Rectifying irregularities on the procedural balance sheet

Foreign representatives may be required to pay security into court for their recognition applications under the Model Law on Cross Border Insolvency (Model Law). The measure is proposed to correct irregularities between proceedings conducted in multiple jurisdictions. 

Foreign representatives administering the reorganisation or liquidation of a company may witness a shift in court practices in their future recognition applications under the Model Law by being required to pay into court an amount by way of security. The aim of this measure would be to ensure local courts are informed of any changes to the status of foreign insolvency proceedings or foreign representatives. 

The proposal was made in obiter by Justice Rares in Board of Directors of Rizzo-Bottiglieri-De Carlini Armatori SpA v Rizzo-Bottiglieri-De Carlini Armatori SpA [2018] FCA 153 at [30], which is but one of four proceedings in which the fate of Italian shipping fleet company, Rizzo-Bottiglieri-De Carlini Armatori SPA (Company), has hung in the balance, raising in its wake novel issues about the Cross-Border Insolvency Act 2008 (Cth) and the Model Law – the present case being no exception. 

Facts 

• On 24 May 2016, the board of the Company commenced, for the third time, concordato preventivo (reconstruction proceeding) in Court of Torre Annunziata, Naples (Italian Court).
• On 14 February 2017 the Federal Court of Australia made interim orders in respect of an application by the Company’s board that included an order to stay any judicial proceedings against the Company. The purpose of the orders was to support the third concordato preventivo by protecting the company’s assets in, or that may have sailed into, Australia.
• On 31 May 2017 the creditors of the Company voted against the third reconstruction proceeding.
• On 10 January 2018 the Italian Court published its decision to dissolve the third reconstruction proceeding.
• Subsequently three trustees were appointed by the Italian Court to administer the liquidation of the Company. They applied for interim relief to the Federal Court, for a stay of any judicial proceedings against the Company or any of its assets, rights, liabilities or obligations, pending the hearing of an application for recognition of the foreign main liquidation proceedings in Italy and their role as foreign representatives in it.
• The trustees also sought leave to intervene in the earlier recognition proceeding, that supported the efficacy of the third concordato preventivo and orders to dismiss that recognition proceeding.
• The trustees’ applications was the subject of the present proceeding before Rares J in the Federal Court. 

Issues 

The bases of the trustees’ application for leave to intervene in the earlier recognition proceeding and for orders dismissing that proceeding were because there was a substantial change in the recognised foreign concordato preventivo and the status of the board (as plaintiff in the recognition proceeding). This substantial change occurred when the Italian Court’ made orders to dissolve those proceedings and appoint the trustees. 

Rares J observed that the effects of the orders made by the Italian Court were to have already suspended the board’s powers and withdrawn its pre-existing status as debtor in possession of the company. This gave rise to what may be described as an irregularity on the ‘procedural’ balance sheet, with recognition orders in the local, Federal Court, remaining in force “even though”, as Rares J stated, “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.” 

Although Article 18 of the Model Law requires foreign representatives to inform the court of substantial changes to the status of recognised foreign proceedings and foreign representatives’ status, in principle, the grounds for the earlier recognition proceedings commenced by the board had ceased to exist. In practice, the board no longer had resort to funds of the debtor nor a sense of responsibility to draw the Federal Court’s attention to that relevant change.

Rares J observed at [27] that the situation highlighted a serious lacuna in the way in which Article 18(a) of the Model Law and Division 15A of the Federal Court (Corporations) Rules 2000 (Cth), operated.[1] 

To fill that lacuna his Honour suggested that it may be desirable to require foreign representatives to pay into the local court an amount of money by way of security or for the court to fix a period for stay orders. The first option would create an incentive for foreign representatives or their successors to notify the local court of any change in status to the foreign proceeding or foreign representative in order to recover the balance of the security held by the court. The second option would automatically vacate any orders relating to a recognition proceeding where they failed to be extended by the foreign representative, rectifying any irregularities across jurisdictions in the recognition of foreign proceedings, where the foundation for that recognition ceased to exist. 

In the present case the Federal Court held, among other things, that the application to intervene in the earlier proceedings, to inform the court of the changes of the status of the foreign proceedings was apposite and the relief sought was appropriate. 

Authors: Geoff Farnsworth 

[1] Division 15A sets out procedural requirements for applications under the Model Law.

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The information in this publication is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavour to provide accurate and timely information, we do not guarantee that the information in this newsletter is accurate at the date it is received or that it will continue to be accurate in the future. 

Published by:

Geoff Farnsworth

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