A US$12.35 million award against Legend International Holdings has unwittingly become caught between the United States and Australian insolvency regimes. Having filed for Chapter 11 protection in the United States some two days before the hearing of a winding-up application by an Australian court, the enforcement of the award will now effectively benefit from a temporary global stay, bringing into sharp focus the impact of insolvency appointments on the enforcement of obligations.
Enforcement against a company that is subject to the appointment of an external administrator appointed pursuant to Australian law can raise some interesting and specific issues that may not arise in other jurisdictions.
Despite careful negotiation of governing law and arbitration clauses, if a contractual counterparty becomes subject to external administration under Australian law, a party will no longer automatically have the benefit of these clauses. Instead, the Australian insolvency regime will intervene and the party will be required to consider:
- what rights the party has as against the company in administration or liquidation in relation to enforcing an existing debt or claim;
- whether the party is able to bring a new proceeding against the company and, if so, by what means; and
- what impact the external administration may have on commencing or proceeding with an arbitration and the enforcement of an arbitral award.
This article considers the above matters in relation to companies that are subject to voluntary administration under Part 5.3A of the Corporations Act 2001 (Cth) (Act) and liquidation.
Stay of enforcement and proceedings during formal insolvency processes
Depending on the form of external administration a company finds itself in, certain provisions of the Act have the effect of staying proceedings and enforcement processes against a company in external administration although each is stated in slightly different terms.
The purpose of these provisions is to ensure that the role of the administrator or the liquidator is not frustrated or interfered with or distracted by other matters such as legal proceedings. It also prevents a particular creditor from gaining an advantage over the general body of creditors by proceeding to judgment and execution against the property of an insolvent company.
Summary of stay and enforcement provisions
|External administration type||Stay of enforcement||Stay of proceedings|
|Voluntary administration||Except with leave of the Court, no enforcement process in relation to the property of the company can be begun or proceeding with: s 440F
Secured parties may exercise their property rights in specified circumstances.
|A party requires the administrator’s written consent or leave of the Court to begin or proceed with “proceeding in a court” against the company or in relation to any of its property: s 440D|
|Winding-up||Except with leave of the Court, a person cannot begin or proceed with an enforcement process in relation to property of the company: s 471B
Secured creditors retain the right to realise or otherwise deal with their security after winding-up: s 471C
|No “action or other civil proceeding” or “proceeding in a court” is to be proceeded with or commenced against the company or in relation to property of the company except by leave of the court: s 471B and s 500(2)|
The voluntary administration process provides a company with a "breathing space" so that it can attempt a compromise or arrangement with its creditors, with the aim of saving the company or the business and maximising the return to creditors.
To begin or proceed with a “proceeding in a court” against the company or in relation to any of its property during the administration period, a party requires the administrator’s written consent or leave of the Court. It is unusual for leave to be granted to an unsecured creditor, owing to the interference such leave would cause to the orderly disposition and control of unsecured creditors.
No enforcement process in relation to the property of the company can be begun or proceeded with during administration, except with leave of the Court. Restrictions may also apply to the enforcement of the following obligations during the administration period:
- a guarantee of a company's liability given by a director or their spouse, de facto spouse or relative; and
- action by a sheriff or court officer, who has received written notice of the fact of the company’s administration, to sell the company’s property under a process of execution or pay the proceeds of sale or money obtained in connection with the enforcement of an execution process.
Under s 440B of the Act, secured parties may be restricted from exercising their property rights unless:
- they have leave of the Court or written consent of the administrator;
- if the third party has a perfected security interest in the whole or substantially the whole of the company’s property and the secured party acts within the “decision period” (ie 13 business days from the day the notice of appointment was given to the secured party);
- if the secured party had begun to enforce the security interest before the administration, the secured party may continue with enforcement action; or
- if the security interest is over perishable property, whether or not the security interest is substantial.
It will still be necessary to seek leave of the court if the enforcement requires some action within a court proceeding, even if a person is within the exceptions to s 440B.
Winding-up commences the process which leads to the end of the life of an Australian company.
No “action or other civil proceeding” or “proceeding in a court” is to be proceeded with or commenced against a company or in relation to the property of the company except by leave of the court. A creditor’s right to bring a claim against the company the circumstances giving rise to which existed prior to the appointment of the liquidator is converted into a right to lodge a formal proof of debt in the winding up of the company.
In terms of enforcement, a person cannot begin or proceed with, except with leave of the Court, an enforcement process in relation to such property.
However, secured creditors retain the right to realise or otherwise deal with their security after winding-up, including the right to appoint a receiver. If a secured creditor needs to take proceedings in order to realise the security, the Court will usually extend leave to allow him or her to proceed against the company.
Impact of the Australian insolvency regime on arbitration
Commencing and proceeding with an arbitration
Whether a party is able to commence or proceed with an arbitration against a company that is subject to external administration without leave of the Court or the administrator’s consent will depend on which insolvency process has been commenced.
Generally, an arbitration against a company which is subject to voluntary administration will not be automatically stayed on the appointment of an administrator and no leave of the court is required to commence arbitral proceedings against the company. The s 440D stay provisions have been held not to capture private arbitration as it does not fall within the meaning of a “proceeding in a court”.
If the company is in liquidation, generally a party will require leave of the Court to proceed with or commence an arbitration. The term “action or other civil proceeding” in s 500(2) has been held to include an arbitration proceeding. Similarly, the term “a proceeding in a court” in s 471B has been held to extend to arbitration proceedings against the company. This analysis may differ if the Australian company is a party to an international arbitration at a place outside of Australia which is governed by a law other than Australian law and generally when the “proceeding” is in a foreign court.
Enforcing an arbitral award
The recognition and enforcement of a domestic and foreign arbitral award is achieved by commencing proceedings in an Australian court. Accordingly, in every instance, leave of the court or, in the case of an administration, the written consent of the administrator, must be obtained prior to the enforcement of the award.
In determining whether leave should be granted, a court may consider whether the balance of convenience lies in allowing the applicant to proceed by way of action to judgment, or whether the applicant should be left to pursue their claim by lodging a proof of debt with the liquidator.
When an award is enforced, a judgment of an Australian court will be obtained which may facilitate the recovery by the award creditor and avoid the award creditor having to deal with the “vagaries of the proof of debt process”.
If the Court refuses to grant leave to enforce the arbitral award against the company, the arbitral award would be provable in the administration or winding-up by way of filing a proof of debt. If the award is for a monetary amount, a liquidator may be willing to admit a proof of debt on the basis of the arbitral award without requiring a creditor to have the award enforced by an Australian court.
Potential cross-border insolvency issues
As the example of Legend International Holdings illustrates, it is also possible for an Australian-incorporated company to become subject to a formal insolvency appointment in other jurisdictions. The United States courts have, in the past, demonstrated a willingness to accept debtors’ petitions for protection under Chapter 11 of the Bankruptcy Act from Australian-incorporated companies with very limited connections to the United States with the effect that a stay applies to all claims against the company pursuant to United States bankruptcy law.
The commencement of a formal insolvency process can upset the best laid plans at the time of framing contractual obligations or commencing an arbitration process. Ultimately, the ability to enforce obligations against an Australian counterparty or to enforce an arbitral award obtained as the result of an expensive arbitration process will always depend upon the solvency of that counterparty. This reinforces the importance of conducting ongoing due diligence on counterparties during the life of a contract and during the course of any arbitration process to continually assess the prospects of a formal insolvency process disrupting the status quo.