Court scuppers foreign Trustee’s attempt to use Australia’s insolvency laws to recover luxury yacht

King (Trustee); In the matter of Zetta Jet Pte Ltd v Linkage Access Limited [2018] FCA 1979 is the latest in a series of decisions, across multiple proceedings, dealing with the dogged attempts of a United States bankruptcy trustee to recover a luxury yacht moored in Australian waters.

The case provides some guidance on the limits of Article 23 of the UNCITRAL Model Law on Cross-Border Insolvency (the Model Law), and confirms that a foreign insolvency representative cannot have recourse to the voidable transaction provisions of the Corporations Act 2001 (Cth) where the insolvent entity is not a “company” within the meaning of the Corporations Act.

Background

The “Dragon Pearl” is a multi-million dollar yacht registered in the Marshall Islands. She is owned by Linkage Access Limited (Linkage), an entity incorporated in the Marshall Islands.

On the other side of the world, Zetta Jet Pte Ltd (Zetta Jet), a Singaporean entity, is subject to Chapter 7 bankruptcy proceedings in the US. Its bankruptcy trustee (Mr King) asserts that the Dragon Pearl was purchased with Zetta Jet’s funds and, as such, claims an interest in the yacht. On 13 October 2017, on Mr King’s application, the Federal Court of Australia issued a warrant for the arrest of the ship.

Mr King’s subsequent attempts to realise Zetta Jet’s claimed interest in the yacht has sparked what Perram J described as “an unusually large number of proceedings” in the Federal Court: para 2. Mr King first brought an admiralty proceeding, asserting a proprietary maritime claim arising by reason of a resulting or constructive trust.[1] He appealed the dismissal of that proceeding – but was unsuccessful.[2] Six days later, Mr King commenced a second admiralty proceeding. That proceeding was dismissed summarily,[3] and another unsuccessful appeal followed.[4]

This proceeding

Following his failed attempts in the maritime jurisdiction, Mr King changed tack. He commenced this proceeding, wherein he sought to leverage the Model Law to unlock access to Australia’s voidable transaction regime. In other words, he sought to use the provisions of Part 5.7B to unwind the payments made by Zetta Jet towards the purchase of the Dragon Pearl.

Linkage applied for the proceeding to be summarily dismissed. It did so by arguing as follows:

  • section 588FF of the Corporations Act, to which Mr King sought recourse, allows the Court to make orders in respect of a “transaction of the company” that is voidable because of a provision of Part 5.7B;
  • ”company” is defined to mean either a company registered under the Corporations Act or a “Part 5.7B body”. A Part 5.7B body includes a registered foreign company or a foreign company that “carries on business in Australia”; and
  • Zetta Jet was not registered under the Corporations Act, and nor did it carry on business in Australia.

Linkage therefore contended, simply, that because Zetta Jet was not a “company” within the meaning of the Corporations Act, Part 5.7B had no application.

The Trustee’s arguments

Mr King conceded that Zetta Jet was not a “company” within the meaning of the Corporations Act.[5] Rather, Mr King’s case proceeded by reference to the Model Law which, by operation of s 6 of the Cross-Border Insolvency Act 2008 (Cth), has force of law in Australia (subject to any statutory modifications). Mr King relied on Article 23 which, together with its modifications, reads as follows:

Upon recognition of a foreign [insolvency]proceeding, the foreign representative has standing to initiate actions arising under the provisions of Division 2 of Part 5.7B of the Corporations Act 2001 (Cth), with appropriate changes, as if the foreign [insolvency]proceeding in relation to a ‘company’ was an Australian [insolvency]proceeding in relation to a ‘company’.

Mr King’s argument was thus:

  • the Federal Court of Australia had recognised the US bankruptcy proceeding as a foreign non-main proceeding within the meaning of the Model Law;
  • s 22 of the Cross-Border Insolvency Act provides that, to the extent of any inconsistency, the Model Law prevails over Part 5.7 of the Corporations Act;
  • Article 23 should be read as creating a substantive legal remedy available to foreign representatives. If all it did was confer standing on the foreign representative, it would have little work to do as the foreign representative has power under the Model Law to appoint a local liquidator in Australia (who could then access the domestic insolvency regime); and
  • the Model Law uses the term ‘debtor’ to describe any insolvent entity or person to which the Model Law applies, and did not distinguish between bankrupt individuals and insolvent companies.

The result, according to Mr King, was that the reference to ‘transaction of the company’ in the Corporations Act should be read as a reference to ‘transaction of the debtor’ – thus capturing Zetta Jet.

The decision

Justice Perram rejected each of Mr King’s arguments, finding them unpersuasive: para 35. He held that Article 23, on its ordinary construction, did no more than confer standing on foreign representatives to pursue actions under Part 5.7B. His Honour adopted, with approval, commentary[6] that described Article 23 as a narrowly drafted provision that created no substantive rights, and which conferred standing on a foreign representative “only if an insolvency representative within the enacting State could have brought those proceedings”: para 38. To hold otherwise, his Honour remarked, would be to “alter the substantive insolvency law of Australia so that voidable transaction claims […] can now be brought with respect to the affairs of foreign corporations which do not conduct business in Australia and which are not registered here either”: para 28.

His Honour found that none of the contextual matters raised by Mr King justified departure from the ordinary, plain meaning of the language of the Model Law. In particular, he rejected the submission that Article 23 had little or no work to do as a standing rule because of the fact that a local liquidator could be appointed to access the domestic insolvency regime. In doing so, his Honour pointed out that the very purpose of the Model Law was to avoid a multiplicity of appointments. Similarly, his Honour also found that there was no inconsistency between the Model Law and Part 5.7 of the Corporations Act.

Conclusion

As it was common ground between the parties that Zetta Jet was not a “company” within the meaning of the Corporations Act, the Court’s rejection of Mr King’s construction of the Model Law meant that he enjoyed no real prospect of success in the litigation. As such, Perram J summarily dismissed the proceeding.

This may signal the end of the litigation, with his Honour remarking that Mr King and his associated entities “have had more than their fair share of this Court’s time. Enough is enough”: para 101.

 

[2] Zetta Jet Pte. Ltd v The Ship “Dragon Pearl” [2018] FCA 878.

[3] Zetta Jet Pte Ltd v The Ship “Dragon Pearl” [2018] FCAFC 99.

[4] Zetta Jet Pte Ltd v The Ship “Dragon Pearl” (No 2) [2018] FCA 1130.

[5] Zetta Jet Pte Ltd v The Ship “Dragon Pearl” (No 2) [2018] FCAFC 132.

[6] While the decision was reserved, the Trustee sought to re-open its case to argue that Zetta Jet was a “company” because it did carry on business in Australia. Leave to do so was refused.

[8] UNCITRAL Model Law on Cross-Border Insolvency: The Judicial Perspective(UN 2014).

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