The English Court of Appeal’s decision in East-West Logistics v Melars Group (East-West Logistics Llp v Melars Group Ltd [2022] EWCA Civ 1419 of 28 October 2022 draw my attention, especially by the concurring view of one of the judges, Lord Justice Lewison. Lord Justice Lewison is known to me from the famous Stanford International Bank case of 2009, which I studied in depth for one of my books. In the present case of East-West Logistics v Melars, the judge provided a sort of post-scriptum. The major topic in Stanford was, where was the bank’s “centre of main interest” (COMI) located?
COMI. In the judgment in the first instance, Lewison J (as he then was) decided that “centre of main interest” had to be identified by reference to factors that were both objective and ascertainable by third parties, referring to the European Court of Justice’s Eurofood case of 2006. The latter is still a pillar in the determination of COMI under the EU Insolvency Regulation. Mr Justice Lewison said: “Simply to look at the place where head office functions are actually carried out, without considering whether the location of those functions is ascertainable by third parties, is the wrong test.” Accordingly Lewison J said the test to apply was as follows: (i) The relevant COMI was the COMI of Stanford International Bank; (ii) The Bank’s registered office was in Antigua, so it was to be presumed in the absence of proof to the contrary, that its COMI was in Antigua; (iii) The burden of rebutting that presumption lay with the American receiver; (iv) The presumption would only be rebutted by factors that are objective; (v) But objective factors will not count unless they are also ascertainable by third parties; (vi) What is ascertainable by third parties is what is in the public domain, and what they would learn in the ordinary course of business with the company. At that time in the development of the term “COMI”, this last element – “public domain” – was new.
Another view. What I (as a civil law-oriented lawyer) found more spectacular is the public conversion to another doctrine. Lewison J openly showed remorse for his past rulings: “The way in which the [European Court of Justice] approached recital (13) was not to apply the factual assumption underlying it but to apply its rationale. I accept this submission. To the extent that I considered and applied the head office functions test in Lennox Holdings … I now consider that I was wrong to do so. Pre-Eurofood decisions by English courts should no longer be followed in this respect.” In public, the court denied the value of its earlier decisions and announced another interpretation. In civil law jurisdictions, I have never seen such a conversion of thought in case law so explicit (in Belgium, Germany or the Netherlands).
Factors. Which factors “are both objective and ascertainable” by third parties? Lewison J, in Stanford International Bank, confined the factors ascertainable by third parties to: “… what was ascertainable by a third party was what was in the public domain, and what a typical third party would learn as a result of dealing with the company.” According to Lewison J: “One important purpose of COMI is that it provides certainty and foreseeability for creditors of the company at the time they enter into a transaction. It would impose a quite unrealistic burden on them if every transaction had to be preceded by a set of inquiries before contract to establish where the underlying reality differed from the apparent facts.” The judge therefore excluded factors that might be ascertained on enquiry. I have criticised this rather limited approach: the court should take into account all factors, including what could have been found out, with limited research, for example about fraud.
The UK Chancellor at that time, however, agreed with Lewison J’s conclusion and found support in English domestic case law. This, in itself, was not convincing as the COMI-term’s interpretation is an autonomous one, unrelated to a specific meaning under domestic law. The reasoning in Lewison J’s conclusion earns support, however: “To extend ascertainability to factors, not already in the public domain or apparent to a typical third party doing business with the company, which might be discovered on enquiry would introduce into this area of the law a most undesirable element of uncertainty.” Considering the evidence, the Chancellor agreed with Lewison J; he said he applied the right test and that the decision was a “multi-factorial conclusion of fact”.
Behind the scene. In the recent East-West Logistics v Melars Group case, Lord Justice Lewison wished to add a few observations on what was decided in Stanford International Bank. He cited the rival contentions in Stanford, referring to [62]: “This leads on to the next question: what is meant by ‘ascertainable’? Mr. Isaacs submitted that information would count as being ascertainable even if it was not in the public domain if it would have been disclosed as an honest answer to a question asked by a third party. Provided that a third party asked the right questions, and was given honest answers, the result of the inquiry would be ascertainable. Mr. Zacaroli submitted that this formulation was far too wide and blurred the distinction between what was ascertainable and what was not. On the basis of Mr. Isaacs’ submission the requirement of ascertainability was diminished almost to vanishing point. Rather, what was ascertainable by a third party was what was in the public domain, and what a typical third party would learn as a result of dealing with the company. I agree with Mr. Zacaroli. As Chadwick LJ says, one of the important features is the perception of the objective observer. One important purpose of COMI is that it provides certainty and foreseeability for creditors of the company at the time they enter into a transaction. It would impose a quite unrealistic burden on them if every transaction had to be preceded by a set of inquiries before contract to establish where the underlying reality differed from the apparent facts.”
In East-West Logistics, Lord Justice Lewison has now added that it was the choice between those two alternatives “… that led me to the decision that I made (and, as I understand it, for this court to have approved that decision). I was certainly not intending to add to the large cast of hypothetical characters who people EU law (e.g. the average consumer, the diligent and reasonably well-informed tenderer etc). The essence of Mr. Levy’s argument was that the Company’s COMI should be decided in the light of everything that the Petitioner had discovered after the event. Since one of the reasons for requiring ascertainability by third parties is to promote legal certainty and predictability at the time when creditors do business with the company, I consider that his argument is wrong. The importance of predictability was emphasised by the court in both Leonmobili at [33] and MH v OJ at [20]”.
For me, the element of what was discovered “after the event” is not clear. Is it after filing the original petition for the original winding up order, after the order itself, after the petition concerning this appeal? Ascertainability by third parties, as a condition, is to promote legal certainty and predictability at the time when creditors do business with the company, the judge said. During the course of a company’s life there will be numerous creditors doing business every day with it, so that argument does not seem so strong.
An unbroken norm. The definition of COMI in Article 3(1) European Insolvency Regulation (Recast) (“The centre of main interests shall be the place where the debtor conducts the administration of its interests on a regular basis and which is ascertainable by third parties”), should include that these factors should be both objective and ascertainable by third parties. As a result, the definition brings together two sides of the coin: where the debtor conducts the administration of its interests on a regular basis, and the ascertainability of that bundle of facts by third parties. The norm should be taken as a whole, not broken down into a large number of separate elements, because each element influences or colours the other, especially in circumstances hardly existing at the time the original Regulation came into life 20 years ago. In present day and age many business relationships are conducted by counterparties (including creditors) through digital networks, which can be located at the debtor’s COMI. The administration of interests on a regular basis could be conducted from a network which is located elsewhere or without a physical location, for instance a digital connecting address ending with .com or .eu. It certainly is in the public domain, but what is it and where is it in the galaxy?
Hmmm, that’s for the future EU legislation.
In the Netherlands attorneys must plead their case and cherish (or not) the judgment. They must never “post-plead”. That’s not what Lord Justice Lewison has done here. He explained the argument behind his 2009 decision, adding to the history of court cases concerning international insolvency law and sparking new avenues for further legislation.
References
East-West Logistics Llp v Melars Group Ltd [2022] EWCA Civ 1419
Eurofood IFSC Ltd, Case No. C-341/04, 2 May 2006, ECLI:EU:C:2006:281
In re Lennox Holdings Plc [2008] EWHC B11 (Ch)
In re Stanford International Bank Ltd and others [2009] EWHC 1441 (Ch)
Bob Wessels, International Insolvency Law Part I, Wolters Kluwer, 5th ed., 2022/10283c et seq.
This is a slightly adapted version of a regular column Bob Wessels is writing for Global Restructuring Review (GRR) on the topic of cross-border restructuring and insolvency in a European context. GRR is a subscription-only publication and the column appeared in GRR on 18 November 2022. See globalrestructuringreview.com