The first major legal instrument dealing with cross-border insolvencies in the European Union (EU) has been the European Insolvency Regulation (EIR 2000). It was adopted in 2000 and entered into force in 2002. Directly applicable in all Member States (except Denmark), it contained uniform rules on international insolvency jurisdiction, recognition of insolvency judgments, applicable law in insolvency matters and cooperation in insolvency proceedings running parallel in several Member States.
Despite the initial doubts, the EIR 2000 turned out to be an effective tool in dealing with cross-border insolvencies within the EU. The Court of Justice of the EU (CJEU) has played a particularly active role in ensuring its efficiency by clarifying many of its concepts, including ‘centre of main interests’ (COMI), ‘establishment’ and ‘related action’. Nevertheless, as more than ten years had passed since the EIR 2000 took effect, it became clear that further improvements were necessary to better fit the current business and technological trends. This led to the adoption of a new European Insolvency Regulation (EIR Recast), which has been in effect since 26 June 2017. Although the EIR Recast does not change the fundamentals of the EIR 2000, it elaborates some of the existing rules and introduces new ones. For instance, the EIR Recast enhanced the application of the COMI presumption for the purpose of reducing abusive insolvency forum shopping (Article 3).
The concept of COMI is well-known and, in addition to the EIR Recast, is used in the UNCITRAL Model Law on Cross-Border Insolvency (Model Law) and the Convention on International Interests in Mobile Equipment (Cape Town Convention, 2001), even though for different reasons. In the EIR Recast framework, COMI determines international insolvency jurisdiction, i.e. the jurisdiction in which main insolvency proceedings can be opened. The Model Law provides for different effects (relief) upon recognition, depending on whether a foreign proceeding is main or non-main. In a recent article, published in the American Bankruptcy Institute Journal, we discuss how initially originating from the same roots, the concept of COMI has been interpreted differently under the EIR Recast and Chapter 15 of the U.S. Bankruptcy Code which is based on the UNCITRAL Model Law. Such divergence is especially evident in the treatment of the registered office presumption.
The starting point is the same: both the EIR Recast (Article 3) and Chapter 15 (11 USC § 1516(c)) presume that the debtor’s registered office coincides with its COMI. However, European courts have set a rather high bar for the rebuttal of the presumption and require the applicant to provide sufficient evidence that COMI is somewhere else (see e.g. LG Berlin, 84 T 2/18, Jan. 8, 2018, Zeitschrift für Wirtschafstrecht und Insolvenzpraxis (ZIP), 2018, 140). By contrast, the US courts treat the presumption as merely indicative for ‘speed and convenience in instances in which the COMI is obvious and undisputed’ (Creative Fin. Ltd. (In Liquidation), 543 B.R. 514-15 (Bankr. S.D.N.Y. 2016). This latter approach benefits from its inherent flexibility, allowing for better consideration of the economic reality (e.g. in cases of corporate groups). However, the same flexibility may prove damaging for certainty and predictability of court determinations. In practice, simultaneous application of the divergent and conflicting COMI tests opens the door to forum shopping, jurisdictional conflicts and even situations in which the COMI of the same company is found in different states at the same time. This is exactly what happened in the case of the Oi Group, Brazil’s largest fixed-line telecoms operator, when a Dutch member of the Oi Group ended up having two COMIs: (1) as part of the group of companies undergoing restructuring in Brazil; and (2) as a separate entity falling under distinct insolvency proceedings in the Netherlands.
Two other notable distinctions between the EIR Recast and Chapter 15 concerning COMI should be mentioned. The first one relates to timing, i.e. the reference date at which COMI must be determined; for example, whether this should be the date when the (foreign) insolvency proceeding is commenced, or the date when the filing for the recognition of such a proceeding in the US is made. These two moments in time can be separated by days, months or years. Under the EIR Recast, COMI is identified at the moment when an insolvency application has been filed. By contrast, the US courts have repeatedly concluded that COMI should be determined at the time or around the time the Chapter 15 petition is filed, without inquiry into a debtor’s entire operational history (Morning Mist Holdings Ltd v. Krys (Re Fairfield Sentry Ltd) 714 F.3d 137 (2d Cir. 2013). While the court may consider the period between the commencement of the foreign insolvency proceeding and the filing of the Chapter 15 petition, this remains discretionary and principally targets bad faith (abusive) COMI manipulations. Thus, even if the court in the EU Member State is persuaded that the debtor’s COMI is in its jurisdiction (e.g. in May 2018), the US court faced with the petition for recognition can come to a different conclusion, taking into account the facts existing around the time of the Chapter 15 filing (e.g. in January 2019). The need to align the approach under Chapter 15 with that of the EIR Recast has recently been suggested by the National Bankruptcy Conference, a not-for-profit organization composed of the US bankruptcy judges, law professors and practitioners.
The second distinction relates to the issue of recognition. The EIR Recast provides for the immediate recognition of judgments concerning the opening, conduct and closure of insolvency proceedings which fall within its scope, and of judgments handed down in direct connection with such insolvency proceedings (Recital 65). The only and exceptional ground to refuse recognition is where the effects of such recognition or enforcement would be manifestly contrary to the recognizing state’s public policy (Article 33). Importantly, within the European insolvency framework, courts cannot second-guess the correctness of decisions rendered by courts of other Member States, including their conclusion as to the debtor’s COMI or establishment (jurisdictional facts). Opposition to the jurisdiction of the court, which has opened insolvency proceedings, is only admissible in the jurisdiction of that court.
In line with the Model Law, recognition of foreign insolvency proceedings in the US is not automatic and requires an application by a foreign representative pursuant to Chapter 15 (11 USC § 1515). Unlike their EU counterparts, US courts review the jurisdiction of the originating court to decide whether to recognize the foreign proceeding as a foreign main or a foreign non-main proceeding. Only a foreign main proceeding or a foreign non-main proceeding meeting the standards of § 1502 of the Bankruptcy Code is entitled to recognition (In Re Bear Stearns High-Grade Structured Credit Strategies Master Fund Ltd, 389 B.R. 325 (Bankr. S.D.N.Y. 2008). Thus, if the foreign proceeding (according to a US judge) does not satisfy the criteria (definitional requirements) of either main or non-main proceedings, the recognition should be denied. This approach has recently been confirmed in the case of Natalia Pirogova, a Russian citizen, against whom insolvency proceedings were opened in Russia in 2015. Dismissing the Russian trustee’s Chapter 15 petition, the US court reasoned that the trustee failed to adduce sufficient evidence for the court to conclude that the debtor’s COMI or establishment was in Russia as of the petition date (In re Natalia Pirogova, Case No. 18-10870 (SCC) (Bankr. S.D.N.Y. 2018).
From this short analysis of the approaches to COMI under the EIR Recast and Chapter 15, it is evident that consensus is largely missing. We argue that predictability and legal certainty of the effects and costs related to a debtor’s insolvency should be reconsidered and, indeed, ‘reinvented’ as the goal that the concept of COMI was originally created to serve. Ascertainability of COMI is crucial, since a COMI-forum usually determines the law applicable to insolvency proceedings (lex concursus), their effects on rights and duties of a debtor and its creditors (e.g. ranking of creditors). Creditors need certainty to calculate the investment risks, as well as the risk-premiums charged, while the debtor profits from low risk premiums. The achievement of such ascertainability may require harmonization of COMI standards, which will lead to better calculable results, and help avoid multiplication of COMIs. The emerging harmonization of the concept of ‘main insolvency proceeding’ (and therefore of ‘COMI’) contained in the European Convention (the predecessor of the EIR) and the Model Law was highlighted by the Guide to Enactment of the Model Law of 1997 (see para. 31).
Another solution rests with improved cross-border cooperation and coordination in international insolvencies. Recent years have witnessed the rise of multiple initiatives aimed at improving cooperation and communication in international insolvencies. These initiatives have resulted in several soft law guidelines, including the European Communication and Cooperation Guidelines for Cross-Border Insolvency (2007; a revision is due in 2019), ALI-III Guidelines Applicable to Court-to-Court Communications in Cross-Border Cases (updated version from 2012), the EU Cross-Border Insolvency Court-to-Court Communications Principles and Guidelines (2014) and the Judicial Insolvency Network (JIN) Guidelines for Communication and Cooperation between Courts in Cross-Border Insolvency Matters (2016).
The discussed article originates from the new book ‘European Union Regulation on Insolvency Proceedings: An Introductory Analysis’ (Fourth Edition), 2018, written by the authors for the American Bankruptcy Institute (ABI). This book describes the framework of the EIR Recast. It reviews the EIR Recast’s major rules, highlights the differences from the European Insolvency Regulation of 2000, and makes references to the most important and recent cases of the CJEU. The book has been written by the authors as a guide for judges, practitioners, scholars and students who are confronted with this domain of the law, as well as anyone dealing with Europe-related cross-border cases.
Bob Wessels is Emeritus Professor of international insolvency law at Leiden University.
Ilya Kokorin is Lecturer in international insolvency and comparative corporate law at Leiden University.