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“Shortcomings of the Model Law on Cross-Border Insolvency (just some)”

Professor Martin Davies of Tulane Maritime Law Center recently offered a critique of the Model Law on Cross Border Insolvency at a presentation at Sydney University Law School. As he said:

“shortcomings of the Model Law (just some)”.

Limitation on recognition of foreign judgments

An early problem with the Model Law on Cross-Border Insolvency was identified in Rubin v Eurofinance SA [2013] 1 AC 236, namely that the Model Law did not extend to allowing recognition of foreign insolvency related judgments. In that case, judgment in default was given by a US Bankruptcy Court against a company in Chapter 11 rehabilitation proceedings. The applicant receivers were unsuccessful in applying for enforcement of the judgment in England. The judgment would not have been enforceable under English domestic law. Article 21’s reference to “any appropriate relief” after recognition of foreign main proceedings (FMP) did not extend to recognition and enforcement of a foreign court’s judgments in circumstances where domestic law would not otherwise grant recognition.

As Davies explained, UNCITRAL’s Model Law on Recognition and Enforcement of Insolvency-Related Judgments (2018) has had to be drafted and agreed to meet this this shortcoming of the Model Law. That has now been finalised and is open for adoption.

Procedural only

Another difficulty with the Model Law is shown in the Zetta Jet cases: see [2018] FCA 1979. Art 23 gives a foreign representative “standing” to initiate claims, but does not create any cause of action that the representative can enforce if other domestic laws do not confer it. The rights under the Model Law are not as they may initially seem, they are procedural only.

Reporting a “substantial change in status” Art 18 – “a serious lacuna” 

Under Article 18(a), a foreign representative has to inform the court “promptly of any substantial change in the status of the recognized foreign proceeding or the status of the foreign representative’s appointment”. If the foreign main proceedings is dismissed or withdrawn, the foreign representative no longer has authority to act on behalf of the debtor; and no authority or even inclination to inform recognizing courts, and no funds to enable him/her to do so; and unlikely to be held accountable for failing to do so. Therefore, recognition (with stays and other orders intact) continues in the recognizing country long after FMP is over.

This occurred in the series of cases involving Rizzo-Bottiglieri-De CarliniArmatori SpA, an Italian shipping company. Rares J saw a

“serious lacuna in the way in which Art 18(a) of the Model Law and Div15A of the Corporations Rules operate that does not appear to have been anticipated by the drafters of the Model Law”.

Admiralty claims

Notwithstanding the ‘automatic’ or ‘mandatory’ nature of the effects under Article 20, it is expressly provided that the scope of those effects depends on exceptions or limitations that may exist in the law of the enacting State. Those exceptions may be, for example, the enforcement of claims by secured creditors…”.

But, as Professor Davies asked, “but what kinds of secured creditors?” Not admiralty claims in rem.

There is a conflict between insolvency law and admiralty law, in that

“admiralty claimants are deprived of the security that hundreds of years’ worth of admiralty law was designed to provide”.

There is no “safe harbour” at all for admiralty claims.

Singapore, Japan and New Zealand … and Australia

In contrast, Singapore adopted the Model Law only in 2017 and was aware of these issues. Under its adoption of the Model Law, admiralty (and other secured) claims are “ring-fenced” from the operation of the mandatory Art 20 stay.

Japan’s law allows the court to exclude compulsory execution against a certain range of the debtor’s property from the scope of the prohibition order.

A similarly open-ended possibility exists in New Zealand’s Insolvency (Cross-Border) Act, 2006, Sch1, Art 20(2) which provides that “paragraph (1) of this article does not prevent the Court, on the application of any creditor or interested person, from making an order, subject to such conditions as the Court thinks fit, that the stay or suspension does not apply in respect of any particular action or proceeding, execution, or disposal of assets.”

Drafting

Australia’s “Delphic response” in its enactment of the Model Law is not helpful. Davies referred to our “terrible drafting”, and Rares J in Rizzo-Bottiglieri-De Carlini lamented (as he has in other cases)

“the burdensome effect on the commercial community and the courts of the current drafting style of Commonwealth Acts and subordinate legislation.”

In Kim v Daebo International Shipping Co, Rares J said that the effect of Art 20(2) was “beguilingly ambiguous”.

Pre-existing secured claims are not exempted from the mandatory stay if the FMP is in administration/rehabilitation, but are allowed to proceed if the FMP is liquidation, which is “quite sensible, but probably accidentally so”. Canada “has the same distinction (less accidentally)”.

“Centuries of admiralty law”

“The drafters of the Model Law gave no thought whatever to the centuries of admiralty law that are, effectively, all about cross-border insolvency – an insolvent debtor in one country and peripatetic assets in other countries subject to seizure by unsatisfied claimants. Adopting countries “filled in the gap” in Art 20(2) without even noticing the tension between admiralty and insolvency, until the wave of Korean and Japanese ship owner insolvencies in the early 2010s”.

“The holy grail of universalism sounds good in practice but often founders on inconvenient rocks of national law … For good or ill, international conventions prevail over inconvenient domestic laws, bending them to their harmonizing will. Model Laws do not and cannot.”

The event

“The UNCITRAL Model Law on Cross-Border Insolvency: Neither a Law Nor Much of a Model”, Professor Martin Davies, 9 July 2019. The session was attended by academics, legal practitioners and representatives of the Australian personal insolvency regulator, AFSA.

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