Legal experts say European insolvency legislation could lead to cross-border 'bankruptcy tourism', writes CAROLINE MADDEN
INSOLVENT IRISH individuals are being advised to petition for bankruptcy in England as they could potentially free themselves from debt after a year.
In 2002, new European insolvency legislation came into force to facilitate cross-border bankruptcies between member states. The regulation covers personal as well as corporate insolvencies, and theoretically (but unintentionally) enables individuals to “forum shop” for the most lenient bankruptcy jurisdiction within the EU, but this aspect of the legislation has received very little attention in Ireland until now.
Historically the level of bankruptcies here has been extremely low. However, developers such as Paddy Kelly, who personally guaranteed the debts of their business and now find themselves insolvent, have little choice but to consider it as an option. One of the main deterrents against this course of action is the severity of the Irish bankruptcy regime.
“In Ireland, if you are bankrupt, normally you will remain an ‘undischarged bankrupt’ for 12 years. It can even last longer,” says Barry O’Neill, a leading insolvency practitioner with Eugene F Collins solicitors. “However, in England, a bankruptcy can end after as little as 12 months.”
In order to petition for bankruptcy in England, an individual’s “centre of main interests” (Comi) must be based there. Mr O’Neill explains that in the case of a company, the concept of Comi is linked to the registered office of a company, “but there [is] no similar starting point for insolvent individuals,” he explains.
However, some insight was provided by a decision of the English court in a 2007 case involving a German doctor who was made bankrupt in England.
The doctor moved to England to work on a temporary basis as a locum. All of his creditors were based in Germany, as was his wife. English bankruptcy officials believed that his Comi was in Germany, and argued that the individual had only moved to England in 2006 and was living in temporary accommodation.
Nevertheless the judge found that the doctor was entitled to change his Comi from Germany to England, and that it was irrelevant that his debts were in Germany.
He also pointed out that there is no minimum period that a person must spend in a member state before it becomes their Comi.
On the basis of this ruling, heavily indebted Irish individuals are being advised to consider setting up residence in England before applying to the court to become bankrupt there.
“If this works successfully, the bankruptcy will end far sooner than it would in Ireland,” Mr O’Neill says.
A bankruptcy period of one year also applies in Northern Ireland, and for logistical reasons this is likely to be an even more attractive location in which to pursue this strategy. According to Mr O’Neill, the same logic would apply in relation to Northern Ireland, but the key difference is that the issue has not yet been tested in court there.
“Although the was attempting to avoid forum shopping, some commentators have disparagingly described England as ‘insolvency paradise’ and the phrase ‘bankruptcy tourism’ has been mentioned from time to time,” he adds.
Although the prospect of bankruptcy “tourists” fleeing the country might set alarm bells sounding for creditors involved in the property business, Mr O’Neill says that the consequences may not be as dramatic as they might fear.
“If a person is declared bankrupt by an English court, the law of England and Wales will apply to the general aspects of the bankruptcy but the regulation specifically states that the law of Ireland will apply to property situated here,” he explains.
