Proposed Global Rules in International Insolvency...

Global rules on conflict-of-laws matters in international insolvency cases: An Australian perspectiveMark Wellard and Rosalind Mason

The 2012 Report “Transnational Insolvency: Global Principles for Co-operation in International Insolvency Cases” – commissioned by The American Law Institute in conjunction with The International Insolvency Institute – annexed 23 “Global Rules on Conflict-of-Laws Matters in International Insolvency Cases”. These proposed “Global Rules” are intended to “serve as legislative recommendations” to (inter alia) promote uniformity and greater certainty in the unpredictable area of conflict of laws. This article provides a brief commentary upon the 23 proposed Global Rules from an Australian perspective (comparing the effect and intent of each rule with the current Australian conflict-of-laws position) and offers some conclusions as to the merits of the “Global Rules” initiative.

<DIV> INTRODUCTIONAustralian insolvency lawyers are familiar with the UNCITRAL Model Law on Cross-Border Insolvency (Model Law) enacted in Australia through the Cross-border Insolvency Act 2008 (Cth) (the Australian Cross-border Insolvency Act) and the assistance it affords in cross-border insolvency matters. The Model Law largely facilitates procedural matters (that is recognition of and cooperation with foreign proceedings and representatives) but is virtually silent on the myriad of possible questions of applicable law which might arise in a local insolvency proceeding containing foreign elements.

From a conflict-of-laws perspective, the fundamental legal issues which arise in a cross-border legal problem are (i) choice of forum, (ii) the recognition and effect accorded foreign proceedings and (iii) choice of law.1 The Model Law does not deal with choice of forum2 – however questions of jurisdiction may arise when dealing with the recognition and effect accorded foreign proceedings. When an adopting country’s court must determine an application for local recognition of the foreign proceeding and appointment of a foreign representative, it analyses the debtor’s “connection” with the foreign jurisdiction to determine if the foreign proceeding was commenced in a forum which contains

Mark Wellard: Visiting Fellow and member of the Commercial and Property Law Research Centre, Queensland University of Technology, Brisbane, Australia.Rosalind Mason:” Professor of Insolvency and Restructuring Law and member of the Commercial and Property Law Research Centre, Queensland University of Technology, Brisbane, Australia.The research for this article was undertaken at the initiative of, and with financial support from, the Australian Academy of Law, which, in turn, was asked to undertake the underlying project by the Council of Chief Justices of Australia and New Zealand. The authors also acknowledge the anonymous referees who gave generously of their time to review and provided comments on an earlier version of this article. Naturally, the views expressed in this article (and any errors) are the authors’ own.1 Davies M, Bell AS and Brereton P, Nygh’s Conflict of Laws in Australia (9th ed, LexisNexis Butterworths, Sydney, 2014) at [1.9]-[1.12].2 An adopting country’s court must still determine whether it has jurisdiction to commence insolvency proceedings under its local insolvency laws. For example, in the case of a “foreign” debtor, see s 583 and s 601CL Corporations Act 2001 (Cth) and s 43 and s 55 Bankruptcy Act 1966 (Cth). However, the Model Law provides some assistance for example, Art 11 on applications by “foreign representatives” to commence a proceeding under the Australian insolvency statutes and Art 31 on the presumption of insolvency flowing from recognition of a “foreign main proceeding”.

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the debtor’s “centre of main interests” (COMI) or “establishment”. This determines the extent of the effect of the recognition – as a foreign main or non-main proceeding – or even that there is no recognition at all (eg where the only connection with the foreign jurisdiction is the presence of assets). Likewise, the Model Law does little to address the innate uncertainty created by the complexity of choice of law issues which may befall a cross-border insolvency proceeding.

Where there are local proceedings, either insolvency proceedings commenced locally or foreign proceedings recognised locally, choice of law questions may arise at various stages in the proceedings. For example, where is an intangible asset of a multinational company in liquidation said to be located? Which country’s law applies to determine whether a transnational payment can be clawed back as a preference? If the law governing an insolvent debtor’s claim allows a creditor the benefit of a set-off which is not permitted by the law of the country in which the debtor is being wound up, which law applies?

The Australian courts’ approach to choice of law combines a mixture of “unilateralism” and “multilateralism”. Traditional choice of law rules were developed primarily with the common law in mind;3 however regulation is increasingly contained in legislation and so conflict of laws must be applied in a statutory context. Under unilateralism, the court examines the (personal and territorial) reach of potentially applicable local law, especially statute. As much of insolvency law is statute based, this approach is relevant to cross-border insolvencies.4 However, statutes may be silent on cross-border elements,5 may address them specifically6 or may point to common law choice of law principles.7

Under multilateralism, the court “characterises” the issue in dispute and then applies the “connecting factor” for issues of that kind in order to determine the applicable rule or law. An important aspect of “characterisation” is to categorise an issue as procedural or substantive.8 If it is a procedural matter, then the law of the forum applies. If it is substantive, then the law of the cause of action9 applies. This approach is also relevant to cross-border insolvency as much of the administration of an insolvent estate may be characterised as “procedural”.

To reduce the incidence of conflicts of law, countries may agree upon uniform conflicts rules which avoids the need to amend domestic laws and instead unifies the choice of laws applied by domestic courts.10 The Hague Conference on Private International Law11 has developed12 and is continuing to develop13 Conventions to facilitate uniform choice of law rules. Alternatively international conventions may be developed by multilateral organisations such as International

3 Australian Law Reform Commission (ALRC), Choice of Law, Report No 58 (AGPS, Canberra, 1992) at [1.19]. Some of this section draws upon Mason R, “Choice of Law in Cross-border Insolvencies: Matters of Substance and Procedure” (2001) 9 Insolv LJ 69.4 See eg, Re Doyle; Ex parte Brien v Doyle (1993) 112 ALR 653 discussed below. 5 For example, the Model Law as adopted in Australia through the Cross-border Insolvency Act 2001 (Cth) is virtually silent on choice of law. 6 For example, Corporations Act 2001 (Cth), the Act applies s 5(4): “according to its tenor, in relation to acts and omissions outside this jurisdiction”; and s 5(7) “according to its tenor to: (a) natural persons whether … resident in Australia or not] … and (b) all bodies corporate and unincorporated bodies whether … formed or carrying on business in Australia or not”. On the latter, see Waller v Freehills (2009) 177 FCR 507.7 For example, “property’ is widely defined in the Bankruptcy Act 1966 (Cth) and this has been interpreted in light of common law choice of law principles. See Re Doyle; Ex parte Brien v Doyle (1993) 112 ALR 653 discussed below. 8 For an analysis of this important distinction, see Garnett R, Substance and Procedure in Private International Law (Oxford University Press, Oxford, 2012). 9 Or, in conflict of laws terms, the lex causae. That is, the law that the relevant choice of law rules indicates governs the issue: ALRC, n 3, Report No 58 at [10.2].10 Davies et al, n 1 at [1.6]. For example, Australia ratified the Hague Conference on Private International Law, Convention on the Law Applicable to Trusts and on their Recognition (1985) http://www.hcch.net/upload/conventions/txt30en.pdf and implemented it through the Trusts (Hague Convention) Act 1991 (Cth).11 Australia is a member of the Hague Conference, a multilateral intergovernmental organisation: http://www.hcch.net/index_en.php. 12 For example, a Convention on the Law Applicable to Trusts and on their Recognition , Hague Conference on Private International Law, n 10.

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Institute for the Unification of Private Law (UNIDROIT) and the United Nations Commission on International Trade Law (UNCITRAL) “to unify the substantive law of countries by regulating relationships between private citizens and organisations”.14 Finally, Model Laws may be developed as a “more flexible instrument of international unification”, as occurred with the UNCITRAL Model Law on Cross-border Insolvency.15

A recent initiative to develop a comprehensive multilateral approach to cross-border insolvency included a proposal for uniform conflicts rules to apply in international insolvency cases. These rules were proposed as “a useful starting point for further debate on a global level” and to “serve as a guide for courts, insolvency practitioners and creditors in those circumstances where applicable law with regard to international insolvency cases fails to deal with a certain point in issue or is vague”.16 They arose out of an initiative by The American Law Institute17 (ALI) in conjunction with The International Insolvency Institute18 (III) to appoint Professor Ian Fletcher, University College London, and Professor Bob Wessels, University of Leiden, to consider the applicability worldwide of an earlier regional ALI initiative applicable between the three member states of the North American Free Trade Agreement (the ALI NAFTA Principles).19

Their Report entitled ALI-III Transnational Insolvency: Global Principles for Co-operation in International Insolvency Cases (the ALI-III Report) was endorsed in 2012.20 The heart of the ALI-III Report comprises statements of Global Principles for Co-operation in International Insolvency Cases (the Global Principles) and Global Guidelines for Court-to-Court Communications in International Insolvency Cases (the Global Guidelines). The Global Principles and Global Guidelines are largely procedural in focus and aspiration; however the reporters annexed 23 Global Rules on Conflict-of-Laws Matters in International Insolvency Cases (the Global Rules) to “serve as legislative recommendations in general and sometimes in more detailed terms”.21

The ALI-III Report states that:<blockquote>the main goal [of the Global Rules] is to demonstrate that globally there is a wide measure of support for the enactments of rules of this nature, based on the given principle to avoid miscommunication, to prevent uncertainty, to provide accurate translation, and to ensure smooth cross-border co-operation.22 </blockquote>

13 For example, a Victorian Supreme Court Judge is a member of the current working group examining choice of law in international contracts.14 Davies et al, n 1 at [1.7]. For example, Australia ratified the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards of 1958 and implemented it through the International Arbitration Act 1974 (Cth). 15 Davies et al, n 1 at [1.8]. Also, parts of the UNCITRAL Model Law on Electronic Commerce (1996) were introduced through domestic legislation (Electronic Commerce Act 1999 (Cth)) without adopting that Model Law in full.16 Fletcher I F and Wessels B, “Transnational Insolvency: Global Principles for Cooperation in International Insolvency Cases” (Report, The American Law Institute and the International Insolvency Institute, 30 March 2012) p 20 http://www.iiiglobal.org/component/jdownloads/viewdownload/36/5897.html (hereinafter ALI III Report).17 The American Law Institute is an independent United States organisation that produces “scholarly work to clarify, modernize, and otherwise improve the law” through Restatements of the Law, model statutes, and principles of law. These have been referred to by American courts and legislatures and in recent years, the ALI has been increasing the international scope of its work: https://www.ali.org/ 18 The International Insolvency Institute is a non-profit organisation whose primary objectives include “improving international co-operation in the insolvency area and achieving greater co-ordination among nations in multinational business reorganizations and restructurings”: http://iiiglobal.org/. 19 The aim of the ALI’s Transnational Insolvency Project (1993–2000) was “to provide a non-statutory basis for cooperation in international insolvency cases involving two or more of the NAFTA states, consisting of the United States, Canada, and Mexico”: Fletcher and Wessels, n 16, p xvii. 20 The ALI-III Report was presented to the Annual Meeting of the American Law Institute (Washington, DC, 23 May 2012) and to the Annual Meeting of the International Insolvency Institute (Paris, 22 June 2012).21 ALI-III Report, n 16, p 20. For a comprehensive discussion on choice of law in international insolvency, see Buxbaum H, “Rethinking International Insolvency: The Neglected Role of Choice-of-Law Rules and Theory” (2000) 36 Stanford Journal of International Law 23.22 ALI-III Report, n 16, p 20.; Buxbaum, n 21 [AQ: Pls check which one – ALI-III Report or Buxbaum or both].

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It also points to the obvious benefit of uniformity in the area of conflict of laws, namely that:<blockquote>parties’ legitimate expectations can be more consistently fulfilled, thereby reducing the levels of uncertainty and instability that have a key influence on the assessment of risk by those engaging in international transactions.23

</blockquote>Indeed, the UNCITRAL Legislative Guide on Insolvency Law, referring to the lack of harmonised

conflict of laws rules in the Model Law, contains draft legislative provisions on applicable law and states:

<blockquote>By specifically addressing, in a transparent and predictable manner, issues of applicable law an insolvency law can assist in providing certainty with respect to the effects of insolvency proceedings on the rights and claims of parties affected by those proceedings.24

</blockquote>Even though choice of law rules in Australia are largely common law principles, a legislative

approach to reforming choice of laws was recommended by the Australian Law Reform Commission in its Report No 58 of 1992 on Choice of Law.25

Against this background, this article compares the 23 proposed Global Rules with the current Australian conflict-of-laws (private international law) position. Several of the proposed rules are very similar to (one might even say modelled upon) articles which are presently found in the EC Regulation on Insolvency Proceedings 2000 (EC Regulation).26 Unlike the UNCITRAL Model Law which does not contain choice of law rules (being largely procedural in nature), the EC Regulation is one example of a legislative attempt to address the inherent uncertainty which conflict-of-laws questions pose for global transaction participants. Indeed, the Global Rules provide Australia with something of an opportunity to take advantage of the working experience of other jurisdictions’ cross-border insolvency law, as the Global Rules propose some further refinement and improvements upon the “template” articles of the EC Regulation.

Needless to say, the Global Rules cover a very broad canvas. What follows is an economic and accessible summary of the Global Rules and their most obvious potential impact upon (or resonance with) the current Australian private international law position. For ease of reference and the convenience of the reader, the text of the relevant Global Rule(s) is reproduced, followed by commentary and analysis. The article concludes with a recommendation that Australia participates in any future global debate or discussion, for example should UNCITRAL or the Hague Conference engage specifically with choice of law issues in the cross-border insolvency context.

<DIV>THE GLOBAL RULES<subdiv>Part A – General provisions (Rules 1-5)<group>Rule 1 Scope

<blockquote>These Global Rules shall apply to insolvency proceedings that are opened in a state which has jurisdiction for that purpose according to the provisions of Global Principle 13 of the Global Principles for Cooperation in International Insolvency Cases.

23 ALI-III Report, n 16, p 20.; Buxbaum, n 21 [AQ: Pls check which one – ALI-III Report or Buxbaum or both]].24 UNCITRAL, UNCITRAL Legislative Guide on Insolvency Law (2004) Pt 2, p 68. Recommendations 30-34 address the law applicable to the validity and effectiveness of rights and claims, the law applicable in insolvency proceedings and exceptions thereto. Also see Ho LC, “Conflict of Law in Insolvency Transaction Avoidance” (2008) 20 Singapore Academy of Law Journal 343 at 362. 25 The majority of the Australian Law Reform Commission recommendations have not been implemented, except for complementary legislation enacted in three States and a Territory to clarify that limitation periods should be treated as matters of substance rather than merely as procedural matters.26 Council of the European Union, Regulation (EC) No 1346/2000 on Insolvency Proceedings (OJ L 160/1, 29 May 2000).

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</blockquote>The ALI-III Report’s Comment to Global Rule 1 states that it is “intended to introduce … a controlling provision to determine the scope of application of the uniform rules that follow”.27 That is, it imposes “a stipulation that the insolvency proceedings, to which … [States] are in the future to apply choice-of-law rules of an internationally uniform nature, shall be shown to have taken place in a state whose exercise of jurisdiction has taken place in accordance with internationally agreed standards for so acting”.28

Global Principle 13 of the Global Principles states that courts (or other authorities) of a State should have jurisdiction to open an insolvency proceeding relating to a debtor when either (i) the debtor’s centre of main interests (COMI) is situated within that state or (ii) the debtor has an establishment within that State. In the latter case, Global Principle 13 states that the effect of the proceeding should generally be restricted to debtor’s assets located in the State’s Territory (as to which, see Rule 13 below which provides that the effects of the application of the law of a state of the opening of “non-main proceedings” shall be restricted to the debtor’s assets situated in the territory of that state at the time of the opening of those proceedings).

Global Principle 13 plays a central role in the ALI-III Report approach to international insolvency issues. It selects the forum which has jurisdiction to open an insolvency case in respect of a debtor and this choice of forum then has flow-on implications for the recognition and effects of insolvency commencement orders. The twin concepts of COMI and “establishment” are similar to, but not exactly the same as, the terms as they appear in the Model Law.29 Global Principle 13 also addresses issues not covered in the Model Law, such as nominating a point in time at which the debtors’ activities are to be examined for the purposes of determining the COMI; and a debtor changing its COMI, for example as “corporate migration” or “bankruptcy tourism”. As much certainty as feasible on the insolvency proceedings to which the Global Rules apply is to be encouraged so that the uniform conflicts rules can reduce the incidence of conflicts of law. <group>Rule 2 International obligations of this state

<blockquote>These Global Rules shall not affect whatsoever the effects of binding international rules related to choice of law arising out of any treaty or other form of agreement to which [this state] is a party with one or more other states. </blockquote>

Rule 2 is cast in similar terms to Art 3 of the UNCITRAL Model Law on Cross-Border Insolvency which has the force of law in Australia (the Australian Model Law).30 Like Art 3 of the Australian Model Law, Rule 2 provides a “legal reminder” of the supremacy of “international and supranational treaties or conventions”.31 Australian commentators have observed that

<blockquote>as the Explanatory Memorandum [Cross-Border Insolvency Bill 2008] notes, Article 3 [of the Australian Model Law] is likely to have limited relevance in Australia, since a treaty has effect in domestic law only to the extent to which it has been implemented by an enactment. In such case, “the usual principles of statutory

27 ALI-III Report, n 16, p 208.28 ALI-III Report, n 16, p 208.29 For example the Global Principles include a definition, rather than a rebuttable presumption, for “centre of main interests” which refers to “objective factors that are known to or are readily ascertainable by third parties”. This definition accords with the approach to COMI taken by Justice Rares in Akers v Saad Investments Co Ltd (in liq) (2010) 276 ALR 508. Also the definition of “establishment” refers to “assets” instead of “goods”, thereby avoiding the presence of an “establishment” merely on the presence of one asset such as a mailbox or a bank account. For a discussion of the Global Principles, see Mason R, “An Australian Perspective on the ALI-III Global Principles for Cooperation in International Insolvency Cases” (2014) 23(5) Norton Journal of Bankruptcy Law and Practice 634. 30 Cross-bBorder Insolvency Act 2008 (Cth). 31 ALI-III Report, n 16, p 209.

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interpretation would apply to determine any questions of inconsistency” between such enactment and the Model Law.32 </blockquote>There are few treaties or conventions on choice of law and a rare example of Australia having

ratified one is the Hague Conference on Private International Law “Convention on the Law applicable to Trusts and on their Recognition” (1985) implemented through the Trusts (Hague Convention) Act 1991 (Cth). <group>Rule 3 Ex officio application

<blockquote>These Global Rules and the law thereby indicated are to be applied ex officio.</blockquote>

Rule 3 provides that the Global Rules are to be applied by the adopting State’s courts of their own motion, rather than merely where parties to a proceeding seek to invoke them. In the context of EU law, “application ex officio” has been defined as “the application of a rule of Community law which has not been mentioned by one of the parties and falls outside the scope of the dispute”. 33 The ALI-III Report’s Comment to Global Rule 3 states an intention to “provide the court, instead of an interested party, with the active role”.34

It must be acknowledged that an Australian court will in certain instances intervene or impose itself upon the parties’ chosen conduct of a case or proceeding. For example, an Australian court may of its own motion: invoke its inherent power to control and regulate its own process and proceedings (including by case management measures) or to prevent an abuse of its process;35 raise concerns or issues as to its jurisdiction to provide the relief or remedy sought;36 refuse to enforce a contract on its terms where the contract purports to achieve an illegal purpose;37 or ask questions of a witness (to the extent that a judge may consider it necessary to “clear up doubts or uncertainties” which exist in the judge’s mind).38

However, the above categories of “judicial intervention” are of a more limited and exceptional scope than the ex officio application of the Global Rules foreshadowed by Rule 3. The intended effect of Rule 3 would be akin to obliging an Australian court to ensure the application of a particular piece of Commonwealth legislation even where parties to a proceeding did not seek to raise or rely upon that legislation. It might therefore be said that Rule 3 disturbs (or departs from) the usual accepted norms, practices and/or conventions of common law adversarial legal systems (such as Australia).39 <group>Rule 4 Interpretation

<blockquote>

32 Atkins S and Mason R, “Australia” in Chan Ho L (ed), Cross-Border Insolvency: A Commentary on the UNCITRAL Model Law (3rd ed, Globe Business Publishing, 2012) pp 23-24; Explanatory Memorandum, Cross-border Insolvency Bill 2008, p 18. 33 Lauwaars R, “The Application of Community Law by National Courts Ex Officio” (2007) 31(5) Fordham International Law Journal 1161. For a discussion of cases where the European Court of Justice “held that national courts must abandon their judicially passive role to ensure ex officio that consumer rights are sufficiently protected” see Ebers M, “From Océano to Asturcom: Mandatory Consumer Law, Ex Officio Application of Community Law and Res Judicata” (2010) 18(4) European Review of Private Law 823.34 ALI-III Report, n 16, p 209.35 Jago v District Court of New South Wales (1989) 168 CLR 23; 87 ALR 577 at 578 (Mason CJ); 613-614 (Gaudron J). 36 Without jurisdiction, there is no “authority to decide”: Pelechowski v Registrar, Court of Appeal (1999) 198 CLR 435 at [77] (McHugh J). See also Jackson v Sterling Industries Ltd (1987) 162 CLR 612; 71 ALR 457 at 467 (Toohey J). 37 See eg, Holdcroft v Market Garden Produce Pty Ltd [2001] 2 Qd R 381. 38 Galea v Galea (1990) 19 NSWLR 263 at 273 (Kirby A-CJ).39 Currently in practice, where common law (cf as proposed, legislative) principles of choice of law are not raised by the parties as a matter of dispute, the court will normally apply the law of the forum: ALRC, n 3, Report No 58 at [1.3].

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In the interpretation of these Global Rules, regard is to be had to their international origin and to the need to promote uniformity in their application and the observance of good faith. </blockquote>

The terms of Rule 4 are almost identical (word-for-word) to Art 8 of the Australian Model Law. It has been commented that under Art 8 “[c]ourts are encouraged to recognise the international origins of the Model Law”.40 The Explanatory Memorandum to the Cross-bBorder Insolvency Act 2008 (Cth) states:

<blockquote> Australia has a particular interest in uniform interpretation of the Model Law. As a relatively small State it is likely to gain significantly from international jurisprudence on uniform provisions of the Model Law ... Harmonised interpretation of the Model Law will be facilitated by … judicial decisions … that interpret conventions and Model Laws emanating from UNCITRAL. It is expected that Australian courts will make use of international precedents in interpreting the provisions of the Model Law.41

</blockquote>Article 8 has now been referred to in a number of decisions on the Model Law. In the decision on

recognition of the foreign proceedings in Akers v Saad Investments Co Ltd (in off liq) [2010] FCA 1221 Rares J when considering COMI commented:

<blockquote>Given the importance to international commerce and, to third parties, of having an objective ascertainable basis upon which to commence and decide proceedings that will govern winding up an insolvency of a debtor under the Model Law, in my opinion, the approach adopted in Eurofood [2006] Ch 508 and Stanford Bank [2010] 3 WLR 941 should be followed here (and see too Betcorp 400 BR 260 and Art 8 of the Model Law itself).42 </blockquote>Then in 2013 in the first instance Saad decision43 on amending the effect granted upon

recognition, Rares J noted that the Model Law’s “character as an international convention” “imports the rules of interpretation in Arts 31 and 32 in the Vienna Convention on the Law of Treaties”.44 In the subsequent decision of the Full Court of the Federal Court of Australia Allsop CJ stated:

<blockquote>When the question of relief to be granted arises, foreign cases upon the Model Law will, of course, be relevant: see Art 8; but also will be local cases on pre-existing law to the extent that they are conformable with the operation of the Model Law and its aims and purposes.45

</blockquote><group>Rule 5 Exclusion of Renvoi

<blockquote>In applying these Global Rules, any reference to the law of a state means the internal (“domestic”) rules of law in force in that state other than its rules of private international law. </blockquote>

Renvoi arises when a forum state’s choice of law rules apply a foreign law which may contain its own choice of law rules, which in turn either remit the question back again to the law of the forum or alternatively transmit the question to yet another, third state’s law.46 While there is some uncertainty

40 Atkins and Mason, n 32, p 26. 41 Explanatory Memorandum, Cross-border Insolvency Bill 2008, p 21.42 Akers v Saad Investments Co Ltd (in off liq) [2010] FCA 1221 at [49].43 Akers v Saad Investments Co Ltd [2013] FCA 738. 44 Akers v Saad Investments Co Ltd [2013] FCA 738 at [34]-[35] (authorities omitted). He also noted “The Vienna Convention is an authoritative statement of customary international law for the purposes of construing the Model Law … Article 8 of the Model Law also imports the provisions of the Vienna Convention.”45 Akers v Deputy Commissioner of Taxation [2014] FCAFC 57 at [69].

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in Australia as to the applicability of “single renvoi” or “double (total) renvoi” in any given case,47 it appears that Australian courts today will not consider ignoring the renvoi question to be a legitimate solution.48 Mortensen has contended that “[t]he broad rationale for the use of renvoi [in Neilson v Overseas Projects Corporation of Victoria Ltd (2005) 223 CLR 331], therefore, suggests that the doctrine could be available for use in any area of law for which statute does not forbid it”.49

Assuming any adoption by Australia of the Global Rules would be implemented by enactment, Rule 5 would have the very effect referred to by Mortensen – ie, to forbid the use of the doctrine of renvoi – such that, when the Global Rules call for the application of the law of a given state, that applicable “law” shall comprise the relevant state’s domestic, internal “dispositive” rules excluding its choice of law (“indicative”) rules.50 Rule 5 has its European Union antecedents in the form of both: The Rome Convention on the Law Applicable to Contractual Obligations which “specifically excludes the operation of renvoi in cases to which the Convention applies;51 and The EC Regulation on Insolvency Proceedings 2000 (the EC Regulation), Recital 23 of which states that the uniform rules on conflict of laws set out in the EC Regulation replace (within their scope of application) national rules of private international law.52

The ALI-III Report makes the case for the exclusion of renvoi in no uncertain terms:<blockquote>In the modern era, it has become widely accepted that one conspicuous benefit resulting from the conclusion of international agreements in the field of private international law is, or can be, the removal of the core problem giving rise to the insoluble dilemma that is renvoi, namely the divergent approaches to choice of law that have evolved under the laws of different sovereign states.53

</blockquote><subdiv>Part B – Localization of assets (Rules 6-11)Australian courts approach choice of law questions by characterising the issue in dispute requiring determination and then applying a “connecting factor” which “links” the category of legal relationship to the applicable law.54

Four connecting factors have been applied in bankruptcies and liquidations. The first factor essentially relates to the administration (extent and distribution) of the insolvent estate,55 whereas the other three become more relevant where there is a question of local recognition and enforcement of a foreign order.56

First, the most important “connecting” factor is the forum. The law of the forum has been applied to issues such as the extent of the trustee or liquidator’s powers of investigation and powers in respect

46 Davies et al, n 1 at [15.2]-[15.3]; Mortensen R, Garnett R and Keyes M, Private International Law in Australia (2nd ed, LexisNexis Butterworths, 2011) at [8.13]. 47 Davies et al, n 1 at [15.19]: “It … remains an open question [in light of the decision in Neilson v Overseas Projects Corporation of Victoria Ltd (2005) 223 CLR 331] whether double renvoi should be applied in general.” 48 Davies et al, n 1 at [15.6]ff, discussing Neilson v Overseas Projects Corporation of Victoria Ltd (2005) 223 CLR 331 where the majority of the High Court held that if the Australian choice of law test results in a foreign law as the lex causae, then the whole of that foreign law (including its choice of law rules) should be considered. 49 Mortensen et al, n 46 at [8.20]. That said, where parties to a contract have made and expressed their own choice of governing law it has been argued that “the parties presumably did not contemplate application of the conflict of laws rules of the chosen law, which might lead to application of a law different to the one that they chose”: Davies et al, n 1 at [15.11].50 The notions of “dispositive” rules and “indicative” rules are referred to by Mortensen et al, n 46 at [7.4] and [8.13] when explaining the nature of the problem of renvoi.51 Davies et al, n 1 at [15.11].52 ALI-III Report, n 16, p 211 refers to the Regulation (EC) No 1346/2000 of the Council of the European Union on Insolvency Proceedings [2000] OJ L 160/1.53 ALI-III Report, n 16, p 211.54 Mason, n 3 at 70; ALI-III Report, n 16, Annex, “B Localization of assets”, Introductory Comment, p 213.55 This has encompassed the trustee or liquidator’s powers under that administration.56 That is, the effect of a foreign order to sequestrate an estate or to wind up a company, or the associated order to appoint the foreign insolvency administrator.

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of divisible property.57 Secondly, domicile is relevant to matters of status and to the local recognition of foreign bankruptcy or winding up orders.58 Thirdly, the place in which property is situated is relevant to the effect of a bankruptcy or liquidation order on property. 59 Finally, the place in which a claim is created is relevant as the law of that place has determined its validity,60 even though the law of the forum determines the ranking of claims.61

Ordinarily in Australia, the law of the forum exclusively settles the question of situs in respect of property.62 Rules 6 through to 11 of the Global Rules would therefore displace this ordinary approach under Australian conflict of laws and expressly provide where certain types of a debtor’s assets will be deemed to be located “so that it is possible to determine the scope of operation of (cross-border) insolvency proceedings”.63

The question of the location of an asset may be significant or relevant in a variety of contexts: Where one country’s legal system permits the opening of non-main or secondary insolvency proceedings, it is often the case that the effects of those proceedings are limited to that state. That is, the laws of the country in which the non-main or secondary proceedings are opened will only apply to assets located in that state.64 Consequently, it may be necessary to determine just where a particular asset is located in order to conclude whether the asset is covered by the non-main/secondary proceedings or the main insolvency proceedings;65

The question of “whether local recognition and effect is given to a foreign liquidation order authorising a foreign liquidator to deal with the local property” will be determined by the lex situs (the law of the place where the asset is located);66

The lex situs determines title to property which is obviously a fundamental matter for determination upon the commencement of an insolvency proceeding in relation to a debtor and that debtor’s property (whatever that may comprise).67

Ascertaining the location of tangible property is usually a clear-cut or straightforward matter of “geographical fact”68 or “space and time”.69 On the other hand, deeming the location of intangible property is inherently a matter of legal fiction but one which is desirable (if not necessary) in a transnational insolvency case for the reasons stated above. <group>Rule 6 Immovable property

<blockquote>

57 Courts have applied the law of the forum because they identified an issue as a matter of procedure or because they identified it as a substantive issue and the forum as the law of the cause.58 Prior to the Model Law with its presumption that the COMI for individual debtors is their “habitual residence”, domicile has been important for matters of status reflected in the local recognition of foreign bankruptcy orders. 59 Radich v Bank of New Zealand (1993) 45 FCR 101.60 In Re Banque des Marchands de Moscou [1952] All ER 1269 at 1271, Vaisey J stated “according to our law, the debt is situate where the debtor is and ... these claims have to be regulated by Russian law”. Thus, the claim was extinguished by Russian legislation nationalising the Russian bank and was not provable in an English liquidation.61 Re Melbourn (1870) LR 6 Ch 64. 62 Davies , et al, n 1 at [32.17].63 ALI-III Report, n 16, Annex, “B Localization of assets”, Introductory Comment, p 213.64 ALI-III Report, n 16, Annex, “B Localization of assets”, Introductory Comment, p 213. For example, see Art 28 of the Australian Model Law which provides that after recognition of a foreign main proceeding, a local non-main proceeding may be commenced only if the debtor has assets in the local state and the effects of a proceeding are restricted to the assets of the debtor located in that state and, to the extent necessary to implement cooperation and coordination with foreign courts and foreign representatives, to other assets of the debtor that should be administered in the local proceeding under the local law.65 ALI-III Report, n 16, Annex, “B Localization of assets”, Introductory Comment, p 213.66 Mason, n 3 at 78.67 Mason, n 3 at 78.68 ALI-III Report, n 16, Annex, “B Localization of assets”, Introductory Comment, p 213.69 Mortensen et al, n 46 at [19.5].

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6.1. Immovables, and rights vested in or attached to them, are located at the place where the immovable, and the right vested in it or attached to it, is registered in a public register designated for the registration of rights. 6.2. If an immovable, and the right vested in it or attached to it, is not recorded in a public register designated for the registration of rights, then the immovable, and the right vested in it or attached to it, is located where the immovable is situated. </blockquote>

The Global Rules draw upon the ALI-III Report Appendix – Glossary of Terms and Descriptions (Glossary) which defines “Immovable Property” to mean “land and anything so attached to land as not to be subject to change of place by usual human action”. This is consistent with the Australian High Court’s “close identification of immovable property with land and interests in land” 70 in Haque v Haque (No 2) (1965) 114 CLR 98. The reference in the definition to “anything so attached to land as not to be subject to change of place by usual human action” would also appear to dovetail with the underlying rationale for Australian law’s classification of various items of property as moveable.71

In terms of the localisation of immovable property by Rule 6, it is largely consistent with the Australian conflict of laws position that “land and most interests in land are situate in the place where the land lies”.72 As the Report itself notes, often the actual location and the place of registration will be one and the same.73

<group>Rule 7 Nonregistered movables<blockquote>7.1. Nonregistered movables, and rights vested in or attached to them, are located at the place where the nonregistered movable is situated. 7. 2. For the purposes of Global Rule 7.1, the following legal presumptions apply:

a. Movables recorded in a vehicle license register, and rights vested in or attached to them, are presumed to be located at the place where the movable is recorded in the vehicle license register. b. Goods in transit, as well as rights vested in or attached to them, are presumed to be located in the state of destination.

</blockquote><group>Rule 8 Registered movables

<blockquote>8.1. Registered movables, and separately registered rights vested in or attached to them, are located at the place where the movable or the right in question is recorded in a public register designated for the registration of rights. 8.2. For the purposes of Global Rule 8.1, unless there is proof to the contrary, registered movables shall be presumed to be located at the place where the movable is recorded in a public register designated for the registration of rights. </blockquote>

The first issue which would arise for consideration in applying Rules 7 and 8 is just what constitute “movables” and this matter is again addressed by means of a defined term in the ALI-III Report’s Glossary. “Movables” are described as “corporeal and incorporeal property other than immovable property … [including] all movable things serving as household or business objects, upholstery or

70 Mortensen et al, n 46 at [19.22].71 Mortensen et al, n 46 at [19.26] ff. For example, simple contract debts, beneficial interests under a deceased estate and chattels are invariably classified as movable largely due to the fact that relevant critical elements are able to change location by human action (ie, the location of residence of the debtor, the personal representative administering an estate, the chattels themselves). 72 Mortensen et al, n 46 at [19.6] citing Haque v Haque (No 2) (1965) 114 CLR 98 at 107 (Barwick CJ) and at 136 (Windeyer J). For a discussion of mortgage debts’ classification as movables and their location, see Mortensen et al, n 46 at [19.27] and [19.13-14] and Davies et al, n 1 at [32.12] and [32.24]-[32.26].73 ALI-III Report, n 16, Reporter’s Notes, p 214.

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furniture, including collections of art, books, or DVDs and objects of a scientific or historical nature”.74 In Australia, conflict of laws principles would require classification of property as immovable or movable according to the law of the situs (ie, the law of the place where the property is situate),75 such location being first determined under Australian law as the lex fori. For instance, under Australian conflict of laws, chattels are treated as situate “in the place where they happen to be at the decisive time”.76 If Australian law was also the relevant law of the situs, then generally “any tangible property not attached to land will be classified as movable, as will any interest in such property”.77

While “[i]ntellectual property interests are regarded as movables in Australian law”,78 intellectual property rights are specifically addressed in Rule 11 and would therefore appear to fall outside the reach of Rules 7 and 8. The same position would appear to apply to “Claims” and “Shares in Joint-Stock Companies” which are the subject of Rules 9 and 10 respectively (debts79 and shares80 are likewise ordinarily classified as movable under Australian law).

Therefore, while Rules 7 and 8 conflate the concepts of situs (location) and property classification (ie, as immovable or movable), the two rules appear to generally reflect the current position under Australian conflict of laws. Rule 7.2(b) however, may diverge from the Australian common law position in that it provides for a rebuttable presumption that goods in transit (as well as rights vested in or attached to them) are located in the state of destination. Davies et al ( Nygh’s) note that under the Australian common law problems may be encountered with goods in transit at sea, and suggest that “their notional situs should be that of the bill of lading, not the ship on which the goods are being carried.”81 This would presumably not always correspond with the state of destination at the “decisive time”.

Rule 8 provides for a deemed (or presumptive) location for “registered” movables which appears to reflect the views of Australian commentators and courts – at least in respect of assets which by their very function are prone to regular movement and transit such as vehicles, ships and aircraft – that it is appropriate to determine the law of the place of registration to be the lex situs.82 Davies et al (Nygh’s) contend that

<blockquote>there is much to be said for application of the law of registration and not much to be said for any other alternative, at least in relation to ships already built and operating, for which transactions relating to ownership, mortgages and demise charters must be recorded on the ship’s register.83

</blockquote>The general purport of Rule 8 appears in keeping with the approach of the EC Regulation which

deems “property and rights ownership of or entitlement to which must be entered in a public register” to be situated in the state which has authority for keeping the register.84

74 ALI-III Report, n 16 Appendix – Glossary of Terms and Descriptions, pp 179-180.75 Haque v Haque (No 2) (1965) 114 CLR 98 at 139 (Windeyer J). Also se Re Varley (dec’d) (2007) 251 LSJS 461; [2007] SASC 420 at [8] (Debelle J).76 Mortensen et al, n 46 at [19.8] citing Haque v Haque (No 2) (1965) 114 CLR 98. At 136, Windeyer J stated “[a] chattel, on the other hand, is a movable, and at any given time it is where it then in fact is”. 77 Mortensen et al, n 46 at [19.25] citing Haque v Haque (No 2) (1965) 114 CLR 98. Barwick CJ at 107 held: “Physical objects not attached to land, with some exceptions not presently material, are movables, as must be every proprietary interest in them.”78 Mortensen et al, n 46 at [19.29] citing Fullagher J’s comment in Re Usines de Melle’s Patent (1954) 91 CLR 42 at 48 regarding the rights conferred by a grant of letters patent for an invention.79 Mortensen et al, n 46 at [19.26] refers to simple contract, speciality and judgment debts. 80 Mortensen et al, n 46 at [19.28]. On location of shares, see [19.15] and Davies et al, n 1 at [32.42]-[32.46].81 Davies et al, n 1 at [32.29]. Davies et al, at [32.39] note that goods in transit on the high seas “are represented by the bill of lading or other sea-carriage document (such as a sea waybill) issued by the carrier when the goods are accepted for carriage”. 82 Davies et al, n 1 at [32.28]. 83 Davies et al, n 1 at [32.28]. 84 Regulation (EC) No 1346/2000 of the Council of the European Union on Insolvency Proceedings [2000] OJ L 160/1 (29 May 2000), Art 2(g).

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In Tisand Pty Ltd v Owners of Ship MV Cape Moreton (Ex Freya) 2005) 143 FCR 43,85 Ryan and Allsop JJ commented:

<blockquote>There seem to us to be powerful reasons for giving effect to the law of the country of register as the lex situs in relation to questions of title, property and assignment (subject, of course, to local statute and public policy). The chance location of a working merchant ship in a port within its range of sailing or on the high seas appears to introduce an element of arbitrariness to the legal analysis.86 </blockquote>However, a reading of Rules 8.1 and 8.2 together suggests that there may be a drafting error in

Rule 8.1. On its face, Rule 8.1 would appear to render otiose the presumption in Rule 8.2: why does Rule 8.2 presume the location of registered movables to be the place of the register when Rule 8.1 deems the same in absolute terms? It may be that Rule 8.1 should either be removed entirely or possibly re-drafted along the same lines as Rule 7.1 – ie, that “registered movables, and separately registered rights vested in or attached to them, are located at the place where the registered movable is situated”. It is contended that this amendment would allow Rules 8.1 and 8.2 to work together with greater clarity to yield the intended result (as stated in the ALI-III Report) that Rule 8.1 generally operate “in line with the prevailing view that, for legal purposes, registered movables are located at the place where they are recorded in a public register designated for the registration of rights”. 87 If Rule 8.1 were was amended as suggested, Rule 8.2 would provide (“for the purposes of Rule 8.1”) a rebuttable presumption of location in favour of the place of registration. The presumption could be rebutted where there is genuine doubt as to whether the law of the place of registration “is the most obvious connecting factor” (for example, where a vessel or aircraft is transferred from the state of registration to another state).88 If the presumption were rebutted, Rule 8.1 (if amended as suggested) would then deem the location of the asset to be the place where it is situated, consistent with the traditional Australian common law rule.89 The drafting of Rule 8.1 will be the subject of the further debate on a global level of the Global Rules.90

<group>Rule 9 Claims<blockquote>9.1. Claims payable to bearer or order, and rights vested in or attached to them, are located at the place where the bearer or order document is situated.9.2. Claims of known creditors, and rights vested in or attached to them, are located at the place where the debtor has his seat or his domicile.</blockquote>

As stated in the ALI-III Report’s comment upon Global Rule 9, the Report’s Glossary of Terms and Descriptions describes “claim” as “a right to payment from the estate of the debtor, whether arising from a debt, a contract, or other type of legal obligation, whether liquidated or unliquidated, mature or unmatured, disputed or undisputed, secured or unsecured, fixed or contingent, arisen on or before the commencement of the insolvency proceedings”.91

The position laid down by Rule 9.1 reflects the fact that claims payable to bearer and to order are tangible.92 Thus, like specialties (ie, debts created by deed) such claims are regarded as being located

85 Tisand Pty Ltd v Owners of Ship MV Cape Moreton (Ex Freya) (2005) 143 FCR 43 at [146].86 This obiter dicta was subsequently quoted in The Ship “Gem of Safaga” v Euroceanica (UK) Ltd (2010) 182 FCR 27; [2010] FCAFC 14 at [97].87 ALI-III Report, n 16, Comment to Global Rule 8, p 217.88 ALI-III Report, n 16, Comment to Global Rule 8, p 217.89 See above n 76.90 Correspondence between Mark Wellard and the Reporters, Ian Fletcher and Bob Wessels, in which the drafting was raised (and the author’s points were acknowledged), is held on file with the authors. 91 ALI-III Report, n 16, Comment to Global Rule 9, p 219.92 ALI-III Report, n 16, Comment to Global Rule 9, p 219; Mortensen, n 46 at [19.10].

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where the relevant document is physically located or situated.93 Rule 9.2, which relates to claims of known creditors, appears to provide for a position which sits in harmony with Australian private international law’s treatment of simple contract debts – that is, “that they are deemed to be situate in the place where the debtor resides”.94 In AssetInsure Pty Ltd v New Cap Reinsurance Corp Ltd (in liq) (2006) 225 CLR 331 Kirby and Hayne JJ noted that “A debt is generally situated where the debtor resides”.95

The location of a debt which is not yet payable (indeed, whether such a debt can even be attributed a location) has been described as an unsettled point of Australian law.96 However, the broad description of “claim” for the purposes of the rule (ie, as per the ALI-III Report’s Glossary) would clearly extend to “contingent” and “unmatured” claims. 97 Similarly, there is uncertainty in Australia as to whether a mortgage debt is taken to be situate where the mortgagor is resident, where any relevant mortgage deed is located or alternatively where the relevant security property lies.98 Again, the proposed rule would appear to provide certainty in relation to the location of mortgage debts, given that the relevant description of “claim” includes a “secured” debt or right to payment.<group>Rule 10 Shares in joint-stock companies

<blockquote>10.1. Bearer shares, and rights vested in or attached to them, are located at the place where the bearer share certificate is situated. 10.2. Registered shares, and rights vested in them, are located at the place where the registered share, or the right vested in it, is recorded in a register of shareholders kept by the company.99

10.3. If a registered share, or a right vested in it, is not recorded in a register of shareholders, the registered share or the right vested in it is located at the place where the company has the center of its main interests. The center of the main interests of the company is presumed to be the place of its registered office. 10.4. Book-entry shares, and rights vested in them, are located at the place of the registered office of the intermediary with which the securities account is kept in which the book-entry shares are administered. </blockquote>

Rule 10.1 addresses the (increasingly rare) matter of bearer shares which, as tangible property, “are deemed to be located at the place where the relevant bearer share certificate is physically situated”.100 Rule 10.1 therefore accords with the approach under Australian private international law to determining the location of tangible property embodied in a deed or document.101

The terms of Rule 10.2 (and for that matter 10.4)102 appear to generally reflect the “fundamental rule” under Australian law for identifying the location of shares – namely, that they are deemed to be

93 Commissioner of Stamps v Hope [1891] AC 476 at 482 and Royal Trust Co v Attorney-General (Alberta) [1930] AC 144 at 150.94 Mortensen, n 46 at [19.9]. 95 Assetinsure Pty Ltd v New Cap Reinsurance Corp Ltd (in liq) (2006) 225 CLR 331 at 352, [58].96 Mortensen, n 46 at [19.9].97 Mortensen, n 46 at [19.12]. Regarding judgment debts, Mortensen et al question Attorney-General v Bouwens (1838) 150 ER 1390 which deemed in a probate matter that such a debt was located where the relevant judgment is made. Again, this type of debt obligation would clearly fall within the description of “claim” in the ALI-III Report’s Glossary. 98 Mortensen, n 46 at [19.13]-[19.14]. 99 For a detailed discussion on shares beyond the scope of this article, see Ooi M, Shares and Other Securities in the Conflict of Laws (Oxford University Press, Oxford, 2003). 100 ALI-III Report, n 16, Comment to Global Rule 10, p 222. 101 Mortensen et al, n 46 at [19.5], [19.10]. 102 Rule 10.4 acknowledges that many transactions regarding shares are by electronic book-entry debits and credits to securities accounts held with an intermediary. This commercial practice is addressed in the Hague Securities Convention, signed by the United States and Switzerland in 2006. The convention is at: Hague Conference on Private International Law, Convention on the Law Application to Certain Rights in Respect of Securities held with Intermediary (5 July 2006) http://www.hcch.net/upload/conventions/txt36en.pdf with a brief outline at: Hague Conference on Private International Law, The Hague Securities Convention: A Modern and Global Conflict of Laws Regime for Transactions Involving Securities held with an Intermediary (5 July 2006) http://www.hcch.net/upload/outline36e.pdf.

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situate where the shares can be dealt with effectively according to the law of the place of incorporation of the relevant company.103 Under Australia’s companies legislation, a transfer of shares in a company incorporated in Australia can only be effective if registered on the register of members,104 meaning that such company’s shares “are located in the place where the register of members is kept”.105

Rule 10.3 purports to address “an absence of registration” but curiously refers to the notion of a “registered share” (or a right vested in it).106 It is unclear whether Rule 10.3 contemplates a share which “is not recorded in a register of shareholders” but which might be registered in some other manner. In any event, deeming the location of such a share to be the place where the company has its centre of main interests might appear to diverge from the Australian position, which would consult the law of the place of incorporation to determine what that law provides in the way of “means of proving title to and transferring shares”.107 <group>Rule 11 Intellectual property rights

<blockquote>Patent rights, trademark rights, and copyrights, and rights vested in them, are located at the place where the patent holder, trademark proprietor, or copyright holder has his seat or his domicile. </blockquote>

Under Australian private international law, “intellectual property rights are regarded as situate in the place where those interests were created and where they may effectively be transferred”.108 In respect of copyrights, it would usually stand to reason that such rights would be able to be effectively transferred where the copyright holder is located and, for that reason, this accords with the rule deeming the location of copyrights to be the place where the copyright holder has his seat or domicile. However, patents and trademark rights are often the subject of registration regimes in many countries. In Australia for example, the owner of a registered trademark has, subject to some limitations, “an exclusive right to use it, or authorise others to do so” and “[t]he rights vested in the owner are taken to have accrued from the date of registration”.109 Davies et al (Nygh’s), citing numerous authorities, state that

<blockquote>[a] patent granted under the Patents Act 1990 (Cth) must be regarded as being situated in Australia and a foreign patent in the country where it was registered; the same principle applies to trademarks and copyright.110 </blockquote>Therefore, Rule 11 – at least in so far as it extends to patents and trademarks – would appear to

provide for a different approach to that of Australia’s current private international law.<subdiv>Part C – General rules of law applicable to insolvency proceedings (Rules 12-14) <group>Rule 12 Law of the state of the opening of proceedings

103 R v Williams [1942] AC 541. 104 Corporations Act 2001 (Cth), s 1072F(1).105 Mortensen et al, n 46 at [19.15] and Erie Beach Co Ltd v Attorney-General for Ontario [1930] AC 161. 106 ALI-III Report, n 16 Comment to Global Rule 10, p 222.107 Mortensen et al, n 46 at [19.15].108 Mortensen et al, n 46 at [19.19], citing Carruthers J M, The Transfer of Property in the Conflict of Laws, (Oxford University Press, Oxford, 2005) p 29. Garnett R, “An Overview of Choice of Law, Jurisdiction and Foreign Judgment Enforcement in IP Disputes” (2006) 11 Media and Arts Law Review 341 states: “Typically, intellectual property statutes concerning patents, copyright and trademarks are territorially limited which means that a plaintiff can only sue in respect of infringements occurring within the forum state.” Accordingly he comments that plaintiffs would plead local law. 109 Dufty A and Lahore J, Patents, Trade Marks & Related Rights (online subscription service, LexisNexis Australia) at [64,000] and [55,720]. See also [64,015] which states that “[a] person seeking to register his/her interest as an assignee must … provide proof of entitlement to the registrar”. 110 Davies et al, n 1 at [32.37].

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<blockquote>12.1. Save as otherwise provided in [this Act/these Rules], the law applicable to insolvency proceedings and their effect shall be that of the state within the territory of which such proceedings are opened, hereafter referred to as “the state of the opening of proceedings”. 12.2. The law of the state of the opening of proceedings shall determine the conditions for the opening of those proceedings, their conduct, administration, conversion, and their closure. </blockquote>

This reliance upon the law of the forum reflects common practice as referred to in the UNCITRAL Legislative Guide on Insolvency Law:

<blockquote>It is quite typical that the law of the state in which insolvency proceedings are commenced, the lex fori concursus, will govern the commencement, conduct, administration and conclusion of those proceedings.111 </blockquote>Australian commentators have noted this “general forum bias” in choice of law cases involving

insolvency proceedings:112 <blockquote>There are no doubt various explanations for a forum bias in local insolvency administrations with a foreign element, whether a sole insolvency administration or a concurrent principal or ancillary liquidation. At one level, it may be because of a poorly developed sense of the importance of distinguishing substantive matters from procedural. This may reflect a general instinctive view that many issues arising in the administration of an estate are procedural in nature, and hence governed by the law of the forum. It may also be because of a tendency towards concentrating on the applicability of local statute, despite the fact that the choice of law rules point to the law of another jurisdiction and even though the terms of the statute do not demand that they be applied. At a more practical level, it may be because choice of law issues are not raised by the parties as a matter of dispute – in which case the court will normally apply the law of the forum.113

</blockquote>The forum is the most important of four “connecting” factors applied in insolvency choice of law

cases and one which “essentially [AQ: pls indicate the end quote] relates to the administration (extent and distribution) of the insolvent estate”.114 The emphasis on the lex fori in choice of law cases also appears to reflect an approach of the courts to “characterise insolvency as an administration” and – from the perspective of private international law – to view insolvency “as a matter affecting the status of the debtor” in a similar vein to matrimonial and probate proceedings.115

The essential position under Australian private international law in choice of law questions relating to the extent or distribution of the debtor’s estate is that the law of the forum will be applied where: a particular matter is identified as one of procedure (in which case the lex fori applies); or a particular matter is identified as substantive and the lex fori has been determined to be the lex causae (the law of the cause).

111 UNCITRAL Legislative Guide on Insolvency Law, n 24 Pt 2, at 69. The Guide goes on to note common exceptions to the lex fori concursus dealing with payment and settlement systems and regulated financial markets; labour contracts; security interests; and avoidance provisions. 112 Mason, n 3 at 74. See also Davies et al, n 1 at [36.62]: “It has been said that this [the law of the forum governing the administration of property of a bankrupt] is simply an application of the general rule that matters of procedure are governed by the lex fori, yet the principle can extend far beyond true questions of procedure.”113 Mason, n 3 at 74-75, also citing ALRC, n 3, Report No 58 at [1.3], [1.14] and [1.15], and Fletcher I F, Insolvency in Private

International Law: National and International Approaches (Clarendon Press, Oxford, 1999) p 152. 114 Mason, n 3 at 77. 115 Mason, n 3 at 76, citing the judgment of the majority of the High Court in John Pfeiffer Pty Ltd v Rogerson (2000) 74 ALJR 1109 which referred to the established process of choice of law in “areas of status”.

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Examples of the first (procedural) category of matters are enforcement/eligibility of claims in a bankruptcy,116 and what Fletcher describes as issues “encountered at all stages, from the taking of steps to commence bankruptcy proceedings by presentation of a petition, to the ensuing phases of hearings, meetings, processing of claims, and declaration and payment of dividends to creditors”. 117 Fletcher states that Australian law has adopted “the same stance as English law in affirming that all questions of the administration and distribution of the bankrupt’s estate, including the question of priorities of debts, are for determination in accordance with the law of the forum”.118

Examples of substantive matters (again identified by Fletcher) are “the question of the avoidance law to be applied in relation to antecedent transactions entered into with the debtor; the effect of the insolvency proceedings upon current contracts to which the debtor is a party and the validity of any claims arising out of such contracts; the impact upon any type of security, or quasi-security, arrangement of which the creditor seeks to avail himself; and the availability of any right of set-off in the case of any creditor who is also a debtor to the bankrupt’s estate”. 119 Fletcher states that while Canada adopts an approach which is “particularly forceful in pressing the role of the lex fori” in matters of substantive law, “Australian writers incline to a … cautious view in the absence of any settled case law concerned with specific issues”.120

As will be discussed further below, Australian courts appear to consider claims involving foreign recipients of preferential payments to be governed by Australian law (the lex fori) (though difficulties may still be encountered in enforcing any Australian judgment against a foreign defendant),121 while antecedent settlements of foreign real property (under foreign law) would appear to be beyond the reach of an Australian bankruptcy provision purporting to void such settlements.122

It should be noted that in 2000 the High Court in John Pfeiffer Pty Ltd v Rogerson (2000) 74 ALJR 1109 (Pfeiffer) departed from its previous distinction between laws of substance and of procedure based on rights and remedies123 and instead endorsed Mason CJ’s formulation in McKain v R W Miller & Co (SA) Pty Ltd (1991) 174 CLR 1 that procedure refers to “rules which are directed to governing or regulating the mode or conduct of court proceedings”.124 All other provisions or rules are to be classified as substantive. If this were to provide an avenue for courts more readily to consider the application of foreign laws in an insolvency administration,125 Rule 12 would go some way toward settling Australian private international law with respect to insolvency administrations.

116 Re Kloebe (1884) 28 Ch D 175 and Re Azoff-Don Commercial Bank [1954] Ch 315.117 Fletcher I F, Insolvency in Private International Law (2nd ed, Oxford University Press, 2005) at [2.78]. Fletcher also states that “[t]he control exerted by the lex fiori over the distribution or process embraces such vital issues as the types of claim which qualify as provable debts, to the ranking of different types of debt in terms of priority of payment” and that “[o]nce the validity of the substantive claim itself is confirmed, the different mode of treatment to which it would be subjected under the bankruptcy process of the foreign system is of no relevance”. See Ex parte Melbourne (1870) LR 6 Ch App 64 on the application of the lex fiori to the ranking of claims. 118 Fletcher, n 117 at [2.90]. On the tensions between a centralised and a decentralised approach to “administering” a cross-border insolvency as they apply to the priority of distributions, see Westbrook J, “Breaking Away: Local Priorities and Global Assets” (2011) 46(3) Texas International Law Journal 601.119 Fletcher, n 117 at [2.79]. 120 Fletcher, n 117 at [2.90].121 New Cap Reinsurance Corp Ltd v AE Grant (2009) 257 ALR 740. The United Kingdom Supreme Court decision on the question of the enforcement in the United Kingdom of the Australian (unfair preference) judgment in New Cap (against a defendant who did not submit to the Australian jurisdiction) is reported at Rubin v Eurofinance SA [2012] 3 WLR 1019; [2013] 1 All ER (Comm) 513; [2012] UKSC 46. The United Kingdom Supreme Court heard the New Cap appeal together with an appeal in the case of Rubin v Eurofinance SA and delivered one judgment for both appeals. Both cases raised the issue of whether and how an order or judgment of a foreign court in avoidance proceedings can be recognised and enforced in England. 122 Re Doyle; Ex parte Brien v Doyle (1993) 112 ALR 653.123 Huber v Steiner (1835) 2 Bing NC 202; 132 ER 80.124 McKain v R W Miller & Co (SA) Pty Ltd (1991) 174 CLR 1 at 26-27.125 Mason, n 3 at 87. It is noteworthy that in a Chapter 15 case concerning an insurance company, In re Condor 601 F3d 319 (5th Cir 2010), the Court of Appeal permitted foreign representatives to use foreign voidable transaction laws to recover assets of the debtor in the United States. Also see In re Fairfield Sentry Ltd 458 BR 665 (SDNY 2011).

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In the final analysis, Rule 12 appears to generally reflect a lex fori bias which has been embedded in Australian private international law as it applies to insolvency proceedings with foreign elements raising choice of law questions. Rule 12 is stated to be subject to any exceptions or modifications which may be otherwise provided in the Rules.126

<group>Rule 13 Law of the State of the opening of non-main proceedings <blockquote>If insolvency proceedings are opened in a jurisdiction other than that where the center of main interests of the debtor is situated (“non-main” proceedings), the effects of the application of the law of the state of the opening of such proceedings shall be restricted to those assets of the debtor situated in the territory of that state at the time of the opening of those proceedings. </blockquote>

At first blush, Rule 13 appears to largely mirror the current Australian position provided in Art 28 of the Australian Model Law. Under that article, the effect of a proceeding commenced under the Bankruptcy Act 1966 (Cth) or Ch 5 of the Corporations Act 2001 (Cth) after recognition of a foreign main proceeding will be restricted to the assets of the debtor that are located in Australia (and, to the extent necessary to implement cooperation and coordination under Arts 25, 26 and 27 of the Australian Model Law, to other assets of the debtor that, under the law of Australia, should be administered in that proceeding). Indeed, Art 28 of the Australian Model Law provides that after a foreign main proceeding is recognised a proceeding cannot be commenced under Australia’s insolvency regime unless the debtor in fact has assets in Australia.

Where local proceedings were commenced in Australia prior to the application for recognition of foreign proceedings, Art 29 provides for the coordination of the concurrent insolvency proceedings locally and in the foreign state.127 Where insolvency proceedings are opened in Australia, before the filing of an application for recognition of foreign proceedings, any relief granted under Arts 19 or 21 in conjunction with the recognition of the foreign proceeding must be consistent with the existing local proceeding.128 Thus the effects of such local proceedings could not be restricted unless a foreign representative applying for recognition of the foreign proceeding under Arts 15-17 then sought relief under Art 21 in order to constrain the effect of the pre-existing Australian proceeding. Any such constraint would need to flow from the Art 29 requirement that the court shall seek cooperation and coordination under Arts 25-27 and likely from the characterisation of the initial Australian insolvency proceeding as not being in the debtor’s “centre of main interests” (COMI).

Seeing that the Model Law does not allocate jurisdiction, as occurs under the EC Regulation, this characterisation would only become relevant under the Model Law where the courts are dealing with concurrent local proceedings and (recognised) foreign proceedings. Under the EC Regulation, an assessment of the location of the debtor’s COMI is necessary where “territorial proceedings” can be commenced or opened before “main proceedings” in limited circumstances – namely, where main proceedings cannot be opened or where a creditor has domicile, habitual residence or registered office in a state where the debtor has an establishment (or where a creditor’s claim arises from the operation of that establishment).129 If the debtor’s COMI is in another state, main proceedings simply cannot be commenced locally130 and the EC Regulation expressly provides that the effect of any permissible local territorial proceeding is to be “restricted to the assets of the debtor situated in the territory of the

126 See Rules 13 and 14 (Cross-Border Movement of Assets) and Pt D generally (Rules 15-23, “Exceptions to the General Rules of Law Applicable to Insolvency Proceedings”).127 Article 29 also addresses Arts 25-27 cooperation and coordination where the local proceedings commence after recognition or the filing of an application for recognition. 128 If the foreign proceedings are recognised as “foreign main proceedings”, then Art 20 does not apply: Art 29(a(ii)). Note the commentary on Art 29 in the revised Guide to Enactment to the Model Law at [239], United Nations, UNCITRAL Model Law on Cross-border Insolvency with Guide to Enactment and Interpretation (January 2014), http://www.uncitral.org/pdf/english/texts/insolven/1997-Model-Law-Insol-2013-Guide-Enactment-e.pdf. 129 Regulation (EC) No 1346/2000 of the Council of the European Union on Insolvency Proceedings [2000] OJ L 160/1 (29 May 2000), Arts 3(2), 3(4). 130 Keay A and Walton P, Insolvency Law: Corporate and Personal (3rd ed, Jordan Publishing Ltd, Bristol, 2012) p 441 at [26.5.3].

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… [local] Member State”.131 In an Australian context – and in light of the existing approach of the Model Law – Rule 13 would presumably operate in the event of concurrent proceedings rather than require a characterisation of every Australian proceeding which might be opened in the absence of any recognised foreign proceeding.

In so far as Rules 12 and 13 (like the EC Regulation) reflect a model of “modified universalism”,132 this aligns with the Model Law as well as the approach adopted by Australian courts to the question of concurrent local and foreign proceedings prior to the advent of the Australian Model Law. Referring to the 1993 case of Radich v Bank of New Zealand (1993) 45 FCR 101; 116 ALR 676 where the Full Federal Court declined to order the sequestration of the estate of a debtor who was a bankrupt in New Zealand, Davies et al (Nygh’s) state that “the Australian approach can be seen to have been essentially one of modified universalism, which is to be contrasted with the ‘territoriality’ approach predominant in the nineteenth and early twentieth centuries”.133 Where a debtor is already subject to a foreign insolvency proceeding, Australian courts have generally been reluctant to decline jurisdiction even though sometimes there may be reason to not exercise it. 134 However, Australian courts have endorsed the view that local proceedings should not be allowed to interfere with a process of universal distribution already pending in another country. 135 In Chapman v Travelstead (1998) 86 FCR 460 French J stated that

<blockquote>[t]here is no general principle that the forum of a country in which there are assets which first pronounces bankruptcy must displace every other forum – In Re Artola Hermanos ex parte Andre Chale (1890) 24 QBD 640 at 649. Nevertheless it can be stated as a general proposition that considerations of international comity favour the view that if a court finds that there is already pending a process of universal distribution of a bankrupt’s estate it should not allow steps to be taken in its territory which would interfere with the process of universal distribution – Galbraith v Grimshaw [1910] AC 508 at 513 (Lord Dunedin).</blockquote>Indeed, the deferral by Australian courts to foreign “principal” insolvency proceedings would be

consistent with the common law principle of modified universalism espoused and applied by Lord Hoffman in the United Kingdom House of Lords in McGrath v Riddell [2008] 3 All ER 869.136 In Akers v Deputy Commissioner of Taxation (2014) 311 ALR 167; 100 ACSR 287; [2014] FCAFC 57,137 a case regarding modification of the recognition orders under Art 22(3), Allsop CJ with whom Robertson and Griffiths JJ agreed, commented:

<blockquote>

131 Regulation (EC) No 1346/2000 of the Council of the European Union on Insolvency Proceedings [2000] OJ L 160/1 (29 May 2000), Art 3(2).132 Virgos M and Schmit E, “Report on the Convention of Insolvency Proceedings”, Report No 6500/96, (Council of the European Union, 3 May 1996) (an aid to interpretation of the Regulation (EC) No 1346/2000 of the Council of the European Union on Insolvency Proceedings [2000] OJ L 160/1) at [5] refers to the hybrid model “based on the principle of the universality of the proceedings limited, however, by the possible opening of one or more sets of secondary proceedings the effects of which are confined to the Member State or Member States in which they were opened”.133 Davies et al, n 1 at [36.35]. 134 Davies et al, n 1 at [36.26]. In Radich v Bank of New Zealand (1993) 45 FCR 101; (1993) 116 ALR 676, the Federal Court of Australia declined to make a sequestration order in respect of a debtor who was already subject to a New Zealand bankruptcy, on the basis of (i) the power of the Court under s 29 of the Bankruptcy Act 1966 (Cth) to aid the New Zealand Official Assignee in gathering in the debtor’s Australian property and (ii) the fact that there were no Australian creditors who stood to benefit from a local bankruptcy.135 Chapman v Travelstead (1998) 86 FCR 460 (French J) and ML Ubase Holdings Co Ltd v Trigem Computer Inc (2007) 69 NSWLR 577 at 598 (Brereton J). Both cases are cited by Davies et al, n 1 at [36.27]. In the latter case, Brereton J (at 598) stated the rule in qualified terms: “The rationale of the rule is that while local courts recognise foreign bankruptcies (and similar administrations), they do not recognise foreign rules of relation-back.”136 McGrath v Riddell [2008] 3 All ER 869 at 881 [30] (Lord Hoffman). This was cited with approval by Rares J of Australia’s Federal Court in Akers v Saad Investments (2010) 118 ALD 498 at [47] as reinforcing the appropriate approach to determine a debtor’s centre of main interests under the Australian Model Law.137 Akers v Deputy Commissioner of Taxation (2014) 311 ALR 167; 100 ACSR 287; [2014] FCAFC 57 at [120].

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The universalism that underpins the Model Law and [the Cross-border Insolvency Act 2008] is one for the benefit of all creditors, and the protection of local creditors is expressly recognised. It is not inappropriate to call it “modified universalism” for what such an appellation is worth.</blockquote>

<group>Rule 14 Cross-border movement of assets <blockquote>In relation to any asset of the debtor that is of a moveable character, Global Rules 12 and 13 shall apply, subject to the following modifications: (a) Any rule of insolvency law that is applicable by virtue of the localization of an asset in the territory of the state of the opening of insolvency proceedings, at the time of the opening of the proceedings, shall not apply if it is shown that the asset in question has been moved to that location from the territory of another state, to whose insolvency law it would otherwise have been properly subject, in circumstances that suggest that the transfer was effected wholly or primarily for the purpose of avoiding the effects of the law of the other state, including its insolvency law. (b) Conversely, where an asset has been moved from the territory of one state to that of another state under the circumstances stated in paragraph (a), the effects of any insolvency proceedings that are opened in the former state shall apply to the asset in question. (c) In the absence of evidence to the contrary, it shall be presumed that any asset that has been removed from the territory of the state in which insolvency proceedings are opened, within 60 days prior to the opening of such proceedings, was made with intent to avoid the effects of the law of that state. It is for the party who seeks to maintain the validity of the act, whereby the property was removed from the territory of that state, to provide evidence that the transfer was made for a bona fide and legitimate purpose. (d) Except in a case to which paragraph (c) is applicable, it is for the party who alleges that the provisions of paragraphs (a) and (b) of this Rule are applicable in relation to a particular asset to prove that this is the case. </blockquote>

Rule 14 is the quintessential anti-avoidance provision, intended to minimise forum shopping or engineered outcomes. There is no obvious analogous Australian counterpart (or law) to discuss for comparative purposes. The fundamental rationale and case for the Global Rules are promoted and served by ensuring that the rules provide against any new mode of forum shopping which might otherwise be spawned by the adoption and application of the Global Rules. <subdiv>Part D – Exceptions to the general rules of law applicable to insolvency proceedings (Rules 15-23)Global Rules 15-23 bear many similarities to Arts 4-15 of the EC Regulation. Those articles of the EC Regulation have been described as establishing “a miniature code of uniform conflicts rules” which subject insolvency proceedings within the EC Regulation’s scope of application to “the same, standardized choice of law rules regarding matters falling for determination in the context of those proceedings”.138

<group>Rule 15 Rights of secured creditors <blockquote>15.1. Insolvency proceedings shall not affect the rights in rem of creditors or third parties in respect of tangible or intangible, moveable or immoveable assets – both specific assets and collections of indefinite assets as a whole that change from time to time – belonging to the debtor, which are situated within the territory of another state at the time of the opening of proceedings. 15.2. The rights referred to in Global Rule 15.1 shall in particular mean:

(a) The right to dispose of assets or have them disposed of and to obtain satisfaction from the proceeds of or income from those assets, in particular by virtue of a lien or a mortgage;

138 Fletcher, n 118 at [7.78]. Note that UNCITRAL has developed Legislative Guides on Secured Transactions (2007), including a Supplement on Security Rights in Intellectual Property (2010) http://www.uncitral.org/uncitral/en/uncitral_texts/security.html. There is no status reports for such Guides as occurs with Model Laws and Conventions to indicate the extent to which such Guides influence development of domestic laws.

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(b) The exclusive right to have a claim met, in particular a right guaranteed by a lien in respect of the claim or by assignment of the claim by way of a guarantee; (c) The right to demand the assets from, and/or to require restitution by, anyone having possession or use of them contrary to the wishes of the party so entitled; (d) A right in rem to the beneficial use of assets.

15.3. The right, recorded in a public register and enforceable against third parties, under which a right in rem within the meaning of Global Rule 15.1 may be obtained, shall be considered a right in rem. </blockquote>

Rule 15, in protecting the rights of creditors with security or other proprietary interests in the debtor’s assets located in another state, would not appear to provide for a position which is alien to that which an Australian court would be likely to uphold at common law. It is difficult to see how an Australian court, upon the opening of insolvency proceedings in Australia, would allow or countenance those proceedings to affect the proprietary rights of secured creditors or third parties in respect of overseas assets still belonging to the debtor and where such rights are valid according to that state’s law. 139 As Fletcher notes, “[t]o determine the validity and effects of any transaction intended to give rise to some form of real security, English private international law takes as its starting point the law of the situs of the property at the time of the relevant events”.140 Commenting upon Australian and Canadian law, Fletcher states that “[u]nder both systems … the role of the lex situs must likewise be respected in matters relating to property situated abroad”.141

<group>Rule 16 Exception <blockquote>16.1. By way of exception to Global Rule 15, a right in rem (in rem security right) shall not be exempted from the effects of insolvency proceedings if proof is provided that the state where the assets are situated, at the time of the opening of insolvency proceedings, has no substantial relationship to the parties or the transaction in relation to which the security right was created, and there is no other reasonable basis for the fact that the assets are so situated. 16.2. It is for the party who claims that the conditions specified in Global Rule 16.1 are met, in relation to a particular security right, to prove that those conditions are in fact met in the relevant case. </blockquote>

Rule 16 is a straightforward anti-avoidance rule designed (like Rule 14) to avoid tactical movement of security property for the purposes of forum shopping or to any avoid adverse consequences of the law of a state where an asset’s previous location might be said to have had a more reasonable or substantial basis. <group>Rule 17 Set-off

<blockquote>Insolvency proceedings shall not affect the right of creditors to demand the set-off of their claims against the claims of the debtor, where such a set-off is permitted by the law applicable to the insolvent debtor’s claim. </blockquote>

Rule 17 is modelled upon Art 6 of the EC Regulation and “preserves a creditor’s rights of set off which arise under the law applicable to the debtor’s claim”.142 Commentary upon the EC Regulation

139 Callender, Sykes and Co v Lagos Colonial Secretary and Davies [1891] AC 460; Hockey v Mother O'Gold Consolidated Mines Ltd (1903) 29 VLR 196; and Re Doyle (1993) 41 FCR 40 are authorities for the proposition that Australian trustees in bankruptcy can realise tangible property of a bankrupt located overseas, but subject to the relevant foreign law (eg, assignments, charges and liabilities attaching to an asset under the law of the situs).140 Fletcher, n 118 at [2.87].141 Fletcher, n 118 at [2.90]. 142 Groves H, Arden P, Calland T and Kalfon O, Enterprise Chambers Annotated Guide to Insolvency Legislation and Practice (LexisNexis Butterworths, United Kingdom, 2006) Notes to Art 6,; Regulation (EC) No 1346/2000 of the Council of the European Union on Insolvency Proceedings [2000] OJ L 160/1 (29 May 2000), p 1558 [AQ: what does 1558 refer to here?].

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has contended that such a rule “may be useful because rights of set-off are wider under some legal systems than others”.143

Fletcher, albeit in the context of the EC Regulation, provides an instructive explanation of the rationale for this exception to the usual application of the lex concursus under Rule 12:

<blockquote>In the United Kingdom, set-off is treated as a mandatory process which must be applied, as a matter of public policy, in both individual and corporate insolvencies in which the necessary requirement of mutuality is present. In most Civil law systems, on the other hand, the prevailing view is that set-off constitutes a violation of the principle of pari passu distribution, and that as a matter of public policy it must be confined to the most carefully limited circumstances, as where the cross-liabilities arise out of one and the same contract or obligation. Therefore, in a cross-border insolvency, the outcome for any creditor who was also a debtor to the estate can be drastically affected by the way in which the issue of applicable law is resolved… [T]he ability to predict the applicable law and to take its provisions on set-off fully into account is vitally important in the assessment of risk. Clear, and uniformly applicable, choice of law rules are therefore essential.144

</blockquote>Fletcher cites the case of Re Bank of Credit and Commerce International SA (No 10) [1997] Ch.

213 as a “vivid illustration of this problem” of “competing laws” which “happen to belong to the different schools of opinion with regard to set-off”.145

In Australia, the statutory set-off allowed under the Bankruptcy Act or Corporations Act operates in much the same “generous” fashion as set-off in the United Kingdom (as described by Fletcher above).146 Thus, the following summary of the intended effect of this rule as it appears in EC Regulation147 would appear apposite to the potential application of Rule 17 in an Australian context:

<blockquote>If the “lex concursus” allows for set-off, no problem will arise and … [Rule 12] should be applied in order to claim the set-off as provided for by the law. On the other hand, if the “lex concursus” does not allow for set-off (eg since it requires both claims to be liquidated, mature and payable prior to a certain date), then … [Rule 17] constitutes an exception to the general application of that law in this respect, by permitting the set-off according to the conditions established for insolvency set-off by the law applicable to the insolvent debtor’s claim (“passive” claim).148 (emphasis added)</blockquote>The same report stated that “[i]n this way, set-off becomes, in substance, a sort of guarantee

governed by the law on which the creditor concerned can rely at the moment of contracting or incurring the claim”.149

143 Groves et al, n 142..144 Fletcher, n 118 at [7.97].145 Fletcher, n 118 at [7.97].146 See s 86 of the Bankruptcy Act 1966 (Cth) and s 553C of the Corporations Act 2001 (Cth) which have been construed broadly by courts “to protect people engaged in mutual dealings”: Day & Dent Constructions Pty Ltd (in liq) v North Australian Properties Pty Ltd (prov liq apptd) (1982) 150 CLR 85, cited in Nichols P, Annotated Bankruptcy Act 1966 (5th ed, LexisNexis, Australia, 2012) at [81,670.5]. In the recent case of Grapecorp Management Pty Ltd (in liq) v Grape Exchange Management Euston Ltd [2012] VSC 112, s 553C was upheld to allow the set-off of post-liquidation debts/expenses arising under pre-liquidation (contractual) obligations. The court held (at [68]) that “as the authorities establish, it is proper and just that activity undertaken post-liquidation pursuant to antecedent pre-existing obligations that remain on foot should be brought to account and set off in the manner contemplated”.147 The 1996 Virgos Schmit Report was prepared on the EC Insolvency Convention which lapsed but “evolved” into the EC Regulation. This authoritative Report is often cited by courts, eg Akers v Saad Investments Co Ltd (in off liq) [2010] FCA 1221, and is available at the Global Insolvency website: European Union, The Council, Report on the Convention of Insolvency Proceedings, 6500/96 (Brussels, 3 May 1996) http://globalinsolvency.com/sites/globalinsolvency.com/files/insolvency_report.pdf. 148 Virgos and Schmit, n 132, p 77 and cited by Fletcher, n 118 at [7.100]. 149 Virgos and Schmit, n 132, p 77 cited by Fletcher, n 118 at [7.100].

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<group>Rule 18 Exception <blockquote>Where a right of set-off is demanded on the basis of Global Rule 17, if it is the case that, in the absence of express choice made by the parties, the law applicable to the insolvent debtor’s claim would be that of the state of the opening of main insolvency proceedings, Global Rule 17 shall not apply if the law of the state chosen by the parties has no substantial relationship to the parties or the transaction, and there is no other reasonable basis for the parties’ choice. </blockquote>

Rule 18 establishes something akin to the “unconnected law” doctrine which Australian courts have “occasionally” suggested might deny the parties’ express choice of law of a contract “where the chosen law has no real or substantial physical connection with the contract, its subject matter or the parties”.150 The weight of current Australian authority is against the doctrine’s applicability – courts have been more inclined to uphold the parties’ choice of an unconnected law.151 <group>Rule 19 Reciprocal contracts: General rule

<blockquote>Save as otherwise provided by [this Act/these Rules], mutual obligations in respect of a reciprocal contract, which has been concluded prior to insolvency of one of the parties, shall be governed solely by the law of the state of the opening of proceedings. </blockquote>

It would appear that Rule 19 relates to the contractual right of suppliers of essential services to insist on payments as a condition of further supply. The ALI-III Report’s comment upon Rule 19 states:

<blockquote>[T]he lex fori concursus [by virtue of Rule 12] should apply to all aspects of the commencement, conduct, administration, and conclusion of insolvency proceedings and their effects … In [no source] … does one find an elucidation of the terminology “effects.” If and in so far as the opening, the conduct, or the closure of main proceedings has “effects” on a current contract, such effects will be governed by the lex fori concursus. According to Global Rule 19, those effects will be extended all over the globe. In literature on the European continent, the question has been raised as to whether an “effect” will include the provision in the lex fori concursus that the counterparty has an obligation to continue supplying (or more generally, continue performing), for example, the supply of energy, finance or bank credit (hypothesising that the lex concursus contains such provisions) or that the counterparty may first ask to be paid the overdue payments or logic claim against the estate as an unsecured creditor for the total amount. A logical consequence of the proposed Global Rule 19 is that, for instance, the mandatory obligation, for example, to continue performance of certain obligations (eg the supply of energy or water) and therefore the injunction to prevent suspension, represents an “effect” of proceedings to which the lex concursus , containing such a provision, applies.152 </blockquote>An example of such a provision in the Australian insolvency law regime is s 600F of the

Corporations Act which provides that if a liquidator or administrator of a company requests a supplier to supply an essential service (electricity, gas, water or a carriage service) to the company in Australia and the company owes an amount to the supplier in respect of pre-liquidation supply of the essential service, the supplier must not refuse to comply with a request for the reason only that the amount is owing (or make it a condition of supply of the essential service that the amount is to be paid). To take a hypothetical scenario, if an overseas supplier of an essential service to an Australian company sought to mount an argument that Rule 12 did not have the effect of applying s 600F and denying it the ability to insist on payment as a condition of further supply, Rule 19 would ensure that Australian law (most relevantly s 600F) would govern the matter. That is, Rule 19 and s 600F of the Corporations Act would combine to displace any contrary position under the private international law

150 Mortensen et al, n 46 at [17.11]. 151 Mortensen et al, n 46 at [17.11].152 ALI-III Report, n 16, Comment to Global Rules 19-21, p 251.

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of the foreign supplier’s state which might have otherwise enabled the supplier to refuse the request for supply for reason of non-payment of the debt. <group>Rule 20 Contracts of employment (Labor contracts)

<blockquote>The effects of insolvency proceedings on employment contracts and relationships shall be governed solely by the law of the state applicable to the contract of employment. </blockquote>

Rule 20 is virtually identical (word-for-word) to Art 10 of the EC Regulation. Fletcher states that “[t]o protect the interests of employees, Article 10 of the … [EC Regulation] stipulates that the effects of insolvency proceedings on employment contracts and relationships shall be governed solely by the law of the Member State applicable to the contract of employment”.153 Fletcher helpfully summarises the effect and scope of this rule:

<blockquote>It should also be emphasised that … [Rule 20] is confined to the question of the effect of insolvency upon the contract of employment as such, including the issue as to whether the contract is automatically terminated by the insolvency of either party to it, or whether the liquidator has the option to affirm or rescind the contract, subject to specified terms.154 [Rule 20] … does not purport to regulate other issues such as the ranking of employees’ claims for unpaid wages or salary, or the mode of treatment to be accorded to these claims. Such questions remain subject to the lex concursus, in accordance with … [Rule 12]. </blockquote>The Australian statutory scheme for the protection and recovery of the entitlements of employees

in the event of their employer’s bankruptcy or liquidation (the Fair Entitlements Guarantee) would remain subject to the law of Australia since the eligibility and claims of employees (and payments to them) are assessed and maintained under the provisions of the relevant Australian statute.155

<group>Rule 21 Restrictions to exceptions <blockquote>Global Rules 15, 17, and 20 shall not preclude actions for voidness, voidability, or unenforceability of legal acts detrimental to the general body of creditors, pursuant to the law applicable to the insolvency proceedings, as determined by Global Rule 12 or by Global Rule 13 (as the case may be). </blockquote>

<group>Rule 22 Defenses to the avoidance of detrimental acts <blockquote>Global Rule 21 shall not apply where the person who benefited from an act detrimental to the general body of creditors provides evidence that: (i) The said act is subject to the law of a state other than that of the state of the opening of proceedings; and (ii) That law does not allow any means of challenging that act in the relevant case. </blockquote>

<group>Rule 23 Exception <blockquote>23.1. By way of exception to Global Rule 22, a transaction detrimental to the general body of creditors shall not be exempted from the effect of the avoidance rule of the law of the state of the opening of insolvency proceedings if proof is provided that the state to whose law the transaction is subject has no substantial

153 Fletcher, n 118 at [7.110].154 The UNCITRAL Legislative Guide on Insolvency Law (n 24) also makes a specific recommendation that “the effects of insolvency proceedings on rejection, continuation and modification of labour contracts may be governed by the law applicable to the contract” and provides background to this at [87].155 UNCITRAL Legislative Guide on Insolvency Law, n 24 at [7.111], citing Virgos and Schmit, n 132, p 84, para 128. The Australian scheme is established and administered under the Fair Entitlements Guarantee Act 2012 (Cth).

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relationship to the parties or the transaction, and there is no other reasonable basis for the selection of the law of that state as the law to govern the transaction in question. 23.2. It is for the party who claims that the conditions specified in Global Rule 23.1 are met, in relation to a particular transaction, to prove that those conditions are in fact met in the relevant case. </blockquote>

Rule 21 “preserves the application” of the lex concursus (as per Rule 12) in cases which would otherwise benefit from the exceptions laid down in Rules 15, 17 and 20.156 There are corresponding articles in the EC Regulation, namely Arts 5(4) and 6(2) which restrict the exceptions applying to third parties’ rights in rem and set-off respectively. Fletcher states that the restriction to the exception relating to rights of a secured creditor is designed to counter the possibility that a secured creditor may engage in a “tactical relocation” of security property prior to the commencement of insolvency proceedings (ie, removing the asset from the state of the lex concursus) in order to render the secured creditor’s rights “less susceptible to impeachment than they would otherwise have been”.157 In that scenario, Rule 21 “preserves the applicability of the actions for avoidance of antecedent transactions of the lex concursus” in accordance with Rule 12.158 The Australian situation would appear to be unaffected by Rule 21 given that the “exceptions” laid down in Rules 15 and 17 largely mirror the existing positions of foreign secured creditors and creditors who have the benefit of an Australian statutory set-off. As discussed further below, Australian antecedent transaction provisions already appear to have limited reach in attacking the proprietary interests of foreign parties created under a foreign lex situs.

A reading of the ALI-III Report’s Comment to Rules 22 and 23 suggests that the intention is for Rule 22 to have essentially the same effect as Art 13 of the EC Regulation. That is, that “the avoidance rule of the lex fori concursus (the law of the place of the opening of proceedings) is displaced in favour of the rule of another state where the beneficiary of a detrimental act can prove that: (i) the “normally applicable law” is that of another state and (ii) that law precludes any means of challenging the act in the relevant case.159 The rationale for the general defence which applies in those circumstances is “to uphold legitimate expectations of creditors or third parties of the validity of the act in accordance to the normally applicable national law, against interference from a different ‘lex concursus’”.160 Thus, to take an example:

<blockquote>If for example main insolvency proceedings were brought in England, under [Rule 12] … English law would determine whether transactions could be attacked as preferences or on the basis of a transaction at undervalue. [Rule 22] … modifies this rule so that if the transaction was subject to a foreign law (such as a mortgage of foreign land) which did not allow the particular transaction to be challenged, it could not be challenged under English preference or transaction at an undervalue rules.161 </blockquote>If no exception were to apply, the European Court of Justice has confirmed in Seagon v Deko

Marty Belgium NV [2009] BCC 347; [2009] 1 WLR 2168 that Art 4(2)(m) of the EC Regulation (which states that the law of the place of the opening of proceedings governs whether antecedent transactions can be avoided) provides the state of the opening of proceedings with jurisdiction to hear and determine “clawback” actions brought against defendants domiciled in other member states.162 (The term “clawback” is used to describe the sort of actions commonly open to liquidators to avoid antecedent transactions – ie, the “actions for voidness, voidability, or unenforceability of legal acts detrimental to the general body of creditors” to which Rule 21 refers.)

156 Fletcher, n 118 at [7.103].157 Fletcher, n 118 at [7.90].158 Fletcher, n 118 at [7.90].159 Fletcher, n 118 at [7.84]. 160 Virgos and Schmit, n 132 at [138], also cited in the ALI-III Report, n 16, Comment to Global Rules 22 and 23, p 257.161 Groves et al, n 142, Notes to Art 13; , Regulation (EC) No 1346/2000 of the Council of the European Union on Insolvency Proceedings [2000] OJ L 160/1, p 1560. 162 Keay and Walton, n 130, p 448 at [26.8].

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However, it would appear that the terms of Rule 22 may substantively diverge from Art 13 of the EC Regulation. Rule 22 provides that “Rule 21 shall not apply” in the circumstances stated. While Rule 21 refers to the non-preclusion of “clawback” actions in respect of acts to the detriment of creditors, it only provides that Rules 15, 17 and 20 shall not preclude such actions. Therefore, Rule 22 in its current form would appear to only confirm (or reinstate) any preclusion of clawback actions which might arise by reason of Rules 15, 17 and 20 (rather than permit a preclusion of clawback actions more generally). Thus, Rule 22 as currently drafted could have a more limited effect than the equivalent Art 13 of the EC Regulation. Article 13 of the EC Regulation provides more generally that the law of the state of the opening of proceedings (which determines the rules relating to clawback actions) shall not apply where the impugned act is the subject of the law of another (member) state and that law does not allow any means of challenging the act.

For example, the case of an impugned transfer of real property in payment of an unsecured debt might be characterised as a preference under the law of the state of the opening of proceedings. The relevant lex causae may not allow any means of challenging this act, either under the insolvency law of that state or its general (civil) law. If Art 13 of the EC Regulation governed the scenario, the result may well be that the principle of protection of legitimate expectations (ie, of the creditor) is upheld in accordance with the normally applicable national law and against interference from a different lex concursus. If the Global Rules applied however, the terms of Global Rule 22 (via Rule 21) would appear to dictate that the only preclusion of clawback actions the creditor would be permitted to enjoy would be those clawback actions precluded by Rules 15 (Rights of Secured Creditors), 17 (Set-Off) and 20 (Labor Contracts). The lex causae pertaining to the recovery (or non-recovery) of preferences would not appear to fall within the scope of these three rules and so the lex concursus would presumably have free rein in its application to the impugned transfer. The terms of Rule 21 may well be revisited in order to assess whether the scope of operation of defences (made available under Rule 22) should be broadened.163

Assuming that Rule 22 would operate to provide a general defence akin to the corresponding article of the EC Regulation, an interesting question arises as to how it would compare with the current extra-territorial effect of Australia’s insolvency laws (avoidance provisions) which bestow “clawback” actions on office-holders or otherwise target antecedent settlements and transactions. Case law suggests that Australian courts have drawn a distinction between insolvency statutes which enable challenges to preferential payments disturbing the ordinary priority of distribution and those provisions which operate to avoid or unwind dispositions or settlements of property.164

A recent example of the first category of case is New Cap Reinsurance Corp Ltd v AE Grant (2009) 257 ALR 740 (New Cap). New Cap dealt with an Australian liquidator’s attempted recovery of preferential payments made to recipients located in the United Kingdom. Relying on principles established in an earlier judgment (by the same judge) in New Cap Reinsurance Corp Ltd (in liq) v Renaissance Reinsurance Ltd (2002) 192 ALR 601, the Australian court was “satisfied that there was no obstacle” to the court hearing the unfair preference claim in the absence of the defendant recipients who had not submitted to the jurisdiction of the court.165 In the earlier judgment mentioned, Barrett J reinforced the characterisation of a cause of action for a “voidable transaction” under Australian legislation as one which enables the court to make a range of orders against other persons in respect of certain transactions in the event that a liquidator complains “on behalf of the company as an embodiment of its creditors’ interests about the conduct of those responsible for the company’s pre-liquidation activities”.166 Endorsing the earlier view of Australian courts that such claims were bestowed by legislation to avoid “the dislocation of the statutory order of priorities”, Barrett J stated that “[a]ny attack on an undue preference or fraudulent conveyance is always an attack on the giver and the giving, not the recipient and the receipt”.167 Mason, commenting in 2001 on the same decisions upon which Barrett J later relied in New Cap, stated that “[w]hile such analysis assisted

163 Correspondence between Mark Wellard and the Reporters, Ian Fletcher and Bob Wessels, in which the terms of Rule 21 were raised (and the author’s points were acknowledged), is held on file with the authors.164 Mason, n 3 at 79 discusses examples of both in the cases of Re Doyle; Ex parte Brien v Doyle (1993) 41 FCR 40 and Staff Engineered Membranes Pty Ltd (in liq) v Synflex Industries (International) Inc [1984] 2 NSWLR 116. 165 New Cap Reinsurance Corp Ltd v AE Grant (2009) 257 ALR 740 at 746, [22]-[25] (Barrett J).166 New Cap Reinsurance Corp Ltd (in liq) v Renaissance Reinsurance Ltd (2002) 192 ALR 601 at 606, [23] (Barrett J).

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Wellard and Mason

with the question of jurisdiction, it also emphasised the distributive aspect of a liquidation administration.”168

A case with a different result in terms of the extraterritorial reach of Australia’s bankruptcy laws (relating to void property settlements) was Re Doyle; Ex parte Brien v Doyle (1993) 112 ALR 653. (Re Doyle). Re Doyle concerned a challenge by a trustee-in-bankruptcy to an antecedent settlement of Germany property to a (later-deceased) bankrupt’s wife. The Australian Federal Court held that the relevant Australian bankruptcy law which purported to render the settlement void did not extend to govern the effect of a settlement of a foreign immovable under a foreign law. Interestingly, one reason the court was minded to apply this territorial limitation was that upholding the Australian bankruptcy law in relation to the impugned property settlement could (undesirably) provide a different result to that which German insolvency law would provide if the debtor had been made bankrupt in Germany. Burchett J held:

<blockquote>A further difficulty which would confront any attempt to impose s 120 upon a transfer of land in a foreign country would be the incongruity of applying to the transferee a set of disqualifying conditions different from those that might apply, according to the law of the place where the land is situated, if the bankrupt were the subject of a sequestration order there. Indeed, as has already been pointed out, our principles of private international law contemplate that there may be bankruptcy proceedings in each country where there are assets. It would seem to follow from the suggested applicability of s 120 … that the transferee would have the worst of both worlds, being liable at the suit of whichever trustee had been appointed under a law the conditions of which would be most difficult for the transferee to satisfy.169

</blockquote>This perspective of the Australian Federal Court in Re Doyle is consistent with the rationale of

Rule 22 mentioned above – ie, upholding the “legitimate expectations of creditors” as to the “normally applicable national law”. That said, in Re Doyle no evidence was in fact led as to the effect of German bankruptcy (or property) law on the impugned property settlement. If the facts in Re Doyle were repeated at a time when the Global Rules were in force, Rule 22 could well apply because the property settlement could be taken (under Australian private international law) to be “subject to the law of a state [Germany] other than that of the state of the opening of proceedings [Australia]”. The intended effect of Rule 22 would appear to be that the Australian court assess whether German law (ie, both its general civil law as well as its insolvency law) would allow any means of challenging the property settlement. Unlike what transpired in Re Doyle, an assessment of German bankruptcy law’s treatment of the impugned transaction would be carried out at the behest of the court if not the parties.170 If German law dictated that no challenge to the transaction was allowed then Rule 22 would provide the recipient (wife) with a valid defence.171

<DIV>CONCLUSIONUndoubtedly, some of the issues and questions of private international law addressed by the Global Rules warrant further in-depth analysis and study in their own right. However, taken as a whole the Global Rules demonstrate clear potential to clarify and harmonise unsettled and substantive aspects of Australian private international law’s interface with corporate insolvency and personal bankruptcy. To the extent that the Global Rules appear to displace (or diverge from) the current Australian position there does not appear to be any obvious cause for concern or objection. Indeed, some more clarity in the areas of asset localisation and antecedent transaction avoidance in Australian cross-border insolvency proceedings would be welcome.167 New Cap Reinsurance Corp Ltd (in liq) v Renaissance Reinsurance Ltd (2002) 192 ALR 601 at 606, [24] and 607, [26]-[27] (Barrett J).168 Mason, n 3 at 79 (discussing Staff Engineered Membranes Pty Ltd (in liq) v Synflex Industries (International) Inc [1984] 2 NSWLR 116 and Burns v Stapleton (1959) 102 CLR 97).169 Re Doyle; Ex parte Brien v Doyle (1993) 112 ALR 653 at 667-668 (Burchett J).170 See Global Rule 3 (Ex Officio Application). 171 The determination of whether the foreign law allows “any means of challenging that act in the relevant case” requires the court to take into account “all the concrete circumstances of the case” (it is “not sufficient to determine whether it can be challenged in the abstract”): Virgos and Schmit, n 132, at [137].

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The perspective of the Reporters (reflected in their comments in the ALI-III Report) is that the Global Rules embody and represent years of considerable trial and experience in other jurisdictions; the prime example being the European Union which opted for the inclusion of choice-of-law rules when its cross-border insolvency regulation commenced 13 years ago.172 For that reason alone, the ALI-III Report’s Global Rules are worthy of serious consideration by Australian law and policy makers as this country looks beyond its first legislative milestone in cross-border insolvency (ie, the Australian Model Law) to consider what further steps might be taken to enhance certainty and clarity in the complex legal minefield that is cross-border insolvency law.

Currently, there are a number of multilateral initiatives under way in order to improve the efficiency and effectiveness of cross-border insolvency practice. For example, UNCITRAL Working Group V on Insolvency173 is currently examining cross-border insolvency of multinational enterprise groups as well as recognition and enforcement of foreign insolvency-derived judgments.174 In light of the increasing significance for Australian business of potential cross-border insolvency issues, it is recommended that Australia participates fully in global debate or discussion not only in the current Working Group V deliberations but also in any multilateral deliberations, for example by UNCITRAL, the Hague Conference or others, that engage specifically with choice of law issues in the cross-border insolvency context.

172 Regulation (EC) No 1346/2000 of the Council of the European Union on Insolvency Proceedings [2000] OJ L 160/1 came into force on 31 May 2002. 173 See the Working Group Reports and associated documents at: UNCITRAL, Working Group V – 2001 to present” Insolvency Law, http://www.uncitral.org/uncitral/en/commission/working_groups/5Insolvency.html. 174 This project involves the development of a model law or model legislative provisions, likely the former.

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