A Brief Defense of COMI

I. COMI Antecedents¹

For a foreign proceeding to be recognized under the UNCITRAL Model Law on Cross-Border Insolvency (“Model Law”)² and its offspring, chapter 15 of the Bankruptcy Code³, the foreign proceeding must be either a foreign main proceeding or a foreign nonmain proceeding. A foreign main proceeding is one taking place in the country where the debtor has the center of its main interests (“COMI”). A foreign nonmain proceeding is one taking place in a country where the debtor has an establishment, i.e. a place of operations where the debtor carries out a non-transitory economic activity. Model Law Articles 2(b), (c), (f), 17(2); chapter 15 §§1502(2), (4), (5), 1517(b). Recognition of a foreign main proceeding has automatic effects on the debtor’s property and the conduct of creditors (for example, protection of property from creditor actions and the halting of lawsuits); recognition of a foreign nonmain proceeding permits such relief but it is not automatic. In addition, the status of a proceeding as a foreign main proceeding often effects crucial choice of law determinations, such as the fixing of the law governing whether transactions prior to the commencement of insolvency proceedings may be avoidable by a liquidator.

UNCITRAL adopted the COMI terminology from the then-pending European Union Convention on Insolvency Proceedings, which evolved into (EU) 2015/848 of the European Parliament and of the Council of 20 May 2015 on Insolvency Proceedings (the “EC Reg”).⁴ The EC Reg was modified in 2015 by Council Regulation (EC) No. 1346/2000 on Insolvency Proceedings (the “Recast Reg”).⁵

The EC Reg relied on the May 3, 1996 Report on the Convention on Insolvency Proceedings by Miguel Virgos and Etienne Schmit⁶ and the Guide quotes from the Virgos-Schmit Report discussion of COMI:

84. The Virgos-Schmit Report explained the concept of “main insolvency proceedings” as follows:
“73. Main insolvency proceedings “Article 3 (1) enables main insolvency universal proceedings to be opened in the Contracting State where the debtor has his centre of main interests. Main insolvency proceedings have universal scope. They aim at encompassing all the debtor’s assets on a world-wide basis and at affecting all creditors, wherever located. “Only one set of main proceedings may be opened in the territory covered by the Convention. M. Virgos and E. Schmit, Report on the Convention on Insolvency Proceedings, Brussels 3 May 1996.…
“75. The concept of ‘centre of main interests’ must be interpreted as the place where the debtor conducts the administration of his interests on a regular basis and is therefore ascertainable by third parties. “The rationale of this rule is not difficult to explain. Insolvency is a foreseeable risk. It is therefore important that international jurisdiction (which, as we will see, entails the application of the insolvency laws of that Contracting State) be based on a place known to the debtor’s potential creditors. This enables the legal risks which would have to be assumed in the case of insolvency to be calculated.⁷ 

Both the EC Reg and the Recast Reg emphasize the COMI element “ascertainable by third parties” in their introductory recitals.⁸ For EU purposes, the concept of COMI is jurisdictional – when a court in an EU country (except Denmark, which did not subscribe to the EC Reg) determines that a debtor’s COMI is in that country and opens an insolvency proceeding, that proceeding (and the opening country’s insolvency law) will apply throughout the EU.⁹ The universal jurisdiction of the “main proceeding” country is subject to the possibility that a secondary proceeding may be commenced in a different country, but the secondary proceeding will be limited to assets in the secondary country.¹⁰

In contrast, for purposes of the Model Law and chapter 15, the COMI determination is among the requirements for recognition of a foreign main proceeding (including one governed by the Recast Reg) that will enable a domestic court to assist a foreign proceeding. Recognition is essentially an eligibility test of whether there were sufficient “connecting factors” between the debtor and the foreign court to warrant recognition of the foreign proceeding. The Model Law and chapter 15 contain a presumption that a debtor’s country of registration is its COMI.¹¹ In discussing the presumption that an entity’s COMI is its country of registration/incorporation, the Guide states:

41. Although the presumption contained in article 16, paragraph 3 corresponds to the presumption in the EC Regulation, it serves a different purpose. In the Model Law, the presumption is designed to facilitate the recognition of foreign insolvency proceedings and the provision of assistance to those proceedings. Under the EC Regulation, the presumption relates to the proper place for commencement of insolvency proceedings, thus determining the applicable law, and to the automatic recognition of those proceedings by other European Union member States. Under the Regulation, the decision on centre of main interests is made by the court receiving an application for commencement of insolvency proceedings at the time of consideration of that application. Under the Model Law, a request for recognition of a foreign proceeding may be made at any time after the commencement of that proceeding; in some cases it has been made several years later. Accordingly, the court considering an application for recognition under the Model Law must determine whether the foreign proceeding for which recognition is sought is taking place in a forum that was the debtor’s centre of main interests when the proceeding commenced (the issue of timing with respect to the determination of centre of main interests is discussed at paras. 157-160 below). Notwithstanding the different purpose of centre of main interests under the two instruments, the jurisprudence with respect to interpretation of that concept in the EC Regulation may be relevant to its interpretation in the Model Law.

The adoption of COMI as a test of the legitimacy of the foreign proceeding was discussed at two sessions of the UNCITRAL Working Group on Insolvency law, in December 1995 (¶¶89-90) and April 1996 (¶¶22-25).¹² While not mentioned in the reports, the author and Professor Westbrook clearly recall that delegates to the Working Group sessions expressed concern that unscrupulous debtors might seek to commence insolvency proceedings in a country that had no legitimate connection to the debtor but that offered “pliable” courts that were unfairly debtor oriented. The Working Group concluded that requiring a significant presence in the country of the foreign proceeding – COMI for a foreign main proceeding or an establishment for a foreign nonmain proceeding - would mitigate the concern about improper forum shopping. The April 1996 Working Group Report states:

89. The Working Group acknowledged the concern about possibly giving rise to recognition of more than one foreign proceeding as “main”, and, upon further consideration, agreed that paragraph (l)(a)¹³ should be modified to refer to one factor as a competency test for recognition of a foreign main proceeding. It was agreed that that factor should be the “centre of the debtor’s main interests”.

In sum, COMI is a test of the legitimacy of the foreign court’s jurisdictional basis to conduct the foreign proceeding and it functions as an anchor against free range selection of a possibly improper forum. Courts in several countries that adopted the Model Law have made decisions elaborating on the COMI determination required for recognition of a foreign main proceeding and none suggested that the determination of COMI was particularly problematic.¹⁴ 

II. COMI Measurement Date

For purposes of a case under the Restated Reg, COMI must be measured as of the date of the initiation of the proceeding since it is a factor in the court’s determination of whether it has jurisdiction to open the case as a main proceeding.¹⁵  In a Model Law or chapter 15 case, there are two possible measurement dates: the date of the commencement of the foreign proceeding or the date that the chapter 15 petition is filed, which may be long after the commencement of the foreign proceeding. UNCITRAL supports the foreign proceeding date:

With respect to the date at which the centre of main interests of the debtor should to be determined, having regard to the evidence required to accompany an application for recognition under article 15 and the relevance accorded the decision commencing the foreign proceeding and appointing the foreign representative, the date of commencement of that proceeding is the appropriate date.¹⁶

After some back and forth, U.S. courts have settled on the chapter 15 petition date to measure COMI. As the Second Circuit noted:

Most courts in this Circuit and throughout the country appear to have examined a debtor’s COMI as of the time of the Chapter 15 petition. See, e.g., In re Fairfield Sentry Ltd., No. 10 Civ. 7311(GBD), 2011 WL 4357421, at *6 (S.D.N.Y. Sept. 16, 2011); In re British Am. Isle of Venice (BVI), Ltd., 441 B.R. 713, 720–21 (Bankr.S.D.Fla.2010); In re British Am. Ins. Co., 425 B.R. 884, 909–10 (Bankr.S.D.Fla.2010); In re Betcorp Ltd., 400 B.R. 266, 290–92 (Bankr.D.Nev.2009). But there have certainly been courts that have taken a different approach. See, e.g., In re Millennium Global Emerging Credit Master Fund Ltd., 474 B.R. 88, 92 (S.D.N.Y.2012) (recognizing bankruptcy court’s conclusion that “COMI should be determined as of the date of the commencement of the foreign proceeding, rather than—as most of the courts that have looked at the issue have concluded—the date on which the Chapter 15 petition was filed”)….¹⁷ 
We therefore hold that a debtor’s COMI should be determined based on its activities at or around the time the Chapter 15 petition is filed, as the statutory text suggests. But given the EU Regulation and other international interpretations, which focus on the regularity and ascertainability of a debtor’s COMI, a court may consider the period between the commencement of the foreign insolvency proceeding and the filing of the Chapter 15 petition to ensure that a debtor has not manipulated its COMI in bad faith.¹⁸ 

III. U.S. Courts Are Adept at Determining COMI

COMI is determined on a debtor by debtor basis, even when several debtor entities are each members of a corporate group of affiliated entities. Judge Martin Glenn’s decision in the case of In re Serviços de Petróleo Constellation S.A.¹⁹  (“Constellation”) exemplifies the thorough analysis that U.S. bankruptcy courts apply to the COMI examination. Ten members of the Constellation Group, engaged in onshore and offshore oil drilling and production storage and offloading, were among the debtors in consolidated Brazilian restructuring proceedings and sought chapter 15 recognition of those proceedings. Two of the debtors were registered in Luxembourg, one in the Cayman Islands, one in Brazil and six in the BVI. A contingent creditor of one of the debtors objected to recognition and argued that the COMI of all debtors was in Luxembourg. While the objector had standing as to only one of the debtors, “[t]he Court nonetheless analyzes the evidence and objections to recognition …. This requires the Court to analyze whether a proceeding should be recognized as main, nonmain, or not recognized at all, regardless of whether objections have been raised.”²⁰ 

The Constellation court began its analysis with the §1516 presumption that COMI is in the country of the debtor’s incorporation and then reviewed the following factors as to each debtor: location of registered office; residence and citizenship of directors, officers; location of board meetings; location of management; location of assets; location of most creditors; creditors’ expectations for location of any insolvency proceeding; and the country whose law would govern disputes. The court ultimately concluded that the COMI of the parent, Constellation, was Luxembourg while the COMI of the remaining debtors was Brazil.

IV.  COMI Lodging

Early chapter 15 decisions denied recognition to foreign proceedings commenced in the debtor’s country of registration when evidence established that the debtor’s COMI prior to the proceedings was elsewhere.²¹ Partly in response to those exclusionary decisions, courts developed the concept that COMI could become “lodged” at the place of an insolvency proceeding that became the dominant activity of the debtor. Late Bankruptcy Judge Burton Lifland, a pioneer in cross-border insolvency and a member of the U.S. delegation to the UNCITRAL Working Group that produced the Model Law, wrote the 2008 Bear Stearns decision denying recognition to a Cayman Islands proceeding. Two years later, he adopted the “became lodged” language from one of the British American Insurance decisions²² and went on to develop a “totality of circumstances” COMI test that included an examination to insure that there had been no “mischief and COMI manipulation.”²³ 

The logic supporting “lodging” is that the during the possible hiatus between the commencement date of the foreign proceeding and the filing of a chapter 15 petition, the business operation of the debtor may have ended or may have become subservient to the debtor’s liquidation or restructuring. In other words the location of the insolvency proceeding may have become the COMI. Collier discusses this concept relative to the definition of foreign main proceeding in §1502(4):

Several courts have held that the COMI of a debtor entity may become lodged with the foreign representative and the foreign proceedings when the debtor has essentially evaporated and the remains of its assets and affairs have been relocated to the country of the foreign proceeding. In re British Am. Isle of Venice (BVI) Ltd., 441 B.R. 713, 723 (Bankr. S.D. Fla. 2010); In re Fairfield Sentry Ltd., 440 B.R. 60 (Bankr. S.D.N.Y. 2010, aff’d, 2011 U.S. Dist. LEXIS 105770 (S.D.N.Y. Sept. 16, 2011, aff’d 714 F.3d 127 (2d Cir. 2013); In re British Am. Ins. Co. Ltd, 520 B.R. 884, 914 (Bankr. S.D.Fla. 2010; In re Betcorp Ltd., 400 B.R. 266, 292 (Bankr. D. Nev. 2009); In re Creative Finance Ltd., 543 B.R. 498, 520 (Bankr. S.D.N.Y. 2016) (“But here, the Court has found that the Liquidator’s efforts were so minimal that the Court cannot find the necessary change in COMI.”)…²⁴ 

The latest and perhaps most aggressive application of the “lodging” approach postdates the most recent Collier update. In the case of In re Modern Land (China) Co., Ltd.²⁵, the court considered whether COMI could become lodged in the place of a foreign restructuring proceeding when the debtor remained in possession. The question was framed in the context of prior lodging decisions:

The Suntech court’s analysis and conclusion [520 B.R. 399, 419 (Bankr. S.D.N.Y. 2016)] that COMI was in the Cayman Islands was consistent with the Second Circuit’s analysis in Fairfield Sentry. In both cases, court-appointed fiduciaries assumed substantial control over the debtors’ liquidation (in the case of Fairfield Sentry) and scheme proceeding (in the case of Suntech). So, the question is whether the absence of court supervised fiduciaries, such as JPLs [joint provisional liquidators], requires a different result in finding COMI in the Cayman Islands in this case given that no JPLs were appointed. While this would be an easier case if JPLs had been appointed, the Court concludes that the Cayman court’s supervision of the Debtor’s Scheme Proceeding, in light of the other factors present here, is enough for the Court to conclude that the Debtor’s COMI for the proceeding involving the single class of Existing Note holders was in the Cayman Islands. (FN It would be ironic if a scheme proceeding, following the appointment of JPLs in a contentious case where JPLs were needed to facilitate agreement between the debtor and its creditors, was recognized as a foreign main proceeding, but in a case such as this one where the Debtor and its professionals successfully negotiated the RSA [restructuring support agreement] with overwhelming creditor support without the need to file a winding up petition and the appointment of JPLs before obtaining sanction of the Scheme could not be recognized as a foreign main proceeding.²⁶ 

The court later summarized its conclusion, adopting Judge Lifland’s “totality of the circumstances” formulation:

The Court recognizes the Debtor’s COMI in the Cayman Islands. Section 1516(c) provides that “[i]n the absence of evidence to the contrary, the debtor’s registered office ... is presumed to be the center of the debtor’s main interest.” 11 U.S.C. § 1516(c). Given the evidence in this case, the Court considers the totality of the circumstances before it, including the goals of Chapter 15, the Scheme Creditors’ expectations and intentions, the judicial role in the Cayman Scheme, the function of the Cayman Scheme Chairperson, the insolvency activities in the Caymans, Cayman choice of law principles and the Debtor’s good-faith petition for recognition of the Cayman Proceeding. Each of these factors function together to support a finding of COMI in the Cayman Islands.²⁷ 

V. Should We Abandon COMI?

A September 14, 2023 letter to the UNCITRAL Secretariat for the Insolvency Working Group (the “COMI Letter”) recommends that UNCITRAL jettison the COMI requirement and replace it with one of two alternative approaches: first, and preferred, is for an entity to designate in its organizational documents the place where an insolvency proceeding, if someday required, will be initiated; second, and denominated as “second-best”, is to permit a debtor to initiate an insolvency proceeding “in any jurisdiction that permits the initiation of insolvency proceedings by foreign companies.”²⁸ No further “legitimacy” test is required.

The perceived defects with the COMI requirement that inspired the letter are: a debtor may initiate an insolvency proceeding in the country of its COMI even if that country does not have an efficient insolvency system; the concept of COMI is far from clear, especially when a company may “have assets, creditors, subsidiaries, offices, employees and clients in many jurisdictions”; different stakeholders may have different views about the place of the debtor’s COMI; the concept of COMI may lead to opportunistic behavior by debtors who can move their COMI. All of these defects supposedly may lead to increased costs of credit.

The letter does not provide empirical support for its concerns. In addition, from the perspective of personal involvement in numerous cross-border cases, the following observations erode the problems conjured by the letter:

• The determination of COMI is not disputed in the vast majority of chapter 15 cases.
• When COMI is challenged, it is usually as part of the litigation strategy of a party who opposes recognition for strategic reasons having little to do with difficulties in determining COMI.
• In restructuring cases that involve significant amounts of capital market debt, parties consensually find a way to access the jurisdiction of a country whose laws enable restructuring if the debtor’s country of registration or operations is not hospitable.²⁹ Strategies include physically relocating COMI factors (such as headquarters, management, banking); designating or forming a subsidiary registered or otherwise eligible in a country with efficient restructuring laws and procedures to act as the debtor in the proceeding and knitting together the obligations to be restructured of that subsidiary with the obligations of the other members of the group; and changing governing law of debt instruments to the law of a restructuring- efficient country to establish a sufficient connection with that country.
• While disclosure documents in capital market financing transactions disclose insolvency risk factors³⁰ – along with a numbing assortment of other risk factors – there is not likely to be a significant effect on costs of credit. If credit were noticeably more expensive because of the borrower’s future insolvency venue, a new Finco would be formed to raise the money in a more acceptable jurisdiction.
• There is no reason to expect that the EU or countries that have adopted the Model Law will modify their regulations or laws to eliminate COMI even if UNCITRAL is persuaded by the COMI Letter. This will disrupt the harmony promoted by Model Law Article 8 and chapter 15, §1508.
  • Model Law Article 8 provides: “In the interpretation of this Law, regard is to be had to its international origin and to the need to promote uniformity in its application and the observance of good faith.” Section 1508 is substantively identical: “In interpreting this chapter, the court shall consider its international origin, and the need to promote an application of this chapter that is consistent with the application of similar statutes adopted by foreign jurisdictions.”
• The opportunities for opportunistic manipulation of forum selection and for strategic litigation over recognition issues will persist whether COMI remains or is replaced by one of the COMI Letter alternatives. Since the current structure seems to be working and the proposed structure is not self-evidently utopian, there is little to be gained by eliminating COMI as a requirement for recognition of a foreign main proceeding.

VI. Conclusion

COMI is an integral part of the law in the European Union through the EC Reg (and now the Recast Reg) as a test of the jurisdictional basis for a main proceeding. In the 62 jurisdictions that have adopted the Model Law on Cross-Border Insolvency, COMI tests legitimacy of a foreign main proceeding. It is unrealistic to expect that COMI would be abandoned by the EU, UNCITRAL and Model Law jurisdictions when there is no evidence that it is not serving its intended purpose, the defects speculated by the COMI Letter are non-existent, and the proposed revisions invite abuse. The COMI Letter should be allowed to pass away from natural causes.

 

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^[1] The following is adapted from a paper presented to the International Insolvency Institute on January 18, 2024 by Dan Glosband. Dan Glosband was the head delegate of the International Bar Association to the UNCITRAL Working Group that developed the Model Law on Cross-Border Insolvency. With Jay L. Westbrook, the chair of the U.S. Delegation and the Benno C. Schmidt Chair of Business Law at the University of Texas School of Law, he was part of the small drafting group the drafted the Model Law. Mr. Glosband and Professor Westbrook were the primary co-draftsmen of chapter 15.
^[2] The Model Law and the Guide to Enactment and Interpretation (“Guide”) are available at: https://uncitral.un.org/sites/uncitral.un.org/files/media-documents/uncitral/en/1997-model-law-insol-2013-guide-enactment-
^[3] 11 U.S.C. §§1501-1532.
^[4] Available at https://eur-lex.europa.eu/legal-content/EN/ALL/?uri=CELEX:32000R1346
^[5] Available at https://eur-lex.europa.eu/legal-content/EN/TXT/?uri=CELEX:32015R0848
^[6] Available at aei.pitt.edu/952/
^[7] Guide at ¶84.
^[8] EC Reg Recital 13; Recast Reg Recitals 23-31. The Recast Reg recognizes that the debtor’s COMI may be ambulatory: “When determining whether the centre of the debtor’s main interests is ascertainable by third parties, special consideration should be given to the creditors and to their perception as to where a debtor conducts the administration of its interests. This may require, in the event of a shift of centre of main interests, informing creditors of the new location from which the debtor is carrying out its activities in due course, for example by drawing attention to the change of address in commercial correspondence, or by making the new location public through other appropriate means.” Recital 28. But the place of registration does not apply if the debtor relocated its place of registration or principal place of business with three months prior to initiating insolvency proceedings. Recital 31.
^[9] Recast Reg Articles 3, 7.
^[10] Recast Reg Recitals 38-50.
^[11] Model Law article 16, chapter 15 §1516. The Recast Reg contains a similar presumption in Article 3, ¶1.
^[12] The relevant Working Group reports are, respectively, A/CN.9/419 1 December 1995 and A/CN.9. Both are available on the UNCITRAL website: https://uncitral.un.org/en/texts/insolvency/modellaw/cross-border_insolvency
^[13] Ultimately, the point was addressed in Article 17, ¶2(a).
^[14] Case law from other Model Law countries can be found at the UNCITRAL CLOUT (Case Law On Uncitral texts) website: https://uncitral.un.org/en/search/node/CLOUT .
^[15] Recast Reg Article 3.
^[16] Guide ¶159.
^[17] In re Fairfield Sentry Limited, 714 F.3d 127, 135.
^[18] Id. at 137
^[19] 613 B.R. 497 (Bankr. S.D.N.Y. 2019).
^[20] Id. at 246.
^[21] See In re Bear Stearns High-Grade Structured Credit Strategies Master Fund, Ltd., 374 B.R. 122, aff’d, 389 B.R. 325 (S.D.N.Y. 2008); In re Basis-Yield Alpha Fund (Master), 381 B.R. 37, 51–54 (Bankr. S.D.N.Y. 2008).
^[22] In re British American Ins. Co. Ltd., 425 B.R. 884, 914 (Bankr. S,D. Fla. 2010).
^[23] In re Fairfield Sentry Limited, 440 B.R. 60 (Bankr. S.D.N.Y. 2010), aff’d. 2011 WL 4357421 (S.D.N.Y. 2011), 714 F.3d 127 (2d Cir. 2013).
^[24] 8 Collier on Bankruptcy ¶1502.1. The author confesses to also being the author of the Collier chapter 15 materials.
^[25] 641 B.R. 768, 783 (Bankr. S.D.N.Y. 2022).
^[26] Id. at 783.
^[27] Id. at 786-787.
^[28] The COMI Letter is signed by professors Anthony J. Casey, Aurelio Gurrea-Martinez and Robert K. Rasmussen and appends a list of over 20 additional signatories.
^[29] See, e.g., In re In re Ocean Rig UDW Inc., 570 B.R. 687 (Bankr. S.D.N.Y. 2017)) (COMI relocated from Republic of Marshall Islands to the Cayman Islands); Codere Finance (UK) Ltd, [2015] EWHC 3778 (ch) (Spanish debtor “acquired” a UK subsidiary which successfully proposed a scheme of arrangement).
^[30] The Offering Memorandum for a $4 billion financing of Scenery Journey Limited (a BVI registered member of the China Evergrande Group) contained the following: “The insolvency laws of the British Virgin Islands, Hong Kong and other local insolvency laws may differ from U.S. bankruptcy law or those of another jurisdiction with which holders of the Notes are familiar. Because some of the Subsidiary Guarantors are incorporated under the laws of the British Virgin Islands, an insolvency proceeding relating to us or any such Subsidiary Guarantor, even if brought in the United States, would likely involve British Virgin Islands insolvency laws, the procedural and substantive provisions of which may differ from comparable provisions of United States federal bankruptcy law. In addition, we and our other Subsidiary Guarantors are incorporated or may be incorporated in Hong Kong and the insolvency laws of Hong Kong may also differ from the laws of the United States or other jurisdictions with which the holders of the Notes are familiar. We conduct substantially all of our business operations through PRC-incorporated subsidiaries in China. The Subsidiary Guarantors, as equity holders in our PRC subsidiaries, are necessarily subject to the bankruptcy and insolvency laws of China in a bankruptcy or insolvency proceeding involving any of such PRC subsidiaries. Any JV Subsidiary Guarantors that become equity holders of our PRC subsidiaries would also be subject to such laws. The PRC laws and regulations relating to bankruptcy and insolvency and the legal proceedings in that regard may differ significantly from those of the United States and other jurisdictions with which the holders of the Notes are familiar. You should analyze the risks and uncertainties carefully before you invest in our Notes.

 

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