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Centre of main interest not determined by parent company influence, says court

Out-Law Legal Update | 31 Aug 2018 | 11:47 am | 3 min. read

LEGAL UPDATE: The High Court of England and Wales has decided that the centre of main interests of a subsidiary company should be considered independently from that of its parent company. The decision is consistent with previous rulings which suggested that the COMI of companies within a group must be separately assessed. The Court also said that it can be presumed that the COMI of a company will be where its registered office is located unless indicated otherwise by objective factors which are apparent to third parties.

The decision highlights that the centre of main interests (COMI) of a subsidiary company will not necessarily be the same as that of its foreign parent company, even if the parent has substantial control over the management of the subsidiary. Instead the court will consider the COMI of each subsidiary within a group separately.

It also emphasises that the presumption that the COMI of a company will be where its registered office is located can only be rebutted by considering factors which are objective and ascertainable to third parties. These factors are not pre-determined - the court will decide what factors are relevant to COMI based on the facts of each individual case.

The UNCITRAL Model Law on Cross-Border Insolvency entitles debtors to certain automatic reliefs when the court in a foreign jurisdiction recognises a proceeding as a foreign main proceeding. For this recognition to be granted, Article 17(2) of the Model Law requires the foreign court to be satisfied that the proceeding is taking place in the same state where the debtor has its centre of main interests (COMI). This case required the High Court to determine a company's COMI for the purposes of Article 17(2).

Videology Limited was incorporated and had its registered office in England and Wales. It was a wholly-owned subsidiary of Videology Inc., the parent of a large corporate group which specialised in developing advertising software. Videology Inc. was incorporated in Delaware in the US and Videology Limited was formed to develop the group's EMEA business.

On 10 May 2018 Videology Inc. and Videology Limited filed voluntary Chapter 11 petitions in the US Bankruptcy Court in Delaware.

The filing of the proceedings under Chapter 11 resulted in a moratorium of individual creditor action under US law. The group also wanted equivalent protection to be obtained for both companies in the UK. Under Article 20 of the Model Law recognition as foreign main proceedings brings about an automatic stay on individual actions against the debtor. On 11 May 2018 applications were made under the Cross-Border Insolvency Regulations 2006 (CBIR) in the UK for recognition of the Chapter 11 Bankruptcy in relation to both Videology Inc. and Videology Limited as foreign main proceedings under Article 17.

To grant the application the court had to be satisfied that the COMI of each of the companies was in the US. This presented no issue for Videology Inc. but the COMI of Videology Limited was uncertain.

The court said that the Model Law does not define COMI. Instead, Article 16(3) of the Model Law provides that the place of the debtor's registered office is presumed to be its COMI. The automatic presumption was therefore that the COMI for Videology Limited was in the UK.

The court went on to consider numerous authorities on the COMI concept including cases involving Eurofood and Interedil. It said that the COMI of the companies within a group had to be separately assessed and that any factors which could be used to rebut the presumption in Article 16(3) had to be "objective and ascertainable" by third parties.

The factors ultimately considered by the court were the location of the trading premises and staff of Videology Limited; where its customer and creditor relationships were established; where it administered its relations with its trade creditors on a day-to-day basis using those premises and local staff, and where its main assets were located. Significantly, the court also noted that Videology Limited had given warranties and made representations as to its COMI being England in its arrangements and dealings with its main finance creditors. All of these factors pointed towards the COMI of Videology Limited being in the UK.

Videology Limited argued that its COMI was in the US, on the basis that management decisions and high-level issues were dealt with for Videology Limited by the senior management of Videology Inc in the US. It even obtained letters from creditors confirming this. The court acknowledged that this was a relevant factor in the COMI assessment, but it did not carry sufficient weight to displace the other factors. As such, the presumption was not rebutted, the COMI of Videology Limited was in the UK and not in the US, and the court could not grant the application for recognition as foreign main proceedings.

Notably the court did decide that the connections between Videology Limited and the US were sufficient to justify recognition of the US bankruptcy proceedings as foreign non-main proceedings. The criterion to be met for 'non main' recognition is less stringent, requiring only that the debtor has an 'establishment' in the relevant foreign state.

In relation to foreign non-main proceedings, Article 21 of the Model Law gives a recognising court a wide general power to make any appropriate order following recognition. In this case, the court was able to use this discretionary power to impose a moratorium against action by individual creditors as well as permitting the sale of the Videology Limited's assets and the distribution of the proceeds to take place under the Chapter 11 process. Videology Limited therefore obtained a relief equivalent to that which would automatically have been granted if its COMI had been found to be in the UK.

Stephen Barclay is a restructuring expert at Pinsent Masons, the law firm behind Out-Law.com