Commonwealth of Australia (Department of Education, Skills and Employment) v Phoenix Institute of Australia Pty Ltd

Federal Court of Australia|2021-02-22|Before: Markovic J

Pursuant to s 37AF(1)(a) and s 37AG(1)(a) of the Federal Court of Australia Act 1976 (Cth), on the ground that it is necessary to prevent prejudice to the proper administration of justice, the following material is to be treated as confidential until 31 March 2021: (a) the affidavit of Jennifer Nettleton sworn on 14 December 2020 marked "Confidential Affidavit" (Confidential Affidavit); (b) the documents which are contained in the exhibit marked "JN-2" to the Confidential Affidavit; and (c) the submissions dated 18 February 2021 that are marked as "confidential" and filed by the plaintiffs in support of this application.
Pursuant to s 588FF(3)(b) of the Corporations Act 2001 (Cth) (Act), the time for the plaintiffs to make an application under s 588FF(1) of the Act be extended up to and including 30 June 2021 with respect to any voidable transaction involving: (a) Phoenix Institute of Australia Pty Limited (in liquidation) (Phoenix) and Community Training Initiatives Pty Limited (in liquidation); and/or (b) Phoenix and persons or entities who are yet to be identified as potential defendants.
The plaintiffs' costs of the proceedings be costs in the liquidation of Phoenix. Note: Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.

MARKOVIC J: 1 On 22 February 2021 on the application of Scott Langdon and Jennifer Nettleton, the additional liquidators (SPLs) of Phoenix Institute of Australia Pty Limited (in liquidation) (Phoenix), I made orders including an order pursuant to s 588FF(3)(b) of the Corporations Act 2001 (Cth) (Act) extending the time for the SPLs to make an application under s 588FF(1) of the Act up to and including 30 June 2021 in relation to any voidable transaction involving Phoenix and Community Training Initiatives Pty Ltd (in liquidation) (CTI) and Phoenix and other persons or entities yet to be identified as potential defendants. These are my reasons for making those orders.

Background 2 Scott Langdon and Jennifer Nettleton were appointed as SPLs by order of this Court on 4 June 2020: see Commonwealth of Australia (Department of Education, Skills and Employment) v Phoenix Institute of Australia Pty Ltd (in liq) [2020] FCA 937 (Commonwealth v Phoenix). 3 A description of the business undertaken by Phoenix including the regulatory framework in which it operated, the circumstances in which it was placed into voluntary administration and then liquidation and the events which led to the appointment of the SPLs are set out in detail in Commonwealth v Phoenix at [4]-[43]. It is not necessary to repeat those matters save to note the following by way of summary.

Phoenix's operations 4 Phoenix was incorporated on 10 October 1998. It operated as a vocational education provider and became a registered training organisation (RTO) in 2005 and a vocational and education training provider (VET provider) in 2009. As an RTO and VET provider Phoenix was eligible to provide courses that were funded by the Commonwealth under the scheme known as the VET FEE-HELP scheme and was approved as a VET provider for the purposes of the Higher Education Support Act 2003 (Cth) (HES Act) on 5 November 2009. 5 From 2015, Phoenix became a wholly owned subsidiary of Australian Careers Network Limited (in liquidation) (ACN) and thus a member of the ACN group of companies (ACN Group) which included CTI. 6 CTI provided shared services, including payroll, marketing IT, finance and management functions, and a treasury function to the ACN Group. 7 In 2015 Phoenix experienced rapid growth in terms of student enrolments and tuition fees and had in excess of 250 staff. Between January 2015 and 18 August 2015, Phoenix received net VET FEE-HELP advance payments of $106,598,509.48. After August 2015, the Commonwealth ceased making VET FEE-HELP payments to Phoenix because of concerns it had in relation to Phoenix's operations. 8 On 24 November 2015 the Australian Skills Quality Authority (ASQA) notified Phoenix that its registration as an RTO was cancelled with effect from 6 January 2016. 9 Also in November 2015 the Australian Competition and Consumer Commission (ACCC) and the Commonwealth commenced proceeding NSD147/2015 against Phoenix and CTI in this Court (ACCC Proceeding). That proceeding was heard in November 2019 and judgment is reserved.

The administration and subsequent liquidation of Phoenix 10 On 21 March 2016 the directors of Phoenix placed the company into voluntary administration. The administrators of Phoenix became the administrators of all but one of the members of the ACN Group, including ACN. By the time of the administrators' appointment, Phoenix accounted for 95% of the ACN Group's revenue and, in turn, the vast majority of Phoenix's revenue came from VET FEE-HELP advances. 11 On 23 March 2016 a delegate of the Minister for Vocational Education and Skills revoked Phoenix's approval as a VET provider under cl 33(1) of Schedule 1A to the HES Act. 12 On 26 April 2016 the administrators of Phoenix issued a report to creditors recommending that they approve the entry into of a deed of company administration (DOCA) for all entities in the ACN Group save one. At the time of making that recommendation, the administrators observed that any return to creditors of the ACN Group was contingent upon the receipt by Phoenix of VET FEE-HELP payments and the difference to unsecured creditors in a liquidation scenario, as opposed to the proposed DOCA, was marginal. Notwithstanding that, the administrators were of the opinion that the proposed DOCA would replicate the position of creditors in a liquidation scenario in permitting assets and liabilities of the group to be pooled, while avoiding the disadvantages that would otherwise arise from liquidation. 13 On 24 May 2016 entry into of the DOCA was approved by creditors of the relevant entities in the ACN Group and the administrators became the deed administrators. 14 On 26 February 2020 the deed administrators informed creditors that the DOCA was no longer viable or necessary and recommended that each member of the ACN Group being administered according to the DOCA, which included Phoenix, ought to be wound up. The deed administrators proposed that if the companies in the ACN Group went into liquidation then, in their capacity as liquidators, they would await judgment in the ACCC Proceeding and: (1) if the ACCC and the Commonwealth were partly or wholly unsuccessful, they would seek to engage litigation funders to assist in pursuing Phoenix's claim for VET FEE-HELP; and (2) if the ACCC and the Commonwealth were successful in that proceeding, they would proceed to finalise the liquidations and have the ACN Group entities deregistered. 15 On 18 March 2020 the DOCA was terminated and each of the relevant ACN Group companies who were subject to the DOCA, including Phoenix, was placed into liquidation. The deed administrators were appointed as liquidators. 16 As noted at [2] above, on 4 June 2020 on the application by the Commonwealth acting through the Department of Education (Department) the SPLs were appointed. At that time orders were also made approving the entry into of a funding agreement by the SPLs with the Department.

Work undertaken by the SPLs since their appointment 17 Since their appointment the SPLs have undertaken the following tasks: (1) communicated with the liquidators of Phoenix in relation to access to Phoenix's books and records; (2) obtained access to material which had been earlier obtained by the Commonwealth in the ACCC Proceeding. As this material was subject to an express undertaking given to the Court by the Commonwealth in that proceeding, as well as the implied undertaking not to use the material for any other purpose, the SPLs were required first to apply to the Court to obtain access to that material. They did so and orders permitting access were made in the ACCC Proceeding on 24 September 2020; (3) reviewed the books and records of Phoenix which were provided by the liquidators in the period 17 June 2020 to 15 September 2020, the material from the ACCC Proceeding and the documents which comprise a category of material described as the "S1 Material". This material is voluminous and the task of its review is ongoing; (4) prepared a summary of Phoenix's history, a time line and subjects for, and memoranda on areas of, investigation, instructed solicitors and analysed Phoenix's accounting data; and (5) filed an application for the issue of examination summonses and orders for production pursuant to s 596A and s 596B of the Act in respect of the examinable affairs of Phoenix. Those summonses have been issued and examinations are scheduled to commence on 25 February 2021.

Outcome of the SPL's investigations to date 18 Ms Nettleton, one of the SPLs, has provided details of the preliminary investigations which the SPLs have thus far undertaken. Her evidence in that regard, which I do not propose to set out, is presently subject to an order which I was satisfied should be made under s 37AF and s 37AG of the Federal Court of Australia Act 1976 (Cth). 19 However, based on the review undertaken to date the SPLs have identified potential voidable transactions arising from: (1) management fees incurred by Phoenix to CTI for the year ended 30 June 2015 of $18,326,000; (2) management fees paid by Phoenix to CTI in July 2015 of $14,992,624; and (3) management fees incurred by Phoenix to CTI in the period 1 July 2015 to 29 February 2016 of $18,550,000. 20 Despite having identified these potential claims against CTI, Ms Nettleton explains that further investigations are necessary to enable the SPLs, with the assistance of legal advice, to identify any additional potential voidable transactions and to form a view as to the merits of the potential recovery action against CTI, any actions in relation to additional transactions that are identified and whether the SPLs and/or Phoenix will be justified in commencing legal proceedings in respect of one or more of such claims.

Reasons for seeking an extension of time 21 Ms Nettleton explains that, in the absence of the grant of an extension under s 588FF(3)(b) of the Act, any application made by the SPLs under s 588FF(1) of the Act must be made by or on 17 March 2021, being, relevantly, the date which is 12 months after the first appointment of a liquidator in relation to the winding up of Phoenix. 22 Ms Nettleton also explains that the SPLs' inability to bring any application under s 588FF(1) of the Act by that date is due to the time constraints under which they have been working since their appointment on 4 June 2020. In particular their ability to bring any application has been constrained by the following: (1) after their appointment on 4 June 2020, the SPLs only received a limited number of documents relevant to the examinable affairs of SPL. As a result the SPLs' ability to carry out tasks within the scope of their appointment was restricted until the application made for release of the Commonwealth from its undertakings in the ACCC Proceeding was resolved; (2) the investigations conducted by the administrators were preliminary in nature and the deed administrators and liquidators did not conduct any investigations into the affairs of Phoenix, the conduct of its directors and officers or potential claims against wrongdoers including under s 588FF(1) of the Act; (3) the current investigations are taking time given the complexity of Phoenix's business and affairs and the volume of material now provided to the SPLs; and (4) even on the basis of urgent examinations applications, the earliest return date that the SPLs could obtain was 25 February 2021.

Notice 23 To date, the only potential defendant in relation to the transactions which might be the subject of claims under s 588FF(1) of the Act is CTI. I was informed by counsel for the SPLs that the liquidators of CTI had been notified of this application and had indicated that they did not intend to appear. 24 The hearing of the application took place using the technology known as Microsoft Teams. No party contacted my associate notifying their intention to appear at the hearing in response to the invitation to do so included in the Court's daily list of business nor, upon the matter being called three times outside the court room, was there any appearance by or on behalf of CTI or any other party.

statutory framework and Legal principles 25 Section 588FF of the Act relevantly provides: (1) Where, on the application of a company's liquidator, a court is satisfied that a transaction of the company is voidable because of section 588FE, the court may make one or more of the following orders: (a) an order directing a person to pay to the company an amount equal to some or all of the money that the company has paid under the transaction; (b) an order directing a person to transfer to the company property that the company has transferred under the transaction; (c) an order requiring a person to pay to the company an amount that, in the court's opinion, fairly represents some or all of the benefits that the person has received because of the transaction; (d) an order requiring a person to transfer to the company property that, in the court's opinion, fairly represents the application of either or both of the following: (i) money that the company has paid under the transaction; (ii) proceeds of property that the company has transferred under the transaction; (e) an order releasing or discharging, wholly or partly, a debt incurred, or a security or guarantee given, by the company under or in connection with the transaction; (f) if the transaction is an unfair loan and such a debt, security or guarantee has been assigned - an order directing a person to indemnify the company in respect of some or all of its liability to the assignee; (g) an order providing for the extent to which, and the terms on which, a debt that arose under, or was released or discharged to any extent by or under, the transaction may be proved in a winding up of the company; (h) an order declaring an agreement constituting, forming part of, or relating to, the transaction, or specified provisions of such an agreement, to have been void at and after the time when the agreement was made, or at and after a specified later time; (i) an order varying such an agreement as specified in the order and, if the Court thinks fit, declaring the agreement to have had effect, as so varied, at and after the time when the agreement was made, or at and after a specified later time; (j) an order declaring such an agreement, or specified provisions of such an agreement, to be unenforceable. … (3) 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. 26 In the absence of an order under s 588FF(3)(b) the period for the commencement of any proceeding pursuant to s 588FF(1) will expire on 17 March 2021. Relevantly that is the date that is 12 months after the first appointment of a liquidator in relation to the winding up of Phoenix, which is the later of the two periods specified in s 588FF(3)(a). The relation back day in relation to Phoenix is 21 March 2016: see s 91 (item 12) and s 513C of the Act. 27 In considering whether to grant an extension under s 588FF(3)(b) of the Act the Court undertakes "a balancing of the requirements of commercial certainty on the part of those who had past dealings with the corporation against the conflicting interest of the creditors of the company": see Fortress Credit Corporation (Australia) II Pty Ltd v Fletcher (2015) 254 CLR 489 at [8]. 28 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) 124 ACSR 100; [2018] FCA 102 at [54]-[55] Gleeson J summarised the principles applicable to determining whether an order should be made under s 588FF(3)(b) as follows: 54 The Court is required to consider what is fair and just in all the circumstances: BP Australia Ltd v Brown [2003] NSWCA 216; (2013) 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]. 55 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 ("Walker") at [43]. 29 In relation to the issue of merits of the proposed action, at [60]-[61] her Honour said: 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]. 61 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".

CONSIDERATION 30 Based on the evidence before me and the submissions made on behalf of the SPLs, for the reasons that follow, I was satisfied that it was fair and just in the circumstances for an order to be made pursuant to s 588FF(3)(b) extending the time in which the SPLs can commence proceedings under s 588FF(1) of the Act. 31 First, there has been no relevant delay on the part of the SPLs. They were appointed in June 2020 and have, since the time of their appointment, taken steps in an efficient and orderly manner to progress their investigations. True it is that Phoenix was placed into administration in 2016. The events which have taken place since that time are recorded in Commonwealth v Phoenix at [29]-[43] and are summarised above. In short, while Phoenix was in administration, its administrators undertook only preliminary investigations. Phoenix was then subject to a DOCA and, by the time it entered into liquidation some four years later, there were insufficient funds to enable the liquidators to pursue any investigations. The evidence discloses that no substantive steps were taken to investigate the potential for voidable transactions prior to the appointment of the SPLs. If there has been any delay, it does not lie at the feet of the SPLs. 32 Further, the SPLs have sought to minimise the period of any extension of time. They have obtained documents and will shortly commence public examinations of relevant persons. They seek a short extension of approximately four months up to 30 June 2021 to complete their investigations. 33 Secondly, in the present circumstances, where the purpose of the application for an extension of time is to permit the SPLs time to complete their investigations, and thereafter to decide whether or not to bring any proceeding under s 588FF(1) of the Act against CTI or any other person or entity, a review of the merits in unnecessary. That said, based on the evidence before me, I am satisfied that in circumstances where a significant amount of Commonwealth funding obtained by Phoenix was depleted in a short period, and in the absence of any cogent explanation as to how those monies were expended over that period, there are circumstances which merit further investigation by the SPLs. 34 Thirdly, as set out at [24] above, no party appeared to oppose the application. Thus, the only potential for prejudice arises because of the fact that the potential defendants will remain subject to the possibility of commencement of legal proceedings. However, balanced against that is the fact that the period for which the extension was sought was not lengthy and the risk that evidence might be lost and memories fade will be mitigated, to some degree, by the examination process which the SPLs will shortly undertake. In short, given the steps that have been and will be undertaken by the SPLs relative to the period of extension of time, parties that dealt with Phoenix prior to its administration and subsequent liquidation will obtain commercial certainty in a relatively short time.

Conclusion 35 For those reasons I made the orders sought by the SPLs. I certify that the preceding thirty-five (35) numbered paragraphs are a true copy of the Reasons for Judgment of the Honourable Justice Markovic.

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