Allen Stanford and cross-border insolvency: COMI issues

The High Court has made a significant decision in the case of two rival applications for recognition of a foreign proceeding by the two office-holders appointed over Stanford International Bank Limited ("SIB"), which throws light on how English courts will approach the issue of establishing an insolvent company’s Centre of Main Interests ("COMI") outside the European context. CMS Cameron McKenna LLP acted for the Antiguan liquidators of SIB.

Background

On 16 February 2009, the United States Securities and Exchange Commission ("SEC") shut down Allen Stanford’s business operations, and applied to court to have an equity receiver appointed over all Stanford-related assets and entities worldwide.

On 19 February 2009, the Financial Services Regulatory Commission ("FSRC") of Antigua appointed its own receivers over the assets of SIB, a company incorporated in, regulated by, and operating from Antigua. On 15 April 2009, the Antiguan High Court, on an application brought by the FSRC, ordered that SIB be put into liquidation.

The Antiguan liquidators instructed CMS Cameron McKenna to apply for recognition of their appointment in the UK under the Cross Border Insolvency Regulations 2006. This application was opposed by the US receiver on the grounds that he alone should be recognised in the UK and he made a separate application for recognition of his own equity receivership as foreign main proceedings. At stake was the control of approximately £120 million of SIB’s assets held by UK institutions.

Relevant legislation

The United Nations Commission on International Trade Law ("UNCITRAL") produced a model law on cross-border insolvency in 1997 (the "Model Law"). The Model Law was incorporated into UK legislation through the Cross-Border Insolvency Regulations in 2006 and into US legislation in the form of Chapter 15 of the Federal Bankruptcy Code in 2005. The UK is also covered by the EC Regulation on Insolvency Proceedings ("EC Regulation") introduced in 2000, which introduced the concept of "centre of main interest" ("COMI") into the EC legal system. Whilst the EC Regulation and the Model Law are supposed to be interpreted in the same way, the American and European legal systems have had slightly different experiences of applying the principles in practice. As there was no suggestion that SIB’s COMI was in the EC, the applications to the English Court were made pursuant to the Model Law and not the EC Regulation. Last week, the High Court considered the differences between European and American approaches, and decided to apply European case law principles on COMI to a non-European context brought to the Court’s attention under the Model Law.

The Model Law

Under the terms of the Model Law, a "foreign representative" can apply for recognition in the UK in connection with a "foreign proceeding". Such recognition can be given on the basis that the "foreign proceeding" is a "foreign main proceeding" or a "foreign non-main proceeding". A "foreign main proceeding" is the proceeding taking place in the debtor’s COMI. Both the Antiguan liquidators and the US receiver claimed that SIB’s COMI was in their respective jurisdiction.

The Antiguan liquidators relied on the decision in Re Eurofood IFSC Ltd [2006] Ch 508, the leading European case, and argued that (1) there was a rebuttable presumption that a company’s COMI was in the same place as it’s registered office; and (2) this presumption could only be rebutted by objective factors that were ascertainable by third parties.

The US receiver put forward an alternative case based partly on (effectively obiter) elements of the Eurofood decision and partly on American case law. He argued that COMI lies in the jurisdiction where the most material "contacts" are to be found with a heavy emphasis on the head office function. These contacts would include the location of the debtor’s headquarters, the location of those who actually manage the debtor, the location of the debtor’s primary assets, or the location of the debtor’s creditors. It was also put to the court that SIB was simply a vehicle for fraud, and what was therefore relevant was the COMI of the fraudsters themselves.

Factual dispute

Each side put forward a different interpretation of the business being carried on by SIB.

The US receiver argued that SIB was not an entity in its own right, but rather an inseparable part of the wider group of Stanford companies; its affairs were indivisibly intertwined with all of the other group companies; and the whole Stanford empire was a fraudulent enterprise meaning that the court should look through the "fiction" of separate corporate entities. Applying the American approach to the Model Law (which was essentially based on case law relating to offshore letter-box companies) and by arguing that the relevant entity for the COMI analysis was the Stanford group, it was then argued that the majority of SIB’s "contacts" were in fact in Texas, where the Stanford group was headquartered.

The Antiguan liquidators argued that not only was SIB a separate entity based in Antigua, but that that was also the image that it had projected to the rest of the world. They stated that it did not matter that the business may have been fraudulent, but that what was important was that all of the factors that were objectively ascertainable by third parties dealing with the bank pointed to it being based in Antigua. This evidence included the fact that SIB was headquartered in a 30,000 square foot office in Antigua where it employed 88 people, all of the standard contracts SIB entered into with its customers were subject to Antiguan law and jurisdiction, all of SIB’s marketing materials pointed to it being based in Antigua, and indeed when SIB ran into difficulties, many investors came to the bank’s headquarters in Antigua.

The decision

The court decided that, because the EC Regulation and the Model Law were intended to be complementary and use the same interpretation of COMI, Eurofoods should be followed and therefore SIB’s COMI was in Antigua. Not only was that the location of its registered office, but the evidence pointed to Antigua being the place where third parties would have objectively considered SIB’s operations to be based. For these purposes fraud was irrelevant and SIB should be dealt with as an individual company.

The court also found that the US receiver could not be recognised under the terms of the Model Law as he did not comply with the definition of a "foreign representative", and the receivership could not qualify as a "foreign proceeding" because an equity receivership is not "pursuant to a law relating to insolvency", which the judge decided needed to be a definitive law that is set out in statute or case law.

Summary

This decision is indicative of the approach that the English courts may adopt in future towards establishing the COMI of multinational companies. It seems that European jurisprudence will still be highly influential even in non-EU cases.

The court agreed with the interpretation of Eurofood put forward by the Antiguan liquidators, even under the Model Law:

• There is a presumption that the location of a company’s registered office is also the location of that company’s COMI.
• The burden of rebutting that presumption lies with anyone trying to disprove it.
• The presumption will only be rebutted by factors that are objective. In the case of SIB, this meant factors such as the location of its headquarters office, the contracts that SIB entered into with its customers and the marketing materials it produced.
• Objective factors will not count unless they are ascertainable by third parties. So, in the case of SIB, third parties would not, in the ordinary course of things, have been able to ascertain that there had been a fraud, and this was therefore irrelevant.
• What is ascertainable by third parties is what is in the public domain, and what they would learn in the ordinary course of business with the company.