Recognition Denied: COMI Manipulation in Chapter 15

In what is often viewed a rudimentary inquiry, recognition of foreign insolvency proceedings under chapter 15 can be a closely scrutinized affair. In In re Creative Finance Ltd. (In Liquidation), 543 B.R. 498 (Bankr. S.D.N.Y. 2016), Judge Robert E. Gerber of the United States Bankruptcy Court for the Southern District of New York (before his retirement in early 2016) dismissed a chapter 15 case after concluding that the debtors’ “Center of Main Interests” (“COMI”) did not change to the British Virgin Islands (“BVI”) — the debtors’ letterbox jurisdiction and where the initial liquidation was filed. The bankruptcy court found that both the debtors’ and the liquidator’s activities in the BVI were insufficient to warrant recognition under the Bankruptcy Code, either as a main or non-main proceeding. Notably, even though the case was not dismissed on the basis of bad faith, the court nonetheless made specific findings of the debtors’ numerous misconducts that other courts may consider.


Creative Finance Ltd. and Cosmorex Ltd. (collectively, “Debtors”) were foreign exchange trading firms organized under the law of the BVI but had conducted most, if not all, of their business through brokers located in England, Dubai and Spain. In December 2013, the Debtors’ sole shareholder executed a shareholder’s resolution which, inter alia, placed the Debtors into liquidation in the BVI (“Foreign Proceeding”) and provided for the appointment of a specified, named liquidator (“Liquidator”). Contemporaneous with the appointment of the Liquidator, an affiliated entity of the Debtors agreed to provide initial funding to the Liquidator – albeit just enough to cover his cost and expenses in carrying out his basic statutory duties.

The Foreign Proceeding was the Debtors’ strategic response to a $5.6 million judgment that had been obtained by Marex Financial Ltd. (“Marex”) approximately six months earlier in the High Court of Justice in England. Marex was also the Debtors’ sole non-insider creditor in the Foreign Proceeding. However, prior to the entry of the English judgment, Debtors had ceased all operations and depleted their bank accounts in England by transferring out over $9.5 million in liquid assets to bank accounts in Spain and Dubai. Nonetheless, Debtors still had one remaining asset located in the United States – allowed claims totaling $ 171 million against the estate of Refco Capital Markets in a chapter 11 case, wherein an interim distribution of $1.7 million had already been made. Thus, the ensuing chapter 15 petition was filed.

The Court’s Analysis

Under §1517 of the Bankruptcy Code, a foreign insolvency proceeding shall be recognized as a foreign main proceeding if it is pending in the country where the debtor has its COMI. However, the Bankruptcy Code does not define COMI; as a result, courts have developed their own list of factors to ascertain COMI.[1] In 2013, the Court of Appeals for the Second Circuit set forth a definitive ruling on the issue in Morning Mist Holdings Ltd. v. Krys (In re Fairfield Sentry Ltd.), 714 F.3d 127 (2d Cir. 2013).[2] First, the Second Circuit held that the relevant time for measuring COMI is the time at which the U.S. chapter 15 petition was filed. Second, that the “relevant principle” for COMI is that it lies where the debtor conducts its regular business so that the place is easily ascertainable by third parties. The Fairfield Sentry court also warned against a mechanical application of the widely adopted factors that bankruptcy courts have devised and “possible COMI manipulation.”[3]

Most importantly, the Fairfield Sentry decision paved a way for COMI to shift from where the debtor’s principal place of business to where the insolvency proceeding was commenced provided that the foreign liquidator engaged in extensive “pre-U.S. filing” work in the new locale, such as operating or liquidating the debtor’s business. Accordingly, a number of bankruptcy courts have granted recognition to chapter 15 cases filed by foreign liquidators from letterbox jurisdictions based on those liquidators’ efforts in managing or liquidating their debtors’ businesses.

Under Fairfield Sentry’s guidance, Judge Gerber found that the Liquidator’s activities in the BVI between his appointment in the Foreign Proceeding and when the chapter 15 petition was filed was so minimal that the Debtors’ COMI never shifted to the BVI. The court drew its conclusion by finding that the Liquidator had failed to make a “material effort” to request (let alone obtain) financial records from Debtors. The court was further troubled by the Liquidator’s failure to collect or liquidate any assets of Debtors, shut down any business of Debtors, pay any taxes or bring any causes of actions on behalf of Debtors’ estate, and conduct any investigation into possible fraudulent transfer claims during the two-month period after his appointment. Even though Debtors had ceased operating, the Court did not find their COMI to have shifted to the BVI from Spain, Dubai or possibly England — wherever Debtors actually did business.

The court also found that the Foreign Proceeding could not be recognized as a non-main proceeding because Debtors never had an establishment in the BVI. Under § 1502 of the Bankruptcy Code, an establishment is defined as “any place of operation where the debtor carries out a nontransitory economic activity”, which can be described as “a local place of business.”[4] Notably, the court held that the Liquidator’s judicially required activities, such as record keeping and maintenance of property, did not constitute business or economic activities and that to qualify as “economic activity” because the activities in question must make a “local effect on the marketplace.”


It suffices to say that Judge Gerber’s decision clarified the still-developing threshold question of how active must a foreign representative be in order to shift COMI to where the foreign proceeding was commenced. Still, this was a unique case where the Debtor’s bad faith filing overshadows any explanation that might justify the foreign representative’s inactivity. Therefore, it remains to be seen how courts will deal with foreign representatives whose inactivity were actually caused by a lack of funding and the representative’s efforts demonstrating a change in COMI beyond compliance with the minimal statutorily required duties.


[1] See In re SPhinX Ltd., 351 B.R.103 (Bankr. S.D.N.Y. 2006), aff’d, 371 B.R. 10 (S.D.N.Y. 2007) (list of factors).

[2] Fairfield Sentry, 714 F.3d at 129-134.

[3] See Id. at 137.

[4] See British Am. Ins. Co., 425 B.R. 884, 914-15 (Bankr. S.D. Fla. 2010).