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

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

including insolvency

Tallinn University8-9 November 2012

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

I. 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

I. The phenomenon of Consumer Insolvency Tourism

What triggers Bankruptcy Tourism?

• Main incentive: Discharge regimes are considerably divergent

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.

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


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


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


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”


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


Systems influenced by German Law

Estonia:• Since 2004: Discharge possible after closure of

bankruptcy proceedings

only after court approval

Since 6 April 2011: Individuals’ debt restructuring procedure provide for discharge without preceding insolvency proceedings

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



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



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

III. Discharge acknowledgment according to the EIR

Is discharge result of an collective insolvency proceeding acc. to Art. 1-2 EIR and annex A?


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)


Remaining EU member states:

Consumer debt adjustment proceedings are sometimes regulated outside insolvency laws (eg F)

no application of the EIR


Comparison of discharge conditions:

Most attractive are

• Great Britain and

• France (Alsace-Moselle).


Bankruptcy tourism is professionally maintained/supported by an emerging “industry”

services (often all-inclusive offers) are provided via internet


Their main task: Assistance in moving the COMI

What is the COMI according to Art 3 I EIR for

natural persons?


• 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.”


• „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


• 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


• 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)


• 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)

IV. Evaluation of consequences

• Is this effect desirable?



The avoidance of “forum shopping” is listed in the

EIR preamble recital 4



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


• Is the change of COMI in order to escape creditors an abuse of the freedom of movement?


• 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


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.


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.


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”


• Status quo is legally correct, but not desirable

• More virulent since 1 May 2011

(complete freedom of movement granted to accession state citizens)?

How can these interests be taken into account without discrimination?

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


• 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


• Proposal I: No COMI-rule at all for insolvency proceedings granting discharge?


• 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


• Proposal II: Jurisdiction of COMI-country, applicable law of country of origin


• 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


• 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


• 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.


• 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.


Alternatives:• Rebuttable presumption of insolvency during that

period (Walters/Smith)

general suspicion of immigrants


Alternatives:• Rebuttable presumption of insolvency during that

period (Walters/Smith)

general suspicion of immigrants

• COMI stays with home country as soon as there are

any unpaid liabilities (Moss/Paulus)

unfair if majority of debts is incurred after relocation

Proposal:

“The change of COMI to another member state becomes effective not before three years after relocation, if the sum of unpaid and unsecured liabilities in the point of relocation exceed € 15.000,-.”

What do you think?

____________

Contact

Thomas Hoffmann

DAAD-Lecturer in Law, Tartu University

[email protected]

www.rechtintartu.ee

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