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Classic cross-border cooperation: joint court hearings in the Halifax insolvency

06 September 2019 | Australia
Legal Briefings – By Paul Apáthy and Hongbei Li

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On 22 August 2019, the Federal Court of Australia (FCA) held that it could make a request to the New Zealand High Court (NZHC) that there be a joint hearing of those courts in respect of applications relating to the pooling of various funds held by companies subject to Australian and New Zealand liquidations, respectively.

Such a ‘letter of request’ could be issued by the FCA to a foreign court in the context of an Australian insolvency process pursuant to section 581 of the Corporations Act 2001 (Cth) (Corporations Act).

In this case, the liquidators (who were appointed to both the Australian company and New Zealand company) argued that client trust funds of the two related companies had become extensively commingled and were not sufficient to meet client claims. Accordingly, they sought orders allowing them to pool the funds across the Australian and New Zealand insolvencies. However, given the commingling between the companies, they considered that it was not feasible for the pooling orders to be determined separately by the FCA and NZHC, as "each application [was] to a significant extent an application for judicial advice or directions in respect of the same commingled pool of funds."1

The FCA approved in principle the concept of issuing a letter to the NZHC requesting a joint hearing on the pooling applications, describing it as a "classic candidate for cross-border cooperation between courts to facilitate the fair and efficient administration of the winding up."2 However, the FCA ultimately decided that issuance of the letter of request was premature as the relevant client respondents to the pooling application had not yet been identified and consulted.

This is the first time that an Australian court has considered, and approved, the concept of a joint court hearing with a court of another jurisdiction in an insolvency context. Whilst globally there is some precedent for this with the joint hearings of United States and Canadian courts in the bankruptcy of the Nortel group, this remains very much new ground. As such this represents a notable development in Australia’s approach to the orderly and efficient resolution of cross border insolvencies.

The case also demonstrates the ongoing relevance of section 581 of the Corporations Act despite the adoption in Australia of the Model Law on Cross-Border Insolvency of the United Nations Commission on International Trade Law (UNCITRAL Model Law).

Halifax group

The Halifax group provided investment broking and securities trading services through various online trading platforms. The group included an Australian incorporated parent (Halifax AU) and a New Zealand incorporated subsidiary (Halifax NZ).

Halifax AU was the holder of an Australian Financial Services Licence and provided broking and investment services across various 'platforms'. Halifax NZ was licensed to be a derivatives issuer and was primarily an introducing broker to Halifax AU, earning commissions from client referrals to Halifax AU.

In November 2018, both Halifax AU and Halifax NZ went into voluntary administration in Australia and New Zealand, respectively. The same individuals were appointed administrators of both entities. The companies subsequently entered liquidation in Australia and New Zealand, respectively (in March 2019), and again the same individuals were appointed liquidators.

The trust funds

As licensed operators, Halifax AU and Halifax NZ were required to hold client funds on trust (including pursuant to section 981B of the Corporations Act). However, the liquidators’ investigative work identified a deficiency of AU$19 million in the client funds held in trust, as well as substantial commingling of funds held on trust between the various investment platforms and between Halifax AU and Halifax NZ.

Accordingly, the liquidators formed the view that it was not practically feasible to identify the total proportion of that deficiency attributable to each particular client of the two companies or to any particular statutory trust account in the Halifax group.

Pooling applications

The liquidators therefore proposed to bring applications, before both the FCA in Australia and NZHC in New Zealand, to allow the ‘pooling’ of the commingled funds (and to obtain certain other directions in respect of funds held in foreign currencies and the closing out and realisation of extant investments).

The liquidators appear to have envisaged that the Australian application would relate to the funds held by Halifax AU, and the New Zealand application would relate to funds held by Halifax NZ. However, they considered that these parallel applications were likely to overlap, "at least to the extent that they will involve the correct approach by the liquidators, Halifax AU and Halifax NZ to a commingled fund in respect of which they will each have distinct obligations."3

Accordingly, the liquidators proposed that the Australian and New Zealand applications be held by way of a joint hearing of the FCA and the NZHC. This would be with a view to each Court hearing all of the evidence and all of the submissions in both proceedings together. The liquidators envisaged that the Courts would deliberate together "so as to seek to achieve, so far as possible, an outcome in which inconsistency between the judicial advice or directions given by each Court in respect of the same commingled pool of funds is effectively eliminated."4

The liquidators’ proposed mechanism for setting up such a joint hearing was to apply for ‘letters of request’ that would be sent by each Court to the other, pursuant to which each Court would request that the other Court assist it by agreeing to hear their respective applications together.

Role of the UNCITRAL Model Law?

It is notable that the liquidators formed the view that the UNCITRAL Model Law, as enacted in Australia by the Cross-Border Insolvency Act 2008 (Cth) had ‘no relevant application’ in this case. This appears to have been on the basis that Halifax AU and Halifax NZ were separate corporate entities, and that they considered that the UNCITRAL Model Law was only intended to provide assistance in cross-border insolvency matters relating to the same entity. However this issue was not given significant attention in the decision.

Application to FCA under section 581

The Re Halifax decision involved the application by the Australian liquidators before Gleeson J of the FCA for the issuance of a letter of request by the FCA to the NZHC to participate in the joint pooling applications.

The application was made pursuant to section 581 of the Corporations Act, which provides for various ways in which courts can act in aid of other courts in respect of ‘external administration matters’. Section 581(4) provides:

"The Court may request a court of an external Territory, or of a country other than Australia, that has jurisdiction in external administration matters to act in aid of, and be auxiliary to, it in an external administration matter."

The FCA noted, following a previous decision on an analogous power under section 29 of the Bankruptcy Act 1966 (Cth) to issue a letter of request to foreign courts in the context of personal insolvency,5 that three key issues arise on an application to issue a letter of request:

  1. The Court must have power to issue the letter of request.
  2. The foreign court, as receiving court, must have power to act on the proposed letter of request.
  3. The power must be exercised with regard to considerations of utility and comity.6

Power to issue the letter of request

The FCA considered that it had power to issue a letter of request under section 581(4) where:

  1. there is a court of a country other than Australia that has jurisdiction in external administration matters;
  2. there is an external administration matter in relation to which a request may be made; and
  3. the proposed request is to act in aid of, and be auxiliary to, the Court in an external administration.7

In this case, the first two requirements were relatively straightforward. The NZHC had jurisdiction in ‘external administration matters’ as the NZHC had already exercised its jurisdiction in connection with the administration of Halifax NZ. The Australian liquidation of Halifax AU constituted an external administration matter in respect of which a request could be made.

The FCA considered the third requirement more difficult, and examined in detail the scope of a request “to act in aid of, and be auxiliary to”.

As a starting point, the FCA accepted there was no reason to read down section 581(4), having regard to “its evident facultative purpose to assist in the efficient resolution of external administration matters”.8 In addition, the FCA had no difficulty with the general proposition that the FCA and the NZHC “should endeavour to cooperate to the extent possible to promote the objectives of the liquidations of Halifax AU and Halifax NZ.”

The FCA considered the two decisions of Barret J in Re AFG,9 which had considered the ambit of a request that could be made “to act in aid of, and auxiliary to” an Australian court under section 581(4). In the latter of those two decisions Barrett J had noted:10

“The relevant concept of acting in aid of and being auxiliary to this court is not, I think, confined to recognizing or giving effect to an order of this court, although the concept certainly has that aspect. An additional aspect, I am persuaded, involves the making by the foreign court, within and for the purposes of its jurisdiction, of orders that this court could have made in relation to the relevant subject matter had this court’s jurisdiction, in the territorially limited sense, extended that far.”

Whilst the coordinated court hearing went beyond that contemplated in the previous Re AFG decisions, the FCA regarded such relief was consistent with “widely accepted approaches to dealing effectively with cross-border insolvency.”

Accordingly, the FCA considered that the proposed letter of request to the NZHC was a request to act in aid of, and be auxiliary to, the FCA in connection with the Australian pooling application, at least to the extent that any Australian pooling order would require recognition in New Zealand because it would affect bank accounts in New Zealand held in the name of Halifax NZ. More generally, a coordinated approach, including through concurrent hearings, would help avoid the prospect of inconsistent findings or directions, and potentially additional litigation to the detriment of creditors of Halifax AU.

Power of NZHC to comply with letter of request

The FCA also considered whether the NZHC would have the power to accede to the letter of request if issued by the FCA, including undertaking a detailed examination of the relevant New Zealand statutory provisions and case law.

Ultimately the FCA concluded that the NZHC would have such power (pursuant to section 8 of the Insolvency (Cross-border) Act 2006 (NZ)), and that there was no reason to think that the relief would not be granted by the NZHC (albeit noting that this was ultimately a matter for the NZHC).

Considerations of utility and comity

The FCA did not separately address the utility of making the request, although its views on the likelihood of the New Zealand acceding to the request seemed clear from the previous analysis. The FCA considered that the request did not raise any concerns in respect of international comity.

Need for engagement with representative respondents

Despite otherwise being satisfied that the liquidators’ request was a “classic candidate for cross-border cooperation between courts”, the FCA ultimately declined to issue the letter of request on the basis that such an order would be premature.

The FCA indicated that representative clients of the Halifax group should first be identified who would respond to the application. Following their identification, the liquidators should work with such respondents to define the relevant issues to be heard in any joint hearing and seek the respondents views on the most efficient and effective way of proceeding in the case (indeed the FCA noted that one or more of the respondents may oppose a concurrent hearing).

Once those steps had been undertaken, the liquidators could then re-apply to the FCA for the issuance of the letter of request.

Novelty of the Re Halifax decision

The Re Halifax decision is a notable landmark in Australia’s evolving cross-border insolvency jurisprudence. It marks the first time an Australian court has considered, and approved in principle, a joint hearing with a foreign court in respect of an insolvency matter.

As the FCA noted, the concept of such a joint hearing is not entirely novel. The New South Wales Court of Appeal and a Full Court of the Federal Court of Australia sat together while hearing two separate cases together in Brewster v BMW Australia11 and Westpac v Lenthall12 where there was substantial overlap in the issues to be addressed in relation to the question of whether the Court had the power to make a 'common fund' order in the context of litigation funding and class actions.13 However, this was in a non-insolvency context, and involved a joint hearing between Australian courts.

There has also been uptake on the concept of joint hearings in respect of cross-border insolvencies in the academic literature, usually in conjunction with the recent proliferation of (largely non-binding) cross-border insolvency protocols, such as the Judicial Insolvency Network’s Guidelines for Communication and Cooperation between Courts in Cross-Border Insolvency Matters (the JIN Guidelines) and more specific protocols established in the case of individual cross-border insolvencies.

Interestingly, there does not appear to have been any specific protocol adopted between the Australian and New Zealand estates or courts in the Re Halifax case (although practically it may have been less necessary given the same individuals were liquidators in both jurisdictions). The JIN Guidelines are yet to be formally adopted by the FCA or the NZHC.

The main international precedent for this case was the joint cross-border trial held by the Delaware and Ontario courts in the Nortel bankruptcy. That case involved a debate over how approximately $9 billion of sale proceeds relating to the global Nortel business would be allocated between group entities and insolvency estates in the United States, Canada and Europe. Despite lengthy negotiations and mediation, the three estates were unable to agree a way forward, leading the US and Canadian estates to propose a joint trial on the matter. This approach was objected to by the European estates, who argued that the parties had bound themselves to arbitration and raised a number of jurisdictional and procedural issues with a joint hearing (including the concern that the two courts could come to different decisions on the treatment of the sale proceeds). However, these objections were overcome and in each of their respective Nortel decisions the Delaware and Ontario courts each made orders approving a cross-border insolvency protocol specifically intended to facilitate the hearing of the joint trial.14 The joint trial followed, and ultimately resulted in consistent decisions being issued by each of the Delaware and Ontario courts that the proceeds be allocated on a pro rata basis.15

Given the parallels it is interesting that the Nortel decisions were not cited in the re Halifax decision. There was however relatively little examination in either of the Nortel decisions as to the legal basis for the courts to agree to cooperate in such a manner, and no mention was made of the UNCITRAL Model Law or the specific provisions enacting it in either country.16 This may perhaps have been because there had already been a significant degree of judicial cooperation between the Delaware and Ontario courts in the Nortel case in the lead up to those decisions, and a broader history of cross-border protocols being adopted in cross-border Canadian and United States insolvency cases.

Final comments

A detailed examination of the basis for establishing a joint court hearing in respect of an Australian and New Zealand cross-border insolvency is to be welcomed. Given that practical examples of such joint hearings are still rare in the insolvency context, the decision may also prove of interest to insolvency practitioners in other jurisdictions seeking to establish a basis for such a process.

The Re Halifax case demonstrates that an international joint hearing is potentially available to Australian insolvency practitioners grappling with the treatment of assets and claims that do not neatly fit to be assessed within a single jurisdiction. This is of course subject to the critical caveat that the courts of the foreign jurisdiction are willing to cooperate in such an exercise. Given the traditional closeness of Australia and New Zealand (and the similarity of their cross-border regimes), it is not surprising that the first Australian example of this occurring is likely to be between these two countries.

Finally, Re Halifax is a timely reminder of the flexibility and power of section 581 of the Corporations Act in cross border insolvency situations. In recent years it has been overshadowed by the UNCITRAL Model Law, which has seen a significant level of adoption around the world. Nevertheless section 581 continues to be a useful tool in the right cases.

The full judgment can be accessed here.

Endnotes

  1. Kelly, in the Matter of Halifax Investment Services Pty Ltd (in liq) (No 5) [2019] FCA 1341 (Re Halifax), paragraph 30.
  2. Re Halifax, paragraph 76.
  3. Re Halifax, paragraph 29.
  4. Re Halifax, paragraph 32.
  5. Warner (Trustee), in the matter of Barnes and Barnes [2018] FCA 1784.
  6. Re Halifax, paragraph 45.
  7. Re Halifax, paragraph 46.
  8. Re Halifax, paragraph 55.
  9. Re AFG Insurances [2002] NSWSC 735 and Re AFR Insurances [2002] NSWSC 844.
  10. Re AFR Insurances [2002] NSWSC 844.
  11. [2019] SWSCA 35; (2019) 366 ALR 171.
  12. [2019] FCAFC 34; (2019) ALR 136.
  13. See Herbert Smith Freehills ‘Common fund orders upheld following historic joint sitting’ 8 March 2019: 
  14. See In re Nortel Networks, Inc., No. 09-10138, (Bankr. D. Del. 3 Apr. 2013), affirmed in 737 F. 3d 265 (3d Cir. 2013); see also Re Nortel Networks Corp., 2013 ONSC 1757.  
  15. See In re Nortel Networks, Inc., No. 09-10138, (Bankr. D. Del. May 12. 2015), see also Re Nortel Networks Corp., 2015 ONSC 2987.
  16. In the United States, the actual orders were sought and made pursuant to section 105(a) of title 11 of the United States Code, which is very broadly framed, allowing the court to “…issue any order, process, or judgment that is necessary or appropriate to carry out the provisions of this title.”

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