Insolvencies across borders

By Glen Ryan, Associate

First published in the NZ Lawyer, 27 Nov 2009

The Insolvency (Cross-Border) Act 2006, which adopts the UNCITRAL Model Law on cross border insolvency, has taken some time to have any apparent application in New Zealand. But two cases have been decided in as many months, both resulting in recognition of foreign insolvencies by the High Court.

One case, in particular, offers an interesting insight into the nature of practical benefits that might be obtained through the Act and, in doing so, highlights the importance of New Zealand practitioners considering the possibility of similar applications in foreign countries which have adopted the Model Law.

The Model Law was first approved by the United Nations in 1997. It simplifies the procedures relating to obtaining insolvency assistance from foreign Courts and insolvency practitioners, as well as providing for enforceable rights and automatic consequences which may preserve foreign assets of a debtor that may otherwise be disposed of or prove too difficult to recover.

Recognition of foreign insolvency proceedings

A curious feature of the Model Law is that the benefits flowing from its adoption are almost entirely in favour of the practitioners, creditors and debtors located outside New Zealand. The Act does not require that the other relevant state has also adopted the Model Law, but the incentive for states to enact it is, largely, the likelihood of reciprocal assistance where other states do adopt the Model Law. This partly explains New Zealand's reluctance to adopt the Law until Australia had done so. Other countries to take up the Model Law to date include the US, Mexico, the UK, Japan, the Republic of Korea and South Africa.

The principal benefits of the Model Law to foreign parties may, for convenience, be divided into two heads. First, any insolvency practitioner ("foreign representative") acting in respect of a foreign insolvency akin to liquidation, bankruptcy, (probably) voluntary administration and Court-appointed receivership (though probably not a receivership resulting from appointment under a security) may apply to the High Court for recognition of the insolvency in New Zealand as a "foreign proceeding" (Art 15). Such recognition is relatively easy to obtain. Once the requirements have been met, the Court cannot exercise discretion against recognition unless there are public policy reasons for doing so (Art 6).

Once a foreign proceeding is recognised, the Model Law provides several consequences. Most dramatically, there is an automatic stay of individual actions or execution against any assets the debtor may have in New Zealand where the foreign insolvency is a "foreign main proceeding", being an insolvency where the debtor's main business interests are located in the other country (Art 20).This may apply, for example, to overseas companies registered under Part 18 of the Companies Act. As with the appointment of a New Zealand liquidator, proceedings against such companies are stayed, but additionally execution against any of the company's assets in New Zealand is also stayed. There are accordingly very real, potentially dramatic, consequences on New Zealand creditors, particularly secured creditors, of the debtor. One purpose of the stay is to grant the foreign representative "breathing space" to consider and take appropriate action in relation to assets of the debtor in New Zealand, including, for example, seeking the appointment of a local representative or other local assistance. The Court may, on application, lift the stay in respect of a particular creditor(s). Further, the stay does not affect the right to request commencement of a New Zealand "insolvency proceeding" (though again, this probably does not include appointment of a receiver under a security), and will not apply if a New Zealand insolvency proceeding has already commenced (Art 29). However, where the other proceeding is a "foreign main proceeding", the New Zealand proceeding can apply only to assets located in New Zealand and the practitioner acting will have powers only "to the extent necessary to implement co-operation and co-ordination" under the Act (Art 28).

Secondly, recognition of a foreign proceeding entitles the insolvency practitioner to apply to the Court for certain relief, including:

1. Stays of proceedings or execution to the extent not automatically stayed (eg where the foreign proceeding is not a "foreign main proceeding");

2. Providing for examination of witnesses located in New Zealand;

3. Entrusting the administration or realisation of the debtor's assets in New Zealand to the foreign practitioner (Art 21).

Thirdly, the foreign insolvency practitioner has standing to bring any action that a New Zealand practitioner may bring in a New Zealand court relating to voidable transactions, securities or charges relating to the debtor (Art 23).

Principles of access and co-operation (with or without recognition)

The second main benefit to foreign parties is recognised rights of standing for both foreign practitioners and creditors in New Zealand insolvency proceedings (Chapter II), and mandatory co-operation "to the maximum extent possible" by New Zealand courts and insolvency administrators in favour of foreign courts or practitioners in respect of foreign insolvencies (Chapter IV). These benefits mainly apply regardless of whether or not a foreign insolvency has been recognised (Arts 25 & 26). The forms of co-operation include direct communication between Courts and insolvency representatives of the states, co-ordination of the administration and supervision of the debtor's assets and co-ordination of concurrent proceedings (Art 27).

The cases

The cases decided in this country to date show the potentially diverse facts that might give rise to applications under the Act. In Re Pacific Northstar Property Group, LLC (Associate Judge Faire, 29 September 2009), the liquidator of Pacific Northstar, a company subject to Chapter 11 bankruptcy in California, applied for recognition of the bankruptcy as a "foreign main proceeding". This was granted, on the basis that the company's only valuable interest was in an apartment project in Beverley Hills, California. The apparent motive for the application was that Hanover Finance Limited had commenced proceedings against Pacific Northstar in California before the commencement of its bankruptcy. Hanover applied for leave to continue the proceedings following the bankruptcy. In opposing that application, the company sought access to papers prepared by Hanover's auditors, who were based in New Zealand. It was not possible to obtain such orders from the Californian court. In granting recognition, the High Court noted (obiter) that the circumstances warranted orders under Article 21(1)(d), including for examination of witnesses, the taking of evidence and delivery of information. Such orders may be made under that article only "where necessary to protect the assets of the debtor or the interests of the creditors". The comment demonstrates a liberal interpretation of that requirement, but one which reflects a common sense approach to the Act.

In Sin-Jong Jeong v TPC Korea Co Limited (Associate Judge Faire, 15 October 2009), the applicant applied for recognition of a "rehabilitation" proceeding of the respondent company as a foreign main proceeding. The applicant had been appointed as a "receiver" by a Korean court. The reason for the application is not made clear by the judgment, but His Honour noted that the evidence indicated that the respondent company was the subject of "creditor interest" in New Zealand. The Court granted all creditors a right to apply to set aside the orders within three days of service on such creditors.

Issues remaining

There are several significant matters which remain to be clarified by the Court through further applications under the Act. Overseas decisions should be of assistance where relevant (Art 8 providing that the Model Law should be given uniform application where possible), but equally, given that the Model Law adopted is not identical in each country, should not be presumed to provide the correct answer for New Zealand. Matters requiring clarification include:

1. Whether appointment of receivers by a creditor in a foreign country will be accepted as a "foreign proceeding" and thereby enable a foreign receiver to obtain a stay of enforcement in New Zealand and other assistance provided by the Act. Commentators generally support the view that such receiverships are not included as they probably do not constitute “collective” proceedings.

2. Similarly, whether a New Zealand receivership commenced under a contractual power will be recognised as an insolvency proceeding. Receiverships are expressly included in the definition of "New Zealand insolvency proceeding" in Article 2, but it is probable that that only applies to Court-appointed receivers. If correct, such a receiver will be subject to the automatic stay if the assets to which the receivership relates are owned by a foreign company in respect of which a foreign main proceeding is recognised (unless the company is also in a New Zealand liquidation (Art 29(a)(ii)). Interestingly, the Act departed from the standard Model Law in this regard, which provides that the automatic stay does not affect a creditor's rights to enforce security.

3. Whether the right of a foreign representative under Article 23 to initiate proceedings relating to a transaction, security or charge "that is voidable or may be set aside or altered" allows the representative to seek orders under s 297 of the Companies Act in relation to transactions at an undervalue. Given that the right provided by that section is to compensation rather than affecting the status of the transaction, the foreign representative is unlikely to be able to utilise the provision. This represents an unfortunate gap in the Act, as there seems no reason in principle why the foreign representative should have only some of the weapons in a local liquidator’s arsenal.

Alignment with Australian insolvency law

Finally, it is worth noting the relevance of the Act to the intention to align our insolvency laws with those of Australia. In addition to the Model Law, UNCITRAL encourages member states to make treaties providing for standardised means of dealing with insolvencies applying across their borders. The Model Law is clearly only a limited step towards more effective cross-border co-operation. The joint statement of Prime Minister Key and Australian Prime Minister Kevin Rudd in August of steps towards alignment of our insolvency regime with that of Australia (including a single cross-border proceeding where an insolvent has interests on both sides of the Tasman) is to be applauded, though it is unfortunate that greater consideration was not given to this before the significant legislative changes in this country to personal and corporate insolvency and the introduction of voluntary administration in 2006.

Things appear to move slowly in cross-border insolvency circles. The Labour government first proposed incorporation of the Model Law in 2001. It also proposed the passing of regulation which would have resulted in automatic recognition of classes of insolvency proceedings of certain foreign countries (eg Australia), a step that would make a lot of sense in light of the recent announcement. Insolvency practitioners and lawyers should watch for developments in this area, as they are likely to open further streamlining and new possibilities for more efficient insolvency administration where debtors own assets in more than one jurisdiction.

Glen Ryan is an Associate specialising in civil litigation and insolvency at national and trans-Tasman law firm Duncan Cotterill. glen.ryan@DuncanCotterill.com

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