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Foreign territory: uncertainties of cross-border insolvency


Feature Articles

Cite as: (2009) 83(03) LIJ, p.52

The Cross-Border Insolvency Act 2008 (Cth) is intended to implement the UN’s Model Law in this area of international law, but leaves many issues to be resolved by the courts.

By Chris Furnell

In enacting the Cross-Border Insolvency Act 2008 (the Act), Australia implemented a United Nations recommendation that member states adopt the Model Law on Cross-Border Insolvency of the United Nations Commission on International Trade Law (Model Law).

While the Act and the Model Law contain provisions dealing with a range of matters, the focus of this article is on those provisions dealing with concurrent Australian and foreign insolvency proceedings.1

The legislation

The Model Law is, by the Act, given the force of law in Australia2 and will apply in a number of circumstances, including where:

  • assistance is sought in Australia by a person authorised in a proceeding of a collective judicial or administrative nature pursuant to a law relating to insolvency (a foreign proceeding) to either represent the proceeding or administer a liquidation or reorganisation of a debtor’s affairs (a foreign representative); or
  • there is, in respect of the same debtor, a concurrent foreign proceeding and a proceeding under certain Australian laws which relate to insolvency, such as the laws set out in Chapter 5 (other than Parts 5.2 (receivership) and 5.4A (winding up other than on the basis of insolvency)) and s601CL (which concerns, among other things, the appointment of a liquidator to registered foreign companies) of the Corporations Act 2001 (Australian insolvency laws).

When interpreting key concepts in the Model Law (such as “foreign proceeding”) courts are encouraged to adopt “international jurisprudence”,3 and are required to have regard to its international origins and to the need to promote uniformity in its application.4 Of assistance in this endeavour is the UN’s Case Law on UNCITRAL texts (CLOUT) website, which has a variety of case abstracts on various UNCITRAL conventions and model laws.5

Foreign proceedings recognition

A foreign representative can apply to a relevant court (basically, in the case of companies, the Federal Court or a Supreme Court) for recognition of the foreign proceedings in respect of which the representative has been appointed.6

A relevant court is obliged to grant an application if certain pre-conditions are satisfied, and may make certain presumptions to facilitate the procedure.7

When recognising a foreign proceeding, a court is also obliged to recognise the proceeding as a:

  • foreign main proceeding if it is taking place in the state where the debtor has its centre of main interests (in the absence of evidence to the contrary, this is presumed to be the case if the debtor has its registered office in the state);8 or
  • foreign non-main proceeding if it is taking place in a state where the debtor has a place of operation where it carries out a non-transitory economic activity with human means and goods or services (an establishment).9
  • Despite the apparent terms of the Model Law:
  • if there is a dispute about whether a foreign proceeding is main or non-main, a court may still recognise the proceeding while deferring its decision as to the type of proceeding;10 and
  • it would seem that a court, even in the absence of an objection, may refuse an application for recognition of a foreign proceeding as a foreign main proceeding if the applicant representative fails to adduce relevant evidence supportive of the foreign jurisdiction being the relevant entity’s centre of main interests.11 Relevant evidence would include evidence that goes to establishing the location of an entity’s principal place of business, such as evidence addressing the location of an entity’s manager, its principal assets and most of its creditors.12

There is the potential to have Australian insolvency law proceedings concurrently with recognised foreign main and non-main proceedings.

Most Australian insolvency laws are expressed to apply in relation to “companies”, entities registered under the Corporations Act 2001. Where those laws apply to a debtor company, any foreign proceeding in relation to the company will generally not be recognised as a foreign main proceeding because, absent “proof to the contrary”, the company will be presumed to have its centre of main interests in Australia as it will have its registered office in Australia. Nevertheless, Australian insolvency laws can apply to non-company entities. In particular, Chapter 5 of the Corporations Act applies (insofar as it is applicable)13 to Part 5.7 bodies (which include bodies corporate registered as foreign companies under the Corporations Act or carrying on business in Australia). Hence, for example, a Part 5.7 body may be wound up under Chapter 5 in certain circumstances, such as where it is unable to pay its debts: ss583 and 585.

An application for recognition of a foreign proceeding may affect a concurrent Australian insolvency proceeding because:

  • relief may be awarded on making the application, which may interfere with the conduct of the Australian proceeding;
  • the relevant foreign representative is empowered to initiate, and participate or intervene in, certain proceedings;
  • on the grant of recognition of a foreign main proceeding the solvency of the relevant debtor is affected and certain proceedings are stayed and rights suspended.

Relief

After an application for recognition of a foreign proceeding is filed but prior to the decision being made on the application, relief of a provisional nature may be granted where it is “urgently needed to protect the assets of the debtor or the interests of the creditors”. It can involve such things as:

  • staying execution against debtor assets;14
  • entrusting to the foreign representative or another the administration or realisation of those of the debtor’s Australian assets as are perishable, susceptible to devaluation or in jeopardy;
  • suspending the right to encumber or otherwise dispose of debtor assets.

After recognition of a foreign proceeding, any appropriate relief15 may be granted where it is “necessary to protect the assets of the debtor or the interests of the creditors”.

It can involve such things as:

  • staying commencement of individual actions or individual proceedings concerning the debtor’s assets or liabilities;
  • staying continuation of such individual actions or proceedings;
  • staying execution against debtor assets (the Explanatory Memorandum (EM) suggests that an important objective of the Model Law is to permit foreign representatives to seek a stay of proceedings against debtor assets);
  • suspending the right to encumber or otherwise dispose of debtor assets;16
  • entrusting to the foreign representative or another the administration or realisation of the debtor’s Australian assets;
  • entrusting to the foreign representative or another the distribution of the debtor’s Australian assets, provided the court is satisfied that the interests of Australian creditors are adequately protected; and
  • granting relief that may be available to liquidators in Australia.17
  • Relief may only be granted where the relevant court is satisfied that the interests of creditors, the debtor and other interested persons are adequately protected.
  • It may be:
  • granted conditionally;
  • modified or terminated by a relevant court – anyone affected by a grant of relief has standing to seek its termination or modification;
  • restricted to remedies otherwise available under Australian law – UNCITRAL’s guide to enactment of the Model Law18 (para 159) suggests that recognition of a foreign proceeding is only intended to attach to the proceeding consequences envisaged under local law.

If an Australian proceeding is taking place when the recognition application is filed, such relief may only be granted to the extent consistent with the Australian proceeding. If the Australian proceeding commences after filing of the recognition application, the relief must be modified or terminated to the extent it is inconsistent with the Australian proceeding. In a foreign non-main proceeding, relief may only be granted in relation to assets that under Australian law should be administered in the foreign proceeding, or concerning information required in the foreign proceeding.

Foreign representative and proceedings

On recognition of a foreign proceeding, the foreign representative may:

  • participate in a proceeding regarding the debtor under Australian insolvency laws (giving, according to the EM, standing to make submissions);
  • intervene in any proceeding in which the debtor is a party, provided local legal requirements are met (it is not clear what this entitlement entails);
  • initiate an action under the voidable transaction provisions of the Corporations Act 2001 (Division 2 of Part 5.7B), as if the action were for the purposes of a proceeding in relation to a company (but only if, in respect of a foreign non-main proceeding, the action relates to assets that under Australian law should be administered in the foreign proceeding). Again, what this entails is left unclear. Presumably, however, it is intended that a foreign representative have capacity to apply for court orders on finding that a transaction of a company is voidable (s588FF), to seek from a company’s related entity the amount of any liability discharged in connection with a voidable insolvent transaction (s588FH) and to recover in respect of money paid in discharge of a debt secured by floating charge (s588FJ(6)), despite liquidators being identified in the relevant provisions as the only persons capable of taking those actions. This approach seems consistent with the EM.

While a foreign representative is vested with certain powers under the Model Law, it is not clear how the foreign representative would be treated under the Corporations Act if there were to be concurrent proceedings under Australian insolvency laws in relation to a debtor “company”. In such a situation, it is unlikely that the foreign representative could deal with debtor property while it was under administration or after commencement of its winding up: ss437D and 468.

It is also unlikely that the foreign representative could proceed with any court proceeding against the debtor or in relation to any of its property or any enforcement process, other than with leave:

  • while the debtor was under administration: ss440D and 440F;
  • while the debtor was subject to a deed of company arrangement (s444E) or being wound up in insolvency: s471B; or
  • after the passing of a voluntary winding up resolution: s500.

A foreign representative who was an officer of the debtor company (being a person administering an arrangement made between the company and another) would be precluded from exercising any powers as such an officer while the debtor was under administration (s437C),19 or being wound up in insolvency (s471A),20 and could be bound to do whatever the debtor’s liquidator reasonably required them to do to help in the winding up: s530A.

Solvency status

Recognition of a foreign main proceeding in relation to a debtor is proof that the debtor is insolvent (absent evidence to the contrary) for the purpose of commencing a proceeding under Australian insolvency laws.

The impact of this presumed insolvency is unclear. Where the debtor is a “company” the presumption is unlikely to be relevant. A foreign proceeding in respect of a “company” is not likely to be a main proceeding, given that a company will be registered in Australia. Where the debtor is a Part 5.7 body, such as a foreign company, the presumption is also unlikely to be relevant, at least in terms of winding up proceedings. Insolvency is not one of the grounds for winding up such a body expressly provided for in the relevant Corporations Act provision (s583), a provision likely to be considered exhaustive.21

The presumption could be considered to apply in the context of recovery proceedings under the voidable transaction provisions (Part 5.7B), but this would be difficult to reconcile with s588E(3), which seems to suggest that, for the purposes of the relevant provisions, insolvency at a time is presumed only in relation to certain specified events.

Stays and rights suspension

After recognition of a foreign main proceeding, a proceeding under Australian insolvency laws cannot be commenced unless the relevant debtor has assets in Australia and the effects of the proceeding are restricted to such assets and, to the extent necessary to facilitate cooperation and coordination with foreign courts or representatives, to other debtor assets that under Australian law should be administered in the proceeding.

On its face, there is a difficulty in restricting an administration or liquidation to certain debtor assets, especially as the control vested in an administrator seems to be of all debtor property (s437A) and a liquidator is duty bound to take control of all company property (s474) and collect company property: s478. These provisions, however, apply in relation to “companies,” entities to which the restriction is unlikely to apply since foreign proceedings in relation to them are unlikely to be foreign main proceedings. For registered foreign companies, insolvency proceedings do not entail the taking of control of all property: s601CL(15). For unregistered foreign companies carrying on business in Australia, winding up under Part 5.7 is treated as an administration over local assets only, on the basis that courts in a jurisdiction other than that of the company’s domicile ought act only in an ancillary capacity22 so as to secure local assets and local creditors.23

If an application for recognition of a foreign main proceeding was filed at a time when no proceeding under Australian insolvency laws was taking place, commencement and continuation of individual actions and individual proceedings concerning the relevant debtor’s assets or liabilities are stayed. The stay does not apply to prevent commencement of an action or proceeding necessary to preserve a claim against the debtor or to prevent the filing of a claim in (or a request to commence) a proceeding under Australian insolvency laws. Moreover, while the stay would appear to extend to non-curial actions, it is unlikely to affect the exercise of secured creditor rights (such as the right to appoint a receiver) or set-off rights, and may permit actions and proceedings with leave, given that, in scope, the stay is the same as would apply if it arose under Chapter 5 of the Corporations Act: ss471B and 471C. Lastly, it is unlikely that the stay would prevent the service of a statutory demand: s459E. The statutory demand provisions probably do not apply to foreign companies despite the general application of Chapter 5 to Part 5.7 bodies,24 and the stay is unlikely to apply in relation to a “company”, given that it only applies where the foreign proceeding is a main proceeding.

Execution against the relevant debtor’s assets is also stayed, and the right to encumber or otherwise dispose of such assets is suspended.

If a proceeding under Australian insolvency laws commences after application for recognition of a foreign main proceeding is filed, the automatic stay and suspension is required to be modified or terminated to the extent necessary to render it consistent with the Australian proceeding.

Conclusion

Although the intention is that the Model Law be universally adopted, its interaction with existing Australian laws relating to corporate insolvency is left unexplained. Perhaps inevitably, the uncertainty which this engenders awaits resolution by the courts.


CHRIS FURNELL is a Victorian barrister with extensive experience in commercial law.

1. While the Model Law also applies to individuals, this article focuses on its application to corporations and does not address court obligations concerning cooperation and coordination triggered by concurrent foreign and local insolvency proceedings.

2. The Model Law would not oblige a local court to take any action which is manifestly contrary to public policy. This is a narrow exclusion and is likely to be limited to only the most fundamental policies: US Bankruptcy Appellate Panel of the Ninth Circuit, Nos HI-07-1006-DKS, 06-00376, 06-90059, In re Katsumi Iida, 26 September 2007. Exceptional circumstances are needed to fall within the exclusion; denial of jury trial on product liability claims did not constitute such circumstances: US District Court for the Southern District of New York, Nos 04 MD 1598 (JSR), 06 Civ. 538(JSR), 06 Civ. 539(JSR), In re Ephedra Products Liability Litigation (Muscletech Research and Development, Inc., et al.), 11 August 2006.

3. The Explanatory Memorandum to the Cross-Border Insolvency Bill (EM) at 1.4.

4. In terms of the need for uniformity “in application”, the fact that courts in several jurisdictions were, in aid of a UK insolvency proceeding, prepared to grant stays affecting unidentified persons did not persuade Barrett J to adopt a similar position in Australia in Re Independent Insurance [2005] NSWSC 587 [41-44], although his Honour did seem to suggest that application of the Model Law might change the result [53].

5. See http://www.uncitral.org/uncitral/en/case_law.

6. Procedural rules in relation to such an application, and in relation to other proceedings under the Act, can be found in Division 15A of the Federal Court (Corporations) Rules 2000 and in the Corporations Rules of the Supreme Court.

7. Hence, a US bankruptcy trustee could appear in a Mexican court without the need for documentation to be “legalised”, given the presumptions available under the Model Law: Mexico City Federal District Court Proceedings no. 29/2001, bankruptcies of Jacobo Xacur Eljure, Felipe Xacur Eljure and Jose Maria Xacur Eljure (19 December 2002).

8. It has been suggested that this presumption should only apply where the issue is not the subject of serious controversy, and that where it is, the onus is on the foreign representative (although this might be a function of the US use of “evidence” rather than “proof” when adopting the Model Law), and that the presumption could be rebutted by facts suggestive of the debtor’s being simply a “letter box company” in the jurisdiction where it had its registered office: US Bankruptcy Court for the Southern District of New York, Nos 07-12383 & 07-1234 (BRL), In re: Bear Stearns, 30 August 2007 (a decision affirmed by the US District Court for the Southern District of New York on 22 May 2008). In deciding the issue, relevant criteria are those which are objective and ascertainable by third parties: US District Court for the Southern District of New York, No 06-11760 (RDD), 06 Civ. 13215 (RWS), In re SPhinX, Ltd, 3 July 2007. A centre of main interests may be where the relevant debtor conducts the administration of its interests on a regular basis: US Bankruptcy Court for the Central District of California, Nos 06-22652-C-15, 06-22655-C-15 and 06-22657-C-15, In re Tri-Continental Exchange Ltd, 11 September 2006.

9. In the Bear Stearns decision (note 8 above) the court refused to grant recognition to a foreign proceeding as the jurisdiction in which the proceeding took place was neither the debtor’s centre of main interests nor a place where the debtor maintained an establishment. If a foreign proceeding is in a jurisdiction in which the relevant entity has no establishment and is not its centre of main interests, recognition will be refused: US Bankruptcy Court for the District of Massachusetts, No 07-17180, In Re Tradex Swiss AG, 12 March 2008.

10. US Bankruptcy Court District of South Carolina, No 07-02356-JC, In re: Spencer Partners Limited, 29 May 2007.

11. Bear Stearns, note 8 above; US Bankruptcy Court for the Southern District of New York, No 07-12762, In Re Basis Yield Alpha Fund, 16 January 2008.

12. US Bankruptcy Court for the District of Colorado, No 07-22719, In Re Klytie’s Development Inc, 8 February 2008; In Re Tradex Swiss AG, note 9 above.

13. Peninsular Group v Kintsu (1998) 44 NSWLR 534 at 536.

14. Relief staying attachment against debtor receivables in the US on an application for recognition was granted to a Canadian foreign representative: US Bankruptcy Court Southern District of New York, No 06-13077 (RDD), In re: North American Steamships Ltd 2, 25 January 2007.

15. The UNCITRAL guide to enactment of the Model Law (published with the Model Law at http://www.uncitral.org/pdf/english/texts/insolven/insolvency-e.pdf) suggests a court is not restricted unnecessarily in its ability to grant any type of relief available under local law (para 154).

16. After obtaining a general suspension of the right to dispose of debtor assets in the US, a foreign representative obtained an injunction against a proceeding by a secured creditor seeking recovery of a debt owed to the relevant debtor: US Bankruptcy Court Western District of Washington at Tacoma, No 06-4004, In re: Petition of Ho Seok Lee as Court-Appointed Manager of Young Chang Co Ltd, 10 August 2006.

17. A similar catch-all provision was relied on by Cayman Islands foreign representatives in obtaining an order in the US requiring a US corporation to release funds of the debtor: US Bankruptcy Court Southern District of New York, No 07-10327 (RDD), In re: Amerindo Internet Growth Ltd, 6 March 2007.

18. Note 15 above.

19. Subject to certain exceptions, such as where the power is exercised as part of enforcement of a certain type of charge.

20. Again subject to certain exceptions, such as where the exercise of powers as an “officer” is with court approval.

21. Kintsu, note 13 above, at 540.

22. Re English Scottish and Australian Chartered Bank [1893] 3 Ch 385, cited with approval in Re Wayland; ABC Containerline [2005] NSWSC 1 at [16, 17].

23. Re Australian Federal Life and General Assurance [1931] VLR 317 at 320.

24. Kintsu, note 13 above.

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