International offices, global knowledge

Jun 21 2007 By Paul Dutton, The Journal

Paul Dutton discusses the international and cross-border implications of trading abroad.

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The worldwide web, free trade zones and the rise in off-shoring have changed the way that companies do business.

It is not uncommon for firms to be registered in one country, have their factories, sale and distribution teams in another, with management living in a completely different part of the world.

This is fine until the applicable legal jurisdiction needs to be decided, whether for restructuring, further investment or asset recovery and failure.

Recent European legislation (which applies globally) has tried to classify which country is first and second in line on failure and therefore who is in control of the recovery of assets.

If the company is based in a number of different countries it maybe difficult and come as a surprise to find out which jurisdiction the business legally resides in and therefore who controls the recovery purposes.

One thing that is certain is the country that the company is registered in is not necessarily the main country for legal purposes. Registration nowadays is almost symbolic, with little business substance. The test is where the company has its "centre of main interest" (COMI).

This legislation is increasingly important for modern business. If, for example, an English Registered Company has off-shored its manufacturing to Eastern Europe, its customer service is out of India, but the HQ is in the North East - their COMI may be Eastern Europe not England.

UK creditors may then find themselves dealing with a foreign legal jurisdiction on failure and paid out of only the UK assets.

Head office location is not the determining factor. A company that has a high percentage of its sales, staff and property in overseas markets may be considered to have its COMI in that country.

This applies to firms that sell anything from electronics to langoustine. If the market is cross-border, then any recovery of assets will be focused on the country or countries where the COMI and creditors reside.

So what is the answer? The simple advice we give is that knowledge is all important. It is vital companies, investors, creditors and suppliers understand their own positions. If something does go wrong, the ability to handle the situation will be dependent upon the legal protections put in place, as much as the location of resources.

One of the most telling recent examples of multi-jurisdiction actions was when MG Rover went into administration.

Eversheds acted for the administrators in the sale of the assets of MG Rover Group and Powertrain Limited to Nanjing Automotive (Group) Corporation. This was a very significant and complex deal. Court applications in the UK were required to ensure foreign subsidiary businesses in eight different countries could be managed and recovered by the UK administrator for the benefit of UK creditors and not lost on foreign soil.

We would never suggest not looking at off-shoring elements of work to reduce and control costs or not expanding into new cross-border markets. Indeed with 22 international offices we can help.

But, we would strongly recommend that North-East companies and their investors carefully consider the legal implications of doing this and carefully structure their business abroad. We would always hope these moves are successful, but would suggest companies in the North-East work with Eversheds, the only international law firm in the region. We are therefore equipped to help by understand where the business legally resides, thus reducing risk and maximise control and returns.

• Paul Dutton is an Eversheds partner and former R3 chairman.