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The right to individual bankruptcy

12/ 07/ 2018

Article from Absolute Law Agency

At first glance, human rights and bankruptcy procedures are plots from different operas, but this direction is actively studied in the world and leads to legislative changes.

The modern vector of the development of law is more aimed at justice, rather than on formal correspondence to the letter of the law. The courts of different jurisdictions, taking decisions, increasingly rely on the key principles of law. In addition, there is a worldwide tendency to censure such a phenomenon as “abuse of the law”.

Individual bankruptcy

The procedure of individual bankruptcy has long been known in the world and is often used. Active lending to the population, as well as the possibility of opening a loan for a loan, first led to the inflation of credit bubbles and the massive inability to fulfill their obligations.

As a result of the 2008 crisis around the world, the legislation regulating the procedure for individual bankruptcy, which until then was distinguished for its cruelty, was revised. It was then that for the first time people started talking massively about human rights in the procedure of individual bankruptcy, and also about the revision of the whole paradigm as a whole.

Until 2008, the legislation of the EU countries and the US was aimed at maximum protection of creditors. Despite the opportunities provided by the law for pre-trial settlement of the procedure for individual bankruptcy and the possibility of restructuring existing debts, a person who went through the procedure of individual bankruptcy could not return to the restoration of the standard of living as quickly as possible.

This was especially evident in the presence of a sufficiently long term (from 12 to 20 years) in fulfilling obligations to repay debts to creditors. In addition, some jurisdictions had a fairly strict list of restrictions on possible areas of activity and positions that are prohibited from occupying a person who has undergone an individual bankruptcy procedure.

Mass individual bankruptcy in 2008 led to a total revision of the existing system, as a result of which the scientific and practical paradigm governing this procedure was changed.

Thus, a definition was adopted according to which a bankrupt is an honest person who, under the influence of unfavorable circumstances, is unable to fulfill all debt obligations to creditors. In addition, the time frame during which a person is considered bankrupt was substantially limited, and the basic principles protecting human rights in individual bankruptcy were developed.

Legal possibility

Speaking about the legislation regulating the procedure for individual bankruptcy, it is necessary to note the frequency of using such concepts as honesty, honesty, a minimum worthy standard of living and the like. Especially many interesting precedents in US judicial decisions.

The key definition of the procedure for individual bankruptcy was given back in 1934, when it was determined that the bankruptcy procedure is a legal opportunity for an honest, but unsuccessful person to pay off debts and start living off a clean slate.

Also indicative are not only the judgments themselves, full of fairness, but also an active study of the causes of bankruptcy and the subsequent creation of a regulatory framework that helps the citizen.

In particular, the analysis of judicial practice shows that courts tend to forgive debts that arise as a result of debt for the provision of medical services rather than arrears arising from the thoughtless conduct of business.

In addition, during the trial, the negative factors preceding bankruptcy are investigated in detail. In the absence of objective reasons for such or the creation of a fictitious insolvency, all transactions preceding this will be canceled, the property will be returned to the original owner, the bankruptcy procedure is closed, and the bankrupt will be obliged to fulfill its obligations, regardless of the availability of formal legal validity.

"Bankrupt" tourism

The trend of so-called “bankrupt tourism” is ambiguous. The basis for this trend is laid by the provisions of EU legislation, according to which a person is able to freely move between EU member states, to conduct business in any EU country without hindrance, to freely move goods and capital.

Due to this, a citizen of one EU member state has the right to freely live, work and conduct business in another member state of the EU.

These freedoms led to the emergence of such a concept as a “center of primary interest,” which means the primary jurisdiction that regulates the activities of a citizen. However, these concepts played an unexpected role in regulating the procedure for individual bankruptcy.

The changes, according to which the procedure of individual bankruptcy was substantially simplified, and the period during which a citizen is considered bankrupt, from 5 years to one year in the UK, was shortened, caused a wave of “bankruptcy tourism”.

In particular, the courts of the UK increasingly began to consider cases of individual bankruptcy of German citizens, most of whose creditors were in Germany.

Indicative in this respect was the case of Sparkasse Hilden Ratingen Velbert v Benk & Anor[2012] EWHC 2432 (Ch) (August 29, 2012).

So, Mr. Benc petitioned to declare himself bankrupt in June 2010, confirming that in June 2009 he moved his center of interest (COMI) to England (according to the rules governing individual bankruptcy, the center of interest should be changed between 6 months to a year prior to declaring itself bankrupt). In court, the debtor stated that he had previously worked as a notary in Germany, but was removed from office, and therefore moved to England, where he worked as a sports photographer.

As evidence, Mr. Benck presented contracts confirming the rental of an apartment in England, the purchase of a car, the opening of a bank account, and an insurance contract. In addition, among the evidence is a bonus card in one of the local coffee shops, showing that the bankrupt is leading an ordinary everyday life in the UK. On this basis, the district judge made a decision on the possibility of opening the procedure for individual bankruptcy of Mr. Benk in the jurisdiction of England.

However, in the future, one of the creditors proved that, despite residing in England, Mr. Benc continued to exercise actual control in the sphere of his former activities, as a result of which England can’t be recognized as the center of his interests.

Subsequently, a precedent decision was adopted that regulates all the main provisions that need to be studied by the debtor before declaring himself bankrupt in foreign jurisdictions.

Draft Code of Ukraine on Bankruptcy

Interestingly, Ukraine also plans to develop a procedure for individual bankruptcy.

Thus, in the Draft Code of Ukraine on bankruptcy, a second book has been singled out that regulates the procedure for individual bankruptcy. This procedure is largely similar to the procedure for individual bankruptcy in the United States.

In particular, there is a simple and simplified procedure for conducting bankruptcy proceedings. However, let us dwell on the protection of human rights in this draft Code.

Thus, article 145 provides for restrictions on property that can’t be included in the liquidation mass, namely: social housing, an area of ​​more than 60 square meters for an apartment or a residential area not exceeding 13.65 sq. m for each member of the family, as well as an apartment building with an area not exceeding 120 sq. m.

In turn, the economic court is given the opportunity to exclude the debtor’s property from the liquidation mass.

Provisions are also made for relatively liberal consequences for a person declared bankrupt. In particular, during the next 5 years, such a person is prohibited from taking loans and credits, acting as a guarantor and transferring property as collateral without indicating the fact of previous bankruptcy.

Also, the draft Code provides for the possibility of registering a person as an Individual Entrepreneur, but with an indication of the fact of the previous bankruptcy.

In addition, during the next 5 years, a bankrupt is prohibited from engaging in independent professional activity as a lawyer, private notary, arbitration administrator or private contractor.

It is necessary to note the special liberal nature of these norms, since even the most liberal UK legislation provides for a complete ban on engaging in private activities during the year, as well as prohibiting not only activities in certain areas, but also a list of prohibited posts for a person who has gone bankrupt.

However, the Ukrainian legislation is in step with the times and, by analogy with the experience of the EU countries and the United States, provides for an early discharge from the bankrupt status in the event that the person has faithfully repaid the existing debt or fulfilled the debt restructuring plan ahead of schedule.

On the other hand, there are circumstances that can aggravate a person’s guilt, as a result of which privileges to get rid of existing debts will not be applied to him.

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