BANKRUPTCY – PUNISHMENT FOR FAILURE?

Entrepreneurs know they must limit their exposure to risk but they also know there is no way to eliminate it entirely, writes senior counsel Ross Maguire in The Sunday Business Post.

Maguire, one of a group of constitutional lawyers involved in a challenge to the bankruptcy laws, details the rationale for an overhaul of the present punitive system.

“Entrepreneurs are different from workers in public or professional services … During the Celtic Tiger years a practice developed which became ubiquitous: that of the banks demanding personal guarantees,” he writes. “In the wink and nod language of bankers it was always understood that the personal guarantee would never be called in. Today, however, the Commercial List of the High Court is saturated with banks demanding their pounds of flesh based on those same guarantees. Every lawyer knows the huge mountain that must be climbed to defend against these one-page destroyers.”

Maguire goes on to make the point that at the very time we most need wealth creators to stimulate jobs, many of our entrepreneurs have been saddled with personal debts, making it impossible for them to contribute towards economic recovery.

“A properly functioning personal insolvency or bankruptcy system … is not about punishment, but about management of debt and rejuvenation of the debtor,” he says. “In Ireland, the process may never end and, not surprisingly, the system is often used by vindictive creditors seeking to maximise the pain they can inflict.”

Under our bankruptcy laws, an individual is put in virtual commercial limbo for 12 years unless he or she can pay half of their debts. Just how this can happen if someone is financial handcuffed is far from a moot point – a person is virtually condemned to financial limbo.

During this period, all of the bankrupt’s property belongs to the official assignee and if he or she does get a job (unlikely in many ways because someone used to working for themselves is usually not the type of individual to fit neatly into the kind of employment boxes cherished by recruitment agencies) all of the earnings must be paid over to this official assignee, who will hand back a living allowance.

Although it may seem like an “easy option” for those weighed down with liabilities they cannot possibly repay, debts are not discharged. Also, a bankrupt cannot:

• Be a director of a company or be involved in the management of a company without permission of the High Court
• Obtain more than €700 of credit and must disclose bankruptcy to anyone with whom he has commercial dealings
• Take the right to travel for granted – and he could be arrested and imprisoned if it appears he is fleeing the country to avoid creditors
• Become a member of the Oireachtas
• Be more than a second-class citizen as he or she is excluded from many other aspects of public life

Even after 12 years, discharge from bankruptcy is at the discretion of the courts.

“In practice, therefore, people who are adjudicated bankrupt stay bankrupt for decades, and there is no automatic right of discharge Even death does not discharge the bankruptcy,” Maguire says.

Contrast this with the UK, where the process typically takes less than a year.

And, of course, in Ireland a bankrupt is a bankrupt is a bankrupt – there is no distinction between someone who owes millions of euro and someone who cannot pay debts greater than €1,900 immediately. The courts do not have the discretion to decide on gradations of bankruptcy on a case-by-case basis.

“Here, it is almost a moral position adopted by the State – punishment meted out for perceived failure,” Maguire says. “In the past, this may have been aligned to the mores of society but today it must be unacceptable to all but the most miserable or small-minded.”