Determining COMI for a virtual debtor

East-West Logistics Llp v Melars Group Ltd [2022] EWCA Civ 1419Are administrative or operational facts more relevant to determining a debtor’s COMI?

Overview

This appeal concerns the appropriate approach to determining COMI when a debtor trades virtually rather than physically and, more specifically, considers whether administrative or operational facts are more relevant to determining a debtor’s COMI in these circumstances.

Background

Melars Group Limited (the “Company”) was incorporated in the British Virgin Islands in 2005 and traded in oil and petroleum. In 2011, it entered into a charterparty with East-West Logistics LLP (the “Petitioner”) in December 2011 for a shipment to Turkmenistan. The address of the Company in the charterparty was stated to be in the BVI. The charterparty contained a clause providing for disputes to be resolved by arbitration in London under English law.

The Petitioner claimed that the Company breached the charterparty and, after a series of procedural steps, in 2016, the Petitioner obtained default judgment against the Company in the amount of US$657,839.18 in the BVI. Unbeknownst to the Petitioner, in 2015, the Company had moved its place of incorporation, and hence its registered office, to Malta. Following the move, in addition to a Swiss national, the Company appointed two other directors who were Estonian nationals. At the time, it operated two bank accounts in Geneva, Switzerland.

The Petitioner learned of the move to Malta when it tried to send a demand letter to the Company, threatening winding up proceedings if it was not paid. The Company failed to pay, and the Petitioner presented a winding up petition in London. In 2018, the Company opened an account with a digital payment service based in London.

The Decisions Below

The Petition was heard by Judge Baister, who made the winding up order. Judge Baister indicated that he regarded much of the COMI case law as being of little assistance because it dealt largely with companies that had a physical presence such as headquarters, offices, tangible assets or staff, whereas the Company “traded virtually rather than physically”. He then outlined his approach to the facts of the case, indicating that he regarded the case as one of forum shopping, and that locating the company’s COMI in Malta rested on its registered office being there and no more than that. There was no operational office and no one conducting the business of the company there. The registered office was a “letter box” and no more.

On the basis of the documentary material, the location of the Company’s banking facilities from time to time, and the location of its legal advisers, amongst other factors, Judge Baister found that the Company was administering its interests in a manner that was ascertainable by third parties in both the UK and Switzerland. On balance, and “by a narrow margin and with misgivings”, Judge Baister concluded that the UK was the Company’s COMI rather than Switzerland, given the greater use of English law for contracts, the greater use of London as a seat of arbitration, the actual recourse to legal proceedings in the UK and the consequential use of English lawyers.

Judge Baister gave permission to appeal, and the Company’s appeal was allowed by Miles J. Miles J found that Judge Baister erred in three principal respects:

1. in relation to the importance of the presumption that the Company’s COMI was the jurisdiction of its registered office – Malta – which the judge treated as “illusory”;

2. in relation to the concept of ascertainability: when the judge ascertained the various connecting factors, such as the governing law or the contracts for the company’s banking arrangements, he did not go on to examine the further question whether such aspects of the company’s business were ascertainable, in the sense of being available to typical third parties of the company, without further enquiry; and

3. in failing properly to distinguish between the matters of the administration of the company, on the one hand, and matters of the operations of its business on the other hand. Specifically, a number of factors relied on by the judge were matters going to the operation of the business, rather than its administration.

Having determined that Judge Baister had taken the wrong approach, Miles J redetermined the COMI of the Company de novo. He held that none of the factors relied upon by the Petitioner, whether considered individually or cumulatively, were sufficient to rebut the presumption that the COMI of the Company was in Malta as the place to which its registered office had been moved.

The Court of Appeal Decision

The Court of Appeal upheld Miles J’s decision. The Court of Appeal agreed that Justice Baister erred in not starting from the presumption that the Company’s COMI was in Malta and asking whether the evidence of actual administration of interests in any other place was sufficient to displace that presumption.

The Court disagreed with Miles J that matters that were known to or ascertainable at the relevant time by the company’s actual creditors should be excluded from consideration on the COMI question simply because they were not generally known or advertised to the public at large. The Court also disagreed with Miles J that the court should invent a hypothetical “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 notional dealing with the company. Likewise, the Court disagreed with Miles J’s findings that, where the contractual terms upon which any one creditor dealt with the company would not be known or disclosed to other creditors, this meant that evidence of those terms should be excluded from consideration by the court on the basis that they would not be ascertainable by a “typical” creditor.

However, the Court ultimately upheld Miles J’s findings that Malta was the Company’s COMI, finding that Miles J’s observations with respect to the “typical” creditor were not central to his decision. The Court of Appeal agreed with Miles J’s analysis of each of the factors relied upon by the Petitioner to argue that Malta was the Company’s COMI, his assessment of their relevance and weight, and his rejection of the suggestion that, individually or collectively, they were sufficient to displace the presumption in favour of Malta.

Specifically, Miles J was right to place little or no weight on, amongst other factors: (1) the fact that the Company entered into international commercial contracts with a variety of counterparties that were in the English language and were governed by English law (since English has been a preferred language of international commerce for generations); (2) that arbitral proceedings were brought against the Company under English law in London; or (3) that the Company opened an English account in 2018. These factors were not sufficient to establish that the Company actually conducted the administration of its interests on a regular basis in England, so as to displace the presumption in favour of Malta.

As a result, the Court dismissed the appeal.

Judges: Lord Justice Lewison, Lord Justice Snowden and Sir Launcelot Henderson

Counsel: Robert Levy KC and Owen Curry of XXIV Old Buildings (instructed by Thomas Miller Law) for the Appellant; James Sheehan of Essex Court Chambers (instructed by Hogan Lovells International LLP) for the Respondent