CMS Expert Guide to Finding COMI

Introduction

We are delighted to present this CMS report which provides an overview of the interpretation by courts in 12 jurisdictions of the ‘centre of main interest’ (COMI). The EC Insolvency Regulation (EIR) [Council Regulation (EC) No. 1346 / 2000 on insolvency proceedings] stipulates which national law is applicable if insolvency proceedings are opened in a relevant EU jurisdiction. The drafting of Article 3 para 1 of the EIR is such that, under certain circumstances, it allows for the possibility of choosing the national insolvency law that will apply by changing the COMI of a subject debtor. This is also referred to as forum shopping.

Which national law is applicable can be critical in determining the opportunities to deploy a variety of corporate restructuring methodologies. The interpretations of Article 3 para 1 by national courts differ in the various CMS jurisdictions, in some cases significantly.

During the CMS Restructuring & Insolvency Associates Training, which took place in 2012 in Brussels, the main topic was to identify and compare the interpretation of the COMI in different European countries. This report provides an overview of interpretations in 12 jurisdictions!

In the first part of this report a general introduction is given on forum shopping and the EIR with focus on the interpretation of the European Court of Justice (ECJ) with respect to the COMI principle.

Throughout this report we seek to draw your attention to the varied incidences of forum shopping opportunities that may arise and the complications this may cause. If you have any questions arising out of any of the issues contained in this report, please contact us.

CMS Practice Group for Restructuring & Insolvency

About CMS

CMS at a glance

With more than 5,000 people working in 54 offices across 29 countries, CMS has the most extensive European footprint of any legal and tax services provider. Our breadth across Europe is supported by our depth in terms of legal, industry and local expertise.

Based on our combined revenues, we are one of the top 5 legal providers in Europe. We also rate at or near the top of the list when measured by the number of jurisdictions where we operate, our number of offices and number of lawyers.

CMS maintains strong, trusted relationships with many of the world’s leading businesses. We act for more than a quarter of the FT European 500 and for a number of Fortune 500 companies.

In terms of quality, CMS has a strong presence in leading directories, including 94 Band 1 rankings and 179 Band 2 rankings in Chambers 2012 and Legal 500 2012.

(IMAGE)

CMS brings together ten European-headquartered law firms. We have chosen a single organisational structure that suits clients doing business in Europe. Each CMS office is tailored to its local market, ensuring that clients benefit from personal service and market sensitivities, while working together under a shared mission and governance structure.

The CMS Practice Group for Restructuring and Insolvency

Representing all the restructuring and insolvency teams of the various CMS jurisdictions, the restructuring and insolvency practice group has a long history of association and commands strong positions, both locally and on the international market. The group was created in order to meet the growing demand for integrated, multi-jurisdictional legal services in this field.

Members of the Practice Group advise on specialized restructuring and insolvency issues affecting business across Europe.

Restructuring & Insolvency issues can be particularly complex and there is a wide range of different laws and regulations affecting them. The integration of our firms across Europe means we can provide coordinated European advice through a single point of contact. Contact details are set out at the end of this guide.

The information contained in this guide is of a general nature and is not intended to be a full legal review of the topics covered and cannot be relied upon for specific advice. We accept no responsibility for any acts or omissions as a result of the information contained in this guide. If you would like to receive specific legal advice, please contact your usual CMS attorney.

The information in this guide is accurate as at December 2012 but please keep in mind that this is a developing area.

EC Insolvency Regulation and Forum Shopping

Forum shopping

Forum shopping is a popular issue today, where big corporations operate in more than one country and technology enables parallel engagement in numerous places and, more generally, there has been a global convergence of economies and legal systems. Particularly within the European Union, the close legal and economic connections between the Member States in the internal market allow the migration of both legal and natural persons in search of the most favourable legal framework.

In its broadest meaning, forum shopping provides a claimant with the choice of bringing an action in more than one jurisdiction. The choice of jurisdiction in which to bring the action will be based upon the route most likely to result in the best possible solution. From an insolvency perspective, the parties focus on finding the optimal legal system for restructuring a company or managing its insolvency.

Forum shopping may be motivated by various factors including both substantive law issues and practical procedural reasons, such as the promptness of proceedings or costs. The main reason for forum shopping in the area of insolvency law is the search for a restructuring mechanism or insolvency outcome unavailable (or more cumbersome) under the national laws of a country.

Para 4 of the preamble to the EIR states that it is necessary to avoid incentives for parties to transfer assets or judicial proceedings from one Member State to another, seeking to obtain a more favourable legal position. It is clear that the EIR both identifies and explicitly seeks to prevent forum shopping. In practice, it has become evident that it is possible to shift COMI (whether by moving the registered office or the central and financial administration of a company or both) in order to benefit from more favourable bankruptcy or reorganisation processes.

EC Insolvency Regulation

The introduction of the EIR in May 2002 was intended to achieve a level of harmonization in relation to insolvencies across EU Member States (except Denmark which opted not to participate). Given the rise in cross border transactions, the pre-amble outlines the need for coordination of the measures to be taken with regard to an insolvent debtor’s assets within the EU.

However, the EIR also recognizes the differing substantive laws across the EU and the impracticality of attempting to formulate a code of insolvency law applicable throughout every Member State. The EIR therefore only provides rules on significant aspects of cross border insolvencies and focuses on process rather than substantive law. These include which Member State’s courts have jurisdiction to open insolvency proceedings, the choice of law applicable to such proceedings, and recognition across the EU of the effects of judgments by a court in a Member State having jurisdiction.

To whom does the EC Insolvency Regulation apply?

The EIR applies to a debtor (who can be either a physical or legal person) having its COMI within a Member State of the EU. Credit institutions and insurance companies are excluded from the scope of the EIR and are regulated by separate directives.

Perhaps surprisingly, as COMI is one of the cornerstones of the EIR, the EIR itself does not contain a definition of the term. The pre-amble, which serves as an aid to interpretation, but which is not legally binding, provides that COMI ‘should correspond to the place where the debtor conducts the administration of his interests on a regular basis and is therefore ascertainable by third parties’. In the case of a company, the place of the registered office is presumed to be the COMI in the absence of proof to the contrary.

Determining the COMI is often a problem when it comes to group companies. The EIR however does not provide specific rules for group companies with subsidiaries in different countries. Some commentators plead for an expansion of the COMI principle to enable all group members to enjoy the same COMI. This creates a number of difficulties. Firstly the COMI of individual group members would not always be ascertainable by third parties. This would be a radical departure from the fundamental principles of the EIR. Secondly it would multiply many times over the possibility of jurisdictional arguments over the effectiveness of COMI shift. The judges of different states would have an increasing opportunity to declare themselves competent to take jurisdiction over broad swathes of companies clearly otherwise marked out as companies ‘belonging’ to other jurisdictions. Finally such an expansion would almost certainly increase the attraction of attempting COMI shifts ahead of opening insolvency proceedings.
To what proceedings does the EC Insolvency Regulation apply?

The EIR applies to all ‘collective insolvency proceedings which entail the partial or total divestment of a debtor and the appointment of a liquidator’. The different national procedures are listed in Annex A of the EIR. A ‘liquidator’ is defined as a person whose function it is to administer or liquidate assets of which a debtor has been divested or to supervise the administration of his affairs.

Jurisdiction: main proceedings

Primary jurisdiction is accorded to the courts of the Member State within which the COMI of the debtor is located. Subject to any secondary proceedings (see below) and any relevant exceptions, insolvency proceedings opened in the Member State where the debtor’s COMI is located are called ‘main proceedings’ and they are deemed to be of universal scope encompassing all the debtor’s assets on a worldwide basis.

Subject only to certain entrenched rights (see below), the law of the Member State in which the proceedings are opened determines the conditions for the opening of those proceedings, their conduct and their closure. Art. 4 sub 2 EIR lists, not exhaustively, those matters that are governed by the law of that Member State. They include, for example, the respective powers of the debtor and the office-holder, the effects of the insolvency proceedings on current contracts to which the debtor is party and the rules governing the lodging, verification and admission of claims.
Jurisdiction: secondary proceedings

The courts of other Member States have jurisdiction to open secondary insolvency proceedings against a debtor possessing an ‘establishment’ within the territory of that other Member State. The term establishment is defined as ‘any place of operations where the debtor carries out a non-transitory economic activity with human means and goods’.

Primacy of main proceedings

Secondary proceedings are limited to the assets of the debtor situated in the territory of the Member State in which proceedings are commenced and may only be ‘winding up proceedings’. Various provisions of the EIR ensure the primacy of the main proceedings, including a requirement on the liquidator of the secondary proceedings to co-operate with the liquidator of the main proceedings.
Recognition

A judgment handed down in the main proceedings will, subject to limited exceptions based on public policy, be recognized and given effect in other Member States with no further formalities. In addition, the effects of any judgment handed down in secondary proceedings may not be challenged in other Member States.

The liquidator appointed in the main proceedings will be entitled to exercise all the powers conferred on him by the law of the Member State of the main proceedings in another Member State, provided no secondary proceedings have been opened in that other Member State nor any preservation measures to the contrary have been taken there.

Entrenched rights

Certain creditors’ rights are excluded from the general choice of law rule in the EIR and are given entrenched status. Rights in rem (including security rights of a propriety nature) are one example. So if a debtor has its COMI and main proceedings in for instance France, in general the EIR dictates that its insolvency and assets (wherever they are) are dealt with according to French insolvency law. But if it has a creditor with a proprietary claim relating to an asset situated in for instance Germany, the law applicable to the proprietary claim remains German law. Other entrenched rights include reservation of title claims, set-off and contracts relating to immoveable property.

COMI

Since the coming into force of the EIR, a large body of jurisprudence has sprung up dealing with the interpretation of Art. 3 para 1 of the EIR. This is true at both the national level in several European countries as well as under the auspices of the European Court of Justice (ECJ). The following brief summaries highlight some of the issues the ECJ has been asked to consider.

Eurofood, 02-05-2006, C-341 / 04

Eurofood was an Irish financing company of the (Italian) Parmalat Group. The Irish court appointed a provisional liquidator. Shortly after, an Italian judge opened main proceedings in Italy. It was considered in this case that the sole fact that the control over the economic choices of the debtor were made by the mother company in another member state, is not sufficient for rebutting the presumption given in Art. 3 sub 1. A decision of a judge in a member state concerning the COMI must be respected by judges in another member state; they cannot examine this judgment.

Interedil, 20-10-2011, C-396 / 009

This case concerned a COMI shift. An Italian company moved to England and was registered there. The court decided that when the place of the central board of a company is not at the place of its registered office, the existence of assets and agreements regarding these assets in another member state other than the state of its registered office, can only lead to a rebutting of the presumption when, from a complete assessment of all the relevant factors, in a way that it is ascertainable by third parties, it becomes clear that the actual centre of management and control is in that other member state.

Rastelli, 15-12-2011, C-191 / 10

Insolvency proceedings were opened in France. The French judge extended the procedure to Rastelli, an Italian company. The court ruled that the judicial authority in a member state that opened the main proceedings by deciding that the company’s COMI is in that state, can only expand this judgment to another company if this company also has its COMI in that member state. Furthermore, a decision which will have the same consequences as a decision to open main proceedings can only be taken by the judicial authorities in a member state when they are competent to open main proceedings.

Problems with the EC Insolvency Regulation

The practical application of the EIR across the Member States since its introduction in 2002 has not always been smooth. There have been instances of ‘forum shopping’ and jurisdictional conflicts, which the Regulation set out to avoid. However, it is hoped that these problems will reduce (or at least outcomes become more predictable) as the EIR case law and practice develops. Notwithstanding these problems, the EIR represents progress towards co-operation and coordination in the field of international insolvency, for the benefit of insolvent businesses and their creditors alike.

Proposals for an amendment to the EIR have been issued by a working group of INSOL Europe. An important proposed amendment is to take up a so called ‘look back period’: if the COMI has changed in the year before filing for insolvency, the creditors have to give their approval for the opening of proceedings. Since these are only just proposals it is unlikely that amendments to the EIR with regard to forum shopping will be made in a short term.