Forum Shopping, Portable COMI, and the Lessons of Wind Hellas, Jones Day Business Restructuring Review
No two recessions are the same. The current recession is the first one since the effective date of the EC Regulation on Insolvency Proceedings (the "Insolvency Regulation"). It offers the potentially exciting and dramatic ability for an individual or company facing financial disaster to open up an atlas and take a good, hard look at a map of Europe, then rush to the country where the debtor can best restructure or where it is best for the debtor to declare bankruptcy or enter into a formal insolvency procedure. In legal terms, this occurs by a process known as "center of main interests migration," or "COMI migration." One recent example of COMI migration occurred in the Wind Hellas case, which attracted a great deal of colorful press coverage involving accusations that England had become a "brothel for bankrupts." In this article, we examine the reasons for COMI migration, how it was achieved in the Wind Hellas case, whether England is in fact a bankruptcy brothel and, if so, whether being so is a bad thing.
COMI migration is one example of "forum shopping." The wealthy have long taken their pick of where they live, pay their taxes, and divorce. U.S. companies have long favored incorporating in Delaware even though they may do no business there. In a similar vein, England has been a popular venue for bringing libel actions and (according to English restructuring professionals) offers an ideal environment in which to restructure a company due to its respected body of insolvency legislation and associated case law, its trusted and impartial judiciary, its developed rescue culture, and the depth and breadth of its restructuring experience and expertise. Compared to many nations, England is arguably both a creditor- and debtor-friendly country for those seeking to restructure their financial liabilities, even if they have had little connection with the country before. Wind Hellas certainly shared this view.
Wind Hellas is one of Greece's largest telecom groups, with more than 5 million customers, 400 stores in Greece, and revenue exceeding €1 billion a year. In the summer of 2009, a Luxembourg-registered entity, Hellas Telecommunications (Luxembourg) II S.C.A ("HTL"), which held the group assets (comprising shares in operating companies), migrated its COMI (but not its registered office) from Luxembourg to London. (HTL was a hybrid between a company and a partnership that has no equivalent under English law.) Three months later, it applied to the English court for an administration order (the purpose of the administration being a better realization of assets for creditors than would be achieved by a liquidation). In a short judgment delivered on November 26, 2009, but not published until considerably afterward, the court held that HTL had successfully moved its COMI to England and could therefore make use of the U.K. administration procedure as a "main" insolvency proceeding for the purposes of the Insolvency Regulation. This in turn enabled HTL (acting through its court-appointed administrators) to effect a prepackaged sale of its assets that was later approved by the court.
HTL's COMI migration may seem a curious decision in the midst of its financial problems. It is unlikely that the decision to migrate was made with an aim toward benefiting HTL's business or streamlining operations. In fact, the move appears to have been clearly contrived with the sole motive of effecting an efficient and expeditious sale (by means of an English prepackaged administration) of the group assets to the successful bidder (which was part of the Wind Hellas group) following a marketing exercise. Presumably, this option was not available in either Luxembourg or Greece. It should come as no surprise that the English court expressed no concerns as to whether genuine commercial or business reasons existed for moving the COMI. There is, after all, nothing in the Insolvency Regulation limiting the reasons that a debtor may elect to move its COMI, nor is there any prohibition on moving a COMI purely for the purpose of entering into a more favorable insolvency procedure than would otherwise be available.
The Insolvency Regulation
The Insolvency Regulation came into force throughout the European Union (other than Denmark) on May 31, 2002. COMI, one of the key concepts of the Insolvency Regulation, is conferred on all "legal persons" (e.g., corporations, as opposed to "natural persons"). The geographical location of a debtor's COMI is important because it will govern where the debtor's main insolvency proceedings in the EU must be filed. If the debtor is a company, regardless of where the debtor is incorporated, it must commence a main insolvency proceeding in the EU Member State where the debtor's COMI is located.
Unfortunately (and surprisingly), there is no complete definition of "COMI" within the Insolvency Regulation itself. Guidance, however, can be found in Recital 13 of the Regulation, which provides that "the [COMI] should correspond to the place where the debtor conducts the administration of his interests on a regular basis and is therefore ascertainable by third parties." Further assistance is found in Article 3(1) of the Insolvency Regulation, which provides that "the place of the registered office shall be presumed to be the [COMI], in the absence of proof to the contrary."
Since the Insolvency Regulation came into force, there have been a number of reported cases on COMI migration relating to the "proof to the contrary" that is required to rebut the presumption that the COMI is where the registered office is located. Similarly, there have been examples where a registered office has been moved but the COMI has not.
German auto parts maker Schefenacker moved its COMI as the first step in its chosen restructuring process, which involved a nonconsensual restructuring of bondholder debt by way of a debt-for-equity swap implemented by an English company voluntary arrangement, or "CVA" (the CVA being less cumbersome and providing greater certainty of result than an "Insolvenzplan" under German law). Schefenacker's automotive supply group consisted of a German holding company with subsidiaries in various jurisdictions, including England, the U.S., Australia, and Germany. The German holding company decided that its best interests from a restructuring perspective would be to move ownership of its assets and liabilities to a new English holding company (using procedures available under German law). The company was then able to enter into an English CVA. Applying German law, the holding company's place of incorporation was successfully relocated, and the German court, on the basis of the movement of assets and liabilities to England, was satisfied that the company had moved its COMI there. However, as demonstrated by another case involving a German company—Hans Brochier Holdings Ltd. v. Exner—simply moving the jurisdiction of a company's incorporation through German law procedures is not, by itself, sufficient to move a company's COMI.
Command and Control Alone Is Not Enough
The tests used to establish COMI in a country different from the one where the debtor's registered office is located have had a somewhat turbulent history. Until quite recently, the "command and control" test was applied by courts in many countries in Europe, including England. Under this test, it was often sufficient to base COMI in the country where the group parent was located on the basis that the parent determined the overall strategy of the group and many group functions were conducted in the parent's home country (e.g., IT services, human resources, treasury and finance functions, corporate branding, and purchasing functions).
Since 2006, however, the command and control test has been placed on the back burner, following a ruling by the European Court of Justice in Eurofood IFSC Limited, where the court stated that command and control by a parent in one country is not enough on its own to establish that the COMI of the parent's subsidiaries is the same as the parent's. The Eurofood court stressed the need for COMI to be ascertainable by third parties. Following extensive review of a number of decisions of the courts in England, in the U.S., and throughout Europe, the English Court of Appeal recently applied Eurofood in In Re Stanford International Bank Limited (in liquidation), where the controversy concerned whether an Antiguan-incorporated bank had its COMI in the U.S. rather than in Antigua. On the evidence, the court found that the bank's COMI was in Antigua. Further, the court held that COMI is to be determined by information about the debtor in the public domain that a typical third party would learn as a result of its dealings with the debtor in the ordinary course of business. Matters that could be established only on inquiry, the court held, should be ruled out. Although Stanford was decided under the Cross-Border Insolvency Regulations 2006 rather than the Insolvency Regulation, both statutes use COMI as a basis for recognition of foreign insolvency procedures.
A decision earlier this year by the English High Court, Chancery Division, in Kaupthing Capital Partners Master LP Inc. is a further example of a court applying the principles articulated in Stanford. Kaupthing, a special-purpose vehicle that, alongside other group companies and its ultimate parent company, formed part of an investment fund administered by an English-registered limited partnership, had its registered office in the Bailiwick of Guernsey in the Channel Islands, but its day-to-day activities, including the performance of its administrative and business functions, were carried out in London. The appointment of administrators for Kaupthing was challenged on the basis that the company's COMI was in Guernsey, and therefore it could not be subject to administration under English law.
The court held that the presumption that COMI is where the registered office is located can be rebutted only by factors that are both objective and ascertainable by third parties (i.e., those that conduct business with the company). Simply looking at where head-office functions are carried out, the court emphasized, is insufficient. According to the court, in determining what is ascertainable by third parties, reference should be made to what third parties could find out in the public domain and what they could learn in the ordinary course of business (similar to the approach in Stanford). Information ascertainable only by investors (or industry insiders) should not be taken into account in assessing COMI.
The Court's Ruling in Hellas
Let us go back to HTL. How did HTL manage successfully to move its COMI and how did it do so, bearing in mind its size, in just three months? In addition to and concurrent with moving its head office, the company also:
- Informed creditors of the change of address to London;
- Made a press announcement that its activities were moving to London;
- Opened a London bank account;
- Registered under the Companies Act as a foreign company; and
- Appointed U.K. resident individuals directors of the English company that had become HTL's general partner.
However, HTL retained its registered office in Luxembourg, occupied no more than relatively modest premises in London (certainly not befitting the parent company of a group with €1 billion in revenue), retained a bank account in Luxembourg, and may have remained liable to pay tax in Luxembourg.
The court's approach in determining COMI was in line with Eurofood and Stanford. It found that the presumption that HTL's COMI was in Luxembourg was rebutted and that the company's COMI was in England on the basis of objective and ascertainable facts. It is interesting to note that the court deemed one factor to be the most significant. The judge wrote:
The purpose of the COMI is to enable creditors in particular to know where the company is and where it may deal with the company. Therefore it seems to me that one of the most important features of the evidence . . . is that all negotiations between the company and its creditors have taken place in London.
The case, therefore, is consistent with the German Insolvency Court's 2008 decision in The PIN Group, which held that the COMI of a Luxembourg group company was in Germany because all of the group's financial-restructuring negotiations took place in Germany. Following Hellas, the importance that English courts will place on the location of negotiations with creditors is evident. Foreign directors trying to establish an English COMI for their companies would be well advised to establish a significant presence in England (both personally and commercially) at the earliest opportunity.
Use or Abuse of Forum Shopping
It is in no way unique to corporate restructurings that well-advised clients will seek to place themselves in the best possible position. Whether by setting up a tax-efficient corporate structure or keeping parts of corporate structures insolvency-remote, clients will try to seek an advantage in whatever way they can. COMI migration is no different, although it is understandable why certain creditors may feel aggrieved.
Central to the concept of COMI is the idea that it would be unfair to local creditors for a debtor to be able to avail itself of an insolvency regime in a jurisdiction other than that which is reasonably ascertainable by the creditor. But the fact that a company can change its COMI in a relatively short time frame may be perceived as rendering this protection redundant. An unsecured creditor may decide to enter into a debtor-creditor relationship on the basis of many factors, among them the creditor's awareness of its rights under applicable law if the debtor becomes subject to an insolvency procedure. The possibility that the debtor may later move its COMI to a different jurisdiction injects an additional (and perhaps unfair) element of uncertainty into the creditor's calculus of potential exposure.
Prepackaged Administration Sales
It is not just the issues relating to COMI that make Hellas significant. A notable goal of the migration of the debtor's COMI to England was the facilitation of a prepackaged sale of the company's main asset—its shares in the operating telecom company—to a new group company, leaving behind subordinated lenders with nearly €1.5 billion in debt owed by a company with no assets. The court specifically acknowledged significant concerns in relation to the use (or misuse) of prepackaged transactions. These concerns prompted the Association of Business Recovery Professionals (also known as "R3") to issue a new Statement of Insolvency Practice 16 (E&W) on Pre-Packaged Sales in Administrations ("SIP 16"), which became effective on January 1, 2009. SIP 16 requires insolvency practitioners to provide transparency to creditors about prepackaged sales and establishes short time frames for the provision of such information.
In Hellas, the court held that the guidance provided by SIP 16 had met with compliance, and it expressly authorized the administrators to proceed with the prepack on the basis of the court's finding that there was no realistic alternative to realizing better value for creditors. Although prepacks are not new, the judgment is one of the few occasions on which the English court has expressly given support to a specific prepack strategy.
There has been much criticism from nonlegal sources in relation to both key aspects of Hellas. Aggrieved creditors are incensed that a debtor can blatantly "play the rules" and move its COMI for the purpose of gaining what they perceive to be an unfair advantage. Additionally, prepacks have garnered more bad publicity, which was probably inevitable, given the size of the business in question and the volume of the debt left behind. Administrators are required to act in the best interests of creditors generally, and in circumstances where the court has considered the prepack strategy and approved it, no creditor can successfully challenge the administrator's conduct. It does seem a fair bet to say that forum shopping will continue to play a central role in cross-border insolvencies, as commerce and industry continue to become more globalized. However, whether England is in fact a "brothel for bankruptcy" remains to be seen.
Hans Brochier Holdings Ltd. v. Exner  BCC 127.
Eurofood IFSC Limited (Case C-341/04).
In Re Stanford International Bank Ltd (in liquidation), 2010 EWCA Civ 137.
Kaupthing Capital Partners Master LP Inc. Ch D (Proudman J) 31.3.2010.
A version of this article appeared in the August 2010 issue of Corporate Rescue and Insolvency. It has been reprinted here with permission.