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COMI shifting: a fluid determination in international insolvencies?

David S Ward, Larry C Ellis and Erin Craddock

Cassels Brock & Blackwell LLP

Tuesday 11 December 2018

Insolvency professionals tend to think of the centre of main interest (COMI) determination in cross-border insolvencies as a once and for all fixed determination. However, as with many decisions in a restructuring proceeding, it sometimes makes sense to revisit them as matters develop and new facts are uncovered. The occasionally ‘shifting nature’ of COMI is readily apparent in an international pyramid scheme wind-down involving courts in Canada and the Isle of Man.

Banners Broker International Limited (BBIL) was an Isle of Man corporation that operated an online enterprise whereby registered members could advertise their business on the Banners Broker network of websites while, at the same time, earn revenue as an advertising publisher through websites designed and hosted by Banners Broker associated companies. BBIL was central to a corporate network of entities and operations around the world including in Belize, Canada, India, Portugal, the United Kingdom and the United States, that operated under the trade name Banners Broker.
In December 2015, two of Banners Broker’s principals were arrested and charged under the Criminal Code, RSC 1985, C. C-46 (Canada) with defrauding the public, possession of proceeds of crime, and laundering proceeds of crime. They were also charged under the Competition Act, RSC 1985, C. C-34 (Canada), with operating a pyramid scheme and making false or misleading statements. (They subsequently pleaded guilty to certain of the charges.)

Prior to charges being laid, in February 2014, winding-up proceedings in respect of BBIL were commenced in the Isle of Man (Isle of Man Proceeding) and joint liquidators of BBIL were appointed (joint liquidators) by the High Court of Justice of the Isle of Man (Manx Court).  

The joint liquidators were authorised by the Manx Court to administer the property and affairs of BBIL for the purpose of liquidation. The joint liquidators were empowered under the Companies Act 1931 (Isle of Man) to carry on the business of BBIL, bring proceedings on behalf of BBIL, pay classes of creditors in full, compromise creditors’ claims and dispose of BBIL’s property.

In the months following their appointment, the joint liquidators determined that BBIL had significant connections to Canada and that it would be necessary to commence restructuring proceedings in Toronto as well. Accordingly, in August 2014, upon the application of the joint liquidators, the Ontario Superior Court of Justice (Commercial List) (Canadian Court) granted an order recognising the Isle of Man Proceeding as a ‘foreign main proceeding’ and appointed the joint liquidators ‘Foreign Representatives’ for the purposes of Part XIII of the Bankruptcy and Insolvency Act, RSC 1985, C. B-3 (Canadian proceeding).  

In connection with the recognition proceedings, a receiver was also appointed over BBIL’s assets in Canada (receiver). The Receiver was authorised by the Canadian Court to assist the foreign representatives in the winding up of BBIL, including the identification of and realisation of BBIL assets.

An important ground for the Canadian proceeding and the appointment of a Canadian receiver was that BBIL appeared to have property in and business connections to Canada, as well as financial dealings that were deserving of investigation.

The Canadian Court granted recognition of the Isle of Man proceeding as a foreign main proceeding under the COMI test despite the fact that the Isle of Man is not a signatory to the UNCITRAL model law.

From August 2014 to May 2016, the joint liquidators and the receiver (collectively, the court officers) investigated BBIL’s affairs, pursued claims on behalf of BBIL, and realised upon BBIL assets.

Importantly, as the insolvency administration progressed, it became clear that BBIL’s connections to Canada were far more extensive than initially believed. Indeed, BBIL’s connections to Canada vastly outweighed its connections to the Isle of Man, or any other single jurisdiction. It became apparent that the business of BBIL was effectively run by Canadian citizens from offices in Canada. Banners Broker’s principals controlled multiple Canadian corporations that were operated under the Banners Broker trade name. The Banners Broker websites, computer program and back office support function were designed and managed from Canada.  

Relatively speaking, Banners Broker’s connections to the Isle of Man now appeared much more limited. It was determined that BBIL was in many respects a ‘letterbox company’, incorporated to hold rather than operate assets. BBIL deposited substantial funds in a bank account in the Isle of Man but only for a limited period of time. BBIL did not employ Manx residents and communications with creditors and investors were mostly initiated from Canada.

Given the Canadian focus of the proceedings, the court officers concluded that it was no longer economical to administer the insolvency proceedings as a conventional cross-border recognition proceeding. Instead, the court officers determined that it would be more economical for BBIL to be wound up in a single insolvency jurisdiction.

As a result, in May 2016 the court officers brought a motion to stay the Isle of Man proceeding in favour of the proceedings in Canada and to empower the receiver to conclude the administration of BBIL in Canada by transitioning the insolvency administration activities from the joint liquidators to the receiver (transition motion).

In connection with the Transition Motion, the Court Officers sought authorisation from the Canadian Court to enter into a transition services and assignment agreement whereby the joint liquidators would assign to the receiver any and all residual property, assets, claims and undertakings of BBIL that had accrued to the joint liquidators by virtue of their appointment and activities as joint liquidators (assignment agreement).  

The receiver also sought certain limited additional authority to deal with any and all interests assigned under the assignment agreement, to respond to creditor inquiries, and to take possession of the joint liquidators’ records.

On 26 May 2016, the Canadian Court granted the relief sought by the court officers on the transition motion and authorised the transition of the insolvency administration activities from the joint liquidators to the receiver.

Later that year, the Manx Court granted an order directing that the BBIL liquidation proceedings in the Isle of Man be stayed until further Order of the Court.  

The Manx Court reasoned that while it was initially the view of the joint liquidators that COMI was in the Isle of Man, as matters progressed it became apparent that COMI was ‘in reality and substance Canada’. The Manx Court further found that it made ‘a great deal of commercial and practical sense for the receiver to progress matters in Canada and for the joint liquidators in the Isle of Man to stand down’.

The Manx Court noted that the stay of the Isle of Man Proceeding would not cause ‘undue prejudice to anyone’ nor would it ‘offend against “commercial morality” or the “interests of the public at large”’.

Although unique, the BBIL insolvency proceedings are an important reminder that insolvency professionals may choose to reassess an initial COMI determination where new facts are uncovered and it is otherwise in stakeholders’ interests to ‘shift’ COMI. The possibility of having a COMI move mid-case is probably highest in cross-border insolvencies having aspects of fraud and concealment of assets and operations.

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