Offshore, But Not Off-Center

Determining the COMI

Although the Model Law contains a presumption that the place of a debtor company's registered office is its COMI, there is no definition of COMI or express reference to the point in time at which it must be determined. However, U.S. Courts have historically held that the appropriate time for determination of the COMI is the filing date of the petition for relief under Chapter 15 (See In re Ran, 607 F.3d 1017, 1025 (5th Cir. 2010), In re Betcorp Ltd., 400 B.R. 884, 290-92 (Bankr. D. Nev. 2009), In re British American Ins. Co. Ltd., 425 B.R. 884, 909-11, In re Fairfield Sentry, 440 B.R. 60 (Bankr. SDNY, 2010)).

Millenium

In Millennium, in which Bermudian liquidators sought recognition in New York, the U.S. Bankruptcy Court instead used the date of the commencement of the foreign insolvency proceedings, and criticized the use of the petition filing date for that purpose. The Judge dismissed the concern expressed in In re Ran and In re Betcorp Ltd. that an earlier date would result in a “meandering enquiry” and decided that there was no suggestion that the court should use an indeterminate date in the past, but rather that regard should be had to the specific date of the commencement of the existing foreign proceedings.

If followed, this approach would unify the application of Chapter 15 with the regime laid down by Council Regulation (EC) 1346/2000 (the “EU Regulation”). This ought not to come as any surprise given that the UNICTRAL Guide to Enactment for the Model Law refers to the term “center of main interests” as corresponding to the formulation in Article 3 of the European Union Convention on Insolvency Proceedings. Indeed the UNCITRAL Practice Guide (20 July 2011) acknowledges the trend of authority defining the COMI as “the place where the debtor conducts the administration of its interest on a regular basis and that is therefore ascertainable by third parties.” This formulation reflects the language in the EU Regulation discussed in In re Eurofood IFSC Ltd. [2006] 1 Ch 508, which was approved in both the U.S. case, In re SPhinX Ltd. 351 B.R. 103 (Bankr. SDNY, 2006) (upheld on appeal 371 B.R. 10 (Dist. SDNY 2007) and the English case, In Re Stanford International Bank Ltd. [2010] EWCA Civ 137.

However it will also likely mean that steps taken by offshore liquidators after appointment, but before the Chapter 15 petition, may not be effective in “shifting” COMI offshore in the absence of sufficient business being conducted in the offshore jurisdiction prior to appointment of the offshore liquidators.

Courts applying the Model Law are required to have regard to its “international origin and to the need to promote uniformity in its application and the observance of good faith” in its interpretation. See Article 8 of the Model Law. As the Judge in Millennium rightly points out, the timing issue does not arise with respect to proceedings under EU Regulation because the existing insolvency case in another member state must be recognized (be it, as a “main or territorial” proceeding) and therefore the important date under the EU Regulation is the date upon which the first proceedings are commenced.

Next month, we will discuss the case in depth.

Joanne Collett and Martin Ouwehand are members of the Litigation & Insolvency practice group of Appleby. Collett, who has practiced insolvency and bankruptcy law in both Australia and New York, is now resident in the Cayman Islands and represents clients primarily in relation to contentious and non-contentious insolvency matters. Ouwehand is resident in Bermuda and focuses on commercial litigation, particularly in matters involving urgent interim relief, corporate law, shareholder and partnership disputes, insolvency and commercial goods and services.

The recent insolvencies of offshore-based mutual funds have presented challenges for international comity when it comes to the complex issues of cross-border insolvency. One of the most important challenges is the degree to which the courts of one jurisdiction will recognize and assist the representatives of insolvency proceedings in another jurisdiction. This is particularly important in the context of offshore funds, which typically have investments, investment managers and investors located throughout the world, including the United States. This article considers recent developments in the approach of the U.S. Bankruptcy Courts to the recognition of insolvency proceedings commenced with respect to funds in foreign offshore jurisdictions; and in particular the approach taken in the recent case of Millennium Global Emerging Credit Master Fund Limited (SDNY 11-13171, Gropper J, 26 Aug. 2011).

The Model Law

The UNCITRAL Model Law on Cross Border Insolvency (the Model Law) deals with the recognition of foreign insolvency proceedings by reference to the location of the insolvent debtor's Center of Main Interest (or “COMI”) or an “Establishment.” The United States enacted the Model Law in Chapter 15 of the U.S. Bankruptcy Code. Under the Model Law a foreign insolvency proceeding may be recognized as a “foreign main proceeding” if it is pending in the country where the debtor has its COMI. Recognition as a foreign main proceeding confers certain powers on the foreign representative and protections for the proceeding, as of right, in contrast to the alternatives, namely recognition as a foreign nonmain proceeding (where there is an establishment) or no recognition at all (where there is neither COMI nor an establishment).

Determining the COMI

Although the Model Law contains a presumption that the place of a debtor company's registered office is its COMI, there is no definition of COMI or express reference to the point in time at which it must be determined. However, U.S. Courts have historically held that the appropriate time for determination of the COMI is the filing date of the petition for relief under Chapter 15 (See In re Ran, 607 F.3d 1017, 1025 (5th Cir. 2010), In re Betcorp Ltd., 400 B.R. 884, 290-92 (Bankr. D. Nev. 2009), In re British American Ins. Co. Ltd., 425 B.R. 884, 909-11, In re Fairfield Sentry, 440 B.R. 60 (Bankr. SDNY, 2010)).

Millenium

In Millennium, in which Bermudian liquidators sought recognition in New York, the U.S. Bankruptcy Court instead used the date of the commencement of the foreign insolvency proceedings, and criticized the use of the petition filing date for that purpose. The Judge dismissed the concern expressed in In re Ran and In re Betcorp Ltd. that an earlier date would result in a “meandering enquiry” and decided that there was no suggestion that the court should use an indeterminate date in the past, but rather that regard should be had to the specific date of the commencement of the existing foreign proceedings.

If followed, this approach would unify the application of Chapter 15 with the regime laid down by Council Regulation (EC) 1346/2000 (the “EU Regulation”). This ought not to come as any surprise given that the UNICTRAL Guide to Enactment for the Model Law refers to the term “center of main interests” as corresponding to the formulation in Article 3 of the European Union Convention on Insolvency Proceedings. Indeed the UNCITRAL Practice Guide (20 July 2011) acknowledges the trend of authority defining the COMI as “the place where the debtor conducts the administration of its interest on a regular basis and that is therefore ascertainable by third parties.” This formulation reflects the language in the EU Regulation discussed in In re Eurofood IFSC Ltd. [2006] 1 Ch 508, which was approved in both the U.S. case, In re SPhinX Ltd. 351 B.R. 103 (Bankr. SDNY, 2006) (upheld on appeal 371 B.R. 10 (Dist. SDNY 2007) and the English case, In Re Stanford International Bank Ltd. [2010] EWCA Civ 137.

However it will also likely mean that steps taken by offshore liquidators after appointment, but before the Chapter 15 petition, may not be effective in “shifting” COMI offshore in the absence of sufficient business being conducted in the offshore jurisdiction prior to appointment of the offshore liquidators.

Courts applying the Model Law are required to have regard to its “international origin and to the need to promote uniformity in its application and the observance of good faith” in its interpretation. See Article 8 of the Model Law. As the Judge in Millennium rightly points out, the timing issue does not arise with respect to proceedings under EU Regulation because the existing insolvency case in another member state must be recognized (be it, as a “main or territorial” proceeding) and therefore the important date under the EU Regulation is the date upon which the first proceedings are commenced.

Next month, we will discuss the case in depth.

Joanne Collett and Martin Ouwehand are members of the Litigation & Insolvency practice group of Appleby. Collett, who has practiced insolvency and bankruptcy law in both Australia and New York, is now resident in the Cayman Islands and represents clients primarily in relation to contentious and non-contentious insolvency matters. Ouwehand is resident in Bermuda and focuses on commercial litigation, particularly in matters involving urgent interim relief, corporate law, shareholder and partnership disputes, insolvency and commercial goods and services.