[Nitika and Shaurya are students at National University of Study and Research in Law.]
To ensure proper functioning of the internal market, it is crucial to eliminate incentives for parties to move assets or judicial proceedings from one state to another, thereby, compromising the interest of creditors. Consequently, the Regulation (EU) 2015/848 on Insolvency Proceedings (Recast) (Regulation) introduced ‘suspension period’ as a safeguard with an aim to mitigate abusive forum shopping. However, this provision has certain limitations. This blog critically scrutinizes the efficacy of the suspension period as a safeguard, and proposes solutions to the current framework in order to curb abusive forum shopping and to ensure that the interests of all stakeholders are protected in the cross-border insolvency proceedings.
Understanding the Strategies of Abusive Forum Shopping
Under international insolvency framework, the location of the debtor’s Centre of Main Interests (COMI) is considered to be the decisive factor for determining the appropriate jurisdiction wherein the main insolvency proceeding would be tried. This is done to prevent multiplicity of proceedings, since, the debtor company might operate in more than one jurisdiction. COMI is not defined, but its determination mainly depends upon two factors i.e. (a) place of registered office and (b) place of central administration as ascertainable by third parties. Article 3 of the Regulation provides for a presumption of COMI in favour of registered office which is indeed rebuttable on proof of contrary. However, a corporate debtor might manipulate COMI to a more favourable jurisdiction which best serves its interests, more commonly referred to as ‘forum shopping’. Such shift in COMI may be considered as abusive when it is done to safeguard the personal interest of debtor to the detriment of the interest of its creditors.
In cross-border insolvency cases, broadly two strategies are prominently used by debtor for forum shopping. Firstly, change in the place of registered office whereby the debtors upon impending insolvency shift the registered office to another jurisdiction in complete disregard to the interests of creditors. Such shift in COMI is considered to be abusive in nature as it is initiated for debtor’s personal interests and not with the objective of maximizing the value of assets for fulfilling the creditors’ claims. Secondly, change in location of central management as ascertainable by third parties. Debtors may indulge in abusive COMI shift by changing the location of central management without shifting the registered office. Central management herein may include key managerial personnel of the company, board of directors, bank accounts, main office building, etc. Such strategy was elucidated in Hellas Telecommunications case, wherein it was held that though the company’s registered office remained in Luxembourg, the COMI of the company was effectively transferred to England.
Suspension Period: An Incomplete Safeguard?
The Regulation defines ‘forum shopping’ as ‘seeking a more favorable legal position at the expense of the general body of creditors’. It addresses the issue of ‘fraudulent or abusive forum shopping’ and provides for ‘suspension or neutralization period’ as a safeguard. Therefore, it allows for subsequent changes in COMI but at the same time, limits this ‘free choice of forum’ by providing a time-lag provision to eliminate the opportunistic shift in the face of insolvency proceeding.
Article 3 of the Regulation provides that the presumption of COMI to be at the place of registered office shall not apply if there has been a shift in registered office in immediate vicinity of the insolvency proceeding, i.e., 3 months (in case of a company or legal person) and 6 months (in case of other individual).
Such mechanisms prominently form part of national insolvency law of various jurisdictions like Spain, Italy and France etc., with minor variations in the duration of the suspension period. However, the present formulation of the suspension period suffers from severe defects which in turn questions its effectiveness for fulfilling the purpose with which it was enacted. The criticisms pertaining to the existing provision of suspension period are:
First, that the provision does not apply when there is a shift in COMI without the shifting of registered office. As aforementioned, forum shopping can also happen by moving the central administration leaving behind the registered office. Thus, such exclusion presents a serious flaw in the provision. Second, that it may discourage beneficial forum shifts that are mutually agreed upon by the debtor and all creditors. The suspension period fails to distinguish between the instances where COMI was shifted via mutual agreement for sound commercial reasons and where it was shifted on the sole decision of debtor for its benefit. For example, Deutsche Nickel AG, a German company that moved to England to take advantage of English restructuring laws with support of its creditors, or in Schefenacker AG case in which creditors initiated the shift of the company to U.K through a company voluntary arrangement. Third, it is susceptible to manipulation since the exact moment when the COMI was shifted is difficult to monitor. The whole process of shifting COMI is not a one-time affair. It may take days, weeks and sometimes even months to properly shift the COMI. The existing suspension period fails to provide any objective criteria for determining as to when the period is to be counted. Lastly, it poses a restriction to the freedom of establishment which includes right to move or set up an establishment in any member state. Therefore, COMI shift by a company is protected under Article 49 read with Article 54 of the Treaty on the Functioning of European Union. So, restricting the movement of COMI poses a restriction to this freedom of establishment.
Suggestions for Reform in Suspension Period
While the suspension period emerges as a plausible solution to combat abusive forum shopping, it does have its limitations. However, these shortcomings can be addressed through modifications to the existing framework, thereby strengthening the reliability of the cross-border insolvency regime in preventing abusive forum shopping. The following suggestions aim to provide a nuanced perspective on COMI shifts and their implications, with the goal of optimizing the effectiveness of the suspension period as a safeguard. They are:
Resorting to purposive interpretation
The preamble to the Regulation clearly states that the intention behind introducing ‘suspension period’ was to curb abusive forum shopping. Therefore, Article 3 should not be interpreted in a strict manner, as it might be contrary to the objectives pursued by the Regulation, rather it should be interpreted as being inclusive of shift of COMI with or without shifting the registered office. The European Court of Justice in the case of Susanne Staubitz- Schreiber emphasized the importance of interpreting a legislation in a way that aligns with its preamble and objectives.
Beneficial forum shopping
COMI shift should be allowed irrespective of the neutralization period, either when all creditors have agreed to it, or, such shift is beneficial to the debtor as well as to all the creditors. Also, the shift for sound commercial reasons that results in effective administration of cross-border insolvency shouldn’t be prohibited. For example, in PIN Group case, the company moved its COMI to facilitate a proper restructuring process. Therefore, despite of the close vicinity of insolvency petition and COMI shift, the court recognized it to be non-abusive as it was done to maximize the debtor’s net assets without compromising the interest of the creditors.
The INSOL Europe in its original proposal suggested for an exception from suspension period in the case where all creditors have agreed to the COMI shift. Further, court should have discretion to differentiate between beneficial and detrimental forum shopping according to the facts and circumstance of a case. This allows flexibility for beneficial forum shopping.
No restriction to freedom of establishment
The Regulation aims at preventing abusive forum shopping only, it does not prohibit all COMI shifts per se. Therefore, the contention that Article 3 restricts freedom of establishment lacks strong foundation, as it could be construed as a reasonable restriction. Further, fundamental freedoms can be subject to restrictions for the general interest and protection of creditors can justify such restrictions.
Amendment to Article 3
The article should be amended by substituting the term ‘shifting of registered office’ with ‘shifting of COMI’, to effectively address the situation where COMI is shifted by transfer of central administration and management of the debtor company.
Determining the moment of COMI shift
Indeed, identifying the precise moment of the COMI shift is challenging because it occurs gradually over time and involves considering various factors relevant for its determination. Therefore, to pinpoint the moment of COMI shift accurately, one must observe when a substantial number of relevant factors were transferred to a new location. Factors such as ‘location of who actually manages the debtor’s company, location of primary assets, bank accounts, jurisdiction whose law applies to most disputes, location of headquarters, location of majority of shareholders, etc.’ are relevant while determining shift. This approach not only recognizes the complexity of COMI determination but also ensures that the ‘moment of COMI shift’ is accurately determined based on a comprehensive consideration of relevant factors.
Conclusion
The suspension period was enacted to curb abusive forum shopping, but it suffers from several potential flaws, which in turn makes it susceptible to serve the purpose for which it was brought. Such inherent defects jeopardize the balance between regulatory objectives and practical considerations. Therefore, there is a need to modify the existing framework in order to effectively combat abusive forum shopping, thereby, protecting the interest of all stakeholders.
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