In our September 2013 Insolvency Update ‘The Early Bird Gets the Worm: Tax Office Recovers Debt Before Foreign Creditors’, we highlighted the decision of De Ackers (as joint foreign representative) v Saad Investments Company Limited; In the matter of Saad Investments Company Limited (in official liquidation) [2013] FCA 738 (Saad case).

In that case it was held that that the UNCITRAL Model Law on Cross Border Insolvency did not prevent the Court from making provision for pari passu payment of local tax debts and penalties from a debtor’s local assets (pari passu meaning that each creditor is paid proportionately from the total asset pool realised in accordance with the amount of their claim) before remitting those assets to the debtor’s centre of main interests (being “the place the debtor conducts the administration of his interests on a regular basis and is, therefore, ascertainable by third parties”).

Recently, the Full Court of the Federal Court of Australia has affirmed the Saad case finding that the exercise of the discretion by the primary judge should not be interfered with.

Facts

On 18 September 2009, the Grand Court of the Cayman Islands ordered that Saad Investments be wound up. Saad was subsequently issued with notices of assessment and a penalty from the Deputy Commissioner of Taxation (DCT) in Australia. Although Saad had never ‘carried on business’ in Australia it had made a taxable gain from its disposal of a large parcel of shares in an Australian company.

A letter enclosing a proof of debt for approximately $83million was sent to the liquidators, in the Cayman Islands, on 3 December 2009 which also sought information regarding whether Saad had any assets in Australia at the date of the liquidator’s appointment.

On 22 October 2010 Justice Rares in the Federal Court recognised the proceedings in the Grand Court of the Cayman Islands as a ‘foreign main proceeding’ pursuant to the UNCITRAL Model Law on Cross Border Insolvency (2010 orders). The orders were given on the basis of two undertakings; first, by the DCT not to issue any further notices without giving 14 days written notice and secondly, by the liquidators not to remit outside of Australia the proceeds of any realisation or sale of Saad’s assets without giving 14 days notice.

On 21 September 2010, the solicitors for the liquidators/foreign representatives gave the DCT 14 days notice of their intention to remit assets and the proceeds of their realisation out of Australia. The DCT subsequently sought orders in the Federal Court of Australia preventing the foreign representatives from remitting to the Cayman Islands US$7 million in proceeds and orders for making provision for the pari passu distribution of Saad’s Australian assets.

The DCT sought modification of the 2010 orders pursuant to Article 22 of the Model Law on the basis that the DCT’s interests as a creditor were not ‘adequately protected’. His complaint was that if the 2010 orders were permitted to operate unmodified, he would not be entitled to be treated as he would have been had Saad been wound up in Australia. This was as a result of the Cayman Islands’ legislation which reflected the rule of public international law that claims by or on behalf of a foreign state to recover taxes are unenforceable.

Decision at first instance

Justice Rares was convinced that the interests of the DCT, as an unsecured creditor of Saad, were not adequately protected under the 2010 orders. It was found that the 2010 orders should be modified to permit the DCT to recover up to the pari passu amount that he would be entitled to receive as a dividend were he entitled to be admitted to prove for the tax debts as an unsecured creditor. These orders were made on 29 August 2013 (the Modification Orders).

On Appeal

On appeal, the joint foreign representatives of Saad Investments Company Limited (in official liquidation) argued, among other things, that Justice Rares did not have power to make the Modification Orders under the Model Law and that in the alternative, the discretion to make the orders had not been rightly exercised. Both these arguments were rejected.

In rejecting the argument that the discretion had not been properly exercised, the Court confirmed that the DCT was not receiving preferential treatment. The joint representatives had argued that the Modification Orders, in effect, created a mock local winding up of Saad in Australia in which the only creditor entitled to prove was the DCT. The Court noted, however, that the DCT was not entitled to prove in the Cayman Islands winding up. The other creditors would be entitled to prove in both the local winding up and the Cayman Islands winding up.

Informed by principles of fairness and equality, the Court stated that it would have exercised the discretion in the same way. Although there was no local winding up, the DCT only had access to one fund of the company’s assets; the other creditors had access to more than one fund.

Implications

The decision affirms the willingness of the Court to allow the Deputy Commissioner of Taxation to recover, on a pari passu basis, local tax debts of a cross-border insolvent prior to the assets being remitted to the debtor’s centre of main interests. Had the alternative conclusion been reached, Australian domestic tax debts would have become unenforceable in Australia upon the recognition of foreign proceedings in any centre of main interests in the world.