A recent Federal Court of Australia decision has granted the Australian Commissioner of Taxation the right to recover, from a failed foreign company’s Australian assets, the pari passu amount the Commissioner would have been entitled to receive (on account of outstanding domestic tax and penalties) if he had been allowed to prove in the liquidation before the assets are remitted to the company’s foreign representatives (the liquidators). 

In reaching this conclusion in Ackers (as joint foreign representative) v Saad Investments Co Ltd; Re Saad Investments Co Ltd (in official liquidation) [2013] FCA 738, the court considered the impact of the recognition of a proceeding as a “foreign main proceeding” under the Model Law on Cross-Border Insolvency of the United Nations Commission on International Trade Law, as given force of law in Australia by the Cross-Border Insolvency Act 2008 (Cth), on the collection of domestic tax debts. In this article, we look at the ruling and consider its implications. 

Background 

Saad Investments Co Ltd was not registered in Australia as a foreign company and did not carry on business in Australia. The company did, however, have investments in Australian companies. It had been wound up by order of the Grand Court of the Cayman Islands (the company’s centre of main interests) in September 2009, and liquidators were appointed. 

Thereafter, the Commissioner issued notices of assessment on Saad Investments in relation to unpaid domestic tax, as well as a penalty (arising from a failure to lodge a tax return). In December 2009, the Commissioner lodged a proof of debt for over AU$83 million in the liquidation in relation to the outstanding tax and penalty. 

In October 2010, the Federal Court of Australia made orders under the Act and Article 17 of the Model Law recognising the proceeding in the Grand Court in which the liquidators had been appointed as a foreign main proceeding (the October 2010 Orders). Importantly, these orders also provided that no legal or administrative proceedings could be taken against Saad Investments or its assets unless leave was granted by the court or written consent was obtained from the liquidators. 

Nearly two years later, the liquidators (in compliance with an undertaking made in respect of the October 2010 Orders) gave the Commissioner 14 days’ notice that they intended to remit Saad Investments’ Australian assets (which included proceeds of realisations) out of Australia. The assets were valued at approximately US$7 million. 

This prompted the Commissioner to seek orders under the Model Law modifying the October 2010 Orders to prevent the liquidators from remitting the proceeds of the sale of the Australian assets to the Cayman Islands, so that the Commissioner could receive a distribution from those proceeds of no more than he would be entitled to receive as his pari passu entitlements under Australian law. 

Decision 

Justice Rares agreed that the Commissioner’s interests, as an unsecured creditor of Saad Investments, were not adequately protected under the October 2010 Orders. He ruled that the Model Law gave the court jurisdiction to make orders enabling payment of taxation and penalty liabilities from a debtor’s assets before those asserts were removed from the local forum and sent to the debtor’s centre of main interests or elsewhere at the direction of the foreign representatives (the liquidators). 

Reasoning 

In reaching his decision, Justice Rares considered the Cayman Islands legislation regarding foreign taxes, fines and penalties. Pursuant to those laws, the debts that were the subject of the Commissioner’s notices of assessment would not be able to be admitted to proof in the Saad Investments liquidation. Justice Rares noted that the Cayman Islands legislation reflected the rule of public (or private) international law: that claims by or on behalf of a foreign state to recover taxes are unenforceable. Moreover, there was no jurisdiction to appoint a local liquidator to Saad Investments under Australian legislation. 

Furthermore, his Honour noted that the terms of the October 2010 Orders prevented the Commissioner from using other statutory remedies normally available to him (like the statutory remedy of attachment) to recover the outstanding tax and penalty. 

The liquidators contended that, amongst other reasons: 

the Commissioner had no right to a pari passu distribution of the company’s Australian assets because no Australian court had jurisdiction to wind up the company;

alternatively, if an Australian court did have such jurisdiction, the principle of modified universalism in private international law affecting corporate insolvencies does not require that claims for tax should be ranked equally with other creditors’ claims; and

by lodging a proof of debt in December 2009 the Commissioner had elected to submit the determination of his claims to the jurisdiction of the Grand Court and could no longer seek relief in Australia.

Election or submission to jurisdiction of the Grand Court of the Cayman Islands 

Justice Rares rejected the liquidators’ argument that, by lodging a proof of debt, the Commissioner was essentially stopped from seeking relief under Article 22, on the basis that the Commissioner had somehow submitted or elected to submit to the jurisdiction of the Grand Court of the Cayman Islands. 

Modified Universalism 

Justice Rares said that creditors of Saad Investments would be likely to expect that the company would meet its local tax obligations, in each jurisdiction in which it earned income or made taxable gains or profits, before its creditors were entitled to receive dividends in the Cayman Islands. 

If a foreigner trades or makes profits in a local jurisdiction, he said, it must obey the laws of general application in that forum. His view was that the insolvency of the foreigner should not be a reason to exclude it from an accrued liability to pay tax or penalty. He emphasized the fact that the purpose of the principle of modified universalism was to achieve proper and fair distribution to creditors of a cross- border insolvent company. 

Justice Rares concluded that there was nothing in the Model Law to suggest that domestic legislation could be construed to deny or diminish the rights of the local sovereign power to collect its taxation and social security claims from an insolvent debtor’s estate before that estate is remitted to the debtor’s centre of main interest for distribution to creditors under that jurisdiction’s laws. 

Impact on cross-border insolvencies – the claims of domestic tax authorities 

With more and more companies operating in multiple jurisdictions, and therefore incurring taxation liabilities in more than one country, and with the rule of public (or private) international law that domestic courts will not enforce a foreign penal or public law, the role of domestic courts is likely to remain of significance in ensuring that domestic taxes are equitably dealt with in cross-border insolvencies. 

Foreign liquidators and unsecured creditors generally should now be on notice that Australian courts have shown a willingness to ensure that the Commissioner is treated equally with other unsecured creditors in a foreign liquidation in respect of unpaid domestic taxes and penalties. Importantly, Australian courts are prepared to order that the Commissioner receive his pari passu entitlement from the Australian assets of such a company before the funds are remitted to a foreign liquidator. 

It may also be the case that courts in other jurisdictions are willing to rely on Article 22 to modify the operation of the Model Law so as to ensure the claims of local tax authorities are protected in cross-border insolvencies.