29 July 2021
In the recent case of Re Hydrodec Group Plc [2021] NSWSC 755 (Hydrodec) the Supreme Court of New South Wales (NSW Supreme Court or Court) rejected an application by a non-operating holding company, Hydrodec Group Plc (the Company), for recognition of its United Kingdom (UK) debtor-in-possession Part A1 moratorium process (Part A1 Moratorium) and relief from a winding up application being made against the Company in Australia.
In doing so, the NSW Supreme Court found that the centre of main interests (COMI) of the Company was not in the UK, and therefore refused to recognised the Part A1 Moratorium as a foreign main proceeding for the purposes of the Model Law on Cross-Border Insolvency of the United Nations Commission on International Trade Law (the Model Law) as applied in Australia pursuant to the Cross-Border Insolvency Act 2008 (Cth) (the Cross-Border Act).
In reaching this view, the NSW Supreme Court determined that there could be no presumption that the COMI of the Company was at its registered office in the UK (under Article 16(3) of the Model Law) as the Company also had a second registered office as a foreign company in Australia. Instead, the Court considered that the affairs of the Company were, in substance, the business and operations of its operating subsidiary in the United States of America (USA). This was a somewhat surprising result given the many conventional factors indicating a UK connection, such as the Company’s registered office, the location of its directors and board meetings, the contact details on its website and a recently cancelled listing on the LSE, its main asset being shares in a UK incorporated company and the location of the majority of its creditors (and that the Company itself conducted no business in the USA).
The NSW Supreme Court did however accept that the UK’s new Part A1 Moratorium was a “foreign proceeding” for the purposes of the Model Law. The Court also considered the joint monitors appointed to oversee the Company’s Part A1 Moratorium to be “foreign representatives” under the Model Law – notably rather than the Company itself or one of its directors or officers as has generally been the approach in previous applications by debtors-in-possession.
In addition, the NSW Supreme Court declined to provide assistance to the Company pursuant to section 581 of the Corporations Act 2001 (Cth) (the Corporations Act) or at common law, noting that the Company had no evidence that the Part A1 Moratorium would achieve its intended sale or restructuring to the benefit of creditors.
The decision arguably marks a departure from traditional approaches to determining the COMI of a holding company, placing significantly greater emphasis on the activities of the company’s operating subsidiaries. The case also highlights the importance of demonstrating that an application for recognition and assistance is in respect of a viable process that is in creditors’ interests (rather than appearing a last minute attempt to stave off liquidation).
The Hydrodec Group
The Company was a public company incorporated in the United Kingdom and registered as a foreign company in Australia. The Company was the head of a group of companies (the Hydrodec Group), and listed on the AIM part of the London Stock Exchange until cancellation in April 2021.
The Hydrodec Group specialised in re-refining waste transformer oil, and held various patents for proprietary technology in that regard. The Company itself did not hold any patents, and was not a trading entity, but instead held shares in another UK incorporated company (and certain intercompany balances), Hydrodec Holdco Limited (Holdco), which in turn directly or indirectly owned all of the other companies in the Hydrodec Group (other than two dormant entities). The only trading entity in the group at the time of the proceedings was Hydrodec North America LLC (Hydrodec NA) one of the indirect subsidiaries of Holdco. Hydrodec NA had a plant in Canton, Ohio where it processed waste oil.
The Hydrodec Group appeared to have been under some financial pressure in the lead up to the proceedings, and was seeking to refinance Hydrodec NA’s debt facilities, or to sell the shares of Hydrodec NA. The return to creditors of the Company was dependent on the success of such refinancing or sale.
The Australian judgment debt and winding up petition
In February 2021, the NSW Supreme Court issued its judgment in legal proceedings that had been commenced by Southern Oil Refining Pty Ltd (SOR) against Hydrodec and its Australian incorporated (indirect) subsidiary Hydrodec Australia Pty Ltd (Hydrodec Australia). The NSW Supreme Court ordered that Hydrodec and Hydrodec Australia were jointly and severally liable to SOR in the amount of approximately A$1.7m (the Judgment Debt).
Subsequent to that decision, Hydrodec Australia entered into an Australian creditors’ voluntary liquidation process and SOR served a statutory demand on the Company for payment of the Judgment Debt. The Company failed to comply with the statutory demand, and SOR accordingly sought an order from the NSW Supreme Court for the compulsory winding up of the Company on ground of insolvency.
The Company sought an adjournment of the winding up proceedings on the basis that the Company intended to appeal the February judgment, but this application was dismissed by the NSW Supreme Court.
The UK Part A1 Moratorium
Following the rejection of its application to adjourn the winding up application, the Company commenced a Part A1 Moratorium in the UK. This was done by filing the necessary documents with the High Court of England and Wales (the EW High Court), and appointing FRP Advisory partners Phillip Reynolds and Anthony Wright as joint monitors of the Company (Joint Monitors).
Introduced in June 2020, a Part A1 Moratorium is a new voluntary debtor-in-possession procedure under the Insolvency Act 1986 (UK) (the UK Insolvency Act). A Part A1 Moratorium provides companies with a “payment holiday” of up to 40 business days without the need for Court approval.[1] During this period, a company remains under the director’s control and may continue to trade. However, the company is not obliged to repay “pre-moratorium debts” and the company’s creditors are restricted from taking enforcement action against the company during the moratorium.
A company’s activities are restricted for the duration of a Part A1 Moratorium. In particular, the consent of the company’s monitor is required before the company can grant new security or dispose of assets outside the ordinary course of business.
The monitor does not have any direct control over the business during the Part A1 Moratorium. Instead, the monitor performs an oversight role; including assessing eligibility to rely on the moratorium, monitoring the probability of rescue, and sanctioning asset disposals outside of the ordinary course of business.
The application for recognition and relief in Australia
Following the commencement of the Part A1 Moratorium in the UK, the Company applied to the NSW Supreme Court (heard before Williams J) seeking recognition of the UK proceedings and orders staying the Australian winding up proceedings.
Specifically, the Company sought orders:
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that the Part A1 Moratorium in respect of the Company be recognised as a “foreign main proceeding” under the Model Law;
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that the Company itself, or alternatively the Joint Monitors, be recognised as the “foreign representative” of the Company for the purposes of the Model Law;
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for relief under Article 21 of the Model Law, including a stay on the winding up proceedings against the Company; and
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in the alternative to (a) – (c) above, for a stay on the winding up proceedings under section 581(2) of the Corporations Act or at common law.
The key relief sought under Article 21 (described at (c) above) was conditional upon the preceding orders (described at (a) and (b) above) recognising the Part A1 Moratorium as foreign main proceedings and either the Company or the Joint Monitors as foreign representatives.
Notably, no application was made for recognition of the Part A1 Moratorium as a “foreign non-main proceeding” under the Model Law. It is unclear why such an application was not made in the alternative to recognition as a foreign main proceeding, as relief under Article 21 is available upon either form of recognition.[2]
Was the Part A1 Moratorium a foreign proceeding?
The first issue for the NSW Supreme Court was whether the Part A1 Moratorium was a “foreign proceeding”.
The Model Law defines a foreign proceeding in Article 2(a) 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.
Williams J considered that the Part A1 Moratorium satisfied this definition, as:
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the Part A1 Moratorium was a proceeding under the UK Insolvency Act, a law relating to insolvency;
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the Part A1 Moratorium proceeding was collective in nature as it was intended to rescue the Company as a going concern;
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the assets and affairs of the Company were subject to the control or supervision of the EW High Court (through the Joint Monitors, who were officers of the Court); and
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the moratorium was intended to rescue the Company as a going concern, which would inevitably involve some reorganisation given the Company’s distressed state.
Was the application made by foreign representatives?
Under Article 1(a) of the Model law, an application for assistance must be made by a foreign court or a foreign representative. In this case, the NSW Supreme Court was asked to recognise either the Company itself or alternatively the Joint Monitors as foreign representatives.[3]
Article 2(d) of the Model Law defines “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 …
When courts in Australia and abroad have previously been petitioned to grant assistance in connection with foreign debtor-in-possession proceedings, the court has frequently recognised either the company itself or one or more of its directors or officers as the foreign representative.[4]
However in this case, Williams J preferred to recognise the Joint Monitors as the foreign representatives. Williams J took the view that the Joint Monitors were in substance the persons authorised to administer the reorganisation because:
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there were constraints on the Company’s dealings with its assets and entry into contracts under the Part A1 Moratorium;
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the Joint Monitors had an oversight role; and
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the Joint Monitors had the power to terminate the Part A1 Moratorium.
Williams J did not cite any authority for this approach. It seems arguable that primary responsibility for administering a reorganisation under a Part A1 Moratorium remains with the directors, rather than the monitor, given that a monitor has no power to deal with the company’s assets, enter into contracts or otherwise act on the company’s behalf.
Was the Part A1 Moratorium a foreign main proceeding?
Under Article 2(b) of the Model Law, a foreign main proceeding is a foreign proceeding that is taking place in the State where the debtor has its COMI. The NSW Supreme Court therefore needed to determine whether the COMI of the Company was in the UK (i.e. the place where the Part A1 Moratorium was taking place).
Registered office presumption not applicable
COMI is not defined in the Model Law. However, Article 16(3) of the Model Law contains a presumption that in the absence of proof to the contrary, a corporate debtor’s registered office is presumed to be its COMI.
The Company sought to rely on this presumption, on the basis that its registered office was in the UK. This was contested by SOR, which argued that the presumption could not apply because the Company had two registered offices – one in London (the registered office in its place of incorporation) and one in Sydney (its registered office as a foreign company under the Corporations Act).
Williams J agreed with SOR, stating that where a company has more than one registered office, there is nothing in the Model Law or the Cross-Border Act that requires only one of the offices to be treated as relevant for the purpose of the presumption. Her Honour therefore considered that the presumption did not apply in respect of any of the Company’s registered offices, and the NSW Supreme Court was required to determine the Company’s COMI in accordance with all the relevant evidence.
In reaching this decision, Williams J referred to the decision in Legend International Holdings Inc (as debtor in possession of the assets of Legend International Holdings Inc) v Legend International Holdings Inc [2016] VSC 308, where Randall AsJ held, in a similar situation, that a Delaware incorporated company which had registered as a foreign company in Australia had two registered offices for the purposes of Article 16(3), and there was no presumption in favour of the registered office in the place of incorporation in such circumstances.
Where was the Company’s COMI?
As the registered office presumption did not apply, the NSW Supreme Court conducted a factual assessment of whether the Company’s COMI was in the UK.
Williams J noted the various Australian case law on the meaning of COMI under the Model Law, referring in particular to the statement by Jagot J in Young, Jr, in the matter of Buccaneer Energy Limited v Buccaneer Energy Limited [2014] FCA 711 (Buccaneer) that COMI must be identified by reference to criteria that are objective and ascertainable by third parties.
The factors which Williams J considered are summarised below:
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Favouring UK COMI |
Against UK COMI |
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Williams J placed particular emphasis on these factors:
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Hydrodec Group’s only trade operations were in the USA (via Hydrodec NA);
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Hydrodec NA’s plant and operations, and its key market, were in the USA;
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Hydrodec Group’s largest creditor was in the USA, and refinancing this debt was important to the Company; and
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her Honour’s view that the administration of the affairs of the Company involved, in substance, the administration of the operations of Hydrodec NA (which she based on the material in the Company’s annual report, an announcement, and the minutes of meetings of directors of the Company).
As a result of these four factors, she considered that “the affairs of the Company are, in substance, the business and operations of Hydrodec NA in the United States”. This was the case despite several companies being interposed between the Company and Hydrodec NA in the group’s corporate structure.
Williams J noted that the four key factors were generally ascertainable by third parties on the basis of the information published in the Company’s 2018 annual report and in subsequent announcements (although third parties would not have access to the minutes of meetings of the directors).
Williams J placed little importance on the incorporation of the Company in the UK, the location of its offices, and the location of its directors. Furthermore, her Honour did not consider the listing on the London Stock Exchange to be relevant as the listing had been cancelled in April 2021 (despite this being only 1 ½ months before the Part A1 Moratorium commenced).
Accordingly, Williams J held that:
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the Company had its COMI in the USA (and therefore not in the UK); and
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the Part A1 Moratorium was therefore not a foreign main proceeding under the Model Law.
Assistance under section 581 or common law
Given her Honour’s refusal to recognise the Part A1 Moratorium under the Model Law, it was necessary for Williams J to consider the alternative grounds upon which the Company sought assistance under either section 581 of the Corporations Act or at common law (the Company submitted that the same principles applied in either case). However, Williams J declined to exercise her discretion to grant such assistance and stay the winding up proceedings.
Williams J considered that the Company had not demonstrated any clear plan for the rescue of the Company apart from a mere hope that some further time for continued negotiations would lead to a refinancing or sale of Hydrodec NA. The Company had been seeking to achieve a refinancing or sale since late 2019, but the Joint Monitors and the Company had not adduced any evidence as to whether there were realistic prospects of achieving this during the period of the Part A1 Moratorium. The claim by the Joint Monitors that the Part A1 Moratorium was in the best interests of creditors was therefore just a “bare assertion”.
Williams J also noted that, whilst not a prerequisite for relief under section 581, the EW High Court had not made any assessment of whether the Part A1 Moratorium was likely to result in the rescue of the Company as a going concern or to achieve a better result for creditors than if the Company was wound up. Nor had the EW High Court issued any request for assistance to the NSW Supreme Court.
In contrast, Williams J considered that the Australian liquidation could have real utility. She considered that (as a matter of Australian law) an Australian liquidator would not be precluded from dealing with assets of the Company in the United Kingdom. Furthermore, an Australian liquidator could investigate potential voidable transaction claims and insolvent trading claims in relation to the Company. Williams J considered that such a liquidator potentially could seek assistance in foreign jurisdictions under Chapter IV of the Model Law to the extent necessary.
Williams J therefore rejected the application for assistance under section 581 (and alternatively at common law).
Comment
The approach to COMI taken by the NSW Supreme Court is noteworthy.
First, it now seems clear that Australian courts will not apply the Article 16(3) COMI presumption in favour of the foreign jurisdiction incorporation if the relevant company has registered as an Australian foreign registered company (given the requirement in such circumstances to maintain an Australian registered office). It can be expected that the Australian courts would similarly decline to apply the presumption if the company had a registered office in some third jurisdiction. However, it is unclear whether the Model Law was intended to preclude the operation of the presumption in these circumstances – neither the Model Law itself nor the Guide to Enactment appear to contemplate the possibility of a company having two registered offices.
Second, the case indicates that where the Australian courts analyse the COMI of a non-operating holding company the operations of its subsidiaries, and the group as a whole, will be an important factor.
There are some similarities between this case and the approach taken by Jagot J in Buccaneer. In that case, however, Jagot J placed emphasis on factors showing that though the parent company had its registered address in Australia, its real activities, and not merely those of the subsidiary companies were focussed on the development of oil and gas assets in Alaska. Whilst those activities were predominantly carried on by subsidiaries incorporated in the USA, Jagot J pointed to factors such as the parent company’s key executives operating out of Houston offices, the parent company holding itself out as having offices located in the USA, and the parent company declaring income from business in the USA.
The Hydrodec decision appears to go further than Buccaneer, in that Williams J relied on factors relating to the subsidiary, and equated the business of the subsidiary with that of the parent. It is not clear how comfortably this approach sits next to COMI-shifting decisions such as Re Hellas Telecommunications (Luxembourg) II SCA [2009] EWHC 3199 (Ch), which have generally focussed on factors relating to the parent company itself, rather than its operating subsidiaries.[5] It is also questionable how readily apparent to third parties this approach is, which seemed to emphasise where the Company and its directors were focussing their attention, rather than objective factors apparent to creditors such as where the Company, its key personnel and any related dealings were located.
It is worth noting that, although not apparently central to the reasoning of the case, the NSW Supreme Court clearly had concerns regarding a financing and security arrangement entered into by the Company with Mr Black (a current or former shareholder of the Company) on the same date as commencing the Part A1 Moratorium, and the potential for these arrangements to also improve Mr Black’s position in respect of his pre-existing exposures at the expense of other creditors of the Company. In addition, it is notable that the Company only decided to apply for the Part A1 Moratorium at a late stage, once its attempts to adjourn the Australian winding up application failed – something which had the appearance of a last minute attempt to avoid the effect of the Court’s rulings. These factors likely contributed to the Court’s scepticism as to how viable or appropriate the Part A1 Moratorium was in the circumstances. The case also highlights that many applications for cross-border recognition and assistance depend on an exercise of the Court’s discretion – in such circumstances it is important to have a compelling case as to why the assistance is in the best interests of the company’s creditors.
For further information, please contact:
Paul Apathy, Partner, Herbert Smith Freehills
paul.apathy@hsf.com
Endnotes
[1] See Herbert Smith Freehills, ‘Governance: Changes to UK Insolvency Law Could Impact Secured and Unsecured Bank Debt (UK)’ (9 June 2020) <https://www.herbertsmithfreehills.com/latest-thinking/governance-changes-to-uk-insolvency-law-could-impact-secured-and-unsecured-bank-debt>.
[2] It is also unclear whether the Company sought a voluntary administration-style stay pursuant to Article 20, which arguably might be appropriate in such a case – see for example Suk v Hanjin Shipping Co Ltd [2016] FCA 1404.
[3] Hydrodec [50]–[55].
[4] Moore, as Debtor-in-Possession of Australian Equity Investors v Australian Equity Investors [2012] FCA 1002, [7]–[12] and Board of Directors of Rizzo-Bottiglieri-De Carlini Armatori SpA v Rizzo-Bottiglieri-De Carlini Armatori SpA [2013] FCA 157, [5]–[7] (recognition of director as foreign representative under Italian Insolvency Law); Young, Jr, Re Buccaneer Energy Ltd v Buccaneer Energy Ltd [2014] FCA 711, [2] (apparent acceptance by Federal Court of the company’s Chief Restructuring Officer and board of directors as the foreign representative under US Chapter 11 Proceedings); Re Senvion GmbH (No 2) [2019] FCA 1732, [10]–[13] (recognition of the insolvent company under German self-administration insolvency proceedings); Re 19 Entertainment Limited [2016] EWHC 1545 (Ch), [15]–[17] (recognition of company and its directors as foreign representatives under Chapter 11 of the US Bankruptcy Code by the EW High Court); Re Michele Bottiglieri Armatore SpA [2021] FCA 795, [20] (recognition of Italian shipping company as foreign representative under Italian debtor-in-possession proceedings).
[5] It could also been seen as something of an inversion of the ‘command and control’ test applied in English cases such as Re Daisytek-ISA Ltd [2003] BCC 562 (Ch), prior to the decision of the European Court of Justice in Eurofood IFSC Ltd (Case 341/04).
