Testing foreign state immunity in Australia: the High Court rules on the Garuda Indonesia winding up application

In a landmark decision on foreign states’ immunity, the High Court of Australia has upheld foreign state immunity as a basis for the national airline of Indonesia, P.T. Garuda Indonesia Ltd (Garuda Indonesia) to resist a winding up application, dismissing an appeal from the New South Wales Court of Appeal.

The Indonesian restructure and the Australian winding up application

During 2022 Garuda Indonesia undertook a Penundaan Kewajiban Pembayaran Utang (PKPU) restructure process in Indonesia. Garuda Indonesia's Composition Plan proposed pursuant to the PKPU obtained the requisite approval of creditors and was homologated by the Indonesian Commercial Court on 27 June 2022.

On 15 August 2022, two Irish aircraft lessors, Greylag Goose Leasing 1446 Designated Activity Company and Greylag Goose Leasing 1410 Designated Activity Company (Greylag), applied to the New South Wales Supreme Court to have Garuda Indonesia wound up under section 583 of the Corporations Act 2001 (Cth) as a foreign company registered in Australia on the basis that Garuda failed to comply with Greylag’s creditors’ demands for payments of various debts relating to aircraft leases.

In response to Greylag's winding up application, Garuda Indonesia filed a motion in the same Court, invoking foreign state immunity pursuant to the Foreign States Immunities Act 1985 (Cth) (FSIA). It sought orders that the Court did not have jurisdiction over Garuda Indonesia to make the winding up order on the basis that Garuda Indonesia is an “agency or instrumentality” of a foreign State, entitling it to immunity as a “separate entity” of a foreign State.

The Foreign States Immunities Act 1985 (Cth) (FSIA)

The FSIA provides general immunity from jurisdiction for foreign States in Part II of the FSIA: “except as provided by or under this Act, a foreign State is immune from jurisdiction of the courts of Australia in a proceeding” (section 9).

“Foreign State” is defined as “a country the territory of which is outside Australia, being a country that is (a) an independent sovereign state; or (b) a separate territory (whether or not it is self-governing) that is not part of an independent sovereign state” (section 3(1)).

This general immunity is extended by section 22 to a “separate entity” of a foreign State, which is defined as:

“in relation to a foreign State, a natural person (other than an Australian citizen), or a body corporate or corporation sole (other than a body corporate or corporation sole that has been established by or under a law of Australia) who or that:

(a) is an agency or instrumentality of the foreign State; and

(b) is not a department or organ of the executive government of the foreign State.”

It was acknowledged by Greylag at every stage of the litigation that Garuda Indonesia is an agency or instrumentality of the Republic of Indonesia, and on that basis is a separate entity of a foreign State for the purposes of the FSIA.

The FSIA also contains various exceptions to foreign state immunity:

14. Ownership, possession and use of property etc.

(1) A foreign State is not immune in a proceeding in so far as the proceeding concerns:

(a) an interest of the State in, or the possession or use by the State of, immovable property in Australia; or

(b) an obligation of the State that arises out of its interest in, or its possession or use of, property of that kind.

(2) A foreign State is not immune in a proceeding in so far as the proceeding concerns an interest of the State in property that arose by way of gift made in Australia or by succession.

(3) A foreign State is not immune in a proceeding in so far as the proceeding concerns:

(a) bankruptcy, insolvency or the winding up of a body corporate; or

(b) the administration of a trust, of the estate of a deceased person or of the estate of a person of unsound mind. [emphasis added]

In opposing Garuda Indonesia's motion, Greylag sought to rely upon the exception contained in section 14(3)(a) of the FSIA, on the basis that the words “of a body corporate” were to be read as including the foreign State.

Court of Appeal considers the background to the Foreign States Immunities Act

The Court of Appeal decision found that section 14(3)(a) of the FSIA does not make a foreign State (or a separate entity of a foreign State) susceptible to a winding up proceeding and on its proper construction, the section relates to a bankruptcy, insolvency or winding up in which a foreign State has or claims an interest in property with which the relevant proceeding is concerned.

The Court made significant reference to the Australian Law Reform Commission’s Report on Foreign State Immunity (ALRC Report), which underpinned and contributed to the development of the FSIA. It observed the ALRC Report provides important context by reference to which the FSIA and section 14(3) is to be interpreted. The judgment also considered the ALRC Report in light of the 1983 report of the United Nations International Law Commission on the “Jurisdictional immunities of states and their property” (ILC Report) and foreign legislation from the UK, Singapore and Pakistan to inform the context of the FSIA and the Court’s interpretation of the FSIA. in doing so, the Court of Appeal found that the ALRC Report, ILC Report and other foreign legislation demonstrated that section 14(3)(a) was directed at exempting a foreign State’s or its separate entities’ interests and property from immunity.

It concluded:

“Had what would have been a quite radical legislative initiative been recommended and intended, namely that a corporate or personal emanation of a foreign state be rendered susceptible to winding up, insolvency or bankrupt [sic] proceedings, one would have expected the thorough and scholarly ALRC Report of Professor Crawford to have gone into the merits of such a legislative initiative in considerable detail. There is no hint in the ALRC Report that such a reform was intended or recommended, and [116] and [117] of the ALRC Report in particular lend no support to that view. In that context, part of the contextual significance of the ALRC Report lies in what it does not say.”

High Court: foreign immunity when a separate entity of a foreign State is also a body corporate

The question in the High Court was whether the exception from immunity in section 14(3)(a), read with section 22 of the FSIA, applies to an Australian proceeding for the winding up of a separate entity of a foreign State that is a body corporate registered in Australia as a foreign company.

Greylag argued that the exception in section 14(3)(a) is to be read as providing that "[a separate entity] is not immune in a proceeding in so far as the proceeding concerns... bankruptcy, insolvency or the winding up of a body corporate" and given that "separate entity" is defined to include "a body corporate", there is no reason why the "separate entity" to which section 14(3)(a) refers must be an entity different from the "body corporate" to which section 14(3)(a) refers.

The majority decision rejected Greylag's textual argument as misconceived, finding that under sections 9 and 22 a body corporate that is a separate entity of a foreign State is immune from the jurisdiction of an Australian court in a proceeding.

The majority found that section 22 is substantive and not definitional in that it operates to confer on a separate entity of a foreign State the same immunity from jurisdiction as section 9 confers on the foreign State itself. Where, "the separate entity (like the foreign State itself) is the object of the exception from immunity; the ‘body corporate’ is an entity other than the separate entity (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”. Therefore, the majority found that, the exception applies to a proceeding under Pt 5.7 of the Corporations Act only if and insofar as the proceeding concerns the winding up of a body corporate that is not the same body as the separate entity; for it to be otherwise would lessen the immunity of a separate entity in comparison with the immunity of a foreign State which defies the substantive operation of section 22 of the FSIA.

The majority also considered the legislative history of the FSIA, including the ALRC Report and the ILC Report in determining the purpose of section 14(3)(a), finding that there was no basis for treating the purpose of that section as extending to permit an Australian court to wind up a separate entity which is registered as a foreign company.