Consumer Insolvency Tourism and the EIR

1. Consumer Insolvency Tourism and the EIR – stuck between convergence needs and the Stockholm action plan? Dr. Thomas Hoffmann, LL.M. Institute of East European Law, CAU Kiel

2. The phenomenon of Consumer Insolvency Tourism • “Consumer”: Slightly incorrect; most “tourists” are professionals (same goes for “Tourism”) • Technically possible by EIR provisions which were initially created for corporate insolvencies • Emerging due to increasing over-indebtedness all over Europe

6. The phenomenon of Consumer Insolvency Tourism • What triggers Bankruptcy Tourism? • Main incentive: Discharge regimes are considerably divergent

7. II. Discharge regimes in the EU • No discharge in • Bulgaria • Croatia • Greece • Hungary* • Italy • Lithuania* • Luxemburg* • Portugal • Rumania *Respective drafts pending.

8. II. Discharge regimes in the EU • Austria: • Since 1993 • If creditors agree: Partly Discharge after a maximum of 7 years (“Zahlungsplanverfahren”) • Without agreement: “Abschöpfungsverfahren” •  Minimum of 50 % to be paid within 3 years or •  Minimum share of 10 % within 7 years

9. II. Discharge regimes in the EU • Czech Republic: • Since 2008 • Two options: •  All assets are sold in order to pay creditor or •  income of following 5 years is paid to creditors. • Either way: 30 % have to be paid before discharge is granted by the court

10. II. Discharge regimes in the EU • Estonia: • Since 2004: Discharge possibleafter closure of bankruptcy proceedings •  only after court approval •  habitual residence must be in Estonia 2 years before filing bankruptcy (!) • From 6 April 2011: Individuals’ debt restructuring procedure provide for discharge without preceding insolvency proceedings

11. II. Discharge regimes in the EU • France: • Since 1989 (Loi Neiertz) • “code de consommation”  no insolvency procedure according to the EIR • Application by commission, not by debtor • “rétablissment personel” is granted after a judicial procedure taking 9-18 months

12. II. Discharge regimes in the EU • France (only Alsace-Moselle): • Code de commerce is applicable for consumers •  insolvency proceedings according to EIR • If no real estate, simplified proceedings: • 15 months maximum • Debts become merely unenforceable • “Wohlverhaltensphase” of up to 2 years upon court decision

13. II. Discharge regimes in the EU • Germany: • Verbraucherinsolvenzverfahren, since 1999/2001 • 6 years “Wohlverhaltensphase” (debtor must assign income above minimum wage to court-appointed trustee) •  Reduction to 3 years discussed

14. II. Discharge regimes in the EU • Great Britain (England and Wales): Since 1976 • Bankruptcy: automatic discharge 1 year after opening of proceeding; no payments to creditors • County court administration order: Debts of max 5.000 GBP; court decides upon eventual payments on discretion • Debt relief order: Access restrictions; discharge generally after 1 year

15. II. Discharge regimes in the EU • Ireland: Bankruptcy Act, 1988 • Discharge generally only after 12 years • During this period, a partial payment of debt’s can be imposed on court’s discretion • Eventual exception from the 12-years-period possible when 50 % of the debts are paid

16. II. Discharge regimes in the EU • Sweden: • Regulated since 1994 • Since 2007: no compulsory counselling before applying discharge • Is filed at national execution body (not at court) • Payment plan usually 5 years • Restr. access (>3 years of over-indebtedness, 50 % file successfully)  “once a lifetime”

17. III. Discharge acknowledgment according to the EIR •  Is discharge result of an collective insolvency proceeding acc. to Art. 1-2 EIR and annex A? • Only Belgium and The Netherlands explicitly listed discharge mechanisms in annex A • Ger and A: Discharge is based on independent decision  Art 25 I (1) resp (2) (disputed)

18. III. Discharge acknowledgment according to the EIR  Remaining EU member states: Consumer debt adjustment proceedings are sometimes regulated outside insolvency laws  no application of the EIR

19. III. Discharge acknowledgment according to the EIR •  Comparison of discharge conditions: • Most attractive are • Great Britain (England and Wales) and • France (Alsace-Moselle).

23. III. Discharge acknowledgment according to the EIR Bankruptcy tourism is professionally maintained/supported by an emerging “industry”  services (often all-inclusive offers) are provided via internet

28. III. Discharge acknowledgment according to the EIR Their main task: Assistance in moving the COMI  What is the COMI according to Art 3 I EIR for natural persons?

29. III. Discharge acknowledgment according to the EIR • Eurofood/Stanford I’tl Bank: • COMI has to be interpreted in uniform manner • “objective and ascertainable” • Virgos-Schmit: “The COMI (…) will be for natural persons, in general, the place of their habitual residence.”

30. III. Discharge acknowledgment according to the EIR „Habitual residence“ does not presume COMI EU-wide (court practices differ), but is the least common denominator It is not „domicile“ (as in German Insolvency Law): Possible multitude of domicile contradicts principle of ascertainability

31. III. Discharge acknowledgment according to the EIR • COMI can be deliberately changed •  freedom of movement enshrined in Treaty on the Functioning of the EU (Art. 39-42) • British courts in Eichler: Debts abroad/practical convenience completely irrelevant for verification of COMI change

32. III. Discharge acknowledgment according to the EIR • Change may even be temporal • (to some degree). •  Therefore, this “habitual residence” is the only condition to be examined by courts •  is conducted thoroughly (eg french court practice)

33. III. Discharge acknowledgment according to the EIR • Relevant point of time for examination: • Date of reception of the application to open the insolvency proceedings by the relevant insolvency court • (Re Staubitz-Schreiber)

34. IV. Evaluation of consequences • Is this effect desirable? •  The avoidance of “forum shopping” is listed in the EIR preamble recital 4 •  But: After a genuine move of the COMI applying for a more favorable discharge is in so far no forum shopping any more, as debtor has just same access as country national

35. IV. Evaluation of consequences • Is the change of COMI in order to escape creditors an abuse of the freedom of movement? •  No: “Fact that law is not harmonized is of little consequence” (Re centros) •  EU Freedoms aim at integration among Europ. peoples  shift of COMI is exactly that

36. IV. Evaluation of consequences • Abuse of the EIR? •  No case law, but taking to EU precedents (Emsland-Stärke), an abuse were • the intention to conduct • artificial operations in order to obtain • advantages contradicting the purpose of EIR. •  Disputable, probably not.  No abuse at all.

37. IV. Evaluation of consequences But: Recital 4 is being violated  investigation of debtor’s affairs is impeded  creditor faces discharge “risks” he did not price in when issuing the credit And practical problems: The destination country’s institutions face considerably more costs and efforts handling “insolvency tourists”

38. IV. Evaluation of consequences • Status quo is legally correct, but not desirable • Will be even more virulent after 1 May 2011 (complete freedom of movement granted to accession states) •  How can these interests be taken into account without discrimination?

39. V. Proposals for legislative reform • Reform of the EIR does only work on symptoms • In order to remove incentives, the convergence of EU discharge regimes is inevitable • Common background (credit society), EU legislation in consumer law and bankruptcy tourism phenomenon are going to lead on long term to convergence

40. V. Proposals for legislative reform • But: Until then, a reform of the EIR can help to allay the starkest discrepancies • Reform should address exclusively cases where a COMI change was conducted only to flee creditors

41. V. Proposals for legislative reform • Proposal I: No COMI-rule at all for insolvency proceedings granting discharge? •  hardly feasible: Jurisdiction would have to be determined by origins of debt (Rome I) •  unfair to those who moved for “upright” reasons and than fell bankrupt

42. V. Proposals for legislative reform • Proposal II: Jurisdiction of COMI-country, applicable law of country of origin •  hardly feasible: COMI-courts have to apply foreign law (contradicts lex fori conc. principle) •  Here as well: unfair to those who moved for “upright” reasons and than fell bankrupt

43. V. Proposals for legislative reform • Proposal III: Raising the “price” for discharge •  Essential difference to corporate COMI change: • The genuine change of COMI is an essential personal detriment for “abusers” of EU freedoms

44. V. Proposals for legislative reform They pay discharge by “expatriation” This price can be gradually raised by increasing the period which has to pass after relocation before a debtor can request to open a proceeding. The period only takes effect if unpaid liabilities in the home country exceed a certain sum.

45. V. Proposals for legislative reform • Alternatives: • Rebuttable presumption of insolvency during that period (Walters/Smith) •  general suspicion of immigrants over-broad • COMI stays with home country as soon as there are any unpaid liabilities (Moss/Paulus) •  unfair if majority of debts is incurred after relocation

46. V. Proposals for legislative reform • Proposal: • “The change of COMI to another member state becomes effective not before three years after relocation, if at relocation the sum of unpaid and unsecured liabilities in the state from where the debtor relocates exceed € 50.000,-.”

47. I really look forward to further proposals. - Thank you for your attention.

48. The organisers of the Conference thank the following for their support Conference Sponsor www.buse.de Conference Supporter Academic Forum Sponsor Consiglio Nazionale dei Dottori Commercialisti e degli Esperti Contabili www.cndcec.it www.edwincoe.com

49. The organisers of the Conference thank the following for their support Conference Sponsor www.buse.de Conference Supporter Academic Forum Sponsor Consiglio Nazionale dei Dottori Commercialisti e degli Esperti Contabili www.cndcec.it www.edwincoe.com

50. The organisers of the Conference thank the following for their support Conference Sponsor www.buse.de Conference Supporter Academic Forum Sponsor Consiglio Nazionale dei Dottori Commercialisti e degli Esperti Contabili www.cndcec.it www.edwincoe.com