CoMI Gives Leg Up to Country of Registry

The European Court of Justice (ECJ) has recently

released its decision in <i>In re Eurofood IFSC</i> (Case C-341/04)
on Council Regulation (EC) 1346/2000 on Insolvency Proceedings (EC
Insolvency Regulation). It is the first major ECJ ruling on the
operation of the EC Insolvency Regulation, in particular on the
meaning of the centre of main interests (CoMI), the opening of
insolvency proceedings and the public policy exception. </p>
<p>Beyond the strict confines of the EC Insolvency Regulation, this ECJ
decision will serve as the most persuasive authority for the meaning

of CoMI and the public policy exception in the UNCITRAL Model Law on

Cross-Border Insolvency, not least because the concepts of CoMI and
public policy in the Model Law have their origin in the European
Union Convention on Insolvency Proceedings, which was subsequently
reproduced as the EC Insolvency Regulation. </p> <p><b>The
Facts</b></p> <p> Eurofood IFSC Ltd., a subsidiary of Parmalat SpA, is
a company incorporated and registered in Ireland. It is a wholly
owned subsidiary of Parmalat, a company incorporated in Italy that
operated through subsidiary companies in more than 30 countries
worldwide. Eurofood's principal objective was the provision of
financing facilities for companies in the Parmalat group. </p>
<p>Eurofood's registered office is at the International Financial
Services Centre, Dublin (IFSC). The IFSC was established to provide
a location for internationally traded financial services to be
provided only to nonresident persons or bodies. Eurofood carried on
business at the IFSC as required by Irish law. </p> <p>On Dec. 24,
2003, Parmalat was admitted to extraordinary administration proceedings

by the Ministero delle Attivite Produttive (Italian Ministry of
Productive Activities). Dr. Enrico Bondi was appointed as
extraordinary administrator. </p> <p>On Jan. 27, 2004, Bank of
America presented to the High Court of Ireland (the Irish court) a
petition for the winding up of Eurofood, alleging that Eurofood was
insolvent. On the same day, Bank of America also applied <i>ex
parte</i> for and obtained the appointment of Mr. Pearse Farrell as
provisional liquidator to Eurofood. </p> <p>On Feb. 9, 2004, the
Italian Minister for Production Activities admitted Eurofood to the
extraordinary administration procedure and again appointed Dr. Bondi

as the extraordinary administrator. The next day, the Italian court
made an order in which it acknowledged the filing of a petition to
declare the insolvency of Eurofood and set Feb. 17, 2004, as the
date for the hearing of that petition. </p> <p>On Feb. 20, 2004,
the Italian court gave judgment opening insolvency proceedings
concerning Eurofood, declaring it to be insolvent, determining that the
centre of its main interests was in Italy and appointing Dr. Bondi
as extraordinary administrator. </p> <p>On March 23, 2004, the
Irish High Court ruled that according to Irish law, the insolvency
proceedings with respect to Eurofood had been opened in Ireland on
the date on which the application was submitted by the Bank of America

NA, namely Jan. 27, 2004. Taking the view that Eurofood's CoMI was in
Ireland, it held that the proceedings opened in Ireland were the
main proceedings. It also held that the failure of Dr. Bondi to put
Eurofood's creditors on notice of the hearing before the Italian
court (despite that court's directions on the matter) and the
failure to furnish Mr. Farrell with the petition or other papers
grounding the application until after the hearing had taken place
all amounted to a lack of due process such as to warrant the Irish
courts refusing to give recognition to the decision of the Italian
court on grounds of public policy under Article 26 of the EC
Insolvency Regulation. Finding that Eurofood was insolvent, the
Irish High Court made an order for winding up and appointed Mr.
Farrell as the liquidator. </p> <p>Dr. Bondi then made an appeal to the

Irish Supreme Court. The Supreme Court decided to stay the
proceedings and referred the following questions to the ECJ for a
preliminary ruling: </p> <blockquote> <p>1. Where a petition is
presented to a court of competent jurisdiction in Ireland for the
winding up of an insolvent company and that court makes an order,
pending the making of an order for winding up, appointing a provisional

liquidator with powers to take possession of the assets of the
company, manage its affairs, open a bank account and appoint a
solicitor all with the effect in law of depriving the directors of

the company of power to act, does that order combined with the
presentation of the petition constitute a judgment opening...
insolvency proceedings for the purposes of Article 16, interpreted

in the light of Articles 1 and 2 the EC Insolvency Regulation?

<br>2. If the answer to Question 1 is in the negative, does the
presentation, in Ireland, of a petition to the High Court for the
compulsory winding up of a company by the court constitute the
opening of insolvency proceedings for the purposes of that
regulation by virtue of the Irish legal provision (section 220(2)
of the Irish Companies Act, 1963) deeming the winding up of the
company to commence at the date of the presentation of the petition?

<br>3. Does Article 3 of the said regulation, in combination with
Article 16, have the effect that a court in a Member State other
than that in which the registered office of the company is
situated and other than where the company conducts the
administration of its interests on a regular basis in a manner
ascertainable by third parties, but where insolvency proceedings
are first opened has jurisdiction to open main insolvency proceedings?
<br>4. Where </p> <blockquote> <p>(a) the registered
offices of a parent company and its subsidiary are in two
different Member States, <br>(b) the subsidiary conducts the
administration of its interests on a regular basis in a manner
ascertainable by third parties and in complete and regular
respect for its own corporate identity in the Member State where

its registered office is situated and <br>(c) the parent company

is in a position, by virtue of its shareholding and power to
appoint directors, to control and does in fact control the policy of

the subsidiary, in determining the CoMI, are the governing factors
those referred to at (b) or (c) above? </p> </blockquote>
<p>5. Where it is manifestly contrary to the public policy of a Member
State to permit a judicial or administrative decision to have
legal effect in relation [to] persons or bodies whose right to
fair procedures and a fair hearing has not been respected in
reaching such a decision, is that Member State bound, by virtue of

Article 17 of the EC Insolvency Regulation, to give recognition to

a decision of the courts of another Member State purporting to
open insolvency proceedings in respect of a company, in a situation
where the court of the first Member State is satisfied that the
decision in question has been made in disregard of those
principles and, in particular, where the applicant in the second
Member State has refused, in spite of requests and contrary to the

order of the court of the second Member State, to provide the
provisional liquidator of the company, duly appointed in accordance

with the law of the first Member State, with any copy of the essential
papers grounding the application? </p> </blockquote>
<p><b>Decision</b></p> <blockquote> <p> The ECJ ruled as follows:

<br>1. Where a debtor is a subsidiary company whose registered
office and that of its parent company are situated in two different

Member States, the presumption laid down in Article 3(1) of the EC
Insolvency Regulation, whereby the CoMI of that subsidiary is
situated in the Member State where its registered office is
situated, can be rebutted only if factors which are both objective

and ascertainable by third parties enable it to be established
that an actual situation exists which is different from that which

location at that registered office is deemed to reflect. That could

be so in particular in the case of a company not carrying out any
business in the territory of the Member State in which its
registered office is situated. By contrast, where a company
carries on its business in the territory of the Member State where

its registered office is situated, the mere fact that its economic

choices are or can be controlled by a parent company in another
Member State is not enough to rebut the presumption laid down by
that Regulation. <br>2. On a proper interpretation of Article 16(1) of
the EC Insolvency Regulation, the main insolvency proceedings
opened by a court of a Member State must be recognised by the
courts of the other Member States, without the latter being able
to review the jurisdiction of the court of the opening State.
<br>3. On a proper interpretation of Article 16(1) of the EC
Insolvency Regulation, a decision to open insolvency proceedings for

the purposes of that provision is a decision handed down by a court of

a Member State to which application for such a decision has been
made, based on the debtor's insolvency and seeking the opening of
proceedings referred to in Annex A to the EC Insolvency
Regulation, where that decision involves the divestment of the
debtor and the appointment of a liquidator referred to in Annex C
to the EC Insolvency Regulation. Such divestment implies that the
debtor loses the powers of management that he has over his assets.
<br>4. On a proper interpretation of Article 26 of the EC
Insolvency Regulation, a Member State may refuse to recognise
insolvency proceedings opened in another Member State where the
decision to open the proceedings was taken in flagrant breach of
the fundamental right to be heard, which a person concerned by
such proceedings enjoys. </p> </blockquote> <p><b>Analysis</b> </p>
<p>This decision will make it harder to rebut the presumption that CoMI
is in the jurisdiction of a company's registered office, and thus
more difficult to centralise the CoMIs of a number of companies
incorporated in different jurisdictions in one EU jurisdiction.</p>

<blockquote><blockquote>
<hr>
<big><i><center>
[I]t will not be sufficient to produce evidence that economic choices
are controlled by a parent company in another Member State... Once main
proceedings have been opened, recognition of those proceedings
as such in all other Member States is automatic and mandatory.
</center></i></big>
<hr>

</blockquote></blockquote>

<p> The starting point is that each
company is "a distinct legal entity...subject to its own court
jurisdiction." Although CoMI is unfortunately not actually
defined in the body of the EC Insolvency Regulation, the ECJ found that
one of the recitals made it plain that CoMI must be identified by
reference to criteria that are "both objective and
ascertainable by third parties." The need for legal certainty
and, interestingly, <i>foresee-ability</i> as to which court has
jurisdiction to open main proceedings was clear to the ECJ,
particularly given the importance of the CoMI decision for the conduct

of the proceeding. In the light of this, it will not be sufficient to
produce evidence that economic choices are controlled by a parent
company in another Member State. One also wonders whether it can
still safely be said that a CoMI can be "moved" from one
jurisdiction to another within a relatively brief period of time.
</p> <p>Once main proceedings have been opened, recognition of those
proceedings as such in all other Member States is automatic and
mandatory. If there is unhappiness with the finding of the first
court to do so, appeals must be made to the appeal courts in that
Member State. Any other result would be inconsistent with the
"simplified mechanism" for recognition of decisions given
in insolvency proceedings and the principle of "mutual
trust" set out in Recital 22 of the EC Insolvency Regulation. There

are no surprises in this. </p> <p>To ensure effectiveness of the
system, the ECJ went into detail on the sorts of national decisions
that will amount to a "decision to open insolvency
proceedings." The decision must so qualify as a matter of the
national law of the Member State of the court that makes it; the
proceedings must be collective, based on the debtor's insolvency and

entail at least partial divestment of the debtor, and they must also

prompt the appointment of a liquidator. All these factors were
present in <i>Eurofood</i>. Had they not been present, the Italian
court would arguably have been free to open main proceedings
notwithstanding any doctrine of Irish domestic law relating the
commencement of a liquidation back to the date of the presentation
of the winding-up petition to the Irish court. </p> <p>Finally,
there is a friendly but firm slap on the wrist for Dr. Bondi and his

advisers on the public policy point. Where what is in question is a
fundamental right to be heard, a court that is in a position to deny

such a right must not confine itself to the application of "its

own conception of the requirement...and of how fundamental that
requirement is in its legal order...." The reference to a need
to have regard to the "whole of the circumstances" is to
be read as a need for courts hearing matters of this sort to look beyond

narrow domestic concerns. </p> <p>As noted above, this ECJ decision

will serve as the most persuasive authority for the meaning of CoMI
and the public policy exception in the Model Law. This in turn
should help promote a consistent application of the Model Law and
thus achieve the Model Law's objectives.</p>