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Bankruptcy courts typically scrutinize transactions that attempt to shift the jurisdiction or activities of a debtor, prior to filing for bankruptcy, on the basis that such actions may thwart creditor expectations or accomplish other improper objectives.

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In the case of foreign insolvencies, this occurs when a debtor attempts to manipulate its center of main interests (“COMI”)—an essential element to the recognition of a foreign insolvency proceeding in the United States.

Indeed, allowing a debtor to shift its COMI to a favorable jurisdiction on the eve of its restructuring, could result in a company attempting to restructure in a jurisdiction that it has little to no nexus with. A debtor, however, that shifts its COMI prior to commencing an insolvency is not, however, per se impermissible.

Courts within the Second Circuit have recognized foreign restructurings where a debtor’s COMI was moved to best suit the needs of creditors. In re Fairfield Sentry Ltd., 440 B.R. 60, 65-66 (Bankr. S.D.N.Y. 2010); In re Modern Land (China) Co., 641 B.R. 768, 782-83 (Bankr. S.D.N.Y. 2022); In re Ocean Rig UDW Inc., 570 B.R. 687 (Bankr. S.D.N.Y. 2017).

Thus, while the strategy may be beneficial for corporations whose assets are spread out across different countries, a debtor needs to consider the inherent risk of whether such a restructuring will be recognized in the United States.

In In re Mega Newco Ltd., No. 24-12031 (MEW), 2025 WL 601463 (Bankr. S.D.N.Y. Feb. 24, 2025), the U.S. Bankruptcy Court for the Southern District of New York granted recognition of a foreign proceeding and enforced an order approving a scheme of arrangement under U.K. law, despite the fact that the debtor was a newly formed subsidiary of a Mexican parent company that had no substantial connection to the U.K. other than its registered office.

The Bankruptcy Court considered the issue of whether it should disregard the form of the transaction and the participation by the newly formed entity as an improper manipulation of COMI, and instead look to whether the parent entity, on its own, satisfied the conditions for relief under Chapter 15.

Ultimately, the court found that the subsidiary's center of main interests (COMI) was in the U.K., and that the restructuring structure was not an improper manipulation of COMI, given the consent and support of the affected creditors (affirmatively or tacitly) and the benefits of the scheme of arrangement for all parties.

The Bankruptcy Court’s ruling suggests that where there is no discord between creditor expectations and what is objectively a case based on COMI manipulation, and such manipulation may actually support creditor expectations, then COMI manipulation may be permissible (or at least tolerated) to affect a global restructuring successfully.

Understanding Main and Non-Main Proceedings in COMI

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Under Chapter 15 of the U.S. Bankruptcy Code, a foreign proceeding can be recognized as either a “foreign main proceeding” or a “foreign nonmain proceeding.” A foreign main proceeding is one that is pending in the country where the debtor has its COMI. The Bankruptcy Code presumes that a debtor’s COMI is where its registered office is located, in the absence of evidence to the contrary.

On the other hand, a foreign nonmain proceeding is one that is pending in a country where the debtor has an “establishment,” defined as any place of operations where the debtor carries out nontransitory economic activity. An “establishment” must be an actual place from which economic market-facing activities are regularly conducted. In re Mood Media Corp., 569 B.R. 556, 561-63 (Bankr. S.D.N.Y. 2017).

Paradoxically, it can be easier to obtain recognition as a foreign main proceeding than as a foreign non-main proceeding. See In re Modern Land (China) Co., Ltd., 641 B.R. 768 (Bankr. S.D.N.Y. 2022).

Mega Newco Limited (“Mega Newco”), a subsidiary of the financial services company Operadora de Servicios Mega, S.A. De C.V. (the “Parent”), was incorporated under the laws of England and Wales. The Parent, an entity incorporated in Mexico, needed to restructure its obligations under U.S. Notes, issued by the Parent in 2020 under an indenture governed by New York law, to increase its liquidity.

Under the U.S. Notes, outside of a bankruptcy, a restructuring would require the affirmative consent of 100% of the noteholders. In other words, restructuring the U.S. notes outside of bankruptcy was not practical.

While U.S. bankruptcy laws available to the Parent would have permitted a restructuring with less than 100% consent, they would not allow the Parent to surgically restructure just the U.S. Notes without addressing its other liabilities in a court-supervised process. On the contrary, U.K. law allows for a consensual arrangement to restructure a single set of note obligations.

To facilitate this restructuring, the Parent created Mega Newco, which assumed the Parent’s obligations under the U.S. Notes and initiated a scheme of arrangement in the U.K. The holders of more than 75% of the U.S. Notes voted in favor of the scheme, which was sufficient for the English court to have jurisdiction to sanction the scheme.

Because Mega Newco (unlike the Parent) was incorporated in the UK, which is enough to create jurisdiction, and because the other conditions necessary to sanction the scheme were met, the English court entered approved scheme.

Thereafter, Mega Newco sought recognition of the U.K. scheme under Chapter 15 in the Bankruptcy Court.

Creditor Expectations Predominate Over COMI Manipulation Concerns

In granting recognition of the scheme, the Bankruptcy Court focused its decision on whether the U.K. scheme of arrangement qualified as a “foreign nonmain proceeding” or “foreign main proceeding” under Chapter 15.

The Bankruptcy Court acknowledged that Mega Newco had never engaged in any business or regular market-facing activities in the U.K., and that its only activities were related to the restructuring of the U.S. notes. The court therefore held that Mega Newco did not have an “establishment” in the U.K., which would have qualified the foreign proceeding as a "foreign nonmain proceeding" under Chapter 15.

The court explained that if restructuring activities alone were sufficient, then any proceeding in which a debtor sought relief would automatically qualify as a “foreign nonmain proceeding,” and the requirement of an “establishment” would be deprived of any meaning.

However, the court found that Mega Newco’s registered office in London was sufficient to establish a presumption that its COMI was in the U.K., and that there was no contrary evidence in the record to rebut that presumption. The court noted that Mega Newco had engaged in restructuring activities in the U.K., which could be considered in determining its COMI, and that those activities were the only activities in which Mega Newco had ever engaged.

Although the Bankruptcy Court granted recognition, it expressed concerns about potential COMI manipulation. The court observed that the structure used in this case—creating a subsidiary in a favorable jurisdiction to assume the parent’s obligations and initiate a restructuring—could be properly used to circumvent the statutory requirements of Chapter 15.

The court analyzed whether this structure would undermine the legitimate expectations of creditors and the integrity of the cross-border insolvency framework. It concluded that the underlying structure in this case did not constitute such an improper manipulation of COMI, and that it did not need to disregard the form of the transactions or the participation by Mega Newco, in light of the following factors:

The structure was created, and the foreign proceeding was pursued, for laudable objectives, as the scheme of arrangement would enable a broader restructuring to be accomplished efficiently and, thereby, enhance all parties’ recoveries and maximize the value of the underlying businesses. Therefore, the Bankruptcy Court found that the enforcement of the scheme was fully consistent with the purposes of Chapter 15, which include cooperation, fairness, and value preservation.• The procedures that the parties followed were not implemented in any way that took unfair advantage of the holders of the U.S. Notes, as the whole process was worked out with the involvement and consent ofthe affected creditors, and not for the purpose of harming them or thwarting their expectations. All parties were aware of the basis on which U.K. jurisdiction was asserted and either consented to or did not object to this basis or the U.K. scheme itself, and that there was not a single objection to the recognition of the foreign proceeding or the enforcement of the order in the Mega Newco Chapter 15 itself. In fact, the Bankruptcy Court noted that the only thing that would thwart creditor expectations in this case would be if it were to decline to enforce the order approving the scheme of arrangement.

In coming to its conclusion, the Bankruptcy Court relied on the principle that COMI determinations should not be made mechanically, but rather in light of Chapter 15’s emphasis on protecting the reasonable interests of parties in interest pursuant to fair procedures and the maximization of the debtor’s value, and that creditors presumably are in the best position to determine whether their own expectations are being thwarted. The court therefore deferred to the creditors’ acquiescence in or support of the proposed COMI.

The Bankruptcy Court cautioned that if there were an actual contention or evidence that the structure at issue here had been used in an unfair way and had thwarted third-party expectations, there would be serious questions in its mind as to whether it ought to be approved. However, in the absence of such contention or evidence, the court saw no cause to look past the form of the transactions or to pursue theoretical issues that no affected party wished to pursue. The court therefore recognized the foreign proceeding and enforced the order approving the scheme of arrangement

The Bankruptcy Court’s decision in the Mega Newco has several important implications for cross-border proceedings.

First, the court emphasized the importance of creditor expectations in COMI determinations, noting that the overwhelming support of the noteholders for the U.K. scheme of arrangement played a crucial role in the court’s decision to recognize the foreign proceeding.

Second, the decision highlights the potential risks and challenges of using a newly formed subsidiary to establish jurisdiction in a foreign jurisdiction for the purpose of restructuring the parent company’s obligations.

Third, the decision highlights that there need not be tension between achieving efficient restructurings and ensuring fairness to creditors. While it noted that certain structures may be used to unfairly manipulate COMI, the court recognized that in certain circumstances COMI shifting can a powerful tool to support a global restructuring.

"Good Forum Shopping: Shifting Jurisdiction To Effectuate a Restructuring Is Permissible if It Prioritizes Creditor Expectations," by Evan Jason Zucker, Michael B. Schaedle, and Jennifer K. Malow was published in the <a href="https://www.law.com/newyorklawjournal/2025/04/23/good-forum-shopping-shifting-jurisdiction-to-effectuate-a-restructuring-is-permissible-if-it-prioritizes-creditor-expectations/">New York Law Journa</a>l on April 23, 2025.

Reprinted with permission from the April 23, 2025,&nbsp;edition of the&nbsp;New York Law Journal&nbsp;© 2025 ALM Media Properties, LLC. All rights reserved. Further duplication without permission is prohibited.

Good Forum Shopping: Shifting Jurisdiction to Effectuate a Restructuring Is Permissible If It Prioritizes Creditor Expectations

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Good Forum Shopping: Shifting Jurisdiction to Effectuate a Restructuring Is Permissible If It Prioritizes Creditor Expectations

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