Thomas v Frogmore: COMI Factors and Improper Motive Reviewed

This article was originally published in International Corporate Rescue, Volume 14 Issue 5, 2017.  Please click here to read the original article.

The recent case of Thomas & another v Frogmore Real Estate Partners & others [2017] EWHC 25 (Ch) provides useful guidance for analysing the centre of main inter- ests (‘COMI’) of a company not registered in the UK or other EEA state and therefore of the circumstances in which UK courts will allow insolvency proceedings to be instigated within the jurisdiction in the relating to such a company.

Further the judgment is one of only a few cases to comment on the scope of the ‘improper motive’ provi- sion, contained in paragraph 81 of Schedule B1 to the Insolvency Act 1986 (the ‘Act’), which provides that the court may terminate an administration where the appointor had an ‘improper motive’ for making the appointment.

The facts

The case involved three companies, FREP (Knowle) Limited, FREP (Ellesmere Port) Limited and FREP (Belle Vale) Limited (the ‘Companies’). The Companies form part of Frogmore group, which specialises in real estate investment  and management  in the  UK.

The Companies were special purpose vehicles, formed for the acquisition of three shopping centres. Each of the Companies owns a shopping centre located in England (‘the Shopping Centres’). The Companies were registered in Jersey (which is not a EEA state). However, they did not carry on any trading operations in Jersey, did not have employees of their own, their principal assets (namely the Shopping Centres) were situated in England and the sole shareholder of the Companies, Frogmore Real Estate Partners GP1 Limited (the ‘Share- holder’), was an English company.  Further each of  the Shopping Centres was managed by Frogmore Real Estate Investment Managers Limited (‘FREPIM’), an English company with its registered office and base in London

Nationwide Building Society (‘Nationwide’) had advanced substantial sums to the Companies under a facility agreement (the ‘Facility Agreement’). Security in respect of this loan had been provided by the Compa- nies by a combination of debentures (the ‘Nationwide Debentures’). Pursuant to these arrangements, the Companies owed and were required to repay over £106 million to Nationwide on 1 October 2016. They failed to do so. Therefore in November 2016 administrators were appointed by Nationwide under floating charges granted in its favour. There had also been on-going pro- ceedings since December 2014 between the Companies and FREPIM against Nationwide, after Nationwide decided to transfer its economic interest in the loans to another company (the ‘2014 Litigation’).

The issues

It was common  ground  that  for  the  administrators to be validly appointed the Companies had to have their COMI in England and Wales. The administrators applied for a declaration as to the location of the Com- panies’ COMI.

Further, the Companies applied for an order termi- nating the administrators’ appointment arguing that Nationwide had had acted with an improper motive   in that the purpose of appointing the administrators had been to stifle the progress of the December 2014 litigation.

Therefore the issues were (1) the location of the Companies’ COMI and (2) whether the administrators’ appointment should be terminated on the basis of an improper motive on Nationwide’s part.

Issue 1: COMI

The starting point is that a company’s COMI is where its registered office is located. Paragraph 111(1B) of the Act and Article 3 of the EC Regulation together create a rebuttable presumption that the location of the regis- tered office of a company will be its COMI.

Existing case law, in particular the decisions of the European Court of Justice, in Re Eurofood IFSC Ltd (Case 341/04) [2006] Ch 508 and Interedil Srl v Fallimento Interedil Srl(Case C-396/09) [2012] Bus LR 1582 provide guidance as to what might rebut the presumption.

In Eurofood the European Court of Justice explained that the COMI must be identified by reference to crite- ria that are both objective and ascertainable by third parties.

‘[The] presumption in the second sentence of article 3(1) of  the Regulation may be rebutted, however, where, from the viewpoint of third parties, the place in which a company‘s central administration is lo- cated is not the same as that of its registered office. As the court held in In re Eurofood IFSC (Case C-341/04) [2006] Ch 508, para 34, the simple presumption laid down by the European Union legislature in favour of the registered office of that company can be rebutted if factors which are both objective and ascertainable by third parties enable it to be established that an actual situation exists which is different from that which locating it at that registered office is deemed to reflect’ (Interedil, para. 51).

Further

‘[t]he factors to be taken into account include, in par- ticular, all the places in which the debtor company pursues economic activities and all those in which it holds assets, in so far as those places are ascertainable by third parties’ (Interedil, para. 52).

Applying the existing case law and guidance the court held that the COMI of all three of the Companies was in England rather than in Jersey where the Companies were registered.

The day-to-day conduct of the business was in the hands of an agent (namely FREPIM) that was an English company, appointed in England, pursuant to an English law governed agreement. The actions of FREPIM were not just limited commercial activities but included the types of function that one would expect a head office to discharge, including working on investment strat- egy and business plans for the Companies, instructing lawyers, surveyors and consultants for them, negotiat- ing the purchase and sale of properties on their behalf and so on. Similarly, the day-to-day dealings with third parties were carried out from the offices of FREPIM in London. For example the companies’ VAT returns stated that the FREPIM London office was the business address for the Companies.

Further the Facility Agreement and Nationwide Debentures were governed by English law and made ref- erence to Nationwide’s ability to appoint administrators under the Act. Nationwide was the Companies’ largest creditor, and therefore its views were important when deciding the issue of the Companies’ COMI.

The Companies sought to establish that their COMI was in Jersey and relied on the fact that Board meetings were held in Jersey. However the court did not find this persuasive. A third party would not know where Board meetings are taking place. In any event the location of the board was of limited importance in circumstances where the day-to-day  conduct and business dealings  of the Companies were carried out through FREPIM in London.

This aspect of the decision serves as an important reminder, for debtors and creditors alike, of the court’s objective approach in ascertaining the COMI of a com- pany not registered in the EEA but operating in the UK.

Though the starting point is to look at a company’s reg- istered address that is not the end of the matter. A case and fact specific analysis needs to be carried out.

Issue 2: Improper motive

In respect of the second issue, the Companies submit- ted that Nationwide had acted with an improper motive in that the purpose of appointing the administrators had been to stifle the progress of the December 2014 litigation.

Paragraph 81 of Schedule B1 of the Act provides:

‘(1) On the application of a creditor of a company the court may provide for the appointment of an administrator of the company to cease to have effect at a specified time.

(2) An application under this paragraph must allege an improper motive (a) in the case of an admin- istrator appointed by administration order, on the part of the applicant for the order, or (b) in any other case, on the part of the person who appointed the administrator. On an application under this paragraph the court may -

  • adjourn the hearing conditionally or unconditionally;
  • dismiss the application;
  • make an interim order;
  • make any order it thinks appropriate (whether in addition to, in consequence of or instead of the order applied for).’

This provision was introduced as an amendment to the 1986 Act the by the Enterprise Act 2002, Schedule 16, paragraph 1. The court observed that there was little in the way of explanation as to what lay behind this amendment. No guidance was to be found in the mate- rial published by the relevant government departments and agencies which sponsored the amendment nor was there any debate on the provision recorded in Hansard. The court held that it was invidious to attempt to pinpoint precisely what form the motivation must take for the statutory jurisdiction to be invoked. The test is whether there is a motive that is not in harmony with the statutory purpose of administration and that is causative of the decision to appoint. If there is no dis- harmony it is difficult to see why the motive should be treated as a material matter militating towards termination of the administration.

Further, following the reasoning in the Northern Irish case of Cursitan v Keenan [2011] NICh 23, the court held that even where there is a finding of an improper motive, the court has a wide discretion as to whether to terminate an administration.

‘If the statutory purpose of administration would be likely to be achieved, notwithstanding the motives of the appointor, like McCloskey J. in Cursitan it seems to me that this would normally be the main touch- stone for the court. The existence of an improper motive may become of relative insignificance in such circumstances, particularly where the appointor’s improper objective was not actually achieved.’ (para. 47 of the Judgment).

The court did not find a improper motive on the facts of the case. The date of repayment for Nationwide’s loans had been set as October 2016 for some years, Nationwide had offered to extend the date for repayment by six months and the deadlines set had not been unreasonable. Further, even if there had been an im- proper motive, there was no satisfactory evidence that the statutory purposes of the administration were not likely to be achieved. Therefore the court did not inter- fere with the administrators’ appointment.

This aspect of the decision is likely to be welcomed by administrators and potential appointors alike because it provides certainty. Essentially as long as the statu- tory purpose of administration is reasonably likely to be achieved, the motivation for the appointment is irrelevant. Therefore it appears that courts will only interfere with appointments in limited and somewhat extreme circumstances.