Focus: Insolvency – September 2005
Say 'please': letters of request in cross-border insolvencies
In this issue: Partner Michael Quinlan (view CV) and Overseas Practitioner1 Elliot Norton examine three recent decisions, two of the New South Wales Supreme Court and one of the English High Court of Justice, with regard to the issue of letters of request in the context of complex cross-border insolvency proceedings.
- Introduction
- The Independent Insurance decision
- The Fourie v Le Roux judgment
- The HIH Casualty & General Insurance letter of request
Introduction
Section 581 of the Corporations Act 2001 (Cth) (Corporations Act) provides for courts to act in aid of and be auxiliary to each other in all external administration matters. Where a court of a country other than Australia seeks aid in an external administration matter and files a letter of request to this effect in an Australian court, the court may exercise such powers as if the matter had arisen in its own jurisdiction. Reciprocally, the Australian court may ask a foreign court with jurisdiction in external administration matters to act in aid of, and be auxiliary to, it in an external administration matter.
In two recent decisions, Independent Insurance Company Ltd 2 and Fourie v Le Roux (No.2)3, the Supreme Court of New South Wales (NSWSC) and the High Court of Justice of England and Wales (English court) respectively have considered letters of request from foreign Commonwealth countries and the principles to be applied in their consideration. A third judgment from the English court in relation to a letter of request issued by the NSWSC is eagerly awaited in respect of the HIH Casualty & General Insurance Ltd case.
The Independent Insurance decision
Background
In a cross-border insolvency, a letter of request was directed by the English court to the NSWSC on the application by an English company and its provisional liquidators for orders in aid of the English court, invoking the NSWSC's auxiliary jurisdiction under s581 of the Corporations Act.
The NSWSC recognised, as a matter of comity, the English order appointing the provisional liquidators in England, discussed whether declaratory relief was appropriate where there was no dispute between the parties (lis inter partes), and considered whether such declaratory relief would be of any utility generally.
Justice Barrett also considered whether final injunctive relief should be granted in the absence of the other parties (ex parte) against persons generally, whether comity requires the making of orders in NSW of a kind made by the English court in generally reciprocal circumstances, and whether the auxiliary jurisdiction extends to the replication of orders made by courts in the United States of America and the Republic of Ireland.
Letter of request
The English court requested the NSWSC to act in its aid by making orders including orders giving effect to provisions of the English Insolvency Act 1986.4 The request for these orders was based on evidence showing a tangible and substantial connection with Australia, in that inter alia, although Independent Insurance carried on insurance business in the United Kingdom, in the course of doing so, it wrote policies in favour of Australian residents.
Scope and effect of sections 581(2)(a) and 581(3) of the Corporations Act
Both s581(2)(a) and s581(3) of the Corporations Act were considered because of the letter of request and the fact that the provisional liquidators were in office by virtue of an order made under a law of a 'prescribed country', which the UK is by reason of regulation 5.6.74 of the Corporations Regulations 2001 (Cth). The threshold question as to the existence of an 'external administration matter' was satisfied because the case related to the insolvency of a body corporate5 since Independent Insurance was insolvent and unable to pay its debts.
Section 581(2)(a) says that the NSWSC 'must act in aid of, and be auxiliary to', among others, the courts of the UK that have jurisdiction in external administration matters. The word 'must' means that it is an obligation. Section 581(2)(a) not only requires the court to act in aid but confers a specific jurisdiction to so act.
Section 581(3) applies where a letter of request is received from a court of a country other than Australia. It pays no attention to whether the other country is a 'prescribed country'. The effect of s581(3) is to confer a discretion upon the court rather than directing it to act. This discretion is for the court to 'exercise such powers with respect to the matter as it could exercise if the matter had arisen in its own jurisdiction'.
Sections 581(2)(a) and 581(3) are thus different in purpose and effect. Section 581(3) allows the court to treat the foreign matter in practice as if it were a matter that had arisen within the court's own jurisdiction and to make any order relevant to such a domestic matter.
Section 581(2)(a) on the other hand imposes a requirement to act. It is not triggered by a letter of request, in the sense that the court may act pursuant to it in the absence of such a request. However, the absence of a request is likely to mean that the Australian court does not know what action by it is, or might be thought to be, 'in aid of' or 'auxiliary to' the other court. A letter of request is thus a means of giving content to the s581(2)(a) requirement and, in addition, bringing s581(3) into play.
The effect of analogous UK provisions in s426 of that country's Insolvency Act, from the perspective of a court receiving a letter of request, was considered by the English Court of Appeal in England v Smith6, where it was observed, following Hughes v Hannover Ruckversicherungs AG7, that the task of the receiving court is to apply either its own insolvency law or that of the requesting country and, in either case, its own general jurisdiction and powers.
Under s581, the position is different. Section 581(3) enables an Australian court having jurisdiction which receives a letter of request issued by an English court to exercise, in respect of matters relating to the United Kingdom insolvency, powers that the Australian court could have exercised if the matters had arisen in Australia. Section 581(2)(a) requires the Australian court, by exercise of those powers or other aspects of its own jurisdiction, to act in aid of the English court. But Justice Barrett explained that the Australian court is not expressly permitted or required by the Australian legislation to exercise the statutory powers that the English court itself may exercise; nor can the UK legislation be the source of any direct power of the Australian court to do so.
Recognition of the English liquidation
Justice Barrett recognised the presentation of the English winding-up petition, the pendency of the winding-up application and the making and effect of the order by which the provisional liquidators were appointed in accordance with principles of private international law referred to by Justice Gummow in Re Macks; ex parte Saint.8 The authority of the provisional liquidators and the position they occupied, as well as the status of their appointment under English law, were recognised as a matter of private international law and altogether apart from any order the Australian court might make under s581 or otherwise.
Claim for declaratory relief
The claims for declaratory relief were made beyond the confines of any demonstrated justiciable controversy. The claim for injunctive relief was also advanced apart from any lis inter partes and sought what Justice Barrett described in Re AFG Insurances Ltd 9 as 'an order expressed to be binding on the whole world in the manner of legislation'.
The question therefore arose as to whether the obligation cast upon the NSWSC by s581(2)(a) required, or the power conferred by a combination of that provision and s581(3) permitted, the making of the particular orders sought. Was the court either bound or empowered to grant the declaratory relief sought on the ex parte application of Independent Insurance and its provisional liquidators?
The application was made in circumstances where no-one was questioning the existence or status of the English proceedings or the making or effect of the order appointing the provisional liquidators. The only conceivably relevant jurisdiction of the NSWSC was therefore its inherent jurisdiction referred to in s75 of the Supreme Court Act 1970 (NSW), the very wide discretionary power to make 'binding declarations of right': Forster v Jododex Mines Pty Ltd 10 and Ainsworth v Criminal Justice Commission.11
Justice Barrett held that the declaration sought was one that would be of no utility. The only possible recipient of the message contained in the declarations sought would be the court itself. There was clearly no need for the court to make a declaration directed in effect to itself.
Claim for injunctive relief
The claim for injunctive relief was, in effect, a claim for a permanent injunction by way of final relief. The order, if made, would be an indiscriminate command to unidentified persons not to commence or continue any proceeding against Independent Insurance or its property in Australia while the provisional liquidators remain in office (or after a winding-up order is made), except with leave granted by the English court under the English legislation.
Justice Barrett was satisfied that such an order would be an order made in aid of the English court in the matter of the provisional liquidation ordered by it in respect of Independent Insurance. This was because s130(2) of the UK Insolvency Act, a provision very similar to s471B of the Corporations Act, provides that, where a provisional liquidator has been appointed, no action or proceeding shall be proceeded with, or commenced against, the company or its property except with the leave of the English court and subject to such terms as it may impose, and a similar embargo applies after a winding-up order has been made.
Section 581(2)(a) was the clear source of the jurisdiction. The order would regulate the initiation or continuation of proceedings in a way that would have been open to the English court if the proceedings had been prosecuted within its jurisdiction and this, following the second AFG Insurances case12, is an aspect of the 'acting in aid' jurisdiction.
Order directed to unidentified persons
The order in question, however, if made, would be 'an order expressed to be binding on the whole world in the manner of legislation'. The entities to which it was directed were those with claims against Independent Insurance and they were presently unidentifiable.
Justice Barrett held that an injunction should not be made in terms that are indefinite as to the persons to be bound and nor should any relief be granted ex parte except in urgent circumstances. No circumstances of urgency warranting ex parte relief were suggested in the case and there was no suggestion that any person was threatening to commence or continue relevant proceedings against Independent Insurance or in respect of its property.
The fact that the jurisdiction invoked was the particular auxiliary jurisdiction created by sections 581(2)(a) and 581(3) did not displace the general principles that apply with respect to granting the particular form of relief sought. Justice Barrett stated that principles governing the making of orders in the exercise of general equitable jurisdiction must be observed, even though that jurisdiction is resorted to in aid of a foreign court under statutory powers of the kind conferred by s581: Fourie v Le Roux.13
Reciprocity
It was submitted that comity warrants reciprocity in light of the English court's willingness to make restraining orders of the kind in question when asked to do so by the NSWSC court.
The court held that Australia has not enacted laws adopting recognised international measures for the administration of cross-border insolvencies. Although moves towards incorporation of the UNCITRAL Model Law on Cross-Border Insolvency into Australian law are well advanced, in the meantime, in a case involving a corporate insolvency in the UK, the only special jurisdiction held by the NSWSC is that conferred by s581, and, insofar as that section empowers the court to deploy its general equitable jurisdiction in aid of a UK court in a way that territorial limitations would otherwise not allow, the jurisdiction is to be exercised in accordance with general principles.
Similar auxiliary relief in other countries
There were in force both in the US and Ireland court orders generally similar in purpose and effect to the injunctive relief order sought. Justice Barrett described the mechanisms for ancillary administration in aid of foreign insolvency proceedings in s304 of the US Bankruptcy Code and the provisions of s250 of the Companies Act 1963 of Ireland. It was submitted that, in a case of cross-border insolvency where Australia is one of several satellite jurisdictions, relief here should, to the extent possible, be framed so as to be compatible and consistent with relief already in place in comparable countries.
Justice Barrett's decision in this regard was that the statutory approaches and judicial attitudes to auxiliary jurisdiction in cross-border insolvency in the US and Ireland differ from those in Australia. While there is apparent acceptance in the US of the notion that a prohibitory order against persons with no notice of it is unobjectionable because those persons may apply for exemption, the clear emphasis in Australian courts is the other way: BP Australia Ltd v Brown.14
Conclusion
This decision clearly explains how sections 581(2)(a) and 581(3) of the Corporations Act operate. The main findings were that the NSWSC will recognise, as a matter of private international law, an English order appointing provisional liquidators in the UK. However, declaratory relief will not be given in the absence of a lis inter partes (dispute between the parties) and, in effect, directed to the court, and injunctive relief will not be granted ex parte (in the absence of the other parties) as an indefinite order against unidentified persons.
Comity does not require that orders be made in NSW just because in generally reciprocal circumstances the English court would be prepared to make them. Similarly, the auxiliary jurisdiction does not extend to the replication of orders made by courts in the US and Ireland, since, irrespective of its being a satellite jurisdiction in the cross-border insolvency, the approach to ex parte injunctive relief in Australia is different.
The Fourie v Le Roux judgment
Background
The first three claimants were the joint liquidators of a South African company (the fourth claimant), a wholly owned subsidiary of H Ltd. The first defendant, a South African resident, was the majority shareholder of H Ltd, and he was in control of that company and the fourth claimant. The liquidators sought to pursue certain non-statutory claims for inter alia damages and other relief for conspiracy and misappropriation of the fourth claimant's assets, as well as certain statutory claims under relevant South African legislation.
With a view to empowering the English court to entertain claims under South African law, the liquidators applied to the South African High Court to issue a letter of request to the English High Court for aid and assistance, under s426(5) of the UK Insolvency Act, by applying the relevant South African statutory insolvency law and by authorising the liquidators to institute proceedings for the recovery of any amounts due to the fourth claimant.
Letter of request
In a previous judgment, Justice Blackburne upheld a challenge to the validity of the initial letter of request, on the basis that it lacked specificity. In this more recent judgment, however, a revised letter of request was accepted, containing specific requests to apply particular sections of South Africa's companies and insolvency legislation.
Two questions were raised: (i) whether the court had jurisdiction under s426 to accede to the South African High Court's request to entertain the statutory claims; and (ii) whether, even if it had, it should exercise its discretion under s426 to entertain the statutory claims.
Jurisdiction
The court ruled that the insolvency law of the requesting court, which, by the letter of request, the English court was authorised to apply, did not extend to the procedural or other rules of the requesting court which determined over whom that court was willing to exercise its insolvency jurisdiction. Nothing in s426(4) and (5) of the UK Insolvency Act would suggest that the additional jurisdiction which a letter of request was capable of conferring upon the English court was one that the requesting court, according to its own procedural and other rules, could have exercised over the person whom, by its request, it sought to have brought before the English court. Whether or not the person in question was within the jurisdictional reach of the requesting court was a matter that went to the exercise of the English court's discretion, rather than to its jurisdiction.
Justice Blackburne did not consider the question of jurisdictional reach of the requesting court to be relevant to the existence of the English court's jurisdiction to apply the insolvency law of the requesting court upon a request made to it under s426(5).
If it were a pre-condition to the conferring of jurisdiction on the English court under s426(5) that the requesting court should be able to exercise jurisdiction over the person in question, it was difficult to see why, apart from considerations of convenience, the requesting court should not simply apply its own insolvency law by exercising its own jurisdiction over that person rather than request the assistance of the English court.
The jurisdictional challenge therefore failed.
Discretion
Justice Blackburne held that assistance should be given if, in accordance with the law to be applied, the relief sought may properly be granted and, further, that in the exercise of the discretion the fact of the request is a weighty, although not by itself, decisive matter. The degree of connection of the person in respect of whom the requesting court invited the English court to assist was a material consideration to the exercise of the English court's discretion. The fact that that person might, at any or all material times, have been beyond the jurisdictional reach of the requesting court was not, of itself, a matter of significant, let alone, decisive, importance in the exercise of the discretion.
On the evidence, there appeared to be a much closer connection between the second defendant and South Africa than between that company and any other jurisdiction in relation to the matters forming the basis of the statutory claims. Accordingly, there was no good reason for the court to decline jurisdiction in accordance with the letter of request.
Conclusion
The English court will accept a letter of request to apply particular sections of the companies and insolvency legislation of foreign countries (such as South Africa or Australia), as long as inter alia the request is sufficiently specific.
The question of whether the person over whom the requesting court is asking the English court to exercise jurisdiction is within the jurisdictional reach (according to its own laws and practice) of the requesting court is irrelevant to the existence of the English court's jurisdiction to apply the insolvency law of the requesting court upon a request made to it under s426(5).
Assistance will be given by the English court if, according to the law to be applied, the relief sought may properly be granted. The fact of the request is a weighty, although not by itself a decisive, matter in the exercise of the discretion.
The HIH Casualty & General Insurance letter of request
Background
An originating process to wind up HIH Casualty & General Insurance Ltd (HIH) and three associated companies was presented to the NSWSC in March 2001 and liquidators of HIH were appointed in August 2001. The NSWSC had already issued a letter of request to the English High Court in March 2001 for the appointment in England of provisional liquidators over HIH under s426 of the English Insolvency Act. The English provisional liquidators were duly appointed to HIH, the liquidation of which in the UK was ancillary to the Australian liquidation.
It subsequently became clear that, in order to assist the Australian liquidators to perform their duties, the sums collected by the English provisional liquidators would need to be remitted to Australia for the Australian liquidators to apply them in the due course of winding up HIH or in accordance with a scheme of arrangement. In June 2005, the Australian liquidators demanded the remittance of the assets by the English provisional liquidators to Australia for distribution and the latter resisted, instead seeking directions from the English High Court as to the appropriate distribution of the assets collected in England. Accordingly, the Australian liquidators applied to the NSWSC for a letter of request to the English High Court to be issued to this effect.
Letter of request
On the application of the Australian liquidators, Justice Barrett on 4 July 2005 ordered the transmission of a letter of request to the English High Court.
What is interesting is that the letter of request did not directly seek direction by the English High Court that the English provisional liquidators pay over to the Australian liquidators the sums collected in their official capacity. Instead, the letter of request asked the English High Court to assist, act in aid of and be auxiliary to the NSWSC 'by hearing and determining an application by the Australian liquidators for directions to the English provisional liquidators' to pay over the relevant sums collected. It can be inferred that this attenuation of the request was made in the interests of comity between jurisdictions and reflecting Australian judicial respect for the equivalent court in England.
English proceedings
On the same date that Justice Barrett issued the letter of request in Australia, Justice Hart in the Companies Court in the Chancery Division of the English High Court ordered that the application for directions and the request application be expedited and heard as vacation business over the English summer holiday period. Justice Richards heard the applications at the start of August, but reserved judgment. It is likely to be handed down some time this month.
Watch this space
We await with interest the judgment from the English High Court, which should tell us the significance that it ascribed to the Australian letter of request in making its decision. The ruling will further develop this complex and fast-growing area of international insolvency case law.
Footnotes
- Admitted in England and Wales only.
- [2005] NSWSC 587, judgment dated 22 June 2005.
- [2005] EWHC 922 (CH), [2005] All ER (D) 263, judgment dated 18 May 2005.
- Sections 130(2) and 126.
- Under s580(c).
- [2001] 1 Ch 419.
- [1997] 1 BCLC 497.
- (2000) 204 CLR 158.
- (2002) 20 ACLC 1588 (at [20]).
- (1972) 72 CLR 421 at p 435 per Gibbs J.
- (1992) 175 CLR 564 at pp 581-2 per Mason CJ, Dawson, Toohey and Gaudron JJ.
- (2002) 43 ACSR 60 at paragraph [8].
- [2005] EWCA Civ 204, 7 March 2005.
- (2003) 58 NSWLR 322 at p 348 per Spigelman CJ (with whom Mason P and Handley JA agreed).
For further information, please contact:
- Geoff RankinPartner,
Brisbane
Ph: +61 7 3334 3235
Geoff.Rankin@aar.com.au - Michael QuinlanPartner,
Sydney
Ph: +61 2 9230 4411
Michael.Quinlan@aar.com.au - Clint HinchenPartner,
Melbourne
Ph: +61 3 9613 8924
Clint.Hinchen@aar.com.au - Simon McConnellPartner,
Hong Kong
Ph: +852 2840 1202
Simon.McConnell@aar.com.au
