The Cross-Border Insolvency Act 2008 (Cth) has been passed by Australia's Federal Parliament and received royal assent on May 26, 2008. The Act provides for the adoption and enactment as a law of Australia of the Model Law on Cross-Border Insolvency, which was adopted by the United Nations Commission on International Trade Law (UNCITRAL) in May 1997.
The explanatory memorandum to the Cross-Border Insolvency Act recognizes that complexities surrounding cross-border insolvencies result in uncertainty, risk and cost to businesses. The reforms aim to facilitate international trade in goods and services and integrate national financial systems with the international financial system.
The introduction of the law will mean that Australia joins the other countries which have adopted the UNCITRAL Model Law, including Great Britain, Japan, the United States, Canada and New Zealand.
When it commences, the UNCITRAL Model Law will:
- operate in Australia so as to provide access to Australian courts to a person administering a foreign insolvency proceeding for the purpose of seeking a temporary stay of proceedings in Australia against assets of an insolvent debtor;
- permit a foreign representative to commence an insolvency proceeding in Australia where the debtor is subject to a foreign proceeding, and participate in an Australian insolvency proceeding in relation to that debtor;
- allow foreign creditors (with limited exceptions) the same rights as Australian domiciled creditors regarding the commencement of and participation in insolvency proceedings in Australia;
- apply the concept of ‘centre of main interest' to allow a court to determine whether a proceeding is a ‘foreign main proceeding' or a ‘foreign non-main proceeding'; and
- provide a legislative framework for cooperation and coordination between courts and insolvency practitioners of different jurisdictions.
Australian Specific References
The UNCITRAL Model Law provides for adopting states to modify or omit existing provisions, or include new provisions. UNCITRAL recommends that an adopting state make as few changes as possible to the text of the UNCITRAL Model Law when enacting it.
Australia has followed this approach, with the anticipated advantage that international jurisprudence and experience in interpreting and dealing with the UNCITRAL Model Law will assist Australian courts to interpret the provisions of the Cross-Border Insolvency Act.
The Cross-Border Insolvency Act provides that the UNCITRAL Model Law as modified by the Act is to take effect as a law of Australia. The UNCITRAL Model Law is a schedule to the Act.
The major Australian elements introduced by the Act are as follows:
- The UNCITRAL Model Law has effect as a law of Australia in both personal and corporate insolvency, and references to the laws of the enacting state are treated as a reference to the Bankruptcy Act 1966 in the case of personal insolvency and Chapter 5 of the Corporations Act 2001 in the case of corporate insolvency.
- Australia can prescribe by regulation the removal of particular entities (or classes of entity) from the operation of the UNCITRAL Model Law.
- The Federal Court of Australia will have exclusive jurisdiction in proceedings under the UNCITRAL Model Law relating to individual debtors, which reflects the fact that bankruptcy matters are now dealt with in federal courts. Both the federal court and state supreme courts will have jurisdiction under the UNCITRAL Model Law where the entity involved is not an individual.
- Whenever the UNCITRAL Model Law refers to a person or body administering a reorganization or liquidation under the law of Australia, it is taken to be a reference to a trustee in bankruptcy in the case of an individual, and otherwise to a registered liquidator within the meaning of Section 9 of the Corporations Act.
- A foreign representative applying in Australia for recognition of a foreign proceeding is obliged to identify and report on all foreign proceedings in respect of the debtor, and must also report on any Australian proceedings under the Bankruptcy Act, any appointment of a receiver, controller or managing controller, or any proceedings under Chapter 5 or Section 601CL of the Corporations Act. This is an ongoing disclosure obligation imposed on the foreign representative in respect of both foreign and Australian proceedings.
Bankruptcy Act or Chapter 5 of the Corporations Act.
It is likely that authorized deposit-taking institutions (banks) and insurance companies will be exempted from the operation of the UNCITRAL Model Law via regulations.
The UNCITRAL Model Law will not apply to the external Australian territories of Christmas Island and the Cocos (Keeling) Islands, which are not part of Australia as defined in Section 5(1) of the Cross-Border Insolvency Act, nor to receiverships and controllerships in general (ie, those governed by Part 5.2 of the Corporations Act) or a winding-up not on the grounds of insolvency.
Access to Australian Courts
Both a foreign representative and foreign creditors are entitled to apply to Australian courts directly. The foreign representative or creditor is not taken to have submitted to an Australian court's jurisdiction for any purpose other than the relevant application.
Equal Treatment of Foreign Creditors
The UNCITRAL Model Law explicitly provides that foreign creditors have the same rights as Australian creditors to commence and participate in an Australian insolvency. Foreign creditors (other than foreign tax or social security creditors) must not be ranked lower than unsecured claims of other creditors simply because they are foreign.
Recognition of Foreign Proceedings
Article 15 of the UNCITRAL Model Law, when read with Section 13 of the Cross-Border Insolvency Act, provides that any application for recognition of a foreign proceeding must be accompanied by a statement identifying all foreign and Australian proceedings (including any receivership or controllership) in respect of the debtor that are known to the foreign representative. There is an ongoing duty of disclosure in this regard.
Centre of Main Interest
If a foreign proceeding is recognized, the Australian court will be required to determine whether it is a foreign main proceeding or a foreign non-main proceeding. The criteria for such a determination are whether the proceeding is taking place in the state where the debtor has the centre of its main interest or where the debtor has an 'establishment' (ie, a 'place of operation where the debtor carries out non-transitory economic activity with human means and goods and services').
There is a substantial body of overseas law governing the determination of a debtor's centre of main interest and the explanatory memorandum envisages that this will be utilized by Australian courts.
Presumption of Insolvency and Stay of Proceedings
If a proceeding is a foreign main proceeding, insolvency is presumed and the UNCITRAL Model Law allows for a stay of the same scope and effect against the debtor as if the stay or suspension arose under the Bankruptcy Act or the Corporations Act in relation to an Australian bankruptcy or insolvency.
Cooperation with Foreign Courts or Representatives
The scheme of cooperation envisaged by Articles 25 to 27 in Chapter IV of the UNCITRAL Model Law sets out a streamlined approach for communication between Australian courts and foreign courts or representatives.
The explanatory memorandum explicitly states that this enactment is not intended to restrict other means by which a court can choose to cooperate.
The Cross-Border Insolvency Act also provides that if a provision of the UNCITRAL Model Law or the Cross-Border Insolvency Act is inconsistent with Section 29 of the Bankruptcy Act, the provisions of the UNCITRAL Model Law or the Cross-Border Insolvency Act will prevail.
A similar pronouncement is made in respect of Division 9 of Part 5.6 of the Corporations Act. This is to overcome potential inconsistencies created by the Bankruptcy Act and the Corporations Act, which provide for mandatory obligations on courts to assist only courts from certain prescribed countries, but gives a discretion to the court in relation to other foreign courts as to whether to provide assistance. Part 5.7 of the Corporations Act concerns the winding-up of bodies other than companies and does not provide for recognition of foreign insolvency proceedings.
Articles 28 to 30 of the UNCITRAL Model Law, as adopted by the Cross-Border Insolvency Act, set out the procedure where a foreign main proceeding or a foreign proceeding have been recognized by an Australian court, and how coordination is to occur where there is more than one proceeding.
After recognition of a foreign main proceeding, the commencement of an Australian proceeding against a debtor will be prevented unless the debtor has assets in Australia and provided that the action is limited to the assets of the debtor in Australia. If there are no assets in Australia, the Australian court will not have jurisdiction.
Once a foreign main proceeding is recognized, an Australian proceeding can still have limited extra territorial cross-border reach where necessary to other assets that should be administered in the Australian proceeding. For example, where a meaningful administration locally may have to include assets abroad, particularly when there is no foreign proceeding necessary or available in the state where the other assets are located. This is subject to the qualification that the extension to foreign assets must be necessary to implement cooperation and coordination under Articles 25, 26 and 27.
The Australian court is to cooperate to the maximum extent possible with foreign courts or foreign representatives and is permitted to communicate directly with them. Likewise, the trustee in bankruptcy or a registered liquidator shall, in exercising their functions, cooperate to the maximum extent possible with foreign courts and foreign representatives subject to the supervision of the court.
Commencement of an Australian proceeding does not prevent or terminate the recognition of a foreign proceeding. However, the pre-eminence of the local Australian proceeding is maintained over the foreign proceeding, mainly by review and modification of any terms of relief made in the foreign proceeding to ensure consistency with the Australian proceeding.
This must be done in such a way that any relief granted on an application for recognition or the actual grant of recognition under Articles 19 and 21 respectively must be consistent with the Australian proceeding.
Other effects of foreign recognition include that the relief already granted to the foreign proceeding is reviewed or modified or even terminated to ensure consistency with the local proceeding.
If the foreign proceeding is a main proceeding, the automatic effects of recognition under Article 20 of the UNCITRAL Model Law can be modified and terminated if they are inconsistent with the local proceeding. If a local proceeding is pending when recognition is accorded to the foreign proceeding as a main proceeding, Article 20 does not automatically apply.
It was previously unclear whether the UNCITRAL Model Law, as modified by the Cross-Border Insolvency Act, would apply to voluntary administrations under Part 5.3A of the Corporations Act. The explanatory memorandum provides that:
"[A] registered liquidator may be appointed to administer a range of different proceedings under Australian insolvency law. These include for example being appointed to act as an administrator of a company. It is intended that the reference to a registered liquidator in Clause 11 of the bill will enable persons registered in Australia under that title to exercise all functions and powers under the [UNCITRAL] Model Law, regardless of whether they are appointed as a liquidator in an Australian proceeding or some other capacity."
It is now clear that a voluntary administrator is subject to the UNCITRAL Model Law, as only registered liquidators are entitled to be appointed as administrators by virtue of Section 448B of the Corporations Act.
Adoption of the UNCITRAL Model Law as proposed by the Cross-Border Insolvency Act will facilitate access by overseas insolvency practitioners to Australian courts, which are given the capacity to deal with cross-border issues in a more streamlined way.
Cooperation between courts, both Australian and foreign, in respect of insolvency proceedings and between the insolvency practitioners which administer those proceedings, can be governed by the coordination provisions of the UNCITRAL Model Law.
Any uncertainty as to whether a voluntary administrator is subject to the UNCITRAL Model Law has been removed by the explanatory memorandum.
Commencement date of the Cross-Border Insolvency Act was 1 July 2008.
The Cross-Border Insolvency Act applies to local proceedings whenever they were or are commenced, but in respect of foreign proceedings it applies only to those that commence after the commencement of the Act.
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.