Recognition and enforcement in cross-border insolvency law: a proposal for judicial gap-filling.
The globalization of business activity necessarily entails contacts with a diverse array of national laws and legal systems, and insolvencies in this context often have transnational consequences. In such situations, there is a clash of competing national laws on weighty questions including the recognition of security interests, processes related to the disbursal of assets, and different policy preferences underlying the protection of different kinds of creditors. These clashes pose difficulties because each country has framed its insolvency laws in response to particular political exigencies and the policy preferences of its citizens, reflecting different bargains between creditor and debtor protection. Despite its enormous financial importance and academic complexity, cross-border insolvency law remains in a state of confusion. This Article analyzes the recognition and enforcement of cross-border insolvency judgments from the United States, United Kingdom, and Australia to determine whether the UNCITRAL Model Law's goal of modified universalism is currently being practiced, and subjects the Model Law to analysis through the lens of international relations theories to elaborate a way forward. We posit that courts could use the express language of the Model Law text to confer recognition and enforcement of foreign insolvency judgments. The adoption of our proposal will reduce costs, maximize recovery for creditors, and ensure predictability for all parties.
TABLE OF CONTENTS I. INTRODUCTION II. CROSS-BORDER INSOLVENCY LAW IN AUSTRALIA A. Bankruptcy Laws B. Corporations and Insolvency 1. Model Law C. Judicial Interpretation of the Model Law 1. Ackers v. Saad Investments Company Ltd 2. Yu v. STX Pan Ocean Co Ltd 3. Moore, as Debtor-in-Possession of Australian Equity Investors v. Australian Equity Investors III. CROSS-BORDER INSOLVENCY LAW IN THE UNITED STATES A. Judicial Interpretation of the Model Law 1. In re Betcorp Ltd 2. ABC Learning Centres 3. In Re Metcalfe 4. In re Qimonda 5. In re Vitro IV. RECOGNITION AND ENFORCEMENT IN THE UNITED KINGDOM A. Judicial Interpretation 1. Cambridge Gas 2. In re HIH 3. Rubin and New Cap Re V. HARMONIZED FRAMEWORK FOR RECOGNITION AND ENFORCEMENT A. The Model Law is Insufficient B. Universalism is the Solution C. Harmonization of Cross-Border Insolvency Law: Why a Model Law? D. The Role of the Courts VI. CONCLUSION
The globalization of business activity necessarily entails contacts with a diverse array of national laws and legal systems. It is no accident then that when multinational businesses become insolvent, such insolvencies often have transnational consequences and cross the boundaries of domestic jurisdictions. (1) A recent illustration of the scale, complexity, and financial significance of the issues involved is provided by the insolvency of Lehman Brothers, a firm that conducted business in over forty countries through the instrumentality of about 650 legal entities outside the United States. (2) In such situations, there is a clash of competing national laws on questions including the recognition of security interests, processes related to the disbursal of assets, and different policy preferences underlying the protection of different kinds of creditors.
These clashes pose difficulties because each country has framed its insolvency laws in response to particular political exigencies and the policy preferences of its citizens, reflecting different bargains between creditor and debtor protection. Alongside this variety of legal rules is the competition among creditors to maximize their private benefit to the exclusion of others. The result has been summed up by one author as triggering "diverse and uncoordinated legal proceedings in various countries connected to the affairs of [a multinational] enterprise." (3) Inevitably, as private actors compete to secure their interests via a multiplicity of proceedings across the world, costs rise. (4) In this milieu, it is clear that the primary beneficiaries are the debtor, and some creditors who possess deep pockets, because small creditors may not be able to afford the costs of participating in multiple proceedings in different jurisdictions. In sum, the problems thrown up by cross-border insolvency include (1) lack of clarity as to applicable laws, (2) uncertainty about participation in proceedings in foreign courts, (3) language, (4) ensuring procedural fairness, (5) equal treatment of creditors, (6) uncertainty about the validity and enforceability of security, (7) protecting the interests of employees and other vulnerable groups, (5) (8) increased borrowing costs owing to uncertainty faced by creditors, (6) (9) delays in disbursement of assets, and (10) difficulty in protecting a diverse array of national public policy goals.
Clearly, for many practitioners and scholars, the solution to these problems would be to subject the insolvency to one proceeding with global reach to cover all assets worldwide and with the responsibility for disbursing assets to claimants. This view--universalism--is one pillar of the tripod that divides academic opinion about cross-border insolvency law. (7) The alternative approach to cross-border insolvency is where each country applies its own laws within its own jurisdiction to the assets of the insolvent debtor and distributes the proceeds to local creditors. This is referred to as territorialism, 8 a system characterized by a multiplicity of proceedings and resulting inefficiencies.9 Currently, insolvency law has not been subjected to a global mandatory harmonization process, and there is no international law to limit diverse and uncoordinated proceedings. Instead, the international legal landscape is characterized by a patchwork of national laws that seek to accommodate cross-border insolvencies, often owing their provenance to a different commercial age. For instance, until recently, Australia's laws in relation to cross-border insolvency derived from the bankruptcy laws developed in the United Kingdom in the nineteenth century. (10)
During the twentieth century, a number of countries developed bilateral and multilateral agreements to govern the processes involved in cross-border insolvencies between them. (11) Although these agreements work between individual nation states that are party to those agreements, they are necessarily limited in their application. While these regional initiatives were being developed, other world bodies were developing protocols to provide a better framework for global insolvencies. (12) More recently, academics, judges, and practitioners have sought to develop a harmoized that would govern cross-border insolvencies on a global basis as a potential cure for this lack of consistency in approach and application. These efforts reached their apogee when on May 30, 1997, the United Nations Commission on International Trade Law (UNCITRAL) adopted its Model Law on Cross-Border Insolvency (Model Law). (13) The Model Law subscribes partially to the universalist approach to cross-border insolvency. Among other things, it
* sets out the conditions under which persons administering a foreign insolvency proceeding have access to local courts;
* sets out the conditions for recognition of a foreign insolvency proceeding and for granting relief to the representatives of such a proceeding;
* permits foreign creditors to participate in local insolvency proceedings;
* permits courts and insolvency practitioners from different countries to cooperate more effectively; and
* makes provision for coordination of insolvency proceedings that are taking place concurrently in different States. (14)
A number of developed countries (including the United States, Canada, Britain, Japan, and Australia) have adopted the Model Law, and it has become the law that governs cross-border insolvency in some of the world's most economically powerful nations. It was the aim of its drafters that most countries in the world would adopt it as law, paving the way for incremental harmonization of the law in this area. (15) However, an inherent flaw in the model law approach is that the longer it takes to achieve adoption on a global level, the more open it is to the generation of uncertainty derived from inconsistent application and interpretation.
Moreover, until September 10, 2015, only twenty-two countries in total had adopted the law in the seventeen years since it was developed. (16) Very few developing countries (17) had adopted it. However, on September 10, 2015, seventeen African countries, member states of OHADA (the Organisation pour l'Harmonisation en Afrique du Droit des Affaires) adopted the Model Law. (18) Before that, the last three countries to adopt the Model Law were Seychelles, Vanuatu, and Chile in 2013. (19) The Model Law represents the third pillar--modified universalism--under which a diversity of national laws is allowed to exist with an emphasis on cooperation. (20) Modified universalism has the virtue of flexibility and acknowledges deeply held divisions between nation states about the applicability of their policy preferences to assets located within their jurisdiction. (21) The approach has been criticized for not providing sufficient certainty, failing to reduce transaction costs, being inefficient, and for possessing all of the vices of territorialism. (22)
The various avenues available to resolve cross-border insolvencies have been supplemented more recently with less formal processes based on contracts between creditors and debtors. Those processes include cross-border insolvency agreements in which the parties cooperate and coordinate insolvency proceedings in multiple jurisdictions, usually by way of agreed protocols. (23) Other scholars have proposed that the most efficient means of governing cross-border insolvencies can be achieved through the use of contract ex ante, allowing creditors and debtors to agree beforehand on the approach to be taken in the event of insolvency. (24) The proponents of an agreed contractual position, in relation to choice of forum and law between creditors and debtors, gained some credence in the 1990s. These advocates have typically argued from a law and economics perspective about the economic benefits to creditors from certainty in the event of insolvency, but opponents decry its narrow focus and failure to meet other normative goals of insolvency law. (25)
In this uncertain legal environment, the growth in the number of cross-border insolvencies in recent years has heightened interest in the question of recognition and enforcement of cross-border insolvency judgments. As is obvious, absent recognition and enforcement, there is no effective remedy, and decisions are confined to territorial limits. UNCITRAL noted the difficulties presented by the absence of specific legal rules:
Approaches based purely on the doctrine of comity or on exequatur do not provide the same degree of predictability and reliability.... For example, in a given legal system general legislation on reciprocal recognition of judgements, including exequatur, might be confined to enforcement of specific money judgements or injunctive orders in two-party disputes, thus excluding decisions opening collective insolvency proceedings. Furthermore, recognition of foreign insolvency proceedings might not be considered as a matter of recognizing a foreign "judgement", for example, if the foreign bankruptcy order is considered to be merely a declaration of status of the debtor or if the order is considered not to be final. (26)
Despite this recognition early on in the drafting process, the Model Law does not specifically deal with the enforcement of judgments, and there has been significant controversy in recent years on this topic. (27) Moreover, although international efforts at harmonizing the law on recognition and enforcement in general have been ongoing for a long time, progress has been scant. Even when treaties have been signed to recognize and enforce specific types of judgments, insolvency judgments have typically been excluded. (28) In 2014, UNCITRAL gave Working Group V the mandate to commence work on a model law or provisions on the enforcement of foreign insolvency derived judgments. (29) In its work on developing these rules, Working Group V had to wrestle with the question of jurisdiction:
One approach might he to focus, as a starting point, on judgements issued by courts of the jurisdiction in which the debtor has its COMI or an establishment. Those two concepts are already used in the cross-border context and the Guide to Enactment and Interpretation of the UNCITRAL Model Law would provide a source of relevant explanatory material. Such an approach could lead, however, to the exclusion of judgements from courts with no jurisdictional claim over main or non-main insolvency proceedings concerning the debtor (within the meaning of the Model Law), including judgements entered by a court with jurisdiction over insolvency proceedings concerning the debtor, but commenced on the basis of presence of assets or the place of the debtor's registration. Since judgements from those courts might also be relevant to the goal of any instrument to be developed, a wider formulation might be required using some of the more general criteria above such as jurisdiction over the debtor. (30)
Clearly, despite its enormous financial importance and academic complexity, cross-border insolvency law remains in a state of confusion. This Article seeks to tackle one significant aspect of that confusion by analyzing the recognition and enforcement of cross-border insolvency judgments from the United States, United Kingdom, and Australia to determine whether the UNCITRAL Model Law's goal of modified universalism is currently being practiced. Having determined that the position is unsatisfactory, we subject the Model Law to analysis through the lens of international relations theories to elaborate a way forward. The drafters of the Model Law chose a non-legal form to embody their agreement due to the deeply held divisions between national insolvency laws. Further, the drafters preserved a high degree of interpretive latitude for courts because of these divisions and the uncertainty associated with particular insolvency settings. Therefore, we posit that courts could use the express language of the Model Law text to confer recognition on and make decisions about the enforcement of foreign insolvency judgments. In order to check the inappropriate use of interpretive discretion, we subject enforcement to the test of fairness and real and substantial connection. The adoption of our proposal will reduce costs, maximize recovery for creditors, and ensure predictability for all parties.
This Article is organized as follows: Part II provides an overview of cross-border insolvency law in Australia and outlines the key provisions following the enactment of the Model Law. It also discusses some issues presented by the implementation and interpretation of the Model Law by courts, and illustrates potential problems. Parts III and IV discuss the position in the United States and United Kingdom, respectively, illustrating the confusion created by conflicting decisions on recognition and enforcement in cross-border settings. In Part V, an argument is set forth for courts to harmonize the recognition and enforcement of cross-border insolvency judgments in order to effectuate the normative foundations of the Model Law and provide certainty for international business. Part VI concludes.
II. CROSS-BORDER INSOLVENCY LAW IN AUSTRALIA
Oliver Wendell Holmes famously claimed that:
The life of the law has not been logic: it has been experience. The felt necessities of the time, the prevalent moral and political theories, intuitions of public policy, avowed or unconscious, even the prejudices which judges share with their fellow-men, have had a good deal more to do than the syllogism in determining the rules by which men should be governed. The law embodies the story of a nation's development through many centuries.... (31)
Until recently, the laws that governed cross-border insolvencies in Australia relied on three main approaches: (1) the limited statutory powers available under Chapter 5 of the Corporations Act 2001, (2) comity, and (3) the various contractual remedies that parties were able to negotiate either ex ante or ex post insolvency. This Part will focus on the statutory remedies and the recent developments that accompany Australia's adoption of the Model Law in 2008. Firstly though, as directed by Holmes, in order to gain a better picture of the operation of statutory provisions, it is necessary to understand the general history of how the sections developed.
A. Bankruptcy Laws
In Australia, "bankruptcy" refers to personal insolvency, which is governed under the Bankruptcy Act 1966 (Cth), (32) while "insolvency" is the term used for corporate insolvency, which is governed by the Corporations Act 2001 (Cth). (33) Modern Australian insolvency laws derive from, and are still in some cases redolent of, nineteenth century English bankruptcy statutes. For example, a direct line can be drawn from [section] 74 of the Bankruptcy Act 1869 (United Kingdom) to [section] 581 of the Corporations Act 2001 (Cth). Section 74 of the 1869 United Kingdom statute provided:
The London Bankruptcy Court, the local Bankruptcy Court, the Courts having jurisdiction in bankruptcy in Scotland and Ireland, and every British Court elsewhere having jurisdiction in bankruptcy or insolvency, and the officers of such Courts respectively, shall severally act in aid of and be auxiliary to each other in all matters of bankruptcy, and an order of the Court seeking aid, together with a request to another of the said Courts, shall be deemed sufficient to enable the latter Court to exercise, in regard to the matters directed by such order, the like jurisdiction which the Court which made the request, as well as the Court to which the request is made, could exercise in regard to similar matters within their respective jurisdictions (emphasis added). (34)
By the end of the nineteenth century, all Australian colonies had developed their own bankruptcy legislation based on the English Bankruptcy Acts. (35) Upon the Federation of Australia in 1901, the Commonwealth Government was given power under the Constitution to make laws "with respect to bankruptcy and insolvency." (36) However, it was only in 1924 that the Commonwealth Government enacted the Bankruptcy Act 1924 (Cth), albeit that Act did not contain the relevant section. It was not until the Bankruptcy Act 1966 was enacted that a similar provision was included. (37) Section 29 of the 1966 Act required all Australian courts with jurisdiction under the Act and the judges and officers of those courts to "act in aid of and be auxiliary to each other in all matters of bankruptcy." Section 29(2) stated that "[n]othing in this Act shall be taken to affect the operation of section 122 of the Imperial Act known as the Bankruptcy Act, 1914" (that is, the English Bankruptcy Act 1914, which contained the section excerpted above and which continued to have force in Australia). (38) In 1980, the Bankruptcy Act 1966 was amended by adding the following subsections to [section] 29:
(2) In all matters of bankruptcy, the Court-
(a) shall act in aid of and be auxiliary to the courts of the external Territories, and of prescribed countries, that have jurisdiction in bankruptcy; and
(b) may act in aid of and be auxiliary to the courts of other countries that have jurisdiction in bankruptcy.
(3) Where a letter of request from a court of an external Territory, or of a country other than Australia, requesting aid in a matter of bankruptcy is filed in the Court, the Court may exercise such powers with respect to the matter as it could exercise if the matter had arisen within its own jurisdiction.
(4) The Court may request a court of an external Territory, or of a country other than Australia, that has jurisdiction in bankruptcy to act in aid of and be auxiliary to it in any matter of bankruptcy.
(5) In this section, 'prescribed country' means
(a) the United Kingdom, Canada and New Zealand;
(b) a country prescribed for the purposes of this sub-section; and
(c) a colony, overseas territory or protectorate of a country specified in paragraph (a) or of a country so prescribed. (39)
The explanatory memorandum to the Bankruptcy Amendment Act 1980, which enacted the amendments, explained the scope of the section as follows:
Australian Courts exercising jurisdiction in bankruptcy will act in aid of the Bankruptcy Courts of the External territories, Canada, New Zealand and the United Kingdom (which have similar bankruptcy legislation to Australia) and of other prescribed countries and may act in aid of the Bankruptcy Courts of non-prescribed countries. They may also request Bankruptcy Courts in other countries to act in their aid. (40)
B. Corporations and Insolvency
Laws relating to the governance of companies were developing at around the same time. Mason notes that the development of the law of corporate insolvency is "related to the law of personal insolvency in that bankruptcy concepts have consistently been included in corporate insolvency legislation, although in recent years there has been an increasing divergence between the two." (41) Again, the history of company law in Australia generally followed that outlined above for bankruptcy laws. That is, the various states enacted Company Acts prior to Federation in 1901. The Constitution gave the Federal Parliament power to make laws with respect to "foreign corporations, and trading or financial corporations formed within the limits of the Commonwealth." (42) As in the case of bankruptcy legislation, the Commonwealth government did not immediately attempt to introduce laws relating to corporations. In fact, the government did not attempt to create legislation governing companies until the 1980s. (43) At that time, both state and federal legislation contained provisions for the winding up of companies in liquidation. In an attempt to create a standardized law that governed companies, each state enacted uniform legislation in 1961, and again in 1981. To overcome the constitutional limitations on the federal power to make laws in relation to incorporation, each state enacted a Corporations Act in 1990 and adopted the Commonwealth Corporations Law as the law of the state. The Corporations Law (as it was known) then had effect as a uniform law throughout Australia. It was not until the Corporations Law was enacted that any of the company legislation required courts to act in aid of and auxiliary to other courts in the insolvency of a corporation. The wording of the clause, as it was in the Corporations Law, was similar to that contained in the Bankruptcy Act 1966 as amended in 1980. The relevant section [section] 581 was as follows:
(1) All courts having jurisdiction in matters arising under this Act,... shall severally act in aid of, and be auxiliary to, each other in all external administration matters.
(2) In all external administration matters, the Court:
(a) shall act in aid of, and be auxiliary to, the courts of the excluded Territories, and of prescribed countries, that have jurisdiction in external administration matters; and
(b) may act in aid of, and be auxiliary to, the courts of other countries that have jurisdiction in external administration matters.
(3) Where a letter of request from a court of an excluded Territory, or of a country other than Australia, requesting aid in an external administration matter is filed in the Court, the Court may exercise such powers with respect to the matter as it could exercise if the matter had arisen within its own jurisdiction.
(4) The Court may request a court of an excluded Territory, or of a country other than Australia, that has jurisdiction in external administration matters to act in aid of, and be auxiliary to, it in an external administration matter.44
An external administration matter is a matter that relates to the winding up or the insolvency of an Australian or a foreign company whether inside or outside Australia. (45) Despite some minor amendments to clarify its meaning, [section] 581 remains essentially in the same form.
Under [section] 581 of the Corporations Act 2001, Australian courts must act in aid of and be auxiliary to the courts of prescribed countries that have jurisdiction in external administration matters. The prescribed countries are the Bailiwick of Jersey, Canada, the Independent State of Papua New Guinea, Malaysia, New Zealand, the Republic of Singapore, Switzerland, the United Kingdom, and the United States of America.
The equivalent section in the United Kingdom is [section] 426 of the Insolvency Act 1986 (UK). That section states among other things that:
The courts having jurisdiction in relation to insolvency law in any part of the United Kingdom shall assist the courts having the corresponding jurisdiction in any other part of the United Kingdom or any relevant country or territory. (46)
Lord Collins, Justice of the Supreme Court, observed in Rubin v. Eurofinance that "[a]ll the countries to which it currently applies are common law countries or countries sharing a common legal tradition with England." (47) It is interesting to note how two laws on ostensibly the same subject have evolved from the same root legislation but have taken different shape over time and have different effect. Nonetheless, despite the procession of years since these laws were created, their modern counterparts appear ill-equipped to deal with the demands of contemporary commercial practice.
1. Model Law
These divergences are an interesting historical note, but they also provide an example of the way transplanted laws can develop differently in different contexts. In contrast to other countries, Australia adopted the Model Law in its entirety in the Cross-border Insolvency Act 2008 (Cth) (CBI Act). (48) Some recent Australian cases illustrate the practice of modified universalism in the country. The Model Law has been portrayed as a more universalist regime than the limited approach of local legislation, such as [section] 581 of the Corporations Act. However, as will be shown, the case law on the Model Law has not always borne this out.
C. -Judicial Interpretation of the Model Law
1. Ackers v. Saad Investments Company Ltd.
A discussion of the case of Ackers v. Saad Investments Company Ltd. (49) illustrates one of the perils of harmonization: disharmony caused by the license domestic courts possess to interpret the provisions of the Model Law. This interpretative process itself has the potential to weaken the harmonization achieved in the text of the Model Law.
Saad Investments Ltd., a company whose center of main interests was in the Cayman Islands, held assets in Australia to the value of about USD$7 million from the proceeds of a share deal it had facilitated in 2008. It also had a tax liability to the Australian Tax Office of over AUS$83 million. It was common ground in the proceedings that there was no jurisdiction for the Commissioner for Taxation to wind up Saad Investments, as it did not "carry on business" in Australia and was not a "registered company" sufficient to bring it within the winding up of a foreign company provisions of the Corporations Act 2001 (Cth). Without more then, the Commissioner could not commence proceedings in Australia to recover the outstanding tax debt. He did, however, lodge a proof of debt with the liquidator in the Cayman Islands. Unfortunately, under the Cayman Island's foreign judgments law, claims for tax from a foreign country are not recognized. This reflects the long-standing rule of public international law that claims by a foreign sovereign for taxes are unenforceable. (50) Therefore, the Commissioner would not receive anything in the distribution from the winding up in the Cayman Islands either. The Explanatory Memorandum to the CBI Act states that "with the exception contained in paragraph 2, Article 13 [of the Model Law] embodies the principle that foreign creditors, when they apply to commence an insolvency proceeding in Australia or file claims in such proceeding, should not be treated worse than local creditors." (51) Australia enacted the alternative wording in paragraph 2 to Article 13 as the relevant exception. The wording in the alternative paragraph recognizes the fact that Australia does not recognize foreign tax and social security claims in insolvency proceedings.
On September 18, 2009, the Grand Court of the Cayman Islands ordered that Saad Investments be wound up. (52) Mr. Ackers was appointed one of the liquidators of the company. He applied to the Federal Court of Australia under the CBI Act for orders recognizing him as a foreign representative and the Cayman Islands proceedings as "foreign main proceedings." (53) Under Article 20 of the Model Law, upon recognition of proceedings as foreign main proceedings:
(a) Commencement or continuation of individual actions or individual proceedings concerning the debtor's assets, rights, obligations or liabilities is stayed; (emphasis added)
(b) Execution against the debtor's assets is stayed;
(c) The right to transfer, encumber or otherwise dispose of any assets of the debtor is suspended. (54)
In 2010, Justice Rares of the Australian Federal Court granted the relief sought by the foreign representative under Article 20. Hence, the Commissioner was stayed from commencing any claim he might have had and was forced to argue under the CBI Act.
Under Article 21 of the Model Law, once a foreign proceeding has been recognized as a main or non-main proceeding, the foreign representative is entitled to approach the court to seek "any appropriate relief," which may include:
(a) [s]taying the commencement or continuation of individual actions or individual proceedings concerning the debtor's assets, rights, obligations or liabilities, to the extent they have not been stayed under paragraph 1(a) of article 20;
(b) [s]taying execution against the debtor's assets to the extent it has not been stayed under paragraph 1(b) of article 20;
(c) [suspending the right to transfer, encumber or otherwise dispose of any assets of the debtor to the extent this right has not been suspended under paragraph 1(c) of article 20; delivery of information concerning the debtor's assets, affairs, rights, obligations or liabilities;
(e) [e]ntrusting the administration or realization of all or part of the debtor's assets located in this State to the foreign representative or another person designated by the court;
(f) [e]xtending relief granted under paragraph 1 of article 19; [or]
(g) [g]ranting any additional relief that may be available to a liquidator under the laws of this State. (55)
Clause 2 of the Article authorizes the court to "entrust the distribution of all or part of the debtor's assets" in Australia to the foreign representative or a court appointed person as long as it "is satisfied that the interests of creditors" in the country are "adequately protected." (56)
In addition, Article 22 of the Act provides that in "granting or denying relief under article 19 or 21, or in modifying or terminating relief' under 22(3), the court is required to be satisfied that "the interests of the creditors and other interested persons, including the debtor, are adequately protected." (57) Further, the court is authorized to subject any relief it grants to appropriate conditions. It may also modify or terminate relief upon request by the foreign representative or any person affected by the grant of relief under Articles 19 and 21. The court may also modify or terminate of its own motion.
Unsurprisingly, in 2013, the foreign representative attempted to remit the assets out of Australia in order for it to be included in the distribution in the liquidation in the Cayman Islands. The Commissioner sought injunctive relief under Article 22(3) to prevent the foreign representative from doing so. As discussed, without that avenue being open to him, the Commissioner's rights as an Australian creditor of the foreign company were limited.
In his decision in the proceedings in July 2013, Justice Rares considered the universalist intent of the Model Law outlined previously. (58) However, he also noted that one of the objectives of the Model Law was the "fair and efficient administration of cross-border insolvencies that protects the interest of all creditors and other interested persons, including the debtor." (59) He considered that the Commissioner's interests were not adequately protected by orders he had made in the 2010 proceedings under Article 21. He stated that:
[I]f the Australian assets of Saad Investments were remitted without the Commissioner being allowed to prove for his unsecured debt here or be paid here his pari passu entitlement, the other unsecured creditors will receive a windfall to the extent that his bona fide claim is irrecoverable outside Australia. That result would be contrary to the fair or efficient administration of Saad Investments' insolvency. That is because, effectively, Saad Investments would benefit from its insolvency since it would cease to be subject to the incidents of Australian taxation and insolvency laws in respect of taxable capital gains and penalties imposed in respect of its profit making activities in this country. (60)
Consequently, Justice Rares considered that Art 22(1) gave the court:
[T]he forum jurisdiction to make orders enabling the payment of taxation and penalty liabilities to be made from the debtor's assets held by it, or a foreign representative appointed under Arts 19 or 21 before those assets are removed from the local forum and sent to the debtor's centre of main interests ... (61)
He ordered that the Commissioner could "recover from Saad Investments' assets in Australia up to the pari passu amount that he would be entitled to receive as a dividend were he entitled to be admitted to prove for the tax debts as an unsecured creditor in the Cayman Islands liquidation" (62)--an entitlement he did not own absent the Model Law.
This decision illustrates the discretion available to judges deciding cases commenced under the CBI Act. Although the Model Law aims to instill a universalist approach to the recovery of assets globally, the territorialist tendencies of sovereign states threaten to overwhelm that ideal.
The next case also demonstrates the flexibility inherent in the Model Law to accommodate claims by local creditors in proceedings commenced under the CBI Act.
2. Yu v. STX Pan Ocean Co Ltd.
In Yu v STX Pan Ocean Co Ltd. (South Korea), (63) Justice Buchanan in the Federal Court held that the foreign insolvency proceedings were "foreign main proceedings" under the CBI Act. The foreign representative applied for orders that sought to prevent any person from enforcing a charge on any of the insolvent company's property. (64) The property in question consisted of ships owned by the debtor company that continued to sail and trade around the world. The foreign representative sought court orders to prevent creditors in Australia from arresting the ships as they docked in Australian waters. (65) Section 16 of the CBI Act mandates the Corporations Act 2001 as the appropriate law to which the stay and suspension granted in Article 20(1) of the Model Law are subject. (66)
Justice Buchanan confirmed that under maritime law, "the arrest of individual vessels to enforce the security of a maritime lien (e.g. for damage done by a ship, for seamen's wages, for salvage etc) is an important facility." (67) The judge was not prepared to make all of the orders sought by the foreign representative on the basis that to do so would impinge on what, under maritime law, are equivalent to the rights of a secured creditor. The judge said that "[t]hose potential rights may require assessment according to the circumstances of particular cases but, to take a simple example, there may be a very good reason why a claim for seamen's wages, normally enforceable as a maritime lien, should not be affected by recognition of the foreign main proceedings." (68)
His Honor underlined that "Article 21(2) requires consideration of the interests of creditors in Australia before an order such as proposed order 5 is made." (69) He also said that "Article 22(1) contains a similar requirement." (70) But recall that Article 22(1) requires that the "interests of the creditors," not merely local creditors, are adequately protected. A consideration of creditors under Article 22 would entail a broader and more universalist consideration of the interests of all creditors than was necessary under Article 21. It was unfortunate that Article 22 of the Model Law was dragooned to assist the argument, as it clearly requires an assessment of the rights of all creditors, not only local creditors. This interpretation of Article 22 of the Model Law in Yu again muddied the waters. It also left the foreign representative empty-handed.
3. Moore, as Debtor-in-Possession of Australian Equity Investors v. Australian Equity Investors (71)
The defendants were Arizona limited partnerships constituted under the Uniform Limited Partnership Act as adopted by Arizona. Gregory Moore Real Estate Company, Inc. is a 1 percent general partner in both of the defendant limited partnerships. In 2003, the first defendant, AEI, became an investor in a property development project in Sydney. Thereafter, it transferred the property to the second defendant, 258 Nest, after default by the owner. They then commenced proceedings against Colliers International (NSW) Pty Ltd (Colliers). In 2011, it was held that Colliers had engaged in misleading or deceptive conduct under the Trade Practices Act. In 2012, the defendants applied under Chapters 3 and 11 of the Bankruptcy Code in the United States Bankruptcy Court in Arizona. Mr. Gregory Moore, who was appointed as debtor-in-possession for the defendants, applied to the court for recognition of the U.S. proceedings. Colliers resisted recognition and public policy was one of the grounds canvassed. The judge was not impressed:
I have some difficulty in understanding the propositions advanced in reliance upon article 6. The proposition is that the cause of action that AEI and 258 Nest have asserted against Colliers is a statutory right that is not capable of assignment. The argument is that the effect of the proceedings in the US Bankruptcy Court is that the cause of action has become, or may become, part of the estate of the two limited partnerships being administered in bankruptcy. Whether or not the cause of action is capable of assignment, and whether there has been an assignment, appears to me to be irrelevant in terms of the question of the public policy of Australia. There is nothing in the recognition of the two proceedings in the US Bankruptcy Court that, in my view, is contrary to the public policy of Australia. What the consequences of that recognition may be will no doubt be the subject of argument. That, however, is not presently to the point. It is an argument for another day. (72)
From the review of these cases, decided under the Model Law in Australia, it is apparent that, even though it was adopted with a universalist spirit, the way it is interpreted and implemented has limited its effectiveness as an instrument of universalism.
III. CROSS-BORDER INSOLVENCY LAW IN THE UNITED STATES
The United States adopted the Model Law in 2005, and enacted it as Chapter 15 of the Bankruptcy Code following the passage of the Bankruptcy Abuse Prevention and Consumer Protection Act. The explicit objective of Chapter 15 is to provide effective mechanisms in cross-border cases by promoting (1) cooperation between U.S. and foreign courts, (2) greater certainty in international trade, (3) fairness and efficiency in order to protect all creditors and other stakeholders, (4) protection and maximization of the value of the debtor's assets, and (5) protection and preservation of investment and employment by enabling the rescue of businesses in financial trouble. (73)
The scope of application of Chapter 15 requires that there is a foreign proceeding (74) and assistance is sought by a foreign court or representative in the United States, or in a foreign court under this title. (75) The trigger is the filing of a petition for recognition of a foreign proceeding. (76) There are two types of foreign proceedings under the statute: a foreign main proceeding, which is "a foreign proceeding pending in the country where the debtor has the center of its main interests," (77) and a foreign non-main proceeding, which is defined as "a foreign proceeding, other than a foreign main proceeding, pending in a country where the debtor has an establishment." (78) The court is required to decide on a petition to recognize a foreign proceeding at the earliest time. (79)
Upon the grant of recognition, the court is authorized to grant to the foreign representative additional assistance under Chapter 15 or under other U.S. law, as long as such assistance, "consistent with the principles of comity, will reasonably assure--
(1) just treatment of all holders of claims against or interests in the debtor's property;
(2) protection of claim holders in the United States against prejudice and inconvenience in the processing of claims in such foreign proceeding;
(3) prevention of preferential or fraudulent dispositions of property of the debtor;
(4) distribution of proceeds of the debtor's property substantially in accordance with the order prescribed by this title; and
(5) if appropriate, the provision of an opportunity for a fresh start for the individual that such foreign proceeding concerns. (80)
In interpreting Chapter 15, [section] 1508 states that the court "shall consider its international origin, and the need to promote an application of this chapter that is consistent with the application of similar statutes adopted by foreign jurisdictions."
Section 1509 provides the foreign representative with direct access to the court for purposes of seeking recognition. (81) If the court grants recognition under [section] 1517, the foreign representative has the right to sue and be sued in courts in the United States, and apply directly to a court for appropriate relief granted by that court. (82) In addition, U.S. courts are required to grant comity and cooperation to the foreign representative. (83) If the foreign representative seeks comity or cooperation in a U.S. court other than that which granted recognition, a certified copy of the order granting recognition under [section] 1517 has to be filed before that court. (84) Equally, if recognition is denied, the court may make any appropriate order to deny comity and cooperation. (85) In any case, and subject to [section][section] 306 and 1510 of the Bankruptcy Code, the foreign representative is subject to otherwise applicable non-bankruptcy law of the United States. (86) Any failure by the foreign representative to file a case for recognition is not prejudicial to its ability to sue in a U.S. court to collect or recover any claim owed to the debtor. (87)
Filing a claim for recognition does not subject the foreign representative to the jurisdiction of the U.S. courts for other purposes. In other words, the jurisdiction is limited to the purpose for which the filing was made. (88) Upon recognition, the foreign representative may commence an involuntary case under [section] 303, or if the foreign proceeding is a foreign main proceeding, a voluntary case under [section] 301 or 302. If the foreign representative intends to commence a case under this provision, it must communicate such intent to the court granting recognition. (89)
Section 1513 provides that foreign creditors have the same rights as domestic creditors with regard to commencement of and participation in proceedings. (90) Section 1513(b) protects foreign creditors from discrimination merely from the fact that they are foreign: "(1) Subsection (a) does not change or codify present law as to the priority of claims under section 507 or 726, except that the claim of a foreign creditor under those sections shall not be given a lower priority than that of general unsecured claims without priority solely because the holder of such claim is a foreign creditor." The section also maintains the embargo against foreign tax claims or other public law claims, with the proviso that such claims are subject to any treaties entered into by the United States with foreign countries. (91)
Section 1515 provides the process for seeking recognition, which is by filing a petition before the court. This petition is to be accompanied by--
(b) (1) a certified copy of the decision commencing such foreign proceeding and appointing the foreign representative;
(2) a certificate from the foreign court affirming the existence of such foreign proceeding and of the appointment of the foreign representative; or
(3) in the absence of evidence referred to in paragraphs (1) and (2), any other evidence acceptable to the court of the existence of such foreign proceeding and of the appointment of the foreign representative.
(c) A petition for recognition shall also be accompanied by a statement identifying all foreign proceedings with respect to the debtor that are known to the foreign representative.
The above documents have to be translated into English if they are in a different language. (92)
Section 1516 creates three presumptions. The court is entitled to presume that the person is a foreign representative and that the foreign proceeding is a foreign proceeding if the decision or certificate accompanying the filing indicates that fact. The court may also presume that the documents are authentic without the need for legalization. It is presumed that the debtor's registered office or the place of habitual residence, in the case of an individual debtor, is the center of main interests in the absence of any evidence to the contrary.
There are crucial differences between foreign main proceedings and non-main proceedings that follow upon recognition. In the former case, [section] 1520 provides that (1) provisions of the Bankruptcy Code with respect to adequate protection and automatic stay apply to the debtor and its property located within the territorial jurisdiction of the United States; (93) "(2) sections 363, 549, and 552 apply to a transfer of an interest of the debtor in property that is within the territorial jurisdiction of the United States to the same extent that the sections would apply to property of an estate; (3) unless the court orders otherwise, the foreign representative may operate the debtor's business and may exercise the rights and powers of a trustee under and to the extent provided by sections 363 and 552; and (4) section 552 applies to property of the debtor that is within the territorial jurisdiction of the United States." (94) In contrast, in non-main proceedings, there is no automatic stay; the foreign representative has to request it, and the court has discretion whether to award it. Broadly, the foreign representative is entitled to relief upon recognition of a foreign proceeding, including:
(1) staying the commencement or continuation of an individual action or proceeding concerning the debtor's assets, rights, obligations or liabilities to the extent they have not been stayed under section 1520(a);
(2) staying execution against the debtor's assets to the extent it has not been stayed under section 1520(a);
(3) suspending the right to transfer, encumber or otherwise dispose of any assets of the debtor to the extent this right has not been suspended under section 1520(a); (95)
(4) providing for the examination of witnesses, the taking of evidence or the delivery of information concerning the debtor's assets, affairs, rights, obligations or liabilities;
(5) entrusting the administration or realization of all or part of the debtor's assets within the territorial jurisdiction of the United States to the foreign representative or another person, including an examiner, authorized by the court. (96)
Under this provision, the court is authorized to "entrust the distribution of all or part of the debtor's assets located in the United States to the foreign representative" or any court appointed person as long as the court "is satisfied that the interests of creditors in the United States are sufficiently protected." (97) An important limitation is that the court is only authorized to award such relief if it "relates to assets that, under the law of the United States, should be administered in the foreign nonmain proceeding or concerns information required in that proceeding." (98)
It is also noteworthy that the court is authorized to grant urgent provisional relief in order to ensure that the creditors do not attack the debtor's assets prior to the determination as to foreign main proceedings. Such relief includes a stay and an order entrusting the foreign representative with the administration of the debtor's assets located in the United States. (99) The granting of provisional relief is subject to the same standards and processes as applicable to injunctions. (100)
The chapter operates a presumption that a debtor's registered office is the center of main interests in order to determine a foreign main proceeding. This was further elucidated in the Bear Stearns case where the court also adverted to the following factors as being salient: "the location of the debtor's headquarters; the location of those who actually manage the debtor (which, conceivably could be the headquarters of a holding company); the location of the debtor's primary assets; the location of the majority of the debtor's creditors or of a majority of the creditors who would be affected by the case; and/or the jurisdiction whose law would apply to most disputes." (101)
Section 1506 authorizes the court to refuse to take action under Chapter 15 if it would be "manifestly contrary to the public policy of the United States." (102) Crucially, in common with other harmonizing legislation, the court is obligated to have due regard to its international origins and consider the application of similar laws by foreign countries. (103)
A. Judicial Interpretation of the Model Law
1. In re Betcorp Ltd. (104)
Betcorp Ltd. was a publicly listed company regulated by the Australian Securities and Investments Commission. Its main business was in the online gaming sector directed at customers in the United States. The passage of the Unlawful Internet Gambling Enforcement Act by the U.S. Congress proved to be a game changer for Betcorp because it prevented the company from receiving fund transfers from U.S. customers. Shortly thereafter, in 2007, Betcorp's members commenced a voluntary winding-up of the company's operations by appointing liquidators to administer the company. In 2008, 1st Technology LLC sued Betcorp in a Nevada court claiming that Betcorp's gambling operations infringed a patent it held on a data transmission system. The Australian liquidator sought recognition of the liquidation proceedings under Chapter 15. This was resisted by 1st Technology on the ground that the Australian liquidation did not qualify as a "foreign proceeding." (105) It argued that "(i) there is no lawsuit or legal proceeding pending in an Australian court (or anywhere else except the United States) involving any of Betcorp's creditors; (ii) Betcorp is not bankrupt or in administration under Australian bankruptcy laws, or any other bankruptcy laws; and (iii) there is no lawsuit or other legal process by which a judge or other judicial officer directly supervises the liquidators' actions in the winding up." (106)
The court commenced its analysis by identifying "seven criteria or elements, each of which must be satisfied before Betcorp's winding up can be called a 'foreign proceeding.' These elements are:
(i) a proceeding;
(ii) that is either judicial or administrative;
(iii) that is collective in nature;
(iv) that is in a foreign country;
(v) that is authorized or conducted under a law related to insolvency or the adjustment of debts;
(vi) in which the debtor's assets and affairs are subject to the control or supervision of a foreign court; and
(vii) which proceeding is for the purpose of reorganization or liquidation. (107)
In relation to the first element, the court opined that "the word 'proceeding' requires a broader definition in order to achieve the statutory directive of interpretation consistent with the understandings and the usages of international law and the UNCITRAL Model Law." (108) It explained that:
[T]he hallmark of a "proceeding" is a statutory framework that constrains a company's actions and that regulates the final distribution of a company's assets. In this case, that framework is provided by the Australian Corporations Act (Cth) 2001. Under Australian law, this Act governs voluntary winding up, as well as a multitude of other procedures used to end a corporation's existence. Chapter 5 of the Corporations Act, entitled "External Administration," governs the termination of businesses through the appointment of an administrator or liquidator, and is applicable to Betcorp. (109) (emphasis added)
The court was not persuaded by the lack of a petition to a court and held that "an Australian voluntary winding up is a 'proceeding' under section 101(23) and, by extension, chapter 15." (110) Elements 2, 3, and 4 were relatively easily satisfied on the facts. In relation to element 5, the court relied upon two facts: "(1) the unified structure of the external administration provisions of the Corporations Act; and (2) the Australian Parliament's own interpretation that Australia's company laws qualify under the Model Law." (111) In relation to the first fact, the court observed that:
[S]everal sub-parts of Chapter 5 [of the Australian Corporations Act] contain provisions that deal with corporate insolvency and allow for the adjustment of debts. See Parts 5.3, 5.4A, and 5.4B of Chapter 5 of the Corporations Act. These facts, combined with the statutory ability to shift among various forms of dissolution given changing circumstances, demonstrate that winding up is achieved under a law relating to insolvency or the adjustment of debts. (112)
With regard to the second fact, the court quoted from the Australian Explanatory Memorandum to the Model Law's enacting legislation:
Many articles of the Model Law require an insertion for Taws of the enacting State relating to insolvency' (or similar). It is intended that the Model Law will apply to collective judicial or administrative proceedings pursuant to a law relating to bankruptcy or corporate insolvency. As such, the relevant Australian laws are the Bankruptcy Act and Chapter 5 (other than Parts 5.2 and 5.4A) of the Corporations Act, and also section 601CL of the Corporations Act [Part 2, clause 8]. (113)
The court explained that:
A voluntary winding up is governed by Part 5.5 of Chapter 5 of the Corporations Act. It is telling that this is not one of the sub-parts excluded in the Explanatory Memorandum. Accordingly, based upon the Australian legislature's interpretation of the UNCITRAL Model Law and Australian domestic law, a company engaged in a voluntary winding up is being administered under a law relating to insolvency. (114)
The decision has been criticized by Look Chan Ho, who points out that the Australian legislative history is contrary to the court's assertions. He quotes from the Corporate Law Economic Reform Program (CLERP) 8 Discussion Paper that:
[T]he scope of the Model Law would extend to liquidations arising from insolvency, reconstructions and reorganisations under Part 5.1 and voluntary administrations under Part 5.3A. It would not extend to receiverships involving the private appointment of a controller. It would also not extend to a members' voluntary winding up or a winding up by a court on just and equitable grounds as such proceedings may not be insolvency related. (115)
The author notes that the policy objectives of the Model Law are contrary to the interpretation favored by the court:
A members' voluntary winding-up is a mechanism to return value to shareholders and a common solvent restructuring method to improve efficiency. Recognising a foreign members' voluntary liquidation could entail an automatic stay on all litigations against the company, as demonstrated in Betcorp. It is hard to see why a proceeding primarily aimed at conferring benefit on the shareholders should have the effect of stymieing creditors' legitimate litigations against the company. (116)
In this connection, reference may also be made to the Guide:
A judicial or administrative proceeding to wind up a solvent entity where the goal is to dissolve the entity ... are not insolvency proceedings within the scope of the Model Law. Where a proceeding serves several purposes, including the winding up of a solvent entity, it falls [within] the Model Law only if the debtor is insolvent or in severe financial distress. (117)
2. ABC Learning Centres (118)
The case concerned the liquidation of an Australian business that provided childcare facilities in the United States and Australia. Upon the commencement of voluntary administration prior to the eventual liquidation, the secured creditors appointed receivers to protect their assets in accordance with their rights under Australian law. Thereafter, the administrators delegated their power to the receivership. The liquidators filed a Chapter 15 action in order to obtain a stay on an enforcement action commenced by a judgment creditor in the United States. The latter objected to recognition on the grounds that there were no collective proceedings in Australia and that ABC had no interest in the U.S. assets being managed by the receivership. The bankruptcy court rejected these arguments and recognized the Australian proceedings as a foreign main proceeding. The district court affirmed, and the judgment creditor appealed. The Third Circuit court ruled that
Chapter 15 embraces the universalism approach. The ancillary nature of Chapter 15 proceedings "emphasizes the United States policy in favor of a general rule" that our courts "act ... in aid of the main proceedings, in preference to a system of full bankruptcies ... in each state where assets are found." Congress rejected the territorialism approach, the "system of full bankruptcies," in favor of aiding one main proceeding." (119)
The judgment creditor argued that recognition under Chapter 15 would only benefit the receivership because all of the assets of ABC were leveraged and nothing would be left to the unsecured creditors. (120) The court did not find this persuasive:
Chapter 15 makes no exceptions when a debtor's assets are fully leveraged.... We do not find any exception to recognition based on the debtor's debt to value ratio at the time of insolvency. Moreover, we find such an exception could contravene the stated purposes of Chapter 15 and the mandatory language of Chapter 15 recognition. (121)
With regard to the applicability of the public policy exception under Chapter 15, the court said:
[W]e are unconvinced the Australian insolvency proceeding conflicts with our own rules. The United States Bankruptcy Code prioritizes secured creditors, as does Australia's Corporations Act.... The sole difference here is that Australian law allows secured creditors to realize the full value of their debts, and tender the excess to the company, whereas secured creditors in the United States must generally turn over assets and seek distribution from the bankruptcy estate. (122)
It concluded that "Australian law established a different way to achieve similar goals. Recognition of the Australian liquidation proceeding does not manifestly contravene public policy. On the contrary, allowing RCS to use U.S. courts to circumvent the Australian liquidation proceedings would undermine the core bankruptcy policies of ordered proceedings and equal treatment." (123)
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|Title Annotation:||Abstract through III. Cross-Border Insolvency Law in the United States A. Judicial Interpretation of the Model Law 2. ABC Learning Centres, p. 1225-1254|
|Author:||Gopalan, Sandeep; Guihot, Michael|
|Publication:||Vanderbilt Journal of Transnational Law|
|Date:||Nov 1, 2015|
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