Australia: Bankrupt New Zealander bankrupted in Australia

Another failed property developer has just been made bankrupt in Australia, this time with a difference – he was already bankrupt in New Zealand. Bank of Western Australia (Bank) v David Stewart Henderson (No. 3) [2011] FMCA 840 is another Australian cross-border insolvency case in which we have successfully tested the boundaries of the Cross-Border Insolvency Act 2008 (Cth) (the CBIA), this time with the Bankruptcy Act 1966 (Cth).

Although powers for the New Zealand Official Assignee (equivalent to an Australian trustee in bankruptcy) already existed under both the CBIA and the Bankruptcy Act, his Honour Federal Magistrate Raphael decided in this case that neither the UNCITRAL Model Law on Cross-Border Insolvency (incorporated into the CBIA (the Model Law)) nor the Bankruptcy Act interfere with the Court's power to make a sequestration order against a debtor already bankrupt in New Zealand.

Property developer tries to do deal

The debtor was a property developer who, in late 2009, sent to his creditors (including the Bank) an affidavit in support of a proposal under Pt 5 of the Insolvency Act 2006 (NZ), seeking to implement a process similar to Pt X of the Bankruptcy Act (the Pt 5 Proposal).

In early 2010, the Bank argued that the service of that affidavit was an act of bankruptcy under section 40(1)(h) of the Bankruptcy Act, entitling it to present a creditor's petition against the debtor without the usual step of relying upon an unsatisfied bankruptcy notice.

Subsequent to the creditor's petition being filed, there was considerable activity in New Zealand arising out of the debtor's filing of the Pt 5 Proposal, which involved a challenge to the validity of the Pt 5 Proposal. Nonetheless, the debtor was adjudicated bankrupt in New Zealand on 9 June 2011.

Following the debtor's bankruptcy in New Zealand, the Bank sought to proceed on its creditor's petition in the Australian proceedings because of the convenience of having a local investigation and administration of his affairs.  

NZ bankrupt opposes second bankruptcy

The debtor sought to resist the making of a sequestration order against his estate in Australia on a number of grounds, including that:

  1. the Court lacked jurisdiction to make a sequestration order because the debtor:
    1. is a New Zealand resident who had always conducted his business affairs from New Zealand;
    2. has no dwelling house or place of business in Australia; and
    3. does not carry on business in Australia either personally or by means of an agent or manager;
  2. the Court should already be satisfied that the Official Assignee could exercise his rights in Australia either under the CBIA or the Bankruptcy Act; and
  3. bankrupting the debtor in Australia would be prejudicial, extending the period of the debtor's bankruptcy as a result of his earlier bankruptcy in New Zealand.

The debtor conceded the "jurisdiction" point at hearing, leaving the "other sufficient cause" (outlined below) and "prejudice" points to be determined.

The "other sufficient cause" submission by the debtor was that, either by use of the Bankruptcy Act or the CBIA, the Official Assignee would have the same ability as an Australian trustee to gather in and distribute amongst the debtor's creditors the assets he may find in Australia or elsewhere. That being the case, the debtor submitted that there was no need to make a second sequestration order against him.

Bank persuades Court of benefit of second bankruptcy

In rejecting the debtor's submissions, and making a sequestration order against the estate of the debtor, his Honour noted that the question is one of policy as to whether a sequestration order should be made, having regard to the rights and remedies available to the Official Assignee under the Bankruptcy Act and the CBIA.

His Honour noted that:

  1. the Model Law has no substantial effect on the local court's jurisdiction, and that the existence of the Model Law did not operate to prevent the local court from making a sequestration order;
  2. in any event, no application for recognition under the Model Law had been made by the Official Assignee, as a result of which the effect, if any, of the Model Law on the Australian proceedings was minimal;
  3. the Official Assignee did not object to the making of a sequestration order against the debtor in Australia;
  4. even if the Official Assignee had sought recognition under the Model Law, this would not affect the Court's jurisdiction;
  5. local proceedings may be commenced irrespective of the existence of foreign proceedings; and
  6. to read the Model Law as not interfering with the Court's jurisdiction to make a separate, local sequestration order is consistent with the common law approach to recognition of foreign judgments.

The Court also had regard to practical matters in respect of the debtor's contentions, noting that:

  1. recognition under the Model Law (as a required step in order for a foreign bankruptcy judgment to take effect in Australia) had not occurred, and on that basis, the Model Law should not prevent the making of a sequestration order;
  2. an Australian trustee in bankruptcy would be more familiar with Australian bankruptcy law, and would have a "sharper understanding" of matters relating to any dissipation of assets by the debtor prior to his bankruptcy; and
  3. any extension to the period of the debtor's bankruptcy by reason of a sequestration order being made in Australia was not sufficiently long to prevent the Court making an order against the debtor, and that the period would have been considerably less had the debtor not resisted the application.

Practical applications

The decision in this case practically demonstrates the limits of the Model Law's effect on local insolvency proceedings, and demonstrates the Court's willingness to allow the commencement or continuation of local insolvency proceedings despite the existence of related foreign proceedings, in the absence of an application for recognition being made under the Model Law or the assistance provisions of the Bankruptcy Act.

In particular, this decision shows that in circumstances where:

  • a local insolvency proceeding has been commenced;
  • an intervening foreign insolvency proceeding results in the appointment of an external administrator or trustee to the debtor, and the foreign representative does not seek recognition of the foreign proceeding in Australia; and
  • the local creditor wishes to continue with the local proceedings, and seeks the appointment of a trustee or external administrator to the debtor,

the courts will not refuse to make an order in the local proceedings merely because of the existence of the Model Law, or the assistance provisions under the Bankruptcy Act.

What is required, in order for foreign bankruptcy proceedings to take effect, is for the foreign proceeding to be recognised. The Model Law does not import automatic recognition or universal application of judgments, nor does section 29 of the Bankruptcy Act interfere with local proceedings, in the absence of an application being made by the foreign representative.

This decision also reaffirms the common law position that foreign judgments have no effect until such time as they are recognised.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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