The real issue for the Court on an application under s 477(2B), is whether any prolongation of the liquidation that would be occasioned by the relevant agreement, is warranted by the offsetting benefits that would flow from it: City Pacific at [13].

CONSIDERATION 41 I have concluded that the orders and declarations sought by the Liquidator should be made for the following reasons. 42 First, I am satisfied that the Deed provides a mechanism whereby the Ongoing Actions can be cost effectively and efficiently resolved. The Deed will allow the Liquidator to proceed now to adjudicate claims, declare and pay dividends and proceed to finalise the liquidation. 43 The Commonwealth, through various departments and bodies is the major creditor (in dollar terms) of the Company by a very significant margin. The Commonwealth's claims, including the ATO Proof of Debt, account for approximately 99% of the value of all ordinary unsecured creditor claims. 44 The Liquidator seeks recoveries from the Commissioner in the Voidable Transaction Proceeding and the ATO Objection. If the Liquidator were successful in making recoveries under the ATO Objection or in the Voidable Transaction Proceeding, then those recoveries from the Commonwealth (that is, the Commissioner) would almost exclusively be then paid back to the Commonwealth (that is, to the Commonwealth Creditors) by way of dividend in the winding up. 45 The Deed avoids this potentially circularity and the costs of the recovery actions by providing an arrangement whereby, upon the happening of the "Subordination Events" (as set out below): (a) the Ongoing Actions are to be resolved without further unnecessary costs or expenses being incurred: see clause 4 of the Deed; (b) the Voidable Transaction Proceeding will be dismissed with no order as to costs: see clause 4.42 and Schedule 2 of the Deed; (c) the ATO Objection will be withdrawn by the Company: see clause 4.4.1; (d) the Commonwealth Creditors will subordinate part of their claims in the liquidation to enable the Non-Commonwealth Creditors to be paid with the first dividend in the winding up at a dividend rate, calculated in accordance with the provisions of the Deed, that assumes that the Company and the Liquidator were wholly successful in recovering the full amount from the Ongoing Actions: see clauses 1 ("Agreed Amount" and relevantly "Notional Assets") and clause 2 of the Deed; (e) an amount of costs will be left aside for future costs, which will include winding up and deregistering the Company: see clauses 1 ("Agreed Amount" and relevantly "Notional Assets" and clause 2 of the Deed); (f) to the extent there is more than one dividend to be paid, subsequent dividends will be paid in relation to ordinary unsecured creditors rateably in accordance with Part 5.6 of the Corporations Act: see clause 2.7; and (g) the Liquidator immediately declaring and paying the first dividend: see clause 2.1. 46 The "Subordination Events" are set out in Schedule 4 to the Deed. They include (a) the Liquidator obtaining Court approval to enter into the Deed (or waiving that requirement), (b) the Liquidator calling for proofs of debt and admitting the Commonwealth Creditors' claims for the amounts provided in the Deed, and (c) that immediately prior to declaring the first dividend, the admitted claims and debts of the Non-Commonwealth Creditors' claims not exceed 2% (or an agreed greater percentage) of the claims of all unsecured ordinary creditors (the Non-Commonwealth Creditor claims are currently 0.83% of the value of all ordinary unsecured creditor claims). 47 Second, each of the Commonwealth Creditors has consented to the arrangements proposed by the Deed and have indicated that they intend to enter into the Deed. 48 Third, I am satisfied that the Non-Commonwealth Creditors will not be prejudiced by the subordination contemplated in the Deed. The arrangements contemplated by the Deed provide that the Commonwealth Creditors will not prove in competition with the Non-Commonwealth Creditors to a specified extent. By assuming a dividend rate that assumes successful recovery from the Ongoing Actions when the first dividend is calculated and facilitating payment to the Non-Commonwealth Creditor at that rate will ensure that the Non-Commonwealth Creditors, who are not party to the arrangement, are not 'injured' or adversely affected by the arrangements proposed in the Deed. The 'Worked Example' set out in Schedule 3 of the Deed shows a potential dividend rate of 35.78 cents in the dollar, which exceeds the anticipated dividend described in the report to creditors dated 7 December 2020. The anticipated dividend as at 4 December 2020, advised to creditors in that report, not taking into account any potential recovery from the Voidable Transaction Proceeding and the ATO Objection, was between 10.94 and 11.13 cents in the dollar. 49 Fourth, the Commonwealth Creditors have been notified of this application and the hearing. The Liquidator has published notices in relation to this application, and the hearing date, on the webpage maintained for creditors of the Company. In addition, the Liquidator's solicitors, Minter Ellison, notified Mr Amjad Khanche, a director of the Company and Non-Commonwealth Creditor of the application and the hearing date. 50 Other than communications from the Commonwealth Creditors, the Liquidator has given evidence that he has only received minor queries in response to those notices. 51 Fifth, the Liquidator had given evidence that in his opinion, with which I concur, entry into the Deed is in the best interests of the creditors as a whole, having regard to : (a) a consideration of the practicalities, costs and risks associated with participating in the Ongoing Actions; (b) the quantum of the Commonwealth Creditors' claims and the Non-Commonwealth Creditors' claims recorded in the proofs of debt lodged in the liquidation of the Company; (c) the design of the Deed so that Non-Commonwealth Creditors are not prejudiced by the operation of the Deed; and (d) the ability, if the Deed is approved, to resolve the Ongoing Actions without significant further costs and to move expeditiously to declare and pay a dividend to the Company's creditors. 52 Sixth, I am satisfied that the Liquidator does not seek any direction or order that could be characterised as a business decision, nor is the application for direction one which seeks a "rubber stamp" over a commercial decision made by the Liquidator. 53 Seventh, there is no evidence before me that would provide any basis to suspect bad faith, impropriety or error of law by the Liquidator in entering into the Deed and seeking to resolve the Voidable Transaction Proceeding and the ATO Objection on the basis of the terms set out in the Deed. 54 Eighth, I am satisfied that approval under s 477(2B) of the Corporations Act should be provided to the extent that it is required. Approval under s 477(2B) has been sought as there is the possibility that the time taken to give effect to all of the conditions in the Deed may exceed the period of 3 months. The resolution of the Ongoing Actions on the terms of the Deed will bring about a faster and more costs effective resolution of the Ongoing Actions than if those actions were sought to be progressed to finality otherwise than through the mechanics of the Deed. Entry into the Deed will not prolong the Liquidation. 55 Finally, I note that clause 8.1 of the Deed, read in conjunction with the definitions in clause 1.1 of the Deed, provides that the Liquidator must use reasonable endeavours to ensure that any application to the Court for orders or directions pursuant to s 90-15 of the IPS or s 477(2A) or s 447(2B) to enter into the Deed must be made as soon as practical after the last date on which a party executes the Deed, and in any event within 21 days of that date. Further, clause 8.2.1 provides that the Liquidator must use reasonable endeavours to inform the Commonwealth Creditors of any fact, matter or circumstance of which they may become aware that might result in any application for Court approval being refused or dismissed. 56 The inherent difficulty with these clauses is that the Liquidator is seeking orders and directions under s 90-15 of the IPS and s 477(2B) from the Court to enter into the Deed prior to executing the Deed. 57 A further issue is that each of the Commonwealth Creditors has already executed the Deed. 58 In order to address these matters, in a practical and expeditious manner, a letter dated 10 August 2023 was sent from Craddock Murray Neumann, the solicitors for the Commissioner, to MinterEllison, the solicitors for the Liquidator. The letter was written on behalf of and with the consent of each of the Commonwealth Creditors. In the letter, the Commonwealth Creditors confirm that they have agreed to waive any rights that they might have otherwise had to rely on any failure of the Liquidator to perform any obligation imposed on him pursuant to clauses 8.1 or 8.2.1 of the Deed.

DISPOSITION 59 Orders and declarations will be made in the form sought in the originating process. I certify that the preceding fifty-nine (59) numbered paragraphs are a true copy of the Reasons for Judgment of the Honourable Justice Halley.

Corporations Act 2001(Cth)ss 9, 477(2B), 588FA, 588FB, Sch

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