Vol 13 (2016) - Issue 4

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Centre of Main Interests (COMI): A Creditor’s Perspective

Council regulation (EC) No. 1346/2000 (the 'Regulation') was the result of a decades-long effort to improve the administration of international insolvencies. It stopped short of an attempt to harmonise Europe’s disparate and often incompatible insolvency laws. However, with its arch-policy objective of ensuring the efficient functioning of the single market, the Regulation created a legal framework to facilitate cross border co-operation and brought with it an armoury of legal innovations. Its arrival in 2002 also marked the beginnings of the modern European restructuring market.
The most notable of these innovations has been the concept of the 'Centre of Main Interests' ('COMI'). COMI determines which domestic laws will apply in an insolvency. It seeks to resolve what is essentially a conflict of laws problem by imposing a rule on all member states that 'main' insolvency proceedings must be opened in the jurisdiction where a debtor’s COMI is located. Thereafter, subject to certain exceptions, the proceedings and insolvency laws of that member state are recognised as having universal effect.
What makes this concept even more remarkable is that the COMI of any given debtor (human or corporate) can in theory be located in any member state (excluding Denmark). The Regulation states that a debtor’s COMI should merely be 'presumed' to be located in its jurisdiction of its registered office. It follows that (i) COMI may in fact be located in a member state other than the location of the registered office; and (ii) COMI may change from time to time. This amounts to a tacit and limited dispensation to forum shop. Ironically, another stated aim of the Regulation is itself the prevention of forum shopping. However, this has to be viewed through the lens of the pre-Regulation landscape where certain courts’ jurisdictions took a distinctly more permissive stance.
While the ‘mobile’ COMI can be said to be consistent with the overarching principle of the free movement of goods and persons, there have been many concerns about perceived abuses of this freedom. ‘Bankruptcy tourism’ is one such example. The financial crisis witnessed the appearance of firms offering to relocate impecunious individuals seeking to flee creditors in their home country. They would then be helped to file for bankruptcy in a country with less draconian laws with a view to returning home with the slate wiped clean.
There may however be very legitimate commercial reasons for preferring a particular jurisdiction over another: insolvency laws and procedures differ considerably from country to country. Whereas some are debtor friendly, others are more favourable to creditors. Some offer more predictable outcomes. As a result, it is not uncommon in the European restructuring market for parties to look to bring proceedings in the jurisdiction which is most likely to serve their own interests.
In the corporate domain this flexibility has given rise to the practice known as 'COMI shifting' which involves a debtor deliberately relocating its COMI to restructure its debts in a another jurisdiction. The strategy is usually deployed with the knowledge and support of major creditors to take advantage of a more favourable restructuring regime. As the practice has grown over the last decade and a half the development of European jurisprudence has beaten a fairly clear path for those inclined to make the journey.
The leading authority on COMI is Interedil Srl (in liquidation) v Fallimento Interedil Srl and another [2011] EUECJ C-396/09. The European Court of Justice gave a detailed explanation of how the registered office presumption can be rebutted. In doing so the Court referred to the Regulation’s preamble which states that a company’s COMI should ‘correspond to the place where the company or legal person conducts the administration of its business on a regular basis and which is therefore ascertainable by third parties’. The information should also be limited to information generally available in the public domain. The Court held that the presumption can be rebutted if a 'comprehensive assessment' of all the relevant factors establishes that the debtor’s actual centre of management and supervision is located in another Member State. The main factors include the places in which the company pursues economic activities, holds its board meeting and carries out its central governance functions, and the location of its assets. The Court also stated, however, that the existence of assets in a different member state will not be sufficient on its own to rebut the registered office presumption.