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)  FCA 319, a decision of the Federal Court of Australia on the approval of a funding agreement between the Commonwealth Government and a liquidator.
Key points to remember
- Under section 477(2B) of the Companies Act 2001 (Cth) (the Law), the liquidator of a company cannot enter into an agreement on behalf of the company if the term of the agreement or the obligations must be paid more than three months after the registration, except with the agreement of the court or the control commission or of a resolution of the creditors.
- The most crucial factors in obtaining court approval of a financing agreement appear to be the interests of creditors, the fact that the financing agreement does not limit the control or authority of the liquidator, that he there is no lack of good faith or error of law, the extent to which the liquidator has considered other financing options, the level of the lender’s premium and the consultation of creditors.
- The Court should be advised of any other funding options as this is within the Court’s discretion.
The first applicant, Australian Vocational Learning Institute (AVLI), was a registered training organization providing vocational training courses to the public under the Commonwealth’s struggling VET FEE-HELP scheme. Mr. Paul Lange was its sole director and secretary, and LFI Ventures Pty Ltd was its sole shareholder (together Lange evenings).
On December 2, 2016, AVLI was dissolved and a liquidator appointed.
On June 6, 2019, as part of the liquidation proceedings, the Commonwealth (acting through the Department of Education) presented formal proof of debt totaling almost $29 million (Commonwealth evidence). This was admitted by the liquidator.
Approval was given in 2020 for funding public examinations and collection proceedings against the Lange parties.
Sometime after this approval was granted, a second application for approval was made by the liquidator for funding the defense of the Lange parties’ proceedings challenging the Commonwealth’s evidence (Lange procedure) and to investigate and adjudicate upon the Commonwealth evidence variation.
The conclusions of the liquidator
The liquidator set out a number of reasons why a financing agreement was necessary. These reasons included that:
- the liquidator would not be able to play an informed and active role in the Lange proceedings because AVLI held limited assets;
- the likelihood of obtaining financing on better terms was low; and
- without a successful defense in the Lange proceeding (among others), distribution to creditors was unlikely.
In deciding whether to grant the request, Cheeseman J considered the principles relevant to approval of a financing agreement under section 477(2B) of the Act set out in Robinson in Reed Constructions Australia Pty Ltd (in liq)  CAF 594 including:
- the recovery of funds for the benefit of creditors;
- that entering into the funding agreement is not ill-advised or improper; and
- that the Court is undertaking anything less than an examination on the merits and will generally not intervene unless there is a lack of good faith, an error of law, or real and substantial grounds to doubt prudence driving.
First, Cheeseman J agreed with the liquidator that creditors’ interests were a very persuasive factor in granting approval. It was in the interest of the creditors that the liquidator could engage substantially in all matters arising from the Lange proceedings, as this would affect distributions to creditors. As a challenge to the change in evidence of debt was likely, this interest would likely widen in the future.
Second, Justice Cheeseman found that the financing arrangement was “commercially attractive” and that the likelihood of obtaining financing on better terms was remote. Although the liquidator did not consider other financing options, His Honor agreed that the financing agreement posed no risk to unsecured creditors and did not impinge on the authority of the liquidator. This meant that the funding agreement was the best way forward.
Third, Cheeseman J determined that the liquidator’s reasons for not engaging in creditor consultation were satisfactory, considering 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 an error of law.
Confidentiality orders were granted alongside the application.
Justice Cheeseman’s judgment highlights some of the factors relevant to the approval of a funding agreement. The interests of the creditors, as well as the commerciality and risks of the agreement, are compelling for the Court to exercise its discretion to approve an agreement.
The content of this article is intended to provide a general guide on the subject. Specialist advice should be sought regarding your particular situation.
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