Vol 7 (2010) - Issue 2

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In re Stanford International Bank Limited [2009] EWHC 1441 (Ch)

Overview

If a company used to perpetrate a fraud (Ponzi, Madoff, Stanford) should fail, how should its centre of main interests (COMI) be determined?
The question is without an easy answer because, on one view, COMI should only ever be a question of fact whereas, on another view, the meaning of COMI not settled and may require refinement in the context of Council Regulation 1346/2000 on insolvency proceedings (the 'Insolvency Regulation'), and in the different context of the Cross Border Insolvency Regulation 2006 (the 'Cross Border Regulation'), to accommodate cases of fraudulent failure.
COMI is a question of fact (or more accurately a question of application) if it is treated as having a tolerably clear legal meaning derived from the legislative text and relevant legislative background. The Court must identify a company’s 'interests', identify from those 'interests' which are 'main' and which are not, and, in relation to the former, locate their 'centre'. In applying each component to the facts found, the Court is entitled to exercise discretion in reaching its conclusion. Such discretion is permissible because it is unavoidable in making a judgement as to the proper application of a legal concept. On this view, there is no need to sharpen the legal meaning of COMI to reach a right answer consistent with the legislative intent and, significantly, there is no basis on which to do so.
There is no practical obstacle on this view, the broad view, to accommodating cases of fraudulent failure within the same framework as cases of non-fraudulent failure. COMI is to be determined at the point proceedings are opened, or at which recognition is sought, and that enquiry may take into account facts revealed post failure which would not have been apparent to creditors and other third parties (including, for example, financial regulators) in dealing with the company prior to its failure and the revelation of the fraud.
COMI is, alternatively, a concept that has a much more precise legal meaning. It is to be determined by reference to objective factors ascertainable to third parties which either confirm or rebut the presumption that a company’s COMI is at the place of its registered office. The components of COMI outlined above are on this view, the narrow view, subject to a rule which regulates the factors which the Court can take into account in determining COMI.
The narrow view does create a practical obstacle to accommodating fraudulent and non-fraudulent failure within the same framework. The same test can, of course, be applied in all cases, but in cases of fraudulent failure it is deeply unattractive that the opening and recognition of main insolvency proceedings should turn on the façade apparent to third parties and not the facts. For example, the mastermind of a fraud might organise the head office functions of his front company in Jurisdiction A because of its lack of effective regulatory oversight in order to facilitate a fraud on investors in Jurisdiction B. The matter is complicated if the assets acquired are diverted to Jurisdiction C. In such cases, it is difficult to see the practical value of protecting creditors’ and others’ reliance on the façade created. What is important is the getting in and distribution of the assets (and their substitutes) that still exist. For the most part, this will turn on a thorough investigation of the fraud itself, but secondary considerations include the effectiveness of the claims handling and distribution process to be put in place.
In re Stanford International Bank [2009] EWHC 1441 (Ch), Mr Justice Lewison considered himself bound to adopt the narrow view in the context of the Cross Border Regulation, having regard to the recitals to and the case law in connection with the Insolvency Regulation.
This case note summarises the facts and reasoning underlying the decision in Stanford and asks whether the broad view might sensibly be adopted as the test for COMI under the Cross Border Regulation and the Insolvency Regulation.

Facts

A receiver appointed by the Securities and Exchange Commission in the United States ('SEC'), and a liquidator appointed by the Financial Services Regulatory Commission ('FSRC') in Antigua, in relation to Stanford International Bank ('SIB') applied for recognition in the United Kingdom under the Cross Border Regulation. The practical reason for recognition was to gain control of bank accounts in London.