The EU Strategy for the Baltic Sea Region and topical legal and economic issues, including insolvency

1. The EU Strategy for the Baltic Sea Region and topical legal and economic issues, including insolvency Tallinn University 8-9 November 2012

2. The Phenomenon of "Consumer Insolvency Tourism" and its Challenges to European Legislation Dr. Thomas Hoffmann, LL.M. DAAD-Lecturer in Law University of Tartu, Faculty of Law

3. 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

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

8. II. Discharge regimes in the EU • No discharge in • Bulgaria • Croatia • Greece • Hungary* • Italy • Lithuania* - until 1 March 2013 • Luxemburg* • Portugal • Rumania *Respective drafts pending.

9. II. Discharge regimes in the EU: • Very weak debt discharge systems • 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

10. II. Discharge regimes in the EU: • Countries granting partial discharge • 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

11. II. Discharge regimes in the EU: • Countries granting partial discharge • 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

12. II. Discharge regimes in the EU: • Full discharge: The Scandinavian approach • Sweden: • Regulated since 1994 • Since 2007: no compulsory counseling before applying discharge • Is filed at national enforcement body (not at court) • Payment plan usually 5 years • 50 % file successfully  “once a lifetime”

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

14. II. Discharge regimes in the EU: • Systems influenced by German Law • Estonia: • Since 2004: Discharge possibleafter closure of bankruptcy proceedings •  only after court approval • Since 6 April 2011: Individuals’ debt restructuring procedure provide for discharge without preceding insolvency proceedings

15. II. Discharge regimes in the EU • The most debtor-friendly discharge mechanisms • 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

16. II. Discharge regimes in the EU: • The most debtor-friendly discharge mechanisms • 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

17. II. Discharge regimes in the EU: • The most debtor-friendly discharge mechanisms • 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

18. III. Discharge acknowledgment according to the EIR • Is discharge result of an collective insolvency proceeding acc. to Art. 1-2 EIR and annex A?

19. 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 • Germany and Austria: Discharge is “based on independent decision”  Art 25 I (1) resp (2) (disputed)

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

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

25. 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

30. 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?

31. 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.”

32. 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

33. 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. 45-49) • British courts in Eichler: Debts abroad/practical convenience completely irrelevant for verification of COMI change

34. 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)

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

36. IV. Evaluation of consequences • Is this effect desirable?

37. IV. Evaluation of consequences • Is this effect desirable? •  The avoidance of “forum shopping” is listed in the • EIR preamble recital 4

38. 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 formally no forum • shopping any more, as debtor has just same access • as country national

39. IV. Evaluation of consequences • Is the change of COMI in order to escape creditors an abuse of the freedom of movement?

40. 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

41. 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.

42. 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.

43. IV. Evaluation of consequences But: The purpose of recital 4 is still violated, and:  investigation of debtor’s affairs is impeded  creditor faces discharge “risks” he did not price in when issuing the credit Finally, the destination country’s institutions face considerably more costs and efforts handling “insolvency tourists”

44. IV. Evaluation of consequences • Status quo is legally correct, but not desirable • Morevirulent since 1 May 2011 (complete freedom of movement granted to accession state citizens)? •  How can these interests be taken into account without discrimination?

45. 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 issues are going to lead on long term to convergence

46. 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

47. V. Proposals for legislative reform • Proposal I: No COMI-rule at all for insolvency proceedings granting discharge?

48. 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 then fell bankrupt

49. V. Proposals for legislative reform • Proposal II: Jurisdiction of COMI-country, applicable law of country of origin

50. 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