Solving Personal Debt Problems with Support from Europe

Most citizens of member states of the European Union (EU) are unaware of certain unexpected benefits that EU membership conveys in relation to personal insolvency. These benefits are rooted in the principle of the free movement of labour which EU citizens enjoy within the EU and are particularly relevant for those who find themselves overburdened by debt and threatened with aggressive insolvency proceedings in certain member states of the EU.

There are huge differences in insolvency legislation between different member countries of the EU. The UK is often held up as a shining beacon of enlightenment insofar as it has evolved a comprehensive body of personal insolvency law. This provides any insolvent citizen with a variety of solutions to their predicament. The wide variety of remedies and options available are neither draconian nor punitive. What they do offer however is recognition of every citizen’s right to a second chance – a fresh start in fact. The underlying philosophy could be described as pro-entrepreneurial akin to the economic environment in the USA and when compared to some other member states of the EU, the UK system is particularly attractive. In the UK insolvent debtors can get the opportunity to rehabilitate themselves, whereas in certain other EU member states the prevailing legislative and social culture tends to seek to punish the insolvent debtor. So how can the insolvency culture in the UK provide unexpected benefits for European Union citizens who are not UK citizens?

European Union regulations permit the insolvency legislation of one EU member state to apply in another, subject to certain provisos. One of the features of cross-border insolvency is that debtors may seek to open insolvency proceedings in a state of the EU, other than the state in which they reside and work. Furthermore, they may choose any member state in which to exercise this right and it is only to be expected that they would choose a state which has enacted insolvency legislation more favourable to their particular circumstances than that which prevails in their own ‘home’ jurisdiction. This phenomenon is sometimes referred to as “forum shopping”. As a result of this right, an insolvent debtor who lives in any member state may be able to put forward an Individual Voluntary Arrangement (IVA) or petition for bankruptcy or indeed pursue some other legal solution to their debt problems in the UK – provided that the UK is their “centre of main interests”. The definition of the term “centre of main interests” or COMI is of course key to the matter.  The relevant EU Regulation states that “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”.

The usual interpretation of this statement is that the COMI will be the country where the debtor mainly carries out their trade, profession or self-employment. Where the debtor does not trade or carry on a profession, the COMI is usually considered to be the country where he or she resides. If the debtor resides in one country and trades in another, the COMI is the country where the debtor trades. Where the person’s only connection with a country is that they work there on a non self-employed basis (perhaps, commuting from a neighbouring country), then the COMI will generally be in the country in which they live and consequently pay bills, operate a bank account, purchase goods and so on.

In the event of bankruptcy proceedings, the COMI is determined at the date the petition is presented and not where, historically, the relevant activity was carried out. Therefore the location of creditors and the country in which debts were incurred are not material issues in determining a COMI. Interestingly, although not relevant to personal insolvency is that in the case of a company, the COMI is the registered office, in the absence of proof to the contrary.

What about an IVA? To take an example: a serving member of the Armed Forces who is serving abroad and who may be stationed abroad for long periods may enter into an IVA in the UK. The same may apply to anybody who is for example working in an EU member state but whose assets are located in the UK. Similarly, anybody who works in the merchant navy may enter into an IVA, even though they may be abroad for much of their working lives, provided their “centre of main interests” is in the UK. Obviously there are many different scenarios which may impact on the debtor’s capacity to comply with the terms of an IVA. These could include assets held or acquired abroad or the likelihood of incurring debts abroad during or just prior to the term of the proposed IVA. Nevertheless, creditors will generally approve such an IVA provided they are satisfied with the debtor’s capacity to comply with the terms. It should be noted that an IVA in the UK is limited to England, Wales and Northern Ireland. For Scotland the broadly equivalent insolvency solution is a Trust Deed.