4. Litigation, arbitration and insolvency

Introduction

4.1 Cross border litigation, arbitration and insolvencies generate issues that are at the heart of cross border legal risk. The civil remedies that are in fact available through those proceedings set the ground rules for negotiations over cross border legal issues and influence the form of the legal support that is given to the commercial arrangements that help in managing cross border risk. Many of the issues raised in the inquiry, and many of the comments in the submissions and consultations, concern problems arising in cross border legal proceedings.

4.2 This chapter outlines the main litigation, arbitration and insolvency issues raised with the Commission and their implications for reform. The recommendations in this chapter fall into two categories

• proposals for reform that are essentially technical and will require only limited further consultation, primarily with legal practitioners and the courts

• issues for reform that will require more extensive consultation with the legal profession, courts and the business community.

The implementation of these recommendations is discussed at the end of the chapter. In all cases it is contemplated that the Attorney-General will review and form a view on the proposal or issue for reform. However in some cases full implementation will depend upon other bodies such as the courts.

Litigation

Overview

4.3 Chapter 2 outlined the principal concerns expressed in submissions and consultations about cross border litigation and about related problems in insolvency administration and arbitration. The problems arise because of difficulties in the detailed technicalities of the procedures used in court proceedings in Australia and in other countries. The analysis in Part II of this report illustrates many of the technicalities in Australian law and practice and their effect on particular claims and disputes.

4.4 The information and comments received during the inquiry indicate that the reforms required to address these problems are a combination of statutory provisions, changes in court rules and practices, and techniques allowing greater judicial cooperation between the courts of Australia and other countries. The changes need to be led by federal law reform but closely guided by consultation with the business community, courts and legal profession. The reforms fall into five categories:

• commencing proceedings — service and jurisdiction

• obtaining evidence abroad

• secrecy laws

• seeking protective orders regarding offshore assets or to detain absconding defendants

• enforcing Australian judgments outside Australia.

The reforms are discussed below in these categories.

Commencing proceedings — service and jurisdiction

4.5 The commencement of proceedings involving cross border parties and evidence can raise significant issues of service of process and jurisdiction. Australian courts will consider not only their powers to issue summons or applications intended to be served abroad but also whether the actual service of that process in a foreign court’s territorial jurisdiction may raise questions that challenge the authority of foreign courts and government.[cxxix] Questions of that kind involve issues of international comity which Australian courts are reluctant to prejudice even if the extent of such comity is uncertain.

4.6 Sometimes alternative forms of service are available. For example, in a situation where there were close links between a local Australian subsidiary and its foreign parent, service on the US parent company was permitted via service on the local subsidiary.[cxxx] However, where such shortcuts are not available, service of process offshore can be a problem particularly in cases of urgent relief where it is not feasible to use processes such as service through diplomatic channels given the delays these involve.[cxxxi]

Reform (1) — Hague Service Convention

4.7 A major barrier to service outside Australia is that some countries prohibit the service of the process (or some kinds of process) of a foreign court without the approval of the local authorities. In some cases breach of the prohibition attracts criminal penalties. This prohibition is more likely in civil law jurisdictions. Such a barrier is mitigated to some degree where it is possible to effect service under the procedures set out in the Hague Convention on the Service Abroad of Judicial and Extra-judicial Documents in Civil and Commercial Matters 1965 (Hague Service Convention). It was suggested in several consultations that there would be gains in terms of cost and efficiency if Australia was to become a party to the Hague Service Convention.[cxxxii] A consensus has not yet been reached among the States on the terms of accession. Implementation of the convention in Australia could be an opportunity to remove inconsistencies and gaps in the rules of relevant courts in Australia applying in relation to service of documents.[cxxxiii] The indications from the Commission’s inquiry are that this is a priority for review.

Reform (2) — service on constructive trustees

4.8 A second service issue arises where as a result of acts partly in, and partly outside, the Australian jurisdiction the foreign party has either knowingly assisted or received funds in breach of trust, thereby giving rise to equitable claims on a foreign party as a constructive trustee in any subsequent recovery action. There is some uncertainty as to whether in that situation there is sufficient territorial connection for service and jurisdiction. This issue has been clarified for English cross border litigation in the relevant English rules of court. The position in Australia requires consistent clarification in all State and federal jurisdictions through suitable amendment of rules of court.[cxxxiv]

Reform (3) — overlapping jurisdiction

4.9 It is not uncommon for more than one court to have jurisdiction, under its own rules, in a cross border dispute. This can lead to parallel proceedings which increases costs and creates uncertainty and potential conflict between judgments. Various mechanisms have developed to address this, including (under Australian law) applications to stay proceedings on the ground that the forum is clearly inappropriate (forum non conveniens), anti-suit injunctions and negative declarations. Consultations and submissions indicated that the potential for parallel proceedings was a significant cause of complexity, cost and delay.[cxxxv] Some commentators suggested that there should be some capacity for direct discussion between the judges handling the dispute in each country’s courts to help overcome any duplication.[cxxxvi] It has also been suggested that the principles governing the issue of forum non conveniens need statutory clarification.[cxxxvii]

Reform (4) — choice of law and jurisdiction

4.10 One submission drew attention to the complications created by Australia’s federal system for choice of law in cross border contracts.

… a cross border transaction which provides that the proper law of the contract is to be ‘Australian law’ opens up a considerable areas of uncertainty. From the point of view of foreign commercial interests, there is a very natural hesitation in entering into a contract which provides that the proper law of the contract shall be, for example, the law of Tasmania or the law of the Northern Territory or the law of NSW, although, if uncertainty is to be avoided, there is no escape from observing this degree of precision.[cxxxviii]

The same issue can arise in relation to the choice of ‘Australian courts’ as a choice of jurisdiction.

4.11 One way of simplifying the choice of law is to provide in federal legislation that any reference in a cross border contract to ‘Australian law’ shall be construed as a reference to the law of the jurisdiction chosen in the contract or, if none, the jurisdiction with which the dispute has the closest connection.[cxxxix] This is similar to the way in which Germany overcomes the same federal issue.[cxl] The Commission considers that this should be considered further both in general principle and in relation to the specific choice of law rules which would be applied.[cxli] As choice of law and choice of jurisdiction are closely related this statutory reform should be considered in relation to both.

Obtaining evidence abroad

4.12 Cross border litigation raises significant issues concerning the collection and admission of evidence.[cxlii] It is not uncommon for a cross border dispute to arise out of a complex chain of transactions involving elaborate international corporate structures with the parties disagreeing about many details of the arrangements and events. A thorough investigation is required but there are significant practical difficulties and costs involved in investigating offshore transactions. Specific issues were raised in the inquiry about the use of letters of request to obtain documentary evidence, bilateral agreements on evidence issues, reciprocal cooperation on evidence taking, and the admissibility of foreign evidence. These are discussed below.

Reform (1) — letters of request and documentary evidence

4.13 The Foreign Evidence Act 1994 (Cth) (Foreign Evidence Act) does not allow letters of request purely for documentary evidence located abroad. Documents can only be sought from foreign non-parties as part of a request for oral testimony.[cxliii] Given the importance of documentary evidence to commercial disputes, this is a significant shortcoming.[cxliv] It limits access to documents that only relate to the oral examination of a witness in a foreign jurisdiction by a foreign court. It also creates a problem for preliminary discovery where evidence is located offshore since discovery is limited to documentary evidence.[cxlv]

Reform (2) — Bilateral agreements on evidence

4.14 The Hague Convention on the Taking of Evidence Abroad in Civil and Commercial Matters 1970 (Hague Evidence Convention) provides Australian litigants with a procedure to obtain evidence located outside Australia. However it has been criticised for procedural delay and for giving member states the ability to make reservations in relation to pre-trial discovery requests. One response to these difficulties is to supplement the Hague Convention with more extensive bilateral arrangements for gathering evidence across borders.

4.15 Bilateral arrangements of this kind have already been made between states in certain areas such as trade practices and securities.[cxlvi] They can streamline procedures significantly. For example, bilateral agreements may provide for the direct communication of a letter of request to the court of the place of execution. They sometimes permit witnesses to be examined by a consul without the intervention of the authorities of the state in which that examination takes place. It may even be possible to obtain the assistance of a foreign court to compel witnesses under a bilateral arrangement even though the state has not made a declaration permitting this under the Hague Evidence Convention.[cxlvii] In addition, bilateral arrangements can make the sanction of a local prosecution available for perjury or contempt.[cxlviii]

Reform (3) — reciprocal cooperation on evidence

4.16 A third aspect of evidence procedures raised during the inquiry concerns foreign litigants seeking disclosure of information by letters of request to Australian courts. It was noted in one submission that the State legislation which deals with letters of request is silent on the use of the letter of request procedure by a US litigator for the purpose of US style depositions, which are used as part of the US discovery process, rather than for evidence at the trial.[cxlix] The position in England seems to be clear that it is not acceptable to use the letter of request procedure for discovery depositions. Case law to date in New South Wales has been more liberal. The Supreme Court of New South Wales has held that

… there is power [to make the orders sought] provided that the foreign court is desirous of obtaining the evidence for use, or possible use, at the trial notwithstanding that there is another, and dominant, purpose for which the evidence is required.[cl]

4.17 This is a significant issue for the collection of evidence and will have an impact on any reciprocal arrangements Australia seeks on evidence procedures. There is a need therefore for a clear and common position to be developed on this issue throughout Australia (particularly given the contrary approach in England). Closely related to this is the question of whether foreign lawyers are entitled to examine persons resident in Australia for the purposes of foreign proceedings under the letter of request procedure.[cli] This also needs to be clarified. It raises the broader issue of Australian lawyers’ rights of appearance and representation outside Australia and foreign lawyers’ similar rights in Australia. This is discussed further in the section on legal representation and advice below.

Reform (4) — the ‘civil or commercial’ threshold

4.18 A further issue on evidence procedures is the meaning of ‘civil or commercial’ in the legislation enacted by the States to assist with letters of request from a foreign court.[clii] This legislation is generally couched in terms of assisting foreign ‘proceedings in any civil or commercial matter’. Unfortunately, there is no established common law meaning for this phrase. If the point is taken (as it has been in English litigation) the relevant State court would need to go into a detailed examination of the law in the foreign jurisdiction to determine if the foreign proceedings properly relate to civil or commercial matters in that country and then to determine whether they can be so described in the local State jurisdiction.[cliii] When determining this issue the court may also need to consider policy questions such as whether a letter of request that relates to foreign revenue or other matters which are arguably of a civil or commercial nature but encompass public law notions, should be assisted by local courts.[cliv] Statutory guidance is required to define the phrase.

Reform (5) — admissibility of ‘mutual assistance’ evidence

4.19 For effective litigation in Australia, it is necessary not only to be able to collect foreign evidence but also to have it admitted in the Australian court. However there seems to be a mismatch between Australian law on the collection of foreign evidence and Australian law on its admission in Australian courts. It was submitted to the Commission that there is a gap in the Foreign Evidence Act in relation to the use in civil proceedings of material obtained by the Attorney-General or the Australian Securities Commission under mutual assistance arrangements.

4.20 The Attorney-General and the Australian Securities Commission each have powers and are the beneficiaries of international agreements and arrangements which enable them to obtain evidence from abroad and bring it back to Australia. In the case of the Attorney-General the powers relate primarily to the investigation and prosecution of crimes and the attachment of proceeds of the crime. In relation to the ASC, the powers relate to the ASC’s investigatory powers. In either case, the material obtained may also be of relevance and use to a civil litigant. For example, the victims of the crime being investigated may be pursuing civil proceedings in relation to the same matters and a company whose directors are being investigated by the ASC may be pursuing civil remedies against those directors.

4.21 The first issue is whether the Attorney-General or the ASC may lawfully pass on that material to a civil litigant. This is sometimes possible. In some cases it is expressly permitted for certain purposes under the relevant treaty or memorandum of understanding made pursuant to the Mutual Assistance in Business Regulation Act. In other cases the foreign authority may give express permission when the request is put to it.

4.22 The second issue is whether the material, lawfully passed on to the civil litigant, can then be admitted as evidence in the Australian court. This is where the gap occurs. The Foreign Evidence Act only gives the court a discretion to admit the material

• in the case of the Attorney-General’s material, in a ‘related civil proceeding’ — this is a civil proceeding arising from the same subject matter from which the criminal proceeding arose and includes a proceeding under the Proceeds of Crime Act 1987 or the Customs Act 1901 or a proceeding for the recovery of a tax, duty, levy or charge payable to the Commonwealth

• in the case of the ASC material, in a civil proceeding which is not a related civil proceeding but is a proceeding under the Corporations Law or the ASC Law in which the ASC is a party.

These provisions seem to limit the court’s discretion concerning the admission of this lawfully obtained material to civil proceedings in which the Attorney-General or the ASC is involved. In the case of the Attorney-General’s material, there is potential for a broader interpretation of ‘related civil proceeding’ but this would raise some uncertainty as to the meaning of ‘same subject matter’. In any case the reasons for limiting the court’s discretion in this way are unclear.[clvii] It would seem preferable to limit the court’s discretion to material that can be demonstrated to have been properly passed on to the civil litigant by the Attorney-General or the ASC rather than to the type of civil proceeding. These provisions should be reconsidered.

Secrecy laws

4.23 In some countries banks are subject to secrecy requirements that extend beyond the usual duty of confidentiality to the bank’s customer. Disclosure of information about a customer’s bank account without the client’s consent or, in some cases, the permission of the foreign state can lead to civil or criminal liabilities.[clviii] This can affect the discovery and other disclosure orders that an Australian court is willing to make and the letters of request it is willing to issue.

4.24 Australian law on this point is not settled. The issue usually arises in the context of an application for a stay of a foreign disclosure application on the basis of international comity, bank confidentiality and bank exposure to penalty. Australian courts have looked to overseas judicial decisions to assist them on this issue, particularly US and English decisions. In the US the emphasis has been on balancing the interests, on the one hand, of the US plaintiff as litigant and the integrity of any US laws involved in the dispute and, on the other hand, any interests of the foreign bank and the foreign jurisdiction.[clix] In England the balancing approach has been supplemented by an emphasis on the sovereignty of the foreign state and the legitimate interests of professional confidentiality.[clx]

4.25 This issue needs to be reviewed. It can have significant practical consequences both for the bank involved and for the party seeking the evidence. There is also a related issue of whether a local bank branch should be quarantined from disclosure orders sought against foreign parent offices or branches. The practice defeats cross border tracing and recovery remedies but also raises the legitimate double penalty issue of when should a bank be exposed to potential contempt for failure to disclose in the foreign proceedings when disclosure would expose it to local liability for breach of confidence.

Protecting offshore assets

4.26 There is little point in pursuing a claim if there are no assets available to satisfy it. For all practical purposes a court cannot provide an effective civil remedy if it cannot prevent a defendant from removing assets beyond the reach of the court’s orders (by, for example, taking the asset offshore) or if it cannot help a successful plaintiff to find and collect the defendant’s assets after the judgment has been handed down.[clxi]

4.27 In common law and many civil law jurisdictions the legal response to these issues has been through the development of protective orders (such as the ‘worldwide’ Mareva injunction and Anton Piller orders). In broad terms these orders respectively restrain the disposal of specified assets and authorise a party to enter specified premises to search for and seize relevant assets. Often courts are willing to give ancillary relief in the form of interim payments and pre-trial disclosure orders to determine where the defendant’s assets are, have been moved to or may be moved from, even where they were originally outside the court’s jurisdiction.[clxii]

Reform (1) — extending the effect of protective remedies

4.28 In Australia Mareva injunctions, Anton Piller orders and ancillary relief such as disclosure orders and the appointment of receivers can be expressed to apply to assets, premises or documents outside Australia; that is, they can all be expressed to have extraterritorial effect.[clxiii] However in practice Australian court orders directed to foreign third parties and assets will always require the cooperation of the courts where the third parties and assets are situated unless there are bilateral or other agreements obliging those courts to give effect to the Australian orders.[clxiv]

4.29 Formal international arrangements of that kind may be possible. Article 24 of the Convention on Jurisdiction and the Enforcement of Judgments in Civil and Commercial Matters 1968 (Brussels Convention) is one example.[clxv] An alternative approach could be non-binding memoranda of understanding coupled with domestic legislation to effect protective orders.[clxvi] Such an approach could form an intermediate step to a formal bilateral arrangement. These possibilities need to be examined further.

Reform (2) — jurisdiction to grant Mareva injunctions

4.30 One particular issue that needs to be considered in relation to the effectiveness of protective orders is the circumstances in which an Australian court should have jurisdiction to grant a Mareva injunction. If, for example, a fraud occurs outside Australia and there are assets of the fraudster in Australia a Mareva injunction might be sought to freeze the assets of the fraudster pending an overseas judgment. However, if the fraudster is outside Australia and the Australian assets cannot be identified as the proceeds of the fraud there is doubt as to whether an Australian court would consider that it had jurisdiction to issue this injunction.[clxvii] In the absence of a stronger territorial connection with Australia the court is likely to take the view that a Mareva injunction is only ancillary to the exercise of jurisdiction by a foreign court and not in itself a subject for its jurisdiction.[clxviii] Such a situation would therefore create problems for parties seeking to restrain the offshore disposal of assets.

4.31 UK decisions in this area have been influential in Australia. However, the UK approach to pre-judgment Mareva jurisdiction over local assets pending the outcome of foreign proceedings remains uncertain following the recent House of Lords decision in Mercedes Benz AG v Leiduck.[clxix] Despite the more liberal approach to jurisdiction set out in sections 24 and 25 of the Civil Jurisdiction and Judgments Act 1993 (UK), which allows for the granting of interim relief in support of foreign proceedings, the House of Lords held that the rules of court confined jurisdiction to situations where there was a cause of action. Since a Mareva injunction did not decide upon and give effect to rights it did not involve a cause of action. This decision has been criticised on the basis that it is wrong in law and undermines the policy of the UK legislation, the Brussels Convention and the need of the international community to be able to effectively prevent the dissipation of assets in situations involving commercial fraud. Calls have subsequently been made for the clarification of the Civil Jurisdiction and Judgments Act 1993 (UK).[clxx] The Australian position needs to be reviewed in light of these developments.

Reform (3) — keeping absconding defendants in Australia

4.32 One submission commented that there are occasions, particularly in fraud cases, where it is appropriate for courts to restrain a defendant from leaving the country to enable the proper conduct of civil proceedings against the defendant.[clxxi] Since the abolition in most Australian States of the writ ne exeat regno there has been doubt as to whether Australian courts have the power to do this,[clxxii] although the Supreme Court of New South Wales has recently made orders to that effect and equivalent orders are available under the Corporations Law for certain investigations and for prosecutions and civil proceedings under that law.[clxxiii] This issue needs to be reviewed to determine whether the courts should be given express powers to make such orders and, if so, in what circumstances.

Enforcing Australian judgments outside Australia

4.33 A common theme in the consultations was the difficulty of enforcing Australian court decisions outside Australia.[clxxiv] In some jurisdictions (for example, Indonesia) foreign judgments are not recognised and the matter must be re-litigated in that jurisdiction to establish the judgment creditor’s rights.[clxxv] In a number of jurisdictions (for example, California) there is no international agreement governing foreign judgments but there is a domestic procedure under which the local court may recognise and enforce the foreign judgment.[clxxvi] Usually this procedure is cumbersome, costly and slow. In a few jurisdictions (for example, Germany) Australian judgments are recognised and enforced more quickly through reciprocal arrangements. The Australian law in relation to those reciprocal arrangements is now set out in the Foreign Judgments Act 1991 (Cth) (Foreign Judgments Act).[clxxvii]

4.34 There were mixed views in consultations on the policy that should be adopted in relation to recognition and enforcement of foreign judgments. Some commented that the reciprocal arrangements made to date are very limited and there is a clear need to extend them.[clxxviii] Only 31 countries are covered by the reciprocal arrangements under the Foreign Judgments Act. They include France, Germany, Japan, and certain Canadian provinces but there are a number of notable omissions such as the USA and Indonesia. One suggestion was that Australia should provide liberal unilateral recognition and enforcement of foreign judgments to establish and support an international ‘best practice’ on this issue.[clxxix] Others disagreed on the basis that this would unduly increase the risks faced by Australian firms.[clxxx] Indeed, some were wary of any reciprocal arrangements since they undermined the ability to quarantine risk to a particular country, particularly where that country might claim exorbitant jurisdiction.[clxxxi]

4.35 Australia has an ongoing program of bilateral negotiations seeking to extend its reciprocal arrangements, particularly in the Asia-Pacific region. Australia is also actively participating in the work of the Hague Conference assessing the scope for a multilateral convention on the recognition and enforcement of foreign judgments based on the Brussels and Lugano Conventions. Although it is expected to take at least ten years to prepare and settle, if it is successful it will be particularly valuable because it will directly address concerns about exorbitant jurisdiction and excessive damages awards in US litigation. These concerns are unlikely to be effectively addressed in any bilateral negotiations.[clxxxii] This bilateral and multilateral work is fundamental to cross border litigation. The Hague Conference work should be given a high priority because of its far reaching potential.

4.36 There is also an issue as to whether Australia should supplement its Hague Conference work by seeking to become a signatory to the Convention on Jurisdiction and Enforcement of Judgments in Civil and Commercial Matters 1988 (Lugano Convention) thereby effectively obtaining the same benefits as those provided in the Brussels Convention.[clxxxiii] This would require the agreement of all the EU member states. It is not clear whether that is a practical prospect. However, if it is, the benefit of becoming a signatory is that it would give Australian firms in the EU the same relief from exorbitant jurisdiction as that currently enjoyed by their European competitors in jurisdictions that are party to those conventions.

4.37 This benefit is illustrated by Article 14 of the French Civil Code. This provision gives the French courts unlimited general jurisdiction over any defendant where the plaintiff is a French national. Under the Brussels and Lugano Conventions a French judgment made on such an exorbitant basis of jurisdiction would not be enforceable against the domicillary of any other convention country (that is, a ‘Contracting State’). But for Australian corporations or individuals holding property in a Contracting State, such exorbitant jurisdiction still applies and means that the French judgment can be executed against the assets of Australian companies holding assets in France as well as in any of the contracting European states even though it could not be executed against corporations from the contracting states.[clxxxiv]

Cross border insolvency

Overview

4.38 The general view arising from consultations and submissions is that Australian bankruptcy and insolvency law is effective for domestic administrations and more responsive than most jurisdictions in assisting foreign insolvencies. However some submissions and consultations commented that there was a need for greater international cooperation because of the difficulties that emerge where realisable assets and competing creditors of the insolvent entity are spread across several jurisdictions.[clxxxv] Many of the issues discussed above in relation to cross border litigation apply equally to cross border insolvencies at the stage that legal proceedings are taken. However, there are a number of other cross border legal issues that are specific to insolvencies. These fall into two broad categories

• investigations and evidence

• international management of cross border insolvencies.

Investigations and evidence

4.39 Where there are legal proceedings on foot a trustee in bankruptcy or the liquidator of a company will be able to use the various techniques available in civil litigation to obtain evidence outside Australia that relates to that litigation. However a trustee or liquidator will often need to obtain information before any proceedings are commenced or to obtain information that does not relate to a particular proceeding.[clxxxvi] To do this the trustee will need to rely on the special investigation powers available under bankruptcy and insolvency regimes.

4.40 For this purpose section 29(4) of the Bankruptcy Act 1966 (Cth) (Bankruptcy Act) provides that a court of relevant jurisdiction in bankruptcy in Australia may seek the assistance of competent courts in a foreign jurisdiction on bankruptcy matters. This is usually done by a letter of request. Section 581(4) of the Corporations Law contains a similar provision for liquidators.

4.41 Letters of request issued under these provisions will only be effective in practice if the foreign courts to which they are sent will give effect to them. Australia only has reciprocal arrangements in place with seven countries to assure assistance in a bankruptcy or liquidation: UK, PNG, Jersey, Malaysia, Switzerland, Singapore and the USA.[clxxxvii] Although arrangements of this kind are not a pre-requisite to the issue of a letter of request, Australian courts are reluctant to issue the request unless there is evidence that the foreign court is likely to accede to the request.[clxxxviii]

4.42 Comments in consultations and submissions indicated that the reciprocal arrangements work well in the UK, Jersey and USA but that the reciprocal assistance offered in Switzerland is cumbersome and limited.[clxxxix] It was also commented that it is critical to the overall effectiveness of cross border investigations by a trustee in bankruptcy or a liquidator to increase the number of countries with which appropriate arrangements are in place.

4.43 The prospects for extending and improving arrangements for mutual assistance in bankruptcy and insolvency investigations are currently being considered by the UNCITRAL Working Group on Insolvency. This is discussed later in this chapter. It was suggested during the inquiry that it would be useful to supplement the UNCITRAL project with some specific work focusing solely on mutual assistance arrangements and assessing the prospects for bilateral arrangements.[cxc] Mutual assistance was seen as the major area of need in current arrangements. It was suggested that bilateral arrangements might be able to be settled with some countries within a shorter period than is expected to be required for the UNCITRAL project and could provide a greater level of assistance than a multilateral arrangement would allow.

Admissibility of foreign evidence

4.44 As discussed earlier in this chapter, the Foreign Evidence Act has set up a regime for the admission in Australian courts of material obtained by a letter of request in civil proceedings. However the Act does not deal with the admission of material obtained through letters of request issued under the special investigatory regimes established in the Bankruptcy Act and Corporations Law for bankruptcies and insolvencies. It can be particularly important in insolvency investigations to be able to tender in evidence transcripts of the examination of witnesses outside Australia.[cxci] In the absence of express statutory provisions, the admissibility of transcripts is uncertain.[cxcii] Consideration should therefore be given to amending the Foreign Evidence Act or the Evidence Act 1994 (Cth) for this purpose.

Regulatory investigations

4.45 Cross border insolvencies and bankruptcies that involve Australian firms are often the subject of investigation by Australian regulatory and prosecuting agencies. Under their statutory powers of investigation these agencies are able to generate information that trustees or liquidators may not be able to discover independently under their more limited investigatory powers. Often this information can be directly relevant to the investigations and purposes of the trustee or the liquidator. As discussed above in relation to the admissibility of ‘mutual assistance’ evidence, regulatory agencies are able to obtain evidence abroad through the use of mutual assistance treaties and memoranda of understanding with their regulatory counterparts in other countries.[cxciii]

4.46 A general issue arises as to whether there is scope for greater cooperation between these regulatory agencies and trustees and liquidators, particularly in relation to the pooling of information. The regulatory agencies will only be able to pool information to the extent that doing so is consistent with their statutory obligations and their interest in ensuring maximum cooperation with their regulatory counterparts in other countries. Nonetheless there may be scope to build into their mutual assistance arrangements and memoranda of understanding specific third party release arrangements, where the third party is a trustee or liquidator, to streamline the procedures for getting their permission to release information to third parties. This issue touches directly on the broader question of regulatory cooperation with civil litigants in all cross border civil proceedings.[cxciv]

International management of cross border insolvencies

4.47 Cross border insolvencies can generate many issues concerning jurisdiction and enforcement. In a local winding up those issues may arise in relation to

• the making of the liquidation order (eg the jurisdiction of a court to liquidate a foreign company)

• identification of the estate (eg the examination of corporate officers overseas)

• realisation of assets (eg sale of real property in another country)

• avoidance of pre-administration transactions (eg preference transactions which occurred at least partially outside the jurisdiction)

• distribution to creditors (eg adjudication upon a foreign creditor’s claim which is based upon events occurring in another jurisdiction)

• dissolution (eg determination of the local effect on assets of a foreign dissolution of a foreign company).

If a foreign insolvency administration has already commenced, the further issue arises of whether an Australian court will recognise the foreign proceedings and the foreign liquidator.[cxcv]

4.48 Australian insolvency law generally tends towards a universalist (as opposed to strictly territorial) approach on jurisdiction. For example, it is possible to wind up a foreign corporation under Australian law even if it is not registered within Australia provided there is sufficient territorial connection such as local assets. In addition Australian law will in some circumstances recognise a liquidation in a company’s foreign place of incorporation as the primary proceeding with a concurrent Australian liquidation playing an ancillary role.[cxcvi] To support this approach the Corporations Law gives extraterritorial application to the provisions in external administration of corporations.[cxcvii]

4.49 Not all countries are so universalist. Many countries isolate insolvencies with cross border elements along purely territorial lines, usually to achieve the public policy goal of protecting local creditors.[cxcviii] Submissions and consultations commented on three areas of reform in this respect: the UNCITRAL Working Group on Insolvency; direct communication between courts; and the extraterritorial reach of insolvency laws.

Reform (1) — UNCITRAL working group on insolvency

4.50 The UNCITRAL Working Group on Insolvency is working on a model law to deal with judicial cooperation and access and recognition in cases of cross border insolvency. It is focusing on three aspects of insolvency administration

• facilitating international judicial cooperation

• court access for foreign insolvency administrators

• recognition of foreign insolvency proceedings.

While the group is considering model laws, the emphasis is less on harmonisation of substantive laws or the formulation of treaties and more on the formulation of general guidelines to be developed and implemented by different national insolvency courts, lawyers and accountants. These guidelines are intended to be reflected in the development of a draft Cross Border Insolvency Concordat.[cc]

4.51 UNCITRAL’s work on insolvency has been prompted by suggestions from insolvency practitioners. It follows a Colloquium on Cross-Border Insolvency held jointly with the International Association of Insolvency Practitioners (INSOL) in 1994. It is the leading multilateral initiative on this topic. Australia is not a party to any multilateral convention on cross border insolvency issues and there are no other relevant multilateral conventions or initiatives in which it could participate.[cci] While UNCITRAL’s work is not likely to be completed for some years, the initiative is directly relevant to the problems of jurisdiction and enforcement faced in cross border insolvencies involving Australian firms and assets.[ccii]

Reform (2) — direct communication between courts

4.52 One particular issue that has been considered by the UNCITRAL Working Group on Insolvency is direct communication between courts. This was highlighted to the Commission during the inquiry as a promising development that could help coordinate insolvency administrations involving creditors or assets in more than one country.[cciii] At this stage there is no developed protocol for direct communications. Any such protocol would need to address considerations such as the relationship with diplomatic communications, the onus of cooperation to be placed on insolvency administrators, the level of formality required and of procedural due process, and the language to be used.[cciv] These considerations would make it difficult to pursue a multilateral agreement on direct judicial communications. However, as discussed in chapter 3 a bilateral arrangement with a country with a closely related legal system, such as New Zealand, may be possible. The author of one submission suggested that a bilateral arrangement between Australia and New Zealand on arbitration of international insolvency disputes could also be considered.[ccv]

Reform (3) — extraterritorial reach of insolvency laws

4.53 A third area where submissions for reform have been proposed relates to the extraterritorial reach of various bankruptcy and insolvency laws.[ccvi] In some instances, before a company is liquidated substantial sums of money and other assets are transferred offshore in circumstances where the transfer constitutes a fraudulent, unfair or otherwise voidable preference under the Corporations Law.[ccvii] In order to expand the property available for distribution in an Australian winding up to such assets, the liquidator would have to establish that the Australian court has jurisdiction to avoid the relevant transactions. It has been argued that there is doubt as to the extraterritorial effect of the voidable transaction provisions in the Corporations Law and that without an express reference in the Corporations Law to the extraterritorial operation of those provisions it must be presumed they have no extraterritorial effect whatsoever.[ccviii] Any lack of extraterritorial effect for the voidable transaction provisions would be inconsistent with the general approach of Australian insolvency law. These provisions should therefore be reviewed.

International arbitration

Increasing in significance

4.54 International arbitration has played a significant role in cross border dispute resolution for many years. It is commonly considered as a mechanism for resolving disputes between foreign corporations and host governments in relation to infrastructure project disputes.[ccix] It is also increasingly being used to resolve other commercial cross border disputes, including maritime, construction and trade disputes. The use of arbitration is on the increase in the Asia Pacific region albeit somewhat slowly.[ccx]

Adequacy of Australian law on arbitration

4.55 The Commission sought comments on how effectively Australian laws support international arbitration and what improvements could be made, both domestically and regionally, to enhance the effectiveness of existing arbitration processes. Australian law on international arbitration is outlined in chapter 11 together with some background information on international arbitration practice. The principal Australian statute affecting international arbitration is the International Arbitration Act 1974 (Cth) (International Arbitration Act). In broad terms this Act incorporates into Australian law the UNCITRAL Model Law on International Commercial Arbitration 1985 (UNCITRAL Model Law), the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards 1958 (New York Convention), and the Washington Convention on the Settlement of Investment Disputes between States and Nationals of other States 1965. In general the comments given to the Commission indicated that the International Arbitration Act was regarded as setting out an appropriate and supportive regime for international arbitrations in Australia. Nonetheless there are some difficulties with international arbitration that commentators suggested should be addressed in reform proposals.

• First and foremost, many of those consulted commented that it was still difficult to enforce foreign arbitral awards in some countries, particularly in the Asia Pacific region, notwithstanding the widespread adoption of the New York Convention.

• Second, there were differing views on the impact of some Australian judgments on arbitration issues, notably the decision on the confidentiality of arbitral hearings in Esso v Plowman. One view was that some of the Australian case law did not adequately support international arbitration.[ccxiii]

• Third, it was suggested that the legal profession was not sufficiently familiar with the law and practice of international arbitrations and that this should be remedied through tertiary and professional training.

• Fourth, it was suggested that there were a number of technical flaws in the International Arbitration Act which should be remedied to enable the legislation to have full effect.

Reform proposals

4.56 The first three of those points are essentially dependent on the assessment of the advisory committee of how best to deal with the cross border legal risk faced by Australian firms, particularly in transactions involving Asia Pacific countries. Consideration of those points should be deferred pending that assessment. The fourth point on technical flaws is not dependent on that assessment and does not need to be deferred.[ccxvi] In summary the particular technical issues raised are

• whether the term ‘international commercial arbitration’ should be defined in the International Arbitration Act to ensure that parties who choose arbitration rules other than the UNCITRAL Model Law still have the benefit of the International Arbitration Act

• whether additional provisions should be included in the International Arbitration Act to govern arbitrations where parties have opted out of the UNCITRAL Model Law and not made provision for procedural issues such as the appointment of a replacement for an arbitrator who dies or is incapacitated

• whether the International Arbitration Act should set out the grounds on which an award can be challenged if the parties have opted out of the UNCITRAL Model Law.

Comments were also received on drafting points that should be considered, including amendments to sections 22 and 27 of the International Arbitration Act and the suggested deletion of sections 25, 26 and 29.[ccxvii]

Legal representation and advice

4.57 Many countries restrict the right to appear in local litigation on behalf of a litigant to a locally admitted lawyer. Some countries extend this restriction to the right to appear on behalf of clients in arbitrations and before certain government bodies. Many countries also limit the right of foreign lawyers to practice, either alone or in partnership with local lawyers. Recently there has been a trend in Australia and elsewhere to relax these restrictions. However they remain to some extent in many jurisdictions.[ccxviii]

4.58 Some submissions commented that these restrictions adversely affect cross border litigation and limit the advice and assistance given on cross border commercial transactions. In particular proceedings they can result in added costs by duplicating in one jurisdiction the work already done by another lawyer in another jurisdiction, for example in examining witnesses or preparing for a hearing.[ccxix] More generally they magnify any cross border legal issues and hinder the administration of cross border legal engagements.[ccxx] By contrast liberal rules on legal representation may lead not only to lower costs but also to greater levels of confidence in the legal systems of different countries. Clients may feel more comfortable relying primarily on their local lawyers throughout the transaction or proceeding. Lawyers may become more comfortable with different legal systems as they become more directly involved.

4.59 There are already well developed proposals for the elimination of barriers to the practice of foreign law in Australia.[ccxxi] The issue is also being considered by a number of other countries.[ccxxii] This issue should be considered further by the advisory committee to assess whether Australia should promote any other initiatives on the topic.[ccxxiii]

Implementation

4.60 The proposals for reform are essentially a short term project. It is envisaged that they can be reviewed and settled within six months. The issues for reform will require more detailed discussion within a broader section of the community. The advisory committee should also be consulted on those issues. It is envisaged that they will take about 18 months to review and settle. In some cases implementation will require the involvement and support of other bodies such as the courts or the ASC. They will therefore need to be closely involved in settling any proposed amendments or other reform. For both the proposals and the issues for reform the procedures for consulting on and implementing reforms of the kind contemplated are well established in the Attorney-General’s Department so it is appropriate for that Department to undertake this work.