The Personal Insolvency Bill (the “Bill”) was published on Friday, 29 June 2012 and provides for significant changes to the personal insolvency regime in Ireland. It is envisaged that the Bill will be passed into law imminently, with the finer details currently under discussion within the Dáil Chamber. Some key points are as follows:
Although the Bill makes it unlikely that secured lenders will, in many circumstances, be compelled to accept a write-down of their debt, the PIA offers debtors a formal process through which they can apply. The three new settlement options are likely to be beneficial mechanisms for dealing with personal insolvency outside of the bankruptcy process, and will allow qualifying insolvent individuals to deal with their debts in a structured manner similar to the examinership model for limited companies, thus avoiding the negative implications of a formal bankruptcy.
It is important to note that the reduction in the bankruptcy period from twelve years to three years is subject to court discretion to order the making of payments to creditors from a discharged bankrupt’s income for a period lasting up to five years from the date of the discharge. This can occur where the court is satisfied that the bankrupt has failed to cooperate fully with the Official Assignee.
The proposed debt settlement mechanisms, which are designed to offer an alternative to bankruptcy for individuals in certain prescribed circumstances, are summarised below:
An insolvent individual with unsecured debts of €20,000 or less and very limited means (eligibility criteria include having a net disposable income of €60 or less a month, having assets of €400 or less, and having no likelihood of becoming solvent within a period of 5 years) may apply, through an approved intermediary, to the IS for a DRN. Once the IS are satisfied that the application is in order, it will issue a certificate to that effect, and furnish the certificate and the application with supporting documentation to the Circuit Court, which, if satisfied that the appropriate criteria have been met, will issue a DRN.
A DRN will provide a three-year “protection period” during which creditors cannot pursue the debtor in respect of debts specified in the DRN. If the debtor is unable to pay the debt at the end of the protection period, the debt will be written off, but provision has also been made for a debtor to be removed from the Register of Debt Relief Notices during the protection period if a repayment of at least 50% of the value of the specified debts are made to the IS.
A DSA system is proposed to enable an insolvent individual with unsecured qualifying debts in excess of €20,000 to make settlement proposals through a Personal Insolvency Practitioner (“PIP”) to one or more creditors for payment of debt over a period of five years (with a possible extension to six years). If the proposal is approved by at least 65% in value of creditors voting at a creditors’ meeting, and is subsequently approved by the appropriate court on notification by the PIP, it will become binding on all creditors and will be registered by the IS.
A PIA will allow for settlement of both secured and unsecured debt by an insolvent individual over a six-year period (with a possible extension to seven years), provided that at least one creditor involved is a secured creditor and the aggregate secured debts do not exceed €3 million (unless all secured creditors agree to waive this limit). A PIA must be approved at a creditors’ meeting by at least 65% in value of actual votes cast at the meeting as a whole (whether secured or unsecured creditors) and by (i) more than 50% of secured creditors and (ii) more than 50% of unsecured creditors, and subsequently approved by the appropriate court on notification by the PIP, before it will become binding on all creditors.
A PIP acting on behalf of a debtor may, whilst in the process of preparing an application for a DSA or a PIA, apply to the IS for “a protective certificate”. If approved and issued by the appropriate court, this will provide a period of seventy days protection (extendable by a further forty days in certain circumstances) during which time certain enforcement proceedings or bankruptcy proceedings may not be initiated or continued against the debtor or his / her property, except with the leave of the court.
Failure by a debtor and his / her creditors to agree to a suitable non-judicial debt settlement leaves open the option of debt enforcement or judicial bankruptcy. Furthermore, a creditor may challenge the issuance of a DRN, DSA, PIA or a protective certificate by way of an application to the appropriate court.
Insofar as secured creditors are concerned, it is important to note that only a PIA has the potential to deal with secured debt and the principal owed to the secured creditor cannot be written down to less than the value of the security. Certain protections have been given to secured creditors including a “claw-back” in the event of a subsequent sale of a mortgaged property where the mortgage has been written down.
A PIA cannot include a requirement that a debtor cease to occupy or dispose of his / her principal private residence unless the debtor agrees to such a proposal, or if the PIP, having discussed the issue with the debtor, forms the opinion that the costs of the debtor continuing to reside there are disproportionately large bearing in mind his / her financial circumstances. The protections afforded under the Central Bank Code of Conduct on Mortgage Arrears will continue to be available to cooperating borrowers.
Recent Central Bank statistics confirm that 23 per cent of mortgage holders were either in arrears or had their mortgages restructured following consultations with the banks. About 167,000 Irish families or individuals were affected with an amount of €22 billion of mortgage debt which is either in arrears of more than 90 days or currently being restructured. The banks policy to-date of making case by case arrangements with individual borrowers including forbearance solutions and long term extensions is not working and is not capable of dealing effectively with the magnitude of the problem of long term and unsustainable mortgage debt. Each proposal for a DRN, DSA, and PIA must be approved at a creditors meeting and then approved by the appropriate Court. Following these approvals they will be registered with the IS. The proposed legislation, therefore, puts a more formal structure on debtor arrangements with financial institutions.
The likely success of the Bill is still a topic of much debate. The Troika recently argued that the ceiling of €3m for aggregate secured debts is excessive and that a cap of €1 million would be enough to capture all those in significant personal debt. The higher figure has the effect of protecting the interests of those who speculated in the buy-to-let property market. It means that the taxpayer, who now owns almost the entire banking system, will have to foot the bill for losses run up by those who speculated in the property market. The Minister for Justice, Alan Shatter has recently defended the higher figure, claiming that the Bill was a “mechanism whereby people living in reasonably sized homes, based on their family needs and requirements, were given the opportunity to retain them and rearrange their debts rather than going into bankruptcy”. The provision, he said, was not about providing “some easy mechanism” for speculators.
It is likely that political policy will dictate the State owned financial institutions’ willingness to engage in the arrangements proposed above. The proposed legislation heavily favors financial institutions and does not appear to go far enough to address the crisis surrounding secured debt. Creditors maintain an effective veto for DSA’s and PIA’s by virtue of the fact that 65% of creditors in value must approve of the arrangements at a creditor meeting. Significantly, the Taoiseach Enda Kenny has said the Government will be “far more active” in requiring banks to arrive at a solution with those in mortgage difficulties. The aim would be to keep a roof over the heads of the people in the vast majority of cases, he said, adding that there was a need for a “direct conversation and dialogue” between the borrower and the lender. This language suggests that creditors will be strongly encouraged to sit down at the negotiation table with individual debtors.
It remains unlikely that the new provisions will be sufficient to affect the trend whereby insolvent individuals are moving their centres of main interests (COMI) to the United Kingdom to avail of the possibility of discharge from bankruptcy after one year.
The Bill, in its current form, does not appear to be the silver bullet that will conclusively address the current and future mortgage arrears crisis and may indeed require further tweaking once enacted. One thing is certain; our economy will only fully recover when the banks can concentrate on lending as opposed to recovery. Therefore, the success of the new legislation is a must. Success of the legislation has been effectively secured by the IMF bailout and the continued hardship of the Irish tax payer. The hope is now that an efficient roll out of the provisions can be achieved which result in the protection of the most vulnerable in society.
Lavelle Coleman’s Insolvency and Corporate Restructuring Group comprises some of Ireland’s leading lawyers in the corporate recovery and insolvency field. The group is led by Michael Lavelle, Managing Partner, who has over 25 years experience in the insolvency field and provides specialist advice on all contentious and non-contentious insolvency and corporate restructuring matters.
Our firm provides advice across the range of insolvency matters. Our lawyers have expert knowledge and experience in advising debtors, creditors, and insolvency practitioners in insolvency arrangements. Our team is also extremely experienced in advising clients on court supervised arrangements and debt agreements.
We are regularly instructed by accountants, insolvency practitioners and banking and other creditors.
Our team has significant experience in the areas of receivership, voluntary and compulsory liquidation of companies, claims in liquidation, examinerships and personal bankruptcy. We have acted for numerous receivers and liquidators and have a continuous successful track record in insolvency over the past 25 years.
Our Solicitors also regularly attend creditors meetings on behalf of Directors and Liquidators.
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