Bankruptcy tourism has hit the headlines. Irish property developer Sean Quinn, owing 2 billion euros, has filed for bankruptcy in Northern Ireland in order to avoid the Republic of Ireland’s harsh bankruptcy regime.

As an EU member the UK is obliged to recognise Court decisions made in other member states, even if they do not accord with our law. We get concerned when a Greek Court extradites a UK citizen to face what might be a minor offence here.  But, it works two ways; Europeans must recognise our laws.

English bankruptcy laws are amongst the most debtor-friendly in the western world.  The process is simple, quick and fairly benign with an exit in a year.

Contrast this with many European jurisdictions, where the process can last seven, eight or in the case of Ireland, twelve years. It may be rigorous during that period, catching assets and rights that are exempt in the UK.

Sean Quinn is just one insolvent European looking to have his bankruptcy dealt with under the English regime. Forum shopping (the action of seeking a court or judge deemed likely to render a favourable result) has long been done by companies.

So why is it wrong for individuals?

Creditors seem to perceive this to be an abuse and apply to have such bankruptcies annulled.  In the end it all comes down to COMI – where you have your Centre of Main Interest. This is where you are entitled to file for bankruptcy.

COMI is simply defined as the place where the debtor conducts the administration of his interests on a regular basis – and the latter has been held to need no minimum period but merely to have an “element of permanence”.

In the case of re Mitterfellner, the Court annulled the bankruptcy on the basis that the debtor had come over on a day trip to open a bank account and did little else. It found his so-called job offer over here was fictional. Mitterfellner had also told the German authorities he was moving to Dublin.

On the other hand, in the case of re Eichler, the position was somewhat different.  Here, the bankrupt was a German doctor who had obtained a genuine (although short-term) job here as a locum.  Eichler organised his affairs so:

• his assets had been transferred to his wife who remained in Germany
• he was employed via a service company and was paid a minimal amount (thus avoiding a three-year bankruptcy income payments order)

This was not found to offend English bankruptcy law.

So, while such favourable bankruptcy filings may be controversial, they do have legal backing.  As far as is known, there has as yet been no equivalent case law on foreigners filing for IVAs here but there appear to be no obvious reasons why they would not be effective.

Being cynical, one suspects that the average European creditor would not understand the effect of an IVA on his rights which might make it fairly easy to get a scheme through and be binding on unwitting creditors.

So, while Sean Quinn is an extreme case (and the decision on whether the legal challenge will succeed or not is awaited), there is no doubt that we will see an increasing flood of insolvent Europeans taking up residence in the UK.

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