Most readers will be familiar with the practice of British companies domiciling themselves in Ireland to gain from efficient corporation taxation – but how many know that both businesses and individuals are coming to Britain to go bankrupt?
Bankruptcy tourism, as the practice is known, stems from England and Wales’ more entrepreneur-friendly bankruptcy and insolvency laws which are more lenient than EU counterparts for people declaring they’ve run out of money.
In England and Wales, a bankrupt typically face just 12 months in a state of financial purdah – where you are unable to be a director of a company or borrow money, among other conditions – in Ireland it can be as much as 12 years.
Irish entrepreneur Phillip Marley brought this to Huff Post UK’s attention, saying his government’s refusal to get to grips with the issue of reforming its own bankruptcy laws was killing off growth in the Irish economy.
“Bankruptcy is viewed as a dirty, horrible thing in Ireland, but I see it as a badge of honour,” he said.
“Risk-takers are being butchered – and without taking risks, we can’t grow. Of course, if you go bankrupt you should be on ‘the naughty step’ for a period of time, but on this issue the government is being weak.
“I've always said, if a footballer makes a mistake you ban him for a few games – but you don’t cut off his legs."
The phrase bankruptcy tourism was first coined in around 2006/7 when bankruptcy registrars began to notice high numbers of German men and women travelling to the UK to declare bankruptcy.
Following a change in the UK’s Enterprise Act, which brought the normal bankruptcy discharge time down from three years to one, England and Wales suddenly became more attractive to those staring into a financial abyss.
The reason for the change was to avoid what happened after the dotcom crash of 2000/2001, where hundreds of businessmen found their companies had failed, leaving them penniless and unable to become a director of a new venture for three years.
The government wanted to stimulate the British economy and make it easier for entrepreneurs and small businesses to get going again after suffering a failure.
“The perception from other European jurisdictions was that their own regulations now looked draconian,” Mark Davies, insolvency partner at JMW Solicitors told Huff Post UK.
“The whole purpose was to get away from this notion of punishment for failing and to encourage entrepreneurs to have another go.”
Germany had a bankruptcy period of seven years – and in the aftermath of the dotcom crash, a number of businesses set up and advertised trips to the UK to help literally bus-loads of Germans to travel over here to seek bankruptcy.
England and Wales were quickly labeled the 'bankruptcy brothel of Europe' and questions were asked about the legitimacy and morality of the bankrupts' claims.
First the Germans, now the Irish
Following the housing crash in 2010, the latest nation to come to our shores is the Irish.
As with the Germans, companies began to appear both in the UK and in Ireland, advertising their services to help individuals successfully obtain bankruptcy rights in England and Wales.
“Anecdotally, I’ve heard there’s a booming business in helping these guys to provide proof," said Davies. "I'm not suggesting they’re fraudulent at all – but these companies will assist them to set up accommodation, utility bills and so on for an up-front fee."
As for what those fees are, that’s also been difficult for Huff Post UK to uncover. But uncover we did; Louise Brittain, an insolvency practitioner for Deloitte, told us she’d seen charges of between £500 and £5,000, depending on how much work was needed.
It seems no organisation has been able to record how many of these ‘tourists’ have successfully managed to claim bankruptcy here – but anecdotal evidence suggests its in the low hundreds per year for individuals and less than a hundred for businesses.
Nick Hood, insolvency specialist from Company Watch, the financial health monitoring specialist, shared Huffington Post UK’s frustration at the lack of hard data on the matter.
“As we welcome the latest wave of bankruptcy tourists, this time escapees from the repressive Irish system, it is particularly frustrating that accurate data on their numbers and the debts being cleansed through the lenient UK regime are so hard to find,” he said.
“The Insolvency Service surely needs to facilitate public scrutiny of this questionable practice by providing regular information on debtors who come to use or abuse our bankruptcy procedures.”
However, the Insolvency Service did force more than 60 of this sort of company to wind up in 2011 after seeking a court order to wind them up for a series of offences, including filing false information at Companies House and failure to co-operate with its investigators.
Why go bankrupt?
The reasons for individuals wanting to go bankrupt in the UK are very different to why companies come to our shores; in a nut shell, for individuals it’s about wiping the debt slate clean and walking away as fast as possible, but for corporates it’s about rescuing a viable business from within a wrecked corporate shell quickly and cost-efficiently, often saving jobs into the bargain.
It is something of a common misconception that a bankruptcy ends once the bankruptcy period is over and the individual discharged, but in fact the bankruptcy continues for as long as it takes a trustee in bankruptcy to realise a bankrupt's assets for the benefit of creditors.
A discharge from bankruptcy allows an individual to act as a director and ends the risk of a trustee pursuing further assets such as property or income, but all property (save for the matrimonial home after three years and any pension) can be pursued by a trustee in bankruptcy "wherever situated" – and therefore applies worldwide.
A report into the issue by Neil Smyth, a restructuring lawyer at Taylor Wessing in Accountancy Age explained: “While the English courts are prepared to be flexible in allowing EU nationals to make themselves bankrupt here, in accordance with the European principle of free movement, debtors should not think that they will get an easy ride from English bankruptcy.
"If there are assets to be realised – wherever they might be – an English trustee in bankruptcy has the powers to realise them.”
Creditors can also challenge the bankruptcy petition, if they feel false claims about the individual or company’s centre of main interest, or COMI, have been made.
To be granted bankruptcy in England or Wales, you have to prove your COMI is here, before insolvency proceedings are launched.
Bankruptcy registrars require proof in the form of utility bills, rental or mortgage statements and evidence that the majority of the individual’s concerns are also in England and Wales.
For a company to change its COMI, you also need to satisfy the registrars that your business operation genuinely has moved its financial centre; that means registrars will look at where your head quarters are, where your creditors consider the majority of your business is carried out, where is your administration, where are your clients and so on.
This checking process has become more rigorous in recent years, driven in part by upset creditors who saw their debtors successfully wiping off commitments by gaining 'easy' bankruptcy in the UK.
Case studies
In fact, there are several high profile cases where attempts at gaining bankruptcy here have been rebuffed.
Arguably the most high profile was that of Irish businessman Sean Quinn, who attempted to persuade the courts that his business COMI was in Belfast, and therefore he should be applicable for bankruptcy under the UK laws.
In his evidence, Quinn said he brought the bankruptcy application north of the border because he was born, reared and worked all his life in County Fermanagh.
The Irish Bank Resolution Corporation - formerly known as the Anglo Irish Bank which was bailed out by taxpayers - was owed 2.8 billion euros (£2.4bn) by Quinn in 2011.
The bank’s barrister successfully argued that there was "a huge credibility issue" over Quinn’s claim that his main office was in County Fermanagh was using the office in respect of these alleged future businesses.
The bank won, Quinn was forced to become bankrupt in the Republic of Ireland and was sent to prison for nine weeks after being found guilty of contempt of court.
Quinn arriving at the High Court in Dublin - months earlier, he had been Ireland's richest man
More recently was the case of Die Sparkasse Bremen vs Armutcu, a property owner of Turkish descent, who lived in Germany, tried to petition for bankruptcy in England by claiming his COMI had changed to London.
“He initially tried to claim bankruptcy in France, but then came to the UK claiming he now lived and worked in London,” said Vernon Dennis, a solicitor for Howard Kennedy who was appointed by Die Sparkasse – a German bank – to investigate the man’s claims.
“He claimed he was working at a supermarket in a Turkish supermarket in Stoke Newington and living above it; he produced tenancy agreements and bank accounts – even photographs to prove he had been there,” Dennis continued.
“However, it became apparent the supermarket was only paying him about £100 a week, which was far too little for him to be living on – we discovered his wife was still in Germany and was sending him money. He also still had property there."
The result was the bankruptcy was annulled – and a subsequent appeal was also dismissed.
“The case is interesting because from a creditor's point of view it was difficult to prove that he wasn’t based in the UK,” Dennis concluded.
Others have proved more successful. Wind Hellas, a Greek telecoms group that relocated to Britain in 2009 and went on to secure bankrupty three months later.
Will this continue forever?
Insolvency and bankruptcy procedures are being reconsidered in both Germany and Ireland – in Ireland it is already possible to appeal for the bankruptcy to be removed after you’ve first served five years in the wilderness – and reforms are afoot for the tenure to be limited further still to three years from next summer.
And the tougher scrutiny being applied by the English and Welsh courts is starting to be recognised.
Sacha Pickering, insolvency lawyer for Michelmores, told Huff Post UK: "I'm currently advising a number of Irish property developers, some of which are very high profile and have substantial debts, but none of them are going to try and move their COMI."
But our bankruptcy laws are still preferential to our EU counterparts and while that remains the case, bankruptcy tourists will continue to arrive on our shores.
“I think it’ll always be an option when a jurisdiction adopts a more entrepreneurial insolvency system, although this is subject to the EU commission’s review, which is considering EU regulation on insolvency in specific relation to bankruptcy tourism," Pickering said.
Deloitte’s Brittain added that our advanced individual voluntary arrangements (IVAs) were also more advanced than in other EU states, making us attractive for individuals.
There is also a second potential spanner in the works which could, in the worst-case scenario, see an increase in bankruptcy tourists.
Proposals are being considered to take the bankruptcy process out of the court system for individuals and have the petition process instead run by an adjudication officer, appointed by the civil service, through a website.
"It has been suggested that they officer may not be as robust in challenging the bankruptcy petitions as the court process," said JMW’s Davies.
"There is a risk that those who would not normally have been allowed to slip through the net, could under this process."
Howard Kennedy’s Dennis shared Davies' concerns. "This is a sophisticated area, it cannot happen at the official receiver office level. The courts have learned a lot and the case law is now more robust – but if it was to go before just the official receiver's office it would become a computerised, standard response."
Deloitte’s Brittain added: "I don't think it's a good idea. The whole point of the court process is it's independent."
The final word goes to insolvency trade body R3 council member Frances Coulson.
Coulson, who is also a partner at Moonbeever solicitors, said while there was nothing inherently objectionable about individuals having a choice about where to deal with their debt problems, or companies having a choice over where to restructure, it was important for the UK’s bankruptcy regime to remain robust, as well as efficient.
“This issue provides the opportunity to examine the reasons why an individual goes bankrupt in the first place. Were the debts accrued through reckless spending or simple misfortune such as divorce or loss of employment? Should the debtor’s behaviour prior to bankruptcy affect the term of their bankruptcy?
"I sense the public are seeing both reckless spenders and bankruptcy tourists as 'taking advantage' of the UK’s more lenient terms. Taking into account the reasons an individual entered into bankruptcy in the first place and looking at extending the bankruptcy discharge period for those who are more culpable could ensure the system is not open to abuse."