Zone of Insolvency

Zone of Insolvency

Federal Court deems Halifax a “classic candidate” for cross border insolvency cooperation

Posted in Administration

On August 22, 2019, Justice Gleeson delivered her judgment in Re Halifax.

Halifax Australia (Halifax Aus) owned and operated a number of Halifax investment services companies operating under the Halifax name in various locations around the world.

In late 2018, liquidators were appointed to Halifax Aus. At the time, Halifax owned 70% of Halifax New Zealand (Halifax NZ).

As a part of business operations, funds were transferred between Halifax Aus and Halifax NZ on an “as needs basis”. A majority (95%) of the funds held on trust by the Halifax group were affected by commingling. Halifax Aus, or its clients, were said to have been in a position to make a claim in relation to funds held in the name of Halifax NZ and vice versa. However, accounts held in the name of Halifax Aus and Halifax NZ, on behalf of investor clients, ceased to be feasibly traceable to any entitlement on the part of individual clients.

Pooling applications

The liquidators proposed to bring applications in Australia and New Zealand to allow for the “pooling” of the above mentioned commingled funds. This proposed application ended up taking the form of an application for a ‘letter of request’, essentially requesting that the New Zealand court agree to hear the application cooperatively with the Federal Court of Australia (FCA). The letter of request application was made pursuant to section 581 of the Corporations Act 2001 (Cth) (Corporations Act).

Issue

The main issue in consideration was as follows:

Where a cross border insolvency matter exists, can the FCA issue a letter of request seeking that the New Zealand High Court (NZHC) act in aid of, and auxiliary to, the FCA to enable an application to be resolved in an effective way.

Decision and reasoning

The Court decided that it could issue the request to the NZHC to jointly hear, alongside the FCA, the applications in respect of pooled funds. The reasons were as follows:

As per New Zealand statute, the NZHC has jurisdiction over external administration matters.

The FCA held that the liquidators’ claim comprised an external administration matter because it followed the making of a winding up order.

The Court said that if the liquidators’ applications were not co-ordinated, a real prospect of inconsistent directions and further litigation existed, which would be to the detriment of creditors of Halifax Aus. Therefore, the Court found that the pooling of the accounts was required.

Finally, the Court held that there was no reason to believe that, upon receipt of the letter of request, the NZHC would not grant the relief. The Court emphasised that it did not see cause for concern considering the individual integrity of Australian courts in New Zealand and vice versa.

Takeaways

Re Halifax demonstrates that where a company has several commingled funds held on trust with its New Zealand counterpart, the courts can request the cooperation of the New Zealand courts to assist in distributing and managing assets and claims in insolvency proceedings.

This is somewhat a testament to the strong ongoing relationship between Australia and New Zealand, and the similarity in insolvency laws and regimes. Critically, the perceived willingness of the other jurisdiction is imperative to the success of these kinds of ‘letter of request’ applications.

The Halifax decision reminds us that section 581 of the Corporations Act is flexible and provides a certain extent of protection in insolvency matters, especially where assets move beyond the strict boundaries of their originating jurisdiction.


Special thanks to Ellen Soust in our Brisbane office for her assistance in preparing this content.

Supreme Court settles trademark Circuit split

Posted in U.S.

On May 20, 2019, the US Supreme Court ruled that a licensor’s rejection of a trademark license in bankruptcy does not terminate the licensee’s right to continue using the licensed mark. Mission Product Holdings Inc. v. Tempnology LLC, 587 US __ (2019). The decision brings trademarks into alignment with how patents and copyrights are already treated under the Bankruptcy Code.

Samuel Kohn, Susan Ross, Bandar Al-Saif and Joy Wang have provided a briefing.

The Corporations Amendment (Strengthening Protections for Employee Entitlements) Act 2019 commenced April 6, 2019

Posted in Australia

Australia has a taxpayer funded scheme which guarantees employee entitlements arising out of liquidation up to statutory caps. It is known as the Fair Entitlements Guarantee Scheme (FEG). The Australian Government has become concerned that questionable practices which rely on FEG to avoid employee entitlement obligations, such as illegal phoenixing, are on the rise and imposing significant costs on FEG and therefore, the Australian taxpayer. The Government has introduced legislative amendments to facilitate the effective recovery of entitlements from parties which take part in these questionable practices. Continue Reading

UNCITRAL draft Model Law on Enterprise Group Insolvency

Posted in Australia

In December 2018, UNCITRAL Working Group V (Insolvency Law) held its 54th session in Vienna where it discussed, among other topics, cross border insolvency of enterprise groups. These discussions included amendments to the Enterprise Group Insolvency: Draft Model Law (‘draft Model Law’) and the Enterprise Group Insolvency: Guide to Enactment of the Draft Model Law (‘draft Guide to Enactment’). The Working Group began drafting the Model Law after agreeing to the UNCITRAL mandate in December 2013. Continue Reading

Opposing the National Bankruptcy Conference’s proposal to legislatively repeal Fairfield Sentry

Posted in U.S.

On August 20, 2018, the National Bankruptcy Conference (the “NBC”), a group of bankruptcy judges, professors, and professionals that has consulted with Congress on the drafting of the U.S. Bankruptcy Code, sent a letter to Congress proposing a series of amendments to Chapter 15, which governs the process for obtaining recognition of a foreign insolvency or restructuring proceeding in the U.S. Continue Reading

English Court of Appeal affirms application of the “Gibbs Rule” in a cross-border restructuring

Posted in Australia, U.S.

Under the English common law rule known as the “Gibbs rule,” a contractual obligation can be changed or discharged only in accordance with the law governing that obligation. Consequently, a debt governed by English law may not be discharged in a foreign insolvency or under a foreign restructuring plan unless the creditor submits to the foreign insolvency proceeding or consents to the plan. Earlier this week, the Court of Appeal of England and Wales affirmed the application of the Gibbs rule in a case under the Cross-Border Insolvency Regulations 2006 (“CBIR”), Great Britain’s version of the UNCITRAL Model Law on Cross-Border Insolvency, or Chapter 15 as it is referred to in the U.S.  Continue Reading

High Court of Australia rules that “holding” deeds of company arrangements are valid

Posted in Australia

BVI based creditor – Mighty River International Limited – challenged the validity of a “holding” deed of company arrangement (or a ‘holding DOCA’) approved by creditors of Australian miner Mesa Minerals Limited (Company).  Continue Reading

Will Singapore become an international center of debt restructuring?

Posted in Australia

Singapore has set its sights on becoming an “International Center for Debt Restructuring”, approaching the status of London and New York.

Key to achieving that goal, in 2017 Singapore enacted the Companies (Amendment) Act 2017 which effected major legislative changes to restructuring provisions of the Singapore Companies Act (Cap 50) 2006 (referred to hereafter as the “Companies Act”). That legislation has been followed by further reforms with the passage of the Insolvency, Restructuring and Dissolution Act 2018 (which passed parliament on 1 October 2018). Continue Reading

Claims against IPs: the rising tide

Posted in Europe

The role of an IP has always been challenging – taking control of a company in crisis, making swift decisions based on limited information and balancing the competing interests of stakeholders; all of this requires sound judgment, often under extreme pressure. It is no surprise that, when things go wrong (or perhaps more accurately when parties feel they have lost out), the IP can become the focus of blame, and their insurance policy an attractive target for ‘last resort’ litigation.

The traditional situation in which an IP finds themself the target of litigation is one where lenders have enforced personal guarantees against the company’s directors or shareholders. Faced with the prospect of paying out under the guarantee, the director or shareholder responds with a cross claim against the IP1, usually along the lines that the IP breached his/her duties by failing to realize the best price when selling key assets. In other words, a claim that the IP ‘undersold’ those assets2.

However, in the past few years, there has been a noticeable change in the type of claims brought against IPs and their firms, as well as a large uptick in their frequency. Two main themes have emerged.

The first is that claims for ‘underselling’ are increasingly being brought as standalone actions, rather than as a defensive tactic to demands under a guarantee. See, for example, AM Holdings v. Batten & LePage [2018] EWHC 934 and Davey v. Money & Another [2018] EWHC 766 (Ch). Both of these claims were brought by the company or its shareholders as standalone claims that (inter alia) the IPs had undersold the company’s assets. It is notable that both claims were brought after what would ordinarily be perceived as successful administrations – in AM Holdings the company returned to solvency, and in Davey unsecured creditors had received a significant dividend.

The second theme is the rise in claims based on economic torts – most notably claims for unlawful means conspiracy. The most high profile of these claims has arguably been Premier Motor Auctions v. Lloyds Bank and PwC, which was dismissed earlier this year, but there have been (and still are) many similar claims at various stages of proceedings. The typical allegation in such claims is that the IP or their firm unlawfully conspired with a secured creditor (usually a bank) to place the company into an insolvency process with a view to extracting the associated fees and (in the case of the bank) a discounted equity stake in the company.

In this article we look at a number of cases exemplifying these themes and consider: (i) what has driven the increase in them; (ii) what tactics IPs and their firms have used to defend them; and (iii) what the future holds for this type of litigation.

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