Cross border insolvency and COMI: update

The Court considered the centre of main interests (COMI) of Videology Ltd (the Company), in refusing to recognise insolvency proceedings as foreign main proceedings under Article 17 of UNCITRAL Model Law on Cross-Border Insolvency (the Model Law), as incorporated into English law in the Cross-Border Insolvency Regulations 2006 (the CBIR). However, discretionary relief in the form of an extended moratorium against creditors was still afforded to the Company under Article 21(1)(g) of the Model Law (Article 21) to prevent the commencement of collective insolvency proceedings in the UK.

Facts

The Company formed part of a wider corporate group (the Group), existing as a wholly-owned subsidiary of Videology Inc., (the Parent). The Parent was incorporated in the United States but the Company was incorporated and had its registered office in England and Wales (where it operated from leased premises in London).

In 2015, intense competition in the industry saw the Group transform its business strategy. This transition depleted the Group's capital resources resulting in serious financial difficulties. Following a number of failed attempts to secure additional funding, the Parent and the Company (amongst other subsidiaries) filed voluntary petitions under Chapter 11 of the US Bankruptcy Code. This gave the Group the benefit of "immediate protection from individual creditor action under US law". However, similar protection was yet to be granted in the UK under the CBIR.

Conclusions on COMI

The issue in this case was whether the Company's COMI was in the US or the UK. If the Company could successfully argue a US COMI, like its Parent, then proceedings would be foreign main proceedings and it would be able to benefit from more extensive automatic stays and suspensions of certain types of creditor action.

The presumption under the Model Law is that a company's COMI is in the place of its registered office – this being the UK. Yet, the Company argued it was 'essentially an American company, run by American management, based in America' and as such this presumption should be displaced because:

• its senior management was based in the US
• third parties dealing with the Company on a regular basis would be aware that strategic decisions of the Company were made in the US
• the Company was dependent upon the technology owned by the Parent and did not have a distinct brand identity from this US corporation; and
• recent meetings with creditors regarding the financial problems of the Company had taken place in the US.

The court followed Re Eurofood IFSC Ltd [2006] (Eurofood) and Interedil Srl v Fallimento Interedil Srl [2012] (Interedil) in reaching its decision as to the location of the Company's COMI. Firstly, it reasoned that the COMI of companies within a group must be separately assessed. Secondly, for the Company to rebut the presumption that its COMI is in the place of its registered office, the factors relied upon must be objective and ascertainable by third parties.

Though it was relevant that strategic decisions and senior management of the Company operated in the US, Snowden J held, "in addition to being the place of its registered office, the UK is where the Company's trading premises and staff are located, where its customer and creditor relationships are established, where it administers its relations with its trade creditors on a day-to-day basis using those premises and local staff, and where its main assets…are located." Under a UK loan agreement, the Company even made representations to its main finance creditor that its COMI was situated in the UK. The Company could not rebut the presumption as to the location of its COMI and the court refused to recognise US insolvency proceedings as foreign main proceedings.

The grant of discretionary relief

Given the Company's close connections with the US, the insolvency proceedings were recognised by the court as foreign non-main proceedings. Such proceedings would not grant a stay on individual creditor's claims against the Company unless the court exercised its discretion.

The evidence given by the Company suggested rather than a stand-alone liquidation of the Company, a co-ordinated sale of the business and assets of the Group pursuant to the Chapter 11 proceedings would achieve the best financial result for all creditors, including those based in the UK. Communications from unsecured creditors further reassured the court and therefore Snowden J granted the Company an extended moratorium against creditors under Article 21. This protected the Company against actions by individual creditors and prevented insolvency proceedings from commencing in the UK, despite this being the location of the Company's COMI. Instead the sale of the Group's business and assets, including the Company, took place in the US.

Comment

This case is significant as it demonstrates the court's ability to grant discretionary relief under the Model Law as implemented by the CBIR where a Company is not the subject of foreign main proceedings. Despite a UK COMI, the Company was still granted the same relief that would have automatically been granted if its COMI was in the US.

Re Videology Ltd, Re the Cross Border Insolvency Regulations 2006 [2018] EWHC 2186 (Ch)