Cross-border insolvencies and restructuring might sound challenging, but there are some mechanisms that can make the process run surprisingly smoothly. Australia's Cross-Border Insolvency Act 2008 (Cth) was recently used in the context of a multinational reorganisation of a Japanese business to recognise foreign insolvency proceedings (Yakushiji v Daiichi Chuo Kisen Kaisha  FCA 1170).
Overview of the Cross-Border Insolvency Act
The Cross-Border Insolvency Act 2008 incorporates the Model Law on Cross-Border Insolvency in Schedule 1 to the Act. The Model Law is intended to ensure co-operation between foreign courts, increased legal certainty for trade and investment and fair and efficient administration of cross-border insolvencies.
Importantly, the Model Law allows a foreign representative, such as an overseas liquidator, to apply to a court in a country where it has been enacted to obtain recognition of a foreign insolvency law proceeding in which the foreign representative has been appointed or authorised to act. Recognition allows a foreign representative to seek a range of court orders to help it in carrying out a cross-border reorganisation, or liquidation of a corporation or individual debtor's assets.
The cross-border reorganisation of Daiichi Chuo Kisen Kaisha
Daiichi Chuo Kisen Kaisha (DCKK) is a well-known marine transportation company providing overseas shipping and coastal shipping. It is a joint stock company incorporated under Japanese law, and headquartered in Tokyo. Star Bulk Carrier Co SA is one of its subsidiaries.
DCKK and Star Bulk had entered into a number of long-term time charters which were negotiated at a time of very high rates. Following the GFC, DCKK experienced financial difficulties owing to fluctuations in the shipping market. While it was expected that trade creditors would be paid in the ordinary course, the long-term viability of the companies required certain long-term charters with very high levels of charter hire to be renegotiated. To achieve this, the companies made applications to the Tokyo District Court under the Civil Rehabilitation Act of Japan (Minji saisei hô, Law no. 225/1999).
The companies' foreign representatives then sought orders in Australia under the Cross-Border Insolvency Act that the administration or realisation of all DCKK's and Star Bulk's assets in Australia be entrusted to them. Secured creditors fell outside of the rehabilitation proceedings, so they had to be dealt with separately as part of the orders sought in Australia.
This was part of a global strategy; the applicants had already obtained recognition and similar relief in the UK and Canada, and proceedings were on foot in the US.
Did the applications fall under the Model Law?
The first question for Chief Justice Allsop was whether the civil rehabilitation proceedings were “foreign proceedings” as contemplated by Article 2(a) of the Model Law. He found that the DCKK proceedings were; they were a collective judicial proceeding in a foreign state, pursuant to a law relating to insolvency, in which proceedings of the assets and affairs of the debtors are subject to control and supervision by a foreign court, and for the purpose of reorganisation.
They were also the "foreign main proceeding" as required by Article 2(b) of the Model Law because DCKK has its "centre of main interests" (COMI) in Japan. Article 16(3) of the Model Law says that a company’s registered office (here, Tokyo) is presumed to be the centre of its main interests, unless there is proof to the contrary.
Chief Justice Allsop was also satisfied that the Star Bulk proceeding was a "foreign main proceeding" even though the company's incorporation and registered office are in Panama. The evidence made it clear that Star Bulk’s COMI was Japan, because:
- Star Bulk did not have any assets in Australia or Panama;
- its operations in Australia were restricted to the passage of ships through Australian territorial waters, and the calling of those ships owned or chartered into Australian ports;
- Star Bulk was wholly controlled by persons in Japan (including its three directors, who were all Japanese citizens and residents), so the location of its directing mind and will was Japan;
- Star Bulk had no employees of its own and relied upon DCKK employees, most of whom reside in Japan;
- Star Bulk operated in Japan through DCKK and its administrative functions, including accounting, financial reporting, budgeting, and cash management were all conducted in Japan; and
- most of its creditors were located in Japan.
Crafting orders to protect secured creditors if maritime liens were enforced
Given the position of secured creditors, Chief Justice Allsop took some time to work through the law on enforcing maritime liens so that secured creditors in Australia could be adequately protected in any orders made.
A key issue was the problematic intersection between international insolvency law and the law of the enforcement of maritime claims. International mechanisms for the enforcement of maritime claims vary greatly. While most common law countries (including Australia) have a proceeding by way of an "in rem" claim against the ship (ie. a direct action against the ship), generally speaking, civil law countries (such as Japan) do not. Civil law countries instead use "maritime attachment" (ie. the pre-judgment seizure and potential sale of the debtor’s property to satisfy a judgment).
The importance of a maritime lien is that it runs with the ship irrespective of sale. It can only be removed from the hull of a ship either by the payment of the claim or by sale of the ship by a maritime Court (such as the Federal Court) pursuant to a maritime process.
The orders sought by the applicants would not necessarily defeat proper maritime claims that are lien claims, and the question of the status of any claims that were lien claims would have to be resolved in any litigation, unless there were an agreement.
Accordingly, in Chief Justice Allsop's view, it would be wrong to make orders preventing creditors from taking action which may be contrary to the rehabilitation of the companies. However, it would also be wrong to not support the rehabilitation under the Act on the mere possibility of existence of such lien claims.
He therefore structured the orders to allow creditors to deal with and vary them if appropriate, on the application of the holder of a maritime lien claim (ie. a secured creditor) seeking to enforce its lien.
This was seen as desirable because a foreign representative would want the Federal Court (or any other maritime court) to have charge of any sale of a ship, which would clean the ship's hull of all other maritime liens, and, most likely, achieve the highest price possible.
Chief Justice Allsop therefore made the following additional orders:
- that any application for issue of a warrant for the arrest in Australia of any vessel owned or chartered by DCKK and Star Bulk brought by a person claiming to hold a security interest be made to a Judge of the Federal Court of Australia; and
- that any person who claims to hold a security interest in any property or vessel owned or chartered by DCKK and Star Bulk has liberty to apply to the Federal Court of Australia.
Keep the Cross-Border Insolvency Act in mind
The decision highlights the usefulness of the Act in recognising foreign proceedings and enabling overseas applicants to seek orders locally, protecting assets and assisting in the administration of foreign insolvencies.
With particular relevance to the facts in this case, the decision also highlights that complex cross-border issues can be dealt with relatively easily within the confines of the Act as long as flexibility is built into any orders made.
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