This week’s TGIF considers Tai-Soo Suk v Hanjin Shopping Co Ltd [2016] FCA 1404 in which the Court was required to determine the scope of a stay arising under the UNCITRAL Model Law on Cross Border Insolvency.

BACKGROUND

A Korean shipping company was subject to ‘rehabilitation’ proceedings in Korea. Rehabilitation proceedings seek to ‘rehabilitate’ insolvent debtors by restructuring their debt pursuant to a rehabilitation plan approved by the creditors and the Rehabilitation Court.

A former director of the company was appointed as the custodian of the company for the purposes of the rehabilitation proceedings.

In September 2016, the company applied to the Federal Court seeking recognition in Australia of the rehabilitation proceedings under the United Nations Commission on International Trade Law Model Law on Cross-Border Insolvency (Model Law), which is given force in Australia by the Cross-Border Insolvency Act (CBIA).

In September the Court ordered that any enforcement or recovery action against the company’s ship be prohibited without further order of the Court.

PROCEEDING

The company’s application was heard in November 2016. At that hearing, the Court ordered that the rehabilitation proceedings should be recognised as a foreign main proceeding, and the director as a foreign representative, pursuant to the Model Law.

In light of those orders, the company then sought a declaration that the scope of the stay and suspension of enforcement and insolvency proceedings consequential upon recognition, is the same as that arising under Part 5.3A of the Corporations Act.

Article 20 of the Model Law provides that upon recognition of a foreign main proceeding:

  1. Commencement or continuation of individual actions or proceedings concerning the debtor’s assets is stayed; and

  2. Execution against the debtor’s assets is stayed.

Article 20 is subject to section 16 of the CBIA which provides that the scope of the stay or suspension in Article 20 is the same as that which would apply if it arose under the Bankruptcy Act or Chapter 5 (other than Parts 5.2 and 5.4A) of the Corporations Act.

The Company submitted that article 20 requires the Court to identify the type of proceedings under Chapter 5 which the foreign proceedings most closely resemble and that in this case the rehabilitation proceedings most closely resemble a voluntary administration (VA) under Part 5.3A of the Corporations Act.

DECISION

Jagot J accepted that Article 20 required the Court to determine what the “case required”. Meaning that the Court was required to identify which parts of the Corporations Act would apply to the foreign proceedings if they were taking place under that Act.

His Honour held that here the “case required” acceptance of the proposition that the relevant stay was the one which would arise under Part 5.3A of the Corporations Act, because the rehabilitation proceedings most closely resembled a VA.

His Honour came to that decision for the following reasons:

  1. Although not identical, the objectives and nature of the rehabilitation proceedings were sufficiently similar to those of a VA under part 5.3A of the Corporations Act. For example, in rehabilitation proceedings:

    1. The goal is to rehabilitate insolvent debtors pursuant to a rehabilitation plan approved by the creditors and the Court;

    2. A debtor company may file for the commencement of rehabilitation proceedings;

    3. Upon commencement of the rehabilitation proceedings, the Court appoints a custodian, usually an existing representative of the company, unless they were the cause of the insolvency, to administer the rehabilitation;

    4. The Court may grant interim relief prohibiting the debtor from disposing of its assets and/or making repayments;

    5. Any litigation related to the debtor’s assets will be suspended and enforcement actions against the debtor are prohibited or suspended.

  2. Although there are some similarities between a scheme of arrangement under the Corporations Act and rehabilitation proceedings, a scheme of arrangement lacks significant characteristics which the rehabilitation proceedings have in common with VA. For example, a scheme is not purpose built to maximize the chances of rehabilitating an insolvent debtor and does not provide for the appointment of a custodian or administrator to be answerable to the Court.

  3. The stay under Part 5.3A (as with all stays under Part 5) is subject to a capacity for leave to be obtained to proceed and prosecute any claim.

  4. Further protection can be given to creditors by requiring notice of the making of the orders to be given and permitting creditors to vary or rescind the orders.

His Honour also considered how enforcement actions in admiralty law may be displaced by the relevant stay provisions of the Model Law, noting that there is no reference in the Model Law to the rights which arise under the Admiralty Act 1998 (Cth) – for example, such rights include a maritime lien for damage done by a ship or for sailors’ wages which is recognised almost universally.

This is contrasted with the Corporations Act which provides a specific exemption for secured creditors from the operation of the stay and suspension in place in a liquidation context.

His Honour ultimately concluded that as the “case required” that the stays and suspensions in Part 5.3A applied, there was no suggestion that a maritime claim would be defeated.

This decision is an interesting example of the process the Court must undertake in order to determine the operation of a stay and suspension under the Model Law, and the possible tension which exists between the Model Law and maritime law.