More food for thought in a post by John Armour on the Credit Slips blog.

I agree with the conclusion that:

"we're going to see a number of the highly leveraged buyouts that run into difficulty winding up in formal bankruptcy proceedings, after a workout has been attempted and failed".

And this may well lead to attempts to reform some European bankruptcy codes.

It will also promote and no doubt extend the migration concept (previously discussed here).

Moving a COMI (centre of main interests) to a jurisdiction where the insolvency regime is more suited to concluding a successful restructuring not only can be done, but can add huge value to the restructuring.

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In a judgement here, published on 30 August 2007, Judge Burton Lifland in the US Bankruptcy Court (Southern District of New York) declined to recognise the Cayman Islands provisional liquidations of two Bear Stearns' Hedge Funds as foreign main proceedings.

Although registered in the Cayman Islands, the two companies' Centres of Main Interest were in the USA so the provisional liquidations could not be main proceedings.

Neither could they be foreign non-main proceedings as neither company had an establishment in the Cayman Islands.

The decision specifically uses the UNCITRAL Model Law and the European Insolvency Regulation to interpret the provisions of Chapter 15 of the US Bankruptcy Code. It also disagrees with parts of the Sphinx decision. Eurofood is cited.

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The famous decision on COMI (Centre of Main Interests) and the opening of main insolvency proceedings under the European Insolvency Regulation, which involved an Irish subsidiary of the Italian Parmalat group, is not the easiest to find quickly on the internet, so here's the link:

Eurofood IFSC Ltd, European Court of Justice Case C-341/04, Judgement of the Court (Grand Chamber), 2 May 2006

and here's the preceding Advocate General's Opinion:

Opinion of Advocate General Jacobs, 27 September 2005

For a selection of commentaries, try the following links:

• eir-database.com: Commentary on Case C-341/04
• A&L Goodbody (solicitors for the Irish Provisional Liquidator): Eurofood ECJ Decision - Guidelines on COMI
• Weil, Gotshal & Manges (lawyers acting for the Italian Extraordinary Administrator): European Court of Justice Establishes Approach for Determining Debtor's Center of Main Interests
• Linklaters: Eurofood - the ECJ ruling on the determination of COMI
• Freshfields Bruckhaus Deringer: The Eurofood IFSC Case

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Although he describes Judge Drain's decision in In re SPhinX Ltd as pragmatic and commercial, Chris Mallon of Weil, Gotshal & Manges uses the case in an article entitled:

Bankruptcy Blunder

I think the benefits of legislation encouraging cooperation between insolvency regimes far outweigh the risks of forum shopping. Of course parties will seek to gain advantage from any perceived uncertainty and some courts may react less predictably than others, but the COMI concept and its interpretation is becoming familiar to most practitioners.

Certainly in Europe the debate has moved beyond COMI to considering how to manage cooperation between main and secondary proceedings, particularly in relation to creditors' rights to claim in either or both, or whether secondary proceedings are better avoided altogether by recognition of creditors' local rights in main proceedings.

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In a review of the first year of enactment of Chapter 15 of the US Bankruptcy Code (which is based on the UNCITRAL Model Law on Cross-Border Insolvency) Mark Douglas of Jones Day considers the concepts of main and non-main proceedings and of COMI (centre of main interests) by reference to In re SPhinX Ltd and In re Tri-Continental Exchange Ltd under the title:

Chapter 15 Turns One: Ironing Out the Details.

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