Whether the discretion to make the Modification Orders was rightly exercised
107 Once one reaches the point of acceptance that the primary judge had power to protect the position of the DCT through some form of modification to the Recognition Orders, one must assess whether he erred in the exercise of the discretion or power in making the Modification Orders, and, if he did, whether this Court should act differently in re-exercising the discretion or power. For the reasons that follow, the exercise of the discretion of the primary judge should not be interfered with.
108 The primary submission of the appellants was that any exercise of discretion which would protect the DCT was inconsistent, as a matter of principle, with the universalism of the Model Law and CBI Act.
109 The framework of the discretion or power is to be appreciated: the leave to proceed, to execute and otherwise to exercise statutory and administrative remedies against Saad and its property in Australia. If the DCT could prove in the Cayman Islands winding up, there would be no basis to justify the placing of any impediment to the remittal of funds to the joint liquidators. That, of course, is not the position. The claim of the DCT is a revenue debt and will not be admitted to proof in the Cayman Islands. That position is not an unusual one. Foreign revenue debts are not enforceable in Australia; and Australia, by s 12(1) of the CBI Act, adopted the alternative wording set out in footnote 2 to Art 13 of the Model Law that excluded foreign tax and social security claims from an insolvency proceeding in Australia.
110 Further, there are no particular surrounding circumstances to take into account. Saad acquired and sold shares on an Australian stock exchange. It is said to have made a sizeable capital gain from entering into commercial transactions in Australia. It is thus said to have come under a liability to pay Australian tax. No particular conduct of Saad and the DCT needs be pointed to. In these circumstances, the argument of the appellants reduced to the proposition that in the circumstances of a foreign main proceeding of a company whose assets were not (and could not be) under the control of a liquidator in Australia, it would be contrary to the principle of internationalism expressed and embodied in the Model Law (having the force of Australian law) ever to permit the Australian revenue to proceed in Australia against the company or its assets here.
111 That the Model Law reflects a universalist approach (reflected in the pre-existing common law framework discussed in In re HIH) can be accepted: see the 2002 discussion paper entitled CLERP 8 at pp 17 and 21. CLERP 8 explained the universal approach as:
"[O]ne insolvency proceeding will be universally recognised by the jurisdictions in which the entity has assets or carries on business. All the assets of the insolvent company will be administered by the court or the administrator in, and possibly also according to, the law of the place of incorporation. All creditors seeking to claim in the winding up submit claims to that court or administrator. When assets of the insolvent company are located in foreign countries, the court has the power to apply for assistance from the courts of those countries."
112 A similar statement of general approach and underlying informing concept is to be found in Re ABC Learning Ctrs Ltd 3rd Circuit 27 August 2013 at p 9:
"The Model Law reflects a universalism approach to transnational insolvency. It treats the multinational bankruptcy as a single process in the foreign main proceeding, with other courts assisting in that single proceeding. In contrast, under a territorialism approach a debtor must initiate insolvency actions in each country where its property is found. This approach is the so-called "grab rule" where each country seizes assets and distributes them according to each country's insolvency proceedings".
113 This, the Court said, at p 10, involved a rejection of:
"the territorialism approach…in favour of aiding one main proceeding. 'The purpose is to maximise assistance to the foreign court conducting the main proceeding.' Thus, a Chapter 15 court in the United States acts as an adjunct or arm of a foreign bankruptcy court where the main proceedings are conducted."
114 These statements can be accepted; but they do not direct attention to the particular case of how a local (recognising) court should approach the question of the position of a creditor who has enforceable rights in the local (recognising) jurisdiction, but who will be stripped of all the benefit of those rights if assets are sent to the foreign main proceeding, because the law of that jurisdiction will not permit the enforcement of such a debt. Nor do the statements adequately incorporate the aim of the protection of local creditors seen in Art 21.2 or the fact that the Model Law was not intended to bring about a change to the substantive law of the recognising State and was procedural in character.
115 The present particular circumstance involves a claimed revenue debt. Other examples of debts unenforceable in the centre of main interests, but enforceable in the forum of recognition, are not difficult to hypothesise. The debt may be an unenforceable penalty in the centre of main interests, but not locally. The jurisdiction of the centre of main interests may have a law discriminating against or refusing to recognise the commercial interests or rights of citizens or companies of a particular state, whether because of a state of affairs such as belligerency, or because of some other reason. The local (recognising) state may have no such attitude. Thus, whilst we are dealing here with a revenue debt, the problem need not necessarily be so framed.
116 Universalism can be recognised in the preamble to the Model Law; but it is universalism that promotes the objectives of all creditors, and which protects local creditors. In In re Dr JÜrgen Toft 22 July 2011, United States Bankruptcy Court for the Southern District of New York, United States Bankruptcy Judge Gropper discussed the Model Law as adopted by Ch 15 of the Bankruptcy Code. That chapter contained a provision (s 1507) that provided for additional assistance provided that such assistance was consistent with the principles of comity and satisfied certain fairness considerations set out in s 1507(b):
"[W]hether such additional assistance, consistent with the principles of comity, will reasonably assure - (1) just treatment of all holders of claims against or interests in the debtor's property; (2) protection of claim holders in the United States against prejudice and inconvenience in the processing of claims in such foreign proceeding; (3) prevention of preferential or fraudulent dispositions of property of the debtor; (4) distribution of proceeds of the debtor's property substantially in accordance with the order prescribed by this title; and (5) if appropriate, the provision of an opportunity for a fresh start for the individual that such foreign proceeding concerns."
117 Judge Gropper then discussed the notion of comity and said, citing Circuit Court of Appeals authority:
"The principle of comity has never meant categorical deference to foreign proceedings. It is implicit in the concept that deference should be withheld where appropriate to avoid the violation of the laws, public policies, or rights of the citizens of the United States."
118 The DCT emphasised this passage in submissions on public policy (to which topic I will come). The passage is, however, powerful support for the proposition 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. The force of this proposition is to be recognised when one appreciates that the universality of the Model Law is qualified by the capacity to modify and terminate the effect of Arts 19 and 20 by Arts 20.2 and 22.3, and where the interests of local creditors are expressly protected by Art 21.2.
119 The appellants submitted that the respondent should be willing to suffer the same inability to enforce tax debts as foreign revenue authorities would in Australia in the light of the adopted Art 13.2 in this new environment of unqualified universalism. That submission assumes that it was the intention of the Model Law, and of the Parliament in the CBI Act, to affect the domestic enforceability of Australian tax debts through the process of recognition of a foreign main proceeding. No such intention can be inferred. The Working Group memoranda make clear that what was being opposed by some negotiating States was the placing of foreign revenue authorities on an equal footing with local revenue authorities. There was no evident purpose of destroying the effective local enforcement of local revenue debts.
120 Whilst the Model Law reflects universalism, there is nothing in the Model Law or the UNCITRAL Working Papers prior to its formulation, or in the CBI Act, which would justify the stripping of rights of a local creditor by reason of recognition. The universalism that underpins the Model Law and CBI Act is one for the benefit of all creditors, and the protection of local creditors is expressly recognised. It is not inappropriate to call it "modified universalism" for what such an appellation is worth.
121 Thus, I would reject the proposition that no protection can be given to the DCT by making orders of the kind made in the Modification Orders. To accept this primary submission of the appellants on the exercise of discretion would be to see the Model Law and the CBI Act transform a local revenue creditor into someone who has the status of a foreign revenue creditor.
122 This takes one to the second essential argument that the method used by the primary judge to protect the DCT was legally inappropriate, and in effect elevated the DCT to the status of a preferred creditor. The appellants submitted that the primary judge failed to have proper regard to the interests of (all) creditors, for the purposes of Art 22.1, and concerned himself only with the interests of the DCT.
123 It is to be recalled that in Modification Order 4, the DCT was prevented from benefitting from the exercise of rights beyond a pari passu amount that the DCT would receive if he were entitled to prove for the taxation debt as an unsecured creditor in the Cayman Islands proceedings. The appellants submitted that this protection, in effect, created a mock local winding up of Saad in Australia in which the only creditor entitled to prove was the DCT. The appellants submitted that if some winding up in Australia was to be hypothesised, it should be an ancillary winding up. In such a winding up, if, on the authority of such cases as In Re Australian Federal Life and In Re Matheson Brothers Limited, the liquidator thought it inappropriate to remit funds to the main liquidation because the DCT would not be treated equally in the main winding up, the funds in Australia would have to be divided among all creditors of the company, not just any creditor (such as the DCT) whose debt was sited in Australia. If one were to use such an hypothesised local ancillary winding up as the proper analogue for protection, this would leave the DCT to share in the Australian assets with all creditors of Saad equally. This, it was submitted by the appellants, would reflect the DCT's non-priority status. It was submitted that to permit the DCT to enforce his or her rights up to an amount which he or she would receive if he or she were able to participate in the Cayman Islands winding up as a creditor, effectively created a preference to the DCT in relation to Australian assets over the equal position of other creditors.
124 In response, the DCT submitted that the focus was upon the DCT's position because it was the creditor whose domestic rights were to be destroyed by the repatriation of the moneys to the Cayman Islands. The DCT submitted that the limitation on recovery fashioned by the primary judge in Modification Order 4 put him in a position of parity with other creditors (assuming equal enforcement). Adequate protection of all creditors, it was submitted, involved the notion of relativity. The posited lack of any enforcement by the DCT in Australia would create a relative injustice amongst all the creditors. A windfall would be created for foreign creditors by the remittance to the Cayman Islands of untaxed profits and the transformation by the Model Law and the CBI Act of a domestic revenue creditor into someone with the status and position of a foreign revenue creditor. The protection of the local creditor under Art 21.2 could be ameliorated by a cap conforming with equality of treatment as an incident of the adequate protection of all creditors in accordance with Art 22.1.
125 The DCT submitted that the question of adequate protection was an evaluative consideration within a discretion. In exercising that discretion, and in making that evaluation, the Court was, it was submitted, entitled to have regard to the Guide to Enactment, in which there is a discussion of the turning over of assets to foreign representatives and its discretionary character. In the Guide to Enactment at [157], the following appears:
The "turnover" of assets to the foreign representative (or another person), as envisaged in paragraph 2 [of Article 21], is discretionary. It should be noted that the Model Law contains several safeguards designed to ensure the protection of local interests before assets are turned over to the foreign representatives. Those safeguards include…the general statement of the principle of protection of local interests in Article 22, paragraph 1; the provision in Article 21, paragraph 2, that the Court should not authorise the turnover of assets until it is assured that the local creditors' interests are protected; and Article 22, paragraph 2, according to which the Court may subject the relief that it grants to conditions it considers appropriate.
Thus, the appropriate protection, it was submitted, is a matter of evaluation and discretion.
126 In Debis Financial Services (Aust) Pty Limited v Allied Bellambi Collieries Pty Limited [1999] NSWSC 935; 17 ACLC 1636, Hamilton J considered what was meant by the term "adequate protection" for the interests of secured creditors in s 441D of the Corporations Act. At [14] his Honour said:
"Adequate" is a word which imports notions of relativity. It is relevantly defined in the Macquarie Dictionary as: "equal to the requirement or occasion; fully sufficient, suitable, or fit…". In other words, the protection as to which the Court is required to be satisfied is not protection which is absolute or perfect in all circumstances, but protection which is adequate or suitable considering the circumstances which actually prevail.
127 In In Re Atlas Shipping A/S, a Danish Corporation (2009) 404 B.R. 726, the United States Bankruptcy Court was dealing with a similarly worded provision to s 441D in s 1521(b) of the United States Bankruptcy Code. In that case, the Court stated:
One Court has described "sufficient protection" …as embodying three basic principles: "the just treatment of all holders of claims against the bankruptcy estate, the protection of US claimants against prejudice and inconvenience in the processing of claims in the [foreign] proceedings, and the distribution of proceeds of the [foreign] estate substantially in accordance with the order prescribed by US law".
128 Irrespective of whether or not all aspects of In Re Atlas Shipping should be adopted, what is plain from it is that the notion of sufficient or adequate protection involves an evaluation (as in Debis Financial Services) of the protection afforded to relevant creditors.
129 Here, there is no local winding up. The rights of the local revenue authority have not been destroyed. The question is: what is the proper framework of analysis for the protection of the local revenue authority in circumstances where, to remit the funds to the Cayman Islands, would see the destruction of the value of the rights of the local authority? The conclusion that the local revenue authority should not be stripped of its rights does not answer the question as to what level of protection should be granted to it. Here, the company is not amenable to an order for winding up. It has, however, been wound up in its centre of main interests. Given the operation of the Model Law and the CBI Act, the DCT needs an order of the Court to enable him or her to enforce all his or her rights, once recognition has been given to the foreign main proceeding. The relevant environment in which those orders are to be made is dictated by the Model Law, the CBI Act and the principles contained within them. The DCT is not a priority creditor. He or she should not, however, have his or her status as a creditor destroyed. There are assets in Australia which should be available to meet his or her claims. If one also recognises the legitimate entitlement of foreign creditors to participate in those assets, one might be led to the view that the proper protection, involving the adequate protection of all creditors, would be to recognise that the Australian assets were available to all creditors, including the DCT. Such an approach would see the DCT extract value in the order of only $154,000 out of the $7 million remaining in Australia. The DCT would be left to his or her rights in foreign proceedings. Those rights, however, would see the DCT's claim being unenforceable according to Cayman Islands law, which is in broad accordance with international principle, including Australian law, that foreign revenue debts are not enforceable. This approach was said by the appellants to balance the various competing considerations of protection of the local revenue authority under local law, protection of the rights of other creditors to participate in all assets of the company, including Australian assets, the non-priority status of the DCT and the recognition of the general principle of private international law widely held and recognised by Australia in Art 13.2, that foreign revenue debts are not enforceable.
130 This argument on behalf of the appellants was barely put to the primary judge (to put the matter at its highest). The appellants' substantive contention below was an all or nothing approach (as it was on appeal) that the DCT was entitled to receive nothing. This was so, in particular, because of the extra-territorial effect of the Cayman Islands' winding up and the lack of an ability to wind up Saad in Australia. The joint liquidators' counsel did put a submission below as to the consequences of a hypothetical local winding up. There was, however, no focus upon what is now put by the appellants by way of a fall-back position. In those circumstances, it is difficult to criticise the primary judge's approach to the exercise of the discretion once one concludes that he had the power to fashion some protection to the DCT as the local creditor. That said, the question is an important one, and has been fully argued. Further, given my views, there is no ultimate prejudice to the DCT in allowing this approach to be argued.
131 The above argument of the appellants has a degree of superficial attraction, in particular if one appreciates the degree of focus on local assets in any winding up under s 601CL(14) or s 583 of the Corporations Act. That attraction lessens, however, if one considers the general nature of an ancillary winding up, the relative restriction of the company's assets available to satisfy the claim of the DCT, and the importance of equality in an insolvent administration.
132 It can be accepted that foreign creditors can come in to an ancillary winding up: Re Bank of Queensland Ltd (1867) 1 QSCR 159 and Re Melbourn; ex parte Melbourn (1871) 6 Ch App 64 at 70. This is a necessary incident of the nature of the ancillary winding up of the company, and the entitlement of all creditors to equal treatment: Phillips v Hunter (1795) 2 Hy Bl 402 at 405; 126 ER 618 at 620; Re Commonwealth Agricultural Service Engineers Ltd [1928] SASR 342 at 351; Re Union Theatres Ltd (1933) 35 WALR 89 at 91; Re Vocalion (Foreign) Ltd at 207; Sedgwick Collins & Co v Rossia Insurance Co [1926] 1 KB 1 at 13; and Re Standard Insurance Co Ltd [1968] Qd R 118 at 125. In coming in to an ancillary winding up, foreign creditors come in to a winding up of the kind described by Sir Richard Scott V-C in In re BCCI at 238-248, especially at 241-242. The local (ancillary) insolvency administration, subject to statutory provisions such as s 601(15)(c) and s 583(d) of the Corporations Act, is not merely territorial, that is concerned with its local area; it is a winding up of the company. If the company is incorporated abroad and a winding up is taking place in that jurisdiction, that winding up will be recognised, and recognised to be the main or primary administration. The local liquidator's role will then be to deal with the local assets and prepare the list of local contributories. That limited role in point of usual practice, however, is a product of statutory provisions, the recognition under the rules of private international law of the foreign main winding up, and of the judicial practice discussed by Lord Hoffmann in In re HIH at [9]:
But the judicial practice which developed in such a case was to limit the powers and duties of the liquidator to collecting the English assets and settling a list of creditors who sent in proofs. The Court, so to speak, "disapplied" the statutory trusts and duties in relation to the foreign assets of foreign companies. This practice was based partly upon the pragmatic consideration that any foreign country which applied our own rules of private international law would not recognise the title of an English ancillary liquidator to the company's assets. But it was also based on the principle of universalism.
133 Nevertheless, the local (ancillary) winding up is carried on under local law, not foreign law. Nothing in the Model Law or the CBI Act changes this. Here, the DCT in the posited local (ancillary) winding up is entitled to rank as an equal (not preferential) creditor with all other creditors in respect of the assets of the company, although, through judicial practice, and by statutory provisions (unless the Court varies their effect) the local liquidator will limit his or her efforts largely to collection of local assets.
134 The DCT is not entitled to prove in the Cayman Islands winding up. All other creditors are entitled to prove in the posited local (ancillary) winding up, but are also entitled to prove in the Cayman Islands winding up (assuming they not to be other foreign revenue creditors). The DCT has, therefore, one fund of the company (the hypothesised local administration) in which to prove; all other creditors have two funds of the company (the hypothesised local administration and the Cayman Islands administration) in which to prove. A creditor who seeks to share in the assets of a debtor in an administration must bring to account the benefits of recovery from other assets of the debtor, whether by execution, self-help or through participating in a second administration: Selkrig v Davies (1814) 2 Dow 230; 3 ER 848 (Lord Eldon); Banco de Portugal v Waddell (1880) 5 App Cas 161 at 167-168, 170 and 175-176 (Earl Cairns LC, Lord Selborne and Lord Blackburn, respectively); Ex parte Wilson (1872) 7 Ch App 490 at 492-493 and 493-494 (James LJ and Mellish LJ); Re Harris, Goodwin & Co (1887) 7 QLJ (NC) 94; Re Standard Insurance at 127-128 (Lucas J); Re National Employers' Mutual General Insurance Association Ltd (1995) 15 ACSR 624 at 626 (McLelland CJ in Eq); Cleaver v Delta American Reinsurance Co (in liq) [2001] UKPC 6; [2001] 2 AC 328 at 337-341 [16]-[29]; and Re HIH Casualty and General Insurance Co [2005] NSWSC 240; 53 ACSR 12 at [96]. In these circumstances, the local liquidator would be entitled to require the foreign creditors to bring to account in the nature of hotchpot the value of their participation in the Cayman Islands winding up (or indeed any other foreign winding up) in the equal distribution of the assets of the company, and in the overall equal distribution of the local assets. An illustration of the approach is Re Oriental Inland Steam Company. There, the execution creditor in India was required to bring to account in England the value of the execution in India based on the fairness of bringing to account in the English winding up the access to the company's property that the creditor had achieved in India.
135 The analogue to the above cases here is close. If one hypothesises a local winding up the foreign creditors have access to more than one administration; the DCT to one only. Both administrations concern the assets of the company, although the nature of the task of the liquidator in the local (ancillary) winding up is limited in the way I have discussed. Even if the local ancillary winding up is limited to local assets or assets outside the place of incorporation, both administrations are dealing with the assets of the company that are to be available to unsecured creditors. Hotchpot (like marshalling) is an illustration of the maxim that equity is equality. The nature of the ancillary winding up, as a winding up of the company for the benefit of all its creditors, under local (here, Australian) law would permit (quaere require) an Australian liquidator to require foreign creditors to bring to account the value of their participation (or expected participation) in the other assets of the company (including through participation in another administration of the company's assets) before they obtained any benefit from the Australian assets. This would vindicate the equality of the local creditor and also vindicate the ancillary winding up as being one for all creditors. This would also reflect the operation of Art 32 of the Model Law.
136 It is not necessary to decide between the views of Lord Hoffmann and Lord Walker, and Lord Scott and Lord Neuberger in In re HIH to accept that the above approach would have been one that was available to a local liquidator in the hypothesised local liquidation. Lord Hoffmann's speech does not stand as authority for a proposition that a local liquidator in an ancillary winding up (or a court administering the CBI Act) must not apply the principle of hotchpot to protect the interests of a local creditor, who by local law was entitled to participate fully in the winding up of the company, but who was prevented from participating in the main winding up and thus gaining access to assets of the company administered there. Put another way, whatever may be the difference of view among their Lordships in In re HIH about the power under general law to remit assets to a foreign liquidator without fully vindicating the rights of creditors under local law, nothing in Lord Hoffmann's reasons would require a local liquidator (and a local court) to limit the local creditor's rights, and to limit the evaluation of the local creditor's position to part only of the company's assets, being those assets held in Australia.
137 It is important, however, not to lose sight of the task that was before the primary judge and this Court: the proper construction of the relevant provisions of the Model Law as enacted as Australian law. In particular, in this respect, the notion of adequate protection in the Model Law under Arts 21.2 and 22.1 in the light of the preamble is the fundamental consideration.
138 Any hypothesised liquidation is just that: an hypothesis - a posited framework to assist in the organisation of informing principle. The most potent informing principle is the notion of fair and equal treatment of all creditors, and the pari passu distribution of the assets of the debtor company. The principle of pari passu distribution adopted by the primary judge is informed by fairness and equality: Re Harris, Goodwin & Co; The case of the bankrupts (1592) 2 Co Rep 25, 76 ER 441; British Eagle International Airlines v CIE Nationale Air France [1975] 2 All ER 390; Hardy v Fothergill (1888) 13 App Cas 351 at 363; and see generally S.W. Symons, Pomeroy's Equity Jurisprudence (5th Ed) Vol 2 at 144-148 [405]-[407]. Though there is no local winding up, the DCT has access only to one fund of the company's assets and other creditors have access to more than one fund.
139 The fairness and equality in the approach of the primary judge is reinforced when one recognises the available principle of hotchpot that is based on the same notions of fairness and equality. The balancing of the protection of the local creditor under Art 21.2 and the protection of all creditors under Art 22.1 is thus achieved by recognising the equality of all creditors, when considering the dealing with, and access to, the funds of the company. The approach is consistent with the views of the reporters in the report to the American Law Institute (ALI) on Transnational Insolvency: Global Principles for Co-operation in International Insolvency Cases presented to the 2012 Annual Meeting of the ALI, at pp 127-128 on Global Principles 34 and 35.
140 Once one recognises the potential operation of the law of hotchpot in any hypothesised local (ancillary) liquidation, the fairness and appropriateness of the approach of the primary judge becomes evident. The approach of the primary judge was open as a proper evaluative conclusion directed to the question of the adequate protection of the local creditor and of all creditors of the company, considering all the available assets of the company. I would make the same evaluative conclusion.
141 The appellants also submitted that the primary judge's exercise of discretion miscarried by his reformulation of Lord Hoffmann's comments in In re HIH contained in [29] of the primary judge's reasons: see [74] above. I disagree. Whilst the matter could have been expressed differently, his Honour was making a point as to the justice of other creditors not being enriched by the denial of enforcement rights of the local taxation authority. It is the same point that was made by the Court in the Alberta Queens Bench Division in Re Sefel Geophysical Ltd (7 October 1988) 3542 (AB QB); 70 CBR 9, per Forsyth J. Speaking of foreign (United States) revenue creditors, Forsyth J applied the ruling in Ex parte James; In re Condon (1874) 9 Ch App 609 at 614 and 616; and see generally M Hunter and D Graham Williams and Muir Hunter on Bankruptcy (19th ed) at 249ff, on the basis that the estate of the bankrupt, as a whole, had been enriched at the expense of the foreign revenue authorities and equity demanded that they be treated fairly and not in a manner that unjustly enriched the general creditors otherwise. One needs to be careful with this reasoning. The DCT is not a preferred creditor. Many creditors, by their extension of credit to the business of a company may have helped enrich its assets. That is the foundation for the general rule of equality of treatment. Nevertheless, I see no operative error in how his Honour expressed himself.
142 Further, whilst creditors would expect, as the appellants submitted, that the winding up should be dealt with in accordance with Cayman Islands law, that does not deny the proper formulation of any qualification to the operation of the Model Law to bring about equality of treatment of creditors.
143 For the above reasons, I do not consider that his Honour's discretion miscarried. For the same reasons I would exercise the power in the same way.