In re Karhoo Inc, No 16-13545 (Bankr. S.D.N.Y. 2016)

Karhoo was a US incorporated company able to benefit from the Chapter 15 US bankruptcy code provision for foreign insolvency proceedings following UK Administration.

Karhoo was a taxi comparison app aiming to provide its users with access to minicabs and taxis. The Karhoo group (Karhoo) consisted of a holding company incorporated in the US, a US incorporated trading company (US Companies) and various companies incorporated in the UK (UK Companies). Karhoo entered into about 700 contracts with fleet owners and about 21 contracts with dispatchers in the cities in which it did business, including London.

Although the US Companies entered into the majority of the 700 contracts, the relationships were managed through the UK Companies. Over 90% of Karhoo's revenue originated in the UK. Karhoo also employed around 200 people, of which the majority were employed by the UK Companies. 

Karhoo's business and operations were directed out of London. Its executives were all based in London, as well as the human resources and accounting teams. Karhoo's IT systems were cloud based but billed to the UK Companies. 

However, Karhoo encountered a number of difficulties that proved to be insurmountable and eventually the UK Companies entered into Administration in the UK, and subsequently the US Companies entered Administration also in the UK. In the board minutes annexed to the Notice of Appointment of Administrators to the US Companies the directors went to some length to set out why COMI for the US Companies was in the UK. The sworn Notice of Appointment itself also contained the usual declaration as to COMI.

The assertion of COMI was on the grounds that the US Companies, though incorporated in Delaware, conducted their main operations in England and this was ascertainable by third parties in England. Furthermore, their headquarters were in England. However, Karhoo had $18million debt in secured convertible notes governed by US law, and critical contracts that were entered into by the US Companies. Karhoo claimed that those parties negotiating the contracts did so in London. Karhoo therefore claimed those contracted counterparties would have been aware of the UK as the strategic control centre of the US Companies. Karhoo further claimed that with a central COMI, the individual companies within its group formed one economic unit based in the UK.

The Administrators filed Chapter 15 petitions for both the US and UK Companies in the US. They further requested the UK Administrations be recognised as foreign main proceedings, as Karhoo's COMI was in the UK.

It is the responsibility of the foreign representative to establish a company's COMI. However, it is presumed to be located wherever the debtor's registered office is located/place of incorporation.

In light of the factors and arguments above, the US Bankruptcy Court granted Chapter 15 recognition for both the UK and US Companies, declaring them to be foreign main proceedings. While in reality there were multiple recognition applications for all of the US and UK Companies, the US Bankruptcy Court uniquely agreed to consolidate, for procedural purposes, all the Chapter 15 applications into one.

Recognition under Chapter 15 of a US company as a foreign debtor in its own country of incorporation, demonstrates the US courts' flexibility. The courts were willing to deviate from Karhoo's presumed COMI of the US accepting it as the UK. It further demonstrates the US courts' willingness to apply Chapter 15 and allow jurisdiction to be devolved to foreign courts. In this particular case, Karhoo was able to benefit from US and UK insolvency law to achieve the best outcome for creditors.

Demonstrating a company's COMI differs from its country of incorporation, be it in this case to benefit from Chapter 15, is not unusual and shows the ability to establish a company's true home location. Furthermore, Ashfords' Restructuring and Insolvency Team are experienced in such matters having recently assisted the directors of Ronin Development Corporation, a US incorporated company, in demonstrating the company's COMI was in fact located in the UK. 

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