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118 Organisations such as Committee J of the International Bar Association’s Section on Business Law, which deals with Insolvency and Creditors’ Rights, and INSOL International (an international organisation of insolvency practitioners, both legal and accounting) have since the early 1980s been working on projects designed to deal with international insolvencies in the twenty-first century. The first step in the process was the drafting of the Model International Insolvency Co-operation Act, known generally as MIICA (see Mears 1990).
119 In 1995, the International Bar Association formally approved a document known as a Concordat. As Bruce Leonard, the then Co-Chair of Committee J, stated in a paper delivered at the United Nations Commission on International Trade Cross-Border Insolvency Colloquium in Vienna, Austria in 1994:
The Concordat originated out of the common insolvency-community conclusion that cross border insolvencies and reorganisations would rarely be dealt with effectively through international treaties. The concept of the Concordat was to draw upon the experience of the insolvency community to develop a set of general guidelines which could be used in identifying solutions applicable to individual cross border insolvencies. The intention of the Concordat is to suggest rules which would be applicable to cross border insolvencies and reorganisations which participants in the reorganisations or the Courts could adopt as practical solutions to problems arising in the insolvency or reorganisational process.
The Concordat is based on the view that an insolvency regime in order to be supportive of international commerce must be reasonably predictable, fair and convenient. The Concordat begins with the view that international trade and commerce will be enhanced and facilitated by an understanding among nations that principles exist which, in the event of a business failure or reorganisation, will govern the proceedings. (10–11)
120 Subsequently, the Concordat was used to resolve a number of cross-border international problems even though, as a matter of law, it had no effect. Judges were prepared to act on the statements of principle contained in the Concordat as being internationally accepted principles sourced through practitioners experienced in the difficulties arising in the administration of a cross-border insolvency. Examples of cases in which the Concordat was applied are Re Hackett WL 422132.N3 (Bankr SDNY 1995) and Re Commodore Electronics Limited & Commodore International Limited (Supreme Court, Cth of the Bahamas, Equity Side, 27 March 1995, 473/1994).
121 In conjunction with INSOL International, UNCITRAL organised conferences to discuss cross-border insolvency problems. The background to the work ultimately taken by UNCITRAL is recorded in a report by Zulman J of the Supreme Court of Appeal of South Africa: Final Report on Trans-National Insolvency. As a person involved in discussions leading up to approval of the Model Law by the General Assembly of the United Nations, Zulman J’s explanation of the process is illuminating:
UNCITRAL decided to undertake work on cross-border insolvency in response to suggestions made to it by practitioners directly concerned with the problem. At an UNCITRAL conference entitled “Uniform Commercial Law in the 21st Century” held in New York in May, 1992 [United Nations reference A/CN.9/SER.D/1] UNCITRAL decided to pursue these suggestions further [Official records of the General Assembly, 48th Session, Supplement No 17 (A/48/17), paras 302/306.] The background note on which UNCITRAL based its discussion is contained in document A/CN.9/378/Add.4. Subsequently, in order to assess the desirability and feasibility of work in the area, and to define appropriately the scope of the work, UNCITRAL and INSOL held a Colloquium on cross-border insolvency in Vienna in April 1994 involving practitioners from various disciplines, judges, government officials and representatives of other interested sectors including lenders. [The report on this Colloquium is to be found in document A/CN.9/38].
The first UNCITRAL-INSOL Colloquium gave rise to the suggestion that work by the commission should, at least at that stage, have the limited but useful goal of facilitating judicial co-operation, court access for foreign administrators and recognition of foreign insolvency proceedings. Subsequently, an international meeting of judges was held specifically to illicit [sic] their views as to work by UNCITRAL in that area. This meeting took place in Toronto in March 1995. . . . The view taken by participating judges and government officials at that Colloquium was that it would be worthwhile for UNCITRAL to provide a legislative framework, for example by way of model legislative provisions, for judicial co-operation, court access for foreign insolvency administrators and recognition for foreign insolvency proceedings. Working sessions of the group were held in New York in April 1996, in Vienna in October 1996, and in New York in January 1997. . . . (Zulman 1998, para 8.1; see also www.un.or.at/uncitral)
122 The advantage of legislation designed to reduce uncertainty about the initial steps in an international insolvency, while not removing all national discretion on the conduct of an insolvency, was recognised as valuable in the recommendations made by the Group of Thirty in its discussion paper International Insolvencies in the Financial Sector (August 1996).
123 The Guide to Enactment issued with the Model Law on Cross-Border Insolvency explains the purposes and provisions of the Model Law in detail. In this chapter we outline the purposes of the Model Law and then proceed to discuss a number of issues relevant to adoption of the Model Law in New Zealand. Our observations on these issues should be read in conjunction with the Guide to Enactment (set out in the appendix to this report with the Model Law) and the commentary on our draft legislation. The reference table at page xvi of this report should be used to ensure that all references to particular articles in the Model Law are captured.
124 Three points should be made immediately:
125 The Model Law reflects both the need for certainty in determining how to initiate a cross-border insolvency proceeding and the broad discretion which must necessarily be reposed in courts to enable them to fashion practical solutions to cross-border insolvency problems. The Model Law provides a framework within which protocols can be approved, for example, those formulated as a result of co-operation between the United States’ Bankruptcy Court, Southern District of New York, and the Chancery Division of the High Court in proceedings involving Maxwell Communications Corp Plc.27 A further example of judicial co-operation is the recent case involving Chapter 11 proceedings in the United States (in New Mexico) and a Canadian proceeding (under the Companies’ Creditors Arrangement Act) which resulted in a joint hearing being convened to discuss issues in the course of which both the Canadian and United States judges exchanged comments about the resolution of procedural and substantive issues.28
126 The purposes of the Model Law are set out in the Preamble which reads:
The purpose of this Law is to provide effective mechanisms for dealing with cases of cross-border insolvency so as to promote the objectives of:
(a) cooperation between the courts and other competent authorities of this State and foreign States involved in cases of cross-border insolvency;
(b) greater legal certainty for trade and investment;
(c) fair and efficient administration of cross-border insolvencies that protects the interests of all creditors and other interested persons, including the debtor;
(d) protection and maximization of the value of the debtor’s assets; and
(e) facilitation of the rescue of financially troubled businesses, thereby protecting investment and preserving employment.
127 It is clear from the Preamble that it is designed to be all things to all people. The interests of creditors, the debtor and employees of the debtor are all emphasised to accommodate the different weight given to each of those factors by the domestic laws of individual states.
128 The Preamble also emphasises co-operation between courts: this is something new. Mr Justice Farley, one of the senior judges sitting in the Commercial List of the Ontario Court of Justice (General Division) who has considerable experience in cross-border insolvency arrangements, recently stressed the need to avoid becoming bogged down in non-productive diversions that are destructive to the value of the enterprise. He stated: “[w]e in the judiciary must recognise the sovereignty of each country’s insolvency regime, but there are significant commonalities upon which to build” (Farley 1998, 12).
129 Other judicial guidance is found in the observations of Blair J in the case of Olympia and York Developments v Royal Trust Company (1993) 20 CBR (3d) 165 who, when considering a negotiated protocol between parties in order to harmonise matters arising under the Canadian Companies’ Creditors Arrangement Act and Chapter 11 of the United States Bankruptcy Code, said:
The Courts of the various jurisdictions should seek to co-operate amongst themselves, in my view, in facilitating the trans-border resolution of such disputes as a whole, where that can be done in a fashion consistent with their own fundamental principles of jurisprudence. The interests of international co-operation and comity, and the interests of developing at least some degree of certitude in international business and commerce, call for nothing less. (167)
130 There are five distinct parts of the Model Law:
131 Some of the provisions of the Model Law are drafted in a style which is different from that usually encountered in New Zealand statutes. Accordingly, an issue for consideration, if the Model Law is to be adopted, is the language to be employed in a New Zealand statute to reflect its provisions. Should the wording of the Model Law be adapted to reflect the style in which a New Zealand statute is usually worded?
132 In our view, because the Model Law is intended to be used internationally, it is desirable that consistent language be used. That will avoid any argument over whether a change from the Model Law’s wording has changed the meaning originally intended by the Model Law. The aim is global consistency of approach to interpretation of the Model law and therefore predictability in outcome in any given case.
133 New Zealand’s approach to statutory interpretation is consistent with the objective of consistency: as Keith J said in New Zealand Air Line Pilots’ Association Inc v Attorney-General [1997] 3 NZLR 269:
We begin with the presumption of statutory interpretation that so far as its wording allows legislation should be read in a way which is consistent with New Zealand’s international obligations, eg Rajan v Minister of Immigration [1996] 3 NZLR 543 at p551. That presumption may apply whether or not the legislation was enacted with the purpose of implementing the relevant text. (289)29
134 More generally, it is desirable that there is consistency of approach by each enacting state, again to ensure consistent interpretation. In consequence, the case law, though domestic in nature, will acquire an international flavour. To date the only other states at the stage of drafting legislation are the United States and South Africa. In comparing the United States draft legislation with the Model Law, Glosband and Tobler consider few changes have been made to the structure while many changes have been made to the language; but “those changes were idiomatic, not substantive” (Glosband and Tobler 1998, 28). As for the South African draft, the South African Law Commission determined to make “as few changes as possible . . . in the proposed adaptation in order to strive for a satisfactory degree of harmonisation and certainty.” (“Invitation to Comment on UNCITRAL Model Law on Cross-Border Insolvency”, available at www.law.wits.ac.za/salc/media/crossbinvite.html.) We favour the South African approach.
135 Article 1(2) of the Model Law leaves open the possibility of a particular state excluding particular types of entities from the ambit of the Model Law. Examples given in article 1(2) of the Model Law are banking and insurance. Aside from life insurance and banking industries, the general insolvency statutes in force in New Zealand apply across the board to individuals and companies.
136 The issue whether banks registered under the Reserve Bank of New Zealand Act 1989 (the Reserve Bank Act) should be subject to the Model Law is a unique one. First, the total assets of registered banks made up approximately 93 percent of the total assets of financial institutions in New Zealand at the end of 1997 (KPMG 1998 Financial Institutions Performance Survey). This survey included registered banks, finance companies, savings institutions and mortgage origination companies as “financial institutions”, but excluded financial institutions with total assets of less than $30 million. Second, there is a very high degree of foreign ownership within the New Zealand banking system. As at the end of December 1997 there were 19 registered banks in New Zealand of which 18 were either branches or subsidiaries of overseas banks. This translates to over 95 percent of the total assets of banks in New Zealand being held by overseas-owned banks. Indeed, the only banks with any degree of local ownership are TSB Bank Limited (wholly owned by the TSB community trust and operating largely in the Taranaki region) and ASB Bank Limited (which is 25 percent owned by the ASB community trust). Although ASB Bank Limited started primarily as an Auckland-based bank, it now has branches in many other parts of New Zealand.
137 Foreign ownership creates the risk that an insolvency of a bank in New Zealand will emanate from overseas; in such a case, New Zealand authorities would have virtually no control over the timing of a bank failure. Such a failure could arise if a bank in New Zealand guaranteed obligations to its parent company (located overseas) and the parent company became insolvent requiring the New Zealand bank to pay on the guarantee. This raises peculiar problems about protection of the New Zealand financial system. For that reason we have devoted a separate chapter to the question of whether registered banks should be subject to the Model Law.
We discuss in chapter 5, particularly, the extent to which the Reserve Bank of New Zealand ought to be able to continue to exercise prudential management functions to avoid systemic financial failure as a result of the insolvency of a particular bank.
138 Life insurance companies are the only other form of company in New Zealand to have an industry-specific form of insolvency regime. That regime is the judicial management regime established under the Life Insurance Act 1908 Part iA as enacted by the Life Insurance Amendment Act 1985. As Barker J observed in Re ACL Insurance Limited [1991] 1 NZLR 211:
The scenario provided by Part iA of the Life Insurance Act is a variation on a fairly regular theme which has seen statutory managers imposed on a whole range of companies in the public interest. In recent troubled financial times, there has been frequent exercise of the powers of the Executive under the Companies Special Investigations Act 1958 . . . , and its successor, the Corporations (Investigation and Management) Act 1989. . . . The Reserve Bank of New Zealand Amendment Act 1989 . . . gives similar powers to the Reserve Bank in respect of registered banks. Virtually each statutory management ordered thus far has resulted in complex litigation. However, none of the other cognate statutes reposes the power of appointment of managers in this Court. Nor are any of the other kinds of manager called “judicial manager” with a duty to report to the Court. (214)
139 It may be doubted whether, under current market conditions, a separate insolvency regime for life insurance companies can be justified. Market conditions now are rather different from what they were when the judicial management procedure was enacted in 1983 before full deregulation of financial markets. It is difficult to see what can, in the current deregulated financial environment, distinguish a life insurance company from any other company engaged in investment management where, for example, citizens invest their money to provide for their retirement. A factor which supports the view that life insurance policies should not be treated any differently from any other form of retirement savings was the repeal, by s 4 of the Insurance Law Reform Act 1985, of the protection on life insurance policies passing to an Official Assignee on bankruptcy (see Laws NZ, Insolvency, para 254).
140 There may, however, come a time when the life insurance industry should be treated like banks. Banks are facing increasing competition in areas of traditional banking business, blurring traditional distinctions between banks and investment companies. For example, at the close of 1997 AMP/ERGO Mortgage and Savings Limited had a mortgage portfolio of close to $1 billion. While this portfolio is still much less than that carried by most banks it is, nevertheless, indicative of significant inroads being made into the residential mortgage market. There is a distinct possibility that financial institutions other than banks will become sufficiently active – in what have historically been core banking activities – to pose financial risks similar to those posed by the failure of a bank. For example, in Australia non-bank mortgage providers have expanded and now provide a significant share of the residential mortgage market.
141 Notwithstanding the anticipated entry of financial institutions into the activities of traditional banking, we are satisfied on current evidence that life insurance companies per se do not pose sufficient threat of systemic financial failure to warrant exclusion from the Model Law. The question whether a separate insolvency regime should continue for life insurance companies should be addressed in the Ministry of Commerce’s forthcoming insolvency law review.
142 A practical question arises as to how the Model Law should refer to the types of insolvency regimes in force in New Zealand to which it would apply. There are a number of ways of achieving this objective:
a statutory or contractual regime under which the assets of the insured have been or are to be realised for the benefit of secured or unsecured creditors; . . .
143 On balance, we prefer the fourth option. The stating of exceptions to the Model Law is consistent with the approach recommended in the Guide at para 65. A generic definition when combined with specific exclusions would provide both sufficient predictability of outcome as well as efficiency in the sense that it will not require constant changes being made to the law.
144 The Model Law only applies to a foreign proceedings which are collective in nature (article 2(a)). Because of that prerequisite, a receivership commenced by a single secured creditor exercising powers under a floating charge should not fall within the Model Law for the following reasons:
145 Because a secured creditor’s rights are not exercised for the collective benefit of creditors, we see no justification to extend procedures available under the Model Law to debenture holders.
146 However, we do not believe that there should be an exclusion of receiverships as a class from the Model Law’s application as unnecessary definitional problems may be created due to some forms of receivership being “collective proceedings” for Model Law purposes (see also paras 160–162).
147 Article 6 of the Model Law expressly provides:
Nothing in this Law prevents the court from refusing to take an action governed by this Law if the action would be manifestly contrary to the public policy of this State.
The Guide to article 6 states:
As the notion of public policy is grounded in national law and may differ from State to State, no uniform definition of that notion is attempted in article 6. (para 86)
148 The use of the term “manifestly” in article 6 emphasises that the public policy exception should be interpreted restrictively and that article 6 is only intended to be invoked in exceptional circumstances concerning matters of fundamental importance in the enacting state. We have considered whether it would be helpful to identify any aspects of public policy within a New Zealand statute but have come to the view that the courts should be free to consider and apply public policy rules in the particular circumstances of the case.
149 There are public policy reasons why a New Zealand court would decline to enforce a judgment given in a foreign court (eg, attempts to enforce foreign revenue and penal laws, judgments obtained by fraud and judgments given in breach of the rules of natural justice as applied in New Zealand: see Electronic Commerce Part One: A Guide for the Legal and Business Community (NZLC R50), para 301). However, in the area of cross-border insolvency those public policy considerations are not so clear cut as it is the collective interests of the creditors who will be affected by a decision not to grant relief rather than a particular creditor who has abused the judicial process. For example, a number of countries have moved from an absolute forbidding of enforcement of revenue claims (expressed in cases such as Government of India v Taylor [1955] AC 491 and Peter Buchanan Limited v McVey [1955] AC 516) to allowing revenue claims to be enforced when those claims form part of the debts of an insolvent debtor subjected to an insolvency regime: Ayres v Evans (1981) 39 ALR 129 (Australia); re Tucker (A bankrupt), ex parte Bird [1988] LRC (Comm) 995 (Isle of Man); and Priestly v Clegg (1985) 3 SA 955 (South Africa). Based on these authorities, foreign taxation claims may sometimes be admitted to proof in a New Zealand bankruptcy or liquidation.
150 Article 13(2) of the Model Law requires the ranking of foreign claims to be determined. We propose that foreign claims will be ranked as ordinary unsecured creditors. This leaves open the question of foreign revenue debts which might be ruled inadmissible to proof as being contrary to public policy if the purpose of the application is indirectly to enforce a revenue debt.
151 We do, however, propose one minor modification to the Model Law. We propose that in any case where a question of public policy is raised as a reason for refusing aid, the court be directed to consider whether it is necessary to serve the Solicitor-General with the proceedings so that the court can have the benefit of independent argument on behalf of the Crown on the public policy point. In addition to ensuring that the public policy interests of the state are properly argued in any given case, this provision may also serve to deter counsel from raising public policy objections which have little or no merit.
152 Commencement of the statutory management procedure under the Corporations (Investigation and Management) Act 1989 by Executive Order may cause foreign courts to decline relief on the ground that statutory management does not constitute an administrative procedure. We can see no public policy reason why corporations which are subject to statutory management under that Act should be excluded from the operation of the Model Law. Nor has any public policy reason been suggested to us. However, to avoid uncertainty as to whether other states might decline relief on the ground that statutory management is commenced executively rather than judicially, it might be prudent for the legislature to consider whether statutory management should be activated by judicial order (compare with Wood 1995, 222). This is a matter which, in our view, should be considered in the course of the Ministry of Commerce’s insolvency law review.30
153 A court may give discretionary relief to foreign creditors under article 19 or 21 of the Model Law. Generally speaking, we are of the view that foreign creditors should rank equally with New Zealand creditors of equal priority in any distribution of funds unless either:
154 We see no reason to legislate further. The Model Law reserves sufficient discretion in the courts to meet the needs of most cases. The court has a number of options available to it to dispose of an application with practical protection for New Zealand creditors. For example, it would be possible for a judge in New Zealand to insist on an application for assistance being supported by a calculation showing the notional realisation of assets among all creditors. It would be open to the judge to order return of sufficient assets to the state of the foreign representative making the application while leaving sufficient moneys in New Zealand to distribute among all New Zealand creditors. Any distribution in New Zealand could be made on the basis that those creditors no longer had a right to prove pari passu with other creditors in the jurisdiction of the main proceeding. In our view, practical solutions such as this are preferable to prescriptive legislation.
155 It is necessary to consider which courts in New Zealand should have jurisdiction under the Model Law. The High Court retains exclusive jurisdiction in matters of insolvency save for some specific provisions which allow particular matters to be determined by a District Court (see Laws NZ, Insolvency, para 141). It is desirable that the High Court, as the specialist court dealing with insolvency issues in New Zealand, should have exclusive jurisdiction under the Model Law. This policy decision is reflected in s 5 of our draft legislation.
156 Procedurally, we recommend that application be made by way of originating application in the manner provided by Part IVA of the High Court Rules, without excluding the ability to make oral application in circumstances of unusual urgency. As the statute enacting the Model Law is likely to be the first point of reference for overseas practitioners it is desirable to incorporate jurisdiction and method of application to the High Court into the Act adopting the Model Law. In addition, we recommend that further procedural rules can be made by the Rules Committee under the High Court Rules 1985. This recommendation is reflected in s 6 of our draft legislation.
157 We have considered whether or not Masters should be granted jurisdiction to determine applications for assistance under the Model Law if, as we recommend, jurisdiction is vested in the High Court. In New Zealand, Masters of the High Court are senior judicial officers who exercise all jurisdiction of a judge in chambers and specific court jurisdiction entrusted to them under the Judicature Act 1908, including a good deal of the court’s insolvency jurisdiction. We think it desirable for Masters to be given the right to exercise High Court jurisdiction under the Model Law because of the considerable experience which Masters of the High Court have gained in insolvency related matters and because of the speed with which such matters may need to be considered. Any exercise of this jurisdiction by a Master should be stated, in the Judicature Act 1908, to be an exercise of court jurisdiction from which an appeal would lie to the Court of Appeal rather than a Chambers decision from which an application to review could be made to a High Court judge. It will always be open for a party to request that the case be transferred to a judge (see s 26N(1) Judicature Act 1908) on the grounds that the complexity of the matter so demands (see also Laws NZ, Civil Procedure: High Court, para 47). We have included in our draft legislation a provision which consequentially amends the Judicature Act to confer on Masters jurisdiction under the Model Law (see s 7).
158 The definition of “foreign proceeding” in article 2(a) of the Model Law refers to a “collective judicial or administrative proceeding”. As previously indicated, this will exclude a receivership commenced by the appointment of a receiver and manager by a single creditor holding a debenture. Rescue proceedings initiated through voluntary administration are not so problematic; specific reference is made in the definition of “foreign proceeding” to “reorganization” being within the Model Law’s purview.
159 Examples of voluntary administration regimes are found in both the United Kingdom and Australia. The United States equivalent is the Chapter 11 Bankruptcy regime. In New Zealand the doctrine of comity enables the courts to deal with these issues at present. It is sufficient to note our earlier discussion of decisions of the High Court in Fournier v The Ship “Margaret Z” [1997] 1 NZLR 629 and Turners & Growers Exporters Limited v The Ship “Cornelis Verolme” [1997] 2 NZLR 110 (see paras 55 and 57). It is plain that one of the objectives of the Model Law is to facilitate rescue procedures of which voluntary administration and Chapter 11 are examples.
160 We have considered whether there are any New Zealand insolvency regimes which may not be regarded as “collective” for the purposes of the definition of “foreign proceeding”. We do this to ascertain whether a New Zealand insolvency administrator may face obstacles in seeking assistance under the Model Law as enacted in another state. In our view, both Parts XIV and XV of the Companies Act 1993 will pass muster as collective proceedings. Both of those regimes envisage collective proceedings and, to the extent that in any particular case they are single creditor compromises, they would not, as a matter of evidence, fall within the ambit of the Model Law.
161 Although statutory management under the Corporations (Investigation and Management) Act 1989 and the Reserve Bank Act are both commenced by Executive Order rather than judicial decision, it is unlikely that any difficulty would ensue for that reason alone: they are, nevertheless, collective proceedings. We consider public policy issues relating to statutory management separately.
162 Some forms of receivership may fall within the scope of the Model Law; others will not, for example, appointment by a debenture holder (see paras 144–146). There are circumstances in which a court will appoint a receiver under its equitable jurisdiction to act for the benefit of a particular body of creditors. If, as a matter of fact, the order appointing the receiver requires the receiver to act for a group of creditors, rather than one particular creditor, it is likely that the receivership will be regarded as a “collective” proceeding for the purposes of the Model Law. Much will turn on the nature and purpose of the appointment: for example, if the appointment of a receiver has been for the purposes of execution it is unlikely to be subject to the Model Law (see generally Re Samco Sargent Consolidated Limited (1977) 1 BCR 112 and Rea v Chix Products (California) Limited (1986) 3 NZCLC 99, 852). It should be noted that the statutory overlay set out in the Receiverships Act 1993 applies to all forms of receivership commenced in New Zealand.
163 The definition of the term “foreign proceeding” has a second limb. As well as being a “collective judicial or administrative proceeding” it must also be “subject to control or supervision by a foreign court, for the purpose of reorganization or liquidation”.
164 A difficulty arises with the compromise provisions of Part XIV of the Companies Act 1993 as, in certain cases, those proceedings may not involve any court control or supervision. However, while it may not be necessary in any given case for the court to have a role in a compromise commenced under Part XIV of the 1993 Act, there are various functions in relation to the giving of directions by a court which would, in our view, amount to “supervision” for the purposes of the Model Law. We refer, in particular, to ss 228(2), 232(1) and (3), 233 and 234 of the 1993 Act.
165 The definition of “compromise” in s 227 of the Companies Act 1993 is likely to cover either a reorganisation or a liquidation, depending upon the terms of the actual compromise.
166 Where a compromise is effected through Part XV of the Companies Act 1993 the compromise must be effected through the court: Companies Act 1993 s 236(1). In that case, provided the actual arrangement in question was one which fell within the meaning of either “reorganization” or “liquidation”, the procedure would be covered by the Model Law.
167 The term “foreign main proceeding” is defined by article 2(b) of the Model Law as
a foreign proceeding taking place in the State where the debtor has the centre of its main interests; . . . (emphasis added)
168 The term “centre of its main interests” has been taken from the European Convention on Insolvency Proceedings. The definition places emphasis on the centre of economic activity rather than on the place of incorporation or domicile. Particular problems will, no doubt, arise for entities which operate in cyberspace through means of the world-wide web. It may be difficult to answer the question as to where the place of the “centre of [those entities’] interests” is. However, ultimately, this will be an issue to be dealt with by way of evidence and the court will need to draw inferences where necessary to determine the centre of the debtor’s main interests.
169 Mr Michael Steiner of London, an experienced insolvency law practitioner, reminded us of problems which arise in cases involving the perpetration of fraud where directors of the corporate entity have deliberately moved the “centre of its main interests” to what is perceived to be a “friendly” jurisdiction to avoid proper investigation of the affairs of the company and/or an effective liquidation of the company. An example of this type of situation is to be found in the judgment of the Supreme Court of Massachusetts in Electric Mutual Liability Insurance Company Limited 426 Mass 362 (1998).
170 While acknowledging that these types of problems will arise in cross-border insolvency cases, we are not persuaded that any amendment to the Model Law is required to deal with the issue. Ultimately, the question of what constitutes the centre of the main interests of the debtor is a question of fact to be proved by evidence. If a court was satisfied that there had been a fraudulent movement of the centre of the main interests of the debtor to a “friendly” jurisdiction prior to the main insolvency proceeding being commenced that would be a factor which the court could take into account in determining whether or not to grant relief under the Model Law. Alternatively, the nature of relief could be circumscribed to fit the circumstances with which the court is faced. For example, if the court had doubt as to the bona fides of the foreign representative it would be open to the court to grant relief by requiring a New Zealand insolvency practitioner to be appointed to administer New Zealand assets (see article 21(i)(e) of the Model Law). It seems clear that any insolvency practitioner (whether a foreign representative or a New Zealand insolvency practitioner) appointed by the court to act under the Model Law would be an officer of the court to whom the rule in ex parte James (1874) LR9 Ch 609 would apply.
171 In our view no amendment is required to the Model Law in order to address the issue raised by Mr Steiner. We consider the terms of the Model Law give ample powers to the court to deal with any difficulties on a case by case basis. In particular, we refer to the wide powers given to the court under Article 21(1) of the Model Law and to the need for the court to be satisfied that the interests of creditors and other interested persons, including the debtor, are adequately protected when making, modifying or terminating any relief under either article 19 or article 21: see article 22 of the Model Law.
172 One of the distinctive features of the Model Law is the emphasis on and encouragement of judicial co-operation (articles 25, 26 and 27). Specific forms that co-operation may take are specified in article 27. Article 27(f) is left blank for the enacting state to “list additional forms or examples of cooperation”.
173 In our view it is not necessary to specify additional means of cooperation given the introductory clause to article 27: “Co-operation . . . may be implemented by any appropriate means, including . . .”. Clearly the court from whom assistance is sought would not be limited to forms of assistance set out in article 27. Neither the draft United States legislation nor the South African legislation specify forms of co-operation beyond those already set out by the Model Law.
174 In resolving cross-border insolvency issues, direct communication between judges in different jurisdictions is starting to occur and, for some time, indirect contact has been taking place through counsel appointed for the purpose of communication.31 This practice is likely to continue when resolving cross-border cases under the auspices of the Model Law. The issue arises as to whether any limitation should be placed upon informal communications. For example, is it necessary to set out any specific requirements in relation to observance of the principles of natural justice when judicial co-operation is taking place?
175 It is in our view unnecessary to set out any specific requirements to observe the principles of natural justice. There are three reasons why this is so:
176 These issues are best dealt with by way of co-operation between counsel and the court. While specific protocols may need to be fashioned in particular cases to deal with communications between courts of different states there are many precedents available to assist counsel and judges to deal with these issues.
177 The Model Law is silent as to whether a proceeding under the Model Law should be dealt with on an adversarial basis or in an inquisitorial manner. That, in itself, is not surprising given that both common law and civil law states contributed to its drafting.
178 In our view it would be inappropriate to prescribe particular practices to be followed. The court should be allowed to develop appropriate procedures to deal with particular cases, subject always to the overriding need to comply with the rules of natural justice.
179 Article 20 provides for certain consequences to flow automatically from the recognition of a foreign main proceeding (for example, stay of proceedings, stay of execution and suspension of right of debtor to transfer, encumber or otherwise dispose of assets). Article 20(2) allows the enacting state to specify exceptions and limitations to which the effects of recognition are subject. The Bill that is currently before the United States Congress and the draft South African legislation specify particular provisions in those states’ insolvency laws which override the consequences of article 20.
180 We take the view that such an approach is not desirable in New Zealand. Each of the consequences which flow from article 20 would occur as a result of most formal insolvency regimes in New Zealand. The court is given a discretion to override the consequences of stay or suspension of rights: examples are s 32 of the Insolvency Act 1967 and s 247 of the Companies Act 1993.32 Article 20(2) should enable the High Court to exercise the same type of discretion as is reposed in that court by both s 32 of the Insolvency Act 1967 and s 247 of the Companies Act 1993.
181 Article 21(g) of the Model Law envisages an enacting state inserting into article 21 any additional relief that may be available to a duly appointed insolvency administrator under the law of the enacting state. With the aim of ensuring consistency of approach we have considered the approach adopted in the United States Bill and in the draft South African legislation. The United States Bill permits additional relief but excludes certain types of relief under the Bankruptcy Code. In the South African draft statute additional powers are given which could have been exercised within South Africa by various classes of insolvency administrator who are expressly named.
182 In our view, no additional provisions are required: the court has a discretion whether to grant further relief which can be exercised in the circumstances of any given case and having regard to the nature of the insolvency administration (ie, whether corporate or individual). The power given to the court under article 21(1) is inclusive in nature. Accordingly, there is no need for a subparagraph (g) to be added to article 21(1).
183 Article 23(1) of the Model Law is designed to specify actions which a foreign representative may initiate in respect of antecedent transactions which could be attacked if one was acting under a domestic bankruptcy or liquidation. We have already shown that New Zealand’s domestic insolvency law does not recognise the doctrine of “relation back” in the case of a foreign bankruptcy (see paras 43 and 44). We recommend that article 23 be modified to make it clear that that substantive rule of law will not be changed.
184 A problem with New Zealand adopting a prescriptive approach is that different rules apply to the setting aside of antecedent transactions depending upon whether the debtor is a corporate entity or an individual. An example is the comparison of s 292 of the Companies Act 1993 (transactions having preferential effect) with s 56 of the Insolvency Act 1967 (voidable preferences based on intention to prefer): Tranz Rail Limited v Meltzer (HC Auckland, 18 December 1998, M451/98). Because the Model Law is designed to cover both types of insolvency it would be difficult to articulate precisely what types of proceedings a foreign representative could initiate.
185 In the case of individuals who are subject to the Insolvency Act 1967, an order under s 135 of the Insolvency Act 1967 enables the High Court to exercise, in regard to the matter specified in the order, such powers as the High Court might exercise in respect of the matter if it had arisen within its own jurisdiction: s 135(1). By s 342(1) of the Companies Act 1993, an application for the liquidation of assets in New Zealand of an overseas company in accordance with Part XVI of the Companies Act 1993 (which relates to New Zealand company liquidations) is carried out, subject to modifications and exclusions set out in Schedule 9 to that Act, in accordance with the rules which apply to New Zealand companies. Thus, under both bankruptcy and liquidation cross-border regimes, antecedent transactions may be attacked.
186 We therefore conclude that a foreign representative should under article 23(1) be able to initiate any proceedings to avoid or otherwise render ineffective transactions detrimental to creditors which would have been available had the insolvency proceeding been commenced in New Zealand. In determining the extent of the foreign representative’s rights, the court will need to have regard to the type of insolvency and whether that type of insolvency regime would have given rise to any right to attack the transactions in issue under New Zealand domestic insolvency law.
187 If the Model Law is enacted thought should be given to development of conventions which would take precedence over the Model Law by virtue of article 3 of the Model Law. Such conventions could be entered into between particular states to formalise procedures to be adopted when applications involving only those states are made. For example, it is easy to see how a more detailed protocol would be of benefit to deal with cross-border insolvency applications brought under the Model Law between Australia and New Zealand. Such a convention could provide for a separate arbitral process to resolve any questions of preference or priority (or the like) which arise, thus avoiding the potential of conflicting court decisions.
188 The idea of individual bankruptcy treaties or conventions is not new. The European Union has developed its own Convention on Insolvency Proceedings. Unfortunately that Convention has not yet come into force due to ramifications from the ban on English meat exports following “mad cow” disease (Borch 1998). In addition, Scandinavian and Latin American countries have long been parties to treaties defining what will happen in cross-border insolvency cases in their geographic regions.33
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