Cross-Border Insolvency Disputes – It’s All In The Detail

The Cross-Border Insolvency Act 2008 (Cth) (Act) has undeniably simplified international insolvency disputes. But some recent cases highlight that there might be more to the law than meets the eye. These case reports from MST Lawyers’ Alicia Hill and Nicholas Yusuf from McInnes Wilson Lawyers cover some recent decisions and their practical impact for insolvency practitioners.

ARAVANIS & AMOR v NEFFATI (NO. 3) [2015] FCCA 3424

In Late 2015, the Federal Circuit Court of Australia decided the issues in dispute in Aravanis. This case considered how cross-border insolvency matters might be resolved when a country is not a party to the United Nations Model Law on Cross-Border Insolvency 1997 (Model Law).

Facts

Mr Neffati was a former resident of Tunisia, but resided in, and was a citizen of, Australia. He became bankrupt under the Bankruptcy Act 1964 (Cth) in 2013 and a trustee was appointed to administer his estate. The trustees discovered that Mr Neffati, at the time of his bankruptcy, likely held indirect or direct interests in property situated in Tunisia. Mr Neffati owed upwards of $5.7 million to his creditors, and the trustees believed this property would aid in resolving the creditor’s claims.

The trustees came before the Court and requested that the Federal Circuit Court issue a letter of request to the Court of Ben Arous in Tunisia to aid with the administration of Mr Neffati’s estate and his Tunisian property.

Issue in dispute

The main issue was whether an Australian court could issue a letter requesting the assistance of the Tunisian courts with respect to the administering of a bankrupt estate when Tunisia was not a signatory to the Model Law.

Held

Judge Street held that the Court had the power to issue the letter of request to the Tunisian courts despite Tunisia not being a signatory to the Model Law.

Points to note

In this case, the trustees called expert evidence from Mr Rachid Gaied, an attorney and counsel at Law of the Tunisian Bar Association. The expert report identified that the Court of Ben Arous in Tunisia had the power to prevent the transfer or interference with Mr Neffati’s Tunisian Property.

The expert’s report also noted that while a judgment preventing the transfer of the Tunisian property would have more weight, a letter of request from an Australian court was still persuasive.

The letter of request would justify the Tunisian court taking conservative measures to avoid the transfer of Mr Neffati’s property.

While the power to issue a letter of request is discretionary, the Court may be more inclined to exercise its discretion when the evidence suggests that a foreign court of a country that is not a signatory to the Model Law is likely to respond to the request for aid.

 

YAKUSHIJI v DAIICHI CHUO KISEN KAISHA [2015] FCA 1170

In late 2015, the Federal Court of Australia in Yakushiji considered whether foreign proceedings and foreign representatives should be recognised in Australia. Chief Justice Allsop also commented specifically on maritime law and its intersection with the Act and Model Law which may be of interest to insolvency practitioners.

Facts

DCKK is a company incorporated under Japanese law, with its headquarters in Tokyo. It operates a cargo shipping business internationally. Star Bulk is a subsidiary of DCKK and also operates a cargo shipping business. It is incorporated in the Republic of Panama.

Both companies applied under the Civil Rehabilitation Act of Japan for civil rehabilitation.

Issue

The main issue was whether the foreign proceedings and representatives should be recognised in Australia under the Model Law.

Held

The Court had little issue recognising the proceedings and representatives under the Model Law.

Despite article 16(3) of the Model Law presuming that a company’s centre of main interests is in the place where it is registered, the evidence, in this case, rebutted that presumption. Star Bulk largely operated from Japan and held its assets there, and so its main interests were in Japan. As such, the Court recognised the Japanese proceedings as the main foreign proceedings.

The Court also commented, in obiter, on the difficulties of the intersections between international insolvency law and maritime law. In particular, the Court engaged in a discussion of the recognition of maritime liens. The Court noted that its orders in this proceeding under the Model Law should not be seen as necessarily defeating other maritime claims that may arise in future.

Points to note

The Court stated that orders under the Model Law should not necessarily interfere with proper maritime claims and that in any event, such claims would need to be dealt with in their own litigation. It is worth keeping in mind the intersection of these two areas of law as it may result in successful maritime law-based claims that affect the operation of the Model Law.

Another point raised by this case concerned the advertising of an application for recognition. In this case, advertising was sought lobe completed in The Australian newspaper alone. But the Court noted that in large maritime and international cases that The Australian would unlikely be read by creditors outside of Australia. In that regard, Chief Justice Allsop also indicated that advertising in a publication such as Lloyd’s List would satisfy the requirements under the Federal Court (Corporations1 Rules 2000 (Cth) (Corporations Rules).

Advertising under the Corporations Rules in relation to Model Law claims should seek to cover appropriate jurisdictions and readership.

 

KIM v SW SHIPPING CO LTD [2016] FCA 428

In April 2016, the Federal Court of Australia had to consider questions relating to service of an application for recognition of foreign proceedings. Kim v SW Shipping Co Ltd explores and clarifies a key distinction between ‘service’ and ‘send’ in the Corporations Rules.

 

Facts

SW Shipping was registered in Seoul, South Korea and carried on the business of shipping. By late 2015, SW Shipping petitioned to commence a Rehabilitation Proceeding, and thereafter an injunction was issued to preserve SW Shipping’s assets.

While SW Shipping had no known assets in Australia, Kim was concerned that Sea Honesty and Sea Future, two of SW Shipping’s ships, would enter Australian waters in late 2015 and be arrested by international creditors while in Australian territorial waters.

On that basis, Kim sought recognition of the Korean proceedings in Australia.

Issue in dispute

The issues were whether there were foreign proceedings on foot and whether Kim was a foreign representative for the purposes of the Act.

A more troublesome issue for the Court was whether ‘send’ as is used in rules 15A.6(1)(a) and 15A.7(1)(c) of the Corporations Rules had the same meaning as ‘serve’ which is used in the Corporations Rules at rule 15A.7(1)(b) and elsewhere in legislation. That is, did the Applicants have to ‘serve’ every creditor with notice of their application for recognition under the Act or was ‘sending’ the notice enough.

Held

The Korean proceedings were relevantly foreign proceedings for the purposes of the Act. Further, because SW Shipping’s main practice was based in Korea, the Court had no trouble finding that these proceedings should be foreign main proceedings. That being the case, the Applicant was a relevant foreign representative.

On the serve/send distinction, the Court held that ‘send’ in rules 15A.6(1)(a) and 15A.7(1)(c) did not have the same meaning as ‘serve’ which is found elsewhere in law. While the Court did not seek to define ‘send’, the distinction reached between ‘send’ and ‘serve’ is helpful in of itself.

By reaching this conclusion the insolvency practitioner avoided the need of having to comply with international service rules.

Points to note

By highlighting the distinction between ‘serve’ and ‘send’, the Court has made the practical distinction of information by insolvency practitioners a lot easier.

In larger international cases, such as this one, to individually ensure service upon creditors who may be scattered across the globe would be expensive and time-consuming.

It will suffice in light of this case to ‘send’ notice to the creditors under the Corporations Rules.

 

RE PALMER [2016] FCA 780

In late June 2016, the Federal Court of Australia in Re Palmer considered whether a foreign proceeding should be recognised. Particularly, the Court made findings on certain evidential points, noting the importance of submitting a certificate as evidence in accordance with Article 15 of the Model Law.

Facts

Mr Slater, an Australian citizen, was declared bankrupt under the Insolvency Act 1986 [UKI in 2015 by a County Court in the United Kingdom. There had been attempts to bankrupt Mr Slater in Australia, but they had failed because he did not have a connection with Australia required under the Bankruptcy Act 1966 (Cth).

The Applicant sought to have the UK proceedings recognised in Australia to aid in the insolvency matters,

Issue

The issue for determination was whether or not the UK proceedings were foreign proceedings within the meaning of the Model Law, and hence whether they should be recognised in Australia.

Held

The Court did not find that the UK proceedings should be recognised and as such, did not find that the Applicant was a relevant foreign representative.

For the Applicant to succeed, it needed to adduce evidence to prove the existence of a foreign proceeding in the UK. The Applicant was unable to do so, and this failing resulted in the Court not recognising the proceedings.

Particularly, the Applicant did not submit an Article 15(2)(b) Certificate from the UK court affirming the existence of the foreign proceeding and the appointment of a foreign representative. An order declaring Mr Slater bankrupt was submitted and claimed to be evidence of the foreign proceeding, but the Court held that it did not constitute evidence of a foreign proceeding.

The Applicant should have also tendered an affidavit outlining why she was a foreign representative within the meaning of the Model Law.

The Court gave leave to the Applicant to provide further evidence in support of the application for recognition.

Points to note

Foreign proceedings may not be recognised in Australia, particularly where a foreign court has not issued a certificate of the kind contemplated in the Model Law.

Always request a certificate from the relevant court affirming the existence of foreign proceedings to submit to the court considering whether to recognise the foreign proceedings. An affidavit outlining why a person should be recognised as a foreign representative should also be tendered as supporting evidence.

In summary:

Where a country is not a signatory to the Model Law, Australian courts may still issue a request for aid, but evidence about the likely reply to a request for aid by the foreign court will be key to whether it is granted.

  • Advertising of any orders for recognition of foreign proceedings should not be
    limited to a single publication. Instead, ensure that publication is made in places where relevant affected parties may have the opportunity to see the orders.
  • Where notification of an application for recognition of foreign proceedings must be
    given to creditors, simply ‘send notice and that will suffice.
  • An Article 15 Certificate and an affidavit should be filed in order to prove the existence of foreign proceedings and of a foreign representative.