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Navigating Cross-border Insolvency: Unravelling the COMI Conundrum

The authors are Hrishikesh Goswami and Aryan Soni, third year students at Gujarat National Law University, Gandhinagar


Background


This blog extensively explores the intricate realm of cross-border insolvency, focusing on the complex concept of the “Centre of Main Interest” (“COMI”). This scenario arises when financially distressed entities operate globally, dispersing assets and liabilities across various jurisdictions. It sheds light on the significance of the UNCITRAL Model Law on Cross Border Insolvency, devised by the UN, which introduces the COMI concept to differentiate between ‘main and non-main insolvency proceedings’, facilitating streamlined management of insolvency processes. However, the lack of clarity surrounding the exact definition of COMI gives rise to diverse interpretations.


The intricacies of COMI encompass distinct definitions adopted by national courts. While the United States underscores the operational core, often termed the “nerve centre,” Europe prioritizes objective and verifiable evidence. Additionally, temporal factors influencing COMI establishment are notable, emphasizing the importance of the “effective date” and its influence on strategic jurisdictional selection. This facet is particularly pronounced in the digital sphere, exemplified by e-commerce businesses. This blog recommends refining the “establishment” definition to suit digital enterprises better. Collaborative efforts, reminiscent of the Jet Airways case, provide insights for the future by proposing the application of the “nerve centre principle” and an evaluation in the “present tense.” Importantly, this piece underscores the imperative for a universally recognized COMI protocol, supported by UNCITRAL, to address the intricacies of the COMI challenge impartially, systematically and comprehensively.


The Role of COMI in Cross-Border Insolvency


Cross-border insolvency is a situation that arises when a financially troubled company or a corporate debtor has assets or liabilities outside of its country of incorporation. This can also occur when the debtor’s creditors are not from the jurisdiction where the insolvency proceedings have been filed. This situation is challenging as the insolvency proceedings are not confined to domestic laws alone. The complexity arises from multiple jurisdictions, varied assets, creditors, and, notably, the intricate web of international interests that could potentially lead to disputes and inefficiencies.


To address cross-border insolvency complexities, the United Nations Commission on International Trade Law (“UNCITRAL:) introduced the concept of a ‘Centre of Main Interest’ (COMI), which  is the decisive factor in discerning between foreign main proceedings and non-main proceedings. The key distinction is that main proceedings ensure that the principal jurisdiction retains the authority to administer and coordinate the insolvency process, while other jurisdictions manage local concerns through non-main proceedings.


As per Article 16(3) of the UNCITRAL Model Law (“Model Law”), the debtor’s registered office or habitual residence ordinarily constitutes the COMI, though it could be located elsewhere with substantiating evidence from a different jurisdiction. However, the definition of COMI is not explicitly specified, leading to varied interpretations by various jurisdictions.


In the modern global business landscape, multinational corporations often encounter intricate cross-border insolvency challenges, emphasising the importance of precisely determining COMI. Nonetheless, the interpretation of COMI varies among nations due to core definitions and temporal factors, posing a hurdle in recognising primary and ancillary insolvency proceedings.

 

Complexities and Ambiguities Surrounding COMI


  1. Variations in COMI Definitions and Court’s Approach:

The lack of consensus and clarity on the definition hinders establishing jurisdiction over the COMI, leading to the simultaneous identification of different COMIs for the same debtor. National courts and tribunals worldwide use several factors to establish a company’s COMI, including asset location, registered office address, account maintenance country, main bank account location, and primary operations. However, decisions may vary among national courts as they rely not solely on these parameters. Insolvency practitioners are, therefore, forced to study court decisions to ascertain the relevant factors and protocols for establishing a company’s COMI instead of depending on an exhaustive definition that has not been ascertained.

 

Different national courts exhibit comparable yet unique methodologies while determining COMI. In the United States, courts prioritise speed and convenience, and they determine COMI utilising the ‘establishment criterion, typically denoting a location where the debtor carries out its operations. The nerve centre’ or the principal place of a business test is applied, recognising the corporate headquarters as the key aspect, exemplified by the influential Hertz v. Friend case. The case stated that the COMI should be where the corporation’s centre of direction, control, and coordination lies rather than merely where board meetings are held. In contrast, European Courts, including the UK, adopt a nuanced approach, relying on presented evidence and the ability to substantiate jurisdiction. They integrate cross-border insolvency laws like the European Commission Regulations, emphasising the third-party perception of pre-insolvency activities. Notably, the EuroFood case is a vital UK and European reference, stressing the use of objective criteria verified by third parties for certainty and enforceability in COMI determination.

 

  1. Temporal Factors and Forum Shopping in COMI Determination

Another critical aspect of determining COMI is the date of establishment of COMI or the effective date,” as specified by Recommendation 12(h) of the UNCITRAL Legislative Guide on Insolvency Law, which varies in different regions. The temporal gap between foreign insolvency proceedings and the filing of recognition applications allows corporate debtors to engage in forum shopping,’ choosing a location based on favourable precedents and court decisions.


Initially, the Model Law did not address the timing issue, leading to three approaches adopted by different national courts. English and European courts used the date of foreign insolvency proceedings’ commencement, Australian courts relied on the recognition application hearing date, and American courts used the date of filing the recognition application. In 2014, the updated Model Law recommended considering the date of the commencement of the foreign proceedings to determine COMI, as the debtor’s business activity likely stops at that point.


In the recent past, the Singapore High Court, in the case of Re: Zetta Jet Pte Ltd & Others, adopted a model similar to the American approach but slightly altered. It considers the ‘present tense,’ indicating that the time of the application for recognition is crucial in determining the effective date. The Singapore court excluded administration and liquidation activities from the COMI determination process, differing from the American courts.


Uncovering E-commerce Vulnerabilities


The foreign exposure of a firm goes beyond physical presence in a foreign jurisdiction and extends to assets, liabilities, and operations. This is particularly relevant in internet-based companies, such as e-commerce enterprises, where the concept of establishment’, defined under Article 2(f) of the Model Law, becomes complex to address. The issue of carrying out economic activity ‘with human means’ has been extensively debated by various organisations, including the UNCITRAL Working Group and the Insolvency Law Committee on Cross Border Insolvency of 2018 set up by the Ministry of Corporate Affairs in India.


The Indian Insolvency Law Committee specifically considered a proposal to remove the phrase ‘with human means and goods’ from the definition of establishment, which plays a crucial role in determining the COMI, to avoid excluding enterprises operating exclusively in an electronic environment. However, the UNCITRAL Working Group, during its 21st Session, decided to retain the current definition, aligning it with Article 2(h) of the European Union (EU) Convention on Insolvency Proceedings. Notably, while the United States eliminated this reference in its establishment definition, countries like the United Kingdom and Singapore have maintained it. Given these divergent international precedents, the Insolvency Law Committee recognised the need to allow jurisprudence to develop further before making any recommendations for changes to the establishment definition outlined in the Model Law.


The complexities of cross-border insolvency for internet-based companies go beyond establishment issues. The lack of a precise physical location or central administrative base makes identifying the COMI challenging. Additionally, the absence of harmonisation among jurisdictions exacerbates the complexity, with varying approaches to recognising and enforcing cross-border insolvency judgments. Asset localisation is another crucial factor in determining jurisdiction, as internet-based companies rely heavily on intangible assets like intellectual property rights, digital content, and customer data. These assets are not confined to specific jurisdictions, and their treatment, valuation, and administration during insolvency proceedings present challenges due to potential conflicts arising from different laws governing intellectual property rights in various jurisdictions, impacting asset valuation and creditor distribution.


Recommendations: Making Insolvency Work Across Borders


The discretionary approach, currently applied by various national courts, has addressed the COMI establishment issue to some extent. However, an excessive reliance on discretion could lead to arbitrariness and confusion. In the context of jurisdictional conflicts, cooperation becomes a vital consideration. The recent Jet Airways v. State Bank of India case highlights the potential for international collaboration to tackle such challenges, although influenced by geopolitical factors. The case saw insolvency proceedings initiated in the Netherlands and India simultaneously. To prevent duplication, India’s National Company Law Appellate Tribunal (“NCLAT”) ruled that Jet Airways’ COMI was in India despite its assets in the Netherlands. The decision hinged on the company’s registered office, which oversaw administrative functions, indicating India as its primary location. Notably, the NCLAT recognised the Dutch proceedings as non-main proceedings despite this determination.


To navigate the complexities and uncertainties surrounding COMI determination, the ‘nerve centre principle’, similar to the approach used in the United States, emerges as an effective solution. This principle defines COMI as the core of a corporation’s direction, control, and coordination, emphasising its operational hub rather than mere board meeting locations. Additionally, adopting the ‘present tense’ approach, as observed in the Singapore High Court’s decision, should be considered for determining the effective date.


Furthermore, revising Article 2(f) of the model law’s ‘establishment’ definition is also desirable. Specifically, deletion of the phrase ‘with human means’ would be especially relevant for companies conducting business using the internet. Such a deletion would effectively exclude asset localisation from the purview of COMI determination and would increase the emphasis on intangible assets like intellectual property rights, digital content and customer data.


Presently, the need is for careful deliberation and subsequent codification of these principles by the relevant commissions. Establishing a comprehensive universal protocol for COMI determination and effective dates is crucial. An inclusive approach involving international organisations and the UNCITRAL is necessary to recognise and harmonise the COMI definition. This ensures that COMI determination relies on the rule of law rather than the varying cooperation of nations.

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