Dalian Huarui Heavy Industry International Co Ltd v Clyde & Co Australia - [2021] FCA 112 - FCA 2021 case summary — Zoe

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Dalian Huarui Heavy Industry International Co Ltd v Clyde & Co Australia

[2021] FCA 112

Federal Court of Australia|2021-02-16|Before: McKerracher J

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Source facts

Court

Federal Court of Australia

Decision date

2021-02-16

Before

McKerracher J

Source

Original judgment source is linked above.

Judgment (22 paragraphs)

[1]

Pursuant to r 10.43 of the Federal Court Rules 2011 (Cth), the Applicants are granted leave to serve an originating process in substantially the form annexed as 'JRS-1' to the affidavit of Jonathan Rex Shepherd (sworn 12 February 2021) on the following prospective defendants in foreign countries: (a) Mongbwalu Goldfields Investments Limited (Registered No. 133304), being a company incorporated in the Republic of Seychelles; (b) Mongbwalu Goldfields Investments Holdings 6 Limit (Registered No. 1571486), being a company incorporated in the British Virgin Islands; and (c) Harneys Corporate Services Limited (Registered No. 1006316), being a company incorporated in the British Virgin Islands. Such service on each of the prospective defendants identified above to be effected in accordance with a convention, the Hague Convention or the law of the foreign country by the methods more specifically explained by Counsel for the Applicants at the hearing held on 16 February 2021 from 2.30 pm (Perth time).
Costs of the application be costs in the administration of the Third Applicant. Note: Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.

[2]

MCKERRACHER J: 1 The Applicants apply urgently and ex parte for leave to serve a separate proposed originating process (Ultimate Proceeding) outside Australia. The Applicants are the prospective plaintiffs in the Ultimate Proceeding. The First and Second Applicants are the voluntary administrators (Administrators) of the Third Applicant (the Company). For the following reasons, I consider that the service out orders should be granted. 2 The application is supported by expansive affidavit evidence which is intended to establish for present purposes that the Company purchased shares (Shares) in the prospective second defendant to the Ultimate Proceeding (MGIH6) (a company incorporated in the British Virgin Islands) from the prospective first defendant to the Ultimate Proceeding (MGI) (a company incorporated in the Republic of Seychelles) and entered into a security arrangement by which the prospective third defendant to the Ultimate Proceeding (Harneys) (another company incorporated in the British Virgin Islands) would hold, and now does hold, documents in escrow to effect a transfer of the Shares back to MGI in certain circumstances (Escrow Arrangement). In addition to holding the escrowed documents, Harneys is also said to be 'the registered agent' of MGIH6. 3 In September 2020, MGI issued a notice of breach on the Company. The breach notice pertained to certain clauses of the Share Sale and Purchase Agreement (SSPA) through which the Company had purchased the Shares. The breach notice indicated that unless the purported breach was rectified, MGI would take steps to enforce and protect its rights under the SSPA, including having recourse to the Escrow Arrangement by instructing Harneys to release the documents held. In October 2020, the Company obtained an injunction from the Eastern Caribbean Supreme Court restraining Harneys from releasing the escrowed documents. That injunction lapses on 25 February 2021. Upon a grant of leave for service out, the Applicants intend to apply to this Court on an expedited basis for final relief in the form of declarations that, by virtue of the Company's administration, the security interest created by the Escrow Arrangement vests in the Company. Alternatively, it will argue that the prospective defendants cannot enforce the Escrow Arrangement during the administration of the Company. Injunctions are also sought to this effect. 4 Even though the Shares are property of the Company located outside Australia, the Applicants contend that certain provisions of the Corporations Act 2001 (Cth) and the Personal Property Securities Act 2009 (Cth) (PPSA) apply on their terms to the property in the following manner: (a) the Escrow Arrangement is a security interest within the meaning of the PPSA; (b) the PPSA further operates to vest that security interest in the Company through lack of perfection; and (c) alternatively, at the least, the moratorium provisions in s 440B of the Corporations Act apply to prohibit enforcement of the security interest during the voluntary administration of the Company.

[3]

REQUIREMENT FOR LEAVE 5 By r 2.7 of the Federal Court (Corporations) Rules 2000 (Cth), an originating process once issued must be served on the defendants. Under r 10.43 of the Federal Court Rules 2011 (Cth), an originating application served on a person in a foreign country is effective only if: 10.43 Application for leave to serve originating application outside Australia (1) Service of an originating application on a person in a foreign country is effective for the purpose of a proceeding only if: (a) the Court has given leave under subrule (2) before the application is served; or (b) the Court confirms the service under subrule (6); or (c) the person served waives any objection to the service by filing a notice of address for service without also making an application under rule 13.01. Note: A respondent may apply to set aside an originating application or service of that application - see rule 13.01. (2) A party may apply to the Court for leave to serve an originating application on a person in a foreign country in accordance with a convention, the Hague Convention or the law of the foreign country. (3) The application under subrule (2) must be accompanied by an affidavit stating: (a) the name of the foreign country where the person to be served is or is likely to be; and (b) the proposed method of service; and (c) that the proposed method of service is permitted by: (i) if a convention applies - the convention; or (ii) if the Hague Convention applies - the Hague Convention; or (iii) in any other case - the law of the foreign country. (4) For subrule (2), the party must satisfy the Court that: (a) the Court has jurisdiction in the proceeding; and (b) the proceeding is of a kind mentioned in rule 10.42; and (c) the party has a prima facie case for all or any of the relief claimed in the proceeding. Note 1: The law of a foreign country may permit service through the diplomatic channel or service by a private agent - see Division 10.5. Note 2: Rules 10.63 to 10.68 deal with service of local judicial documents in a country, other than Australia, that is a party to the Hague Convention. Note 3: The Court may give permission under subrule (4) on conditions - see rule 1.33. (5) A party may apply to the Court for leave to give notice, in a foreign country, of a proceeding in the Court, if giving the notice takes the place of serving the originating application. (6) If an originating application was served on a person in a foreign country without the leave of the Court, a party may apply to the Court for an order confirming the service. (7) For subrule (6), the party must satisfy the Court that: (a) paragraphs (4)(a) to (c) apply to the proceeding; and (b) the service was permitted by: (i) if a convention applies - the convention; or (ii) if the Hague Convention applies - the Hague Convention; or (iii) in any other case - the law of the foreign country; and (c) there is a sufficient explanation for the failure to apply for leave. (emphasis added.)

[4]

JURISDICTION OF THE COURT - r 10.43(4)(a) 6 In the Ultimate Proceeding, the Applicants propose to seek orders confirming the operation of the Corporations Act and the PPSA over the Shares and the Escrow Arrangement under s 90-15 of the Insolvency Practice Schedule (Corporations) 2016 (being Sch 2 to the Corporations Act). 7 The Applicants contend but it is unnecessary to decide, that orders under s 90-15 might conceivably be sought on an ex parte basis. However they acknowledge that it is appropriate that the prospective defendants have the opportunity to be heard in respect of the relevant issues. 8 In addition to declaratory relief, the Applicants also intend to seek injunctive relief which requires the prospective defendants to be parties. Further, including the prospective defendants as parties to the Ultimate Proceeding is likely to assist the Applicants (in the event the relief is ultimately granted) in obtaining assistance from a court in the British Virgin Islands to determine if necessary, whether or not to enforce any ruling. 9 By s 1337B of the Corporations Act, the Court has jurisdiction with respect to civil matters arising under the Corporations legislation. The relief sought in the Ultimate Proceeding is an order under s 90-15 of the Insolvency Practice Schedule which is a matter arising under the Corporations legislation. The Court's jurisdiction under s 90-15(1) of the Insolvency Practice Schedule is wide. The provision allows the Court to make such orders as it thinks fit in relation to the external administration of a company. The power under s 90-15(1) is wider than previous sections of the Act and accommodates the determination of third-party substantive rights: Re Hawden Property Group Pty Ltd (in liq) [2018] NSWSC 481 (at [6]-[8]). 10 To the extent that the PPSA jurisdictional provisions are relevant, the Court also has jurisdiction under s 207 of the PPSA to hear matters arising under the PPSA (defined in more detail as a 'PPS matter' in s 206 of the PPSA). 11 Furthermore, s 39B(1A)(c) of the Judiciary Act 1903 (Cth) confers original jurisdiction on this Court in any matter 'arising under the laws made by Parliament, other than a matter in respect of which a criminal prosecution is instituted or any other criminal matter'. 12 The question whether the Court has jurisdiction may also be affected by the facts which are relied upon to establish there is a prima facie case. Accordingly, while it is clear that the Court has jurisdiction with respect to the statutes from which the Applicants seek their relief, it will be necessary to briefly return to the issue of jurisdiction following consideration of whether there is a prima facie case for relief.

[6]

A PRIMA FACIE CASE? - r 10.43(4)(c) 16 As foreshadowed above, the Applicants' case relies on various provisions of the PPSA and s 440B of the Corporations Act to assert that the Escrow Arrangement cannot be enforced against the Company during its administration (moratorium argument) and further, that the security created by the arrangement in fact vests in the Company by virtue of the administration (vesting argument). Given the steps in the analysis, it is necessary to set out the Applicants' contentions in some detail. 17 The moratorium argument for the relief sought relies on s 440B of the Corporations Act which relevantly provides as follows: 440B Restrictions on exercise of third party property rights General rule (1) During the administration of a company, the restrictions set out in the table at the end of this section apply in relation to the exercise of the rights of a person (the third party) in property of the company, or other property used or occupied by, or in the possession of, the company, as set out in the table. Note: The property of the company includes any PPSA retention of title property of the company (see section 435B). … Possessory security interests - continued possession (3) If a company's property is subject to a possessory security interest, and the property is in the lawful possession of the secured party, the secured party may continue to possess the property during the administration of the company. Restrictions on exercise of third party rights Item If the third party is … then … 1 a secured party in relation to property of the company, and is not otherwise covered by this table the third party cannot enforce the security interest. 2 a secured party in relation to a possessory security interest in the property of the company the third party cannot sell the property, or otherwise enforce the security interest.

[8]

Is the Escrow Arrangement a 'security interest' 19 To make good its case under s 267 of the PPSA or s 440B of the Corporations Act the Applicants need to demonstrate that the Escrow Arrangement is prima facie a security interest. 20 A 'security interest' for the purposes of s 440B of the Corporations Act is defined in s 51A of the Corporations Act as: (a) a PPSA security interest; or (b) a charge, lien or pledge. 21 A 'PPSA security interest' is defined in s 51 of the Corporations Act as a security interest within the meaning of the PPSA and to which that Act applies. Under s 6 of the PPSA, that Act applies to a security interest in goods or financial property if, inter alia, the grantor is an 'Australian entity'. Relevantly, the Company is an Australian entity under s 10 of the PPSA. 22 A security interest is defined under s 12(1) of the PPSA as: an interest in personal property provided for by a transaction that, in substance, secures payment or performance of an obligation (without regard to the form of the transaction or the identity of the person who has title to the property). 23 In this case, the Applicants have provided a draft affidavit of the Second Applicant, Mr Carruthers (Draft Carruthers Affidavit) which annexes an Escrow Deed which appears to provide for the Escrow Arrangement in respect of the Company's Shares in MGIH6. The Escrow Arrangement provides MGI with both a legal right and the practical ability to have the Shares transferred to it in order to secure the Company's performance of obligations under the SSPA. A copy of the SSPA, which the parties entered into on 10 July 2018 is also annexed to the Draft Carruthers Affidavit. 24 The Shares are, as defined in s 10 of the PPSA: (a) 'personal property'; (b) 'investment instruments'; and (c) consequently also 'financial property'. 25 The Applicants therefore contend, that on a proper reading of s 12 of the PPSA, the Escrow Arrangement is a security interest in the Shares (Security Interest) granted by the Company in favour of MGI. In similar but not identical scenarios, Kenneth Martin J in the Supreme Court of Western Australia has recently considered questions about the application of s 12 to funds (rather than transfer documents) held in escrow by an independent third party: Dalian Huarui Heavy Industry International Co Ltd v Clyde & Co Australia [2020] WASC 132 (at [210]-[219]); Gas Sensing Technology Corporation v ProX Pty Ltd [2019] WASC 10 (at [259]-[271]). 26 The Applicants note that if it is ultimately concluded that the Security Interest vested in the Company pursuant to s 267 of the PPSA, then the application of the moratorium in s 440B of the Corporations Act will be of little consequence. However, until the vesting question is determined, the Applicants say the Security Interest cannot be enforced during the voluntary administration of the Company by reason of the moratorium provided by s 440B. 27 In Dalian, Kenneth Martin J said (at [251]): Clearly, a strong status quo asset protective legislative intent during any administration underlies s 440B (and, indeed, the whole of Pt 5.3A of the Corporations Act). That objective must be fully recognised and respected, so far as the text permits. Section 440B is a provision that seeks to deliver a status quo retention over the corporation's property while an administration unfolds. To that end, the terminology used describing the items in the s 440B table is extraordinarily wide. 28 There is a relevant restriction in s 440B Item 1 of the table (set out above (at [17]), which provides that 'if the third party is a secured party in relation to property of the company, and is not otherwise covered by this table, then the third party cannot enforce the security interest'. 29 Whilst the Applicants say that the Security Interest is not a 'possessory' security interest within the meaning of s 51D of the Corporations Act (that is, not an interest to which Item 2 of the table applies), that question does not need to be determined for the purpose of this part of the application because the prohibition on enforcing the Security Interest applies in either event.

[10]

Extra-territorial effect of s 440B 34 An important question is whether s 440B has extra-territorial effect such that MGI (a company incorporated in the Republic of Seychelles) is prohibited from effecting a transfer of the Shares in MGIH6 to MGI. 35 Section 5(4) of the Corporations Act provides that: 5 General territorial application of Act (4) Subject to subsection (8), each provision of this Act also applies, according to its tenor, in relation to acts and omissions outside this jurisdiction. 36 Subsection (8) relates to the operation in non-referring States and is not presently applicable. 37 The Applicants have not sourced any reported decisions considering the application of s 5(4) to s 440B. However in PCH Offshore Pty Ltd v Dunn [2009] FCA 553, Siopis J considered the meaning of the words 'according to its tenor' in s 5(4) of the Corporations Act with respect to the extraterritorial operation of different provisions, namely ss 180-183. At [11]-[12] his Honour said: 11 In my view, the tenor of the sections in question does not contain any limitations such as would cause me not to give effect to the clear words of s 5 of the Act. The language is plainly capable of applying to acts and omissions which have occurred outside of Australia. Further, that these sections of the Act are to be construed as operating outside of Australia, is consistent with the position which has been taken in the United States of America, where the extraterritorial operation of similar provisions in the securities legislation of the United States is justified on the grounds that breaches of duty overseas by officers of an United States corporation may have an adverse effect within the United States. In my view, similar policy considerations apply to Australian corporations and the duties owed by their officers. 12 Accordingly, in my view, notwithstanding that the alleged breaches of the Act are said to have occurred in Azerbaijan and Kazakhstan, they are allegations which are justiciable in this court because of the extraterritorial operation of those sections of the Act… 38 Similarly to the language of ss 180-183, the tenor of s 440B of the Corporations Act does not contain any limitations that would prevent the Court from giving effect to the clear words of s 5(4) of the Corporations Act. While any policy considerations would no doubt differ from those identified by Siopis J, the language used in the provision itself is said by the Applicants to explicitly define the extent of the foreign application of the moratorium in the following manner: (a) s 440B applies by the language in the table to a 'security interest'; (b) that phrase is defined in the Corporations Act with explicit reference to the PPSA and security interests governed by it (see [19]-[29] above); and (c) the PPSA itself deals clearly with the extent of its extra-territorial application (by applying only to property outside Australia where the grantor of the requisite security interest is located in Australia). 39 On that basis, it is certainly arguable that s 440B has extra-territorial operation over the Security Interest.

[19]

FURTHER CONSIDERATION OF JURISDICTION 61 The Applicants propose to seek primary orders in a declaratory form about the operation of the requisite provisions of the Corporations Act and the PPSA. 62 The Applicants contend that the jurisdiction under s 90-15 the Insolvency Practice Schedule extends to making injunctive orders - a contention which may be correct but is more challenging - but I am satisfied that the Court's jurisdiction extends to making declaratory orders about the operation of the relevant provisions. 63 Separate from the question whether the Court has jurisdiction under the Insolvency Practice Schedule to make orders in the ordinary course, the Applicants say specifically that the Court has a broader jurisdiction to make orders about the Shares notwithstanding they are located overseas and would affect overseas persons. 64 In this regard, the Full Court (Finn, Dowsett and Siopis JJ) considered the question of jurisdiction in Waller v Freehills (2009) 177 FCR 507. Having considered decisions of the English Court of Appeal in respect of the extraterritorial operation of the insolvency legislation there and its application to residents of offshore jurisdictions, the Full Court determined that it should authorise service of an examination summons overseas, saying (at [49]): It follows that legislation which operates extraterritorially may comprise a statutory source, other than the rules of court, which vests in a court a power to assert jurisdiction over non-residents. 65 In my view, given the manner in which the Corporations Act and the PPSA apply on their face (as described above), the Applicants have a prima facie case sufficient to give the Court jurisdiction over the property and the prospective defendants in respect of it. The case on the s 440B moratorium by reason of the voluntary administration is the less complex of the two cases. 66 But I consider for prima facie purposes so as to warrant service out, the threshold has been reached for both prospective cases. In saying that I firmly stress that I have reached no concluded view in the matter having heard only one side of the story, thus without the benefit of a contradictor if there is to be one. 67 As noted, there is an existing injunction in favour of the Applicants' position granted by the Eastern Caribbean Supreme Court which is currently scheduled to be discharged on 25 February 2021. 68 The Applicants seek to have at least some of the final relief granted by 25 February. As will be apparent from the foregoing, there are two aspects of the final relief sought by the Applicants which may have an effect on the position - there is a question whether the alleged security interest has vested (the more complicated question), and there is a question whether, even if the security interest has not vested, there is a moratorium preventing enforcement of the security during the Third Applicant's voluntary administration. 69 Even though the vesting and moratorium positions are framed in the alternative, it may be possible to determine the moratorium issue as a preliminary step which would be sufficient for the grant of order 1 (and possibly order 2) in the draft originating process. The questions relating to the vesting issue could then be determined over a longer period of time if necessary. 70 If the Applicants obtain relief on that issue by 25 February 2021, there are mechanisms to preserve the status quo for an additional period of time (whether through an extension of that injunction or otherwise). 71 If leave is granted and the prospective defendants require more time to conduct the proceedings, the prospective defendants may be prepared to provide undertakings that would allow for a less expedited timetable. 72 All these matters in relation to the future conduct of the proceeding are relevant only to the feasibility of relief, if there should be any which is by no means determined, within the very narrow time frame.

[21]

METHOD OF SERVICE 76 Rule 10.43(3) of the Rules requires that an application for service out must be accompanied by an affidavit stating: (a) the name of the foreign country where the person served is or is likely to be; and (b) the proposed method of service; and (c) that the proposed method of service is permitted by: (i) if a convention applies - the convention; or (ii) if the Hague Convention applies - the Hague Convention; or (iii) in any other case - the law of the foreign country. 77 Although the affidavit filed sets out the proposed method of service to satisfy the requirements of the Rules, it fell a little short of the requirements of the practice direction. This is presumably due to the urgency with which the application is brought and the need to bring the Ultimate Proceeding to the attention of the prospective defendants within a matter of days. At the hearing, I asked counsel to explain on the record exactly how services would be effected. He did so in a way which adequately met the requirements of the practice note given the urgent circumstances of the case. 78 With respect to MGIH6 and Harneys, companies incorporated in the British Virgin Islands, it is intended to effect service in accordance with local law. Section 101 of the British Virgin Island's Companies Act 2004 permits service of documents by leaving them at the company's registered office. The Applicants are also in introductory discussions with Harneys and it appears that it may be acceptable to it and MGIH6 for service to be effected by way of email which is permissible under British Virgin Island's law by consent. 79 MGI is a company incorporated in the Republic of Seychelles. The Applicants intend to effect service under local law or using the process established under the Hague Convention though it seems those avenues are not without their difficulties. The Applicants have however, contacted MGI's Australian solicitors to ascertain whether they are instructed to accept service and file a notice to satisfy r 10.43(1)(c). 80 Again, given the urgency with which the Ultimate Proceeding is to be brought, a further application for deemed or substituted service may be required. But that will be left for another day.

Dalian Huarui Heavy Industry International Co Ltd v Clyde & Co Australia

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