State of Victoria v CTM Training Solutions Pty Ltd

2 In this application, the DET seeks orders for the appointment of Robert Ditrich and Craig Crosbie, both of PPB Advisory, as special purpose liquidators of CTM and SET. The DET also seeks orders which would enable Mr Ditrich and Mr Crosbie to execute a funding deed under which DET would provide funding to CTM and SET for investigations and litigation.

3 The DET filed an originating process dated 7 December 2016, and relies on the affidavit of David Peter Barron affirmed 6 December 2016. The defendants oppose the application and rely on the affidavit of Shane Leslie Deane sworn 9 February 2017. Mr Deane attended Court and was cross examined.

4 There are a number of relevant companies with common links:

(d) The Opportunity People Pty Limited (in liq) ('TOP');

(e) Smart Customer Pty Ltd (in liq) ('Smart Customer');

(g) Corporate Edge Developments Pty Ltd ('Corporate Edge'); and

5 Jason Sweeney ('Sweeney'), Glenn Robert Carter ('Carter') and Cheryl Carter ('Mrs Carter') were involved in the operations of each of the above companies. Each of CTM, SET, G2 and Smart Customer was a registered education and training organisation ('RTO') and received millions of dollars in subsidy payments from the Government of the State of Victoria, through the DET. Each of those four companies is now in liquidation. TOP is also in liquidation.

6 CTM and SET have two liquidators from the firm Dye & Co. G2, TOP and Smart Customer have two liquidators from the firm PPB Advisory.

7 Imagelogic is a 50% shareholder in each of CTM, SET, G2 and Smart Customer. Mrs Carter is, in turn, the sole shareholder of Imagelogic.

8 There are serious questions about the proper utilisation of subsidy payments received by these companies and the manner in which millions of dollars which were paid to the companies by the DET have been expended.

9 CTM was placed in voluntary liquidation on 20 May 2016.[2] Sweeney has been a director since 23 June 2015. Mrs Carter was a director between 13 May 2013 and 23 June 2015. Carter, while not shown on the ASIC search as a director of CTM, sent correspondence on its behalf.

10 CTM operated as a RTO and received subsidy payments, under two separate agreements, from the Government of the State of Victoria to carry out and deliver the Government subsidised training services to eligible individuals. The DET administered the RTO scheme and subsidy payments. In or around 2013, the DET entered into two agreements with CTM, in its capacity as a non-Victorian RTO:

(a) a 2013 Service Agreement, Victorian Training Guarantee Program, with CTM dated 29 January 2013 ('2013 CTM Service Agreement'); and

(b) a 2014 VET Funding Contract, Victorian Training Guarantee Program (non-Victorian based RTO delivering a National Enterprise), with CTM dated 18 December 2014 ('2014 CTM Funding Contract'),

(together, 'CTM Funding Agreements').[3]

11 Pursuant to the terms of the CTM Funding Agreements, CTM was required to supply, amongst other things, high quality training services, including training and assessment that was suitable and appropriate for each Eligible Individual (as defined therein).

12 In May 2014, Carter of CTM, wrote a letter to the DET, confirming that CTM had breached each of the 2013 CTM Services Agreement and the 2014 CTM Funding Contract and proposed a repayment plan for the claims made and paid for ineligible individuals under the Victorian Training Guarantee. CTM also confirmed that it would complete the training of the current students and not re-enrol further students previously enrolled with CTM.[4] There were further communications between CTM and DET about the repayment plan in May and June 2014.[5] By May 2016, CTM had repaid the DET $550,000, however, a further $32,329 remained outstanding and CTM was in breach of the repayment proposal.

13 The DET provided funds to CTM, pursuant to the terms of the CTM Funding Agreements, on the basis that CTM was complying with its obligations, in the following amounts:

(a) $313,962.00 (including GST) for the 2013 calendar year; and

(b) $272,427.10 (including GST) for the 2014 calendar year,

15 The liquidators have estimated that CTM has unsecured creditors of approximately $1.8 million and likely assets of $22,500.

16 SET was placed in voluntary liquidation on 30 June 2016.[6] Carter, was a director from 27 July 2012 to 11 November 2014.

17 SET also operated as a RTO and received subsidy payments from the Government of the State of Victoria to carry out and deliver the Government subsidised training services to eligible individuals. In or around 2012, the DET entered into a 2013 Service Agreement Victorian Training Guarantee with SET dated 17 December 2012 ('2013 SET Service Agreement') in its capacity as a RTO.[7] In the latter part of 2013, the DET entered into a 2014-2016 Vocational Education and Training Funding Contract with SET dated 29 November 2013 ('2014-16 SET Funding Contract') in its capacity as a RTO.

18 Pursuant to the terms of the 2013 SET Service Agreement and the 2014-16 SET Funding Contract, SET was required to supply, amongst other things, high quality training services, including training and assessment that was suitable and appropriate for each eligible individual.

19 On or about 25 August 2016, Ernst & Young ('EY') produced a Final Report in connection with a Quality Review, which identified a number of instances of non-compliance with the 2014-16 SET Funding Contract, including, but not limited to, failure to adhere to relevant guidelines to determine student eligibility, adequate pre-training reviews of students were not completed and the quality of training services was inadequate to satisfy the contractual funding obligations.[8] As SET had ceased training on 21 June 2016, prior to the completion of the Quality Review, SET had not been provided with a preliminary report and had therefore not provided comments in relation to it.

20 The DET provided a total of $39,342,259.09 to SET pursuant to the terms of the 2014-16 SET Funding Contract, on the basis that SET was complying with its obligations in the following amounts:

(a) $13,308,802.70 (including GST) for the 2013 calendar year;

(b) $14,914,841.33 (including GST) for the 2014 calendar year; and

(c) $11,118,615.06 (including GST) for the 2015 calendar year,

In addition, the DET funded SET $15,893,736.60, under the terms of a former funding contract relevant for the 2012 calendar year.

21 DET is a creditor of SET. To date the DET has filed a Formal Proof of Debt with the liquidators of SET in the amount of only $55,517.[9] However, beyond this, given the deficiencies identified by EY as part of their Quality Review of SET, the DET submitted that it has a potential claim against SET, for breaches of the 2014-16 SET Funding Contract, such that SET is required to make restitution of substantial funds to the DET. It is observed that shortly after SET was informed about EY's engagement, it went into voluntary liquidation.

22 The DET has funded CTM and SET, a total of approximately $55 million, in respect of the calendar years of 2012, 2013, 2014 and 2015. It was submitted that the sudden insolvency of SET appears to have been precipitated, at least in part, by the DET seeking to undertake quality reviews to ensure compliance with their respective funding contracts.

23 Moreover, the unexpected closure of each of the trading operations of CTM and SET suggests, it was submitted, that they may have been experiencing financial difficulties for a period of time, prior to their respective liquidations. Each of CTM and SET were placed directly into liquidation, as opposed to voluntary administration which, it was submitted, suggests that neither had a trading operation capable of a sale prior to the insolvency of each of the companies.

24 It is neither necessary nor appropriate for the Court to make findings on these matters at this point.[10] However the facts point, it was submitted, to a real need to investigate the affairs of SET and CTM in order to determine:

(a) Whether their directors or officers have breached their duties;

(c) Whether there have been any voidable transactions;

(d) The genuineness of the related party transactions; and

(e) Whether there are other recovery proceedings which may need to be pursued, or at least considered, in the interests of creditors of SET and CTM

25 It is common ground that the Liquidators have insufficient funds to carry out the Investigations into the affairs of SET and CTM. They are at present self-funded.

26 The DET, a creditor, is willing to fund the Investigations into the affairs of SET and CTM, but only if special purpose liquidators ('SPLs'), other than the Liquidators, are appointed to conduct the Investigations. That is, in part, it was submitted, because the Liquidators - who were appointed to both SET and CTM - were selected by the directors of SET and CTM.

27 The DET submitted that it was preferable that Mr Crosbie and Mr Ditrich (together, 'Nominated Liquidators') of PPB Advisory be appointed as SPLs of each of CTM and SET. The Nominated Liquidators have some familiarity with the affairs of CTM and SET, due to their respective appointment to each of G2 and TOP (on 27 April 2016) and to Smart Customer (on 19 February 2015), all related companies of both SET and CTM. Each of Mr Crosbie and Mr Ditrich is an experienced insolvency practitioner, with experience in the type of investigations that are necessary in the present case.[11]

28 It was submitted that there are obvious efficiencies in the Investigations relating to the 5 companies - SET, CTM, G2, TOP and Smart Customer - being carried out by a single set of liquidators. The companies have common links, including:[12]

(a) Imagelogic is the 50% shareholder of each of G2, Smart Customer, SET and CTM;

(b) There are intercompany loan accounts between the entities;

(c) Each of G2, TOP, SET and CTM shared financial services, as a number of these companies regularly transferred funds between them. A number of employees of G2 were transferred to CTM and others from CTM to G2, during the course of 2014, for example, in or about 14 September 2014 an employee of G2 was informed their employment position had been transferred to CTM;[13]

(d) Each of G2, SET and TOP operated from the one site, namely Unit 1, 1 Clelland Road, Brooklyn;[14] and

(e) Some of the properties from which the companies operated were jointly owned by Carter.

29 If the Court appoints the SPLs, then the DET proposes to enter into a funding deed with the SPLs ('Funding Deed').[15] The terms of the Funding Deed are confidential,[16] however, relevant funding will be provided by the DET to the SPLs to undertake the Investigations into the affairs of each of SET and CTM, including the undertaking of a public examination and pursuit of any recovery action, on behalf of each of SET and CTM, that may arise from the aforementioned Investigations. It was submitted that the terms of the Funding Deed are reasonable.[17]

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

31 The Liquidators submitted that although the affairs of CTM and SET required investigation, including if necessary a public examination, the scope of any such investigation by a special purpose liquidator should be narrow in scope and specifically set out. The appointment should not, it was submitted, be in broad terms so as to effectively render the Liquidators irrelevant. The applications were not - it was emphasised - an application for removal of the Liquidators. Finally, the Liquidators pointed to the work that they have already commenced, on a self-funded basis, in relation to the desired areas of investigation. They are, it was submitted, prepared to continue the Investigations on a self-funded basis, and if necessary seek funding at a later stage.

32 The Court has power to appoint special purpose liquidators under s 472 of the Corporations Act 2001 (Cth) ('Corporations Act'). That provision appears within Part 5.4B which relates to compulsory winding up. However it has been held that the power extends, by s 511 of the Corporations Act, to voluntary winding up.[19] 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.

33 In Re Obie Pty Ltd (No 4),[20] Thomas J considered whether an additional liquidator should be appointed in respect of causes of action which was said to exist between the company and a firm of accountants. Thomas J held that the additional liquidator should be appointed because of the nexus between the liquidators and the firm of accountants against which the claim was said to exist. The scope of the appointment was limited to the making of a decision whether proceedings should be brought against the accountant and the institution and conduct of those proceedings if it is decided that such proceedings should be brought.

34 In Onefone Australia Pty Ltd v One.Tel Ltd,[21] Windeyer J considered whether an additional liquidator should be appointed in respect of a particular aspect of the winding up of One.Tel Limited. The additional liquidator was sought to be appointed to investigate the cancellation of the renounceable rights issue by the directors of the first defendant and to make recommendations to the creditors as to whether any rights of action exist and whether any action should be commenced against any party(s) in relation to that rights issue or the cancellation of it or such other orders as the Court may think appropriate. Windeyer J accepted that there was a reasonable apprehension of conflict in the position of the liquidator in connection with the cancellation of the renounceable rights issue by the directors. His Honour considered that there was a basis for ordering the appointment of a special purpose liquidator for the purpose of conducting investigations and making recommendations to the creditors only. His Honour granted leave to apply to extend the purpose for which the special purpose liquidator was appointed. Leave was sought in subsequent proceedings after the special purpose liquidator conducted his investigations and made recommendations to the creditors.

35 In Lo v Nielsen & Moller (Autoglass) (NSW) Pty Ltd,[22] the funder was willing to finance investigations only if the liquidator was someone other than the existing liquidator.[23] 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 the interest of the general body of creditors for the work envisaged for the special purpose liquidator to be undertaken.[24] 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.[25]

36 In Re Ambient Advertising Pty Ltd Pty Ltd (in liq),[26] 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.[27] Robb J recorded the position of the funder but did not give it his imprimatur.[28] 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.[29] The position was that if the Court did not make the orders sought, it was highly likely that the investigations would not be pursued.[30] The existing liquidators consented to the orders.[31] 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.[32] His Honour also approved the funding agreement,[33] referring to the case law on approval under s 477(2B) of the Corporations Act 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.[34]

37 In State of Victoria v Goulburn Administration Services (in liq),[35] the liquidation was unfunded. The DET was willing to finance investigations only if the liquidator was someone other than the existing liquidators. None of the other creditors were willing to fund.[36] I considered that it would be beneficial to the administration of the winding up and the interest of the general body of creditors for the work envisaged for the special purpose liquidators to be undertaken.[37] Any recoveries would benefit creditors as a whole.[38] The two administrations - by the existing liquidators and the special purpose liquidators - were financially independent of one another.[39]

38 It is not in dispute that the Investigations are required in relation to the affairs of each company. Antecedent transactions and conduct need to be carefully scrutinised. The question is whether this should be undertaken by the Liquidators or the proposed SPLs. If the latter, what is to be the scope or limits of the Investigations?

39 As pointed out, the Liquidators were not as such opposed to the appointment of SPLs. Rather, they submitted that any such appointment 'should be limited to investigating and prosecuting payments made pursuant to the CTM Funding Agreements and the SET Funding Agreements and to make recommendations to the creditors of CTM and SET as to whether any rights of action should be commenced against any individual persons in respect of the breaches of the CTM Funding Agreements or the SET Funding Agreements'.[40]

40 The suggested scope or area of investigation is very narrow and not entirely clear. It is primarily directed to breaches of the various funding agreements and payments made thereunder. The wording is not sufficient to extend to the examination of antecedent transactions and conduct as contemplated. Presumably this would be undertaken by the Liquidators. They have, it appears, already commenced the process.

41 The critical question or issue therefore is, as pointed out, whether the contemplated and desirable examination and investigation of antecedent transactions and conduct of the companies be conducted by the Liquidators or the proposed SPLs. If it is the Liquidators, there is no point in appointing the proposed SPLs to undertake such a limited and narrow task as submitted. If it is the proposed SPLs, the Liquidators will remain and attend to matters falling outside the scope of the SPLs.

42 In my opinion the Investigations should be undertaken by the proposed SPLs. I propose to make the appointments and set out with some precision the scope of the appointment. It will not be at large. The appointments are not intended to replace the Liquidators.

43 There are a number of factors that point to the desirability of appointing the proposed SPLs. In identifying these factors I wish to stress that I make no adverse findings against the Liquidators. I should also stress that it is of the first importance that liquidators are totally independent and are seen to be so. It is important that confidence in the integrity, objectivity and impartiality of an administration be maintained.[41]

44 Firstly, it is in my view preferable that the Investigations be properly and fully funded. This is not a criticism of the Liquidators who propose to continue on a self-funded basis, or perhaps seek funding to pursue any claims following the Investigations. However, the DET is prepared to fully fund the Investigations and is prepared to enter into a Funding Deed to such effect. Indeed, the execution of the proposed Funding Deed is part of the application.

45 Secondly, I am a little concerned, and it is not insignificant so far as the appearance of impartiality is concerned, about the past engagement of Dye & Co by Tony Kairouz[42] in other creditors voluntary liquidations before the appointment of the Liquidators.[43]

46 Thirdly, notwithstanding the explanation given by Mr Deane, it appears from the work in progress reports[44] that work in the nature of the Investigations only started after this application was commenced. Indeed the initial position taken by the Liquidators was that the appointment of the SPLs was a matter for the Court. They in fact indicated an intention to resign. Although they have commenced the Investigations there is still much work to be done. Further, in a Form 524 dated 29 November 2016[45] lodged with ASIC, and in relation to CTM, Mr Deane estimated the completion date of the administration to be '03/2017'. In item 4 of the Form he indicated that the only delay would be because of 'ASIC Investigations'. Clearly, further investigation was not contemplated by Mr Deane as at late November 2016. This does not inspire confidence.

47 In all of the circumstances, the SPLs should conduct the Investigations with funding pursuant to the proposed Funding Deed. This is the preferable course.

48 I will hear from the parties as to the form of order and costs.

[1] I have taken this background summary of facts from the plaintiff's submissions for which I am grateful.

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

[13] The loan accounts are in Exhibit DPB-27.

[14] The Liquidators confirmed that 'one or both of the companies operated out of the listed premises at various points in time': Exhibit DPB-28.

[16] In Re Ambient Advertising Pty Ltd (in liq) [2015] NSWSC 1079 ('Re Ambient Advertising'), at [34], the draft funding deed was made a confidential exhibit.

[17] Re Ambient Advertising, at [35].

[18] I have taken this summary of the relevant cases from the parties' submissions for which I am grateful.

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

[20] (1984) 2 ACLC 663.

[21] [2003] NSWSC 1228; (2003) 48 ACSR 562.

[22] [2008] NSWSC 407.

[26] [2015] NSWSC 1079.

[27] Re Ambient Advertising, at [9].

[28] Re Ambient Advertising, at [33].

[29] Re Ambient Advertising, at [38].

[30] Re Ambient Advertising, at [39].

[31] Re Ambient Advertising, at [11].

[32] Re Ambient Advertising, at [40].

[33] Re Ambient Advertising, at [46].

[34] Re Ambient Advertising, 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 ACSR243; [2014] VSC 75, [96] per Robson J.

[35] [2016] VSC 654.

[36] State of Victoria v Goulburn Administration Services (in liq) [2016] VSC 654 ('Goulburn Administration Services'), [29].

[37] Goulburn Administration Services, [29].

[38] Goulburn Administration Services, [29].

[39] Goulburn Administration Services, [29].

[40] Paragraph [24] of Liquidators submissions filed 10 February 2017.

[41] Apple Computer Australia Pty Ltd v Wily [2003] NSWSC 719; (2003) 46 ACSR 729.

[42] Tony Kairouz was a director and secretary of G2, ceasing on 15 July 2015. He was also a former shareholder of G2. Tony Kairouz was also a director and secretary of TOP until 30 June 2015, and a former beneficial shareholder. Tony Kairouz is a director and secretary of Corporate Edge and also a beneficial shareholder. (The ASIC searches for these companies are at Exhibit DPB1).

[43] I refer in particular to Brooklyn Meat Processors Pty Ltd and Khanstin Pty Ltd (ASIC searches in respect of these companies form part of Exhibit A).