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The “FREP” Cases – COMI and “Improper Motive”

Background

The administrators of three companies applied for a declaration as to the location of the companies’ centre of main interests (COMI). The companies applied for an order terminating the administrators’ appointments on the ground that the appointor Nationwide had an “improper motive” in making the appointment: to stifle litigation between the appointor and the companies. There had been on-going proceedings since December 2014 between the companies and others and Nationwide after Nationwide had decided to transfer and had transferred its economic interest in the loans to another company.

Nationwide was a qualifying chargeholder and had lent in excess of £106 million to the three Jersey registered companies to finance the purchase by each of them of three separate English-located shopping centres. The shopping centres and the day-today operations of the companies were managed by an English company based in London. The companies had no employees in Jersey. The directors of the Jersey companies (all but one of whom was Jersey-based) held their meetings in Jersey and took the ultimate decisions. The loan was repayable in October 2016, but no repayment was made and the administrators were appointed under the charge in early November 2016.

Issues

Was the presumption that COMI was where a company’s registered office was displaced on the facts?
Was there an “improper motive “ if there was an intention to stifle the litigation and, if so, should the Court exercise its discretion to terminate the appointment of the administrators?

Legal Arguments

With regard to the first issue the companies argued that since the registered offices of the companies were in Jersey and that, despite the operations carried out in London, the ultimate decision-making was with the respective Jersey-based boards, the COMI was in Jersey.

With regard to the second, they argued that “improper motive” was different from the long-established common law concept of “improper purpose” and that if “improper motive” was established the court’s discretion should be exercised in favour of terminating the appointment. Nationwide argued that the requirement for an “improper motive” was simply a “gateway” provision and that, even if established, the court’s discretion should be exercised in favour of leaving the administration in place if there was no inconsistency with the statutory objectives of the administration set out in paragraph 3(1) of Schedule B to the Insolvency Act 1986.

Judgment

COMI

Under Regulation 1346/2000, the COMI should correspond to the place where the debtor conducted the administration of its interests on a regular basis and was therefore ascertainable by third parties.
There were a number of facts that led to the clear conclusion that the companies’ COMI was in England.
1. The day-to-day conduct of their business and activities had been in the hands of an agent based in England;
2. The advisory agreement appointing the agent was governed by English law;

The agent took on full responsibility for providing a very large range of services to the companies. Those services were not just limited to commercial activities, but also included the types of function that a head office would be expected to discharge;

Day-to-day dealings with third parties were carried out from the agent’s London offices by its staff, the Jersey companies having none. For example, in their day to day dealings with third parties regarding expenditure the agent’s offices were given as the address for invoices They were also the address of the companies’ VAT registrations;
Nationwide’s point of view as the most substantial creditor was particularly relevant. The debentures were governed by English law and expressly referred to the power to appoint administrators;
The location of the directors meetings was not ascertainable by third parties and they would not have known where the directors meetings were taking place (Northsea Base Investment Ltd, Re [2015] EWHC 121 (Ch) applied). A third party would also not have regarded the identity of the directors as of particular importance in the context of the facts showing how and from where the operation and management of the companies’ businesses was conducted;

The COMI was in England and Wales (paras 35, 39-40 of judgment).

“Improper Motive”

“Improper motive” was a “gateway” provision. There was nothing in paragraph 81 of Schedule B1 which provided that establishing an “improper motive” would normally lead to the result that the administration would be terminated;
The court declined to define precisely what kind of motive was required for the statutory jurisdiction to be engaged. It was sufficient if there was a motive which was inconsistent with the statutory objectives and which was causative of the decision to appoint;
The court would have regard to the nature of administration as a process which potentially affected parties other than the appointor and so, when paragraph 81 was invoked it was unlikely that an appointment would be terminated where the statutory objectives could be achieved, irrespective of the appointor’s motive (Cursitan v Keenan [2011] NI Ch. 23 followed) (paras. 46-48) As the judge said in the present case:

“The existence of an improper motive may become of relative insignificance in such circumstances, particularly where the appointor’s improper objective was not actually achieved.” (para. 48)

In the present case, there had been no improper motive on Nationwide’s part. The date of repayment for the loans had been set as October 2016 for a number of years and Nationwide had even offered to extend the date for repayment by six months on reasonable terms. The deadlines for acceptance of Nationwide’s offer had not been unreasonable. On the contrary, the reason given for the failure of the companies to respond was unconvincing. Even if there had been any improper motive, there was no satisfactory evidence that the statutory purposes of the administration were not likely to be achieved (paras. 50, 53, 56).

Conclusions

This case offers at least some guidance as to the application of Schedule B1 paragraph 81 where none was offered in the White Paper or the Parliamentary debates which led to the introduction of the provision as to what significance there was in the move away from the well understood words”improper purpose” in insolvency law and the recognition of the concept as a class of abuse of process.
Relegating “improper motive” to a “gateway” is consistent with the construction of paragraph 81 and also deals with the fears that the provision would become a “charter for any disaffected party to impugn the administrator’s appointment…” (see judgment paragraph 49).
Assuming that an “improper motive” for the appointment can be shown, the usual result will still be that the administration will continue, except where the motive is inconsistent with the statutory objectives. Something that looks suspiciously close to requiring a finding that there has been an abuse of process because the purpose, rather than the reason behind the purpose, was improper.

Richard Perkoff and Jamie Riley acted for the Administrators