The Concept of 'Establishment' in the Model Law on Cross-Border Insolvency

The Concept of ‘Establishment’ in the Model Law on Cross-Border Insolvency

By Irvin Ho Jia Xian (LLB Student, Singapore Management University)


The concept of an establishment plays an important role in cross-border insolvency disputes. Under Article 2(f) of the Model Law on Cross-Border Insolvency (the “Model Law”), an establishment means any place of operations where the debtor carries out a non-transitory economic activity with human means and goods or services. In this article, I hope to examine the practical effects of finding an establishment, and the conditions necessary to make such a finding.

What are the practical effects of finding an establishment? 

The most important practical effect of finding an establishment in a foreign state is the determination of what kind of proceeding may arise there. Under Article 2(b) of the Model Law, a foreign non-main proceeding can arise in a State where the debtor has an establishment. Article 17(2) further provides for a mechanism for the court in an enacting State to recognise such a proceeding.

According to UNCITRAL Guide to Enactment and Interpretation of the Model Law, the decisive factor in determining whether an establishment exists is how the activity appears externally, rather than the intention of the debtor. This resembles the Centre of Main Interest (“COMI”) concept used for foreign main proceedings. The rationale underlying both of these concepts is to enable creditors to ascertain the place where an insolvency proceeding concerning the debtor is likely to commence. This promotes greater legal certainty as creditors can better estimate both information costs and legal risks, ex ante.

Yet, there are different consequences to finding a foreign non-main proceeding compared to finding a foreign main proceeding. Pursuant to Article 21 of the Model Law, the court has the discretion to choose whether to stay proceedings against the debtor’s assets upon a petition for recognition. In contrast, a petition to recognize a main proceeding will guarantee an automatic stay. 

Additionally, in tailoring the relief granted to a representative of a foreign non-main proceeding, the court must bear in mind that the interests and authority of that representative are narrower than those of a foreign main proceeding. In other words, any relief granted pursuant to a foreign non-main proceeding must give priority to a foreign main proceeding. 

What are the conditions necessary to find an establishment?

According to the definition set out in Article 2(f) of the Model Law, there are four key elements for finding an establishment. They are (i) the presence of economic activity (ii) which is non-transitory, (iii) carried out with humans means and goods or services (iv) from a place of operations. This inquiry is factual in nature and must be decided based on the specific circumstances of each case. 

The presence of economic activity

First, the debtor must carry out economic activity in the foreign state. It must be shown that the debtor was involved in dealings exercised externally on the market, which was perceptible by third parties. Wholly internal actions, like auditing, will not satisfy this requirement. 

One question that has arisen before is whether acts taken in accordance with an insolvency proceeding are relevant. This includes the retention of legal counsel and accountants or the investigation of assets and liabilities for the purposes of bankruptcy. The Fifth Circuit answered this question in the negative in the American case of Re Ran 607 F 3d 1017, 1028 (5th Cir, 2010). The court held that the establishment concept would be rendered nugatory if such an interpretation were allowed. The petition for recognition would succeed simply if evidence of the commencement of a foreign proceeding can be shown. This would be tautological as the initiation of a foreign non-main proceeding is proof per se that the debtor has the necessary connection to the foreign state to begin these proceedings in the first place. Thus, any action taken pursuant to the insolvency proceeding are deemed irrelevant for the purposes of finding that the debtor has carried out economic activity in the foreign state. 

The activity must be non-transitory

Second, the economic activity must not be transitory. The court’s decision may consider objective indicia, like the duration, frequency, and consistency of the economic activity. Notably, the Model Law does not prescribe a minimum time requirement, and the decisive factor is how the activity appears externally. Additionally, according to the UNCITRAL Guide to Enactment and Interpretation of the Model Law, the relevant date for determining the transitoriness of the debtor’s establishment is the date when the foreign proceeding was commenced. 

The activity must be carried out with human means and good or services

Third, the economic activity must be carried out with human means and goods or services. This criteria necessitates a minimum level of organisation and stability of human resources, beyond the mere presence of assets. Although it is uncertain what the lower bounds of this threshold are, there have been judgments which have tackled this issue. For example, the English High Court in Trustees of the Olympic Airlines SA Pension & Life Assurance Scheme v Olympic Airlines SA [2015] 1 WLR 2399 held that a “skeleton staff” would be insufficient. In that case, the debtor’s entire workforce during the material time constituted a mere two to three employees. Further, these employees were only engaged in insolvency-related activities for months and were uninvolved in the debtor’s primary business activity of selling air tickets. Accordingly, the court concluded that the debtor did not meet the minimum level of organisation or stability to have an establishment in the foreign state. 

The activity must be carried out from a place of operations

Lastly, the activity must be carried out from a place of operations. In the context of corporate debtors, there must be a place of business for there to be an establishment. If the corporation’s COMI can be analogised to an individual debtor’s primary or habitual residence, then a place of business would be regarded as a level below that. It is similar to an individual debtor’s secondary residence or place of employment. Common examples of what constitutes a “place of business” include a physical office or branch in the foreign state.


Moving forward, the establishment concept provides a fertile ground for future developments. Despite the creation of general guidelines, the inquiry as to what constitutes an establishment must principally consider the factual matrix of each case. Ultimately, the court must strike a delicate balance between maintaining certainty and foreseeability, and acknowledging the inherently amorphous nature of the establishment concept.