The flight of the Irish Bankrupt

Put yourself in the shoes of a type of individual who has become considerably more prevalent of late: the businessman or woman who has, through a combination of well-intentioned but flawed decision-making, and economic circumstances unprecedented in adversity, found themselves in a state of financial ruin and designated with that most pejorative of terms – bankrupt.

Anyone who has even flirted mildly with this state knows the terrible toll it exerts: progressive physical debilitation and mental turmoil, to say nothing of the destruction it brings on personal and family relationships.

The only possible relief for this person is some scintilla of hope that he or she might have the opportunity to put things right and to turn the situation around. That they can, through redoubling of effort and application of their talent and ingenuity, one day recover to an acceptable level of economic well-being for themselves and their families.

Sadly, for all too many Irish people, this is at present an impossibility if they are to remain within the Irish jurisdiction. For here in Ireland we have bankruptcy legislation that stands with the most punitive and archaic in the world and can effectively condemn the bankrupt to a lifetime of virtual penury and economic paralysis.

The Irish bankrupt can look forward to a miserable existence where he or she can retain the tools of their trade and very little else. Any prospective earnings are subject to attachments on the part of their creditors giving little incentive to the bankrupt to trade his or her way out of their predicament. It is impossible to plan for the future and the original debt is often compounded by the requirement to reimburse the petitioner’s legal costs. And this goes on indefinitely.

The Law Reform Commission in its report on Personal Debt Management and Debt Enforcement late last year recognised the suffocating effect of our bankruptcy laws on entrepreneurial activity. In its report it set out the rationale for a more indulgent attitude to insolvency and the possibility of early discharge.

As the Commission stated: “Personal insolvency laws acts as a form of limited liability whereby individuals who are aware that business failure will not result in a life of over-indebtedness will be more likely to take the risks necessary to start new business ventures which are essential for the growth of the economy and the generation of employment. The safety net of insolvency procedures thus encourages entrepreneurial activity.”

In fact, the Commission states that research shows that bankruptcy law has a hugely significant impact on the levels of self-employment in an economy. Bankruptcy laws are in fact the most important contributor to high levels of self-employment – even more so than other factors such as real GDP growth: “Generous bankruptcy laws, particularly regarding the property which a debtor may retain in bankruptcy, support small-business formation by providing a form of implicit wealth insurance.”

The Commission in its report proposed a number of reforms in the current judicial (High Court based), bankruptcy system, currently regulated by the Bankruptcy Act 1988.

While the Commission agreed that the judicial bankruptcy process remains suitable for large and complex cases or for those that cannot be resolved using its proposed non-judicial process (for example, because a debtor did not act in good faith) there are far-reaching recommendations.

First, it is proposed that there is an automatic discharge from bankruptcy after 3 years, subject to leaving the bankrupt’s full estate (including any house) in the bankruptcy; and allowing the High Court’s Official Assignee in Bankruptcy to order the bankrupt make repayments for up to 5 years.

Hard to believe, but a person with a debt of €1,900 can be petitioned for bankruptcy: the Commission proposed this be increased to a minimum €50,000. The Commission also proposed a reduction in the number of priority debts in bankruptcy (including Revenue debts).

Exactly when and if these proposals will be implemented remains unclear. On a positive note, the Fine Gael election manifesto is clear called for a reduction in the time to discharge from bankruptcy from six years to one for “honest bankrupts” (these they define as one that has materially complied with the Tax, NAMA and Companies Acts among others). The manifesto also calls for a prohibition against discrimination against discharged bankrupts to ensure that former bankrupts are treated fairly in their applications for credit or other services.

But that is for the future. Meanwhile, in the great Irish tradition of exporting our domestic problems, it is small wonder that increasingly large numbers of individuals are looking abroad to find a route out of their predicament.

Most infamously, there is the case of former Anglo Irish Bank CEO, David Drumm, who has moved to the US. For the vast amount of hopelessly indebted the easiest option is the United Kingdom. This option is available to Irish citizens under EU law which states that a person may migrate their centre of main economic interest (COMI).

Naturally, as Irish citizens struggle with the fallout of reckless borrowers, any moves by former corporate buccaneers away from the jurisdiction are naturally greeted with considerable skepticism, to put it mildly. Apart from David Drumm, we also have names such as Sean Dunne and Derek Quinlan, who now prefer the attractions of the United States and Switzerland, respectively, to their native land.

But going bankrupt in the UK is not an easy option – the applicant loses everything bar the spouse’s share of jointly-owned assets which must be sold (including the family home) and in some cases a portion of pension assets – but the process is considerably more straightforward and less punitive than Ireland. All that is needed is a UK address where the would-be bankrupt has resided for six months. Providing the bankrupt makes a full disclosure of his or her financial status it is possible for the bankrupt to be discharged within a year.

And of course are less scrupulous individuals for whom the foreign bankruptcy option is attractive – the serial defaulters and opportunist bankrupts who seek to evade their obligations in a manner for which the provisions of the law was never intended.

Here at Stubbs we plan to keep a close eye on Irish citizens who look to file for bankruptcy abroad and we look forward in particular to bringing suspect recidivist behaviour to the attention of our readers.