TGIF 8 April 2022 – Approving liquidator funding agreements under the Corporations Act

This week’s TGIF considers Australian Vocational Learning Institute Pty Ltd (in liq), in the matter of Australian Vocational Learning Institute Pty Ltd (in liq) [2022] FCA 319, a Federal Court of Australia decision on the approval of a funding agreement between the Commonwealth government and a liquidator.

Key Takeaways

• Under section 477(2B) of the Corporations Act 2001 (Cth) (the Act), a liquidator of a company must not enter into an agreement on the company's behalf if the term of the agreement or the obligations are to be discharged more than three months after entry, except with the approval of the Court or the committee of inspection or a resolution of the creditors.
  
  
• The most crucial factors for obtaining a court’s approval of a funding agreement appear to be the interests of creditors, that the funding agreement does not limit the liquidator’s control or authority, there being no lack of good faith or error of law, the extent the liquidator has canvassed other funding options, the level of the funder’s premium and consultation with creditors.
  
  
• The Court should be informed of any other funding options as it is relevant to the Court’s discretion.

What happened?

The first plaintiff, Australian Vocational Learning Institute (AVLI), was a registered training organisation providing vocational training courses to the public under the Commonwealth’s troubled VET FEE-HELP scheme. Mr Paul Lange was its sole director and secretary, and LFI Ventures Pty Ltd was its sole shareholder (together the Lange Parties).

On 2 December 2016, AVLI was wound up and a liquidator appointed.

On 6 June 2019, as part of winding up proceedings, the Commonwealth (acting through the Department of Education) submitted a formal proof of debt totalling close to $29 million (Commonwealth Proof). This was admitted by the Liquidator.

Approval was provided in 2020 for the funding of public examinations and recovery proceedings against the Lange Parties.

Sometime after this approval was granted, a second approval application was made by the Liquidator for funding to defend proceedings by the Lange Parties challenging the Commonwealth Proof (Lange Proceedings) and to investigate and adjudicate the variation of the Commonwealth Proof.

The Liquidator’s submissions

The Liquidator outlined a number of reasons why a funding agreement was necessary. Those reasons included that:

• the Liquidator would not be able to take an informed and active role in the Lange Proceedings as AVLI held limited assets;
  
  
• the likelihood of securing funding on better terms was low; and
  
  
• without a successful defence in the Lange Proceedings (amongst others), distribution to creditors was unlikely.

Decision

In deciding to grant the application, Cheeseman J considered the relevant principles for approving a funding agreement under section 477(2B) of the Act set out in Robinson, in the matter of Reed Constructions Australia Pty Ltd (in liq) [2017] FCA 594 including:

• the recovery of funds for the benefit of creditors;
  
  
• that the entry into the funding agreement is not ill-advised or improper; and
  
  
• that the Court undertakes something less than a merits review, and will generally not interfere unless there is a lack of good faith, some error of law or real and substantial grounds for doubting the prudence of the course of conduct.

First, Cheeseman J agreed with the Liquidator that the interests of Creditors was a highly persuasive factor in granting the approval. It was in the interests of Creditors that the Liquidator be able to engage substantively in any issues arising from the Lange Proceedings, as it would affect distributions to Creditors. As a challenge to the variation to the proof of debt was likely, this interest would probably broaden in future.

Secondly, Justice Cheeseman found that the funding agreement was ‘commercially attractive’ and that the likelihood of securing funding on better terms was low. Although the Liquidator had not canvassed other funding options, her Honour agreed that the funding agreement posed no risk to unsecured creditors and did not encroach upon the Liquidator’s authority. This meant that the funding agreement was the best way forward.

Thirdly, Cheeseman J determined that the Liquidator’s reasons for not engaging in consultation with creditors were satisfactory, having regards to efficiency and cost, and given that the largest creditor was the Commonwealth.

Finally, Cheeseman J was satisfied that there was no evidence of a lack of good faith or any error of law.

Confidentiality orders were granted alongside the application.

Comment

Justice Cheeseman’s judgment highlights some of the factors relevant to the approval of a funding agreement. The interests of creditors, as well as the commerciality and risks of the agreement, are persuasive to the Court exercising its discretion to grant approval for an agreement.