In East-West Logistics LLP v Melars Group Ltd [2022] EWCA Civ 1419 the Court of Appeal once again considered the test for establishing the location of a debtor's centre of main interests (COMI) for the purposes of the Recast Regulation on Insolvency Proceedings 2015/848. The case was a second appeal considering whether to uphold the dismissal of a winding up order on the grounds that the debtor's COMI was not in the United Kingdom.
Giving the leading judgment in the Court of Appeal, Lord Justice Snowden held (with the concurrence of the other judges) that the correct approach to determining a debtor's COMI was to start with the statutory presumption that a debtor's COMI was in the place of its registered office, and then analyse whether the presumption had been displaced. A lack of evidence of activities in the place of a debtor's registered office would not be sufficient by itself to rebut the presumption under Article 3(1) of the Recast Regulation.
Snowden LJ also concluded, in contrast to the judgment of Mr Justice Miles in the High Court below, that the analysis of a debtor's COMI, and in particular the question of whether it was ascertainable to third parties, could take factors into account that were known only to particular creditors. In that regard Snowden LJ considered that the Court should not "invent a "typical" third party creditor with “average” or “normal” characteristics and form a view on what might (or might not) have been apparent to that creditor in the course of a notional dealing by him with the company".
The Court held that the statutory presumption that the debtor's COMI was in Malta (the place of its registered office) had not been displaced and the appeal was dismissed.
The case remains relevant as guidance in instances where the concept of COMI has been incorporated into English law, which includes for recognition under the Cross Border Insolvency Regulations 2006, and as a ground for a debtor being able to commence administration proceedings under Schedule B1 of the Insolvency Act 1986, as well as in cases in the more limited cases in which the Recast Regulation will continue to apply in England and Wales. It also demonstrates the Court's likely approach to cases where a debtor is clearly a "letterbox" with limited substantial activities being conducted in the place of its registered office.
______________________________
COMI and Ascertainability
The Court of Appeal has once again considered the test for establishing the place of a debtor's centre of main interests (COMI) for the purposes of the Recast Regulation on Insolvency Proceedings 2015/848. In East-West Logistics LLP v Melars Group Ltd [2022] EWCA Civ 1419, the Court in particular considered the correct approach to the statutory presumption under the Recast Regulation that a debtor's COMI is in the place of its registered office, and the requirement that COMI is "ascertainable to third parties" when considering the presumption.
Giving the leading judgment in the Court of Appeal, Lord Justice Snowden held (with the concurrence of the other judges) that the correct approach to determining a debtor's COMI was to start with the statutory presumption and then consider whether the presumption had been displaced. A lack of evidence of activities in the place of a debtor's registered office was not sufficient to rebut the presumption under Article 3(1) of the Recast Regulation. He also concluded, in contrast to the judgment of Mr Justice Miles in the High Court below, that the analysis of a debtor's COMI, and in particular the question of whether it was ascertainable to third parties, could factors into account that were known only to particular creditors. In that regard Snowden LJ considered that the Court should not "invent a "typical" third party creditor with “average” or “normal” characteristics and form a view on what might (or might not) have been apparent to that creditor in the course of a notional dealing by him with the company".
On that basis the Court of Appeal held that Miles J had been right to find that the factors put forward by the petitioner were insufficient to rebut the statutory presumption that Melars Group Limited's (Melars) COMI was in Malta, the place of its registered office. The winding up order granted on the petition of East-West Logistics LLP (East-West) was set aside.
The case was decided under the Recast Regulation which no longer has direct effect under English law. However, substantially the same language is used in various enactments such as the Cross Border Insolvency Regulations 2006, and the revised test for whether a debtor can commence administration proceedings under Schedule B1 of the Insolvency Act 1986, as well as the enactments providing for the continued effect of the Regulation to cases opened prior to the end of the Brexit transition period. This means that the court's interpretation will be of great interest to those considering those provisions in the future.
The case also provides helpful guidance when considering the COMI analysis of a debtor whose registered office is merely a "letterbox" and undertakes no substantive activities there. While this is most likely to occur where debtors are incorporated in particular jurisdictions for reasons of tax structuring, such entities are often subject to substance requirements such as directors being present in the jurisdiction, which would be factors indicating that the debtor's COMI was in that jurisdiction. The guidance is therefore more relevant when considering debtors which are incorporated in particular jurisdictions for other reasons. Similarly, as more commercial activity has moved online and business is increasingly conducted remotely, it is clear that a debtor's business activity could be substantively de-coupled from the place of its registered office, putting greater emphasis on the statutory presumption.
Background
Melars is a company that had been registered in the British Virgin Islands (BVI), but during the course of its dealings with East-West had moved its registration to Malta. East-West and Melars had entered into an English law charterparty for a shipment of cargo to Turkmenistan. The shipment was redirected to Russia when the buyer refused to take delivery and East-West commenced LCIA arbitration proceedings in London, as required by the charterparty, claiming demurrage. Melars was successful in a jurisdictional challenge, which meant that the arbitration did not proceed, and East-West commenced proceedings in the BVI courts. Those proceedings concluded when East-West obtained judgment in default. When East-West sought to recover the damages from Melars in the BVI it learned that Melars had moved its place of incorporation, and hence its registered office, to Malta.
East-West then sought to wind-up Melars in England, asserting that Melars' COMI was in the United Kingdom rather than the place of its registered office. East-West was successful at first instance in obtaining a winding-up order against Melars, but this was overturned on appeal to the High Court.
Establishing COMI in the UK
East-West relied on the following factors to support its assertion that Melars' COMI was in the UK and not Malta (the place of its registered office):
- East-West was aware of six commercial contracts (including its own charterparty) to which Melars was party that were governed by English law, drafted in the English language and contained dispute resolution clauses providing for arbitration in London;
- Melars had already participated in LCIA arbitration with East-West in London, and had been represented by a firm of solicitors in London;
- Melars did not actually have an office in Malta as its registered office address was that of a Cypriot law firm providing company administrative services;
- Melars had no employees and did not conduct any business in Malta;
- Its sole director was a nominee who as a Swiss national resident in South Africa; and
- Its sole shareholder and principals were Russian.
The courts at first instance, on appeal to the High Court and in the Court of Appeal, considered two main issues:
- The approach to the COMI analysis and the importance of the statutory presumption; and
- The question of what facts are "ascertainable by third parties" for the purposes of the analysis.
Statutory Presumption
In granting the winding up order, Deputy ICC Judge Baister considered that the evidence was sparse and that therefore establishing that COMI was difficult. He held that in those circumstances, the Court could not avoid an inquiry to ascertain a company's COMI by using the registered office presumption to make a finding by default. The judge's approach was then to consider the evidence, concluding that there was insufficient evidence of any activities in Malta, with no operational office and no person conducting the business of the company there. He went on to conclude that Melars' COMI was in the UK because of Melars' greater use of English law for its contracts and London arbitration as the preferred means of dispute resolution, and its involvement in legal proceedings and instruction of lawyers in London.
This approach was dismissed by Miles J in the High Court, who found that the approach to the decision at first instance had been flawed. He found that the judge had taken the wrong approach in dismissing Malta as the place of Melars' COMI on the basis that it was merely a "letterbox" registration, placing too little weight on the fact that the registered office address is a fact that is itself public and ascertainable to third parties, and that the statutory presumption means that this should be the starting point for the analysis. The fact that Melars had moved its registered office for the purposes of frustrating the proceedings in the BVI might have been relevant to the strength of the presumption, but the fact of that move was insufficient to rebut the presumption without further evidence.
Snowden LJ agreed with Miles J, finding that the first instance judge had erred by weighing up the competing cases for COMI to be located in England, Switzerland and Malta, rather than starting from the presumption that Melars' COMI was in Malta and asking whether the evidence was sufficient to displace that presumption.
Ascertainable by Third Parties
Miles J identified what he considered to be a further flaw in the first instance court's analysis – the judge had not considered whether the factors relied on to establish Melars' COMI in the UK were ascertainable to third parties, which is a key criteria for determining a debtor's COMI under Article 3(1). A number of the factors had required investigative work by East-West, and there was no reason to suppose that those factors would have been ascertainable to typical creditors of Melars. With this in mind, Miles J addressed each of the factors relied on for establishing COMI in the UK (both those identified in the original petition and raised subsequently in evidence).
In doing so, he considered the argument that Melars had a number of contracts governed by English law, conducted LCIA arbitration in London and included a statement in its charterparty with East-West that the "place" was London. In each instance he concluded that these factors would not be ascertainable by typical third party creditors, and therefore no weight should be placed upon them. He also concluded that there was no real evidence that, despite the frequent use of English law for contracts and LCIA arbitration as a dispute resolution mechanism, that any of the contracts were intended to be performed in England, and that this was commonplace in international trade contracts in which parties would be surprised to find COMI was moved to England as a consequence.
Miles J concluded that the statutory presumption had not been rebutted by any matters that would have been ascertainable by typical third party creditors, and therefore Melars' COMI was in Malta. The appeal was allowed and the winding up order set aside.
Snowden LJ agreed that none of the factors relied on by East-West were sufficient to displace the statutory presumption that Melars' COMI was in Malta. However, he disagreed with Miles J's approach to the ascertainability of certain factors to third parties, finding firstly that it was not essential that such matters be in the public domain, and secondly that factors known only to a particular creditor could still be taken into account in the analysis, including arising from their own dealings with the debtor, provided that appropriate weight was given to those factors. In doing so, Snowden LJ considered that Miles J's formulation of "typical" third party creditors should be resisted, and that the Court should not invent a creditor with "normal" or "average" characteristics for the purposes of determining which factors were ascertainable to third parties or not.
Conclusions
While the Recast Regulation now has only limited effect in English law, the case remains relevant as guidance in instances where the concept of COMI has been incorporated into English law, as well as those limited cases to which the Recast Regulation will continue to apply. It also demonstrates the Court's likely approach to a case where a debtor's registered office is clearly merely a "letterbox" with no real substance in that place.
