This article deals with the insolvency concept of the center of main interests (COMI) under the European Union insolvency legislation, in particular Regulation 2015/848 on insolvency proceedings (the Insolvency Regulation or the Regulation).
Pursuant to the Insolvency Regulation COMI is one of the central unified and autonomous concepts1 of the insolvent debtor, i.e. it is an insolvency concept and not a corporate law or tax concept.
It is important to make a distinction between (i) the real seat of a company for the sake of Luxembourg corporate law, (ii) the effective management concept approach often taken with respect to the jurisdiction with taxation rights of a company, and (iii) the COMI concept, being the sole concept considered in this article.
COMI forms the basis for the jurisdiction of an EU court to open main insolvency proceedings according to Article 3 of the Regulation. Since the law applicable to the insolvency proceedings of a company is in principle the law of the forum where main proceedings are opened,2 (regardless of the country of incorporation of the company) it is crucial to define, properly understand and correctly apply the concept of COMI.
- COMI and COMI presumptions
In the absence of a definition in the first version of the Insolvency Regulation3, the European Court of Justice (ECJ) defined COMI in a number of rulings. In the Eurofood case4 the ECJ held that in order to determine where the COMI of a debtor was located, the court needs to look at objective criteria which could be ascertained by third parties.5
This view was confirmed in the Interedil case6. The ECJ put emphasis on the place where the debtor "conducts the administration of its interests on a regular basis" insofar as such place was sufficiently known to third parties "in particular the company's creditors".7 The ECJ also held that the COMI was a synonym for the central administration of the debtor8 (a concept already known to Luxembourg corporate law).
Significantly, the ECJ stated that the existence of assets or contracts located in a Member State other than the Member State in which the registered office is located was not enough to rebut the presumption that the COMI of a company is at the registered office of that company.9 The Court insisted that a comprehensive analysis of all elements of the case was required to determine COMI.10
The recast Insolvency Regulation included the conclusions of the ECJ and defined COMI as "the place where the debtor conducts the administration of its interests on a regular basis and which is ascertainable by third parties".11 This definition is read together with the presumptions contained in the Regulation, the most relevant of which for commercial companies is that the COMI is presumed to be at the registered address of the company, (unless this address was changed 3 months prior to the opening of insolvency proceedings).12
As a result of the presumption being rebuttable13, it is clear that the EU company law concept of a registered office in any one Member State under the laws of that Member State, is a matter apart from the insolvency concept of COMI of a company. As a result the registered office of an EU company and the COMI of an EU company may be located in two different Member States.
Certain factual elements have been considered by courts across the EU as being factors showing the place where the company conducts the administration of its interests (for the purposes of determining COMI), some of which are:
- the place where the board of directors (or managers) meets, and where the general meetings take place;
- the place of residence of the directors (or managers);
- the place of the supervision or the general oversight and the strategic oversight of the group;
- the location of the main commercial transactions;
- the location of the lenders;
- the location that the creditors of the company reasonably believe to be the place of business of the company;
- the location of the bank accounts;
- the location of the employees and of the human resources functions; and
- the location of restructuring negotiations with creditors.14
Where the above factors are in an EU jurisdiction other than the jurisdiction of the registered office, these facts can be used to rebut the presumption that the COMI is at the registered office of the company. This permits the court in the applicable EU jurisdiction to find jurisdiction.
The importance of certain factors depends on whether the company is a holding company or an operating company. For example an operating company would have several employees, pay social security contributions etc., whereas a finance holding company may have fewer or no direct employees, but may be a significant borrower under specific finance documents with applicable security package, giving more weight to the view of creditors as to the place of day to day business of the company.
Consequently, the COMI need not be the place of incorporation or the place of a company's registered office. The above listed factual matters become relevant where a company attempts to shift its COMI with the aim of entering into an insolvency proceeding in a different Member State.
- What is a COMI Shift?
A COMI shift15 is the change of COMI of a debtor from one Member State to another.16 A COMI shift has a significant effect on a Member State company: (i) the place of COMI being the place of jurisdiction for the opening of main insolvency proceedings, and (ii) the opening of main insolvency proceedings by one Member State preventing the opening of main insolvency proceedings by the courts of any other Member State.17
2.1 COMI shift combined with a transfer of seat
A COMI shift may occur by means of a formal transfer of the registered office of a commercial company from one Member State to another. If there are no elements to rebut the presumption that the COMI is at the registered office, then such transfer automatically includes a COMI shift.
In this regard, the Regulation contains an anti-forum shopping provision with Article 3 of the Regulation providing that: "The presumption shall only apply if the registered office has not been moved to another Member State within the 3-month period prior to the request for the opening of insolvency proceedings."
A transfer of the registered office of a company between members states requires several company law aspects to be considered in both the "leaving" state and the "arriving" state, often resulting in impractical delays for a company in financial distress. A transfer of registered office would ordinarily result in changes to a company's nationality and as result a change in the lex societatis (the law applicable to the company) as well as changes to the tax residency amongst other factors.
It is therefore more common in practice for a company to shift its COMI for insolvency purposes without formally transferring its seat for company law purposes.
2.2 COMI shift with no change in seat
To shift the COMI independently from the registered office, the company needs to disassociate the administration of its interests from its registered seat, in a way that third parties, namely creditors, are aware of the new COMI.
The factors referenced above, as those considered by the EU courts, are ordinarily used to give effect to this shift of COMI (for insolvency law purposes). Attention must however be given to the applicable company law and whether or not the jurisdiction applies the "real seat theory"18 as opposed to the "incorporation seat theory"19, as well as to the change of tax residency that may be associated with a change of effective management of a company.
In the majority of cases a COMI shift is deliberate as part of a restructuring plan negotiated with major creditors and as a result the knock-on effects to both company law aspects and tax consequences are considered and weighed in the process. The focus of this article therefore remains on the insolvency concept of COMI alone.
- COMI Shift – why?
A deliberate COMI shift aims at allowing the court of another Member State than the Member State of the registered office to find jurisdiction and to open main insolvency proceedings. The opening of main insolvency proceedings in one Member State prevents the courts of the other Member States from opening main proceedings; the other courts may, at most, open secondary insolvency proceedings, i.e. proceedings limited to the territory of the relevant Member State.20
A COMI shift is an example of forum shopping, since the debtor attempts to avoid the jurisdiction of a certain court and to have the insolvency proceedings started by the courts of a different Member State. Ordinarily this is a planned process done to enable the debtor company to use a restructuring proceeding in another Member State which is more beneficial to it (based on the facts of the situation in which the company finds itself) which proceeding may not be available to the company in its existing Member State. A practical example was where historically many Luxembourg companies shifted COMI to the United Kingdom (pre-Brexit) to avail themselves of either the UK pre-pack administration process, or the scheme of arrangement to enable them to restructure UK and US governed debt.
The ultimate aim of any COMI shift is to use what is regarded by the board of the company (based on facts) to be the best process available to it in the EU to enable it to restructure its debt and seek to continue operations as a going concern. The rationale for the COMI shift is important, as a COMI shift is a means of forum shopping, and is therefore open to abuse.
Forum shopping is not prohibited by the Regulation. The Regulation does contain soft anti-forum shopping rules concerning the transfer of the registered office of a debtor but contains no explicit prohibitions on a change to COMI where the COMI is disassociated from the change of registered office.
The preamble of the Regulation gives insight to the European legislator's intentions regarding forum shopping. Recital 5 states that forum shopping "to the detriment of the general body of creditors" ought to be avoided. Recitals 29 and 31 are even more explicit by stating that "fraudulent or abusive" forum shopping should be prevented. Article 90 (review clause) of the Regulation contains provisions for a study on abusive forum shopping to be directed by the Commission.
It follows that the Regulation does not consider forum shopping per se as abusive or fraudulent, but that the reason for and effects of such forum shopping must be considered. Forum shopping to the detriment of the general body of creditors is deemed abusive, as is forum shopping with the aim of changing the preferential ranking between creditors.21
The sanctions for abusive forum shopping are debated. The courts of other Member States could rely on Article 33 of the Regulation in order to refuse to recognise the opening of main proceedings by another court. The threshold for this sanction is however very high (the opening must be manifestly contrary to public policy, including constitutional rights, such as the right to property). A softer sanction would be that the court seized in order to obtain an unfair advantage would refuse to grant such advantage (e.g. a change of the creditor rankings).22
Based on the above, the general view is that forum shopping is permitted as long as such forum shopping is undertaken for legitimate purposes, such as to avail of a more efficient insolvency regime. Legal scholars appear to agree with this view.23 Forum shopping should be prohibited where abusive or done solely with the intention to prejudice (certain) creditors.
As a limit to the general ability to forum shop, the ECJ has held in Staubitz-Schreiber that where a debtor files for insolvency in one Member State, and subsequently moves its COMI to another Member State before the court of the first State could open proceedings, such court first seized retains jurisdiction.24
- How to shift the COMI – Recent case law analysis
4.1 Difference between the limited and extensive approach
There are two approaches to implementing a COMI shift i.e. (i) a shift of COMI with minimal effort, as quickly as possible and with the least possible resources, or (ii) a more rigorous approach to "tick as many boxes" as possible (requiring time and resources).
The practical differences between holding and financial companies, whose COMI can be shifted more easily, and operating companies, whose COMI will likely be harder to change, should be considered. Any risk of challenge by any interested parties to such COMI shift should also be taken into account.
Another important factor regarding a COMI shift is the view of the court in which application for main insolvency proceedings is brought. Courts in different Member States appear to apply different levels of strictness with respect to their ability to find jurisdiction which seems to contradict the clear intention of the Regulation and the ECJ that COMI be an autonomous and unified concept of EU law.
A difference also arises in practice, where, as evidenced in the below cited case law, courts to which an application is made to open proceedings often more easily accept a COMI shift to their own jurisdiction, whereas a court which is seized with a proceeding where it is argued that the applicable court no longer has jurisdiction is more reluctant to relinquish jurisdiction by accepting an argument that COMI has shifted.
4.1.1 The extensive approach taken by the debtor in Wind Hellas25
In the context of the restructuring of the Hellas group, Hellas Telecommunications (Luxembourg) II SCA (HTL) successfully implemented a COMI shift (from Luxembourg to the United Kingdom). The shift was successful in that it was recognised by the High Court of England and Wales (pre-Brexit).
The High Court relied on a number of facts, among them the fact that the company had rented office space in London, had notified its creditors, and had opened a bank account in the UK.26 Crucially, the UK High Court deemed the fact that restructuring discussions with the creditors had taken place in London, to be "one of the most important factors".27 The High Court expressly acknowledged the fact that the company was a mere "financing and shareholding vehicle".28
An extensive approach was therefore taken to ensure that as many factors as possible were put in place to reflect a COMI shift to ensure that the High Court in England was able to find COMI in the United Kingdom.
4.1.2 The limited approach taken by the junior creditors in Galapagos
A more minimalistic approach was taken by a group of junior creditors in the Galapagos matter.
In this matter, the junior creditors took control of one of the group companies with its registered office in Luxembourg by means of a pledge enforcement entitling them to appoint directors to the board of the Luxembourg entity and they duly did appoint a new director.
On the very same day that the new sole director' was appointed, the Amtsgericht Düsseldorf opened provisional insolvency proceedings (which count as main proceedings).29 The only factor reflecting a shift in COMI appeared to be that the sole director appointed was based in Germany (for one day – in fact a matter of hours).
Ten days later the Amtsgericht reversed its stance and found that it did not have jurisdiction. A new filing for provisional measures in the same court was made on the same day as that judgement, and three days later, provisional insolvency proceedings were again opened by that court. The Amtsgericht held on this second occasion that it had jurisdiction based on the fact that the sole director had been appointed for those 10 days (in which the previous proceedings were dismissed).
On appeal, the Landgericht Düsseldorf confirmed that provisional proceedings count as main proceedings30, and it held that the German courts had jurisdiction, since the COMI of the company was now in Germany.
The Landgericht Düsseldorf justified its extraordinary decision based on the fact that the debtor was a holding company and it stated that, in its view, in such cases it was "particularly easy" to shift COMI.31 It was satisfied with the fact that between 23 August 2019 and the date of the opening of the proceedings on 9 September 2019 the company had an administrator with an office in Düsseldorf and had made declarations regarding its COMI to certain creditors.32
On further appeal, the German Bundesgerichtshof appeared to confirm that the COMI was in Düsseldorf but referred the matter to the ECJ asking for a preliminary ruling on two questions.33
An extremely limited approach, disregarding almost all factors considered by the ECJ in the Eurofood and Interedil cases was taken to shift COMI with such limited factors being in place for a very short period of time.
4.1.3 The conservative position taken by the Luxembourg District court in Galapagos
The extensive approach taken in Wind Hellas and the limited approach taken in the Galapagos matter referred to above were both to request a non-Luxembourg court to find jurisdiction in respect of a Luxembourg company which had purportedly COMI-shifted. This Galapagos matter involves a Luxembourg court being requested to find that it did not have jurisdiction as a result of an extensive COMI shift.
The Galapagos restructuring also gave rise to litigation in Luxembourg with respect to a separate subsidiary of the group. Junior creditors filed an insolvency application against a group company in Luxembourg. In defending that application, the group company argued it had shifted its COMI from Luxembourg to the UK and therefore the Luxembourg Courts did not have jurisdiction to open main insolvency proceedings.
In this matter, the group company had opted for an extensive approach and had rented office space in the UK, appointed UK based directors, had employed an employee in the UK, changed its letterhead and signature blocks to reflect the new address in the UK, made a public announcement on the Luxembourg stock exchange that it had transferred the COMI to the UK and had led the negotiations with creditors from the UK. The extensive approach being accepted in Wind Hellas by the UK courts appeared to be sufficient for them to find jurisdiction in that matter.
The Luxembourg District Court held in its decision that its jurisdiction first of all derived from the presumption that the COMI was located at the registered office of the company in Luxembourg. It then summarised relevant case law and insisted on the fact that to transfer the COMI, the "bridges" to the past (i.e. the old COMI location) should be "burned".34
Contrary to the extremely minimalistic requirements applied by the German courts (as reflected in the first Galapagos decision), the Luxembourg courts held that the very definition of COMI contained an element of durability of the COMI location35 and that a "detailed and cautious analysis" was required, especially if the COMI was transferred shortly before an insolvency application was made.36
The Court approved the company's argument that the analysis of the effectiveness of the COMI shift depended on the nature of the company's activities and that the company was a holding company. This decision appeared in line with the reasoning of the UK High Court in Wind Hellas with respect to the application of various factors to determine COMI which also aligns with the ECJ reasoning. However, contrary to the UK High Court in Wind Hellas, the Luxembourg Court held that the location of restructuring negotiations was not relevant for the COMI since restructuring negotiations are not a part of the normal business of a commercial company.
Crucially in its reasoning, the Luxembourg District Court insisted on the fact that because the articles of association of the company stated that board meetings were in principle to be held in Luxembourg, and that meetings held by any form of telecommunication were deemed to be held at the registered office of the company, it considered that despite all the other steps taken to shift COMI, third parties were able to rely on this provision to consider that the board meetings should have continued to take place in Luxembourg or should at least have been deemed to take place there.37
Finally, the Luxembourg District Court held that, on balance, the purported central administration of the company in the UK did not have more substance than the administration taking place at the registered office and that therefore the presumption could not be rebutted.38
It would seem therefore that a very conservative approach is taken by the Luxembourg Courts when considering whether a COMI shift has taken place, where the argument before a Luxembourg Court is that such Luxembourg Court does not have jurisdiction over a Luxembourg incorporated company as a result of a COMI shift.
4.2 Critical assessment of the case law examples and conclusion
Considering the ECJ case law in Eurofoods and Interedil, the UK High Court's decision in the Wind Hellas matter appears, in the views of the Authors, the most defensible. Not only did the UK High Court acknowledge the differences between holding vehicles and operating companies (also highlighted by the ECJ39), it also insisted on the importance of informing the creditors of the COMI shift and importantly took into consideration the place of the negotiations with creditors (implying a certain sense of permanence to the knowledge of the creditors of the COMI shift during negotiations). The third parties that should most importantly be able to ascertain the debtor's COMI are, in the view of the Authors, the debtor's creditors. Additionally, if such creditors negotiate with their debtor in a particular location, for a period of time, this must surely be an important element in conjunction with other factors, in considering any COMI shift (contrary to what the Luxembourg District Court held in Galapagos). This view is substantiated by the fact that one of the aims of the Regulation is to avoid a position where creditors are "surprised" by the opening of insolvency proceedings in a Member State to which their debtor apparently had little to no links.
The Luxembourg District Court decision seems to mostly align with the position taken in Wind Hellas and the points highlighted by the ECJ by considering various factors, but by also indicating the importance of a form of permanence of COMI where the presumption is being rebutted that COMI is at the registered office of the Company.
The decisions of the Düsseldorf court in Galapagos, (where no consideration appears to be given at all to any sense of permanence of any alleged COMI shift and limited other factors appear to have been applied), are, in the views of the Authors, incorrect. This surprise judgement does not appear to be in line with a true interpretation of the Regulation or the ECJ's previous positions. Given that the Regulation contains an explicit 3-month anti-forum shopping deadline for a change of registered office, one should consider, as the Luxembourg District Court did in its Galapagos judgement, that a certain element of permanence is required in order for a COMI shift to be effective. The Authors would suggest that a period in the region of at least 3 months should be considered to establish a sense of permanence (considering all other factors combined).
It is the view of the authors that the approach of the UK High Court in Wind Hellas is correct in applying: (a) a full set of factors to rebut the presumption, (b) making a distinction between a holding company and operating company when applying such factors, and (c) in considering the place of negotiations with creditors as an important factor from both a creditor knowledge perspective as well as a sense of permanence of COMI shift (to the knowledge of creditors participating in such negotiations).
It is the view of the Authors that the approach of the Luxembourg District Court in Galapagos in holding that a COMI shift should have a greater measure of permanence is correct and an essential part of the intention of the Regulation which creates legal certainty.
It is the view of the Authors that the judgements of the Düsseldorf court in Galapagos in its apparent disregard for any sense of permanence in a COMI shift, in addition to its light approach taken to application of the factors indicated by the ECJ, are incorrect and in contrast to the provisions and intentions of the Regulation. Practical application of the position taken by the German courts in disregarding any sense of permanence would in the view of the authors create legal chaos.
In conclusion, forum shopping is not incompatible with the Regulation and any COMI shift undertaken to find jurisdiction of a Member State Court should be considered based on the factors set forth in Wind Hellas with a degree of permanence as to the COMI shift being a crucial factor as referenced by the Luxembourg District Court. A seeming "free for all" finding of jurisdiction as indicated in the German Court judgements appears inconsistent with the intention of the Regulation and results in uncertainties in negotiations with creditors where a company is in distress.
1 European Court of Justice (ECJ), 2 May 2006 (Grand Chamber), C-341/04, Eurofood IFSC Ltd., §31; 20 October 2011, C-396/09, Interedil, §43; 16 July 2020, C-253/19, §18
2 Article 7 Insolvency Regulation
3 Council Regulation (EC) No 1346/2000 of 29 May 2000 on insolvency proceedings
4 2 May 2006 (Grand Chamber), Eurofood IFSC Ltd., C-341/04
6 20 October 2011, Interedil, C-396/09
11 Article 3 (1)
12 Article 3 (1) Insolvency Regulation.
13 Article 3 (1) Insolvency Regulation: "In the case of a company or legal person, the place of the registered office shall be presumed to be the centre of its main interests in the absence of proof to the contrary."
14 See MARTINS COSAT C, RICHTER D, GERBER-LEMAIRE M & MARCHAND A, Regulation 1364/2000 on insolvency proceedings: The difficult COMI determination, the treatment of groups of companies and forum shopping in the light of the CJEU's and domestic case law, and the modernization of the Regulation in: Droit bancaire et financier au Luxembourg, 2014, Vol. 6, p.3281ff, §76
15 For the purposes of conflict of law rules, a COMI shift is a conflit mobile, since the connecting factor (critère de rattachement) changes over time meaning that the courts of different Member States successively have jurisdiction.
16 It would in theory also be possible to shift the COMI out of the European Union, so that no EU court would have jurisdiction. However, in practice this has two significant disadvantages: 1) EU courts, including the ECJ, may not take a liberal approach to such migration and may try to safeguard their jurisdiction and 2) the automatic recognition of the insolvency proceedings (Article 19ff of the Insolvency Regulation) would no longer be guaranteed.
17 Articles 3 (3) and 34 of the insolvency Regulation provides that any insolvency proceedings opened after main insolvency proceedings were opened are secondary insolvency proceedings. Secondary insolvency proceedings have a limited territorial scope and only apply to assets held in the Member State where they were opened. It should be noted that the insolvency practitioner appointed in the main proceedings may prevent the opening of secondary proceedings by giving the undertaking that assets located in the Member State where secondary proceedings are contemplated will be distributed in accordance with the distribution and priority rights under the law applicable if secondary proceedings had been opened (Articles 36 and 38 of the Insolvency Regulation).
18 At least as a matter of Luxembourg law, since the criterion for the application of Luxembourg law to a commercial company is its real seat (Article 1300-2 of the Law of 10 August 1915 on commercial companies). However due to the application of the general conflit of law rules, a renvoi is arguably possible. Thus, if a Luxembourg company transfers its real seat to another jurisdiction which applies a statutory seat criterion to determine the applicable law, Luxembourg law should continue to apply to the company (the conflict of law rules of the country of the real seat lead to the application of the law of the statutory seat, i.e. Luxembourg, which accepts its own application).
19 See note 18. If the real seat is shifted from Luxembourg to a country applying the incorporation seat theory, Luxembourg law should in principle continue to apply.
20 See note 18.
21 See DE WEIJS R J & BREEMAN M S, Comi-migration: Use or Abuse of European Insolvency Law? in: ECFR, De Gruyter, 2014, Vol. 11, Number 4, p.495 ff
22 For more detailed developments see Ibid.
23 Ibid. p. 513-514 : the authors base their argument on the Creditors' Bargain Theory (see the seminal article by JACKSON T, Bankruptcy, Non-Bankruptcy Entitlements, and the Creditors' Bargain in: The Yale Law Journal, 1982, Vol. 91, Number 5) which highlights the fact that insolvency proceedings aim at maximizing the assets available to creditors and "anticommons behaviour" analysis which shows that creditors in insolvency proceedings will try to maximise their nuisance value in order to get a more advantageous position. See also DE WEIJS R J, Harmonisation of European Insolvency Law and the need to tackle two common problems: common pool & anticommons available online at the following address (consulted on 9 May 2021): https://www.iiiglobal.org/sites/default/files/media/de_weijs_submission2.pdf
24 17 January 2006, C-1/04, Staubitz-Schreiber
25 29 November 2009  EWHC 3199 (Ch) ;  BCC 295 (Re Hellas II)
26 Ibid. §4
27 Ibid. §5
28 Ibid. §4
29 Landgericht Düsseldorf, 25 T 602/19, II.1, §24
30 Relying on Eurofood (C-341/04), §§ 50-58
31 Landgericht Düsseldorf, 25 T 602/19, II.1, §35
32 Ibid. §35 ff
33 IX ZB 72/19. The first question referred to the ECJ asks in substance whether a debtor who has transferred its COMI from one Member State to another and filed for insolvency in the second State could still retract such filing and transfer the COMI to a third State and file for insolvency there if the insolvency proceedings in the second State are still pending, despite the fact that all relevant criteria are met in the third State. The second question asks in substance whether the Regulation contains an implied lis pendens rule, i.e. whether the German courts could not open main proceedings while the UK courts had not yet decided whether or not they have jurisdiction.
34 Judgement 2019TALCH02/01728 of 15 November 2019, number TAL-2019-06530 of the docket, p.10
35 Article 3 (1) of the Regulation speaks indeed of the "regular basis" on which the interests of the debtor must be conducted.
36 2019TALCH02/01728, loc. cit.
37 Ibid., p. 12
38 The bankruptcy application was nonetheless declared inadmissible, due to lack of standing of the junior creditors, who only held beneficial interests in global notes issued under a New York law governed indenture.
39 C-341/04, Eurofood, §35-36
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