In its 2013 ruling in Morning Mist Holdings Ltd. v. Krys (In re Fairfield Sentry Ltd.), 714 F.3d 127 (2d Cir. 2013), the Second Circuit expanded the availability of Chapter 15 relief to offshore entities by holding that a debtor’s “center of main interest” (COMI) for purposes of Chapter 15 should be determined at the time the Chapter 15 case is commenced. As a result, the activities of a foreign representative (i.e., an administrator or liquidator) may be considered in determining the location of a foreign debtor’s COMI, even where, prior to insolvency, the debtor performed no business in that jurisdiction. Although Fairfield resolved when COMI is to be determined, it never addressed the scope or level of activities required to be taken by a foreign representative to establish COMI. A recent decision from the United States Bankruptcy Court for the Southern District of New York provides some guidance as to what conduct is necessary to shift COMI to an offshore jurisdiction to support Chapter 15 recognition. See In re Creative Finance Ltd., 2016 WL 156299 (Bankr. S.D.N.Y. Jan. 13, 2016).
Creative Finance Ltd. and Cosmorex Ltd. were organized under BVI law in 1995 and were primarily engaged in foreign exchange trading through brokers located outside the BVI. Prior to the appointment of the liquidator, Marex Financial Ltd., the debtors’ only non-insider creditor, sued the debtors in England. Following the English court’s entry of a judgment in excess of $5 million against them, the debtors (at the direction of their sole shareholder) transferred the bulk of their funds out of their English bank accounts without satisfying the judgment. On October 30, 2013, Marex obtained an order domesticating and enforcing the English court’s judgment in New York where the debtors had assets.
In December 2013, a liquidator was appointed for the debtors in the BVI. Upon his appointment, the BVI liquidator displaced the directors and principals and became the sole manager of the debtors. The liquidator performed certain perfunctory functions, such as opening bank accounts, gathering and preparing required documents, providing notice of his appointment, calling for creditors to file claims, and holding a first meeting of creditors. Approximately two months after his appointment, the BVI liquidator requested Chapter 15 recognition of the BVI insolvency proceeding as a foreign main proceeding. Because recognition would likely result in a stay of any enforcement actions in the U.S., Marex opposed the liquidator’s request.
Citing to the Second Circuit’s decision in Fairfield, the bankruptcy court confirmed that a debtor’s COMI should be determined as of the Chapter 15 filing date. Moreover, the court noted that a debtor’s COMI can shift from the debtor’s principal place of business to the jurisdiction of the foreign insolvency proceeding if the foreign representative has engaged in significant action in that jurisdiction prior to the Chapter 15 filing. In this instance, however, the court found that the liquidator had done “no more than the bare minimum necessary to comply with his statutory duties, if that, and that the limited activities he undertook fell far short of being sufficient to justify a finding that the Debtors’ COMI moved to the BVI.” According to the court, the liquidator had failed to take the “most basic activities,” such as securing the debtor’s bank records and related books and records, and analyzing the debtors’ financial records. The court was especially troubled by the liquidator’s failure to investigate the transfer of the debtors’ funds out of its English accounts. Finally, the bankruptcy court found that the sole shareholder and debtors had acted in bad faith by attempting to unduly control the liquidator and depriving him of the necessary resources to comply with his obligations.
In contrast to Creative Finance, the bankruptcy court’s earlier decision in In re Suntech Power Holdings Co. Ltd., 520 B.R. 399 (Bankr. S.D.N.Y. 2014), provides an example of a case where a foreign representative’s actions were sufficient to shift COMI to the offshore jurisdiction. In that case, the court found there to be a COMI shift based on the foreign representatives’ activities, which included, updating the debtor’s address in SEC filings, publishing notices of their appointment, appointing a Cayman Islands director, and conducting board meetings from the Cayman Islands. The liquidators also addressed funding needs by arranging for the transfer of funds to the Cayman Islands.
The take-away from Suntech and Creative Finance is that the COMI analysis is fact-intensive and may be influenced by the circumstances surrounding the appointment of the foreign representative and their actions. While a court’s primary focus will be on the foreign representative’s activities, Creative Finance suggests that a court may consider the legitimacy and ultimate purpose of the underlying foreign proceeding in determining whether those activities were meaningful and not merely perfunctory.