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6th February 2014

Bankruptcy tourism: Exploding the myths

6th February 2014

Bankruptcy tourism: Exploding the myths

Mike Pavitt

Posted: 6th February 2014

T: 023 8048 2275

E: Email Me

Bankruptcy tourism regularly appears in the press, but what does it mean?

Last week the Insolvency Service used the term ‘bankruptcy tourism’ in a press release about the forced winding up of Lovell Hill & Co LLP, a firm in Hull which falsely provided facilities for people claiming that they were resident and economically active in the UK.  Presumably they did so as a way of taking advantage of our bankruptcy regime. To call the firm’s clients bankruptcy tourists is, in my view, a misnomer. Properly said they were bankruptcy fraudsters.

The reason we see a number of overseas nationals coming to the UK to declare themselves bankrupt is that in their home countries they have much harsher insolvency procedures.  If they choose to relocate to the UK to take advantage of our more favourable regime, surely what they are doing is forum shopping. This is perfectly lawful, and most would say ethically sound too. It involves an insolvent entity (be that a person or a company) genuinely relocating to another jurisdiction because that allows them access to restructuring or other flexible English legal procedures which give them the best chance of preserving the value of their assets and generating income in the future. After all, with a struggling European market economy, surely the last thing we need is economic value being destroyed just because the available cash may have run out? Would we seek to deny a foreign-owned business entry to the UK because they thought they could generate more taxable wealth here than elsewhere, create more jobs, place more orders with UK trading partners?

In my view the same thinking should be applied to personal insolvency. I have acted for a number of economic migrants in the process of moving to the UK to escape historic business-related liabilities in their country of origin. My clients have invariably been referred to me by UK insolvency practitioners for advice on jurisdiction and have been economically productive individuals willing to do useful work in the UK who contribute to their debts over time. Often their families will not, or cannot, relocate with them, so in time they may go back to their home country periodically or after all of their debts have been resolved. That does not mean they are any less economically active in the UK in the meantime. These people have every right under European and English law to do this and should not find themselves unduly stigmatised owing to a superficial perception that somehow all bankruptcy tourists are necessarily doing something wrong.

I have sympathy for creditors of individuals who relocate in this way, but there is every reason to be assured that their interests are fully protected. Quite apart from the checks and balances inherent in the court system to prevent abuse, where appropriate annulment applications can and will be pursued by creditors for any that have slipped through the net (and I have been involved in many of these on both sides as well). Also, insolvency practitioners in England and Wales are by now experienced in considering these issues on or before their appointment and dealing effectively with overseas creditors. If there is a problem for these creditors in securing engagement from the English insolvency practitioner, effective local advice can be taken by such creditors to ensure their voice is heard.

It should be noted that the European institutions are currently considering amendments to European law which would potentially make relocation and automatic recognition of UK out of court insolvency procedures more difficult, that Irish insolvency law remains in a state of transition, and that proposals are currently being considered in the UK to extend the current one year bankruptcy discharge period (which has been with us for 10 years or so now) back to three years. Whilst it is to be hoped that the UK will remain the forum of choice for insolvency reorganisations (which bring money into the UK), it may be that the UK bankruptcy tourist trade will soon have had its day.

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3 Comments

  1. Andrey

    Quality post Mr Pavitt!
    I fully support your views on UK bankruptcy tourism. Most of these people (and their families) simply need a fresh start in life. Unfortunately, just a few “celebrity bankruptcy tourists” who make headlines give a very negative perception to majority of common and UK tax-paying debtors from other EC countries.
    Apart from the R3, are you aware of any other proposals for 3 years bankruptcy in England and Wales? What’s your view on this?

    Thanks!
    Andrey

    Reply
    • Paris Smith

      Andrey,
      Many thanks for your post. My thoughts on R3’s proposed bankruptcy law reforms (which I broadly support, although only as part of a package of measures designed to ensure focus on the cases which need most attention) can be found in my blogpost last month http://parissmithdev.co.uk.linux.rh-temp.co.uk/uk-bankruptcy-time-get-tough/#.UvT3efl_vTo
      Various academics have been proposing the return to 3 year discharge since 2004, based in part on experiences in other Commonwealth jurisdictions, but so far as I’m aware it’s only R3 who are seriously picking up the baton at present.

      If you would like to discuss further please email me.

      Mike Pavitt

      Reply
  2. Andrey

    Mr Pavitt, thank you for your prompt reply and your shared views.
    I can’t wait to hear opinions on the subject matter from CAB, Money Advice Trust, Step Change and other pro-debtor organisations. Hope they will get involved sooner rather then later.

    Andrey Smolenko

    Reply

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Mike Pavitt

Posted: 6th February 2014

T: 023 8048 2275

E: Email Me