In recent years there have been conflicting rulings by US courts on the question of the time at which the centre of main interests (COMI) of non-US debtors should be determined. This has cut against one of the primary goals of Chapter 15 of the Bankruptcy Code, namely provision of legal certainty in the US assistance of administration of cross-border insolvencies.
The ruling of the second US Circuit Court of Appeals (the Court) in the case of In the Matter of Fairfield Sentry Limited, Morning Mist Holdings Limited v. Kenneth Krys on 16 April 2013 (Fairfield) has resolved one particular uncertainty while retaining a versatile and open-ended approach to assessment of the criteria which govern Chapter 15 relief. This will be of particular importance to liquidators of offshore investment funds.
Chapter 15, in part, provides an automatic stay of US proceedings against a company (or individual) when Chapter 15 relief is granted to a liquidator (or a trustee in bankruptcy, if the debtor is an individual) who is appointed in foreign main proceedings. Such a stay is of particular importance to non-US debtors susceptible to US proceedings. Whether the non-US insolvency proceedings qualify as foreign main proceedings is determined by reference to whether those proceedings were initiated in the jurisdiction in which the debtor has its COMI. If it is found that the insolvency proceedings have been commenced in a "foreign non-main jurisdiction" (i.e. not where the debtor's COMI is located) then recognition is not automatic and a stay may only be granted at the Court's discretion.
US judges in various cases have been presented with arguments that COMI should be determined (a) through reference to the entire operational history of the debtor (which can be decades of business activity); (b) at the date of the commencement of the foreign insolvency proceeding; or (c) at the date of presentation of the petition for Chapter 15 relief. In Fairfield, the appellant shareholder (Morning Mist Limited) submitted, in aid of an argument that the COMI of the company was in New York, that it was necessary to take into account the operational history of the debtor in order to determine Fairfield's COMI. The Court rejected the shareholder's submission and also rejected the proposition (which found support in the case of Millennium Global Emerging Credit Master Fund, a decision of Judge Gropper in 2011) that the date at which the assessment of factors relevant to determine COMI should be assessed was the date of commencement of the foreign insolvency proceeding. Instead, the Court in Fairfield held that the time at which COMI was to be assessed was at or around the date of the filing of the Chapter 15 petition, but with a 'backwards glance' to activity in the period since commencement of the foreign proceeding, to ensure that the debtor has not manipulated its COMI in bad faith (for the purpose of forum shopping). This ruling is consistent with the language of the Bankruptcy Code (COMI is referred to in the present tense - the place where the debtor 'has' its COMI), which the Court in Fairfield affirmed to be the place as at the time of issue of the Chapter 15 petition.
The ruling brings much-needed certainty to the temporal question involved in determining COMI and, in consequence, will, in future cases, bring greater certainty about whether the stay on proceedings will be automatic or require further application. This certainty was not, however, at the expense of flexibility; the Court affirmed that US Courts can assess whether debtors have engaged in any manipulation or 'gaming' of the system by strategically seeking to shift COMI after issue of the insolvency process. There is little guidance from the Court, however, as to what may constitute such manipulation (though in an earlier Fairfield ruling, the moving of bank accounts, taking office space and hiring employees, was held not to be manipulation) and this is an area therefore to develop.
Indeed, the Court seems to have recognised more generally that the "open-endedness" of the term (COMI) invites development "without prescription or limitation" and confirmed that a broad and flexible approach should be taken to consideration of COMI-relevant factors that are present at the time the Chapter 15 petition is filed. It therefore remains to be seen, in future cases, how effective the 'backwards glance' will be to prevent forum shopping. It is likely further case law will be needed, in particular before it is clear what kinds of behaviour will be considered manipulative. In the meantime, however the Fairfield ruling is at least to be welcomed as a clear and authoritative statement of the timing of determination of COMI, which will be of significance to liquidators and stakeholders of non-US investment funds susceptible to US proceedings.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
