During the Budget Session of Parliament this year, Union Finance Minister Nirmala Sitharaman announced the introduction of a cross-border insolvency mechanism in the Insolvency and Bankruptcy Code, 2016 (IBC). This is modelled on the UNCITRAL model law on cross-border Insolvency.
Recognition of foreign proceedings with respect to cross-border insolvency is one of the paramount features of the UNCITRAL Model Law, as it allows for the harmonization of proceedings in different jurisdictions concerning the same corporate debtor. However, in situations of multiple proceedings concerning the same debtor in different jurisdictions, it is important to recognize one such proceeding as the main proceeding and others as supplementary to the main proceeding. It is for this purpose the Model Law has introduced the concept of Centre of Main Interest (COMI).
In an increasingly globalized world where corporates have business interests spread far and wide across various countries, COMI is bound to play an important role. And with India soon adopting the cross-border insolvency model, it would be pertinent to understand what COMI is.
What is COMI?
COMI has not been specifically defined in the Model Law. However, the Model Law makes a reference to the said concept under Article 16(3), which states that the presumption of the debtor's COMI shall be the debtor's registered office or place of habitual residence.
Article 16(3) also stresses upon the fact that the COMI can also be at any place other than the jurisdiction where the debtor maintains his registered office or his habitual place of residence, if evidence is provided that it is based in some third jurisdiction.
The concept of COMI evolves from the key element on which the Model Law on cross border insolvency is based – recognition. Ascertaining a debtor’s COMI will consequently lead to proceedings in that particular jurisdiction to be recognized as the main proceeding by all other jurisdictions wherein the debtor's assets are located. This will enable courts in the COMI jurisdiction to seek cooperation and assistance from other jurisdictions where the debtor's assets are located without having to indulge in the time-consuming process of having a foreign proceeding recognized under national laws.
Universality v. territoriality
The two dominant models with respect to Insolvency that exist today are universality and territoriality. The former model argues that the assets of the debtors, no matter where they are located, should be collated into one combined estate and be governed under the rules of the jurisdiction where the debtor is domiciled. The territoriality model, on the contrary, argues that the insolvency proceedings should be limited to the territorial extent of the jurisdiction where the proceedings have been initiated. COMI is a mid-way between these two approaches to avoid conflict between courts.
COMI in the European Union
The European Union was the first jurisdiction to adopt the principle of COMI when it was introduced in the European Insolvency Regulation (EIR) which was adopted in 2000 and entered into force in 2002. Over the years, the European Court of Justice and courts in various jurisdictions within the EU have contributed immensely to the development of the concept.
EU member countries like Luxembourg and Ireland, which offer various tax incentives, have become popular destinations for companies to set up their corporate headquarters. In light of this, the EU has played an active role in ensuring the efficiency of the cross-border insolvency mechanism by giving more clarity and further expanding several key concepts in the subject, including that of COMI. The EIR 2000 was subsequently revised in 2017, which has greatly elaborated on the concepts of COMI.
The European Court of Justice (ECJ) in the famous case of Re Eurofoods, observed that the presumption of COMI shall be by default in the jurisdiction where the debtor maintains his registered corporate office. The ECJ, however. also ruled that such a presumption is rebuttable if evidence is provided that the registered office in the jurisdiction is no more than a letterbox address and the administration of the company along with a bulk of its economic activities are conducted elsewhere.
Further, the ECJ also held that the onus of determining COMI shall be on the court in which the insolvency proceedings are initiated. The court in the original state, prima facie ,will have to determine whether the debtor’s COMI lies in its jurisdiction in light of the evidence available. In the event the court decides that the debtor's COMI shall lie in the original state, it is also imperative for other courts where parallel insolvency proceedings have been initiated against the same debtor to recognize the proceedings initiated in the jurisdiction of the first state as the main proceedings. In case a court in any other jurisdiction feels that the there is an error in the decision of the court in the original state, it may appeal to a higher court in the jurisdiction of the first state.
The decision in the Eurofoods case further places clear emphasis on the possibility of forum shopping by companies in order to seek lenient regulations concerning administration and liquidation. The decision of the ECJ clearly adds a rider that the court must look beyond the mere presence of a corporate office in a jurisdiction and must actively ascertain whether the registered office plays an active role in the administration of the company’s affairs.
Further, European jurisprudence on COMI also lays great emphasis on the views and opinions of the creditors of the debtor as to where is the principal place of business of the debtor. In addition to the above criteria, nationality of the directors of the debtor company along with the jurisdiction where the company’s board meeting is held regularly are also given due weightage whilst determining COMI.
Application of COMI in India
Clause 14 of the Draft Chapter Z of the IBC incorporates the concept of COMI under Indian law.
It is evident that the Insolvency Law Committee has adopted the EU’s interpretation of COMI, as is evident from Clauses 14 (2) and 14(3). Clause 14(2) states that the presumption of COMI jurisdiction being the place where the debtor’s registered office is located, shall only be applicable when the office has not been relocated within three months of the date of commencement of insolvency proceedings. Further, under Clause 14(3), the onus has been put on the adjudicating authority in India to ascertain a debtor's COMI on the basis of the factors which will be prescribed by the Central government. Both these Clauses are identical to Article 3 of the EIR, 2017.
Further, with respect to the determination of COMI, the report on rules and regulations for cross-border insolvency has recommended that certain additional factors shall include identifiable place of central administration, which shall be treated on the same footing as other involved factors. The report also recommends that the date of determination of COMI shall be considered as the date of commencement of proceedings in the jurisdiction where the insolvency proceedings have been initiated.
One of the first cases where the principle of COMI was successfully applied by Indian courts was in the case of Jet Airways (India) Ltd v. State Bank of India & Anr. In this case, insolvency proceedings were initiated against Jet Airways in a Dutch court whilst parallel insolvency proceedings had already been initiated in India. A representative of the Dutch proceedings appeared before the National Company Law Tribunal (NCLT) to seek recognition of the proceedings in the Netherlands. The NCLT, however, refused, citing that there exists no provision in the Indian insolvency regime to afford recognition to a foreign proceeding.
The National Company Law Appellate Tribunal (NCLAT), however, took a different approach to this question. Referring to the Model Law, the NCLAT determined that while Jet Airways did have assets in the Netherlands, its COMI lies in India. The NCLAT determined Jet Airways’ COMI based on the registered office presumption as the company's registered office was situated in India and its administration was directed through the same. The NCLAT, however, did recognize the proceedings in the Netherlands as non-main foreign proceedings and instructed the Resolution Professional to coordinate and cooperate with the Dutch Resolution Professional and for the terms and conditions of the cooperation to be enshrined in an agreement between the two parties.
Conclusion
The recognition of the COMI principle by NCLAT in the Jet Airways case, even before the implementation of the Model Law, showcased the willingness of Indian courts to cooperate with foreign authorities in ensuring smooth and harmonious insolvency proceedings. With the implementation of Draft Chapter Z in the near future and considering the influence of EIR with respect to the application of the COMI principle, India can greatly benefit from the European interpretation of the principle and adopt a more liberal approach towards recognizing foreign proceedings.
Prashanth Shivadass and G. Nithin are Partner and Associate respectively, with Shivadass & Shivadass (Law Chambers).
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