Cross Border Insolvency Update

27 January 2017

We have reported and commented upon updates and developments concerning cross-border insolvency matters in all editions of Insolvency Quarterly from time to time. In this quarter we briefly comment upon three particular decisions/themes that emerged over the last quarter.

The first theme is the concept of “co-operation” which is, of course, one of the fundamental foundations of the Cross Border Insolvency Act (CBIA). In the decision of Kapalua (Trustee), in the matter of Edelsten (Bankrupt) (No. 2)1, the Federal Court made various orders with the stated reasoning in order “to facilitate co-operation between this Court and the United States Bankruptcy Court”.

In that case, among other things, the Court found that:

  • The proceeds of certain property held in Australia were to be paid to the United States Bankruptcy Court to be held as funds in Court pending the resolution of another proceedings commenced by the foreign representative against National Australia Bank in the United States Bankruptcy Court seeking to avoid two registered mortgages over Australian properties on the basis that, in essence, the transfers were fraudulent transfers of an interest in property to the Bank for no consideration.
  • The Court made the above order, for among various reasons, the following:
    • the Bank had already participated in the US Bankruptcy Court proceedings and lodged a proof of debt in that proceeding;
    • the Bank specifically participated in the hearing and adjudication in the United States dealing with money relating to the proceeds of sale and is therefore bound by that order;
    • the US Bankruptcy Court was not deciding whether the Bank’s interest existed or any priority dispute is determined;
    • the judge and the US judge at paragraph 34 were at idem in “that it is more appropriate and convenient that the United States Bankruptcy Court deal with questions concerning the Bank’s entitlement to the proceeds of sale including any priority issue. The solution is not perfect, but Judge Olson [of the United States Bankruptcy Court] is now seized of these matters. The counter factual scenario where I dealt with these matters would result in an inappropriate bifurcation. Discretionary considerations support Judge Olson dealing with all aspects of the dispute concerning proceeds of sale”; and
    • there was little prejudice to the Bank in arguing the interest question and priority question in the proceeding in the United States. In fact there was nothing preventing the Bank from arguing in the US Bankruptcy Court that Australian substantive law applies to the questions of the existence of the Bank’s interest and priority.

The second theme that emerged was the scope of any stay and suspension ordered by the Court. In the decision of Tai-Soo Suk v Hanjin Shipping Co Limited2, the Court found that the scope and modification or termination of the stay and suspension referred to in Article 20(1) of the Model Law for that particular case is the same as would apply if the stay and suspension arose under Part 5.3A of the Corporations Act (Administrations). In particular, in the shipping context although there have been various recognitions of Korean shipping companies that have entered into insolvency, in the decisions of Hur, Yu and Kim the focus in those decisions was on stays that arose in liquidation or Part 5.4B of the Corporations Act (Liquidations). In this case the Court held;

  • The rehabilitation proceeding in Korea at issue was most closely aligned with the voluntary administration process in Part 5.3A of the Corporations Act;
  • Was not really similar to the scheme of arrangement position;
  • The stay pursuant to Part 5.3A is subject to a capacity for leave to be obtained to proceed and prosecute any claim. He said at paragraph 57 “The peripatetic nature of ships, to which Rares J referred in Hur at [33], is a given. It is not apparent, however, why the capacity for the grant of a leave to enforce a maritime claim is insufficient protection for such claims, albeit recognising their unique nature. To take an unpaid crew as an example, as did his Honour Hur at [33], the potential for arrest of the ship arises once the ship reaches the port. Arrest requires an application. An application for arrest and for leave to proceed despite the stay may be made simultaneously. If leave is granted, the crew are in the same position as they would have been if the stay did not apply to their claim. Any risk of de facto labour or enslavement of the crew would be relevant to the grant of leave”; and
  • As is common place with applications pursuant to the CBIA and the Model Law orders may be made requiring notice to be given to creditors of the making of orders and permitting creditors to carry or rescind the orders.

The third theme that arose in both of the above decisions was that orders continue to be made by Australian Courts allowing the foreign representatives, as they deem appropriate, to examine witnesses, take evidence or require the delivery of information concerning the debtor’s assets, affairs, rights, obligations or liabilities. This continues to be a welcome granting of power (on a case by case basis) to the foreign representative to allow them the same practical rights and mechanisms that would exist if they were appointed as an external administrator to a company/individual under Australian law. As a matter of practice and practicality, the continued exercising of discretion by the Court (as set out above) should also attempt to restrain the debtor from using foreign laws to muddy the Australian process used by the foreign representatives to carry out the above mentioned objectives such as examining witnesses, taking evidence or the debtor delivering information concerning the debtor’s assets, affairs, rights, obligations or liabilities.

Each of the above three themes, among others, continue to mould the evolving jurisprudence in Australia concerning the CBIA and related concepts. We will continue to watch with interest further decisions with a cross-border flavour that develop in this area of law over the next 12 months.

This article was written by Grant Whatley, Partner in Sydney.

1[2016] FCA 1269 (26 October 2016).

2[2016] FCA 1404 (23 November 2016).

Subscribe to HWL Ebsworth Publications and Events

HWL Ebsworth regularly publishes articles and newsletters to keep our clients up to date on the latest legal developments and what this means for your business.

To receive these updates via email, please complete the subscription form and indicate which areas of law you would like to receive information on.

Contact us