and Ireland’s “other” debt crisis
– Mr Micawber, David Copperfield by Charles Dickens
The Republic of Ireland’s outdated bankruptcy law is hopelessly ill-equipped to cope with the country’s personal debt epidemic which sits alongside the sovereign and banking debt crises as remnants of the “Celtic Tiger” era.
As the economic crisis caused the leveraging undertaken during the boom years to crystallise into over-indebtedness, the attention of desperate debtors has been drawn to the salvation potentially offered by the comparatively generous debt relief offered by the neighbouring UK’s personal insolvency law.
This was illustrated by the recent high-profile case of Seán Quinn, once Ireland’s richest man but now insolvent, in which the difference between financial despair and relief was the distance of five miles between his home in the Republic and an office in Northern Ireland.
This minor geographical distance was of significance due to the legal chasm that exists between the bankruptcy laws of these neighbouring jurisdictions. Northern Ireland’s modern bankruptcy law, almost identical to that of its fellow UK jurisdiction England and Wales, now provides for a generous discharge of personal debt, with most of debtors’ obligations being extinguished after just 12 months in the majority of cases.
In stark contrast, Ireland’s modern credit economy – in which private sector credit in Ireland increased from 128 per cent of annual GDP in 2002 to 215 per cent in 2007, and in which the household debt to disposable income ratio is among the highest in the world (see Figure 1) – is ill-served by an obsolete bankruptcy law, more recognisable to Dickens’ Mr. Micawber than to bankruptcy observers from most developed legal systems.
Irish law provides that debtors are discharged from bankruptcy only after 12 years, a situation which actually represents a recent improvement to the law, as prior to 2011 there was no automatic discharge. A conditional discharge is available after a period of five years, but the onerous conditions that must be satisfied – including the payment in full of all costs and preferential debts (which in Ireland includes tax obligations) – mean that this route to discharge is extremely difficult to access.
During the twelve year waiting period Irish debtors are prohibited from acting as company directors and from working in a wide range of professional capacities, and are also subject to restrictions on obtaining credit and trading.
The status of the bankrupt as a second-class citizen is confirmed by his/her disqualification from holding elected office at local, national and European levels. Not only do the restrictions on debtors in Northern Ireland and England and Wales apply for much shorter period of just one year, but they are also much fewer in number as a targeted approach was introduced a decade ago to reserve serious sanctions for only those debtors found to have acted culpably.
The huge differences between the laws are reflected in the staggering contrast in the rate of use of bankruptcy procedures on either side of the border. Thus in 2010 there were 29 bankruptcies in the Republic (0.0633 per 10,000 members of the population) compared to 2,323 personal insolvencies in Northern Ireland (12.9 per 10,000). Therefore the lack of a functioning personal insolvency law in Ireland can make the UK system appear as an attractive “debtor’s paradise” to distressed Irish debtors.
Under the European Insolvency Regulation, the courts of the EU member state in which the “centre of a debtor’s main interests” (COMI) is situated have jurisdiction to open insolvency proceedings, with the law of that member state also applying.
Due to the comparative leniency of the UK law, examples have arisen in the English courts of debtors from other member states (particularly from Germany) attempting to transfer their COMIs to England in order to benefit from the debt discharge available there.
The results of such efforts have been mixed and have turned on the facts of the specific cases, with some debtors found to have genuinely moved their interests (see eg Official Receiver v Eichler), while in other cases illegitimate attempts to give the impression of an English COMI have been exposed and condemned (eg Official Receiver v Mitterfellner). In the latter case, the English court cautioned of the need to be vigilant in guarding against “bankruptcy tourism”, as some cases relating to foreign debtors may involve “a dishonest scheme”.
It was in this context that two familiar characters of the Celtic Tiger story litigated in Belfast over the validity of a bankruptcy order previously granted by a Northern Irish court to Seán Quinn in November 2011. In Irish Bank Resolution Corporation Ltd. v Quinn, this order was challenged byQuinn’s major creditor, a reincarnation of the failed and nationalised Anglo-Irish Bank.
The liabilities owed to this creditor included guarantees and indemnities against loans advanced to various finance, hotel and property companies in the Quinn Group, in respect of which the bank had already obtained judgments in the Republic for sums of over US$2bn. The operations of the Group were shared on an approximately equal basis between the two Irish jurisdictions.
The group headquarters were based in Northern Ireland, but Mr. Quinn, whose home is in the Republic, had been expelled from this premises when a share receiver was appointed by the creditor several months previously. The issue arising for decision by Justice Deeny therefore was on which side of the border Quinn’s COMI was located.
According to the judge, this issue raised two questions: firstly, the location in which the debtor conducted the administration of his interests on a regular basis before bankruptcy; and secondly, whether that location was ascertainable by third parties, in particular his creditors.
In respect of the first question, the judge rejected Quinn’s argument that his interests – being work on his and his family’s ongoing litigation arising from his business and financial dealings and ideas for new business ventures – had been located for the past several months in a small office in Derrylin, just north of the border.
Justice Deeny found that omissions in the bankruptcy petition relating to the debtor’s address and occupational status, as well as aspects of other documentation relating to the Derrylin office, suggested that the debtor had not been operating from this premises during the relevant period, but rather the arrangement to lease it was probably “prepared at some much later date to try and bolster the [debtor’s] case”.
Turning to the second question, Deeny J found that even if the debtor had been operating from this office, it was not sufficiently or reasonably ascertainable by third parties as to constitute his centre of main interests. The debtor had sought to maintain a low profile at the office, in order “to avoid snooping into [his] family’s affairs and also to provide a level of protection”.
While the judge found this position to be understandable, he concluded that it would be inconsistent for the debtor to seek such privacy and “then claim that he has established an office at a centre of main interest which is ascertainable by third parties”.
In finding that the debtor’s COMI was in fact located in the Republic, Deeny J focused his attention on the interests of the debtor in the period prior to the presentation of the bankruptcy petition.
The judge thus placed less weight on factors such as where the debtor lived, conducted business, voted and paid tax (“historical facts”); as well as on the factors giving rise to the debtor’s incurring of debt and subsequent financial difficulty (the “root of insolvency”). Interestingly, Deeny J instead considered that the debtor’s “interests in recent months were the litigation in which he and his family are embroiled and the salvaging of what he can from the situation in which he finds himself”.
The debtor was administering these interests from a combination of venues within the Republic, including his home one mile south of the border, a nearby small office he had been identified as visiting regularly in the Republic, and Dublin, the city in which his professional advisors were based. All of these locations had been ascertained by the bank, thus fulfilling the second requirement of establishing the debtor’s COMI in the Republic.
The Northern Irish bankruptcy was therefore annulled, and shortly afterwards Quinn was adjudicated bankrupt via creditor’s petition in the Republic.
As the judge’s findings are particular to the facts of this case, perhaps the high-profile decision’s greatest import lies not just in its legal significance, but rather in illustrating vividly the illogical and unjustifiable position whereby minor geographical distances can lead to huge differences in the treatment of debtors.
While all indications are that the practice of “bankruptcy tourism” remains on a small scale, with the numbers of debtors moving to the UK for insolvency purposes very limited, cases such as that of Ireland’s former richest man has attracted a disproportionate amount of media and political attention.
Therefore the increased attention cast on the comparative shortcomings of Irish law in this manner may generate reputational concerns that create political initiative for reform, and Irish members of Parliament have indeed discussed such concerns when arguing for legal change.
This factor was joined by other persuasive and mandatory forces in spurring the Irish government to propose significant reforms to Irish law in early 2012. In 2009-10, the Law Reform Commission of Ireland (LRC) exposed the failings of the “outdated and ineffective” bankruptcy law and recommended a comprehensive redesign of the personal insolvency system.
Furthermore, the conditions attached to the IMF/EU/ECB financial assistance package provided to Ireland in late 2010 require Ireland to reform its personal insolvency laws. In response, the Irish government has published plans to liberalise bankruptcy law, following the LRC’s recommendation in proposing to reduce the waiting period for automatic discharge from 12 years to three years.
This reform will apply to outstanding cases, meaning that debtors such as Quinn will not remain subject to the rigours of bankruptcy for as long as had been expected. These rigours will remain powerful however, as the government has proposed that debtors could be required to make repayments to creditors for up to five years after discharge; and the LRC’s recommendations to alleviate the severe restrictions and disqualifications that arbitrarily apply to all bankrupts automatically have not been adopted.
The government also proposes to introduce non-judicial personal insolvency procedures. While the proposals follow the LRC in suggesting a fast-track debt relief procedure for low income debtors, the plans for non-judicial procedures designed for other debtors are more conservative than the LRC’s recommendations, and the granting of debt discharge may be conditional on debtors making repayments to creditors for up to seven years.
The government’s plans are subject to change following a consultation process and scrutiny by a Parliamentary committee. Thus interesting times lie ahead as the coming months will reveal the final shape that Ireland’s personal insolvency law will take, and just how green the grass will continue to appear on the other side of the EU insolvency regulation fence.