The recent decision of Ackers (as joint foreign representative) v Saad Investments Company Limited; In the matter of Saad Investments Company Limited (in official liquidation) [2013] FCA 738 held that the UNCITRAL Model Law on Cross Border Insolvency did not prevent the Court from making provision for pari passu payment of local tax debts and penalties from a debtor’s local assets before remitting them to the debtor’s centre of main interests (being “the place the debtor conducts the administration of his interests on a regular basis and is, therefore, ascertainable by third parties”).

Facts

On 18 September 2009, the Grand Court of the Cayman Islands ordered that Saad Investments be wound up. Saad was subsequently issued with notices of assessment and a penalty from the Commissioner of Taxation (Commissioner) in Australia. Although Saad had never ‘carried on business’ in Australia it had made a taxable gain from its disposal of a large parcel of shares in an Australian company.

A letter enclosing a proof of debt for $83,271,545.70 was sent to the liquidators, in the Cayman Islands, on 3 December 2009 which also sought information regarding whether Saad had any assets in Australia at the date of the liquidator’s appointment.

On 22 October 2010 Justice Rares in the Federal Court recognised the proceedings in the Grand Court of the Cayman Islands as a ‘foreign main proceeding’ pursuant to the UNCITRAL Model Law on Cross Border Insolvency (2010 orders). The orders were given on the basis of two undertakings; first, by the Commissioner not to issue any further notices without giving 14 days written notice and secondly, by the liquidators not to remit outside of Australia the proceeds of any realisation or sale of Saad’s assets without giving 14 days notice.

On 21 September 2010, the solicitors for the liquidators/foreign representatives gave the Commissioner 14 days notice of their intention to remit assets and the proceeds of their realisation out of Australia. The Commissioner subsequently sought orders in the Federal Court of Australia preventing the foreign representatives from remitting to the Cayman Islands US$7 million in proceeds and orders for making provision for the pari passu distribution of Saad’s Australian assets (pari passu meaning that each creditor is paid proportionately from the total asset pool realised in accordance with the amount of their claim).

The Commissioner sought modification of the 2010 orders pursuant to Article 22 of the Model Law on the basis that the Commissioner’s interests as a creditor were not ‘adequately protected’. His complaint was that if the 2010 orders were permitted to operate unmodified, he would not be entitled to be treated as he would have been had Saad been wound up in Australia. This was as a result of the Cayman Islands’ legislation which reflected the rule of public international law that claims by or on behalf of a foreign state to recover taxes are unenforceable.

The foreign representatives submitted in response that the Commissioner had no right to a pari passu distribution because no Australian court had jurisdiction to wind up the company and even if it did, the principle of ‘modified universalism’ in private international law would be better promoted by remitting the Australian assets to its centre of main interest. Modified universalism is an international law principle which states that courts should cooperate with the courts of the country of the principal liquidation so as to ensure that all of the insolvent company’s assets are distributed to creditors under a single system distribution.

Additionally, the foreign representatives argued that allowing the 2010 orders to operate without variation would not be ‘manifestly contrary to the public policy’ of Australia as submitted by the Commissioner.

Decision

Justice Rares noted in the present case that there were policy grounds for not remitting the assets to the Cayman Islands. The purpose lying behind the principle of ‘modified universalism’ is the achievement of a proper and fair distribution to creditors of a cross-border insolvent. It was found highly unlikely that creditors would expect that a local sovereign could not, let alone should not, be able to collect tax due before funds were remitted from its jurisdiction.

His Honour also stated that the Model Law is silent on how domestic taxation, social security claims and other legislation may operate to diminish the debtor’s estate that will become available for remission. It was found that it should be taken not to affect the rules of private or international public law except insofar as it expressly provides.

Ultimately, Justice Rares was convinced that the interests of the Commissioner, as an unsecured creditor of Saad, were not adequately protected under the 2010 orders:

“It would not be fair to a domestic sovereign, its taxpayers or others doing business in its territory…for a debtor’s estate to be freed of any taxation obligation except in the debtor’s centre of main interests, merely because the debtor was subject to a cross-border insolvency governed in another jurisdiction…”

For these reasons, it was found that the 2010 orders should be modified to permit the Commissioner to recover up to the pari passu amount that he would be entitled to receive as a dividend were he entitled to be admitted to prove for the tax debts as an unsecured creditor.

Implications

This decision indicates that the Commissioner of Taxation will be able to recover, on a pari passu basis, any local tax debts of a cross-border insolvent prior to assets being removed from Australian jurisdiction.