The recent Federal Court of Australia decision in Yu v STX Pan Ocean Co Ltd (South Korea), in the matter of STX Pan Ocean Co Ltd (receivers appointed in South Korea) [2013] FCA 680, highlights that the Court will be reluctant to grant additional relief to a foreign representative under the Cross Border Insolvency Act 2008 (Cth) where the additional relief sought would adversely affect the rights of creditors.

Facts

STX Pan Ocean Co Ltd (STX) is a bulk shipping company with its registered office in South Korea.  It is also insolvent and in June 2013, Mr Yu was appointed as receiver of STX.  A Korean receiver is akin to an Australian Court appointed liquidator.

Mr Yu applied to the Federal Court for recognition as a “foreign representative” under the Model Law on Cross-Border Insolvency, (Model Law) which is incorporated in Australia through the Cross-Border Insolvency Act 2008 (Cth) and for recognition of the Korean administration as the “foreign main proceeding” with respect to STX. 

Mr Yu also applied for additional relief under Article 21 of the Model Law in an attempt to mitigate against the risk that ships within STX’s fleet may be arrested or seized under the Admiralty Act 1988 (Cth) or that a creditor may attempt to exercise rights pursuant to a maritime lien.  Article 21 allows the Court to grant additional relief where it is necessary in order to protect the assets of the debtor or it is in the interests of creditors to do so. 

In short, the effect of the additional relief sought by Mr Yu was to restrain secured creditors from enforcing a charge against the property of STX without first obtaining the leave of the Court or the consent of Mr Yu.  Mr Yu’s concern was that Australian creditors of STX may take steps to enforce maritime liens or to arrest ships owned and operated by STX as they call into Australian ports.  If ships were arrested, this would have a devastating impact on STX business and had the potential to:

  • cause a chain reaction of delays to STX’s business operations as those vessels were scheduled to depart Australia for ports all around the world; and
  • severely damage the possibility of a successful reorganisation or restructure of the STX (which was, in the opinion of Mr Yu in the benefit of all creditors).

The decision

His Honour Justice Buchanan was content to make orders recognising Mr Yu as the foreign representative and the South Korean receivership as the foreign main proceeding.  However, his Honour declined to grant the additional relief sought by Mr Yu.

The Federal Court held that it was not in the interests of creditors to grant the additional relief sought and made the following observations:

  • Recognition of the South Korean receivership as the foreign main proceeding under Article 20 had a number of consequences, including an automatic stay of execution against the STX’s assets and of recovery proceedings.
  • Article 20 of the Model Law preserves the operation of local insolvency laws.  Relevantly, this included sections 471B and 471C of the Corporations Act.
  • With respect to the potential arrest of a ship under the Admiralty Act, his Honour could see no reason to depart from the procedure in s471B, which would require leave of the Court if an arrest warrant was required.
  • His Honour noted that maritime law has developed its own security regimes, which remain generally observed around the world.  His Honour was satisfied that a maritime lien was a “charge” for the purpose of s471C and that no leave would ordinarily be required to enforce such a maritime lien against a company in liquidation.  If a maritime lien were to arise in the present case, his Honour could see no reason why it should not be afforded the ordinary protection under s471C and Mr Yu had not made out a case as to why the ordinary operation of the Model Law should be departed from.

Comment

The Model Law is a useful tool for effectively managing cross-border insolvency matters.  But it is important to realise that it has limitations and that the Courts will be reluctant to grant additional relief if the relief sought will adversely impact on rights that creditors may otherwise have had, whether under the Corporations Act or otherwise.