The EU insolvency law has resulted in insolvent debtors shopping for a better jurisdiction in which to become bankrupt.  This article examines why and how.

Why?

The EC Regulation on Insolvency Proceedings 2000 (the ECIR), came into effect in May 2002, providing a framework for the national jurisdictions to work together by recognition of each states insolvency mechanisms.  However the EC Regulation does not harmonise substantive differences in insolvency law between the subscribing nations.

England and Wales aim to encourage entrepreneurialism and the comparatively friendly insolvency legislation has caused bankrupts to establish their centre of main interest (COMI) in England or Wales.  Automatic discharge of a bankrupt after 12 months and wiping of all pre bankruptcy debts so that the bankrupt can effectively start afresh (subject to certain exceptions) has caused England and Wales to become known as a ‘debtor friendly’ state.

Our ‘debtor friendly’ state is more marked when compared with Germany where the discharge from bankruptcy can take up to 9 years and Irish law where currently there is no automatic discharge and bankruptcy lasts 12 years.

How?

Recital 4 of the ECIR states that the regulation should not be used for forum shopping.  However, there is no clear definition of COMI and the ECIR therefore enables some insolvent debtors to establish a COMI in a more favourable jurisdiction.  The court will usually regard the country where the debtor carries on a business or earns their living as their COMI.  Recital 13 of the ECIR states that an individual’s COMI will be ‘the place where the debtor conducts the administration of his interests on a regular basis and is therefore ascertainable by third parties’.  The court will also have regard to the place where the debtor normally lives, how long they have lived their and how often they travel abroad.  The location of a debtor’s COMI will be a question of fact to be decided on the specific circumstances of each case.

Change?

Concerns have been raised that there is not sufficient policing of the line between genuine and fictional relocations.  Chadwick LJ in Shierson v Vlieland-Boddy [2005] BPIR 1170 said ‘that there is nothing… which prevents a debtor’s centre of main interests from being changed from time to time’.  There have however been a number of recent “cross border” bankruptcies which have been annulled in the courts of England and Wales following findings that the debtor’s COMI was not correct at the commencement of proceedings.  In Official Receiver –v- Huck [2011] BPIR 702, and Sparkasse Hannover –v- Korffer [2011] B.P.I.R the courts held that the debtors COMI was not England.  Both cases emphasise that in establishing a COMI there must be a necessary element of permanence.     In practice, for a debtor to establish their COMI, the debtor will have to have had their arrangement for a minimum of 6 months for the court to consider such arrangement to be credible.

In 2010 there were 59,173 bankruptcies in England and Wales compared with only 9 bankruptcies in the Republic of Ireland.  In quarter 3 of 2011, there were 9,567 bankruptcies in England and Wales compared with 301 bankruptcies in Northern Ireland.  Ireland’s financial difficulties have been well noted since 2008 and it seems at odds to see so few bankruptcies compared with England and Wales.  Arguably these statistics demonstrate the ability to shop for bankruptcy.

The creditor perspective is that reform of the ECIR is needed to limit the scope for insolvent debtors to switch their COMI in anticipation of filing for bankruptcy.   The European Commission has committed to reviewing the position by 1 June 2012 and its recommendation for any change to the EU law will be awaited with interest.