the Italian insolvency representative
placed EuroFoods into insolvency in
Italy, and the Italian court determined
that Italy was the COMI of EuroFoods.
The European Court of Justice has
jurisdiction to decide commercial
disputes between EU member
countries and accepted and reviewed
the issues in regard to EuroFoods.
The European Court of Justice
determined that because EuroFoods
was opened first in Ireland, that
determination was controlling. Italy
was bound by that determination,
and Irish law, rather than Italian law,
applied. The preference and fraudulent
conveyance law is much shorter in
Ireland than in Italy, so Bank of America
received a substantial benefit by the
European Court of Justice decision.
Substantial work has been undertaken
at UNCITRAL to clarify issues to be
considered in addressing COMI and
to provide instructive clarification as
to the legislative intent, background,
and explanation regarding how the
Model Law should be interpreted.
UNCITRAL has developed a substantial
revision to the Guide to Enactment, the
explanatory guide to the Model Law,
which includes recommendations
regarding the primary factors to be used
in determining the COMI of a debtor.
place. Obtaining this information at the
outset allows a business to determine if
it wants to engage in business with this
entity and what issues it may confront
if the customer becomes insolvent,
depending on the location of the COMI.
Thus, if creditors have an interest in
the determination of COMI, those
issues must be addressed promptly, and
creditor participation must be prevalent
in the initial COMI determination
or adverse results can occur.
Those factors include determination
of the location in which the debtor is
conducting its principal business, as
ascertainable by third parties, the same
standard used by the EU in its insolvency
regulations determining COMI. A second
factor to be considered is where the
principal operations and management
of the debtor are being conducted. The
revised Guide to Enactment provides
that courts can look at other factors
as set forth in case law, but the two
primary factors should be considered
as a basis for any COMI determination.
As the business relationship continues,
the same determination should be
made annually to ascertain whether the
COMI of the debtor has changed. Under
both the European Union Regulations
and the Model Law, the COMI of the
debtor is to be determined upon the
opening of the insolvency proceedings.
Thus, if a debtor has changed locations,
the COMI can change as part of that
process, which could substantially
modify the resulting treatment of
the business if insolvency occurs.
As a further consideration, many
countries do not have restructuring laws
like the United States does and, therefore,
the only option available to debtors and
creditors in those countries is liquidation.
Secured creditors often would prefer a
jurisdiction in which liquidation occurs,
as long as their liens and priorities
are recognized so they can be paid.
The EU is in the process of updating
its insolvency regulations and has also
proposed many substantial changes to
address COMI and the determination
of a debtor’s COMI. These changes
have established procedures that are
more definitive and predictable for
creditors in dealing with a debtor in
international cross-border trade.
Role of a Gatekeeper
Over the past several years, a function
known as a gatekeeper has emerged.
A gatekeeper should be an individual
who is experienced and has been
engaged in cross-border insolvency
proceedings for some time and who,
in addition, has reliable contacts
in numerous jurisdictions.
Under the hypothetical scenario,
France would not be a jurisdiction in
which a secured creditor would prefer
to have an insolvency proceeding
pending. For businesses that rely
on ongoing business to recover
losses, the filing of an insolvency
proceeding in a jurisdiction that allows
restructuring would be of substantial
importance to the unsecured creditor.
Having defined some of the problems
in addressing international recovery
issues, a look at potential ways in which
resolutions can be effectuated is in order.
In cross-border insolvency proceedings,
a gatekeeper enlists knowledgeable
counsel from the different jurisdictions
involved to determine the effect of
each jurisdiction’s insolvency law on
the potential recovery by the business.
The gatekeeper also establishes and
coordinates specific directions as to
the scope of work to be performed
by professionals retained in different
jurisdictions and establishes budgets for
review and approval by the business.
Litigation over COMI can be extensive
and costly, and the ultimate outcome
is often unpredictable. In the United
States and other jurisdictions, the general
experience is that COMI is generally
well-recognized and, therefore, more
than 90 percent of business insolvency
proceedings do not involve a COMI
dispute. In the event of a dispute in
the EU, one of the main factors in
determining COMI is the location
that is recognizable by third parties as
to where the debtor was conducting
its primary business operations.
Prior to an initial business transaction,
a company should obtain basic
background information on a potential
customer that operates internationally.
One aspect is determining where the
business is located and incorporated and
obtaining supporting documentation
for that finding. An additional aspect
is to determine where the COMI of the
debtor is by determining the location
of the primary administration of the
debtor, as ascertainable by third parties.
In addition, the gatekeeper can assist in
coordinating activities so that actions
taken in one country are not detrimental
in another country, which would either
extinguish or substantially reduce
recovery by the creditor if the COMI
actually is determined to be in another
jurisdiction. As an overall coordinator,
the gatekeeper can be efficient, effective,
and informative so that the business can
make appropriate determinations and
weigh its risk to determine what actions,
if any, it wants to undertake to attempt
to recover outstanding debt obligations.
Due diligence may be required in regard
to these issues, such as reviewing
the debtor’s website, looking at its
billing and collection functions, and
reviewing a number of other factors
to determine the primary location in
which the debtor’s operations take
The gatekeeper generally conducts on
a three-phase process. Phase one is
the initial review in coordination with
the business of what jurisdictions are
involved and what initial issues need
to be reviewed. Phase two involves
coordination with foreign counsel