11 September 2006
The recent case of Eurofoods is the latest in the line of authorities to consider the meaning and impact of the centre of main interests (Comi) of the debtor.
Article 3(1) of the European Commission Regulation on Insolvency Proceedings 2000 provides: "The courts of the Member State within the territory of which the centre of a debtor's main interests is situated shall have jurisdiction to open insolvency proceedings. In the case of a company or legal person, the place of the registered office shall be presumed to be the centre of its main interest in the absence of proof to the contrary."
The significance of the above provision is that, in general, a person wishing to bring insolvency proceedings against a debtor company or individual will be restricted to bringing such proceedings in the place where that debtor has their Comi. The determination of a debtor's Comi, therefore, may not only impact on the decision of a creditor as to whether or not to bring insolvency proceedings, but also may provide a debtor with a defence to such proceedings. Furthermore, the regulation gives scope to 'form shopping'. It is perhaps for these reasons that, since the regulation's introduction, numerous developments have come about relating to this important jurisdiction.
The purpose of Comi
Before considering these developments it is worth taking a step back to look at the rationale for the introduction of the concept of Comi. In the modern age of international business, it has long been thought desirable for there to be an element of certainty as to which country's insolvency jurisdiction should apply in the event of a business failure. Indeed, the place where insolvency proceedings will have to be taken in the event of a customer going 'bust' may well be a material consideration for any person considering contracting with an overseas concern. The aim was to provide a single regulatory code that would apply across the whole of the EU.
Early case law
In the months following the coming into force of the regulation, much attention was focused on the relevant considerations to be applied when determining Comi. In particular, guidance was found in Recital 13 of the preamble to the regulation, which provides: "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."
In Skjevesland v Geveran Trading Co Ltd (2003) particular emphasis was put on the place where the debtor was "ascertainable by third parties". At first instance, Mr Registrar Jacques, whose judgment was upheld on appeal, stated: "The rationale for this is that insolvency is a foreseeable risk and that it is important that international jurisdiction be based on a place known to the debtor's potential creditors, in order that the legal risks assumed through dealing with that party in the event of its insolvency can be calculated… It is the need for third parties to ascertain the centre of a debtor's main interests that is paramount, because, if there are to be insolvency proceedings, the creditors need to know where to go to contact the debtor."
Similarly, in Re Daisytek-ISA Ltd (2003), the judge stated: "The requirement in Recital 13 that, as a result of the administration of its interests at a particular place, the fact that such place is the centre of the debtor's main interests must therefore be 'ascertainable by third parties' is very important… In my view, the most important 'third parties' referred to in Recital 13 are the potential creditors."
In some cases the Comi is unclear, particularly where the concern has several sites and business is transacted either electronically or by telephone. However, in general it is clear that the place where the debtor is ascertainable by third parties, and in particular by creditors, is likely to be given particular significance.
Shierson v Vlieland-Boddy
In Shierson v Vlieland-Boddy (2005) the debtor had his Comi in England and Wales. In due course a bankruptcy petition was presented against him in the High Court, following which the debtor claimed that, since the commencement of those proceedings, his Comi had moved from England to Spain.
At first instance the registrar held that the debtor's Comi was in fact England and accordingly made the bankruptcy order. On appeal Mr Justice Mann held that the registrar had considered the debtor's Comi as at the date at which the debts had been incurred, as opposed to the date on which the insolvency proceedings had been opened, and accordingly allowed the appeal.
On further appeal the bankruptcy order was reinstated on the basis that the debtor had an establishment within the jurisdiction sufficient to enable secondary proceedings to be opened under Article 3(2). On the more legally significant question under Article 3(1), however, the Court of Appeal held that the judge had been right to hold that the debtor's Comi was to be determined at the time of the opening of the insolvency proceedings.
Accordingly, it is now clear that it will not be possible for a creditor to argue that the Comi should be fixed in the jurisdiction in which the debtor had their Comi at the time the creditor contracted, or otherwise conducted, business with the debtor. While such a conclusion is not surprising on the wording of the regulation, it does not fit easily with its intended purpose of providing a level of certainty to those contemplating carrying on business with overseas concerns.
The most recent decision of significance is that of the European Court of Justice (ECJ) in Eurofood IFSC. In that case the company was incorporated in Ireland, although its policy was effectively governed by its parent company in Italy. In due course the company's bankers presented a winding-up petition in Ireland and on the same day obtained the appointment of a provisional liquidator. Within a month insolvency proceedings were purportedly also brought in Italy, following which the Italian court held that the appointment of the provisional liquidator had not opened insolvency proceedings in Ireland and that the company's Comi was in Italy.
Notwithstanding the above, the Irish High Court proceeded to make a winding-up order on the basis that the Comi was indeed in Ireland and that the Italian court had failed to act fairly in its procedure, such that the Irish court was entitled to invoke the provision of Article 26 to refuse to recognise the Italian purported opening. The Italian insolvency practitioner then appealed the matter to the Irish Supreme Court, which in turn referred the matter to the ECJ.
In a controversial decision, the ECJ preferred the place of the registered office to be the place where the company conducted its administration on a regular basis as opposed to the location of the parent company. To what extent this decision will impact on the 'head office functions' that authorities had accepted in various other European jurisdictions is yet to be seen.
The introduction of Comi was a political compromise intended to simplify and clarify the position of creditors faced with competing insolvency jurisdictions across the EU. Whether it has succeeded in that aim is hard to tell, although on current case law it seems there is a long way to go before the muddy waters surrounding the regulations become clear.