Bankruptcy tourism in Europe is increasing as an unexpected consequence of the principle of the free movement of labour in the European Union (EU). Certain jurisdictions in the EU have much more favourable laws for dealing with the individual insolvency of citizens than others. The UK stands out as the pre-eminent country in this regard. Bankruptcy and Individual Voluntary Arrangements (IVAs) offer insolvent debtors in the UK a second chance and an opportunity to deal with their financial difficulties in a timely and affordable way while avoiding the sometimes punitive approach adopted by some other EU member states in their current legislation and indeed in their prevailing social culture.
Any EU citizen – that is to say any citizen of any EU member state – may seek to benefit legally from the differences in personal insolvency legislation in various EU member states. Under European regulations an insolvent debtor has the right to have his or her insolvency dealt with in any other member state, subject to certain provisos. Since UK legislation is deemed by many to be the most favourable to the insolvent debtor then that is the jurisdiction where the phenomenon of bankruptcy tourism or as it is sometimes called ‘forum shopping’ is most likely to occur. The option of going bankrupt or offering creditors an Individual Voluntary Arrangement (IVA) or pursuing an alternative legal financial solution to insolvency in the UK is indeed attractive to insolvent EU citizens. One criterion which must be met is that the insolvent debtor’s “centre of main interests” or COMI must be in the UK. The EU Regulation states that “the centre of main interests 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”. While it is not absolutely clear what this means precisely it appears that many insolvent debtors are exercising their right to pursue a resolution of their financial problems in the UK (or in some cases in some other member state) while relying on the UK court to interpret this regulation to their benefit.
To date, a citizen’s COMI is deemed to be the country where he or she mainly carries out their trade, self-employment or profession. In the absence of a trade or a profession, the citizen’s country of residence is usually deemed to be the COMI. If the debtor trades in one member state but lives in another, the COMI is usually considered to be the member state where they trade. For non self-employed debtors who work in one member state but live in another member state (perhaps commuting to work) then their country of residence will usually be their COMI, since that is where they will normally buy goods, pay bills and operate their bank accounts.
In bankruptcy, the COMI is determined at the date the petition is presented and not where, historically, the relevant activity was carried out. Therefore the location of creditors and the country in which debts were incurred are not material issues in determining a COMI. A citizen may change his or her COMI quite easily and legally. Take for example a citizen of the Republic of Ireland who loses their job and perhaps their home and they decide to emigrate to the UK to live and to work. The option of petitioning for their own bankruptcy in the UK miraculously becomes a real option for them since their COMI has effectively changed to the UK.
The same applies to an IVA. Since an IVA requires at least 75% approval by (voting) creditors, it might be difficult to persuade creditors (in the Republic of Ireland, for example) to agree to an IVA in the UK. It should be remembered also that an IVA in the UK is limited to England, Wales and Northern Ireland. In Scotland a Trust Deed is the broad equivalent of an IVA.