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Rethinking COMI in the Age of Multinational, Digital and Glocal Enterprises
Written by Renato Mangano, Professor of Commercial Law at the University of Palermo (Italy).
Regulation (EC) No 1346/2000 of 29 May 2000 on insolvency proceedings failed to provide a definition of COMI (centre of main interests), either in Article 2, which was specifically devoted to definitions, or in Article 3, which regulated international jurisdiction.
For its part, Article 3(1) merely provided that “the courts of the Member State within the territory of which the centre of a debtor’s main interests is situated shall have jurisdiction to open insolvency proceedings”. Article 3(1) further stipulated that “in the case of a company or legal person, the place of the registered office shall be presumed to be the centre of its main interests in the absence of proof to the contrary.”
Recital 13 specified that “the ‘centre of main interests’ should correspond to the place where the debtor conducts the administration of his interests on a regular basis and is therefore ascertainable by third parties”, but different views have been expressed as regards, in particular, the relation between the concept of ‘administration’ and the concept of ‘ascertainability by third parties’.
As a result, Article 3 of Regulation No 1346/2000 gave rise a number of disputes and was the object of several requests to the European Court of Justice (ECJ) for preliminary rulings, with Eurofood being the first case in point.
Eventually, Regulation (EU) 2015/848 of 20 May 2015 on insolvency proceedings (Recast) laid down new rules on COMI — a definition of COMI was introduced; the presumption aiming at better ascertaining COMI was extended to individuals as well; the judicial rule of thumb that evaluated negatively a debtor who had moved his/her/its COMI shortly before the request to open insolvency proceedings was incorporated into a mandatory rule; and eleven recitals, aiming at making this framework clearer and more easily applicable, were introduced (Recitals 25 to 34, and 53).
However, one may doubt whether these efforts have succeeded. The many disputes involving NIKI Luftfahrt GmbH are illuminating. NIKI was an insolvent company under Austrian law incorporated in Austria. However, NIKI was also a subsidiary of the Air Berlin PLC & Co. Luftverkehrs KG, better known as Air Berlin. This is a company under German law incorporated in Germany.
Therefore, the crucial question was: which Member State had jurisdiction to open main insolvency proceedings against NIKI? Did Austria or Germany have jurisdiction? The question was clear-cut but the answers to this question were various and contradictory. The NIKI dispute has at long last been settled, but the dynamic of the NIKI case is intriguing because it demonstrates that the new COMI rules still give rise to doubts as regards both the relation between the two elements constituting the COMI definition (i.e.between “the place where the debtor conducts the administration of its interests on a regular basis” and the place “which is ascertainable by third parties”), and the relation between the definition of COMI and the presumptions that are provided to make it easier to apply this definition.
Moreover, some legal counsels maintain that the new COMI rules could facilitate fraudulent COMI relocations. A company could move its registered office to another Member State which is less favourable towards its creditors; make the transfer public,e.g.by using the new address in correspondence; await the expiration of the three-month period laid down by the time limit to the presumption; and apply for a fraudulent, but a ‘legally authorized’ opening of insolvency proceedings in the new jurisdiction.
Mutatis mutandis, a similar idea is proposed as regards individuals. To our knowledge there is no evidence of cases where these proposals have facilitated fraudulent COMI relocations. However, the proposal to circumvent the new COMI rules deserves attention because it leverages some prescriptions which were conceived precisely to prevent a debtor from circumventing the COMI rules.
The problems with the new COMI rules do not end here, as I have demonstrated in a recent paper titled The Puzzle of the New European COMI Rules: Rethinking COMI in the Age of Multinational, Digital and Glocal Enterprises.
In fact, sometimes the investigation about ‘ascertainability by third parties’ could prove problematic. The more complex a business organization is, the more often this situation arises. This is because the more complex a business organization is, the easier it becomes for a firm to be split into many ‘units’ (the term is intentionally non-technical) which, on the one hand, are located in different countries and, on the other hand, are in contact with different groups of creditors: case by case, these groups of creditors may have differing perceptions as to where the firm is located.
Undoubtedly, problems of this nature may arise when insolvency occurs within a group of companies – Recital 53 of Regulation 2015/848 allows one single court to open one single set of insolvency proceedings concerning several companies belonging to the same group. But the investigation about ‘ascertainability by third parties’ could prove equally challenging when a firm conducts its relationships with suppliers and customers through digital networks, and even more so if this firm runs a business which is glocal, in the sense that it is characterized by both global and local considerations. The domain name “.com” gives no indication as to where a business is located and, even where the domain name uses a country code such as “.de” or “.fr”, there is no guarantee that the firm is established in that country, since it is relatively common practice to keep web servers geographically separated from the actual location of the enterprise.
It is highly probable that these shortcomings will result again in requests for preliminary rulings; it is also highly desirable that the ECJ provide an interpretation of the COMI rules which would prove crucial in resolving those specific issues that gave rise to such requests.
Arguably, this situation is less serious as regards the flaw affecting the rules which lay down the time limits to the applicability of the COMI presumptions – this flaw could probably be fixed by means of interpretation. However – as regards the flaw concerning the prerequisite of ‘ascertainability by third parties’– it is highly improbable that the ECJ will be able to solve this problem at the roots and, consequently, prevent subsequent litigation.
Even the most enthusiastic supporters of ECJ activism must admit that the European Court is not allowed to interpret the new COMI rules in a way that proves to be against both the letter and the spirit of the legal framework, for this power belongs to the regulator alone. To be more precise, this statement implies that the ECJ will be unable either to rule that the prerequisite ‘ascertainability by third parties’ would be unnecessary whenever this presence was de facto incompatible with that of ‘administration on a regular basis’, or to rule that the application of the COMI presumptions might disregard the COMI definition. Both rulings would infringe not only the letter of the new COMI rules but also the clearly traceable intention of the regulator.
Further, the ECJ might certainly rule that the COMI of a company X is located in a country Y by putting the COMI of that company into a system of relations with some elements which are considered as relevant to the case. However, since ascertainment of the COMI is case-sensitive and since the one-to-one relation between these factors and the debtor’s exact location cannot be established in a universal way, this ruling will not provide the interpreter with a general criterion that would hold good for any future cases.
US Supreme Court has granted certiorari in a case concerning the determination of habitual residence under the Child Abduction Convention: Monasky v. Taglieri
On 10 June 2019, the US Supreme Court granted certiorari in the case of Monasky v. Taglieri. By doing so, the US Supreme Court will finally resolve the split in the US Circuits regarding the standard of review and the best approach to follow in determining the habitual residence of a child under the HCCH Convention of 25 October 1980 on the Civil Aspects of International Child Abduction (Child Abduction Convention).
The questions presented are:
- Whether a district court’s determination of habitual residence under the Hague Convention should be reviewed de novo, as seven circuits have held, under a deferential version of de novo review, as the First Circuit has held, or under clear-error review, as the Fourth and Sixth Circuits have held.
- Where an infant is too young to acclimate to her surroundings, whether a subjective agreement between the infant’s parents is necessary to establish her habitual residence under the Hague Convention.
Regarding the first question, it is important to note that findings of facts are reviewed for clear error and issues of law are reviewed de novo. This is of crucial importance as this would determine the extent to which the decision of the US district court can be reviewed by the US court of appeals, as these standards confer greater deference for findings of fact. The question then arises as to whether the determination of habitual residence is a mixed question of law and fact or only a question of fact.
The second question deals with the case of newborn or young infants and whether a subjective agreement between the parents is necessary to establish a habitual residence under the Child Abduction Convention. Despite its simplicity, the Court may also take the opportunity to address the current split in the US circuits regarding the extent to which courts can rely on the parents’ last shared intent or the child’s acclimatization or both in determining the habitual residence of a child.
This is well summed up by the Seventh Circuit Court of Appeals in Redmond v. Redmond (2013): “In substance, all circuits – ours included – consider both parental intent and the child’s acclimatization, differing only in their emphasis. The crux of disagreement is how much weight to give one or the other, especially where the evidence conflicts.”
In my personal opinion, the hybrid approach, that is relying on both shared parental intent and the child’s acclimatization (without placing more emphasis on one or the other, except perhaps for the case of newborns or very young infants), as well as looking to all other relevant considerations arising from the facts of the particular case, is the right approach to follow. This would avoid that parents create artificial jurisdictional links in a State and thus engage in forum shopping. The flip side of this argument is that this would necessarily mean less party autonomy in these matters. By following this approach, the United States would align itself to case law in Canada (Balev case – Canadian Supreme Court, see our previous post here), the European Union (Mercredi v. Chaffe, confirmed in O.L.v. P.Q.) and the United Kingdom (A. v. A. (Children: Habitual Residence)).
To conclude with the words of the Balev case: “[…] the hybrid approach to habitual residence best conforms to the text, structure, and purpose of the Hague Convention. There is no reason to decline to follow the dominant trend in Hague Convention jurisprudence. The hybrid approach should be adopted in Canada”.
Singapore Court of Appeal Affirms Party Autonomy in Choice of Court Agreements
Professor Yeo Tiong Min, SC (honoris causa), Yong Pung How Professor of Law at Singapore Management University, has kindly provided the following report:
“The Singapore Court of Appeal has recently affirmed the significance of giving effect to party autonomy in the enforcement of choice of court agreements under the common law in three important decisions handed down in quick succession, on different aspects of the matter: the legal effect of exclusive choice of court agreements, the interpretation and effect of non-exclusive choice of court agreements, and the effect of exclusive choice of court agreements on anti-suit injunctions.
In Vinmar Overseas (Singapore) Pte Ltd v PTT International Trading Pte Ltd [2018] SGCA 65, proceedings were commenced in Singapore in respect of an alleged breach of a commercial sale contract containing an exclusive choice of English court agreement. The agreement was dated before the Hague Convention on Choice of Court Agreements took effect in English law, so the Convention was not engaged. Like many other common law countries, the Singapore courts would give effect to the agreement unless strong cause can be demonstrated by the party seeking to breach the agreement. A complication arose because there had been four previous decisions of the Court of Appeal in the shipping context where proceedings had been allowed to continue in Singapore in the face of an exclusive choice of foreign court agreement because the court had found that the defence was devoid of merits. The claimant’s argument that based on these decisions the Singapore court should hear the case because there was no valid defence to its claim succeeded before the High Court.
Sitting as a coram of five on the basis of the significance of the issue, the Court of Appeal unanimously reversed the decision. It decided that the merits of the case were not a relevant consideration at the stage where the court was determining whether to exercise its jurisdiction, and departed from its previous decisions to the extent that they stood to the contrary. While affirming the continuing validity of the strong cause test, the court placed considerable emphasis on the element of contractual enforcement. Thus, factors that were reasonably foreseeable at the time of contracting would generally carry little or no weight. In particular, the court recast one of the traditional factors in the strong cause test, “whether the defendants genuinely desire trial in the foreign country, or are only seeking procedural advantages”, as an inquiry into whether the party seeking to enforce the choice of court agreement was acting abusively in the context of cross-border litigation. In the view of the court, the genuine desire for trial in the contractual forum has been adequately expressed in the choice of court agreement itself, and it is legitimate to seek the procedural advantages in the contractual forum. The court considered that strong cause would generally need to be established by either proof that the party seeking trial in the contractual forum was acting in an abusive manner (which is said to be a very high threshold), or that the party evading the contractual forum will be denied justice in that forum (ignoring the foreseeable factors), for example if war had broken out in that jurisdiction.
The court left open the question whether the same approach would be taken if the choice of court agreement had not been freely negotiated, taking cognisance of situations, especially in the shipping context, where contracting parties may find themselves bound by clauses the contents of which they have had no prior notice. The court expressed the tentative view that as a matter of consistency, the same approach should be adopted.
In Shanghai Turbo Enterprises Ltd v Liu Ming [2019] SGCA 11, the Court of Appeal was faced with an unusual clause: “This Agreement shall be governed by the laws of Singapore/or People’s Republic of China and each of the parties hereto submits to the non-exclusive jurisdiction of the Courts of Singapore/or People’s Republic of China.” The High Court found the choice of law agreement to be meaningless as a purported floating choice of law, and that the choice of court agreement was invalid as it could not be severed from the choice of law agreement. The court then applied the natural forum test and declined to exercise jurisdiction on the basis that China was the clearly more appropriate forum for the dispute. On appeal, the Court of Appeal agreed with the finding that the choice of law agreement was invalid, but held that the choice of court agreement could be severed from the choice of law agreement.
In a prior decision, the Court of Appeal in Orchard Capital I Ltd v Ravindra Kumar Jhunjhunwala [2012] SGCA 16, had considered a non-exclusive choice of court clause to be relevant at the very least as a factor in the natural forum test, and that the weight to be accorded to the factor depended on the circumstances of each case. It also considered that there was another possible approach to such clauses based on contractual enforcement principles, which it did not fully endorse as the parties had not raised arguments based on contractual intentions.
In Shanghai Turbo, the Court of Appeal had to face this issue squarely, and affirmed that if there is a contractual promise in the non-exclusive choice of court clause, the party seeking to breach the agreement had to demonstrate strong cause why it should be allowed to do so. The court went on to hold that, generally, where Singapore contract law is applicable, the “most commercially sensible and reasonable” construction of an agreement to submit, albeit non-exclusively, to a court is that the parties have agreed not to object to the exercise of jurisdiction by the chosen court. This inference does not depend on there being an independent basis for the chosen court to assume jurisdiction (eg, by way of choice of law agreement), or on the number of courts named in the clause. Conversely, there is generally no inference that the parties have agreed that the chosen court is the most appropriate forum to hear the case.
Thus, practically, where there is a non-exclusive choice of Singapore court clause, in general the Singapore will hear the case unless strong cause (the same test elucidated in Vinmar) is demonstrated by the party objecting to the exercise of jurisdiction by the Singapore court, but where there is a non-exclusive choice of foreign court clause, this is merely a factor in the natural forum test, as the party seeking trial in Singapore is not in breach of any agreement. On the facts, the court held that jurisdiction should be exercised because the defendant could not demonstrate strong cause.
It is to be noted these are canons of construction under Singapore law. Under Singapore private international law, the choice of court agreement is governed by the law that governs the main contract unless the parties have indicated otherwise. However, Singapore law will apply in default of proof of foreign law. Moreover, canons of construction may be displaced by evidence of contrary intention. The court left open the question – expressing no tentative view – whether the same approach would be taken for contracts which are not freely negotiated. However, as this is a question of interpretation, the context of negotiation could be a relevant indication of the true meaning of contractual terms.
The third case is on arbitration, but the Court of Appeal also made comments relevant to choice of court agreements. In Sun Travels & Tours Pvt Ltd v Hilton International (Maldives) Pvt Ltd [2019] SGCA 10, an injunction was sought to prevent reliance on a foreign judgment obtained in proceedings commenced in breach of an arbitration agreement. The court correctly identified the remedy sought as an anti-enforcement injunction, but nevertheless also discussed the anti-suit injunction because the case was argued on the basis that the injunction sought followed from an entitlement to an anti-suit injunction. The court clarified that an anti-suit injunction would generally be granted to enforce a choice of court agreement unless strong cause is demonstrated why it should be denied, and that there is no need to demonstrate vexatious or oppressive conduct independently. Thus, the law in this area is the mirror image of Vinmar. This case is particularly significant for Singapore because statements in the previous Court of Appeal decision in John Reginald Stott Kirkham v Trane US Inc [2009] SGCA 32 could be read as suggesting that the breach of contract is merely one factor to consider in determining whether the conduct of foreign proceedings abroad was vexatious.
These common law developments are highly significant in bringing greater consistency with developments elsewhere where party autonomy has come to assume tremendous significance. One is the Hague Convention on Choice of Court Agreements which took effect in Singapore law on 1 October 2016. Two critical aspects of this Convention are that a choice of the court of a Contracting State is deemed to be exclusive unless there are express provisions to the contrary, and that the chosen court should assume jurisdiction unless the choice of court clause is invalid. The second is the Singapore International Commercial Court (SICC) established in 2015. Where there is a choice (whether exclusive or not) of SICC clause, the SICC will assume jurisdiction unless the case is not an appropriate one having regard to the court’s character as an international commercial court. In addition, under the Rules of Court, a choice of the Singapore High Court made on or after 1 October 2016 is presumed to include the SICC unless expressly indicated otherwise. In both situations, the common law is not relevant, and to that extent, the practical effects of Vinmar and Shanghai Turbo will be limited. However, the extent to which anti-suit injunctions will be consistent with the Hague Convention on Choice of Court Agreements remains an open question, and it is certainly an area for watch for further developments.”
A more detailed discussion of the cases mentioned above can be found at: https://cebcla.smu.edu.sg/sites/cebcla.smu.edu.sg/files/Paper2019.pdf
News
Available as of next week in Recueil des cours: Mario J. A. Oyarzábal, The Influence of Public International Law upon Private International Law in History and Theory and in the Formation and Application of the Law
The lectures of Mario J. A. Oyarzábal entitled “The influence of public international law upon private international law in history and theory and in the formation and application of the law”, which were delivered at The Hague Academy of International Law in 2020, will be published on 22 March 2023 in the Collected Courses of the Academy (Recueil des cours de l’Académie de droit international de La Haye, Vol. 428, 2023, pp. 129 et seq.).
Mario Oyarzábal is an Argentine diplomat and scholar, currently the Ambassador of the Argentine Republic to the Kingdom of the Netherlands.
The summary below has been provided by the author.
As its title suggests, this course explores the influence of public international law upon private international law, in the history and the theory as well as in the formation and the application of the law.
The course focuses on the biggest transformations that have taken place on the international plane over the course of the last century and assesses how that has affected the legal landscape, raising questions as to the scope and the potential of private international law and the suitability of the traditional sources of international law to address the role of private actors and the incursion of public law in the private arena.
Issue 1 of Uniform Law Review for 2023
The HCCH this month published some recent developments on private international law in Issue 1 of Uniform Law Review for 2023 as “News from the Hague Conference on Private International Law (HCCH)”
Over the past year, the HCCH, supported by its Permanent Bureau, has continued its work for the progressive unification of the rules of private international law (PIL). This annual contribution to the Uniform Law Review provides an overview of the activities of the HCCH from 1 November 2021 to 30 November 2022 and anticipates some upcoming events, encompassing the HCCH’s three main areas of work: international family and child protection law, transnational litigation and apostille, and international commercial, digital, and financial law.
NGPIL Prize
Originally posted in News and events – Nigeria Group on Private International Law (ngpil.org)
On 4 March 2023, the Nigerian Group on Private International Law (“NGPIL”) colleagues were pleased to meet the winners of the 2023 NGPIL Conflict of Law’s Essay Prize. This year, we awarded two candidates, winner and first runner up, for excellent and engaging pieces on PIL and Nigeria.
Our winner, Oluwabusola Fagbemi, an LLM student from the University of Ibadan, Oyo State emerged as the winner of this year’s competition. She wrote on “A Comparative Analysis of Product Liability in the Conflict of Laws”, a piece that the deciding panel found to engage robust research, comprising of Nigeria common law, EU approach, English approach and US approach. Our winner was awarded 185,000NGN. In her words “It is an honour to be selected for The NGPIL Prize for the year 2022/2023. Thank you very much…It was also great to get to know them [NGPIL] and hear of their exciting work, and the impact that they are making in the PIL space globally… believe that The NGPIL is the right place for me to grow, learn, advance my career, and develop my interests in PIL. I will definitely keep in touch and remain connected, and I am looking forward to future collaboration.”
Adeyinka Adeoye from the Nigerian School of Law, Kano Campus received the 1st runner prize on her paper entitled “Product Liability in Private International Law” from a Nigerian perspective. She was awarded 65,000NGN. In her words “I am super excited that my essay emerged first runner-up. This news came at the best possible time“.
Huge congratulations to Busola and Adeyinka!