IF THE RECOVERY STRATEGIES DON’T WORK

1. IF THE RECOVERY STRATEGIES DON’T WORK Steps available to creditors and debtors arising from company failure Barry Lyons Lyons Kenny Solicitors, 57 Fitzwilliam Square, Dublin 2

2. Limited Liability – the reality A. The scourge of the personal guarantee B. Tax structures for property ownership C. The effect of (s) 286 Companies Act 1963 (as amended)

3. (s) 286 Companies Acts 1963 breaches • (s) 286 of the Companies Act 1963 provides that payments by Directors or companies to connected parties is presumed to be a fraudulent preference unless it is shown to the contrary, and is repayable by the recipient and the Director if made within six months of the date of the appointment of a liquidator. • The 2001 Company Law (Amendment) Act extended this period to two years from the date of the liquidators appointment. • Any payment made by the Company that reduces the Director’s personal liability (for example, reducing a personally guaranteed Company overdraft or other loan account) is also reversible and funds so advanced must be repaid • In the event of such a finding the costs incurred arising from any application by the liquidator will also stand to be recovered against the director and/or the recipient of the sums

4. What happens on the crystallization of the personal guarantee? • If the creditor is satisfied that the Director is a mark for the value of its personal guarantee, or if it is aware that the company failure may give rise to numerous claims against their remaining assets then they should move quickly to obtain judgement; • In the Commercial Division of the High Court • If the liability is in excess of €1m, • If the debt arises from a commercial undertaking, • If the creditor has moved with sufficient expediency, • If these conditions are not satisfied, then either regular summary proceedings in the Circuit Court or High Court before the Master are appropriate

5. What happens when you get judgment? • It is the basis for any enforcement activity against the debtor • Examination in aid of execution • Instalment order against the debtor’s income • Request for execution by the Sherriff against the goods of the debtor • Registration of judgment mortgage against property assets • Garnishee order against any lump sum payment that the creditor is aware that the debtor may be entitled to

6. An amount of the debt remains outstanding; What next? • Getting blood from a stone – practical considerations • The approach taken by the debtor – has he assisted the debtor to recover their debt by furnishing information requested? • Is there evidence of assets being salted away? • Has the debtor been honest in his dealings with the creditor? • What are likely to be the costs of bankruptcy (in particular the cost of indemnifying the Official Assignee regarding his costs and expenses)

7. Bankruptcy; the nuclear option • What causes a bankruptcy • There are 8 acts of Bankruptcy set out at (s) 7 of the Bankruptcy Act 1988, where a debtor; • Disposes of all their property for the benefit of their creditors generally, • Fraudulently transfers his property, • Disposes of property which would be considered a fraudulent preference if he were adjudicated a bankrupt, • If with intent to defeat his creditors claims he remains out of the State, • If he files in Court a declaration of insolvency, • If execution against his assets under a Fi Fa has been made by the Sherriff, or if a return of “no good” has been made against his assets • If the sum set out in a bankruptcy summons has not been paid with 14 days of its service, • If the debtor fails to comply with a debtor’s summons as appropriate • Typically the Bankruptcy Petition is grounded on the return by the Sherriff of the Execution order marked “Nulla Bona”, or “no good”

8. What happens then; • Assets of the debtor/brankrupt vest in the Official Assignee in bankruptcy to be sold for the benefit of the debtors creditors (after the OA’s costs are paid), • All property acquired by the bankrupt post his adjudication become vested in the OA, • Bankrupt’s salary or income liable to become attached in favour of the OA having regard to the family responsibilities of the bankrupt, • A bankrupt cannot; • Act as a director of a company without leave of the court, • Obtain credit of £500 or more without disclosing his status as a bankrupt, • Hold elected office • Depending on the recovery position of the asset, the OA may elect not to realise an asset. • Term of bankruptcy was 12 years, reduced in 2010 to 6 years, and due to be reduced further this year to 3 years

9. Position in the UK • More developed framework for the administration of problem debt, • There are a number of options available to the debtor that are not adequately provided for in Ireland, for example, an individual voluntary arrangement • Far less onerous term of bankruptcy of 1 year

10. Sounds good – how do I avail of it? • There are two provisions underpinning any consideration of whether a person can “jurisdiction shop” by petitioning for court protection so as to avoid punitive Irish bankruptcy provisions; • Under the EC Regulation on Insolvency Proceedings if you live in a member state, except Denmark, you can only open insolvency proceedings (make yourself bankrupt) in the country where you have your "centre of main interests". There is no definition of a centre of main interests but the Court will usually regard the country where you carry on a business or earn your living as your centre of main interest. The Court will also consider the place where you normally live, i.e. your country of habitual residence. If you are not employed or self-employed your centre of main interests will be the country you normally live in at the date of the petition.

11. UNCITRAL Model Law The UNCITRAL Model Law on Cross-Border Insolvency (the “Model Law”) was adopted by the United Nations Commission on International Trade Law in 1997 and is designed to assist States to manage transnational insolvency cases in an efficient, fair and cost-effective manner. The UNCITRAL Model Law was enacted by the 2006 The Cross Border Insolvency Regulations. Inter alia, these provided that the court in any part of Great Britain shall have jurisdiction in relation to the functions referred to in paragraph 1 of this article if— • the debtor has – (i) a place of business, or (ii) in the case of an individual, a place of residence, or (iii) assets situated in Great Britain, or (b) the court in that part of Great Britain considers for any other reason that it is the appropriate forum to consider the question or provide the assistance requested.

12. Any examples? The issue of the debtor’s centre of main interest (“COMI”) and whether one can change COMI has been considered in various cases such as Shierson v Vlieland-Boddy[2005] and Re Staubitz- Schreiber [2006]. In the latter, it was decided that a Member State which receives a request for the opening of insolvency proceedings did not have jurisdiction to open such proceedings if the debtor moved his COMI to the territory of another State after filing his request, as this would be contrary to the objectives of the EC Regulation. The determination of the jurisdiction representing a debtor’s COMI at the date of the request to open proceedings can in some instances be difficult to establish.

13. Official Receiver v Eichler [2007] Issue; Whether or not a bankruptcy order which was made upon the debtor’s petition should have been made in the UK on the basis of the question mark over the debtor’s COMI. In his petition the debtor disclosed that his COMI was within England and Wales and that for the greater part of the preceding six months he had been residing in Hertfordshire. However, he was German by birth, and worked as a locum medical consultant. His Statement of Affairs disclosed no assets. He had three German creditors, to whom he owed £206,700 (two of whom were owed £200,000 under a judgment obtained in Germany), and no UK creditors.

14. The Official Receiver, in support of his application, advised that the debtor’s debts were incurred entirely in Germany, and that the debtor had moved to England approximately five months before presenting his petition. During this period, he lived in temporary accommodation provided in connection with his employment and his wife continued to live in Germany. The Official Receiver also submitted that as the debtor had owned a property in Germany which had been recently transferred into his wife’s name, proceedings to undo this transaction could more conveniently be pursued in Germany through a German bankruptcy. The debtor argued that he had genuinely moved to the UK for work purposes, and whilst his wife remained in Germany, he spent more time in the UK in connection with his work than in Germany. He denied that there was any impropriety in connection with the transfer of the property to his wife, and that he had initiated bankruptcy proceedings in this jurisdiction after taking advice from a Solicitor in Germany.

15. The Court’s Ruling The Chief Registrar ruled that the debtor was at liberty to change his COMI, and that the country in which the debtor’s debts were incurred was not a relevant consideration in establishing his COMI. The true inquiry was to the debtor’s habitual residence. It was ruled that at the date the proceedings were opened, the debtor’s COMI was in the UK, and even where the debtor’s residence was temporary, that would not necessarily change the position. The Chief Registrar stated that he was not aware of any authority establishing any minimum period of time which a person must spend in a Member State before it could be said to have become his COMI. It was declared that the bankruptcy order was properly made and the declaration as to the applicability of the EC Regulation and the nature of the proceedings was also properly made.

16. Comment Bankruptcy proceedings by debtors with foreign connections are becoming increasingly common. There are internet advertisements in Germany for debtors to take short “insolvency holidays” in England, so as to take advantage of their rules on insolvency. This way, a debtor with debts in Germany can potentially clear himself of all debts whilst making little or no contribution and obtain discharge and release within one year or less. The relevant discharge occurs after a period of seven years if an individual is made bankrupt in Germany.

17. Other reliefs available in the UK Individual Voluntary Arrangement (IVA) An IVA involves an insolvency practitioner approaching parties to whom a debtor owes money, and putting proposals to them for the repayment to the creditors of the amounts that they consider to be possible having regard to the personal circumstances of the debtor. It involves payment to the creditors of an amount of money over a number of years from the major asset of the debtor, which will invariably be his ability to earn a salary. 75% in value of the creditors must approve the insolvency practitioner’s proposals in order for the IVA to be legally binding

18. Debt relief orders (DRO) DROs provide debt relief, subject to some restrictions. They are suitable for people who do not own their own home, have little surplus income and assets and less than £15,000 of debt. An order lasts for 12 months. In that time creditors named on the order cannot take any action to recover their money without permission from the court. At the end of the period, if the debtor’s circumstances have not changed they will be freed from the debts that were included in their order. DROs do not involve the courts. They are run by The Insolvency Service in partnership with approved intermediaries, who will help the debtor apply to The Insolvency Service for a DRO

19. What next; what is planned to resolve the crisis with personal insolvency in Ireland? • The terms of the EU/IMF Memorandum of Understanding include provision for the laws on Personal Insolvency being updated to reflect a modern approach to personal debt. As part of this process, two steps are anticipated; • In 2011 a Civil Law (Miscellaneous Provisions) Bill is to be introduced, reducing the term of bankruptcy from 6 to 3 years • In Spring of 2012 a Personal Insolvency Bill is to be introduced for consideration of the Dáil. • It is anticipated that the Personal Insolvency Bill will largely follow the outline of the December 2010 report of the Law Reform Commission’s report on Personal Insolvency, which in turn is heavily influenced by the UK’s Insolvency Act 1986 (as amended)

20. Any questions? Thank you for your attention Barry Lyons Lyons Kenny Solicitors, 57 Fitzwilliam Square, Dublin 2