7.01  One of the objectives of the Insolvency Regulation is to avoid incentives for debtors to transfer assets or judicial proceedings from one Member State to another in order to obtain a more favourable judgment. In these terms, recital 4 clearly speaks of forum shopping as a threat to the internal market. The question to be examined here is whether the transfer of the COMI from one Member State to another in order to benefit from the latter’s insolvency laws is permissible under the Regulation.

7.02  The intricacies of forum shopping are discussed at great length elsewhere.¹ Instead this chapter focuses only on briefly explaining the meaning of forum shopping and the negative connotations it carries in private international law. This will ensure a better understanding of forum shopping within the Insolvency Regulation.

7.03  Despite its extensive use in modern litigation, there is no standard and universally agreed definition of forum shopping. English courts used the term for the first time in 1969.² Referring to double actionability as the English choice of law for torts committed abroad, Lord Pearson stated that ‘it might lead to what has been described in American cases as “forum-shopping”, i.e. a plaintiff by-passing his natural forum and bringing his action in some alien forum which would give him relief or benefits which would not be available to him in his natural forum’.³ Lord Pearson’s definition envisages forum shopping only as the plaintiff’s effort to have the case heard by the courts of a country other than the natural forum.

7.04  As such, forum shopping was not a concept unknown to English courts and was not necessarily borrowed by US case-law. Focusing on the plaintiff’s behaviour, Lord Cooper spoke against the encouragement of forum shopping stating that ‘pursuers should not be encouraged to improve their position vis-à-vis their opponents by invoking some secondary forum in order to exact compensation for a type of loss which the primary forum would not regard as meriting reparation’.⁴

7.05  Despite the condemnation of forum shopping by the House of Lords, there were instances where English judges sought to justify it. Lord Denning MR held that if the plaintiff believes that English law provides him or her with an advantage, he or she is entitled to bring the action here, provided that he or she can serve the defendant within the jurisdiction of English courts and that the action is not vexatious or oppressive.⁵ He went on to state explicitly that ‘[y]ou may call this “forum shopping” if you please, but if the forum is England, it is a good place to shop in, both for the quality of the goods and the speed of service’.⁶ This approach was not unprecedented. Bowen LJ, although implicitly, had referred to forum shopping and held that judges ‘have no sort of right, moral or legal, to take away from a plaintiff any real chance he may have of an advantage’ even if there is a possibility that he or she may prosecute a suit in two countries.⁷

7.06  Lord Reid did not share Lord Denning’s view of forum shopping. His approach was very similar to that of Lord Pearson. He drew a distinction (p. 213) between cases where England is the natural forum for the plaintiff and cases where the plaintiff merely sues in England to serve his or her own ends. With regard to the latter, he held that ‘the plaintiff . . . should be expected to offer some reasonable justification for his choice of forum if the defendant seeks a stay . . . There have been many criticisms of “forum shopping” and I regard it as undesirable’.⁸

7.07  While allowing the appeal, Lord Wilberforce did not seem to believe that the plaintiff had engaged in forum shopping by bringing the English action, which he thought had better prospects of success by comparison to the Belgian action. He thought such course of action was ordinary in business.⁹

7.09  Lord Simon’s argument is cynical, but also pragmatic. The plaintiff will always try to sue in a court which is available to him or her and where it offers the best prospects of success. Such behaviour should be expected.

(p. 214) 7.11  It can be noted, by means of conclusion, that English courts have identified forum shopping with the effort of a litigant to have the case heard in a court other than the natural forum, in which better chances of success may be offered. Despite the fact that some judges thought that forum shopping is a right that litigants have, it is clear that on the whole English courts have taken the view that forum shopping is undesirable and should be avoided.

7.12  The US approach to the definition of forum shopping is also very similar. Forum shopping is ‘a litigant’s attempt “to have his action tried in a particular court or jurisdiction where he feels he will receive the most favourable judgment or verdict”’.¹² The term was used as early as 1951 by the US Court of Appeals.¹³ However, its origin as a concept can be traced back to 1938, when the US Supreme Court eliminated much of the incentive for State–federal forum shopping by requiring federal courts in diversity cases to apply the substantive law of the State in which they are located.¹⁴ Federal courts were subsequently required to apply the forum State’s private international law rules.¹⁵

7.13  Just like English judges, their American counterparts did not consistently conceive forum shopping as an evil practice. There were judges who thought forum shopping was a corollary of the existence of different legal systems that accord different rights to the same litigants. Widener J stated that ‘[t]here is nothing inherently evil about forum-shopping. The statutes giving effect to the diversity jurisdiction under the Constitution, 28 USC § 1332 (jurisdiction) and § 1391 (venue) are certainly implicit, if not explicit, approval of alternate forums for plaintiffs’.¹⁶

7.14  Other judges have taken a different view. They have recognized that some kinds of forum shopping are legitimate. In differentiating between legitimate and illegitimate forum shopping, Ellis J provided the following guidelines. ‘In legitimate forum shopping, personal jurisdiction either antedates the cause of action or arises in conjunction with the action, as a consequence of it. Here, by contrast, the personal jurisdiction post-dated the accrual of the cause of action and was manufactured by plaintiff solely for the purpose of providing plaintiff with a preferred forum for litigation.’¹⁷

7.15  French case law has a theory of forum shopping and the term is used widely in French scholarship. Forum shopping goes hand in hand with abuse of law (fraude à la loi). It is thought to be a means of obtaining in another court ‘what could not be obtained under the applicable law’.¹⁸

7.16  Forum shopping is, in French eyes, a kind of fraud and its story goes back to the nineteenth century. As early as 1878, French courts demonstrated their unwillingness to allow parties voluntarily to alter their legal relationship for the sole purpose of avoiding the law that would be otherwise applicable to them.¹⁹ Thus fraude à la loi was thought to comprise three elements: first, the physical element—ie the act of the parties that will lead to the change of the applicable law; second, the legal element—ie the change of the applicable law; and third, the mental element—i.e. the intention of the parties to perform an act for the sole purpose of altering the applicable law.²⁰

7.17  Against this background, French courts developed another kind of definition of fraud. To the extent that French courts do not enjoy exclusive jurisdiction under French private international law for a particular matter, they will refuse recognition of a foreign judgment if the foreign court did not have a substantial connection with the litigation and the choice of forum was fraudulent.²¹ It is not clear what a fraudulent choice of forum means but it has been held to cover the intention to have a case heard by a court other than the natural forum.²² However, there is a long line of authority to show that in cases where French courts thought fraude à la loi to exist, one of the parties had tried to obtain judgment from a court that would not apply the law that to the eyes of French conflict of laws would be applicable and thus deprive the other party of the possibility to win the case.²³

(p. 216) 7.18  Thus, forum shopping is perceived to be the strategic search on behalf of either the plaintiff or the defendant concerning access to the most favourable court, either with regard to its procedural or substantive law.²⁴

7.19  Forum shopping is a term which, undoubtedly, has negative connotations in all jurisdictions. There are two major reasons that have lead to the vilification of forum shopping: first, it undermines the authority of substantive law and thus creates a public mistrust of the equity of the legal system; and second, it overburdens certain courts and creates unnecessary expense as litigants pursue their claims not in the natural but in the most favourable forum.²⁵

7.20  With regard to the first reason, one’s opinion on forum shopping depends, largely but not solely, on the view that one takes with regard to the relation between the administration of justice as a reality and as an ideal. The fact that courts exorcize it demonstrates that judges are orientated towards a certain ideal of the rule of law, according to which, for each dispute there is a natural forum. The fact that forum shopping occurs, and is occasionally tolerated too, proves that judgments are not the product of a pure logical process utilized by a judge, but the function of social and other factors.²⁶

7.21  The Re SPhinX case is an example where the court could be seen to be implicitly driven by some kind of protectionism of US creditors.²⁷ The collection and publication of data on federal judges, like the Almanac of the Federal Judiciary or the Judicial Staff Directory, which inter alia contain information on temperament, political views, and other personal characteristics of judges, is also another example of the dissonance between legal ideals and legal practice.

7.22  Although some may wish to deny the influence of such factors on judicial reasoning, it is nonetheless true that in certain countries forum shopping is entrenched not only in the behaviour of litigants, but also in politics. Political theorists in the US recognize ‘the American habit of shopping for favourable laws, first in local legislatures, then in Congress, and finally in courts’.²⁸ However, it can be debated whether this statement is true of Europe to the extent that it is in the USA. It would appear that shopping (p. 217) in Europe occurs first in courts, although one should not neglect the amount of lobbying that takes place in Brussels.

7.23  Referring to the second reason relating to the economic cost of forum shopping, there are rules that mitigate this concern. Undeniably, forum shopping is costly to the extent that it removes litigation from the forum with the closest connection to and the best knowledge of the dispute. Rules though, like the forum non conveniens doctrine and rules on subject matter and personal jurisdiction exist to facilitate this mitigation. In practice, when forum shopping allows for ‘substantively efficient rules to be enforced . . . the outcome is efficient; where it allows such laws to be avoided, [it] is inefficient’.²⁹ This statement encapsulates the idea that the characterization of forum shopping as ‘impermissible’³⁰ or ‘undesirable’³¹ depends by and large on the fairness and efficiency of the forum and the law applicable to the merits of the dispute.

7.24  Forum shopping though is not always a vice. It has been argued in connection to the Insolvency Regulation that ‘forum shopping, is not a completely unlawful practice. The Community legislation counters the opportunistic and fraudulent use of the right to choose a forum, which is very different to the demonization for the sake of it of a practice which on occasions it is appropriate to encourage.’³²

7.25  The definition that one gives to forum shopping really matters. It is not necessary to describe forum shopping as a kind of fraude à la juridiction or fraude à la loi. Prorogation agreements included in contracts are a kind of forum shopping which is per se not objectionable. On the contrary, they are rather common and guaranteed by party autonomy. Article 23 of the Brussels I regulation confirms the truth of this statement. For these reasons, one needs to distinguish between good and bad forum shopping (forum shopping bonus et malus).³³

7.26  It is probably hard to give a definition of good forum shopping. It will be seen that any forum shopping that is not bad forum shopping is good forum shopping. Bad forum shopping is a choice of jurisdiction of an available forum, which is not a natural forum, with the sole purpose and knowledge that the opponent is most likely to lose there.³⁴ Of course, the (p. 218) plaintiff will always look for the forum which offers the best chances of success and the opponent the most chances of losing, but this should not be done in a way to deprive the opponent of the right to have the case heard in a natural forum.

7.27  In this sense, the English and French definition of bad forum shopping is very similar.³⁵ Bad forum shopping thus appears to be an affront to the court itself rather than the other party to the dispute.³⁶ Although this appears to be the understanding of forum shopping in civilian jurisdictions, there is even some authority to support this conclusion in English law. It has been held that a court can use its discretion to grant anti-suit injunctions to protect its jurisdiction.³⁷ The latter was conceived as a separate ground from actually enforcing the consent of parties to litigate in England, either by agreement or submission.

7.28  However, bad forum shopping should be described as an injury to the interests of the other party, to the extent that one views jurisdiction as rights-based. There is indeed public interest in safeguarding the finality of litigation. The natural forum, however, has other means of protecting its jurisdiction, such as the grating of anti-suit injunctions or the refusal to recognize the judgment handed down by the foreign court. Thus, bad forum shopping is primarily an injury to the rights of the other party which has, in a sense, a legitimate expectation that the dispute in question should be litigated in a particular forum.³⁸

(p. 219) 7.29  Bad forum shopping thus comprises two components. The physical element is the behaviour that is destined to remove the case from the judge who ‘is normally competent’. The intention to follow a ‘reprehensible procedural’ or substantive aim constitutes the relevant mental element.³⁹ Bad forum shopping or forum shopping malus are rather unfortunate terms. One could speak instead of forum shopping (which corresponds to bad forum shopping), as a species of forum selection; in other words, as a term without positive or negative connotations. Of course, there is an important question to be answered: in which cases should forum shopping be impermissible?

7.30  An example will show how consent amongst stakeholders or the lack thereof can explain the difference between forum shopping and forum selection. Suppose A AG is incorporated in Germany and realizes it is about to become insolvent. German law requires that the directors declare the company insolvent, whereas under English law there is a possibility of a Company Voluntary Arrangement (hereinafter ‘CVA’), which may allow for the company to renegotiate its debt with its creditors. The directors of the company together with the shareholders and all the creditors have a meeting. They agree to set up an English company that will succeed to the assets and liabilities of A AG by operation of the German doctrine of successio universalis.⁴⁰ The reason is that the debtor, its shareholders, and the creditors wish to benefit from the possibility of a CVA. The question becomes, in case of insolvency, whether this transfer of the company abroad is forum shopping or a forum selection.

7.31  The stakeholders are meant to be able to tell whether a corporate debtor can be salvaged or not better than anyone else. Thus, if all interested parties are present and they agree to a transfer of the company to the UK in order to perform a CVA and the latter is successful,⁴¹ there is not much a court can say. In fact, creditors often would prefer a restructuring to formal insolvency proceedings.

7.32  Insolvency calls the debtor’s existence in question, ‘with the consequence that its suppliers and customers downgrade their expectations about its commitment to performance – which, in turn reduces the value that can be obtained by selling the firm’s assets’.⁴² Few jurisdictions permit firms to (p. 220) contract with their creditors to use a particular procedure and no jurisdiction allows firms to design its own.⁴³ This leaves the transfer of the COMI to another Member State as a viable solution that creditors and debtors can use to select a national insolvency law that is more appropriate to their ends.

7.33  Under the so-called ‘London approach’ to voluntary arrangements supported by the Bank of England, commercial banks are traditionally urged to take a supportive attitude toward debtors who are in financial difficulties. Decisions about the debtor’s longer-term future should be made only on the basis of comprehensive information, which is shared between all the banks and other parties that would be involved in any agreement as to the future of the debtor. Interim financing is facilitated by a standstill and subordination agreement, and banks work together with other creditors to reach a collective view on whether and on what terms a debtor entity should be given a financial lifeline.⁴⁴

7.34  Parties have a high incentive to reach an agreement. The directors and the shareholders do not wish the company to become insolvent. Neither do the creditors, as an eventual restructuring or liquidation would decrease their chances of recovering their investment in the debtor. The courts should hesitate to interfere in this bargaining. It should just ensure that it is conducted in a fair manner, ie that all the interested parties are involved, and that no information on the condition of the debtor is withheld. This efficiency makes the transfer of the company not forum shopping, but forum selection.⁴⁵

7.35  On the contrary, if the transfer is conducted by the debtor only, without any prior consultations with the stakeholders there is good reason to believe that it is a strategic move performed for the sole benefit of the debtor. This is the reason that a transfer without prior consultation with stakeholders—eg the exit of B&C Finanziaria from Italy to Luxembourg⁴⁶—will be seen as forum shopping and not as a benign forum selection.

7.36  What would happen though in a case where the cross-border transfer would increase the value of the firm by improving the position of the (p. 221) creditors,⁴⁷ but would partially reduce the value of the firm to shareholders? It has been argued that in the event that lending is concentrated, ‘sophisticated adjusting⁴⁸ creditors, such as the firm’s main bank, will be able to stimulate the other groups’ to enter negotiations.⁴⁹ However, on the creditors’ side the benefits will be limited to adjusting creditors and, on the debtor’s side, such benefits will be available only to large shareholders and directors to the exclusion of the minority shareholders.⁵⁰

7.37  Consequently, whenever there is consent among the stakeholders about the relocation of the COMI in order for the parties to achieve what they think to be an efficient result, regardless of whether it actually is or not, there can be no forum shopping.⁵¹ Courts should refrain from upsetting this bargain because they are less likely to strike a bargain that leads to greater firm value maximization than the parties themselves. From a doctrinal point of view, if all parties have agreed to the transfer of the COMI, they cannot complain against it later, even if they miscalculated the possible outcomes of the transfer by their own fault. This is so because volenti non fit iniuria, provided that one shares the view that jurisdiction is rights based. Undeniably, parties can pursue their interests in an efficient manner without State interference.

7.38  According to recital 4 of the Insolvency Regulation, forum shopping comprises two alternative acts, which constitute its physical element: transfer of assets or judicial proceedings. The mental element required is the intent to obtain a more favourable legal position.

(p. 222) 7.39  The concept of forum shopping is not unique to the Insolvency Regulation. It also exists in relation to the Brussels I regulation, where, on one view,⁵² the ECJ is thought to have involuntarily encouraged forum shopping through its jurisprudence.⁵³ Although the ECJ has stated that the Brussels I regulation seeks to discourage forum shopping,⁵⁴ it has never defined the term. According to two AGs, forum shopping is the choice of a forum ‘according to the advantages which may arise from the substantive (and even procedural) law applied there’.⁵⁵

7.40  Thus far in interpreting the notion of forum shopping in the context of the Insolvency Regulation, the ECJ has not gone any further than repeating the definition provided in recital 4 of the Regulation.⁵⁶ However, some domestic courts have provided some guidance regarding its interpretation.

7.43  This interpretation is in tune with the holding of Langan QC that there is a difference between a restructuring of the debtor’s business ‘which is carried out for sound commercial reasons long before the question of insolvency proceedings becomes live’ and ‘a more or less cynical removal of the seat of a company’s operations’ outside the EU ‘a few weeks before the business goes to the wall’.⁶¹

7.44  Therefore, as far as the English courts’ interpretation is concerned, forum shopping can materialize through change of the COMI only prior to the insolvency of the debtor. The mental element⁶² of forum shopping is intent with regard to the change of the COMI and a view to alter the law applicable to insolvency. In the extracts from the Shierson case discussed earlier,⁶³ Chadwick LJ stressed the ‘deliberate’ manner in which the change of the COMI needs to be performed in order for forum shopping to be established. This matches perfectly with the aforementioned principle of volenti non fit iniuria.⁶⁴

7.45  The holding of Chadwick LJ is not contrary to ECJ case law. In particular, the ECJ has held that the critical moment for founding of the jurisdiction under Article 3 of the Regulation is the moment of the filing of application, even if after the filing and before the debtor has sought to move its COMI elsewhere.⁶⁵ Therefore an effort to move the COMI posterior to the filing of an insolvency petition with the view of altering the applicable law may amount to forum shopping.⁶⁶ For this reason, some have argued in favour of the perpetuatio fori principle, ‘according to which the international jurisdiction of the courts of a Member State, once established, continues to exist and which can frustrate debtors’ attempts to transfer their COMI to another Member State.⁶⁷ Regrettably, such a position does not seem to (p. 224) leave any room for the transfer of the COMI to another Member State following a decision to that effect taken with the consent of the relevant stakeholders.

7.46  It is exactly for these reasons that several authors have argued that the COMI is ‘fuzzy and manipulable, allowing forum shopping at the vicinity of bankruptcy’.⁶⁸ As a consequence, it is argued, creditors cannot adequately ascertain the applicable insolvency regime and ‘this leads to risk-inadequate credit terms’.⁶⁹ Furthermore, the manipulability of the COMI affects especially the category of creditors who are not in a position to readjust their legal position in case of a shift in the COMI and the law applicable to the merits.⁷⁰ The use of the COMI as a connecting factor ‘will often lead to discrepancies between the applicable insolvency and company law rules’.⁷¹

7.47  Although not explicitly articulated in these terms, the French courts have taken a similar view to that of the English courts. The Court of First Instance of Strasbourg, the Court of Appeal of Colmar, and the Court of Cassation concluded that the French courts lacked jurisdiction to open bankruptcy proceedings (procédure de liquidation judiciaire) under the Insolvency Regulation over a debtor who had moved its residence from Germany to France for the very purpose of benefiting from the said procedure which is not available under German law. Without making any explicit reference to forum shopping, the Court of Cassation held that ‘the only reason for [the debtor’s] installation in Alsace was to obtain a discharge of liabilities incurred in Germany’, and concluded that the French courts lacked jurisdiction to open insolvency proceedings.⁷²

7.48  Despite the fact that Article 3(1) of the Insolvency Regulation offers national courts a degree of flexibility which is necessary in order to identify the COMI in light of the facts of each case, it has been suggested that the presumption contained therein in favour of the registered office should become an irrebuttable one. The law should also be revised to allow for free choice of the forum of the insolvency and the law applicable to corporate matters.⁷³ The bundling of company and insolvency law in this particular way would have certain advantages. It provides for a stable and ascertainable (p. 225) forum, it is less fact-sensitive and less costly to administer. Additionally, it disavows any divergence between the law applicable to corporate matters and the law of the forum of insolvency, and it prohibits the shifting of risk to less sophisticated or non-adjusting creditors.⁷⁴

7.49  The greatest disadvantage of this approach is that it discourages value-maximizing strategies, thus group insolvencies may only be administered through ad hoc protocols, potentially in the way that UNCITRAL is also considering.⁷⁵ However, there is more than this. The bundling of corporate and insolvency law has two significant disadvantages, one functional and one practical. First, it discourages forum shopping, but it also discourages regulatory competition, to the extent that whenever a company wishes to alter the law applicable to corporate matters will have to alter the law applicable to insolvency as well and vice versa.⁷⁶

7.50  Second, in case of letter-box companies, the court of the COMI will be in charge of proceedings, which are only nominally main. Other stakeholders will be able to deprive the main proceedings of actual enforceability by opening secondary proceedings in other Member States; not to mention, of course, that the judgment may not qualify for recognition and enforceability outside the EU, to the extent that the State where recognition and enforcement is sought has to follow the Model Law. Under the latter, proceedings are recognized as main only if the COMI is located within the territorial jurisdiction of the foreign court. The approach taken by the non-EU court will not necessarily be one of identification between the COMI and the registered office. It is mainly for these two reasons that it is submitted that the possibility to rebut the presumption of Article 3(1) should not be removed.

7.51  The Insolvency Regulation has enacted the COMI as a mechanism to combat forum shopping. The question thus is whether the identification of the COMI at a particular location can be resisted on grounds of the doctrine of abuse. It is submitted that the doctrine of abuse applies throughout EU law. The prevention of forum shopping constitutes the said doctrine’s specific application in the context of the Insolvency Regulation.

(p. 226) 7.52  The application of the doctrine of abuse in the field of the Insolvency Regulation has been very recently examined.⁷⁷ The main thrust of the argument is that shifts of the COMI that do not evidently contribute to maximizing the debtor’s net assets are abusive. Eidenmüller draws a distinction between abuse and fraud. The first ‘is about applying the law to a specific set of facts, whereas fraud is about correctly determining the facts to which the law then is applied’.⁷⁸ This actually means that abuse is committed when the facts which call for the application of the law are fraudulently or artificially constructed, whereas fraud exists when a court erroneously considers the COMI to be considered in its territory.

7.53  According to Eidenmüller, abuse can be constituted if the law is employed contrary to each purpose, without paying regard to the existence of a specific abusive intent.⁷⁹ This second proposition though is contrary to the case law of the Court, which requires the finding of a subjective element of abuse.⁸⁰ Although on certain occasions it is evident that Eidenmüller conflates the real seat and the COMI to a certain extent,⁸¹ his article really brings to the scene a very interesting question. The crucial issue is under which circumstances the shift of the COMI, even when it is performed with the consent of all the stakeholders, can constitute an abuse. Eidenmüller follows an economic analysis. In his view, the purpose of insolvency law is to maximize the net assets available in order to satisfy the creditors’ claims.⁸² While this is undoubtedly one of the aims of insolvency law, the Court has nonetheless interpreted the purpose of the freedom of establishment to be the participation of a corporation in the economic life of another Member State.⁸³

7.54  It is not clear to what extent the coordinated shift of the COMI by the debtor and creditors would qualify as participation in the economic life of another Member State. On one reading of the definition of freedom of establishment, an artificial shift of the COMI would not qualify for the (p. 227) protections of freedom of establishment, even though both the debtor and the creditor agree to it.

7.55  This could be so, because the debtor and creditors could actually create the conditions for finding the COMI in another Member State artificially, ie by taking advantage of the presumption of Article 3(1) in favour of the registered office. The registered office of the debtor, as will be shown following, may have been moved to another Member State, whereas in fact the real COMI could have remained in the Member State of origin. However, the transfer might not be contested by either the debtor or the creditors. In applying Article 3(1), a civilian court, which is not bound by the submissions of the parties as to jurisdiction, could disregard the construction created by the debtor and the creditors.

7.56  This point brings the discussion back to a fundamental question. What is the philosophical basis of jurisdiction in Article 3(1)? Is it based on private rights or the State’s imperium?⁸⁴ Is it based on considerations of economic efficiency or public interest, in the sense that the public has the right to know the details of insolvencies that are in a position to affect national or global economy—eg Bear Stearns? Eidenmüller appears to consider jurisdiction in the Insolvency Regulation as based on economic efficiency. The COMI must be interpreted in a way to safeguard the economic interests of creditors, and not as a link of substantial connection of insolvency proceedings with a particular State.⁸⁵ All that matters is the maximization of the value of the debtors’ assets. In his view, the need to prevent forum shopping is secondary.⁸⁶

7.57  On the other hand, one may view the COMI as embodying a jurisdictional rule that safeguards State or public interest. Let it be supposed that X SA is incorporated in France and both the company and its creditors, with the exception of employees, agree that the COMI be transferred to the UK. If French courts were to take this view of jurisdiction then they could intervene in order to safeguard the interests of employees by appending the tag of forum shopping on the COMI shift.⁸⁷ Taking this view to its extreme, (p. 228) national courts could consider the concept of the COMI itself as a melange of anti-forum shopping considerations and thus refuse to uphold any change or shift of the COMI so as to defend their jurisdiction.

7.58  The COMI is a connecting factor which serves multiple purposes. First, it is a connecting factor of substantial connection. Second, it is meant to provide a certain degree of creditor protection. In other words, the COMI indicates the natural forum for the insolvency proceedings of a debtor.

7.59  This conclusion is also reinforced by the possibility of rebutting of the presumption in Article 3(1). What is effectively argued in case of a rebuttal is that if proceedings are carried on in the forum in which they are brought, the judgment will not enjoy a great deal of recognition.⁸⁸ The reason is that there is another secondary establishment where the debtor’s assets are located and where proceedings can be brought successfully. This would render the main proceedings main in name and not in fact.

7.60  In fact, even secondary proceedings require an establishment, which should be interpreted as Article 2(h) of the Regulation requires.⁸⁹ If the registered office is a letter-box then why should the courts of the Member State of incorporation enjoy the exclusive jurisdiction to open main proceedings, whereas for the same amount of presence jurisdiction to open secondary proceedings would not be established? The fact that the presumption of Article 3(1) is rebuttable safeguards the integrity of the main proceedings.

7.61  Therefore, it is erroneous to treat the COMI as purely belonging to one of the aforementioned categories. Close connection is not directly concerned with economic efficiency. Rather it is concerned with the administration of justice. Insolvency disputes should be ‘dealt with at the place which is most suitable for reasons of substance and procedure’.⁹⁰ In principle, insolvency proceedings should be administered by the court which has the closest connection with the dispute.⁹¹ Expedient administration of justice (p. 229) though indirectly affects efficiency. The more readily enforceable a judgment is, the lesser the costs.

7.62  On the other hand, no court has the right to upset the agreement of the parties to place the COMI at a particular location, even if that it is not an economically efficient decision.⁹² The reason is that in such a case the creditors have expressed their will to conduct their affairs in a particular manner. The courts should, in principle, trust their judgement as well as that of the debtor. However, under the current state of EU law, courts could potentially upset such arrangements if it turned out that the shift of the COMI was not real but artificial and it did not lead to participation in the economic life of the host Member State.

7.63  Therefore, jurisdiction in the Insolvency Regulation is not solely a matter of economic efficiency. The doctrine of abuse cannot be applied in this context on the basis of pure economic considerations. Forum shopping is the specification of abuse in the context of the Insolvency Regulation and it is not primarily related to economic efficiency, but rather to consent. As the ECJ has indicated in the context of the Brussels I regulation, abuse can only have a limited role to play.⁹³ Indeed it is hard to see how the application of a rule on jurisdiction can be abusive. Abuse requires that the purpose of the freedom has been evaded. Forum shopping requires that one party is seeking to unduly disadvantage the other. Therefore, forum shopping is more suited than abuse of law for the purposes of the Insolvency Regulation or, in other words, forum shopping is the specification of the doctrine of abuse in the context of the Insolvency Regulation.⁹⁴

7.64  Indeed, as pointed out by Armour, the reasons that necessitate the existence of an independent doctrine of abuse for the Insolvency Regulation are not entirely clear.⁹⁵ First, there are corporate law mechanisms that often ensure that creditors are consulted before a shift is effected.⁹⁶ Second, there can be other ways that protect creditors, such as the conclusion of contractual clauses according to which a change of the COMI without prior consultation with the creditor would trigger the debtor’s default. On top of these considerations, the existence of a separate abuse doctrine for the Insolvency Regulation could increase uncertainty over a term as loose and uncertain as the COMI.

(p. 230) 7.65  Having said this, it is also crucial to differentiate between forum shopping and regulatory competition. If forum shopping is conceived as any effort made to unduly disadvantage one’s opponent, regulatory arbitrage is the effort made by debtors and creditors to submit an insolvency to the most efficient national law, while regulatory competition is the effort made by Member States to attract such submissions. Regulatory competition and arbitrage can take two forms; ie either the form of a race to the top or a race to the bottom. Whether either of these races in fact constitutes forum shopping depends on the meaning that one attaches to the terms ‘top’ and ‘bottom’.

7.66  Both views, namely that the insolvency race in Europe will go to the top⁹⁷ or to the bottom,⁹⁸ have been put forward. Before examining their individual merit, a few preliminary observations should be made. As in the case of regulatory competition for corporate charters, it is hard to tell whether favouring a particular interest group in insolvency encourages a race to the top or to the bottom. For some, ranking employee claims above these of secured creditors is monstrous and for some others it is ideal. Economic efficiency can be opposed to social efficiency and so on. There appears to be no solid answer in Europe as to what is desirable and undesirable or right and wrong in insolvency law.

7.67  In any event, if by ‘race to the top’ one refers to regulatory competition that facilitates what the stakeholders believe to be firm value increasing then it can be safely concluded that a race to the top and forum shopping do not usually overlap. By contrast, a race to the bottom implies an effort that is being made to benefit a particular group of interest more than others, which subsequently leads to a decrease in the quality of insolvency law. As in the case of forum shopping, a race to the bottom does not presuppose stakeholders’ consent. Actually, it usually tries to avoid it.⁹⁹

7.68  Notwithstanding these conclusions, one should note that forum shopping does not necessarily lead to a race to the top or the bottom. It is at least theoretically possible that insolvency proceedings will be opened in the courts of Member States without prior negotiation of the stakeholders. Courts can create regulatory competition just by the mere interpretation they give to the notion of the COMI. The nature of the race that will emerge will depend on the quality of each national law. However, one can reasonably anticipate that no Member State will wish to initiate a race to the bottom (p. 231) and the European Commission will always do its best to ensure that such thing never happens.

7.69  Regardless of whether one views the (potential) race for insolvencies in Europe as one to the top or the bottom, one should also bear in mind the differences between the race as it has been evolving in the US and in Europe. Delaware’s success stems from two main factors. First, it has enjoyed the pre-eminent position in relation to incorporations.¹⁰⁰ Second, insolvency law in the US is debtor-, and in particular, manager-friendly, as managers enjoy the possibility of remaining at their post, even after the filing, which they usually make themselves.¹⁰¹

7.70  One of the major factors that prevent a race to the bottom is the leading role that banks play in insolvency. As debtors are desperate for cash, banks ‘use the financing agreement to exert substantial control over the debtor, both before and in bankruptcy’.¹⁰² This goes to the extent that ‘the banks themselves often appear to be the ones who make the venue decision’.¹⁰³

7.71  By contrast, in Europe a Member State has yet to assume the role of Delaware and insolvency law is, in varying degrees, creditor-friendly. Creditors very frequently file for insolvency instead of the managers.¹⁰⁴ Most European insolvency regimes, including the English one, are manager-displacing: ‘[d]irectors are not rewarded with the carrot of prolonged control over the corporation, but threatened with the stick of liability in the case of a late filing. However, it appears that this stick does not work effectively, because the case placers are usually creditors’.¹⁰⁵

7.72  US courts have not dealt with forum shopping in bankruptcy in great depth. The Re SPhinX case is the earliest authority with regard to this matter.¹⁰⁶ In that case, Drain J decided that the COMI of the hedge funds was outside the Cayman Islands, based on anti-forum shopping considerations. The bringing of proceedings in the courts with territorial jurisdiction over the registered office was thought to be tainted with ‘improper purpose’ as their goal was (p. 232) to frustrate the settlement that had been reached with the US creditor, Refco Capital Markets, objecting to the petition. If the Cayman proceedings were recognized as foreign main proceedings the appeal on an action regarding the settlement with Refco would be stayed. This would have the same consequence as overturning the ‘settlement without addressing or prevailing on the merits’.¹⁰⁷

7.73  While holding that he would be prepared to accept that the COMI of SPhinX lay in the Cayman Islands, Drain J derived the forum shopping incentives from the attempted frustration of the settlement reached with Refco. On a proper construction, he should have probably concluded that the COMI lay elsewhere in order to deny recognition of the Cayman proceedings.

7.74  This stance which mixes forum shopping with the older doctrine of ‘improper purposes’ contained in §304(c) of the Bankruptcy Code replaced by Chapter 15 was heavily criticized. The basis of the criticism was that the purpose of the very Chapter 15 was to provide a new legal framework that would limit the flexibility that US courts enjoyed under the old regime.¹⁰⁸

7.75  The second and more recent authority on forum shopping is much sounder in principle. Lifland J has held that ‘[t]he jurisprudence emerging from [the courts in Re Ran, Betcorp and British American] does not preclude looking into a broader temporal COMI assessment where there may have been an opportunistic shift to establish the COMI (i.e. insider exploitation, untoward manipulation, overt thwarting of third party expectations).’¹⁰⁹

7.76  The use of the term ‘opportunistic’ cannot be construed to imply shifts which are not consensual only. Indeed it may also include shifts which take place for the sole reason of benefitting from another country’s law. However, the last of three factors given by means of example guarantees at a minimum that a shift of the COMI which performed without any consultation with the creditors, and which is aimed at placing the creditors at a weaker position, will not be recognized the courts. It does not though go as far as accepting the COMI at the location where the debtor and the creditors have agreed it to be located.

7.77  By contrast, US courts insist that they should be satisfied that the COMI is indeed at the agreed location. In the same vein, commentators such as (p. 233) Glosband have taken the view that it is not necessary to recognize the proceedings brought in the place of registered office as main or non-main. Recognition may be refused on the basis that the registered office is neither the COMI nor an establishment.¹¹⁰ In these terms forum shopping is often thought of as insolvency filing at a court other than that of the location of the company’s ‘executive office’.¹¹¹

7.78  Returning to the transfer of the COMI as a kind of forum shopping, it should be stated that a change of the law applicable to the insolvency proceedings, effected through a transfer of the COMI to a Member State with less restrictive company or insolvency law, is not necessarily detrimental to the creditors.

7.79  A study of defaults and bank recovery rates in France, Germany, and the UK performed in 2008 revealed that ‘the median recovery rate in bankruptcy is 82 per cent in the UK, 61 per cent in Germany, and only 39 per cent in France’.¹¹² Expediency of procedures influences efficiency. ‘The median total length of reorganization proceedings and case closure is 1.45 years in the UK, 3.05 years in France and 3.82 years in Germany’.¹¹³ By contrast, ‘renegotiation of debt’ processes—eg CVAs—have very high recovery rates for banks across all three jurisdictions: 78 per cent in the UK, 83 per cent in France, and 76 per cent in Germany.¹¹⁴ Of course, banks are not the only creditors and this study does not reveal the overall rate of recovery.

7.80  There are a number of reasons why recovery rates differ so much. Different insolvency regimes pursue different objectives. The UK is said to be a ‘creditor-friendly’ jurisdiction. In the event of insolvency, control passes to the creditors. An administrator is appointed with the sole purpose of materializing funds to pay the debts to the creditors whose hierarchy of claims is prescribed by law.¹¹⁵ In addition, it provides a legislative framework for CVAs and pre-packs—ie a prearranged sale which the administrators (p. 234) intend to effect as soon as or shortly after an administration order is made by the court.¹¹⁶

7.81  In Germany, a judicially appointed administrator supervises the insolvent company and designs a plan for reorganization that has to be approved by the majority of secured creditors, otherwise the company must be liquidated.¹¹⁷ However, unlike English law, German directors face severe civil and criminal penalties if they fail to file for insolvency within three weeks of the company becoming unable to pay its debts.¹¹⁸

7.82  In France, the objectives of a judicially appointed administrator are to maintain the company ‘as a going concern, preserve employment,¹¹⁹ and satisfy creditors’ claims, in that order’.¹²⁰ Despite recent legislation introducing a rescue procedure, which resembles that of Chapter 11 of the US Bankruptcy Code,¹²¹ French insolvency law is indeed orientated towards attempting to achieve a social efficiency rather than an economic efficiency model.¹²² Indeed, the State and employees have priority and thus higher recovery rates than secured and unsecured creditors.¹²³

7.83  Concluding, the paradigm case of forum shopping is that of a debtor company, which, upon realizing it is about to become insolvent, moves its COMI to another Member State. The exit from the jurisdiction may be performed in four different ways. One is to transfer the central management. Another is to transfer the registered office. A third way is to perform a cross-border merger with a foreign company that either pre-existed the merger or was set up for this specific purpose. A fourth way is to set up a company in another Member State which will become a shareholder of the (p. 235) debtor and then it will gradually acquire the shares of the other shareholders until it succeeds to the debtor by succesio universalis. Each case will be examined in turn.

7.84  The transfer of the place of central management, ie of the place where the debtor conducts the administration of his business on a regular basis, will be performed for the purpose of affecting the COMI test. Since the COMI has to be established under inter alia objective criteria, such a transfer will undermine the solidity of the presumption of Article 3(1) in favour of the place where the registered office lies. Although it is no longer possible for the host Member State to deny the legal personality of a company that moves its head office into that jurisdiction,¹²⁴ this method of forum shopping can be very troublesome for a number of reasons.

7.85  First, some Member States might prohibit companies from moving their head office out of the jurisdiction and at the same time retain the legal personality of the State of incorporation.¹²⁵ Second, even if it is permissible under the law applicable to corporate matters to transfer the head office abroad and to the extent that the registered office is not moved, there is nothing to guarantee that in the event that a petition for insolvency is brought in the courts of the State of incorporation, the latter will hold that the COMI has indeed moved. Not to mention, of course, that transferring the head office is always not a very cost-effective decision.

7.86  On the other hand, there have been instances where such a move has been effective. The major competitor of Deutsche Post, PIN Group AG, was registered in Luxembourg. When it ran into difficulties, it decided to shift its COMI to Cologne and restructure itself there. All statutory books, all personnel files, and other substantial documents were transferred to a rented office in Cologne; the top management was based in Cologne; the board of directors launched an executive committee (Lenkungsausschub), which regularly held its meetings only in Cologne; the areas of finance/controlling and human resources were all transferred to Cologne, etc. At the end the only parts that remained in Luxembourg were a small legal department and a registry to forward mail.¹²⁶

(p. 236) 7.87  More recently Hellas Telecommunications, a company incorporated in Luxembourg and holding shares in Wind Hellas, sought to transfer its COMI to England by transferring its head office to London. Its aim was to facilitate a pre-pack of the company’s main asset, namely its shares in Wind Hellas to Weather Investments, another company of the same group.¹²⁷ Lewison J agreed that the COMI had moved to London because Hellas Telecommunications had informed its creditors of the change in address to London, a relevant announcement was made in the press, a bank account was opened in London, and most of the payments were made to and from that account. Hellas Telecommunications had also registered under the Companies Act and all the negotiations between the debtor and the creditors took place in London.¹²⁸ This latter factor appeared to carry considerable gravity in Lewison J’s judgment.¹²⁹

7.88  Cases like PIN show that it is actually possible for a debtor to move out the COMI gradually and that some courts will be willing to accept the new location as the place where affairs are managed regularly. As far as ascertainability is concerned, in that case it sufficed that third parties—ie creditors, employees, other companies of the group and other contracting parties—knew that the place where the policy of the group was planned had shifted.

7.89  One may reasonable think that this could be a clear-cut case of forum shopping. Indeed, the case of Hellas Telecommunications received negative coverage in the press: ‘[a] Greek multinational has deprived creditors of £1.3 billion by claiming that a one-man London office was its global headquarters and exploiting lenient insolvency rules introduced by Labour.’¹³⁰ The accusation was that the pre-pack had allowed the owner of a struggling company to set up a new firm and then buy back the best stock, property, and other assets from the original company leaving unsecured creditors without protection.¹³¹

7.90  This critique is ill-founded. First of all, AG Kokott has clearly accepted that to the extent that such transfers of the COMI are performed by setting up a new establishment in another Member State with the purpose of benefitting from the latter’s insolvency law procedures, such transfers should in (p. 237) principle be protected by freedom of establishment.¹³² It is only if a court establishes specific acts which constitute an abuse of law that the transfer of the COMI to another Member State can be regarded as impermissible forum shopping.¹³³ On these grounds, a market for insolvencies will be clearly established in the EU. As in the Centros case, the ECJ acknowledged that freedom of establishment guarantees the right of businessmen to incorporate a company under the national law they consider preferable provided that no abuse of law is committed. The Interedil case was the opportunity for the ECJ to make a similar acknowledgement for insolvencies subject to the same limitation imposed by the doctrine of abuse of law. Although AG Kokott addressed this issue in her Opinion, the Court did not as it did not need to in order to decide the Interedil case. It is hoped so that the Court will make such an acknowledgment when a proper opportunity arises in the future.

7.92  Indeed if the creditors have dropped their claims or the appropriate majority of creditors have approved the transactions proposed, the case for forum shopping cannot be made, unless one ascribes to the view that jurisdiction should be based on public interest consideration and not on the consent or acquiescence of the parties. According to the view presently advocated the agreement of the creditors with debtor should carry special weight in finding against the engagement of the debtor in impermissible forum shopping.¹³⁵

(p. 238) 7.93  In the PIN case the German courts took a different approach. They accepted that a shift of the COMI can be abusive only ‘if its primary purpose is to evade protection for creditors’.¹³⁶ However, in that specific case it was held that the debtor performed the shift ‘in the interests of the creditors, preservation of the group and with a view of restructuring the group’, and the transfer of the COMI was cleared of suspicion of forum shopping.¹³⁷

7.94  Although this approach seems to take into account the rights of creditors, it is nonetheless argued that it is regrettable. In principle, no court should be willing either to take the word of the debtor on the merit of the transfer at face value, or to substitute its own judgement for that of the stakeholders about the efficiency of a transfer in or out of the jurisdiction. Unilateral transfers should be viewed as highly suspicious of being tainted with improper purposes. Courts should be expected to enforce some level of cooperation between debtors and creditors.

7.95  Consequently, if a transfer is effected in a manner similar to that employed in the PIN case the COMI shift should not be recognized, especially if the filing for insolvency takes place straight after the shift is completed. By contrast, if the debtor has taken steps to inform the creditors and either the latter did not react or they consented to the COMI shift as happened in the Re Hellas Telecommunications case, the case for recognizing the shift should be stronger.

7.96  Another way to alter the jurisdiction under Article 3(1) of the Insolvency Regulation is to transfer the registered office to another Member State. This would suffice to confer jurisdiction under the presumption of Article 3(1) of the Insolvency Regulation in favour of the courts of the place where the new registered office is located.

7.97  It must be stated at the outset that progress on the 14th Directive on the cross-border transfer of the registered office has been stopped. With regard to the best option to tackle the problems of cross-border transfer of the registered office, the Impact Assessment concluded that the ‘“no action” option or a directive would be suitable to achieve the policy objectives. (p. 239) However, when the proportionality test is applied, it is not clear that adopting a directive would represent the least onerous way of achieving the objectives set’.¹³⁸

7.98  The rationale behind the ‘no action’ option was to await the impact of other developments in EU law, such as the ‘practical effects of the cross-border merger directive, the developments in Community case law or an action on a European Private Company’.¹³⁹ In light of this conclusion, Commissioner McCreevy has decided there is no need for action at EU level on this issue. He may prove to be right, especially if Member States in transposing the CBM Directive revise their domestic law in a way to allow for the transfer of the registered office in and out of the jurisdiction. Indeed Spain has already enacted legislation to this effect.¹⁴⁰

7.99  One might have expected that the Commission would not halt the drafting of the 14th Directive. In its Impact Assessment, the Commission admitted that the only realistic possibility for existing companies to transfer their registered office to another Member State is to wind up the company in the Member State of origin and to reincorporate it in the host Member State, an operation whose cost varies significantly throughout the EU.¹⁴¹ Despite these obstacles, the Commission decided not to push through with the 14th Directive. Some argue that one of the reasons the ECJ took further steps to foster corporate mobility in the Cartesio case was a consequence of the Commission decision to stop progress of the 14th Directive.¹⁴²

7.100  The decision to transfer the registered office is both risky and extremely costly. The ECJ has condemned the requirement of reincorporation as (p. 240) ‘tantamount to outright negation of freedom of establishment’ only with regard to the transfer of the real seat.¹⁴³ Regardless of whether they adhere to the incorporation or the real seat theory, several Member States do not usually allow companies incorporated in their territory to both transfer their registered office to another State and maintain their initial legal personality.¹⁴⁴ The ECJ has also acknowledged that such a prohibition does not constitute an unlawful restriction of freedom of establishment.¹⁴⁵ So the only way open to a debtor corporation is to dissolve in the Member State of incorporation and reincorporate in another Member State, unless both States allow such a transfer and assumption of the new legal personality without dissolution of the corporation.¹⁴⁶ If, however, a company wishes to perform this transfer to convert to a new legal person governed by the law of another Member State, the requirement of prior dissolution and liquidation amounts to a restriction to freedom of establishment that needs to be justified.¹⁴⁷

7.101  If the transfer of the registered office is performed successfully, it would prima facie seem that the debtor has succeeded in altering the insolvency forum. Under Article 3(1) of the Insolvency Regulation, the courts of the State where the new office registered will enjoy exclusive jurisdiction. The European Commission seems to believe that this transfer would constitute a valid exercise of freedom of establishment and cannot per se be seen as an abuse of EU law.¹⁴⁸ As has been explained earlier, AG Kokott in the Interedil case has confirmed that the fundamental freedoms of the EU protect the transfer of a company from one Member State, to another which is performed with the purpose of the being liquidated at the latter Member State and that forum shopping can be established only if a national court is able to pinpoint specific facts which demonstrate the existence of an abuse of law.¹⁴⁹

7.102  Indeed there have been indeed a few instances where companies have sought to migrate to another Member State in order to benefit from the latter’s insolvency laws. Some Italian companies transferred their registered offices abroad and a Luxembourgian company moved its registered office to Spain.¹⁵⁰ On all occasions the transfer was allowed and was (p. 241) successfully performed. However, when a petition for insolvency was filed, the Italian courts reacted to this transfer which had the effect of companies evading the application of Italian insolvency law.

7.103  One of these cases was the Interedil case which eventually reached the ECJ. In her Opinion, AG Kokott suggested that migration to another Member State for the purposes of migration is protected by the EU’s fundamental freedoms and that so far as the steps taken by the company at its new registered office for the purposes of liquidation are visible by third parties the COMI should be considered to be at the new registered office.¹⁵¹ In her view, the activities of Interedil in Italy did not suffice to deprive the English courts of jurisdiction.

7.104  Interestingly AG Kokott also stated that cases like Interedil could, however, pose interesting questions of forum shopping but since the referring Italian court had not offered any facts to substantiate such an allegation, it would be impossible to settle this matter. On the other hand, she acknowledged that in case of a company that immediately upon migration petitions the courts of its new registered office for a declaration of insolvency, it may be the case that the critical point in time for establishing jurisdiction might not be the moment of the filing as is the rule under the Staubitz-Schreiber case.¹⁵²

7.105  Such was the case in the insolvency of B&C Finanziaria, a company incorporated in Italy, which upon realizing that it would become insolvent, lawfully moved its registered office to Luxembourg and acquired Luxembourgian legal personality under the name ‘B&C Finanziaria Srl’. Its creditors filed a petition for insolvency before Italian courts. B&C Finanziaria sought to contest the jurisdiction of the Italian courts by relying on the valid transfer of its registered office and real seat to Luxembourg by virtue of article 25(3) of Law No 218 of 31 May 1995. The argument did not succeed.¹⁵³ Although it is possible for an Italian company to move its registered office abroad and still be governed by Italian law, the transfer of the registered office to Luxembourg and the re-incorporation there was thought to result in the loss of Italian legal personality. Only the new company was thought to be exclusively subjected to Luxembourgian law. Thus the Italian courts would enjoy jurisdiction over the winding-up of the Italian company.

7.106  To the extent that the creditors had not been consulted prior to the migration of B&C Finanziaria, the decision of the Italian courts to establish jurisdiction seems right. However, in the same case, the Italian Court of Cassation went much further than this and rejected an argument based on Articles 49 (p. 242) and 54 TFEU that an interpretation of article 25(3) of Law No 218 of 31 May 1995 which allowed the Italian courts to establish jurisdiction was contrary to freedom of establishment. It held that freedom of establishment does not come at all into play in such a case. Relying on the ruling of the ECJ in the Daily Mail case, it reasoned that the dissolution of legal persons established under Italian law is a matter that falls squarely within the realm of Italian domestic law.

7.107  Even more interestingly, the Italian Court of Cassation also declared the Insolvency Regulation irrelevant in this particular case to the extent the case did not concern the location of the COMI or the location of the statutory seat. It explicitly ruled that cross-border transfers do not fall within the field of application of the Regulation, which clearly names the combat of forum shopping as one its objectives in recital 4.

7.108  The soundness of this ruling of the Italian Court of Cassation should be contested. First, aside from the criticisms that one can direct against the judgment from a domestic law point of view,¹⁵⁴ the application of the Daily Mail case in this context could be arguably challenged. The ECJ has recognized that companies do not have a Treaty right to move their central management and control and their central administration to another Member State while retaining their status as companies established under the legislation of the Member State of incorporation.¹⁵⁵

7.109  However, the Daily Mail case was not concerned with the transfer of the registered office.¹⁵⁶ The Italian Court of Cassation has assumed that the Daily Mail case can be expanded to include cases like B&C Finanziaria although the company in question at no times wished to transfer its registered office abroad and at the same time retain its Italian legal personality. More importantly, the Cartesio case has made it plain that companies, like B&C Finanziaria, cannot be prevented from moving their seat—without differentiating between real and statutory seat—to another Member State, if the company is going to acquire the legal personality of the Member State of destination.¹⁵⁷ In any event, the B&C Finanziaria case goes against the basic tenet of AG Kokott’s Opinion that migrations for the purposes of liquidation are protected by the EU fundamental freedoms.¹⁵⁸

(p. 243) 7.110  Second, the soundness of the Italian judgment might also be contested with regard to the argument on the non-applicability of the Insolvency Regulation to the cross-border transfer of the registered office of a company. It is explicit that the Regulation applies to the insolvency proceedings of any company that has its COMI in the EU.¹⁵⁹ In this sense, it is the Regulation that confers jurisdiction on the Italian courts for the opening of insolvency proceedings over the Italian B&C Finanziaria. The Italian Court of Cassation has in effect held that so long as there is no continuity of the legal personality, Article 3(1) of the Insolvency Regulation cannot be of much use. In a sense the COMI of the old company was in Italy and the COMI of the new company is in Luxembourg. The Italian courts have demonstrated their will to combat forum shopping by not recognizing the continuity of legal personality and by dissolving the Italian company.

7.111  However, the validity of this approach is doubtful. The ECJ in the Cartesio case held that the transfer of the seat should not be blocked if the company is going to be converted to a corporate form governed by the law of the Member State of destination. The only argument the Italian and other national courts may resort to is that such transfers constitute forum shopping, ie they are meant to deprive the natural forum (Italy) of its jurisdiction or, preferably, they are performed without the consent of the other stakeholders, and for the purpose of depriving them of some procedural or substantive benefit available under Italian law.¹⁶⁰

7.112  Therefore, the understanding that one has of the basis of jurisdictional rules will become increasingly important. If the civilian trend prevails, ie that jurisdiction is based on imperium and forum shopping constitutes an act directed against the State, then national courts will have much more room to in thwart the decisions to shift the COMI. If, on the contrary, jurisdiction is understood to be rights-based and that parties should be allowed to bargain as to where to litigate in the context of insolvency, then national courts will have substantially less room to interfere.¹⁶¹ B&C Finanziaria fell short of both tests.

7.113  Similarly to the B&C Finanziaria case, in the Italfinanziaria Iberica case an Italian company, upon realizing that it would become insolvent, transferred its registered office to Spain, lost its Italian nationality, and acquired a Spanish one.¹⁶² The Spanish company was declared insolvent with retroactive effect from the date that the company was in fact unable to pay its debts. (p. 244) This period included the transfer of its registered office to Spain. The Italian Court of Cassation held that due to the retroactive effect of insolvency and the loss of legal personality for any purpose other than insolvency, article 25(3) of Law No 218/31 May 1995 was not available to the insolvent company and that it had always remained an Italian company.

7.114  Thus, if the transfer of the registered office abroad is caught by relation back to the time of commencement of insolvency, as a matter of Italian law, the company will fail to benefit from its effort to exit the jurisdiction of incorporation. Italian courts will apply the law of the place of incorporation under article 25(1) of the Law No 218 of 31 May 1995 in order to establish the actual real seat of the company for the purpose of asserting jurisdiction in insolvency proceedings.¹⁶³ However, if the ECJ adopts the same approach on forum shopping as that of AG Kokott in the Interedil case Member State courts will have to rely upon concrete evidence of forum shopping before establishing their jurisdiction.

7.115  A third potential way to forum shop in insolvency proceedings is to merge with another foreign company that either pre-existed or has been set up for the purposes of the merger. Of course the possibility of merging with a pre-existing foreign company is not as likely as the other possibility given that the prospective of a merger with a company that is about to become insolvent would normally not be very attractive. It is this consideration that might prevent the creation of a Societas Europaea (hereinafter ‘SE’).¹⁶⁴

7.116  Nonetheless, it is still an option for the debtor to merge with other companies in order to exit the jurisdiction to which it is subjected.¹⁶⁵ So far though it appears that SEs have been set up to achieve tax advantages or evasion of co-determination regimes,¹⁶⁶ but there is nothing to preclude the formation of an SE in order to achieve a COMI shift. Actually, given that the statutory and the real seat of the SE have to coincide, the incorporation of a SE will decrease the likelihood of litigation over the location of the COMI.

(p. 245) 7.117  Unlike the case of the SE, there has been clear indication that the CBM Directive has been used for the purpose of effecting a change in the applicable company law.¹⁶⁷ There are three requirements for the applicability of the CBM Directive.¹⁶⁸ First, there has to be a merger of some kind; eg merger by acquisition, merger by creation of a new corporation, or merger by transfer of share capital to a holding corporation.¹⁶⁹ Second, the merger should involve at least two companies governed by the laws of different Member States.¹⁷⁰ Third, the companies involved should fall under the scope of the Directive; namely they should be limited liability companies as referred to in Article 1 of the First Directive¹⁷¹ that qualify under Article 54 TFEU to enjoy the benefits of freedom of establishment, have legal personality, and possess separate assets.¹⁷²

7.118  The CBM Directive has adopted a mixed approach to choice of law for mergers.¹⁷³ First, the capacity of companies to merge will be judged on the basis of both national laws.¹⁷⁴ Second, the merging companies should observe all the requirements imposed by their respective governing national laws.¹⁷⁵ The Directive does not make it clear which law will govern the transfer of the assets and liabilities of the company being absorbed or acquired. One argument is that ‘the transfer of all assets and liabilities and the cessation of the corporate acquisition refer only to the law of this first corporation’.¹⁷⁶

7.119  There is though another, more plausible, argument. There is no need for a governing law because under Articles 14 (1)(a) and (2)(a) of the Directive, the assets and liabilities are transferred ipso facto, that is by virtue of the very act of the merger. On this view, the purpose of Article 14 is to ensure (p. 246) that there will not be an effort to set free the acquiring of the new company or the debts of their predecessors.¹⁷⁷ Regardless of the fact that the Directive in question ensures that the assets and liabilities will be transferred tothe acquiring or the new company, it is still the case that a merger may be performed in order to benefit from the insolvency laws of another Member State.

7.120  The question then becomes whether the Insolvency Regulation can be read in a way to deprive companies of their rights under the CBM Directive. Once the merger is performed and its consequences have been brought about, is it open for the courts of the Member State where the COMI of the debtor used to be to declare the merger void and establish jurisdiction over the debtor?

7.121  Article 4(2) allows for a Member State whose law will apply to a merger to adopt appropriate provisions for the protection of minority members who have opposed the merger. The pre-merger certificate requirement introduced by Article 10 can also be used by such a Member State to achieve a better protection of minority members. Nonetheless, this is the limit or the extent to which a Member State can react to a merger. Under Article 17, a merger cannot be declared null and void. Nor will it be possible for a court to hold that the merger with a foreign company had the consequence of dissolution of the debtor. The ECJ has already precluded this possibility.¹⁷⁸

7.122  The last alternative solution is for the court to hold that the COMI of the new company is not at the Member State where the new registered office is located. By reversing the presumption of Article 3(1) of the Insolvency Regulation, it may reach the conclusion that the COMI has remained at the place where it was before the merger had been performed. In displacing the requirements of objectivity that point to the Member State where the new registered office is located, the court will have to rely on the requirements of ascertainability.

7.123  However, this should not be possible either, to the extent that the debtor company had complied with the publicity requirements of Article 7 of the CBM Directive. Under the latter article, the management or the administrative organ of each merging company is required to produce a report explaining and justifying the legal and economic aspects of the merger, among others, to the creditors as well. If the company has observed this requirement, it will be assumed that the creditors were or ought to have (p. 247) been aware of the proposed change of the COMI’s location and will be estopped from complaining against it.

7.124  Therefore, it seems that there is not much room for an argument that such a merger constitutes forum shopping. The reason is that the debtor has made use of rights conferred on it by EU law itself and did so in a public process so that creditors and other stakeholders are aware of it. Nor does it prima facie appear that there is some scope for an abuse of EU law argument. Allowing businessmen to have recourse to a corporate structure provided by the less restrictive laws of another Member State is by no means in and of itself an abuse of EU law.¹⁷⁹ With the view of establishing an abuse, one objective requirement and one subjective need to be satisfied.¹⁸⁰ First, the purpose of the EU law provision in question must not have been achieved. Second, there must be an intention to obtain an advantage by creating artificially the requirements of application of the provision in question.

7.125  In the kind of case contemplated earlier, the purpose of the CBM Directive is the completion and good functioning of the Internal Market through the facilitation of cross-border mergers. Even if one were to satisfy the courts that such a requirement is met, it would be hard to see how one would proceed about establishing that the debtor company has artificially created the requirements of application of the CBM Directive, since the latter is available in any event.

7.126  The only way forward for the creditors would be to point to some fraudulent behaviour on behalf of the company. The ECJ has indicated that it is likely for an abuse to be found in cases of artificial arrangements and pro-forma transactions.¹⁸¹ However, the creditors will have an uphill battle to show this. The change of the law of the forum of insolvency does not necessarily mean that they will be defrauded. At the same time, there is no legal system in Europe with lax insolvency laws. Thus, it will be hard for them to rely on an abuse of the CBM Directive.

7.127  This leaves only one plausible argument to the creditors. They will have to place reliance only on recital 4 of the Insolvency Regulation which purports to prevent forum shopping. This argument too encounters problems. The Insolvency Regulation was enacted as a means to eradicate forum shopping in insolvency proceedings by transferring assets or judicial proceedings (p. 248) from one Member State to another. Although it can be argued that a debtor trying to prove that the COMI does not lie at its registered office constitutes forum shopping, it is hard to see how a merger would be tantamount to forum shopping, given that creditors were or ought to have been aware of the merger and the change of registered office.

7.128  The same considerations can apply by analogy to the formation of a SE. However, the formation of a SE is more problematic. First, the SE Regulation concerns mainly public limited liability companies.¹⁸² There is a limited role for private limited liability companies.¹⁸³ One important difference with the CBM Directive is that national authorities to which the debtor is subjected have the right to oppose to the latter’s participation to the formation of a SE on grounds of public policy.¹⁸⁴ It is arguable that this opposition may be validly made when the debtor is fraudulently trying to alter the COMI.

7.129  It has been argued, however, that a right to oppose in such a context should not be available to a Member State because the creditors have other effective means of protection under the SE Regulation.¹⁸⁵ Such means are provided by the publicity requirements of Article 21. Additionally, Article 24(1)(a) provides that the law governing each merging company shall apply with regard to the protection of the interests of their creditors. Indeed, it is not hard to see how the State of incorporation of the debtor will wish to claim a right to prevent the fraud of creditors, which is independent from the protection and rights conferred to creditors. The ECJ though has indicated that when the creditors have had the chance of assessing the risk themselves then it will not be open to the Member State to impose restrictions on freedom of establishment justified by the protection of creditors.¹⁸⁶

7.130  The conclusion, thus, is that the use of the CBM Directive cannot be seen per se as forum shopping in the sense of recital 4 of the Insolvency Regulation. Additionally, it is hard to contemplate any situation in which a merger under the Directive would amount to forum shopping.

7.131  The fourth way of engaging in forum selection is by transfer of the assets and liabilities of the debtor to a company incorporated under the laws of another or a non-Member State by means of universal succession (successio universalis). To the extent though that the successor is a limited liability company incorporated in a Member State, in the sense of Article 2(1) of the CBM Directive, the latter nowadays applies and thus reliance on the doctrine of succesio universalis as a separate construction has become unnecessary.¹⁸⁷ Of course, successio universalis may still be relied upon in cases where national laws do not allow the merger of specific types of companies and thus the CBM Directive is not applicable.¹⁸⁸

7.132  This mechanism has been used several times so far. The first to use it was Deutsche Nickel Group, which had entered trading difficulties in 2004, principally as a result of high losses being incurred in the Euro coins business as a result of the demand for such coins dropping considerably following the completion of the introduction of the Euro. Close Brothers were appointed financial adviser to the ad hoc committee of creditors and they came up with the following consensual restructuring plan.¹⁸⁹ Deutsche Nickel AG was converted into a German limited partnership and all assets and liabilities where passed to it. DNICK Ltd became the general partner and EuroCoin Ltd the limited partner. Both companies had been incorporated in England for this purpose. EuroCoin Ltd subsequently withdrew and DNICK Ltd took on all assets and liabilities of the old German AG. The incentive for Deutsche Nickel and its stakeholders was to benefit from a CVA which is not available in German law.

7.133  The same mechanism was applied by Close Brothers to the consensual restructuring of another German company, Schefenacker AG.¹⁹⁰ Schefenacker announced its poor trading performance. Unrealized operational restructuring savings would result in an inability to service its existing indebtedness. Close Brothers recommended a migration to England in order to benefit from a CVA.

(p. 250) 7.134  A new company was set up in England with the name ‘Schefenacker plc’. Schefenacker AG was transformed to a limited partnership in accordance with German law and named ‘Schefenacker GmbH & Co KG’. Schefenacker plc became one of the general partners of Schefenacker KG. All the rest of the partners then withdrew from Schefenacker KG either by mere withdrawal or by transfer of their partnership share to Schefenacker plc. As a result of this latter stage, the KG, being left with only one partner, collapsed. Its assets and liabilities passed to its sole partner, Schefenacker plc, ipso jure and without any further transfer declarations being required (successio universalis).¹⁹¹

7.135  The question whether these cases constitute examples of forum shopping is dependent upon the way that the COMI is transferred to another Member State. If the COMI together with the debtor is moved to another Member State by means of an agreement to which the creditors are a party, it is hard to see how the COMI could not be ascertainable at the new registered office. To the extent that the creditors have consented to the transfer of the debtor company and the COMI to another Member State, they should be estopped from relying on it against the debtor. The creditors should be required to prove some fraudulent behaviour on behalf of the debtor.

7.136  Indeed, when the joint supervisors of Schefenacker applied for recognition of the English insolvency proceedings as foreign main proceedings in the US, certain of the creditors objected. However, the requested recognition was granted on the basis that ‘the CVA was approved on 2 May 2007 by the requisite majorities of creditors and members in accordance with the Insolvency Act and no challenge has been timely filed that has not been dismissed by the English Court’.¹⁹² In addition to this, the objecting bondholders held less than 15 per cent in value of the outstanding bonds.¹⁹³

7.137  If, however, the company and the COMI have been moved to a non-Member State, the courts of a Member State, having found under objective and ascertainable criteria, that the COMI is located outside the EU, may still entertain a petition for insolvency based on their national rules of international jurisdiction in insolvency proceedings. In English law, companies incorporated abroad are classified as unregistered companies and may be wound up: (a) if the company is dissolved, or has ceased to carry on business, or is carrying on business only for the purpose of winding up its affairs; (p. 251) (b) if the company is unable to pay its debts; (c) if the court is of opinion that it is just and equitable that the company should be wound up.¹⁹⁴ The enactment of the UNCITRAL Model Law on 4 April 2006 has not altered these rules.¹⁹⁵

7.138  Concluding, it is worth underlying the importance in involving the debtor’s creditors in a decision to transfer the COMI. Aside from any additional benefit that such a negotiation might have regarding the debtor’s survival as a going concern, the consent or acquiescence of the creditors will minimize the risk of diverting attention of the court seized under Article 3(1) of the Insolvency Regulation from the merits of the case to a challenge of its jurisdiction. Cases like Re Hellas Telecommunications exemplify the importance of transparency in a decision to shift the COMI from one Member State to another. Finally, it should be noted that such an approach to forum shopping emphasizes the private nature of the rights in question and consent as the source of the binding nature of private law.(p. 252)