In the recent well-documented case of Ocean Rig UDW Inc. the company shifted its center of main interest (COMI) from the Marshall Islands to the Cayman Islands and subsequently filed for provisional liquidation in the Cayman Islands to affect a financial restructuring. How does a company go about shifting its COMI and why should it choose the Cayman Islands as a jurisdiction to restructure its debt via a provisional liquidation?
Steps to take to affect a COMI shift
Typically, in most jurisdictions, the COMI is presumed to be where the company is incorporated; however, that is a rebuttable presumption and can be overturned if the debtor company is conducting the administration of its interests in another location. For example, a company that is incorporated in one jurisdiction but maintains its headquarter in another is likely to have a deemed COMI where its headquarter is located rather than where it is incorporated.
The simple answer to affecting a COMI shift is to establish as large a “presence” as possible in the jurisdiction to which the company wants to shift. The below list is an example of steps a company could take to demonstrate that it had shifted its COMI to its new jurisdiction:
- redomiciling the country of incorporation or having the company registered as a foreign company in the jurisdiction ;
- appointing directors who are resident within the jurisdiction;
- establishing a physical office with employees undertaking the administration of the company within the jurisdiction;
- convening board and stakeholder meetings within the jurisdiction;
- relocating assets to the jurisdiction, for example moving the company’s operating bank account to the jurisdiction or registering assets within that jurisdiction (i.e., boats, aircrafts, etc.); and
- changing the law of the documents governing the debt obligations.
One important point to note is that the COMI shift has to be objectively ascertainable to third parties and each case will therefore turn on its facts. It may not be necessary to take all the above steps, however, the greater connection the company is able to establish in its jurisdiction of choice, the more likely it would be able to resist any future challenges to the location of its COMI.
Why should a company shift its COMI to the Cayman Islands to affect a restructuring?
The Cayman Islands has a number of advantages, notably:
- highly experienced professionals with vast cross-border restructuring experience;
- a proven track record in helping companies quickly and efficiently restructure their debt via a Cayman provisional liquidation, examples include
o Ocean Rig UDW;
o LDK Solar; and
- regular recognition of Cayman restructuring proceedings in other international jurisdictions including:
o United Kingdom; and
o Hong Kong.
- a favorable tax regime;
- a pro-business government;
- a robust regulatory regime; and
- fast and direct connections to major international business centers – including London, New York, Miami and Toronto.
How soon should a debtor company seek to shift COMI prior to any provisional liquidation filing?
If COMI is shifted before a provisional liquidation filing, the debtor company should take as many steps as possible as far in advance of any intended filing. A company facing financial difficulty might not always have the luxury of being able to plan for a COMI shift months in advance, however, often a prudent debtor company will know of an upcoming event which may trigger financial difficulties, such the maturing of debt obligations or payments on contracts coming due. Typically, other options, such as attempting to refinance or raise capital, will often have been realistically explored and exhausted well in advance of any due date.
How quickly can a company establish a physical presence in the Cayman Islands to affect a COMI shift?
Obtaining trade and business licenses and work permits for employees in the Cayman Islands is a process that can take several months, but in September 2011 the Cayman Islands government passed the Special Economic Zones Law. This law was set up primarily to attract technology-focused companies; however, it has also attracted other businesses.
Today, Cayman’s Special Economic Zone has five “zone parks”:
- commodities and derivatives;
- science and technology; and
- maritime and aviation services.
Expedited trade and business licenses and work permits means a Special Economic Zone company can be established within four to six weeks.
While these are the practical considerations, in the event of a COMI shift to Cayman, the court also has to consider whether it has the discretion to order the winding up of a company to affect a restructuring through a provisional liquidation. This point was not tested in the recent case of Ocean Rig, but it is a factor that must also be considered.
Are there any risks associated with shifting COMI?
As with any strategic decision taken by a company, there will inevitably be risk and potential downside associated with that decision. The first, and most obvious, risk is that the COMI shift is not recognized by the court in the jurisdiction to where the COMI shift has been attempted. This could potentially force the restructuring to take place in a jurisdiction which is not experienced in dealing with complex restructurings, which would at least impact the efficiency of the process and possibly even jeopardize the outcome of the restructuring itself.
A related risk is that the steps to COMI shift are not inexpensive, and generally take place at a time when director decisions may be subject to scrutiny, should the restructuring fail by any subsequently appointed liquidator. The risks to directors can generally be mitigated by ensuring that experienced advisers are engaged who can provide robust, frank and timely advice during the process and who have been successful in ensuring COMI shifts in the past.
Fortunately, modern jurisprudence in most of the key financial centers has readily embraced COMI changes as the courts and judges begin to cooperate more readily with their international colleagues. There is a recognition that the key aspect of a restructuring is to benefit stakeholders, who would be faced with a worse outcome in the face of an alternative liquidation scenario, and if a COMI shift is necessary to facilitate that process, then courts are generally receptive to such a step.
Turf wars over where proceedings should be initiated inevitably add delay and expense to a situation that is, ordinarily, highly time- and cash-sensitive. There is a limit, however, to how far courts are willing to go when interpreting a company’s COMI and, in some cases, parallel restructuring proceedings in two or more jurisdictions may be necessary, particularly if the company is faced with hostile creditors in multiple jurisdictions.
In a world that is currently in the grip of various trade wars and protectionist policies, it is refreshing that the restructuring and insolvency world appears to be moving toward greater international cooperation. However, it might be naïve to think that the current political climate could not one day also impact a court’s willingness to cooperate with another.
Several offshore and onshore jurisdictions are competing to be regarded as the pre-eminent jurisdiction to affect debt restructurings, but with the success of the COMI shift and debt restructuring on Ocean Rig via a provisional liquidation, and a host of successful major financial restructurings over the past five years, the Cayman Islands has established itself as a robust option for companies seeking to restructure their debts, however large.