FEDERAL COURT OF AUSTRALIA
Aquino (Trustee), in the matter of McGowan (Bankrupt) v McGowan [2020] FCA 221
ORDERS
DATE OF ORDER: |
THE COURT ORDERS THAT:
1. Pursuant to s 6 of the Cross-Border Insolvency Act 2008 (Cth) (CBI Act), Arts 15 and 17(1) of the Model Law on Cross-Border Insolvency of the United Nations Commission on International Trade Law (Model Law) and r 14.03 of the Federal Court (Bankruptcy) Rules 2016 (Cth), the proceeding of the United States Bankruptcy Court, District of Massachusetts, Oakland Division, Case number 16-11879, Re Gerard McGowan, relating to the respondent (Foreign Proceeding), in which the applicant was appointed as trustee in bankruptcy for the estate of the respondent, be recognised as a foreign proceeding, within the meaning of Art 2(a) of the Model Law.
2. Pursuant to s 6 of the CBI Act and Art 17(2)(a) of the Model Law, the Foreign Proceeding be recognised as a foreign main proceeding, within the meaning of Art 2(b) of the Model Law.
3. Pursuant to s 6 of the CBI Act and Art 21(1)(e) of the Model Law, the administration and realisation of all of the respondent’s assets located in Australia be entrusted to Andrew John Scott and Scott Darren Pascoe, One International Towers, Watermans Quay, Barangaroo in the State of New South Wales (Australian Representatives).
4. Pursuant to s 6 of the CBI Act and Art 21(1)(a)-(c) of the Model Law, except with leave of the Court or with the applicant’s or Australian Representatives’ written consent:
(a) the commencement, continuation or enforcement of any individual action or legal proceeding (without limitation, any arbitration, mediation, or any judicial, quasi-judicial, administrative action, proceedings or process whatsoever) against the respondent or any of his assets, rights and obligations be stayed;
(b) the enforcement or any execution of judgment, order or award against the respondent or his assets be stayed;
(c) the right to transfer, encumber or otherwise dispose of any of the respondent’s property be suspended,
to the same extent that would apply if each such stay or suspension arose under the Bankruptcy Act 1966 (Cth) (Bankruptcy Act).
5. Pursuant to s 6 of the CBI Act and Art 21(1)(g) of the Model Law, subject to the provisions of the Bankruptcy Act, all powers normally available to a trustee in bankruptcy under the provisions of the Bankruptcy Act, be made available to the Australian Representatives.
6. The respondent pay the applicant’s costs.
7. Subject to Order 6 of these Orders, the costs of the applicant be costs of the bankruptcy of the respondent, and accorded the same priority as costs of the proceedings incurred by a trustee in bankruptcy appointed under the Bankruptcy Act.
Note: Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.
MARKOVIC J:
1 By originating application filed on 17 April 2019 (Originating Application) the applicant, John Aquino in his capacity as trustee of the bankrupt estate of Gerard McGowan (also known as Gerard Patrick McGowan) (referred to as Mr Aquino or the Trustee), seeks orders pursuant to the Cross-Border Insolvency Act 2008 (Cth) (CBI Act) including an order that bankruptcy proceedings in the United States of America (US) in respect of Mr McGowan be recognised in Australia as a foreign main proceeding as that term is used in Art 17(2) of the Model Law on Cross-Border Insolvency of the United Nations Commission on International Trade Law (Model Law) set out in Sch 1 of the CBI Act. By reason of s 6 of the CBI Act, and with the modifications set out in Pt 2 of that Act, the Model Law has the force of law in Australia.
2 In the Originating Application Mr Aquino also seeks the following ancillary relief:
(1) an order pursuant to s 6 of the CBI Act and Art 21(1)(e) of the Model Law that the administration and realisation of all of Mr McGowan’s assets located in Australia be entrusted to Andrew John Scott and Scott Darren Pascoe (Australian Representatives);
(2) an order pursuant to s 6 of the CBI Act and Art 21(a)-(c) of the Model Law that, except with leave of the Court or Mr Aquino’s or the Australian Representatives’ consent, there be a stay on the commencement or continuation of proceedings or enforcement of judgment against Mr McGowan or any of his assets, and suspension of dealings in Mr McGowan’s property; and
(3) an order pursuant to s 6 of the CBI Act and Art 21(1)(g) of the Model Law that all powers normally made available to a trustee in bankruptcy under the provisions of the Bankruptcy Act 1966 (Cth) (Bankruptcy Act) be made available to the Australian Representatives.
3 Mr McGowan opposes the making of the orders sought by Mr Aquino that the realisation of his assets located in Australia be entrusted to the Australian Representatives and for the conferral of powers on them (Opposed Relief).
Background
Mr McGowan files a petition for his bankruptcy
4 On 18 May 2016 Mr McGowan filed a Chapter 7 Petition in the United States Bankruptcy Court for the District of Massachusetts (US Bankruptcy Court) which was allocated case number 16-11879 (US Proceeding).
5 On 19 May 2016 the US Bankruptcy Court issued a Certificate of Appointment of Interim Trustee and Fixing of Bond (Certificate of Appointment) in the US Proceeding appointing Mr Aquino as interim trustee effective from 25 May 2016.
6 On 21 June 2016, by operation of the United States Bankruptcy Code (Bankruptcy Code), Mr Aquino was appointed as the permanent Chapter 7 Trustee of Mr McGowan’s estate in the US Proceeding following the conclusion of a meeting of creditors conducted pursuant to § 341 of the Bankruptcy Code.
7 By operation of § 323 of the Bankruptcy Code Mr Aquino, in his capacity as Trustee, is the sole representative of the bankrupt estate of Mr McGowan and the only party with authority to deal with Mr McGowan’s non-exempt assets that form part of his bankrupt estate.
The Trustee’s investigation into Mr McGowan’s affairs
8 On 21 June 2016 Mr Aquino conducted an examination of Mr McGowan in relation to the matters set out in his petition and his affairs generally.
9 On 22 June 2016 Mr McGowan filed an updated list of his assets and liabilities.
10 Based on his investigations into Mr McGowan’s bankrupt estate, including the examination, Mr Aquino:
(1) is aware that Mr McGowan has employment in the US;
(2) is not aware that Mr McGowan has any ongoing business connections in Australia other than certain share ownership referred to at [15] below;
(3) has presumed that the centre of Mr McGowan’s main interests is in the US, specifically Massachusetts where he maintains his residence in Lexington;
(4) has not located any non-exempt assets of Mr McGowan in the US;
(5) is aware that all known creditors appear to be located, or have a presence, in the US;
(6) is not aware of any further debts due or owing to persons who reside, or are entities, in Australia or any other location outside the US; and
(7) is not aware of any liabilities or obligations which may be owing by Mr McGowan to Susan Myra McGowan, his former wife.
11 During the course of his investigation into Mr McGowan’s bankruptcy Mr Aquino also became aware of the matters set out below.
12 First, Mr Aquino became aware that:
(1) Mr McGowan was previously the joint registered proprietor, with Mrs McGowan, of property located at 38 Bay Street, Double Bay, New South Wales comprised in 13/SP75071, 26/SP75071, 27/SP75071 and 33/SP75071 (together, Double Bay Properties);
(2) on or about 23 February 2015 the Double Bay Properties were transferred by Mr and Mrs McGowan to Margaret Lynette Harvey for consideration of $8.9 million; and
(3) on 20 February 2015 Westpac Banking Corporation (Westpac) discharged its mortgage registered on the titles of the Double Bay Properties. As at 4 April 2019, Mr Aquino had not received a response to his inquiry of Westpac requesting the amount received by it on settlement of the sale of the Double Bay Properties.
13 According to Mr Aquino, in his examination Mr McGowan gave the following evidence:
(1) he was finalising a divorce from Mrs McGowan and there was a tentative agreement about the property of the marriage which was documented (Property Agreement) a copy of which Mr McGowan indicated he would provide to Mr Aquino;
(2) the Double Bay Properties were sold for $8.9 million. At the time of their sale there was a mortgage registered on their title securing an amount of approximately $5 million;
(3) he received about $500,000 and Mrs McGowan received about $3.9 million from the settlement proceeds of the Double Bay Properties;
(4) there was an agreement that the settlement proceeds from the sale of the Double Bay Properties would not be split evenly between Mr and Mrs McGowan because Mr McGowan was still working at the time and had borrowed against their wealth to invest in ventures in the US which had failed. Although not documented, it had been agreed that Mr McGowan would bear all of the risk on those ventures; and
(5) there had previously been successful ventures in Australia from which Mrs McGowan had benefitted.
14 As at 4 April 2019 Mr Aquino had not received a copy of the Property Agreement nor a copy of the final orders made for the dissolution of Mr and Mrs McGowan’s marriage.
15 Secondly, Mr Aquino became aware that Mr McGowan was a director of, and 50% shareholder in, TRW Holdings Pty Limited (TRW), holding 99,500 shares. TRW was the registered proprietor of a property known as Tawarri at Merriwa, New South Wales (First Merriwa Property).
16 According to Mr Aquino, in his examination Mr McGowan gave the following evidence:
(1) TRW owned property in Merriwa, confirmed to be the First Merriwa Property, which was zoned as rural;
(2) the purchase price for the First Merriwa Property was $950,000;
(3) the First Merriwa Property was listed for sale for a non-disclosed amount but there was “media talk” of an asking price of $15 million; and
(4) as at the time of Mr McGowan’s examination there was a debt owing of $3 million secured by way of a mortgage over the title of the First Merriwa Property.
17 On 21 February 2017 Rural Bank Limited (Rural Bank) discharged its mortgage registered on the title of the First Merriwa Property. Mr Aquino’s inquiry of Rural Bank as to the amount received by it on settlement of the sale of the First Merriwa Property remained unanswered as at 4 April 2019. Mr Aquino is therefore not aware of the amount received by Rural Bank to discharge its mortgage or how the balance of the settlement proceeds from the sale of the First Merriwa Property were allocated.
18 Thirdly, as at the date of Mr Aquino’s appointment as Trustee, Mr McGowan was a director and secretary of Tawarri Investments Pty Limited (Tawarri) which was the registered proprietor of a second property situated at Merriwa, New South Wales (Second Merriwa Property). The shareholder and ultimate holding company of Tawarri was TRW.
19 According to Mr Aquino, in his examination Mr McGowan gave the following evidence:
(1) the Second Merriwa Property was owned by Tawarri and was known as the Fitzroy Hotel;
(2) the Fitzroy Hotel was a block of land, the hotel did not operate and it was to be demolished; and
(3) the Second Merriwa Property had been for sale for a number of years with an asking price of $100,000.
20 On or about 20 January 2017 the Second Merriwa Property was transferred to Angela Louise Montgomery and Matthew Daniel Purcell for a sum of $150,000. Mr Aquino is not aware how the funds from the sale of the Second Merriwa Property were allocated. There was no mortgage registered on the title of the Second Merriwa Property at the time of its transfer.
21 As at 4 April 2019 Mr Aquino was not aware of any proceedings in Australia against Mr McGowan concerning a bankruptcy action, any appointment of a receiver or a controller or a managing controller to Mr McGowan’s property or any proceedings pursuant to s 601CL of the Corporations Act 2001 (Cth) in relation to Mr McGowan.
Evidence filed on behalf of Mr McGowan
22 Mr McGowan relied on an affidavit sworn by Darrin Shane Mitchell, a lawyer in the employ of Mr McGowan’s lawyer, Jeffrey Richard Brown of Matthews Folbigg, on 16 August 2019; an affidavit sworn by Melissa Escobar, a contract secretary engaged by Matthews Folbigg, on 13 August 2019; and an affidavit sworn by William John Hanlon, a partner of law firm Seyfarth Shaw LLP located in Boston, Massachusetts, on 15 August 2019.
23 Ms Escobar transcribed the audio tapes of the Trustee’s examination of Mr McGowan which took place on 21 June 2016.
24 Among other things, Mr Mitchell gives evidence about the transactions referred to by Mr Aquino in relation to the Double Bay Properties, TRW, the First Merriwa Property and the Second Merriwa Property (collectively, the Merriwa Properties). Relevantly, Mr Mitchell says that he has been instructed by McGowan that:
(1) as well as the mortgage to Westpac, a loan to Mr McGowan’s daughter, Nicole Lee, was encumbered on the Double Bay Properties. A loan agreement dated 5 October 2014 between Mr McGowan and Ms Lee for a principal sum of $850,000 plus interest on the balance was in evidence. Among other things, that agreement recorded that the principal plus any accrued interest and costs and expenses was due and payable on the sale of 13/38 Bay Street, Double Bay, New South Wales;
(2) Ms Lee also loaned monies to Mr and Mrs McGowan to pay the mortgage on the Double Bay Properties and on “a property at Merriwa”;
(3) of the settlement monies from the sale of the Double Bay Properties, $345,538.04 was paid to Mr McGowan;
(4) on 20 June 2017 Mr and Mrs McGowan obtained an order for their divorce from the Federal Circuit Court of Australia;
(5) upon sale of the First Merriwa Property, after payment of the mortgage, loans, costs and disbursements, half of the available settlement proceeds were paid to Mrs McGowan. The settlement proceeds paid to Mr McGowan were invested by him in renewable energy products, left in TRW for Australian investment purposes or transferred to corporations in the US for ongoing investment purposes;
(6) on 24 February 2017 Mrs McGowan resigned as a director of TRW;
(7) TRW has no assets of any commercial value and its share value would be negligible;
(8) monies received by Tawarri from the sale of the Second Merriwa Property, after payment of costs and disbursements, were paid to TRW; and
(9) Tawarri was deregistered on 6 June 2018.
25 Mr Hanlon was retained as an expert and prepared a report addressing the question of “whether, as a matter of U.S. bankruptcy law, the avoidance actions contemplated by [Mr McGowan’s] bankruptcy trustee in the Litigation would otherwise be time-barred as a result of a two year statute of limitations, considering among any other legally relevant exceptions to the two-year limitations period, the application of the doctrine of equitable tolling”. I return to Mr Hanlon’s report below.
Legislative framework
26 As noted at [1] above, s 6 of the CBI Act provides that, subject to that Act, the Model Law with the modifications set out in Pt 2 of the CBI Act, has the force of law in Australia.
27 In Palmer (Trustee), in the matter of Slater (Bankrupt) [2016] FCA 780 Gleeson J summarised relevant parts of the Model Law as it applies in Australia. I gratefully adopt that summary. At [11]-[21] her Honour said:
11 Relevantly, and subject to the CBI Act, the Model Law applies where assistance is sought in this State by a foreign representative in connection with a foreign proceeding: article 1(a).
12 Article 2 of the Model Law contained the following relevant definitions:
(a) “Foreign proceeding” means a collective judicial or administrative proceeding in a foreign State, including an interim proceeding, pursuant to a law relating to insolvency in which proceeding the assets and affairs of the debtor are subject to control or supervision by a foreign court, for the purpose of reorganization or liquidation;
(b) “Foreign main proceeding” means a foreign proceeding taking place in the State where the debtor has the centre of its main interests;
…
(d) “Foreign representative” means a person or body, including one appointed on an interim basis, authorized in a foreign proceeding to administer the reorganization or the liquidation of the debtor's assets or affairs or to act as a representative of the foreign proceeding
13 Article 4 of the Model Law provides that the functions referred to in the Model Law relating to recognition of foreign proceedings and cooperation with foreign courts shall be performed by a specified court or courts or other authority. Section 10(a) of the CBI Act provides relevantly that, if the functions relate to a proceeding involving a debtor who is an individual, the Federal Court of Australia is taken to be specified in article 4 as a court competent to perform the functions referred to in the Model Law relating to recognition of foreign proceedings.
14 Article 6 provides:
Nothing in this present Law prevents the court from refusing to take an action governed by the present Law if the action would be manifestly contrary to the public policy of this State.
15 Article 15 of the Model Law provides:
1. A foreign representative may apply to the court for recognition of the foreign proceeding in which the foreign representative has been appointed.
2. An application for recognition shall be accompanied by:
(a) A certified copy of the decision commencing the foreign proceeding and appointing the foreign representative; or
(b) A certificate from the foreign court affirming the existence of the foreign proceeding and of the appointment of the foreign representative; or
(c) In the absence of evidence referred to in subparagraphs (a) and (b), any other evidence acceptable to the court of the existence of the foreign proceeding and of the appointment of the foreign representative.
3. An application for recognition shall also be accompanied by a statement identifying all foreign proceedings in respect of the debtor that are known to the foreign representative.
4. The court may require a translation of documents supplied in support of the application for recognition into an official language of this State.
16 Section 13 of the CBI Act provides:
In addition to the requirement in paragraph 3 of Article 15 of the Model Law (as it has the force of law in Australia) that an application for recognition be accompanied by a statement identifying all foreign proceedings in respect of the debtor that are known to the foreign representative, the application must be accompanied by a statement identifying:
(a) all proceedings under the Bankruptcy Act 1966 in respect of the debtor; and
(b) any appointment of a receiver (within the meaning of section 416 of the Corporations Act 2001), or a controller or a managing controller (both within the meaning of section 9 of that Act), in relation to the property of the debtor; and
(c) all proceedings under Chapter 5, or section 601CL, of the Corporations Act 2001 in respect of the debtor;
that are known to the foreign representative.
17 Article 16 of the Model Law provides:
1. If the decision or certificate referred to in paragraph 2 of article 15 indicates that the foreign proceeding is a proceeding within the meaning of subparagraph (a) of article 2 and that the foreign representative is a person or body within the meaning of subparagraph (d) of article 2, the court is entitled to so presume.
2. The court is entitled to presume that documents submitted in support of the application for recognition are authentic, whether or not they have been legalized.
3. In the absence of proof to the contrary, the debtor’s registered office, or habitual residence in the case of an individual, is presumed to be the centre of the debtor’s main interests.
18 Article 17 of the Model Law provides:
1. Subject to article 6, a foreign proceeding shall be recognized if:
(a) The foreign proceeding is a proceeding within the meaning of subparagraph (a) of article 2;
(b) The foreign representative applying for recognition is a person or body within the meaning of subparagraph (d) of article 2;
(c) The application meets the requirements of paragraph 2 of article 15;
(d) The application has been submitted to the court referred to in article 4.
2. The foreign proceeding shall be recognized:
(a) As a foreign main proceeding if it is taking place in the State where the debtor has the centre of its main interests; or
(b) As a foreign non-main proceeding if the debtor has an establishment within the meaning of subparagraph (f) of article 2 in the foreign State.
3. An application for recognition of a foreign proceeding shall be decided upon at the earliest possible time.
4. The provisions of articles 15, 16, 17 and 18 do not prevent modification or termination of recognition if it is shown that the grounds for granting it were fully or partially lacking or have ceased to exist.
19 Thus, if certain matters are established, the foreign proceeding must be recognised, unless recognition would be manifestly contrary to the public policy of Australia: Kapila, in the matter of Edelsten [2014] FCA 1112; (2014) 320 ALR 506 (“Re Edelsten”) at [22].
20 Rule 14.03 of the Federal Court (Bankruptcy) Rules 2016 states:
(1) An application by a foreign representative for recognition of a foreign proceeding under article 15 of the Model Law must be made by filing an application in accordance with Form B2.
(2) The application must:
(a) be accompanied by the statements mentioned in article 15 of the Model Law and in section 13 of the Cross‑Border Insolvency Act; and
(b) name the foreign representative as the applicant and the debtor as the respondent; and
(c) be accompanied by an affidavit verifying the matters mentioned in paragraphs 2 and 3 of article 15 of the Model Law and in section 13 of the Cross‑Border Insolvency Act.
(3) When filing the application, the foreign representative must file, but need not serve, an interim application seeking directions as to service, and the Court may give any directions about service, and make any incidental orders, that it thinks just.
(4) The applicant must serve a copy of the application and the other documents mentioned in subrule (2):
(a) unless the Court otherwise orders—on each respondent (if any) to the proceeding as soon as practicable after filing an application and, in any case, at least 5 days before the date fixed for hearing; and
(b) on any other persons the Court may direct at the hearing of the interim application.
(5) A person who intends to appear before the Court at the hearing of an application for recognition must file and serve the documents mentioned in rule 2.04.
21 By article 20, and subject to s 16 of the CBI Act, upon recognition of a foreign main proceeding:
(a) commencement or continuation of individual actions or individual proceedings concerning the debtor’s assets, rights, obligations or liabilities is stayed;
(b) execution against the debtor’s assets is stayed;
(c) the right to transfer, encumber or otherwise dispose of any assets of the debtor is suspended.
28 As set out at [2] above, Mr Aquino seeks ancillary relief pursuant to Art 21 of the Model Law, as modified by s 11 of the CBI Act, which provides:
1. Upon recognition of a foreign proceeding, whether main or non‑main, where necessary to protect the assets of the debtor or the interests of the creditors, the court may, at the request of the foreign representative, grant any appropriate relief, including:
(a) Staying the commencement or continuation of individual actions or individual proceedings concerning the debtor’s assets, rights, obligations or liabilities, to the extent they have not been stayed under paragraph 1 (a) of article 20;
(b) Staying execution against the debtor’s assets to the extent it has not been stayed under paragraph 1 (b) of article 20;
(c) Suspending the right to transfer, encumber or otherwise dispose of any assets of the debtor to the extent this right has not been suspended under paragraph 1 (c) of article 20;
(d) Providing for the examination of witnesses, the taking of evidence or the delivery of information concerning the debtor’s assets, affairs, rights, obligations or liabilities;
(e) Entrusting the administration or realization of all or part of the debtor’s assets located in this State to the foreign representative or another person designated by the court;
(f) Extending relief granted under paragraph 1 of article 19;
(g) Granting any additional relief that may be available to a trustee (within meaning of subsection 5(1) of the Bankruptcy Act 1966) or a registered liquidator (within the meaning is section 9 of the Corporations Act 2001) under the laws of this State.
2. Upon recognition of a foreign proceeding, whether main or non‑main, the court may, at the request of the foreign representative, entrust the distribution of all or part of the debtor’s assets located in this State to the foreign representative or another person designated by the court, provided that the court is satisfied that the interests of creditors in this State are adequately protected.
3. In granting relief under the present article to a representative of a foreign non‑main proceeding, the court must be satisfied that the relief relates to assets that, under the law of this State, should be administered in the foreign non‑main proceeding or concerns information required in that proceeding.
29 Article 22 is headed “[p]rotection of creditors and other interested persons”. It provides:
1. In granting or denying relief under article 19 or 21, or in modifying or terminating relief under paragraph 3 of the present article, the court must be satisfied that the interests of the creditors and other interested persons, including the debtor, are adequately protected.
2. The court may subject relief granted under article 19 or 21 to conditions it considers appropriate.
3. The court may, at the request of the foreign representative or a person affected by relief granted under article 19 or 21, or at its own motion, modify or terminate such relief.
Recognition of the US Proceeding under the model law
30 Before consideration can be given to whether the US Proceeding should be recognised as a foreign main proceeding under the Model Law, as Mr Aquino submits it should, Mr Aquino must satisfy a number of conditions precedent. Those conditions precedent fall into two categories, those that are status based and those that are procedural in nature: see Kapila, in the matter of Edelsten (2014) 320 ALR 506; [2014] FCA 1112 (Edelsten) at [26].
Status based criteria
31 The status based conditions precedent are those specified in Art 17(1) of the Model Law, namely the US Proceeding must be a foreign proceeding within the meaning of Art 2(a) of the Model Law, the applicant must be a foreign representative within the meaning of Art 2(d) of the Model Law and the application must be submitted to a court referred to in Art 4, which is the case for this Court: see s 10(a) of the CBI Act.
Is the US Proceeding a foreign proceeding?
32 The evidence before me establishes that the US Proceeding is:
(1) a judicial proceeding pending in the US Bankruptcy Court and subject to ongoing oversight by the Honourable Judge Hoffman;
(2) collective in nature as it is for the benefit of Mr McGowan’s creditors whose claims are subject to proof and adjudication pursuant to Chapter 5 of the Bankruptcy Code. Mr Aquino, as Trustee, is the only person with authority to deal with Mr McGowan’s non-exempt assets;
(3) taking place in the US and thus in a foreign state;
(4) pursuant to a law relating to insolvency, the Bankruptcy Code; and
(5) for the purposes of liquidation, i.e. the getting in, realisation and distribution of Mr McGowan’s assets pursuant to § 704 of the Bankruptcy Code.
33 Based on those matters I am satisfied that the US Proceeding is a foreign proceeding for the purposes of Art 2(a) of the Model Law.
Is Mr Aquino a foreign representative?
34 Mr Aquino is a foreign representative within the meaning of Art 2(d) of the Model Law. He has been appointed as Trustee and is authorised in the US Proceeding to administer the liquidation of Mr McGowan’s assets pursuant to the Bankruptcy Code.
Procedural criteria
35 The procedural conditions precedent are set out in Art 17(1)(c) of the Model Law, s 13 of the CBI Act and r 14.03 of the Federal Court (Bankruptcy) Rules 2016 (Cth) (Bankruptcy Rules).
36 Article 17(1)(c) requires the applicant to comply with Art 15(2) of the Model Law. Mr Aquino has done that by tendering the Certificate of Appointment which meets the requirements of Art 15(2)(b). It confirms the existence of the US Proceeding and Mr Aquino’s appointment as interim trustee and, in the absence of rejection, Trustee.
37 As set out at [21] above, Mr Aquino has provided the certification required by s 13 of the CBI Act. The evidence also establishes that Mr Aquino has complied with r 14.03 of the Bankruptcy Rules.
38 Thus Mr Aquino has satisfied each of the conditions precedent for recognition of the US Proceeding.
Is the US Proceeding a foreign main proceeding?
39 The next issue to consider is whether the US Proceeding is a foreign main proceeding and should be recognised as such. Resolution of that issue depends on whether the centre of Mr McGowan’s main interests is, as Mr Aquino has presumed it to be, the US.
40 In Edelsten at [35] Beach J observed that the Model Law does not stipulate the date for determining the centre of the debtor’s main interests. At [39], following the authorities on the issue, his Honour made his assessment at the time at which the Court was being called upon to make a decision giving recognition to the foreign proceeding.
41 The Model Law does not include a definition of the term “centre of main interests”. However, Art 16 contains a rebuttable presumption that, for an individual, the debtor’s “habitual residence” is “to be the centre of the debtor’s main interests”. The term “habitual residence” is also not defined in the Model Law. In Edelsten at [46]-[48] Beach J said the following about that term:
46 The concept “habitual residence” has been used in many international conventions and other instruments. To treat it as presenting just a question of fact is attractive, but wrong. First, its use and content must be read in the light of the specific convention being considered and its context. Second, objective criteria derived from or implicit in such a context may need to be identified so that the conclusionary composite phrase can be applied to the facts. Third, the composite phrase may usefully be divided in the first instance, although ultimately the whole phrase must be construed and applied. Where does the insolvent reside? A wide variety of circumstances may bear upon that question. Is that residence habitual? Again, a wide variety of circumstances may bear upon that question. Past and present intentions of the insolvent may bear on such questions. Such intentions may manifest themselves in terms of the duration of connection or residence with a particular place. But intention is not to be given controlling weight (see LK v Director-General, Department of Community Services (2009) 237 CLR 582 (LK) at [28]). Moreover, an insolvent’s intentions may be ambiguous.
47 It is also possible that a transnational insolvent may lead such a nomadic life so as not to have a habitual residence (see LK at [25]).
48 One useful practical test may be to identify the centre of a person’s personal and family life (as disclosed by the individual’s activities) and to align that centre with the concept of habitual residence (cf LK at [25]), but care needs to be taken.
42 At [53] his Honour said:
In terms of principle, the centre of main interests is where the debtor conducts the administration of the debtor’s interests on a regular basis (Moore at [20] per Emmett J). In making a determination, the court must have regard to the need for the centre of main interests to be ascertainable by third parties, creditors and potential creditors. It is important, therefore, to have regard not only to what the debtor is doing but also to what the debtor will be perceived to be doing by an objective observer. It is important also to have regard to the need, if the centre of main interests is to be ascertainable via third parties, for an element of permanency.
43 I am satisfied that Mr McGowan’s habitual residence is the US and thus the centre of his main interests is the US. So much is evident from the fact that his last known address is in Massachusetts, US, he works in the US and all of his creditors appear to be located, or have a presence, in the US. Further, despite appearing at the hearing of the application, Mr McGowan did not lead evidence to the contrary.
44 It follows that the US Proceeding should be recognised as a foreign main proceeding and orders in the form of paras 1 and 2 of the Originating Application should be made.
Ancillary relief
45 Mr Aquino seeks the ancillary relief summarised at [2] above. Mr McGowan opposes the grant of the Opposed Relief (see [3] above).
Mr McGowan’s submissions
46 Mr McGowan submits that the only apparent utility in the grant of the Opposed Relief is to facilitate exploration and commencement by the Australian Representatives of antecedent transaction avoidance proceedings under ss 120-122 of the Bankruptcy Act and equivalent provisions available under Australian law. After referring to the principles which underpin the Model Law, Mr McGowan sets out four reasons why in his opinion the Court would not grant the Opposed Relief.
47 First, Mr McGowan submits that Art 21(1)(g) of the Model Law only functions through the recognition of a foreign proceeding and it is to that proceeding that the functions bestowed by Art 21(1)(g) must be assessed as “additional” to the statutory rights which the Trustee has under the statutory scheme by which he is appointed to act in the US Proceeding. Mr McGowan contends that a reference in Art 21(1)(g) to “the laws of this State” would include Australian rules of conflict of laws and private international law. He contends that the ancillary relief neither necessarily imports the consequences of the foreign law into the insolvency system of the enacting state nor applies to the foreign proceeding the relief that would be available under the law of the enacting state, describing it as “conflict of law neutral”. He says that is because it specifically introduces a choice of law which he says is a choice which must not be “incongruous” with the foreign main proceeding which the Australian court is recognising.
48 Mr McGowan submits that where the only insolvency proceeding is the US Proceeding (thus being the only jurisdiction having a strong interest in applying its insolvency law), the law generally applied is the lex fori concursus, the law of the state in which the insolvency proceeding is commenced. Mr McGowan contends that this choice of law is supported by the fact that insolvency law does not create rights or claims but determines the relative position of each of those rights and claims once an insolvency proceeding has commenced and, where appropriate, establishes the restrictions and modifications to which they will be subject in the insolvency proceeding in order to fulfil the collective aims of that proceeding.
49 Mr McGowan submits that these restrictions are “insolvency effects” because they arise from the commencement of an insolvency proceeding against a debtor. He says that the rationale for applying the lex fori concursus is that it supports certainty and diminishes the risk which may apply to the application of avoidance provisions. He also says that assigning rights in rem to the lex fori concursus is consistent with the principle of universalism underpinning the Model Law and notes that the position expressed in the Legislative Guide on Insolvency Law (United Nations Commission on International Trade Law, 2004) favours the application of the law of the state where the insolvency proceeding is pending.
50 Mr McGowan submits, relying on Mr Hanlon’s evidence, that:
(1) under US bankruptcy law the Trustee is time barred from commencing proceedings against him for antecedent transaction avoidance;
(2) as such the Trustee’s substantive right under US bankruptcy law to commence such proceedings has been extinguished; and
(3) on that basis, the Opposed Relief sought under Art 21(e) and (g) should be declined.
51 Secondly, Mr McGowan submits that, consistent with the approach adopted in Akers v Deputy Commissioner of Taxation (2014) 223 FCR 8 (Akers) to the application of Art 22(3) of the Model Law, the Court would be satisfied that the interests of creditors and other relevant persons, including the debtor, are best protected by denying the relief sought by the Trustee under Art 21.
52 Thirdly, Mr McGowan submits that in considering whether to afford powers under the local law, purportedly as an alternative to the now redundant powers available to the Trustee under US bankruptcy law, it is important to recall that the Model Law provides that this Court assumes a complementary authority to the court supervising the foreign proceeding. He contends that therefore any relief under Art 21(1)(g) would necessarily need to be limited to exclude the equivalent antecedent transaction avoidance provisions in ss 120-122 of the Bankruptcy Act and s 37A of the Conveyancing Act 1919 (NSW) (Conveyancing Act) as this is not, in granting “additional relief”, a grant of power otherwise supplementary or complementary to the extinguished statutory rights under US bankruptcy law.
53 Fourthly, Mr McGowan submits that the CBI Act’s incorporation of the Model Law has not purported to remove an essential aspect of the substratum of the common law with the consequence that it cannot be said that the common law doctrines of cooperation and comity have ceased entirely to exist in this field and they would continue to inform the appropriate exercise of the discretion contained in Art 21.
54 Mr McGowan contends that there is a longstanding tradition in the common law of recognising and assisting foreign insolvency proceedings but that the obligation to assist is not an absolute one. Mr McGowan notes that in Singularis Holdings Ltd v PricewaterhouseCoopers [2015] AC 1675; [2014] UKPC 36 (Singularis) the principle of modified universalism was accepted to form part of the common law and that an aspect of this modification was that the characterisation of the proper use of the power of assistance is not to make good a limitation on the power of a foreign court of insolvency jurisdiction under its own law: Singularis at [29]. Mr McGowan submits that, consistent with that approach, this Court would not assist to confer avoidance powers upon the Trustee, acting by his Australian Representatives, which operate to circumvent the Bankruptcy Code’s time limitations on the same powers, which in this case proscribe the Trustee’s substantive powers in respect of antecedent transaction avoidance in the US Proceeding.
Consideration
55 For the reasons that follow, in my opinion, the ancillary relief sought by Mr Aquino, including the Opposed Relief, should be granted.
56 The first order Mr Aquino seeks by way of ancillary relief is in para 3 of the Originating Application. There Mr Aquino seeks an order that, pursuant to s 6 of the CBI Act and Art 21(1)(e) of the Model Law, the administration and realisation of Mr McGowan’s assets located in Australia be entrusted to Messrs Scott and Pascoe as the Australian Representatives. The evidence establishes that Mr McGowan has an interest in assets in Australia, namely shares in TRW, and that he previously held interests in real property in Australia.
57 There is nothing unorthodox about the relief sought in the form of para 3 of the Originating Application: see for example Edelsten at [58]. Mr McGowan opposes the relief sought in para 3 of the Originating Application but he makes no substantive submissions that go to that relief save for a suggestion that the appointment of Messrs Scott and Pascoe as the Australian Representatives would be inutile if the ancillary relief sought in para 6 of the Originating Application is not granted. That is, Mr McGowan does not appear to oppose the appointment of the Australian Representatives per se. Rather, his submissions and opposition focus on the relief sought in para 6 of the Originating Application under Art 21(1)(g) of the Model Law.
58 In any event, given that there are assets in Mr McGowan’s name in Australia, I am satisfied that they should be entrusted to Messrs Scott and Pascoe as the Australian Representatives to administer and realise. Relevantly, Messrs Scott and Pascoe have signed a “Trustee Consent to Act Declaration” for that purpose.
59 The next order sought by Mr Aquino by way of ancillary relief is in para 4 of the Originating Application. That relief is not opposed by Mr McGowan. By para 4 of the Originating Application Mr Aquino seeks moratoria on proceedings against Mr McGowan or any of his assets, a stay on enforcement of judgments or orders, and suspension of dealings in Mr McGowan’s property. As is appropriate, that order is only sought to the same extent as would apply if the moratoria or suspension arose under the Bankruptcy Act: see Edelsten at [59]. An order in the terms sought in para 4 of the Originating Application should be made.
60 The final order sought by Mr Aquino by way of ancillary relief is in para 6 of the Originating Application. It is in relation to that relief that the real controversy between the parties lies and to which Mr McGowan’s submissions are directed. In para 6 of the Originating Application Mr Aquino seeks an order pursuant to s 6 of the CBI Act and Art 21(1)(g) of the Model Law that, subject to the Bankruptcy Act, all powers normally available to a trustee in bankruptcy under the Bankruptcy Act be made available to the Australian Representatives.
61 At the heart of Mr McGowan’s opposition to the grant of the Opposed Relief and, in particular, the relief sought in para 6 of the Originating Application is his contention that the relief is inutile. This is said to be because any claim sought to be brought pursuant to ss 120-122 of the Bankruptcy Act would not be available as any like claim under the Bankruptcy Code is statute barred. On this basis Mr McGowan says that any grant of relief would need to be limited to exclude the equivalent antecedent transaction avoidance provisions under those sections of the Bankruptcy Act and s 37A of the Conveyancing Act.
62 Before proceeding further it is convenient to set out some of the principles which apply to the CBI Act and the Model Law generally. In Akers Allsop CJ (with whom Robertson and Griffiths JJ agreed), after summarising relevant provisions of the Model Law, identified at [68] the “four key elements of the Model Law”: access to local courts for foreign representatives; recognition of certain orders of foreign courts; relief to assist foreign proceedings; and cooperation amongst courts of the states where assets are held and coordination of concurrent proceedings.
63 At [111]-[113] Allsop CJ observed that the Model Law reflected a universalist approach, stating:
111 That the Model Law reflects a universalist approach (reflected in the pre-existing common law framework discussed in Re HIH) can be accepted: see the 2002 discussion paper entitled CLERP 8 at pp 17 and 21. CLERP 8 explained the universal approach as:
[O]ne insolvency proceeding will be universally recognised by the jurisdictions in which the entity has assets or carries on business. All the assets of the insolvent company will be administered by the court or the administrator in, and possibly also according to, the law of the place of incorporation. All creditors seeking to claim in the winding up submit claims to that court or administrator. When assets of the insolvent company are located in foreign countries, the court has the power to apply for assistance from the courts of those countries.
112 A similar statement of general approach and underlying informing concept is to be found in Re ABC Learning Centres Ltd 728 F (3d) 301 at 306 (3rd Circuit, 27 August 2013):
The Model Law reflects a universalism approach to transnational insolvency. It treats the multinational bankruptcy as a single process in the foreign main proceeding, with other courts assisting in that single proceeding. In contrast, under a territorialism approach a debtor must initiate insolvency actions in each country where its property is found. This approach is the so-called “grab rule” where each country seizes assets and distributes them according to each country’s insolvency proceedings.
113 This, the Court said, at 306, involved a rejection of:
the territorialism approach … in favour of aiding one main proceeding. “The purpose is to maximise assistance to the foreign court conducting the main proceeding.” Thus, a Chapter 15 court in the United States acts as an adjunct or arm of a foreign bankruptcy court where the main proceedings are conducted.
64 Mr McGowan’s submission that, where a foreign proceeding is recognised under the Model Law, this Court acts “as an adjunct or arm of the foreign bankruptcy court where the main proceeding is conducted” can be accepted.
65 The granting of relief under Art 21 of the Model Law is discretionary and is conditioned by Art 22 (see [29] above) which requires the court in granting relief under, relevantly, Art 21 to be satisfied that the interests of creditors and other interested persons, including the debtor, are adequately protected and permits the court to impose conditions on the grant of any relief under Art 21.
66 Also relevant are Art 11 and Art 23 of the Model Law. Article 23 of the Model Law, as modified by s 17 of the CBI Act, relevantly provides that upon recognition of a foreign proceeding the foreign representative has standing to initiate an action arising under or because of ss 120, 121, 121A, 122, 128B or 128C or Div 4A of Pt VI of the Bankruptcy Act. Article 11 of the Model Law, read subject to the modifications in s 8 of the CBI Act, relevantly provides that:
A foreign representative is entitled to apply to commence a proceeding under the Bankruptcy Act 1966 if the conditions for commencing such a proceeding are otherwise met.
67 As Mr McGowan submits Art 23 does not create substantive rights. It is a rule about standing and is procedural in nature: see King (Trustee), in the matter of Zetta Jet Pte Ltd v Linkage Access Limited [2018] FCA 1979 at [35].
68 Relevantly, Chapter 1 of the Explanatory Memorandum to the Cross-Border Insolvency Bill 2008 (Cth) which “explains the objectives of the Bill, the scope of its application and the nature and extent of its implementation” and “also comments on the … interaction between the Model Law and section 29 of the Bankruptcy Act” includes under the heading “[a]ctions to avoid acts detrimental to creditors”:
1.29 Article 23 of the Model Law provides for a foreign representative having standing to initiate actions to recover assets when actions have been taken that are detrimental to the interests of creditors. Under Australian law, these are the voidable transactions provisions in Division 2 of Part 5.7B of the Corporations Act and sections 120, 121, 121A, 122, 128B, 128C and Division 4A of Part VI of the Bankruptcy Act.
1.30 The provisions listed for the purposes of article 23 of the Model Law relate to allowing for the reversal or avoidance of transactions that a debtor has entered into that prejudice the interests of creditors. The effect of enacting article 23 of the Model Law is that the foreign representative is not precluded from commencing such actions by the sole fact that the foreign representative is not the insolvency representative approved in Australia.
1.31 Under the Division 2 of Part 5.7B of the Corporations Act the liquidator of a company is given standing to make an application in relation to voidable transactions. It is intended that the foreign representative will have the same standing as if they were a liquidator in relation to all provisions within Division 2 of Part 5.7B of the Corporations Act. The Bankruptcy Act provides for the trustee having certain rights in relation to transactions covered by the relevant sections. The foreign representative is to have the same rights as if they were the trustee in relation to those transactions …
(Emphasis added.)
69 It follows from the combined operation of Art 11 and Art 23, as modified by the CBI Act, that Mr Aquino has standing to commence proceedings under, relevantly, ss 120-122 of the Bankruptcy Act. He has the same rights he would have if he was an Australian trustee in relation to the transactions the subject of such proceedings. He does not require a grant of relief under Art 21(1)(g). That being so, to the extent Mr McGowan opposes the relief sought in para 6 of the Originating Application because it would empower Mr Aquino to commence proceedings pursuant to ss 120-122 of the Bankruptcy Act, that concern is misplaced.
70 The relief sought in para 6 of the Originating Application is confined to the Australian Representatives. They can enjoy no greater rights than those which Mr Aquino currently enjoys. Thus, as submitted by Mr Aquino, if the US Proceeding, for the purposes of which he is Trustee, is recognised as a foreign main proceeding he would, because of the recognition of that proceeding, be entitled to administer Mr McGowan’s Australian assets. However, for orthodox reasons he wishes to have that done by Australian practitioners familiar with Australian insolvency law and procedure. It is appropriate that the Australian Representatives have power granted to them to do so.
71 To that end, the relief sought in para 6 of the Originating Application is for the Australian Representatives to exercise all of the powers normally available to a trustee under the Bankruptcy Act. Those powers are not limited to bringing proceedings under ss 120-122 of the Bankruptcy Act, which is the focus of Mr McGowan’s objection, but include, by way of example, the power to examine people who may be able to provide information about Mr McGowan or his examinable affairs under s 81 of the Bankruptcy Act and the power to require the production of books under s 77A of that Act. Mr McGowan says nothing about the exercise of these other powers. In circumstances where Mr McGowan had and has assets in Australia and the circumstances surrounding the transfer of some of those assets remains unclear to Mr Aquino, it is appropriate that an order conferring powers of that nature on the Australian Representatives be made.
72 Mr McGowan’s principal opposition to the Opposed Relief is based on his argument that Mr Aquino would not be permitted to commence proceedings under ss 120-122 of the Bankruptcy Act because of the operation of principles of private international law. For example, the first reason why Mr McGowan says that the relief sought, in particular, in para 6 of the Originating Application would be refused is because Art 21(1)(g) only functions through the recognition of a foreign proceeding. To that end, Mr Aquino contends that the functions bestowed by Art 21(1)(g) must be assessed by reference to the foreign proceeding and as “additional” to the statutory rights which Mr Aquino has under the statutory scheme by which he is appointed to act in the US Proceeding. The second reason given by Mr McGowan is that the Court would be satisfied that the interests of creditors and other relevant persons, including him, are best protected by denying the relief sought under Art 21. Mr McGowan contends that a creditor lodging a proof of debt in a foreign proceeding submits to the jurisdiction of that proceeding according to the lex fori concursus, and is thus willing to be susceptible to the limitation of the powers and functions able to be exercised in that proceeding.
73 There are two principal reasons why those arguments cannot succeed, at least at this stage.
74 First, they are premature. They are arguments that can and should be made if such proceedings are commenced or, indeed, threatened.
75 Secondly, the evidence relied on by Mr McGowan to demonstrate that Mr Aquino would be barred from bringing an equivalent proceeding in the US Proceeding is not conclusive.
76 Mr McGowan relies on Mr Hanlon’s evidence. As set out at [22] above, Mr Hanlon is a partner of law firm Seyfarth Shaw LLP based in Boston, Massachusetts. He has been practising bankruptcy law for over 30 years and was engaged as an expert to provide his opinion on the question of “whether as a matter of U.S. bankruptcy law, the avoidance actions contemplated by [Mr McGowan’s] bankruptcy trustee in the Litigation would otherwise be time-barred as a result of a two year statute of limitations, considering among any other legally relevant exceptions to the two-year limitations period, the application of the doctrine of equitable tolling”.
77 Before turning to consider Mr Hanlon’s evidence I note that Mr Aquino objected to Mr Hanlon’s evidence insofar as he expresses opinions on how the relevant court, being a US Bankruptcy Court or other US court exercising jurisdiction under the Bankruptcy Code, would determine an issue. To the extent that Mr Hanlon expressed such opinions, his evidence was read as a submission.
78 In summary, in his report Mr Hanlon;
(1) sets out the general scheme and relevant provisions of the Bankruptcy Code including:
(a) § 548 which he says “allows for the avoidance of transfers that are either intentionally or constructively fraudulent”. Mr Hanlon observes that while administering the estate the trustee has the sole right to pursue claims under that section;
(b) § 546(a) which “establishes a statute of limitations for avoidance actions brought under” relevantly, § 548 of the Bankruptcy Code. Mr Hanlon notes that § 546(a)(1)(A) “establishes a two-year statute of limitation after the entry of the order for relief” and that “[i]f the defense is not timely asserted, a defendant may waive its statute of limitations defense under section 546(a)”. He also observes that the § 546(a) limitation period can be extended “by stipulation between the parties” and that it may be equitably tolled. As to the latter, Mr Hanlon gives the following evidence:
The limitations periods in Section 546(a) may be equitably tolled when a trustee, exercising due diligence, has been prevented from asserting a cause of action because he or she remains unaware of the action due to fraud or misrepresentation, or when extraordinary circumstances beyond the trustees [sic] control make it impossible to file claims on time. Jobin v. Boryla (In re M&L Bus. Mach. Co., Inc.), 75 F.3d 586, 591 (10th Cir. 1996). The doctrine of equitable tolling is to be used sparingly. See, e.g., Wiscovitch-Rentas v. Super Roof & Gen. Contractor, 405 B.R. 397 (D.P.R. 2009). In the case of fraud, equitable tolling will apply if the trustee can prove that (1) the alleged fraud was concealed by affirmative acts of the defendant, or (2) although the fraud was not affirmatively concealed, it went undiscovered despite due diligence on the trustee's part. See, e.g., Milby v. Templeton (In re Milby), 875 F.3d 1229, 1235 (9th Cir. 2017). The limitation period will not be equitably tolled, however, if the court finds that that trustee has not acted diligently. See, Ernst & Young v. Matsumoto (In re United Ins. Mgmt., Inc.), 14 F.3d 1380, 1386 (9th Cir. 1994) (“equitable tolling’s requirement of diligence is particularly acute in the bankruptcy context”); In re Silva, 2016 U.S. App. LEXIS 22312 (9th Cir. Dec. 15, 2016) (unpublished). Eckbold v. Miller (In re Redden), 2013 Bankr. LEXIS 4023, at *13-15 (Bankr. D. Del. Sept. 26, 2013); Nasuti v. Dolin (In re McDonald), 500 B.R. 209, 211-13 (Bankr. N.D. Ga. 2013) (refusing to equitably toll statute of limitations where trustee did not exercise proper diligence).
(c) § 549 which enables the trustee to avoid post-petition transfers by a debtor that are not authorised by the Bankruptcy Code or the court. Mr Hanlon notes that to establish a post-petition transfer under § 549 the trustee must establish: first, that there was transfer; secondly, that the transfer was of estate property; thirdly, that the transfer was not authorised; and fourthly, that the transfer occurred after the commencement of the case. Section 549(d) establishes a statute of limitations of two years after the date of the transfer sought to be avoided. An action under the section “must be filed timely”. The § 549(d) statute of limitations can be waived and may also be equitably tolled; and
(2) provides an analysis of the application of the statute of limitations in § 546(a) of the Bankruptcy Code in relation to the Double Bay Properties and the application of the § 549(d) statute of limitations in relation to the sale of the Merriwa Properties.
79 In relation to the Double Bay Properties Mr Hanlon’s report includes the following, which was read as a submission:
Under the Bankruptcy Code and cases interpreting it, a court should hold that the statute of limitations to bring an action for fraudulent transfer of the Double Bay proceeds expired on May 18, 2018, two years after the commencement of the Chapter 7 Case. Although the Debtor failed to schedule the transfer of Double Bay, he disclosed the transfer during the June 21, 2016 Examination, and the Trustee was on notice of the Double Bay transfer, as evidenced by his request for the agreement between the Debtor and his spouse and his March 20, 2017 Status Report. Despite knowledge of the potential claim, the Trustee did not commence an action within 2 years of the commencement of the Chapter 7 Case.
A Court would not apply the doctrine of equitable tolling to extend the statute of limitations under Section 546(a) of the Bankruptcy Code. Even assuming that Debtor's failure to schedule the transfer was intentional fraud and constituted "extraordinary circumstances" which prevented the Trustee from filing a claim, the transfer was discovered by the Examination. A trustee seeking to apply the doctrine of equitable tolling must demonstrate an inability to discover assets and avoid post-petition transfers in a time to file a timely action to “either active [] or passive [] concealment” of the underlying facts by the debtor. In re Anderson, 511 B.R. 481, 499 (Bankr. S.D. Ohio 2013). Here, the Double Bay transfer and unequal distribution of proceeds was disclosed to the Trustee twenty-three months before the statute expired. Applying Ninth Circuit's “stop-clock rule” would extend the statute of limitations to June 16, 2018, two years from the discovery of the Double Bay transfer. See, In re Milby, 875 F.3d 1229, 1235 (9th Cir. 2017).
80 Mr Hanlon then addresses the Merriwa Properties. He notes that Mr McGowan does not own the First Merriwa Property, the Second Merriwa Property or the shares in Tawarri but that his 50% shareholdings in TRW is property of Mr McGowan’s bankrupt estate and that the Trustee’s rights as a shareholder of TRW would be determined under corporate laws applicable to TRW. Mr Hanlon says that the § 549(d) statute of limitation does not apply because that section would only apply if there has been a transfer of property of the estate and there is no evidence that Mr McGowan has transferred his shares in TRW.
81 Mr Hanlon’s report includes the following summary, which was also read as a submission:
Based on the foregoing and subject to the limitations and assumptions set forth in this Opinion, it is my opinion that under present reported decisional authority and statutes applicable to federal bankruptcy cases, in a properly presented and competently argued case, a United States Bankruptcy Court or other United States court exercising jurisdiction of such case under the Bankruptcy Code and under Title 28 of the United States Code would, in the proper exercise of its equitable discretion, apply the 2 year statute of limitation to the Trustee's attempt to recover proceeds of Double Bay as a fraudulent transfer, and would not exercise its discretion to apply equitable tolling to the statute of limitations, except to the extent of the “stop-clock rule,” which would extend the limitations period to June 21, 2018. The 2 year statute of limitation in Section 549(d) does not apply to the transfers of the First Merriwa Property and the Second Merriwa Property, because neither is property of the Debtor's estate.
82 Mr Hanlon’s report is expressed to be subject to a number of limitations including:
My opinion herein is expressly predicated on a timely and procedurally proper defense of statute of limitations being asserted and fully litigated by Debtor. I note that a Bankruptcy Court or other United States court exercising jurisdiction of such case under the Bankruptcy Code, as a court of equity, has the express power to issue any order or process necessary to carry out the purposes and provisions of the Bankruptcy Code (provided that the foregoing does not alter the reasoned opinion set forth herein).
Equitable tolling analysis requires a fact-intensive inquiry, and so equitable tolling cases are largely sui generis. Accordingly, it is difficult to ascertain a consistent factual pattern upon which legal precedent of general applicability may be based. The foregoing opinion, therefore, necessarily is based upon a reasoned analysis of cases decided by courts under the laws of various jurisdictions, which cases would not necessarily be controlling and offer at best a general guide in attempting to anticipate what circumstances will result in substantive consolidation.
83 The effect of Mr Hanlon’s evidence is as follows:
(1) pursuant to § 546(a) of the Bankruptcy Code, a trustee has a period of two years after the date of entry of the order for relief to bring an avoidance claim under § 548 of the Bankruptcy Code against a debtor;
(2) it is for the defendant to such an action to assert a defence based on the statute of limitations in § 546(a). That defence must be raised in a timely fashion and the failure to do so may result in a waiver of the statute of limitations defence;
(3) the limitation period in § 546(a) can be extended by agreement or may be equitably tolled; and
(4) a claim by a trustee under § 549 of the Bankruptcy Code to avoid a post-petition transfer not authorised by the Bankruptcy Code or the court is to be brought within two years after the date of the transfer sought to be avoided. That limitation period can be waived if not pleaded as a positive defence and may be equitably tolled.
84 Having regard to Mr Hanlon’s evidence and Mr McGowan’s submissions, based on Mr Hanlon’s report, the following issues arise.
85 First, contrary to Mr McGowan’s submissions, it does not appear that an avoidance action is extinguished by operation of § 546(a)(1) if the action is not brought within the two year limitation period. Mr McGowan’s position is based on the terms of § 546(a) which provides:
(a) An action or proceeding under section 544, 545, 547, 548, or 553 of this title may not be commenced after the earlier of—
(1) the later of—
(A) 2 years after the entry of the order for relief; or
(B) 1 year after the appointment or election of the first trustee under section 702, 1104, 1163, 1202, or 1302 of this title if such appointment or such election occurs before the expiration of the period specified in subparagraph (A); or
(2) the time the case is closed or dismissed.
86 Notwithstanding the chapeau to § 546(a), the effect of Mr Hanlon’s evidence is that, while a statute of limitations is established under § 546(a) of the Bankruptcy Code, a claim can be brought by a trustee with the onus then being on the defendant to plead an affirmative defence relying on that section. If that is not done in a timely fashion the entitlement to rely on such a defence may be waived. Mr Hanlon also points out that the limitation period can be extended “by stipulation” or may be equitably tolled.
87 Seemingly, in support of the proposition that failure to assert a timely defence based on the statute of limitations in § 546(a) may result in a waiver of that defence, Mr Hanlon refers, by way of example to one case, IBT International, Inc. v Northern (In Re International Administrative Services, Inc.) 408 F3d 689 (11th Cir 2005) (IBT International). In that case the trustee of the debtor, International Administrative Services, Inc. (IAS), commenced a proceeding against IBT International, Inc. (IBT) and Southern California Sunbelt Developers, Inc. (SCSD) to recover assets which the trustee alleged had been fraudulently transferred from IAS to IBT and SCSD.
88 The background to the claims is complicated. IAS had been the subject of a number of proceedings claiming damages for negligent advice and of a number of regulatory investigations. As a result of the litigation and investigations, with the assistance of lawyer, David Tedder, IAS attempted to formulate a plan to shield assets from creditors. Mr Tedder transferred assets to foreign and domestic entities which he owned and then “recycled” those assets through international transactions. Between 1992 and 1996 Charles Givens, the sole shareholder of IAS, removed in excess of $50 million from IAS.
89 IAS filed a voluntary Chapter 11 bankruptcy petition on 20 June 1996. The US Trustee appointed the Official Committee of Unsecured Creditors (Committee) to facilitate IAS’ reorganisation. However, Mr Givens still had an active role in IAS which hampered its ability to investigate the transfers. The Committee discovered the transfers between IAS and Mr Givens and IAS assigned its right and duty to pursue any fraudulent transfers or avoidance actions to the Committee.
90 By September 1996 the trustee faced the task of unravelling the transfers; his ability to do so was hampered by Mr Givens and his associates who, among other things, delayed document production, withheld discovery responses and “lost” records of the transfers. A special master was eventually appointed by the bankruptcy court to oversee discovery compliance. Ultimately, because of the problems associated with discovery, the trustee was unable to commence proceedings to avoid the transfers within the two year limitation period which expired on 20 June 1998. The bankruptcy court extended the time to file avoidance actions “through the time of a hearing by the Special Master on July 29, 1998, when the court would against consider any extensions based upon the prospection of discovery”.
91 The hearing before the special master did not conclude until 3 September 1998, one month after the expiry of the initial extension. The special master determined that the transfer documents did not seem to have been misplaced but that they had been “deliberately and intentionally secreted” from the trustee. Based on these findings, the trustee’s oral application made on 3 September 1998 to extend further the time to file avoidance actions was granted and an order extending the time to file avoidance actions until 10 February 1999 was entered on 17 September 1998. On 10 February 1999 the trustee filed the proceeding against a number of defendants. IBT and SCSD were joined as defendants on 17 August 1999, once the trustee had traced IAS assets to them. By the first count of the amended complaint the trustee sought to avoid any transfer of an interest of IAS in property pursuant to § 544(b) of the Bankruptcy Code.
92 Judgment was entered in favour of the trustee in the bankruptcy court and was affirmed on appeal to the district court. IBT and SCSD then appealed to the Court of Appeals, Eleventh Circuit. One of the questions on appeal was whether the statute of limitations prevented an extension of time for bringing the action by either court order or equitable tolling. IBT and SCSD argued that: the bankruptcy court did not have the power to extend the § 546(a) limitation period; the bankruptcy court’s extension of that period was inoperative because of the gap between the orders that were made; the doctrine of equitable tolling should not apply to the adversary proceeding; and the § 546(a) enlargement orders were ineffective against them.
93 The court first dealt with the threshold issue of whether the bankruptcy court had any authority, either by its own order or by equitable tolling to enlarge the period in § 546(a) for commencing avoidance actions. The court found at 699 that § 546(a) is a “statute of limitations, subject to waiver, equitable tolling, and equitable estoppel”. The court held that § 546(a) does not operate as “a jurisdictional bar”. The court also held at 699-700 that the bankruptcy court has the discretion to extend the filing period for an adversary proceeding and, in the context of the facts before it, found that the limitation period was extended albeit, the court observed, not in a seamless way.
94 Out of “an abundance of caution” the court did “not limit [its] analysis of the limitations period to the bankruptcy court’s orders” and considered whether the trustee demonstrated an equitable basis for extending the limitation period. The Court said at 700-702:
Where, despite the exercise of due diligence, a trustee fails to timely bring an avoidance action due to fraud or extraordinary circumstances beyond the trustee’s control, equitable tolling prevents the expiration of § 546(a)’s limitations period.
…
Generally, two types of cases give rise to the equitable principles of tolling where the plaintiff cannot timely commence an action because of a defendant's affirmative or negligent conduct. In re Pomaville, 190 B.R. 632 (Bankr.D.Minn.1995). First, when the fraud goes undiscovered because the defendant has taken positive steps after the commission of the fraud to keep it concealed, then the statute of limitations is tolled until the plaintiff actually discovers the fraud. Id. at 636-37. In re Lyons, 130 B.R. 272, 280 (Bankr.N.D.III.1991). “Fraudulent concealment must consist of affirmative acts or representations which are calculated to, and in fact do, prevent the discovery of the cause of action.” Lyons, 130 B.R. at 280. The identity of the party concealing the fraud is immaterial, the critical factor is whether any of the parties involved concealed property of the estate. Id. The second instance is the more mundane circumstance where the defendant has not actively concealed the fraud, and the plaintiff must then exercise due diligence in an attempt to discover the fraud. Id. The limitations clock starts ticking when the plaintiff obtains—or should have obtained—knowledge of the underlying fraud. Id. Again, the inquiry is whether assets of estate have been concealed. Id. Because the applicability of equitable tolling is a fact-based decision, the bankruptcy court determines whether equitable tolling governs on a case-by-case basis. Pomaville, 190 B.R. at 636.
95 Based on Mr Hanlon’s evidence and the decision in IBT International it cannot be said conclusively that Mr Aquino’s right to bring an action under § 548 of the Bankruptcy Code in relation to the transfer of the Double Bay Properties has been extinguished. Section 546(a) operates as a statute of limitations. If a proceeding is commenced, it may be met by a defence based on the statute of limitations in § 546(a). The court would need to determine whether the defence was made out and, presumably whether in the circumstances, equitable tolling prevented the expiration of the limitation period in § 546(a). Whether that is so will depend on the facts surrounding the circumstances in which Mr Aquino as Trustee became aware of the existence of the Double Bay Properties and the cause of action. It is not an issue to be determined on this application.
96 Secondly, an avoidance action under § 548 of the Bankruptcy Code may, and is most likely, to be brought against a party other than Mr McGowan. That is, the recipient of the asset in question rather than the donor. While one may infer that if such an action is brought against Mr McGowan he would plead a defence based on the statute of limitations in § 546(a) of the Bankruptcy Code, the attitude and approach of other potential defendants is unknown.
97 Thirdly, at this stage Mr Aquino has not identified what cause of action, if any, may lie as a result of any inquiries or investigations made by the Australian Representatives and against whom. That is hardly surprising given the limited information available to him. Nor as I have already observed is there sufficient evidence before me to determine whether, if a claim was brought under § 548 of the Bankruptcy Code, it would be successfully defended on the basis of a statute of limitations defence relying on § 546(a) or whether Mr Aquino would be successful in extending the period within which the claim could be brought relying on the principles of equitable tolling. As Mr Hanlon points out an “equitable tolling analysis requires a fact-intensive inquiry” and “it is difficult to ascertain a consistent factual pattern upon which legal precedent of general applicability may be based”.
98 Finally, § 549(d) of the Bankruptcy Code has no application to the transfers of the Merriwa Properties because those properties are not property of Mr McGowan’s estate nor to the shares in TRW because there is no evidence that Mr McGowan has transferred his shares in TRW.
99 To the extent that Mr McGowan seeks to limit the grant of any relief under Art 21(1)(g) of the Model Law to exclude the power to bring proceedings under ss 120-122 of the Bankruptcy Act, for the reasons set out above there is no basis on which such a limitation should be placed on the grant of relief.
100 Mr McGowan also submits that any relief granted under Art 21(1)(g) of the Model Law should be limited to exclude s 37A of the Conveyancing Act for the same reasons as he seeks to exclude ss 120-122 of the Bankruptcy Act. Section 37A of the Conveyancing Act provides:
(1) Save as provided in this section, every alienation of property, made whether before or after the commencement of the Conveyancing (Amendment) Act 1930, with intent to defraud creditors, shall be voidable at the instance of any person thereby prejudiced.
(2) This section does not affect the law of bankruptcy for the time being in force.
(3) This section does not extend to any estate or interest in property alienated to a purchaser in good faith not having, at the time of the alienation, notice of the intent to defraud creditors.
101 The relief available under s 37A(1) of the Conveyancing Act bears some similarity to ss 120-122 of the Bankruptcy Act and § 548 of the Bankruptcy Code. However, in contrast to those sections, any creditor of Mr McGowan has standing to commence a proceeding seeking relief under s 37A of the Conveyancing Act provided they are a person prejudiced by the relevant transfer. That will be the case if at the date of hearing or at the date of filing the summons commencing the proceeding, they are a person who is owed a debt: see HP Mercantile Pty Ltd v Dierickx [2012] NSWSC 1005 at [86]-[87]. It is difficult to see how the limitation periods prescribed in the Bankruptcy Code for avoidance actions by a trustee could affect the commencement of a proceeding by a person with standing under s 37A of the Conveyancing Act. Insofar as Mr McGowan says that any relief granted under Art 21(1)(g) of the Model Law should be fashioned to exclude the ability for the Australian Representatives to commence a proceeding under s 37A of the Conveyancing Act, for the same reasons as set out above in relation to the similar provisions of the Bankruptcy Act, I would decline to do so.
Conclusion
102 It follows from the matters set out above that orders should be made in the form sought by Mr Aquino in the Originating Application.
103 That leaves the question of costs. Mr McGowan submits that, had the relief in paras 3 and 6 of the Originating Application not been sought by Mr Aquino he would not have opposed the residue of the application, save for the issue of costs. However, Mr McGowan has been unsuccessful in his opposition. Therefore he is not entitled to his costs of the application.
104 Mr Aquino seeks an order that Mr McGowan should pay his costs and that he should otherwise be entitled to be indemnified for his costs from the estate. Given that Mr Aquino has been successful in his application, over Mr McGowan’s opposition, I will make orders in relation to costs in the terms sought by Mr Aquino.
I certify that the preceding one hundred and four (104) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Markovic. |
Associate:
