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Cross-border insolvency: finding the hub of the matter

Feature Articles

Cite as: April 2012 86 (04) LIJ, p.42

Determining where a debtor has its “centre of main interests” is crucial to obtaining prompt recognition of a foreign insolvency proceeding and thereby protecting vulnerable assets.

By Dr Philip Bender

The Cross-Border Insolvency Act 2008 (Cth) introduced an Australian cross-border insolvency regime which was based on a Model Law drafted by the United Nations Commission on International Trade Law (UNCITRAL). The law provides a framework for insolvency situations involving multiple jurisdictions. The recent case of Ackers v Saad Investments Company Ltd (in liq.)1 (Saad Investments) is the first Australian case to consider one of the key concepts of the Model Law: namely, where a debtor has its “centre of main interests” (COMI). A foreign representative can obtain recognition of a foreign insolvency proceeding by an Australian court. The form of relief granted will differ if the foreign proceeding takes place where a debtor has its COMI.

MODEL LAW IN AUSTRALIA

The Model Law allows direct access to Australian courts for foreign representatives and creditors in respect of the “foreign proceeding”. A “foreign proceeding” is defined as a “collective judicial or administrative proceeding in a foreign State . . . pursuant to a law relating to insolvency in which proceeding the assets and affairs of the debtor are subject to control or supervision by a foreign court, for the purpose of reorganization or liquidation”.

Foreign representatives

A “foreign representative” is essentially a person or body authorised to administer or liquidate assets, or represent creditors in a foreign insolvency proceeding (e.g. a liquidator). A foreign representative has standing under the Model Law to access Australian courts to, for example, institute or participate in Australian insolvency proceedings.

A foreign representative can also seek recognition of foreign proceedings by an Australian court. Recognition allows a court to grant the foreign representative particular types of relief, including relief to preserve and manage Australian assets.

A foreign proceeding will only be recognised if there is a sufficient economic presence of the debtor in that jurisdiction. If a foreign proceeding is recognised, a court must distinguish between:

  • a foreign main proceeding; and
  • a foreign non-main proceeding.

The different classifications impact the type of relief available. The main advantage of recognition as a main proceeding is an “automatic” stay: Model Law Article 20. This stay applies to the commencement or continuation of individual actions/proceedings concerning the debtor’s assets, rights, obligations or liabilities; execution against the debtor’s assets; and the right to transfer, encumber or otherwise dispose of those assets.

Recognition of a foreign “main” insolvency proceeding also gives rise to a presumption of insolvency when commencing an Australian insolvency proceeding, which can be rebutted by evidence to the contrary: Model Law Article 31.

A “non-main” proceeding does not receive these “automatic” benefits; however, other forms of discretionary relief are available.

Foreign non-main proceedings

A foreign non-main proceeding will be recognised where a debtor has an “establishment”. An “establishment” is “any place of operations where the debtor carries out a non-transitory economic activity with human means and goods or services” (broadly, a place of business of the debtor): Model Law Article 2(f). The Model Law does not recognise foreign proceedings that are commenced simply because the debtor has assets in a jurisdiction, but has no establishment or COMI there.

Foreign main proceedings

A foreign main proceeding is recognised when the proceeding occurs in a state where the debtor has its COMI: Model Law Article 17(2)(a). This concept is not defined in the Model Law and the Cross-Border Insolvency Act 2008. The Explanatory Memorandum states that the “Bill does not seek to define COMI as a considerable body of common law exists in overseas jurisdictions in relation to that concept” and that it is “expected that Australian courts will be guided by that body of law”.2 There is a body of European and US cases that have analysed COMI. Interpreting the Australian law by reference to foreign law is consistent with the Model Law’s objective of harmonising cross-border insolvency laws. The law itself provides that Australian courts, when interpreting the law, are to have “regard” to “its international origin and the need to promote uniformity in its application and the observance of good faith”.

There is also a presumption that, in the absence of proof to the contrary, a corporate debtor’s registered office is its COMI: Model Law Article 16(3). The purpose of this presumption is to allow a court to expedite the evidentiary process in order to preserve assets that might otherwise be dissipated.3 The presumption also facilitates the law’s requirement that an application for recognition of a foreign proceeding be decided on at the earliest possible time: Model Law Article 17(3).

Saad Investments was the first Australian case to consider COMI in any detail.

SAAD INVESTMENTS

Saad Investments was an exempted limited liability company incorporated, and with a registered office, in the Cayman Islands. It was the holding company of about 40 companies based in the Caymans.

Saad Investments was involved in money market dealings and investments in securities and real estate. The books and records of the company were held by a related Swiss company in Geneva under a services agreement to provide investment advisory and back-office services.

The company’s winding-up was triggered by a default under a credit facility. The Grand Court of the Cayman Islands initially appointed a receiver to the company. Subsequently, some of the company’s creditors presented a winding-up petition to the Court and liquidators were appointed and discharged the appointment of the receivers. These liquidation proceedings were initially recognised in Bermuda, Jersey and the UK as foreign main proceedings.

Saad Investments also held Australian listed shares which had a significant value. Accordingly, the liquidator sought Australian recognition of the winding-up as a foreign main proceeding to protect the Australian assets. The company had only one Australian creditor, the Australian Taxation Office.

There is a presumption that Saad Investments’ COMI would be in the Caymans, where its registered office was located, unless there was proof to the contrary. The Federal Court of Australia analysed the European and US case law on COMI to determine how the presumption should apply.

EUROPEAN LAW

The European Council Regulation No. 1346/2000 on insolvency proceedings defines “centre of main interests” as the place where the debtor conducts the administration of its interests on a regular basis and that is therefore ascertainable by third parties.4 This regulation recognises the same presumption that the registered office is the COMI.5

The Model Law and the European Council regulation were preceded by the European Convention on Insolvency Proceedings, which also used the concept of COMI.

The Explanatory Memorandum to the Cross-Border Insolvency Act 2008 and related UN materials recognise that the concept of COMI was based on these earlier insolvency laws.6 Accordingly, interpretative documents and case law on these European enactments should be relevant for the interpretation of COMI in the Model Law.

The Virgós-Schmit Report on the European Convention, although never adopted, is recognised as the pre-eminent document for the interpretation of this earlier Convention. The report states that the COMI “must be interpreted as the place where the debtor conducts the administration of his interests on a regular basis and is therefore ascertainable by third parties”. This interpretation is reflected in the subsequent European Regulation. The report outlines that the rationale for this requirement is that insolvency is a foreseeable risk that must be based on a place known to potential creditors to enable an analysis of legal risks to be assumed if a debtor became insolvent: at [75].

The European Court of Justice (ECJ) in Eurofood IFSC Ltd7 considered these concepts in the context of a subsidiary company with a registered office in Ireland which had an Italian holding company. The parent company went into administration in Italy. A creditor sought to wind-up the subsidiary in Ireland and a liquidator was appointed. The ECJ had to consider whether the subsidiary’s COMI was in Ireland or Italy (i.e. whether the presumption that Ireland was the COMI because the registered office was there had been rebutted).

The ECJ outlined that COMI had to be identified by reference to criteria that are both objective and ascertainable by third parties due to the issues of legal certainty and foreseeability mentioned in the Virgós-Schmit Report on the European Convention. The ECJ stated that the presumption in favour of the registered office can only be rebutted if objective factors exist that are ascertainable by third parties and which demonstrate that the COMI is not located in the same jurisdiction as that registered office.8 On this basis, the ECJ held that a parent company’s ability to control a subsidiary is not sufficient to rebut the presumption because such control, even if exercised, may not be ascertainable by third parties.

The principles outlined in Eurofood have subsequently been considered in Re Stanford International Bank Ltd,9 a case involving a winding-up in Antigua and Barbuda. The case involved competing claims in the UK Court of Appeal for “foreign main proceeding” status under the UK enactment of the Model Law by a US receiver and an Antiguan liquidator.

The court adopted and expanded on the Eurofood principles when interpreting COMI under the Model Law. In the first instance judgment, Lewison J held that the objective factors ascertainable by third parties should be restricted to matters in the public domain, or to matters that a typical third party would learn as a result of dealing with the company. Matters in the public domain might, for example, include facts disclosed in marketing material produced by the debtor.

On appeal, the US receiver argued that the ascertainability test was incorrect and that, even if correct, it should extend to matters which could be ascertained by third parties on enquiry. This approach was rejected by the Court of Appeal and Lewison J’s approach was approved.

US LAW

There are a series of US cases that have dealt with chapter 15 of the US Bankruptcy Code, which was intended to incorporate the Model Law. Many of the US cases purport to follow the principles outlined in Eurofood (i.e. the location of COMI is determined by objective factors ascertainable by third parties); however, the application of those principles in the US cases does not always appear to accord with those principles.

In re SphinX Ltd,10 Drain J at first instance referred to Eurofood with approval and focused on creditors’ perceptions as being of paramount importance in determining the COMI (i.e. where the creditors believed the COMI was located). The case involved a Cayman Islands hedge fund with no substantive business presence in the Caymans. On appeal, the court held that the COMI was not in the Caymans because the status as a main proceeding was sought for an improper purpose, and there were no board meetings, employees, offices or assets in the Caymans.11

In a similar factual scenario in Re Bear Stearns High Grade Structured Strategies Master Funds,12 the court equated COMI to a “principal place of business” test under US law. The court outlined the following objective factors to consider when determining a debtor’s COMI:

1. Location of:

(a) a debtor’s headquarters;

(b) people who actually manage the debtor;

(c) the debtor’s primary assets;

(d) the majority of the debtor’s creditors or those affected by the case.

2. Jurisdiction whose laws would apply to most disputes.

The court found that the Cayman Islands funds were mere “letterbox” companies with no “adhesive connection” to the Caymans other than being registered there. The court held that the COMI was not located in the Caymans because the funds had no managers/employees in the Caymans; the funds were administered from the US; and the books and records and fund assets were held outside the Caymans.

The “principal place of business” formulation and the above factors were adopted in subsequent US cases, including Re Tradex Swiss.13 In Re Betcorp Ltd,14 however, the court referred to the “objective factors ascertainable by third parties” test to determine the location of the COMI, but in doing so stated that courts do not apply any rigid formula or consistently find one factor dispositive but instead analyse a variety of factors (at 30, line 23).

The court referred with approval to the factors outlined in Bear Stearns and cited a line of European authority which looked to “head office” functions to determine the “ascertainable principal place of business”. For example, in Collins & Aikman Corp. Group15 the UK court found that the COMI was in the UK because the head office functions of each of the relevant companies were located there. These activities included human resources, sales functions, IT, design, and other administrative functions. It should be reiterated, however, that the Betcorp approach was one which did not apply “any rigid formula” to determining COMI.

US LAW vs EUROPEAN LAW

The line of European cases that considered “head office” functions to be relevant was rejected in Re Stanford International Bank. The primary judge, Lewison J, also rejected the factor approach adopted in Bear Stearns because none of those factors were qualified by the requirement of ascertainability. The UK Court of Appeal observed that the US cases had adopted the Eurofood test (i.e. objective factors ascertainable to third parties), but the court did not need to decide whether those cases had applied the test correctly.

The court in Saad Investments had regard to both the US and European cases and preferred the approach taken in Eurofood and Stanford. The court commented that the purpose of the rebuttable presumption was to provide a means of dispensing with formal proof. This was to achieve the objective in Article 17(3) of the Model Law that an application for recognition of a foreign proceeding be decided at the earliest possible time. The court found that the Eurofood and Stanford approach would lead to a more predictable and orderly outcome than the “less certain approach” adopted in some of the US cases. In doing so, the court also suggested that the approach taken in Betcorp was the same approach as adopted in the European cases – that is, an approach based on objective, ascertainable factors – and was consistent with the requirement in Article 8 of the Model Law to have regard to the need to promote uniformity of application when interpreting the law.

The court’s approach in Saad, it is submitted, was the correct one. The factor approach taken in some of the US cases appears to incorrectly apply the Eurofood test.

Some of the US cases which adopted the factor approach did not appear to restrict the use of those factors to situations where they were ascertainable by third parties. For example, the location of board meetings would be considered even where such information might not be readily apparent to a third party creditor.

Stanford placed an appropriate restriction on the objective factors which are ascertainable by third parties, by limiting the test to information in the public domain or that a typical third party would learn as a result of dealing with the company.

A blanket “factor” approach would be contrary to the requirement in Article 17(3), that recognition of a foreign proceeding be determined at the earliest possible time. Consideration of a myriad of factors, without limitation, would mire the recognition process in evidentiary matters and prohibit a timely recognition of a foreign proceeding. This would be contrary to the asset protection objectives of the Model Law. A drawn out process would increase the risks of asset dissipation. The types of relief provided by the Model Law (e.g. interim relief and the “automatic” stay) also evidence a policy of timely resolution of recognition claims. The presumption that the COMI is at the location of the registered office exists to circumvent such complex evidentiary inquiries.

As recognised by the court in Saad Investments, the Model Law permits a court to reconsider an order for recognition if subsequent investigation showed that the COMI was elsewhere: Article 17(4). Accordingly, the objective factors adopted in Bear Stearns should only be relevant where they are in the public domain or would be ascertained by a typical third party dealing with the debtor (e.g. the location of a debtor’s assets may be disclosed in marketing material or annual reports available in the public domain).

The approach in some of the US cases is contrary to the Model Law’s objective (as stated in the Preamble) of providing greater legal certainty for trade and investment. The ascertainability criterion exists so that creditors can calculate legal risks associated with an insolvency situation because creditors will know the jurisdiction in which the main insolvency proceedings will occur. If the COMI test also required a court to consider facts which a creditor might discover by enquiry, more uncertainty would exist as to possible insolvency outcomes.

In Betcorp, the court rejected a consideration of a debtor’s operational history in assessing COMI on a similar basis of uncertainty, and raised creditor perceptions as a key issue (as in the lower court judgment in Re Sphinx). Creditor perceptions could simply be seen as an aspect of the restricted COMI test adopted in Stanford (i.e. the court in Stanford restricted the ascertainable factors to only those that would be within a creditor’s perception – information in the public domain and matters they would become aware of by dealing with the debtor).

Sensibly, the first Australian case to consider the COMI concept has adopted the restricted Eurofood and Stanford approach. This approach is reflective of the underlying policy objectives of the Model Law and is more likely to lead to timely recognition of foreign proceedings by Australian courts. This will facilitate preservation of assets in cross-border insolvency situations.




DR PHILIP BENDER is a barrister and was a visiting scholar at UNCITRAL.

1. [2010] FCA 1221.

2. Explanatory Memorandum, para .07, chapter 1, Cross-Border Insolvency Act 2008.

3. Explanatory Memorandum, note 2 above, para 37, chapter 2.

4. Recital 13.

5. Article 13, European Council Regulation No. 1346/2000.

6. Explanatory Memorandum, note 2 above, para 5, chapter 2; Official Records of the UN General Assembly 52nd Session, Supplement No. 17, para 153; UNCITRAL Guide to Enactment, paras 31 and 72.

7. [2006] EUECJ C-341/04.

8. Paragraphs 33 and 34.

9. [2010] EWCA Civ 137.

10. (2006) 351 BR 103.

11. In re SphinX Ltd (2007) 371 BR 10.

12. (2007) 374 BR 122, and (2008) 389 BR 325 on appeal.

13. (2008) 384 BR 34.

14. (2009) 400 BR 266.

15. [2005] EWHC (Ch) 1754.

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