Navigating Chapter 11 Restructurings in Australia: How Important is Recognition?
8 min read
In today's globalised economy, local recognition of foreign insolvency proceedings can be essential for the successful implementation of cross-border restructurings. This is particularly relevant in Australia — a popular host for foreign investment and global corporate groups with local assets.
As the international economic landscape becomes increasingly characterised by highly leveraged companies grappling with rising borrowing costs, squeezed margins and the looming need to refinance debt, navigating considerations relevant to gaining recognition in Australia is more relevant than ever for multijurisdictional groups looking to restructure their debt. In this context, Chapter 11 of the United States Bankruptcy Code emerges as a commonly used tool by relevant debtors and creditors to implement complex cross-border restructures.
With the possibility of a surge in the number of distressed groups with an Australian presence accessing Chapter 11 proceedings to facilitate a restructuring, it is worth reflecting on the implications and potential challenges of using Chapter 11 within Australian borders.
Do I really need recognition?
When a debtor undergoing a Chapter 11 bankruptcy procedure has assets or operations in Australia, questions naturally arise regarding the recognition and enforcement of the US proceedings in this jurisdiction. The first question debtors generally have to grapple with is whether they should pursue formal recognition of the proceeding in Australia. This is an important question, particularly for those who may (wrongly) assume that the stay on creditor claims provided under Chapter 11 automatically extends beyond US borders.
While a Chapter 11 proceeding may provide certain benefits and protections to debtors within the United States, debtors, creditors and indeed all relevant stakeholders should be aware that Australian courts do not automatically recognise the stay or impose any form of moratorium on creditor claims when a debtor enters Chapter 11. The foreign proceeding, and any protections afforded by it to the debtor company or group, can only have an effect in Australia if formal recognition from a local court is obtained. The extent of the effect of this foreign procedure may vary depending on the manner in which the proceeding has been recognised by an Australian court.
Without recognition, creditors are free to pursue Australian-based assets or exercise contractual rights that have been enlivened by the debtor accessing Chapter 11, potentially disrupting restructuring efforts and complicating the overall process. This may be particularly relevant where a secured lender looks to enforce local security and take control of the process insofar as the Australian arm of the debtor group is concerned, or a key contractual party attempts to leverage its position in Australia using contractual rights that have been triggered by the Chapter 11 proceeding.
This highlights the utility for debtors (and supporting creditors) of seeking formal recognition to ensure asset protection, coordination and consolidation of creditor claims, as well as to facilitate a streamlined and efficient restructuring — which will of course benefit both the debtor and its creditors as a whole. It follows that the key threshold question when deciding whether to seek recognition in Australia is determining the extent of the debtor group's presence in the country. This will include considering the value of assets held in this jurisdiction, the size and significance of the group's Australian operations and the potential level of influence or disruption that could be caused by local creditors to the overall Chapter 11 restructuring. With recognition secured, the debtor group will have the benefit of certain relief provided by a court that may assist with controlling any disruptive creditors or other stakeholders.
How do I get recognition?
The extent of the debtor's presence in Australia will be a relevant consideration in determining the means by which recognition can be obtained here. The two primary ways to obtain recognition of a foreign insolvency proceeding in Australia are via the provisions of the Cross Border Insolvency Act 2008 (Cth) (which gives force to the UNCITRAL Model Law on Cross-Border Insolvency ("Model Law") in Australia), or, alternatively, via the "aid and auxiliary" provisions contained in the Corporations Act 2001 (Cth) ("Corporations Act"). Both options offer varying degrees of relief and assistance.
In most cases, the Model Law is the most simple, comprehensive, and certain means to have a foreign insolvency proceeding recognised in Australia and is generally the preferred approach. Using this method, the proceeding must be recognised as either a "foreign main proceeding" if it is initiated in the country where the debtor has its centre of main interest ("COMI"), or a "foreign non-main proceeding" if the debtor only has an "establishment" in that country. This distinction is an important one. If recognised as a "foreign main proceeding", certain automatic effects are triggered, including a freeze on the debtor's local assets and a stay on creditor claims which is intended to operate in the same manner as the one provided under the corresponding Australian insolvency procedure – in the case of Chapter 11, the stay is usually the same as applies under voluntary administration1. In contrast, there are no automatic consequences arising from the recognition of a foreign non-main proceeding, and the debtor must rely on the court's discretionary power under Article 21 of the Model Law to grant relief. That said, Australian courts have shown an inclination towards granting the same protections and powers pursuant to Article 21 as would be available as a matter of course if the insolvency procedure was occurring under Australian law.2
Alternatively, while no automatic relief is provided under the Corporations Act, its "aid and auxiliary" provisions3 provide an alternative means of obtaining recognition and should not be overlooked, especially when considering the flexibility this approach offers. This option may also be particularly useful for debtors who have neither a COMI nor an establishment in the jurisdiction of the foreign proceeding, which would mean obtaining recognition under the Model Law would not be possible.
Under these provisions, an Australian court must "act in aid of, and be auxiliary to", the courts of certain countries (including the United States). This assistance will usually occur in the context of a request, usually in the form of a letter, from the appropriate courts of other countries. That said, the provisions do not apply only as between courts — an example being the Supreme Court of New South Wales exercising its jurisdiction under the "aid and auxiliary" provisions to assist a Singapore liquidator, without having received a specific request from the Singapore Court.4 In this case, the Court granted the specific relief sought by the liquidator (being to operate certain Australian bank accounts) while stating that its decision would support and enhance the orders of the Singapore Court. While perhaps less certain compared to the Model Law given the discretionary nature of the Court's power, the aid and auxiliary provisions grant the Court a wide scope of assistance and may provide a more flexible approach to seek recognition without the strict procedural requirements prescribed by the Model Law.
How does Australia compare in APAC?
Two of our regional counterparts, Singapore and Hong Kong, each with an active restructuring market, provide an interesting comparator for Australia.
In line with Australia's approach, Singapore has also adopted the Model Law, albeit a little later, enacting the law in 2017 compared to Australia's adoption in 2008. There are recent examples of the Singapore High Court granting recognition of Chapter 11 proceedings in Singapore.5
On the other hand, Hong Kong has not enacted the Model Law and, unlike in Australia, the Hong Kong courts do not have access to specific statutory powers to recognise foreign insolvency proceedings and make orders assisting the foreign process.6 Instead, common law principles must be relied upon. The current common law criteria for determining whether or not a foreign insolvency proceeding will be recognised and granted assistance in Hong Kong are that: (i) the foreign proceeding constitutes a collective insolvency process; and (ii) the foreign proceeding is being conducted in the jurisdiction in which the debtor's COMI is located (subject to certain limited exceptions).7 It is also worth noting that the Hong Kong court has recently reiterated that the ‘debtor in possession' model has been rejected in Hong Kong on the basis that Hong Kong has consciously decided not to enact legislation that provides for this type of moratorium.8
Key Takeaway
As activity in the global restructuring market continues, we are likely to see an increase in cross-border restructurings reaching Australian shores. While our courts have shown a willingness to recognise foreign insolvency proceedings and have a number of jurisdictional avenues by which to do so, it is important for multijurisdictional businesses – and their investors – to be aware that there is a formal process to be followed for local recognition of foreign insolvency procedures.
1 Bradley, in the matter of Astora Women's Health, LLC v Astora Women's Health, LLC (No 2) [2022] FCA 1268, [44] (Lee J).
2 See, for example, in King, Re Zetta Jet Pte Ltd [2018] FCA 1932 the Federal Court of Australia ("FCA") granted the foreign representative in a Chapter 7 proceeding (being a liquidation style proceeding in the US) the same powers in relation to the realisation of local property and assets that a liquidator appointed under the Corporations Act would have. The FCA also made orders implementing a stay with the same scope and effect as if the company was being wound up under the Corporations Act.
3 Section 581 of the Corporations Act.
4 Re Chow Cho Poon (Private) Ltd (2011) 80 NSWLR 507.
5 Re Genesis Asia Pacific Pte Ltd [2023] SGHC 240; Re Alan Tantleff [2022] SGHC 147; Re Rooftop Group International Ltd and another (Triumphant Gold Ltd and another, non-parties) [2019] SGHC 280.
6 Other than the Record of Meeting dated 14 May 2021 signed by the Hong Kong SAR Government and the PRC Supreme People's Court which provides for mutual recognition and assistance of insolvency proceedings between designated Mainland municipalities (Shanghai, Shenzhen and Xiamen) and Hong Kong.
7 Global Brands Group Holding Limited (in liquidation) [2022] HKCFI 1789.
8 As above.
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