Board of Directors of Rizzo-Bottiglieri-De Carlini Armatori SpA v Rizzo-Bottiglieri-De Carlini Armatori SpA

Issues 12 The circumstances that I have outlined above about the 2017 and 2018 proceedings raised several issues that do not appear previously to have been considered in judgments in Australia under the Cross-Border Insolvency Act or the Model Law, namely: can a person in the position of the trustees intervene in another proceeding under the Model Law to seek orders that a stay order made in it be set aside and the proceeding dismissed? if so, from what date should any such stay order be vacated? in what locations does Div 15A of the Federal Court (Corporations Rules) 2000 (the Corporations Rules) require advertising of the applications for, and, orders that I will make, in the 2017 and 2018 proceedings? whether the order for an interim stay in support of the trustees' pending application for recognition of the liquidation as a foreign main proceeding, that I will fix for hearing on 1 March 2018, should reflect the provisions of both ss 471B and 471C of the Corporations Act 2001 (Cth)?

The legislative scheme 13 Relevantly, ss 471B and 471C of the Corporations Act provide: 471B Stay of proceedings and suspension of enforcement process While a company is being wound up in insolvency or by the Court, or a provisional liquidator of a company is acting, a person cannot begin or proceed with: (a) a proceeding in a court against the company or in relation to property of the company; or (b) enforcement process in relation to such property; except with the leave of the Court and in accordance with such terms (if any) as the Court imposes. 471C Secured creditor's rights not affected Nothing in section 471B affects a secured creditor's right to realise or otherwise deal with the security interest. (emphasis added) 14 The Cross-Border Insolvency Act provides in s 16 that, for the purposes of Art 20(2) of the Model Law, "the scope and the modification or termination of the stay or suspension referred to in [Art 20(1)], are the same as would apply if the stay or suspension arose under … (b) Chapter 5 (other than Parts 5.2 and 5.4A) of the Corporations Act". 15 The Model Law provides, in Art 15(1), for a foreign representative to have standing to apply to this Court for recognition of the foreign proceeding and, in Art 17, for the Court to recognise that as either a foreign, or (as here) a foreign main, proceeding if certain conditions are met. Next, Art 17(2) and (4) provides: 2. The foreign proceeding shall be recognized: (a) As a foreign main proceeding if it is taking place in the State where the debtor has the centre of its main interests; or (b) As a foreign non main proceeding if the debtor has an establishment within the meaning of subparagraph (f) of article 2 in the foreign State. … 4. The provisions of articles 15, 16, 17 and 18 do not prevent modification or termination of recognition if it is shown that the grounds for granting it were fully or partially lacking or have ceased to exist. (emphasis added) 16 Relevantly, Arts 18, 19(1), 20(1), (2) and 21(1) of the Model Law provide: Article 18 Subsequent information From the time of filing the application for recognition of the foreign proceeding, the foreign representative shall inform the court promptly of: (a) Any substantial change in the status of the recognized foreign proceeding or the status of the foreign representative's appointment; (b) Any other foreign proceeding regarding the same debtor that becomes known to the foreign representative. Article 19 Relief that may be granted upon application for recognition of a foreign proceeding 1. From the time of filing an application for recognition until the application is decided upon, the court may, at the request of the foreign representative, where relief is urgently needed to protect the assets of the debtor or the interests of the creditors, grant relief of a provisional nature, including: (a) Staying execution against the debtor's assets; …. Article 20 Effects of recognition of a foreign main proceeding 1. Upon recognition of a foreign proceeding that is a foreign main proceeding: (a) Commencement or continuation of individual actions or individual proceedings concerning the debtor's assets, rights, obligations or liabilities is stayed; (b) Execution against the debtor's assets is stayed; (c) The right to transfer, encumber or otherwise dispose of any assets of the debtor is suspended. 2. The scope, and the modification or termination, of the stay and suspension referred to in paragraph 1 of the present article are subject to [refer to any provisions of law of the enacting State relating to insolvency that apply to exceptions, limitations, modifications or termination in respect of the stay and suspension referred to in paragraph 1 of the present article]. (italics in original) … Article 21 Relief that may be granted upon recognition of a foreign proceeding 1. Upon recognition of a foreign proceeding, whether main or non main, where necessary to protect the assets of the debtor or the interests of the creditors, the court may, at the request of the foreign representative, grant any appropriate relief, including: (a) Staying the commencement or continuation of individual actions or individual proceedings concerning the debtor's assets, rights, obligations or liabilities, to the extent they have not been stayed under paragraph 1 (a) of article 20; (b) Staying execution against the debtor's assets to the extent it has not been stayed under paragraph 1 (b) of article 20; … 17 The Corporations Rules provide that Div 15A is to be interpreted in a manner that gives effect to the Cross-Border Insolvency Act (r 15A.2(2)) and, unless the contrary intention appears, an expression used in both that Act and Div 15A has the meaning that it has in that Act (r 15A.2(1)). Applications, such as the trustees' application today for interim relief under Art 19, must be made by filing an interlocutory process (r 15A.4). An application for recognition of a foreign proceeding under Art 15, such as the trustees seek in their originating process filed under r 15A.3(1), must be publicised in accordance with r 15A.6 which provides: 15A.6 Notice of filing of application for recognition (1) Unless the Court otherwise orders, the plaintiff in a proceeding mentioned in rule 15A.3 must: (a) send a notice of the filing of the application in accordance with Form 20 to each person whose claim to be a creditor of the defendant is known to the plaintiff; and (b) publish a notice of the filing of the application for recognition of a foreign proceeding in accordance with Form 20, in a daily newspaper circulating generally in the State or Territory where the defendant has its principal, or last known, place of business. (2) The Court may direct the plaintiff to publish a notice in accordance with Form 20 in a daily newspaper circulating generally in any State or Territory not described in paragraph (1) (b). (emphasis added) 18 Similar publication requirements apply by force of: r 15A.7 which applies if the Court makes an order for recognition of a foreign proceeding under Art 17 or any orders under Arts 19 or 21 of the Model Law, or if the recognition application is withdrawn or dismissed; and r 15A.9 which applies if an application is made to modify or terminate any order for recognition under Art 17(4) or any order made under Arts 19 or 21 of the Model Law. 19 Article 17(2)(a) and (b) draws a distinction between a foreign main proceeding (being one that "is taking place in the State where the debtor has the centre of if its main interests") and a foreign non-main proceeding (being one where the debtor has "an establishment … in the foreign State") that focuses on the debtor's activities in the locale that is the source of the foreign representative's authority to see recognition here. I discussed the test for determining what "the centre of main interests" of a debtor is under Art 17(2)(a) in Ackers v Saad Investments Company Ltd (in official liquidation) (2010) 190 FCR 285.

Background 20 Mr Alari explained that the company was incorporated in Italy on 20 July 1993 and that its registered office is in Torre del Greco, Naples, Italy. He explained that the debtor had experienced significant cash flow and other financial difficulties as a result of the global financial crisis but that, due to the trustees' very recent appointment they have not yet been able fully to review its financial position. 21 He explained the nature of the fallimento procedure under which the Italian Court appoints trustees for the liquidation of an insolvent's assets in order to distribute the proceeds pari passu among the creditors in proportion to their respective claims and in accordance with the priority rules established under the law of Italy. Mr Alari said that during that procedure an insolvent corporation itself does not have the power to manage or dispose of its assets and that this was why, when the Italian Court appointed the trustees, it gave them the power to do so. One of the trustees' duties is to identify and dispose of all the debtor's assets and, having reviewed the claims of creditors (both secured and unsecured), make a report to the Italian Court. He said that, pursuant to Art 51(1) of the Italian Bankruptcy Act, once an insolvency has been declared, creditors cannot bring individual actions in relation to assets included in the insolvent's estate. 22 Mr Alari identified the three Australian creditors known to the trustees as being Gulf Agency Company (Australia) Pty Ltd, Thomas & Coffey Pty Ltd and Southern Cross Marine Suppliers Pty Ltd which, as he understood, were owed a total of about AUD15,000. He said that the company had no assets in Australia and that no ship is currently scheduled to sail to a port in Australia, although that could change at any time.

Should the trustees be made interveners in the 2017 proceeding? 23 Relevantly, r 1.3(1)(b) of the Corporations Rules provides that Div 15A applies to a proceeding in the Court under the Cross-Border Insolvency Act and r 1.3(2)(b) provides that the other rules of the Court, including, obviously, the Federal Court Rules, apply to the extent that they are relevant and not inconsistent with the Corporations Rules. 24 Rule 9.12 of the Federal Court Rules gives the Court a wide discretion to grant leave to a person to intervene in a proceeding with such rights, privileges and liabilities (including as to costs) as the Court may determine. 25 In my opinion, the application by the trustees to intervene in the 2017 proceeding is apposite and, the relief they seek in it, is appropriate. The trustees were mindful of the remarks of Allsop CJ in Yakushiji v Daiichi Chuo Kisen Kaisha (No 2) [2016] FCA 1227 and myself in Rizzo [2017] FCA 331 concerning the need to bring to the Court's attention promptly a substantial change to the status of a foreign representative's appointment, namely its termination in the jurisdiction in which he or she had been appointed: see too In re Daewoo Logistics Corporation 461 BR 175 (SDNY: 2011). Each of those decisions referred to the obligation imposed on the foreign representative by Art 18(a) of the Model Law to bring to the Court's attention any substantial change in his or her status or that of the foreign proceeding. 26 Here, the effect of both the Italian Court's decisions to terminate the third concordato preventivo, that had the consequence of withdrawing the capacity of the board to act in its pre-existing status as debtor in possession of the company, and to appoint the trustees to liquidate the company, suspended any power of the board to act in its previous capacity as the persons in control of the company. 27 This situation highlights a serious lacuna in the way in which Art 18(a) of the Model Law and Div 15A of the Corporations Rules operate that does not appear to have been anticipated by the drafters of the Model Law. The problem is that once the foreign proceeding, pursuant to which the foreign representative brought proceedings for recognition in the local forum, has been either terminated or withdrawn, that event necessarily also extinguishes the status or authority of the foreign representative to act in respect of the debtor and his, her or its affairs. In reality, the foreign representative subsequently will be highly unlikely to be in a position financially (or feel responsible) to inform the local court, that had acted earlier to recognise the foreign proceeding in the forum, of that fact under Art 18 of the Model Law. 28 As a matter of common sense, once the foreign representative ceases to occupy his or her position in the jurisdiction of the foreign court that appointed him or her (such as the Italian Court here), he or she will have no resort to funds of the debtor or, more particularly, no sense of responsibility to another court, such as this, to which the foreign representative may have no realistic chance of being made to account, if he or she fails to act under Art 18(a) to draw attention to any substantial change of status of himself or herself or the recognised foreign proceeding. 29 That practical reality means that any interim or final recognition orders by the local court (such as this Court) will remain in force in its jurisdiction even though the change of status in the jurisdiction of the foreign court has removed the very foundation of, or continuing justification for, the local court's orders under the Model Law. Thus, the interim stay and other orders I had made on 17 June 2015 remained in force in Australia in the period between the Italian Court's dismissal of the second concordato preventivo on 28 April 2016 and 3 February 2017, when I made orders vacating those orders (with retrospective effect) despite the Italian Court's earlier dismissal of the very proceeding that this Court's orders were supposedly continuing to recognise: see Rizzo [2017] FCA 331 at [13]-[19]. 30 In the absence of an amendment to address this problem in the uniform rules of Australia's Supreme Courts and of this Court giving effect to what is in Div 15A of the Corporations Rules, it may be desirable to consider, in future recognition applications under the Model Law, requiring a foreign representative to pay into court an amount by way of security. That could ensure that there will be funds in this jurisdiction available to support the foreign representative, or an intervener, applying for orders under Art 18 to take account of any relevant change of the foreign representative's status. The existence of that security is likely to be known to the debtor or whomever succeeds to the position of the foreign representative to control the debtor's affairs after the change of status in the jurisdiction in which the foreign court or other appointing authority (such as the creditors or the debtor) is located. Hence, someone is likely to want to recover the balance of any security held in court for the benefit of the debtor or his, her or its creditors, by making an application under Art 18 to regularise matters. 31 An alternative to requiring security may be to make any stay orders under Arts 19, 20 or 21 for a fixed period of say three months, and to require the foreign representative at regular intervals to report to the Court to justify each extension of the stay, failing which it would be vacated automatically. However, that course may cause unnecessary expense.

On which date should the 14 February 2017 orders be vacated? 32 The purpose of the 14 February 2017 orders was to support the efficacy of the third concordato preventivo by protecting the company's assets in, or that may have sailed into, Australia. That purpose came to an end on 10 January 2018 when the Italian Court dismissed the third concordato preventivo. As Art 17(4) of the Model Law recognises and as Allsop CJ and Judge Lifland, respectively, cogently explained in Yakushiji (No 2) [2016] FCA 1277 at [20]-[22] and in Daewoo 461 BR 175 at 179 (to which I referred in Rizzo [2017] FCA 331 at [17]-[18]), recognition can be terminated, if the grounds on which it was granted "have ceased to exist". 33 As a matter of principle, orders made under the Model Law should also cease to operate once the reason for having originally granted a stay and any other orders under the Model Law to recognise, aid or facilitate the conduct of the foreign proceeding also has ceased to exist. There is then no need to protect the debtor's assets here under the Model Law, because the foreign proceeding (in aid of which the local stay, recognition and any other orders were made) has ceased to exist, or otherwise no longer provides a justification to prevent creditors from exercising their rights in Australia against the debtor or the debtor's assets. 34 Accordingly, in circumstances like the present, the stay and other orders affecting the rights of creditors made on 14 February 2017, should be vacated or set aside with effect from the same date as the Italian Court dismissed the concordato preventivo, namely 10 January 2018.

When should the vacation of the earlier orders take effect? 35 A person in the position of the board (such as occurred between the second and third concordato preventivos) or the trustees should not be able to benefit from a failure of a foreign representative to take prompt action under Art 18 to inform the Court of a substantial change in his or her status or that of the foreign proceeding before, or instead of, seeking fresh relief in a new proceeding under Art 17 to replace the stay and any orders that supported a previous, but no longer active, foreign proceeding: Rizzo [2017] FCA 331. 36 Once again, the board did not inform the Court promptly, or at all, that the Italian Court had terminated the third concordato preventivo. However, the trustees promptly brought this to the Court's attention and sought to regularise the 2017 proceeding, and that action raised the issues that I identified above.

Where should the present application be advertised? 37 As I noted above at [16]-[17], rr 15A.6 and 15A.9 of the Corporations Rules require, unless the Court otherwise orders, that notice of the filing of an application for recognition or modification or termination, in Form 20 or Form 23 respectively, be published "in a daily newspaper circulating generally in the State or Territory where the defendant has its principal, or last known, place of business". 38 Two issues arose in respect of the advertising that should occur, namely first, whether it was necessary in the circumstances of the company, that owns or charters ships that from time to time might sail to Australia, and that has only three known local creditors, to advertise in a daily newspaper circulating throughout Australia and, secondly, whether "the State or Territory" referred to in rr 15A.6(1)(b), (2), 15A.9(4)(b) and (5) is one within the geographical limits of Australia or within the State where the debtor has "the centre of its main interests" or "an establishment … in the foreign State" as referred to Art 17(2) of the Model Law. 39 The trustees rely on the affidavit of Jesper Martens sworn today that in complying with the orders that I had made on 3 and 14 February 2017 for the advertising of the termination of 2015 proceedings and the application for a stay and other orders in the 2017 proceedings, the board had advertised in Lloyd's List Australia, Lloyd's List International and the national daily newspaper, The Australian. The cost of the advertisements in those three publications was respectively $726, GBP1,500 (about $2,600) and $7,356.80. Since 12 October 2017, Lloyd's List Australia has been published under the name Daily Cargo News (DCN) which is a trade newspaper circulating in the Australian maritime and transport logistic industry. 40 On the evidence before me, it does not appear that the company carries on any form of business in Australia or would otherwise have a need to incur liabilities to creditors here, unless and until a ship that it owns or charters calls at an Australian port. Thus, the trustees argue, there is little utility in requiring them to advertise in The Australian or another national daily newspaper at a similar considerable expense as that incurred last year. Indeed, that expense equated to about half of the value of the company's known liabilities to its three known Australian creditors. 41 It does not seem to be necessary to bring to the attention of any at present unknown creditor notice of the termination of the 2017 proceeding or the existence of the 2018 proceeding. The three known local creditors and readers who might be creditors will have notice of those matters from the publication of advertisements in the DCN and or Lloyd's List International. 42 I am satisfied that, for the reasons advanced by the trustees, in all of the circumstances, including that this is, in effect, the fourth attempt to deal with the insolvency of the company, little purpose would be served by also requiring advertising in The Australian. It will suffice if the advertising occurs, as the trustees propose, in the DCN and Lloyd's List International. 43 That conclusion substantially renders nugatory the need for me to decide the meaning of the expression "the State or Territory where the defendant has its principal, or last known, place of business" in r 15A.9. 44 Until senior counsel for the trustees raised this issue, I had assumed that the reference to "State or Territory" in Div 15A was to require advertising in the place of the debtor's centre of main interests, or the place where the debtor had an establishment abroad. This would serve the purpose of notifying creditors there that the person in control of the debtor's affairs (being the foreign representative) had taken steps to seek recognition of the foreign proceeding in this jurisdiction, so that creditors would know that they should not make claims here because of the stay under Arts 19(1), 20(1) and 21(1). 45 Ordinarily, insolvent shipowners trading internationally, who make applications here under the Model Law, are unlikely to have any place of business in Australia. Their vessels may be likely to call here and then be exposed to the risk of arrest in a proceeding in rem. My rationale for considering that "State or Territory", as used in the advertising requirements in rr 15A.6 and 15A.9, related to the place whence the application for recognition came, was that creditors in that jurisdiction would be advised they did not need to bring proceedings in Australia. That would follow since the Australian court had made orders, for the purposes of the Model Law, in effect, prohibiting the bringing of, or staying, any such proceedings until further order so as to enable the administration of all of the debtors' liabilities to take place in the forum for which recognition was sought in Australia. 46 There are some textual indications in the Corporations Rules and the Cross-Border Insolvency Act to suggest that the reference to "State or Territory" or a place of business is to one within Australia. The use of the proper noun "State" also appears in the Model Law, including in Art 17(2), albeit that the Model Law does not use the word "Territory", while the Cross-Border Insolvency Act refers to "States or Territory" as jurisdictions within Australia. 47 It is not necessary to resolve this issue, but it seems to me that there may be utility in advertising both locally and in the foreign jurisdiction whence the foreign proceeding arose, for the reasons I have given. In any event, advertising in Lloyd's List International is likely to bring this Court's orders to the attention of any creditors in the shipping and maritime industry who might have considered bringing proceedings here.

Conclusion - the 2017 proceeding 48 Accordingly, I will make orders in the 2017 proceeding, as refined during the course of argument, that the trustees be given leave to intervene under r 9.12, and, pursuant to Art 22(3), vacating orders 3 and 4 made on 14 February 2017 (that had granted interim protection under Art 19(1) of the Model Law in respect of the third concordato preventivo proceeding) with effect from 10 January 2018, and that the 2017 proceeding be dismissed. I will also order that, in satisfaction of r 15A.9(3)(b) and (4), the trustees publish notices of the making of those orders in the DCN and Lloyd's List International and serve each known Australian creditor with those notices, and I will waive any further requirement under the Corporations Rules to advertise those orders, give notices and send a Form 23 to known creditors, or serve them with copies of documents.

The 2018 proceeding 49 The trustees seek a stay in broad terms under Art 20(1) of the Model Law and the interim, and then ultimately, final recognition here of the fallimento proceeding as a foreign main proceeding. Mr Alari said that the company's centre of main interests was in Italy and that it had held itself out to the world as operating from that country. He said that creditors and potential creditors would be fully aware that the company was based in Italy. He was not aware of any foreign proceedings in respect of the company other than the 2017 proceeding in Australia and two other applications that the trustees had made for recognition. Mr Alari disclosed that on 23 January 2018, the KwaZulu Natal Local Division of the High Court of South Africa, in Durban, had made interim orders in aid of their application for recognition of the fallimento proceeding. That Court's order included a very broad stay, that precluded any potential to bring any action in rem in South Africa. He said that the trustees had also applied in the United States for recognition of the fallimento proceeding as a foreign main proceeding but that this was still to be heard. 50 The trustees also sought relief from having to serve notice of the recognition application on the company since that would be futile, given the status of the trustees in controlling its interests.

The form of the stay 51 I am satisfied by Mr Alari's evidence that, for the purposes of granting interim relief under Arts 17 and 19, the company is in a fallimento procedure. That is a form of external administration analogous to a liquidation under Pt 5.4B of the Corporations Act. 52 The question now arises as to the form of stay that I should order. For the purposes of s 16 of the Cross-Border Insolvency Act and Art 20(2) of the Model Law there is a problem of classification of debtor-in-possession proceedings, like those under Ch 11 of the Bankruptcy Code of the United States or the analogous Italian concordato preventivo procedure, because there is no exact equivalent under Ch 5 of the Corporations Act. Jagot J concluded in Tai-Soo Suk v Hanjin Shipping Co Ltd [2016] FCA 1404, which I followed in Rizzo [2017] FCA 331 at [2], that debtor-in-possession proceedings of that nature were more closely analogous, for the purposes of Art 20(2), to proceedings under Pt 5.3A of the Corporations Act than to other proceedings under Ch 5. 53 However, here, the analogous provisions of the Corporations Act, for the purposes of Art 20(2), are in Pt 5.4B, namely ss 471B and 471C. Those provisions recognise the entitlement of secured creditors to enforce their rights to realise assets that an insolvent corporation provided as security. 54 The researches of counsel and myself have not ascertained any proceedings in relation to recognition of a foreign proceeding, analogous to a liquidation by the Court under the Cross-Border Insolvency Act, in which a Court has made a stay order that, in its terms, referred to a secured creditor's right under s 471C to realise or otherwise deal with their security interests. 55 As the trustees' senior counsel pointed out, Div 6A of Pt 1.2 of the Corporations Act provides definitions of security interests for the purposes of that Act. Section 51A provides that, in the Corporations Act, "security interest" means a security interest within the meaning of the Personal Property Securities Act 2009 (Cth) or a charge, lien or pledge, and s 51E provides that "secured creditor" of a corporation means "a creditor of the corporation, if the debt owing to the creditor is secured by a security interest". In addition, s 8(1)(b) and (c) of the Personal Property Securities Act exclude from that Act's operation a lien or charge or other interest in personal property that is created, arises or is provided for by an Act or the operation of the general law, such as a maritime lien as well as a mortgage of a foreign ship that does not need to be registered under the Shipping Registration Act 1981 (Cth). 56 The trustees raised the question whether, having regard to those definitions and exclusions, a maritime lien or a mortgage of such a foreign ship fell within the definition of "security interest" in the Corporations Act for the purposes of s 471C. It is not necessary to decide this question here. Such a question ought be resolved only when it arises in a proceeding in which all relevant issues can be explored with the benefit of argument. However, the fact that it arises emphasises again the burdensome effect on the commercial community and the courts of the current drafting style of Commonwealth Acts and subordinate legislation: cf. Morris Finance Ltd v Brown (2017) 350 ALR 86 where Beach, Markovic and Moshinsky JJ discuss s 58(5) of the Bankruptcy Act 1966 (Cth) being the analogue of s 471C. 57 I am of opinion that it is appropriate to grant the trustees interim relief, pending the final hearing of the application for recognition on 1 March 2018, by ordering a stay that accords with s 16 of the Cross-Border Insolvency Act, namely the stay that would apply if the 2018 proceeding were a liquidation by the Court or a winding up in insolvency for the purposes of Pt 5.4B of the Corporations Act. The order should reflect the provisions of both ss 471B and 471C, so that secured and unsecured creditors will be made aware of their rights (as best the Court can do so). 58 I will also make an order in what is now the usual form that the Court has granted in cases under the Model Law relating to foreign shipping companies. This will require that any application for the issue of a warrant of arrest in Australia of any vessel owned or chartered by the company be made ex parte to a judge: see Yu 223 FCR 189. 59 I will adjourn the recognition application for final hearing on 1 March 2018. I certify that the preceding fifty-nine (59) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Rares.