Introduction

Before an insolvent debtor can avail of the bankruptcy procedures in an EU member state he must have his centre of main interest in that state. In contrast to a corporate debtor, the centre of main interest of an individual debtor who is living and working in a particular member state will be that state. For example, a person who habitually resides and works in Ireland will have their centre of main interest in Ireland. If the debtor then decides that he wants to avail of bankruptcy procedures in another member state (e.g. the UK), he will first need to move his centre of main interest to that other state.  

There has been much discussion in the media recently about people travelling to the UK (and in particular to England and Northern Ireland) to avail of the UK’s bankruptcy procedure. Against this background, I will set out a practical rule of thumb which should allow a creditor, such as a bank, to assess whether the debtor has successfully transferred his ‘centre of main interest’ from Ireland to the UK.  

The reason that a debtor would want to become a bankrupt in the UK rather than in Ireland is that the UK’s bankruptcy procedures are regarded as being more modern, efficient and less punitive than Ireland’s. The major draw of the UK procedures can be attributed to the fact that a debtor will usually expect to exit bankruptcy after 12 months. At that time the debtor should be free from debt and so in a position to start again.

This is in stark contrast to Ireland, where our bankruptcy procedures are regarded as being antiquated and punitive with neither creditor nor debtor appreciably benefiting from the process. The major disincentive is that, currently, a debtor can usually expect not to exit the process within 12 years. Even though a recent change in the law means that the period can in limited circumstances be reduced to five years, and despite further changes likely to come as a result of the on-going overhaul of Irish bankruptcy law and a new Personal Insolvency Bill, the differences mean that the UK’s procedures will remain comparatively attractive for some debtors.

The Rule of Thumb

If a debtor wants to shift his centre of main interest from one member state (e.g. Ireland) to another (e.g. UK), in order to avail of the insolvency procedures in that other member state, he is entitled to do so. This is so even if he is an Irish citizen who has always lived and worked in Ireland and who incurred all of his debts in Ireland with Irish lenders. It is also the case even if the motivation for him wanting to move from Ireland to England is because of the perceived advantages of the UK’s bankruptcy procedures over those in Ireland. This freedom to move yourcentre of main interest from one member state to another is seen as a key component of our EU right to freedom of establishment.  

The overarching principle coming out of the Irish, UK and European courts is that the shifting of a debtor’s centre of main interest must stand up to substantive scrutiny. That is, the facts underpinning the shift must demonstrate an element of permanency that lends it substance. Depending on the complexity of the case many objective factors may ultimately be called into play in that analysis. However, where a debtor is seeking to demonstrate that he has shifted his centre of main interest from Ireland to England the analysis will usually commence with the following:

  • An individual’s centre of main interest will usually be the member state in which he is habitually resident.
  • In relation to a married person with a spouse and children, this centre of main interest will be where he has his settled permanent home i.e. where he lives with his spouse and family and the place to which he returns from business trips from elsewhere or abroad. That person can maintain his habitual residence in another member state than that in which his spouse and family live but he will need to introduce evidence to demonstrate that in reality and in substance his habitual residence is in that other member state.
  • In the case of an individual who carries out an independent business or professional, his centre of main interest will normally be the member state where he carries out his business or profession, particularly if it is the business or professional activities which are at the root of the insolvency.
  • An individual can shift his centre of main interest from one member state to another by moving his habitual residence to the other member state. There is no minimum period of time that a debtor has to be living in the other member state to be considered habitually resident there. That said the English Eichler case (discussed below) provides authority for the fact that six months should be sufficient if the move is one of substance.
  • The Eichler case is also authority for the fact that if a debtor’s move lacks substance or permanence then it is open to possible challenge.
  • The overriding principle in relation to the shifting of a centre main interest is that the change is based on substance and is not an illusion, and that it has a necessary element of permanency. This will be determined by the facts.
  • In practical terms, the attitude of the Official Receiver in the UK – the Insolvency Service official whose job it is, in the first instance, to administer a bankruptcy – will have an important bearing on whether a bankrupt’s petition will be challenged or not. If the Official Receiver is not convinced that the shift has occurred he may seek direction for an annulment of the bankruptcy.
  • Even where the debtor has convinced the Official Receiver and the bankruptcy process proceeds, Eichler demonstrates that a creditor can challenge at a later date and be successful.  

The Detail

The concept of ‘centre of main interest’ arises from EU Council Regulation 1346/2000 on insolvency proceedings (the “Insolvency Regulation”). The purpose of the Insolvency Regulation is to provide a set of rules and procedures that will allow EU member states, and in particular the courts or agencies which administer insolvency procedures in those states, to determine whether the courts and insolvency rules of one state or another should be the main court and set of rules that apply to an insolvent debtor. The Insolvency Regulation applies in most EU member states, including Ireland and the UK but with the notable exception of Denmark (references to EU member states will exclude Denmark).  

The basic rule under the Insolvency Regulation is that the courts of the EU member state where a debtor has his centre of main interest will be the courts that have jurisdiction over the main insolvency proceedings for the debtor. The Insolvency Regulation does not define ‘centre of main interest’ but it states that a debtor’s centre of main interest “should correspond to the place where the debtor conducts the administration of its interests on a regular basis and is therefore ascertainable by third parties.”  

The Insolvency Regulation only comes into play where there is some cross-border element to the insolvent debtor in question. For example, in the case of an Irish individual who lives and works in Ireland, their centre of main interest will almost certainly be in Ireland. In such circumstances an analysis on the location of the debtor’s centre of main interest is not required and Irish bankruptcy rules will apply.

IBRC v Quinn

By contrast, when Sean Quinn petitioned to be adjudged a bankrupt under Northern Ireland’s bankruptcy rules and Irish Bank Resolution Corporation (“IBRC”) then challenged that decision, there was a mish-mash of cross border issues which meant that the Insolvency Regulation provided the critical framework for deciding where Sean Quinn’s centre of main interest is located and consequently which set of bankruptcy rules apply to Sean Quinn.  

The cross-border issues in the Sean Quinn case arose because Sean Quinn had his home address in the Republic of Ireland (i.e. he was habitually resident there) but had for many years carried out his business activities on both sides of the border. In addition, at the time of his bankruptcy petition, Sean Quinn maintained an office in Northern Ireland for his personal business purposes but he also attended to ongoing personal and business activities in the Republic of Ireland. When added to this, the fact that Sean Quinn was a UK taxpayer but paid 20% of his taxes to the Republic of Ireland created a complex set of facts requiring analysis within the context of the Insolvency Regulation and the related case law in order to determine the true location of Sean Quinn’s centre of main interest.  

To do so, the judge assessed the evidence presented to the court by Sean Quinn and IBRC respectively. The judge arrived at his own conclusions on the facts and balanced up the totality of Sean Quinn’s activities North and South of the border. For instance, the judge looked at the fact that while Sean Quinn maintained an office in Northern Ireland this was balanced against the fact that Sean Quinn had only begun using that office relatively recently. In the view of the judge, he also carried out more substantial business activities on an ongoing basis in the Republic of Ireland. In particular, he was involved in trying to set up a new insurance business with previous Quinn Insurance colleagues in Belturbet. The test was essentially a test of substance. Applying the test, the judge found that Sean Quinn did not, on balance, have his centre of main interest in Northern Ireland as he did not conduct the administration of his interests on a regular basis in the North. Consequently, Sean Quinn’s bankruptcy in Northern Ireland was annulled on the basis that he did not have his centre of main interest in the North.  

The Eichler Case

Another case addressing this issue involved a German doctor, Eichler. Eichler had been living and working in Germany where he was a partner in a radiology practice with two other doctors, Steinhardt and her husband. Eichler’s difficulties arose when Steinhardt brought proceedings against him in Germany alleging that he had wrongfully withdrawn funds from the partnership account. The German court found against Eichler and judgment was granted against him. Subsequently Eichler transferred his property to his wife and moved to England where he began working as a doctor under a series of locum contracts. He also rented bedsit accommodation.

After approximately six months in England, Eichler petitioned for bankruptcy. The petition was granted but the Official Receiver applied to the court for directions as to whether the petition was properly granted. The Official Receiver argued that Eichler’s centre of main interest was really in Germany as he was only resident in the UK on a temporary basis, his wife lived in Germany and Eichler owed no debts in England. The Official Receiver’s arguments were rejected by the court which found that there was no reason why a debtor could not change its centre of main interest. In addition the country in which Eichler had incurred his debts was irrelevant and the correct approach was to look to where he had his habitual residence. The court found that at the time that Eichler presented his bankruptcy petition, he was habitually resident in England and it was of no consequence that his residence there may turn out to be temporary as long as at the time of the petition England was where he was conducting the administration of his interests on a regular basis.  

Unfortunately for Eichler, Steinhardt was not easily dissuaded. She applied to have Eichler’s bankruptcy annulled at a later date. Steinhardt was successful with her application and the court found that Eichler’s claim to have shifted his centre of main interest to England was a sham. He was also found to have given materially misleading information in his statement of affairs such that his petition was misleading. The court found that Eichler had, on balance, continued to conduct the administration of his interests in Germany rather than England and that Germany remained his home. This meant that his establishment in England lacked any degree of permanence, regularity or continuity. It was found that he was forum shopping with the main purpose being to pay the minimum amount possible to his creditors.  

Some Discussion

On the basis of the case law, it would appear that the shifting by debtors of their centre of main interest is a relatively common occurrence across EU member states. Reports indicate that individuals with serious financial difficulties are frequently choosing to go to the UK in order to avail of its shorter bankruptcy process. There is some evidence in the UK case law of an emerging lack of patience by the UK courts with this phenomenon and this is particularly evidenced in the Eichler case referred to above.  

There is no question that the shifting by a debtor of his centre of main interest from one member state to another, in order to avail of what is perceived as a more favourable (or convenient) set of insolvency rules, is forum shopping. It is also true that one of the stated objectives of the Insolvency Regulation is to discourage forum shopping whereas in fact (and ironically) it may have made it easier by providing a uniform set of rules across member states for determining issues such as the location of the centre of main interest.

However, practice and case law have shown that there is nothing objectionable about a genuine shift in a person’s centre of main interest even if that means that the debtor can take advantage of the insolvency laws of another jurisdiction. In this regard, the shifting of a debtor’s centre of main interest is deemed to be consistent with the principles of freedom of establishment enshrined in the EU treaties. Case law has confirmed that forum shopping by individuals is permissible, even if it is for self-serving purposes. Case law has also demonstrated however that the provision of misleading information or sham attempts to shift centres of main interest will open the bankruptcy to challenge and possible annulment.  

In Ireland’s case, it would be an overstatement to state that it is very common for Irish individuals who are experiencing financial distress to seek to avail of the bankruptcy (personal insolvency) procedures in the UK in preference to the Irish bankruptcy procedures, but there have been some very high profile cases recently which have attracted considerable media attention. The most noteworthy of these is IBRC’s successful application to have Sean Quinn’s bankruptcy in Northern Ireland overturned by the High Court in Belfast which is discussed above.  

Against this backdrop, it is worth considering the context in which this phenomenon arises. That is, why would an Irish person who is living and working in Ireland endure the personal and professional upheaval involved in shifting his centre of main interest from here to a foreign jurisdiction? The reasons for preferring the UK’s bankruptcy procedures are well established. As referred to above, the UK is perceived to be a more debtor friendly jurisdiction. This is because its insolvency procedures are more modern, cost-effective, efficient and, most importantly (from a debtor’s perspective), less punitive.  

The UK’s procedures generally allow a bankrupt debtor to exit bankruptcy within a year, and in simple cases the bankrupt may be discharged in less than a year. A year is substantially shorter than in Ireland where a bankrupt may not be discharged for 12 years after adjudication, possibly even longer. While recent changes in Irish bankruptcy law now allow a debtor to apply for discharge after 5 years, discharge at that time is subject to such strict conditions that discharge at that point is by no means certain. Even with a new Personal Insolvency Bill having been published on 29 June 2012 of this year which proposes automatic discharge after 3 years; it is likely that the UK procedures will remain more attractive in certain circumstances.  

From a creditor’s perspective, the Irish procedures as they stand are unsatisfactory and it would be fair to say that the effect of the Irish procedure is primarily to inflict punishment as opposed to maximizing return from the process for creditors or providing a framework within which to resolve an individual’s insolvency. The lack of attraction for creditors can be evidenced by the fact that the process is not commonly used by them.

As long as member states operate different insolvency regimes, forum shopping will remain prominent as certain jurisdictions will always remain more attractive than others. Furthermore, as long as the concept of centre of main interest remains relatively uncertain and dependant on the individual debtors circumstances, forum shopping by moving ones centre of main interest is destined to stay.