In Akers (as a joint foreign representative of Saad Investments Company Ltd) (in official liquidation) (a company registered in the Cayman Islands) v DCT [2014] FCAFC 57 the Federal Court of Australia recently upheld an earlier landmark decision concerning the proper construction and interpretation of the Model Law on Cross Border Insolvency on the United Nations Commission on International Trade Law, made part of Australian Law by the Cross-Border Insolvency Act 2008 (Cth). Associate, Stefano Calabretta discusses.

Objects of Model Law – the concept of “recognition”

One of the consequences of a transnational corporation becoming insolvent is that its assets become subject to the individual insolvency laws of the particular countries in which they are located. To help overcome the potential abundance of insolvency regimes and the administrative issues this can produce, the Model Law on Cross Border Insolvency (Model Law) aims to establish a system whereby a transnational company’s insolvency is run out of the company’s centre of main interests (COMI) alone.

Under Article 20 of the Model Law, a transnational company’s assets in jurisdictions outside its COMI are quarantined from the local insolvency laws of those jurisdictions. Therefore, a local creditor would be prevented from commencing or continuing enforcement proceedings against the company in that jurisdiction.  However,  quarantining  would only apply in a country that has adopted the Model Law (which Australia has) and if a Court in that country has granted what is known as “recognition” under the Model Law.

Facts

Saad Investments Company Limited (SAAD) was a company incorporated in the Cayman Islands and was involved in money market operations and investments in marketable securities and real estate in various locations around the world. Prior to August 2008, SAAD held shares in a number of publicly listed Australia companies, including shares in Sunshine Gas Limited (Sunshine). In August 2008 SAAD sold its shares in Sunshine, which sale gave rise to an asserted tax liability.

In September 2009 the Grand Court of the Cayman Islands made orders that SAAD be wound up. The Deputy Commissioner of Taxation (DCT) then contacted SAAD’s joint liquidators advising them that it was a creditor of SAAD and in November 2009 issued a notice of assessment for the year ending 30 June 2009 totalling approximately $83 m (Tax Debt). The DCT then lodged a Proof of Debt in the liquidation.

In September 2010 the joint liquidators filed an application in the Federal Court of Australia seeking “recognition” under the Model Law. Recognition orders were made in October 2010. 

Modification of 2010 recognition orders

The matter  then  came to  a  head two years  later  when  in  September  2012,  the joint liquidators gave the DCT 14 days’ notice of their intention to remit SAAD’s Australian  assets  to  the  Cayman  Islands. The  problem  for  the  DCT  was  twofold. First,  the  effect  of  the  recognition  orders was that he could not enforce his claim against SAAD in Australia. To add salt to the DCT’s wounds, under the laws of the Cayman Islands, claims for foreign taxes are  unenforceable.  Therefore,  the  DCT was faced with the very real possibility of ending up with nothing.

Finding himself between a rock and a hard place, the DCT filed an interlocutory application in which he sought orders that the recognition orders be modified (Modification Orders), the effect of which would be to:

  • prohibit the joint liquidators from transferring SAAD’s Australian assets overseas
  • allow the DCT to commence enforcement action against SAAD and its Australian assets in relation to the Tax Debt.

The DCT’s application was heard in November 2012. Ultimately the Modification Orders were made by the Federal Court of Australia in August 2013. The joint liquidators appealed.

Appeal

The joint liquidators’ appeal was determined by Chief Justice Allsop and Justices Robertson and Griffith on 14 May 2014. They dismissed the appeal and upheld the primary judge’s decision below. On the surface, the decisions are inconsistent with the aim and objectives of the suspension provisions in Article 20 of the Model Law as they allow the DCT to take such enforcement steps as Australian Law permits against SAAD in Australia.

The main arguments advanced by the joint liquidators included:

  • that the Modification Orders were inconsistent with the suspension provisions of Article 20 of the Model Law
  • that section 468(4) of the Corporations Act 2001 (Cth), which provides that any attachment, sequestration, distress or execution put in force against a company in liquidation after the commencement of the winding up of a company is void, would apply in this case to the DCT’s Notice of Assessment
  • that the DCTs’ decision to lodge a proof of debt in the Cayman Islands liquidation constituted a submission to the jurisdiction of the Cayman Islands (where foreign tax claims are unenforceable) and the DCT was therefore estopped from making a claim in Australia.

The Court rejected all the arguments advanced by the joint liquidators. It observed that there is scope in Article 22.3 of the Model Law for the Court to modify the suspension provisions in Article 20 and also referred to the “public policy” provision under Article 6 and the primary judge’s observations at [45] in response to the DCT’s public policy arguments:

It is fundamental in any society that its government is able to require its citizens and others who operate a business or reside within that society, to pay taxation so as to maintain the State. I would simply observe that, without deciding the issue, there is thus considerable force in the Commissioner’s reliance on Art 6.

The above passage highlights that the decisions (and perhaps, to a greater extent, the decision below) were clearly motivated by public policy. It will be interesting to observe how Courts approach similar applications in the future, particularly those without the underlying public policy ingredients.