Bankruptcy Tourism under the EC Regulation on Insolvency Proceedings: A View from England and Wales

This article provides an account of the emergent phenomenon of bankruptcy tourism forum shopping by debtors for favourable personal insolvency law within the EU and with particular reference to England and Wales. After outlining the structural features of the European legal framework that make forum shopping for personal insolvency law possible, including the EC Regulation on Insolvency Proceedings, and explaining why England and Wales in particular has proved to be an attractive tourist destination, the article charts how the official receivers and the courts in England and Wales have sought to manage the influx of foreign bankruptcies in terms of legal principle and process drawing on two reported cases, Eichler and Mitterfellner. It will be seen that the institutional response in England and Wales has been twofold. First, the problem of forum shopping debtors has been framed as a problem of policing the line between genuine and fictional relocations. Secondly, there are signs that the procedural onus on debtors to evidence their claim to English jurisdiction before a bankruptcy order is made has been increased, a move that can be interpreted as a form of institutional resistance designed to raise the barrier to entry. Having sought to illuminate the problems, costs and inconvenience associated with forum shopping from a practitioner standpoint, we explore the good versus bad forum shopping question and consider the scope for reform of the EC Regulation. Adopting a creditor perspective, we conclude provisionally that the Regulation could usefully be reformed to limit the scope for insolvent debtors to switch their COMI in anticipation of filing for bankruptcy. Author contact details: Adrian Walters Geldards LLP Professor of Corporate and Insolvency Law Insolvency and Corporate Law Research Group Nottingham Law School Nottingham Trent University Burton Street Nottingham NG1 4BU, UK Tel: +44 (0)115 8482771 Fax: +44 (0)115 8486489 Email: adrian.walters@ntu.ac.uk ICLRG Working Paper Series Anton Smith Senior Associate Solicitor Business Recovery and Insolvency Geldards LLP The Arc NG2 Enterprise Park Enterprise Way Nottingham NG2 1EN, UK Tel: +44 (0)115 9833742 Fax: +44 (0)115 9833771 Email: anton.smith@geldards.com

Electronic copy available at: http://ssrn.com/abstract=1630890

Bankruptcy Tourism under the EC Regulation on Insolvency Proceedings: A View from England and Wales Adrian Walters and Anton Smith

I. INTRODUCTION The EC Regulation on Insolvency Proceedings (ECIR) was intended, among other things, to streamline the allocation of insolvency jurisdiction in relation to corporate and personal insolvencies that have a cross-border element within the European Union.1 In the realm of international corporate insolvency, it has sparked much interest and controversy. Creative practitioners have exploited the concept of the centre of main interests (COMI), which is fundamental to determining which Member State can open insolvency proceedings, to open new frontiers in the restructuring of multinational group

Geldards LLP Professor of Corporate and Insolvency Law, Nottingham Law School, Nottingham Trent University, UK. Walters is INSOL Scholar for the Europe, Africa and Middle East Region 2009/10. Senior Associate Solicitor in the Business Recovery and Insolvency Team at Geldards LLP in Nottingham, UK. The views expressed in this article are those of the authors alone and are not attributable to Geldards LLP. The article is based on a paper given at the INSOL Academics Group Meeting held in Dublin, Ireland on 11-13 June 2010 and is dedicated to the memory of Michael Green. The authors wish to thank the participants at that meeting, especially Bill Holohan and Frank OReilly, and the following for their assistance during the preparation of the article subject to the usual disclaimers: Stephen Baister, Martina Breach, David Capper, Alison Dennis, Graham Ferris, Nick Howard, Christian Kser, Shona Manson, Donna Mckenzie Skene, David Payne, Muhunthan Vaithianathar, Bob Wessels, Gary Wilson [and the IIR referee]. The usual disclaimer applies. All weblinks given below were active and correct on 23 June 2010.
1

Council Regulation (EC) 1346/2000 of 29 May 2000 on Insolvency Proceedings [2000] OJ L160/1. The

ECIR is directly applicable in all Member States with the exception of Denmark: see recital (33); IF Fletcher, Insolvency in Private International Law (2nd edn OUP, Oxford 2005) 357.

Electronic copy available at: http://ssrn.com/abstract=1630890

enterprises.2 Forum shops orchestrated by senior creditors seeking a restructuring in their venue of choice, usually London, remain contentious.3 In the context of personal insolvency, the ECIR has attracted less attention. This is not surprising as most personal insolvencies in Europe are local and have no crossborder element. With less at stake compared to corporate cases in terms of assets and fees, creditors and trustees have little incentive to embark on ground breaking litigation even where there is a cross-border element. However, one emerging issue of crossborder personal insolvency stimulating debate in the UK is the phenomenon known as bankruptcy tourism: essentially, forum shopping for favourable bankruptcy law.4 Having contracted their debts and become insolvent in one Member State tourists look to move their COMI or create the impression of having moved their COMI to another Member State with a view to opening main proceedings and discharging their debts under that states bankruptcy law. Moreover, tourists can shop for a debtor friendly bankruptcy law the effects of which will apply throughout the EU, including in the home country where the debts were contracted, by virtue of Articles 4, 16, 17 and 25 of the ECIR.

Re Daisytek-ISA Ltd [2003] BCC 562; Klempka v ISA Daisytek SA [2006] BCC 841. See also Case C-

341/04 Re Eurofood IFSC Ltd [2006] ECR I-3813.

3

Witness the furious response of junior creditors to the Wind Hellas restructuring begun during 2009: see

Re Hellas Telecommunications (Luxembourg) II SCA [2009] EWHC 3199 (Ch); M Herman, Abuse of prepack deals could turn Britain into an insolvency brothel The Times (London 18 January 2010); E Moya, London risks becoming brothel for bankruptcy tourists The Observer (London 31 January 2010); R Watts and C Newell, Firms flock to bankruptcy brothel UK The Sunday Times (London 7 March 2010).
4

See e.g. A OSullivan, UK could face wave of bankruptcy tourism (15 August 2009)

<http://www.thisismoney.co.uk/news/article.html?in_article_id=489549&in_page_id=2>; R Singh Bankruptcy tourists exploit UKs lenient insolvency laws Accountancy Age (20 August 2009).

There is reliable evidence that England and Wales has become the bankruptcy venue of choice. According to information obtained from the Insolvency Service, the government agency which has operational responsibility for the network of official receivers who act as trustees of first and last resort in bankruptcy cases, there has been a quiet invasion of German nationals petitioning for their own bankruptcy in England and Wales. The Insolvency Service does not record a debtors nationality and therefore has no firm statistical data identifying bankruptcy orders made on the petition of non-UK Nationals. However, recent surveys of official receivers suggest that up to 200

bankruptcy orders were made on the petition of foreign nationals in the two years ended 31 March 2010, the majority of whom were German. In less than half these cases there was information to suggest that there may have been no real relocation to the UK. To date, 14 orders have been annulled with further applications in the pipeline.5 Although the number of cases involving foreign nationals is tiny relative to the total number of bankruptcies in England and Wales,6 these cases highlight a tension arising from the interplay of different norms. On the one hand, the Treaty on the Functioning of the European Union7 privileges freedom of movement and establishment

Email from Alison Dennis, Senior Policy Advisor at the Insolvency Service on file with authors. See also

the Insolvency Services Technical Manual, an internal best practice guide for official receivers, <http://www.insolvency.gov.uk/freedomofinformation/technical/TechnicalManual/default.htm> Ch 41 (Cross-Border Insolvency European Union) at para 41.65 (Change of COMI) and Official Receiver v Mitterfellner [2009] BPIR 1075 [53]. One of the Deputy Registrars in Bankruptcy has reported that in his experience at least one in the 20-25 debtor petitions filed each day in the High Court relates to a debtor with substantial foreign connections: see J Briggs, Debtor forum shopping (2010) 23(2) Insolvency Intelligence 28, 30.
6

See Insolvency Service, Statistics Release: Insolvencies in the Fourth Quarter 2009 (5 February 2010)

<http://www.insolvency.gov.uk/otherinformation/statistics/201002/index.htm>.
7

Prior to the Treaty of Lisbon coming into force, the EC Treaty.

within an internal market crossing the national boundaries of sovereign states which retain legislative competence in their own territories. Insofar as areas of substantive law remain unharmonised, the possibility of regulatory competition is always present and relocation to take advantage of more favourable law is facilitated. On the other hand, where debtors relocate with a view to discharging their debts under a foreign bankruptcy law, creditor expectations are frustrated, additional burdens are imposed on host institutions, such as the courts and, in England and Wales, the official receivers, and effective administration of bankruptcies in terms of identification and realisation of assets may be rendered more cumbersome and costly to the further detriment of creditors. As the freedom of EU citizens to relocate from one Member State to another is enshrined within the European legal order, the question begged is whether any relocation involving a forum shop, be it temporary or permanent, should be regarded as an undesirable abuse of EU law freedoms or whether this is only so where the relocation is an outright fiction designed to manufacture jurisdiction. Accordingly, the tension between EU law

freedoms and creditor protection resolves into normative questions of whether, and in what circumstances, forum shopping for bankruptcy law is good or bad within the parallel discourses of EU and national policy making. With these questions in mind, this article provides an account of the bankruptcy tourism phenomenon from an English perspective. The article divides into four further sections. In Section II, we consider those structural features of the EU legal framework that make forum shopping for personal insolvency law possible in the first place,

including the ECIR itself, and explain why England and Wales8 has proved to be an attractive tourist destination. This section also attempts briefly to explain why, hitherto, the rising numbers of foreign nationals petitioning for bankruptcy in England and Wales have tended to be German debtors with a professional background. In Section III, we chart how the official receivers and the courts in England and Wales have sought to manage the influx of foreign debtors in terms of legal principle and process drawing on two reported cases, Official Receiver v Eichler9 and Official Receiver v Mitterfellner.10 It will be seen that the institutional response in England and Wales has been twofold. First, the problem of forum shopping debtors has been framed as a problem of distinguishing and policing the line between genuine and fictional relocations. It is thus acknowledged that the genuine are entitled to use English law to release pre-existing debts wherever incurred. Secondly, the courts have shown some signs of institutional resistance by increasing the procedural onus on debtors to evidence their claim to English jurisdiction before a bankruptcy order is made thus raising the barrier to entry. Section IV

illuminates the practical problems, costs and inconvenience associated with forum shopping from a practitioner standpoint with particular reference to the Hagemeister case in which the second-named author acted for a German creditor. In the final section, we explore the good versus bad forum shopping question and consider the scope for
8

Scotland and Northern Ireland, the other two law districts which, together with England and Wales,

make up the United Kingdom, have their own separate personal insolvency regimes albeit there is considerable convergence. The English and Northern Ireland systems are identical in all material respects and, although Scots bankruptcy law retains its distinctive character, reforms of the Bankruptcy (Scotland) Act 1985 brought in by the Bankruptcy and Diligence etc (Scotland) Act 2007 have aligned Scots law with English law on core matters such as the period to discharge.
9

[2007] BPIR 1636. [2009] BPIR 1075.

10

reform of the ECIR. Adopting a creditor perspective, we conclude that the ECIR could usefully be reformed to limit the scope for insolvent debtors to switch their COMI in anticipation of filing for bankruptcy. Pending such reform, we think it conceivable that the tourism phenomenon could accelerate moves towards greater convergence of bankruptcy law within the domestic legal orders of the EU Member States. For the avoidance of doubt, the term bankruptcy is used throughout the article in its English sense to refer exclusively to the insolvency of, and insolvency proceedings relating to, individuals (natural persons) rather than corporations (legal persons).

II. FORUM SHOPPING FOR FAVOURABLE BANKRUPTCY LAW WITHIN THE EUROPEAN UNION

A. Structural factors that facilitate forum shopping EU law freedoms The scope for forum shopping is inherent within the supra-national and domestic legal orders that subsist within the European Union. At the supra-national level, the Treaty on the Functioning of the European Union (formerly the EC Treaty) guarantees freedom of movement, freedom of establishment and freedom to supply services throughout a theoretically borderless Europe without discrimination on grounds of nationality. The rationale of these freedoms in their original guise under the Treaty of Rome was predominantly economic in character. They formed part of the legal apparatus devised to overcome domestic obstacles to the establishment of the single market. So, for example, free movement, as originally conceived, was concerned specifically with the free

movement of workers and the promotion of labour market mobility.11 The introduction of the concept of European Union citizenship by the Maastricht Treaty in 1992 has led to the development of a wider right of EU citizens to move and reside freely within the territory of the Member States. Moreover, under EU law, this citizenship right, which encompasses the right of non-nationals to vote in the host Member State, is not confined to those who are economically active, and has taken on a broader socio-political character that assures equal treatment to all EU citizens on matters falling within the scope of the EC Treaty.12 Thus, the EU law freedoms facilitate mobility between

Member States for economic and non-economic purposes and, in consequence, the exploitation of differences in domestic legal rules and systems.

Divergent insolvency law The ECIR is a coordinating measure adopted originally under Title IV of the Consolidated EC Treaty with a view to the progressive establishment of an area of freedom, security and justice.13 As such, it is a measure for developing judicial

cooperation in civil matters having cross border implications which aims to ensure the compatibility of the rules applicable in the Member States concerning the conflict of laws and of jurisdiction. It does not harmonise the domestic insolvency laws of the Member States save in respect of certain procedural matters concerning the provision of
11

Art 45 of the Treaty on the Functioning of the EU (TFEU). For freedom of establishment and freedom

to supply services see TFEU arts 49 and 56.

12

TFEU art 21; Council Directive (EC) 2004/38 of 29 April 2004 on the right of citizens of the European

Union and their family members to move and reside freely within the territory of the EU [2004] OJ L158/77. See further RCA White, Free movement, equal treatment and citizenship of the Union (2005) 54(4) International and Comparative LQ 885.
13

See now TFEU art 81.

information to creditors and the lodging of claims.14

It merely establishes uniform

private international law rules in relation to insolvency proceedings as regards allocation of jurisdiction, applicable law, recognition of foreign insolvency proceedings and coordination of concurrent proceedings. Given the divergence between the substantive laws of Member States, especially on such matters as security rights and statutory priorities, the framers of the ECIR concluded that it was impractical to introduce a scheme whereby a single insolvency proceeding could be opened having universal scope and effect under its applicable law throughout the EU.15 It follows from this general approach that the ECIR does nothing to mitigate the diversity of domestic bankruptcy laws in relation to matters such as eligibility for bankruptcy relief, estate exemptions, provable debts, contributions by the debtor out of ongoing income and the length of time to discharge. Moreover, local variations in these aspects of bankruptcy law can be expected to be enduring as bankruptcy laws are prone to be culturally specific and path dependent reflecting hitherto deeply held societal views about the moral character of debt accumulation, repayment and forgiveness and the appropriate balance to be struck between debtors and creditors.16 Thus, several jurisdictions including Italy and Greece

14

ECIR arts 39-41. In any event, the EC lacks the legislative competence to effect substantive

harmonisation of Member States substantive insolvency laws via EU level measures.

15

ECIR recitals (11)-(12). See also The Report on the Convention on Insolvency Proceedings, prepared by

Professor M Virgos and ME Schmit (hereafter Virgos-Schmit), EU Council Doc 6500/96, DRS 8 (CFC), 3 May 1996, paras 12-13. On the status of Virgos-Schmit as an authoritative guide to the interpretation of the ECIR see the opinion of Advocate General Jacobs in Case C-341/04 Re Eurofood IFSC Ltd [2006] ECR I-3813 [2].
16

See e.g. R Efrat, Global Trends in Personal Bankruptcy (2002) 76 American Bankruptcy LJ 81; N

Martin, The Role of History and Culture in Developing Bankruptcy and Insolvency Systems (2005) 28 Boston College International and Comparative LR 1. For differences in legal response to consumer bankruptcy between Commonwealth jurisdictions such as Australia, Canada and England and Wales on the

still restrict eligibility for bankruptcy relief to traders and there is considerable divergence in the timing of, and modus operandi for, granting discharge. Forum shopping is

therefore acutely possible in the personal insolvency context for those debtors who have access to sufficient financial and informational resources to be able to engage in systematic pre-bankruptcy planning.17

The effect of main bankruptcy proceedings under the ECIR While the availability of different legal treatments clearly creates scope for arbitrage, it is not sufficient of itself to guarantee that a debtor who has incurred all his debts in Country X will successfully be able to discharge those debts by having recourse to the bankruptcy law of Country Y. Ordinarily, it would be a question for Country Ys private

international law whether or not a debtor from Country X is eligible to file in Country Y and a question for Country Xs private international law whether Country X will recognise the effects of Country Ys bankruptcy law. Within a system of unharmonised private international law, Country X may conceivably object to the effects of Country Ys law on public policy grounds and refuse recognition. The ECIR, however, creates

one hand and Scandinavian and continental European jurisdictions on the other hand see JS Ziegel, Comparative Consumer Insolvency Regimes A Canadian Perspective (Hart Publishing, Oxford and Portland, Oregon 2003). See also JJ Kilborn, Comparative Consumer Bankruptcy (Carolina Academic Press, Durham NC 2007). The effects of globalisation and international lawmaking initiatives may have led to greater global convergence of law and policy in the field of corporate insolvency. On the role of UNCITRAL in this respect see S Block-Lieb and T Halliday, Harmonization and Modernization in UNCITRALs Legislative Guide on Insolvency Law (2007) 42 Texas Intl LJ 475.
17

For an attempt by a debtor whose domicile of origin was England and Wales to avoid bankruptcy by

sheltering in a jurisdiction (Mauritius) where only traders can be made bankrupt see Henwood v Barlow Clowes [2007] EWHC 1579 (Ch), [2007] BPIR 1329 (especially [56]-[57]), revd [2008] EWCA Civ 577, [2008] BPIR 778.

10

uniform rules on the allocation of jurisdiction, applicable law and inter-state recognition which, in practice, improve the prospects for successful shopping. This is so even though the intention of the framers, stated in the preamble at recital (4), was to avoid incentives for the parties to transfer assets or judicial proceedings from one Member State to another, seeking to obtain a more favourable legal position.18 The point can be illustrated by a brief consideration of the scheme of the ECIR. The ECIR applies to debtors whose COMI is situated in the EU and encompasses specified forms of collective insolvency proceeding which are defined in articles 1-2 and listed in Annex A and include the principal personal insolvency regimes of the Member States, Denmark excepted. By virtue of articles 3, 4, 16 and 17, the courts of the Member State within which the debtor has his COMI have jurisdiction to open a main insolvency proceeding governed by that Member States law (lex fori concursus) which must be recognised and given full effect without further formality in the other Member States in accordance with the principle of mutual trust.19 This means that if a debtor moves his COMI from one Member State (Country X) to another (Country Y) and he is otherwise eligible under the second states law20 to apply for bankruptcy, the bankruptcy will have

18

See also Virgos-Schmit (n 15) para 7. Cf. R Hnel, Take the Debt Drain Discharge-tourism Coming

Up Roses? INSOL World (First Quarter 2010) 30-31 arguing that the transfer of an individuals COMI with a view to a more favourable bankruptcy regime does not involve a transfer of assets or judicial proceedings and so does not conflict with recital (4). Similarly, Chadwick LJ in Shierson v VlielandBoddy [2005] EWCA Civ 974, [2005] 1 WLR 3966 at [46] suggested that recital (4) cannot be read as restricting the ability of the debtor to choose where he carries on the administration of his interests.
19

ECIR recital (22) and see the preliminary ruling of the European Court of Justice in Eurofood (n 15)

[38]-[44]. ECIR art 25 also requires other Member States to recognise judgments concerning the course and closure of insolvency proceedings without further formality.
20

ECIR art 4(2): The law of the State of the opening of proceedings shall determine the conditions for the

opening of those proceedings

11

universal effect and impact on the rights of creditors wherever they are situated. The practical consequence is that Country Xs law on such matters as the composition of the bankruptcy estate, claims that can be lodged in the bankruptcy and the timing and scope of discharge are exported to, and apply throughout, the other Member States including Country Y.21 The universal effect of main proceedings is tempered by a series of schematic features:22 provision for the opening of parallel territorial or secondary winding-up proceedings in countries where the debtor has an establishment restricted to the debtors assets within those countries;23 carve-outs excluding or modifying the effects of the lex fori concursus on specified matters such as security or quasi-security rights, payment systems, financial markets contracts, employment contracts and rights in immoveable property subject to public registration;24 and a limited ground for Member States to refuse to recognise foreign insolvency proceedings where the effects of such recognition would be manifestly contrary to their public policy.25 In seeking to protect local interests, expectations and transactions, these aspects of the ECIR reflect realpolitik and allow residual scope for Member States to resist wholesale importation of bankruptcy norms from other countries and systems.

21

ECIR art 4(2). Note, in particular, arts 4(2)(b), (g), (h), (j), (k). Article 25 can also be prayed in aid to

export the effect of a court order discharging the debtor or the declaratory effect of a certificate of the type issued by the English court confirming the bankrupts automatic discharge.
22

The model is one of modified universalism: see I Mevorach, Insolvency Within Multinational

Enterprise Groups (OUP, Oxford 2009) 65-81, 89-93.

23 24 25

ECIR arts 3(2), (3), 27-29. ECIR arts 5-15. ECIR art 26.

12

However, given that a natural persons COMI is mobile, the ECIR has made it easier for debtors to shop for a favourable bankruptcy regime. A main proceeding opened in the host country (broadly speaking) has universal effect and, because of the principle of mutual trust, it is difficult for creditors in the debtors country of origin to object without incurring the cost and inconvenience of challenging the host countrys jurisdiction. Furthermore, the tempering provisions of the ECIR may be of little comfort to creditors left behind if the debtor has no establishment26 in the country of origin to support secondary proceedings and, in any event, the debtor may have no assets there (or have arranged his affairs so that there are no assets there). The ECIR also contains no carve out mitigating the effects of discharge under the lex fori concursus on debts contracted and incurred under some other applicable law.

COMI and COMI mobility Apart from the presumption that the COMI of a corporate debtor is in the place of its registered office in the absence of proof to the contrary, article 3 neither defines COMI nor prescribes a list of indicative factors. COMI is an autonomous concept of EU law that should be interpreted in a uniform manner independently of national legislation.27 However, the only textual clue is the statement in the preamble at recital (13), deriving from Virgos-Schmit, that COMI should correspond to the place where the debtor conducts the administration of his interests on a regular basis and is therefore ascertainable by third parties. According to the European Court of Justice, COMI must

26

Defined in ECIR art 2(h) as any place of operations where the debtor carries out a non-transitory

economic activity with human means and goods.

27

Eurofood (n 15) [31].

13

be identified by reference to criteria that are both objective and ascertainable by third parties in order to ensure legal certainty and foreseeability concerning the determination of the court with jurisdiction to open main insolvency proceedings and, by virtue of article 4, the insolvency law which is to apply.28 Virgos-Schmit contains only limited guidance as regards the COMI of individuals stating that COMI will in the case of professionals be the place of their professional domicile and for natural persons in general, the place of their habitual residence.29 It is clear within the scheme of the ECIR that a debtor can only have one COMI at any one time30 as the identification of a single jurisdiction as the appropriate forum for main proceedings depends on COMI being exclusively in one place. Thus, allocation of jurisdiction under the ECIR is modelled on the assumption that the lives and activities of transnational debtors will have an identifiable core and periphery. As with multi-branch companies, while the geographical centre of gravity may often be clear, there will always be cases at the margins involving individual debtors in which more than one country has a good claim to being the place of the COMI at a given point in time. One problem is that some transnational debtors maintain a permanent family residence in one country (where they might be said to be habitually resident) but pursue their profession or business activities elsewhere (where they might be said to be professionally domiciled). It will not always be easy to determine whether the COMI is in the country of principal residence or in the country where the debtors profession or business is ordinarily

28

Eurofood (n 15) [33]. For further elucidation see Re Stanford International Bank Ltd [2009] EWHC

1441 (Ch), [2009] BPIR 1157 [59]-[70], affd [2010] EWCA Civ 137.
29 30

Virgos-Schmit (n 15) para 75. Stojevic v Official Receiver [2006] EWHC 3447 (Ch), [2007] BPIR 141 [6].

14

transacted.31 Other debtors may conceivably have residences in several jurisdictions and create the impression of being simultaneously everywhere and nowhere.32 Much may depend on the composition of the debts and any evidence from major creditors concerning their perceptions of the debtors home base.33 As well as raising inevitable interpretive difficulties at the margins, a transnational debtors COMI can change. Thus, the English courts have ruled that the mere fact that the debtors debts were incurred entirely in Country X where the creditors are located will not of itself preclude a court in Country Y from opening main insolvency proceedings if the debtor has demonstrably moved his COMI to Country Y.34 Consistent with the EU law freedoms outlined earlier, debtors are, in principle, free to choose where they carry on the administration of their interests. Accordingly, there is no outright prohibition in EU law on a debtor switching his COMI from Country X to Country Y having already incurred debts in Country X and it seems that the debtor is free to switch COMI for what may be a self-serving purpose.35

31

See e.g. Stojevic (n 30) in which the COMI of a Croatian citizen who had no permanent right of residence

in the UK but spent over 40% of his time in the UK running the business of an English registered company as a shadow director was held to be in Austria where he did have residence rights and maintained a family home. Cf Eichler Official Receiver v Eichler [2007] BPIR 1636.
32 33

See e.g. Skjevesland v Geveran Trading Co Ltd [2002] EWHC 2898 (Ch), [2003] BCC 391. See e.g. the inference drawn in Stojevic (n 30) [72] about the debtors dealings with his principal creditor,

an Austrian bank. Note, however, there is no scope for evidence to be adduced from creditors in connection with a debtors petition given existing practice and procedure: see Sections IIB and IIIC.
34 35

Shierson v Vlieland-Boddy (n 18) [41]; Eichler (n 31) [15], [20]. Shierson v Vlieland-Boddy (n 18) [42], [48]-[50], [55]. Note in particular at [49]: [T]here is nothing in

[Virgos-Schmit] to suggest that the centre of main interests, once established in state A, remains in state A notwithstanding the debtors relocation to state B, until, say, all his debts in state A have been paid. This view of the ECIR is not necessarily shared in other jurisdictions where courts have been prepared to restrict pre-bankruptcy COMI moves by reference to the anti-forum shopping sentiment in recital (4): see J

15

A COMI switch must nevertheless have some quality of permanence in order to satisfy the EU law principle of third party ascertainability and, according to the English Court of Appeal in Shierson v Vlieland-Boddy, where there are grounds for suspecting that a debtor has deliberately sought to change his COMI at a time when he is insolvent, or threatened with insolvency, so as to change the insolvency law that will apply to him in respect of his existing debts, this will trigger heightened scrutiny of the facts said to give rise to the change in order that the court can be satisfied that the change is based on substance and not an illusion.36 However, there is no authority specifying a minimum period of time for the purposes of establishing COMI and the fact that the debtors residence is only temporary is not necessarily decisive.37 It is also clear from the European Court of Justices decision in Re StaubitzSchreiber38 that the cut-off point for switching COMI is the date on which the request to open the insolvency proceedings is received by the relevant insolvency court. In

Staubitz-Schreiber, a German debtor applied to open voluntary insolvency proceedings at her local court in Germany. Before the application was determined, she moved to live and work in Spain. The German courts refused to grant the application for want of jurisdiction because, by the time the application was considered, the debtors COMI was in Spain. On a reference by the German Bundesgericht for a preliminary ruling, the European Court of Justice held that the German court retained jurisdiction under the ECIR in relation to her bankruptcy notwithstanding that her COMI had moved to another
D Weber, The rise of insolvency tourism (LLM thesis, University of Leiden) <http://bobwessels.nl/wordpress/?p=918>.
36 37 38

Shierson v Vlieland-Boddy (n 18) [55]. See also at [46]. Eichler (n 31) [19]. Case C-1/04 [2006] ECR I-701.

16

Member State in the period between the filing of the request and the opening of proceedings.39 The Courts grounds for concluding that the court first seised should retain jurisdiction were that: (i) otherwise the debtor could change bankruptcy jurisdiction and applicable law in defiance of the anti-forum sentiments expressed in recital (4) of the preamble; (ii) such a transfer of jurisdiction would be contrary to the objective, also stated in the preamble, of efficient and effective cross-border insolvency proceedings as it would force creditors to be in continual pursuit of the debtor wherever she chose to establish herself and tend to prolong the proceedings; and (iii) it would ensure greater judicial certainty for creditors who have assessed insolvency risk with regard to the place where the COMI was situated when they entered into a legal relationship with her. However, Staubitz Schreiber only rules out forum shopping after a request to open main proceedings has been filed. Although the reasoning could form the basis of a broader anti-avoidance rule, the question referred to the Court was narrow and the decision does not rule out COMI switching before the filing of a request as part of a pre-bankruptcy planning strategy. Thus, as is the case in the corporate context,40 the
39

In the earlier English ruling in Shierson v Vlieland-Boddy (n 18) [39], [55], Chadwick LJ held that the

COMI fell to be determined at the time that the court is required to decide whether to open insolvency proceedings rather than when the request was filed. It is clear under the doctrine of EU law supremacy that this decision on timing cannot stand with Staubitz-Schreiber in cases where the debtor moves COMI after filing the request but before the decision opening proceedings is made. The correctness of StaubitzSchreiber appears to have been accepted by the English High Court: see Eichler (n 31) [16].
40

J Armour, Who Should Make Corporate Law? EC Legislation versus Regulatory Competition (2005) 58

Current Legal Problems 369; G McCormack, Jurisdictional Competition and Forum Shopping in Insolvency Proceedings [2009] Cambridge LJ 169, 179-180, 191-192; G McCormack, Reconstructing European insolvency law putting in place a new paradigm (2010) 30 Legal Studies 126; WG Ringe, Forum Shopping under the EU Insolvency Regulation (2008) 9 European Business Organization LR 579; S Moore, COMI migration: the future (2009) 22(2) Insolvency Intelligence 25. See also the controversy surrounding the Wind Hellas restructuring in which the Luxembourg vehicle that operated a Greek

17

ECIR has been a driver of forum shopping for favourable insolvency law because debtors are ostensibly free under EU law to move their COMI before filing for bankruptcy.

B. The relative attractiveness of England and Wales as a tourist destination England and Wales has proved to be an attractive destination for bankruptcy tourists because our bankruptcy law and process is perceived to be significantly more debtor friendly in comparison to that in other Member States. There are three main aspects to this debtor friendliness:

1. An automatic and generous discharge of bankruptcy debts. Provision for automatic discharge was introduced in England and Wales in 1976 and, since 1 April 2004, debtors have ordinarily been entitled to automatic discharge no later than one year from the bankruptcy order.41 The scope of the discharge is generous, extends to tax debts and is subject to few exceptions.42 The quid quo pro is that debtors nonexempt assets fall into the bankruptcy estate43 and they can be required to make payments to the estate out of ongoing discretionary income exceeding what is

telecoms business relocated to England and Wales with a view to a pre-pack administration (references in n 3).
41

Insolvency Act 1986 (IA 1986) ss 279(1), (2). For further background see A Walters, Personal

Insolvency Law After the Enterprise Act: An Appraisal (2005) 5 Journal of Corporate Law Studies 65.
42

IA 1986 ss 281, 382; Insolvency Rules 1986 SI 1986/1925 (IR 1986) r 12.3. As a matter of English

private international law the discharge is regarded as encompassing debts owed to foreign creditors even where the debt is governed by foreign law or was payable abroad: see Fletcher (n 1) 108. The debtor can apply to the court for a certificate confirming automatic discharge under IR 1986 r 6.220(1) which, although merely having declaratory or confirmatory effect, is useful for purposes of international recognition.
43

IA 1986 ss 283, 283A, 306-309.

18

necessary for meeting their and their families reasonable domestic needs for up to three years.44 By way of contrast, in Germany, debtors must surrender their nonexempt assets and, for six years, formally assign a portion of income, determined by reference to a statutory income scale, to a court-appointed trustee. It is only at the end of this six-year so-called good behaviour period that debtors are eligible to apply to court for discharge of their remaining debts and even then there is scope for creditors to object.45 The conditioning of discharge on long term compliance with mandatory payment plans is also a pronounced feature of other continental European and Scandinavian jurisdictions.46 Elsewhere, in Ireland, debtors must wait 12 years before they can apply to court for discharge unless, in the meantime, they are able to procure payment of their bankruptcy debts and expenses in full or obtain the consent of all their creditors or, in cases where estate assets have been fully realised, the creditors have received 50 per cent of their claims.47 2. Broad eligibility. The only substantive eligibility requirement that debtors must satisfy before petitioning for bankruptcy in England and Wales is that they are unable to pay their debts.48 The regime is open to traders and consumers. This contrasts

44

IA 1986 ss 310-310A. Note also that discharge is not conditional on full compliance with mandatory

income payments as is the case in other jurisdictions.

45

Kilborn (n 16) 77-81. See also S Braun, German Insolvency Act: Special Provisions of Consumer

Insolvency Proceedings and the Discharge of Residual Debts (2005) 7 German LJ 59; A Tashiro, Bankruptcy tourism Recovery (Winter 2009) 23; and, for the origins of the current German law, CG Paulus, The New German Insolvency Code (1998) 33 Texas Intl LJ 141.
46 47

Kilborn (n 16) 63-95; Ziegel (n 16) 133-143. Bankruptcy Act, 1988 (Ireland) s 85. It is no wonder then that the Irish bankruptcy procedure, a throw

back to the English Bankruptcy Acts of 1883 and 1914, is seldom used. See further B Holohan, Major Shake up of Bankruptcy Law in the Offing? INSOL World (First Quarter 2010) 36-37.
48

IA 1986 s 272.

19

with jurisdictions that restrict access to bankruptcy relief to traders only such as Greece and Italy. 3. Ease of process. The voluntary bankruptcy procedure in England and Wales has hitherto been extremely process friendly compared to other jurisdictions. The only procedural requirements that have to be met are the filing of the petition and statement of affairs49 together with the payment of the court fee and the mandatory non-refundable deposit (which covers the administrative costs of the official receivers initial processing of the case).50 It is common for debtors to make an appointment to attend court, complete and file the paperwork and obtain a bankruptcy order all on the same day.51 Debtors are not required to give creditors advance notice. There are no mandatory pre-petition process hurdles of the type that have to be cleared in other jurisdictions such as requirements to access debt counselling services or renegotiate with creditors.52 Furthermore, the adversarial nature of English court process means that our courts generally accept material in the petition and statement of affairs as being prima facie true unless challenged by a party to the proceedings or,
49 50

IA 1986 s 272; IR 1986 rr 6.37-6.42, 6.67-6.72. The statement of affairs must be verified by affidavit. The Insolvency Service increased its fees for cases arising from bankruptcy petitions presented on or

after 6 April 2010. For a debtors petition the deposit increased from 360 to 450 making it relatively expensive to go bankrupt unless the debtor is financially eligible for a debt relief order which is much cheaper to access.
51

IR 1986 r 6.42(2) contemplates same day orders. In practice, as bankruptcy volumes have increased

debtors have experienced delays in obtaining appointments to file their paperwork at some courts. This has led the government to propose the replacement of court initiated voluntary bankruptcy with an administrative process operated by the official receivers. See Insolvency Service, Consultation on Reforming Debtor Petition Bankruptcy and Early Discharge from Bankruptcy (November 2009) <http://www.insolvency.gov.uk/insolvencyprofessionandlegislation/con_doc_register/Debtor%20Petition% 20Reform%20Final%20Nov%2009.pdf> 10-11.
52

Kilborn (n 16) 19-48.

20

in the case of bankruptcy, some other interested party such as a creditor or the official receiver. Thus, the practice has been for statements that the debtors COMI is in England and Wales, which the debtor is required to make in the pro forma debtors bankruptcy petition,53 to be accepted at face value54 even though the debtor can petition without having to give notice to other interested parties, such as creditors, who will only learn of the bankruptcy once the order has been made. From the standpoint of many continental jurists, these features of British process may be considered somewhat casual or cavalier, especially given the legal significance accorded to main insolvency proceedings by the ECIR. Similar concerns have been voiced from the continental perspective periodically about the English tendency for orders opening insolvency proceedings to be made without accompanying reasons in the order.55 Be that as it may, it has been relatively straightforward for debtors to access bankruptcy relief in England and Wales and, despite cries of foul from distinguished continental commentators such as Professor Dr Christoph Paulus,56 the

53 54 55

See <http://www.insolvency.gov.uk/pdfs/forms/form6-27.pdf>. See e.g. Eichler (n 31) [12]. G Moss, Group Insolvency Choice of Forum and Law: The European Experience under the Influence

of English Pragmatism (2007) 32 Brooklyn J Intl L 1005, 1010-1011. See also the criticisms levelled at English bankruptcy process by the Higher Regional Court in Vienna addressed by Registrar Jacques in Stojevic (n 30).
56

Stojevic (n 30) [17]. Professor Dr Pauluss objection to the bankruptcy order in Stojevic on procedural

public policy grounds seems misplaced bearing in mind the case arose from a hostile creditors petition and the debtor had been given a full opportunity to contest jurisdiction before he eventually, and successfully, applied for annulment of his English bankruptcy on jurisdictional grounds. That said, in fairness to Paulus, he would argue that the principle of mutual trust requires more than a cursory and transparent assessment ex ante of the courts claim to international jurisdiction under ECIR art 3: see the European Court of Justices preliminary ruling in Eurofood (n 15) [41]. For signs that the English courts may be adapting their processes to introduce greater ex ante scrutiny see Section IIIC.

21

scope for other Member States to refuse recognition of an English bankruptcy order under article 26 on grounds of procedural public policy are restricted by the principle of mutual trust.57 Furthermore, it seems unlikely that foreign courts would refuse to recognise the effects of an English discharge where their own bankruptcy system allows for debt forgiveness in principle even if apparently on less favourable terms.58

In sum, England and Wales offers a combination of substantive and procedural selling points that have made it attractive to inbound shoppers.

C. The profile of foreign nationals petitioning for bankruptcy in England and Wales Information gleaned from the Insolvency Service to which we referred at the outset suggests that foreign nationals petitioning for bankruptcy in England and Wales have tended to be of German nationality. There has been some speculation that the Irish Republic could become a source of inbound tourists given its punitive bankruptcy law and geographical proximity to the UK, but there is no hard evidence of such a trend.59
57

ECIR recital (22). The principle requires the courts of other Member States to recognise the decision to

open main proceedings without conducting a review or reassessment of the merits of that decision and assumption of jurisdiction. See further the preliminary ruling of the European Court of Justice in Eurofood (n 17) [38]-[44].
58

See reference to the German Bundesgerichts ruling of 18 September 2001 (IX ZB 51/00) in Tashiro (n

46). In that ruling the German court recognised the effect in Germany of a discharge obtained by a German debtor under French law even though, as a result, debts incurred in Germany were discharged significantly more quickly than would have been the case under German law.
59

See e.g. __ Bankruptcy tourism could be next big thing <http://insolvencyjournal.ie/news/09-04-

17/Bankruptcy_tourism_could_be_next_big_thing> In theory, it would be possible for debtors in the Irish Republic to relocate to Northern Ireland, which forms part of the United Kingdom, in order to take advantage of a bankruptcy regime which is identical in all major respects with that in England and Wales. In practice, however, it appears that debtors and creditors have persistently avoided the bankruptcy law

22

Again, while there is no conclusive evidence, there are reasons to suppose that these foreign nationals tend characteristically to be middle class professionals or business people as it is debtors fitting this profile who will generally have the resources (informational and financial) and sophistication needed to engage in legal arbitrage. Furthermore, professionally qualified debtors may well have qualifications in their home country that will be recognised in other Member States under the passport regime which springs from the fundamental freedom to supply services throughout the EU.60 It may be thought curious that the shopping that has occurred to date has been primarily a German pursuit. One explanatory variable is the growing number of fee charging intermediaries based in Germany who actively market the benefits of English bankruptcy as a debt solution for German citizens and offer relocation services that include arranging accommodation, opening bank accounts, obtaining credit cards and assisting debtors in applying for National Insurance numbers.61 As yet, this supply side development does not seem to have been matched in other Member States to anything like the same extent. It is conceivable that the numbers of non-German foreign nationals
resorting instead to non-bankruptcy law and other mechanisms such as schemes of arrangement. Irish bankruptcy law is currently under review: see Holohan (n 47). See also T Harding, Bankruptcy Tourism (2010) 15(1) Bar Review 6.
60

For example, the debtor in Eichler (n 30) was a qualified doctor. In the course of his practice the second-

named author has encountered medical practitioners, dentists, accountants and other white collar professionals, who take on part time or locum work in England assisted by the services of intermediaries described in the text to n 61.
61

The following websites illustrate that the advisory market in Germany has reached cottage industry

proportions: <http://www.insolvenz-agentur.com/>; <http://www.insolvenzberatung.tel>; <http://wdvermarktung.de/>; <http://www.teleconsulting.ltd.uk>; <http://www.business-schuldenfrei.de>; <http://www.firma-ausland.de>. Fees start from around 250 for an initial consultation but may be as much as 8,000-15,000 for a full relocation service and assistance with the English court process.

23

relocating to England and Wales could expand as a result of network effects which may raise the profile of English bankruptcy and increase the provision of advisory services to meet demand among relatively sophisticated debtors in other jurisdictions.

III. MANAGING BANKRUPTCY TOURISM IN ENGLAND AND WALES: EMERGING PRINCIPLE AND PRACTICE

A. Challenging the English courts jurisdiction over foreign debtors English bankruptcy procedure has proved conducive to inbound forum shopping. The pro forma debtors petition is ill equipped to filter out questionable cases. The debtor is required to state where his COMI has been located, the notes to the form recording that COMI should correspond to the place where the debtor conducts the administration of his interest on a regular basis. Debtors are also required to provide their home address, occupation, any former address at which they may have incurred debts or liabilities still unpaid or unsatisfied, to confirm that they have resided or carried on business for the greater part of six months immediately preceding the presentation of [the] petition in the local court district, and to admit insolvency giving particulars of any bankruptcy adjudication in the five years ending with the date of the petition.62 However, these statements are not sworn it is only the supporting statement of affairs that has to be verified by affidavit and same day bankruptcy orders have been the norm.63 As there is no requirement for creditors to be notified of a debtors petition, jurisdiction can only

62 63

These requirements reflect IR 1986 rr 6.37-6.40A. The bankruptcy order is made by a District Judge or Master. In the Hagemeister case (considered further

in Section IV below), the same day procedure was followed.

24

be challenged ex ante if the court decides of its own motion to conduct a full enquiry into the debtors circumstances. For these reasons, the majority of challenges to date have been pursued by the official receiver or creditors as applications to annul the bankruptcy on the ground that the order should not have been made for want of jurisdiction.64

B. Eichler and Mitterfellner In the two leading reported cases, Eichler and Mitterfellner, applications for annulment were made by the official receiver.65 Before we consider these cases further, we need to say a word about the Insolvency Services approach to tourism cases as the exercise of the official receivers regulatory discretion has naturally shaped the courts frame of reference. The official response to debtor forum shopping has been unenthusiastic. On the whole, cases involving foreign debtors are more costly to administer because of the crossborder dimension and language differences may make it difficult to elicit information even from debtors who co-operate. There is no differential between the fees charged by the official receiver for administering the affairs of a foreign bankrupt and a home bankrupt. The fall out from foreign bankruptcies has also added to the burden on the courts.66 The Hagemeister case considered further below provides a graphic illustration of this. However, the Insolvency Services policy, influenced we suggest by the

64

IA 1986 s 282(2). Under the principle of mutual trust, aggrieved creditors in the original home country

are compelled to incur the costs of challenging the bankruptcy order in the English court. Hence, creditors are usually keen to persuade the official receiver to make the annulment application.
65 66

See Official Receiver v Eichler (n 31); Official Receiver v Mitterfellner (n 5). For an insight into the implications of rising bankruptcy numbers for the workload of the Bankruptcy

Registrars see Stojevic (n 30) [22].

25

Vlieland-Boddy decision,67 is to take action only in cases where it is demonstrable that the debtors relocation is a fiction or sham. Implicit in this approach is the view that genuine relocation in exercise of EU law freedoms which, in line with Staubitz-Schreiber occurs before the filing of any request to open main proceedings in the country from which the debtor has migrated, cannot safely be restricted by UK domestic law even where the debtors principal motivation for moving COMI is to take advantage of a more favourable bankruptcy law.68 Thus, in both Eichler and Mitterfellner the official

receivers case was that the debtors English COMI was false and his real COMI was in Germany.

Eichler The debtor moved to England from Germany in October 2006 and was living in temporary accommodation provided by an English company that employed him as a locum radiologist. Less than four months after moving to England he filed for

bankruptcy on the basis of an English COMI. His statement of affairs disclosed no assets. All three of his creditors were in Germany. Of these, it appears that two were former business partners who had obtained a judgment in Germany against him for 200,000. The official receivers case was that the debtors presence in England was merely temporary and that his COMI was in Germany. His wife still lived in Germany

67 68

See text at nn 33-37. N Howard, Overview of personal insolvency Recovery (Winter 2009) 20. Consistent with this policy

the UK government has pursued successful public interest winding-up proceedings against a number of companies found to have assisted foreign debtors in manufacturing false COMIs (email from Alison Dennis, Senior Policy Advisor at the Insolvency Service on file with authors). See also <http://bankruptcyandinsolvency.blogspot.com/2009/04/bankruptcy-tourism-and-medicon-limited.html>.

26

and his business affairs and creditors were in Germany. The debtors case was that he had moved to England to work as an EU qualified doctor, as he was entitled to do, and was working here permanently. Chief Registrar Baister held that the debtor had been free to change his COMI and that he had done so. There was no evidence to refute his claim that he was working permanently in England and therefore no basis on which the court could conclude that his presence was merely temporary or that he was conducting the administration of his interests on a regular basis anywhere other than in England.69 The fact that the debts were incurred in Germany and that there might be practical difficulties in investigating the debtors affairs and administering his estate were not legally relevant.70 The Chief Registrar remarked in his judgment that the general practice of the court is to accept at face value the evidence sworn in support of such petitions but to make inquiries of the debtor if it appears that there is no justification for invoking the jurisdiction adding that:

[i]t is unfortunate therefore that I find myself having to decide this case on the basis of very thin evidence and very limited submissions as to the law.71

69

Eichler (n 31) [18]. The Chief Registrar added obiter that even were the debtors presence temporary that

would not necessarily prevent his COMI from being in the UK though [c]ommon sense would seem to indicate that a few days (or even a few weeks) would be unlikely to suffice because that would be at odds with conducting the administration of ones interests in a place on a regular basis (as well as being at odds with the idea of an habitual residence).
70 71

Eichler (n 31) [15], [21]. Eichler (n 31) [12].

27

From this it can be inferred that the manner in which the application was presented72 and the lack of evidence to undermine the debtors claim to an English COMI may have affected the outcome. Notwithstanding the evidential difficulties that faced the Chief Registrar, Eichler was disappointing from the standpoint of practitioners, creditors and the official receiver. There was an allegation that the debtor had transferred a property in Germany into his wifes name before the bankruptcy and the official receivers view that it would have been more practically convenient and less costly to challenge this transaction in German proceedings is difficult to contest. As already indicated, however, the Chief Registrar was not swayed by questions of practical convenience. Thus, despite being a marginal case, Eichler suggested that the courts would not look behind evidence suggesting that the debtor had genuinely moved to England and Wales in the exercise of EU law freedoms in the absence of evidence to the contrary.73 Furthermore, it made clear that forum conveniens arguments were simply off point.74 The only relevant question was whether the debtor had made a genuine COMI switch.

Mitterfellner The debtor owned and ran a caf in Germany but the business failed and he was substantially indebted to his business creditors. His evidence was that he had moved to

72

The debtor appeared in person and the official receiver was self-represented so the case was not

presented and argued by counsel.

73 74

Which is unlikely to be available to the official receiver without troublesome investigation. See, by analogy, Case C-281/02 Owusu v Jackson [2005] ECR I-1383 restricting the scope of forum non

conveniens in the context of transnational civil litigation falling within what is now Council Regulation (EC) 44/2001 [2001] OJ L12/1.

28

live in Hastings in the south of England in the summer of 2007 to pursue a training opportunity with the English affiliate of an Austrian company. Six months later, in January 2008, he filed for bankruptcy in the Hastings County Court having de-registered as a resident of the German town of Rosenheim where he had previously carried on his business.75 The official receivers subsequent application for an annulment on the basis that the debtor had falsely claimed that his COMI was in the UK was fully argued with both parties represented by counsel. The debtor was cross-examined on his evidence through an interpreter. The application was again heard by Chief Registrar Baister. The legal principles were largely common ground between the parties both counsel drawing primarily on the Vlieland-Boddy decision in their skeleton arguments.76 The issue for decision was

therefore framed in much the same way as Eichler: taking into account all the evidence had the debtor genuinely moved his COMI to the UK? The Chief Registrar ruled that at the relevant time the debtors COMI had not been in Hastings or anywhere else in the UK. The Hastings County Court therefore had no jurisdiction and the bankruptcy was annulled. The debtors credibility was undermined by inconsistencies between his

written evidence and oral testimony given under cross-examination. In his favour, there

75

Under German law individuals are obliged to register with their local town hall. Registration fixes their

legal domicile for the purposes of service of legal process, regardless of physical location, until they deregister. There are criminal penalties for failing to register or de-register and individuals risk being deemed served with legal process if they move elsewhere without de-registering.
76

See text at nn 33-37. Thus, it was common ground that the date on which the COMI is to be established

is the date when insolvency proceedings were opened. This cannot stand with Staubitz-Schreiber (n 38) in cases where there is a gap between request and opening and the debtor moves in the gap. The point was not material in Mitterfellner as the petition was presented and the order made on the same day.

29

was third party evidence supporting his claim to have resided at various addresses in Hastings. However, the court placed greater weight on evidence relating to the debtors employment prospects, the opening of UK bank accounts months after he claimed to have moved to Hastings, three documented return trips from Germany to the UK at times when the debtor claimed to be living permanently in England and his de-registration in Rosenheim the day before he presented his bankruptcy petition claiming to have resided in Hastings for the greater part of the preceding six months. The inference drawn was that the debtor had sought to create the impression of a greater connection with the UK than was in fact the case. Aside from the jurisdictional question, the standard of disclosure to be expected from debtors petitioning for bankruptcy was considered, the Chief Registrar concluding in the alternative that there [was] ample reason to annul [the] bankruptcy order based on the false or misleading information which [the debtor] gave to the court when applying for it.77 This alternative ground offers a wider, more discretionary route to annulment in cases involving foreign debtors than lack of jurisdiction. It rests on the principle that a party seeking ex parte relief may be deprived of the relief obtained if it was procured on the basis of false information or non-disclosure. In applying this principle in

Mitterfellner, the Chief Registrar held that the standard of disclosure expected by a debtor petitioning for bankruptcy relief was at the same high level as that demanded of an applicant for interim injunctive relief such as a freezing order.78

77

Mitterfellner (n 5) [65]. The official receiver had not relied on this ground in the application but it had

emerged during cross-examination: see paras [3], [68].

78

Mitterfellner (n 5) [65]-[69]. Substantial reliance was placed on the Court of Appeal decision in Brinks

Mat Ltd v Elcombe [1988] 1 WLR 1350.

30

Taking into account contextual factors, we doubt whether interim injunctions and debtor bankruptcy petitions can be treated as equivalents. The only formal evidence given by a debtor is in the pro forma affidavit verifying his statement of affairs. The facts in a debtors bankruptcy petition are not required to be verified by affidavit or witness statement, merely by signature. The only material statements the petitioner is required to make are my centre of main interests has been at [address] and I have for the greater part of six months immediately preceding the presentation of this petition [resided at] [carried on business at] [address] within the district of [court].79 The only guidance given on the form is the statement: centre of main interest should correspond to the place where the debtor conducts the administration of his interests on a regular basis. Debtors invariably complete the paperwork themselves with limited guidance from court staff. Contrast this with an application for an interim injunction where the applicant will be legally advised, all the evidence verified by statement of truth or affidavit (the implications having been carefully explained to the deponents) and the obligation to make full and frank disclosure of all material points weighing for and against the applicant are well understood. We suggest then that the preparation and presentation of a pro forma debtors petition and an application for a freezing order are at opposite ends of a wide spectrum. That said, in mandating full disclosure, the Mitterfellner duty can be viewed as an appropriate device designed to raise the barrier to access and to flush out issues ex ante at the petition stage rather than ex post on an annulment application. In this respect, it reflects the increasing tendency of the English courts to scrutinise

79

There are some other minor requirements, e.g. to state occupation (if any) and the nature of any business:

IR 1986 r 6.38(1).

31

bankruptcy petitions by foreign nationals more closely before an order is made, a point to which we now turn.

C. Current court practice and procedure In Shierson v Vlieland Boddy the Court of Appeal indicated that, while debtors may choose to move COMI, if there are grounds for suspecting that they have done so deliberately when already insolvent, or threatened with insolvency, the court will need to scrutinise the facts said to give rise to the change to be satisfied that the change is not illusory and has the necessary element of permanence.80 It seems that, in the light of cases like Eichler and Mitterfellner, the courts have begun to adjust their procedure at the petition stage adopting what may be described as a more quasi-inquisitorial approach. The practice currently in the High Court is for the petition to be adjourned pending production by the debtor of further evidence on such matters as accommodation, employment and transactions on bank accounts with a view to establishing at the outset the genuineness of the COMI switch. It is not uncommon for the Registrar to question debtors about their circumstances having considered the paperwork and additional evidence furnished in support of the claim to a UK COMI.81 This practice has started to spread from London to the regions. The secondnamed authors firm has been involved in one such case during 2010 involving a German national, Re Stbing-Exner (unreported) in the Leicester County Court. Frau Stbing80 81

Shierson v Vlieland-Boddy (n 18) [46], [55]. Briggs (n 5) 30. In another move to increase scrutiny at the petition stage, David Richards J, the

presiding Chancery judge on the northern circuit, instructed the Manchester courts (in a letter in June 2010 referred to in a court newsletter of which the authors have had sight) to refer any bankruptcy case which appears to raise a COMI issue to the High Court.

32

Exners petition was listed for a hearing to which the official receiver was invited the purpose of which was for the court to satisfy itself that her COMI was in the UK and within the territorial jurisdiction of Leicester County Court. Upon being so satisfied on the evidence provided a bankruptcy order was made. This practice of testing the

evidence ex ante has the advantage that it avoids the costs of an ex post challenge to bankruptcy jurisdiction via the annulment route. It may also enhance the credibility of English bankruptcy process in other countries as, consistent with the European Court of Justices ruling in Eurofood, there is some proactive check on whether the court has jurisdiction to open main proceedings having potentially far reaching effects.82 It

remains to be seen how far this process of ex ante scrutiny will be affected by implementation of government proposals to remove debtor bankruptcy petitions from the court and institute an administrative system under the auspices of the official receiver.83

IV. PRACTICAL PROBLEMS

This section highlights some of the practical problems, costs and inconvenience that arise from debtor forum shopping. First, we consider the (as yet) unreported Hagemeister case in which the second-named author acted for a German creditor. Hagemeister, a variant of Staubitz-Schreiber,84 illustrates how forum shopping can create wasteful jurisdictional confusion and delay indefinitely the effective administration of the debtors affairs.
82 83

Eurofood (n 15) [41]. Insolvency Service (n 51). The government may need to consider a dual system in which domestic

debtor petitions are administered by the official receiver but petitions by foreign nationals are automatically referred to the court.
84

Text to nn 38-40.

33

Second, and more generally, we discuss briefly the difficulties of administering a bankruptcy in the host country where the debtors affairs have largely been conducted in the home country.

A. Hagemeister Hagemeister concerned two German brothers who had guaranteed the liabilities of their German company. The company failed and the German bank applied to the Amtsgericht Paderborn to open main insolvency proceedings in December 2008, based on the guarantee. Unaware of this application, the Hagemeisters relocated first within Germany (from Paderborn to Berlin) and then (apparently) to Manchester. In March 2009, the Amtsgericht Paderborn opened interim insolvency proceedings in relation to both brothers and appointed an interim insolvency administrator. Interim insolvency

proceedings (insolvenzverfahren) are main proceedings listed in Annex B of the ECIR and an interim insolvency administrator (vorlufiger insolvenzverwalter) is a liquidator listed in Annex C. In April 2009 the brothers presented debtors petitions to the Manchester County Court, being the local court having insolvency jurisdiction based on their alleged COMI. None of the paperwork filed mentioned the proceedings in the Amtsgericht Paderborn although it was acknowledged that they had become aware of those proceedings shortly after they had been opened. Oblique reference was made to enforcement proceedings affecting their property. English bankruptcy orders were made the same day. Unaware of the main proceedings in Paderborn, the Manchester County Court made bankruptcy orders expressly recording that the bankruptcies were main proceedings for the purposes

34

of the ECIR. At this point, there were two conflicting main proceedings. Shortly afterwards, the debtors met the interim insolvency administrator in Germany and advised him of the English bankruptcy orders. He then wrote to the Amtsgericht Paderborn indicating that the debtors were already bankrupt in England. In May 2009, in the light of this information, the Amtsgericht Paderborn rescinded security measures that had been ordered within the German proceedings. By two separate orders in June and July 2009, the Amtsgericht Paderborn then purported to dismiss the German insolvency proceedings on the basis that the English bankruptcies had effect under Article 17 of the ECIR and the banks applications were therefore inadmissible. A flurry of appellate decisions followed culminating in the

decision of the Landgericht Paderborn in September 2009 to the effect that the original order opening the interim insolvency proceedings in March 2009 represented the opening of main insolvency proceedings which had priority over the bankruptcy orders subsequently made in Manchester. However, in December 2009 the Landgericht

Paderborn reversed its earlier decision holding that, while the German insolvency proceedings did have priority over the English bankruptcies, this priority was removed with the cancellation of the security measures in May 2009. From that point, only the English insolvency proceedings were effective and their existence and recognition in Germany under the ECIR prevented the German proceedings from being subsequently reinstated. At the time of writing, this decision is subject to an appeal by the bank to the German Bundesgericht. In the meantime, the bank applied to annul the English bankruptcy orders on the basis that the Manchester County Court lacked jurisdiction to open main proceedings

35

when main proceedings had already been opened in Paderborn.85

In an unreported

judgment Mr Recorder Cadwallader ruled that: (i) at the time the Manchester court opened main proceedings it had no jurisdiction to do so because of the prior existence of the German proceedings; and/or (ii) the debtors failure to disclose the existence of the German proceedings (of which they were aware by March 2009) was material nondisclosure of itself justifying annulment as per Mitterfellner. Assuming that the

Bundesgericht restores the German proceedings the matter will finally be resolved.86 The jurisdictional issue arising from the debtors attempts to switch COMI has put the administration of the bankruptcies on hold and left their creditors in limbo. Currently there are no insolvency proceedings in the UK or Germany and the assets are unprotected. Substantial costs have been incurred in both jurisdictions. The debtors assets and creditors are all in Germany. It can readily be inferred that the debtors were anxious to maintain their English bankruptcies to take advantage of the attractive features of English law considered in Section IIB above.

B. Forum conveniens? The jurisdictional uncertainty in Hagemeister illustrates the problems associated with debtor forum shopping writ large. More generally, any bankruptcy case involving a foreign national whose affairs have been conducted in another jurisdiction raises practical

85

Before making the application the bank asked the official receiver in Manchester if he would be prepared

to seek the annulments as had been the case in Eichler and Mitterfellner. The official receiver was reluctant to proceed pending clarification of position in Germany.
86

The debtors were automatically discharged under English law in April 2010. However, discharge is

reversed where a bankruptcy is subsequently annulled: see Owo-Samson v Barclays Bank (No 1) [2003] BPIR 1373.

36

difficulties and additional costs for creditors and for institutions such as the courts, official receivers and bankruptcy trustees.87 By definition, it is more difficult and costly to collect assets, investigate possible causes of action and identify creditors where the centre of gravity of the bankruptcy estate remains decisively in the home country. Some of these difficulties are an inevitable consequence of cross-border insolvency. However, they are accentuated in the paradigmatic debtor forum shopping case where the debtors past affairs in the home country fall to be administered in a host jurisdiction with which he or she may have no previous connection. In such cases, the host jurisdiction is not obviously forum conveniens. The costs of pursuing avoidance actions where the subject matter is in the home country or income payments orders where, having obtained a discharge in the host country the debtor returns to the home country, may well be prohibitive for trustees already burdened with realising assets in a foreign jurisdiction. However, as we saw in Section IIIB, Eichler makes clear that questions of practical convenience are irrelevant to the allocation of jurisdiction under the ECIR.

V. CONCLUSION

A. Good and bad forum shopping In a supranational system that privileges geographical and legal mobility, it may be thought that relocation motivated in whole or part by a desire to shop for benefits

87

On the increased burden on the courts see Briggs (n 8) 30; Stojevic (n 31) [22]. It is arguable that

inbound forum shoppers enjoy benefits in the host country (bankruptcy relief) without bearing the full additional costs imposed on host country institutions.

37

available in another domestic legal system is an inevitable and acceptable by-product of EU law freedoms. The entire EU project is premised on the idea of a single market which EU citizens are free to move around in order to improve their economic welfare. There may then be a case for saying that individuals such as Dr Eichler who exercise these freedoms to pursue their employment or profession should be allowed to benefit from host country bankruptcy law. The official English line appears to be that debtors who relocate to the UK are free to access the English bankruptcy system under current EU law. The implication is that EU law freedoms override creditor expectations. Accordingly, the role of the court is merely to police the boundary between genuine and sham relocations and debtor forum shopping where there is a real COMI switch having an element of permanence is tacitly accepted.88 This is not to say that the official receiver and the courts have embraced forum shopping enthusiastically. It seems that they simply consider themselves

precluded by current EU law from resisting inbound forum shopping on any broader footing. Normative questions lurk beneath the surface. In what circumstances and

according to what criteria should debtor forum shopping within the EU be regarded as good or bad? Should any COMI switch involving a deliberate forum shop, whether

88

Although there is no authority which establishes or considers any minimum period of time which a

person must spend in a Member State before it can be said to become his or her COMI, the idea that COMI should correspond to the place where the debtor conducts the administration of his interests on a regular basis and in a manner ascertainable by third parties underpins this point without necessarily preventing a debtor from acquiring a new COMI based on a temporary move of sufficient substance and duration to satisfy the regularity/ascertainability test: see Eichler (n 31) [19]. Local jurisdiction within the UK is based on residence for the greater part of six months (i.e. just over three months) in the relevant court district.

38

manufactured or real, be regarded as an undesirable abuse of EU law freedoms?89 Is forum shopping only bad where the COMI switch is an outright fiction designed to manufacture jurisdiction? Moss, Fletcher and Isaacs posit the following distinction

between good forum shopping which occurs where a debtor moves COMI to benefit creditors and bad forum shopping (usually by a natural person) where the debtor moves COMI to escape creditors90

These distinguished commentators suggest further that it is only opportunistic and fraudulent choices of jurisdiction that are objectionable under EU law and not forum shopping per se. The distinction turns on creditor welfare but it is not free from

difficulty. Corporate restructurings involving a pre-planned COMI migration may not benefit all creditors. It can be objected that while such restructurings benefit the

powerful creditor and practitioner constituencies that sponsor them, other constituencies, such as trade creditors and employees, do not benefit and may be disenfranchised where insolvency proceedings are opened in an unfamiliar jurisdiction with which the enterprise has no historic connection.91 Londons current status as the restructuring capital of Europe rests on the perception that the English insolvency system facilitates efficient

89

For development of the idea that COMI switches by insolvent debtors are an abuse of EU law freedoms

see H Eidenmller, Abuse of Law in the Context of European Insolvency Law (2009) 6(1) European Company and Financial LR 1; Weber (n 35).
90

G Moss, IF Fletcher and S Isaacs, The EC Regulation on Insolvency Proceedings (2nd edn OUP, Oxford

2009) 262.
91

The Wind Hellas restructuring (references in n 3) is an obvious case in point.

39

outcomes.92 As it is in the economic interests of our restructuring profession to reinforce this perception, the claim that all creditors benefit from corporate COMI migration is more contentious than Moss, Fletcher and Isaacs would have us believe.93 That said, we are happy to concede for the purposes of the present discussion that corporate COMI migrations are more likely than not to enhance aggregate creditor welfare. Conversely, are COMI migrations by individual debtors necessarily bad even where tinged with opportunism? What about debtors who prima facie move to escape creditors at a time when they are unable to pay their debts but ultimately remain in the host country on a permanent basis, taking up employment, paying taxes and becoming socially integrated? Should debtors who relocate credibly and permanently not be

entitled to discharge their debts by recourse to the legal system of their country of permanent residence regardless of where those debts were incurred and even where they were facing insolvency or already insolvent at the time of relocation? If so, on what indicators and after what period of time can a debtor be judged to have credibly and permanently relocated? Within the EU legal order the question of entitlement to access the host countrys bankruptcy system boils down to a question about the extent to which EU law

92 93

McCormack, Reconstructing European insolvency law (n 40) 143. There is an extensive literature from the United States on the merits or otherwise of bankruptcy venue

shopping which we do not have the space to review here. Advocates of shopping into jurisdictions such as Delaware and New York point to efficiency factors and incentives for restructuring professionals in other jurisdictions to seek the introduction of more efficient insolvency laws thus promoting a race to the top. Detractors argue that shopping encourages rent-seeking by powerful constituencies and interest groups and, in extremis, collusion between judges and professionals in favoured jurisdictions over relaxations of standards aimed at attracting the biggest, most lucrative cases, i.e. a race to the bottom. For a useful distillation of this literature see McCormack, Reconstructing European insolvency law (n 40).

40

freedoms require forum shoppers to be accorded the same access as host country nationals to the bankruptcy system. Framed thus, the question leads to other questions such as: how far can the debtors state of origin (where the debts were incurred) and/or the host country (where she now seeks to discharge those debts) derogate from these freedoms by raising barriers to exit or entry as the case may be and on what grounds?94 Within this framing, it may be arguable that a debtor who exercises EU law freedoms and, having done so, becomes integrated as a Union citizen into the fabric of the host Member State95 should be entitled to access debt relief in the host state alongside host country nationals. Normatively, this argument coheres with the idea of an ever wider and deeper socio-political union among the peoples of Europe promoted by European integrationists. Moreover, in the case of business debtors the European Commission has actively promoted more forgiving bankruptcy laws as a mechanism for encouraging entrepreneurship.96 It may be thought then that the relocation of business debtors97 seeking access to a generous bankruptcy regime would at least be countenanced by the EU institutions. The practical problems associated with debtor forum shopping discussed earlier suggest that an unfettered migratory freedom for debtors is undesirable. In contrast to a

94

On the extent to which Member States can impose exit or entry restrictions that fetter the analogous

Treaty right to freedom of establishment see Case C55/94 Gebhard v Consiglio dellOrdine degli Avvocati e Procuratori di Milano [1995] ECR I4165; Case C-210/06 Cartesio Oktat s Szolgltat bt [2008] ECR I9641 especially at [32]. On the wider EU law concept of abuse of rights see Eidenmller (n 89).
95 96

To borrow a phrase from White (n 12) 900. Walters (n 41) 67-68; European Commission Communication COM/2007/584 of 5 October 2007,

Overcoming the stigma of business failure for a second chance policy.

97

Note that Eichler, Mitterfellner and the Hagmeisters all fall into this category.

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creditor-focused, court-sanctioned corporate COMI migration to a country having a favourable restructuring environment, there is little prospect of added value for anyone other than the debtor. Debtor migration makes the investigation of the debtors affairs and the administration of the estate (including the exercise of avoidance and other powers) more costly to the detriment of creditors while imposing costs on host country institutions which are absorbed by host country users of the bankruptcy system. There is also some force in the view that debtor forum shopping frustrates creditor expectations by permitting legal obligations arising within one legal system to be reconfigured by reference to another legal system without the risk having been priced in ex ante at the point credit was extended. So, for example, we might expect German creditors to assess the risk of lending to German debtors based, in part, on assumptions about how they will be treated under German not English insolvency law in the event of insolvency. On this view, EU law freedoms should be qualified by the need to protect creditor expectations and conceptualised as forward-looking, not as a licence for debtors to reconfigure the treatment of historic liabilities, assets and transactions by recourse to legal systems with which they may have had no previous connection.98 Where the debtor is insolvent at the time of relocation, the case for protecting creditor expectations acquires even greater force. A further point is that where an individual debtor switches COMI, it will invariably be difficult for creditors to avail themselves of secondary proceedings as a vehicle for protecting their interests as, even if the debtor has assets in the state of origin, mere presence of assets does not give rise to an
98

In contrast, the English courts currently regard the location of the debtors assets and creditors as

irrelevant in determining COMI presumably because such matters relate to past rather than present ascertainability of the debtors whereabouts: see Shierson v Vlieland Boddy (n 18) [41]; Eichler (n 31) [15], [21] and discussion in text to nn 27-40.

42

establishment.99 From a creditor standpoint, the upshot is that EU law freedoms should not imply an entitlement to bankruptcy relief on the most favourable terms available under the domestic legal orders of the Member States. On a separate tack, given that debtor forum shoppers tend to be middle class professionals with transferable skills and assets,100 it may be objected on egalitarian principles that forum shopping privileges relatively better off, sophisticated debtors who are best placed to pay down historic debt from future income. On balance then, there is a case for treating forum shopping by individuals and corporate debtors differently, and more restrictively, as Moss, Fletcher and Isaacs suggest, principally because of its impact on creditors and host country institutions. In the light of the discussion thus far, we turn now to consider possible options for legislative reform at the EU level to address debtor forum shopping.

B. Revising the ECIR to address debtor forum shopping Our discussion of the normative issues involves a recasting of perennial questions about the balance to be struck in bankruptcy policy between the interests of debtors and creditors within a regional and transnational context. It would be easy enough to

establish a consensus that debtor forum shopping involving outright manufacturing of jurisdiction is bad and should be resisted on grounds of fraud and abuse of process: the current approach of the English courts reflects this position. At the opposite extreme from the manufacturers are debtors who permanently relocate at a time when they are able to pay their debts as a whole but, with debts still outstanding in their home country,

99

For an illustration see Shierson v Vlieland Boddy (n 18) where, although secondary proceedings were

opened, the finding that the debtor had an establishment is questionable.

100

See Section IIC.

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subsequently experience insolvency after having become integrated in the host country. We tend to think that these will be outliers. Somewhere in the middle is the question whether genuine (as opposed to sham) relocations by debtors facing the prospect of insolvency or who are already insolvent are bad and ought to be regulated on a broader footing. Should these debtors be free to choose their own brand of debt resolution even if it results in a net reduction to creditor welfare? Should that freedom be fettered in order to prevent them from fleeing creditors whose expectations have been shaped by the local configuration of bankruptcy policy, the balance local law strikes between debtors and creditors etc, in the place where credit was extended?101 The current legal position in England and Wales is that relocation in anticipation of insolvency is permitted as long as it is genuine.102 However, in the interests of creditor protection and of minimising the practical difficulties associated with debtor forum shopping, our provisional conclusion is that the ECIR could usefully be reformed on a broader footing to limit the scope for insolvent debtors to switch COMI in anticipation of filing for bankruptcy. The question is how this might be done. There appear to be two broad possibilities. The first is to craft a rule that makes bankruptcy jurisdiction stick with the home country even though the debtors COMI has moved to the host country. The second is to carve out an additional exception to Article 4 of ECIR providing that debts can only be discharged according to their applicable law

101

It is interesting to note that for over three centuries fleeing the realm was an act of bankruptcy in English

law which provided grounds for creditors to petition for the debtors involuntary bankruptcy. It remains an act of bankruptcy in Australia.
102

Accordingly, a COMI switch in such circumstances will attract heightened scrutiny: see Shierson v

Vlieland-Boddy (n 18) [46], [55] and discussion in Section IIIC.

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as determined by reference to the Rome I Regulation103 rather than under the lex fori concursus. On balance, we reject the second approach in favour of the first. A rule that pegs discharge to the applicable law of the obligation is consistent with Article 12(1)(d) of Rome I (which states that the law applicable to a contract by virtue of Rome I shall governthe various ways of extinguishing obligations) and so fits well with creditor expectations especially bearing in mind that the default position in Rome I is to defer to the express or implied choice of the parties in order to determine the applicable law of the obligation.104 However, such a rule potentially opens up two types of problem assuming the COMI standard is retained as the principal mechanism for allocation of jurisdiction. On the one hand, it leaves the host country with the difficulty of having to determine the international effect of its bankruptcy discharge by reference to foreign law. On the other hand, it would force debtors who have genuinely moved and wish to remain in the host country to return to the home country in order to seek bankruptcy relief in relation to home country debts unless those debts could be refinanced in the host country. It would also impact debtors who are indebted but solvent at the time they move and who only become insolvent after having incurred further debts in the host country. Although such debtors may well be outliers, bearing in mind EU law freedoms, a rule providing for discharge other than in accordance with the lex fori concursus may be thought over-broad. Furthermore, such a rule relates solely to discharge and would not

103

Regulation (EC) 593/2008 of 17 June 2008 on the law applicable to contractual obligations [2008] OJ

L177/6
104

See further Fletcher (n 1) 108-109; Rome I Regulation (n 102) recitals (11)-(14), art 3. Of course, the

parties are free to choose a law other than their domestic law to govern their relationship. Assuming that the will of the lender is dominant, the aligning of discharge to applicable law risks undesirable consequences for borrowers as lenders could choose a law which is unfriendly to debtors.

45

affect other matters, such as the extent of future income capture, which may be of pressing interest to creditors. For these reasons, the preferable option is a rule pursuant to which jurisdiction sticks to the home country notwithstanding the debtors relocation with the result that (broadly speaking) the administration and effects of the debtors bankruptcy will be governed by home country law. On this approach, there is more than one possibility. Jurisdiction could be allocated in personal insolvency cases to the Member State where the debts were, or were principally, incurred rather than the COMI: a centre of main debts test. Aside from problems of detail105 and assuming retention of the COMI test for companies, this would have the disadvantage of introducing a separate jurisdictional rule for personal insolvencies. Our instinctive preference is therefore for an avoidance rule which meets the mischief identified COMI switching in contemplation of insolvency as well as sham relocations by extending the logic of Staubitz Schreiber to a defined period before the filing of the request to open proceedings. The virtue of such a rule is that it would permit the retention of COMI as the primary mechanism for allocation of jurisdiction in personal insolvencies and so fit more easily within the current dispensation. Its normative content could also be focused to strike at insolvent debtors who seek to avoid dealing with their debts according to creditor expectations.

105

Sub-rules would need to be devised to determine where debts were principally incurred which involve

choosing between triggers based on either the number or value of the debts or some combination of the two (e.g. a value-based majority in number). A change to the primary rule of jurisdiction for main proceedings would probably also necessitate some reconsideration of the establishment test for secondary proceedings to deal with outlying cases where debts are incurred in several jurisdictions.

46

Moss and Paulus have proposed a rule along the lines that we favour.106 Their version would leave jurisdiction with the home country (based on the debtors former COMI) for up to five years after the debtor has relocated where unpaid liabilities are left behind in the home country. We consider the Moss-Paulus proposal to be over-broad as it is not confined to debtors who are insolvent, or deemed insolvent, at the time they relocate and would apply even if modest liabilities were left behind and the vast majority of the debts were incurred after relocation in the host country. What is needed as a matter of European realpolitik is a rule that creates a sufficient disincentive to forum shopping by debtors in contemplation of insolvency without restricting EU freedoms in a disproportionate manner. We suggest a rule that is formally structured so it is directed at debtors who move their COMI when already insolvent or in contemplation of insolvency. A debtor would be deemed to have moved his COMI when already insolvent etc where: (i) at any time in the previous two years his COMI was in one Member State; and (ii) at the date of the request to open proceedings his COMI is in another Member State. In such cases, jurisdiction would remain with the first Member State unless it could be demonstrated that all home country debts were refinanced or otherwise secured. Of course, there is always an element of arbitrariness about any defined cut off point be it two years or five years. An arbitrary period always risks penalising those who move to better themselves and, as such, a rebuttable presumption of insolvency during the twoyear period may be preferred to deemed insolvency. The suggested formulation also does nothing to address cases of highly mobile transnational debtors at the margins where it may be difficult to pin down the debtors COMI at any one time. However, we have
106

The European Insolvency Regulation the case for urgent reform 2006 19(1) Insolvency Intelligence

1, 3.

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worked on the assumption that, as it is now an established international standard, EU lawmakers will not readily abandon the COMI concept although marginal cases of this type test COMI to its straining point. We also prefer a bright line rule to a solvency test applicable in every case although conscious that we are seeking to trade away the costs of proving solvency or insolvency in return for the risk that a fixed look back period operates arbitrarily at the margins.

C. Greater convergence of personal insolvency laws as a precursor to EU legislative reform Article 46 of the ECIR commits the European Commission to reporting on the application of the Regulation and, if necessary, making proposals for its adaptation, by no later than 1 June 2012. Any reform process is likely to be cumbersome and we would not expect it to bear fruit until some time later. Although, as we discussed in Section III, domestic bankruptcy laws are notoriously divergent, it is conceivable, pending EU legislative reform, that greater convergence may occur which may reduce incentives for forum shopping. The conditions for such convergence seem ripe as countries wrestle with the effects of the globalisation of credit markets and increasing credit card penetration. The Enterprise Directorate-General of the European Commission has also been influential in fostering more forgiving personal insolvency laws, albeit by reference to business debtors, by benchmarking Member State laws according to the extent of the rehabilitation that they provide.107 As levels of personal indebtedness increase across the Continent, the EU may continue to insinuate a shift towards bankruptcy systems that
107

Walters (n 41) 67-68; European Commission Communication COM/2007/584 of 5 October 2007,

Overcoming the stigma of business failure for a second chance policy.

48

more closely resemble the fresh start model in England and Wales. There are modest signs of progress in this direction. The Irish Law Reform Commission has proposed a radical overhaul of Irish bankruptcy law which it regards as unsuitable to providing solutions for the realities of a modern credit society.108 Prompted by the influx of German debtors into the UK, a leading German practitioner has called for German law to be reformed.109 It remains to be seen whether convergence will fix the problems associated with debtor forum shopping before EU lawmakers consider revamping the ECIR. Longer term, it may be that convergence and legislative reform will work in tandem to have the desired effect. 15,506 words (11,195 w/o fns)

108

Personal Debt Management and Debt Enforcement (LRC CP56-2009) available at

<http://www.lawreform.ie/Consultation_Papers_Published/Default.134.html> 115, discussed in Holohan (n 48). See also Interim Report Personal Debt Management and Debt Enforcement available at <http://www.lawreform.ie/news/interim-report-on-personal-debt.292.html> proposing inter alia a reduction in the current 12-year discharge period which the report acknowledges as being very long by comparison with international norms.
109

Tashiro (n 45).

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