Update | Insolvency: Bankruptcy tourism

Since the Enterprise Act 2002 came into force, individuals made bankrupt in the UK are automatically discharged from bankruptcy after one year. Various government consultations show that the period of bankruptcy is not the main contributor to the stigma caused by it, yet the change was made in an attempt to reduce that negative association. Some would question why there is such concern about reducing the stigma of bankruptcy given the effect on creditors and the ripple effect caused when creditors suffer large losses and can’t then pay their own creditors. We have certainly come a long way since the debtor’s prisons of the seventeenth century!

An unintended effect of the relative leniency shown towards bankrupts is that England is now a popular destination for European bankruptcy tourists.

Debtors living in countries with harsh bankruptcy regimes often seek to make themselves bankrupt in England, before creditors make them bankrupt in their own country, in order to take advantage of discharge from bankruptcy after a year. This is particularly prevalent among citizens of the Republic of Ireland, where discharge cannot be obtained until after six years and Germany where discharge cannot be obtained until after 12 years with no automatic discharge from debts.

One of the purposes of the European Regulation, Council Regulation (EC) No 1346/2000 (the EC regulation), was to avoid debtors transferring assets around member states in order to obtain a more favourable treatment on bankruptcy. All of the assets of a debtor, within the EC (excluding Denmark) will fall into the bankruptcy estate. To achieve this, “main” insolvency proceedings are opened in the country where the debtor has its Centre of Main Interest (COMI). If subsequent insolvency proceedings are opened elsewhere than the debtor’s COMI then only the assets situated in that country will fall into the bankruptcy estate.

While this reduces the benefit of moving assets around the EU, it does not address the draw of a favourable term of bankruptcy and automatic discharge that a debtor can take advantage of through asserting a COMI in England

The EC regulation does not provide a definition of COMI but the recitals to it state: “The centre of main interest should correspond with the place where the debtor conducts the administration of his interests on a regular basis and is therefore ascertainable by the parties.”
Over and above that statement there is no guidance as to what this might mean in practice within the regulation.

Identifying COMI

Clarification can be obtained from case law. A useful statement of the principles behind deciding upon the location of an individual’s COMI can be found in the recent case of Sparkasse Hilden Ratingen Velbert v Horst Konrad Benk and the Official Receiver [2012] EWHC 2432 (Ch).

This case concerns a German national, Benk, who had attempted to create an illusion of having his COMI in England and had succeeded in making himself bankrupt. His main creditor, a bank, applied for an annulment on the grounds that the court had no jurisdiction to make the order because Mr Benk’s COMI was not in England, notwithstanding that the bankruptcy had already been discharged.

The legal principles for determining COMI, found in earlier court decisions, were summarised before the court. The principles referred to were found in Geberan Trading Cov Skjevesland [2003] BCC 209, Shierson v Vieland-Boddy [2005] 1 WLR 3966, Official Receiver v Stojevic [2007] BPIR 141, Official Receiver v Mitterfellner [2009] BPIR 1075), re Eichler (No 2) [2011] BPIR 1293 and Irish Bank Resolution Corporation Ltd v Quin [2012] NICh 1.

The principles set out were as follows:

an individual’s COMI is where he can be contacted, usually his habitual place of residence;

in the case of a professional the COMI may be their professional domicile, provided that the profession is at the root of the insolvency;

a habitual residence is a settled permanent home where a man lives with his wife and family and to where he returns from business trips elsewhere;

a debtor can have only one COMI;

the COMI must have an element of permanence;

it must be ascertainable by reasonably diligent third parties, in particular creditors and potential creditors – this should not normally require notification by the person to his creditors but nor should it be hidden;

an individual can change his COMI even on the eve of insolvency but the court must determine if this is substance or illusion;

the question of where an individual carries on the administration of his affairs is a subjective one;

in the EC regulation the term “regular administration” means the management, organisation and control of the individual’s interest and the term “regular basis” indicates a “quality of presence”, “a degree of continuity”, “an idea of normality,” “a stable link with the forum” and “a degree of permanence”.
 

Mr Benk was a notary in Germany. He had previously petitioned for his bankruptcy in England and obtained a bankruptcy order on 21 May 2009. The order was annulled on 11 March 2010, on the application of the Official Receiver, on the grounds that Mr Benk had filed false information in support of the petition and it was found that the court had no jurisdiction to make the order.

Mr Benk tried again and an order was made. Following an unsuccessful appeal against the decision, Mr Benk’s major creditor, the bank, sought an annulment of the order notwithstanding that the bankruptcy and been discharged.

COMI of significant other

Mr Benk had a residence in Birmingham. He had entered into a tenancy agreement from December 2008 and had previously rented a furnished flat in Birmingham from September 2008. He had paid utility bills and council tax. He was able to produce bank statements showing that he had made purchases in England from February 2009.

Mr Benk provided evidence that he had his own sports photography business, referring to business trips and details of his main client.

The court found Mr Benk to be an unreliable witness. Mr Benk had sought ?to convince the court that he was no ?longer pursuing his career as a notary in Germany, having been suspended from ?the practice in June 2009 as a result of the ?earlier bankruptcy order. The court ?was unconvinced.

Mr Benk had been appealing his suspension since it occurred and an appeal to the European Court of Human Rights was pending. He remained on the register of notaries notwithstanding his suspension. The court considered that his intention was to achieve discharge from bankruptcy in England and then resume his activities as a notary in Germany.
The court stated that the motive behind a debtor choosing a new COMI was not relevant but the potential for abuse means that the court would need to scrutinise the evidence in support of the petition with care. The court considered that Mr Benk had come to England prompted by his looming insolvency. He was relocated by a friend who was connected with a company that advertised relocation services to Germans facing bankruptcy and many of the facts relied upon to establish Mr Benk’s COMI in England were provided by that friend. He claimed to have a business in England as a sports photographer yet the evidence showed that he did not own his own a camera, took photographs on his own golf trips, golf being a particular hobby of his, and he had only one client, someone Mr Benk had known well since 1983. The business was loss making, which Mr Benk explained as being due to start up costs yet he could not identify any of those costs. His only means of support was his girlfriend and he had no prospect of supporting himself financially through his sports photography. Mr Benk had not informed his creditors of his new country of residence. He claimed that they were aware of this through receipt of notice of his first bankruptcy (and presumably its annulment). The court did not consider that this was sufficient to make his COMI ascertainable by third parties.

Mr Benk lived with his girlfriend before he came to England and lived with her in the rented accommodation in Birmingham. She had financed his golf trips through German credit cards and bank accounts and she arranged golf trips using her German address. She returned to Germany after Mr Benk’s discharge from bankruptcy. Mr Benk later followed her back to Germany where, by the time of the hearing, he spent most of his time.

The court added a new consideration when assessing a debtor’s COMI. The Court felt that the COMI of Mr Benk could not be considered separately from that of his girlfriend. The Court considered that there was a sufficiently close dependence, emotional and financial, that it was appropriate to consider her circumstances when considering Mr Benk’s COMI. All of the evidence pointed to her COMI being in Germany. It was said that her unsevered ?ties with Germany were Mr Benk’s unsevered ties also.

Enterprise and Regulatory Reform

The court concluded that Mr Benk resided only temporarily in England and not habitually, also that he had no professional domicile in England. His presence in England was to facilitate his return to Germany.

On 11 October 2012, amendments to the Insolvency Act 1986, included in the Enterprise and Regulatory Reform Bill, were published. These include an out of court procedure that will be used by all debtors wishing to make themselves bankrupt. The application will be dealt with by an adjudicator. The new provisions include a direct reference to the European Regulations that is much clearer than the passing reference to them contained in the act currently, making it clear that applicants must have a COMI in England and Wales unless their COMI is in a country that has not adopted the EU Regulation. It remains to be seen how this will work in practice.
The rules include an entitlement for the adjudicator to request further information from the debtor, orally if considered appropriate, such that there may be more scope for the debtor’s entitlement to be made bankrupt to be tested ahead of an adjudication in the debtor’s favour.
That said, if a debtor asserts that his COMI is in England and Wales then, unless a previous address in another jurisdiction is disclosed or an adjudicator can rely upon, say, the family name of a debtor to justify further enquiries, then it may remain the case that the onus will be upon aggrieved creditors to incur the costs, burden of ?proof and consequent adverse costs risk ?of challenging bankruptcy adjudications and seeking annulments once they ?are made.