We look at one of the first cases in the EU considering the provisions of the Recast Regulation on Insolvency 2015/848. The Supreme Court of Gibraltar considered the provisions regarding the centre of main interests (COMI) of a bankrupt individual.
Advalorem Value Asset Fund Ltd v Gregory King, Supreme Court of Gibraltar, 2016/COMP/039
In one of the biggest changes for cross-border restructuring and insolvency lawyers in the last 17 years, substantial reforms are made to the Regulation (EC) 1346/2000 on insolvency proceedings (the EC Regulation on Insolvency) under the Regulation (EU) 848/2015 of the European Parliament and of the Council of 20 May 2015 on insolvency proceedings (recast) (the Recast Regulation on Insolvency). This is one of the first cases to consider these new provisions.
What are the practical implications of this case?
Although this case from the Supreme Court of Gibraltar is not binding on English courts, they are likely to find it persuasive on interpreting the new provisions of the Recast Regulation on Insolvency as it will be some time before cases start reaching the level of the EU Court of Justice. Specifically, the Supreme Court of Gibraltar decided that:
- the Recast Regulation on Insolvency applied rather than the EC Regulation on Insolvency; even though the application for bankruptcy was issued before 26 June 2017, the judgment opening insolvency proceedings occurred after that date
- the applicable COMI test for this individual debtor was for an individual exercising independent business or professional activity
- the debtor’s centre of main interests (COMI) was in Gibraltar
Despite the Brexit vote, the Recast Regulation on Insolvency still currently applies to England and this is one of the first cases discussing the COMI of individuals. Specifically, although this debtor was resident in one country (here, Spain), he showed no sign of actually carrying out his business there. On the contrary his business, so far as the evidence showed, was exclusively in another country (here, Gibraltar), meaning his COMI was in Gibraltar.
What was this case about?
The debtor, Gregory Hugh Colin King, is alleged to have defrauded investors of over US$600 million in a fraud concerned with a hedge fund called Heather Capital Ltd (Heather Capital). The liquidator of Heather Capital, Mr Duffy, was a supporting creditor. The current proceedings concerned an alleged fraud committed by Mr King for £6 million on the applicant, Advalorem Value Asset Fund Ltd (Advalorem).
In earlier judgments, the judge gave the liquidator of Advalorem permission to serve a statutory demand on Mr King in Spain and also permission to serve an application for a bankruptcy order out of the jurisdiction on Mr King’s residence or at least the place where he was residing in La Zagaleta in Benahavis near Marbella. The debtor did not appear and was not represented, and although this was an uncontested case, it is still useful guidance on how EU courts will interpret the new provisions of the Recast Regulation on Insolvency.
What were the issues the judge had to decide?
The threshold question for the judge was whether the EC Regulation on Insolvency or the Recast Regulation on Insolvency applied given that the bankruptcy application was issued on the 5th June 2017 (before the Recast Regulation on Insolvency came into force on 26 June 2017).
The second question was: which COMI test applied?
The third question was: where was the debtor’s COMI?
What did the judge decide?
Although the Recast Regulation on Insolvency entered force on 26 June 2015, the majority of the provisions were only effective from 26 June 2017 onwards—this was to allow Member States to familiarise themselves with the new provisions (a Corrigendum was published by the EC on 21 December 2016 clarifying that the Recast Regulation on Insolvency only applies to insolvency proceedings opened from 26 June 2017; the previous text said proceedings opened after 26 June 2017). The EC Regulation on Insolvency continues to apply to proceedings opened before 26 June 2017 (Recast Regulation on Insolvency, Article 84(2)).
In his earlier judgment of 12th January 2017, the judge cited the European law which was in force at that time, namely the EC Regulation on Insolvency. He noted that was replaced by the Recast Regulation on Insolvency which came into force on 26th June 2017 (see Article 92 of the Recast Regulation on Insolvency), and so after the date on which the application to make Mr King bankrupt was issued by the court.
However, the judge was satisfied that the definition of ‘judgment opening insolvency proceedings’ (defined to include: (i) the decision of any court to open insolvency proceedings or to confirm the opening of such proceedings; and (ii) the decision of a court to appoint an insolvency practitioner) and the ‘time of the opening of the proceedings’ (defined as the time at which the judgment opening insolvency proceedings becomes effective, regardless of whether the judgment is final or not) as defined in Article 2 of the Recast Regulation on Insolvency meant that he needed to apply the Recast Regulation on Insolvency rather than the original regulation.
Applicable COMI test
The critical question was whether this case fell under the third or the fourth sub paragraph of Article 3(1) of the Recast Regulation on Insolvency:
- for an individual exercising independent business or professional activity: the COMI should be presumed to be that individual’s principal place of business in the absence of proof to the contrary; or
- in the case of any other individual: the COMI shall be presumed to be the place of the individual’s habitual residence in the absence of proof to the contrary
If the applicant showed that the debtor exercised an independent business or professional activity in Gibraltar, Gibraltar would be the COMI. If not, then the fourth sub paragraph applied and the COMI would be in Spain.
The judge was satisfied on the basis of the evidence that the debtor did carry on his business through companies in Gibraltar and that these companies appeared to be mere cyphers for him as often happens when fraudsters use companies for their own nefarious purposes. That was sufficient to decide that the Gibraltar court had jurisdiction.
Location of COMI
The judge considered various evidence provided by the petitioning creditor that the debtor’s COMI was in Gibraltar, including that the debtor:
- appeared to have assets in Gibraltar and had within the period of three years prior to the date of his affidavit carried on business in Gibraltar, either personally or by means of an agent
- had cash assets in Gibraltar
- was the ultimate beneficial owner of various Gibraltar companies, held through a head company, Steadfast Trustees Ltd
- has and has had significant interest in connection with many companies in Gibraltar, including Rathdrum
- (in addition to his financial interest in companies) was listed as a director of Gibraltar Assets Management Ltd, a company incorporated in Gibraltar which was a member of the London stock exchange
- was party to a loan agreement where the governing law was Gibraltarian law
- for a limited period between May and July 2007, may have lived at an address in Gibraltar
The judge then considered various information from third party sources (various press articles available on the internet) presented by the petitioning creditor on the basis that when establishing COMI, one considers the information in respect of that individual that is easily ascertainable by a third party.
The judge concluded that although the debtor was resident in Spain, he showed no sign of actually carrying out his business there. On the contrary his business, so far as the evidence showed, was exclusively in Gibraltar. In those circumstances, even if the judge had to weigh up the competing claims of Gibraltar and Spain to be the main insolvency proceedings, he would still conclude that it was Gibraltar.
To what extent is the judgment helpful?
Although not binding on the English courts, this case may be persuasive and is extremely helpful in showing how the courts of the EU Member States are likely to approach the new definition of COMI of individuals under the Recast Regulation on Insolvency. It may be some time before cases reach the EU Court of Justice and give definitive guidance on these new provisions and until then, courts are likely to be guided by how the courts in other Member States are applying the new provisions.
How can I find more cases on the Recast Regulation on Insolvency?
The INSOL Europe Case Register (available to LexisPSL Restructuring and Insolvency subscribers and INSOL Europe members) contains summaries of over 500 judgments, from the EU Court of Justice and first instance and appeal courts of the EU Member States, that consider a significant point relating to the EC Regulation on Insolvency or, from 26 June 2017 onwards, the Recast Regulation on Insolvency.
As it will take some months for the first case(s) on the Recast Regulation on Insolvency to reach the EU Court of Justice, practitioners will be very interested in how other Member States across the EU are dealing with the new wording in the Recast Regulation on Insolvency. Abstracts for key cases on the Recast Regulation on Insolvency will be added to the INSOL Europe case register as judgments are delivered from 26 June 2017 onwards.
- Court: Supreme Court of Gibraltar
- Judge: Adrian Jack, Puisne Judge
- Date of judgment: 31 July 2017
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