Two wrongs make a right? Singapore Court of Appeal considers relevance of activities outside place of incorporation (in breach of relevant regulatory licence) for determining COMI

In this article, José-Antonio Maurellet SC and Michael Lok consider the recent judgment of the Singapore Court of Appeal discussing potentially relevant (and irrelevant) factors to a centre of main interest (COMI) analysis.  The article highlights particular points of interest from the judgment which will no doubt be of value in considering the COMI question in future.

In Re British Steamship Protection and Indemnity Association Ltd [2024] SGCA 43, the Appellant Company (“Company”) was an insurance company incorporated and registered in Bermuda. It had obtained a licence from the Bermuda Monetary Authority (“BMA”) to carry out insurance business “in and from within Bermuda”. However, it later started conducting business beyond Bermuda. The BMA then petitioned to wind up the Company in Bermuda, based on the Company’s various breaches of the Bermuda Insolvency Act (“Proceeding”). A winding up order was later granted and joint provisional liquidators (“JPLs”) were appointed (§5). The JPLs then applied for the Proceeding to be recognised in Singapore as “foreign main proceeding” under Art 17(2)(a) of SG Model Law¹ (§6). The lower court allowed the application.

The Company challenged this decision, on the grounds that (i) the Proceeding was not a “collective” action conducted “under a law relating to insolvency or adjustment of debt” under Art 2(h) of the SG Model Law; (ii) the Proceeding was not a “foreign main proceeding” under Art 17(2)(a); and (iii) the recognition of the Proceeding as a “foreign main proceeding” was contrary to Singaporean public policy (§16).

All three grounds were rejected by the CA.

A “foreign proceeding” under the definition of Art 2(h) must fulfill all 5 requirements set out in Ascentra Holdings², i.e. the proceeding must be (i) collective in nature; (ii) a judicial or administrative proceeding in a foreign state; (iii) conducted under a law relating to insolvency or adjustment of debt; (iv) the property and affairs of the debtor company must be subject to control or supervision by a foreign court in that proceeding; and (v) the proceeding must be for the purpose of reorganisation or liquidation.

The Company disputed grounds (i) and (iii), but the CA was of the view that both were made out (§19).

• On (i), the Proceeding was collective, because JPLs are given “full power” to handle the assets and liabilities of the Company which affects all creditors of the Company. This is consistent with the principles laid down in Ascentra Holdings (§29). Notably, notice / participation of all creditors is not a requirement for proceedings to be regarded as collective in nature (§30).
• On (iii), the Proceeding was commenced under a law relating to insolvency/adjustment of debts, as they were brought under Section 35 of the Bermuda Insolvency Act (§21) – which allows for companies to be wound up on insolvency / just and equitable grounds (§§22-24). This is consistent with the “Broad Interpretation Approach” in Ascentra Holdings, which also states that it is irrelevant that the company was not insolvent/under financial distress (§20).

A “foreign proceeding” must be recognised as a “foreign main proceeding” if it takes place in the state where the company’s COMI is: Art17(2)(a) SG Model Law.

• The CA upheld the lower court’s decision that the Company’s COMI was in Bermuda, and agreed with their anaylsis that, as the Proceeding was both “foreign” and conducted in the Company’s COMI of Bermuda, it was a “foreign main proceeding”.
• Art16 (3) presumes that a company’s registered office is its COMI, but this can be displaced by other factors. Relevant factors include e.g., location of the company’s principal assets, books and records, employees; location whose law governed the preparation and audit of accounts in which they are prepared and audited; and the site of the controlling law or the law governing the main contracts of the company³(§36).
• The weight of each factor depends on a creditor’s likelihood of placing emphasis on it. The factors are to be ascertained holistically, based on what is readily and objectively ascertainable by third parties, especially creditors (§37).
• The CA, having considered evidence raised by both parties, concluded that the COMI was in Bermuda. First, the Company was incorporated to provide insurance services in Bermuda and had done so accordingly, with business activities and records kept in Bermuda (§47). Secondly, creditors would have perceived Bermuda to be its COMI, given how, for example, their insurance policies require creditors to obtain interests in the Company (§48).
• The CA held that the presumption in Art 16(3) applied and there was nothing to rebut it (§45).

The Company, when trying to disprove the COMI presumption, raised evidence of its business activities in China, Ukraine, and Russia (§§38-40), which were in breach of their Bermuda licence. The question was whether these could be considered in a COMI analysis.

• The CA found these to be irrelevant in ascertaining the COMI (§§51; 64). Instead, a factor that was at the fore was the “location in which the debtor was subject to supervision or regulation”⁴. The Company’s insurance business was under the supervision and regulation of the BMA.
• This approach is consistent with the manner in which COMI should be analysed, i.e., from the perspective of a creditor who may reasonably and objectively assume that the Company would act according to its term of licence (§52).
• The matter would have been different had the Company conducted these overseas businesses legitimately, through subsidiaries which were licenced outside Bermuda⁵ (§53).
• The CA held that “only legitimate factors and conduct can be taken into account in assessing COMI. This stands to reason as it is self-evident that only legitimate conduct could and would be objectively and readily ascertainable by third parties” (§58).

The JPLs, in trying to demonstrate that the Company’s COMI was in Bermuda, sought to rely on their prior efforts in liaising with Bermudian authorities as foreign representatives⁶. The relevance of this factor in the COMI analysis was not at issue but was nevertheless discussed.

• The lower court declined to consider this line of argument, relying on Re Tantleff, Alan [2023] 3 SLR 250, which held that the location of the acts of foreign representatives is irrelevant to the determination of COMI. It is considered better to assess the COMI by looking at activities of the company before the foreign proceedings took place, even though the relevant date for determining COMI is the date of application for recognition of proceedings (§68).
• The CA questioned the correctness of an absolute bar against the acts of foreign representatives…“once it was accepted that the date of the application for recognition was the reference point for the COMI analysis, all factors must come into play regardless of whether some of the factors were attributable to the conduct of the foreign representative”; additionally, creditors might have dealt with foreign representatives and could ascertain where the COMI was through their acts (§69).
• The CA noted that this was not a fully ventilated view and required further consideration in future cases (§70), bearing in mind that the threshold for displacing the COMI presumption remains high (§69).

The 2 objections raised by the Company in relation to public policy under Art 6 of SG Model Law were both rejected by the CA.

• First, the Company complained of a breach of due process in the Proceeding as the application to wind up the Company was served on them after the order was made (§72). The CA rejected this argument, as it was a matter of Bermudan law and no evidence suggests that this was not allowed (§79). The Company could have applied to set aside the winding up order in Bermudan courts (§80).
• Secondly, the Company complained that the JPLs made misrepresentations in this application and incurred excessive costs (§81). The CA rejected this argument, as costs had nothing to do with the integrity of the Proceeding as a matter of public policy (§82).
• The public policy exception was not engaged (§83).

While the judgment merits review as a whole, we would consider the following to be of particular importance going forward.

1. What do third parties perceive to be the company’s COMI: “[t]he touchstone for assessment of COMI is the perception of third parties, especially creditors, as to where the debtor would open primary insolvency proceedings based on readily identifiable factors” (§48);
2. Whether the company’s activities comply with applicable regulatory/licensing regime: “where a regulated debtor carried out business activities in a manner that was not in conformity with its licence, that would presumptively be not relevant for the purpose the debtor’s COMI analysis” (§59);
3. Work of foreign representaties may be relevant for assessing COMI: there are “doubts as to the correctness of the position expressed in Re Tantleff, that there was an absolute bar against taking into account work done by the foreign representative for the purposes of assessing COMI…once it was accepted that the date of the application for recognition was the reference point for the COMI analysis, all factors must come into play regardless of whether some of the factors were attributable to the conduct of the foreign representative”

 

Co-Authors:

José-Antonio Maurellet SC (Barrister, Des Voeux Chambers Hong Kong; associate member, 3 Verulam Buildings London), Registered Foreign Lawyer (SICC)

Michael Lok (Barrister, Des Voeux Chambers Hong Kong; associate member, South Square London), Registered Foreign Lawyer (SICC)

 

The full judgment is available at https://www.elitigation.sg/gd/s/2024_SGCA_43

 

 

 

¹ UNCITRAL Model Law on Cross-Border Insolvency as adopted in Singapore (“SG Model Law”).

² Re Ascentra Holdings [2023] 2 SLR 421.

³ The UNCITRAL Model Law on Cross-Border Insolvency with Guide to Enactment and Interpretation (2013) (“2013 Guide on UNCITRAL Model Law”) and Re Zetta Jet [2019] 4 SLR 1343 at §§85-107.

⁴ 2013 Guide on UNCITRAL Model Law, §47.

⁵ BAICO 425 B.R.884 and Bear Stearns 374 B.R.122 distinguished, as both cases involve companies conducting business overseas legitimately through registered subsidiaries (§53).

⁶ Defined under Art 2(i) of SG Model Law to mean “a person or body, including one appointed on an interim basis, authorised in a foreign proceeding to administer the reorganisation or the liquidation of the debtor’s property or affairs or to act as a representative of the foreign proceeding”.