Bankruptcy tourism: excess baggage

For those who work in the personal insolvency industry, it would appear that
more and more of our European cousins are being attracted to these shores to
experience the UK’s “bankruptcy lite” regime. The suggestion is that many shop
in our forum with a view to avoiding their liabilities, but is that the reality?

The figures are not available and would be very hard to calculate, but
another anticipated record breaking quarter for personal insolvency figures up
to September 2009 is likely to include an increase in the number of petitions
presented by debtors from other EU countries. The statistics confirm that 86% of
petitions are presented by debtors themselves. That means that more than 16,000
debtors presented petitions in the courts across England and Wales in the last
quarter, which, combined with creditors’ petitions, IVAs, insolvency
applications and other matters, makes for a very heavy court workload.

Not all courts have the opportunity to place every debtor’s petition in front
of a member of the judiciary before a bankruptcy order is made. The debtor’s
evidence as to his or her centre of main interests (COMI) is often therefore
relied on in making an order on paper without a hearing.

The Official Receiver’s office is making queries of individuals and
investigating their circumstances to assess whether those individuals’ COMI is
properly in England or Wales, however, it is not possible to investigate every
bankruptcy. So, where does that then leave the insolvency practitioner who takes
the appointment as trustee of such a “bankruptcy tourist”?

Under EC Regulations on Insolvency Proceedings 2000, a bankruptcy order
should be recognised in other EU states (save for Denmark) and should have the
same effect in other EU states as it does in here. A trustee in bankruptcy
should therefore be able to realise assets across the EU under English law,
subject to some exceptions, and be recognised in the courts of those
jurisdictions with relative ease and with the regulations on their side.

In addition, the insolvency legislation provides that all property in a
bankrupt’s estate vests in the trustee on his or her appointment. Property is
defined as property “wherever situated” and therefore applies to assets
worldwide. This therefore supports the trustee’s position in making pan-EU
realisations. The reality may, however, be somewhat different.

Cross-border co-operation
The first problem the trustee will have is locating the assets, if any. If the
debtor co-operates with the Official Receiver, possibly in an effort to avoid
challenge to the bankruptcy order, the trustee may have some information to go
with the debtor’s statement of affairs, but this is likely to only be a starting
point.

If the debtor is in the jurisdiction and co-operates, then all well and good.
If the debtor is in the jurisdiction and refuses to co-operate then either the
Official Receiver or the trustee can apply to court for a public or a private
examination. This is against a likely backdrop of limited realisations and
therefore limited resources.

The trustee is likely to experience even more difficulty in obtaining the
co-operation of a bankrupt based outside the jurisdiction. While, in response to
such non-cooperation, the Official Receiver can apply for suspension of
bankruptcy or a bankruptcy restriction order and a warrant for arrest can be
issued for non-attendance at an examination, the effect of such sanctions on
someone based abroad are questionable.

In addition, the trustee can request an order for delivery up of assets. Even
if the courts here make such an order, it would need to be enforced in the
jurisdiction that the bankrupt was residing in, assuming that he or she was not
in this country nor co-operating. There is also the ability to request
information and delivery up of assets from third parties, but the above
difficulties still apply if that third party refuses to co-operate. Even if the
bankrupt does co-operate and assets are identified for realisation, problems
remain.

The main asset in a bankruptcy tends to be real estate. Any legal issues
relating to real estate owned by a bankrupt in other EU jurisdictions will be
determined under the law of the jurisdiction in which the real estate is
located. This means that the mainstay asset in the bankruptcy will most likely
require foreign legal advice and additional time and expense to realise. Local
law may not govern other assets, but it may still require local legal advice to
secure their realisation.

Other potential areas of realisation include income payment orders/agreements
and orders regarding property acquired by the bankrupt after the bankruptcy
order was made. These are orders made by the courts in this jurisdiction, but
are likely to require enforcement through courts in the local jurisdiction
depending where the income is earned and the property acquired.

The trustee has the power to bring various actions against third parties.
Again, while these actions are begun in this jurisdiction, permission to serve
out of the jurisdiction will be required if the defendants are based elsewhere,
and any judgment will most likely have to be enforced through local courts.

Overarching all of these difficulties is the possibility that all of the
creditors are based overseas. The first these creditors may hear about the
bankruptcy could well be when the trustee approaches local courts for
recognition and assistance and this may well be the time that those creditors
decide to challenge the validity and jurisdiction of the bankruptcy order in
local courts bringing more expense, uncertainty and delay to the process.

It is likely that bankruptcy orders against non-UK citizens are on the
increase and “forum shopping” is a reality. Although the regulations set down a
framework and principles to allow trustees in bankruptcy to realise assets and
be recognised across the EU, there still remain a number of practical and
logistical difficulties in securing pan EU realisations and returns to
creditors, which will only heighten the attraction of this jurisdiction as a
place where EU citizens can make themselves bankrupt with a view to leaving
their debts and problems behind them.

Neil Smyth is a partner at Taylor Wessing