Restructuring and InsolvencyCorporate Group COMI: “Nerve Centre” Location a Key FactorPublished: 11/17/2011 What happens when Canadian entities are part of a corporate group with international operations that seeks to restructure? A recent decision of the Ontario Superior Court of Justice in Re Massachusetts Elephant & Castle Group, Inc. provides guidance on how Canadian courts will consider recognition of foreign restructuring proceedings. Canadian provisions incorporated in Part IV of the Companies’ Creditors Arrangement Act (CCAA) governing the recognition and enforcement of foreign restructuring proceedings have now been in force for two years. Similar to Chapter 15 of the United States Bankruptcy Code, these provisions were modelled on the Model Law on Cross-Border Insolvency adopted by the United Nations Commission on International Trade Law (UNCITRAL) in 1997. UNCITRAL is the United Nation’s core legal body for international trade law, whose role is to modernize and harmonize rules on international business. Its Model Law contains no special rules for the treatment of groups of debtor companies operating internationally. Pub group seeks Chapter 11 protection The Elephant & Castle group of companies operated British-style restaurant pubs in the United States and Canada. In June 2011, the group, comprising 14 companies including three Canadian corporations, began proceedings under Chapter 11 of the US Bankruptcy Code in Massachusetts. The group sought to continue operating while it attempted to sell its business as a going concern. Immediately following the Chapter 11 filing, the lead US debtor, Massachusetts Elephant & Castle Group, Inc., acting as foreign representative, sought recognition in the Superior Court of Ontario of the Chapter 11 proceedings as a “foreign main proceeding” under the CCAA. The registered offices of the three Canadian debtor companies were all in Canada, as were nearly half of the group’s operating locations and 43% of its employees. Elephant & Castle argued that the Canadian companies operated as part of a highly integrated group that was managed entirely from the United States, so that the US proceedings should be recognized as foreign main proceedings for all debtors, including the Canadian companies. For a proceeding to be recognized as a “foreign main proceeding”, the centre of main interest (COMI) of the debtor must be located in the jurisdiction of the foreign proceeding. The CCAA presumes, as does the Model Law, that the registered office of the debtor is its COMI. Although that presumption is easily rebutted in the case of a single corporation, there are no clear guidelines as to how to determine the COMI of a group of companies. The analysis to determine COMI has to be performed on an individual basis for each debtor. Location, location, location After recognizing that the Chapter 11 proceedings were “foreign proceedings”, Mr. Justice Geoffrey Morawetz then tackled the COMI issue. After citing a list of potential factors to be considered in determining the debtors’ COMI, Mr Justice Morawetz noted that, depending on the circumstances, some factors may be more important than others, and that none of these factors will necessarily decide the issue of recognition. He stated that “the intention is not to provide multiple criteria, but rather to provide guidance on how the single criteria, i.e., the centre of main interest, is to be interpreted.” The judge noted that the following factors are usually significant in determining COMI:
While other factors may be relevant in specific cases, “it could very well be that they should be considered to be of secondary importance and only to the extent that they relate to and support the above factors.” Mr. Justice Morawetz found that the location of the debtors’ “headquarters or head office or nerve centre”, as well as the group’s management team, was in Boston. The judge also took into consideration that a “substantial” lender did not oppose the application. The Court concluded that, for the purposes of the recognition application, each Chapter 11 Elephant & Castle entity, including the Canadian debtors, had its COMI in Massachusetts. Accordingly, the Chapter 11 proceedings were found to be foreign main proceedings, entitled to mandatory relief under the CCAA. While in this case the Court did not elaborate on the “nerve centre” concept, its focus on certain factors including the nerve centre as the most significant factors in determining COMI will provide guidance to courts, not only in Canada but also in other jurisdictions, on the treatment of corporate enterprise groups in multi-national insolvency proceedings. ______________________________________________________________________
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