Australian Corporations Act not beholden to US Chapter 11 proceedings - Insolvency/Bankruptcy

This week's TGIF considers Legend International Holdings Inc (In Liquidation) v Indian Farmers Fertiliser Cooperative Ltd & Kisan International Trading FZE [2016] VSCA 151 in which it was held that s 581 does not prohibit a winding up order where Chapter 11 proceedings are on foot.

WHAT HAPPENED?

This case is an appeal from the decision of In the matter of Legend International Holdings Inc [2016] VSC 308 which was recently considered by our TGIF on 10 June 2016.

Decision at first instance

The trial judge was asked to determine whether a winding up order could be made against a registered foreign company (Company), in circumstances where it had filed for bankruptcy under Chapter 11 in the United States. The Company also sought recognition of the US proceedings under the Cross Border Insolvency Act 2008 and the Model Law to which that act gives force in Australia.

The Court found that the US proceeding was not a foreign main proceeding under the Model Law because its centre of main interests was in Australia, not in the US.

As a result, the winding up application was not automatically stayed and an order was ultimately made to wind up the Company.

The Appeal

On appeal, the Company argued that section 581 of the Corporations Act required the Court to 'act in aid of, and be auxiliary to' the US Bankruptcy Court by refraining from making the winding up order. The Company argued that the Court erred in ordering that it be wound up in circumstances where:

The Company was a US registered corporation;
The Company was, at the date of the winding up order, subject to extant Chapter 11 proceedings;
The US Bankruptcy Court has jurisdiction in an external administration matter (as required by section 581(2) of the Corporations Act); and
A winding up order would conflict with and impede the US Bankruptcy Court's conduct of the Chapter 11 proceeding.

Central to the Company's argument was the contention that there are inherent conflicting differences between a winding up in Australia and a Chapter 11 proceeding. That is, winding up in Australia is aimed at realisation and distribution of a company's assets to creditors, while Chapter 11 is focussed on the reorganisation and continued trading of the company.

Accordingly, the Company submitted that properly construed, s 581 of the Corporations Act means that a winding up order cannot be made where there is a Chapter 11 proceeding pending (except in limited circumstances).

COURT OF APPEAL'S FINDINGS

The Court did not accept the Company's arguments, holding that:

Section 581(2) of the Corporations Act does not mandate that the Court should have refrained from making a winding up order in the circumstances of this case. Rather, the Court was required to consider whether in all the circumstances it would be proper to provide aid and act in an auxiliary manner by not exercising the discretion to wind the Company up.
Very clear words would be required by Parliament to support a conclusion that an Australian court was obliged to refrain from exercising a discretionary power to wind a company up simply because the Company had filed for bankruptcy in the US. Such words are not found in section 581 of the Corporations Act.
The Court at first instance did not make the decision based upon a wrong legal principle or mistake as to the facts such that the decision should be overturned. In fact, the Court noted that it too would have made the winding up order.
A winding up order made in Australia is not the antithesis of, and would not be incompatible with, a Chapter 11 proceeding, nor would it defeat the purpose of the US proceeding. This was particularly obvious in this case where the US proceeding had been adjourned to a date after the hearing of the winding up application in order to ascertain the status of the winding up application.
It is not uncommon for there to be dual insolvency administrations where international companies are concerned – in fact, the Model Law expressly contemplates it.

COMMENT

This decision illustrates the fact that in the absence of a very clear intention from Parliament, Australian recovery proceedings will not automatically be beholden to recovery proceedings in another jurisdiction.

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.