Restructuring and Insolvency Bulletin Issue 2 - 2017: An update on COMI shifting to take advantage of the best insolvency tools to restructure debt and cram down dissenting or hold-out creditors

by Dechert LLP
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The EU has taken aim at fraudulent or abusive forum shopping in the Recast Insolvency Regulation,1 acknowledging the potential for misuse by debtors seeking to take advantage of more flexible insolvency processes available in other jurisdictions to complete a debt restructuring in the face of opposition from a minority of creditors. In the recent Ocean Rig decision, the Bankruptcy Court in the U.S. demonstrated again that the courts will not stand in the way of debtors legitimately shifting the centre of its main interests (COMI) to take advantage of procedures available in another jurisdiction to complete a restructuring that will maximize value for creditors.

EU Insolvency Regulations: an update

Within the EU, the Insolvency Regulations2 determine which laws apply to the insolvency of a debtor. The Insolvency Regulations require the main insolvency proceedings to be opened where the debtor has the COMI and the laws of that jurisdiction apply.

A debtor’s COMI is the place where it conducts the administration of its interests on a regular basis ascertainable by third parties. It is presumed that a corporate debtor’s COMI is situated at its registered office. A debtor may rebut that presumption by establishing that the place of its central administration (where the actual centre of management and supervision and management of its interests is located) is situated elsewhere. Special consideration will be given to a debtor’s creditors and their perception as to where a debtor conducts the administration of its interests.

The Recast Insolvency Regulation introduced new measures to address fraudulent or abusive forum shopping, including requiring courts to examine whether a debtor’s COMI is actually located within its jurisdiction and placing “look back” restrictions on the presumptions which apply to a debtor’s COMI.

In order for a debtor to legitimately take advantage of the insolvency processes of another jurisdiction within the EU it would have to effect a genuine shift of its COMI to the target member state. There are a number of ways to effect a COMI shift, with varying time and cost implications. Any shift must be based on a genuine movement (examples include changing registered office, moving head office functions and holding board meetings in the new jurisdiction) and the court will undertake a comprehensive assessment of all of the relevant factors.

The courts have recognised that forum shopping can be undesirable where, for example, a debtor seeks to move its COMI with a view to taking advantage of a more favourable regime to escape its debts. However, where a debtor is attempting to achieve the best possible outcome for creditors, forum shopping by COMI migration has been viewed favourably. In particular, courts will bear in mind the level of creditor support and the interests of the general body of creditors.

Ocean Rig: an update on obtaining Chapter 15 recognition of foreign main proceedings

Ocean Rig is an offshore ultra deepwater drilling contractor providing oilfield services for offshore oil and gas exploration, development and production drilling. 

Ocean Rig launched inter-locking Cayman Island schemes to restructure circa US$3.7 billion of liabilities of its ultimate parent company, Ocean Rig UDW, and three of its subsidiaries (together, the "Ocean Rig Debtors") in May 2017. All of the Ocean Rig Debtors had been based and registered in the Republic of the Marshall Islands but Ocean Rig UDW switched its registration in April 2016 to the Cayman Islands.  

The Grand Court of the Cayman Islands placed the Ocean Rig Debtors into voluntary provisional liquidation in March 2017 and the joint provisional liquidators then immediately filed Chapter 15 petitions in New York to protect the Ocean Rig Debtors while they engaged in the restructuring and implemented the Cayman schemes.

A number of creditors questioned the directors’ efforts to “manufacture” Ocean Rig’s relocation to the Cayman Islands in a short space of time. A sole practitioner, claiming to be a shareholder of Ocean Rig UDW, objected to the Chapter 15 recognition application, arguing that the debtors' COMI "appears to lie in Cyprus". On 24 August 2017, Judge Martin Glenn approved the petition, rejecting these objections.

Judge Glenn determined that the COMI shift by the Ocean Rig Debtors from the Marshall Islands to the Cayman Islands was legitimate because the move was done to facilitate the debtors’ debt restructuring. Furthermore the judge determined that the COMI shift to the Cayman Islands “was done for proper purposes to facilitate a value-maximizing restructuring of the Foreign Debtors’ financial debt”. The key points supporting a finding of a Cayman Islands COMI included the foreign debtors’ management and operations, offices, board meetings, bank accounts, books and records and restructuring activities in the Cayman Islands.

The Court considered that it was prudent for Ocean Rig to explore restructuring alternatives and that the directors, motivated by the intent to maximize value for creditors and the preservation of assets, properly concluded that commencing restructuring proceedings in the Cayman Islands and seeking recognition and enforcement in the US offered the best opportunity for successful restructuring and survival under difficult financial conditions.3

The alleged shareholder has filed a notice of appeal against Judge Glenn’s decision giving Chapter 15 recognition to the company's Cayman main proceedings.

Following the sanctioning of the Cayman schemes by the court in the Cayman Islands on 14 September 2017, Judge Glenn subsequently granted Ocean Rig’s enforcement motion seeking to give “full force and effect” to the Cayman schemes.

Conclusion

Even with the best intentions, COMI migration can be difficult and costly to effect. Where a recent change in COMI is evident, the court will take particular interest to ensure that it is not abusive or a sham designed to defeat creditors. It may be appropriate for a debtor to negotiate with affected creditors at an early stage to avoid objections and garner creditor support. Ocean Rig serves as a useful reminder that forum shopping can be used by debtors for legitimate purposes to achieve an optimum restructuring outcome for creditors and stakeholders.

Footnotes

1) Regulation (EU) 2015/848 of the European Parliament and of the Council of 20 May 2015 on insolvency proceedings (recast), applying to insolvency proceedings opened on or after 26 June 2017.

2) Council Regulation (EC) No 1346/2000 of 29 May 2000 on insolvency proceedings, applying to insolvency proceedings opened prior to 26 June 2017, and the Recast Insolvency Regulation.

3) The Court’s decision is currently the subject of an appeal.

 

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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