ASX listed company Buccaneer Energy Limited (BCC) has opened a Chapter 11 Bankruptcy case in the US which has been recognised in Australia. Norton Rose Fulbright offices in Texas and Sydney brought the US bankruptcy proceedings and achieved full recognition of them in Australia, in this ground-breaking cross-border insolvency case.
Despite vigorous opposition from a party keen to seek the insolvent winding up of BCC in Australia, Justice Jagot in the Federal Court of Australia (the Court) recently found that BCC had its Centre of Main Interests (COMI) in Houston, and the Court recognised BCC’s United States Chapter 11 Bankruptcy case as a foreign main proceeding. The automatic effect of this is that no court proceeding or action against BCC’s property is able to be progressed in Australia without leave of the Court.
BCC, a publicly listed independent oil and gas company, was founded in 2006 and listed on the ASX, with offices in Sydney, New South Wales, Houston and Dallas, Texas and Anchorage and Kenai, Alaska. The Sydney office is small and part of a suite of serviced offices, with no employees, serving only to ensure compliance with ASX and related reporting requirements. The only remaining asset in Australia was $4,000 in a bank account.
BCC’s registered office is however in Sydney.
In contrast, BCC has a substantial operation in the United States both in its own right and through its subsidiaries, conducting extensive oil and gas exploration businesses including in Texas and Alaska. Executives were paid in US dollars and key executives in the US had business cards showing them as representatives of BCC. A large number of contracts, for example, for insurance and guarantees referring to BCC, identified US locations and choice of law. Accounting functions were performed in the US.
COMI or “establishment” in the balance
Article 16(3) of the UN Model Law on Cross-Border Insolvency, received into Australian law under the Cross-Border Insolvency Act 2008 (Cth), provides that, in the absence of proof to the contrary, the registered office is taken to be the location of the debtor’s COMI. Although the US operations of BCC are clearly substantial, the fact of having its registered office in Sydney meant that, in the absence of proof to the contrary, BCC’s COMI would be located in Sydney.
A finding of COMI being located in the place where the foreign proceeding is taking place, and its subsequent recognition as a foreign main proceeding, carries the benefit for a debtor of automatic stays on commencing or progressing litigation against it, executing against its assets and transferring or encumbering its assets, within the broad framework that would apply to Australian insolvency proceedings (under Article 20 of the Model Law). In the absence of this automatic relief, the debtor is left to seek similar protections only if it can satisfy the domestic court that it should grant the relief.
BCC’s Chief Restructuring Officer (and foreign representative) Mr Young sought recognition of BCC’s United States Chapter 11 case in Australia as a “foreign main proceeding” under the Model Law. This application was opposed by Chrystal Capital Partners, LLC (Chrystal) which claimed to be a creditor of BCC (although that claim was itself opposed). Chrystal opposed Mr Young’s application for recognition on the basis that the US Proceeding was not a foreign main proceeding, that BCC’s COMI was in Sydney and that BCC’s US operations were conducted by its subsidiaries.
Chrystal’s opposition was unsuccessful. Despite Chrystal pointing to certain regulatory and compliance activities being undertaken by BCC in Australia, the Court found that the weight of the evidence showed that BCC’s COMI was “objectively ascertainable” by third parties to be in the United States, based on the greater significance of its US operations as mentioned.
Chapter 11 for Australian companies?
Australian companies with a global presence can choose where they wish to start an insolvency proceeding. That is, Chapter 11 proceedings can in some circumstances be used instead of local voluntary administration or schemes of arrangement.
The Court will have regard to the commercial reality of a debtor’s operations in determining COMI for the purpose of giving the foreign insolvency proceedings priority over local interests, and will not bind itself rigidly to the presumption that COMI is the place of the debtor’s incorporation – even where the debtor carries out certain activities in that place.
This decision also demonstrates the global trend toward “modified universalism” in cross-border insolvency proceedings, where the Court will have regard to the purpose of the Model Law in allowing there to be one insolvency proceeding in respect of a debtor’s assets in multiple jurisdictions.
What remains unresolved is how the Model Law will be applied in Australia to more complex group enterprises, or where there are multiple foreign insolvency proceedings or multiple jurisdictions in which a debtor’s COMI may potentially be located. The effect of this decision is, however, that where an Australian registered company acts as a mere “letterbox”, and carries on the vast majority of its commercial operations (even if partially through its subsidiaries) in another jurisdiction, its COMI will be located in that other jurisdiction.
Things to consider: creditors and debtors
Creditors should take notice of where a multinational debtor operates. Where is its COMI? It is not sufficient simply to assume that a debtor’s COMI will be the location of its registered office. A creditor should have regard to the whole of the debtor’s operations, and consider, once it has formed a view on COMI, how that may affect the creditor’s local rights in insolvency.
Similarly, debtors should consider the potential for their COMI to be located outside the country of their registered office. Chapter 11 or foreign restructuring laws may offer better alternatives than local voluntary administration.
This case is one of a number of leading Australian cross-border insolvency cases successfully run by Norton Rose Fulbright, including recognition of the reorganization of an overseas airline, the recognition of a New Zealand liquidator in Australia with the power to execute a search warrant, the concurrent appointment of an Australian trustee in bankruptcy over an individual already bankrupt in New Zealand, and giving effect to foreign judgments in Australia on behalf of a US trustee.