On Tuesday 17th November, Beauchamps Solicitors launched the findings of its review: ’Bankruptcy Law in the European Union and Forum Shopping’.  This report, which outlines the procedures in relation to bankruptcy in a number of EU member states, shows that Ireland’s laws are out-dated and compare unfavourably with our European counterparts.

    

According to Gabriel Daly, Head of Restructuring and Insolvency at Beauchamps Solicitors, “To ensure Ireland’s economic regeneration, our bankruptcy laws must be revised.  The existing bankruptcy laws are anti-entrepreneurial, out-dated and unwieldy.  Business leaders take risks on new ideas and without these people, to stimulate business and provide employment, our economy could suffocate. The freedom to fail in business is essential.

    

“Bankruptcy law stagnated because there has been a failure to update the legislation. This has now come into sharp focus as distressed debt becomes an important issue and the existing procedures cannot cope with the masses of individuals in this situation.

 

“The Irish approach to bankruptcy is penal.  If you are declared a bankrupt, the restrictions applied become a millstone around your neck for the next twelve years; however, in England and Wales you may only face being in bankruptcy for twelve months.  If Alan Sugar or Donald Trump had gone bankrupt in Ireland, they would not have been in a position to create new businesses, take new risks and succeed on a larger scale.

 

“Revising our laws may encourage the entrepreneurship that could lead the economy out of recession.  This isn’t simply a case of allowing people to walk away from their debts, should they fail.  However, their limited means could be distributed and dealt with in a controlled fashion. Reform is needed to ensure these people are not kept in limbo for the rest of their business lives.

 

“The downturn and credit crunch have resulted in a serious lack of access to finance, which is causing companies nationwide to shut down. However, banks are aware that our existing bankruptcy law is costly and outdated and so they are likely to consider other options and avenues before proceeding down that route. It should be the case that individuals are able to restructure and move forward again in the same way that a company can. After all, on a basic level, companies are made up of individuals.

  

“Alternatives are available.  Private ‘schemes of arrangement’, though costly and time consuming, enable debtors to avoid the disqualifications of becoming bankrupt and gives them privacy to help protect their standing and credit”, Daly said. 

 

In September 2009, the Law Reform Commission produced a consultation paper on Personal Debt Management and Debt Enforcement that makes 122 provisional recommendations for reform. As regards bankruptcy, it recommends the creation of a new system of personal insolvency law in Ireland; in particular, that a statutory non-court-based debt settlement scheme should be introduced, which would supplement (though not necessarily replace completely) the current court-based scheme in the Bankruptcy Act 1988. 

 

“We welcome this development, which will make a radical difference to the current system, and hope to see it implemented as soon as possible.  Under personal guarantees given to financial institutions, many company directors have personal liability for the debts of their companies and it is likely that there will be a significant increase in the volume of personal bankruptcies in the near future,” Daly said.

 
Report – Bankruptcy Law in the European Union and Forum Shopping

To be declared bankrupt in Ireland an individual must commit one of eight “acts of bankruptcy”. This is “an act or default, voluntary or involuntary, committed by a debtor which is either evidence of an intent to deprive creditors of their rights through fraudulent assignment or as an implication of insolvencies.”

 

Successful proceedings see the debtor’s property transferred to a trustee who distributes it amongst the creditors.  Discharge from the debts happens either when all monies are paid or 12 years elapses, all the property is disposed of; any property acquired since bankruptcy has been disclosed and it would be reasonable to discharge the individual. As there is no automatic right to discharge, people may remain bankrupt even after death without a High Court discharge.

 

The EU Insolvency Regulation from May 2002, which applies to EU member states except Denmark, provided a framework for proceedings and determined pan-European jurisdiction for main and secondary insolvency proceedings across member states.  Two sets of proceedings can be run in parallel, depending on an individual’s assets, business interests and where they are located.

 

According to Gabriel Daly, “the Regulation tries to prevent the notion of ‘forum shopping’ which happens when a plaintiff chooses between courts in different countries that have the power to consider his case and he initiates legal proceedings in the country that is likely to consider the case more favourably,” he said.

 

The Regulation states that main proceedings may be opened where the insolvent debtor has its centre of main interests (COMI). Once opened, proceedings in other states must be secondary or winding-up proceedings. It provides that proceedings must be recognised by all member states.

 

“So, while an Irish individual may chose to move his COMI to a more favourable jurisdiction (such as England and Wales) to have his proceedings commenced there, his Irish assets could still be subject to secondary proceedings in Ireland if he still has an establishment there.

 

“Although not defined in the Regulation, the COMI must be the place where interests are administered on a regular basis and is ascertainable (easily determined) by third parties, especially creditors.  According to case law, there doesn’t appear to be a minimum period that a person must spend in a member state before it becomes their COMI. It is a matter for the court to decide depending on the facts of each case.

 

A 2007 European Commission paper “Overcoming the stigma of business failure- the second chance policy” examined bankruptcy practice across the various EU jurisdictions.  In its review of insolvency law Ireland scored only two out of ten in terms of the number of insolvency measures either in existence or proposed.  Marks were allocated on a number of criteria, such as better legal treatment for bankrupts, reduced restrictions, streamlined procedures and shorter discharge periods.  The countries ranking highest in terms of score were Austria and the UK.

 

When comparing Irish bankruptcy law to a selection of other EU states, this report finds that,  “In most states, it is possible to enter into arrangements with creditors and obtain the sanction of the court for such arrangements. Some countries have set time limits for the conclusion of proceedings; others appear to be open-ended and dependent on the payment of creditors. Several countries, such as Spain, have penalty provisions to restrict a debtor where they have acted in a reckless manner towards creditors,” Daly said.