Structural weaknesses in the Model Law on Cross-Border Insolvency?

Cross-border insolvency law necessarily tries to ensure that insolvency proceedings about a debtor in different jurisdictions are co-ordinated and fully disclosed to the court. The Model Law on Cross-Border insolvency imposes requirements on parties to ensure that.

Inattention to those requirements by foreign representatives occurred in two recent cases in Australia. These were the subject of comment and analysis in a presentation on maritime law by Professor Martin Davies, in Sydney, on 21 June 2018.

Rizzo-Bottiglieri-De Carlini Armatori SpA

In Board of Directors of Rizzo-Bottiglieri-De Carlini Armatori SpA v Rizzo-Bottiglieri-De Carlini Armatori SpA [2017] FCA 331, plaintiffs applied to the Federal Court of Australia to have their Italian rehabilitation proceedings (a concordato preventivo) in relation to an Italian shipping company ‘recognized’ in Australia as a ‘foreign main proceeding’ for purposes of the Cross-Border Insolvency Act 2008. The Federal Court made interim orders staying existing and any new proceedings against the company. Before the final hearing, the Italian court dismissed the concordato preventivo proceedings.  The plaintiff did not disclose that to the Federal Court but commenced fresh concordato preventivo proceedings in Italy.  That came to light when the plaintiff filed an amended application in the Federal Court to terminate the interim stay and obtain a new stay based on the second concordato preventivo.

As Justice Rares pointed out, under Article 18 of the UNCITRAL Model Law, the foreign representative has a continuing obligation to inform the local court promptly of any substantial change in the status of that recognized foreign proceeding. That was not done here by the Italian foreign representative.  

Another ‘even more egregious example’ – Hanjin

As Professor Davies explained, another

‘even more egregious example’

of failure by the foreign representative to abide by Article 18 occurred in relation to the shipping line Hanjin.

The Federal Court of Australia recognized the South Korean foreign main proceedings, but the Korean court then later terminated the rehabilitation order, declared Hanjin bankrupt, and appointed someone other than the plaintiff as Hanjin’s trustee in bankruptcy.  The original trustee made no effort to inform the Federal Court of Australia of this. When the Court was informed, of its own motion it vacated its earlier stay orders.  The Court also made interim orders restraining any removal of Hanjin’s assets from Australia.  See Suk v Hanjin Shipping Co Ltd [2017] FCA 404. 

The Registrar of the Federal Court was instructed to inform the South Korean Court of the contravention of the UNCITRAL Model Law by Hanjin and its designated foreign representative.  The outcome of this, if any, was not explained.

Structural weaknesses of the UNCITRAL Model Law? 

Professor Davies went on to say that Hanjin, and to a lesser extent, Rizzo-Bottiglieri,

‘reveal yet another of the structural weaknesses of the UNCITRAL Model Law on Cross-Border Insolvency.  The Model Law’s provisions for a mandatory stay in the event of recognition of a foreign main proceeding encourage insolvent companies to send their representatives out to Model Law countries around the world, seeking prophylactic stays freezing any court action in those countries’.

As examples, he mentions that in Hanjin, interim stays were obtained from courts in England and Wales, the United States, and South Africa, as well as in Australia. He could have added Canada, Germany, Japan and Singapore.

‘Despite its elaborate provisions dealing with the ‘front end’ of recognition, the Model Law has very little to say about what should happen at the ‘back end’ when insolvency proceedings cease, or circumstances change.  Article 18 requires the recognized foreign representative to give ‘prompt notice’ of changed circumstances to all of the courts around the world where he or she instituted recognition proceedings’.

Professor Davies says that this ‘is plausible in principle, but highly unlikely to occur in practice’ and that

‘one can forgive’ the Hanjin trustee ‘for losing interest in the affairs of Hanjin once his role had been terminated when the rehabilitation proceedings were replaced by bankruptcy proceedings with someone else as trustee’. 

Indeed the trustee

‘would be dutiful beyond measure if he were to travel the world dolefully informing many courts of his dismissal’.

Davies refers to the ‘resourcefulness and persistence’ of Justice Jagot in the Federal Court in bringing the Hanjin proceedings to an end, ‘but local creditors should not really be forced to rely on this expedient to protect their position in the event of a change in the foreign insolvency proceedings’.

Others may not agree 

In domestic proceedings in Australia, insolvency practitioners, and their lawyers, would be criticised if they were not to give full disclosure of related proceedings to a court. And whatever legal obligations might apply, a practitioner who is replaced will have some continuing professional obligation to attend to any necessary notifications.  Those obligations would remain in respect of any cross-border proceedings, perhaps even more so in terms of international comity and national support for the Model Law. This would certainly be case if the foreign court made a direct inquiry of the practitioner through their lawyers.

Further comments about this are made by Justice Rares in a later decision in Rizzo-Bottiglieri-De Carlini Armatori SpA [2018] FCA 153, which also clarifies certain matters, and that matter is continuing.

———–

See Australian Maritime Law, Case Studies 2017, Professor Martin Davies, Admiralty Law Institute Professor of Maritime Law, Tulane University Law School; Director, Tulane Maritime Law Center USA; Professorial Fellow, Melbourne Law School, Australia, Consultant to Norton Rose Fulbright Australia.

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