TGIF 29 November 2024 – Challenging examinations in aid of cross-border insolvency proceedings

IE CA 3 Holdings Ltd and IE CA 4 Holdings Ltd (Companies) were two Canadian registered companies whose directors were located outside of Canada. The Companies’ parent company, Iris Energy Limited (Iris), was listed on NASDAQ and had its registered office in Melbourne and principal place of business in Sydney, with three of its six directors located in New South Wales.

In November 2022, the Companies defaulted on certain payment obligations. After failed attempts at restructuring, the Supreme Court of British Columbia (BC Supreme Court) appointed receivers over the Companies’ property (Canadian Receivers).

The BC Supreme Court authorised the Canadian Receivers to assign the Companies into a Canadian bankruptcy process, giving the Canadian Receivers enhanced investigative powers. The BC Supreme Court, in December 2023, allowed an application for the Canadian Receivers to examine the Companies’ directors and CFO with time limitations, but did not give permission to examine the New South Wales based Iris directors.

Key takeaways

• This case considered the unusual situation where an interested party applied for a stay of orders recognising foreign insolvency proceedings, pending an appeal.
  
  
• In determining a stay application pending an appeal, the Court will consider:
  
  a) the successful party’s presumed entitlement to the benefit of the judgment;
  
  b) whether a stay is necessary to preserve the subject matter or integrity of the litigation, or to preserve the ability of a successful appellant to be restored to their former position; and
  
  c) whether the proposed appeal is genuine and based on reasonable grounds.
  
  
• Based on the decisions handed down to date, interested parties may face difficulty showing prejudice caused by orders merely recognising foreign insolvency proceedings. Interested parties may experience more success seeking relief against specific subsequent action taken in Australia (in this case, examination summonses).

The Court's original decision

The Canadian Receivers applied to the Federal Court of Australia for the Canadian bankruptcies to be recognised under Article 17 of the Model Law. One of the stated purposes of recognition was to conduct examinations of persons identified as officers of Iris. Iris was granted leave to intervene in the proceedings and applied to have the proceedings for recognition dismissed as an abuse of process.

As outlined in our earlier TGIF article on 8 November 2024, the Canadian Receivers obtained orders vesting their local representatives with the powers of an Australian liquidator.

Application for leave to appeal

Iris filed an application for leave to appeal the whole of Federal Court’s judgment on the basis that:

• recognising the Canadian bankruptcies was an abuse of process which would be ‘manifestly contrary to the public policy of this State’ within the meaning of Article 6 of the Model Law; and
  
  
• it is not ‘necessary’ within the meaning of Article 21 of the Model Law for a liquidator’s powers to be conferred on the local representatives of the Canadian Receivers where examinations had been conducted in Canada, and the Canadian Receivers had the right to apply to the BC Supreme Court to conduct further examinations.

Stay application

Iris also sought a stay of the orders granting the Canadian Receivers’ local representatives all the powers which are available to a liquidator appointed under the Corporations Act 2001.

In determining whether it was appropriate to grant the stay application, Justice Stewart considered the following relevant factors:

First, the Court considered whether the appeal was genuine and reasonable. The Court considered that each of the proposed appeal grounds were genuine and reasonable points to argue, since there were previous examinations in Canada, and the Canadian Receivers had the right to apply to the BC Supreme Court for further examinations. However, the Court did not express a view on the prospects of success for either argument.

Second, the Court considered the prejudice Iris would suffer if no stay was granted and it ultimately succeeded in an appeal.

The Court observed, in the event a summons for an examination was issued, the examinee, or Iris itself, could apply to discharge or stay the summons (including on abuse of process grounds). The Court did not accept Iris’ submissions that an abuse of process argument supporting a discharge of the summons was barred by the Federal Court’s earlier judgment. Instead, the Court considered that abuse of process arguments could be raised against particular examinations after the summons have been issued and served.

The Court also considered that the stay application was too broad. It would prevent the Canadian Receivers from engaging in any examinations, regardless of whether they would prejudice Iris. Though the only persons identified as potential examinees were officers of Iris, the Court observed the Canadian Receivers may seek to examine others.

Iris argued that it would be prejudiced by the reputational damage associated with further public examinations. The Court rejected this argument, noting there is an overriding public interest in the affairs of companies in liquidation being investigated.

Third, the Court considered prejudice to the liquidation if the stay was granted. The Court considered there was substantial public interest for liquidation proceedings to be dealt with quickly and efficiently. In the circumstances, the Court held that delaying the proceeding would prejudice the trustees and possibly the creditors.

On balance, the Court found any prejudice Iris might suffer if they were successful on appeal did not outweigh the countervailing prejudice if the stay was granted. Consequently, the Court dismissed the application.

Implications

Australian public examinations can be useful in connection with foreign insolvency proceedings.

An interested party (e.g. potential examinees) seeking to oppose Australian-based public examinations in aid of foreign insolvency proceedings on abuse of process grounds should carefully consider the grounds upon and stage of proceedings at which they seek relief.