It is well established that the type of recognition granted by the recognising court under the UNCITRAL Model Law will depend on whether the originating proceedings are ‘foreign main’ or ‘foreign non-main’ proceedings, which in turn hinges on the centre of main interests (COMI) of the insolvent entity.
In a ground-breaking case, the English court has followed the precedent set down by the US Bankruptcy Court in undertaking this COMI analysis at the date of the recognition petition, rather than the date that the insolvency proceedings were initiated. This has the scope to significantly simplify the recognition of cross-border insolvencies going forward, particularly in respect of Chapter 11 recognitions in the UK.
The UNCITRAL Model Law
The Model Law has been enacted into the English statute book as the Cross Border Insolvency Regulations 2006 (the CBIR), which states (using the wording of the Model Law) that:
““foreign main proceeding” means a foreign proceeding taking place in the State where the debtor has the centre of its main interests”; and
““foreign non-main proceeding” means a foreign proceeding, other than a foreign main proceeding, taking place in a State where the debtor has an establishment…”
COMI for these purposes has the same interpretation as under the Recast Insolvency Regulation, with the rebuttable presumption being that COMI will be in the jurisdiction of the debtor’s registered office. The analysis of whether or not that presumption can be rebutted is largely a fact-based one.
Recently, Reed Smith assisted Toisa Limited (Toisa), a debtor in a Chapter 11 case, in seeking recognition of those Chapter 11 proceedings before the English court under the CBIR. The application came before ICC Judge Burton on Friday 29 March. Having been presented with evidence regarding the COMI of the debtor, the Judge raised the question of when is the appropriate date to consider the COMI of the insolvent entity for the purposes of the CBIR.
The English Approach
The English courts have not previously considered this question in significant detail in reported cases, albeit they appear to have leaned towards the view that that the appropriate time to conduct the COMI analysis is at the date of the initiation of the insolvency proceedings for which recognition is being sort. For example, in the recent case of Videology Ltd., re Cross-Border Insolvency Regulations 2006 it was discussed (although such consideration did not affect the overall judgment) that the appropriate question when considering an application under the CBIR was whether the foreign proceedings for which recognition is sought are in the place that was the debtor’s COMI when such proceedings were commenced.
The Chapter 15 Approach
In contrast, this question had been considered previously by the US Bankruptcy Court in the context of Chapter 15 recognition cases, Chapter 15 being the enactment of the Model Law into US law. The US Second Circuit has taken the view in Morning Mist Holdings Ltd v. Krys (Re Fairfield Sentry Ltd) 714 F3d137 (2d Cir. 2013) that the appropriate time to analyse the COMI of the debtor entity is at the time of the Chapter 15 recognition petition, rather than at the time of the initiation of the overseas insolvency proceedings.
Toisa entered Chapter 11 proceedings in January 2017, and since that date it had been managed exclusively from New York, all creditors corresponded with management based in New York, and all strategic decisions and board meetings were held in New York. Overall, there was little argument that since the initiation of the Chapter 11 proceedings, Toisa’s COMI was anywhere other than the United States of America. However, prior to the initiation of Chapter 11, the evidence regarding COMI was not so conclusive. Toisa’s registered office was (and still is) in Bermuda, and its assets and employees were located around the world albeit that many decisions had been taken out of New York even prior to the Chapter 11 filing, and significant assets had been located in the United States.
It was submitted to the court that, for the following reasons, the Chapter 15 approach should be favoured over the historic approach of the English courts:
- The wording of Article 17 of Schedule 1 to the CBIR is couched in the present tense, such that “the foreign proceeding shall be recognised as a foreign main proceeding if it is taking place in the state where the debtor has the centre of its main interests” (emphasis added). This grammatical structure is also reflected in the definitions of ‘foreign main proceeding’ and ‘foreign non-main proceeding’ as reproduced above. Therefore, as a matter of statutory interpretation, it would suggest that the relevant consideration is where the debtor’s COMI is currently to be found when the application is being heard.
- Article 8 of the Model Law stresses the international nature of the legislation, and requires that when it is being interpreted “regard is to be had to its international origin and to the need to promote uniformity in its application”. Given the line of US caselaw following Fairfield Sentry, there is strong international precedent that the relevant time to assess COMI is at the time of the recognition application.
- It is not unusual for insolvency proceedings to be initiated in a country other than the COMI of the relevant debtor. This is particularly true of Chapter 11 proceedings, where the US bankruptcy courts generally do not require a significant level of connection to the States to accept jurisdiction – often assets (such as a bank account) being held in the jurisdiction will give rise to a sufficient connection for the initiation of Chapter 11 proceedings. In such cases, there is a good argument that COMI shifts following the commencement of Chapter 11, because the debtor comes under the control of the US courts and key positions on the board of the debtor are often taken by US insolvency professionals, shifting the management of the debtor to the US. Given the level of nexus required by the US bankruptcy courts to claim jurisdiction in Chapter 11 proceedings, it is highly feasible that the debtor had neither its COMI, nor an establishment in the jurisdiction at the time that Chapter 11 proceedings were initiated. If this were the case, and the English approach to COMI analysis under the CBIR were to be followed, then such Chapter 11 proceedings would not be eligible for recognition at all, as a court would not be able to class them as either foreign main proceedings or foreign non-main proceedings. It was submitted that this could not have been the intention of the draftsman.
It was, however, also noted as a counter-argument, that the guide to enactment and interpretation that accompanied the Model Law clearly states that when assessing an entity’s COMI the appropriate date is the date of commencement of the foreign proceedings, and not the date of the recognition application.
Having weighed the evidence ICC Judge Burton was of the view that the appropriate date on which to determine the COMI of the debtor for the purpose of recognition under the CBIR was the date of the recognition petition, rejecting the argument that the date of the initiation of the underlying insolvency proceedings was the appropriate time. This has the scope to significantly simplify the process of obtaining recognition orders before the English Courts, particularly in circumstances where a period of time has elapsed between the overseas insolvency proceedings commencing and the seeking of recognition.
Togut, Segal & Segal LLP are lead counsel for Toisa in relation to the Chapter 11 and wider group restructuring, and Reed Smith LLP have been engaged to advise on English-law aspects of this. Reed Smith retained Adam Goodison of South Square for the application.