A Case Study of Divergences and Convergences in National Personal Insolvency Laws in the Context of European “Bankruptcy Tourism”

Ireland v England and Wales: from “Debtors’ Prison” to “Debtors’ Paradise” and the incentives for forum shopping provided by differences in national laws.

Impossibility of harmonisation: inherently national characteristics influencing divergences in personal insolvency law?

Trends towards convergence: natural reduction in incentives for forum shopping.

Irish personal insolvency law wholly inappropriate to address the country’s high levels of over-indebtedness

Access:• Ireland: high costs and procedural complications.• England & Wales: inexpensive and simple procedure (same day

bankruptcies). Discharge conditions:

• Irl: No automatic discharge: 12 years plus preferential payments plus realisation of entire estate plus court discretion. It “may be that, because of the requirement to discharge expenses and

preferential payments as a precondition to being discharged from bankruptcy, the [debtor] has no prospect of being discharged and will remain a bankrupt for the remainder of [his or her] life unless... [the debtor] wins the lottery.” Grace v Ireland [2007] IEHC 90, per Laffoy J.

• EW: 12 month automatic discharge. Restrictions:

• Irl: severe restrictions with view that all bankrupts are dishonest and should be excluded from society.

• EW: fewer restrictions, with distinction between honest and culpable debtors – BROs and BRUs.

Conclusions: • Differences in national laws create irresistible incentives for forum

shopping.• Extent of differences make harmonisation impractical.

Are personal insolvency laws based on inherently national characteristics/preferences, meaning that harmonisation is impossible and/or undesirable?

Social welfare provision• Generous social welfare system could justify restrictive bankruptcy

regime.• Ireland: third smallest unemployment benefit in EU15; lowest income

replacement rate in EU15 (2009). Regulation of credit markets

• Open credit markets lead to increased indebtedness and necessitate liberal insolvency laws.

• Ireland: open credit markets and huge levels of indebtedness, but restrictive bankruptcy regime.

National dispositions towards entrepreneurship• Bankruptcy as a safety net for risk-takers and a driver of

entrepreneurship.• Ireland: traditional pro-entrepreneurship government policy and

national opinion; bankruptcy law unfriendly towards entrepreneurs. National “culture”

• Ideological and cultural views of credit, indebtedness and default.• Irish law appears to deter and punish over-use of credit, yet Ireland has

a modern consumer credit society.

“Facts on the ground” and political economy.• Plus research explaining flawed premises of old approaches.

Role of political influences in personal insolvency law reform: • BAPCPA 2005 in USA.• European consumer bankruptcy revolution during recession of

early 1990s. Ireland:

• Late 1980s/early 1990s : Very low levels of personal debt: bankruptcy reform not an urgent issue.

• 2000s: Credit-driven boom and bust: personal indebtedness as a priority public concern.

• Law Reform Commission: research explaining flawed premises of traditional legal approach and outlier status of Irish law.

Are the links between personal insolvency law and national characteristics overstated?

Do national characteristics continue to create obstacles to convergence?

France• Consumer insolvency system based on minor, consensual

adjustments to contractual obligations.• 2004: “personal recovery” procedure: immediate and total

debt discharge.

Sweden • Typical continental approach : restricted access, mandatory

payment plan, debt counselling and voluntary negotiations.• 2007: removal of restrictions on access.• “zero proposal”: immediate debt discharge.

Netherlands• Mandatory payment plan (3 years).• 2008: discharge after one year for debtors unable to make

part repayments sufficiently large to justify continuing plan.

England and Wales• IVA repayment plan as the “gateway criterion”.• Debt Relief Orders: mandatory debt counselling.

Ireland• Law Reform Commission recommendations 2009-2010.• Bankruptcy law: access, discharge, restrictions.• Introduction for first time of a non-judicial debt

settlement system: inspired by UK and European regimes.

• An outlier of European personal insolvency laws falls in line with laws of other Member States

Possibilities for future convergence and consequent reduction in forum shopping

Increase in scope and influence of comparative research: • Renewed academic interest, pan-European research projects,

European Consumer Debt Network...

European Union and Council of Europe initiatives:• European Commission Communication: Overcoming the Stigma

of Business Failure – for a Second Chance Policy (COM(2007) 584 final).

• Recommendation of the Committee of Ministers to Member States on Legal Solutions to Debt Problems (Council of Europe CM/Rec(2007)(8), 2007).

Awareness of bankruptcy tourism as a driver of convergence:• “Debtors’ Prison” and “Debtors Paradise”: are either reputations

desirable?• Race-to-the-middle?

It may be impossible to remove incentives for forum shopping without harmonisation: bankruptcy tourism remains very attractive.

Harmonisation may be practically impossible at present.

Personal insolvency laws may not be as closely linked to inherently national characteristics as often thought: common realities of credit society and political factors may be key.

Therefore, obstacles to convergence, if not harmonisation, can be overcome.

Convergence has begun, and looks likely to continue. Natural convergence in national laws may remove

incentives for forum shopping.

Thank You