The technical and cultural differences in insolvency matters.
I’m flying back from Washington DC and I’m supposed to be writing a technical paper for this month’s On The Pulse. I’ve realised that the story of my last few days in the USA are infinitely more interesting, so I’ve ordered a lovely glass of Californian merlot and I’m writing a summary of my experience with the US Bankruptcy Court.
Let me set the scene. I am Receiver and Manager of an Australian company with an American subsidiary. The Australian company loaned the American subsidiary excess of $21m. The American subsidiary filed for Chapter 7 Bankruptcy.
Throughout January and February 2015, I tried to contact the US Trustee to ask him, among other things, the process to register my claim in his administration. He did not respond until 28 February 2015, whereupon he advised me that the date that my claim had to be lodged (Bar Date in American speak) expired four days prior.
My debt represents more than 95% of the total creditors and he waited until after the Bar Date’s expiry to notify me. This very proposition seems absurd in the Australian context. However, I am reliably advised that he hasn’t done anything wrong under American law. The American system requires creditors to lodge their claim with the court within a set time to preserve their priority. The Trustee sent my notice to an incomplete and incorrect address, the mail was returned to him as undeliverable, and he failed to respond to my correspondence prior to the Bar Date. Yet, it is still incumbent on me as a creditor to comply with the Bar Date—even though I did not receive notice.
So, I engaged an American attorney, received advice that there are grounds upon which foreign creditors can apply for an extension of the Bar Date. I conduct the research to quantify my claim, I lodge my Proof of Claim and I instructed my US attorneys to make an application on my behalf to extend the Bar Date so that my claim can be registered.
My US attorney appears at the Bankruptcy Court on my behalf on an unopposed, ex-parte application. The Judge requests that I attend to provide evidence. My attorney’s request to allow my attendance by telephone is denied. My application is adjourned until 28 July 2015, and so I booked my flights to the USA.
Before I flew out, the US Bankruptcy Court was described to me as a cloak room where cowboys check-in their boots and hats and borrow a business suit. I’m pleased to report that tradition appears to have gone, however Australian insolvency practitioners will still find it a very strange place indeed.
US insolvency practitioners, Trustees, are attorneys who happen to practice bankruptcy. They are appointed as the representative of the bankrupt estate and they stand at the bar table to petition the Court to approve functions that are resolved administratively in Australia, by resolution of the creditors, or by a decision of insolvency practitioners. They conduct meetings of creditors under oath, and the debtors face examination.
As I sit and wait for my matter to be called, I witness numerous applications on administrative issues and his honour approves or denies applications with haste. Our Judge is a former bankruptcy trustee himself.
At 4:45pm my case is finally called. My application is now opposed by a third party. It appears his honour has forgotten that he ordered that I fly from Australia for the examination and has not allowed himself enough time to hear my testimony. There is insufficient time to deal with that today and he requests that I come back tomorrow. But I fly home tomorrow!
The next morning we’re in court at 9:30am and all other matters that morning have been referred before another Judge. Mine is the only case on the bill. The attorneys address the court and then I am called to the witness box. After about an hour of direct examination, it’s then time for cross examination. After about half an hour of cross examination counsel for my opponent challenged part of my testimony on the basis of my understanding of Australian Corporations Law. That did not go well for him.
Finally, his honour made his judgment in favour of my application. I made my flight, just, and it’s time for another glass of wine. I am reflecting upon whether the process I have just experienced in the USA is preferable to the Australian model of lodging proof of debt with a liquidator. In my case, certainly not! The process has cost a lot and would not have occurred in Australia. However, the American model has advantages. It provides greater certainty and transparency as to the identity and value of creditors. On balance though, I prefer our system because the involvement of the court in simple administrative processes simply isn’t necessary.