Insolvency Law Update - the High Court pronounces on the immunity of a ‘separate entity’ of a foreign state from Australian winding up proceedings

Last month, in Greylag Goose Leasing 1410 Designated Activity Company & Anor v PT Garuda Indonesia Ltd [2024] HCA 21, the High Court (5:2) held that the answer is no. The exception from immunity from the jurisdiction of Australian courts under ss 14(3)(a) and 22 of the Foreign States Immunities Act 1985 (Cth) (‘Immunities Act’) has no application to a winding up proceeding brought under Part 5.7 against a separate entity of a foreign State that is registered as a Part 5.7 body. For that exception to apply, the company that is sought to be wound up must be a different entity, other than the foreign State’s separate entity.

The High Court’s decision and the possible implications for winding up proceedings in Australia are discussed below.

Facts

PT Garuda Indonesia Ltd (‘Garuda’), incorporated in the Republic of Indonesia, is the national airline of the Republic of Indonesia and is a Part 5.7 body.

Greylag Goose Leasing 1410 Designated Activity Company and Greylag Goose Leasing 1446 Designated Activity Company (together, ‘Greylag Goose’) are companies incorporated in Ireland which lease aircraft to Garuda.

Greylag Goose made demands on Garuda for the payment of USD$193,003,254.55 and USD$244,968,492.29, said to be owed by Garuda.

Greylag Goose commenced a wind-up proceeding under Part 5.7 and sought orders in the Supreme Court of New South Wales that Garuda be wound up on the basis that it is unable to pay its debts or otherwise that it is just and equitable to do so. Greylag Goose argued that the exception to immunity from jurisdiction provided by ss 14(3)(a) and 22 of the Immunities Act applied to the wind-up proceeding.

Procedural History

At first instance, Hammerschlag CJ rejected Greylag Goose’s submission that the exception in ss 14(3)(a) and 22 of the Immunities Act applied to the wind-up proceeding and set aside the originating process. That decision was upheld on appeal to the New South Wales Court of Appeal by Bell CJ, with whom Meagher and Kirk JJA agreed.

The Immunities Act and the High Court’s Findings

Section 9 of the Immunities Act confers immunity on a foreign State from the jurisdiction of Australian courts in a proceeding. Sections 10 – 21 provide exceptions to this general immunity.

Section 14 is titled ‘Ownership, possession and use of property etc’. Sub-section 14(3)(a) provides that a foreign State is not immune in a proceeding in so far as the proceeding concerns ‘bankruptcy, insolvency or the winding up of a body corporate’.

Relatedly, although not referred to by Greylag Goose, s 11(1) provides that a foreign State is not immune in a proceeding in so far as the proceeding concerns a ‘commercial transaction’. Commercial transaction is defined in s 11(3) as:

a commercial, trading, business, professional or industrial or like transaction into which the foreign State has entered or a like activity in which the foreign State has engaged and, without limiting the generality of the foregoing, includes:

1. a contract for the supply of goods or services;
2. an agreement for a loan or some other transaction for or in respect of the provision of finance; and
3. a guarantee or indemnity in respect of a financial obligation; but does not include a contract of employment or a bill of exchange.

Pursuant to s 22, these exceptions, and the general immunity under s 9, apply in relation to a ‘separate entity’ of a foreign State as they apply to the foreign State.

A ‘separate entity’ in relation to a foreign State includes a body corporate, other than a body corporate that has been established by or under a law of Australia that is an agency or instrumentality of the foreign State and is not a department or organ of the foreign State’s executive government (s 3).

It was common ground that Garuda is an agency or instrumentality of the Republic of Indonesia and on that basis is a ‘separate entity’ of a foreign State within the definition in the Immunities Act (at [10]).

The High Court considered the purpose of s 14(3)(a), informed by the Australian Law Reform Commission’s Foreign State Immunity Report, which recommended the enactment of the Immunities Act. The majority found that the ALRC intended that the implementation of s 14(3)(a) was to ensure that an Australian court exercising jurisdiction in a bankruptcy, insolvency or winding up proceeding would be able to adjudicate on the proprietary interests of all the interested parties, including the proprietary interests of a foreign State (at [59]).

The majority held that as s 14(3)(a) applies through the operation of s 22 in relation to a separate entity of a foreign State in this way: the separate entity (like the foreign State itself) is the object of the exception from immunity; the ‘body corporate’ (referred to in s 14(3)(a)) is an entity other than the separate entity of the foreign State (just as it is an entity other than the foreign State itself); and the winding up of that other entity is the subject-matter of the exception (at [33]). Accordingly, for the exception in s 14(3)(a) to apply, the winding up of a body corporate cannot be of the same entity that is the object of the immunity and its exceptions – that is either the foreign State or a separate entity of the foreign State. The winding up must be of another entity (at [32], [61]).

Edelman J also rejected Greylag Goose’s interpretation of s 14(3)(a). The possibility of a foreign State entity being at liberty to engage in insolvent trading in Australia, leaving creditors to race to the execution of their judgments on a first come, first served basis is, according to Edelman J, precluded by the operation of ss 11 and 22 of the Immunities Act (at [103] and [110]). Edelman J held that (at [146], emphasis added):

No authority in this Court requires that ss 11(1) and 22 be interpreted in a manner that would require…these startling insolvency effects. For instance, if the meaning and application of a “separate entity of a foreign State” in s 22 (read with the definition in s 3(1)) were confined to corporations in the position of a government department or corporations that were generally serving the functional purposes of a government department, then there might be reason to doubt whether Garuda would be a separate entity within s 22. Alternatively, if a proceeding for winding up a corporation based on the failure to pay a debt arising from a commercial contract were a “proceeding concerning a commercial transaction”, then s 11(1) might have the effect that Garuda and other foreign entities like it would have no foreign State immunity in respect of such a proceeding. I am, therefore, satisfied that the elasticity of the concepts of a “commercial transaction” and “a separate entity of a foreign State” provides sufficient reason to doubt the insolvency effects discussed above.

Gordon J and Steward J (dissenting) examined the text and purpose of the Immunities Act and held that the exceptions in ss 11-21 reflect the overarching policy that “commercial or trading activities conducted by or on behalf of foreign governments should not attract the special jurisdictional immunity enjoyed by foreign States” (at [74], emphasis in original). Consistent with this policy and the text and purpose of the Immunities Act, Gordon J and Steward J held that the better view is that the exception in s 14(3)(a) applies to remove the general immunity where the relevant proceedings concern the insolvency or winding up of the same body corporate that is the subject of the s 9 immunity (at [78]).

Implications

The majority’s interpretation of s 14(3)(a) may have the effect that a separate entity of a foreign State registered as a Part 5.7 body can continue to trade in Australia while insolvent without the ability of any of its creditors to insist upon its winding up (at [83]).

Creditors can be comforted by Edelman J’s findings that the ‘elasticity’ of the concepts of “commercial transaction” in s 11 and “a separate entity of a foreign State” in s 22 are sufficient to doubt this effect (at [146]). However, it remains unclear whether these exceptions apply to the winding up of a Part 5.7 body on just and equitable grounds. Such applications do not always require the existence or relationship to a ‘commercial transaction’ as defined in s 11 of the Immunities Act. Where a ‘commercial transaction’ cannot be identified but there are otherwise just and equitable grounds for the winding up of a separate entity of a foreign State, applicants are arguably left with no pathway to initiate proceedings in Australian courts.

Legislative reform to extend the scope of s 14(3)(a) to foreign States and their separate entities may instil greater confidence amongst creditors. It could also provide a clearer pathway for wind up applications against the separate entities of foreign States to be brought on just and equitable grounds. However such reform would mean a change in the policy discussed in the ALRC Report (1984) as underlying the Immunities Act, which could take Australia out of step with other jurisdictions, and may be unlikely.