Fergus Doorly and Marguerite Dooley outline the details of the new Bill aimed at reforming Ireland’s bankruptcy legislation
The draft Heads of the Personal Insolvency Bill (the “Heads”) were published on January 25 2012. The Heads propose the introduction of personal insolvency laws which will bring Irish law into line with personal insolvency laws in other European Union member states. They provide for the introduction of three new non-judicial debt settlement procedures and amendments to the Bankruptcy Act 1988. The Heads have been introduced as part of the State’s obligations under the EU/IMF Programme of Financial Support for Ireland and attempt to strike an appropriate balance between the rights of debtors and creditors. It is the balance between the rights of debtors and creditors that will fuel extensive debate before any legislation is enacted. It is anticipated that a detailed Bill will be published by the end of April 2012.
Establishment of an Insolvency Service
The Heads provide for the establishment of an Insolvency Service which will oversee non-judicial personal debt settlement systems and maintain a Personal Insolvency Register which will include details of debtors who have availed of a debt settlement system.
Non-Judicial Debt Settlement Systems
The Heads provide for three non-judicial debt settlement systems. The debt settlement system applicable to any debtor will depend on the value of the debt, whether it is secured or unsecured and the ability of the debtor to repay the debt.
The debt settlement systems are as follows:
1. Debt Relief Certificates (“DRC”)
This option is available in respect of qualifying unsecured debts up to €20,000. Qualifying unsecured debts include credit card debt, overdrafts, unsecured loans, rent, utilities, telephone bills and guarantees. The debtor may apply to the Insolvency Service for a certificate that the qualifying debts be subject to a one year moratorium period during which time no creditor enforcement action can be taken. If, at the expiry of the one year period, the debtor cannot pay the debt, the debt is deemed to be written off. (Excluded debts include court fines, child support and spousal maintenance payments).
Requirements for a DRC:
(i) The debtor has qualifying unsecured debts of €20,000 or less;
(ii) The debtor has a net monthly disposable income of €60 or less after provision for normal household expenses and assets and savings worth €400 or less.
The effect of a DRC:
(i) A moratorium period of one year
commences during which creditors with qualifying debt may not commence any legal proceeding in respect of the debt except with the Court’s permission and a stay is put on existing proceedings which relate to qualifying debt.
(ii) Following a moratorium period of one year, if the debtor is unable to repay the qualifying debts, they will be deemed to be discharged;
(iii) The DRC will be registered and is binding on qualifying debt;
(iv) A further DRC cannot be applied for within 6 years;
(v) A DRC may not be availed of more than twice;
(vi) A DRC has no effect on secured debt.
2. Debt Settlement Arrangements (“DSA”)
A DSA is available for unsecured debts above €20,000 (there is no upper monetary limit). A DSA can be made between a debtor and two or more creditors to repay an amount of unsecured debt over a defined period of up to 5 years. When commencing this procedure, the debtor, acting through a Personal Insolvency Trustee, may apply to the Insolvency Service for a Protective Certificate which provides for a standstill period of 30-40 working days. The Personal Insolvency Trustee proposes the DSA to the creditors and if approved by creditors representing 65 percent in value of qualifying creditors, the terms of the DSA become binding.
Requirements for a DSA:
(i) The debtor must have unsecured qualifying debts in excess of €20,000;
(ii) The DSA must be approved by 65 percent in value of qualifying creditors; and
(iii) Only one application for a DSA is permitted in a ten-year period.
The effect of a DSA:
(i) A DSA, if approved, is binding on all qualifying creditors;
(ii) The DSA will come into effect on registration by the Insolvency Service;
(iii) At the end of the term of the DSA the creditor is deemed to be repaid in full and the debtor is discharged from the remainder of his debts covered by the DSA;
(iv) Creditors may challenge a DSA in the Circuit Court on specified grounds including where the DSA unfairly prejudices the interests of a creditor or where there is a material inaccuracy in the debtor’s Statement of Affairs which causes a material detriment to the creditor; and
(v) A DSA does not affect the rights of secured creditors.
3. Personal Insolvency Arrangements (“PIA”)
This option is available is respect of secured and unsecured debts between €20,000 and €3,000,000. A PIA can be made between a debtor and one or more creditors to repay an amount of both secured and unsecured debt over a defined period in time. The Personal Insolvency Trustee will make the PIA proposal to creditors. If the proposal is accepted by the relevant majority of creditors (see below), it will be binding and will be administered by the Personal Insolvency Trustee.
Requirements for a PIA:
(i) The debtor has debts between €20,001 and €3,000,000;
(ii) The debtor is cash flow insolvent (i.e. unable to pay their debts in full as they fall due) and it is unforeseeable that over a 5 year period the debtor will become solvent;
(iii) A DSA would not be a viable alternative to restore the debtor to solvency over a five year period; and
(iv) A debtor will only be able enter into a PIA once in his lifetime.
Approval of a PIA
There are two approval mechanisms provided for in the Heads. It is unclear which approval mechanism is to apply to secured creditors and this will have to be clarified. The first is that the PIA must be approved by at least 65 percent of creditors in value and at least 75 percent of secured creditors and 55 percent of unsecured creditors. The second is that the PIA must be approved by all secured creditors rather than a percentage of secured creditors.
The effect of a PIA
(i) An approved PIA will be binding on all relevant creditors and will provide for payment of debt over a six year period; and
(ii) Creditor objections to a PIA may be taken to the Circuit Court on specified grounds including where the PIA unfairly prejudices the interests of a creditor and where there is a material inaccuracy in the debtor’s Statement of Affairs which causes a material detriment to the creditor.
The effect of a PIA on secured creditors:
(i) There are detailed provisions which provide for how security can be treated in a PIA. This can include sale, surrender and retention of the secured property. Where the PIA provides for the sale of a secured property and that property is in negative equity and therefore the monies realised from the sale of the asset are less than the debt amount, the balance due to the secured creditor will (unless the PIA provides otherwise) rank equally with unsecured debts in the PIA so that the debtor shall be discharged from the balance due on completion of the PIA.
(ii) A “clawback” is permitted in certain circumstances where a sale of a secured asset is achieved at a value greater than that attributed to the secured creditor in the PIA. Any uplift is to be paid to the secured creditor; and
(iii) There are other provisions that allow a PIA to provide for changes in the payment terms of a loan to include deferral of payment and changes to payments of capital and interest.
The Principal Private Residence in a PIA
A PIA may not include terms that would require a debtor to cease to occupy his or her principal private residence unless (a) the debtor confirms in writing to the personal insolvency trustee that the debtor does not wish to remain in occupation for the duration of the PIA; or (b) the costs to the debtor of remaining in occupation of his principal private residence are in the opinion of the Personal Insolvency Trustee disproportionately large relative to the debtors income and other financial circumstances and the reasonable accommodation needs of the debtor and his dependents. A PIA cannot contain terms providing for a disposal of the debtor’s interest in the principal private residence unless the debtor has obtained independent legal advice or has been advised to obtain such advice and the requirements of the Family Home Protection Act 1976 are satisfied to the extent possible.
Bankruptcy
The Heads provides for a number of important amendments to the Bankruptcy Act 1988. The bankruptcy reforms include the following:
(i) The automatic discharge period from bankruptcy is reduced from twelve years to three years;
(ii) The discharge from bankruptcy can be delayed by the court for up to a maximum of eight years, for non-co-operation with the Official Assignee, or for fraudulent or dishonest behaviour by the bankrupt during the bankruptcy;
(iii) There is also provision for a court to make an order requiring a discharged bankrupt to make certain payments in favour of creditors, for a period of up to five years after discharge;
(iv) The timeframes for the review of pre-bankruptcy transfers or the settlement of assets by the bankrupt are to be extended to three years; and
(v) The introduction of a minimum debt amount of €20,001 in respect of a creditor petition for bankruptcy.
The proposed automatic discharge after three years still contrasts with a one year discharge period in Northern Ireland and England.
Conclusion
The reforms to personal insolvency law are long overdue and they will assist in dealing with issues of personal debt in the Irish economy. There will be debate about whether the Heads achieve the right balance between the rights of debtors and creditors. There will be debate about the ability of a secured creditor to block the implementation of a PIA and the absence of any mechanism to prevent creditors unreasonably voting against a debt settlement proposal. Where a debtor avails of a debt settlement system, creditors will have to decide if their best prospect of recovery is through the debt settlement arrangement or through other enforcement options such as bankruptcy. The proposed reduction of the automatic discharge from bankruptcy to three years may make bankruptcy a more attractive proposition for an insolvent debtor and debtors may threaten bankruptcy to compel a creditor to accept a debt settlement proposal whether made through a DSA or a PIA.
In introducing legislation dealing with personal debt, the legislation must promote the responsible use of credit while at the same time provide for the financial rehabilitation of people who have a contribution to make to the Irish economy.
This article first appeared in the February 2012 edition of the PAI monthly Journal. For more information on how to subscribe to the Journal, click here.