Katayama v Japan Airlines Corporation [2010] FCA 794 | Case summary

REASONS FOR JUDGMENT 1 The plaintiffs have applied for orders under the Cross-Border Insolvency Act 2008 (Cth) (the Act). On 19 January 2010, the plaintiffs, Mr Eiji Katayama and Enterprise Turnaround Initiative Corporation of Japan (ETIC), were appointed as trustees of the three defendants (the Debtors), Japan Airlines Corporation (JAL), Japan Airlines International Co Limited (JALI) and JAL Capital Co Limited (JALC) under the Corporate Reorganisation Act of Japan (the Japanese Act) in a proceeding in the Tokyo District Court, Civil Department Number 8 (the Japanese Proceeding). 2 The plaintiffs seek an order under the Act that the Japanese Proceeding be recognised as a foreign proceeding and that it also be recognised as a foreign main proceeding. They also seek an order, under the Act, that the administration and realisation of all of the Debtors' assets located in Australia be entrusted to the plaintiffs. 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 (the Model Law). Under s 6 of the Act, the Model Law, which is set out in Schedule 1 to the Act, has the force of law in Australia with the modifications set out in the Act. Under s 8, the Model Law has the force of law in Australia as if it referred to the Bankruptcy Act 1966 (Cth) (the Bankruptcy Act) and certain provisions of the Corporations Act 2001 (Cth) (the Corporations Act), wherever the Model Law provides that the laws of Australia relevantly relating to insolvency are to be identified. Section 10 of the Act provides that the Federal Court of Australia, amongst other courts, is taken to be specified as a court competent to perform the functions referred to in the Model Law relating to recognition of foreign proceedings and cooperation with foreign courts. Section 22 of the Act provides that, where the Model Law is inconsistent with the named provisions of the Corporations Act, the Model Law and the provisions of the Act prevail, and the relevant provision of the Corporations Act is to have no effect to the extent of the inconsistency. 4 The preamble of the Model Law provides that its purpose is to provide effective mechanisms for dealing with cases of cross-border insolvency so as to promote a number of objectives, including the protection and maximisation of the value of debtors' assets and the facilitation of the rescue of financially troubled businesses, thereby protecting investment and preserving employment. Under Article 1, the Model Law is to apply where assistance is sought in Australia by a foreign court or a foreign representative in connection with a foreign proceeding. 5 Article 2 provides that a foreign proceeding is 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 a debtor are subject to control or supervision by a foreign court for the purpose of reorganisation or liquidation. A foreign main proceeding is a foreign proceeding taking place in a state where the debtor has the centre of its main interests. A foreign representative is a person or body authorised in a foreign proceeding to administer the reorganisation or the liquidation of a debtor's assets or affairs. A foreign court is a judicial or other authority competent to control or supervise a foreign proceeding. 6 Under Article 9, a foreign representative is entitled to apply directly to a court having jurisdiction in Australia. As I have said, the Federal Court of Australia is such a court. Under Article 15, a foreign representative may apply to the Court for recognition of the foreign proceeding in which the foreign representative has been appointed. Paragraph 2 of Article 15 specifies certain material which must accompany an application for recognition. Under paragraph 3 of Article 15 an application for recognition must also be accompanied by a statement identifying all foreign proceedings in respect of the debtor that are known to the foreign representative. Those formalities have been satisfied in the present case. 7 Under Article 17, a foreign proceeding must, subject to Article 6, be recognised if the foreign proceeding is a foreign proceeding within the meaning of the definition in the Model Law and the foreign representative applying for recognition is a person or body within the meaning of that term in the Model Law. Article 6 provides that the Model Law does not prevent 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. There is no basis that has been put forward that would suggest that that might apply in the present case. Under paragraph 2 of Article 17, the foreign proceeding in respect of which an application is made must be recognized as a foreign main proceeding if it is taking place in the state where the debtor has the centre of its main interests. Paragraph 3 of Article 17 provides that an application for recognition of a foreign proceeding must be decided upon at the earliest possible time. 8 Article 20 provides that, upon recognition of a foreign proceeding that is a foreign main proceeding, the commencement or continuation of individual actions or individual proceedings concerning the debtor's assets, rights, obligations or liabilities is 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. Paragraph 2 of Article 20, in conjunction with s 20 of the Act, indicate that the scope and the modification or termination of the stay and suspension just mentioned are subject relevantly to the Bankruptcy Act and Chapter 5 (other than Parts 5.2 and 5.4A) of the Corporations Act. 9 Article 21 of the Model Law provides that, upon recognition of a foreign proceeding, the Court may, at the request of the foreign representative, grant relief under various heads, including entrusting the administration or realisation of all or part of the debtor's assets located in Australia to the foreign representative or other person designated by the Court. Article 22 relevantly provides that, in granting or denying relief under Article 21, the Court must be satisfied that the interests of the creditors and other interested persons, including the debtor are adequately protected. 10 It is against that background that I must now consider the present application by the plaintiffs for recognition of the Japanese Proceeding. The plaintiffs were appointed as trustees of the Debtors by the Tokyo District Court. The first plaintiff, Mr Katayama, has extensive experience in the field of Japanese corporate reorganisation law. He is fluent in Japanese and English, including the use of legal terminology in English and its translation from and into Japanese. By reason of his experience, he has developed an extensive knowledge of both Japanese and United States corporate bankruptcy laws. 11 Mr Katayama has, for the purposes of his appointment as a trustee, examined numerous financial and other records of the Debtors. As a result, he is familiar with the financial and operational history and current position of the Debtors. He has also acquainted himself with the various litigation proceedings in which the Debtors are involved around the world, including litigation in Australia. 12 The Debtors and affiliates of the Debtors have been operating since 1951 and constitute one of the world's largest air carriers, providing air transportation, cargo and other transportation and related services to millions of customers around the world. The Debtors' domestic passenger business is the largest in Japan. They also have a strong international presence at hubs in London, Beijing, New York, Los Angeles and Hong Kong, and offer flights to some 35 different countries and regions. 13 As with many other airlines, the Debtors have struggled to maintain consistent operating performance in recent years by reason of the events in New York on 11 September 2001 and the outbreak of various epidemics and pandemics from 2003 to 2009. Despite taking cost cutting measures and attempting to improve their liquidity, the Debtors have posted losses and experienced difficult liquidity levels leading to their current proposed restructuring. 14 In October 2009 the Debtors engaged in consultations regarding possible debt restructuring with the second plaintiff, ETIC. ETIC was established and funded by the Government of Japan to help provide firms with state guaranteed loans. In the discussions with ETIC, it was ultimately determined that a court-supervised restructuring should be sought to provide the Debtors with the best opportunity to restructure their debt and return to profitability. Accordingly, they have entered into an agreement pursuant to which ETIC and the Development Bank of Japan have committed to provide approximately $US5 million of post-petition financing to effect a re-organisation. The funding is available and is being used to meet the ongoing operations of the Debtors, including liabilities to their ordinary trade creditors and customers. 15 The Japanese Proceeding was initiated on 19 January 2010, when the Debtors filed for the commencement of a corporate re-organisation proceeding under the Japanese Act. Under the Japanese Act, the entry of a commencement order designates one or multiple trustees to assume full responsibility for managing the debtor through formulation, confirmation and full performance of a corporate re-organisation plan. The trustees must formulate and submit a formal plan of re-organisation to the Japanese court that presides over the restructuring. The due date for such a plan is set in the commencement order for a date within one year of entry of the commencement order, although that date may be extended. 16 If a debtor's assets exceed its liabilities, the plan is submitted to the debtor's creditors and stockholders for formal approval. The Japanese Act establishes the applicable voting requirements to obtain formal approval of the re-organisation plan by the debtors' creditors. On 19 January 2010, the Tokyo District Court issued an order, effective that same day, which commenced the Japanese Proceeding. A timetable was fixed as follows: · First, the creditors had until 19 March 2010 to file a claim in the re-organisation. While that deadline was not extended officially, the Tokyo District Court accepted claim forms submitted up to 28 May 2010. · Secondly, the date for admission or denial of claims was fixed as 30 April 2010. Mr Katayama, together with officers of ETIC, reviewed and then admitted or denied claims that had been submitted by creditors to and accepted by the Tokyo District Court. That process is now complete. · Thirdly, the period for ordinary investigation of filed re-organisation claims was fixed as 10 May 2010 to 24 May 2010. That period was subsequently extended to be the period from 31 May 2010 to 14 June 2010. · Fourthly, creditors who made a claim in the re‑organisation proceedings were given until 31 May 2010 to submit proposals for a re-organisation plan. That deadline was extended to 23 June 2010. A few shareholders, but no creditors, have submitted proposals that are being considered by the plaintiffs. · Finally, the deadline for submitting a proposed re-organisation plan to the Tokyo District Court was fixed as 30 June 2010. That deadline was subsequently extended to 31 August 2010 by order of the Tokyo District Court on the application of the Debtors. That extension was sought to enable the profitability and risk management ability of the Debtors to be improved by additional cost reductions. The proposed re-organisation plan has not yet been submitted to the Tokyo District Court. The plaintiffs have received no opposition from creditors to the restructuring process on which the Debtors have embarked and, as I have said, no creditors have submitted a re-organisation plan. 17 Mr Katayama expects that the plaintiffs will be able to comply with the revised timetable and supply to the Tokyo District Court a re-organisation plan on or before 31 August 2010. Based on his experience, he expects that any plan would be approved by about November 2010, although there is no certainty about that date. On the same day as the plaintiffs were appointed, an application was made to the United States Bankruptcy Court for the Southern District of New York under Chapter 15 of the US Bankruptcy Code and on 8 February 2010 an order was made in the Companies Court of the High Court of Justice of England and Wales, recognising the Japanese Proceeding as a foreign main proceeding within the meaning of the Model Law. 18 The Tokyo District Court has granted permission for the Debtors to continue to pay their trade creditors in the ordinary course of business, irrespective of the commencement of the Japanese Proceeding. As a result of that order, the obligations to general trade creditors and customers of the Debtors are being met as and when they fall due. 19 JAL is a holding company which owns JALI and JALC. JALI is the operations arm, which employs staff, enters into contracts for the carriage of passengers and cargo, contracts with the suppliers for the day-to-day operations of the airline and operates bank accounts for the receipt of customer payments and payments for suppliers. JALC's principal function is to own or lease major aircraft assets, including airframes and engines. The Debtors and an affiliate, JALways Co Limited, fly to two airports in Australia and have code-sharing agreements with other airlines covering flights to four other Australian airports. 20 The Debtors and their affiliates offer six flight routes to Australia and, on average, have six flights daily to or from Australia. Passengers from Australia use the Debtors' airline to fly to Japan and to other locations in Asia. Similarly, passengers from Asia and other countries use the airline to fly to Australia. The Debtors' airline also transport cargo between Australia and other locations within their network. To operate those facilities the Debtors own or lease a wide variety of assets in Australia including aircraft, spare aircraft parts, equipment for maintaining aircraft, aircraft fuel, real estate and bank deposits. Those assets are critical to the Debtors' continued operations in Australia. Any attempt by creditors to seize or interfere with those assets would harm the revenues of the Debtors and disrupt their flight schedules and operations. 21 As with other airlines, the Debtors' network of service routes requires precision in scheduling. Any error or delay in scheduling that might be caused by creditors attempting to seize assets would affect the entire international network as well as domestic services in Japan. Any interference, or threat of interference, with the assets of the Debtors could result in a potential loss of customers. The Debtors have a number of trade creditors in Australia who are presently being paid as and when their debts are due. If the Debtors' business partners were to stop providing, or increased the cost of, any of the goods and services which are presently being supplied as a consequence of the proposed reorganisation, it could potentially disrupt the Debtors' operations at a critical time, leading to a loss of customer confidence and revenues. Such measures would distract management from focusing on restructuring. 22 It is intended that the operations of the Debtors will continue in as smooth and stable a manner as possible, notwithstanding the reorganisation which has commenced pursuant to the Japanese Proceeding. The Debtors have thousands of customers and business partners who depend upon their continued operation in the ordinary course of business despite the proposed reorganisation. Continued stable operations are essential to enable the Debtors to operate with a minimum of disruption or loss of sales. To minimise any loss of value to the business, it is the objective of the Debtors to engage in business as usual following the commencement of the reorganisation under the Japanese Proceeding with as little interruption to their operations as possible. That objective will be served by recognition of the Japanese Proceeding under the Act, to prevent business partners or creditors from disrupting the operations. 23 Under the Japanese Act, upon appointment of a trustee, the trustee assumes control over the relevant debtor. The trustee has authority and power to give instructions on behalf of the debtor and to administer the reorganisation of the debtor's assets. In particular, the trustee has power to apply for recognition of the Japanese Proceeding. 24 I am satisfied that the plaintiffs, ETIC and Mr Katayama, as trustees appointed in the Japanese Proceeding, are foreign representatives within the meaning of the Model Law. The Japanese Proceeding is a collective judicial proceeding in that it affects all of the creditors and assets of the debtors. I am satisfied, therefore, that the Japanese Proceeding is a foreign proceeding within the meaning of the Model Law. 25 The corporate headquarters of the Debtors are located in Tokyo and each of them is a corporation organised and existing under the laws of Japan. They are principally controlled by and their decision-making is made from their principal place of business in Japan. The majority of the Debtors' employees are resident in Japan and the majority of the Debtors' assets are located in Japan. The majority of their creditors are also located in Japan. Finally, all of the Debtors' administrative functions, including accounting, financial reporting, budgeting and cash management, are conducted in Japan. Accordingly, I consider that the Japanese Proceeding is a foreign main proceeding within the meaning of the Model Law. 26 In all of the circumstances, I am persuaded that it is appropriate to make orders as claimed in the originating process, to the effect that the Japanese Proceeding should be recognised as a foreign proceeding, that it should be recognised as a foreign main proceeding and that the administration and realisation of all of the Debtors' assets located in Australia be entrusted to the plaintiffs. I certify that the preceding twenty-six (26) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Emmett.

Katayama v Japan Airlines Corporation

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