The Australian Federal Court has clarified the limitations for foreign entities and their office holders in pursuing action in Australia to access the voidable transaction provisions of the Australian Corporations Act.

This case concerned a luxury yacht named “Dragon Pearl” that was sold for AU$4,492,034.82. The proceedings were brought by Mr King, the US Chapter 7 bankruptcy Trustee to Zetta Jet Pte Limited (a Singaporean company) which was subject to liquidation proceedings in the US. Mr King alleged that the Dragon Peal had been purchased from Zetta with misappropriated funds and was therefore held on constructive trust for Zetta by the yacht’s registered owner. Zetta sought return of the yacht from Linkage Access Limited (“LAL”), the current owner and previously Dragon Pearl Limited (“DPL”) the previous purchaser of the yacht.

Previous Proceedings

In earlier proceedings Zetta asserted that they had proprietary maritime claims to the possession, title and ownership of the Dragon Pearl by virtue of the constructive trust arising from the misappropriated funds. The courts, however, found no trust had been established and the claim was dismissed. An arrest warrant for the vessel was dismissed. Following this decision Zetta attempted to appeal the decision, but was rejected by the court due to their failure to prove an error in the process.

Soon after the appeal, the Dragon Pearl was sold to LAL for A$1 and as a result Zetta issued fresh proceedings alleging that LAL was liable as a result of them knowingly receiving the Dragon Pearl in breach of trust. Zetta further argued that the value of the sale at $1 was voidable under the voidable transaction provisions (S.588FE) of the Australian Corporations Act 2001 (“the Act”), seeking injunctive relief to stop LAL from removing the vessel from Australian waters or transferring title to a third party.

Reviewing the proceedings on the same facts, the court dismissed the claim against LAL and declined the request for injunctive relief on the basis of Res Judicata, which prevents a party from re-litigating any claim or defence already litigated in the interest of ensuring the finality of judgments and conserving judicial resources.

Following this unsuccessful appeal (but prior to the second appeal) Zetta applied to the Federal Court of Australia for recognition of the bankruptcy proceedings as a “foreign proceeding” within Article 2(a) of the UNCITRAL Model Law on Cross-Border Insolvency. Alongside recognition of this order Zetta obtained an interim injunction under Article 21 of the Model Law, preventing removal of the Dragon Pearl from Australian waters.

Second Appeal

On second appeal to the full court the Appeal Judge decided that whilst the original trial Judge was correct in refusing the injunction on the basis of Res Judicata, the submission that the sale of vessel was a voidable transaction had not been considered. That issue was remitted back to the trial Judge.

Voidable Transaction Decision

On this basis Zetta progressed its application for relief under S.558FF of the Act, a provision which the Defendants argued only applies to those companies as defined under S.9 of the Act as a corporation which is registered or carries on business in Australia. Zetta submitted that the effect of Article 23 was much broader and expanded the operation of S.588FF so that it applied to these transactions notwithstanding that it did not fit the definition of a company within the meaning of S.9 of the Act.

Persuaded by the Defendant’s submission, the Federal court determined that as Zetta was incorporated under the laws of Singapore and did not carry on business in Australia the purchase of the Dragon Pearl could not be a transaction of the company within the meaning of s.588FF, as Zetta was not a company under S.9 of the Act. Whilst the Model Law provided foreign representatives with standing, simply having the foreign insolvency proceeding recognised does not in itself satisfy the requirements needed under the voidable transaction provisions of the Act. Namely to access the provisions under S. 558FF of the Act the foreign entity must fulfil the definition of “company” as defined by S.9 of the Act.

The court therefore dismissed the appeal and ordered summary judgment in favour of the Defendants, reiterating that in order to be successful in such a claim a local liquidation of the foreign entity would still be needed in order to successfully initiate the claw-back provisions.