TGIF 8 November 2024 – Australian liquidators’ powers in cross-border insolvency proceedings

This week’s TGIF considers the recent Federal Court of Australia decision in PricewaterhouseCoopers Inc in its Capacity as Foreign Representative of IE CA 3 Holdings Ltd v IE CA Holdings Ltd [2024] FCA 1208, concerning a cross-border insolvency application.

Key takeaways: PricewaterhouseCoopers Inc in its Capacity as Foreign Representative of IE CA 3 Holdings Ltd v IE CA Holdings Ltd [2024] FCA 1208

• Australian liquidators are able investigate pre-appointment transactions by pursuing an examinations process. The powers available to liquidators may be broader and preferable to those available in other jurisdictions.
  
  
• Applying to Court for the appointment of Australian local representatives may provide an avenue for creditors and foreign insolvency practitioners to pursue further investigations that are not available outside Australia.
  
  
• The case serves as useful guidance on how the Model Law on cross-border insolvency is applied when seeking recognition of foreign insolvency proceedings in Australia.

What happened?

IE CA 3 Holdings Ltd and IE CA 4 Holdings Ltd (Companies) were two Canadian-registered companies within a broader group in the business of Bitcoin ‘mining’ and related activities. The Companies’ three directors were located in Sydney, Las Vegas and London respectively. The Companies’ Australian parent company, Iris Energy Limited (Iris), listed on the NASDAQ, had its registered office in Melbourne, its principal place of business in Sydney and three of its six directors located New South Wales.

The Companies defaulted on certain payment obligations in November 2022, following a drop in the Bitcoin market. Following failed attempts at restructuring, the Supreme Court of British Columbia (BC Supreme Court) appointed receivers in respect of the Companies’ property (Canadian Receivers) on an application by a creditor allegedly owed approximately US$115 million.

From their investigations, the Canadian Receivers contended that an assignment into bankruptcy in Canada should be undertaken to enable it to further investigate the intergroup dealings. This included examining the relevant persons involved.

In June 2023, the BC Supreme Court authorised the Canadian Receivers to assign the Companies into a Canadian bankruptcy process (Canadian Proceeding). This was to access enhanced investigative powers available to a trustee in bankruptcy, including powers to conduct examinations into certain pre-receivership intercompany transactions (noting that in August 2023 the BC Supreme Court found that certain transactions were voidable conveyances).

In December 2023, the BC Supreme Court allowed an application for the Canadian Receivers to examine the Companies’ directors and CFO, but with time limitations and no permission to examine the Sydney-based Iris directors. However, following the Canadian examination process in early 2024, the Canadian Receivers considered that it did not provide sufficient information to finalise the investigations because of these restrictions.

Application in Federal Court of Australia

The Canadian Receivers sought relief in the Federal Court of Australia, seeking the broader examination powers available under Australian law for a range of purposes, including to investigate possible claims against the Companies’ directors and related entities.

Iris filed an interlocutory application, intervening in the proceedings and seeking to set aside the Canadian Receivers’ application.

The essential questions raised by the applications were:

• whether to recognise the Canadian Proceeding as a ’foreign main proceeding’ under the Model Law;^[1] and
  
  
• if so, whether discretionary relief ought to be granted as sought by the Canadian Receivers. These are orders for appointing local representatives with all powers of a liquidator under the Corporations Act 2001 (Cth) (Corporations Act) (including examination powers) and for distributing any Australian assets.

Her Honour Justice Markovic found in favour of the Canadian Receivers as follows.

Requirements for recognition

Her Honour found that the requirements for recognising a foreign proceeding, as set out in Article 17 of the Model Law, were satisfied as follows:

• the Canadian Proceeding is a ‘foreign proceeding’ under Article 2(a) of the Model law, as a collective judicial proceeding in a foreign state, conducted pursuant to a law relating to insolvency, where the assets and affairs of the Companies are subject to supervision of the BC Supreme Court and the proceedings are for the purposes of a reorganisation or liquidation;
  
  
• the Canadian Receivers were ‘foreign representative(s)’ as the bankruptcy trustees authorised to administer the liquidation of the Companies’ assets (Article 2(d)); and
  
  
• formal requirements for a recognition application were met (including providing relevant certificates from the BC Supreme Court) (Article 4 and 15(2)). For completeness, prior to considering the recognition application, the Court also ordered the Companies to publish public notices in the Australian Financial Review and on its website and to distribute notices to all known third-party creditors of the Companies.

Despite satisfying these requirements, Iris contended that recognition would be manifestly contrary to public policy. Under Article 6 of the Model Law, the Court may refuse to recognise an ‘action [if it] would be manifestly contrary to the public policy of [Australia]’.

Iris’s argument was that recognition was sought for an improper purpose, constituting an abuse of process and ‘forum shopping’, as the Canadian Receivers’ stated purpose of recognition was to conduct further examination of company officers and to potentially relitigate claims already heard in British Columbia.

The Court did not accept that further examination in Australia would be ‘manifestly contrary’ to public policy, observing that:

• the application ought to be considered in light of the duties and obligations on the Canadian Receivers as bankruptcy trustee to continue to investigate the Companies’ affairs to bring a better outcome to creditors; and
  
  
• the ‘public policy exception’ is a high bar to meet that should be construed restrictively and invoked only in exceptional circumstances for matters of fundamental importance for Australia. Carrying out further examinations does not offend public policy to that requisite level. Relevantly, it is not:
  
  
  • a deliberate attempt to frustrate other proceedings;
    
    
  • failure to comply with an order of this Court; or
    
    
  • an act which would put fundamental policies in Australia at risk.

The Court also addressed its inherent jurisdiction to stay proceedings for an ‘abuse of process’. The Court confirmed that seeking an Australian examination is not an abuse of process when it remained open for the Canadian Receivers to seek further examination in Canada.

The Court observed that a public examination is not a proceeding, but rather a tool available to liquidators to gather information and to identify available causes of action. In that sense, the Court acknowledged ‘forum shopping’ can be legitimate in the context of a cross-border insolvency provided it satisfies the objectives of insolvency law, namely, to achieve the best possible outcome for creditors.

In respect of Iris’s contention that recognition would permit the re-litigation of claims already heard, the Court considered that any potential claim was purely speculative at this stage, and that res judicia arguments can be made if the Canadian Receivers commence proceedings. The Court also indicated that any abuse of process argument would need to be raised only once the examinations proceedings were commenced.

Additional relief (appointment of local representative to pursue investigations)

Article 21 of the Model Law gives the Court discretion to grant ‘any appropriate relief’ when recognising a foreign proceeding where it is ‘necessary to protect the assets of the debtors or interests of the creditors.’

The Court rejected Iris’s contention that for the additional relief to be ‘necessary’, the Canadian Receivers must identify the risk it sought to mitigate. It was immaterial that the Companies had no identifiable assets in Australia and that the Canadian Receivers did not specify any specific powers under the Corporations Act beyond those that had already been exercised in Canada.

Ultimately, the Court considered it reasonable in the context of the Canadian Receivers’ ongoing investigations for its local representatives to be vested with the powers of an Australia liquidator as if the Companies had been subject to a Part 5.4B winding-up.

Implications

The case provides useful guidance on how the Court will approach a contested application of the Model Law, involving a multinational enterprise. More specifically, it indicated that the Court will be tolerant of perceived ‘forum shopping’ provided that creditors’ interests are being pursued. The Court acknowledged that even to the extent the Canadian Receivers’ application constituted ‘forum shopping’, it still formed part of their efforts in the Canadian Proceedings seeking to achieve an advantageous outcome for creditors.

On the facts in the case, there were substantial reasons for the Court to allow the appointment of local representatives to pursue examinations. It remains to be seen whether the Court will do so if the connection to Australia were more tenuous.

^{[1]  Model Law on Cross-Border Insolvency of the United Nations Commission on International Trade Law contained in Schedule 1 and as modified by the provisions of Cross-Border Insolvency Act 2008 (Cth) (Model Law).}