Cross Border Bankruptcy

Forum Shopping for bankruptcy

Forum shopping (or “bankruptcy tourism”)is the term given to the debtor determining the best jurisdiction to be made bankrupt in. In many cases it is clear which jurisdiction the debtor should be made bankrupt in. However, in practice, it may be possible to change a person’s Residence and Domicile from, say, Ireland to that of, say the United Kingdom, where the bankruptcy regime is much more favourable to the bankrupt debtor in terms of the length of the bankruptcy. A “simple” Irish bankruptcy will last at least 3 years. A “simple” UK bankruptcy could last just one year, with very straightforward cases just lasting 6/7 months. An Income Payments Order could be made in the UK for three years, whilst the period in Ireland is 5 years.A faster bankruptcy process may have significant benefits for a bankrupt in areas such as pensions and expected inheritances.

Some commentators have suggested that the Belfast High Court’s decsion in respect of Sean Quinn’s decsion to self adjudicate for bankruptcy, and which was challanged by Irish Bank Resolution Corporation Limited, makes it more difficult for Irish people to avail of UK bankruptcy procedures. However, the High Court’s decision to annul the Bankruptcy Order was based on the specific facts of the case. If anything, the High Court decision confirms that if the proper procedural steps are taken by a bankrupt in the UK, that it would be very difficult for an Irish creditor to challange it. We are experts at advising clients on how to comprehensively change their COMI to the UK.

In the United Kingdom, the position of your pension may depend on:

  • the date you were made bankrupt;
  • whether you have been discharged from bankruptcy or not;
  • whether your pension is an occupational pension or a personal pension.

The United Kingdom Welfare Reform and Pensions Act 1999 protects all pensions arising from tax-approved pension schemes against being part of a bankrupt’s estate, for anyone made bankrupt after 29 May 2000. So, the Trustee in Bankruptcy cannot usually control UK approved pension schemes to pay off creditors. However, there is uncertainty as to whether certain Irish pension schemes may be seized, and thus expert advice should be taken.

The Trustee in Bankruptcy can apply to the Court, however, to receive a pension in payment for a period, under an Income Payments Order. But the United Kingdom Enterprise Act 2002 has reduced the automatic discharge period for people made bankrupt after 1 April 2004 to one year, so it is anticipated that a Trustee in Bankruptcy will have little time to apply for an Income Payments Order. Also, the bankrupt can make an out-of-court agreement with the Trustee in Bankruptcy to pay over a part of the pension for a specified period.

However, the discharge period can be extended if the bankrupt fails to comply with the obligations of the bankruptcy order. This can happen if the bankrupt for example had made what are deemed to be “excessive” contributions to a pension policy before bankruptcy.

While the United Kingdom has general bankruptcy rules, the specific rules vary between between England & Wales, Northern Ireland and Scotland.

While forum shopping might reduce the length of the bankruptcy period, the end result is the same i.e. all of the bankrupt’s existing assets are taken away and distributed amongst the creditors.

The United Kingdom offers Individual Voluntary Arrangements (IVA’s), which allows individuals to enter into a Scheme of arrangement with their creditors. Such schemes avoid the stigma of bankruptcy.

If a bankrupt debtor is prepared to change their place of Residence and Domicile, we can provide advice on the best jurisdiction to select and put them in contact with a reputable Insolvency Practitioner to ensure that the bankruptcy process is completed in the fastest possible time, or, alternatively, to carry out an Individual Voluntary Arrangement.

Comparision of UK Bankruptcy with Irish Bankruptcy

The advantages of debtors moving to the UK and utilising the Bankruptcy procedure in the U.K. are obvious. Firstly, the U.K. has a tried and tested system of Individual Voluntary Arrangements (“IVA”) which allow debtors to do deals with their creditors on a low cost basis. The U.K. does approximately 50,000 IVA’s every year. If the IVA is not successful, then the debtor is placed into bankruptcy, but at least he is discharged after a bankruptcy period of just 12 month, which compares favourably with the proposed three years discharge period in Ireland.

One of the key planks of the new proposed Irish bankruptcy regime is a Personal Insolvency Arrangement (“PIA”) which is effectively modelled on the U.K. IVA system.

The reason why IVA’s are so successful in the U.K. is that creditors receive more money back than they do under a Bankruptcy. Similarly, it is expected that under a PIA, that creditors would receive more money back than under bankruptcy.

While the proposed Irish PIA will be closely modelled on the U.K. IVA system, there will still be substantial differences between the actual bankruptcy regimes of each Country. In the U.K., when a debtor is declared bankrupt, the Official Receiver is initially appointed. The Official Receiver is a Government Official whose costs are effectively financed by a levy on all realisations in a bankruptcy. In practice, if the bankrupt estate has realisable assets, the Official Receiver will hand it over to a private sector Insolvency Practitioner who will charge fees on a time cost basis. In Ireland, the Official Assignee, also a Government Official, is initially appointed, and he tends to complete the bankruptcy. The Official Assignee does not charge fees himself, but Court Duty is levied on asset realisations.

A major difference between the Irish bankruptcy regime and the UK bankruptcy regime is the involvement of the court system. In Ireland, there is a constant interface with the Court system, which is costly in terms of solicitor and counsel fees. The best way to illustrate the differences between the Irish and U.K. systems is to show a comparison of an estimated outcome on a typical case. If you assume a Mr. Murphy who has five investment properties with a market value of €1 million and mortgages of €3 million, and an unencumbered property with a market value of €500,000, then a comparison of the different outcomes (on the basis of a “lump sum” IVA or PIA) is shown in the accompanying table. For ease of comparison purposes, the exchange rate is assumed to be €1 to £1.

Irish Bankruptcy Irish PIA U.K. Bankruptcy U.K. IVA
Assets Available (After realisation costs)Less: Costs 475,000 500,000 475,000 500,000
Petitioner Costs 10,000 2,000
Official Receiver’s Fees 1,715
Court Duty/Secretary of State 71,700 63,250
Trustee Fees 40,000
Disbursements/Legal 50,000 5,000 5,000 5,000
Nominees Fees/Personal Insolv’y Trustee 12,300 10,000
Supervisors Fees/Personal Insolv’y Trustee 12,300 10,000
Bordereau 116
Total Costs 131,700 29,600 111,965 25,116
Net Assets Available 343,300 470,400 363,035 474,884
Unsecured Creditors 2,000,000 2,000,000 2,000,000 2,000,000
Dividend Available 17.16% 23.52% 18.15% 23.74%

The table clearly shows that the creditors receive more either under the proposed Irish PIA or the U.K. IVA. The reasons for the differences are apparent from the table. Firstly, the unencumbered property would realise more in an orderly sale (particularly if the property is located in a different jurisdiction) as opposed to a distressed sale, and secondly the Court Duty/Secretary of State fees (which can get as high as 15% of realisations) would be significant in both types of bankruptcies. The reason for the differences in the cost of the professional fees under the PIA and the IVA is that VAT is no longer charged by insolvency practitioners in the UK following the Paymex Limited case last year.

It is clear from the accompanying table that the high costs associated with bankruptcy actually make it easier for debtors to persuade their creditors to accept a scheme of arrangement.

The majority of IVA’s done in the UK are 5 year arrangements which mainly feature the debtor also making contributions from his personal income towards his creditors. Such “income” IVA’s can produce good dividends for creditors where the debts are consumer type debts such as credit card debts. However, where the debts are in the millions, any dividends available from income tends to be immaterial.

For clients who wish to apply of UK bankruptcy, we can refer them to UK specialists. We have relationships with established Insolvency Practitioners in Northern Ireland, Scotland, England & Wales who can provide detailed local advice on how to go bankrupt in the UK. In practice, some of the High Courts/County Courts have their own specific requirements e.g. some Courts are now seeking Witness Statements in addition to the normal statutory documentation. We have agreed fixed fees of Stg£2,000 + VAT for clients wishing to have their “hands held” through the UK process. This service includes the preparation of the Statement of Affairs that has to be submitted.

For further information please contact Jim Stafford or Tom Murray. on 01 661 4066 or jim.stafford@frielstafford.ie, tom.murray@frielstafford.ie