Our drawn-out bankruptcy process may seriously hinder economic recovery

PICTURE THE scene. It’s a courtroom in some city in the English midlands – Birmingham, for example. It’s a dull Monday morning in January. A barrister gets to his feet and tells the judge his client has declared himself bankrupt. The name means nothing to anyone in the room.

A few eyebrows might be raised at the size of the debts, most of which relate to property, but that is it. They don’t know it, but the handful of people in the court have just witnessed one of the titans of the Celtic Tiger quietly throwing in the towel.

It hasn’t happened yet, as far as we know, but Dublin is awash with rumours of property developers and financiers either planning to move to the UK to go bankrupt or having actually done so.

The reason is that in theory you can get out of bankruptcy in the UK in a year, compared with 12 years in the Republic

The story is fast becoming something of an urban myth, but that is all it is ever likely to be. That at least seems to be the view of a report published last month on forum shopping, as it is known, for insolvency by Dublin law firm Beauchamps.

There seem to be three main issues, the first being that the European Union is opposed to the idea on the basis that it might help someone evade their creditors.

As a result European rules allow someone to be subject to insolvency proceedings in more than one EU state at the same time.

What this means in the case of our fictitious Irish developer is that while he may well declare himself bankrupt in the UK, his Irish assets will be subject to separate proceedings in Ireland.

Before getting to that stage, the developer would also have to satisfy the courts that the UK is his centre of main interests (COMI).

This is apparently not as difficult as it sounds because there is no minimum residency requirement. To qualify, the debtor must conduct “the administration of his interests from England on a regular basis, and importantly, as English courts have pointed out, that this fact is ascertainable by third parties”, according to Beauchamps.

In the round, the report is pretty nonplussed about the benefits of going bankrupt in the UK and sums it up as follows: “While a debtor might be able to avail of the more lenient bankruptcy legislation in England, their Irish property would remain subject to Irish legislation and the various insolvency procedures,” says the report. “There may be little advantage to be gained for a person who has a large portfolio of assets in Ireland in moving their COMI to England or Wales.”

It would appear then that any Irish property developer planning such a move had better not be counting on coming back to Ireland because his Irish affairs will presumably drag on, even if his quickie UK bankruptcy is complete.

While there is obviously something appealing about this, it does nonetheless highlight how out of step Irish bankruptcy legislation is compared to European norms.

The issue has attracted a great deal of attention of late and the Law Reform Commission has been asked to come up with some proposals. Minister for Justice Dermot Ahern seems to be alive to the need for urgent action.

The main cause of concern is that our bankruptcy process will seriously hinder economic recovery. There is, we are told, a small army of companies and individuals out there in need of restructuring. For many, bankruptcy would be the best option, particularly if it could be done quickly and neatly, allowing the individual to get on with their lives.

Doing something about the bankruptcy legislation should be a Government priority, but you can’t help feeling that it is, at best, only part of the solution to what could be the next big challenge to the recovery, which is: what will happen when interest rates start to go up towards the back end of next year and the pressure really starts to come on Ireland’s massively indebted household balance sheets?

There appears to be a certain complacency at official level that the anticipated recovery in economic growth will somehow allow people to keep servicing their borrowings as interest rates rise, despite big cuts in disposable income as taxes rise and wages fall. It’s unsettlingly akin to the notion that was abroad a few years ago that an economic soft landing would prevent a housing market crash.

The current consensus is that interest rates will start to rise towards the end of next year. That gives the Government, and of course the banks, about 10 months to start figuring out how to deal with this problem should the Cassandras once again turn out to be right.