As the name suggests, the UNCITRAL Model Law on Cross-Border Insolvency 1997 (Model Law) seeks to address complexities caused where insolvencies cross borders, while leaving substantive insolvency laws of each country largely unaltered. However, as jurisdictions continue to adopt and interpret the Model Law, inconsistencies in its application are coming to light. The focus of this article is on the distinct interpretations by Australian, English and US Courts in two primary areas of the Model Law: the criterion when determining a company's 'Centre of Main Interests' (COMI); and the question of when the COMI is assessed.
Background
The Model Law provides for the recognition of foreign proceedings and the relief that may be granted in proceedings so recognized. In order to have foreign proceedings recognized, the foreign representative (usually the insolvency officeholder in the relevant proceedings) must apply to court for recognition. Other than temporary "provisional relief", it is only once foreign proceedings are recognized that a foreign representative can seek orders enabling it to complete a cross-border liquidation or restructuring.
Once the Court determines a proceeding is a foreign proceeding, relief will be dependent on whether the proceeding is a foreign main proceeding or foreign non-main proceeding. A foreign main proceeding is a proceeding taking place in the State where the debtor has its COMI, whilst a foreign non-main proceeding is a proceeding taking place in any other State where the debtor has an "establishment".
Although there is discretionary relief available under the Model Law for both foreign main and non-main proceedings, if a foreign proceeding is recognized as a 'main' proceeding then certain automatic relief must follow, including a stay on enforcement and proceedings.
This automatic relief is intended to promote predictability for insolvency practitioners seeking recognition via provisions based on the Model Law. However, given each State applies its own rules of interpretation and its own rules of private international law when interpreting national legislation adopting the Model Law, distinctive national positions have arisen regarding assessing the debtor's COMI and the relevant date of assessment.
The COMI Criterion
Although there is a presumption in the Model Law that the debtor's COMI is located in the State of its registered office, the term is otherwise undefined in the Model Law.
The Australian and English Positions
The Australian and English approach to the criteria for determining COMI has been heavily influenced by the approach taken by the European Courts in relation to the European Insolvency Regulation (1346/2000 as later recast in Regulation 2015/848), which also uses concepts of COMI and establishment.
The European Court of Justice's decision in Eurofood has been particularly influential. In that case, the Court found that the presumption that COMI is located in the State of the debtor's registered office may only be rebutted by "reference to criteria that are both objective and ascertainable by third parties".
This requirement of criteria that are "both objective and ascertainable by third parties" has been applied by the Courts of Australia and England.
In the leading Australian case of Ackers (as Joint Foreign Representative) v Saad Investments Co Ltd (in Official Liquidation) [2010] FCA 1221, Saad Investments was a company incorporated in Cayman Islands, but had a number of commercial connections to Switzerland (including that the company's books and records were maintained by a company registered and based in Switzerland). Citing Eurofood, Justice Rares found that the presumption could not be rebutted here, and held that Saad Investments' COMI was the Cayman Islands.
In England, the Eurofood test was applied in Re Stanford International Bank with the court noting that the English courts should interpret COMI consistently in the context of both the European Insolvency Regulation and the Model Law. This approach has been more recently followed in Re Videology Ltd [2018] EWHC 2186 (Ch).
The United States' Position
The US takes a slightly different approach to determining a debtor's COMI. Many US Courts look to a variety of factors to determine COMI, such as the location of (i) the debtor's headquarters; (ii) those who manage the debtor; (iii) the debtor's primary assets; (iv) a majority of the debtor's creditors, as well as the jurisdiction of applicable law governing relevant disputes.1 In Re Railpower Hybrid Technologies Corp 09-41498-WWB (Bkrtcy WD Pa, 2009), however, the US Bankruptcy Court adopted the term used by the United States Supreme Court in a non-bankruptcy case of "nerve centre" to determine the debtor's COMI, and focused on where the debtor company performs its most important and consequential business decision-making functions. Although US cases look at a similarly broad range of factors in determining the debtor's COMI, the language of "nerve centre" has been lamented as inflexible by some foreign courts.2 The factors listed above are not to be applied mechanically. Instead, courts apply them "in light of chapter 15's emphasis on protecting the reasonable interests of parties in interest pursuant to fair procedures and the maximization of the debtor's value. "3 In order to protect the expectations of creditors, investors and other interested third parties, courts ask whether the debtor's COMI would have been ascertainable to interested third parties.
Guidance by the United Nations Commission on International Trade Law (UNCITRAL)
UNCITRAL issued a revised version of the Guide to Enactment of the Model Law in January 2014 (Guide). In relation to determination of COMI, the Guide provides that in all cases the endeavor is an holistic one, designed to determine the "actual location of the debtor's centre of main interests, as readily ascertainable by creditors". The Guide thus appears to recommend something akin to the Eurofood approach. It is therefore not consistent with the US expression of the test.
Yet, the Guide to the Model Law does not expressly accord with the Australian and English position either. The Guide notes there are two primary factors to be accounted for when determining a debtor's COMI, being the location: (a) where the central administration of the debtor takes place, and (b) which is readily ascertainable by creditors. When these principal factors do not yield a ready answer, a number of additional factors concerning the debtor's business may be considered, although it must be noted that the endeavor is an "holistic one".
It is debatable how much this sort of guidance can do to promote consistency of interpretation, particularly in jurisdictions which already have developed precedent on the question.
The Relevant Date for Determining COMI
The English and US Position
The US courts have held that the relevant date for assessment of COMI is the date of the filing of the application for recognition.
The English courts have recently grappled with this question, and appear now to have adopted the approach taken in the US. In Videology, the court appeared to lean towards assessing COMI at the date of commencement of the foreign proceedings, as is recommended in the Guide. Arguably however, this is inconsistent with the text of the Model Law which refers to COMI in the present tense, stating that "the foreign proceeding shall be recognized as a foreign main proceeding if it is taking place in the state where the debtor has the centre of its main interests". In Videology however, the date for assessment of COMI was not material; there were no material differences between the date of opening of the proceedings and the date of the recognition application. The question came into stark relief about six months later in the thus far unreported decision in Tosia. In that case, the Judge concluded that COMI should be assessed at the date of the filing of the application for recognition.
The Australian Position
The Australian Courts have taken a slightly different approach and assess the debtor's COMI at the time of the hearing of the recognition application rather than the date the application is made (although regard may be had to historical facts which led to the position at the time).4
A Shift in the COMI
The detrimental effect of these inconsistencies in interpretation becomes more visible when considering a debtor seeking recognition in multiple jurisdictions, potentially at different times. If, for example, a debtor seeks recognition in Australia and the US and shifts its COMI in the time between the filing of the application for recognition and the time of the hearing to the recognition application, the foreign proceedings may be recognized in one jurisdiction as foreign main proceedings and the other as foreign non-main proceedings. Should this occur article 30 of the Model Law provides guidelines for dealing with the situation.
The Difficulty of Inconsistency
The divergence between positions taken by adopting States create difficulties for newly adopting States in implementing internationally consistent cross-border insolvency provisions. We have seen the Singapore courts contend with this in Zetta Jet following Singapore's adoption in 2017 and are likely to see more with other new adopters such as the Dubai International Financial Centre, which adopted provisions based on the Model Law earlier this year.
While countries continue to adopt differing interpretations of the key provisions in the Model Law, inconsistency in cross-border insolvencies will remain. We hope to see greater guidance and clarity emerge from an international law perspective to ensure a consistent application of the Model Law and reduce uncertainty for insolvency practitioners in cross-border insolvencies. As noted above, it is debatable how much the revised Guide to the Model Law has achieved in this regard. Although a change in the Model Law might be better positioned to deal with these inconsistencies, it is worth remembering that countries are not bound to adopt the Model Law in a uniform manner, so such changes are only useful to the extent they are adopted nationally.
Footnotes
1. See for example In re Sphinx Ltd, 351 B.R. 103,117 (Bankr. S.D.N.Y. 2006)
2. See Re Zetta Jet Pte Ltd and others (Asia Aviation Holdings Pte Ltd, intervener)
3. In re SPhinX, Ltd., 351 B.R. at 117.
4. Legend International Holdings Inc (as debtor in possession of the assets of Legend International Holdings Inc) v Legend International Holdings Inc [2016] VSC 308.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
