FEDERAL COURT OF AUSTRALIA Kelly (liquidator), in the matter of Australian Institute of Professional Education Pty Limited (in liq) [2018] FCA 780 File number: NSD 650 of 2018 Judge: GLEESON J Date of judgment: 1 June 2018 Catchwords: BANKRUPTCY AND INSOLVENCY – judicial advice as to conduct of proceedings Legislation: Corporations Act 2001 (Cth), Sch 2 item 90-15 Trustee Act 1925 (NSW) s 63 Cases cited: Australian Competition and Consumer Commission v Australian Institute of Professional Education Pty Ltd (in liq) [2017] FCA 521 Cosmoluce v Tsagaris [2010] NSWSC 1115 In the matter of Ansett Australia Ltd and Korda (No 3) [2002] FCA 90; (2002) 115 FCR 409 Re Addstone Pty Ltd (in liq) (1997) 25 ACSR 357 Re MF Global Australia Limited (in liq) [2012] NSWSC 994; (2012) 267 FLR 27 Reidy, In the Matter of eChoice Limited (Admin Apptd) [2017] FCA 1582 Date of hearing: 3 May 2018 Registry: New South Wales Division: General Division National Practice Area: Commercial and Corporations Sub-area: Corporations and Corporate Insolvency Category: Catchwords Number of paragraphs: 49 Counsel for the Plaintiffs: Ms K Morgan SC and Ms C Hamilton-Jewell Solicitor for the Plaintiffs: Minter Ellison ORDERS NSD 650 of 2018 IN THE MATTER OF AUSTRALIAN INSTITUTE OF PROFESSIONAL EDUCATION PTY LIMITED (IN LIQUIDATION) (ACN 126 628 215) MORGAN KELLY, GEORGE GEORGES AND RYAN EAGLE IN THEIR CAPACITY AS JOINT AND SEVERAL LIQUIDATORS OF AUSTRALIAN INSTITUTE OF PROFESSIONAL EDUCATION PTY LIMITED (IN LIQUIDATION) (ACN 126 628 215) First Plaintiff AUSTRALIAN INSTITUTE OF PROFESSIONAL EDUCATION PTY LIMITED (IN LIQUIDATION) (ACN 126 628 215) Second Plaintiff JUDGE: GLEESON J DATE OF ORDER: 1 June 2018 THE COURT ORDERS THAT: 1. The first plaintiffs are justified in causing the second plaintiff to file in Federal Court proceeding NSD453/2016 ("ACCC proceeding") the amended response to concise statement in the form, or substantially the same form, as the proposed amended response set out at pages 392 to 401 of exhibit "MJK-1" to the affidavit of Morgan Kelly sworn 20 April 2018. 2. The first plaintiffs are justified in defending the ACCC proceeding on the basis set out in the amended response. 3. The first plaintiffs are justified in using the resources of the second plaintiff to pay the costs of defending the ACCC proceeding. 4. The first plaintiffs are justified in making this application. 5. The first plaintiffs' costs and expenses in relation to this application be paid out of the assets of the second plaintiff. Note: Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011. REASONS FOR JUDGMENT GLEESON J: 1 By originating process filed on 20 April 2018, the first plaintiffs ("liquidators") applied for directions pursuant to item 90-15 of Sch 2 ("Insolvency Practice Schedule") to the Corporations Act 2001 (Cth) and ancillary orders. The application was heard ex parte on 3 May 2018. 2 The principal relief concerns the liquidators' proposed conduct in a proceeding brought by the Australian Competition and Consumer Commission ("ACCC") and the Commonwealth of Australia ("Commonwealth") against the second plaintiff ("AIPE"), being Federal Court proceedings no. NSD453/2016 ("ACCC proceeding"). The proceeding was commenced on 1 April 2016, and seeks orders including pecuniary penalties and non-party consumer redress orders in relation to loans made by the Commonwealth to students enrolled in AIPE's vocational education training courses under the VET-FEE HELP scheme. 3 On 16 May 2017, the Court granted leave to the ACCC and the Commonwealth to proceed against the company in the ACCC proceeding, pursuant to s 500(2) of the Corporations Act: Australian Competition and Consumer Commission v Australian Institute of Professional Education Pty Ltd (in liq) [2017] FCA 521. The liquidators have estimated the substantial legal costs that they will incur in defending the ACCC proceeding, as revealed in their evidence opposing the grant of leave to proceed. 4 The ACCC proceeding has been fixed for a final hearing commencing on 10 September 2018. Evidence 5 The application was supported by two affidavits of Morgan Kelly, the second-named first plaintiff, sworn 20 April 2018 and 1 May 2018. The affidavits were accompanied by four exhibits marked, respectively, "MJK-1" to "MJK-4". 6 On 2 May 2018, Bromwich J made the following order in the ACCC proceeding by consent: The respondent be released from the implied obligation not to make use of documents filed in these proceedings for the purpose other than those of the proceedings, so far as is necessary to enable the respondent to seek judicial advice in proceedings NSD650/2018 on condition that the respondent seek orders as may be necessary to preserve the confidentiality of any information identifying or disclosing personal information concerning any student enrolled with the Australian Institute of Professional Education Pty Ltd (In Liquidation) or any witness in these proceedings, or the respondent otherwise deal with documents filed in this proceeding in a fashion which does not disclose that information. 7 At the hearing of the application, the liquidators sought, and I made an order of the kind envisaged by the consent order. I also made a confidentiality order in relation to exhibits marked "MJK-2" and "MJK-4" which contained confidential legal advice. Factual background to application 8 On 6 October 2016, the liquidators were appointed following a resolution to wind up the company voluntarily under s 491 of the Corporations Act. According to ASIC's records, the directors of AIPE at this time were Amjad Khanche and Ajay Valanju. Those records show that Tej Preet Dugal ("Dr Dugal") ceased to be a director on 9 September 2016. 9 The liquidators have identified payments just in excess of $62 million which may be recoverable by the liquidators or the company. The impugned transactions pursuant to which these payments were made are summarised in Mr Kelly's 20 April 2018 affidavit. They include: (1) A transfer of $35 million from the company to its then sole shareholder, International Education Management Pty Ltd ("IEM"), in September 2016 (that is, in the month before the appointment of the liquidators). The transfer was in payment of a purported dividend of $34 million, declared by the directors of the company on 11 August 2016. The amount of $1 million was returned by IEM to the company on 5 October 2016. (2) Payments totalling $15 million to Dr Dugal in his capacity as trustee for the Memon Valanju Dugal Trust and Khanche Investments Pty Ltd ("Khanche Investments") in its capacity as trustee of the Khanche Family Trust on 31 March 2016 ("$15 million transaction"). The $15 million transaction is said by Mr Kelly to have been in payment of a purported dividend in the amount of $15 million, declared by the directors of AIPE on 25 March 2016. 10 On 20 October 2017, IEM commenced a proceeding in the Supreme Court of New South Wales seeking declarations to the effect that the $34 million does not form part of the assets of AIPE ("IEM proceeding"). 11 In February 2018, the liquidators conducted examinations of the directors and former directors of the company, and other staff and advisors of the company. Subsequently, the liquidators obtained legal advice from senior counsel in relation to the recoverability of the payments the subject of the impugned transactions. 12 In March 2018, the liquidators obtained injunctions from the Supreme Court of New South Wales preventing IEM's disbursement of $34 million, as well as freezing orders against Mr Khanche and Khanche Investments. On 24 April 2018, those orders were extended to a date that was not identified in the evidence. 13 On 8 March 2018, Bromwich J made orders that gave the liquidators an opportunity to consider: (1) whether to amend the response to the concise statement filed by the ACCC and the Commonwealth ("ACCC's concise statement"); and (2) whether to serve any evidence in the ACCC proceeding. 14 The ACCC's concise statement sets out the key claims made against AIPE in the ACCC proceeding. 15 On 9 April 2018, the liquidators served a defence and a statement of cross-claim in the IEM proceeding for recovery of the payments totalling $62 million made pursuant to the impugned transactions. 16 On 17 April 2018, I made orders authorising the liquidators' entry into a funding agreement with Litigation Lending Services Pty Ltd in respect of the IEM proceeding. Issues raised by Mr Khanche and Dr Dugal concerning defence of ACCC proceeding 2017 17 Mr Kelly gave evidence of his understanding from discussions with Mr Khanche since AIPE went into liquidation that the directors of AIPE wanted the liquidators to defend the ACCC proceeding. By "directors", I understood Mr Kelly to refer to Mr Khanche, Mr Valanju and Dr Dugal. 18 In February 2017, Mr Kelly wrote to those three individuals asking whether the directors and/or IEM would be prepared to fund AIPE's defence of the ACCC proceeding. Dentons Lawyers responded on behalf of IEM, stating that IEM was prepared to provide funding for the defence of the ACCC proceeding on certain conditions. The parties corresponded in April and May 2017. IEM's position was that the funding should be made available from the funds that were then the subject of an undertaking by IEM in favour of the liquidators, being the $34 million referred to above. Ultimately, the liquidators formed the view that it was not appropriate for the defence to be funded out of the funds the subject of the undertaking. 2018 19 On 17 April 2018, the liquidators' solicitors, MinterEllison received a letter from Ashurst, solicitors acting for Mr Khanche and Khanche Investments, seeking the liquidators' confirmation that they would consent to an adjournment of the IEM proceeding until the conclusion of the ACCC proceeding. Ashurst also asked whether the liquidators intended to cause AIPE to actively defend the ACCC proceeding and, if not, why not. 20 On 18 April 2018, MinterEllison received a letter from Ashurst asserting that it was inappropriate for the liquidators to enter into a funding agreement prior to the resolution of the ACCC proceeding, and that the entry into the funding agreement gives rise to questions of conflict that may render the liquidators and their solicitors ineligible to act in that proceeding. 21 The same day, the liquidators' solicitors also received a letter from William James, Dr Dugal's solicitors asserting, amongst other things, that the liquidators should be removed as liquidators of AIPE altogether for being in a position of conflict of interest in respect of the IEM proceeding and the ACCC proceeding. 22 By letter dated 23 April 2018, MinterEllison wrote to Ashurst in reply to Ashurst's 17 April 2018 letter raising matters in relation to the ACCC proceeding. Among other things, MinterEllison informed Ashurst that the liquidators were finalising their position in relation to the extent to which the ACCC proceeding could properly be defended, particularly having regard to AIPE's conduct and admissions made during the recent examinations. The letter also informed Ashurst that, if its clients wished to bring an application to intervene and be heard in relation to the ACCC proceeding, the liquidators would not object to that course. 23 By another letter dated 23 April 2018, MinterEllison wrote to William James rejecting the allegations made in their 18 April 2018 letter, and stating that the liquidators were considering the extent to which the ACCC proceeding could reasonably be defended. 24 By letter dated 24 April 2018, MinterEllison replied to Ashurst's 18 April 2018 letter, disagreeing with the assertions identified above, and expressing the view that they were based upon a false assumption that the success of the cross-claim in the IEM proceeding is dependent upon the outcome of the ACCC proceeding. Relief sought 25 Mr Kelly gave the following evidence: Given the potential size of the claim against AIPE and that the current form of relief seeks refunds of payments made in relation to any student who has not completed a unit of study in the course in which they were enrolled, the Liquidators do not consider it is in the best interests of the creditors for a submitting appearance to be filed, or for the Liquidators to take no steps in the defence of the Proceedings. 26 The plaintiffs have obtained advice from counsel regarding the defence of the ACCC proceedings. This advice identifies how the issues in dispute might be properly narrowed through amendment to the response to the ACCC's concise statement. The proposed amended response has been settled by Ms Morgan SC. The document makes certain admissions or additional admissions, including: in relation to contractors and sub­contractors at [7] and [22], and their conduct at [14A] and [14B]; by withdrawing the denial that AIPE engaged in misleading or deceptive conduct at [15] and by admitting that certain conduct can amount to misleading and deceptive conduct at [15A]; and by articulating issues concerning and the quantification of any potential refund to the Commonwealth at [30]-[31]. 27 The proposed amended response would leave the following issues in dispute: (1) whether AIPE engaged in misleading or deceptive conduct in contravention of the Australian Consumer Law ("ACL") in relation to the individual students referred to in the statement of claim, having regard to the proposed admissions that certain conduct can amount to misleading and deceptive conduct; (2) whether AIPE engaged in a system or pattern of unconscionable behaviour in contravention of the ACL; and (3) whether the Commonwealth is entitled to an order declaring a student's enrolment with AIPE void ab initio (with the resultant annulment of any claim for VET FEE-HELP) solely by reference to a student failing to complete any unit of study. 28 Another important issue that remains in the ACCC proceeding, even with the proposed amendments to the company's response to the ACCC's concise statement, is the identification of students affected by any conduct found to contravene the ACL and the quantification of sums to be refunded. Legal framework 29 Item 90-15 of the Insolvency Practice Schedule provides relevantly: (1) The Court may make such orders as it thinks fit in relation to the external administration of a company. Orders on own initiative or on application (2) The Court may exercise the power under subsection (1): … (b) on application under section 90-20. Examples of orders that may be made (3) Without limiting subsection (1), those orders may include any one or more of the following: (a) an order determining any question arising in the external administration of the company; … Matters that may be taken into account (4) Without limiting the matters which the Court may take into account when making orders, the Court may take into account: (a) whether the liquidator has faithfully performed, or is faithfully performing, the liquidator's duties; and (b) whether an action or failure to act by the liquidator is in compliance with this Act and the Insolvency Practice Rules; and (c) whether an action or failure to act by the liquidator is in compliance with an order of the Court; and (d) whether the company or any other person has suffered, or is likely to suffer, loss or damage because of an action or failure to act by the liquidator; and (e) the seriousness of the consequences of any action or failure to act by the liquidator, including the effect of that action or failure to act on public confidence in registered liquidators as a group. 30 In Reidy, In the Matter of eChoice Limited (Admin Apptd) [2017] FCA 1582, Yates J at [27] proceeded on the basis that an application by an administrator for directions about a matter arising in connection with the performance or exercise of an administrator's functions or powers would fall within the purview of the statutory power in s 90-15 to make an order that determines a question arising in the external administration of a company. His Honour applied the principles which have guided the Court's jurisdiction under the former s 447D(1) of the Corporations Act, mentioning in particular Goldberg J's summation in In the matter of Ansett Australia Ltd and Korda (No 3) [2002] FCA 90; (2002) 115 FCR 409 ("Re Ansett"), referred to below. 31 Prior to its repeal and the enactment of the Insolvency Practice Schedule in 2016, s 479(3) of the Corporations Act allowed a court-appointed liquidator to apply to the court for directions in relation to a matter arising under a winding up. The function of a liquidator's application for directions under s 479(3) was to give the liquidator advice as to the proper course of action to take in the liquidation: Re MF Global Australia Limited (in liq) [2012] NSWSC 994; (2012) 267 FLR 27 at [7]. 32 In Re Addstone Pty Ltd (in liq) (1997) 25 ACSR 357, Mansfield J stated at 363: While the court may be reluctant to give directions where purely commercial considerations are relevant to the liquidator's decision, even in relation to the conduct of litigation, there will be circumstances where it is or may be appropriate to do so. One of those circumstances may be where the liquidator's proposed decision is the subject of criticism by a particular creditor or creditors as being unreasonable or mala fides. 33 In that case, pursuant to s 479(3), his Honour directed that a liquidator would be acting appropriately in discontinuing appeals then on foot. 34 In Re Ansett, concerning s 479(3), Goldberg J explained at [44]: When liquidators and administrators seek directions from the Court in relation to any decision they have made, or propose to make, or in relation to any conduct they have undertaken, or propose to undertake, they are not seeking to determine rights and liabilities arising out of particular transactions, but are rather seeking protection against claims that they have acted unreasonably or inappropriately or in breach of their duty in making the decision or undertaking the conduct. They can obtain that protection if they make full and fair disclosure of all relevant facts and circumstances to the Court. In Re G B Nathan & Co Pty Ltd (1991) 24 NSWLR 674, McLelland J said at 679-680: The historical antecedents of s 479(3)..., the terms of that subsection and the provisions of s 479 as a whole combine to lead to the conclusion that the only proper subject of a liquidator's application for directions is the manner in which the liquidator should act in carrying out his functions as such, and that the only binding effect of, or arising from, a direction given in pursuance of such an application (other than rendering the liquidator liable to appropriate sanctions if a direction in mandatory or prohibitrary form is disobeyed) is that the liquidator, if he has made full and fair disclosure to the court of the material facts, will be protected from liability for any alleged breach of duty as liquidator to a creditor or contributory or to the company in respect of anything done by him in accordance with the direction. Modern Australian authority confirms the view that s 479(3) 'does not enable the court to make binding orders in the nature of judgments' and that the function of a liquidator's application for directions 'is to give him advice as to his proper course of action in the liquidation; it is not to determine the rights and liabilities arising from the company's transactions before the liquidation': [cases cited omitted]. 35 At [65], Goldberg J concluded: [T]he prevailing principle adopted by the courts, when asked by liquidators and administrators to give directions, is to refrain from doing so where the direction sought relates to the making and implementation of a business or commercial decision, either committed specifically to the liquidator or administrator or well within his or her discretion, in circumstances where there is no particular legal issue raised for consideration or attack on the propriety or reasonableness of the decision in respect of which the directions are sought. There must be something more than the making of a business or commercial decision before a court will give directions in relation to, or approving of, the decision. It may be a legal issue of substance or procedure, it may be an issue of power, propriety or reasonableness, but some issue of this nature is required to be raised. It is insufficient to attract an order giving directions that the liquidator or administrator has a feeling of apprehension or unease about the business decision made and wants reassurance. There must be some issue which arises in relation to the decision. A court should not give its imprimatur to a business decision simply to alleviate a liquidator's or administrator's unease. There must be an issue calling for the exercise of legal judgment. 36 In Cosmoluce v Tsagaris [2010] NSWSC 1115, McDougall J said (at [15]): In considering whether or not to grant approval, or to give directions, the Court does not attempt to second guess the liquidator. It pays appropriate respect to the commercial judgment of the liquidator, without going so far as rubber stamping it. As Giles J said in Re Spedley Securities Ltd (In Liquidation) (1992) 9 ACSR 83 at 85-86, the Court respects the liquidator's decision, and generally will not interfere unless there is some apparent want of good faith (I say straight away that there can be no suggestion of that in this case) or some error of law or principle apparent on the face of the material, or some real ground of doubt as to the prudence of the settlement. The Court does, as his Honour made clear, undertake some assessment, on a legal basis, of the merits of the claim, and it expects a liquidator to obtain advice from the lawyers that he or she has retained. Consideration 37 I accept that the plaintiffs do not seek any direction or order that could be characterised as a business decision. Rather, the plaintiffs are confronted with assessing their obligations concerning the defence of the ACCC proceeding in the context of challenges by Mr Khanche and Dr Dugal to the liquidators' decisions in connection with it. 38 On 19 April 2018, Ms Morgan SC and Ms Hamilton-Jewell provided the liquidators with detailed advice concerning the proper form of an amended response to the ACCC's concise statement, and whether judicial advice should be sought in relation to this proposed amended response. The advice received from counsel is based on an assessment of the material currently available to the applicants, comprising: (1) the evidence filed in the ACCC proceeding; (2) the documentary material provided by the applicants in the ACCC proceeding; (3) the testimony given in the examinations; and (4) the evidence filed by AIPE in proceedings brought in the Administrative Appeals Tribunal for a review of a decision by the Australian Skills Quality Authority to cancel AIPE's registrations as a VET provider under the National Education and Training Regulation Act 2011 (Cth) and under the Education Services for Overseas Students Act 2000 (Cth) as a provider of VET or ELICOS courses for overseas students. 39 I have read the 19 April 2018 advice. I am satisfied that detailed consideration has been given to the elements of the causes of action, the material available to the plaintiffs to assess the Company's prospects and the appropriate defence to be mounted in the ACCC proceedings. The advice appears to refer to and apply the relevant principles. There is no obvious defect in the advice, or any matter which raised a question in my mind about the propriety and reasonableness of the liquidators acting on the advice. 40 Further, I am satisfied that the liquidators have chosen to act on the 19 April 2018 advice. 41 Accordingly, I am satisfied that the liquidators' decision to follow the 19 April 2018 advice is proper and reasonable and that the liquidators are justified in continuing to defend the ACCC proceeding and in narrowing the issues in dispute in accordance with the proposed amended response to the ACCC's concise statement. 42 The liquidators also seek an order that they are justified in not filing affidavit evidence in defence of the ACCC proceeding. In supplementary written submissions, counsel for the liquidators noted that the proposed order did not preclude the prospect that the liquidators may tender documentary evidence, namely relevant books and records of the company. 43 In support of this order, the liquidators relied on the following matters: (1) the evidence provided by the ACCC; (2) advice provided by Gilbert + Tobin to AIPE; (3) counsels' advice concerning the ACCC's case with respect to the alleged system of unconscionable behaviour; and (4) the nature of the issue concerning the basis of any entitlement to relief. 44 I am not satisfied that I have sufficient information to make the order sought in relation to individual allegations of misleading or deceptive conduct because I do not know whether there may be evidence available from the persons who dealt with the ACCC's student witnesses to contradict the students' versions of events. 45 On the basis of counsels' advice, apart from the prospect of witnesses who might contradict the ACCC's student witnesses, I accept that the liquidators would be justified in not filing affidavit evidence in defence of the ACCC's system case. 46 Similarly, apart from the prospect of witnesses who might contract the ACCC's student witnesses, I accept that the liquidators would be justified in not filing affidavit evidence on the question of entitlement to relief because the factual issues concern only the identification of affected students and quantification of relief. 47 The evidence does not suggest that the liquidators could locate witnesses who might dispute the evidence of the ACCC's student witnesses. However, without such evidence, I am not satisfied that the liquidators are justified in not filing affidavit evidence in defence of the ACCC proceeding. 48 Having accepted that the liquidators are entitled to orders that they are justified in continuing to defend the ACCC proceeding in accordance with the proposed amended response to the ACCC's concise statement, I accept that it follows that the liquidators are also justified in using the resources of AIPE to pay the costs of defending the ACCC proceeding and in making this application. 49 Accordingly, I will make orders pursuant to item 90-15 of the Insolvency Practice Schedule. There is no need to consider the alternative claim for directions under s 63(1) of the Trustee Act 1925 (NSW), except to note that it does not appear to apply in the context of this liquidation. I certify that the preceding forty-nine (49) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Gleeson. Associate: Dated: 1 June 2018