Model Law on Cross-Border Insolvency

Readers will recall that on 23 September 2016 we posted an article about recognition under the UNCITRAL Model Law on Cross-Border Insolvency (Model Law) of the Korean rehabilitation proceedings for Hanjin Shipping.

After granting interim recognition of the rehabilitation proceedings in September 2016, the Federal Court granted final recognition orders on 11 November 2016. The final orders obtained and the court’s reasons for granting the orders are significant as they answer the question of how the scope of the automatic stay is determined upon recognition of a foreign main proceeding of a corporate debtor under the Model Law.

The confusion about the extent of the stay had arisen because article 20 of the Model Law (which provides for the automatic stay) is subject to section 16 of the Cross-Border Insolvency Act 2008 (Cth) which states that:

For the purposes of paragraph 2 of Article 20 of the Model Law (as it has the force of law in Australia), the scope and the modification or termination of the stay or suspension referred to in paragraph 1 of that Article, are the same as would apply if the stay or suspension arose under:

• the Bankruptcy Act 1966 (Cth), or
• Chapter 5 (other than Parts 5.2 and 5.4A) of the Corporations Act 2001 (Cth), as the case requires.

Chapter 5 of the Corporations Act covers schemes of arrangement, voluntary administration, court-ordered liquidation and voluntary liquidation. No stay applies to schemes of arrangement and the stays which apply in voluntary administration, court-ordered liquidation and voluntary liquidation are all different.

Rares J in Hur v Samsun Logix Corporation [2015] FCA 1154; (2015) 238 FCR 483 at [21] described the operation of these provisions as “beguilingly ambiguous, since the Corporations Act has a variety of different stay provisions that differentially affect the position of secured creditors, sometimes at different points in the same overall process”.

In Hanjin, the court confirmed that the applicable stay is determined by the nature of the foreign proceedings compared to the nature of proceedings under the relevant Parts of the Corporations Act. This meant that the court had to identify which Parts of the Corporations Act would apply to the foreign proceedings if they were taking place under that Act.

Hanjin had entered rehabilitation proceedings under the Debtor Rehabilitation and Bankruptcy Act 2005 (Republic of Korea) (Rehabilitation Act). A partner of a law firm in Korea gave expert evidence about the operation of the Rehabilitation Act, explaining that:

• A debtor company may file for commencement of rehabilitation proceedings, which commence only when the court issues a commencement order.
• Upon commencement, the court appoints a custodian; usually an existing representative of the company unless the insolvency was caused by the representative, in which case the court will appoint an independent administrator (in this case, a director of Hanjin had been appointed as custodian for the purposes of the rehabilitation proceedings).
• The custodian has the power to conduct all of the debtor’s business and manage all of its property, subject to the court’s supervision. However, if/when the custodian intends to perform any of a designated list of acts affecting the debtor’s property or liability, approval from the court is required.
• The goal is to rehabilitate insolvent debtors by restructuring their debt pursuant to a rehabilitation plan approved by the creditors and the court.

The foreign representative argued and the court agreed that, whilst the rehabilitation proceeding had some characteristics in common with a scheme of arrangement, the proceedings most closely resembled voluntary administration and therefore the stay which should apply was that applicable to a voluntary administration. The court ordered that the stay be that which would apply in a voluntary administration under Part 5.3A of the Corporations Act.

The effect of this was that secured creditors without security over all or substantially all of the assets of Hanjin would be prevented from enforcing their security in Australia without leave of the court or consent of the foreign representative. This would prevent the holders of maritime claims in rem from from enforcing those claims by arresting ships. The court was cognisant of this, but was comforted that maritime claimants were required to bring an application to issue an arrest warrant and leave could be sought upon that application.

Key takeaways

When seeking recognition of a foreign main proceeding under the Model Law, foreign representatives need to put on evidence about the nature of the foreign proceeding so the court can determine which of the Australian insolvency proceedings the foreign proceeding most closely resembles and thus the nature of the automatic stay which applies. If the extent of the automatic stay will not be wide enough, additional orders should be sought under Article 22 of the Model Law.

This publication covers legal and technical issues in a general way. It is not designed to express opinions on specific cases. It is intended for information purposes only and should not be regarded as legal advice. Further advice should be obtained before taking action on any issue dealt with in this publication.