Australia Adopts the Model Law on Cross-Border Insolvency

Australia’s Federal Parliament recently enacted the Cross-Border Insolvency Act (the “Act”), which elevates to domestic law the United Nations Commission on International Trade Law’s Model Law on Cross-Border Insolvency (the “Model Law”), a framework of principles designed to coordinate cross-border bankruptcy and insolvency cases that has now been adopted in one form or another by 15 nations or territories. As explained in this article, the Act will have a major impact on the management and administration of international insolvencies with elements in Australia.

According to the Act’s explanatory memorandum, the aim of the Model Law is to address the complexities surrounding cross-border insolvencies, facilitate international trade in goods and services, and integrate national financial systems with international financial systems. Practically speaking, the Act will streamline the role played by Australian courts when a company with assets or debts in Australia and abroad becomes insolvent. It is procedural in nature and is not intended to alter Australia’s substantive insolvency laws.

Unlike many other international treaties, such as the New York Convention on International Commercial Arbitration, the Model Law does not depend upon reciprocity to operate — so creditors and representatives of those creditors (for example, liquidators) who reside in a country that has not enacted the Model Law are not prevented by that fact from utilizing the benefit of the Act, even though creditors resident in Australia cannot expect the same treatment in the other country. The Model Law has not been widely embraced in the Asia-Pacific region; only the United States (which enacted chapter 15 of the Bankruptcy Code in 2005), South Korea, Japan, and New Zealand have adopted it.

Crucial to the objective of streamlining the way international insolvencies are conducted will be the determination by the court of the location (and, therefore, the jurisdiction) most relevant to the insolvency. This determination requires the court to decide whether foreign proceedings are “foreign main proceedings” or “foreign non-main proceedings,” which in turn entails a determination as to the “centre of main interest” (“COMI”) of the insolvency.

The Act provides little guidance as to how the court should determine COMI, other than to create a rebuttable presumption that the location of the registered office of the company will be its COMI. The Honourable J.J. Spigelman, New South Wales Chief Justice, recently confirmed that Australian courts will seek guidance from the way overseas courts have interpreted this concept, including the reasoning articulated by U.S. bankruptcy judge Burton R. Lifland in In re Bear Stearns High-Grade Structured Credit Strategies Master Fund, Ltd. (In Provisional Liquidation), 374 B.R. 122 (Bankr. S.D.N.Y. 2007). In that case, the court held that determining COMI was a matter for the court rather than the parties. (The interested parties had consented to a COMI in the Cayman Islands, which was also where the registered office was located, even though the debtor hedge funds had no meaningful contacts with the Caymans.) The court found that the U.S., not the Cayman Islands, was the COMI of the insolvent company for reasons largely to do with the management of Bear Stearns. Based on that determination, the U.S. bankruptcy court denied recognition of the Cayman Islands liquidation proceedings under chapter 15 of the U.S. Bankruptcy Code as either main or nonmain foreign proceedings. A federal district court upheld that ruling on appeal in May 2008.

Impact of the Act in Australia

Subject to certain exemptions (pertaining principally to insurance companies and “deposit-taking” institutions (i.e., banks)), if a foreign proceeding is recognized as being the foreign main proceeding upon the application of the foreign creditor (or its representative), it will be mandatory for the Australian courts to:

  • Stay any actions in Australia against the debtor;
  • Stay the execution against any assets of the debtor located in Australia;
  • Suspend the right of the debtor to transfer, encumber, or otherwise dispose of its assets; and
  • Permit proceedings to be commenced (or to continue) in Australia only if the debtor has assets in Australia and the proceedings are restricted to those assets.

If the COMI of the debtor is Australia, the Act has several important implications for foreign creditors of the debtor, including:

  • Foreign creditors will be entitled to commence and participate in Australian proceedings;
  • Unsecured foreign creditors have the same rights as unsecured domestic creditors and can therefore expect the same entitlements from the distribution of the proceeds from a liquidation of the debtor; and
  • The court has broad powers to stay proceedings or the enforcement of proceedings if to do so is necessary to protect the assets of the debtor or the interests of creditors.

Regardless of the COMI, the Act requires Australian courts to cooperate to “the maximum extent possible” with foreign courts and foreign representatives (i.e., insolvency practitioners and agents of those practitioners). The type of cooperation that foreign creditors can expect to receive includes:

  • From the time that an application is made to recognize foreign proceedings, the court may grant urgent provisional relief to protect assets of the debtor located in Australia, including orders freezing the assets or staying execution against the assets;
  • Australian courts will be able to entrust a foreign representative of the creditor with the administration or realization of all or part of the debtor’s assets located in Australia and will assist in the coordination of the administration and supervision of the debtor’s assets and affairs;
  • The court may order the examination of witnesses, the taking of evidence, or the delivery of information concerning the debtor’s affairs. Specifically, the court is permitted to communicate directly with the foreign court or representative and communicate information to that foreign court or representative; and
  • The coordination of concurrent domestic and foreign proceedings, if those proceedings involve the same debtor.

The enactment of the Model Law in Australia will provide real assistance to foreign creditors with exposure to debtors in Australia. This assistance will probably be most useful to foreign creditors where the COMI of the debtor is in a foreign jurisdiction, but it will also help streamline recovery actions by foreign creditors against debtors whose COMI is Australia.