Conundrum of Center of main interest (COMI) in Cross-Border Insolvency

I. Significance of COMI in Cross-Border Insolvency

Cross-border insolvency is a situation wherein a corporate debtor faces financial hardship and has assets and creditors outside the place of its incorporation in multiple jurisdictions. The significant issues in the situation of cross-border insolvency are firstly, that the assets of the corporate debtor are spread across borders, which makes it difficult to secure and administer them cohesively. Secondly, various countries where the debtor has assets may claim jurisdiction over the insolvency proceedings, which may lead to jurisdictional conflict. Thirdly, due to this conflict, foreign insolvency judgments may not be recognized and enforced in other jurisdictions. These varied international interests could lead to delays and complexities in the restructuring of the corporate debtor.

The UNCITRAL Model Law on Cross-Border Insolvency, 1997 (Model Law), effectively addresses such issues in cross-border insolvency by providing a fair and harmonized insolvency framework. This also includes the concept of ‘Centre of Main Interest’ (COMI), Which is fundamental to the functioning of Model Law as it accords proceedings in the COMI greater recognition and more immediate and automatic relief. COMI is used to determine foreign main proceedings and foreign non-main proceedings. A foreign main proceeding is generally regarded as having the primary jurisdiction for handling the insolvency of a corporate debtor, even when that debtor has assets and creditors spread across multiple countries. This central role ensures a unified and coordinated approach to the insolvency process. However, this central authority must be balanced with appropriate coordination mechanisms that take into account the specific legal, commercial, and procedural needs of other jurisdictions where the debtor operates.

COMI under Article 16(3) of the Model law is generally presumed to be the place where the debtor has its registered office or habitual residence in the case of an individual, unless sufficient evidence is presented that the COMI is actually located elsewhere. But since the Model law only provides state with a framework for their insolvency law, various states have adopted different interpretation while determining COMI which has led to inconsistencies and uncertainty while determining main proceedings and non-main proceedings.

II. Uncertainties and Challenges in Defining COMI

The absence of a unified and well-defined definition of COMI leads to uncertainty while deciding COMI in cases where debtor’s assets are in multiple countries which results in recognition of different COMI’s by various jurisdiction. Countries across the globe have adopted different approach while deciding COMI which includes various factors like the location where the debtor maintains its books and records, location of registered office, the place of central administration, country where accounts are maintained. Since these factors are not applied uniformly the courts may take into account other criterion which results in inconsistent and often conflicting determinations of COMI across jurisdictions, thereby complicating cross-border insolvency proceedings.

The European courts follow the test laid in the case of Eurofood IFCS ltd., that the COMI should be determined based on an objective criteria that is ascertainable by third parties, which means it should be identified in a manner that allows third parties especially creditors to determine the appropriate jurisdiction with reasonable certainty. The same approach was upheld by the English courts in the case of Videology Limited. In Australia the courts take into account various factors such as the principle place of business, residence of directors and includes consideration of where the debtor conducts the administration of its interests on a regular basis. The United states (US) has adopted the “nerve centre” approach while determining COMI which is basically the place where debtor company carries out its key strategic and operational decision-making activities while taking into account other factors like debtors headquarters location, majority creditors location, location where the primary assets are situated.

The other essential aspect in establishing COMI is selecting the appropriate date for its assessment. Since the Model law does is silent on the issue of timing, three different approaches adopted by various jurisdictions for COMI assessment has resulted in  conflicting outcome, undermining the objectives of the Model Law. In the United states the appropriate date for determining COMI is the date on which the recognition application is filed. In Europe it is the date on which the foreign insolvency proceedings commenced, and in Australia it is date on which the recognition application is heard. The Singapore court, in Re: Zetta Jet Pte Ltd and others has adopted the similar approach as of US but with an alteration excluding activities related to liquidation and administration when determining COMI.

III. Exclusion of Digital and E-Commerce Enterprises

In today’s digital growing age, several companies operate exclusively as e-commerce businesses, relying entirely on online platforms to offer their products and services without any physical retail presence. Under the model law for a foreign non-main proceeding there is a requirement that the corporate debtor shall have an establishment in that particular state. Article 2(f) of the model law defines “Establishment”, where it states that the non-transitory economic activity by the debtor shall be carried out with “human means”. This particular requirement creates difficulty for companies operating in an electronic environment as the above mentioned definition assumes the physical presence of an office, staff or operation site. Companies operating in digital space like e-commerce platforms, cloud service providers etc. may not have  physical presence in the particular state but may generate substantial revenue and engage in continuous commercial activity. Thus, these companies may not meet the threshold of having an “establishment” even though they have significant business activity in a jurisdiction and hence it could lead to non-recognition of the proceeding against such corporate debtor in a particular jurisdiction.

This issue was also discussed extensively by the Insolvency law committee constituted by the Ministry of Corporate Affairs under the 2018 REPORT ON CROSS BORDER INSOLVENCY, wherein the Committee considered the possibility of removing the phrase “with human means” from the definition of “establishment” in order to accommodate internet-based businesses, such as e-commerce platforms. The committee observed that the same issue was dealt with by the UNCITRAL Working group in its 21 session where they decided to retain the current definition. Presently such definition has been retained by countries such as UK and Singapore but the United states has removed such reference to “human means and goods” under its establishment definition. Keeping in view such diverse international perspective the Insolvency law committee decided to retain the present definition.

The present definition of “establishment” under Article 2(f) has significant shortcomings in the context of modern commerce. Firstly, it is based on an outdated physical presence model rooted in the industrial era, emphasizing tangible offices and on-ground employees. This traditional framework fails to accommodate the realities of virtual businesses, remote work structures, and decentralized digital operations. As a result, it creates notable gaps in cross-border insolvency protection. Specifically, foreign non-main proceedings cannot be initiated or recognized in jurisdictions where a company lacks a physical “establishment,” even if the company is actively conducting substantial economic activity there. This leaves creditors and stakeholders in such jurisdictions without any meaningful legal recourse.

IV. Conclusion and way forward

The different approaches adopted by various countries in determining COMI, both in terms of its substantive interpretation and the timing of assessment, undermine the core objectives of the UNCITRAL Model Law on Cross-Border Insolvency. These varying approaches can produce different COMI findings for the same debtor, depending on where and when the application is made. This enables forum shopping, where debtors may shift operations to gain a more favourable jurisdiction, thereby undermining the integrity of the insolvency process. The absence of a globally uniform interpretation with respect to the determination of COMI leads to inconsistent and unpredictable outcomes, undermining the Model Law’s objective of harmonised cross-border insolvency proceedings.

Hence, there is a need for harmonising the definitions adopted by various countries to determine COMI through interpretive guidance for realising the Model Law’s promise of efficient, fair, and coordinated global insolvency resolution. Approaches such as the “Nerve Centre” approach by the US which takes into account the place where the corporate debtor takes its key strategic and operational decisions and the “Objective criteria approach” by the European countries, which allows third parties like creditors to determine the proper jurisdiction, could be harmonised to effectively determine COMI.

Also the present framework of the UNCITRAL Model Law does not adequately address the realities of cross-border insolvency in a digitized global economy, as it leads to exclusion of companies solely operating in digital space and fosters inequality between conventional multinational corporations and digital-first companies. Therefore, revising the definition of  “establishment”  by deleting the words “human means and goods or services”  from Article 2(f) would make the Model Law more inclusive, as it would allow internet based companies to qualify as having an “establishment” based on their economic footprint, rather than physical infrastructure or human labour within the jurisdiction.