Cussen v Bank of Nauru

IN THE FEDERAL COURT OF AUSTRALIA NEW SOUTH WALES DISTRICT REGISTRY GENERAL DIVISION NSD 718 of 2011

JUDGE: JACOBSON J DATE: 2 August 2011 PLACE: SYDNEY

Introduction 1 On 19 November 2009, the Bank of Nauru ("BoN") was ordered to be wound up by an order of the District Court of Nauru and Mr Neil Cussen was appointed as liquidator. 2 By an originating process filed in this court on 25 May 2011, Mr Cussen applies under art 17(1) of sch 1 of the Cross-Border Insolvency Act 2008 (Cth) ("the Act") for the proceeding in the District Court of Nauru by which the BoN was ordered to be wound up to be recognised as a "foreign proceeding". Mr Cussen also applies pursuant to art 17(2) of sch 1 of the Act for the Nauruan proceeding to be recognised as a "foreign main proceeding". Certain ancillary relief which was claimed in para 3 of the originating process is not pursued in this application.

Recognition of a "foreign proceeding" 3 The provisions of the Act governing the recognition of a foreign proceeding and of a foreign main proceeding have been discussed in a number of authorities of the court: see Hur v Samsun Logix Corporation [2009] FCA 372 ("Samsun"); Re Aero Inventory (UK) Ltd, Tucker v Aero Inventory UK Limited (2009) 76 ACSR 19 ("Tucker"); and Katayama v Japan Airlines Corporation (2010) 79 ACSR 286 ("JAL"). As Emmett J observed in JAL at [3], the Act was enacted to give effect to the Model Law on Cross-Border Insolvency of the United Nations Commission on International Trade Law, GA Res 52/158, 52nd sess, 72nd plen mtg, Agenda Item 148, UN Doc A/52/649 (30 January 1998, adopted 15 December 1997) ("the Model Law"). 4 Sections 6 and 8 of the Act provide that the Model Law, which is set out in sch 1 to the Act, has the force of law in Australia as if it referred to the Bankruptcy Act 1966 (Cth) ("Bankruptcy Act") and ch 5 (other than pts 5.2 and 5.4A) and s 601CL of the Corporations Act 2001 (Cth) ("Corporations Act"). Certain entities prescribed by reg 4 of the Cross-Border Insolvency Regulations 2008 (Cth) ("the Regulations") are not covered by the Model Law: see s 9 of the Act. The prescribed entities are authorised deposit-taking institutions or ADIs (as defined in the Banking Act 1959 (Cth)), general insurers (as defined in the Insurance Act 1973 (Cth)) and life companies (as defined in the Life Insurance Act 1995 (Cth)). The Act confers jurisdiction on the Federal Court as a court that is competent to perform the functions referred to in the Model Law: see s 10(b)(i) of the Act; see, also, art 4 of the Model Law. 5 In Tucker at [8], Lindgren J identified the matters that are required to be established for a "foreign proceeding" to be recognised. The matters are specified in a number of different provisions. Some of them are procedural; some are substantive. The relevant provisions are s 13 of the Act, ch 3 of the Model Law (in particular, arts 15 and 17) and r 15A of the Federal Court (Corporations) Rules 2000 (Cth) ("the Corporations Rules"). 6 The pivotal provision is art 17 of the Model Law, which deals with decisions to recognise a "foreign proceeding". Article 17(1) provides that, subject to an exception in art 6, a "foreign proceeding" shall be recognised if it is a proceeding as defined in art 2(a). The exception in art 6 is that nothing in the Model Law prevents the court from refusing to take an action governed by the Model Law if the action would be manifestly contrary to the public policy of Australia. 7 Article 2(a) defines a "foreign proceeding" as a collective judicial or administrative proceeding in a foreign state pursuant to a law relating to insolvency in which proceeding, the assets and affairs of the debtors are subject to the control or supervision by a foreign court for the purpose of reorganisation or liquidation. 8 Article 17(1) specifies two other requirements for recognition of a "foreign proceeding". The first is that the foreign representative who applies for recognition is a person falling within the definition in art 2(d). A "foreign representative" is defined as a person or body authorised in a "foreign proceeding" to administer the reorganisation or the liquidation of the debtor's assets or affairs, or to act as a representative of the foreign proceeding. The second additional requirement for recognition referred to in art 17 is that the application meets the requirements of art 15(2) of the Model Law. That paragraph sets out certain procedural requirements to which I will refer below.

Recognition of a "foreign main proceeding" 9 Article 17(2) deals with recognition of "foreign main proceeding". This provision introduces the concept of the centre of the debtor's main interests. A "foreign proceeding" is to be recognised as a "foreign main proceeding" if it taking place in the state where the debtor has "the centre of its main interests". That concept is not defined, but certain presumptions are set out in art 16, to which I will refer later. 10 Plainly enough, the requirements for standing of the foreign representative and the procedural requirements referred to in art 17(1) apply equally to the recognition of the "foreign proceeding" as a "foreign main proceeding". The entitlement of a foreign representative to apply to the court for recognition of a foreign proceeding and the procedural requirements for such an application are set out in art 15 of the Model Law.

Procedural Requirements 11 Article 15(1) provides that a foreign representative may apply to the court for recognition of the foreign proceeding in which the foreign representative has been appointed. The relevant procedural requirements specified at arts 15(2) and 15(3) are that the application is to be accompanied by: a certified copy of the decision commencing the foreign proceeding and appointing the foreign representative; or a certificate from the foreign court affirming the existence of the foreign proceeding and the appointment of the representative; a statement identifying all foreign proceedings in respect of the debtor that are known to the foreign representative. 12 The procedural requirements referred to in art 15 are supplemented in s 13 of the Act, which requires that, in addition to the requirement of a statement identifying all foreign proceedings in respect of the debtor, the application must be accompanied by a statement identifying all proceedings under the Bankruptcy Act and any appointment of a receiver within the meaning of s 416 of the Corporations Act or a controller or a managing controller in relation to the property of the debtor, as well as all proceedings under ch 5 or s 601CL of the Corporations Act in respect of the debtor. 13 Further procedural requirements are found in r 15A.3 of the Corporations Rules. The Rules require an application for recognition to be made by filing an originating process in accordance with Form 2, which is contained in Schedule 1. Rule 15A.3(2) provides that the originating process must: be accompanied by the statements referred to in art 15 of the Model Law and s 13 of the Act; and name the foreign representative as the plaintiff and the debtor as the defendant; and be accompanied by an affidavit verifying the matters mentioned in arts 15(2) and 15(3) of the Model Law and s 13 of the Act. 14 Certain other procedural requirements are referred to in rr 15A.3(3) and 15A.3(4). It is unnecessary for me to refer to those in my reasons save to say that provision is made for the court to dispense with certain of the requirement.

The effect of recognition of a "foreign main proceeding" 15 As stated in art 20 of the Model Law, the effect of recognition of a "foreign proceeding" that is a "foreign main proceeding" is that: the commencement or continuation of individual actions or individual proceedings concerning the debtor's assets, rights, obligations or liabilities are stayed; execution against the debtor's assets is stayed; and the right to transfer, encumber or otherwise dispose of any assets of the debtor is suspended. 16 The abovementioned provisions are to be seen in light of the objects of the Model Law which are stated in its preamble. The purpose of the Model Law is to provide effective mechanisms for dealing with cases of cross-border insolvency so as to promote the objectives as follows: Cooperation between the courts and other competent authorities of the state and the foreign state involved in cases of Cross-Boarder Insolvency. Greater legal certainty for trade and investment. Fair and efficient administration of cross-boarder insolvencies. Protection and maximisation of the value of the debtor's assets. Facilitation of the rescue of financially troubled businesses.

Other Relevant Provisions 17 I should for completeness refer to a number of other relevant provisions of the Act and the Model Law. Section 4 of the Act contains a territorial limitation. It states that the Act does not extend to the territory of Christmas Island or the territory of Cocos (Keeling) Islands. Section 14 of the Act provides for a foreign representative to inform the court promptly of any other foreign proceedings that become known to the foreign representative. In particular the foreign representative must inform the court promptly of any proceedings under the Bankruptcy Act or the other provisions of the Corporations Act to which I have referred earlier. 18 Article 1 of the Model Law provides that the Model Law applies where assistance is sought in the State (relevantly here, Australia) by a foreign court or a foreign representative in connection with a foreign proceeding. Article 16 of the Model Law contains a number of presumptions concerning recognition. Article 16(1) provides that if the decision or certificate referred to in art 15(2) indicates that the "foreign proceeding" is a proceeding within the meaning of art 2(a) and that the foreign representative is a person or body within the meaning of art 2(d) the court is entitled to so presume. Article 16(2) provides that the court is entitled to presume that documents submitted in support of the application for recognition are authentic whether or not they have been legalised. 19 Article 16(3) is an important provision. It provides that in the absence of proof to the contrary the debtor's registered office or habitual residence in the case of an individual is presumed to be the centre of the debtor's main interests. Article 18 of the Model Law corresponds with s 14 of the Act by requiring the court to inform the court promptly of any substantial change in the status of the recognised foreign proceeding or in the status of the foreign representative's appointment and of any other foreign proceedings regarding the debtor that become known to the foreign representative.

Consideration 20 BON was incorporated on 1 October 1976 under the Bank of Nauru Act 1976-1997 (No 17 of 1976) of the Republic of Nauru ("Bank of Nauru Act"). BON was the only commercial bank in Nauru from incorporation in 1976 until it reportedly became insolvent in the mid to late 1990s. The BON's depositors have not been able to withdraw cash from their accounts since the late 1990s and there are little or no funds to provide any further loans or to pay interest on the accounts. In 2004 the Republic of Nauru revoked the licenses of all off-shore banks preventing them from conducting further banking activities in Nauru. BON was effectively closed from approximately mid-2006. It is clear from this that there are no effective means of conducting ordinary banking operations in the republic. 21 In 2009, Mr Cussen was engaged by the Republic of Nauru to carry out an investigation into the BON. His investigation identified numerous difficulties which he sets out in para 27 of his affidavit of 25 May 2011. The difficulties include the fact that the operational and financial records of BON are poor. There appear to be debtors and depositors located within and outside Nauru, including Australia, other Pacific Island jurisdictions and Asia. In particular there appear to be approximately 3500 depositors who may be owed money and the Nauru Phosphates Trust, which is located in Australia, claims to be owed approximately $25 million. 22 As I said earlier BON was ordered to be wound up by the District Court of Nauru on 19 November 2009. A certified copy of the decision of the District Court of Nauru ordering the compulsory winding up and appointing Mr Cussen as the liquidator is annexed to Mr Cussen's affidavit of 27 July 2011. The winding up order was made under the Corporation Act 1972 (No 5 of 1972) of the Republic of Nauru and the Corporation (Winding up) Rules 1972 of the Republic of Nauru. 23 Mr Cussen's evidence satisfies me as to all of the substantive and procedural requirements set out in the provisions of the Act and the Model Law, to which I have referred. In particular the winding up proceeding in the District Court of Nauru is a "foreign proceeding" because it is a collective judicial or administrative proceeding in a foreign state relating to the insolvency of BON in which the assets and affairs are subject to the control of the Nauru court for the purpose of the liquidation of BON. Mr Cussen is the "foreign representative" applying for recognition because he was appointed as the liquidator by the order of the District Court of Nauru. 24 The proceeding in the Nauru District Court is a foreign main proceeding because it is taking place in the state where BON has the centre of its main interest. There is an abundance of evidence to support the finding that Nauru is the centre of BON's main interest. First, BON undertook its banking activities principally in Nauru. Second, the provisions of the Bank of Nauru Act to which I was taken in detail by Mr Dawson of counsel shows that Nauru was the centre of BON's main interest. In particular, s 3 of the Bank of Nauru Act provides for the incorporation of BON and provides that the republic is the sole corporator. Section 5 of the Bank of Nauru Act provides for a board of directors to be appointed by Cabinet and s 17 provides that the principal place of business is to be Nauru. 25 The territorial provisions of section 4 of the Act are satisfied because Nauru is an independent sovereign state. It is not a territory of Australia or part of the territory of Christmas Islands or the territory of Cocos (Keeling) Islands. The BON is not a prescribed entity under section 9 of the Act because it is not an ADI, a general insurer or a life company. 26 The procedural requirements of ss 13 and 14 of the Act are satisfied because Mr Cussen has sworn that he is not aware of any proceedings by or against BON and he is not aware of the appointment of a receiver, controller or managing controller of the property of BON and he is not aware of any proceedings by or against BON pursuant to the Bankruptcy Act or the Corporations Act. 27 Mr Cussen has updated this information in his affidavits of 25 July 2011 and an affidavit sworn on 2 August 2011. He is not aware of any matters affecting the position as stated in his earlier affidavits. That this is so is supported by matters which Mr Cussen learnt during his trips to Nauru in June 2011 in which he met with as many stakeholders in the winding up of BON as were possible during the time he spent in Nauru. In addition Mr Cussen's evidence as to the absence of any other proceedings apart from the proceeding in the District Court of Nauru is supported by the affidavit of Mr David Lambourne who is the Secretary for Justice and Border Control for the Republic of Nauru. 28 All of the other procedural requirements to which I have referred have been satisfied save for an irregularity in the publication of a Form 20 notice. On 25 May 2011, I directed that notice of the present application be published in the following newspapers or periodicals: The Australian The Commonwealth Government Gazette The Singapore Straits Times The Fiji Times The Solomon Islands Star The Nauru Bulletin 29 The notice was published in all of the above publications in accordance with my directions save for the notices in the Singapore Straits Times, The Fiji Times and The Solomon Islands Star. Notices in those publications were eventually published but they were published only shortly before the matter was listed before me on 28 July 2011. 30 However, any prejudice is overcome by the terms of the orders I propose to make which will provide that the orders recognising the Nauru proceeding will not come into effect until 17 August 2011 and for liberty for any creditor to apply. I should also add that the matter was called before me on 28 July and today and there was no appearance by any creditor. 31 For these reasons I will make orders in accordance with the draft order submitted to me by Mr Dawson which I will sign and date. I certify that the preceding thirty-one (31) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Jacobson.