[By Sachika Vij & Kartikeya Misra]
The authors are students of Ram Manohar Lohiya National Law University Lucknow.
INTRODUCTION
The UNICTRAL Model Law on Cross-Border Insolvency (MLCBI) has recently celebrated its 25th anniversary. The inclusion of the UNCITRAL MLCBI has gained significant traction and is now being incorporated into the domestic legislation of numerous countries worldwide. An increasing number of international jurisdictions, including Hong Kong and Singapore, are aligning themselves with the global trend of embracing a Centre of Main Interest (COMI)-based approach to recognition to insolvency proceedings. However, several challenges have cropped up in its implementation. One such issue is with the interpretation of the date of determination of COMI.
India on the other hand is still in the process of enacting the cross-border insolvency framework. With the different interpretations already in place there is a greater mantle on the Indian authorities to ensure that these loopholes are not used to delay the resolution process and that they do not hamper the interests of the parties involved in seeking recourse.
THE CENTRALITY OF COMI IN INSOLVENCY AND ITS DETERMINATION
Imagine a scenario, where a debtor company finds itself entangled in insolvency proceedings spanning multiple jurisdictions. The COMI holds immense significance when it comes to navigating such a complex realm of cross-border insolvency. Article 17(2)(a) of the Model Law states that a foreign main proceeding is where the COMI lies. It acts as the determining factor as to which jurisdiction shall have the authority to grant the necessary relief for the debtor’s ongoing financial concern.
Though, it has not been defined anywhere in the Model Law but has been of extensive use worldwide. For determining COMI, a comprehensive assessment of various factors is required. Article 16 of the Model Law lays down a rebuttable presumption that the debtor’s registered office is taken to the COMI and as per the Recitals (12) and (13) of the European Commission Regulation 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. However, UNCITRAL MLCBI with Guide to Enactment and Interpretation provide for other factors which may include the jurisdiction where the debtor takes its key managerial decisions and conducts the majority of its economic activities, where it manages its key assets, etc.
Ascertaining COMI is not simple and the determination is to be based on the fulfillment of two important requisites which are:
- Determination of the date for deciding the debtor’s COMI
- Determination of the factors for deciding the location of the debtor’s COMI
It is only once the first element has been determined, the Court will determine the location of COMI under various non-exhaustive factors. Although the preamble and interpretation under Article 8 of the Model Law clearly state that it was enacted for the sole purpose of bringing uniformity to cross-border insolvency proceedings by harmonizing national insolvency laws dealing with it. However, there is no established position on the specific date that will serve as the decisive factor for determining the COMI.
THE TIMING CONUNDRUM IN COMI DETERMINATION
In 2013 answering the approach to be adopted for the timing of determining COMI, the Guide to the Enactment of the MLCBI mentioned that the relevant date for determining the COMI should be the date of commencement of the foreign proceeding.
However, before this guide, US developed its own principles for the date of determining the COMI in the case of Fairfield Sentry which was upon the filing of the recognition application. Australian Courts have on the other hand, stemming from the case of Australian equity investors, held the relevant date of COMI to be the time the Court is called for a decision on the requisite recognition application.
In 2022, a Hong Kong Court Global Brands Group Case opined that the determining factor of COMI should be the date of the foreign office-holder’s recognition application The Court noted that this preference aligns with Article 6 of The Supreme People’s Court’s Opinion on Taking Forward a Pilot Measure for the Recognition of and Assistance to Insolvency Proceedings in the Hong Kong Special Administrative Region. Moreover, claiming it to be consistent with the approach taken by the Singapore Courts in Re Zetta Jet in 2019.
Therefore, Courts internationally have come up with different approaches in deciding the timing of COMI which are relevant because they can have a huge impact on the proceeding and can even impact the location of COMI.
INDIAN APPROACH TO DATE OF DETERMINING COMI
India’s iteration of the Model Law on Cross-Border Insolvency is still under consideration in the form of Draft Part Z to be introduced in the Insolvency and Bankruptcy Code, 2016. The Cross Border Insolvency Resolution Committee (CBIRC) in its Report on the Rules and Regulations for Cross Border Insolvency Resolution recommended that for the determination of the timing of COMI, appropriate date should be the date of commencement of a foreign proceeding under the local law of the jurisdiction.
By adopting this approach, the CBIRC aimed to minimize forum shopping opportunities. Considering the time of filing of the recognition application as determining point of COMI there would only be the proceedings and actions of the foreign representative that would help indicate the COMI. Therefore, relying on the date of commencement of foreign proceedings would provide a clearer result compared to determining COMI at the time of the application. Additionally, this approach would be easier to apply across different jurisdictions, simplifying the practical implementation of the rule.
On the other hand, proponents of the time of filing of the application approach argue that delving into the debtor’s past interests can be complex and may result in denying the true COMI. They believe that determining COMI based on the time of filing the application could prevent such complications and ensure a more accurate determination of COMI.
WORKING IT OUT: THE POLICY CHALLENGE
The different approaches in the timing of determination of COMI have been evolving as has been seen recently in the Hong Kong Court judgment. The question remains as to what will be the approach of the legislature and Courts while dealing with these different interpretations. For Instance- in the case of Global Brands Group Case in the Hong Kong Court, the approach for the date for determining COMI has been the filing of the recognition application of the foreign liquidation. The judgment interestingly discusses that the recognition and assistance should be denied if the foreign liquidation is not happening in the COMI except for two conditions. Firstly, If the application is filed only for the purpose of recognition of the representative’s authority. Secondly, for assistance as a matter of practicality in case of a representative appointed in the place of incorporation. This perhaps is a way out in case of conflicting COMI determinations. Due to different timing of COMI interpretations being readily followed, there will now practically be more such scenarios in future, and it is better that nations come out with amicable solutions to ensure cooperation and assistance to not end up with deadlocks.
In order to establish a comprehensive legal structure for cross-border insolvency worldwide, it is essential to ensure that the laws created by various jurisdictions are harmonized. Synchronization is crucial for promoting a cooperative approach that yields mutual benefits and minimizes discrepancies. If there are inconsistencies in the interpretation of the COMI approach, conflicting judgments may arise, resulting in increased time and financial resources being spent with no clear advantage. This situation would ultimately erode the rights of local creditors at the cost of public money. Furthermore, it would also fail to uphold the true essence of the Model Law, which aims to acknowledge the diverse jurisdictions and their specific procedures for initiating insolvency proceedings, while simultaneously seeking to incorporate all cross-border proceedings within a uniform and internationally recognized framework that resembles a territorial approach.
CONCLUSION
Choosing the interpretation espoused by UNICTRAL is in fact a welcome step towards fulfilling the objectives of the code. However, the authorities would have to evolve to meet the challenges that would still exist and arise, to check that the parties are not able to take advantage of these interpretative loopholes resulting into delays in the process, most importantly nations must come together to ensure that these issues do not lead to fundamental challenges in the application of MLCBI which can greatly tamper with the Corporate Environment. There is a need for nations to come together to resolve the issues in the regime to ensure that access, recognition, relief (assistance) and cooperation are ensured.
In addition, there is an immediate need to suggest a way out for the differing interpretations of timing of COMI determination as encapsulated by the Hong Kong Courts and this resolution must align with the goals of the MLCBI. This way out will somewhere aid in achieving the objectives of MLCBI even with these differing interpretations in place.