Introduction
The United Nations Commission on International Trade Law (UNCITRAL) Model Law on Cross-Border Insolvency (the Model Law) has introduced the new Cross-Border Insolvency Act 2008 (Cth) (the Act), which commenced on 26 May 2008. This Act confers new legal rights upon foreign creditors and foreign liquidators over property of a debtor where the property is situated in Australia. The purpose of the Act will be to provide for better cooperation between domestic and foreign courts and other governmental authorities between countries relating to matters of cross-border insolvency.
Summary of the procedure under the Act
Section 12 of the Act allows a foreign creditor or liquidator to bring proceedings in a court in Australia to commence a winding up of Australian assets. In order to have the foreign proceeding recognised, a foreign creditor or liquidator merely has to apply to an Australian court. The application must be accompanied by evidence of the existence of the foreign claim and arrangements for the appointment of a foreign representative (Article 15 of the Model Law). In addition the application must be accompanied by a statement by the foreign representative identifying all proceedings under the Bankruptcy Act 1966 (Cth), any appointment of a receiver or controller in relation to the debtor’s property and any other proceedings known to the foreign representative (Section 13 of the Act). Once the application for recognition is approved by an Australian court, the foreign proceeding may be brought against the Australian assets of the debtor and the foreign creditor or liquidator will be granted access to participate in the Australian proceedings, subject to the interests of public policy.
However, for foreign creditors and liquidators to have the foreign proceeding considered as the main proceeding, the Australian court will have to be satisfied that the foreign main proceeding arises where the debtor has its centre of main interests (COMI). In most instances, the COMI will refer to the debtor’s registered office in the absence of any proof to the contrary. Foreign non-main proceedings are also not excluded by the Act for recognition and enforcement, as long as the debtor has an establishment, in other words, an economic activity within that country.
Impact of the Act on foreign creditors and liquidators
In view of the advances in technology and international transactions, more multi-national companies and businesses have started to invest in assets and property in various countries. Irrespective of this global phenomenon, Australia did not provide the same legal rights to foreign creditors and liquidators in all countries by either not recognising certain foreign creditors or by restricting the priority and securities of foreign creditors over a debtor’s Australian assets. The impact of the Act is to do away with these restrictions by providing the same legal rights to foreign creditors and liquidators as local creditors over the assets of the debtor in Australia. This is irrespective of whether the debtor is an insolvent individual or company.
Apart from the recognition of foreign proceedings, the Act will provide for the same ranking and priority of foreign claims as local claims brought within the same class. The only exception would be that the claims of foreign creditors may not be ranked below unsecured claims of other creditors. This will effectively align any foreign claim with a local claim brought within the same class. The provision of equal rights to foreign and local creditors effectively simplifies the insolvency process and provides for the distribution of more assets to all creditors in the insolvent estate.
The only current entities that are excluded from the operation of the Act will be deposit-taking institutions such as financial institutions and insurance companies under the Banking Act 1959 (Cth) and the Insurance Act 1973 (Cth). In relation to these entities, foreign creditors and liquidators may still apply to Australian courts for any special insolvency arrangements.
Impact of the Act on local creditors and liquidators
Although the Act will provide the same rights to foreign claims as to local claims, local creditors may still have some protection against foreign claims in those instances where the local creditor has a security over the Australian assets.
Finally, the Act does not have any reciprocity provision to the extent that Australian creditors and liquidators could exercise the same legal rights against a debtor’s assets situated in the foreign creditor’s country. Therefore, Australian creditors and liquidators may still have difficulty enforcing security and/or priority over foreign assets where the foreign country has not adopted the Model Law and imposes certain restrictions. However, more countries are now starting to recognise the growing trend in cross-border trading amongst individuals and corporations hence
the need for better cooperation in cross-border insolvencies. Inevitably, more countries will adopt the Model Law in the near future ultimately allowing for mutual recognition of Australian creditors and liquidators amongst other countries.
In addition to Australia, countries such as the United Kingdom, the United States, New Zealand, Poland, Romania, Serbia, South Africa, Mexico, Columbia, Montenegro, Eritrea and Japan have already adopted the Model Law.
For further information, please contact your usual PricewaterhouseCoopers Legal adviser or:
Andrew Wheeler, Partner
Corporate and Commercial
Phone: +61 2 8266 6401
andrew.wheeler@au.pwc.com
John Cannings, Partner
Corporate and Commercial
Phone: +61 2 8266 6410
john.cannings@au.pwc.com
