Bankruptcy tourism

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Any English judge sitting regularly in the personal insolvency jurisdiction is likely, at one time or another, to have considered a debtor’s petition in which all the listed debts were incurred in a foreign country, in a foreign currency and, usually, to foreign creditors. The currency was probably the euro, the country most likely Germany or the Republic of Ireland. The question of jurisdiction will have been raised in the judge’s mind. What is the debtor’s centre of main interests (COMI) for the purposes of Council Regulation (EC) No 1346/2000 of 29 May 2000 on Insolvency Proceedings (2000) OJ L 160/1 (the regulation) which governs jurisdiction?

Article 3 of the regulation provides that: ‘(1) The courts of the member state within the territory of which the centre of a debtor’s main interests is situated shall have jurisdiction to open insolvency proceedings…

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‘(2) Where the centre of a debtor’s main interests is situated within the territory of a member state, the courts of another member state shall have jurisdiction to open insolvency proceedings against that debtor only if he possesses an establishment within the territory of that other member state. The effect of those proceedings shall be restricted to the assets of the debtor situated in the territory of the latter member state…’

While the concept of COMI is not defined in article 3 itself, paragraph 13 of the preamble to the regulation states that it ‘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’.

In these cases, it is usual for the judge to adjourn the matter and direct that the debtor bring evidence to the next hearing that his COMI has been in England for at least the previous six months. The directions may specify that a tenancy agreement, utility bills in his name, payslips, bank and credit card statements for the previous six months be shown. They may also require that the debtor notify all of his creditors of the adjourned hearing date and bring evidence of this notification and any responses to the hearing.

It is quite usual for the debtor to do what is asked of him. At the adjourned hearing the evidence may show that he has a tenancy agreement of a house (or more often a room) at an address in England, he has six months of payslips showing income for a job in the UK, his bank statements show payments in and out, use of a debit card at a cash machine or in Starbucks. He may show notifications to creditors and either no replies or form replies saying ‘thank you for telling us’. The judge will weigh up the evidence, may conclude that the COMI is in England and make the bankruptcy order. In most cases the debtor will be automatically discharged in a year instead of the minimum of six years for a German bankruptcy and five years in Ireland.

In Sparkasse Hilden Ratingen Velbert v Benk & Anor [2012] EWHC 2432 (Ch) (29 August 2012) this, broadly speaking, is what happened. Mr Benk petitioned for his own bankruptcy in June 2010 evidencing that he had moved his COMI to England in June 2009 following the severance of his ties with Germany. He had previously practised as a notary in Germany but was suspended from his notarial position in June 2009, at which point he deregistered as a resident of his local area and moved to England. He had no property interests in Germany as they had all been repossessed by lenders. Mr Benk said he was working in the UK as a sports photographer and showed he had rented a flat, bought and insured a car, obtained a National Insurance number, opened a bank account and carried out his normal day-to-day activities in the UK since then. Accordingly, the district judge made a bankruptcy order against him, despite the opposition of the official receiver.

The official receiver was interested because Mr Benk had previously been made bankrupt on his own petition in May 2009. That was annulled under section 282(1)(a) of the Insolvency Act 1986 (IA) on the official receiver’s application, on the grounds that Mr Benk had provided false information to the court and still had his COMI in Germany. One of Mr Benk’s creditors, who was owed €3m, made the application to annul the bankruptcy order of June 2010, again under section 282(1)(a) of the IA on the grounds that it should not have been made because Mr Benk’s COMI was still in Germany. This application was heard by Judge Purle QC who found on the facts that Mr Benk’s COMI was, at all material times, in Germany. He annulled the bankruptcy order. The facts included that for some time while Mr Benk was claiming to be a sports photographer, he did not own a camera.

In his judgment Judge Purle QC provided a very useful review of all of the various authorities on establishing COMI and set out the principles which govern such cases. These should be considered by any solicitor acting for the official receiver, a trustee in bankruptcy or a foreign creditor in annulment applications, and by any solicitor advising a client on the subject of bankruptcy proceedings, where there are jurisdictional concerns.

In particular, it is now clear that where a debtor has changed his COMI in the face of potential insolvency, the court must scrutinise the facts to determine whether this change is based on substance or is an illusion. In doing so, it may consider evidence as to the debtor’s activities and actions at times other than the date of presentation of the petition, if such evidence casts any light on his claim to have had his COMI in England at the relevant time. English judges sitting in the personal insolvency jurisdiction may have to look a little deeper into the circumstances of the debtor’s move to England and claims to have severed ties with the home country.

District Judge Melissa Clarke sits at the Bankruptcy Court, Central London County Court at the Royal Courts of Justice

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