Local proceedings in a multi-state liquidation: issues of jurisdiction.

• Jurisdiction: Australia
• Author: Mason, Rosalind
• Date: 01 April 2006

[Following a brief description of multi-state insolvency theories and the different types of jurisdiction exercisable by a court, this article examines jurisdiction in corporate insolvency within Australia. It begins with the constitutional context and then addresses geographical jurisdiction, jurisdiction to prescribe conduct, and jurisdiction to adjudicate between parties. It briefly touches upon the notion of an inherent jurisdiction to adjudicate in liquidation and on jurisdiction for proceedings during the course of rather than on the adjudication of a liquidation. The discussion of jurisdiction to adjudicate in a multi-state liquidation in Australia addresses the winding-up of a foreign company under Part 5. 7 of the Corporations Act 2001 (Cth), as well as topics such as forum non conveniens, lis alibi pendens, anti-suit injunctions, and the notion of discretion to exercise jurisdiction to wind up a company. The jurisdiction to provide aid and auxiliary assistance upon request from a foreign court is also touched upon briefly.]

CONTENTS I Introduction II Multi-State Insolvency Theories III Classification of Jurisdiction A Constitutional Framework for Bankruptcy and Insolvency Jurisdiction B Geographical Jurisdiction in Liquidation C Jurisdiction to Prescribe Conduct in Liquidation D Jurisdiction to Adjudicate between Parties in a Liquidation 1 Inherent Jurisdiction to Adjudicate in Liquidation 2 Jurisdiction in Proceedings during the Course of a Liquidation IV Jurisdiction to Adjudicate in a Multi-State Liquidation V The Exercise of Jurisdiction in a Multi-State Liquidation A Part 5.7 Liquidation B Forum Non Conveniens C Lis Alibi Pendens D Anti-Suit Injunctions E Discretion in the Exercise of Jurisdiction F Jurisdiction under the 'Aid and Auxiliary' Provisions VI Conclusion The Court's inherent jurisdiction, while broad, is not unlimited. (1)

I INTRODUCTION

Fundamental to the winding-up of a company that is insolvent is that otherwise justified claims will remain unsatisfied. The phenomenon of the failed HIH Insurance Group brought home to many people who may previously have had little interest in insolvency that 'just' claims may well go unrewarded. For example, parties with actions in negligence against otherwise impecunious policy holders were suddenly faced with the reality that their 'someone should pay' expectation would be unmet, because there was no-one who 'could pay'. The combination of impecunious defendants and their insolvent insurers meant that claims would remain unrequited.

Yet the law, particularly in areas principally derived from statute, may contain lacunae that prevent applicants from receiving what they believe to be the 'just desserts' of a judgment in their favour. Drafters of legislation, in seeking to reify the wishes of the government and to 'flesh out' the bones of its policy, may choose words that do not cover the particular permutation or combination of facts that serendipitously evolved. Such a fate awaited Mr Lunn, apparently the sole traceable member of the Cardiff Coal Co ('Cardiff'). Mr Lunn unsuccessfully sought the moribund, albeit solvent, private trading corporation's winding-up as a Part 5.7 body under the Corporations Act 2001 (Cth) ('Corporations Act'). (2)

While the case of Lunn [No 2] (3) involved local proceedings in a corporate insolvency, it was not a multi-state insolvency, in the sense of dealing with facts arising in more than one state or law area. (4) Yet, as discussed below, the lack of this multi-state dimension was fatal to Mr Lunn's application. (5) Gaps in the law may also arise where an insolvency crosses jurisdictional borders because the local legislators have not considered or have chosen not to address the 'foreign' implications of a multi-state insolvency.

The majority of companies in Australia derive their existence from the Corporations Act and as such, the provisions on external administrations to achieve their dissolution are also largely to be found in this statute. In the case of a multi-state insolvency, however, the statutory provisions are to be applied in the context of the (largely judge-made) principles of private international law. A range of laws may be relevant to determining issues in a corporate insolvency administration, as insolvency provisions may intersect not only with those regulating companies but also with laws on property, securities, and civil and criminal liability. Underpinning all of these are procedural laws which are often critical to the eventual outcome.

This article addresses local proceedings in a multi-state corporate insolvency, focusing specifically on liquidation. Following a brief description of multi-state insolvency theories, Part III classifies the different types of jurisdiction that a court may exercise. It then concentrates on jurisdiction in corporate insolvency within Australia, beginning with the constitutional framework and then addressing geographical jurisdiction, jurisdiction to prescribe conduct, and jurisdiction to adjudicate between parties. The last briefly touches on the notion of an inherent jurisdiction to adjudicate in liquidation and on jurisdiction for proceedings during the course of, rather than for the adjudication of, a liquidation. Parts IV and V provide a more detailed discussion on jurisdiction to adjudicate in a multi-state liquidation in Australia and address the winding-up of a foreign company under Part 5.7, as well as topics such as forum non conveniens, lis alibi pendens, anti-suit injunctions, and the notion of discretion to exercise jurisdiction to wind up a company. Finally, brief comments are made on the jurisdiction to provide aid and auxiliary assistance upon request from a foreign court.

II MULTI-STATE INSOLVENCY THEORIES

Analysis of multi-state insolvency (specifically bankruptcies or liquidations with multi-state dimensions) has traditionally been undertaken using the two theoretical extremes of 'universality' and 'territoriality'. These terms are often used interchangeably with the terms 'unity' and 'plurality'; however the distinct (though connected) issues require separation. (6) 'Unity' and 'plurality' relate to jurisdiction and the number of courts which have jurisdiction to open insolvency proceedings over a debtor. 'Universality' and 'territoriality' relate to the multi-state effects (7) of the insolvency proceedings. (8)

Under the principle of 'unity', there is one set of insolvency proceedings in respect of the one debtor, while 'plurality' means that there are multiple sets of proceedings in progress concurrently in different states. 'Universality' refers to the extraterritorial effect of one set of proceedings in every other jurisdiction, while 'territoriality' refers to the limitation of the effects of a set of proceedings to its place of origin. (9)

'Territorialism' addresses choice of forum by permitting a court to exercise jurisdiction over any debtor that satisfies local insolvency law requirements. Choice of law 'follows the forum', in that the law of the forum applies to all aspects of the insolvency. The strictly territorialist approach claims no extraterritorial reach to a local insolvency order. Thus, each state which accords itself jurisdiction over a debtor has authority to administer the debtor's estate within its jurisdiction. However, there are few states that adhere to the strict territorialist approach.

'Universalism' involves two aspects. First, the 'active' aspect means that an insolvency proceeding, opened in the insolvent debtor's domicile, place of incorporation or seat, claims to comprise all the assets of the debtor, including those located in other states. Second, the 'passive' aspect means that, if an insolvency proceeding is opened abroad in the insolvent debtor's domicile, place of incorporation or seat, it will be given full local effect in each state that has adopted the universalist approach. (10)

Choice of forum under the universalist approach is based on the debtor's country of domicile or, in the case of a company, its place of incorporation or seat. The doctrine accepts the universal extraterritorial effect of an insolvency adjudication made in such a forum. The law of the forum then governs the insolvency administration, including its foreign effects. (11) As with territorialism, choice of forum is therefore likely to be outcome-determinative because of the differences in states' insolvency laws. (12)

Scholars have proposed various models that modify these theoretical extremes, some of which can be found in current state or convention practice. The qualifications often involve concurrent proceedings, which recognise home state (13) insolvency administrations to a greater or lesser degree. In a multi-state insolvency, judicial orders are typically required in more than one state in order to control the debtor's assets. These concurrent proceedings may take the form of ordinary civil litigation, (14) enforcement of foreign judgments obtained during the principal administration, specific aid and assistance for a foreign principal administration, or separate insolvency administrations.

Concurrent insolvency administrations often comprise liquidation adjudications that purport to be the 'main' administration (15) and similar adjudications in other jurisdictions with lesser claims to significance in the debtor's affairs. These 'non-main' administrations typically take one of two forms. First, such proceedings may primarily be intended to aid the main administration and therefore will not amount to a sequestration of the debtor's assets. For example, they involve a local moratorium on creditor action and assistance to the foreign administrator in realising local assets. Second, local liquidation administrations may be instituted, albeit ones which recognise the main administration and cooperate to a greater or lesser extent with it.

Various terms are used for these forms of non-main administrations...