Kelly v Commissioner of Taxation, in the matter of Australian Institute of Professional Education Pty Limited

1. Pursuant to s 588FF(3)(b) of the Corporations Act 2001 (Cth) (the Act), the time in which the plaintiffs may make any application against the defendant pursuant to s 588FF(1) of the Act be extended to 6 October 2020.
2. The first plaintiffs' costs and expenses of this application be costs and expenses in the liquidation of the second plaintiff. Note: Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.

YATES J: 1 The first plaintiffs are the liquidators of the second plaintiff, Australian Institute of Professional Education Pty Ltd (in liquidation) (the company). They apply under s 588FF(3)(b) of the Corporations Act 2001 (Cth) (the Act) to extend the time in which they may apply for relief under s 588FF(1) of the Act. The extension is sought solely in relation to a payment of $6 million by the company to the defendant, the Commissioner of Taxation of the Commonwealth of Australia (the Commissioner). At the present time, the plaintiffs would be required to make an application under s 588FF(1) in respect of this payment by 6 October 2019 (the relation-back day is 6 October 2016). The extension they seek is to 6 October 2020. 2 As events have transpired, the Commissioner consents to the first plaintiffs' application to extend time. It is nevertheless appropriate that I consider the basis on which the first plaintiffs make their application in this regard, and assess its suitability for the purpose of exercising the Court's discretion under s 588FF(3)(b). 3 The application is supported by an affidavit made by Morgan John Kelly on 10 September 2019. Mr Kelly is one of the first plaintiffs, who were appointed as liquidators of the company on 6 October 2016 pursuant to a members' resolution. 4 Prior to the first plaintiffs' appointment as liquidators, the company carried on business as a registered training organisation (RTO) providing predominantly vocational education and training (VET) courses. In the period 2013 to 2016, it received approximately $211 million from the Commonwealth in payments under the VET FEE-HELP scheme. This appears to have been the company's primary source of revenue in that period. Towards the end of 2015, and throughout 2016, significant regulatory action and investigations were undertaken in relation to the company. 5 First, the company's registration as an RTO was cancelled by the Australian Skills and Quality Authority (ASQA) in December 2015. The company commenced proceedings in the Administrative Appeals Tribunal (AAT) seeking a review of this decision. These proceedings were ongoing at the time of the first plaintiffs' appointment as liquidators, but were discontinued on 3 November 2016. 6 Secondly, an investigation and subsequent audit of the company was carried out by the Australian Taxation Office (ATO). This fact features in the first plaintiffs' assessment that they may have claims against the Commissioner. 7 Thirdly, following an investigation in 2015 - 2016, the Australian Competition and Consumer Commission (ACCC) commenced proceedings against the company in March 2016 seeking, amongst other relief, pecuniary penalties and non-party consumer redress orders (including annulment of VET FEE-HELP contracts and corresponding repayments from the company) arising from the company's alleged misleading and unconscionable processes in relation to the enrolment of students in VET FEE-HELP courses. 8 On 5 October 2016, the company made the $6 million payment. At 6.00 pm that day, the company's directors resolved that the company should be wound up on the basis that it would be unable to pay its debts in full within the coming 12 months. At the time the $6 million payment was made, there had been no assessment or demand for payment from the Commissioner. The running balances of the company's "integrated client account" and "Income Tax Account 551" at the ATO were $48,603.52 and $0.00, respectively. 9 As I have noted, on the next day (6 October 2016), the first plaintiffs were appointed as liquidators of the company pursuant to a members' resolution. 10 On 14 October 2016, the Deputy Commissioner of Taxation issued a Notice of Special Assessment in the amount of $11,429,384.00 in respect of the company's income tax liability for the period 1 July 2015 to 30 June 2016 (the special assessment). 11 On 19 October 2016, the ATO lodged a proof of debt in the amount of $5,380,780.48 for income tax payable by the company for the period 1 July 2015 to 30 June 2016. Subject to some additional minor adjustments, the amount of the proof of debt appears to be the amount of the special assessment less the $6 million payment. 12 In his affidavit, Mr Kelly has deposed that, based on their investigations to date, the first plaintiffs consider that there are causes of action available to enable them to seek an order under s 588FF(1) of the Act for recovery of the $6 million payment on the basis that it was an uncommercial transaction (s 588FB of the Act) or an unfair preference (s 588FA of the Act). However, the first plaintiffs consider that additional time is needed to finalise investigations into the circumstances surrounding the $6 million payment before commencing proceedings against the Commissioner. In particular, the first plaintiffs consider that they should make a further request for documents from the Commissioner. They also wish to continue settlement negotiations with the Commissioner. 13 In Fortress Credit Corporation (Australia) II Pty Ltd v Fletcher [2015] HCA 10; 254 CLR 489 at [24], the High Court said: 24. The function of s 588FF(3)(b), which reflects its immediate purpose, is to confer a discretion on the court to mitigate, in an appropriate case, the rigours of the time limits imposed by para (a). That is a discretion to be exercised having regard to the scope and purposes of Pt 5.7B, characterised in the Harmer Report as the continuing "policy" which underpinned its recommendations. That policy included the avoidance of transactions by which an insolvent company has disposed of property in circumstances that are regarded by the legislature as unfair to the general body of unsecured creditors. It is, however, a policy qualified in its application by the requirement that liquidators be placed under a reasonable time limitation for taking action under the voidable transaction provisions. A purpose of that qualification, expressed in "clear and emphatic" terms, is to favour certainty for those who have entered into transactions with the company during the periods in respect of which designated transactions may be voidable. There is, however, no independent basis for the assertion that any extension of time which does not identify a particular transaction or transactions must be an unreasonable prolongation of uncertainty militating against a construction which would allow such an order to be made. The section provides for the exercise of discretion by the court. Questions of what is a reasonable or an unreasonable prolongation of uncertainty and the scope of such uncertainty are more appropriately considered case-by-case in the exercise of judicial discretion than globally in judicial interpretation of the provision. (Footnote omitted.) 14 In an application under s 588FF(3)(b), the Court usually considers the explanation for the delay in bringing proceedings under s 588FF(1); the merit of such proceedings; and whether the likely specific prejudice resulting from an extension of time is sufficiently substantial to outweigh the case for an extension. 15 As to the first factor, Austin J in Brown v DML Resources Pty Ltd (in liq) (No 7) [2002] NSWSC 162; 41 ACSR 299 at [33] said: 33 The adequacy of the plaintiffs' explanation for delay is not an independent criterion, but rather it is a factor to be weighed up with all other relevant factors in the exercise of the discretion. The degree of delay in the present case would not necessarily be acceptable in a case where failure to take proceedings has caused prejudice to the prospective defendants, or in a case where the insolvent administration is uncomplicated and fully funded. On the other hand, a greater degree of delay might be acceptable in a case where, for example, there is an indubitable entitlement to recover an unfair preference of a very large amount for the benefit of unsecured creditors, and no prejudice to the potential defendant other than the prejudice of repaying money which he was not entitled to receive. 16 Generally speaking, where the liquidator has made a deliberate commercial decision not to progress investigations at an early stage, any inability to pursue a claim outside the limitation period will be considered to have been "self-inflicted", and a significant factor counting against extending time: Re Clarecastle Pty Ltd (in liq) [2011] NSWSC 857; 255 FLR 435 at [23] and [41]; Arthur Andersen Corporate Finance Pty Ltd v Buzzle Operations Pty Ltd (in liq) [2009] NSWCA 104 at [93]. I note, however, that the first plaintiffs have made no such deliberate decision here. On the contrary, they have persisted with their claim against the Commissioner. 17 As to the second factor, the Court is only required to form a preliminary view of the merits of the proposed proceedings to gain an appreciation as to whether they are so devoid of prospects that it would be unfair to expose the prospective defendant to the continuing prospect of suit by granting an extension. Where, however, the liquidator's purpose in seeking an extension is to put himself or herself into a position where he or she can properly decide whether or not to bring proceedings, a preliminary enquiry into the merits of any consequent proceedings may not always be necessary: Green v Chiswell Furniture Pty Ltd (in liq) [1999] NSWSC 608 (Green) at [15]. In Green, Austin J (at [16]) remarked that there is a risk in some cases that a preliminary enquiry into the merits of a prospective proceeding may impose an unnecessary risk on both the liquidator and the Court, especially in a case where the circumstances appear to give rise to complex or disputed questions of fact and law and the evidence before the Court is manifestly incomplete. 18 As to the third factor, the question of specific prejudice does not loom large in the present application given the Commissioner's consent to the extension that is sought. 19 In his affidavit, Mr Kelly gives an account of the numerous tasks that the first plaintiffs have carried out since their appointment on 6 October 2016. He has identified, in particular, the following matters: (a) The usual tasks and inquiries conducted by liquidators, including securing and realising the relevant assets of the business, including bank accounts operated by the company; obtaining and securing access to the company's books and records; reviewing the company's business operations and its books and records; convening and holding meetings of creditors; and preparing and lodging with the Australian Securities and Investments Commission the required documentation in relation to their appointment as liquidators and in relation to the liquidation itself. (b) Conducting an urgent review of the AAT proceedings in respect of the company's cancellation as an RTO, which were part-heard on the date of the first plaintiffs' appointment and were scheduled to resume shortly thereafter; preparing evidence for the proceedings; and ultimately causing the company to consent to the discontinuance of the proceedings. (c) Liaising with ASQA and the Tertiary Education Quality and Standards Agency (TEQSA) as well as the Department of Education and Training (DET) in relation to the company's students and in relation to the provision of student records to ASQA and TEQSA. (d) Taking steps to liaise with students, through the students' services unit, in relation to the short term continuation of classes and the impact of the appointment of the first plaintiffs as liquidators. (e) Reviewing the company's business operations, including ascertaining details of current students enrolled with the company and notifying the Tuition Protection Service (TPS), the Australian Council for Private Education and Training and other stakeholders of student details to assist with the transition of students following the appointment of the first plaintiffs as liquidators. (The TPS is an initiative of the Australian Government to assist international students whose education providers are unable to fully deliver their course of study.) (f) Liaising with the landlord of the property occupied by the company at 160 Sussex St, Sydney, including procuring and negotiating an assignment of one of the leases for the premises and procuring and negotiating a surrender of the other lease for the premises. (g) Liaising with DET in relation to overpayments of VET FEE-HELP made to the company in the calendar years 2013 and 2014. In particular, in October 2016, DET notified the first plaintiffs of a preliminary estimate of overpayments in the amount of $73,368,365.00 for the 2015 calendar year and sought a submission from the company in relation to that alleged overpayment. (h) Inquiring into funds considered to be "protected amounts" under the Education for Overseas Students Act 2000 (Cth) (ESOS Act) in relation to international student fees, including seeking directions from the Supreme Court of New South Wales (Proceeding 2017/388060) as to whether a claim in the liquidation submitted by the TPS should be paid in priority to other claims. (i) Conducting the defence of the proceedings commenced by the ACCC. (j) Conducting liquidators' examinations in the Supreme Court of New South Wales into the company's affairs (Proceeding 2017/32801736). (k) Conducting the defence of proceedings commenced by the company's sole shareholder, International Education Management Pty Ltd (IEM) against the first plaintiffs in the Supreme Court of New South Wales (Proceeding 2017/317853) (IEM Proceeding), including issuing a cross-claim against IEM, the directors of the company and various other parties. (l) Obtaining approval from this Court in proceeding NSD 565/2018 to enter into a funding agreement with a funder for the conduct of the IEM Proceeding. (m) Responding to an application made by Uvision Pty Ltd (Uvision) in the Supreme Court of New South Wales (Proceeding 2016/205797) seeking to set aside a default judgment of the District Court of New South Wales entered against Uvision in a proceeding commenced by the company (Uvision Proceeding), including causing the company to consent to orders setting aside the default judgment and discontinuing both the District Court and Supreme Court proceedings. (n) Responding to an application made by ASQA in the AAT proceedings seeking that ASQA be released from any implied undertaking in respect of certain documents filed in the proceedings so that documents could be provided to the ACCC and the DET for the purposes of the proceedings commenced by the ACCC. ASQA's application was ultimately withdrawn before being determined. 20 The first plaintiffs have realised the company's assets, other than certain computer servers and choses in action. As at 9 September 2019, the cash on hand was approximately $60,000. There are notified claims against the company of approximately $82 million, but the plaintiffs have not yet called for formal proofs of debt to be lodged or adjudicated any claims in the liquidation. 21 The first plaintiffs' explanation for their delay in commencing proceedings against the Commissioner under s 588FF(1) of the Act is based on three matters. 22 First, the liquidation of the company has been large and complex. In addition to their investigation of the $6 million payment, and the potential claims in relation to that payment, the first plaintiffs have been responsible for managing responses to extensive regulatory enquiries, managing investigations and bringing and defending legal proceedings during their appointment, as the above summary reveals. 23 Secondly, since June 2018, when they sent a letter of demand, the first plaintiffs have been in discussions with the Commissioner in relation to the $6 million payment to see whether a resolution of the claim is possible. Those discussions are ongoing. Some of the correspondence is in evidence. 24 Thirdly, given the company's present financial circumstances, the first plaintiffs have concerns about funding the liquidation. As I have noted, cash on hand is approximately $60,000. In July 2019, the first plaintiffs began exploring the possibility of obtaining external funding to pursue a claim against the Commissioner in respect of the $6 million payment. Confidential discussions have taken place with two prospective funders. So far, both funders have declined to provide funding, although one of them has recently made a new proposal which the first plaintiffs are currently considering. 25 I am satisfied that the first plaintiffs have provided a satisfactory explanation for their delay in commencing proceedings against the Commissioner under s 588FF(1) in relation to the $6 million payment. 26 As I have noted, the first plaintiffs consider that the $6 million payment is recoverable against the Commissioner on the basis that the payment was either an uncommercial transaction or an unfair preference. There can be no dispute that the payment was a transaction of the company entered into within the relevant period before the relation-back day. Further, there is evidence that the company was either insolvent at the time of, or as a consequence of, that payment. In particular, on 5 October 2016 the company's directors resolved that they were unable to sign a solvency declaration to the effect that the company would be able to pay its debts in full within 12 months. This resolution was a precursor to the members resolving, on the following day, that the company be wound up voluntarily. These facts are sufficient for me to conclude that the first plaintiffs' claim against the Commissioner is not devoid of merit. It is not necessary for me to express any firmer view on that matter. 27 Finally, there is no specific prejudice which would warrant refusal of the present application, having regard to all the circumstances of the case including, importantly, the Commissioner's consent to time being extended for the period sought. 28 This is an appropriate case, therefore, for the Court to exercise its discretion favourably to grant the relief sought. Extending time will enable the first plaintiffs to complete their investigations in relation to the $6 million payment, continue discussions with the Commissioner to determine if a possible resolution can be reached, and to determine whether it is possible to obtain external funding in relation to any recovery proceedings. 29 The orders sought in prayers 1 and 2 of the originating process filed on 10 September 2019 will be made. I certify that the preceding twenty-nine (29) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Yates.