In an increasingly digital economy that extends across borders and where globalisation continues to accelerate in both pace and intensity, there has been a significant growth in cross-border insolvency matters in recent years. What this means is that, upon being appointed, an insolvency practitioner will often need to consider collecting and distributing assets across multiple jurisdictions, whether as part of formal recognition proceedings or otherwise.
This will often involve the resolution of complex creditor claims, and an insolvency practitioner must assess whether it is economically viable to commence debt recovery proceedings in light of the costs involved and the expected return to creditors.
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Often, insolvency office holders have to deal with the complex issue of determining the expected costs of debt collection measures as well as the possibilities of how costs may be reduced where possible. The chapters also cover the issue of costs incurred by foreign insolvency practitioners when they have to enforce foreign judgments.
It appears that there are very different views about what it may or should cost to gain access to the courts to enforce a claim, and what flexibility plaintiffs and litigators should have with regard to financing the costs of litigation, in particular lawyers’ fees. An interesting finding was that a few countries like Mexico and South Africa in principle offer free access to justice by not charging court fees. Most of the other jurisdictions covered in this report charge court fees and in many cases a prepayment is required in order to start proceedings. Surprisingly, whether court fees are charged, and the quantum of fees charged does not seem to have an influence on the average duration of court proceedings.
With respect to professional litigation financing, in countries like in the USA, India and Germany parties that do not have sufficient funds are able to gain access to the court system and this has been a long-established practice. In some countries however like Croatia, Mexico and the Caymans litigation financing is not available.
There seems to be a tendency, though, that this possibility becomes increasingly widespread, and it is now starting to get established in countries like Brazil, France and Spain. An interesting issue is the admissibility of contingency fee agreements: While some countries consider restrictions on lawyers’ freedom of contract to be problematic, the majority of countries provide for prohibitions or restrictions on contingency fee arrangements, probably because of concerns that those arrangements would impair objectivity.
Another financial obstacle for litigation can be the fact that in some countries the principle of the losing party bears all costs does not apply. Particularly in the USA and the UK, where the basic principle applies that each party bears its own costs, the question of whether it is worth taking legal action in view of the probable costs – insofar as these can be estimated in the first place – becomes a game of calculation or chance. Even with the prospect of at least partial reimbursement for the winner, the lawyer’s fees usually represent the most problematic factor in forecasting costs, because very few countries have regulations for statutory fees like in Germany, which allow a fairly accurate calculation based on the value in dispute.
Australia
Scenario 1: claim has not yet been subject to court proceedings
Recognition proceeding and costs
What is the proceeding and what are the estimated costs for the recognition of the foreign insolvency proceeding and the IP’s power to pursue a claim?
Firstly, there is no impediment to a foreign insolvency practitioner (IP) regularly commencing litigation in an Australian court on behalf of the foreign insolvency proceeding against a third-party debtor domiciled in Australia. Normal private international law choice of law considerations apply as in any case, with the likelihood, however, of the foreign IP also being required to provide security for the defendant debtor’s costs. As with all litigation, the costs of such an action will depend on the complexity and length of hearing of the claim.
The situation will be different where the foreign IP desires to take advantage of recognition of the foreign insolvency proceeding under the United Nations Commission on International Trade Law (UNCITRAL) Model Law, particularly where the foreign insolvent entity has carried on business in multiple jurisdictions including Australia or has assets in Australia which the foreign IP wishes to protect or realise.
Australia adopted the Model Law in 2008 by the Cross-Border Insolvency Act (Cth) 2008 (CBIA). It applies where the debtor carries on a business in Australia (satisfying the definition of “establishment” in Article 2(f) of the Model Law) and the foreign proceeding can be classified as the “foreign main proceeding”. The CBIA applies to both companies and individuals.
It is not proposed to review in this paper the various provisions of the Model Law – they are well known and familiarity with it is presumed. Australia has adopted the Model Law with only minor variations. Reciprocity is not required in order for the foreign IP to apply for recognition of the foreign proceeding in Australia as a foreign main proceeding and to seek recognition and relief against the debtor as a foreign non-main proceeding under Articles 15 to 27. Thus, it does not matter where the insolvency proceedings are opened – the foreign IP and the foreign proceeding can be located anywhere. There have now been nearly 100 recognition cases in Australia under the CBIA, almost all conducted in the Federal Court of Australia. The Australian approach to recognition is consistent with those in the United Kingdom (UK and the United States US).
Where the debtor carries on a business in Australia, and thus has an establishment here, it is usual for the foreign IP, upon recognition of the foreign insolvency proceeding as a foreign main proceeding, to be entrusted in his or her own name with the administration of the debtor as a foreign non-main proceeding and with the realisation and distribution of all its assets in Australia and for the foreign IP to be given all the powers usually available to a liquidator or trustee in bankruptcy, as the case may be, in Australia. There have also, however, been occasions where the foreign IP has sought a joint appointment of a local IP with himself or herself, or even the appointment of a local IP alone. If a local IP is appointed, the foreign IP will not be able to take control of the debtor’s estate or become the registered owner of his / her / its property. To date, a foreign IP has not been required, as a condition of appointment, to take out professional indemnity insurance in relation to administration of the foreign non-main proceeding in Australia.
The advantages of recognition in Australia of the foreign insolvency proceeding as a foreign main proceeding include the automatic stay of proceedings and stay of execution under Articles 20 and 21 and the power to conduct examinations and obtain evidence under Article 21.
Apart from recognition under the CBIA, it sometimes happens that the debtor, especially if an individual, does not carry on a business in Australia but has assets within the jurisdiction, such as land or a valuable chose in action or a chattel. In that case, the letter of request procedure may be available. Based on the UK practice, section 581 of the Corporations Act 2001 provides that the court, in an external administration matter, must act in aid of, and be auxiliary to, a court of a prescribed country, and may act in aid of courts of other countries. Prescribed countries include the UK, US, New Zealand, Canada, Singapore, Switzerland, Malaysia, Jersey and Papua New Guinea. Section 29 of the Bankruptcy Act 1966 is to similar effect and has been utilised by a South African bankruptcy trustee to obtain the assistance of an Australian court.
The letter of request procedure has most often been applied in Australia where the debtor, often a bankrupt individual, owns land in Australia but does not carry on a business or have its centre of main interests here (following the approach in Bear Stearns).
Its application is consistent with the “modified universalism” approach generally applied in Australia. The cost of the letter of request procedure is generally equivalent to that of a Model Law recognition application under the CBIA.
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Financing
The general position in Australia is that, unlike the US, lawyers are not permitted to enter into contingency fee agreements (an exception being recent legislation in the state of Victoria in relation to class actions). A contingency fee agreement would not normally be available to or be recognised in the case of a foreign IP.
Legal aid for civil litigation is generally not available for commercial litigation in Australia and would not be available to a foreign IP.
Litigation financing and / or insurance for litigation costs is, however, available to the foreign IP. The litigation financing industry is well established in Australia, which is at the forefront of the regulation of litigation funding worldwide. Again, it is beyond the scope of this chapter to review all the legislation and case law in Australia in relation to regulation of litigation funding. Suffice it to say that it is a competitive market with a number of players, both local and international. Generally, funders require claims to be from AU$1 million upwards, although there have been some instances of claims as small as AU$500 000 being approved. More often in bankruptcy cases, a creditor will fund the trustee in return for a priority for his or her own debt should the action be successful.
Obtaining an enforcement order
The only ways to obtain an enforcement order in Australia are those referred above. There are no easier and cheaper ways to obtain an enforcement order.
Lawyers’ fees
In Australia, legal fees as between lawyers and their clients (solicitor / client costs) are generally not regulated by any scale and are a matter for negotiation between the lawyer and the client. The states of New South Wales and Victoria have enacted legislation, the Legal Profession Uniform Law 2014, which governs the disclosures that the lawyer is required to make to the client, and the other states have similar regimes. Disclosure is not, however, required to be made to a range of “sophisticated” entities, including an Australian lawyer (but, oddly, not a foreign lawyer), a foreign company or its subsidiary, or a liquidator, administrator or receiver appointed in Australia.
The market for the provision of legal services in Australia is quite competitive. Rates are generally around AU$650 to AU$850 per hour for a principal. The rate may vary if payment is conditional upon a successful outcome and recovery.
Similar to the position in the UK, but unlike that in the US, it is normal in Australia for the unsuccessful party to be ordered to pay the costs of the successful party. When a costs order is made, the Federal Court and each state has its own procedures for assessment and determination of these costs, known as party / party costs. Some processes are entirely conducted and supervised by the court; others are conducted privately but remain ultimately reviewable by the court.
The general rule is that approximately two-thirds of the successful party’s solicitor / client costs are recoverable as party / party costs. In less common cases, usually where there has been unmeritorious conduct or where a reasonable offer of settlement has been refused, an award of indemnity or solicitor / client costs may be made, in which case 100% of the successful party’s own costs would be recoverable.
In bankruptcy there is a compulsory realisation fee payable to the government, currently 7% of the value of assets realised by the bankruptcy trustee.
Court fees
As mentioned above, if a foreign IP regularly commences litigation in Australia, it is very likely that he or she will be required to provide security for the defendant debtor’s costs, either under the Corporations Act 2001 or as a consequence of the foreign IP’s residence overseas. The court will determine the amount of security to be provided by reference to its assessment of the likely quantum of the defendant’s party / party costs should it be successful, often, however, applying a discount of approximately 20% to 30% to that amount. Such security for costs in commercial matters is usually payable in tranches leading up to the hearing, and it is often provided by way of bank guarantee or insurance policy.
For a recognition application under the CBIA, however, it is not usual for security for costs to be ordered. As a matter of practice, most recognition applications are conducted ex parte and the debtor is usually already under the de facto control of the foreign IP.
All courts, both federal and state, require filing fees to be paid on the initiating process commencing proceedings. Most also require hearing fees to be paid if a contested hearing becomes necessary.
Refund of legal costs and expenses
See above in relation to the recovery by the successful party of its legal fees and expenses from the unsuccessful party. Recovery is, of course, always dependent upon the capacity of the debtor or its assets to meet the costs order.
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Examples of legal costs and expenses
The costs of a recognition application can vary considerably from case to case, depending for instance upon whether or not the recognition application is opposed and the extent of ancillary relief that is sought. An unopposed ex parte application could cost around AU$20 000 to AU$30 000, irrespective of the amount of the claim, but this could increase to AU$50 000 to AU$80 000 if opposed. It would not usually be economic for claims less than €50 000 to be litigated.
Average duration of litigation
Recognition applications are generally dealt with expeditiously in the Federal Court of Australia. If unopposed, which is the norm, the application takes around six to eight weeks from commencement to determination, allowing for due service and notice to be given to creditors. Interim relief under Article 19 can also be obtained on an urgent basis, often less than one week from commencement of proceedings.
If opposed, the duration of the dispute will depend upon the usual factors, including the length of the estimated hearing time, the complexity of the issues to be determined, the nature and availability of the relevant evidence and the other hearing commitments of the hearing judge. Nevertheless, in the Federal Court, a hearing date would usually be available within six months of commencement, with a reserved judgment being delivered within one to two months after that.
Scenario 2: Enforcement order (Judgment) exists and needs to be enforced abroad
Recognition proceedings and costs
If it is desired to obtain recognition of the foreign proceeding under the CBIA, there is no difference in the procedure described in section 1.1 above whether the foreign IP has already obtained a judgment against the debtor or not: it is the insolvency proceeding that is being recognised, not the judgment.
Where, however, the foreign IP desires to register his or her judgment in Australia, as distinct from obtaining recognition of the foreign proceeding under the CBIA, different procedures exist.
The Foreign Judgments Act (Cth) 1991 applies where the foreign country has a reciprocal treaty with Australia. Reciprocity is essential: without it, registration is not possible. Prescribed reciprocal countries include the UK, Germany, France, Italy, Switzerland, Poland, Israel, Hong Kong, Japan, Singapore, Republic of Korea, Sri Lanka, Canada (Alberta Colombia and Manitoba Provinces only), Fiji, Cayman Islands, British Virgin Islands and number of other Caribbean countries. The US is not a prescribed reciprocal country. New Zealand has its own separate arrangements with Australia.
The Foreign Judgments Act provides that, upon satisfaction of certain statutory requirements including that it be a final judgment of a superior court not subject to appeal and not be more than six years old, the judgment takes effect as a judgment of the court, federal or state, in which it is registered. Usually, the judgment will be for a monetary amount. The debtor then has a limited period in which to apply to set aside registration of the judgment. This is usually done in conjunction with an application to set aside the judgment in the foreign country.
If the registration application is unopposed, then the cost of it would normally be approximately AU$5 000 to AU$10 000, irrespective of whether it was for €50 000 or €500 000. A €5 000 judgment would not normally be registered. If opposed, however, the costs of registration could be considerably greater.
In July 2018, UNCITRAL adopted the Model Law on Recognition and Enforcement of Insolvency-Related Judgments (MLIRJ). Australia has yet to adopt the MLIRJ, and it is not presently known if or when or in what form that might occur. The complex question of the enforceability of a foreign insolvency judgment, absent reciprocity, will have to await that time, which is beyond the scope of this chapter to predict.
A judgment resulting from an arbitral award is dealt with separately under the New York Convention.
Obtaining information about the debtor
Where the debtor is a registered company or registered foreign company, any winding-up order or application to wind up the company will be recorded in the register maintained by the Australian Securities and Investments Commission (ASIC), which is available for public search on payment of a small fee. Searches at ASIC and of the Personal Property Securities Register will also record whether there are any charges that have been granted by the company to a secured creditor and whether a receiver has been appointed.
Where the debtor is an individual, a register is also maintained by the Australian Financial Security Authority, publicly searchable for a small fee, which records whether or not the debtor is a bankrupt or has any pending bankruptcy proceedings against him or her.
If a recognition order has been obtained under the CBIA, ancillary orders can also be obtained for the public examination of officers of the debtor and other relevant persons and for production of documents on proper cause being shown, in the same way as such procedures exist in relation to local companies in liquidation and bankrupt individuals.
If a foreign judgment has been registered, then an order for the examination of the debtor can be obtained in the same way as for a local debtor under a local judgment.
There are also local credit agencies that provide information on the credit worthiness of corporations and individuals for a fee.
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Enforcement measures
Where the debtor is a company, the usual method of enforcement in Australia is an application to wind up the company based upon failure by it to comply with a 21-day statutory demand. If unopposed, the costs of a winding-up application are usually between AU$7 000 and AU$10 000, irrespective of the amount of the claim. The costs of an opposed application can, of course, be considerably greater. Procedures also exist for registering a writ upon the title to any property owned by the debtor (whether a company or an individual) if the debt exceeds AU$10 000, and also to garnishee its bank account or any debt owed to it.
Where the debtor is an individual, similarly a creditor’s petition may be issued to have his or her estate sequestrated and a trustee to it appointed based upon failure to comply with a 21-day bankruptcy notice. Again, the costs, if unopposed, of obtaining a sequestration order are usually between AU$7,000 and AU$10,000 irrespective of the amount of the claim.
The 21-day statutory periods referred to above have been extended in Australia for up to six months during the current Covid-19 pandemic and may be extended yet further.
Where recognition under the CBIA has been obtained, the foreign IP has standing under Article 23 to initiate proceedings utilising the voidable transaction provisions in the Corporations Act 2001 and the Bankruptcy Act 1966. These provisions apply, with appropriate changes, in relation to an action for the purposes of the foreign proceeding in the same way as they would apply to a local company in liquidation.
Alternatives to lawyers
As in many countries, as well as lawyers specialising in debt collection, a number of collection agencies also specialise in collecting judgment debts. Their fees are usually a percentage of the debt recovered, normally 33%, plus expenses. Some agencies may purchase the claim themselves, at a considerable discount.
Insolvency proceedings
As discussed above, the costs involved, including lawyer and court, for commencing and participating in insolvency proceedings against the debtor are payable in the first instance by the foreign IP irrespective of whether recovery from the debtor ultimately occurs or not.
Economic conclusion
Taking into account the cost and expenses for a foreign IP, the minimum claim amount for which it would make sense to commence litigation or enforcement action in Australia would be not less than AU$100 000. Claims less than AU$100 000 are usually dealt with in the lowest court of the three-court tier system in Australia, and it would rarely be economical for the foreign IP to commence proceedings there.
As a matter of practice, claims of less than AU$1 million are rarely commenced in Australia’s superior courts (the Federal Court and the state Supreme Courts). These are also the courts with jurisdiction under the Corporations Act 2001 and the Bankruptcy Act 1966 to entertain recognition applications under the CBIA, although there is no prescribed minimum amount for these.
