Modified universalism: Full Federal Court protects the rights of a local creditor in a cross-border insolvency
Akers as a joint representative of Saad Investments Company Limited (in Official Liquidation) v Deputy Commissioner of Taxation  FCAFC 57
The Full Federal Court has confirmed a “modified universalism” approach to cross-border insolvencies, and provided guidance on what is required for the “adequate protection” of rights of local creditors under the Model Law on Cross-Border Insolvency (‘Model Law’), as enacted in Australia by the Cross-Border Insolvency Act 2008 (Cth).
Saad Investments Company Limited (in Official Liquidation) (‘Saad’)
Saad, a company incorporated in the Cayman Islands, was a private investment company which invested in securities and real estate around the world, including Australia. In August 2008, Saad made a capital gain of approx. AUD158 million from the sale of shares it held in Sunshine Gas Limited, which was the subject of the tax liability later asserted by the Deputy Commissioner (discussed below).
In 2009, Saad was wound up by order of the Grand Court of the Cayman Islands. The liquidators applied to the Federal Court of Australia, seeking recognition of the Cayman Island liquidation in Australia. Rares J made orders recognising the Cayman Islands liquidation as a ‘foreign main proceeding’ under Art 17 of the Model Law, and entrusted the administration, realisation and distribution of all of Saad’s assets in Australia to the Cayman Islands liquidators (as well as an Australian-based official liquidator appointed to assist).
Claim of the Deputy Commissioner of Taxation
The liquidators of Saad realised approx. AUD7 million from the sale of the company’s Australian assets. They intended to have this money remitted to the Cayman Islands for distribution to the creditors proving in the liquidation. The liquidators estimated a return of 20 – 24 cents in the dollar to unsecured creditors proving in the Cayman Islands liquidation.
The Deputy Commissioner claimed he was a creditor in the amount of AUD83.567 million, comprising a primary tax liability of AUD47 million arising from the sale of the Sunshine Gas shares and a liability for a penalty of AUD35 million. The difficulty for the Deputy Commissioner was that the Cayman Islands do not recognise foreign tax liabilities, so his proof was not accepted. If his proof had been accepted in full, he would have received a distribution of at least AUD16.6 million (at the return rate of 20 cents in the dollar).
The Deputy Commissioner applied to the Court to be permitted to proceed against the AUD7 million of funds available in Australia for the claimed tax and penalties. As set out in this CommBar matters case note, at first instance Rares J found in the Deputy Commissioner’s favour and did not allow the funds to be remitted to the Cayman Islands.
The liquidators appealed, arguing that the decision was contrary to the principle of universalism which underpinned the Model Law (that is, treating a cross-border insolvency as a single process in the foreign main proceeding, with other courts assisting in that single proceeding).
Protecting the ATO’s interests
Allsop CJ (with whom Robertson and Griffiths JJ agreed) dismissed the appeal. His Honour considered Art 21(2) of the Model Law to be key, which provides the Court should only grant leave allowing assets in the local jurisdiction to be turned over to the foreign main proceeding if satisfied that the interests of local creditors are adequately protected. His Honour noted that ‘the sacrifice of the rights (or the value in the rights) of local creditors upon an altar of universalism may be to take the general informing notion of universalism too far’ (at ), and said it may be more appropriate to describe the Model Law regime as ‘”modified universalism” for what such an appellation is worth’ (at ).
His Honour rejected the appellant’s argument that the Deputy Commissioner’s interests would be adequately protected if the Australian assets were made available to all creditors, including the Deputy Commissioner. Such an approach would see the Deputy Commissioner obtaining approx. $150,000 of the $4 million available and a (futile) entitlement to prove for the remainder in the Cayman Islands. The appellant argued that this approach would balance the competing considerations of protecting the local revenue authority under local law, the rights of other creditors to participate in all assets of the company (including Australian assets), the non-priority status of the Deputy Commissioner and the commonly accepted principle of private international law (which Australia itself adopts under the Model Law as enacted) that foreign revenue debts are not enforceable. Allsop CJ acknowledged that this argument had ‘a degree of superficial attraction’, which lessens once the importance of equality in an insolvent administration, the ‘notion of fair and equal treatment of all creditors and the parri passu distribution of the assets’, and the relative restriction of the company’s assets available to satisfy the Deputy Commissioner’s claim, are taken into account. (at -).
The decision is significant as it can be applied to any Australian creditor who would otherwise be stripped of rights, or even the value of rights, by reason of recognition of a cross-border insolvency. Allsop CJ provided as an example a debt which may be an unenforceable penalty in the centre of main interests. Allsop CJ’s comments on protection of value of rights could also see local creditor protection extend when Australian law would provide a creditor with more than the parri passu otherwise available in the foreign proceeding(for example, where a proprietary remedy such as a remedial constructive trust would be ordered here but not overseas, or where a creditor is afforded higher priority in the Australian regime).
Further parts of the judgment, not discussed here, may be of use or interest to practitioners. An additional argument considered (and rejected) by Allsop CJ was that the Deputy Commissioner submitted to the jurisdiction of the Grant Court of Cayman Islands when it submitted a proof of debt (at -). Allsop CJ also provides commentary on the history to the adoption of the Model Law in Australia (including the private international framework that proceeded it), and provides an overview of the Model Law (see paras 27-70).
Georgie Coleman – CommBar profile