8 February, 2019
What you need to know
The Federal Court – in a much-litigated wider contest about the ownership of the luxury yacht, "Dragon Pearl" drifting in an intriguing cross-border insolvency – has clarified the limitations for foreign entities and their insolvency appointees in pursuing action in Australia to un-wind antecedent transactions (by attempting to use the voidable transaction provisions of the Australian Corporations Act).
Insolvency and restructuring professionals need to know:
Recognition of a foreign insolvency proceeding under the Australian Cross-Border Insolvency Act (CBIA) (implementing the UNCITRAL Model Law on Cross-Border Insolvency (Model Law)) provides foreign representatives with standing to commence recovery proceedings in Australia, on behalf of the insolvent company. This happened in relation to the US appointee who was the plaintiff in this recent decision.
The Federal Court has determined, however, that such standing for the foreign appointee has its limits. Importantly, standing alone does not equate to the foreign entity, without more, being one to which the voidable transaction (or "claw-back") provisions of Part 5.7B of the Corporations Act (Act) have application.
To access the voidable transaction provisions, the foreign entity must be a "company" under the Act – that means: (a) an Australian incorporated company, or (b) a foreign entity that is registered under the Act as a foreign company or that carries on business in Australia. Simply having the foreign insolvency proceeding recognised under the CBIA does not in itself satisfy those requirements – more is needed.
Promoting international uniformity, the position adopted by the Federal Court accords with the existing approach in England, as explained in Rubin v Eurofinance [2012] UKSC 46.
The recently published UNCITRAL Model Law on Recognition and Enforcement of Insolvency-Related Judgments may (if adopted in Australia) streamline this process. A note for our clients on this important development will be published later this month.
Pending adoption of the Model Law on Recognition and Enforcement of Insolvency-Related Judgments – which will be some years away – a local, auxiliary liquidation of the foreign entity (with all of its complexity, both in initiating and then conducting) is still needed for the purpose of carrying out claw-back proceedings under the Act. Whilst this is not an ideal or elegant solution, that is the state of the law in Australia for the time being.
The detail follows below, for those interested in reading more.
The details
Background
In its decision in King (Trustee), in the matter of Zetta Jet Pte Ltd v Linkage Access Limited [2018] FCA 1979, the Federal Court dismissed proceedings concerning title to the "Dragon Pearl", a A$4m luxury yacht. The proceedings were brought by Mr King, the US Chapter 7 bankruptcy trustee appointed to Zetta Jet Pte Ltd (a Singaporean entity), which is subject to liquidation proceedings in the US (together, Zetta).
Zetta initially commenced maritime proceedings in the Federal Court, which led to the arrest of the Dragon Pearl in Darwin, Australia, on 16 October 2017. The arrest warrant was issued on the premise that the yacht had been purchased with misappropriated funds from Zetta, and was therefore held on constructive trust for Zetta by the Dragon Pearl's registered owner.
Zetta sought return of the yacht from Linkage Access Limited (Linkage) – the current owner of the Dragon Pearl and also from Dragon Pearl Ltd (DPL) – her previous owner.
Given the extensive litigation history in the wide dispute, it is relevant to set out a brief summary of the proceedings regarding this matter to date.
Procedural history
First Maritime Proceeding1
In this proceeding brought by Zetta against DPL, Zetta asserted that they had proprietary maritime claim to possession, title or ownership of the Dragon Pearl by virtue of a constructive or resulting trust arising from the fact that the purchase price for the yacht came from Zetta's funds. There was no issue as to payment of the relevant instalments, but Zetta failed to put forward adequate evidence proving the Dragon Pearl was bought with misappropriated funds. The Court found no trust had been established and the matter was dismissed accordingly. This resulted in the Federal Court setting aside the arrest warrant issued in relation to the Dragon Pearl.
First Maritime Appeal2
Zetta's subsequent attempt to appeal the decision in the First Maritime Proceeding was dismissed by the Full Court – Zetta failed to prove an error.
Second Maritime Proceeding3
Shortly after the First Maritime Appeal, the Dragon Pearl was sold to Linkage for A$1.00. This prompted Zetta to commence fresh proceedings.
It was alleged by Zetta that Linkage was liable on the first limb of Barnes v Addy by knowingly receiving the Dragon Pearl from DPL in breach of trust or fiduciary duty. In addition – and importantly for insolvency professionals – it was further alleged that the sale of the yacht for $1 was an "uncommercial transaction" for purposes of the voidable transaction provisions of the Act.
On those two alternative bases, Zetta sought an order restraining Linkage from removing the Dragon Pearl from Australian waters or from transferring title of the Dragon Pearl to a third party.
This proceeding was dismissed, on the basis of a successful plea from Linkage of res judicata arising from the decision taken in the First Maritime Proceeding. The Court was satisfied that if the matter were to proceed to trial, Linkage would have inevitably succeeded and Zetta's injunctive relief would be refused since it had no prospects of success.
Recognition Proceeding
Prior to the Second Maritime Appeal – discussed immediately below – Zetta had their US Chapter 7 bankruptcy proceedings in the US recognised by the Federal Court of Australia as a "foreign proceeding" within the meaning of Article 2(a) of the UNCITRAL Model Law on Cross-Border Insolvency (Model Law) as enacted in the CBIA.
Along with the recognition order, Zetta was awarded an interim injunction under Article 21 of the Model Law further preventing the removal of the Dragon Pearl from Australian waters.
Second Maritime Appeal4
On appeal to the Full Court, it was decided that, while the trial judge was correct in refusing the claim to injunctive relief based on res judicata, the trial judge did not separately consider the significance of the application for injunctive relief premised on the basis of a claim that the sale of the yacht was an uncommercial transaction.
The matter was remitted back to the trial judge, to consider Zetta's foreshadowed but unaddressed claims with respect to section 588FF of the Act.
The decision – interaction between the CBIA and the Act
The argument – Zetta could access the voidable transaction powers
Zetta then pressed its application for relief under section 588FF of the Act – the key provision providing power to claw-back antecedent transactions – pointing to the sale of Dragon Pearl as being an uncommercial transaction for the purposes of section 588FB of that Act.
Zetta contended that, amongst other things, sections 17 and 22 of the CBIA operated in tandem with Article 23 of the Model Law. These provisions together expanded the operation of section 588FF, such that it applies to transactions of Zetta conducted in Australia notwithstanding the fact that Zetta is not a "company" within the meaning of section 588FF.
The argument was made on the premise that, by virtue of section 22 of the CBIA, the Model Law prevails over Part 5.7 of the Act in the event of any inconsistency (the inconsistency being that only entities that are "companies" for purposes of section 9 of the Act can be the subject of relief under section 588FF).
The decision
On the key issue, Justice Perram determined that Article 23 of the Model Law is to be narrowly interpreted as a rule on standing to sue only – Article 23 does not operate to capture entities that are not registered in Australia and that do not otherwise carry on business in Australia. This conclusion on the issue of construction was consistent with the English approach in Rubin.
In reaching that conclusion, the judge noted that the purpose of the CBIA is to avoid the need to appoint a local liquidator if a foreign representative has been appointed and recognised in Australia. This did not, however, change the clear terms of section 588FF of the Act, that the foreign representative is to have access to the voidable transaction regime only if the foreign entity is a "company" within the meaning of section 9 of the Act.
From that point, Zetta was found not to be a company within the meaning of the Act. The company was registered in Singapore, and, despite having conducted transactions in Australia, including a number of transactions with airports around the country, this was not sufficient to satisfy the requirement of "carrying on business" in Australia.
For further information, please contact:
David Walter, Partner, Baker McKenzie
david.walter@bakermckenzie.com
1. Zetta Jet Pte. Ltd v The Ship "Dragon Pearl" [2018] FCA 878.
2. Zetta Jet Pte Ltd v The Ship “Dragon Pearl” [2018] FCAFC 99.
3. Zetta Jet Pte Ltd v The Ship “Dragon Pearl” (No 2) [2018] FCA 1130.
4. Zetta Jet Pte Ltd v The Ship “Dragon Pearl” (No 2) [2018] FCAFC 132.
