With the economic disruption stemming from the Coronavirus Pandemic affecting enterprises with operations throughout the globe, the spectre of increased cross-border corporate insolvencies has arisen.
Israel’s Insolvency and Economic Rehabilitation Law, 2018, which came into effect on September 15, 2019 and represents a comprehensive reform and modernisation of Israel’s insolvency regime (“the Insolvency Law”), for the first time incorporated the provisions of the United Nations Commission of International Trade Law (“UNCITRAL”) Model Law on Cross-Border Insolvency (“the Model Law”), joining 46 other states (including Australia, Canada, Japan, the U.K. and the U.S.) that have thus far adopted the Model Law since its introduction in 1997.
The Model Law provisions are set out in Part 9 of the Insolvency Law and are intended to establish an efficient mechanism for cooperation between the competent insolvency authorities in Israel and other countries in cross-border insolvency cases so as to provide greater legal certainty for trade and investment; protection of the interests of all creditors and other interested entities, including the debtor; protection and maximisation of the value of the debtor’s assets; and facilitation of the rescue of financially troubled businesses, thereby protecting investment and preserving employment (“the Purposes”).
One of the principal components of said cooperative mechanism is recognition by an Israeli court of a foreign “main” proceeding, which is defined as “a foreign proceeding pending in the country where the debtor has the centre of its main interests”. The recognition by the Israeli court of a foreign main proceeding will result automatically in an order by the Israeli court to stay payment by the debtor of antecedent debt and freeze proceedings against the debtor as well as to stay the debtor’s transferring or encumbering any right of the debtor in any asset. In addition, the Israeli court may to grant additional relief including authorising the foreign representative of the foreign main proceeding to administer all or part of the debtor’s assets within Israel, and at the foreign representative’s request, authorising the foreign representative to realize and distribute all or part of the debtor’s assets in Israel, provided that the court is convinced that doing so will not injure creditors in Israel.
However neither the authors of the Model Law nor the Insolvency law define “centre of main interests” (“COMI”). Both Laws simply presume, unless proven to the contrary, that a corporate debtor’s COMI is its registered office.
The caveat, unless proven to the contrary, has given rise to a spate of litigation in various jurisdictions as to what factual elements comprise COMI: For example, among the factors considered by U.S. courts have been: (a) the location of the debtor’s headquarters; (b) the location of those who actually manage the debtor; (c) the location of the debtor’s primary assets; (d) the location of the majority of the debtor’s creditors or of a majority of the creditors who would be affected by the case; and/or (e) the jurisdiction whose law would apply to most disputes. Canadian courts have considered (i) the location where corporate decisions are made; (ii) the location of employee administrations, including human resource functions; (iii) the location of the company’s marketing and communication functions; (iv) whether the enterprise is managed on a consolidated basis; (v) the extent of integration of an enterprise’s international operations; (vi) the centre of an enterprise’s corporate, banking, strategic and management functions; (vii) the existence of shared management within entities and in an organization; (viii) the location where cash management and accounting functions are overseen; (ix) the location where pricing decisions and new business development initiatives are created; and (x) the seat of an enterprise’s treasury management functions, including management of accounts receivable and accounts payable.
Other issues that have arisen with respect to the determination of COMI include timing (e.g., is COMI determined at commencement of the foreign proceeding, commencement of the request for recognition thereof, or as of the date of hearing by the court of the recognition request); burden of proof; and the impact of the debtor being part of a greater enterprise of group companies.
The 2013 revised Guide to Enactment and Interpretation of the UNCITRAL Model Law on Cross-Border Insolvency proposes that the following principal factors, considered as a whole, will tend to indicate whether the location in which the foreign proceeding has commenced is the debtor’s COMI. The factors are the location: (a) where the central administration of the debtor takes place, and (b) which is readily ascertainable by creditors, analysed by reference to the date of commencement of the foreign proceedings. The 2013 updated “Judicial Perspectives” on the Model Law adds: “When these principal factors do not yield a ready answer regarding the debtor’s [COMI], a number of additional factors concerning the debtor’s business may be considered. The court may need to give greater or less weight to a given factor, depending on the circumstances of the particular case. In all cases, however, the endeavour is an holistic one, designed to determine that the location of the foreign proceeding in fact corresponds to the actual location of the debtor’s [COMI], which is readily ascertainable by creditors.” It states further: “For the purposes of the Model Law, the focus is on individual entities and therefore on each and every member of an enterprise group as a distinct legal entity. It may be that the [COMI] of each individual group member is found to lie in the same jurisdiction, in which case the insolvency of those group members can be conducted in a single jurisdiction, but there is no scope for addressing the [COMI] of the enterprise group as such under the Model Law.”
As there has been no Israeli published cases thus far interpreting COMI, for purposes of the Insolvency Law, it remains to be seen what an Israeli court will decide with respect to the foregoing issues.
It would appear advisable that an Israeli lender to a company whose registered office is in Israel or whose COMI appears to be in Israel include in its loan documents both a representation of the debtor that its COMI is in Israel, which representation shall include not only the phrase “centre of main interests” but factors showing that the debtor’s “nerve center” is in Israel, and an undertaking not to change its COMI, or the aforementioned facts demonstrating same, to any other jurisdiction without the consent of the lender, or at least without sufficient advance notice to the lender to adjust the loan documentation or security therefor to take into account the possibility of the main insolvency proceeding against that debtor taking place outside of Israel.
Although, as indicated above, COMI is ultimately a question of fact, an Israeli creditor with any concern that its insolvent Israeli corporate debtor may claim COMI outside of Israel would be advised not to hesitate to commence insolvency proceedings against the debtor in Israel and bring to the attention of the court facts (over and above the location of the registered office of such debtor in Israel) ascertainable to such creditor, that would support a factual finding of such debtor’s COMI in Israel. A foreign representative of a foreign insolvency proceeding seeking recognition of same by the Israeli court as an alleged “main” proceeding on the basis of the debtor’s foreign COMI, would presumably be required to rebut not only the presumption that a company with its registered office in Israel has its COMI in Israel, but also the additional facts pleaded by the creditor. Under the Model Law, as incorporated in the Insolvency Law with respect to an insolvency proceeding in Israel, the decision whether or not to recognize a foreign insolvency proceeding as a “main” proceeding lies solely with the Israeli court.