The Victorian Court of Appeal in the recent decision of Legend International Holdings Inc (in liq) v Indian Farmers Fertiliser Cooperative Limited [2016] VSCA 151 considered the effect of section 581 of the Corporations Act 2001 (Act) and whether a winding up order could be made against a registered foreign company, in circumstances where it had filed for bankruptcy under Chapter 11 in the United States under the United States Bankruptcy Code.
Legend International Holdings Inc (Legend) was a United States corporation registered in Delaware in the United States of America. Its principal asset was shares in a company that holds phosphate assets in Queensland. Its principal place of business was in Melbourne.
The respondents (Indian Farmers Fertiliser Cooperative Limited) owned shares in Legend. They applied for the winding up of Legend on 11 April 2016. On 8 May 2016, Legend filed its bankruptcy petition in the USA under Chapter 11 (US Proceeding).
On 10 May 2016, Legend filed an application in the Victorian Supreme Court seeking recognition of the US proceeding under the Cross-Border Insolvency Act 2008 and the Model Law. That application was unsuccessful.
The Associate Judge found that the US Proceeding was not a foreign main proceeding under the Model Law because Legend’s centre of main interests was in Australia (not in the USA) and was not a foreign non-main proceeding under the Model Law because Legend did not have an establishment in the USA (within the meaning of the Model Law).
The second part of the decision by the Associate Judge was whether a winding up order could be made against a registered foreign company in circumstances where it had filed for bankruptcy under chapter 11 of the United States Bankruptcy Code. As the Associate Judge found that there was no recognition of the US Proceeding in Australia then it followed that the application to wind up Legend should be granted. Accordingly, an order was made to wind up Legend.
On appeal, Legend claimed that the Associate Judge fell into error by ordering that Legend be wound up. The basis for this argument was that section 581 of the Act required the Court to ‘act in aid of, and be auxiliary to’ the US Bankruptcy Court. As a result it followed that a winding up of Legend was not an act in aid of or auxiliary to the US Bankruptcy Court as:
Legend also highlighted the conflict between the liquidation regime and Chapter 11 that may arise concerning the respondents’ position as creditors and whether their claims are subordinated to those of other creditors.
The Full Court stated that:
Very clear words would be required by Parliament to justify a conclusion that an Australian court was obliged to refrain from exercising a discretionary power under the Corporations Act to wind up a company simply because the company had filed for bankruptcy in the USA under Chapter 11. Such clear words are not found in s 581. Such an outcome would be surprising and anomalous.[1]
Properly construed, s 581(2) requires the Court to consider what aid may properly be given and how it might act in an auxiliary manner to the United States Bankruptcy Court. As we have said, the aid that Legend says should have been given involved the exercise of a discretion under s 583 as to whether to wind it up.[2]
In dismissing the appeal by Legend the Court continued on to state that:
The effect of Legend’s submissions was that the discretion could only be exercised in one way because it had filed for bankruptcy under Chapter 11; that is, that the Associate Judge had to refuse to make the winding up order. Section 581(2) does not mandate that outcome. Rather, the Court was required to consider whether in all the circumstances (including the existence of the US Proceeding which involves a regime that is distinctly different to liquidation) it would be proper to provide aid, and act in an auxiliary manner, by not exercising the discretion to wind up Legend. The Associate Judge here determined that that would not be appropriate and he exercised the discretion in favour of winding up Legend.
The Court also noted that it was reluctant to interfere with discretionary decisions unless it was shown that the Associate Judge made his decision based upon a wrong legal principle or made a mistake as to the facts or took into account an irrelevant matter or omitted to take into account a relevant matter when weighing the various considerations to arrive at his decision, or that the decision is so unreasonable or plainly unjust that this Court can infer a failure to properly exercise the discretion occurred.[3]
As the Court noted[4] dual insolvencies in different jurisdictions are not uncommon. This decision highlights that Australian Courts will not automatically recognise foreign proceedings and that section 581 of the Act may not necessarily be used to obtain a stay of proceedings or defend a winding up application when dual insolvency proceedings are on foot.
[1] Legend International Holdings Inc (in liq) v Indian Farmers Fertiliser Cooperative Limited [2016] VSCA 151 at [30].
[2] Legend International Holdings Inc (in liq) v Indian Farmers Fertiliser Cooperative Limited [2016] VSCA 151 at [31]
[3] House v The King (1936) 55 CLR 499, 504–5
[4] Legend International Holdings Inc (in liq) v Indian Farmers Fertiliser Cooperative Limited [2016] VSCA 151 at [34].
