Radical Overhaul of Irish Personal Insolvency Laws Imminent
The Irish Government has recently published the long awaited Personal Insolvency Bill 2012 (the “Bill”). The Bill proposes a radical overhaul of Ireland’s outdated personal insolvency laws and is designed to make it easier for individuals who are struggling with debt to get back on their feet.
Details of the Bill
The Bill was published on 29 June 2012 and it is anticipated that the legislation will pass into law before the end of 2012.
The Bill introduces three new non-judicial debt settlement processes:
(a) Personal Insolvency Arrangements (“PIAs”);
(b) Debt Settlement Arrangements (“DSAs”); and
(c) Debt Relief Notices (“DRNs”).
It also proposes the establishment of the Insolvency Service of Ireland, the principal functions of which will be the management of the three processes and maintenance of the new personal insolvency registers.
Certain debts will not be eligible for inclusion in the three processes including taxes, duties, levies and other charges owed to the State. This, in effect, excludes the State - 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.
“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 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.
Personal Insolvency Arrangements
The PIA is available in respect of secured debt of up to €3 million and all unsecured debt.
In order to be eligible for a PIA, the debtor must, inter alia:
(a) have an aggregate of debts, which are secured debts, of less than €3 million (unless increased by unanimous consent of the secured creditors);
(b) owe at least one debt to a secured creditor; or
(c) be either ordinarily resident in Ireland or have a place of business in Ireland within one year of the date of application.
The application for a 70 day protective certificate is the first step and is made by a personal insolvency practitioner (“PIP”) on behalf of the debtor to the Insolvency Service. Once the Service is satisfied with the required financial disclosure made by the debtor, it applies to Court to issue the certificate. The PIP must notify each creditor of the protective certificate issuance. For the lifespan of the certificate (which can be extended by a further 40 days) a notified creditor cannot initiate any legal proceedings against the debtor.
The PIP will then formulate a proposed PIA. 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.
While a PIA is in effect, the debtor and every creditor who was entitled to vote at the creditors’ meeting is bound by it and cannot initiate any legal proceedings in relation to debts covered by the PIA.
Where a debtor is in arrears with his payments for six months he is deemed to be in default; and if a creditor or the PIP notifies the Insolvency Service of the default, the OPIA will be deemed to have failed. Where this happens the debtor is liable for all outstanding debts covered by the PIA unless the terms of the PIA or a Court order 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.
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. There are no monetary limits.
A DSA can only be proposed on behalf of a debtor through a PIP and only one application in a lifetime is allowed.
Like the PIA, a debtor makes an application to the Insolvency Service for a Court approved 70 day 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 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% of the relevant unsecured creditors (in value) 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.
The DSA lasts five years but can be extended to six years. It binds 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 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.
A DRN cannot be applied for 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 three year supervisory period 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 principal change to existing bankruptcy laws which is proposed in the Bill, is that every bankruptcy will automatically terminate after 3 years instead of the current 12 years. However, the bankruptcy official assigned to the bankrupt can apply to the Court to object to the automatic discharge if the bankrupt has acted dishonestly or is uncooperative. In these circumstances the Court can extend the period for up to 8 years.
The Bill raises the threshold for the issuing bankruptcy proceedings against an individual from liquidated debts of €1,900 to €20,000.
A debtor who petitions for bankruptcy must swear an affidavit that he has made reasonable efforts to make use of alternatives to bankruptcy, such as a DSA or a PIA.
Another proposal is that the Court has discretion, to make an order requiring a bankrupt to make payments from his income to the bankruptcy official or a creditor for up to five years. The Court may not make such an order after the bankrupt has been discharged but an earlier order may still have an affect after a bankrupt has been discharged.
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.
The Bill represents a welcome and long overdue modernisation of Ireland’s personal insolvency legislation. The changes to the bankruptcy laws are particularly welcome as they should make it easier for bankrupted entrepreneurs to get back on their feet and this should stimulate business activity and therefore benefit the economy generally.