This week’s TGIF article considers the case of Kelly, in the matter of Halifax Investment Services Pty Ltd (in liquidation) (No 5) [2019] FCA 1341, in which liquidators of two linked investment companies in Australia and New Zealand sought to hold concurrent hearings in the Federal Court and in the High Court of New Zealand.

What happened?

Halifax Investment Services Pty Ltd (Halifax Aus) was a broking and investment services provider that operated a number of online securities trading platforms. A subsidiary of Halifax Aus, Halifax New Zealand Limited (Halifax NZ), offered a number of supplementary investment services in New Zealand. As only Halifax Aus held a licence for providing financial services in Australia, Halifax NZ’s main functions were largely confined to issuing derivatives and introducing clients to Halifax Aus.

In November 2018, both companies went into administration. In March 2019, liquidators from KPMG began the process of liquidating the companies. During the process, the liquidators found that large proportions of funds held by the companies on trust were pooled together, or ‘commingled’. The investigation concluded the funds were transferred between the accounts of the Halifax group on an ‘as needs basis’, to ensure that sufficient funds remained in each account for operational purposes.

The liquidators also discovered a discrepancy between the trust accounts of Halifax Aus and Halifax NZ in the amount of A$19,000,000. The extent of the commingling meant that it was not easily determined which discrepancy applied to which client. As a result, clients of Halifax Aus and Halifax NZ could not clearly identify which Halifax entity to claim against.

What issues were before the Federal Court?

Due to the unreliable financial data of the Halifax group, the liquidators sought guidance from the Federal Court about how they should manage the issue of the commingled funds.

The liquidators sought to invoke the powers of the Federal Court under section 581(4) of the Corporations Act 2001 (Cth) (Corporations Act) to issue a letter of request to the High Court of New Zealand, seeking the cooperation of both courts to resolve the complex insolvency of the Halifax companies simultaneously, by way of joint hearing.

The application to the Federal Court was made on the basis that a joint hearing would provide for a more suitable form of liquidation of Halifax Aus and Halifax NZ. A joint hearing to pool the commingled client money and consider the insolvency evidence of both companies together would avoid much of the anticipated logistical confusion.

What did the court decide?

The Federal Court decided not to issue the letter of request to the High Court of New Zealand. The Federal Court held that because the application was made ‘ex parte’, it would not allow for effective cooperation between all potential parties to the insolvency. As the potential parties had not been readily identified nor consulted, the Federal Court concluded that the ex parte application was premature for the purposes of the liquidation proceedings.

However, the Federal Court did acknowledge the merit of the liquidators’ application and agreed in principle with its terms and the reasoning behind the submissions. The Federal Court went on to:

  1. recommend that a further application on similar terms be made in due course once the potential parties had been identified and consulted; and
  2. prescribe that future applications of a similar nature would be appropriate to facilitate the fair and efficient administration of liquidating companies.

Authority to issue a letter of request to another jurisdiction

The Federal Court held it had the power and authority under the Corporations Act to issue a letter of request to the High Court of New Zealand to hold a joint hearing between the two courts. Under section 581(4) of the Corporations Act, the Federal Court could request the High Court of New Zealand to hold its hearings at the same time as the Federal Court.

While it is not obliged to do so, the High Court of New Zealand is able to accept this request on the basis of section 8 of the Insolvency (Cross-border) Act 2006 (NZ).

Application process for cross-jurisdictional judicial cooperation

Although the Federal Court did not accept the liquidators’ application in this instance, it prescribed a model for considering future applications for insolvency cross-border cooperation.

The Court cited Parbery; in the matter of Lehman Brothers Australia Limited (in liq) (2011) 285 ALR 476 at [59], which found that cooperation between courts will generally occur within a framework or protocol:

  1. that has previously been approved by the court; and
  2. is known to the parties in the particular proceeding.

In this case, the application was made ex parte, without a set framework and for an undetermined range of possible respondents to the application. Without confirming these details, the Federal Court concluded that it would not accept the application to issue the letter of request to the High Court of New Zealand.

Comments

While the application to the Federal Court was unsuccessful in this instance, this case provides a rare example of Australian courts considering and largely accepting cross-jurisdictional cooperation in insolvency matters.

This case confirmed that the Federal Court will be receptive to consulting international courts to assist the liquidation process of corporate entities. However, the Federal Court concluded that these forms of applications would only be accepted following proper consultation with all potential parties to the matter.