Legislating alternatives to bankruptcy
This article was published in the November edition of the International Financial Law Review.
The Irish Parliament passed the Personal Insolvency Act 2012 (the Act) in December 2012 as part of its commitment to the troika to reform key areas of Irish law. It will be implemented over the course of 2013. The Act represents a major reform of personal insolvency law, and has significant implications for purchasers of distressed assets.
Highlights of the Act
• It provides three new possible alternatives to bankruptcy leading to the debtor having a 'clean slate' at the end of the process.
• It reduces from 12 years to three years the basic period for obtaining a discharge from bankruptcy.
• It potentially impacts the interests of secured creditors in certain limited circumstances.
• It establishes an official body (the Insolvency Service of Ireland, the ISI) together with a number of specialist Circuit Court judges to administer the new arrangements.
• It provides for the licensing of intermediaries to liaise between the debtor and the ISI in respect of the three new procedures: personal insolvency practitioners (PIPs).
An individual who is insolvent may apply for one of three forms of procedure to resolve their debts:
Debt relief notice (DRN)
A debtor with unsecured debts of €20, 000 ($27,000) or less who has limited income and assets may apply for a DRN. This procedure is intended for the resolution of consumer debt at the lowest end of the scale and is targeted at credit card and other small-ticket retail debt.
Debt settlement arrangement (DSA)
A debtor with unsecured debts of no limit may apply for a DSA with a view to satisfying (whether in full or in part) those debts over a five year period (extendable in certain circumstances to six). This arrangement involves the debtor dealing with a PIP. The applicant must swear a statement of affairs and confirm that they have not been able to agree to a consensual work-out with creditors.
Personal insolvency arrangement (PIA)
The PIA is available for an individual with debts of which the secured portion is in an amount of up to €3 million. The €3 million limit will not apply provided all of the individual’s secured creditors consent in writing. At least one security must be over property in Ireland. The process is similar to a DSA.
The standout feature of the PIA is that the arrangement may cram down secured debt to the level of the market value of the secured property. At least 65% in value of secured creditors must vote in favour of the arrangement. It follows, therefore, that where there is a single secured creditor it can veto the arrangement.
The Act will have implications for operators in the secondary debt markets who intend to purchase portfolios of loans issued by Irish banks. The Act will impact the legal analysis of the enforceability of security in mortgage loan portfolios.
The intention behind the legislation was to provide an alternative to bankruptcy, and to give debtors a bargaining chip to force creditors to agree to informal work-outs. One can expect increased engagement by defaulting debtors with their creditors if they qualify for one of the statutory arrangements. The outcome of a DSA and PIA may be strategically structured as a slight improvement to the expected return on a bankruptcy.
The marketability of small-ticket consumer loans will be adversely affected by the Act because all debtors who qualify for the DRN process may be in a position to renounce their obligations.
Although the cramming-down of secured debt is a new departure in terms of Irish law, the Act is unlikely to have much impact where the debtor has one or more secured creditors who oppose the PIA. They will be able to block the PIA. A lot of consumer secured debt is taken out with a single lender. There are, however, a significant number of instances where consumers are multi-banked: such debtors will try to get creditors to break ranks.
The Irish Parliament has separately removed the technical impediment – inadvertently contained in conveyancing reform legislation – which halted a large number of repossession actions. However, there is a quid pro quo for this. In any repossession proceedings the court can adjourn the matter to let the debtor explore whether he or she can apply for a DSA or PIA. Equally, though, the Central Bank of Ireland has made a number of changes to the mortgage arrears Code of Conduct which will expedite that process.
Even though the bankruptcy discharge period has been reduced from 12 to three years, Ireland still has a stricter regime than other EU jurisdictions (notably its closest neighbour – the UK). Accordingly a flood of bankruptcy tourists is not expected.