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Federal Court clarifies the scope of stays under the Model Law on Cross-Border Insolvency

by on March 14, 2017

This article was written by Stewart Maiden at The Victorian Bar and first appeared on the Commercial Bar Association of Victoria website.

In Suk v Hanjin Shipping Co Ltd [2016] FCA 1404, the Federal Court (a) provided guidance on how courts are to determine what stay arises upon recognition of foreign main proceedings under the Cross-Border Insolvency Act 2008; and (2) demonstrated that such recognition can cause maritime lien actions to be stayed.

The Cross-border Insolvency Act 2008 (Cth) (the CBIA) gives the force of law in Australia to the UNCITRAL Model Law on Cross-border Insolvency (Model Law). Under the Model Law, a ‘foreign representative’ can apply to the Federal Court of Australia or the Supreme Court of a state or territory to have a foreign insolvency proceeding recognised in Australia as a ‘foreign main proceeding’. Several consequences flow from recognition, perhaps the most important of which is an automatic stay of actions or proceedings in Australia concerning the debtor’s assets, rights, obligations or liabilities: Model Law, art 20.

Section 16 of the CBIA provides that for the purpose of article 20:

“the scope and the modification or termination of the stay or suspension … are the same as would apply if the stay or suspension arose under: (a) the Bankruptcy Act 1966; or (b) Chapter 5 (other than Parts 5.2 and 5.4A) of the Corporations Act 2001; as the case requires.”

Suk v Hanjin Shipping Co Ltd [2016] FCA 1404 was the first occasion on which an Australian court was called on to deliver reasons concerning the interaction between s 16 and article 20.

Hanjin Shipping Co Ltd was the world’s ninth-largest shipping company. It entered a rehabilitation proceeding under the Debtor Rehabilitation and Bankruptcy Act 2005 of the Republic of Korea. The plaintiff was appointed the ‘custodian’ of the rehabilitation by the Korean Court. He applied to the Federal Court for recognition of the Korean proceeding under the CBIA. Jagot J found that the criteria for recognition were present, and that Hanjin’s ‘centre of main interests’ was in the Republic of Korea, and so recognised the rehabilitation proceeding as a foreign main proceeding.

Such an order was uncontroversial: Hanjin is the sixth case in which Korean rehabilitation proceedings have been recognised as foreign proceedings under the CBIA. The unusual features of Hanjin were:

  1. the plaintiff’s application for a declaration in the following terms:

… for the purpose of section 16 of the Cross-Border Insolvency Act 2008 (Cth) and article 20(2) of the Model Law, the scope and modification or termination of the stay referred to in article 20(1) of the Model Law are the same as would apply if the stay arose under Part 5.3A of the Corporations Act 2001 (Cth); and

  1. the plaintiff’s application for orders under article 21 to the effect that maritime liens could not be enforced without the written consent of the plaintiff or further order of the Court.

In respect of the declaration sought, the Court accepted the plaintiff’s submission that:

  1. section 16 and article 20 required the Court to identify the type of proceeding under the relevant provisions of Ch 5 of the Corporations Act 2001 (Cth) (the Corporations Act) which the foreign proceeding most closely resembled, with the effect that the stay imposed by article 20 would be that which was provided for that type of proceeding in the Corporations Act; and
  2. there is no discretion involved in the determination of which stay operates under those provisions.

Jagot J observed that the task required was “not straightforward”, echoing the observation of Rares J in Hur v Samsun Logix Corporation (2015) 238 FCR 483, [21] that the operation of the relevant provisions was “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, having regard to expert evidence given by a Korean lawyer called on behalf of the plaintiff as to the operation of the Korean statute, Jagot J accepted that while the Korean rehabilitation proceeding was similar in some respects to a scheme of arrangement under Part 5.1 of the Corporations Act, it most closely resembled a voluntary administration under Pt 5.3A. As a result, her Honour declared that the scope of the stay which applied was the same as that which applied to voluntary administrations.

The effect of that declaration was that no proceeding against Hanjin, including a proceeding to enforce a maritime lien, could be begun or proceeded with save with the foreign representative’s written consent or with the leave of the Court.

That effect was a consequence of recognition of the foreign main proceeding and the operation of article 20. Thus it applied notwithstanding reservations, expressed in numerous earlier cases and in the extra-curial observations of several judges, about allowing recognition of a foreign proceeding against a shipping company to interfere with the exercise of rights under maritime liens.

Jagot J also went on to grant discretionary relief to the plaintiff under article 21, further restraining the enforcement of charges, liens or pledges and the exercise of the power of arrest against any of Hanjin’s property. The exercise of the discretion to make those orders appears to have been informed by her Honour’s implicit observation that:

  1. as the restraints were subject to consent of the plaintiff or further orders of the Court; and
  2. arrest proceedings required an application to court in any event –

the rights of maritime lien holders were adequately protected by the orders made.

Hanjin demonstrates the importance of having the scope of the Article 20 stay determined by the Court at the time that Model Law recognition orders are made. If such a determination is sought, the applicant may have to adduce expert evidence as to the nature of the foreign proceeding, in order to equip the court to determine its closest local analogue. The case also illustrates the flexibility of the discretionary relief available under article 21, even in the special case where maritime creditors’ interests are involved.

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