In many decisions involving US chapter 15 cases, the bankruptcy court’s principal focus will be on what is the debtor’s center of main interests (COMI). An ancillary issue is whether it is appropriate to create COMI to obtain the benefit of a more favorable jurisdiction to restructure a company’s debt (otherwise known as “COMI shifting”). That was one of the issues Bankruptcy Judge Martin Glenn for the US Bankruptcy Court for the Southern District of New York addressed when he granted recognition of the foreign debtors’ proceedings in In re Ocean Rig UDW, Inc.
The foreign liquidators of Ocean Rig and its subsidiaries sought chapter 15 recognition of four provisional liquidation proceedings that had been commenced in the Cayman Islands and as to which the parties were awaiting sanction of the schemes of arrangement. Until 2016, the COMI for each of the debtors was located in the Republic of the Marshall Islands (RMI). In 2016, however, Ocean Rig changed its registration to an exempted company limited by shares under section 202 of the Cayman Companies Law. This was part of a deliberate effort to shift the future debtors’ COMI from the RMI to the Caymans.
The problem facing the debtors was that RMI law does not have a restructuring component. Indeed, the RMI does not have any bankruptcy or insolvency statute, and the only provisions in the law for winding up a company contemplate dissolution. Accordingly, any proceeding commenced in the RMI almost certainly would have resulted in a liquidation of the debtors. Because Cayman Law, on the other hand, does allow restructuring through schemes of arrangement, the debtors shifted their COMI to the Cayman Islands.
In US chapter 11 cases, the notion of manufacturing venue – taking steps to allow a debtor file in a particular jurisdiction within the US bankruptcy court system – can sometimes be controversial, and parties might question why a company that has its headquarters in one state and is incorporated in another chooses to file in a completely different jurisdiction. At the end of the day, though, every US bankruptcy court accepts the fundamental principle that Judge Glenn recognized underlies the Bankruptcy Code – “reorganization of a potentially viable entity (as opposed to liquidation) may be value maximizing, benefitting creditors, employees faced with the prospect of loss of employment, and other public and private interests.”
For some foreign companies, however, the venue of its main proceeding may determine whether reorganization is even an option. Judge Glenn’s opinion recognizes the dilemma faced by companies such as the Ocean Rig debtors, and it questions what is wrong with COMI shifting when the goal is to take advantage of an alternative, legitimate restructuring regime. Judge Glenn specifically calls out the UK, Hong Kong, Singapore, and the Cayman Islands for allowing companies to effect debt restructurings through schemes of arrangement, and he notes that US bankruptcy courts have recognized schemes of arrangement as the type of collective proceeding that qualifies for recognition. Rather than criticize the Ocean Rig debtors’ COMI shifting, Judge Glenn concluded, “The Foreign Debtors in these proceedings acted prudently in exploring their restructuring alternatives. The Court finds that the directors of the Foreign Debtors properly concluded that changing their COMI to the Cayman Islands, and, if necessary, commencing restructuring proceedings there, and also commencing chapter 15 proceedings in the U.S., offered them the best opportunity for successful restructuring and survival under difficult financial conditions.”
Of course, because the US Bankruptcy Code specifically requires an analysis of COMI in a recognition proceeding, Judge Glenn noted that “more than good intentions are required before a U.S. bankruptcy court can recognize a foreign proceeding as either a foreign main or foreign nonmain proceeding,” and he then proceeded to engage in a lengthy analysis of whether the COMI for each of the debtors, as of the date of the chapter 15 filings, was located in the Cayman Islands. In the end, he concluded that “the Foreign Debtors’ COMI shift was done for proper purposes to facilitate a value-maximizing restructuring of the Foreign Debtors’ financial debt. The Foreign Debtors’ COMI shift to the Cayman Islands was ‘real,’ satisfying the factors or indicia considered by courts in determining a foreign debtor’s COMI.”
With any luck, decisions such as Ocean Rig will start a dialogue about whether we have become COMI constrained in our notions of what is an acceptable jurisdiction to commence a restructuring case. The US Bankruptcy Code does not specifically define COMI, and courts have looked to a number of factors, most of which focus of the debtor’s location (headquarters, management, assets, and place of organization). So long as the debtor’s creditors are not fundamentally prejudiced by a decision to take advantage of a country’s restructuring laws, why should we even care about COMI? A decision to embrace COMI shifting and essentially look the other way when a debtor deliberately takes steps to avail itself of a favorable restructuring jurisdiction is a step in the right direction to reduce the influence of COMI in filing and recognition proceedings and to focus on outcomes that promote restructuring and maximize value for the debtor and its constituents.