Insolvency sans Borders

Introduction

Cross-border insolvency is becoming increasingly common in the globalised world. ' ' This article will review the mechanisms available to deal with cross-border insolvencies, as applied in the recent decision of Justice Derrington in Yit (Trustee), in the matter of Lee (Bankrupt), Lee [2021] FCA 886 ("Yit").

The Model law

Australia became a signatory to the UNCITRAL Model Law on Cross-Border Insolvency (1997) ("Model Law") in 2008.'  The purpose of the Model Law is to assist countries in developing a legal framework to effectively address the complexities surrounding cross-border insolvencies. Unlike many other international treaties, the Model Law is not a reciprocal treaty. This means that creditors and insolvency practitioners in countries that have not adopted the Model Law can still utilise it (but not vice versa). Section 10 of the Cross-Border Insolvency Act 2008 (Cth) ("CBI Act") gives the Federal Court of Australia ("Federal Court") to hear all applications under the Model Law. State and Territory Supreme Courts may also hear applications involving corporate insolvencies.

Yit

On 27 May 2019, Ms Lee was made bankrupt by the High Court of the Republic of Singapore ("Singapore Bankruptcy Proceeding"). Mr Yit, as the trustee of Ms Lee's bankrupt estate, sought to realise Ms Lee's interest in a property in Queensland, and applied to the Federal Court seeking orders recognising the Singapore Bankruptcy Proceeding as a "foreign proceeding" in Australia within the meaning of the Model Law. In order to satisfy the Federal Court of this, Mr Yit had to satisfy the criteria set out in Article 17(1) of the Model Law and further requirements set out in the CBI Act and the Federal Court (Bankruptcy) Rules 2016 ("Bankruptcy Rules"). In particular, Mr Yit was required to demonstrate that:-

1. The Singapore Bankruptcy Proceeding was a "foreign proceeding" under article 2(a) of the Model Law namely: "a collective judicial or administrative proceeding in a foreign State'€¦pursuant to a law relating to insolvency in which proceeding the assets and affairs of the debtor are subject to control or supervision by a foreign court, for the purpose of reorganization or liquidation."
2. Mr Yit was a "foreign representative" under article 2(d) of the Model Law namely: ' "a person or body'€¦.authorized in a foreign proceeding to administer the reorganization or the liquidation of the debtor's assets or affairs or to act as a representative of the foreign proceeding."
3. The application was made to a court of competent . (Article 4 of the Model Law; section 10 of the CBI Act)

Additionally, Mr Yit had to satisfy certain procedural criteria. Ultimately, the Federal Court was satisfied that the Singapore Bankruptcy Proceeding was a "foreign proceeding," as Ms Lee's assets and affairs were subject to the control of Mr Yit under the supervision of the High Court of the Republic of Singapore. Similarly, there was no question that Mr Yit was a "foreign representative" as he possessed powers to administer Ms Lee's bankrupt estate in Singapore. Further, Mr Yit satisfied the requisite procedural criteria. Mr Yit then sought to demonstrate that the Singapore Bankruptcy Proceeding was a "foreign main proceeding," rather than a "foreign non main proceeding." Once a "foreign main proceeding" is recognised in Australia, certain automatic relief follows, including a stay on enforcement and proceedings against the debtor's assets in Australia. A "foreign main proceeding" under article 2(b) of the Model Law is a proceeding taking place in the State where the debtor has the centre of its main interest. A "foreign non-main proceeding" is defined in article 2(c) of the Model Law as a proceeding in any other State in which the debtor carries out non-transitory economic activity. In Yit, the Federal Court found that Ms Lee's habitual residence was in Singapore as there was nothing to suggest she spent any time out of Singapore and she conducted business in Singapore. The Court relied on the presumption in Article 16(3) of the Model Law, which provides that an individual's habitual residence is presumed to be their centre of main interest in the absence of proof to the contrary.'  Accordingly, the Singapore Bankruptcy Proceeding was recognised as a "foreign main proceeding." Finally, Mr Yit sought ancillary relief under Article 21 of the Model Law, namely, that he be granted, in relation to Ms Lee's Australian assets, all of the powers normally available to a trustee in bankruptcy appointed under the Bankruptcy Act 1966 (Cth). Ultimately, ' the Court granted that relief on the basis that:-

1. If Ms Lee's bankruptcy had occurred in Australia, her property would have automatically vested in Mr Yit under s 58 of the Bankruptcy Act.
2. There was no suggestion that the interests of Ms Lee or her creditors would be adversely effected by the making of the orders sought.

Comment

The Yit case is a good example of how the Model Law can be used as a tool in the administration of an insolvent estate which crosses international borders. While the case deals with a foreign trustee seeking to realise assets in Australia, the same process is broadly applicable to an Australian insolvency practitioner seeking to realise assets located in a foreign , subject to local laws (and assuming the country involved is a signatory to the Model Law). While the Court in Yit readily applied the Article 16(3) presumption to find Ms Lee's habitual residence was in Singapore, this will not always be the case. For example, in Wong (Trustee), in the matter of Mackellar (Bankrupt) v Mackellar [2020] FCA 1151, the Court declined to apply the presumption, despite evidence that the debtor was living and operating a business in Australia, and was unlikely to depart in the near future. This was because there was no evidence as to the duration of the debtor's residency, his modality of living or his intentions. Accordingly, practitioners should be armed with sufficient evidence when attempting to establish a proceeding is a "foreign main proceeding" within the meaning of the Model Law.

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~ by' Christian Mennilli,' Lawyer