First appellate decision on Model Law reduces certainty

May 2014

First appellate decision in Australia on UNCITRAL Model Law on Cross-Border Insolvency: a warning to foreign investors and liquidators.

In the first appellate decision of its kind in Australia, the Full Federal Court of Australia has allowed what might be described as a “territorialist” outcome when dealing with local creditors under the UNCITRAL Model Law on Cross-Border Insolvency, limiting its “universalist” operation. In the decision of Akers as joint foreign representative v Deputy Commissioner of Taxation [2014] FCAFC 57, Chief Justice Allsop (with whom Justices Robertson and Griffiths agreed) dismissed an appeal from an earlier decision of Justice Rares.

Background to the case

The dispute arose because the liquidators of Saad Investments Company Limited (in official liquidation), who had previously been recognised as foreign representatives in Australia, sought to remit Saad’s Australian assets to the Cayman Islands, which was the centre of Saad’s main interests and central location of Saad’s winding up.

The Deputy Commissioner of Taxation opposed remission because, as a foreign revenue creditor, he could not be admitted to proof in the Cayman Islands under its local law. The ATO sought orders from the Federal Court of Australia for “adequate protection” under Article 22 of the Model Law. Justice Rares made orders permitting the ATO to use its enforcement powers to recover its tax debt from Saad’s Australian assets. Any recoveries were to be capped at the equivalent of the amount the ATO would have received had it been able to prove as a creditor in the Cayman Islands.

Liquidator’s appeal

Saad’s liquidators appealed that decision arguing that the orders undermined the universalist intent of the Model Law by promoting a territorialist outcome. They argued that under the Model Law, one insolvency proceeding should be universally recognised in its centre of main interests and all assets of the insolvent company and all creditors’ claims should be administered in and according to the law of centre of main interests.

Responding to the ATO’s claims of unfairness arising from its inability to prove in the Cayman Islands, the liquidators argued that this was the consequence of accepted international legal principles, also applicable in Australia, that see foreign revenue creditors rejected from proving (see Government of India v Taylor [1995 ] 1 All ER 292). Similarly, the Foreign Judgments Act 1991 (Cth) excludes judgments relating to taxes, fines, penalties and similar charges.

The decision

The Full Federal Court of Australia rejected the liquidators’ argument confirming the earlier decision to grant leave to the ATO to take enforcement action against Saad’s Australian assets.

While accepting the universalist intent of the Model Law, the Court held that its universalism is qualified by the capacity to modify and terminate the effects of recognition granted under Article 17 of the Model Law, and qualified by the obligation under Article 21.2 to protect local creditors.

The Court stated that “the universalism that underpins the Model Law and the Cross-Border Insolvency Act is one for the benefit of all creditors, and the protection of local creditors is expressly recognised.”

The reasons expressed particular concern with the ATO’s inability to prove as a creditor in the Cayman Islands and considered that a fair outcome was one where creditors worldwide received equal treatment. It did not accept that the outcome for which the liquidators contended properly reflected the objective of the Model Law to achieve fairness.

What this means for you

The decision reduces certainty about the operation of the Model Law by making a decision favouring a local creditor who considers that its position is disadvantaged in the forum of the main liquidation.

Liquidators and other insolvency administrators from non-Australian jurisdictions, who are considering what steps to take in Australia about local assets, will now need to carefully consider whether to seek recognition in Australia or consider alternative options such as those available under sections 601CL and 583 of the Corporations Act.

Reduced certainty about rights and outcomes in insolvency under the Model Law may also increase the inherent risk in foreign companies’ investment decisions in Australia. For example, financiers of foreign companies investing in Australia may have less certainty about potential recoveries in an insolvency context.

The decision might also have negative knock-on effects in other jurisdictions considering how they might treat their local creditors with respect to a liquidation being conducted in Australia.
 

Scott Atkins

I'm unapologetically determined and fearless. I pursue excellence. Always.

Scott Atkins Partner

Scott is a trusted adviser to Australia's leading banks and insolvency and restructuring practitioners and has acted on some of the industry's most complex and sensitive banking and insolvency advisory and dispute resolution matters.

Prior to joining HDY, Scott practiced for 7 years as in-house counsel with Commonwealth Bank Group. He is now our Client Relationship Partner for the CBA Group. He is also the co-leader of our cross-border insolvency practice and our regulatory enforcement practice. Scott is recognised by his peers for his leading expertise in cross-border insolvency, acting on both inbound engagements in Australia and advising Australian clients on outbound engagements in the USA, UK, Cayman Islands, Hong Kong and The Netherlands, among other jurisdictions.

Scott was the Australian delegate on the Advisory Committee on Comparative Law established by the American Bankruptcy Institute as part of its Commission to Study the Reform of Chapter 11 of the US Bankruptcy Code. This resulted in a landmark report for the reform of Chapter 11.

He is a published author on insolvency and cross-border insolvency. Most recently, Scott was one of the Australian contributors to the 2015 publication 'International Contributions to the reform of Chapter 11 U.S. bankruptcy code' which is volume 2 of the European and International Insolvency Law Studies series. He also authored the Australian chapter of Avoidance of Antecedent Transactions and Cross-Border Insolvency (INSOL International). Among other publications, he is the co-author, together with Professor Rosalind Mason, of the Australian chapter of Look Chan Ho's leading text: Cross-Border Insolvency: Cases and Materials (Kluwer International).

Scott is a visiting lecturer on cross-border insolvency at the University of Sydney in its undergraduate and postgraduate law programs lead by Professor John Stumbles.

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