Appeal dismissed in creditor attempt to wind up foreign state airline - Insolvency/Bankruptcy

In a recent case involving PT Garuda, the national airline of Indonesia, the New South Wales Court of Appeal dismissed an appeal by two creditors seeking to wind-up the airline, concluding that PT Garuda enjoyed immunity under the Foreign States Immunities Act 1985 (Cth).

Key takeaways

Foreign companies that are 'separate entities' of a foreign state are immune from being wound-up by operation of the Foreign State Immunities Act 1985 (Cth).
While immunity will protect such entities from being the target of winding up proceedings, the immunity is unlikely to affect the winding up of an Australian registered company in which the relevant foreign entity has an interest (e.g. as a creditor of the insolvent company).
In this regard, the Court has made clear that the immunity does not extend to bankruptcy, insolvency or winding up in which a foreign state/separate entity has or claims an interest in property with which a proceeding is concerned.

In Greylag Goose Leasing 1410 Designated Activity Company v P.T. Garuda Indonesia Ltd [2023] NSWCA 134, two creditors had applied to wind up PT Garuda, the national airline of Indonesia, on the grounds that it failed to satisfy two creditors' demands for payment of debts totalling over US$400 million or otherwise on the basis that it was just and equitable to do so.

PT Garuda claimed immunity under section 9 of the Foreign State Immunities Act 1985 (Cth) (FSIA).

It was accepted by all parties that PT Garuda is a 'separate entity' of Indonesia for the purposes of the FSIA. Section 22 of the FSIA extended the general immunity in section 9 of the FSIA from the jurisdiction of Australian courts to separate entities of foreign states.

The creditors contended that section 14(3) of the FSIA qualified the operation of section 9 such that PT Garuda was not immune from the winding up proceedings. Section 14(3) relevantly provided that a 'foreign state is not immune in a proceeding in so far as the proceeding concerns... bankruptcy, insolvency or the winding up of a body corporate'.

Last year, Hammerschlag J of the Supreme Court of New South Wales dismissed the winding up applications on the basis that PT Garuda was immune from such proceedings under the FSIA. (Our analysis on the primary decision is available in our previously published TGIF here.)

The arguments on appeal

The creditors' overarching submission that section 14(3) of the FSIA exposed PT Garuda to winding up proceedings was underpinned by the following points:

the plain meaning of 'a body corporate' in section 14(3) could refer to both a body corporate that was a 'separate entity' under the FSIA and a body corporate more generally;
the presumption that a superior court's jurisdiction should be construed broadly; and
the context and purpose of section 14(3) of the FSIA as evident from the Australian Law Reform Commission's Report concerning Foreign State Immunity (the ALRC Report), namely, to give effect to a restrictive theory of foreign state immunity.

On appeal, the creditors advanced an alternative argument that even if the phrase 'winding up of a body corporate' in section 14(3) did not extend to a foreign body corporate, which was a separate entity in relation to a foreign state, the term 'insolvency' in section 14(3) was not so constrained. This would mean the applications to wind up Garuda on grounds of deemed insolvency fell within the exception to immunity.

The Court's reasoning

The New South Wales Court of Appeal (Bell CJ, Meagher and Kirk JJA agreeing) rejected each of the creditors' arguments.

First, the Court applied section 21 of the Acts Interpretation Act 1901 (Cth) to interpret the 'body corporate' in section 14(3) as a body corporate 'in and of the Commonwealth', as distinct from a 'separate entity in relation to a foreign state' which is defined under the FSIA to exclude bodies corporate established under Australian law.

Given the impossibility of subjecting a foreign state to insolvency proceedings, the Court considered the reference to 'a foreign state' is the subject rather than the object of section 14(3).

In any case, the Court held that the meaning of section 14(3) needed to be ascertained in the context of section 14 as a whole. In particular, the Court read section 14(3), which concerned judicial proceedings involving questions of property, in the context of sections 14(1) and (2). The Court focussed its attention on section 14(1) which codifies the longstanding rule that disputes concerning immovable property are heard locally.

The Court considered this reflected a common rationale that competing claims and asserted interests in property which arise in the administration of an estate, bankruptcy, insolvency and winding up proceedings should be resolved in one place at one time.

The Court also considered that the presumption that a superior court's jurisdiction should be construed broadly was inapplicable because section 14(3) was not a provision conferring a power to be exercised judicially. Additionally, that presumption did not require words to be given their broadest possible construction in spite of the context and purpose of the words and the consequences of a broad construction.

Third, the Court examined the ALRC report and observed that the terms of the report, read together with the primary and secondary legal materials to which it referred, indicated that the foreign state's claimed interest in property was the focal point of the legislation which introduced section 14(3), rather than a 'radical legislative initiative' to make 'a corporate... emanation of a foreign state... susceptible to winding up'.

Finally, the Court dismissed the alternative argument as ignoring the important context of the text of section 14 as a whole and the ALRC report.

Comment

The case reinforces that foreign companies that are 'separate entities' of a foreign state are immune from being wound-up.

However, the outer bounds of the scope of section 14(3) remain unclear. In particular, the Court approved the trial judge's observation that the FSIA would not make foreign companies that are 'separate entities' of a foreign state immune from:

recovery of property belonging to a corporation being wound up;
judicial determination of alleged voidable transactions under the Corporations Act 2001 (Cth) to which the foreign state entity was a party; and
attendance at compulsory examinations.

This case serves as a useful reminder of the complexities that can arise, and the matters that should be considered, when dealing with foreign states and their entities in a recovery/insolvency context.

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.