Finance & Markets Update - June 2009

• Testing the International Waters: First Application of the Cross-Border Insolvency Act 2008 (Cth) in Hur v Samsun Logix Corporation
• Mortgagee’s duty to take reasonable care - the decision in Investec Bank (Australia) Limited v Glodale Pty Ltd and Ors [2009] VSCA 97
• Australian Credit Licences - Licensing Under the National Consumer Credit Protection Legislation

Testing the International Waters: First Application of the Cross-Border Insolvency Act 2008 (Cth) in Hur v Samsun Logix Corporation

Précis

The Federal Court of Australia has implemented, for what appears to be the first time, the provisions of the Cross-Border Insolvency Act 2008 (the “Act”) in the case of Hur v Samsun Logix Corporation [2009] FCA 372. The decision was handed down on 17 April 2009, and has given the Act a practical context for insolvency practitioners and creditors alike.

The decision has confirmed that the Act may be used, in certain circumstances, for the recognition in Australia of foreign insolvency proceedings for the purposes of preserving a company’s assets within Australia.

The Cross-Border Insolvency Act 2008 (Cth)

In 1997, the United Nations Commission on International Trade Law (UNCITRAL) adopted a Model Law on Cross-Border Insolvency, the purpose of which was to provide a mechanism for addressing cases in which insolvent debtors have assets in more than one country and the consequent difficulties that arise, such as accessing foreign assets, priority of creditors, and recognition of foreign creditors in local jurisdictions.

The Act substantively came into force on 1 July 2008 and implemented the Model Law as Australian law. The Federal Court (Corporations) Rules have also been amended, and a new Practice Note has been issued to reflect the objects of the Act and provide some guidance to legal practitioners in this developing area of the law.

The Decision

It was in this context that Mr Hur, in his capacity as the Korean court-appointed receiver of Samsun Logix Corporation (“Samsun”), a company incorporated in Korea, applied to the Federal Court of Australia’s Sydney Registry for recognition of the Korean proceedings in Australia pursuant to the Act.

Samsun operated an ocean freight forwarding business which had extensive international operations. In March 2009, the Seoul Central District Court’s Bankruptcy Division made an order, on Samsun’s own petition, that “rehabilitation” proceedings be commenced. Mr Hur was appointed receiver.

Mr Hur sought orders in Australia in March 2009, initially on an urgent interlocutory basis, to prevent the enforcement of any charge on Samsun’s Australian property. The interlocutory orders were granted by Stone J, and in April came before Jacobson J for final hearing. The central issue for determination was whether the Act was enlivened so as to recognise the Korean insolvency administration as a “foreign proceeding” in accordance with the definition in Article 17 of the Model Law. The effect of such recognition would be to bring about:

• a stay of any Australian proceedings concerning Samsun’s assets, rights, obligations or liabilities;
• a stay of execution against any of Samsun’s assets; and
• a suspension of Samsun’s ability to transfer, encumber, or dispose of any of its assets.

In his judgment, Jacobson J was satisfied that the requirements of the Act had been met by Mr Hur in that:

• the Korean proceedings were “foreign proceedings” within the meaning of Article 2(a). His Honour also noted the importance of the foreign proceedings “relating to insolvency in which the assets and affairs of Samsun are subject to the supervision of the Korean Court for the purposes of re-organisation of that company”;
• Mr Hur was a “foreign representative” under Article 2(d), on the basis that he was a person appointed as the receiver of Samsun; and
• the Korean proceedings were “foreign main proceedings” under Article 16, as the Korean proceedings were taking place in the State where Samsun had “the centre of its main interests”. It was noted that ancillary proceedings had also been commenced in relation to Samsun and in accordance with the Model Law in several other jurisdictions, including the UK, USA, Singapore and Belgium.

In addition to the above requirements, His Honour was also satisfied that the other procedural requirements had been met, including provision of a certified copy of the Korean court decision commencing proceedings and appointing Mr Hur; proper notification of the application to known creditors; and undertaking proper searches to confirm that there has been no appointment of a receiver or controller, or any other proceedings on foot, under the Corporations Act in Australia.

Accordingly, Jacobson J granted Mr Hur’s application, with the effect that Samsun’s Australian assets and operations are protected by the extensive stay provisions in Article 20. Mr Hur is also now at liberty to bring proceedings in Australia for appropriate relief in relation to the receivership under the Corporations Act.

Implications

This decision is the first example of use of the Act to enable foreign insolvency practitioners to obtain the same type of relief available to Australian insolvency practitioners. The requirements of the Act to obtain recognition as a foreign proceeding within this jurisdiction are easily achievable provided the basic criteria are met, and the application does not meet with any objection from local creditors. One would expect that use of the Act will only increase in the future.

It remains to be seen how Australian insolvency practitioners will fare in relation to similar applications under the adaptations of the Model Law in foreign jurisdictions.

It should be noted that a foreign representative is required under rule 15A(6) of the Federal Court (Corporations) Rules to notify any known creditors of an application made under the Act, as well as for media publication of a notice. Creditors should therefore give careful consideration as to whether they wish to be heard in relation to any orders sought by a foreign representative.

Mortgagee’s duty to take reasonable care - the decision in Investec Bank (Australia) Limited v Glodale Pty Ltd and Ors [2009] VSCA 97

Investec Bank (Australia) Limited v Glodale Pty Ltd is the latest case considering a mortgagee’s duty to take reasonable care when exercising its power of sale. The case considered the sale of two Queensland properties by a mortgagee in possession under section 85(1) of the Property Law Act 1974 (Qld) and section 420A of the Corporations Act 2001 (Cth). The Court considered that the duty of a mortgagee, under both Acts, was the same, that duty being to take reasonable care to sell the security property for market value.

The three main complaints raised by the mortgagors in Glodale were:

1. The mortgagee sold the properties in one line rather than individually. The mortgagors alleged that more money would have been recovered if the units were sold individually.
2. The mortgagee failed to engage a local real estate agent. The mortgagors alleged that the agent engaged was not familiar with the intricacies of the local market.
3. The mortgagee’s tender documents were not calculated to obtain the best price for the mortgaged properties.

The mortgagors failed on their first complaint but were successful on the second and third.

Sale in one line

The evidence before the Court at trial was that the combined sale or sale in one line of the units represented a 15% reduction in total realisation than if the units were sold separately.

The question for the Court was whether that reduction was reasonable. The evidence at trial showed that the mortgagee’s officers had taken into account a range of factors in making their decision to sell in one line. The factors included:

• the debt was increasing rapidly and significantly;
• the owners had tried and failed to sell the apartments individually;
• a sale ‘in one line’ had previously been contemplated between the bank and the owners;
• there was no evidence that the loans would be paid other than by a prompt sale; and
• the owners had previously contemplated selling ‘in one line’.

The Court of Appeal and the trial judge held that the mortgagee’s decision making process, although less than sophisticated, was reasonable. In reaching this conclusion, the Court looked at the decision in context and with regard to the mortgagee’s objective of minimising the risk of further loses that may flow from a protracted sale process. The Court of Appeal noted that the test required an assessment at the time of the events, and not with the benefit of hindsight.

Failure to engage a local estate agent

The Court of Appeal upheld the trial judge’s decision that the mortgagee had breached its duty by failing to engage a local real estate agent for the purposes of the sale. The units were located at Port Douglas. The main agent engaged by the mortgagee was located in Melbourne, had no Queensland qualifications and had visited Port Douglas for only 36 hours. The main agent engaged a Cairns based agent to manage the sale. The question was whether the Cairns agent was significantly familiar with the manner in which sales were conducted in Port Douglas, about 100km away.

The Court concluded that the Cairns and Port Douglas markets were different. Port Douglas was considered a more specialised market and as such required its own local agent. The Court pointed out that there was nothing preventing the appointment of dual agents by the mortgagee, but the failure to appoint any local agent was unreasonable and amounted to a breach of the mortgagee’s duty.

Inadequate tender documents

Perhaps the most technical aspect of the case concerned the details of the tender documents published by the mortgagee about the mortgaged properties. Issues raised with the tender documents included incorrect descriptions of rooms in the units and either overstating or not fully explaining various other problems like ‘illegal’ decking and landscaping non-compliance. The trial judge found that the tender documents were not calculated to obtain the best price for the properties.

In the Court of Appeal it was decided that it was not necessary to examine this issue further because they had already agreed that the trial judge correctly held that the bank breached its duty to take reasonable care, due to the failure to appoint a local real estate agent. Interestingly, the Court of Appeal did comment that it accepted the trial judge’s view that the locking of recreation rooms, so they could not be inspected by potential purchasers, was not a reasonable means of discharging the mortgagee’s duty to take reasonable care.

Damages

The Court of Appeal confirmed that once a breach is established, the amount of damage is determined by ascertaining the difference between the sale price and market value of the property. The market value of the mortgaged property was confirmed as the price that a willing purchaser would have to pay a vendor, willing but not anxious to sell, in order to obtain the property.

The Court of Appeal agreed with the trial judge in preferring the mortgagee’s valuation evidence as the mortgagee’s valuation was made at the approximate time of the actual sales, rather than in hindsight.

Having been found in breach of its duty, the Court awarded the mortgagor approximately $2.2 million in damages.

Lessons from Glodale

Glodale establishes that it may be reasonable for a mortgagee to elect to sell recovered properties ‘in one line’. However, when assessing the merits of a sale of this nature, mortgagees must ensure their decision is justifiable against a range of commercial and practical considerations and that those considerations have been weighed against the alternatives.

Perhaps the principal lesson of the case is that mortgagees must have regard to their market place. If the area is unique or specialised, a local agent is required. In light of the decision, the appointment of a local agent should be considered prudent practice for all mortgagee sales.

Australian Credit Licences - Licensing Under the National Consumer Credit Protection Legislation

One of the major initiatives of the new Legislation, is the implementation of a national licensing scheme through the issuance of Australian Credit Licences for persons engaging in credit activities.

There are two broad categories of persons who engage in credit activities:

1. the first category primarily covers credit providers being consumer lenders and providers of consumer leases but is extended also to cover activities in respect of mortgages and guarantees where they are taken to secure or guarantee obligations under a credit contract; and
2. the second category is defined as persons who provide credit services. Primarily, but not exclusively, these persons are:

• inance brokers and other intermediaries where they have a role in relation to securing credit for a consumer; and
• persons who assist consumers in relation to a particular credit contract with a particular credit provider.

Credit activities will therefore not include:

• lending for business purposes which is not regulated by the legislation; or
• where a person engages in an activity in respect of credit but not a specified credit activity – eg: where a persons provides credit assistance but not in relation to a particular credit contract with a particular credit provider.

There is a two phase approach being adopted, initially comprising registration and then transitioning to licensing with ASIC.

After becoming registered a person will then have to apply to ASIC for an Australian Credit Licence in the period from 1 January  2010 to 30 June 2010.

The entry requirements for licensing are more rigorous than for registration and will require ASIC to consider two key elements in respect of each application:

1. the adequacy of the applicant’s organisational capacity, systems and competence when engaging in credit activities; and
2. whether there is any reason to doubt that the applicant is a fit and proper person to be involved in the provision of credit services.

A person registered or a licensee can authorise third parties to engage in credit activities on their behalf without each person having to hold a licence in their own right. These persons are known as “credit representatives” and the registered person or licensee is generally responsible for their conduct and must specify in writing the activities which they can engage in.

A key element of the licensing requirements is that registered persons and licensees risk having their registration or licence suspended or cancelled if they fail to meet responsible lending obligations, and do not take reasonable steps in determining that borrowers have the financial capacity to meet repayments due under the credit contracts.