A Sea Change: How Hanjin’s Cross-Border Insolvency May Dock in Malaysia

My article published in The Malaysian Reserve on 27 October 2016.

tmr1Background

At the end of August 2016, one of the world’s largest container shipping companies, Hanjin Shipping Co Ltd, filed for rehabilitation proceedings at the Korean Bankruptcy Court. The Korean Bankruptcy Court granted provisional orders to preserve Hanjin’s assets.

There was immediate chaos. Around the world, some of Hanjin’s vessels in ports were seized while other vessels were stranded out at sea for fear of being seized.

To aid the rehabilitation proceedings in South Korea, it has been reported that Hanjin will seek court protection from more than 40 countries to preserve Hanjin’s assets.

Against this backdrop, I set out the ongoing legal developments in such a cross-border insolvency scenario and how these developments may affect Malaysia.

hanjin-small
Credit: Nsandel at English Wikipedia

Universalism vs Territorialism

In a cross-border insolvency, the courts from the different countries may be faced with difficult questions. Should a domestic court apply its domestic laws as if the case had no international aspect at all? Alternatively, should a domestic court defer to the foreign laws of the main jurisdiction of the insolvency company and provide all necessary assistance to aid the foreign insolvency?

In other words, should a ‘territorialist’ approach be applied where the domestic court only applies its domestic laws? Or, should a ‘universalist’ approach prevail in allowing a single set of the foreign laws of the main winding up jurisdiction to govern all of the global winding up proceedings?

 The UNCITRAL Model Law on Cross-Border Insolvency

 In support of a universalist approach, the UNCITRAL Model Law on Cross-Border Insolvency, otherwise referred to as the Model Law, provides an international framework to deal with cross-border insolvencies. Jurisdictions such as the US, the UK and Australia have enacted laws based on the Model Law.

Relying on such laws, Hanjin successfully obtained court protection from the US and the UK. So for example, Chapter 15 of the US Bankruptcy Code allows for a foreign company to seek court protection from the US Bankruptcy Court in relation to assets in the US.

The Singapore Approach to Hanjin’s Cross Border Insolvency

Hanjin recently also applied for court protection from Singapore. Hanjin made an urgent ex parte application (i.e. an application without notice to all interested parties) to restrain all enforcement and execution over its assets in Singapore and to stay all legal proceedings against Hanjin and its Singapore subsidiaries.

Singapore’s insolvency laws share some similarities with our laws and both Singapore and Malaysia have also not adopted the Model Law. However, based on common law cases, our courts could potentially make orders to provide cross-border assistance and cross-border recognition of foreign insolvency or rehabilitation procedures.

Hanjin’s application to the Singapore court sought for the court to exercise its inherent jurisdiction to provide such cross-border assistance. Hanjin relied on the trend observed from foreign court decisions. Foreign courts increasingly recognise foreign insolvency proceedings as it enables the equitable, orderly and systematic distribution of the assets of the debtor. For example, Hong Kong, which has also not adopted the Model Law, has recognised that a domestic court should not allow action to be taken within its jurisdiction that would interfere with a pending process of universal distribution in a foreign jurisdiction.

The Singapore court made interim orders granting Hanjin protection from the enforcement and legal proceedings. However, these orders would be for an interim period until the inter partes hearing (i.e. when all interested parties could make their legal and factual arguments).  It remains to be seen whether the Singapore court will confirm that it does have such an inherent jurisdiction to grant such far-reaching restraining and stay orders in the absence of express laws.

The Future Direction for Malaysia

Hanjin’s cross-border insolvency may or may not dock here in the Malaysian courts. But if faced with a similar cross-border insolvency case, it will be interesting to see to what extent the developments in foreign courts may be adopted or applied by the courts here.

Beyond that however, we should look at analysing our laws and seeing what steps can be taken to cater for cross-border insolvency situations. I see little discussion on this area.

We have recently revamped our corporate insolvency laws through the Companies Act 2016. However, the new provisions have not changed our existing laws on cross-border insolvencies. We will largely still have to rely on the courts to interpret our existing provisions.

Malaysia should chart a course to navigate the increasingly complex cross-border insolvencies that can arise.  Further discussion and analysis is necessary to see how our laws can be amended to strike a balance between the territorialist approach and the universalist approach.

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