European Insolvency Regulation Where Is The Comi


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Presentation at a seminar of the Academy of European Law on cross-border insolvencies

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European Insolvency Regulation Where Is The Comi

  1. 1. Insolvency Regulation 2009 : Where is the COMI? Patrick Wautelet
  2. 2. Today's menu... <ul><li>Back to the basics – the concept </li></ul><ul><li>Light from Brussels and Luxemburg? </li></ul><ul><li>A few applications - what courts have made of the COMI </li></ul>
  3. 3. I. Back to the basics... <ul><li>Going back to the concept and its consequences ―› enlightning to find out what COMI is all about before reflecting on its content... </li></ul><ul><li>COMI court takes the lead in insolvency proceedings : opening of proceedings, appointment of administrator, judgment on difficulties, closing of proceedings, etc. </li></ul><ul><li>Broad concept of jurisdiction : opening of insolvency proceedings but also related issues – see ECJ, Seagon / Deko Marty : also action to set aside fraudulent transfer - pauliana </li></ul>
  4. 4. I. Back to the basics... <ul><li>COM I also basis to determine applicable law : as a rule, claims arising out of insolvency (made by employees, banks, suppliers, other creditors) and other difficulties (power of administrator, etc.) will be determined based on the lex fori concursus </li></ul><ul><li>Numerous exceptions (art. 5 ff) : downplay the importance of the COMI </li></ul>
  5. 5. I. Back to the basics... <ul><li>In sum, COMI – jurisdiction is in the driver seat to pilot insolvency in most of its consequences </li></ul><ul><li>Role of COMI even more important given lack of harmonization between substantive insolvency laws and clear difference between logic and fabric of national insolvency laws ( e.g . turnaround proceedings, creditor in driving seat, etc.) - see Recital 11 Preamble : “ widely differing substantive laws ” </li></ul>
  6. 6. I. Back to the basics... <ul><li>Given the magnitude of the role played by the COMI, importance of defining COMI so as to ensure that COMI jurisdiction has the closest link with the 'insolvency' </li></ul><ul><li>Difficult to craft the perfect definition, given that the 'insolvency' touches : </li></ul><ul><ul><li>Insolvent company (with shareholders, employees, directors....) </li></ul></ul><ul><ul><li>Its suppliers, clients and other creditors (banks, etc) </li></ul></ul><ul><ul><li>Other third parties – e.g . tax authorities </li></ul></ul>
  7. 7. I. Back to the basics... <ul><li>The 'insolvency stakeholders' </li></ul><ul><ul><li>May not all be located in the same jurisdiction, and </li></ul></ul><ul><ul><li>May not have same perception of the debtor's business and its localization - difficult to reconcile divergent interests of all theses parties </li></ul></ul>
  8. 8. I. Back to the basics... <ul><li>On top of this : gone are the days of ' one business – one State ' (if it ever existed...): </li></ul><ul><ul><li>Links between a business and several countries abound (on the credit side, on suppliers' side, on customers' side...) </li></ul></ul><ul><ul><li>Business itself may play the 'globalization' card ( e.g . trend towards delocalisation of the seat : in Belgium, 4.500 English Ltd's in 2008) </li></ul></ul>
  9. 9. II. Some light from Brussels & Luxemburg? <ul><li>Not much in the Regulation on the COMI: </li></ul><ul><ul><li>Article 3(1) refers to COMI and introduces a presumption in favor of the «  place of the registered seat  » - rebuttable </li></ul></ul><ul><ul><li>Recital 13 of the Preamble : only direct European guidance : « The ‘centre of main interests’ 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 » </li></ul></ul>
  10. 10. II. Some light from Brussels & Luxemburg? <ul><li>2 elements in the definition of Recital 13: </li></ul><ul><ul><li>'Conduct of administration' ―› management and control </li></ul></ul><ul><ul><li>Focus on the expectations of third parties ―› external sphere </li></ul></ul>
  11. 11. II. Some light from Brussels & Luxemburg? <ul><li>'Conduct of administration' : </li></ul><ul><ul><li>Comparison with the 3 elements of Art. 54 EU Treaty (and Art. 60 Brussels I Regulation) : 'registered office', 'central administration' and 'principal place of business' or with definition of 'habitual residence' of company in Art. 19 § 1 Rome I Regulation / Art. 23 § 1 Rome II Regulation (“place of central administration”) ―› closer to 'central administration' </li></ul></ul>
  12. 12. II. Some light from Brussels & Luxemburg? <ul><li>'Conduct of administration' : </li></ul><ul><ul><li>Caveat : COMI is certainly an original concept – no pale copy of the ' central administration' : </li></ul></ul><ul><ul><ul><li>Purpose of the rule is much different </li></ul></ul></ul><ul><ul><ul><li>Central administration is only one element (even if key element) of the definition (which also refers to third parties, 'main interests', on a regular basis, etc.) </li></ul></ul></ul><ul><ul><ul><li>ECJ, Eurofood , 31 : concept of COMI is « peculiar to the Regulation » and should receive « autonomous meaning » </li></ul></ul></ul>
  13. 13. II. Some light from Brussels & Luxemburg? <ul><li>'Conduct of administration' : </li></ul><ul><ul><li>Central administration : focus on the place where decisions are taken, where management is in the driver's seat </li></ul></ul><ul><ul><li>No focus on: </li></ul></ul><ul><ul><ul><li>Place where assets are located </li></ul></ul></ul><ul><ul><ul><li>Place where operations are ongoing (place(s) of business) </li></ul></ul></ul>
  14. 14. II. Some light from Brussels & Luxemburg? <ul><li>'Conduct of administration' : </li></ul><ul><ul><li>Question remains : what is administration? </li></ul></ul><ul><ul><ul><li>Board of directors? Strategic decisions </li></ul></ul></ul><ul><ul><ul><li>Management? Day to day operations </li></ul></ul></ul><ul><ul><ul><li>Probably no unique answer – who has authority for the material business decisions? Flexibility of open concept </li></ul></ul></ul>
  15. 15. II. Some light from Brussels & Luxemburg? <ul><li>Expectations of third parties : </li></ul><ul><ul><li>Visibility ―› no requirement of physical presence (premises, etc.), but conduct of administration/management should be visible for third parties (does not matter whether operational aspects or other aspects are visible) </li></ul></ul><ul><ul><li>ECJ, Eurofood , § 33 : COMI “must be identified by reference to criteria that are both objective and ascertainable by third parties » </li></ul></ul>
  16. 16. II. Some light from Brussels & Luxemburg? <ul><li>Expectations of third parties : </li></ul><ul><ul><li>Criteria appears difficult to handle because </li></ul></ul><ul><ul><ul><li>While some third party may have done extensive research and obtained guarantee on this aspect ( e.g . bank with access to information on internal working of the debtor and representation in contract by the debtor on the place of management) </li></ul></ul></ul><ul><ul><ul><li>Other third parties do not have clear expectations ( e.g . one time supplier doing business with branch abroad : will have no clue about chain of command) </li></ul></ul></ul>
  17. 17. II. Some light from Brussels & Luxemburg? <ul><li>Expectations of third parties : </li></ul><ul><ul><li>However, this does not make test irrelevant </li></ul></ul><ul><ul><li>Test is indeed whether conduct of administration is “ ascertainable ” by third parties, and not whether third parties have 'ascertained' where the administration was conducted ―› nuance between the 2, criteria is whether a normally diligent third party had possibility to ascertain where the management was conducted. No requirement that third party has effectively analysed situation and localized the COMI (some third parties may have done the exercise, other not) </li></ul></ul>
  18. 18. II. Some light from Brussels & Luxemburg? <ul><li>What is the impact of the 'objective'expectations of third parties? </li></ul><ul><li>It seems that this element only works to correct the result obtained looking at where the debtor's affairs were administered </li></ul><ul><li>COMI is located at the place where the debtor's affairs are administered... except if third parties did not and could not anticipate such localization? </li></ul>
  19. 19. II. Some light from Brussels & Luxemburg? <ul><li>Expectations of thir d parties : reference to objective criteria ascertainable by third parties </li></ul><ul><ul><ul><li>―› eliminates the 'mind of management' approach (at least in a literal approach : where the management thinks, without formal externalization) </li></ul></ul></ul><ul><ul><ul><li>―› also eliminates the focus on the shareholders behind the corporate body (going back in the chain of command to first supplier of capital...) </li></ul></ul></ul>
  20. 20. II. Some light from Brussels & Luxemburg? <ul><li>Even if test limited to 'objective' expectations and qualified by potentiality (ascertainable), difficulty remains : which third parties? Not all third parties may have the same view of the debtor... </li></ul>
  21. 21. II. Some light from Brussels & Luxemburg? <ul><li>What is ascertainable for one, may not be for the other... </li></ul><ul><li>ECJ in Eurofood : no answer to the question which third parties are relevant (crucial because in many cases, insolvency proceedings opened at the request of creditors, who will attempt to guide COMI based on their expectations...) </li></ul><ul><li>Limited guidance from courts on how to select the 'representative' third parties (see e.g . Ben Q and Daisytek) </li></ul>
  22. 22. II. Some light from Brussels & Luxemburg? <ul><li>Test of the third party - objective bystander ? Looking at what a normally diligent third party should have made out of the information available? </li></ul><ul><li>This entails having the court step back from the evidence submitted by third parties (mainly creditors, e.g . in administration proceedings under English law) </li></ul><ul><li>Related issue : should court take allegations made by third parties regarding where they regarded the debtor's affairs to be managed, at face value? Question of procedure and local rules of ethics (are counsels appearing for creditors officers of the court?) </li></ul>
  23. 23. II. Some light from Brussels & Luxemburg? <ul><li>It seems (but must be verified) that court should not limit itself to one category of third party when verifying whether third parties knew where the debtor conducted its administration – e.g . looking exclusively at what 'big ticket' creditors knew or could have known, or considering exclusively employees </li></ul><ul><li>Court should instead attempt to take into account what various categories of third parties knew or could have known </li></ul><ul><li>What if it appears that different categories of third parties may have had different expectations? Open question (but probably not a frequent occurrence) </li></ul>
  24. 24. II. Some light from Brussels & Luxemburg? <ul><li>Conclusion : </li></ul><ul><ul><li>COMI is something new, original (and copied! See Section 1502 (4) Chapter 15 US Bankruptcy Code and Art. 2(b) Uncitral Model Law on Cross-Border Insolvency) </li></ul></ul><ul><ul><li>Some guidance from the text (mainly Preamble) </li></ul></ul><ul><ul><li>Some light from ECJ – probably more in the future </li></ul></ul><ul><ul><li>Mainly : much left to answer by courts – not surprising with an open concept </li></ul></ul>
  25. 25. III. A few applications <ul><li>1 st application : 'Bati Construct SA' </li></ul><ul><ul><li>Medium sized company established under Belgian law – registered office in Belgium - active in building industry – specializes in luxury homes – almost exclusively active in North of France </li></ul></ul><ul><ul><li>Employees recruited predominantly in Belgium (some with Polish - Brazilian passports) – teams dispatched from Belgium </li></ul></ul><ul><ul><li>Financing exclusively from Lxbg – Belgian bank </li></ul></ul><ul><ul><li>Suppliers : Belgium and France </li></ul></ul><ul><ul><li>Tax debts in France (establishment) </li></ul></ul>
  26. 26. III. A few applications <ul><li>1 st application : 'Bati Construct SA' </li></ul><ul><ul><li>Conducts its administration... : most probably in Belgium (board of directors, AGM shareholders) </li></ul></ul><ul><ul><li>Contact with relevant third parties : scattered in various MS (bank, employees and customers) – location of these contacts is as such not relevant; what is relevant is that all such third parties could reasonably contemplate that centre of management located in Belgium – no indication otherwise </li></ul></ul>
  27. 27. III. A few applications <ul><li>2 nd application : the 'pure ' letterbox company: </li></ul><ul><ul><li>“ ... not carrying out any business in the territory of the MS in which its registered office is situated” (ECJ, Eurofood , § 35) or </li></ul></ul><ul><ul><li>“ No premises, staff and equipment” - “fictitious establishment not carrying out any genuine economic activity in the territory of the host Member State” - “wholly artificial arrangement” (ECJ, 12.09.2006, Cadbury Schweppes , case C-96/04, §§ 67-68) </li></ul></ul>
  28. 28. III. A few applications <ul><li>2 nd application : the 'pure ' letterbox company: </li></ul><ul><ul><li>Conducts its administration... : could be in the MS of its registered office, at least formally (board of directors, AGM shareholders) </li></ul></ul><ul><ul><li>However, no contact with relevant third parties in MS of registered office and third parties not fooled by appearances (letterhead : PO Box Lxbg) </li></ul></ul><ul><ul><li>In this case : rebuttal of the presumption in favor of the registered office should be possible and easy </li></ul></ul>
  29. 29. III. A few applications <ul><li>3 rd application : the 'mixed ' letterbox company: </li></ul><ul><ul><li>SPV : established in favorable jurisdiction, e.g . in framework of securitisation of assets </li></ul></ul><ul><ul><li>Tax vehicle : established in favorable jurisdiction to benefit from generous tax regime ( e.g. reduce the withholding tax on dividends paid within the group under Directive 90/435/EEC of 23 July 1990 on the common system of taxation applicable in the case of parent companies and subsidiaries of different MS) </li></ul></ul>
  30. 30. III. A few applications <ul><li>3 rd application : the 'mixed ' letterbox company: in both cases, no real physical life (premises, staff, operations), but involvment in substantial economic operations </li></ul><ul><ul><li>SPV : issues asset backed bonds and concludes Receivables Purchase Agreement with originator </li></ul></ul><ul><ul><li>Tax subsidiary : holds shares of operating subsidiaries and redistributes dividends among companies of the group (loans, etc.) </li></ul></ul>
  31. 31. III. A few applications <ul><li>3 rd application : the 'mixed ' letterbox company: </li></ul><ul><ul><li>Conducts its administration... Impeccable corporate housekeeping done in local jurisdiction, with required publicity ( Official Gazette , registrar of the court, Companies House, etc. </li></ul></ul><ul><ul><li>Contacts with local tax authorities and local advisers </li></ul></ul><ul><ul><li>But no secret that actual management of tax vehicle / SPV exercised from another jurisdiction... </li></ul></ul>
  32. 32. III. A few applications <ul><li>3 rd application : the 'mixed ' letterbox company: could go in both directions </li></ul><ul><ul><li>Management is keen to ensure that appearances are kept up (meetings in MS of SPV/subsidiary, signature of documents at registered office of SPV/subsidiary, etc.) </li></ul></ul><ul><ul><li>Management does not bother to keep up appearances ( e.g . same counsel acting both for parent company and local subsidiary) </li></ul></ul>
  33. 33. III. A few applications <ul><li>4 th application : the 'giant dwarf' company </li></ul><ul><ul><li>Airline company established in MS A – operates flights to MS B – leases 2 aircrafts from BVI company </li></ul></ul><ul><ul><li>Branch in MS B with few people for handling and ticketing </li></ul></ul><ul><ul><li>Crisis – flight schedule reduced and then cancelled – only remaining operation is MS B where branch still handles ticketing for other companies </li></ul></ul>
  34. 34. III. A few applications <ul><li>4 th application : the 'giant dwarf' company </li></ul><ul><ul><li>Conducts its administration... : originally in MS A </li></ul></ul><ul><ul><li>With the crisis, branch takes over, only activity of the company, management over substantial business operations conducted from MS B ―› COMI in MS B </li></ul></ul>
  35. 35. III. A few applications <ul><li>5 th application : the binational company </li></ul><ul><ul><li>Dutch BV – registered seat in the Netherlands </li></ul></ul><ul><ul><li>Moves seat of its direction to Belgium – move approved by AGM, recorded by Belgian notary and published – registered seat remains in the Netherlands </li></ul></ul><ul><ul><li>Hybrid company governed by 2 laws (Netherlands : statutory seat; Belgium : real seat – renvoi not applicable in this case) </li></ul></ul>
  36. 36. III. A few applications <ul><li>5 th application : COMI of the binational company is most probably located in Belgium : </li></ul><ul><ul><li>Company expressly recognizes that seat of management is in Belgium </li></ul></ul><ul><ul><li>Probably limited operations in the Netherlands </li></ul></ul>