Ackers (as joint foreign representative) v Saad Investments Company Limited; In the matter of Saad Investments Company Limited (in official liquidation) [2013] FCA 738
In September 2009 Saad Investments Co Ltd ('Saad') was wound up by order of the Grand Court of the Cayman Islands. The company had its centre of main interest ('COMI') in the Cayman Islands but among its investments were assets in Australia. The liquidators wanted to recover the assets in Australia but the Australian Commissioner of Taxation ('ACT') wanted to make sure local taxes (and penalties) were paid...
...before any money left Australia. In August 2013, the Federal Court of Australia ('FCA') granted the ACT the right to recover the same proportion of the money it was owed that it would have been entitled to receive in the liquidation as if it had a proveable debt, and to be paid that sum from Saad's Australian assets before they were sent to the liquidators in Cayman. Here we look at how it came to make that decision and the implications for future cross border insolvencies.
What about UNCITRAL?
A key issue was that in 2010 the FCA had recognised the Cayman proceedings as ‘a foreign main proceeding’ under the Model Law on Cross Border Insolvency (‘Model law’) of the United Nations Commission on International Trade Law (‘UNCITRAL’). In Orders arising from those 2010 proceedings both sides gave undertakings; the ACT undertook not to issue any new assessments and Saad’s liquidators undertook not to send the proceeds of Saad’s assets in Australia to Cayman, without each giving the other 14 days’ notice. The 2010 Orders also blocked the ACT from using other methods of recovery of the unpaid tax and penalties under Australian law.
Can foreign tax agencies prove debts based on tax?
The ACT was claiming debts of just over AU$83m for both penalties and unpaid tax and had submitted a proof of debt for those sums to the Cayman liquidators in 2009. However, under Cayman Islands legislation a foreign judgment will not be recognized as a proveable debt if it is a judgment for tax, fines or penalties. This is a common principle of public and private law applicable in the great majority of jurisdictions. This meant that the ACT debts would not be admitted to proof in the Cayman liquidation and, therefore, ACT would not receive any payment from the liquidators in regard to the tax debt. ACT considered that the 2010 Orders of the FCA resulted in a situation where, as it was unable to participate as a creditor in the Cayman liquidation, where its interests as a creditor were "not adequately protected” under the meaning of Article 22(1) of the Model Law.
What did the FCA decide?
The FCA held that it had jurisdiction under Article 22 to make orders that an insolvent entity had to pay its local tax and penalty liabilities from its local assets before those assets were sent overseas at the direction of the liquidators in that entity’s COMI. The FCA rejected arguments that an Australian court had no jurisdiction to deal with Saad’s assets and liabilities as that company was not an Australian legal entity and as such could not be put into liquidation in Australia. It also rejected claims that by lodging the proof of debt the ACT had submitted to the jurisdiction of the Cayman Islands.
Modified universalism
The FCA found that there was nothing in the principle of keeping the administration of a liquidation of a company in one jurisdiction (‘modified universalism’) which meant that local taxes and penalties should not be treated on an equal footing with other unsecured debts. The principle behind modified universalism is that where an insolvent company has assets and liabilities in different jurisdictions, the courts in other jurisdictions should co-operate with the principal liquidators based in the insolvent company’s COMI to ensure that its assets and liabilities are dealt with fairly, using the COMI’s set of rules.
Back taxes and penalties
The FCA considered that investors in an international company would expect that the company would comply with the local laws of any jurisdiction in which it operated. They would also expect the company to pay any local income and capital taxes which were due before it calculated the dividends it would pay to investors in its COMI. If the company did not pay those taxes, or any penalties arising from their not having done so, then those back taxes and penalties should not be left unpaid simply because the company has gone into liquidation. There was nothing in the Model Law to suggest otherwise.
What are the consequences?
As this is an Australian FCA decision it does not create a binding precedent outside of its own jurisdiction, but it does have some authority for reliance in other Common Law Jurisdictions and particularly those that have adopted the Model Law. The immediate effect is that the ACT has so far shown that it is willing and able to pursue payment of taxes and penalties owed to it by an insolvent entity which is in liquidation in another jurisdiction. The wider implications are that the ACT approach, using Article 22 of the Model Law, may be adopted by other countries in the future to recover taxes due in that jurisdiction from assets in that jurisdiction of an insolvent company whose COMI is elsewhere. The case is being appealed by the Liquidators, but pending that decision, liquidators may wish to consider repatriating assets of an insolvent company to the COMI jurisdiction, insofar as they are able, without seeking recognition, and before there has been an opportunity for a tax debtor to seek an order to enforce its debt against such assets.
