Centre of Main Interests and Forum Shopping: Moving Insolvency Proceedings to a Friendlier Jurisdiction

Author: Emeric Domokos-Hancu, Partner Schoenherr si Asociatii

CENTRE OF MAIN INTERESTS

As a general rule, insolvency proceedings fall under the jurisdiction of the national courts in the state where the debtor's head office is registered ("State of Incorporation"). Such jurisdiction is reasonably practical, as most often creditors and the debtor's main assets are located in the State of Incorporation.

However, in more complex situations when companies carry out activities outside their State of Incorporation, a European regulation (EC regulation no. 1346/2000) (the Regulation) enacts jurisdiction to open insolvency proceedings for courts in the Member State where debtors' centre of main interests (COMI) is located (COMI State). If insolvency proceedings are initiated in the COMI State, this will determine the governing law and its effects shall be restricted to the assets of the debtor within its territory. Any other insolvency procedure shall be qualified as secondary (insolvency) proceedings.

The Regulation contemplates only two categories of proceedings, as follows: (a) main insolvency proceedings, determined by reference to the debtor's COMI; or (b) territorial or secondary insolvency proceedings, determined on the basis of the debtor's establishment within the territory of the state in question. Secondary insolvency proceedings may be opened either in advance of any main proceedings, or subsequent to the main proceedings. In the latter scenario however, secondary proceedings must be winding-up proceedings.

The main difference between the two is that the main proceedings are allowed the fullest benefits under the Regulation, including extraterritorial effects throughout the Member States, whereas the effects of the secondary or territorial proceedings are restricted to the territory of the state in which they are commenced.

As per the criteria determining the COMI, the Regulation provides a non-exhaustive definition, indicating the 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". Article 3 of the Regulation presumes that COMI is at the debtor's registered office (i.e. in favor of the State of Incorporation) in the absence of proof to the contrary.

For example, in case Daysytek-ISA Ltd, Judge McGonigal, from the Chancery Division (Leeds District Registry), determined the COMI of an applicant as being in Bradford, UK, because the head office functions were carried there. Notwithstanding the company's subsidiaries in France and Germany, it was determined that the COMI was in England, as most of the creditors knew the functions of the companies were carried in Bradford and not elsewhere.

Claiming a COMI outside the State of Incorporation determines the burden of proof concerning the place of corporate administration, commercial interests and ascertainment towards third parties. In another case, the Swedish court considered that Finnish company Radaflex OY has provided sufficient proof indicating that the company does not carry out activity or does not have any possessions in the State of Incorporation. It was considered that the COMI was indeed in Sweden, as it did not conduct any business in Finland, nor did it have a visitor’s address or employees there.

FORUM SHOPPING – THE REALITY

Given the rather unclear criteria for determination of COMI, there have been numerous cases when debtors or even creditors argued that the COMI is not located in the State of Incorporation in order to avoid carrying out the insolvency procedure under the latter's jurisdiction.

The situation in which a debtor files for insolvency outside the State of Incorporation, claiming its COMI in another Member State to benefit from the laws applicable there (generally aiming to undergo the proceedings under a debtor-friendly legislation) is referred to as "forum shopping ".

The Regulation on the other hand provides that the proper functioning of the internal market excludes forum shopping.

Even though the primary goal and also the purpose of the restructuring is the rescue of the firm, the European Regulation forbids that a debtor moves his COMI only to take advantage of a better legislation, unless objective and ascertainable factors determine otherwise. Thus, forum shopping is generally regarded as an opportunistic instrument used in fraudulent purposes against the creditors' interests, as debtors tend to look for national proceedings in which the procedural rules provide creditors with the least leverage available.

For example, in the EUROGYP case involving a Belgian incorporated company which moved its head office in Paris, the Brussels Commercial Court considered that the COMI was located de facto in Belgium as it continued to make turnover-tax returns and retained its turnover tax identification number. Although the company had organized a registered office in France, the court established that the presumption in favor of the registered office is rebutted and so the Belgium courts had jurisdiction to open the insolvency proceedings.

As per the time frame in which the registered office should be registered, in the Staubitz-Schreiber case, ECJ concluded that the purpose of the Regulation would not be achieved if the debtor could move its COMI to another Member State between the time when the request to open insolvency proceedings was lodged and the time when the judgment opening the proceedings was delivered.¹

Is forum shopping the solution?

Certain Member States are popular as forum shopping venues because of substantive law or due to procedural advantages brought about by litigating there. It should be considered in this respect that insolvency, as a foreseeable risk, may be better evaluated for creditors according to the jurisdiction under which business has been carried out with the debtors.

It has been argued that the possibility for a debtor to move its COMI is first of all a response of the principle of freedom of establishment. Further, in case of insolvency preceding the debtor must have the possibility to move its COMI to take advantage of a more favorable restructuring law from another Member State. Such a solution would also benefit the interests of creditors.

In the PIN Group case, the German court agreed to the change of COMI of a cross-border group of companies to Cologne, in order to achieve the best possible restructuring. The court established that the moving of the COMI was not abusive because it was in the interest of the creditors to maximize the debtor's net assets.

Choosing a more favorable legislation in order to take advantage of a more favorable restructuring law may benefit the creditors and forum shopping has been accepted by creditors in such cases. When looking at the limited cases involving Romanian companies where COMI was determined to be outside of Romania, the majority have preferred to undergo restructuring under UK law.

Such cases of forum shopping have received a positive reaction at EU level as the purpose was to locate the debtor in insolvency under the legal system which ensures the best protection of participants' interests. Advocate General Ruiz-Jarabo Colomer argues in case Staubitz-Schreiber that, in the absence of legal uniformity in the different private law systems, forum shopping must be accepted as a natural consequence, although it is open to criticism.²

Conclusion

Being able to move the COMI to another Member State is not always a negative solution, as it may also have positive effects over the insolvency proceeding. The main purpose of insolvency procedure is to rescue the company and to get the best possible result for the creditors, whereas sometimes such goals may not be easily achieved under the jurisdiction of the State of Incorporation.

However, in order to prevent forum shopping from becoming a permanent remedy, the European Parliament approved a motion to recommend a partial harmonization of insolvency law as per opening of insolvency proceedings, claims filing and verification and reorganization plans.³