THE IMPORTANCE OF CORRECTLY IDENTIFYING A COMPANY'S CENTER OF MAIN INTERESTS FOR THE PURPOSES OF OBTAINING RECOGNITION AS THE FOREIGN MAIN PROCEEDING UNDER THE UNCITRAL MODEL LAW ON CROSS-BORDER INSOLVENCY
As The Location of a Company's COMI Ultimately Dictates Whether a Particular Process Constitutes a Foreign Main Proceeding in Respect of That Company, Care Should Be Taken to Correctly Identify a Company's COMI Before Seeking Recognition of the Process Under the Model Law.
Background to the Model Law
As globalization has accelerated in recent decades, cross-border corporate insolvencies have also increased. Unhelpfully, however, insolvency regimes worldwide have not necessarily adapted sufficiently to address the uncertainties that arise where a corporation with internationally dispersed assets and creditors experiences financial distress and becomes the subject of insolvency proceedings in multiple jurisdictions. Despite this, the Model Law on Cross-Border Insolvency as adopted by the United Nations Commission on International Trade Law in 1997 (the Model Law)1 and locally enacted by 49 states to date including Australia, Canada, Israel, Singapore, New Zealand, the United Kingdom and the United States of America (Enacting States),2 has helped alleviate many of these uncertainties by providing a modern framework for the conduct of cross-border insolvencies. While the Model Law applies to situations involving both individual and corporate debtors, it has been of significant utility in the context of corporate insolvencies or events of financial distress, which are the focus of this article.
In short, the Model Law principally enables the efficient conduct of cross-border corporate insolvencies by (a) providing representatives of foreign insolvency proceedings (generally the appointed insolvency practitioners) access to courts in Enacting States;3 (b) establishing simple processes for recognizing qualifying foreign proceedings in Enacting States and, where multiple proceedings are occurring simultaneously in respect of the same debtor, processes for identifying the 'foreign main proceeding' and the 'foreign non-main proceeding' so that there is clarity as to which process takes precedence;4 and (c) enabling the granting of relief in Enacting States (such as through the imposition of stays on enforcement actions or the suspension of transfers or dispositions of assets located within Enacting States so the debtor's assets and the interests of its creditors are protected and to ensure the objectives of the main proceeding aren't frustrated).5 Finally, the Model Law also empowers Courts in different jurisdictions to communicate with one another so that multiple insolvency proceedings in respect of the one company can be co-ordinated where necessary.6
Importance of obtaining recognition as the 'foreign main proceeding'
Although various relief may be obtained in an Enacting State where a foreign proceeding has been recognised under the Model Law (regardless of whether the proceeding is the main or non-main proceeding),7 obtaining recognition as the foreign main proceeding is significant for three reasons. Firstly, under the Model Law certain forms of relief apply automatically in an Enacting State where a proceeding is recognized as the foreign main proceeding (subject to laws in the Enacting State which may alter that relief).8 Secondly, if separate relief is sought by another party seeking to have its own proceeding recognized in that Enacting State, the Court has discretion to refuse such relief if it would interfere with the administration of the foreign main proceeding.9 Thirdly, before a Court may grant certain relief in respect of a non-main proceeding, the Court must be satisfied that the assets which the relief pertains to should be administered in that non-main proceeding and / or that the relief concerns information which is required in that non-main proceeding (whereas the Court is not required to be satisfied of such circumstances where relief is sought in the context of the main proceeding).10
The Model Law provides that in order for a foreign proceeding to be recognized as a 'foreign main proceeding', it must be occurring in the jurisdiction where the debtor's center of main interests (or COMI) is located
Given these benefits, it is necessary to consider how an insolvency process in respect of a company with internationally-dispersed operations, assets or creditors can obtain recognition as the foreign main proceeding under the Model Law.
A company's COMI dictates the location of the 'foreign main proceeding'
The Model Law provides that in order for a foreign proceeding to be recognized as a 'foreign main proceeding', it must be occurring in the jurisdiction where the debtor's center of main interests (or COMI) is located.11 This is to ensure that the proceeding pending in the location of the debtor's COMI takes precedence and the administrator of that process has principal responsibility for managing the debtor's insolvency irrespective of the number of other jurisdictions in which the company has operations, assets or creditors.12 Accordingly, any party considering initiating an external administration process in respect of an internationally-dispersed company should take care to correctly identify the company's COMI before commencing that process or seeking to have it recognized as the main proceeding under the Model Law.
Where is a company's COMI under the Model Law?
Helpfully, the Model Law provides that in the absence of proof to the contrary, a company's COMI is presumed to be the location of its registered office,13 meaning that identification of a company's COMI will generally be straightforward. However, as the Model Law does not otherwise define COMI and as corporations are continually establishing operations (and registered offices) in multiple jurisdictions, this presumption as to COMI either frequently doesn't apply or is rebutted.14 Courts of Enacting States are therefore increasingly being tasked with identifying the COMI of financially distressed or insolvent companies that are the subject of proceedings in multiple jurisdictions.15 Accordingly, a significant body of case law is beginning to emerge in respect of the principles to be applied when identifying a company's COMI for the purposes of the Model Law.16 Interestingly, a similar regulation which came into force in 2002 which applies to insolvency processes occurring across member states of the European Union (the EIR),17 also recognizes the main proceeding in respect of an insolvent company by reference to the location of the company's COMI.18 Judicial decisions as to COMI, as arrived at under both the Model Law and the EIR demonstrate that the term was to bear a similar meaning under both laws and that where the presumption as to COMI is rebutted, identification of a debtor company's COMI ultimately depends on the factual evidence before the Court.19
To illustrate the above, we have considered two recent decisions of Australian Courts charged with applying the Model Law and the facts that were relevant to those Courts in identifying the debtor company's COMI in each case.
Recent cases where COMI has been considered by Australian Courts
In Re Hydrodec Group Plc,20 which was a decision of an Australian Supreme Court, the appointed monitors of a UK-incorporated public company that was undergoing a moratorium process under Pt A1 of the UK's Insolvency Act21 (UK moratorium), sought recognition of the UK moratorium as the foreign main proceeding and a stay of Australian winding up proceedings brought against the company by an Australian-based creditor. The monitors' application was dismissed by the Court, primarily on the basis that although the UK moratorium was a foreign proceeding for the purposes of the Model Law, it was not the main proceeding as the company's COMI was in the United States of America and not in the United Kingdom where the moratorium process was occurring. The Model Law was therefore of no assistance to the company (or its appointed monitors) and the Australian creditor was successful in obtaining orders that the company be wound up in insolvency under Australia's Corporations Act.
Matters relevant to the Australian Court's finding that the company's COMI was not in the UK included that although the company held a registered office in the UK, it also held a registered office in Australia, meaning the presumption as to COMI did not apply.22 Furthermore, information that was objective and readily ascertainable by third parties23 (such as information in the company's announcements to the London Stock Exchange and in its last financial report) indicated that the company itself did not trade and was effectively a holding company for subsidiaries located in the UK, USA, Australia and Japan and that the USA subsidiary was the only trading or revenue-earning entity within the corporate group and was evidently the focus of the company's activities.24
Where an internationally-dispersed company experiences financial distress or insolvency and becomes the subject of an external administration or winding up process, there is great utility in having that process recognized as the foreign main proceeding under the Model Law
By comparison, in Frege v Greensill Bank AG,25 the insolvency administrator of Greensill Bank, a company registered in Germany, was successful in having the process they were overseeing under the German Insolvency Act recognized in Australia as the foreign main proceeding. In reaching this decision, the Federal Court of Australia found that the company's COMI was in Germany as its registered office was located there (meaning the Model Law's presumption as to COMI was not displaced).26 However, the Court went on to comment that even if the presumption had been displaced, substantial evidence before the Court confirmed that the company's COMI was the location of its registered office (i.e. in Germany) as all strategic decisions relating to the company's business, finances and operations were made at that office and all of the company's books and records were maintained there. In addition, the company did not have any employees outside Germany, its banking license was issued by a German authority and the majority of the company's creditors were also located in Germany.27 As a consequence of having the German insolvency process recognized as the foreign main proceeding, the applicant practitioner obtained the benefit of the 'automatic' relief contained in Article 20 of the Model Law (subject to some modifications as ordered by the Court).
Notably, however, the practitioner was also successful in obtaining ancillary relief under the Model Law which enabled them to conduct public examinations as if they were a liquidator appointed under Australia's Corporations Act and to be entrusted with the company's Australian-based assets. This undoubtedly made it easier for the practitioner to readily administer the insolvency of Greensill Bank from Germany and had the practitioner not been successful in having the German process recognized as the foreign main proceeding, they may have had greater difficulty in obtaining ancillary relief in Australia.
Conclusion
As the above cases illustrate, where an internationally-dispersed company experiences financial distress or insolvency and becomes the subject of an external administration or winding up process, there is great utility in having that process recognized as the foreign main proceeding under the Model Law. However, as the location of a company's COMI ultimately dictates whether a particular process constitutes a foreign main proceeding in respect of that company, care should be taken to correctly identify a company's COMI before seeking recognition of the process under the Model Law. This is particularly so if the company maintains multiple registered offices or has material operations, assets or creditors outside the jurisdiction in which its registered office is located.
1 UNCITRAL Model Law on Cross-Border Insolvency (1997) ('Model Law').
2 Taken as at December 2021 (source: UNCITRAL website: Status: UNCITRAL Model Law on Cross-Border Insolvency (1997) | United Nations Commission OnInternational Trade Law.
3 UNCITRAL Model Law on Cross-Border Insolvency (1997) Guide to Enactment and Interpretation (2013).
4 Ibid.
5 Ibid.
6 Ibid.
7 Model Law art 21.
8 Model Law art 20.
9 Model Law art 19.4.
10 Model Law art 21.3.
11 Model Law art 17.2(a).
12 UNCITRAL digest paper, page 2, para 1.
13 Model Law art 16.3.
14 Digest of Case Law on the UNCITRAL Model Law on Cross-Border Insolvency (2020) (advance copy) p vii ('Digest of Model Law Case Law').
15 Digest of Model Law Case Law pp 39-42; Re Hydrodec Group Plc [2021] NSWSC 755 at [139].
16 Ibid.
17 European Council (EU) Regulation No. 1346/2000 of 29 May 2000 on insolvency proceedings (EIR), including European Union (EU) Regulation 2015/848 of the European Parliament and of the Council of 20 May 2015 on insolvency proceedings (recast).
18 Digest of Model Law Case Law p 39.
19 Ibid.
20 Re Hydrodec Group Plc [2021] NSWSC 755 ('Hydrodec').
21 Insolvency Act 1986 (UK).
22 Hydrodec at [136].
23 Hydrodec at [136]-[139].
24 Hydrodec at [139]-[149].
25 Frege (in his capacity as foreign representative of Greensill Bank AG) v Greensill Bank AG [2021] FCA 330; Frege (in his capacity as foreign representative of Greensill Bank AG) v Greensill Bank AG (No 2) [2021] FCA 510 ('Frege (No 2)').
26 Frege (No 2) at [17].
27 Frege (No 2) at [16]-[17].
Disclaimer – The views expressed in this article are the personal views of the authors and are purely informative in nature.