Cross-border insolvency refers to situations where insolvency proceedings implicate multiple jurisdictions. Even though foreign creditors may have a security interest recognised in their jurisdiction, they must ensure that their interest is perfected under New Zealand legislation to retain priority over other creditors.
Recognition of proceedings may not be unilateral: New Zealand recognises foreign proceedings, but overseas recognition of New Zealand proceedings is determined by those countries’ laws and their adoption of the Model law.
Any orders to deal (or cease dealing) with assets of a debtor or transactions of an insolvency, can only occur if there are existing foreign proceedings, and the New Zealand Court recognises that foreign proceeding.
The use of cross-border insolvency
Insolvency procedures (e.g. receiverships, liquidations, voluntary administrations) are legal mechanisms used to administer protocols for companies in financial distress. Each procedure has its own distinct goal and protocols governed by the laws of the jurisdiction it is taking place. In New Zealand, insolvency procedures are predominantly governed by the Companies Act 1993, Insolvency Act 2006, Personal Properties Securities Act 1999 (PPSA), and the Receiverships Act 1993, among other legislation and regulations.
However, in some cases, debtors of securities are in another jurisdiction to their assets, or they operate multi-jurisdictionally. There also may be cases where a foreign proceeding has made a ruling on a particular asset or transaction, which implicates a person in another jurisdiction.
The UNCITRAL Model Law on Cross-Border Insolvency (Model Law) was created to address this. It facilitates cooperation between courts and insolvency practitioners across borders whilst respecting national sovereignty.
Application of cross-border insolvency in New Zealand
The Model Law was adopted by the United Nations Commission on International Trade Law and approved by the General Assembly of the United Nations, in 1997. New Zealand has adopted its version of the Model Law by enacting the Insolvency (Cross-border) Act 2006 (Act).
The Act applies the Model Law provisions unilaterally, which means New Zealand courts can recognise and cooperate with insolvency proceedings from any foreign jurisdiction, regardless of whether that jurisdiction has implemented the Model Law. However, the effectiveness of cross-border cooperation may vary in practice, as countries that haven’t adopted the Model Law might lack corresponding legislation to reciprocate with New Zealand courts.
The Act essentially allows application to recognise foreign insolvencies and to administer them locally in accordance with them. The Act applies when:
- Assistance is sought in New Zealand by a foreign court or foreign insolvency representative; or
- Assistance is sought in a foreign country regarding New Zealand insolvency proceedings; or
- Concurrent insolvency proceedings exist in more than one state involving the same debtor.[1]
Benefits and consequences of cross-border insolvency in New Zealand
Direct Access to Courts
One of the fundamental principles in the Act is the direct access granted to foreign insolvency representatives (including liquidators and those appointed to reorganise the debtor’s assets or affairs). Foreign representatives are entitled to apply directly to New Zealand courts for recognition of foreign insolvency proceedings, allowing them to administer or protect a debtor’s assets located in New Zealand.[2] This ensures foreign representatives do not have to initiate separate, full insolvency proceedings within New Zealand, ensuring quicker access to a debtor’s New Zealand-based assets.
Types of Recognition
Once the court recognises a foreign proceeding, it can either be classified as a foreign main proceeding (when the debtor’s main centre of interest is in the foreign country) or a foreign non-main proceeding (where the debtor has only an establishment in the foreign country).
Recognition of a foreign main proceeding has significant implications, particularly for secured parties and creditors. Whilst a foreign representative may apply to seek a stay on commencement or continuation of individual actions/proceedings, the recognition of a foreign main proceeding triggers an automatic stay on the commencement or continuation of legal proceedings against the debtor’s New Zealand assets.[3] Additionally, the foreign representative may be empowered to manage and protect these assets. However, New Zealand law provides for certain protections for secured creditors, who may seek relief from the automatic stay if their interests are jeopardised.[4]
Relief
New Zealand courts also have broad discretion to grant relief to foreign representatives both before and after recognition. Urgent relief may be granted before formal recognition is granted, which might include temporary stays or asset protection measures.[5] Post-recognition, the court is empowered to authorise actions such as selling the debtor’s assets, administering them for the benefit of creditors, or entrusting the assets to the foreign representative.[6] These provisions are crucial for protecting the debtor’s estate from dissipation and ensuring that creditors in all involved jurisdictions are treated fairly.
Cooperations Between Courts
The Act mandates New Zealand Courts to work together with the respective foreign court to ensure the efficient handling of cross-border insolvencies, allowing for consistent legal treatment and avoids potential conflicts between different legal systems.[7] Additionally, it establishes procedures for coordinating concurrent insolvency proceedings in different countries, ensuring that assets are distributed equitably and that creditors’ rights are protected across borders.[8] This framework allows for greater efficiency in resolving complex multinational insolvencies, reducing the risk of competing claims over assets.
For Creditors
Overseas Secured Parties and New Zealand Debtors
Secured parties with interests in personal property must comply with the PPSA. Even though foreign creditors may have a security interest recognised in their jurisdiction, they must ensure that their interest is perfected under New Zealand’s PPSA to retain any priority over other creditors.
New Zealand Secured Parties and Overseas Debtors
For New Zealand secured parties seeking to enforce a security interest over an overseas debtor or a New Zealand debtor with substantial assets abroad, the Act will be of little value.
The Act focuses on recognition of foreign insolvency proceedings in New Zealand, but it doesn’t specifically enable the recognition of New Zealand proceedings in overseas courts. Instead, there is an expectation of cooperation and coordination between New Zealand courts and foreign courts in insolvency proceedings. While the Act mandates cooperation, it does not obligate foreign courts to reciprocate by recognising New Zealand proceedings. Recognition of New Zealand proceedings abroad depends on the foreign jurisdiction’s domestic laws. If the foreign jurisdiction has also adopted the Model Law and its equivalent of Article 15 of the Act, it may allow for recognition of New Zealand proceedings there.
If concurrent insolvency proceedings exist in New Zealand and overseas (such as when a debtor has assets in multiple countries), The Act provides guidance on the coordination of these proceedings to avoid conflicts and ensure equitable treatment of creditors.[9]
[1] Article 1, Schedule 1, Insolvency (Cross-border) Act 2006 (Act).
[2] Article 9, Schedule 1 of the Act.
[3] Articles 17 and 21 of the Act.
[4] Article 25, Schedule 1 of the Act.
[5] Article 19, Schedule 1 of the Act.
[6] Article 21, Schedule 1 of the Act.
[7] Article 27, Schedule 1 of the Act.
[8] Articles 28–30, Schedule 1 of the Act.
[9] Chapter 5 of the Act.
