Article 16(3) of the Model Law - the presumption as to the centre of the debtor's main interests
28 The Model Law has rationalised and systematised insolvent administrations in more than one jurisdiction, and represents an attempt to impose a universalist approach: see the comments of Professor Sarah Derrington: International Commercial Litigation and Dispute Resolution, edited by K E Lindgren, Ross Parsons Centre of Commercial, Corporate and Taxation Law, Publication Series, Sydney 2010, 272 at 273.
29 Importantly, Art 16 creates a number of presumptions, the critical one here being in Art 16(3), namely that in the absence of proof to the contrary, Saad Investments' registered office in the Cayman Islands is presumed to be its centre of main interests.
30 The expression, "the centre of the debtor's main interests", is not defined either in the Model Law or in the Act. That position was a deliberate legislative choice, as explained in the Explanatory Memorandum for the Cross Border Insolvency Bill 2008, circulated in the Senate by the Minister for Superannuation and Corporate Law. The Explanatory Memorandum pointed out, in Ch 1.7, that there was a considerable body of common law in overseas jurisdictions in relation to the concept of a centre of main interests. It expected that Australian Courts would be guided by that body of law in considering the definition of that expression in the context of the Bill. The Explanatory Memorandum also suggested that such an approach would ensure that Australian law would be in harmony with that in other jurisdictions.
31 Chapter 2 of the Explanatory Memorandum provided an article-by-article explanation of the Model Law. In Ch 2.37, the Explanatory Memorandum said that Art 16 established presumptions that allowed the court to expedite the evidentiary process, but at the same time, did not prevent calling for, or assessing, other evidence in accordance with any applicable procedural law if the conclusions suggested by a presumption were called into question by the Court or an interested party. It said that Arts 15 and 16 provided a simple and expeditious structure to be used by a foreign representative to obtain recognition. That aim is expressly enunciated in Art 17(3).
32 The question of what is a COMI is, by no means, settled. The liquidators referred to the development of the concept in the Bankruptcy Courts of the United States of America under Ch 15 in its Bankruptcy Code of Title 11 of the United States Code (USC). In the leading decision of In Re Bear Stearns High-Grade Structured Credit Strategies Master Fund Limited (In Provisional Liquidation) 389 BR 325 (SDNY 2008), District Judge Sweet considered whether a Cayman Islands-exempted company, such as Saad Investments, had its centre of main interests in the Cayman Islands or, in the United States. He explained that Cayman Islands' law allowed exempted companies to trade in that jurisdiction, provided that they sought further business outside the Cayman Islands and did not compete with local businesses.
33 The proceedings before District Judge Sweet were an appeal from a decision of Judge Lifland who had participated in the drafting of the adaption of the Model Law in Ch 15 of the United States Bankruptcy Code. Judge Lifland had held that the Cayman Islands' proceedings were not a foreign main proceeding because the insolvent debtor's centre of main interests was in the United States. He had found that a related company of the debtor, located in New York, was its investment manager and, in effect, ran the debtor's "back-office operation". Prior to the liquidation, virtually all of the debtor's liquid assets were located in New York. Judge Lifland concluded that the Cayman Islands' liquidation proceedings did not qualify even as foreign non-main proceedings under the adapted Model Law.
34 District Judge Sweet noted that Congress had enacted s 1516(c) in slightly different terms to its analogue in Art 16(3) of the Model Law that required "proof" to the contrary to defeat the presumed COMI. Instead, Congress had provided that "evidence" to the contrary was required for that purpose. He said that Ch 15 promoted predictability and reliability by establishing a simple, objective eligibility requirement for recognition. He said that the objective criteria for recognition in Ch 15 reflected the legislative decision by UNCITRAL and Congress that a foreign proceeding should not be entitled to obtain direct access to, or assistance from, the host country courts, unless the debtor had a sufficient, pre-petition economic presence in the country of the foreign proceeding. He said that, if the debtor did not have its centre of main interests, or at least an establishment, in the country of the foreign proceedings, the local Bankruptcy Court should not grant recognition and was not authorised to use its power to effectuate the purposes of the foreign proceedings: Bear Stearns 389 BR at 333-334.
35 District Judge Sweet said that the rebuttable presumption in s1516 did not relieve a petitioner of its burden of proof or the risk of not being able to persuade the court of the facts. He said that the change of the word "proof" to "evidence" in the USC's adaption of Art 16(3) in the Model Law, was intended to clarify this issue. He also observed that courts could presume that a debtor's COMI is at the place of its registered office, but that this presumption may be rebutted by evidence to the contrary, even on an unopposed petition for recognition.
36 Both Judges Lifland and Sweet considered that the concept of the centre of main interests derived from the European Union Convention on Insolvency Proceedings (done at Brussels, November 23, 1995) that had been in the process of adoption when the Model Law was being drafted. The regulation adopting the European Convention explained that the centre of main interests meant "… the place where the debtor conducts the administration of his interests on a regular basis and is, therefore, ascertainable by third parties": see Bear Stearns 389 BR at 336. His Honor referred to the decision of the European Court of Justice in Re Eurofood IFSC Limited [2006] Ch 508, particularly at 542 [34]-[35] describing it as "more or less amount[ing] to another non-barking dog". District Judge Sweet noted that the European Court of Justice had held that the fact that a company's economic choices are or could be controlled by a parent company in another state was not enough to rebut the COMI presumption.
37 Subsequently, in Re Betcorp Limited 400 BR 266 (Bankruptcy District of Nevada, 2009) Bankruptcy Judge Bruce A. Markell elaborated on the development of the European Union regulation's concept of centre of main interests. He cited the Report on the Convention on Insolvency Proceedings by Miguel Virgos and Etienne Schmit. That report suggested that it was important that international jurisdiction be based on a place known to the debtor's potential creditors. It concluded that this would enable calculation of the legal risks that would have to be assumed in the case of insolvency.
38 Judge Markell made a comprehensive review of the previous United States decisions, including Bear Stearns 389 BR 325. He concluded that there District Judge Sweet had refused recognition because the debtor company existed in the Cayman Islands as merely a shell or letterbox: Betcorp 400 BR at 288. He considered that Eurofood [2006] Ch 508 and some English decisions confirmed the weight that may be given to a debtor's ascertainable principal place of business, in ascertaining the centre of the debtor's main interests, even when it is not located in the country in which the debtor is registered or incorporated: Betcorp 400 BR at 289, 291.
39 Judge Markell pointed out that giving consideration to a debtor's operational history increased the probability of competing main proceedings, and that probability would defeat the purpose of using the construct of a COMI. He said (Betcorp 400 BR at 291):
"Requiring courts to give weight to the debtor's interests over the course of its operational history may destroy the uniformity and harmonisation that is the goal of employing the COMI inquiry.
Moreover, it is important that the debtor's COMI be ascertainable by third parties. Ran's [In re Ran 390 BR 257 at 274-275 (Bankr SD Tex 2008)] analysis correctly proceeds on the assumption that COMI is affected not only by what a debtor does, but by what the debtor is perceived as doing."
40 Judge Markell reasoned that an inquiry into the debtor's past interests could lead to a denial of recognition in a country where a debtor's interests were truly centred, merely because of past activities. He said that the result would frustrate two of the purposes of the COMI inquiry, namely first, it would decrease the effectiveness of the insolvency proceeding for which recognition was sought, and, secondly, it might lead to a sub-optimal distribution of the debtor's assets because non-recognition, where recognition is due, might forestall needed international co-operation: Betcorp 400 BR at 291.
41 The experience from the United States cases applying the adapted presumption of a COMI in s 1516(c) has not resulted in readily predictable outcomes. Judge Allan L Gropper, an eminent judge of the United States Bankruptcy Court, Southern District of New York, has written a paper: Chapter 15 of the United States Bankruptcy Code: Lindgren, op cit 149 at 154, that lamented:
"The goal of the drafters of the Model Law and section 1516(c) of the United States Bankruptcy Code of simplifying the process of obtaining an initial order of recognition has not been met, as issues relating to the debtor's centre of main interests have been litigated repeatedly in Chapter 15 cases."
42 The European Court of Justice in Eurofood [2006] Ch 541-542 [29]-[37] considered the formulation of the test for ascertaining the COMI. The presumption in Art 16(3) of the Model Law is the same as had been in Art 3(1) of the European Regulation. The Court referred to a recital to the regulation that stated:
"The 'centre of main interests' should correspond to the place where the debtor conducts the administration of his interests on a regular basis and is therefore ascertainable by third parties."
The Court continued (Eurofood [2006] Ch at 541-542 [33]-[34]):
"33 That definition shows that the centre of main interests must be identified by reference to criteria that are both objective and ascertainable by third parties. That objectivity and that possibility of ascertainment by third parties are necessary in order to ensure legal certainty and foreseeability concerning the determination of the court with jurisdiction to open main insolvency proceedings. That legal certainty and that foreseeability are all the more important in that, in accordance with article 4(1) of the Regulation, determination of the court with jurisdiction entails determination of the law which is to apply.
34 It follows that, in determining the centre of the main interests of a debtor company, the simple presumption laid down by the Community legislature in favour of the registered office of that company can be rebutted only if factors which are both objective and ascertainable by third parties enable it to be established that an actual situation exists which is different from that which locating it at that registered office is deemed to reflect." (emphasis added)
43 The European Court of Justice's approach was distilled by Lewison J who said that, for the presumption to be displaced, the Court had to be satisfied that the COMI is not in the State in which its registered office is located. His distillation was not contested in the appeal: In Re Stanford International Bank Limited [2010] 3 WLR 941 at 958 [30] per Sir Andrew Morritt C. The Chancellor (with whom on these points Arden LJ and Hughes LJ agreed at [107], [152] and [159]), did not try to reconcile the United States decisions with that of the European Court of Justice in Eurofood [2006] Ch 508. Morritt C said that, in any event, if there were a difference, the England and Wales Court of Appeal would follow the European Court of Justice: Stanford [2010] 3 WLR at 967 [54].
44 The Chancellor accepted that the derivation of the concept of the COMI in the Model Law had come from the definition in the preamble to the European Regulation quoted above and had been correctly elucidated in the Virgos/Schmidt report: Stanford [2010] 3 WLR at 966 [53]. He held that it had been conclusively established that the factors relevant to a rebuttal of the presumption must be both objective and ascertainable by third parties, being matters already in the public domain. Such matters would be what a typical third party would learn as a result of dealing with the debtor company, but would exclude matters that might only be ascertained on enquiry: Stanford [2010] 3 WLR 968-969 [56].