Getting paid by an entity that is owned by a foreign state can be more complicated than one might expect.
Part 5.7 of the Corporations Act provides a mechanism for a creditor to apply for the winding up of a body corporate which is incorporated in another jurisdiction (called a Part 5.7 body). If the Part 5.7 body is owned by a foreign state then the ability to bring winding-up proceedings against that body may be restricted by the Immunities Act.
Sections 9 and 22 of the Immunities Act provide that separate entities of a foreign state are immune from the jurisdiction of Australian courts. This position is subject to the exceptions detailed in sections 10 – 21 of the Immunities Act. Relevantly, section 14(3)(a) of the Immunities Act provides an exception where the proceeding concerns 'bankruptcy, insolvency or the winding up of a body corporate'. The scope of this exception has been contested. Does it mean that a separate entity of a foreign state can be wound up in Australia? A recent High Court case has considered the scope of this exception.
Background: Testing the 'winding up' exception
Greylag Goose Leasing 1410 Designated Activity Company v P.T. Garuda Indonesia Ltd [2024] HCA 21
P.T. Garuda Indonesia Ltd (Garuda) is a company incorporated in the Republic of Indonesia and is its national airline. Garuda is a registered foreign company under the Corporations Act and is therefore a Part 5.7 body. The applicants before the High Court, referred to as Greylag Goose, are companies which leased aircraft to Garuda.
While Garuda was attempting to restructure its liabilities under a restructuring process in Indonesia, Greylag Goose issued demands to Garuda for payment of US$193,003,254.55 and US$244,968,492.29. Those demands were issued under s 585 of the Corporations Act, which provides for a procedure analogous to a statutory demand that is available as a pre-cursor to applying to wind up a foreign registered company. When Garuda failed to comply with the demands, Greylag Goose commenced proceedings in the New South Wales Supreme Court seeking orders that Garuda be wound up under Part 5.7 of the Corporations Act. Garuda then sought an order that the proceedings be set aside on the basis that the Supreme Court lacked jurisdiction by operation of sections 9 and 22 of the Immunities Act.
The parties agreed that Garuda was an instrumentality or agency of the Republic of Indonesia and, therefore, a "separate entity" to which the Immunities Act applied. Greylag Goose nevertheless argued that the exception to immunity in section 14(3)(a) applied. The primary judge (Hammerschlag CJ in Eq) held that Garuda was entitled to immunity and dismissed the winding up application. On appeal, the New South Wales Court of Appeal also held that Garuda was entitled to immunity.
The majority of the High Court (Gageler CJ, Gleeson, Jagot and Beech-Jones JJ) dismissed the appeal and held that the exception in section 14(3)(a) did not apply to the winding up application in relation to Garuda. After considering sections 9 and 22 of the Immunities Act and the Australian Law Reform Commission's report which was the catalyst for the enactment of the Immunities Act, the majority concluded that the exception in section 14(3)(a) of the Immunities Act applies to the winding up of a body corporate other than the foreign state entity which claims immunity. As Garuda was the subject of the winding up application, and was a separate entity of a foreign state, Garuda was entitled to immunity and Greylag Goose could not rely on the winding up exception.
By contrast, the minority (Gordon and Steward JJ) held that the section 14(3)(a) exception did apply and Garuda should not have been entitled to rely on immunity from jurisdiction. The minority considered that if Garuda's interpretation of section 14(3)(a) was preferred then the options for creditors of a foreign state entity with insufficient assets to meet its debts are to 'engage in a "race to the court insofar as individual execution is concerned" or pursue the debtor body corporate in its home jurisdiction under its home laws'. Gordon and Steward JJ found that the first option 'is contrary to the provisions of the Corporations Act to which Garuda subjected itself when it registered in Australia' and the availability of the second option is 'far from certain'.
A missed opportunity – the 'Commercial Transactions' exception?
At first blush, it appears that the High Court has preferred a construction of the Immunities Act which would, among other consequences, permit foreign state entities to continue trading in Australia while insolvent without any fear of being wound up.
However, we doubt this is the true implication of the decision.
Instead, the majority hinted at the approach which a creditor in the position of Greylag Goose ought to adopt in future. Section 11(1) of the Immunities Act provides a separate exception to immunity from jurisdiction where the proceeding 'concerns a commercial transaction'. The majority noted that Greylag Goose had not argued that the transactions underlying the debts upon which Greylag Goose relied were "commercial" so as to come within the scope of the commercial transaction exception. No explanation for that tactical decision is apparent from the High Court's ruling. The majority expressly observed that 'nothing in the reasons for judgment should be taken to express any view as to whether the proceeding might be capable of bearing that characterisation.'
Justice Edelman, in a separate judgment supporting the majority, also dismissed the appeal but in doing so said he considered the concept of a 'commercial transaction' provides sufficient 'elasticity' to avoid the situation where a foreign state's separate entity could continue to trade while insolvent. In other words, the outcome of the case might well have been different if the applicants had relied on the commercial transaction exception in section 11(1).
Why this decision matters for commercial counterparties
This decision is a timely warning for commercial counterparties who enter into arrangements with state owned entities:
a) If you want to a commence a proceeding against a state owned company, understand that the Immunities Act may apply.
b) Enforcement options need to be assessed, among other things, in light of the potential operation of the Immunities Act and its exceptions.
c) If the Immunities Act potentially applies, legal advisors should consider potential exceptions, and if multiple exceptions could apply, clear reasons should be identified before deciding not to argue all of them.
d) Companies that transact with foreign state separate entities should exercise caution in relying on the winding up provisions in the Corporations Act.
Companies that wish to attempt to bring proceedings in Australia against a foreign state separate entity should carefully review the potential statutory exceptions to immunity, and the 'commercial transaction' exception in particular.
Please reach out at any time if you would like to discuss this decision and its broader implications for your organisation.