Getting to the core of EU Insolvency Regulation and centre of main interests

The EU Insolvency Regulation EC1346/2000 purports to establish a uniform framework for insolvency proceedings in the EU. The regulation becomes operative in insolvency proceedings having a cross-border element. It is designed to prevent debtors experiencing financial distress from forum shopping, namely seeking recourse to jurisdictions that facilitate an insolvency regime that is less punitive and more favourable to their particular circumstances. It has direct effect in all EU member states (excluding Denmark), and applies to all types of insolvency proceedings and to most legal entities and natural persons.

The cornerstone concept of the centre of main interests (COMI) of the debtor lies in the core of the regulation, the vexed determination of which is crucial in pinpointing to the EU jurisdiction where the main insolvency proceedings may be opened, and accordingly the insolvency law that will be applied. A debtor whose COMI is in the EU will be subject to the regulation in so far as the applicable insolvency procedures are concerned.

The reasons for shifting COMI, and accordingly for a debtor choosing the jurisdiction in which to become insolvent, vary. The period of exiting bankruptcy in one EU member state may be considerably shorter when compared to another and accordingly attractive to an individual debtor.

Identifying the set of rules that will apply to an insolvent debtor is also important from a creditor’s perspective, as only main insolvency proceedings have universal effect; territorial and secondary proceedings cover only assets situated in the EU member state in which the secondary proceedings are opened. Creditors may well find themselves bound by the laws of the debtor’s COMI.

The regulation does not feature an express definition of COMI, but rather opts to provide the components making up the concept. Paragraph 13 of the preamble of the regulation suggests conditionally that COMI should correspond to the place where the debtor conducts the administration of its interests on a regular basis and is ascertainable by third parties.

The paucity of the definition has led the European Court of Justice (ECJ) and EU national courts to the generation of a multitude of variables in establishing or shifting COMI towards different jurisdictions. The overarching principle is substance: a debtor’s COMI must be distinguished by a reasonable degree of permanence to where the strategic, operational and financial management take place.

For individual debtors, COMI will invariably turn to the place of the debtor’s professional and habitual residence. In the case of legal entities, article 3 of the regulation creates a strong presumption that the place of registered office shall be presumed to be the COMI, in the absence of proof to the contrary. Such proof would need to correspond to the place where the legal entity conducts the administration of its interests on a regular basis, and be ascertainable by third parties that would include creditors, employees and customers.

Should a legal entity seek to rebut the presumption that jurisdiction follows the registered office, it must demonstrate that the components of ascertainability and transparency are satisfied by variables that are objective and ascertainable to support that an actual situation exists that is different from what the location of the registered office reflects.

The suggestive, yet not exhaustive, variables revealed by ECJ case law that have been considered as capable of shifting COMI bear striking similarities to the criteria of effective management and control used by the Cyprus tax authorities in deciphering an undertaking’s tax residence.

In particular, a company’s COMI may shift from its registered office to the place/location where: i) the company’s business is managed and operated; ii) its contracts are concluded, as well as the governing law of such contracts; iii) its regulatory authorities exist; iv) the board meetings are held; v) the accounts are prepared and audited; vi) the customers, suppliers and loan creditors are; vii) information technology, support, corporate identity and branding are run from; viii) the CEO spends most of his or her time running the business; ix) the majority of the employees exist and the governing law of their contracts is located; x) corporation tax is paid for its trading operations; xi) an active bank account is held and operated, and xii) the company’s head office and principal operating address is located.

The determination of a debtor’s COMI, as well as whether a court in a particular EU member state will accept jurisdiction over insolvency proceedings, are both decided at the point when the petition to commence insolvency proceedings is lodged, and rest with the particular EU member state court concerned.

As COMI shifting may be seen as a manifestation of the EU right of freedom of establishment, a possible look-back period to the debtor’s operational history prior to the petition in order to combat attempts to manipulate COMI should, in the view of the author, be circumstantial if not disregarded in its entirety.

An admission by a tax authority in an EU member state as to the tax residency of an undertaking does not automatically establish that the COMI subsists in that EU member state.

In the absence of particular provisions in the regulation dealing with group of companies, it is considered that the variables pointing to COMI would be separately and individually applicable in the context of a subsidiary company, irrespective of whether the complete management and operations of such subsidiary company are ostensibly conducted by a parent company whose COMI is situated in a place other than that of the subsidiary.

No reported case has yet been brought under the regulation before the Cyprus courts, by either a debtor or creditor, to interpret COMI, so it cannot be said with any certainty that the regulation would be interpreted broadly by the Cyprus courts and result in insolvency proceedings being accepted for the administration of an undertaking that is not seated/domiciled in the Republic of Cyprus.

It is expected, however, that considerable weight would be given to the importance of creditors being certain about where they can pursue assets, and of that place having an element of permanence.