UNCITRAL has recently published its Model Law on Recognition and Enforcement of Insolvency-Related Judgments (MLREIJ), with a recommendation that nations adopt it into their domestic law. You can find a complete copy of the text of MLREIJ here (on the UNCITRAL website). A valuable guide to MLREIJ published by UNCITRAL - with considerable detailed discussion of the Model Law - is available here (on the UN website).

What does it all mean for Australian restructuring and insolvency professionals? Following are some "need to know" points for our clients, and then some further details for those interested.

What do I need to know?

The MLREIJ provides a framework for the domestic recognition and effectuation of "insolvency-related judgments" issued by the courts of a foreign jurisdiction. As such, the MLREIJ is intended to streamline the legal aspects of cross-border insolvency proceedings, by reducing the prospect of conflicting judicial decisions (e.g. the various UK and US judicial disagreements in the Lehman Brothers estate) and reducing the need for local auxiliary liquidation proceedings (e.g. the English auxiliary liquidation of certain of the HIH companies). The MLREIJ has not yet been adopted in Australia (or any other nation) - it is early days.

An insolvency-related judgment is widely defined; it includes voidable transaction recoveries, but also covers determinations of director liability to the insolvent estate, approvals of reconstruction plans, and determinations of the nature and disposal of assets in the insolvent estate. That breadth of recognition would be transformational in certain fields of insolvent estate administration, particularly in recovery action against third parties, but also in effective cross-border recognition of reconstruction plans. This would provide greater certainty to stakeholders, and ought to reduce cost.

The MLREIJ is not a silver bullet; it has various exceptions to the obligation on a domestic court to recognise a foreign judgment. Like the UNCITRAL Model Law on Cross-Border Insolvency (MLCBI), there is a public policy exception to recognition, but the MLREIJ goes further - there are a wide range of other exceptions or grounds for refusal of recognition that centre on a need in the foreign jurisdiction for due process and the protection of local creditors. This is not surprising; unlike the MLCBI, the MLREIJ provides more than simple recognition of a foreign insolvency proceeding - it requires the effectuation of money and in some cases non-money judgments of a foreign court.

As mentioned above, it is early days for the MLREIJ - no nation has given domestic effect to the instrument at this time. There are good reasons, however, for the MLREIJ being enacted in Australia - streamlining the increasingly common stream of cross-border insolvency proceedings is important to international commerce. So we expect to see it adopted - in some form, and perhaps with some additional protections for Australian interests - in the coming years.

For those interested, the details follow.

Overview of MLREIJ

The MLREIJ is a framework for recognising and/or enforcing insolvency-related judgments of foreign jurisdictions. It is designed to complement, and to clarify international judicial uncertainty arising from, the MLCBI (enacted in Australia by the Cross-Border Insolvency Act 2008 (Cth)).

While operating as a means of supplementing the MLCBI the MLREIJ is able to operate independently, allowing for countries that are not party to the MLCBI to implement the MLREIJ (and vice versa).

Broadly, were the MLREIJ to be enacted in Australia, the MLREIJ will find its application where an "insolvency-related judgment" (discussed further below) is issued in the courts of a state other than Australia (although it should be noted that the insolvency proceeding itself could take place in Australia). Australian Courts will be required to give effect to the foreign court's judgment, unless it falls under an exception, or one of the many grounds of refusal (both discussed below).

In general, recognition and enforcement of a foreign judgment under the MLREIJ will mean giving effect to the foreign court's judicial determination of rights and obligations (for instance, in relation to the operation of a security agreement, or title to an asset). The MLREIJ does recognise the distinction between "recognition" and "enforcement" - as a matter of practice, those two concepts will not impact the underlying purpose of Australian courts giving effect to foreign judgments.

It may be noted that the text of the MLREIJ provides enacting states like Australia with a choice between providing that recognition and enforcement of a foreign judgment will have the effect of:

  1. extending to the Australian jurisdiction the foreign judgment, so that the effect is internationally uniform; or
  2. giving the foreign judgment the equivalent effect that would have been provided under Australian law (providing for the prospect of some localised differences).
    Either of those options will make cross-border insolvency matters more predictable for all stakeholders involved in complex cross-border insolvencies.

An important caveat to either of the above recognition/enforcement options is that if the relief sought is not available at all under Australian law, then it cannot be given its original effect; rather, the Australian court would be required to adapt existing avenues of relief so that the end result would be equivalent to that of the original judgment.

So what is an Insolvency-Related Judgment?

An "insolvency related judgment" (IRJ) is defined broadly under the MLREIJ as any judgment that arises as a consequence of or is materially associated with any insolvency proceeding, whether or not that insolvency proceeding has closed. This applies to judgments against individuals and companies, as well as to judgments approving creditors' schemes of arrangements.

Importantly, this definition does not include a judgment commencing or opening an insolvency proceeding - that kind of judgment will remain the exclusive domain of the MLCBI, such that MLREIJ does not function as a de facto avenue for recognising foreign insolvency proceedings generally.

As mentioned at the top of this note, UNCITRAL's Guide to Enactment of the MLREIJ helpfully includes a non-exhaustive list of examples of insolvency-related judgments. These include:

  1. judgments dealing with constitution and disposal of assets in the insolvency estate;
  2. judgments determining whether a transaction involving the debtors or assets of its insolvency estate should be avoided because it was a voidable transaction;
  3. judgments involving director liability in the insolvency context (e.g. liabilities equivalent to liability in Australia for contravention of the duty to prevent insolvent trading under s588G of the Corporations Act 2001 (Cth));
  4. judgments determining that sums are owed to or by the debtor or the insolvency estate; and
  5. judgments confirming or varying a plan of reorganisation or liquidation or approving a voluntary or out-of-court restructuring agreement.

The last item in the above list could have very significant impact on cross-border restructuring transactions; for instance, the cross-border recognition difficulties experienced in relation to the restructuring plan for International Bank of Azerbaijan (discussed in our earlier note here) would likely fall away, were MLREIJ enacted in the UK - the English court would more favourably approach the recognition and enforcement of the Azerbaijan court orders giving effect to the Azerbaijan restructuring plan.

Similarly, the difficulties encountered by the US Chapter 7 trustee in the "Dragon Pearl" litigation (discussed in our earlier note here) would also fall away - in that situation, rather than troubling with attempts to obtain voidable transaction relief in Australia, the US Chapter 7 trustee could seek relief under the equivalent US Bankruptcy Code provisions, and then seek Australian recognition and enforcement of any relief obtained.

These potential outcomes would be transformational in the context of such cross-border transactions and proceedings.

What are the Exceptions and Grounds of Refusal?

But there is a rub. The MLREIJ provides local courts with a wide jurisdiction to determine not to recognise a IRJ.

Article 7 sets out a catch-all public policy exception (much like the MLCBI). This is unsurprising - a local court cannot be expected to give effect to a foreign judgment that does not meet local public policy.

Article 14, however, then goes further - it lists grounds under which a local court may refuse recognition or enforcement of a IRJ. Those grounds are that if the IRJ:

  1. does not meet procedural requirements (i.e. if an Australian court deems that the party in the originating jurisdiction was not given sufficient time to enable a defence to be arranged);
  2. was obtained by fraud;
  3. is inconsistent with an earlier decision of another court (or an Australian court) on the same matter and with the same parties;
  4. would, if recognised, interfere with Australian insolvency proceedings;
  5. materially affects the rights of creditors generally, and the interests of creditors and other interested person were not adequately protected in the original jurisdiction judgment; or
  6. suffers from any jurisdictional issues (i.e. the foreign court did not exercise its jurisdiction on a basis compatible with Australian law).

While the devil will be in the interpretation of these various grounds for refusal, we see good reason for these grounds of refusal; fundamentally, the MLREIJ is concerned with Australian courts giving effect to foreign judgments, and it is proper that Australian courts not be obliged to do so if a IRJ does not meet basic standards expected in Australia for civil litigation - the exceptions in Article 14, as outlined above, are concerned with those basic standards of due process, non-interference with Australian court processes, and protection of creditors.

Is the MLREIJ a step in the right direction for Australia?

Academics and practitioners alike have long seen an universal and uniform approach to cross-border insolvency proceedings as the key to overcoming the current complexity (and associated cost) of those proceedings.

The MLREIJ, following on from UNCITRAL's publication of the MLCBI in 1997, is the next step toward promoting that universality. That step should be applauded. Like all non-binding international instruments, however, the success of MLREIJ is dependent on if and how states enact the instrument.

In our view, Australian law-makers should very seriously consider local adoption of MLREIJ - Australia is a global leader in restructuring and insolvency, and investigating adoption of this latest UNCITRAL product is consistent with maintaining that leadership. Further, as evidenced by the growing body of decided cases in Australia concerned with the MLCBI, the volume and significance of cross-border insolvency proceedings is continuing to grow - this is an important field for continued focus and improvement.

Obviously, adopting the MLREIJ poses some profound policy issues for Australia - giving local effect to foreign court judgments, the essence of MLREIJ, must not be done lightly. The proper functioning of Australian courts and the interests of Australian creditors cannot be compromised for the sake of international comity.

That said, there is already clear precedent - in the Foreign Judgments Act 1991 (Cth) - for local recognition of foreign judgments. Adoption of the MLREIJ would thus, not represent a drastic shift in Australian policy on this issue. Indeed, the Foreign Judgments Act may well provide a good model for how Australia goes about adopting the MLREIJ. In particular, the reciprocity required for recognition under the Foreign Judgments Act is an approach that would sit well with the MLREIJ - for instance, the MLREIJ might only provide for recognition in Australia if the subject IRJ emanates from a state who itself recognises IRJs issued by Australian courts.

A further factor in favour of adoption in Australia is the in-built protections provided by both the public policy exception in Article 7 of the MLREIJ and the list of grounds of refusal set out in Article 14, as outlined above - there can be little doubt that, faced with a IRJ that is a "dud", the Australian courts would find a way to protect their own processes and the interests of Australian creditors, when needed.

We will continue to follow progress with the MLREIJ closely, although its adoption in Australia is likely a number of years away - the MLCBI took around ten years!

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