CLASSIC CROSS-BORDER COOPERATION: JOINT COURT HEARINGS IN THE HALIFAX INSOLVENCY - Herbert Smith Freehills

CLASSIC CROSS-BORDER
COOPERATION: JOINT COURT
HEARINGS IN THE HALIFAX
INSOLVENCY
06 September 2019 | Australia
Legal Briefings – By Paul Apáthy and Hongbei Li

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

APPLICATION TO FCA UNDER SECTION 581
The Re Halifax decision involved the application by the Australian liquidators before Gleeson J
of the FCA for the issuance of a letter of request by the FCA to the NZHC to participate in the
joint pooling applications.

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

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

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

1. The Court must have power to issue the letter of request.

 2. The foreign court, as receiving court, must have power to act on the proposed letter of
    request.

 3. The power must be exercised with regard to considerations of utility and comity.6

POWER TO ISSUE THE LETTER OF REQUEST
The FCA considered that it had power to issue a letter of request under section 581(4) where:

 1. there is a court of a country other than Australia that has jurisdiction in external
    administration matters;

 2. there is an external administration matter in relation to which a request may be made;
    and

 3. the proposed request is to act in aid of, and be auxiliary to, the Court in an external
    administration.7

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

The full judgment can be accessed here.

ENDNOTES

 1. Kelly, in the Matter of Halifax Investment Services Pty Ltd (in liq) (No 5) [2019] FCA 1341
    (Re Halifax), paragraph 30.

 2. Re Halifax, paragraph 76.

 3. Re Halifax, paragraph 29.

 4. Re Halifax, paragraph 32.

 5. Warner (Trustee), in the matter of Barnes and Barnes [2018] FCA 1784.

 6. Re Halifax, paragraph 45.

 7. Re Halifax, paragraph 46.

 8. Re Halifax, paragraph 55.

 9. Re AFG Insurances [2002] NSWSC 735 and Re AFR Insurances [2002] NSWSC 844.

10. Re AFR Insurances [2002] NSWSC 844.

11. [2019] SWSCA 35; (2019) 366 ALR 171.

12. [2019] FCAFC 34; (2019) ALR 136.

13. See Herbert Smith Freehills ‘Common fund orders upheld following historic joint sitting’ 8
    March 2019:

14. See In re Nortel Networks, Inc., No. 09-10138, (Bankr. D. Del. 3 Apr. 2013), affirmed in
    737 F. 3d 265 (3d Cir. 2013); see also Re Nortel Networks Corp., 2013 ONSC 1757.

15. See In re Nortel Networks, Inc., No. 09-10138, (Bankr. D. Del. May 12. 2015), see also Re
    Nortel Networks Corp., 2015 ONSC 2987.

16. In the United States, the actual orders were sought and made pursuant to section 105(a)
    of title 11 of the United States Code, which is very broadly framed, allowing the court to
    “…issue any order, process, or judgment that is necessary or appropriate to carry out the
    provisions of this title.”

KEY CONTACTS
If you have any questions, or would like to know how this might affect your business, phone,
or email these key contacts.

PAUL APÁTHY
PARTNER, SYDNEY

+61 2 9225 5097
paul.apathy@hsf.com

LEGAL NOTICE
The contents of this publication are for reference purposes only and may not be current as at
the date of accessing this publication. They do not constitute legal advice and should not be
relied upon as such. Specific legal advice about your specific circumstances should always be
sought separately before taking any action based on this publication.

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