First published in The Lawyer on July 18, 2011
Western economies, many With recoveries stalling in investors and creditors are considering carefully which jurisdictions will govern their interests in the event of insolvency and what, if anything, can be done to influence the process.
Many investment funds and other vehicles, attracted by tax-neutrality and stability, are incorporated in jurisdictions such as the Cayman Islands and the British Virgin Islands, but with their managers, operations, assets and investors often dispersed globally.
Consequently, when these entities enter insolvency there are frequently competing jurisdictions and office-holders. High-profile turf wars, such as the one that raged recently between the US receiver and Antiguan liquidators in the matter of Stanford International Bank, are prime examples of scant resources being squandered, often to the bemusement of creditors.
By adopting the UN Commission on International Trade Law (Uncitral) model law on cross-border insolvency, countries including the US, theUK, Canada, Australia and Japan acknowledged the need for cross-border cooperation and the desirability of a single global insolvency process. While it was hoped that this would bring a measure of clarity and certainty, the results internationally have been somewhat inconsistent and vulnerable to abuse.
To gain the full benefit of recognition abroad, a foreign representative must be appointed pursuant to a foreign main proceeding. A foreign main proceeding is one whereby the debtor has its ’centre of its main interests’ (Comi). While there is a rebuttable presumption that the Comi will be the company’s registered address, there is no clear definition of what this constitutes; and for entities domiciled offshore and away from their true nerve centres, identifying a Comi can be problematic.
The stakes are high. Once recognition has been gained - for example by way of Chapter 15 recognition in the US - a foreign liquidator or office-holder will enjoy wide-ranging relief. Perhaps most importantly, recognition will trigger an automatic stay of local actions brought against the debtor’s assets. Additionally, following the US case of Re Condor Insurance (2010), foreign law can also be applied to causes ofaction. In Condor, avoidance actions governed by Nevis (a Caribbean island) law were brought in Mississippi.
The US and European courts have taken differing views with regard to ascertaining the Comi. The leading cases in Europe (including Re Eurofood IFSC (2006) and Re Stanford International Bank (2009)) have provided tests of a rebuttable presumption of the place of incorporation and the fact that this presumption can only be rebutted by factors that are both objective and ascertainable to third parties.
The key question is where a party doing business with the debtor would consider its Comi to be. This pragmatic stance is derived from the rationale that commercial parties should be able to tell in advance in what jurisdiction a liquidation will take place.
US courts have traditionally been less enthusiastic in recognising appointments made in so-called offshore ’letterbox’ jurisdictions, particularly where recognition is a challenge to rival domestic appointments. Many cases have focused on the place of the true business establishment, such as Re Sphinx (2006) and Re Basis Yield Master Fund (2007).
Latterly, however, there has been a sea change in the US and a reaction against what has been described as an unnecessarily elaborate enquiry into an entity’s history.
Perhaps in an attempt to militate this, courts in the US now recognise first that the location of the Comi can shift over time, and indeed can be moved by the foreign office-holder (see Re Fairfield Sentry (2011)), and second that the location of the Comi can be assessed as late as the date of the application for recognition.
Comi shifting is nothing new and is, for example, deployed frequently by entities looking to take advantage of local restructuring laws. The recent line of cases in the US, however, opens the door to foreign office-holders establishing Comis and obtaining recognition simply by carrying out their functions.
While this potentially brings more certainty, the ability to shift the Comi undermines the rationale set out in Stanford, namely that third parties should be able to ascertain in advance what jurisdiction will settle their rights in the event of insolvency.
Following the events of 2008 there appears to be a momentum gathering in favour of a universal approach to insolvency, typified in decisions such as that in Rubin & Anor v Eurofinance & Ors (2010).
The identification of a debtor’s Comi is of heightened importance and it looks likely that Uncitral will step in to help resolve some of the divergent approaches and facilitate the unifying model law.