11 February 2010 #Restructuring & Insolvency
The differences between the respective bankruptcy regimes of European Member States may come as a surprise. To take some examples, the standard term of bankruptcy in Ireland is 12 years whereas the equivalent term in England is 12 months. In Italy bankruptcy will not release the bankrupt from certain debts. In England once the bankruptcy is discharged the slate is wiped clean.
The English regime, which was already more lenient than in some other European countries, was moved further in favour of a bankrupt by the Enterprise Act 2002. This Act was intended to promote healthy risk-taking amongst entrepreneurs and to remove the stigma associated with bankruptcy. Whether this was achieved is a moot point. The current level of personal insolvencies within the UK is at a record high. Recently released figures show that there were 74,670 bankruptcies in 2009, in addition to 47,641 individual voluntary arrangements and 11,831 Debt Relief Orders. Another potential consequence of the change in the law is that debtors based elsewhere in Europe might look for opportunities to have their affairs dealt with under the English regime - in other words to embark on "forum shopping" or "bankruptcy tourism".
When does an English Court have jurisdiction?
The Insolvency Act 1986 allows a bankruptcy petition to be served on (or presented by) someone who is domiciled in England and Wales, physically present there when a bankruptcy petition is served or in the last 3 years has been resident or carried on business in England and Wales. However, these rules are now subject to the EC Regulation on Insolvency Proceedings 2000.
The EC Regulation provides that an individual`s main bankruptcy proceedings must take place in his Centre Of Main Interests ("COMI"). There is no single definition of COMI and since the introduction of the EC Regulation there has been much debate over its exact meaning.
On its face, the EC Regulation should outlaw bankruptcy tourism. If a person is habitually resident in tne Member State the bankruptcy of that person should be dealt with in the same Member State. Not only is it right that the person`s creditors should expect the debtor to be dealt with according to his local bankruptcy laws, it would be inefficient if the bankrupt`s trustee in bankruptcy had to deal with assets that were mainly based overseas.
What happens in practice?
A debtor can present his own bankruptcy petition in England. This is a straightforward process and a bankruptcy order may frequently be made immediately. The petitioning debtor is required to certify that his COMI is within England.
Typically the English Court will take a debtor`s petition at face value and not seek corroborative evidence that the debtor`s COMI is in England. There are two reported examples of the Official Receiver (who is initially appointed as a trustee of all bankruptcies in England) taking action against suspected bankruptcy tourists.
One involved a German doctor (Dr Eichler) who moved to England to work as a locum. Dr Eichler moved into temporary accommodation and his wife remained in Germany. After five months he successfully presented a petition for his own bankruptcy. The Court considered it irrelevant that Dr Eichler`s debts were all incurred in Germany and dismissed the Official Receiver`s application to annul the bankruptcy order. At the time of the bankruptcy petition was presented Dr Eichler was habitually resident in England, which the court took as evidence of his COMI. It did not matter that this might prove to be a temporary state of affairs. The bankruptcy was allowed to continue in England subject to the English procedure.
The Court took a different view in the 2009 case of Mr Mitterfellner, another German debtor, who could be more accurately described as a tourist. He incurred substantial debts in Germany before presenting his own bankruptcy petition during a short visit to England. On an earlier short visit he had opened two bank accounts, which had remained dormant. Again, the Official Receiver applied to annul the bankruptcy. The court expressed doubts over Mr Mitterfellner`s claims to be living in England and having an offer of employment. It was apparent that he could not show that he was habitually resident in England and that he had attempted to mislead the court when initially obtaining the bankruptcy order. Although Mr Mitterfellner was clearly insolvent, his English bankruptcy order was annulled, presumably clearing the way for one of his creditors to seek his bankruptcy in Germany.
These two cases leave open the possibility of bankruptcy tourism. There is no minimum qualifying period in order to establish COMI in England. The relative ease with which workers can move between Member States and the huge discrepancy between the respective bankruptcy regimes may lead to more cases of the bankruptcy tourist. Indeed, some anecdotal evidence suggests that England is being marketed as a bankruptcy destination.
Does the EC Regulation offer any further protection to creditors?
The starting point is that once insolvency proceedings are opened, they should be recognised by other member states. In some circumstances (for example where the bankrupt has substantial assets and / or business interests in another member state) it may be appropriate to open "secondary proceedings" in that jurisdiction to assist with the realisation of assets.
The Regulation also provides that certain issues should be determined in accordance with local law rather than the law of the state in which the bankruptcy was commenced. These include:
These provisions will operate to give some comfort to creditors and other parties affected by bankruptcy in other member states. However, creditors based in countries with harsher insolvency regimes may be surprised that the possibility of debtors taking a bankruptcy holiday in England is open at all.