Cross-border insolvency update: 3 cases from September to December 2015

27 January 2016

During the last quarter, the Federal Court of Australia (Court) handed down 3 judgments in respect of 4 applications that had been made pursuant to the Cross-Border Insolvency Act 2008 (Cth) (Act) and the Model Law on Cross Border Insolvency, as set out in Schedule 1 of the Act (Model Law).

The 3 judgments handed down by the Court provide further guidance, confirmation and clarification to practitioners and creditors concerning:

  1. Issues surrounding the identification of a corporate debtor’s centre of main interest (COMI), being a matter relevant to whether a foreign insolvency regime will be recognised as a “foreign main proceeding” or a “foreign non-main proceeding”, which has flow on effects as to whether certain matters operate automatically by virtue of the Model Law;
  2. Issues surrounding the notification to creditors of proceedings, including:
    (i)    how notice should be given when it is known that a corporate debtor has multi-jurisdictional creditors; and
    (ii)   in what particular circumstances the Court may be prepared to waive notice requirements; and
  3. The role of secured creditors (including those who have in rem or maritime lien rights) in the cross-border insolvency regime, and in particular, the restrictions placed on those creditors by virtue of any stay of proceedings/enforcement imposed by the Model Law.
Executive Summary

The key principles and matters that can be taken from the 3 judgments handed down can be summarised as follows:

Consideration of a Corporate Debtor’s COMI 1
  1. The Court will generally start from the position that a corporate debtor’s COMI is the location of its registered office, as this is the rebuttable presumption provided for in the Model Law;
  2. In considering the company’s COMI and whether the presumption referred to in 1 above has been rebutted, the Court will have regard to, among other things: (i) where the company was incorporated and where it has maintained its presence and business; (ii) which stock exchange it is listed on; (iii) where the Company’s directing mind and will (including directors) are located; (iv) where the company’s headquarters are; (v) what the overall effect of the company’s annual report says about the company; (vi) the location of the company’s assets; (vii) the operations of the company, including its employees and administrative functions; (viii) the location of creditors; and (ix) if the company is a subsidiary company, the circumstances of the parent company;
  1. In certain circumstances the Court may be prepared to waive notice requirements if the Court is satisfied that there is no utility in the publication of the notice and the publication of the notice would only serve to increase expenses to the detriment of creditors;2
  2. In circumstances where there are multi-jurisdictional creditors it is appropriate to publish notices in publications that will likely come to the attention of all of the company’s creditors. In relation to shipping companies, foreign representatives have in effect been directed by the Chief Justice to indicate to the Court in future applications that it would be appropriate to also publish notices in the international edition of Lloyd’s List;3
Secured Creditors
  1. Orders made by the Court pursuant to the Model Law should not be seen as defeating maritime claims (and arguably any other claim),4 especially given that nothing in the Model Law justified stripping local creditors of their rights;5
  2. It would not be appropriate for the Court to pre-judge any particular claimant’s claim and any such matter should be the subject of proceedings if it is not otherwise agreed to between the relevant parties, as the Court will not forestall the vindication of any such rights;6
  3. There is a recognised tension of considering the scope/modification of the automatic stay imposed by virtue of Article 20 and section 16, at least in so far as secured creditors are concerned. This is because Part 5 of the Corporations Act 2001 (Cth) (Corporations Act) contains a number of stay provisions that affect secured creditors differently. This tension has not been specifically determined, although cases appear to favour exempting secured creditors from the operation of the stay. However, it has been suggested that it might be appropriate for future proceedings to have an order that explicitly makes clear what the position of secured creditors are;7 and
  4. When considering whether secured creditors (including those with maritime claims/liens) are to be restricted, the Court will have regard to the length of time in which the secured creditor is sought to be restricted, as well as any public policy grounds that may exist as to why those creditors ought not be restricted (such as by depriving or restricting a ship crew’s rights that may, in effect, result in de facto forced labour or enslavement of the ship’s crew).8
Chong, in the matter of CNA Group Ltd v CNA Group Ltd [2015] FCA 1148
The Application

The matters before the Court in this case were not extraordinary and substantially involved a conventional application of the Act and the Model Law as the Court has done on previous occasions.

For the purpose of this article, it is not necessary to go into any great detail concerning the relevant facts before the Court, and it is sufficient to summarise the matter as follows:

  1. The decision concerned a company, CNA Group Ltd (CNA) that had been incorporated in Singapore;
  2. Proceedings had been commenced in the High Court of Singapore to, among other things, place CNA under judicial management (Singapore Proceeding). That application was successful and the applicants were appointed the judicial managers of CNA in Singapore (Judicial Managers);
  3. CNA’s assets in Australia comprised exclusively of shares in a company listed on the Australian Stock Exchange, with an estimated value of S$9.8 million (Shares); and
  4. The Judicial Managers’ main concern was to protect the Shares.
Recognition of the Singapore Proceeding and determination of CNA’s COMI

After referring to the relevant provisions of the Model Law concerning the recognition of foreign proceedings, the Court found that the Singapore Proceeding was a “foreign main proceeding” as CNA’s COMI was Singapore.

In making the determination that CNA’s COMI was Singapore, the Court took into account the following matters:

  1. The presumption in Article 16(3) of the Model Law that a corporate debtor’s COMI is the company’s registered office (COMI Presumption), which in this case was Singapore;
  2. CNA had been incorporated pursuant to the laws of Singapore and had continuously maintained a presence and conducted business in Singapore;
  3. CNA had been listed on the Singapore stock exchange;
  4. CNA’s headquarters were located in Singapore;
  5. All of CNA’s directors reside in Singapore; and
  6. CNA’s annual reports for financial years 2012 and 2013 identified that more than half of CNA’s revenue related to its Singapore operations. In this regard the Court applied Justice Jagot’s reasoning in Buccaneer9 that in considering a corporate debtor’s COMI the Court can have regard to the “overall effect” of the company’s annual report in respect of the company’s operations and activities.

The Court affirmed that in considering whether to grant relief pursuant to Article 21 of the Model Law (and in in this case, the application for a stay) the Court “must be satisfied that ‘the interest of creditors and other interested persons, including the debtor, are adequately protected’: Model Law, Art 22″.

The Court agreed to grant the stay on the basis it would not prejudice the interest of creditors, but rather, would achieve the aims of the Judicial Managers.

Waiver of Notice

The Court noted that whilst notice had been circulated in a daily newspaper as to the orders that were being sought in the proceeding, no communication was received from any creditors and no creditors had filed a notice of intention to appear at the hearing.

On the above basis, the Court agreed to waive the requirement that the Judicial Managers publish a further notice as to the orders being made by the Court, as in the circumstances of this case “incurring the further expenditure of advertising would appear to be pointless and would simply erode funds available for creditors” and that it did not appear “to be in the interest of justice to require that further expense be incurred”.

Yakushiji v Daiichi Chuo Kisen Kaisha [2015] FCA 1170
The Application

This Judgment concerned 2 applications for recognition in respect of 2 related companies, being Daiich Chuo Kisen Kaisha (Parent Company) and Star Bulk Carrier Co., S.A. (Subsidiary Company).

The relevant material facts can be summarised as follows:

  1. The proceedings concerned an application to recognise civil rehabilitation proceedings that had been commenced in the Tokyo District Court (Japan Proceedings);
  2. The Parent Company was incorporated under Japanese law and had its registered office in Tokyo. The Parent Company also had a offices in a number of other jurisdictions;
  3. The Parent Company’s business was providing overseas shipping and Japanese coastal shipping services, and that business was undertaken “in the tramp trade by the use of vessels which are owned, demise charted or time chartered“; and
  4. The Subsidiary Company is a subsidiary of the Parent Company and was incorporated in the Republic of Panama, which the Court recognised has “tax systems and other laws [that] are advantageous to the carrying on [of] the business of shipping“.
Recognition of the Japan Proceeding and determination of the Parent Company and the Subsidiary Company’s COMI

The Parent Company

In relation to the Parent Company, the Court readily found that its COMI was Japan and as such the Japanese Proceedings should be recognised as foreign main proceedings.

That finding was based on the COMI Presumption as well as the fact that evidence was led that confirms Japan as a COMI (the Court did not go into any detail as to what that evidence was).

The Subsidiary Company

In relation to the Subsidiary Company, the Court found that its COMI was also Japan and as such the Japan Proceedings should be recognised as foreign main proceedings.

The Court made the above determination even though the Subsidiary Company’s registered office was registered in Panama and had its registered office in Panama City, which meant that the COMI Presumption pointed to Panama as being the Subsidiary Company’s COMI.

In coming to the above determination, the Court found that the COMI Presumption had been rebutted by virtue of the following facts:

  1. The Subsidiary Company did not have any assets in Australia or Panama;
  2. The Subsidiary Company was a wholly owned subsidiary of the Parent Company, which had been incorporated in and subject to the laws of Japan;
  3. The Subsidiary Company’s operations in Australia are restricted to the passage of ships chartered by it through Australian waters, or otherwise calling of those ships owned or charted in Australian ports;
  4. The directing mind and will of the Subsidiary Company was in Japan, as all of the persons who controlled the Subsidiary Company, as well as is directors, were in Japan;
  5. The Subsidiary Company had no employees of its own and relied upon the Parent Company’s employees, who mostly resided in Japan;
  6. The Subsidiary Company operates in Japan through the Parent Company;
  7. All of the Subsidiary Company’s administrative functions (e.g. accounting, financial reporting etc.) were conducted in Japan; and
  8. Most of the creditors of the Subsidiary Company are located in Japan.

It is interesting to note that in relation to the above matters, the Court did not address in its judgment what assets and operations the Company had in Panama (if any).

Dealing with Secured Creditors and Maritime Creditors

The Court appreciated that there was a difficulty in the intersection between international insolvency law and the enforcement of maritime claims, the enforcement of which vary to a degree around the world.

This included the fact that such claims might be enforced around the world by one or more of the following:

  1. An in rem claim (that is, a claim against property rather than a person);
  2. A maritime attachment claim (generally recognised in civil countries);
  3. A maritime lien over the ship (which do not require possession, but rather arise on certain events occuring); and
  4. Non-lien claims made pursuant to the Admiralty Act 1988 (Cth) as an in rem action when filed, that might be seen as creating a “form or species of qualified or quasi security“, and whether those claims are in fact secured claims remains a live issue.

The Court raised the above on the basis that in making orders pursuant to the Model Law, those orders “should not be seen as necessarily defeating proper maritime claims … and the question of the status of any claims … would need to be resolved in any litigation unless the matter were agreed”. In this regard the Court noted that it would be wrong for the Court to “forestall any vindication by such claimants against the interest of the rehabilitation“.

On this basis the Court made orders that provided “an ability for creditors to deal with and vary … [the] orders should a particular proceeding, such as by way of enforcement of maritime lien claim, be appropriate“.

In this regard, in addition to making what is now the usual order requiring any arrest proceedings be brought before a Judge of the Court (rather than a Registrar) and requiring the applicant to bring the reasons for Judgment in Yu10 to the Court’s attention (Usual Order), the Court made the following order:

“Any person who claims to hold a security interest in any property or vessel owned or charted by either defendant, or who claims to be a creditor of either defendant, has liberty to apply to a Judge of the Federal Court of Australia, on the giving of three days’ written notice to the relevant plaintiff, to vary or rescind any of these orders”

Publication of Notices

The Court noted that the initial orders made by the Court required that notice of the application be circulated in The Australian newspaper.

Such a course was criticised on the basis that particularly in a maritime case where a debtor company carries on business worldwide, publication in The Australian is unlikely to be sufficient as it probably would not come to the attention of international ship owners. On this basis, the Court directed that a notice not only be placed in The Australian, but also in the international edition of Lloyd’s List.

The Court also indicated to practitioners generally that:

“In future, any foreign representative of a shipping line or shipping company who wishes to take advance of the Act should bring to the Court’s attention the appropriateness of advertising not only in The Australian but also in the Lloyd’s List international edition”

Hur v Samsun Logix Corporation [2015] FCA 1154
The Application

This Judgment concerned an application for recognition in respect of Samsun Logix Corporation (Samsun).

The relevant material facts can be summarised as follows:

  1. The proceedings concerned an application to recognise rehabilitation proceedings that had been commenced in the Seoul Central District Court, Fourth Bankruptcy Division (Korean Proceeding);
  2. In the Korean Proceeding the applicant was appointed the receiver of Samsun (Receiver);
  3. Samsun is not registered to trade in Australia, and its activities were limited generally to the loading and shipping of export products and the provision of goods and services in aid of its ships in Australian waters; and
  4. Samsun had 9 Australian creditors who had not appeared at the hearing.
The Issue

The Receiver’s main concern was that creditors may commence proceedings pursuant to the Admiralty Act 1988 (Cth) to “obtain payment of their debts outside the process of the orderly administration contemplated by the Model Law and the rehabilitation proceedings in the Korean Court”.

In support of this argument, the Receiver gave evidence by way of a memorandum of advice from a Korean law firm that, in effect, indicated that secured creditors were, under Korean law, subject to the rehabilitation proceeding and otherwise could not receive payment of their claims (with certain limited exceptions).

The Court noted that the memorandum did not give an exhaustive explanation of the rights or postponement of rights of secured creditors, and in particular, creditors who hadin rem claims against ships.

The Legislative Framework

To consider the Court’s reasoning it is helpful to give a brief overview of the relevant mechanisms being considered as follows:

  1. Article 20(1) of the Model Law imposes an automatic stay and suspension on enforcement action by creditors on recognition of a foreign proceeding as a foreign main proceeding; and
  2. Article 20(2), when read with section 16 of the Act, provides that the scope and the modification and termination of the stay and suspension in Article 20(1) is subject to Chapter 5 (other than Parts 5.2 and 5.4A) of the Corporations Act.
The Court’s Consideration

The Court noted that Article 20(2) when read with section 16 of the Act was “beguilingly ambiguous” as Chapter 5 contained a number of different stay provisions which affected secured creditor. In this regard the Court specifically noted, among other things, section 440B of the Corporations Act, which restricts secured creditor rights during the time a company is in administration, and section 471C of the Corporations Act, which provides secured creditors with an exception of the statutory stay of enforcement for secured creditors in a liquidation.

The Court noted that the scheme of Part 5.3A (including section 440B) could be seen to “have the purpose of preserving the insolvent’s financial status quo pending the making of a decision by creditors” and that the scheme was to “allow a limited period, subject to any extensions that the Court is authorised to grant, for the administrator to propose a deed of company arrangement” (emphasis added).

In this regard the Court noted that the scheme under Korean Law was different as it was the “Korean Court that controls the rehabilitation proceeding … [and] that process can be quite protracted“.

The Court then referred to the United Nations Commision on International Trade Law (UNCITRAL) Guide to Enactment of the Model Law which noted the stay was subject to exceptions and limitations provided in local law, and in doing so the UNCITRAL guide listed the following as specific examples as potential exceptions and limitations to a stay under the Model Law: “secured claims, payments by the debtor made in the ordinary course of business, set-off, execution of rights in rem“. The Court, however, indicated that it appeared that the writers of the guide and the drafters of section 16 of the Act “did not consider the impact of any stay in respect of proceedings in rem on a maritime lien or a secured or proprietary claim in admiralty matters“.

The Court then referred to the decision in Akers11 where the Court noted that whilst the Model Law was intended to reflect universalism, there was nothing that justified the “stripping of rights of a local creditor by reason of recognition“.

The Court’s Determination

The Court noted that in respect of a maritime lien in rem, the creditor’s position is unique compared to other remedies provided in domestic law, due to the transient nature of ships, as those creditors may only be able to enforce their secured maritime liens whilst those ships were in the temporary jurisdiction of the Admiralty court.

The Court noted that in future proceedings the Court might frame “an order to clarify that a secured creditor, to the extent necessary, should have leave to, and may, exercise all the rights to bring proceedings against or in respect to any property of the debtor, including the commencement and prosecution of proceedings in rem under the Admiralty Act, to which the security interests of the creditor extends“, which would put creditors in the same position as if section 471C and section 444F (which provide exceptions to stays for secured creditors) applied. It is not entirely clear why the Court was not prepared to make such an explicit order in this case.

On this basis the Court refused to make any orders restricting creditors from making arrest proceedings, but rather made the Usual Order, noting that there would be little comfort to an unpaid ship’s crew for them to be “denied the right to exercise their security interest consisting of their maritime lien, recognised almost universally in the maritime law of nations as protecting their right to be paid their wages”, especially considering that they may be on a ship from which, if penniless, they cannot escape and may in fact result in de facto forced labour or enslavement of the crew.

It is important to note that the Court did not specifically resolve the tension between the various stay provisions that appear in Chapter 5 of the Corporations Act and which apply by virtue of section 16 of the Act. Whilst the Court in this decision appears to have preferred to adopt the scheme that would apply in a liquidation context (that is, to not restrict secured creditors), the Court appears to have been, at least in part, influenced by the fact that the administration scheme in Korea was more protracted then it was under Australian law. Accordingly, practitioners should be aware that this is a matter that may be revisited.

This article was written by Jonathan Kramersh, Partner and Matthew Youssef, Solicitor.

1 See the discussion below in relation to Chong, in the matter of CNA Group Ltd v CNA Group Ltd [2015] FCA 1148 (Chong) and Yakushiji v Daiichi Chuo Kisen Kaisha [2015] FCA 1170 (Yakushiji).
2 See the discussion below in relation to Chong.
3 See the discussion below in relation to Yakushiji.
4 See the discussion below in relation to Yakushiji.
5 See the discussion below in relation to Hur v Samsun Logix Corporation [2015] FCA 1154 (Samsun).
6 See the discussion below in relation to Yakushiji.
7 See the discussion below in relation to Samsun and our article in relation to Kim v Daebo International Shipping Co Ltd [2015] FCA 684 published in our October 2015 edition of the insolvency quarterly.
8 See the discussion below in relation to Samsun.
9 Young, Jr, Re Buccaneer Energy Limited v Buccaneer Energy Limited [2014] FCA 711. This case was considered in detail in a separate article published in our October 2014 Insolvency Quarterly.
10 Yu v STX Pan Ocean Co Ltd (South Korea) (2013) 223 FCR 189.
11Akers as a joint representative of Saad Investments Company Limited (in Official Liquidation) v Deputy Commissioner of Taxation [2014] FCAFC 57. This case was considered in detail in a seperate article published in our July 2014 Insolvency Quarterly.

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