Bankruptcy tourism – it’s not a holiday

THE RECENT INSOLVENCY STATS revealed a fall in the number of personal insolvencies in Q4 2011 compared to Q4 2010. The number of bankruptcies for the fourth quarter stood at 28,973, a decrease of 5.6% on the same period a year ago. However, while the number of people being declared bankrupt is falling, “bankruptcy tourism” appears to be on the rise.

Bankruptcy Tourism – where a foreign national relocates here to benefit from our personal insolvency rules – hit the headlines a couple of years ago. The focus was on German nationals making themselves bankrupt in England, to avoid a bankruptcy period of seven years in their native country. Now Irish nationals are hitting the headlines with individuals, such as Sean Quinn, attempting to make themselves bankrupt in Northern Ireland and England to avoid a bankruptcy period of 12 years he would have been subjected to in Ireland.

England was famously referred to as the “bankruptcy brothel” of Europe in 2010. While bankruptcy numbers are falling, this reputation remains, with the number of bankruptcy tourists increasing as foreign nationals are drawn to our supposed “bankruptcy lite” system. However, the English bankruptcy system has all of the protections creditors could expect, and sometimes more than other systems, so is this bad press deserved?

Looking at websites for organisations advertising to assist foreign nationals in making themselves bankrupt in England, the main selling point is clear; the average period of bankruptcy is only eight months in England. However, it is a common misconception that the bankruptcy ends once the bankruptcy period is over and the individual discharged. The bankruptcy will go on as long as it takes a trustee in bankruptcy to realise a bankrupt’s assets for the benefit of creditors.

Yes, a discharge from bankruptcy allows an individual to act as a director and ends the risk of a trustee pursuing further assets such as property or income. However, English bankruptcy legislation provides that all property (save for the matrimonial home after three years and any pension) can be pursued by a trustee in bankruptcy “wherever situated” – and therefore applies worldwide.

The same legislation that allows for nationals from other EU countries to make themselves bankrupt in England also provides that an English bankruptcy order should be recognised in other EU states (save for Denmark). It should have the same effect in those states as it does in this country, allowing a trustee in bankruptcy to realise assets across the EU under English law and be recognised in the courts of those jurisdictions.

It is fair to say that assets based in other jurisdictions can be more difficult and costly to realise and this can create difficulties as funds in bankruptcy estates tend to be limited. However, that is a commercial reality faced by any insolvency practitioner trying to realise assets in a foreign country, not as a result of English legislation.

While the English courts are prepared to be flexible in allowing EU nationals to make themselves bankrupt here, in accordance with the European principle of free movement, debtors should not think that they will get an easy ride from English bankruptcy. If there are assets to be realised – wherever they might be – an English trustee in bankruptcy has the powers to realise them.

Neil Smyth is a partner in restructuring and recovery at law firm Taylor Wessing

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