From Russia, With Love – A Guide To Recognition Of Foreign Insolvency Proceedings

In the recent case of Naumets (Trustee), in the matter of Dorokhov (Bankrupt) v Dorokhov [2022] FCA 478, the Federal Court considered an application under the Cross-Border Insolvency Act 2008 (Cth) (Act) and Model Law on Cross-Border Insolvency of the United Nations Commission on International Trade Law (Model Law) for recognition of a foreign insolvency proceeding and the grant of powers in respect of assets in Australia.

The matter revolved around bankruptcy proceedings against Mr Igor Dorokhov (Respondent) in the Russian Federation (Russian Proceeding).  The applicant, Mr Dmitry Naumets (Applicant), was appointed as the Respondent’s trustee in bankruptcy in the Russian Proceeding and sought orders in relation to dealing with assets held by the Respondent in Australia.

The Court carefully considered the requirements under the Act and the Model Law for recognition of the Russian Proceeding before granting the orders sought by the Applicant.

Background

The Respondent is an individual who lives in Vladivostok, Primorsky Krai, Russia, but who also happened to own real property located in Southport in Queensland, Australia (Property).

On 7 November 2019, the Arbitration Court of Primorsky Krai handed down a judgment that:

• contained orders to the effect that the Respondent was declared insolvent and made bankrupt;
• appointed the Applicant as the ‘financial manager’ of the Respondent’s bankrupt estate; and
• approved a procedure for the disposal of the Respondent’s property over a 6 month period.

On 30 November 2019, the Arbitration Court of Primorsky Krai handed down a further judgment extending the period for the administration of the affairs of the Respondent.

In the course of his investigations into the affairs of the Respondent, the Applicant became aware of the Property.

Subsequently on 30 June 2021 the Applicant commenced proceedings in the Federal Court seeking orders for the recognition of the Russian Proceeding as a foreign proceeding under the Model Law, which has the force of law in Australia pursuant to the Act.

A number of steps then took place:

• on 14 October 2021, the Respondent entered into a sale contract for the Property;
• on 28 October 2021, the Court granted leave to the Applicant to serve the court papers for the recognition proceedings on the Respondent by post sent to the Respondent’s address in the Russian Federation (subject to the requirement that the court papers be translated into the Russian language by a certified translator);
• also on 28 October 2021, the Respondent signed an irrevocable authority addressed to his Australian solicitors directing them to pay any net proceeds from the sale of the Property to the Australian solicitors for the Applicant;
• the sale of the property settled on 10 November 2021 and the net proceeds (Proceeds) were duly transferred to the trust account of the Applicant’s solicitors; and
• the translated court documents were delivered to a post office in Vladivostok on 31 January 2022 and were collected by the Respondent on 16 February 2022.

Following these steps, the Applicant sought final orders for recognition of the Russian Proceeding and for orders entrusting the distribution of the Proceeds to the Applicant.

The Respondent did not take part in the proceeding and the application was dealt with on the papers.

The implementation of the Model Law in Australia

Before turning to the decision of McElwaine J, it is useful to consider the background to the Model Law and the Act.

On 30 May 1997, the United Nations Commission on International Trade Law adopted the Model Law.

The Model Law is a template which states can use to create domestic rules to deal with cross-border insolvency.  It is deliberately flexible, in part to encourage its adoption.  It does not provide choice of law rules, but largely respects the states’ substantive and procedural insolvency laws, providing mechanisms to assist the administration of insolvencies with transnational elements.  It applies where local assistance is sought by a foreign court or representative in connection with a foreign proceeding, where assistance is sought in a foreign state in connection with a local insolvency proceeding, where foreign and local proceedings take place concurrently, and where foreign persons have an interest in local insolvency proceedings.¹

On 1 July 2008, the Model Law was implemented in Australia by section 6 of the Act. 

The Act was intended to streamline the role of Australian courts when a company with assets or debt in Australia is declared insolvent in an overseas jurisdiction.

Importantly, the Model Law (via the Act) operates regardless of any lack of reciprocity by the relevant foreign jurisdiction in laws recognising cross-border insolvencies, as was the case here.

The decision

McElwaine J adopted the analysis of the Act and Model Law carried out by Rangiah J in Official Assignee in Bankruptcy of the Property of McCormick v McCormick [2018] FCA 410.  This analysis sets out two categories of criteria for recognition of a foreign proceeding: ‘status-based criteria’ and ‘procedural criteria’.

The status-based criteria are:

• the relevant proceeding must be a ‘foreign proceeding’ for the purposes of Article 2(a) of the Model Law;
• the applicant must be a ‘foreign representative’ for the purposes of Article 2(b) of the Model Law; and
• the application must be submitted to a Court designated by the Act.

The procedural criteria are:

• the application must be accompanied by a certified copy of the decision commencing the foreign proceeding and appointing the foreign representative, or other acceptable evidence as to the foreign proceeding;²
• there must be an affidavit identifying all known foreign proceedings and Australian proceedings under the Bankruptcy Act 1966 (Cth) in respect of the debtor;³ and
• the foreign representative must file an interim application seeking directions and to serve a copy on the respondents.

Examination of the status-based criteria

Article 2(a) of the Model Law defines a ‘foreign proceeding’ as:

a collective judicial or administrative proceeding in a foreign State, including an interim proceeding, pursuant to a law relating to insolvency in which proceeding the assets and affairs of the debtor are subject to control or supervision by a foreign court, for the purpose of reorganization or liquidation

Article 2(b) of the Model Law defines a ‘foreign representative’ as:

a person or body, including one appointed on an interim basis, authorized in a foreign proceeding to administer the reorganization or the liquidation of the debtor’s assets or affairs or to act as a representative of the foreign proceeding

Section 10 of the Act designates the Federal Court of Australia as an authorised court.  When the debtor is not an individual, the State and Federal Courts are also designated as authorised courts.

In support of the application, the Applicant filed (among other things) affidavit evidence which annexed certified and translated copies of the two judgments of the Russian Arbitration Court which declared the Respondent insolvent and appointed the applicant as the Respondent’s ‘financial manager’ (Applicant’s Affidavits).

McElwaine J was therefore satisfied that the status-based criteria were established for the following reasons:

• the Russian Proceeding was a judicial or administrative proceeding in a foreign State related to insolvency in which the assets and affairs of the Respondent are subject to control or supervision by a foreign court;
• the Applicant was the appointed foreign representative in that he is a person authorised in the Russian Proceeding to administer the reorganisation or the liquidation of the Respondent’s assets or affairs; and
• the Applicant applied in a court within the provisions of Article 4 of the Model Law (which included the Federal Court of Australia).

Examination of the procedural criteria

As to the first two the procedural criteria, McElwaine J was satisfied, based on the Applicant’s Affidavits and an affidavit filed by a solicitor for the Applicant which deposed to the undertaking of a search of the National Personal Insolvency Index, that:

• the Russian Proceeding was in fact the ‘foreign main proceeding’;
• the Russian Proceeding was the only foreign bankruptcy proceeding brought in respect of the Respondent; and
• there were no extant Australian bankruptcy proceedings on-foot in relation to the Respondent.

As to the final procedural criterion, McElwaine J was satisfied that:

• an interim application was filed which sought directions as to service; and
• service was effected on 16 February 2022.

Residual issues

Once both the status-based and procedural criteria are satisfied, the Court must then consider the residual issue of whether recognising the foreign judgment would be ‘manifestly contrary to the public policy of Australia’.⁴

McElwaine J found that there was no reason to believe that recognition of the Russian Proceeding would be manifestly contrary to the public policy of Australia for the purposes of Article 6 of the Model Law.  Russia’s lack of reciprocity when it comes to recognising cross-border insolvencies was not a factor relevant to his Honour’s decision.

Accordingly, the relief sought by the Applicant was granted with orders including that the Respondent’s assets in Australia be entrusted to the Applicant, and all powers normally available to a trustee in bankruptcy under the Bankruptcy Act 1966 (Cth) be made available to the Applicant.

Lavan comment

This case is a useful reminder of the reach of foreign insolvency proceedings in Australia, even when the country of origin does not share Australia’s commitment to cross-border insolvency recognition, and of the process required to obtain recognition of such foreign insolvency proceedings.

If you have any questions about the recognition or impact of a foreign insolvency proceeding, the experienced Lavan team is ready to help.