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Bankruptcy tourism could be next big thing
17 April 2009
Thanks to lenient, modern bankruptcy laws, a rising number of struggling business owners are considering petitioning for bankruptcy in England, writes Fiona McGoran.
For many years, insolvency levels remained low in Ireland, with just 363 posted in 2007. However, the numbers have soared in the past two years and, in the first three months of 2009, the figure had already reached 365. This worrying trend has caused some experts to predict the birth of bankruptcy tourism – a process that would see insolvent Irish people travelling to England and petitioning for bankruptcy in a bid to escape the 12 years of bankruptcy imposed by Irish law and avail of the one-year penury enforced across the water.
In the past, few individuals were aware of the 2002 European insolvency legislation, which facilitates cross-border personal bankruptcies. However, the recent glut of insolvencies has caused greater awareness of the benefits of this regulation. A growing number of people from EU member states are petitioning in England for bankruptcy and benefiting from the 2004 Enterprise Act, which dropped the term applicable from three years to one.
According to Barry Cahir, associate partner with William Fry Solicitors, the Enterprise Act was introduced in England to modernise insolvency law and encourage risk-taking entrepreneurs. Cahir believes that, unless Ireland follows suit, it runs the risk of losing its entrepreneurial spirit.
“The view here is that the Irish procedure is too restrictive. If you are declared bankrupt, you are then crippled for the next 12 years unless you can afford to pay off all your creditors. In the current climate, this is affecting a lot of business people. Ireland needs to look at the US and UK, where business failure is treated more leniently. If this country fails to change its procedure, we run the risk of deterring people from becoming entrepreneurs,” he says. “The current system is expensive, cumbersome, bureaucratic and doesn’t lend itself to effective restructuring.”
Cahir is not the only person in the legal sector who believes the system in Ireland is need of change. According to a barrister who asked not to be named, people who enter bankruptcy here are dealing with an archaic law. “The code here is draconian, and if the option was to go to the UK, I wouldn’t doubt someone would use it,” he says. “If you enter bankruptcy here, it is like the seventh circle of hell – it is nightmarish territory because the provisions haven’t kept pace at all. This is a big issue, particularly as people get older because they cannot make a will with any certainty and it has other knock-on effects too.”
Over the past decade, many Irish business owners have found themselves at the mercy of this out-of-date procedure because they chose to create unlimited companies to protect their finances from the prying eyes of the media. Property developer Paddy Kelly personally guaranteed the debts of his business and is now struggling to remain solvent. He is in negotiations with Anglo Irish Bank and has asked the nationalised bank to restructure his €700 million debt as part of a plan to avoid bankruptcy. In return, he is offering it greater security over certain assets.
If negotiations with the lender are not successful, it is expected that Kelly’s next move will be to file for bankruptcy. While many of the projects backed by the ailing developer remain healthy, there are two that have run into serious difficulty – a $1 billion scheme in Florida and a €100 million resort in Italy. Kelly has also invested heavily in the Thomas Read group of pubs and restaurants and Tulfarris House & Golf Resort in Wicklow, which are both in receivership.
Although individuals petitioning for bankruptcy in England must prove that their centre of main interests (COMI) is based in England, this lax rule will not act as a deterrent. There is no minimum period that a person must spend in a member state before it becomes their COMI. Therefore, a person can travel to England, set up a small business and file for bankruptcy as soon as their affairs are in order.
“Establishing that you have commercial interests in the UK is an easy process,” says Cahir. “For example, there has been a spate of German tourists setting up very thin business fronts and using that as their COMI. While it is instinctively uncomfortable to send people to another jurisdiction, there is nothing wrong with it. Bankruptcy tourism does exist and I don’t see that changing as long as Ireland’s system remains in its current form.”
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