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Uncitral Model Law on Cross Border Insolvency

Info: 5522 words (22 pages) Law Essay
Published: 6th Aug 2019

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Jurisdiction(s): International LawEU Law

Most trading nations have developed their insolvency laws for different reasons and based on different policies due to which the countries have different motivations when it comes to debtor’s insolvency proceeding and a battle over jurisdictions ensues. The recent attempts by the European Union and the United Nations to pass harmonious transnational insolvency laws and regulations appear to have a connotation of universalism. [1] The operation of the E.U. Insolvency Regulation was designed to govern insolvency proceedings initiated in member states and seeks to establish a choice of law for the management of any insolvent debtor whose business activities extend over at least two EU member states and which, when established, dictates which legal system will govern the procedure. [2] But what the EIR does not do, is provide member states with more formal and uniform guidelines which would help the courts to determine where the true COMI of a country lies, [3] and this issue is the epicentre of the essay.

The primary purpose of the essay is to discuss the concept of COMI and its controversial nature with relevant cases and thereby discussing the EU attempt to universalism and the formation of United Nations Commission on International Trade Law [4] in 1966 which is considered a vehicle for exploring and recommending changes in order to create greater harmony within the legal systems of the member-states in matters of international trade law [5] .


The European Insolvency Regulation [6] entered into force on May 31, 2002 which was adopted in accordance with arts 61(c) and 65 of the Treaty Establishing the European Community pursuing the general harmonisation of the private and procedural international laws among the Member States. The EIR applies only when (i) the COMI of the insolvent debtor is placed in one of the Member States i.e. one of the Member States to which the EC Insolvency Regulation applies and (ii) the envisaged insolvency proceeding has cross-border implications. It identifies which contracting state’s courts have jurisdiction to open main and possibly secondary insolvency proceedings and once the jurisdiction to open insolvency proceedings has been ascertained, the law of the contracting state applies with exclusivity to all its procedural and substantial aspects, as set forth in art.4. [7] Notwithstanding the great importance given to the concept of COMI, the Regulation does not define it and the only guidance provided is in Article 3(1) 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’ [8] and in recital (13), stating that “… 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.” [9] The words here was imported from the Virgos Schmit Report and to fully understand the concept, we must look back and recall that domestic law in Europe had two approaches – the historic approach based on place of registration and the other focused on the seat of the company which is the idea behind COMI and Article 3 of EIR is a compromise between the two approaches. [10] Therefore it divides the proceedings into two groups- main proceedings which are brought in the Member State where the debtors COMI are situated which further embodies the principles of unity and universality as the jurisdiction of that court is recognised in all other Member States and secondary proceedings which are brought in another Member State where the debtor has establishment. [11] This restricts the Courts to make winding up orders against companies whose COMI is in another EU state. However whatever maybe the nature of the proceedings the law will be that of state where the process was opened. [12] Few scholars believe that the purpose of providing a vague definition is to allow contracting parties court’s to exercise certain degree of discretion in determining COMI through application of bankruptcy provisions under which the proceedings are opened up but again if this is done, then it is highly possible that the court of any contracting state where maximum creditors are located would open the main insolvency proceeding in order to give them an advantage. However this has been contradicted by few upholding that there is only one COMI which is to be derived from the EIR and as interpreted by the decisions of the ECJ which has been confirmed in the ‘Eurofood case’ [13] . Here the ECJ also highlighted the stability and transparency required when managing the company’s interests for third parties. But who are the third parties? This is left undecided, save for, the majority of legal scholars believe that third parties should correspond to the creditors and hence the company’s creditors should be informed of the location of their debtor’s COMI in order to ascertain what law will apply if that debtor becomes insolvent but yet again it fails to address whether all creditors are to be treated equally or not?. The question about COMI again was raised in ‘Eurotunnel case’ and the decision evidences that the local courts of the Member State where the parent company is located are more inclined to bring the subsidiaries within the parent company’s Member State and open main proceeding against them under the laws of the Member State, even in those cases where the subsidiary is formally

located in another Member State, rebutting the presumption under Article 3(1). [14] Scholars have commented that the principle underlying the definition in Recital 13 is that, creditors are entitled to certainty in their dealings and should be able to assess their risks and which jurisdiction’s laws would apply in the event of insolvency. But the Regulation does not indicate what aspects of administration are pertinent to the determination. It fails to address the situation where the debtor strategically shifts its COMI such that its COMI is no longer located within a Member State and hence within the jurisdiction of the Regulation. [15] Nevertheless in this connection it is important that I bring forth another landmark decision given in ‘Bear Stearns [16] ’ which relied on Eurofood and held that their COMI, was the United States where the Funds conduct the administration of their interests on a regular basis and is therefore ascertainable by third parties, unlike the approach in ‘SPhinX’ [17] where greater weight was placed on the presumption that a debtor’s COMI is located at its registered office and treated the COMI presumption as having special evidentiary value even when such an approach was unsupported by the facts [18] and was held to be a bad decision.

Until now in most of the court cases, the determination of COMI is the principle point of legal conflict, and amongst them some highly debated cases are ‘Daisytek’ [19] and ‘Parmalat’. In these decisions the vital question “where is the centre of main interest?” are based on many facts and circumstances and with this regard it has been submitted that in these cases one sees the conflict of two concepts ,namely, “contact with creditors” approach where a debtor’s COMI is determined through the eyes of creditors and the other view is the “mind of management” approach where the debtor’s COMI is situated where the parent company has its principle place for managing its operations. [20] Nevertheless it has been asserted that the question of COMI is that of fact. Indeed as per the Regulation, it presumes COMI to be the registered office although in practice the actual situation may enormously vary like in UK it is quite common for the registered office to be somewhere else than the actual operational headquarters of the company. [21] In February 2003 an English court has decided on this question affirmatively in ‘Re BRAC Rent-A-Car International Inc’ [22] and held that ‘…..the only test for the application of the regulation in relation to a given debtor is whether the centre of the debtor’s main interest is in a relevant Member State, and not where a debtor which is a legal person is incorporated.’ From the decision one can derive that courts in a Member State will have international jurisdiction with regard to a debtor-company that is incorporated in a non-EU State, whenever it can be established that its COMI is in that Member State. The decision has been welcomed by authors from the UK and was also applied in ‘Norse Irish Ferries and Cenargo Navigation Limited’ [23] .

The courts over time have made various observations in determining the COMI for instance the location of the administration and finance functions of a company at times were regarded helpful in locating the COMI of both parent and subsidiary companies [24] or a key factor in determining COMI is where a company performs its “head office functions”. [25] In ‘Shierson v Vlieland-Boddy [2005] EWCA Civ 974’, it was held that the location of the debtor’s COMI should be decided at the time when the court is asked to commence insolvency proceedings against the debtor [26] and in ‘Re Staubitz-Schreiber, Case C-1/04, [2006] BPIR 510’, the debtor tried to move her COMI from Germany to Spain after her insolvency proceedings had been filed but before the hearing. The ECJ held that the debtor’s COMI remained in Germany because the debtor had her COMI there at the time of opening of insolvency proceedings, regardless of any subsequent attempt to move her COMI. [27] This shows the uncertainty in cross border insolvencies. Personally based on my research I feel that indeed the national courts have been granted power to apply its own mind on the basis of facts regarding the notion of COMI as one specific interpretation cannot be applied due to different insolvency laws enacted thereof and each state’s want to protect its interest. This view can be beneficial but at the same time open to abuse. Therefore we require a mechanism which can bring about a degree of certainty and where the courts can inevitably apply prescribed rules to decide a case.

Regardless of the position under the EIR, the presumption in chapter 15 of the Bankruptcy Code that a company has its COMI at the place of its registered office is only meant for speed and convenience and it is the foreign representative who must prove the location of COMI. Furthermore it is suggested that the same approach should be adopted under the Cross-Border Insolvency Regulations 2006 by the English courts. [28] Though the Eurofood decision has global impact but European experience so far has confirmed that applying the concept of COMI in practice has been difficult, controversial and despite the presumption and the explanation in the Regulation’s preamble, it has been difficult in many cases to predict with any amount of certainty what factual criteria would define a company’s COMI. In particular, some commentators have argued that ‘the spirit of the Regulation has been “stretched” by insolvency advisors adopting a liberal, purposeful approach to interpreting the COMI concept’. [29] At present there is a debate as to whether there should be a concept of COMI of a corporate group or whether international rules of comity and cooperation are sufficient to address the matter which is being considered by the UNCITRAL Working group on Corporate Groups. Alternatively, it suggests that the COMI of the group could be deemed to be that of the parent corporation, so that all subsidiaries would have the same COMI. [30]


UNCITRAL was created by the UN in 1966 to unify the law on international trade and in 1995 the Commission agreed to establish a Working Group to develop model legislation relating to cross-border insolvency, the text of which was endorsed in 1997. [31] One great hurdle in smooth flow of trade is due to the conflict of laws between different jurisdictions with regard to insolvency proceedings, thereby resulting in the dissipation of assets and the loss of an opportunity to save a feasible business. The UNCITRAL Model Law on cross-border insolvency is an attempt to promote modern and fair legislation for cases where the insolvent debtor has assets in more than one State [32] . The Model law will assist states to endow their insolvency laws with a modern and fair framework while addressing efficiently cross-border insolvency. There may be considerable overlap between the UNCITRAL Model and the EIR but the principal difference is that the latter provides for foreign insolvency proceedings to have direct effect in the UK, whereas the former require an application to be made to the UK court for recognition. The Model Law may not have much impact as the EIR and in any conflict between them the latter will precede but the greatest impact will be in restructurings which can be carried out in a much more flexible and streamlined way, while minimising the need for multiple proceedings. [33]

Knowing it is impossible to formulate an acceptable regime that can change the substantive insolvency law of the States, the Working Group took advantage of the existing laws and formed a procedural law leaving each states to determine its own law but once it is done to allow foreign representative equal access to those laws. The format of the Law is such that each states are free to adopt as much or little they like and once a State recognizes a foreign proceeding it seeks to harmonise and get positive outcome by requiring co-operation between the two proceedings. [34]

Central to the operation of the Model Law is the location of debtor’s COMI which depends on whether one is concerned with a foreign main proceeding or a foreign non-main proceeding, former taking place in the state where the debtor has its COMI (Article 2(b) and to avoid delay, COMI should be taken as the registered office of the debtor mentioned in Article 16(3) and the latter taking place in a state where the debtor has an establishment (Articles 2(c) and (f)). [35] Unfortunately the definitions are too wide to cover proceedings opened in a state where the debtor has neither COMI nor an establishment. [36] Hence this view did not garner much support and to reduce disputes on this topic the Model Law included rebuttable presumption. Another proposal was to include more than one criterion to define foreign main proceedings which too was rejected as it could pose a lot of problems for example what happens after first recognition if another recognition is sought in a State where the debtor has COMI, should the first be converted into foreign non main proceeding? In addition it provides for recognition of foreign proceedings but based on application and depending on law of recognising state. However it fails to mention which law governs the process unlike EIR that is why it is considered looser having exhortatory tone. It has been criticised for numerous reasons such as that it does not provide a legal basis for the recognition of proceedings, some relief are automatic and some are not and can also be terminated by the courts and most importantly it too does not define COMI. [37] But the enactment notes to the Model Law refer to the fact that the COMI formulation is as under the EC Regulation, therefore the implication is that the same factors should be taken into account. [38] Furthermore Chris Mallon of Weil, Gotshal & Manges states that the uncertainty inherent in the Model Law makes credit-risk assessment very difficult and encourages forum shopping and that in Europe the debate has moved beyond COMI to considering how to manage cooperation between main and secondary proceedings or whether secondary proceedings are better avoided altogether by recognition of creditors’ local rights in main proceedings. [39]

Wherever the COMI is challenged under the Model Law the court will determine the issue based on the evidence; however, there is no legislative guidance on what proof to contrary is required to rebut the presumption that the COMI is the debtor’s registered office. The UNCITRAL Legislative Guide on Insolvency Law, which aims to launch an effective insolvency framework, defines COMI as “the place where the debtor conducts the administration of its interests on a regular basis and that is therefore ascertainable by third parties”. The Guide to Enactment further notes that it is not advisable to include more than one criterion for COMI, because multiple criteria would amplify the risk of competing claims from foreign jurisdictions. [40]

Now let me discuss the implementation of the Model Law in Great Britain. It applies where assistance is sought in GB by a foreign court in connection with a foreign insolvency proceeding; where assistance is sought in a foreign state in connection with a British insolvency proceeding; where a foreign insolvency proceeding and a British insolvency proceeding in respect of the same debtor are taking place concurrently; or where creditors in a foreign state have an interest in requesting the commencement of a British insolvency proceeding. Section 426 of the Insolvency Act 1986 will continue to be available in cross-border insolvency matters. Therefore the Model Law, the EIR and section 426 will have parallel operation, and provide to a foreign insolvency representative cross border insolvency regimes to be considered. It allows a foreign insolvency representative to apply directly to a British court without meeting any formal requirements. However the concepts of COMI and establishment are similar to those in the Regulation. While COMI has not been defined but ‘establishment’ is defined to mean a place of operations where the debtor carries out a non transitory economic activity with human means and assets or services and in the absence of proof to the contrary, the debtor’s registered office is presumed to be the COMI [41] and also incorporates a caveat. There might be evidence to rebut this presumption, and if there is, then the foreign representative ought to be made to demonstrate that the foreign proceeding in question is the debtor’s COMI for reasons in addition to the place of registration. [42] Recently the verdict ‘In Re Stanford International Bank Limited’ [43] till date is one case which deals with the operation of the Regulations that implements the UNCITRAL Model Law and throws some light on how to settle the vexed question of determining COMI which is significant as it allows insolvency risks to be quantified allowing both lenders and companies to judge what will be the director’s duty on insolvency and what formal procedures will be available for restructuring and whether that process will be recognised in other jurisdictions. Despite these, disputes over COMI are unfortunately common which was highlighted in this case and the fact the Model Law has been implemented differently impedes achieving the uniformity as desired. [44]


The discussion will be incomplete if I do not mention the responses of various other countries to the UNCITRAL Model Law. To start with the highlight of the efforts to this point occurred when Mexico enacted legislation based on the Model Law and thereby became the first major jurisdiction to enact the provisions of the Model Law into its domestic insolvency legislation. [45] Thereafter Australia passed The Cross-Border Insolvency Act 2008 which provides for the adoption and enactment as a law of Australia of the Model Law facilitating access by overseas insolvency practitioners to Australian courts, where cross-border issues are dealt with in a more streamlined way. [46] The Act provides little guidance as to how the court should determine COMI, but mentions a rebuttable presumption that the registered office will be the COMI. Further Honourable J.J. Spigelman, recently confirmed that Australian courts will seek guidance from the way overseas courts have interpreted this concept, including the reasoning articulated in In re Bear Stearns case. [47] With the entry into force of a new Chapter 15 of its Bankruptcy Code, United States was the ninth jurisdiction to adopt legislation based upon UNCITRAL Model Law on Cross-Border Insolvency. [48] Although it does not define COMI but it contains a presumption that the debtors registered office or residence is the COMI. [49] It has been argued that there are number of advantages for the US to adopt the Model Law such as – it recognizes debtor’s in possession as foreign representative, it imposes an automatic stay and its final goal is reorganization which agrees with the general goals of US Bankruptcy law. Apart from the above, from a practitioner’s viewpoint, the most prominent feature is its fair and quick distribution of debtor’s assets in cross border proceedings and that it allows foreign representative to question witnesses to determine the extent of debtor’s assets. But even then the US was cautioned before its adoption as the Model law does not define main proceeding in a way that ensures only one court to lay claim, encourages forum shopping and that the scope of bankruptcy estate as per the Code is very broad and can frustrate the goals of the Model Law. [50] Earlier the Japanese rule on cross border insolvency was severely criticized by foreign lawyers because it had refused to recognize the effects of foreign proceedings in Japan and vice versa but in 2000 Japan enacted the Law of Recognition and Assistance for Foreign Insolvency Proceedings which adopted almost all the provisions of the UNCITRAL Model Law on Cross-Border Insolvency. [51] For New Zealand it has been stated that due to efficiency, globalization and fiscal factor, the cross border insolvency law needs reform and should adopt the Model Law and that the present domestic law is inadequate and adoption of the Model Law would prove a more satisfactory option as it would align New Zealand with other trading nations who adopt the Model Law. Also It is necessary for law governing international trade to reflect global trade developments as held in ‘Gordon Pacific Developments Limited v Conlon [1993] 3 NZLR 760’. [52] Even Canada has legislated an adapted version of the Model Law in Chapter 47, embracing many of its fundamental objectives but departing on particular aspects. The Guide to Enactment of the UNCITRAL Model Law on Cross-Border Insolvency noted that a state may modify some provisions but such flexibility can create some uncertainty in harmonization, and hence recommended that states make as few changes while incorporating the Model Law into their legal systems and Canada has taken advantage of the flexibility, but it is unclear yet as what extent. [53] Alike the Model Law, Chapter 47 adopts the concept of COMI as a device for determining main and non-main proceedings and specifies that a debtor company’s registered office shall be deemed to be the COMI in the absence of proof to the contrary. However, foreign non-main proceeding is defined differently and in contrast to the Model Law. The query of COMI arises where there is a question of the debtor’s connection with a jurisdiction and in such cases, insolvency laws adopt different tests for its determination. [54]

On the other hand, now the Indian government is considering the adoption of UNCITRAL Model Law on cross-border insolvency to meet the demands of globalisation and to deal with international insolvency. This will definitely change the orientation of Indian law and make it suitable for dealing with the numerous global challenges and at the same time integrate the Indian economy with the world economy. The Indian law existing today provides only for the recognition of foreign judgments and does not deal with the recognition of foreign proceedings and UNCITRAL Model law can resolve this deficiency. [55] Thankfully, the Indian government and the legislature have considered incorporating the model for which high level advisory committees have been appointed to advise the incorporation of a comprehensive bankruptcy code. [56]


When the EC Regulation came into force, there was no real definition or case law on COMI which was unfortunate since it is an important part of the Regulation and will be used in the future, as cross-border companies keep growing. Today, there is some room for own interpretation about COMI but it needs to be cleared up by higher authority. The courts have tried to define but they do not bind courts in other Member States which can only be done by the ECJ. [57] Many complex issues may arise in the context of cross-border insolvency, including the issue of identifying and satisfying conditions for recognition of a foreign insolvency proceeding, for granting relief and for locating a debtor’s centre of main interests. Because the EIR only vaguely defines the COMI and does not provide guidelines, the matter will remain controversial. Therefore, one solution to remove the ambiguity present in connection to the determination of COMI is by defining what the ECJ meant by “objective and ascertainable” factors and by appointing an arbitrary panel who will conduct such determination and remove the influence of differing local policies from the equation. [58]  Even then the elements of COMI remain indefinable and it is trapped between head office functions and business operations. It is submitted that b

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