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David Walter

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UNCITRAL has recently published its Model Law on Recognition and Enforcement of Insolvency-Related Judgments (MLREIJ), with a recommendation that nations adopt it into their domestic law. You can find a complete copy of the text of MLREIJ here (on the UNCITRAL website). A valuable guide to MLREIJ published by UNCITRAL – with considerable detailed discussion of the Model Law – is available here (on the UN website).

What does it all mean for Australian restructuring and insolvency professionals? Following are some “need to know” points for our clients, and then some further details for those interested.

What do I need to know?

The MLREIJ provides a framework for the domestic recognition and effectuation of “insolvency-related judgments” issued by the courts of a foreign jurisdiction.  As such, the MLREIJ is intended to streamline the legal aspects of cross-border insolvency proceedings, by reducing the prospect of conflicting judicial decisions (e.g. the various UK and US judicial disagreements in the Lehman Brothers estate) and reducing the need for local auxiliary liquidation proceedings (e.g. the English auxiliary liquidation of certain of the HIH companies).  The MLREIJ has not yet been adopted in Australia (or any other nation) – it is early days.

An insolvency-related judgment is widely defined; it includes voidable transaction recoveries, but also covers determinations of director liability to the insolvent estate, approvals of reconstruction plans, and determinations of the nature and disposal of assets in the insolvent estate.  That breadth of recognition would be transformational in certain fields of insolvent estate administration, particularly in recovery action against third parties, but also in effective cross-border recognition of reconstruction plans.  This would provide greater certainty to stakeholders, and ought to reduce cost.

The MLREIJ is not a silver bullet; it has various exceptions to the obligation on a domestic court to recognise a foreign judgment.  Like the UNCITRAL Model Law on Cross-Border Insolvency (MLCBI), there is a public policy exception to recognition, but the MLREIJ goes further – there are a wide range of other exceptions or grounds for refusal of recognition that centre on a need in the foreign jurisdiction for due process and the protection of local creditors.  This is not surprising; unlike the MLCBI, the MLREIJ provides more than simple recognition of a foreign insolvency proceeding – it requires the effectuation of money and in some cases non-money judgments of a foreign court.

As mentioned above, it is early days for the MLREIJ – no nation has given domestic effect to the instrument at this time.  There are good reasons, however, for the MLREIJ being enacted in Australia – streamlining the increasingly common stream of cross-border insolvency proceedings is important to international commerce.  So we expect to see it adopted – in some form, and perhaps with some additional protections for Australian interests – in the coming years.

For those interested, the details follow.   

What you need to know

The Federal Court – in a much-litigated wider contest about the ownership of the luxury yacht, “Dragon Pearl” drifting in an intriguing cross-border insolvency – has clarified the limitations for foreign entities and their insolvency appointees in pursuing action in Australia to un-wind antecedent transactions (by attempting to use the voidable transaction provisions of the Australian Corporations Act).

Insolvency and restructuring professionals need to know:

  • Recognition of a foreign insolvency proceeding under the Australian Cross-Border Insolvency Act (CBIA) (implementing the UNCITRAL Model Law on Cross-Border Insolvency (Model Law)) provides foreign representatives with standing to commence recovery proceedings in Australia, on behalf of the insolvent company. This happened in relation to the US appointee who was the plaintiff in this recent decision.
  • The Federal Court has determined, however, that such standing for the foreign appointee has its limits. Importantly, standing alone does not equate to the foreign entity, without more, being one to which the voidable transaction (or “claw-back”) provisions of Part 5.7B of the Corporations Act (Act) have application.
  • To access the voidable transaction provisions, the foreign entity must be a “company” under the Act – that means: (a) an Australian incorporated company, or (b) a foreign entity that is registered under the Act as a foreign company or that carries on business in Australia. Simply having the foreign insolvency proceeding recognised under the CBIA does not in itself satisfy those requirements – more is needed.
  • Promoting international uniformity, the position adopted by the Federal Court accords with the existing approach in England, as explained in Rubin v Eurofinance [2012] UKSC 46.
  • The recently published UNCITRAL Model Law on Recognition and Enforcement of Insolvency-Related Judgments may (if adopted in Australia) streamline this process. A note for our clients on this important development will be published later this month.
  • Pending adoption of the Model Law on Recognition and Enforcement of Insolvency-Related Judgments – which will be some years away – a local, auxiliary liquidation of the foreign entity (with all of its complexity, both in initiating and then conducting) is still needed for the purpose of carrying out claw-back proceedings under the Act. Whilst this is not an ideal or elegant solution, that is the state of the law in Australia for the time being.

The detail follows below, for those interested in reading more.