Cross-Border Bankruptcy Update: COMI Migration and Illegitimate COMI Manipulation Distinguished
With the significant increase in cross-border bankruptcy and insolvency filings in the 43 nations or territories that have adopted the UNCITRAL Model Law on Cross-Border Insolvency (the "Model Law"), including the U.S., the incidence of "COMI migration"—the shifting of a debtor’s "center of main interests" ("COMI") to a country with more favorable insolvency laws—has also increased. As demonstrated by a ruling handed down by the U.S. Bankruptcy Court for the Southern District of New York, COMI migration may be justified and legitimate under circumstances that do not represent bad-faith "COMI manipulation." In In re Ocean Rig UDW Inc., 570 B.R. 687 (Bankr. S.D.N.Y. 2017), the court ruled that scheme of adjustment proceedings pending in the Cayman Islands (the "Caymans") should be recognized as "foreign main proceedings" under chapter 15 of the Bankruptcy Code, even though the debtors’ COMI had been shifted to the Caymans less than a year before the proceedings were commenced, because the country in which the debtors’ COMI had previously been located did not have a law permitting corporate restructurings.
Procedures and Recognition Under Chapter 15
Eligibility of Foreign Debtor for Chapter 15 Relief
Under section 1515 of the Bankruptcy Code, the representative of a foreign debtor may file a petition in a U.S. bankruptcy court seeking "recognition" of a "foreign proceeding." Section 101(24) of the Bankruptcy Code defines "foreign representative" as "a person or body, including a person or body appointed on an interim basis, authorized in a foreign proceeding to administer the reorganization or the liquidation of the debtor’s assets or affairs or to act as a representative of such foreign proceeding."
Section 109(a) of the Bankruptcy Code provides that, "[n]otwithstanding any other provision of this section, only a person that resides or has a domicile, a place of business, or property in the United States, or a municipality, may be a debtor under [the Bankruptcy Code]." In Drawbridge Special Opportunities Fund LP v. Barnet (In re Barnet), 737 F.3d 238 (2d Cir. 2013), the Second Circuit ruled that section 109(a) applies in cases under chapter 15 of the Bankruptcy Code. "[P]roperty in the United States" has been held to include an attorney retainer in a U.S. bank account, causes of action under U.S. law against parties in the U.S., and contract rights governed by U.S. law, including U.S. dollar-denominated debt issued under an indenture governed by New York law with a New York choice-of-forum clause. See In re Cell C Proprietary Ltd., 571 B.R. 542 (Bankr. S.D.N.Y. 2017); In re Berau Capital Resources Pte Ltd, 540 B.R. 80 (Bankr. S.D.N.Y. 2015); In re Octaviar Administration Pty Ltd., 511 B.R. 361 (Bankr. S.D.N.Y. 2014).
"Foreign proceeding" is defined in section 101(23) of the Bankruptcy Code as:
[A] collective judicial or administrative proceeding in a foreign country, including an interim proceeding, under a law relating to insolvency or adjustment of debt in which proceeding the assets and affairs of the debtor are subject to control or supervision by a foreign court, for the purpose of reorganization or liquidation.
More than one bankruptcy or insolvency proceeding may be pending with respect to the same foreign debtor in different countries. Chapter 15 therefore contemplates recognition in the U.S. of both a "main" proceeding—a case pending in the country where the debtor’s COMI is located (see 11 U.S.C. § 1502(4))—and "nonmain" proceedings, which may have been commenced in countries where the debtor merely has an "establishment" (see 11 U.S.C. § 1502(5)).
Foreign Main Proceedings—COMI
The Bankruptcy Code does not define "COMI." However, section 1516(c) provides that, "[i]n the absence of evidence to the contrary, the debtor’s registered office, or habitual residence in the case of an individual, is presumed to be" the debtor’s COMI.
Various factors have been deemed relevant by courts in determining a debtor’s COMI, including the location of the debtor’s headquarters, managers, employees, investors, primary assets, or creditors, as well as the jurisdiction whose law would apply to most of the debtor’s disputes. See In re SPhinX, Ltd., 351 B.R. 103 (Bankr. S.D.N.Y. 2006), aff’d, 371 B.R. 10 (S.D.N.Y. 2007). In addition, courts have considered any relevant activities, including liquidation activities and administrative functions. See Morning Mist Holdings Ltd. v. Krys (In re Fairfield Sentry Ltd.), 714 F.3d 127 (2d Cir. 2013). Courts may also consider the situs of the debtor’s "nerve center," including the location from which the debtor’s "activities are directed and controlled, in determining a debtor’s COMI." Id. at 138. "[R]egularity and ascertainability" by creditors are also important factors in the COMI analysis. Id.
In Fairfield Sentry, the Second Circuit ruled that the relevant time for assessing COMI is the chapter 15 petition date, rather than the date a foreign insolvency proceeding is commenced with respect to the debtor. The impact of the ruling is that, in cases where a foreign representative engages in significant pre-U.S. chapter 15 filing activities—such as operating or liquidating the debtor—in the jurisdiction where the foreign proceeding was commenced, COMI "can be found to have shifted from the foreign debtor’s original principal place of business to the new locale." In re Creative Finance Ltd. (In Liquidation), 2016 BL 8825, *31 (Bankr. S.D.N.Y. Jan. 13, 2016). Such a COMI "migration" can occur even if the activities take place in a "letterbox" jurisdiction where the debtor itself had few contacts and conducted no meaningful business. Id. (citing cases).
In Fairfield Sentry, the Second Circuit also noted concern about possible COMI "manipulation," ruling that a court "may look at the period between the commencement of the foreign proceeding and the filing of the Chapter 15 petition to ensure that a debtor has not manipulated its COMI in bad faith." Fairfield Sentry, 714 F.3d at 138.
Foreign Nonmain Proceedings—Establishment
An "establishment" is defined in section 1502(2) as "any place of operations where the debtor carries out a nontransitory economic activity." Unlike with the determination of COMI, there is no statutory presumption regarding the determination of whether a foreign debtor has an establishment in any particular location. See In re British Am. Ins. Co., 425 B.R. 884 (Bankr. S.D. Fla. 2010). The debtor’s foreign representative bears the burden of demonstrating that the debtor has an establishment in a particular jurisdiction. Id. at 915.
In Ocean Rig, the bankruptcy court considered whether it should recognize under chapter 15 provisional liquidation and scheme of arrangement proceedings filed on behalf of four affiliated debtors in the Caymans, even though the debtors’ COMI had been purposely migrated from the Republic of the Marshall Islands ("RMI") 11 months before the proceedings were filed.
Publicly traded Ocean Rig UDW Inc. ("UDW") is the ultimate parent of the Ocean Rig Group, which includes three holding companies—Drill Rigs Holdings Inc. ("DRH"), Drillships Financing Holding Inc. ("DFH"), and Drillships Ocean Ventures Inc. ("DOV")—that directly or indirectly own a fleet of deepwater oil drilling rigs leased worldwide to oil and gas exploration companies. Until April 2016, UDW and direct subsidiaries DRH, DFH, and DOV (collectively, the "debtors") were registered as nonresident corporations in the RMI. However, none of the debtors ever conducted operations, directed their affairs, maintained management offices, conducted meetings, or had directors residing in the RMI. UDW was also a tax resident of Cyprus and had previously maintained a "law 89 establishment" in Greece under a law allowing foreign companies to provide limited services for head offices or affiliates outside Greece.
Collectively, the Ocean Rig Group has approximately $4.5 billion in face amount of U.S. dollar-denominated notes issued under credit agreements governed by U.S. law, with U.S. financial institutions acting as indenture trustees or collateral agents.
The sharp decline in oil and gas prices in recent years took a major toll on the finances of the Ocean Rig Group. Faced with expected payment defaults, the debtors began exploring restructuring alternatives in 2016. However, the RMI, which at that time served presumptively as the debtors’ COMI, did not have any laws or procedures permitting reorganization, as distinguished from liquidation, of companies.
Therefore, the debtors decided to migrate their COMI to the Caymans, which does have a corporate reorganization law—the Cayman Islands Companies Law (the "CICL"). Accordingly, in April and October 2016, UDW and the other debtors registered as Cayman corporations. Among other things, each debtor thereafter: (i) maintained its head offices and books and records in the Caymans; (ii) conducted board meetings in the Caymans; (iii) had some, but not all, officers and directors residing in the Caymans; (iv) appointed registered agents for payment and notices in the Caymans; (v) provided notification of the change to investment service providers, the U.S. Securities and Exchange Commission, and various media outlets; (vi) issued a press release noting the relocation of its principal place of business to the Caymans; (vii) opened a bank account in the Caymans; and (viii) conducted restructuring discussions and negotiations from the Caymans.
Beginning on March 27, 2017, the debtors commenced provisional liquidation proceedings and scheme of arrangement proceedings under the CICL (the "Cayman Proceedings") for the purpose of implementing a debt restructuring involving a debt-for-equity swap. The Grand Court of the Cayman Islands (the "Cayman Court") appointed Simon Appell and Eleanor Fisher as joint provisional liquidators (the "liquidators") for the debtors. Creditors voted to support the schemes of arrangement in August 2017, and the Cayman Court sanctioned the schemes on September 14, 2017.
On March 27, 2017, the liquidators filed a petition in the U.S. Bankruptcy Court for the Southern District of New York, seeking recognition of the Cayman Proceedings under chapter 15 as either foreign main or nonmain proceedings, as well as the enforcement of any schemes of arrangement for the debtors sanctioned by the Cayman Court. Certain parties objected to recognition, focusing principally on the shift in COMI from the RMI to the Caymans.
The Bankruptcy Court’s Ruling
The bankruptcy court granted the petition for recognition of the Cayman Proceedings as foreign main proceedings.
Initially, bankruptcy judge Martin Glenn found that the debtors were eligible for relief under chapter 15 because they satisfied section 109(a)’s requirement of property in the U.S. by means of: (i) $1 million in legal fee retainers deposited into U.S. bank accounts; and (ii) $4.5 billion in face amount of U.S. dollar-denominated debt issued under debt instruments governed by New York law (which also satisfied the venue requirements under U.S. law).
Judge Glenn ruled that schemes of arrangement, such as the Cayman Proceedings and similar restructuring proceedings sanctioned under the laws of the U.K., Hong Kong, and Singapore, satisfy section 101(23)’s definition of "foreign proceeding," as required for recognition under section 1517(a) of the Bankruptcy Code.
Judge Glenn also found that the debtors’ COMI was the Caymans despite their previous contacts with the RMI, Cyprus, and Greece. According to the judge, on the basis of all the actions taken by the debtors in the year preceding commencement of the Cayman Proceedings (described previously), the shift of COMI to the Caymans was "real" and "done for proper purposes to facilitate a value-maximizing restructuring of [the debtors’] financial debt," rather than being "manipulated prior to the filing in bad faith." There was no evidence, the judge explained, pointing to any " ‘insider exploitation, untoward manipulation, [and] overt thwarting of third party expectations’ that would support denying recognition" (quoting In re Fairfield Sentry Ltd., 440 B.R. 60, 65–66 (Bankr. S.D.N.Y. 2010)).
Judge Glenn issued an order enforcing the debtors’ Cayman schemes of arrangement on September 20, 2017.
Ocean Rig is instructive as to the steps a debtor should take to ensure that its COMI has been legitimately shifted to a new jurisdiction for purposes of recognition of a bankruptcy proceeding in that jurisdiction as a foreign main proceeding under chapter 15 of the U.S. Bankruptcy Code and versions of the Model Law enacted elsewhere. The ruling reaffirms the principle that COMI migration for a legitimate purpose, such as to restructure a company, preserve going-concern value and jobs, and maximize asset values, does not offend the purposes underlying chapter 15 and the Model Law. By contrast, bad-faith COMI manipulation violates those purposes. See, e.g., Creative Finance, 2016 BL 8825, at *3–4 (denying recognition of a British Virgin Islands ("BVI") liquidation commenced as part of a scheme to avoid paying a U.K. judgment and finding that the debtors’ foreign representative failed to demonstrate that the debtors’ COMI was in the BVI—either at the time of the filing of the liquidation or because of the liquidator’s post-filing activities—or even that the debtors had an establishment in the BVI).
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