Plaintiff v Defendants

2 In this application, the DET seeks orders for the appointment of Adams Pauls Nikitins ('Nikitins') and Justin Denis Walsh ('Walsh'), both of Ernst & Young ('EY'), as special purpose liquidators of GAS and FACTS. The DET also seeks orders which would enable Nikitins and Walsh to execute an indemnity deed under which DET would provide an indemnity for investigations and litigation to be undertaken by Nikitins and Walsh on behalf of GAS and FACTS.

3 The DET filed an originating process dated 5 October 2016, and relies on the affidavit of Samantha Johanna Perussich dated 5 October 2016 ('Perussich affidavit').

4 GAS was placed in voluntary liquidation on 21 December 2015. A number of members of the Barkla family are or have been directors.

5 GAS operated as a registered education and training organisation ('RTO') and received subsidy payments from the Victorian State Government to carry out and deliver the Government subsidised training services to eligible individuals. The DET administered the RTO scheme and subsidy payments. In December 2013, the DET entered into a 2014-2016 Vocational Education and Training Funding Contract with GAS ('GAS 2014-16 Funding Contract') in its capacity as a RTO.[2] Pursuant to the terms of the GAS 2014-16 Funding Contract, GAS was required to supply, amongst other things, high quality training services, including training and assessment that was suitable and appropriate for each eligible individual.

6 On 7 October 2015, the DET foreshadowed an audit of GAS's compliance with the GAS 2014-16 Funding Contract.[3] The audit found deficiencies in GAS's conduct,[4] and GAS responded.[5] In early December 2015 the DET informed GAS that it would appoint EY to undertake a review of compliance by GAS with its obligations under the GAS 2014-16 Funding Contract.[6] In late December 2015 GAS was wound up voluntarily. The Liquidators were appointed by the directors of GAS. On 11 January 2016 the DET indicated that it would terminate the GAS 2014-16 Funding Contract. On 15 January 2016 the Liquidators responded, notifying the DET of their appointment and demanding payment of $47,516 from the DET.[7] The EY review, which was finalised on 9 February 2016, found that GAS had not complied with its obligations.[8] The Liquidators persisted with the demand until the DET informed them that GAS had breached the GAS 2014-16 Funding Contract.[9] Ultimately the DET terminated the GAS 2014-16 Funding Contract in July 2016.[10]

7 The DET provided funds to GAS, pursuant to the terms of the GAS 2014-16 Funding Contract, on the basis that GAS was complying with its obligations, in the following amounts:

(a) $9,267,109 (including GST) for the 2014 calendar year; and

(b) $9,247,588 (including GST) for the 2015 calendar year.

8 In addition, the DET funded GAS $4,745,025, under the terms of a former funding contract which related to the 2013 calendar year. So that in a 3 year period, the DET paid GAS a total of approximately $23 million.

9 The DET claims against GAS for breaches of the GAS 2014-16 Funding Contract, and seeks restitution of approximately $2 million. It has lodged a proof of debt.[11]

10 The Liquidators have estimated that - apart from the DET's claim - GAS has unsecured creditors of approximately $2.5 million, whereas its likely assets are only $100,000. Accordingly, DET is a substantial creditor of GAS.

11 The Liquidators have advised that there were loan accounts with related entities of GAS totalling $7.8 million but the Liquidators were informed that the related entities were insolvent.

12 FACTS was placed into voluntary liquidation on 18 February 2016.[12] Scott Barkla, a director of GAS, was also a director of FACTS, from 8 June 2011 to 21 December 2015, and again since 16 February 2016. Adam Michael Sebastiano was a director of FACTS between 1 August 2011 and 16 February 2016. Graeme Sporn was a director between 21 December 2015 and 16 February 2016.

13 FACTS also operated as a RTO and received subsidy payments from the State Government to carry out and deliver the Government subsidised training services to "eligible individuals". In early December 2013, the DET entered into a 2014-16 VET Funding Contract with FACTS in its capacity as a RTO.[13] Pursuant to the terms of the FACTS 2014-16 Funding Contract, FACTS was required to supply, amongst other things, high quality training services, including training and assessment that was suitable and appropriate for each eligible individual.

14 In February 2016 a number of events occurred in relation to the FACTS 2014-16 Funding Contract. (It will be recalled that on 11 January 2016 the DET indicated that it would terminate the GAS 2014-16 Funding Contract, and on 9 February 2016, the EY review found that GAS had not complied with its obligations.) On 11 February 2016 Ms Noy, FACTS' solicitor, communicated with the DET, indicating FACTS' intention to terminate the FACTS 2014-16 Funding Contract.[14] The DET did not accept the termination.[15] On 15 February 2016 the DET informed FACTS that it would undertake a review of FACTS, and EY communicated with FACTS' solicitor about the review.[16] However the premises of FACTS were closed, and on 18 February 2016 the company was wound up.[17] The Liquidators were appointed by the directors of FACTS. EY's preliminary investigations suggested that a review be undertaken.[18] Ultimately the DET terminated the FACTS 2014-16 Funding Contract in July 2016.[19]

15 The DET provided funds to FACTS, pursuant to the terms of the FACTS 2014-16 Funding Contract, on the basis that FACTS was complying with its obligations, in the amount of $7,961,829 in respect of the 2014-2016 period.

16 The DET claims against FACTS for breaches of the FACTS 2014-16 Funding Contract, and seeks restitution of approximately $2.5 million. It has lodged a proof of debt.[20]

17 The Liquidators have estimated that - apart from the DET's claim - FACTS has unsecured creditors of approximately $317,000, whereas its likely realisable assets are only $84,000. Accordingly, DET is a substantial creditor of FACTS.

18 The DET has funded GAS and FACTS a total of approximately $26.5 million, in respect of calendar years 2014 and 2015. It was submitted that the sudden insolvency of each of GAS and FACTS appears to have been precipitated, at least in part, by the DET seeking to undertake relevant quality reviews to ensure compliance with their respective funding contracts. During the period 2014 to 2016, approximately 2,820 students were in enrolment to complete courses with GAS and approximately 631 students were in enrolment to complete courses with FACTS. Moreover, the unexpected closure of each of the trading operations of GAS and FACTS suggests that they may have been experiencing financial difficulties for a period of time, prior to their respective liquidations. Each of GAS and FACTS were placed into liquidation, as opposed to voluntary administration, which suggests, it was submitted, that neither had a trading operation that may have been capable of a sale, prior to the insolvency of each of the companies.

19 It was submitted, correctly in my view, that it was neither necessary nor appropriate for the Court to make findings on these matters at this point.[21] However the facts point, it was submitted, to a real need to investigate the affairs of GAS and FACTS in order to determine whether their directors or officers have breached their duties, whether they have traded whilst insolvent, whether there have been any voidable transactions, the genuineness of the related party transactions, and whether there are other recovery proceedings which may need to be pursued, or at least considered, in the interests of creditors of GAS and FACTS. I agree. It is indeed desirable that such investigations take place. The question of course is who should undertake such investigations?

20 Based on the information provided to date by the Liquidators, they have insufficient funds to carry out any substantive investigations into the affairs of GAS and FACTS.

21 The DET, a substantial creditor, is willing to fund (by an indemnity) the investigations into the affairs of GAS and FACTS, but only if special purpose liquidators (SPLs), other than the Liquidators, are appointed to conduct the winding up in relation to the matters the subject of the investigations. That is, in part, because the Liquidators - who were appointed to both GAS and FACTS - were selected by the directors and/or solicitors for GAS and FACTS, their appointments having resulted from referrals by Ms Noy, the solicitor for GAS and FACTS.[22]

22 The DET would prefer that Nikitins and Walsh be appointed as the SPLs. Nikitins has some familiarity with the affairs of GAS and FACTS, however, neither he nor Walsh were involved in either of the reviews commissioned by the DET. Nikitins and Walsh are experienced insolvency practitioners, with experience in the type of investigations that are necessary in the present case.[23] Nikitins has particular experience in the education sector and in RTOs.

23 The Court was advised that if it appointed the SPLs, then the DET proposes to enter into an indemnity deed with the SPLs ('Indemnity Deed').[24] The terms of the Indemnity Deed are confidential,[25] however, an indemnity will be provided by the DET to enable the SPLs to undertake an investigation into the affairs of each of GAS and FACTS, including the undertaking of a public examination and pursuit of any recovery action, on behalf of each of GAS and FACTS, that may arise from the aforementioned investigations. The terms of the Indemnity Deed, it was submitted, are reasonable.[26]

24 Apart from the DET, no other person has indicated any willingness to fund the proposed investigations into the affairs of each of GAS and FACTS. If there is no appointment of SPLs and DET does not provide an indemnity, it is likely, it was submitted, that the affairs of GAS and FACTS will not be investigated and avenues of recoveries will not be pursued.

25 It was submitted by reference to authorities that the Court has power to appoint special purpose liquidators under s 472 of the Corporations Act. Although that provision appears within Part 5.4B which relates to compulsory winding up, it has been held that the power extends, by s 511 of the Corporations Act, to voluntary winding up.[27] It was submitted that the essential question for the Court in exercising its discretion, is whether the appointment of a special purpose liquidator would be just and beneficial to the general body of creditors. In my opinion and in the circumstances referred to, it would be just and beneficial to appoint the SPLs. I am satisfied on the evidence that investigations are called for and would not take place if the SPLs were not appointed and suitably indemnified.

26 There are similarities, as was submitted, between the present case and Re Ambient Advertising Pty Ltd (in liq) [2015] NSWSC 1079 ('Re Ambient') and Lo v Nielsen & Moller (Autoglass) (NSW) Pty Ltd [2008] NSWSC 407 ('Lo'). A summary of each case is taken directly from the Plaintiff's submissions.

27 In Re Ambient, the winding up was unfunded, and the liquidators were unable to complete their investigations. The funder was prepared to provide significant funding to enable the necessary investigations to be carried out, and if appropriate, to pursue recovery actions. However the funder was not prepared to provide funding if the investigations and proceedings were carried out by the existing liquidators.[28] Robb J recorded the position of the funder but did not give it his imprimatur.[29] Under the funding arrangement, the funder funded the special purpose liquidator's fees and costs, and also indemnified the company and the special purpose liquidator in relation to any costs and liabilities.[30] The position was that if the Court did not make the orders sought, it was highly likely that the investigations would not be pursued.[31] The existing liquidators consented to the orders.[32] Robb J was satisfied that it would be beneficial to the administration of the winding up, and in the interest of the general body of creditors, for a special purpose liquidator to be appointed.[33] His Honour also approved the funding agreement,[34] referring to the case law on approval under s 477(2B) by which the Court does not pass commercial judgment on the proposed agreement but merely considers whether the entry into it is a proper exercise of power.[35]

28 In Lo, the funder was willing to finance investigations only if the liquidator was someone other than the existing liquidator.[36] None of the other creditors appeared willing to fund. Barrett J was satisfied that it would be beneficial to the administration of the winding up and in the interests of the general body of creditors for the work envisaged for the special purpose liquidator to be undertaken.[37] Any recoveries would benefit creditors as a whole. Barrett J sought to ensure that the two administrations - by the existing liquidator and the special purpose liquidator - were financially independent of one another.[38]

29 In the present case as noted above, the DET is willing to finance investigations only if the liquidator was someone other than the existing liquidators. None of the other creditors appear willing to fund. It would be beneficial to the administration of the winding up and the interest of the general body of creditors of GAS and FACTS for the work envisaged for the special purpose liquidators to be undertaken. Any recoveries would benefit creditors as a whole.[39] The two administrations - by the existing liquidators and the special purpose liquidators - are financially independent of one another.

30 The Liquidators appeared at the hearing of the application and did not object to the appointment of SPLs, but expressed a view that Nikitins and Walsh had a potential for conflict due to their firm's previous involvement.[40] The nature of their previous involvement was, it was submitted, such that they could be considered auditors and therefore precluded from accepting an appointment without court approval. Reference was made to s 532(2)(c)(iii) of the Corporations Act.

31 The Plaintiff submitted that the Liquidators' concerns are unfounded, as:

(a) EY undertook a specific business process audit involving GAS, as contemplated by the GAS 2014-16 Funding Contract, which consisted of an audit of the business processes of GAS and reviewing a sample of transactions that occurred during 2015 in order to assess the compliance of GAS with the GAS 2014-16 Funding Contract.

(b) EY undertook an audit and review activity involving FACTS, as contemplated by the FACTS 2014-16 Funding Contract, which involved an examination of the eligibility of student commencements, evidence of participation of students and the training and assessment strategies of FACTS, as outlined in the letter from the DET to FACTS dated 15 February 2016.

(c) There is no question that arises or might arise about the competency of the audit and review undertaken by EY, such as to create a potential conflict of interest, should Walsh and Nikitins, who are partners of EY, be appointed special purpose liquidators of FACTS and GAS.[41]

(d) Any creditor claims made by DET, in the respective insolvent estates of each of GAS and FACTS, arising from the results of the respective audits, will be able to be determined by the existing Liquidators of each of GAS and FACTS, as to the veracity, or otherwise, of the quantifiable claims of the DET. Those Liquidators, not the SPLs, would adjudicate on proofs. Any such analysis by the Liquidators of each of GAS and FACTS would not give rise to any claim, by either of the companies, against EY, but merely provide an opportunity for the Liquidators to accept, or otherwise, the proof of debt claims filed by the DET, in the liquidations of each of GAS and FACTS.

(e) Section 532 of the Corporations Act does not prevent the appointment. Section 532(2) prohibits a liquidator providing a consent to act, without the leave of the Court, in circumstances where that person has been an auditor of the company (s 532(2)(c)(iii)). Neither Nikitins nor Walsh have been auditors of either GAS or FACTS, nor have these suggested SPLs been involved in either of the contractual audits of either GAS or FACTS. In addition, no other person employed by EY has undertaken an audit of either of the companies, as contemplated by the Corporations Act, namely, a review of the financial affairs of the company and compliance of the financial books and records with the Act.

32 I agree with the Plaintiff. The submissions made in paragraph 31 are compelling. There is no reason why Nikitins and Walsh ought not be appointed as SPLs. In fact there is very good reason why they should be appointed. The Court retains overall supervisory control and the Liquidators would deal with any conflict that may arise.

33 I do not consider that either Nikitins or Walsh, or EY, in conducting their limited and directed investigation were relevantly auditors falling within the suggested disqualification provision (s 532(2)(c)(iii)). The word auditor is not defined. Although the word is presumably capable of a wide definition, in context, I do not consider that they were auditors in the relevant sense.

34 However, whatever the position may be, it is unnecessary to resolve the issue because I would in any event and in the circumstances grant the necessary leave if it was required. It was however entirely proper for the Liquidators to bring this matter to the Court's attention.

35 Appropriate orders were made on 21 October 2016. I indicated that written reasons would follow. These are the reasons.

[1] The facts are taken directly from the Plaintiff's submissions dated 19 October 2016 and the Persussich affidavit.

[2] Persussich affidavit, exhibit SJP-2.

[3] Persussich affidavit ,exhibit SJP-3.

[5] Persussich affidavit, paragraph 12 - 14.

[7] Persussich affidavit, paragraph 16; exhibits SJP-10, SJP-11.

[8] Persussich affidavit, paragraph 17; exhibit SJP-12.

[9] Persussich affidavit, paragraph 18 - 19; exhibits SJP-13, SJP-14.

[10] Persussich affidavit, paragraph 20, exhibit SJP-15.

[11] Persussich affidavit, exhibit SJP-17.

[12] Persussich affidavit, exhibit SJP-18.

[13] Persussich affidavit, exhibit SJP-19.

[14] Perussich affidavit, paragraph 28, exhibit SJP-20.

[15] Perussich affidavit, paragraph 29, exhibit SJP-21.

[16] Perussich affidavit, paragraph 31-32, exhibits SJP-23, SJP-24.

[17] Perussich affidavit, paragraph 33 - 35, exhibit SJP-26.

[18] Perussich affidavit, paragraph 36, exhibit SJP-27.

[19] Persussich affidavit, paragraph 37, exhibit SJP-28.

[20] Persussich affidavit, exhibit SJP-31.

[21] Lo v Nielsen & Moller Autoglass (NSW) Pty Ltd [2008] NSWSC 407, [8].

[22] The Declaration of Independence, Relevant Relationships and Indemnities ('DIRRI') for each of GAS and FACTS is in Persussich affidavit, exhibit SJP-32.

[23] The CVs are in Persussich affidavit, exhibit SJP-36.

[24] Persussich affidavit, confidential exhibit SJP-37.

[25] In Re Ambient, at [34], the draft funding deed was made a confidential exhibit.

[27] Lo v Nielsen & Moller (Autoglass) (NSW) Pty Ltd [2008] NSWSC 407, [25]-[31]; cited with approval in Re Ambient, [42]; see also Downey v Stewart; Re Complete Print Solutions Pty Ltd (in liq) [2014] FCA 792, [5].

[35] Re Ambient, at [44]-[45]; see also Stewart; Re Newtronics Pty Ltd [2007] FCA 1375, [26] per Gordon J; Re Ascot Vale Self-Storage Centre Pty Ltd (in liq) (2014) 98 ACSR 243; [2014] VSC 75, [96] per Robson J.

[39] Subject to any application made under section 564 of the Act to compensate the DET for the risk it assumes in providing an indemnity to the SPLs.

[41] Compare Aboriginal and Torres Strait Islander Commission v Jurnkurakurr Aboriginal Resource Centre Aboriginal Corp (in liq) [1992] NTSC 39; (1992) 10 ACSR 121, which was referred to in ASIC v Franklin; Re Walton Constructions Pty Ltd (2014) 223 FCR 204; [2014] FCAFC 85, [56].