also to any retirement benefits or any
obligations related to their employment.
and maintains its registered office.
The presumption can be overturned
if evidence establishes that the
principal operations of the debtor
are conducted in a jurisdiction other
than the place of incorporation.
continue operations by restructuring
its debt would be in a jurisdiction that
favors creditors and would not require
liquidation in all matters. If the business
is concerned with continued operations
of the debtor to generate future business,
then a jurisdiction such as the U.K.
could be favorable to the business.
The COMI of the debtor is important
because once the location is determined,
the insolvency laws of that jurisdiction
control the insolvency proceeding in
that jurisdiction, which is designated
as the main proceeding for purposes of
liquidation and distribution to creditors.
All other jurisdictions in which the
debtor conducts operations are ancillary
or secondary. The COMI of the debtor
can greatly alter the ability of creditors
to recover balances due to them based
on the laws of the jurisdiction.
Unlike Germany, under Mexican
law a business that provides goods
and materials to a debtor on an open
account is an unsecured creditor. As
a result of their constitutional priority,
workers with unpaid obligations have
priority over unsecured creditors. While
other countries would not be required
to recognize Mexican law regarding
the treatment of wage claims, if the
primary assets, including accounts
receivable, were being collected in
Mexico, Mexican law would apply to the
distribution of those assets. As a result,
unsecured creditors might receive little
or nothing after payments to priority
wage claimants and secured creditors.
A review of potential results
based on where the customer’s
COMI is determined to be in the
hypothetical scenario follows.
Germany. German law provides for the
Under German ROT law, when a product
is sold by a business to a debtor, title
of the product remains with the seller
until the product is paid for in full. If
Germany was the COMI of the debtor
in the hypothetical scenario, then a
German insolvency court would apply
ROT to all of the unsold products of the
debtor, and the seller would maintain a
lien for the balance due until it was fully
paid. ROT is recognized by both civil and
insolvency proceedings in Germany.
France. If France were the COMI
of the debtor, then a result different
from either Germany or Mexico
could occur. A French court would
first focus on the continuation of the
operations of the company; second,
on what is in the best interest of the
debtor’s workers; and last, on what is
in the best interest of creditors. Under
French insolvency law, the ultimate
sale or liquidation of a company
does not occur by a plan or ballot,
but when a French judge makes the
determination based on those priorities.
Opening of Insolvency
The determination of COMI often occurs
with the opening of an insolvency
proceeding or shortly thereafter.
Insolvency proceedings are opened
at different times, depending on the
jurisdiction involved. In the United
States, the insolvency proceeding is
generally opened the same day a case is
filed. In Europe and other jurisdictions,
the filing by the debtor of an insolvency
proceeding does not trigger the opening
of the proceeding. In many jurisdictions,
the courts first must carefully review
and analyze all of the filings by the
debtor to determine if the opening of
an insolvency proceeding is proper.
This process often takes months.
Under the insolvency regulations of
the EU, if an EU country opens an
insolvency proceeding and determines
that Germany is the COMI of the debtor,
then all other EU countries are bound
by that law and ruling. The operations in
France, Italy, and United Kingdom in the
hypothetical scenario would be ancillary.
So if a request to purchase the debtor’s
obligations that provides for payment
to the workers and a continuation of
the business but little or no payments
to the creditors is filed with a French
court, there is a strong probability
that the request will be granted.
Further complicating the process,
French insolvency proceedings
normally take 10 to 12 years.
During that time, in many jurisdictions
outside the United States, as a general
rule, no notification to unsecured
creditors is given that the debtor has,
in fact, filed insolvency proceedings.
This can result in additional unpaid
obligations when a business advances
products or services to a debtor, not
knowing that the debtor already has
filed an insolvency proceeding.
Italy. A result similar to France would
occur in Italy, except that preferential or
fraudulent conveyance actions can be
maintained in Italy based on actions that
occurred seven or eight years prior to
insolvency. That generates substantial
litigation against companies that receive
payments over whether or not those
payments were preferential or fraudulent.
A classic example is the Parmalat
case, which involved billions of dollars
of trade debt. Parmalat operated in
Italy and was the “Enron” of Europe.
Parmalat was a special administrative
proceeding in Italy, where an insolvency
liquidator was appointed under the
control of the Italian government.
However, Bank of America had provided
substantial funding to Parmalat through
an Irish entity called EuroFoods. The
bank filed an involuntary proceeding
against EuroFoods in Ireland and
requested an emergency hearing to
have an insolvency representative
appointed. During the initial hearing, an
insolvency representative was appointed
in Ireland with a determination that the
COMI of EuroFoods was in Ireland.
Mexico. If Mexico were the COMI of the
debtor, then a very different result could
occur. Mexico has constitutional laws
that protect employees and funds due to
them. In fact, the Mexican Constitution
provides for basic protections for workers
that cannot be superseded by other
laws, such as Mexican insolvency laws.
In addition, if workers’ obligations are
not being paid, then the officers and
directors of the business are subject
to criminal charges for the company’s
failure to pay its workers. The obligation
not only applies to current wages, but
United Kingdom. Many of the U.K.’s
insolvency procedures resemble those
in the U.S. The U.K. favors and allows
restructuring of a debtor’s financial
obligations and, in contrast to Mexico,
has a preference for wages due and
owing for 90 days prior to the filing of the
insolvency proceeding. Thus, a debtor
whose COMI is in the U.K. and that can
The insolvency representative in Italy
intervened and challenged those
rulings. During the same time period,