BANKRUPTCY TOURISM TO AVOID THE IRISH LEGAL LOBSTER POST

Our economic system is based on the relationship between risk and return. Low risk activities, which are seen as secure, generally pay a modest return. Higher risk activities carry the potential for higher returns but may not produce any return at all. Any activity funded by debt may not only fail to produce a return but may also, in the event of failure, leave insufficient assets to repay large liabilities.

In a system where we depend on individuals taking on risk in order to generate economic activity, we need to have sensible systems for dealing with the consequences of failure, which is inevitable.

The bankruptcy system in Ireland is not helpful in dealing with the consequences of business failure. Recently there have been minor changes to the system, in that the minimum period of bankruptcy has been reduced from 12 to 6 years where everything has been disposed of and distributed and all fees, costs and expenses have been paid. There is also now a mandatory end of bankruptcy after a maximum of 20 years!

For this reason Irish bankruptcy has been described as a legal lobster pot, easy to get into but very difficulty to get out of. And while there has been an increase year on year in the numbers being made bankrupt, the overall numbers themselves are ridiculously low.

There has been no real reform of the system itself; to modernize it and provide a useful mechanism for dealing with personal debt crisis that has this country in a state of economic paralysis. Such reform has been promised but we’re waiting….

Meanwhile, real people are in real difficulties, so it is not surprising to see them looking for alternatives. “Bankruptcy tourism” is the term used to describe when Irish nationals travel abroad, mainly to the UK, to file for personal bankruptcy there rather than be subject to the Irish system.

The ability to do so is based in an EU Regulation on Insolvency Proceedings introduced in 2000, which was implemented here in 2002. It provides that the courts in the jurisdiction where a debtor has his “centre of main interests” (COMI) have exclusive power to start insolvency proceedings. An individual is entitled to change his or her COMI at almost any time and can do so for the purposes of taking advantage of more favourable insolvency legislation. The country in which the debts are incurred is not necessarily material but the relocation must not be artificial. The question of COMI is determined at the date the application for bankruptcy is made and not at the time the debts were incurred.

Orders made in bankruptcy proceedings in another EU jurisdiction, including an order discharging a person from bankruptcy, are enforceable against creditors here. Bankruptcy proceedings in the UK take 12 months as opposed to a minimum of 6 years here. Pensions are protected in bankruptcy proceedings in the UK but are available to creditors here. However, the approach to the disposal of assets in the UK is much more aggressive than in this jurisdiction with assets, including family homes, being disposed of within the 12 month period.

Bankruptcy is viewed with a mixture of stigma and suspicion in this country. On the one hand our traditional system of bankruptcy is seen primarily as destructive of reputation; a person’s good name is irretrievably damaged if they are declared bankrupt, perhaps for life. But in an economic system based on the relationship between risk and return, we really need to get over this if we wish to foster and attract entrepreneurs.

On the other hand the more modern systems of personal insolvency such as apply in the UK are seen as providing a soft option for debtors to evade paying what they owe their creditors in full. There is a suspicion that dishonest debtors can secrete away assets from creditors, file for bankruptcy and walk away from what they owe while preserving some of their wealth. Therefore, the integrity of a modern bankruptcy system must be based on full disclosure of assets combined with very serious penalties for any failure to make such disclosure; in such a system people who try to hide or shelter assets from creditors should face jail.

It is notable that the first person to face court scrutiny since the start of the Irish banking crisis may be David Drum, not for anything he did here but in the context of whether he made full disclosure to a Massachusetts court in bankruptcy proceedings there. The personal insolvency system in the US is famous for allowing people to start over, but that country is also equally famous for putting executives who flout the system behind bars. We could learn a lot from them.