Personal Insolvency Bill Update
Heads of Bill
On 25 January 2012 the Irish Government published the heads of a new Personal Insolvency Bill for Ireland (the “Heads”). The Heads incorporated many of the findings and suggested strategies of earlier reports on the topic (namely the Law Reform Commission Report on Personal Debt Management and Debt Enforcement 2010 and the Inter-Departmental Mortgage Arrears Working Group Report 2011).
We previously published an update on this entitled New Personal Insolvency Legislation intended for Ireland.
Interested parties were invited to submit commentary on and suggest amendments to the Heads to help shape the final Bill.
Personal Insolvency Bill
On 29 June 2012 the Irish Government published the Personal Insolvency Bill 2012 (the “Bill”). Further amendments during the progress of the Bill through the Oireachtas are expected and it is anticipated that the legislation will be in place before the end of 2012. The Bill provides for the establishment of an independent body called the Insolvency Service of Ireland (the “Insolvency Service”), the principal functions of which will be the management of the three new personal insolvency systems and maintaining the new personal insolvency registers.
The Bill introduces the following three new non-judicial debt settlement processes:
1. Personal Insolvency Arrangements (“PIAs”);
2. Debt Settlement Arrangements(“DSAs”); and
3. Debt Relief Notices (“DRNs”) (previously called Debt Relief Certificates in the Heads).
Further details on each are set out below.
With regard to the bankruptcy laws, the Bill proposes the automatic discharge of a bankrupt from bankruptcy, subject to certain conditions, after three years.
Material Changes in the Bill from the Heads
There are a number of material changes from the Heads to note:
(i) The Circuit Court (and for debts in excess of €2.5 million, the High Court) now has jurisdiction in relation to all three processes and must sanction their approval in each case. Under the Heads only the PIA was subject to court oversight.
(ii) Certain debts are not eligible for inclusion in the three processes including taxes, duties, levies and other charges owed to the State. This, in effect, excludes the State and why this favourable carve out for the State was inserted is uncertain. In addition, preferential creditors are still given priority and are required to be paid in full.
(iii) The PIA is available in respect of secured debt of up to €3 million and all unsecured debt. Although the €3 million cap on secured debt can be waived if the written consent of all secured creditors is obtained, there is no limit for unsecured debt. The Heads had capped the limit for all debt at €3 million.
(iv) Under the Heads, a majority of creditors of not less than 65% in value of the total secured and unsecured debt was required to vote in favour of a PIA together with a majority of 75% of the secured creditors and 55% of the unsecured creditors. The Bill waters this down by providing that the PIA must be approved by a majority of creditors representing at least 65% in value of the total secured and unsecured debt, but only creditors representing more than 50% of the value of the secured debts; and creditors representing more than 50% of the value of the unsecured debt must also be in favour.
(v) “Debt” is only defined in the Bill with reference to the chapter on DRNs and has not been defined for DSAs or PIAs. The definition includes current and prospective debts that will be payable at a specified time in the future but does not include contingent liabilities. This is a possible oversight and therefore it is unclear as to what types of debt are covered by DSAs and PIAs and whether liability on foot of a guarantee can be subject to a DSA or a PIA.
(vi) Only one DRN, DSA or PIA can be applied for in a debtor’s lifetime under the Bill. Under the Heads it was permitted to have two DRNs or a DSA every ten years.
Personal Insolvency Arrangements
The purpose of a PIA is to find a solution to the serious and continuing disruption to society in Ireland as a result of the widespread insolvency amongst debtors with secured debt and to provide a realistic alternative to bankruptcy.
With that in mind, the Bill provides that in order to be eligible for a PIA the debtor must have, inter alia:
(i) an aggregate of debts, which are secured debts, of less than €3,000,000 (unless increased by unanimous consent of the secured creditors);
(ii) at least one secured creditor holding security over an interest in the debtor’s property in the Ireland;
(iii) within one year of the date of application for a protective certificate, either ordinarily resided in Ireland or have a place of business in Ireland.
The application for a protective certificate is the initial step in the process and is made by the personal insolvency practitioner (“PIP”) on behalf of the debtor. The protective certificate remains in force for 70 days and, on application to the appropriate court, can be extended for a further 40 days provided the court is satisfied that the PIA is likely to be accepted by the creditors and to be successfully completed by the debtor.
When a protective certificate issues, the PIP must notify each creditor of the issuance of a protective certificate and the intention to make a proposal for a PIA. For the lifespan of the protective certificate a notified creditor cannot initiate any legal or enforcement proceedings against the debtor.
The PIP will then formulate a proposed PIA. Insofar as possible, the debtor will not be required to dispose of his interest in or to cease to reside in his principal private residence. However, the Bill provides for circumstances where this may not be possible.
The Bill contains a non-exhaustive list of options with regard to payments for inclusion in a proposal for a PIA which include, inter alia, a lump sum payment to creditors, a payment arrangement with creditors or a transfer of specified assets of the debtor to creditors generally or to a specified creditor.
When the PIA proposal is accepted by the debtor, the PIP then convenes a creditors’ meeting. The PIA must be approved by a majority of creditors representing at least 65% in value of the total secured and unsecured debt, but also creditors representing more than 50% of the value of the secured debts; and creditors representing more than 50% of the value of the unsecured debt must be in favour. However, it is arguable that if the secured debt is held by one lending institution then that institution retains an effective veto. On the other hand, if the secured debt is spread around several lending institutions then a minority of dissenting secured creditors could be forced to accept the PIA.
It would appear that all secured creditors, whether first or second charge holders, rank equally and that judgment mortgage creditors are considered as secured creditors for the purposes of treatment under the Bill. It remains to be seen whether, in practice, such categorisation of secured creditors leads to any unfairness.
While a PIA is in effect, the debtor and every creditor who was entitled to vote at the creditors’ meeting is bound by its terms and cannot initiate any legal or enforcement proceedings in relation to debts covered by the PIA.
The payments under a PIA can, under certain circumstances, be varied. However, the debtor is entitled to refuse any variation which requires him to make additional payments in excess of 50% of the increase of his income or to make a payment amounting to more than 50% of the value of any property acquired by the debtor after the PIA has come into effect. In the circumstances, this provision appears to be somewhat generous to the debtor’s position.
Where a debtor is in arrears with his payments for a period of six months the PIA is deemed to have failed and terminates, where a creditor or the PIP notifies the Insolvency Service of the default. Where a PIA has been deemed to come to an end or has failed, the debtor is liable in full for all debts covered by the PIA (less any amounts paid during the continuance of the PIA) unless the terms of the PIA or an order of the appropriate court provide otherwise.
Where the debtor has complied with his obligations under the PIA, the debtor does not stand discharged from his secured debts, except to the extent specified in the PIA.
What does the PIA mean for secured creditors?
The Bill could cause a fundamental shift in the dynamic of a relationship and/or the negotiations between mortgage holders and lenders. If the terms of a proposed PIA are not acceptable to a secured creditor, the debtor may apply to have himself adjudicated bankrupt, and potentially be discharged from bankruptcy after three years. Therefore it may be in a lender’s interest to agree a PIA in order to obtain some of the monies owed.
Lenders can only be forced to accept a write-down of secured debt under the Bill in certain circumstances, but in some instances, it must be acknowledged that a debt write-down may be the only viable option for the debtor. As set out above, a majority of creditors of not less than 65% in value of the total secured and unsecured debt must vote in favour of a PIA before it is effective. In addition, 50% in value of secured creditors and 50% in value of unsecured creditors’ voting at the creditors’ meeting must also be in favour. This still gives lenders a veto but it depends on how the debtor’s debts are spread. For example, if a debtor has similar amounts of secured debt with two lenders, and unsecured debt, all of which is to come within a PIA, one secured lender could be squeezed-out by a PIA being forced on it if approved by the other creditors at the creditors’ meeting.
There are various options as to how secured creditors’ claims are addressed. The Bill sets out a list of possible repayment options that can be included in a PIA. The PIA may provide that the security for a debt is dealt with in a manner that may include:
(i) the sale of the secured property;
(ii) the surrender of the security to the debtor; or
(iii) the retention by the secured creditor of the security.
Where a PIA provides for the sale of a secured property, and the realised value is less than the debt due, the balance of the debt owed to the secured creditor abates in equal proportion to the unsecured debts covered by the PIA and are discharged with the unsecured debts on completion of the obligations in the PIA.
The Bill also contains a list of options with regard to payments to secured creditors under the PIA. Unlike unsecured debts, the PIA could provide that the secured debt remains at the end of the PIA agreement.
There are also protections for secured creditors in the event of a sale, surrender or retention of the secured property in the context of a PIA and the Bill also provides for clawbacks.
It should be noted that write-downs of household mortgages, combined with the current level of mortgage defaults, could amplify banks’ losses which would have ramifications for the Residential Mortgage Backed Securities market in Ireland.
Interestingly, individual voluntary arrangements in the United Kingdom do not permit the writing down of secured debt.
Debt Settlement Arrangements
A DSA is a settlement with one or more creditors which, provided the debtor satisfies the eligibility criteria, will result in a debtor’s unsecured creditors being paid or satisfied in part or in full. This process is for debtors who fall outside the criteria for a DRN. While the Heads provided that a debtor’s unsecured liabilities had to be in excess of €20,001 in order to apply for a DSA, the Bill does not set out any monetary limits.
This arrangement does not affect the rights of a secured creditor.
A DSA can only be proposed on behalf of a debtor through a PIP and only one application for a DSA in a lifetime is allowed.
As an interim protective measure, a debtor makes an application to the Insolvency Service for a protective certificate through a PIP to prevent legal action in respect of any debt owing by him while the DSA proposals are with the Insolvency Service for determination. This protection lasts 70 days and can be extended by a further 40 days.
Before a DSA is granted to a debtor, it must be approved by a majority of 65% in value of the relevant unsecured creditors present and voting at a meeting of creditors. Where no objection has been lodged by an affected creditor with the appropriate court within ten days of the relevant creditors’ meeting having been notified, the court will approve the DSA. There are a number of grounds on which a creditor may challenge the coming into effect of a DSA (such as unfair prejudice to a creditor; the debtor entered into a transaction at an undervalue within the preceding three years or arranged his financial affairs within the previous two years with a view to applying for a DSA or PIA and so on).
The duration of the DSA is five years and, if agreed by the creditors’, this can be extended to six years. The DSA will bind every creditor entitled to vote at the creditors’ meeting, but will not affect the rights of a secured creditor. At the end of the DSA, the debtor is discharged from the debts specified in the DSA.
Debt Relief Notices
A DRN provides for the forgiveness of unsecured “qualifying debt” (as defined in the Bill) for debtors who satisfy certain eligibility criteria such as a net disposable income of €60 or less a month, assets worth less than €400 and being normally resident in Ireland or having lived/had a place of business in Ireland in the preceding year.
In order to apply for a DRN, a debtor must make an application for a Debt Relief Certificate to the Insolvency Service through an approved intermediary including a written statement disclosing all of his financial affairs, liabilities and so on and have qualifying debts of €20,000 or less. When the Circuit Court approves the certificate, the DRN is then granted.
Note that a DRN will not apply where 25% or more of a debtor’s qualifying debt was incurred within six months of the application for a DRN.
At the end of a supervisory period of three years from the date of the grant of the DRN (assuming the debtor’s financial circumstances have not changed), the debtor is discharged from all the qualifying debts specified in the DRN.
Bankruptcy Legislation Changes
The Bill proposes that the threshold for the issuance of a bankruptcy summons be raised and that a summons should only issue against a debtor who owes a liquidated debt which is in excess of €20,000. As it stands, a bankruptcy summons may be issued when a debtor has committed an act of bankruptcy and owes a liquidated debt of €1,900 or more.
A debtor who presents a petition for bankruptcy must swear an affidavit that he or she has made reasonable efforts to make use of alternatives to bankruptcy, such as a DSA or a PIA.
It is envisaged that a court, in deciding whether or not be make an order for costs in respect of the bankruptcy proceedings, may have regard to whether the applicant creditor had refused to accept an appropriate settlement, namely a DSA or PIA which has been proposed by or on behalf of the debtor.
The principal proposed amendment to the bankruptcy legislation is that every bankruptcy will automatically terminate after three years. However, the bankruptcy official assigned to the bankrupt can apply to the court (on his own motion or pursuant to a request from a creditor) to object to the automatic discharge of a person from bankruptcy on the grounds that the bankrupt has acted in a manner that was dishonest or uncooperative. In these circumstances the court can extend the bankruptcy period to a maximum of eight years.
If the bankrupt has any unrealised property at the date of termination of the bankruptcy, it will remain vested in the bankruptcy official.
Another important proposal is that the court has discretion, taking into account reasonable living expenses, to make an order requiring a bankrupt to make payments from his income to the bankruptcy official or a creditor for a period of up to five years. This bankruptcy payments order may not be made after the bankrupt has been discharged but may still affect a bankrupt after the date of discharge of the bankruptcy depending on its length.
As regards the avoidance of fraudulent preferences and certain transactions made before adjudication in bankruptcy, the current period of one year is extended to three years. This is also increased for certain settlements, such as voluntary settlements of property made before adjudication in bankruptcy from two years to three years.