CBW partner John Dickinson provides an insight into how COMI can help to maximise outcomes in insolvencies and rescues. If your organisation has a European operation that’s in distress you will want to consider in which EU member state you could get the most favourable insolvency or rescue outcome. COMI is the key to achieving this. Bankruptcy tourism is a well recognised practice of individuals in distress moving jurisdictions in order to be declared bankrupt under more favourable conditions. In Europe, this has usually meant a move to the entrepreneur- friendly UK where, for example, a debtor will be discharged from bankruptcy after just one year (or sooner) whilst in other EU member states, such as Germany and the Republic of Ireland, the period of bankruptcy can last up to 15 years. In the same way, there can be advantages for EU companies in distress to identify a more favourable jurisdiction for a restructure or insolvency procedure. To achieve this, the company must, however, establish its Centre of Main Interest (COMI) in the chosen member state. What is COMI?
- A company’s COMI is the place where it conducts the administration of its interests on a regular basis and is ascertainable by third parties. This is generally where the registered office is located but, more fully, it is the country in which they mainly manage their trade.
- With individuals, COMI is where they carry out their trade or profession or the country in which they reside (if they do not trade or carry on a profession). However, where the individual resides in one country but trades in another, it is the country in which the trade is carried out that is considered to be the individual’s COMI.
What makes the UK an attractive option for insolvencies and rescues? For many EU companies in distress, the UK will make a very attractive option for a rescue or insolvency procedure because the legislation is generally more mature, the law clearer and there are more options available. The result is often a quicker and more incisive process. The UK offers procedures such as Administration and Corporate Voluntary Arrangements (CVAs) which are analogous with Chapter 11 in the USA and which allow the debtor to remain in possession. These options are not always available in other EU member states. How to take advantage of the UK insolvency regime (while you still can)? In order for a company to file for insolvency within the UK they must first make the UK their COMI. Under the Council Regulation (EC) no 1346/2000 of 29 May 2000 on Insolvency Proceedings, a company may only be put into main insolvency proceedings in the EU member state where its COMI is located. Under the current regulation, this usually means moving a company’s registered office to the UK. Be aware though…
- There have been a number of well publicised challenges to COMI and there is recognition that the legislation currently allows for abusive COMI relocation. For this reason, the outstanding proposals for amendments to the EU insolvency regulations will include a review of the manner in which COMI is determined. However, the amended regulation is not likely to come into effect for around two years.
- Establishing a company’s COMI is not always quite as straightforward as relocating a registered office, because the Insolvency Regulation does not provide a clear definition of COMI and there are several other factors that may be taken into consideration.
- Unless the debtor’s COMI is within the UK, the proceedings will only be classed as territorial proceedings and will not necessarily include foreign creditors. The debtor will need to provide evidence, not only of residence, but that his COMI has also moved to the UK.
- Creditors may be unhappy with the proposed changes and will need to be managed.
- Moving a COMI may take a little time.
What proceedings can be opened, and where?
- A debtor whose COMI is in an EU member state may be made subject to insolvency proceedings in that same EU state, or another, regardless of where the company is registered, or the individual’s nationality.
- Only one set of main proceedings can be opened and these will be in the EU member state where the debtor has its COMI.
- The EC Regulations allow for insolvency proceedings to be instituted in other member states, but these will be territorial or secondary proceedings.
- When main proceedings have been instigated, the insolvency law of that EU member state will generally apply automatically and be recognised throughout the rest of the EU, unless:
- territorial proceedings are already open, or if secondary proceedings are subsequently opened, then the law of the EU member state where the additional proceedings are opened will apply in that EU member state, and
- where special provision is made elsewhere in the EC Regulations.
- The appointed office holder has a duty only to deal with those assets falling within the proceedings to which they are appointed.