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Restructuring & Insolvency

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Focus: Jumping the cross-border insolvency queue

12 August 2013

In brief: A recent Federal Court decision requiring all the Australian assets of an insolvent foreign company be paid to the Australian Taxation Office, rather than being remitted offshore to be distributed in the liquidation, has significant consequences for cross-border insolvency law and the collection of domestic tax debts from insolvent foreign companies. Partner Christopher Prestwich (view CV) and Lawyer David Harris report.

How does it affect you?

  • The Federal Court has made orders under the UNCITRAL Model Law on Cross-Border Insolvency requiring all the Australian assets of an insolvent foreign company be paid to the Australian Taxation Office, instead of being remitted offshore to be distributed in the liquidation.1
  • Under the UNCITRAL Model Law, the usual position is that all of an insolvent company's assets are collected, remitted to the company's 'centre of main interests' and all creditors will prove in the foreign main proceeding.
  • This case is an example of the court's power to modify the operation of the UNCITRAL Model Law if the laws of the 'centre of main interests' do not adequately protect the interests of a particular creditor.
  • Under the laws of the Cayman Islands, amounts owing by the insolvent company to the Australian Commissioner of Taxation (the Commissioner) were not enforceable in the Cayman Islands courts. As such, the Commissioner stood to receive no dividend in the liquidation.
  • The Federal Court ordered that the Australian assets of the insolvent Cayman Islands company be applied to partly pay the tax debt, rather than being remitted to the Cayman Islands for distribution among creditors in the usual way.
  • The decision illustrates the potential for domestic courts to make orders protecting the collection of domestic taxation revenue if there is insufficient protection in the foreign main proceeding. Even in those circumstances, the court will have regard to the requirement for rateable distribution.

The facts

Saad Investments Company Ltd is a Cayman Islands company that made taxable capital gains from investments in Australia. It collapsed in 2009 and the Grand Court of the Cayman Islands made orders for the company to be wound up. The Commissioner claimed that Saad Investments owed $83 million in unpaid Australian tax and penalties.

The liquidators of Saad Investments sold the company's Australian assets and realised approximately $7 million. They intended to remit these Australian assets to the Cayman Islands for distribution, with other realised funds, to Saad Investment's creditors. However, under Cayman Islands law, a foreign tax liability is not enforceable in a domestic court. The Commissioner was unable to prove in the Cayman Islands liquidation, on the basis of the established rule of international law that 'one nation does not take notice of the revenue laws of another.'

In 2010, the Federal Court of Australia made orders under the Cross-Border Insolvency Act 2008 (Cth) and the UNCITRAL Model Law on Cross-Border Insolvency recognising Saad Investments' 'centre of main interests' as the Cayman Islands and that the winding-up proceeding in the Grand Court of the Cayman Islands was the 'foreign main proceeding'. The effect of these orders was to prevent the Commissioner from taking any enforcement action against Saad Investments' assets in Australia, leaving the Commissioner to prove in the Cayman Islands liquidation, along with the other creditors (which the Commissioner could not do).

The Commissioner applied to the Federal Court to have the 2010 orders varied, so that Saad Investments' Australian assets would be distributed to the Commissioner before being remitted to the Cayman Islands.

The decision

Justice Rares ordered that the Commissioner be allowed to recover Saad Investments' outstanding tax liability from the company's Australian assets before they were remitted to the Cayman Islands. The Commissioner was allowed to recover up to the pro rated amount that the Commissioner would have been entitled to recover in the event the Commissioner was able to prove as an unsecured creditor in the Cayman Islands liquidation. Given the relative size of Saad Investments' Australian assets and the tax debt it owed, the Commissioner still stood to receive fewer cents in the dollar than other creditors.

The court's orders were made on the basis of Article 22 of the UNCITRAL Model Law, which allows the court to modify the effect of recognising a foreign winding up proceeding so as to ensure adequate protection of creditors' interests. Justice Rares determined that the court's 2010 orders did not adequately protect the Commissioner's interests and would result in a windfall to the other creditors of Saad Investments. Such an outcome would have allowed Saad Investments to benefit from its insolvency, by ceasing to be liable for Australian tax for profit-making activities in Australia.

The court held that it would not be fair to free the insolvent company of its tax liability merely by reason of the fact that its 'centre of main interests' was in another jurisdiction in which the tax liability was not provable. Saad Investment's creditors would have expected that the company would be required to pay its tax debts incurred in foreign countries before any dividends could be paid out in the Cayman Islands.

Implications for cross-border insolvencies

This case provides an important precedent in which domestic tax collection can be protected despite 'modified universalism', the fundamental principle of cross-border insolvency. Modified universalism is the concept that all countries' courts should cooperate with the court that runs the foreign main proceeding, to ensure that the distribution of an insolvent company's assets takes place within a single system. In this case, the court was willing to make orders to ensure a proper and fair distribution to the Commissioner, who otherwise stood to receive nothing. Underlying the court's reasoning is the statement of public policy that 'it is fundamental to any society that its government be able to require its citizens and others who operate a business or reside within that society, to pay taxation so as to maintain the State.'2

Article 22 of the UNCITRAL Model Law may come to play a significant role in modifying the operation of cross-border insolvency law so as to protect the interests of certain creditors. The case demonstrates the potential for other countries' courts to make orders protecting the powers of domestic tax collection authorities in the event of cross-border insolvency. Similarly, there is scope for this decision to be applied by analogy to protect the interests of non-taxation creditors who might otherwise be disadvantaged by the fact of having to prove in the foreign main proceeding, rather than in the domestic jurisdiction.

Footnotes
  1. Ackers (as joint foreign representative) v Saad Investments Company Limited; In the matter of Saad Investments Company Limited (in official liquidation) [2013] FCA 738.
  2. Ackers (as joint foreign representative) v Saad Investments Company Limited; In the matter of Saad Investments Company Limited (in official liquidation) at [45].

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