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Catch me if you can...

Bankruptcy Tourism Update

With the recent news that Personal Insolvencies in the UK have fallen by 8% compared to those seen in 2012, recording a total of 101,049 personal insolvencies last year (the lowest since 2005) could this be showing the effect of the changing tide of Bankruptcy tourism? We look at some key cases to see how the courts are starting to take a tougher approach...

Rather than providing clear direction, on occasion Statues and Regulations can convey confusion when addressing the issue of bankruptcy tourism. The EC Council Regulation No 1346/2000 states that “Main proceedings must be opened where the debtor has his Centre of Main Interests (“COMI”)”. To clarify this recital 13 states that the COMI “should correspond to the place where the debtor conducts the administration of his interests on a regular basis and is therefore ascertainable by third parties”. Therefore implying that a debtor’s COMI perhaps need not be permanent and can be moved from time to time… clear as mud?

This lifeline that the debtor’s COMI need not be permanent has seen many debtors over the years be cute and flee from stricter regimes (i.e. Germany and Ireland) to more lenient regulations (i.e. the UK). The Courts are however, becoming wise to this situation and are starting to take a harder line.

Recent cases convey this new approach:

Brian O'Donnell and Mary Patricia O'Donnell v The Governor and Company of the Bank of Ireland [2013]

Facts:

  • Irish Property tycoons who had invested in property in Dublin, London, Stockholm and Washington DC.
  • Their family home was in Dublin and they had a country estate in Galway.
  • In December 2010 the bank issued proceedings against the O’Donnell’s in Ireland for Eur 69 million. Despite a settlement being reached payment was never made and the Bank sought a judgment in the sum of c. Eur 71 million plus costs.

COMI considered

  • The O’Donnells travelled to England and had not left since December 2011.
  • The O’Donnells’ solicitors wrote to the bank asserting that their COMI had moved which the bank rejected in response.
  • In May and June 2012 the bank issued respective bankruptcy petitions against the O’Donnells in Ireland.
  • The O’Donnells challenged this and said their COMI was the UK and therefore should have been a UK petition.

First Judgment

The following was taken into consideration:

  • The definition of “interests” was intended to be economic ones.
  • Their economic activities were centred in Ireland that is how creditors would have perceived matters.
  • Their habitual residence was in Ireland.
  • Whilst they may have intended to stay in London that was not sufficiently ascertainable by third parties.
  • Therefore the COMI was held to be in Ireland

Appeal: High Court and Court of Appeal

  • Despite the O’Donnells producing newspaper articles detailing their business as being London based the Judge rejected this on the basis that the article also referred to investments in other jurisdictions and specifically referred to Mr O’Donnell as an Irish Business man.
  • The COMI was held to be in Ireland.

Schrade v Sparkasse Ludenscheid [2014]

Facts

  • Schrade lived in Germany with his wife and family. At the beginning of 2012 he got into financial difficulties, alleged his marriage had broken down and moved to London in May 2012.
  • He took up accommodation and incorporated a company in June 2012.
  • In January 2013 he presented a petition for his own bankruptcy.

COMI considered

  • His family ties were in Germany.
  • Had at least one bank account in Germany with a higher turnover than his English one.
  • He held stocks and shares in Germany and was involved in litigation in Germany.
  • His creditors were almost entirely located in Germany.

Held

  • His COMI was in Germany.
  • Most critically the Judge did not believe he had separated from his wife as the evidence did not support the same.
  • Petition was dismissed.

Winds of Change

Alongside the change of the Court’s attitude, the Irish bankruptcy regime has also seen a change with section 157 of the Personal Insolvency Act 2012 (Republic of Ireland) brought into effect on 3 December 2013 which has seen a reduction of the maximum discharge period in the Republic of Ireland from 12 years down to 3. However, there is still a provision for the payment of money from income for a period of 5 years after the discharge.

Bankruptcy tourism is unlikely to cease altogether, but with the changes of the Irish Bankruptcy laws and scrutiny applied by the Court to COMI it could mark the end of this holiday season.

If you have any questions or would like more information please contact Daniella Thompson, Senior Solicitor, Corporate Recovery, or Gavin Jones, Head of Corporate Recovery.

This information is intended as a general discussion surrounding the topics covered and is for guidance purposes only. It does not constitute legal advice and should not be regarded as a substitute for taking legal advice. DWF is not responsible for any activity undertaken based on this information.

Gavin Jones

Partner - Head of Business Restructuring

I act for banks and asset based lenders, insolvency accountants and boards of directors in relation to both formal and informal insolvency procedures, turnaround and restructuring and in relation to security issues.