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Rodney Hylton-Potts explains how the UK’s more lenient bankruptcy legislation has encouraged debtors from other jurisdictions into the country
Individuals made bankrupt in the UK are automatically discharged from bankruptcy after one year.
A consequence is that England is now a popular destination for European bankruptcy tourists.
Debtors living in countries with harsh bankruptcy regimes often seek to make themselves’ bankrupt in England, before creditors make them bankrupt in their own country, in order to take advantage of discharge from bankruptcy after a year. This is particularly prevalent among citizens of the Republic of Ireland, where discharge cannot be obtained until after six years. and Germany where discharge cannot be obtained until after 12 years with no automatic discharge from debts.
One of the purposes of the European Regulations governing this was to avoid debtors transferring assets around member states in order to obtain a more favourable treatment on bankruptcy. All of the assets of a debtor, within the EC (excluding Denmark) will fall into the bankruptcy estate. To achieve this, “main” insolvency proceedings are opened in the country where the debtor has its Centre of Main Interest (COMI). If subsequent insolvency proceedings are opened elsewhere than the debtor’s COMI then only the assets situated in that country will fall into the bankruptcy estate.
While this reduces the benefit of moving assets around the EU, it does not address the draw of a favorable term of bankruptcy and automatic discharge that a debtor can take advantage of through asserting a COMI in England.
The EC regulation says “The center of main interest should correspond with the place where the debtor conducts the administration of his interests on a regular basis and is therefore ascertainable by the parties.”
A statement of the principles behind deciding upon the location of an individual’s COMI can be found in the case of Sparkasse Velbert v Horst Konrad Benk and the Official Receiver . This case concerns a German national, Benk, who had attempted to create an illusion of having his COMI in England and had succeeded in making himself bankrupt. His main creditor, a bank, applied for an annulment on the grounds that the court had no jurisdiction to make the order because Mr Benk’s COMI was not in England.
The principles set out were as follows:
A) An individual’s COMI is where he can be contacted, usually his habitual place of residence;
in the case of a professional the COMI may be their professional domicile, provided that the profession is at the root of the insolvency;
B) A habitual residence is a settled permanent home where a man lives with his wife and family and to where he returns from business trips elsewhere;
C) A debtor can have only one COMI; the COMI must have an element of permanence; the COMI must have an element of permanence;
D) It must be ascertainable by reasonably diligent third parties, in particular creditors and potential creditors – this should not normally require notification by the person to his creditors but nor should it be hidden;
E) An individual can change his COMI even on the eve of insolvency but the court must determine if this is substance or illusion;
F) The question of where an individual carries on the administration of his affairs is a subjective one;
In the EC regulation the term “regular administration” means the management, organisation and control of the individual’s interest and the term “regular basis” indicates a “quality of presence”, “a degree of continuity”, “an idea of normality,” “a stable link with the forum” and “a degree of permanence”.
Mr Benk was a notary in Germany. He petitioned for his bankruptcy in England and obtained a bankruptcy order. Mr Benk’s major creditor, the bank, sought an annulment of the order.
COMI of Significant Other
Mr Benk had a residence in Birmingham. He had entered into a tenancy agreement from December 2008 and had previously rented a furnished flat in Birmingham from September 2008. He had paid utility bills and council tax. He was able to produce bank statements showing that he had made purchases in England from February 2009
Mr Benk provided evidence that he had his own sports photography business, referring to business trips and details of his main client.
The court found Mr Benk to be an unreliable witness. Mr Benk had sought to convince the court that he was no longer pursuing his career as a notary in Germany, having been suspended from the practice in June 2009 as a result of the earlier bankruptcy order. The court was unconvinced.
Mr Benk had been appealing his suspension since it occurred and an appeal to the European Court of Human Rights was pending. He remained on the register of notaries notwithstanding his suspension. The court considered that his intention was to achieve discharge from bankruptcy in England and then resume his activities as a notary in Germany. The court stated that the motive behind a debtor choosing a new COMI was not relevant but the potential for abuse means that the court would need to scrutinise the evidence in support of the petition with care. The court considered that Mr Benk had come to England prompted by his looming insolvency. He was relocated by a friend who was connected with a company that advertised relocation services to Germans facing bankruptcy and many of the facts relied upon to establish Mr Benk’s COMI in England were provided by that friend. He claimed to have a business in England as a sports photographer yet the evidence showed that he did not own his own camera, took photographs on his own golf trips, golf being a particular hobby of his, and he had only one client, someone Mr Benk had known well since 1983. The business was loss making, which Mr Benk explained as being due to start-up costs yet he could not identify any of those costs. His only means of support was his girlfriend and he had no prospect of supporting himself financially through his sports photography. Mr Benk had not informed his creditors of his new country of residence. He claimed that they were aware of this through receipt of notice of his first bankruptcy (and presumably its annulment). The court did not consider that this was sufficient to make his COMI ascertainable by third parties.
Mr Benk lived with his girlfriend before he came to England and lived with her in the rented accommodation in Birmingham. She had financed his golf trips through German credit cards and bank accounts and she arranged golf trips using her German address. She returned to Germany after Mr Benk’s discharge from bankruptcy. Mr Benk later followed her back to Germany where, by the time of the hearing, he spent most of his time.
The court added a new consideration when assessing a debtor’s COMI. The Court felt that the COMI of Mr Benk could not be considered separately from that of his girlfriend. The Court considered that there was a sufficiently close dependence, emotional and financial, that it was appropriate to consider her circumstances when considering Mr Benk’s COMI. All of the evidence pointed to her COMI being in Germany. It was said that her un-severed ties with Germany were Mr Benk’s un-severed ties also.
Enterprise and Regulatory Reform
The court concluded that Mr Benk resided only temporarily in England and not habitually, also that he had no professional domicile in England. His presence in England was to facilitate his return to Germany. The bankruptcy was annulled.