Chapter 15 of the US Bankruptcy Code2 (Chapter 15) is based upon the UNCITRAL Model Law on Cross-Border Insolvency3 and provides the framework for how a US bankruptcy court will treat a plenary foreign insolvency proceeding. Among other things, the purpose of Chapter 15 is to ‘provide effective mechanisms’ for cooperation between US and foreign courts, greater legal certainty and ‘fair and efficient administration of cross-border insolvencies’.4 To the extent that the debtor has a jurisdiction in which a plenary proceeding can be successfully effectuated, Chapter 15 provides the pathway for recognition of the proceeding and, potentially, of the restructuring order in the foreign proceeding itself.
A company’s centre of main interest (COMI) is a concept foreign to many US-centric restructuring practitioners, because a COMI is not normally relevant to a plenary proceeding under Chapter 11 of the US Bankruptcy Code. However, understanding the COMI of a company is fundamental to understanding what relief, if any, a US court will grant in an ancillary proceeding under Chapter 15. This chapter will discuss the concept of a COMI in the context of Chapter 15 and the circumstances in which a company may, and may wish to, shift or migrate its COMI.
In order for a foreign insolvency proceeding to be recognised in a US ancillary proceeding under Chapter 15, it must either be a ‘foreign main proceeding’ or a ‘foreign non-main proceeding’. A foreign main proceeding is a proceeding pending in the country where the debtor has its COMI.5 A foreign non-main proceeding on the other hand, is defined as a ‘foreign proceeding other than a foreign main proceeding, pending in a country where the debtor has an establishment’.6 Finally, a debtor’s ‘establishment’ is ‘any place of operations where the debtor carries out a nontransitory economic activity’.7 Commentators have taken this latter definition of establishment and compared it to similar regulations in the European Union regulations, providing colour on two elements.8 These elements include (1) a ‘place of operations’, which requires the debtor to have more than the mere presence of assets and (2) a ‘non-transitory economic activity’, which requires a certain level and appearance of stability.9 A debtor can therefore have many places where it maintains an establishment, so long as it has a place of operations with sufficiently stable economic activity, but it can only maintain a single COMI.10 Upon recognition of a foreign proceeding as a ‘main’ proceeding, Chapter 15 allows debtors automatically to take advantage of certain protections found in Section 1520 of the US Bankruptcy Code, including granting an immediate and automatic stay on litigation and collection actions in the US.11
i COMI factors
Determining a debtor’s COMI requires a factual inquiry by the US court. The US Bankruptcy Code states that ‘in the absence of evidence to the contrary, the debtor’s registered office…is presumed to be’ its COMI.12 Despite this presumption, if evidence is presented to the contrary, the determination of a debtor’s COMI is made only after a court ‘consider[s] all of the relevant facts’.13 Factors that courts have considered include:
the location of the debtor’s headquarters, the location of those who actually manage the debtor (which conceivably could be the headquarters of a holding company); the location of the debtor’s primary assets; the location of the majority of the debtor’s creditors or of a majority of the creditors who would be affected by the proceedings; and/or the jurisdiction whose law would apply to most disputes.14
Ultimately, the ‘party seeking recognition as a foreign main proceeding has the burden of proving that the debtor’s COMI is in the jurisdiction where the foreign main proceeding is pending’.15
ii Neither a main nor a non-main proceeding
Importantly, debtors must consider the possibility that a particular foreign proceeding may not be designated, for the purposes of Chapter 15, as either a main or a non-main proceeding, a result that could prevent the foreign proceeding from being recognised at all.
Perhaps the most well-known case in which this issue was addressed is In re Bear Stearns, which is actually two related cases decided in the Southern District of New York in 2008.16 In Bear Stearns the debtors were limited liability investment companies registered in the Cayman Islands and subject to Cayman Island tax law. Following a discussion of the business activities of the companies in order to evaluate their COMI and whether they had an ‘establishment’ in the Cayman Islands, the Court found that the companies met neither.17 The Court held that merely being registered in a country was insufficient to meet the requirements of COMI if other factors suggested the COMI was elsewhere, and that by solely conducting activity in the Cayman Islands necessary to the companies’ offshore businesses, they were not established in the Cayman Islands.18
Earlier this year, a similar fate befell the debtors in In re Creative Finance Ltd.19 Creative Finance and Cosmorex were British Virgin Islands (BVI) entities that did most of their business in the UK and directed their operations from Spain and Dubai. The debtors appointed a liquidator to file a liquidation in the BVI, but only funded the liquidator enough to perform minimal statutory functions. A frustrated creditor sought to execute in the United States on the debtors’ only remaining material asset (an unsecured claim in a US bankruptcy), whereupon the BVI liquidator filed a Chapter 15 case.
The Court held that the COMI of a debtor in liquidation could move to the site of liquidation, if the liquidator conducts sufficient activities in the new location in support of the liquidation.20 However, on the facts presented, the court refused to recognise the BVI as the COMI, writing:
[t]hough managing a liquidation requires less effort than running an active business, here even the most basic activities – such as getting bank records, ledgers, journals and backup documents for cash receipts and expenditures – were not undertaken. Nor were available financial records analyzed except in the most perfunctory manner. And the failure to pursue, by more than a single, hesitant e-mail, the disappearance of $9.5 million – the entirety of the Debtors’ liquid assets – further reinforces the Court’s finding of how minimal the Liquidator’s efforts were here.21
The Court went on to state that ‘the Debtors never conducted any nontransitory economic activity in the BVI; did not conduct business in the BVI; and never had a seat for local business activity in the BVI’ as justification for its refusal to recognise the BVI liquidation as even a non-main proceeding.22
These cases are troubling for debtors seeking comfort that Chapter 15 protections will be available to their insolvency proceedings in some capacity and at odds with some case law that suggested US courts should take an inclusive view in recognising a proceeding either as main or non-main.23
In light of this uncertainty, US restructuring professionals frequently are asked to analyse whether the debtor has its COMI or an establishment in a jurisdiction where a plenary proceeding will accomplish a successful restructuring. If not, a question arises as to whether action can to be taken to shift or migrate the debtor’s COMI to a jurisdiction where an effective plenary proceeding can be commenced.
COMI-migration prior to commencement of a Chapter 15 proceeding is possible in large part because of the time frame in establishing a debtor’s COMI expressed by In re Bear Stearns and subsequently adopted (with an important caveat) in the 2013 decision of the United States Court of Appeals for the Second Circuit, In re Fairfield Sentry. 24
In Fairfield Sentry, the debtor was the largest feeder fund that invested with Bernard L Madoff Investment Securities LLC. The debtor fund was organised in the BVI where it also had, inter alia, a registered office, agent, secretary and corporate documents located. Following Madoff’s arrest, the debtor began to wind down its interests and commenced liquidation proceedings in the BVI. During the proceedings, the debtor’s BVI-based agent organised over 40 board meetings and the debtor kept its investors advised using correspondence that originated in the BVI.
When the debtor filed a Chapter 15 case in New York, the court determined that its COMI was the BVI and issued an automatic stay on all other filings then pending in the US. On appeal, the Second Circuit Court of Appeals considered the appropriate time frame for determining a debtor’s COMI and concluded that ‘a debtor’s COMI is determined as of the time of the filing of the Chapter 15 petition’ but that, in instances where a debtor is seeking to manipulate its COMI, ‘a court may also look at the time period between the initiation of the foreign liquidation proceeding and the filing of the Chapter 15 petition’.25
Other debtors have also had success in New York courts establishing COMI after COMI-migration prior to a Chapter 15 proceeding, perhaps most notably in In re Suntech.26 Suntech was incorporated in the Cayman Islands, but historically listed the location of its principal executive offices in China. Its principal American subsidiary, Suntech America, was incorporated and based in the United States. Suntech negotiated with a group of bondholders to restructure its debt through a scheme of arrangement in the Cayman Islands and a Chapter 15 proceeding.
After commencement of proceedings in the Cayman Islands, a Cayman Islands court placed Suntech into a provisional liquidation proceeding and appointed joint provisional liquidators. The joint provisional liquidators changed Suntech’s principal address from China to the Cayman Islands, opened a Cayman Islands bank account, took physical possession of Suntech’s subsidiaries’ stock certificates, held several board meetings in the Cayman Islands and generally began to wind up Suntech’s affairs. The court found that these actions were in furtherance of the legitimate goal of efficiently winding up Suntech and had the effect of migrating COMI to the Cayman Islands as of the date of the Chapter 15 filing.27
While courts may be reluctant to rubber stamp forum shopping through COMI-migration,28 recent cases provide a roadmap that US restructuring professionals will evaluate in analysing the appropriate restructuring solution for a multinational company. However, even New York courts have not reached a consensus as to how much can be done immediately leading up to the filing of a Chapter 15 petition and still have the resulting COMI respected. Instead, courts have shown that they may consider the motivations and good faith of a debtor in migrating its COMI and, in the cases discussed above, the courts did exactly that. The court in Fairfield Sentry considered and found no opportunism on the part of the debtor29 while the court in In re Suntech found that actions ‘motivated, at least in part, to bolster the contention that the Cayman Islands was the Debtor’s COMI’ and that had the effect of doing so, were not in bad faith.30
Looking at factors considered by the cases detailed above, among others, a debtor seeking to migrate its COMI and have its foreign proceeding recognised by a US court should, in addition to formally moving its place of incorporation and thereby creating a rebuttable presumption in favour of that jurisdiction, consider conducting a variety of legitimate activities in the debtor’s new COMI in advance of a Chapter 15 filing, including:
a maintenance of books and records;
b hiring of employees;
c hiring of outside professionals;
d maintenance of a physical location;
e conducting regulatory actions;
f publishing notice of an address change;
g notifying its creditors and regulators of its address change;
h holding board meetings;
i appointing board members residing in the new COMI; and
j investigating and pursuing legal claims in the jurisdiction of the new COMI.
Importantly, any and all actions will be evaluated for good faith, and the business goal of an orderly liquidation or efficient wind up of the enterprise is an important first step in meeting this good faith threshold.
US restructuring professionals increasingly find themselves in the position of addressing the US aspects of multi-jurisdictional restructurings of global enterprises. Understanding how plenary US Chapter 11 proceedings and Chapter 15 ancillary proceedings can fit into that global framework are critical skills. Even a company with minimal US contacts can benefit from Chapter 15 recognition of its main insolvency proceedings and non-US restructuring schemes or plans. Procedurally, accurate COMI analysis and use of legitimate and timely COMI-migration strategies can open the door to Chapter 15 relief for companies that might not otherwise be able to avail themselves of the protections of Chapter 15.
1 Donald S Bernstein, Timothy Graulich and Darren S Klein are partners, and Christopher S Robertson is an associate, at Davis Polk & Wardwell LLP.
2 Title 11 of the United States Code, as now in effect or hereafter amended.
3 United Nations Commission on International Trade Law (UNCITRAL) Model Law on Cross-Border Insolvency, 30 May 1997, www.uncitral.org/pdf/english/texts/insolven/insolvency-e.pdf.
4 11 U.S.C. § 1501(a).
5 11 U.S.C.A. § 1502(4).
6 11 U.S.C.A. § 1502(5).
7 11 U.S.C.A. § 1502(2).
8 See, for example, Alesia Ranney-Marinelli, Overview of Chapter 15 Ancillary and Other Cross-Border Cases, 82 Am. Bankr. L.J. 269 (Spring 2008).
9 Id. at 296.
10 See, for example, In re Ran, 390 B.R. 257, 263 (Bankr. S.D. Tex. 2008) aff’d, 406 B.R. 27 (S.D. Tex. 2009).
11 11 U.S.C.A. §§ 1520-21.
12 11 U.S.C.A. § 1516(c).
13 See, In re Gerova Fin. Grp., Ltd., 482 B.R. 86, 91 (Bankr. S.D.N.Y. 2012) (citing In re Fairfield Sentry Ltd., 714 F.3d 127 (2d Cir. 2013)).
14 Id. (Citing In re Millennium Global Emerging Credit Master Fund Ltd., 474 B.R. 88, 92 (S.D.N.Y.2012)).
15 In re OAS S.A., 533 B.R. 83, 101 (Bankr. S.D.N.Y. 2015) (citing In re SPhinX, Ltd., 351 B.R. 103, 117 (Bankr. S.D.N.Y. 2006)).
16 In re Bear Stearns, 374 B.R. 122 (Bankr. S.D.N.Y. 2007), aff’d, 389 B.R. 325 (S.D.N.Y. 2008).
17 Id. at 133.
18 Id. at 131.
19 543 B.R. 498, 520 (Bankr. S.D.N.Y. 2016).
20 Id. at 520.
21 Id. at 511.
22 Id. at 512.
23 See In re SPhinX, Ltd., 351 B.R. 103, 122 (S.D.N.Y. 2006) aff’d, 371 B.R. 10 (S.D.N.Y. 2007) (‘where so many objective factors point to the Cayman Islands not being the Debtors’ COMI, and no negative consequences would appear to result from recognizing the Cayman Islands proceedings as nonmain proceedings, that is the better choice’).
24 714 F.3d 127 (2d Cir. 2013).
25 Id. at 134.
26 In re Suntech Power Holdings Co. Ltd., 520 B.R. 399 (Bankr. S.D.N.Y. 2014).
27 Id. at 419.
28 See, for example, In re Millennium Global Emerging Credit Master Fund Ltd., 458 B.R. 63, 75 (Bankr. S.D.N.Y. 2011) aff’d, 474 B.R. 88 (S.D.N.Y. 2012)(‘Use of chapter 15 petition date as the date for determining recognition also leads to the possibility of forum shopping, as it gives prima facie recognition to a change of residence between the date of opening proceedings in the foreign nation and the chapter 15 petition date.’).
29 In re Fairfield Sentry at 139 (‘There was no finding of bad-faith COMI manipulation: “the record here as to the relevant time period…does not support a finding of an opportunistic shift of the Debtor’s COMI or any biased activity or motivation to distort factors to establish a COMI…”’).
30 In re Suntech Power Holdings Co., Ltd., at 420.