BANKRUPTCY PROCEEDINGS IN THE UK The legal perspective

1. BANKRUPTCY PROCEEDINGS IN THE UKThe legal perspective Rory Jenkins BA CantabSolic

2. Purpose of this talk To give an overview of the UK legal approach to EU nationals filing for bankruptcy in the UK: • Courts Jurisdiction to grant bankruptcy orders • Meaning of Centre Of Main Interests and recent case law • The effect of bankruptcy in the UK on non-UK assets and debts

3. 1.The court's bankruptcy jurisdiction • A bankruptcy petition can only be presented by a debtor if one of the following criteria applies: • He is domiciled in England and Wales. • He is personally present in England and Wales on the day that the petition is presented at court. • He has had a place of residence or has carried on business in England and Wales at any time in the three years before the issue of the bankruptcy petition. (Section 265, Insolvency Act 1986 (IA 1986).) • In addition to these critierii, EU legislation provides that the court can only make a bankruptcy order over an individual, the effect of which would eventually discharge both UK and foreign bankruptcy debts of the individual, if the individual's centre of main interests (COMI) is in the UK

4. 2. Centre of Main Interests COMI and recent case law • Under the EC Regulation on Insolvency Proceedings (the Regulation) jurisdiction to open insolvency proceedings is conferred under article 3.1 on the courts of the member state “within the territory of which the centre of main interests is situated” thus if you live in an EU member state, except Denmark, you can only make yourself bankrupt in the country where you have your "centre of main interests". What is a debtor’s centre of main interests? • There is no definition of a centre of main interests in the Regulation but guidance is provided in recital 13 of the Regulation which states “The centre of main interests 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”

5. Relevant factors for COMI • Economic activity : the court will usually regard the country where you carry on a business or earn your living as your centre of main interests. • Habitual Residence: the court will also consider the place where you habitually reside. If you are not employed or self-employed your centre of main interests will be the country you habitually reside at the date of the petition. • Professional domicile • COMI of partner • Subjective intention of debtor • Whilst no minimum time is specified for establishment of COMI the Courts will look for a degree of permanence, regularity and continuity. This must not be underestimated.

6. Leading Supreme Court of Appeal case on COMIShierson (trustee in bankruptcy) v Vlieland-Boddy CA 2005 • Lord Justice Chadwick gave the leading judgment and evinced the following legal principles: • A debtor may choose to change his COMI for self serving purposes in particular he may choose to do so when insolvency threatens • Enquiry as to a debtor’s centre of main interests is “an overall enquiry which takes into account all relevant facts, giving to each of the facts such weight as is appropriate to the circumstances of the particular case” • The place in which a debtor carries on the administration of his interests is for the debtor to choose - subjective test • The question where does the debtor conduct the administration of his interests on a regular basis remains an objective question of fact and must be ascertainable by third parties and by the court (article 13.1) • The court must be satisfied that at time of the opening of proceedings COMI was within that member state ( i.e. at the time of the first hearing in respect of the insolvency proceedings or the date of service of the petition if creditors petition) • An element of permanence is required if the COMI is to be ascertainable by third parties and indeed the courts will scrutinise whether a change of COMI is based on substance rather than illusion.

7. High Court's decision in O'Donnell and another v The Bank of Ireland [2012] EWHC 3749 (Ch) (21 December 2012) • In this case, the court dismissed two debtor's bankruptcy petitions presented by Irish nationals. The court found that, although the individuals had moved to England before presenting the bankruptcy petitions, any change of COMI was not sufficiently ascertainable by third parties at that date. • It is subject to appeal by the O’Donnells The judgment reiterates the following established points of law: • When considering where an individual's COMI is located, the court is only concerned with economic interests. • It is the debtor's own interests that are relevant, not any activities undertaken exclusively on behalf of someone else. • The evidence of the individual's COMI must be ascertainable by third parties, creditors and prospective creditors being the obvious relevant third parties.

8. SparkasseHilden Ratingen Velbert v Benk and another [2012] EWHC 2432 (29 August 2012), In Sparkasse Hilden Ratingen Velbert v Benk and another [2012] EWHC 2432 (29 August 2012), The High Court annulled a bankruptcy order that it previously made over a German national who had relocated his COMI to the UK, to take advantage of the UK's more sympathetic bankruptcy regime. The court annulled the order, despite the fact that the bankruptcy order had been discharged before the date of the proceedings. The effect of this was to reinstate a significant debt owed by the German national to a German bank. • This case is interesting as it undertakes a comprehensive analysis of the circumstances on which the individual had based his claim to a UK COMI. It also highlights an increasingly-seen practice of foreign nationals attempting to relocate to the UK purely in a "forum-shopping" exercise. The court was sympathetic to this practice, noted that the motive in acquiring a new COMI is irrelevant but made it clear that any relocation had to be a genuine one to have the effect of creating a UK COMI. • On the facts, the individual in question had proved an untrustworthy witness who had been found to be untruthful to the court in the past, had made no real effort to obtain genuine employment in the UK and had not undertaken a genuine relocation. Unusually, the court also examined the COMI of the debtor's romantic partner, on the basis it was unrealistic to treat the debtor and his partner as having separate COMIs

9. 3. The effect of bankruptcy in the UK on non UK assets and debts • A debtor is automatically discharged from bankruptcy on the first anniversary of his becoming bankrupt (section 279, IA 1986). Once discharged from bankruptcy, a debtor has no further liability for his bankruptcy debts, save in limited circumstances. • Bankruptcy debts are debts or liabilities that the debtor owes at the date of the bankruptcy order or which arise under an obligation incurred by the debtor before the bankruptcy order, but which fall due after the date of the order (section 382, IA 1986). • Providing an individual's COMI is in the UK, the effect of his discharge from an English bankruptcy should be recognised within the EU (other than Denmark) as a discharge from all debts that qualify as bankruptcy debts, regardless of their EU location

10. Assets • The Regulation establishes that the "main" insolvency proceedings for a debtor must be opened where the debtor has its COMI (Article 3(1), Insolvency Regulation). Main proceedings have universal scope and encompass all of the debtor's assets and affect all creditors, wherever located (subject to certain restrictions where secondary or territorial proceedings have been opened elsewhere (Article 17(1), Insolvency Regulation)). • If your main business or residence is or was in the UK, the trustee of your bankruptcy estate will be able to deal with all your assets throughout the EU, except in Denmark.  However, if bankruptcy proceedings have also been started in another EU state where you have had a business, the assets which are in that other state will be dealt with by a trustee appointed there. • Assets which you have in Denmark or any countries outside the EU, for example the USA, will also be part of your bankruptcy estate in the UK. In this case the trustee may encounter problems in selling them if they are not “recognised” in a foreign jurisdiction as having power to sell them. The trustee may require co-operation from you. They may also need to apply for a court order in the foreign country to deal with the asset.

11. Conclusion Purpose of this talk was to give an overview of the UK legal approach to foreign EU nationals filing for bankruptcy in the UK: • Courts Jurisdiction to grant bankruptcy orders and effect • Centre Of Main Interests and recent case law • The effect of bankruptcy in the UK on non-UK assets and debts

12. NOTES

13. High Court's decision in O'Donnell and another v The Bank of Ireland [2012] EWHC 3749 (Ch) (21 December 2012) The judgment reiterates the following established points of law: • When considering where an individual's COMI is located, the court is only concerned with economic interests. • It is the debtor's own interests that are relevant, not any activities undertaken exclusively on behalf of someone else. • The evidence of the individual's COMI must be ascertainable by third parties. • In this case, the court dismissed two debtor's bankruptcy petitions presented by Irish nationals. The court found that, although the individuals had moved to England before presenting the bankruptcy petitions, any change of COMI was not sufficiently ascertainable by third parties at that date. • It is subject to appeal by the O’Donnells Facts • Mr and Mrs O'Donnell are Irish citizens. They invested in a property portfolio that included properties in Ireland, England, France, Sweden and the USA. The O'Donnell's operated under the trading name, Vico Capital, which was registered in Ireland as a business name. • On 12 December 2011, the Bank of Ireland obtained judgment against them for more than Euro 71 million. On or around 29 December 2011, the O'Donnells went to England and remained there, other than to attend certain court hearings in Ireland. The O'Donnells asserted that they intended to live permanently in England. • On 27 March 2012, Mr and Mrs O'Donnell each presented a petition for their bankruptcy. The bank, whose debt was estimated to be about 91 per cent of the O'Donnells' total indebtedness, subsequently presented bankruptcy petitions in Ireland. • The bank opposed the English bankruptcy petitions. The bank's main argument was that the English court had no jurisdiction over the bankruptcy proceedings as the O'Donnells' COMIs were in Ireland. Decision • Newey J dismissed the bankruptcy petitions. His judgment contains a detailed summary of the evidence before the court, as well as certain matters that case doubt on Mr O'Donnell's credibility as a witness (paragraphs 40-55). The factors mentioned as relevant to Newey J's decision on the location of the O'Donnells' COMI before December 2011 (when the O'Donnells moved to London) included: • The O'Donnells were on the electoral roll and submitted tax returns in Ireland, not in England. • The website of Vico Capital referred to Mr O'Donnell as a Dublin-based solicitor. • Vico Capital had no permanent staff outside Dublin. • Mr O'Donnell spent most of his time in Ireland and it was likely that the majority of his business decisions were made in Ireland. • Although the UK Companies' House recorded the O'Donnells' address as in London, it stated their country of residence as Ireland. Various transactional documents also gave a Dublin address for the O'Donnells. • Newey J considered separately, evidence regarding the O'Donnells' COMI since December 2011. He accepted that the couple intended to stay in London. However, a change in COMI to England was not sufficiently ascertainable by third parties as at 27 March 2012, when the petitions were presented. For example: • Some of the facts relied on in evidence would not have been public knowledge (for example, that the O'Donnells had acquired a Westminster library card, or instructed English insolvency practitioners). • The O'Donnells remained on the electoral roll in Ireland (although, by 27 March 2012, in England as well). • Vico Capital continued to be registered as a business name in Ireland. • Although Mr O'Donnell claimed that he and his wife and written to each of their creditors informing them of their move to the UK, no copy letters were produced in evidence. Further, there was evidence that no letter was received by one of the creditors.

14. SparkasseHilden Ratingen Velbert v Benk and another [2012] EWHC 2432 (29 August 2012), High Court Decision of High Court • The court held that B's COMI was in Germany both at the time of the presentation of the second bankruptcy petition, and when the bankruptcy order was made. The court's decision was based on the following findings of fact: • Habitual residence. B was habitually resident in Germany, though living temporarily in England. The court noted that habitual residence does not require presence at any particular time, only habit. • Professional domicile. B was a professional notary in Germany at all material times. This was despite the fact that he was suspended from practice as a notary at the time of his bankruptcy petition. He lodged a number of appeals against the suspension, including during the bankruptcy. This suggested that B's real purpose was to resume activities in Germany once the bankruptcy was discharged. B's attempts to revive his notarial career were not merely a matter of keeping his options open: he had no other viable means of supporting himself as his purported professional activities (as a sports photographer) in England were mere "window dressing". • Creditors. Most of B's creditors were located in Germany. B had taken no formal steps to notify them of his change of COMI. Although the creditors may have known of B's change in location, due to the formalities of the first, annulled, bankruptcy, this was not sufficient to establish a change in COMI. The court cited Irish Bank Resolution Corporation Ltd v Quinn [2012] NICh 1 as (albeit Northern Irish) authority that the ascertainability of a person's COMI should not normally require actual notification by that person to his creditors (though it may do so sometimes) but nor should a debtor hide his COMI: • "COMI should be ascertainable by a reasonably diligent creditor, but no creditor should be required to search through every phone book in Europe." • Economic activity. B's only serious economic activity after his relocation to England took place in Germany, represented by his litigation to protect his status as a notary, and to preserve his German assets. • COMI of B's partner. B had been financially dependent on his partner (E) since coming to England. Despite E's visits to England, and her joint name on the tenancy agreement for B's English accommodation, E financed all B's English expenses through her German accounts, used her German addresses for significant transactions and maintained a German residence, to which she returned shortly after B was discharged from the bankruptcy. These factors clearly pointed to E maintaining a COMI in Germany. As well as B's financial dependence on E, the close mutual emotional dependence of B and E as a couple made it unrealistic, in this case, to regard the two as having a separate habitual residence or a separate COMI from each other. • Subjective intention of the debtor. B's performance as a witness suggested that he never saw his presence in England as anything other than a convenient short-term arrangement. The court considered that B's real objective was to facilitate his return to Germany free of historical debt, to resume his practice as a notary, and to enjoy his German real estate and pension fund.

15. Sparkasse Hilden Ratingen Velbert v Benk and another [2012] EWHC 2432 (29 August 2012), High Court The court in Sparkasse helpfully summarised the common law tests for an individual's COMI as follows: • An individual's COMI is where he can be contacted; this will normally be his habitual place of residence (see Geveran Trading Co v Skjevesland [2003] BCC 209, upheld on appeal). • A debtor's COMI is, in the case of professionals, the place of their professional domicile and for natural persons in general, the place of their habitual residence (Virgos-Schmidt report and Shierson v Vlieland-Boddy [2005] 1 WLR 3966). • "A man's habitual residence is his settled, permanent home, the place where he lives with his wife and family, […] the place to which he returns from business trips elsewhere or abroad…" (Official Receiver v Stojevic [2007] BPIR 141). • A debtor's COMI must have an element of permanence (Official Receiver v Mitterfellner [2009] BPIR 1075). • A debtor can only have one COMI. • A debtor's COMI must be ascertainable by third parties, in particular creditors and potential creditors (Shierson). • An individual is free to re-locate his COMI, even on the eve of insolvency; what a court must determine on the facts is whether the change in COMI is one of substance or a mere illusion (Shierson). • That change must also have an element of permanence (Shierson and Re Eichler). • Whilst a debtor's choice as to where he conducts the administration of his affairs may be subjective, where he actually carries on the administration of his affairs on a regular basis such that it is ascertainable by third parties and by the court is an objective question (Shiersonand Re Eichler). • The term "on a regular basis" indicates "a quality of presence", "a degree of continuity", "an idea of normality", "a stable link with the forum" and "a degree of permanence" (Stojevic and Re Eichler). • "Regular administration" of a debtor's interests means that the court must look for the place from which the debtor exercises the management, organisation and control of his interests (Stojevic and Re Eichler). • Whilst the date on which the COMI is to be established is the date of presentation of the petition, evidence as to the debtor's activities and actions at other times may be significant in that they cast light on the truth or otherwise of his claim to have had his COMI in England at the relevant time (Shierson).