Two Recent Cross-Border Insolvency Decisions Develop Model Law

Two recent decisions under the Model Law on cross-border insolvency will provide useful guidance for foreign companies and representatives seeking recognition in Australia along with local companies and insolvency practitioners seeking recognition outside of Australia.1

The first decision, Stephen Akers & Ors v Saad Investment Company Limited (In Official Liquidation)2, marked the first time a local court considered in detail the criteria to determine a foreign company’s centre of main interests (COMI). COMI is important because it is the place where the foreign main proceeding will be determined to be. In Australia, recognition by the Australian court of a foreign main proceeding will automatically attract, amongst other things, a stay of proceedings and suspension against execution of the company’s assets. In this decision, the Federal Court of Australia favoured the UK/European approach when an Australian court considers a foreign company’s COMI.

The second decision, Re ABC Learning Centres Limited & A.B.C. USA Holdings Pty Ltd3, the United States Bankruptcy Court in Delaware recognised an Australian liquidation as a ‘foreign main proceeding’ in circumstances where a receivership was concurrently being conducted.

Stephen Akers & Ors v Saad Investment Company Limited
(In Official Liquidation) (Saad)

Incorporated in the Cayman Islands in 1990 as a limited liability company, Saad was, amongst other things, in the business of money market operations and investments in marketable securities and real estate across the world. Saad was placed into provisional liquidation on 5 August 2009 and liquidation on 18 September 2009.

On 9 November 2010, the court found that given the importance to international commerce and third parties of having an objective ascertainable basis upon which to govern the winding up of an insolvent debtor, the approach adopted in the European decision of Eurofood4 and UK decision of Stanford Bank should be followed as it would lead to a more predictable and orderly outcome. Such an approach was in contrast to the approach adopted in the US which was often less certain. 

The court found that in the absence of proof to the contrary, a company’s COMI will be presumed to be its registered office – in this case the Cayman Islands. 

The court also decided that even after it had reviewed all of the evidence and the COMI was uncertain, the Model Law authorised the Australian court to proceed upon the presumption that its COMI will be its registered office as such matters may always be modified or amended later in time.

The court found that Saad’s COMI was in the Cayman Islands as the presumption that its COMI will be its registered office was not displaced.

The court reached this decision even though the following characteristics existed:

  • it was incorporated in the Cayman Islands as an exempted limited liability company limited by shares (being a company
  • that operates outside of the Cayman Islands)
  • it was a holding company and its investments in marketable securities and real estate were mostly held in numerous jurisdictions across the world
  • its books and records were held in Switzerland
  • action was taken to freeze assets held in Saudi Arabia by the Saudi Arabian Monetary Authority, and
  • Its facilities with its lenders were governed by English law. 

In Re ABC Learning Centres Limited & A.B.C. USA Holdings Pty Ltd (ABC Learning)

In the decision of ABC Learning, the Bankruptcy Court recognised an Australian liquidation as a ‘foreign main proceeding’ in circumstances where a receivership was concurrently being conducted. The Bankruptcy Court also permitted the lifting of the automatic stay for the limited purpose of conversion of a jury verdict to a judgment and to preserve a creditor’s right to assert set-off in another proceeding.

In November 2010, the Bankruptcy Court found that an Australian liquidation proceeding was a foreign main proceeding for the purposes of the US equivalent of the Model Law.  In the case of the ABC group, the companies are being wound up in Australia by way of a creditors’ voluntary winding up
as a consequence of the administration process.

Despite an objection from a creditor to the recognition of the Australian liquidation proceeding by the
US Courts, the Bankruptcy Court held that the Australian liquidation was recognised as a foreign
main proceeding pursuant to Chapter 15 of the US Bankruptcy Code. Among the reasons were:

  • it was a proceeding within the meaning of the US Bankruptcy
  • it was primarily administrative and at times judicial in character
  • it was collective in nature despite a receivership operating concurrently pursuant to Australian law and the liquidator was excluded by the receivers from the vast majority of ABC’s assets. The liquidation proceeding was to be evaluated on its own merits
  • it was located in a foreign country
  • it operated under a law relating to insolvency
  • it was under a foreign court’s control or supervision
  • it was for a reorganisation or liquidation purpose
  • it met the requirements pursuant to section 1517 of the US  Bankruptcy Code, and
  • it was not manifestly contrary to US public policy and, in so doing, the Bankruptcy court rejected the objections from a creditor that the liquidation proceedings were at the behest of the receivers for the purposes of gaining advantage in other US litigation and notice of the Australian liquidation to the creditor by the administrators/liquidators was inadequate.

In addition, the creditor was entitled to have the automatic stay that is granted upon recognition lifted for the limited purpose of having a jury verdict it obtained in Arizona against ABC converted to a judgment. The Bankruptcy court made this order to permit the creditor to preserve any right to set-off that it may have in other proceedings commenced by ABC in Nevada.    

Subsequent to the above decision, late last year the creditor filed a motion for reconsideration6 of the decision and argued that:

  1. recognition by the US court was granted to the ongoing receivership proceeding, and
  2. the automatic stay should be restricted to only the property controlled by the liquidators.

On 21 January 2011, the Bankruptcy court confirmed that recognition was not intended to extend to the receivership proceeding and rejected categorically7 the argument by the creditor that the property of ABC controlled by the receivers was not part of the bankruptcy estate and that the mandatory stay of proceedings and suspension of execution did not apply to those assets. Further, the court found that the failure by the US court to protect ABC’s US assets would undermine Australia’s insolvency laws and that if the US court were to allow the removal of assets from the purview of the foreign main proceeding as the creditor had argued it would undermine the spirit and intent of the Model Law as enacted in both Australia and the US.

Matters for practitioners

There have only been a handful of applications made by companies and representatives pursuant to the Cross-Border Insolvency Act (Cth) 2008 and by Australian companies and representations to overseas jurisdictions that have implemented their own versions of the Model Law on cross-border insolvency.

The Saad decision is a positive step in the Australian development of the meaning of COMI and is likely to be welcomed by insolvency practitioners and lawyers. This approach is likely to promote quick and just decisions in Australian courts and should hopefully reduce the need for applicants and creditors to engage the court in an analysis of transactions and facts that may not be possible to determine or pinpoint without certainty at the time any application for recognition is made.

The decision in the ABC Learning case will be of interest when Australian companies and representatives apply to a jurisdiction that has enacted the Model Law. This will particularly apply to circumstances where receivers and managers have been appointed to substantially the whole of the assets of the company and that company is also subject to an Australian liquidation which has resulted from an administration.

This decision will also be of interest to Australian liquidators and administrators seeking to protect assets outside of Australia or to receive the benefit of any stay outside of Australia because it remains common in Australia for secured lenders to appoint receivers and managers to a company concurrently with an administration or liquidation.

  1. Henry Davis York acted for the Cayman Islands Joint Official Liquidators of Saad Investments Company Limited (In Official Liquidation) in relation to their application for recognition of the Cayman Islands liquidation and continues to act for the Receivers and Managers of the ABC group of companies.
  2. [2010] FCA 1221
  3. Decision of Judge Gross in the United States Barnkruptcy Court in Delaware dated 16 November 2010
  4. [2010] FCA 1221 at paragraph 29.
  5. Cross-Border Insolvency Bill 2008 – Explanatory Memorandum – Chapter 1.7 at page 6.
  6. Decision of Judge Gross in the United States Bankruptcy court in Delaware dated 21 January 2011.
  7. In particular, the court noted at footnote 2 of the 21 January 2011 decision: “The court is fully aware that RCS is now baldly attempting to reach Debtors’ assets after directly and repeatedly disavowing such an effort when it opposed recognition. The court, in fact, granted RCS the relief it requested. RCS now seeks more in the guise of requesting reconsideration. The court answers with a resounding “No”.”