The liquidation of a “letter box” company with no operations, assets or actual management on the Isle of Man was not entitled to either foreign main or foreign nonmain recognition under chapter 15, because the island was not the center of main interests, nor did the company have an “establishment” there, according to Bankruptcy Judge Janice D. Loyd of Oklahoma City.
Judge Loyd’s October 14 opinion stands in contrast to In re Modern Land (China) Co., Ltd., 641 B.R. 768, 784 (Bankr. S.D.N.Y. July 18, 2022), where the bankruptcy court granted foreign main recognition to proceedings in the Cayman Islands, even though the company’s assets, management and business were in mainland China. In Modern Land, however, there was debt governed by New York law. Furthermore, the creditors were almost unanimous in their approval of a scheme of arrangement approved in the Caymans, and no creditor objected to recognition in the U.S. To read ABI’s report on Modern Land, click here.
Prof. Jay L. Westbrook told ABI that he found the Oklahoma case “interesting . . . because mere incorporation was not enough to make the Isle of Man the COMI even though accompanied by the usual lineup of statutory offices and resident directors where the offices and the directors were all associated with the corporate service organization.”
The country’s leading authority on cross-border insolvency, Prof. Westbrook went on to say that the “court relies on SPhinX [infra], which I regret, but nonetheless finds correctly that there was a failure of proof on COMI, especially where failure to produce knowledgeable management or liquidator witnesses permitted the court to make adverse inferences from their nonproduction.”
Prof. Westbrook is the Benno C. Schmidt Chair of Business Law at the University of Texas School of Law.
The Liquidation on the Isle of Man
The debtor was a limited liability company that was incorporated in the Isle of Man and maintained its registered office there. It owned an aircraft and contracted to sell it to a third party, after the completion of heavy maintenance. Two years later, disputes arose regarding the repairs. At the time, the escrow agent for the sale was holding more than $500,000.
The escrow agent filed an interpleader action that ended up in federal district court in Oklahoma to determine whether the debtor, the repair shop or the buyer was entitled to the $500,000. Later, the debtor was placed in a “creditors’ voluntary liquidation” on the Isle of Man, where a liquidator was appointed.
Four months later, the liquidator filed a petition in Oklahoma City for recognition of the proceedings on the Isle of Man as either a foreign main or nonmain proceeding under chapter 15.
The Paucity of Relevant Evidence
Regarding recognition, there was no dispute that the proceedings abroad were a “foreign proceeding” and that the liquidator was a “foreign representative.” Recognition turned on whether the liquidation abroad was a foreign main or nonmain proceeding as defined by Section 1502.
Under Section 1502(4), the proceedings would be foreign main if they were “pending in the country where the debtor has the center of its main interests,” or COMI. Under Section 1502(5), the proceedings abroad would be nonmain if they were being conducted “where the debtor has an establishment.” The debtor’s registered office is presumed to be the COMI under Section 1516(c). Of course, the presumption can be overcome.
The repair shop and the buyer opposed recognition as main or nonmain. To decide whether the presumption had been overcome and the liquidator was entitled to foreign main recognition, Judge Loyd applied the five-factor test from In re SPhinX, Ltd., 351 B.R. 103 (Bankr. S.D.N.Y. 2006), aff'd, 371 B.R. 10 (S.D.N.Y. 2007).
The first factor was the location of the debtor’s headquarters.
The debtor’s address on the Isle of Man was that of a “worldwide corporate service company.” Although the debtor’s directors lived on the island, they were employees of the service company. As Judge Loyd said, the service company’s “corporate and governance services include[] acting as a registered office and providing directors.”
The liquidator testified that the debtor’s business model was to own an aircraft leased to an affiliate located in the Togalese Republic. Otherwise, there was no additional testimony about the debtor’s operations or actual management.
The lack of further evidence led Judge Loyd to conclude that the first factor was “neutral.”
The second factor inquires about the location of those who actually manage the debtor.
Because there was “no evidence” that the two employees from the service company “independently managed or exercised control,” Judge Loyd decided that the second factor “weights against a finding of COMI.”
The third factor is the debtor’s primary assets.
The debtor claimed an interest in the aircraft, which was in Delaware, and had some $600,000 in a bank account in Switzerland, along with the $500,000 held by the court in Oklahoma. Finding “no evidence” about assets on the Isle of Man, Judge Loyd held that the location of assets “weighs heavily” against a finding of COMI.
The fourth factor, the location of creditors, similarly weighed against COMI because there were none on the island.
The fifth factor is the law to govern “most” disputes. It was neutral because Judge Loyd had no evidence on the issue.
Judge Loyd held that the liquidator was not entitled to foreign main recognition because the SPhinX factors weighed against a finding of COMI on the Isle of Man.
Still, the proceeding could be “foreign nonmain” if there was an “establishment” on the Isle of Man.
To qualify for nonmain recognition, Judge Loyd said that “the foreign debtor must establish a degree of stable connections with the jurisdiction to constitute a nontransitory ‘establishment.’ 11 U.S.C. § 1502(2).” She cited authority for the proposition that mere incorporation and record-keeping is not enough. There must be “a local effect on the marketplace,” she said.
Judge Loyd found no establishment on the Isle of Man and therefore no right to nonmain recognition, because the liquidator had not shown that the debtor had not “sufficiently engaged the local economy.”
To contravene the findings, the liquidator contended that the buyer and the repair shop had waived the right to object because they both participated in the proceedings on the Isle of Man by voting in favor of the creditors’ voluntary liquidation.
Judge Loyd presumed that they were protecting their rights to share in a distribution. She declined to “infer” that the creditors waived “their substantive, statutory rights” to object to recognition.
Judge Loyd denied the liquidator’s petition for both foreign main and foreign nonmain recognition.
Commentary by Prof. Westbrook
Prof. Westbrook elaborated on “letter box” companies and COMI:
The point was made recently that the idea of jurisdiction of incorporation having broad jurisdiction over a corporation was invented by the English as a way of ensuring English law would control for an English corporation operating elsewhere in or out of the empire. I don’t know if that is true, but it is plausible and I intend to explore it, because incorporation standing alone should never be a sufficient basis for COMI jurisdiction. [Emphasis added.]
As Bankruptcy Judge Martin Glenn held, it certainly cannot be the basis for nonmain jurisdiction. Yet SPhinX makes too much turn on what “the parties” want, which is to say the parties with the means and incentive to show up in the U.S. court. The rock-solid core of COMI doctrine is, of course, the opinion of Judge Lifland in In re Bear Stearns High-Grade Structured Credit Strategies Master Fund Ltd., 389 B.R. 325 (S.D.N.Y. 2008), where the court takes on the burden of ensuring the COMI policy of Chapter 15 is enforced.
The liquidation of a “letter box” company with no operations, assets or actual management on the Isle of Man was not entitled to either foreign main or foreign nonmain recognition under chapter 15, because the island was not the center of main interests, nor did the company have an “establishment” there, according to Bankruptcy Judge Janice D. Loyd of Oklahoma City.
Judge Loyd’s October 14 opinion stands in contrast to In re Modern Land (China) Co., Ltd., 641 B.R. 768, 784 (Bankr. S.D.N.Y. July 18, 2022), where the bankruptcy court granted foreign main recognition to proceedings in the Cayman Islands, even though the company’s assets, management and business were in mainland China. In Modern Land, however, there was debt governed by New York law. Furthermore, the creditors were almost unanimous in their approval of a scheme of arrangement approved in the Caymans, and no creditor objected to recognition in the U.S.