The COMI (Center Of Main Interest) in insolvency law in the United Kingdom

The English court was asked to consider applications by a bank for administration orders to be made in respect of two companies (incorporated in Delaware (A) and Jersey (B)), i.e. outside of England and Wales [Re Ci4net.com Inc, [2005] BCC 277]. The main issues for the court were whether the companies had their COMI in the UK for the purpose of the EIR to give the English court jurisdiction, and if so, whether it should make the administration orders. The bank contended that this was the case and as such, the purpose of administration could be achieved in accordance with English statutory requirements.

Both companies did have their COMI in the UK, but the “purpose” of administration could only be achieved in the case of B (and not A). In order to establish a company’s COMI it was necessary to closely analyse both its recent history and present situation. Company “A” had used the address of a London office as its main address up until 2001. Even after this date it still maintained offices there and continued to use that address in correspondence, as well as in its official reports to the US authorities. “A” was by no means a dormant company and there was no evidence that it conducted activities to any greater extent elsewhere than in London.

Equally B had no other active address or place of activity other than London. Thus the court had jurisdiction in respect of both companies. However, there was no real prospect of the purpose of administration being achieved in the case of A. Administration would result in asset stripping which could not be said to be a rescue of the company as a going concern. Winding up was not likely to achieve any less of a result than an administration order, and the bank was not a secured creditor of A. However with respect to B, a debenture existed which made the bank a secured creditor and therefore an administration order was appropriate.

Particular attention was paid as to where the company conducted its interests on a regular basis and whether this was ascertainable by third parties and creditors (here, London addresses were used).

In another case, the court was asked to make an administration order in respect of a company (L) and three of its subsidiaries (E, S and M)[Re Lennox Holdings Plc, [2009] EWHC B11 (Ch)]. L supplied British food products to consumers in Spain and was itself supplied by a number of companies based in the UK. S and M had their registered offices in Spain. Each of the companies within the group was likely to be unable to pay its debts as they fell due and needed to be the subject of an appropriate insolvency procedure. In the case of L and E there was no doubt that the appropriate procedure was an entry into administration. The issue was whether England and Wales could be said to be the COMI of S and M so as to give the court jurisdiction to make an administration order in respect of them. Notwithstanding the location of their registered offices, L submitted that the strategic operational and financial management of S and M was conducted in the UK and that the UK was therefore the COMI.

The court concluded that it had jurisdiction to open main proceedings and administration was the appropriate procedure in respect of S and M. The fact that these two companies had their registered offices in Spain created a rebuttable presumption that Spain was the COMI. While control by a parent company elsewhere was not sufficient to rebut the presumption, S and M were controlled by their boards of directors from the UK. Neither company had a commercial undertaking that was separate from that of L; their board and management meetings were held in the UK; their accounts were prepared by English auditors; and their financing and administration was conducted in the UK through English suppliers and directors and with English funding. That was sufficient to rebut the presumption. Here, the court concentrated on the “head-office functions” test. This was an unopposed application and the question arises whether the result might have been different otherwise?

It was alleged that a bank (B) incorporated in Antigua and Barbuda had been involved in a fraudulent “Ponzi” scheme operated by an individual (S) and his associates [Re Stanford International Bank Ltd (in liquidation), [2010] EWCA Civ 137]. The United States Securities and Exchange Commission (“SEC”) brought proceedings in the US against S, B and others alleging fraudulent breaches of securities law and obtained the appointment of (R) as the “worldwide receiver” of the assets of those defendants.
The US Department of Justice (“DOJ”) issued a letter of request to the UK authorities pursuant to a bilateral treaty requesting assistance by way of restraint of the assets of S and B in the UK. Pursuant to that request the SFO obtained without notice a restraint order against those named in the letter of request. (B) was then ordered to be wound up by the High Court of Antigua and Barbuda and (L) were appointed joint liquidators. Competing office-holders were therefore appointed.

Both L and R applied for recognition of their respective proceedings in the UK in order to gain control of the assets of B located in the UK (on the basis that there was no connection with the EU, the application was made under the Cross Border Model Law). One of the main issues was which jurisdiction ought to be considered B’s COMI.

The court ruled that:

  • The relevant COMI was the COMI of B.
  • Since B’s registered office was in Antigua, its COMI was presumed to be Antigua, in the absence of proof to the contrary.
  • The burden or rebutting the presumption lay on R.
  • This presumption could only be rebutted by factors that were both objective and ascertainable by third parties.
  • What was ascertainable by third parties had to be what was in the public domain, and what a third party could learn in the ordinary course of business.

Applying that test, the presumption was not rebutted.

Mr Justice Lewison back-pedalled on his previous decision in Re Lennox, holding that the “head office functions” test is actually the wrong test. Lewison J followed the test that had previously been set down in Eurofood (i.e. what is objective and ascertainable to third parties).

The proper course therefore was to start with the presumption of COMI based on the registered office address. A non-exhaustive list of relevant issues to be considered was (in no order of importance):

  • who are the companies creditors / customers and where are they based?
  • under what law does it contract with creditors / customers?
  • where do its banking relationships take place?
  • where do customers contact /  correspond with the company?
  • where is its head office?
  • from where does it conduct business?
  • where are its employees based?
  • where are directors based?
  • where are shareholders based?
  • where is its management based?
  • where do board meetings take place?
  • where are administrative and accounting functions carried out?
  • where are the majority of its assets based?
  • where are the main bank accounts of the company based?
  • where are the annual accounts filed? Where are the auditors based?

In another case, (H), a company registered in Luxembourg, was set up as the finance company for a group of companies [Re Hellas Telecommunications (Luxembourg) II SCA [2011] EWHC 3176 (Ch)]. H suffered substantial losses and the directors of H had taken steps to relocate the business to London as part of a restructuring strategy. The chosen route for restructuring H was via a non-consensual restructuring of its debts by way of a pre-packaged administration sale (which resulted in approximately EUR 1.5 billion of subordinated debt being left behind in an insolvent company).

The court held that the company’s COMI had been migrated to England: therefore, under Art. 3 para 1 of the EIR, the Court had jurisdiction to make the administration order. Among the factors relevant to the Court’s decision was that:

  • the corporate general partner was an English registered company;
  • UK resident individuals had been appointed to the supervisory board of H’s immediate parent;
  • a new head office had been opened in London, where correspondence was sent and board meetings held;
  • all creditors were notified; and
  • the company’s restructuring negotiations had taken place in England.

The Court paid particular attention to where the company’s restructuring negotiations had taken place when determining its COMI. At all times however, the key point was whether the information was already the public domain which a typical third party would learn through their dealings with the company (which could not be “hidden” changes within the company’s organisation).

Initially the English law position was very much that COMI was taken to be the location of the registered office. This assertion however, has since been substantially overtaken and judicial thinking has evolved, as set out below. Following the decision in Re Lennox Holdings plc [2009] B.C.C 155, the test became the ‘head office functions’ test; that the COMI would be the place where functions such as board meetings, internal accounting, treasury management, human resources, IT systems etc., took place (see also Re Enron Directo SA [Re Enron Directo SA (unrep., 4 July 2002)], Re Daisytek-ISA Ltd / ISA Daisytek SAS [Re Daisytek-ISA Ltd /  ISA Daisytek SAS [2003] BCC 562], Crisscross Communications [Crisscross Communications (unrep., 20 May 2003)], MG Rover [MG Rover (unrep., 14 August 2006)] and Collins & Aikman [Collins & Aikman (unrep., 15 July 2005)].

Six months later, the Stanford case came before the courts and again the test was slightly amended. Mr Justice Lewison, who also heard the Lennox case, stated: “Simply to look at the place where head office functions are actually carried out, without considering whether the location of those functions is ascertainable by third parties, is the wrong test. The way in which the ECJ approached recital (13) was not to apply the factual assumption underlying it but to apply its rationale. I accept this submission. To the extent that I considered and applied the head office functions test in Lennox Holdings on the basis accepted by Jacobs A-G in § 114, I now consider that I was wrong to do so. Pre-Eurofood decisions by English courts should no longer be followed in this respect. I accept Mr Zacaroli’s submission that COMI must be identified by reference to factors that are both objective and ascertainable by third parties.”

Therefore, the position became where the debtor conducts the administration of his interests on a regular basis and which is ascertainable by third parties and creditors as such. This is of course consistent with the ECJ approach in Eurofood.

The significance of the ‘objective and ascertainable’ provision is based on the principle that insolvency is a foreseeable risk and thus as the collective insolvency process will be for the benefit of creditors, it should, therefore, be based in a place known to the debtor’s actual and potential creditors. It follows then that the most important third parties, as referred to by Mr Justice Lennox and recital 13 of the EIR, are the creditors.

Regardless of the cases that have considered the COMI issue, the relevant factors to be considered are still not definitive. However, judicial guidance is to start with the presumption based on the registered office and then exhausting other factors including: who the company’s creditors are and where there are based; where do its banking relationships take place; where do customers correspond with the company; where are the company’s employees and directors based.

The response to forum shopping in England and Wales has seen the courts willing to entertain a variety of EU registered entities seeking to utilize a perceived more flexible restructuring and insolvency jurisdiction. However the courts are equally unwilling to sanction cases where it is demonstrable that the attempted ‘relocation’ of COMI is a ‘fiction’ or ‘sham’ by refusing to be drawn into assuming jurisdiction.

Implicit in this approach is the view that genuine relocation, in exercise of EU law freedoms, which occurs before the filing of any request to open main proceedings in the country from which the debtor has migrated, cannot safely be restricted by UK domestic law, even where the debtor’s principal motivation for moving COMI is to take advantage of more favourable or flexible insolvency laws.