Suitable Jurisdiction for an Enterprise Group in Cross Border Insolvency

By Mahima Chhabrani (National University of Juridical Sciences)

I.    Introduction

Businesses are gradually becoming complex in nature. Many enterprise groups with a large number of members, both necessary as well as incidental, are spreading their operations across multiple jurisdictions, raising the issue of the choice of appropriate jurisdiction for initiating an insolvency proceeding. The insolvency of enterprise groups has long been an enigmatic and untouched issue in the realm of international insolvency law. 

Before delving into the issues pertaining to the insolvency of enterprise groups, it is important to understand the meaning of an enterprise group. Under the Model Law on Enterprise Group Insolvency (“MLEGI”), an enterprise group is defined as “two or more enterprises that are interconnected by control or significant ownership”. Therefore, the focus is on multiple insolvency proceedings involving multiple debtors that are members of the same enterprise group, rather than cross-border proceedings involving a single debtor.

II.    Forum identification for initiating a 'planning proceeding'

A planning proceeding is a proceeding initiated with the aim of developing and implementing a group insolvency solution to protect, preserve or enhance the overall combined value of the members of an enterprise group. Enterprise groups may have complex structures involving numbers of wholly owned subsidiaries, operating subsidiaries, and service companies. There are various factors that help in determining the necessary degree of integration, namely: whether the relationship between the group members involves a significant degree of interdependence or control, intermingling of assets, reliance on management, and financial support. 

Under the MLEGI, pursuant to article 2(g), the planning proceeding can be initiated only in the jurisdiction of the centre of main interests (“COMI”) of a member that is “necessary and integral” to the group.  Consequently, a group having various members cannot automatically become a part of the planning proceeding. In cases of an enterprise group in the tertiary sector, for e.g. a hotel business, the companies may depend on various agencies to provide management to the members of the group involved in the hospitality business. Similarly, the group may be dependent on a financial company to finance the entire group. Given the nature of these entities, a planning proceeding cannot take place without including these entities.

III. Alternative way of determining the appropriate location

An alternative method for determining the appropriate common venue for the commencement of insolvency cases for an enterprise group is by locating the enterprise centre of main interests (“ECOMI”) as proposed by the Honourable Samuel L. Bufford. However, this ECOMI does not have to necessarily coincide with the location of the COMI of the members of the group. In cases of enterprise groups, it has become a common practice to have the parent company’s place of incorporation, activities, and “operational headquarters” in different jurisdictions. 

This “operational headquarters” is deemed to be the centre of “command and control” of the distressed group. Factors that assist in locating the “operational headquarters” of the Group include where financial affairs are regulated, where executive meetings take place, and where management has the authority to direct or coordinate the global business of the group companies. This is not an exhaustive list, but it presents several aspects that are indicative of the place of the group’s operational headquarters. This criterion will indicate the main place of administration of the debtor's affairs. That is, this place will be deemed as a place from where the debtor manages and controls the business as a whole. A group will possibly have a number of subsidiaries and the same are usually directed and managed from headquarters of the group enterprise. As described by Professor Irit Mevorach, “the headquarters may be viewed as the brain and nerve centre, while the subsidiaries as the limbs.” Hence, the headquarters reflect the 'meeting point' for the various entities. 

Critics of the “operational headquarters” test might argue that test of incorporation is also an equally viable option. However, with enterprise groups expanding their roots to multiple jurisdictions, it is possible for the group to conduct no operations from the place of incorporation. This was the case in Re Bank of Credit & Commerce International (BCCI). Here, the parent company was incorporated in Luxembourg with a 'brass plate' headquarters there. However, the group conducted no activities in Luxembourg, the group's assets were spread around the world, and the operational headquarters were situated in London. Some leading scholars have expressed their dissent regarding the initiation of the main proceedings in Luxembourg, which was just the debtor’s place of incorporation but the actual COMI of the BCCI group was based in England where it carried out its operations. 

Furthermore, this incorporation test can be unhelpful in determining the appropriate forum since the parent entity may actually be just a holding company with no significate activities or workforce. If that company is solvent, then it may not need to be involved in the insolvency proceeding. Therefore, from the point of view of apt forum identification, the “operational headquarters” test is a more viable option. 

Another advantage of this concept is that ECOMI is based on a “modified universalist approach”, allowing one forum (the ECOMI court) to take charge of the proceedings and distribute the assets as per the relevant provisions and principles. Modified universalism takes the view that the entire case and its assets should be administered under the local law of the ECOMI State, except to the extent that choice of law rules lead to the application of foreign law. The goal of modified universalism is to achieve a “global collective result” to the maximum extent possible between courts among all the related cases (including secondary cases) in all States where they are commenced. This is a core principle mentioned in the MLEGI and Model Law on Cross-Border Insolvency. Cooperation and coordination among the relevant corporate entities is particularly important for such entities.

IV.    Way Forward

MLEGI came into effect in 2018 and complements MLCBI that has been adopted in 49 States in a total of 32 jurisdictions. Unlike the concept of COMI, the principles of ECOMI and “operational headquarters” have not found a place in MLEGI. Sometimes, it may be that the COMI of these necessary and integral entities overlap with that of the ECOMI of the enterprise group. However, a conflict may also arise in cases where the COMI and ECOMI are situated in different locations. Therefore, there is a need to reconcile this conflict as both these ways of identifying a common venue for initiating an insolvency proceeding involving a group enterprise may produce an effective result, depending on the situation.