The Personal Insolvency Act 2012 was signed into law on 26 December 2012. The Act provides for the introduction of three new non-judicial debt settlement arrangements and reforms to the current bankruptcy legislation.
The Insolvency Service of Ireland, an independent body established under the Act on 1 March 2013, is tasked with overseeing and operating the new non-judicial debt settlement arrangements. It is also responsible for authorising and regulating Approved Intermediaries and Personal Insolvency Practitioners to work with persons seeking to avail of the new arrangements.
New Non-Judicial Debt Settlement Arrangements
The three new non-judicial debt settlement arrangements introduced under the Act are (i) Debt Relief Notices; (ii) Debt Settlement Arrangements; and (iii) Personal Insolvency Arrangements.
The relevant sections of the Act providing for these new arrangements have not yet been commenced by the requisite ministerial order, but it is expected that the Act will be fully operational by late summer.This article focuses on Debt Settlement Arrangements (DSAs) and Personal Insolvency Arrangements (PIAs).
Debt Settlement Arrangements (DSAs)
A DSA is available in respect of unsecured debts only. It is aimed at assisting debtors who are unable to pay their unsecured debts, but who have sufficient income and assets available to propose a reasonable level of repayment to creditors. A debtor is eligible for a DSA if he:
- Is insolvent, with no likelihood of become solvent within 5 years
- Is domiciled in Ireland or within one year before making an application under the Act was ordinarily resident in Ireland or had a place of business here
- Has completed a Prescribed Financial Statement (“PFS”) and has made a statutory declaration confirming its accuracy and completeness, and
- Has obtained a statement from a PIP confirming that he is an appropriate applicant for a DSA as there is a reasonable prospect that a DSA would assist him in becoming solvent within five years
The maximum duration of a DSA is 5 years (extendable by not more than 12 months in certain circumstances).
Personal Insolvency Arrangements (PIAs)
A debtor is eligible for a PIA if he fulfils the four criteria referred to above in respect of DSAs and additionally has secured debts of up to €3 million in aggregate. This €3 million limit can be waived where all creditors agree.
The maximum duration of a PIA is 6 years (extendable by not more than 12 months in certain circumstances).
Overview of DSA/PIA Process
If a debtor decides to enter a DSA/PIA, he must formally instruct a Personal Insolvency Practitioner (“PIP”) to act on his behalf. The PIP will help the debtor to complete a PFS and will submit it to the Insolvency Service on the debtor’s behalf. The PIP must also submit a statement confirming, amongst other things, that the information in the PFS is complete and accurate and that the debtor is eligible to enter a DSA/PIA.
The Insolvency Service may raise queries or seek further details in respect of any of the matters referred to in the PFS. If the Insolvency Service is satisfied the application is in order, it will refer it to the appropriate court. The Circuit Court will determine applications concerning liabilities up to €2.5 million, and the High Court will determine all other applications. If the court is satisfied the debtor meets the eligibility criteria and that all other requirements have been met, it will issue a Protective Certificate. This certificate imposes a 70 day moratorium (extendable once only by 40 days) on the enforcement of relevant debts. The PIP will consult with the debtor and his creditors and put together a proposal for a DSA/PIA. The proposal must be approved at a creditors’ meeting and subsequently approved by the Court.
Voting Requirements for DSA
A proposal for a DSA must be approved by a majority of creditors representing at least 65% in value of the unsecured creditors participating in the meeting and voting.
Voting Requirements for PIA
A proposal for a PIA must be approved by:
- A majority of creditors (secured and unsecured) representing at least 65% of the total amount of the debts due to the creditors participating in the meeting and voting; and
- Creditors representing more than 50% of the value of the secured debts due to creditors who are entitled to vote and have voted as secured creditors; and
- Creditors representing more than 50% of the amount of the unsecured debts due to creditors who are entitled to vote and have voted as unsecured creditors.
Challenging a DSA/PIA
Creditors may challenge an approved DSA/PIA by making an application to the appropriate court within a prescribed period. If the challenge is dismissed or if no creditor objects, the court will consider whether to approve the DSA/PIA and may hold a hearing for this purpose.
Effect of DSA/PIA
A DSA/PIA binds every creditor whose debt is covered by the arrangement. Any such creditors cannot therefore institute any legal proceedings (including bankruptcy petitions) in relation to a debt the subject of a DSA/PIA, take any steps to recover payment of the debt, or enforce a judgment or order against the debtor.
Debtors are obliged to fully disclose details of their pension entitlements. They cannot be required to hand over their pension entitlements or to draw down their pensions early. However, where excessive contributions to a pension arrangement were made by a debtor within the three years prior to the application for a Protective Certificate with a view to putting funds beyond the reach of creditors, an application may be made to the appropriate court by creditors for relief in respect of such excessive contributions.
Valuation and Write Down of Secured Assets
An independent expert may be appointed to value secured assets in certain circumstances. Claw back provisions require a debtor who has benefitted from a write-down of negative equity to repay the secured creditor some or all of the amount written-down in the event that he/she sells the property the subject of the security within 20 years of a PIA coming into effect.
The Insolvency Service is responsible maintaining separate public registers for all DRNs, DSAs and PIAs.
The bankruptcy option will continue to apply to unsecured debts and secured debts of any amount over €20,000 and will be the only option available to a debtor with secured debt greater than €3 million, unless all secured creditors consent to the debtor entering a PIA.
Changes to the current bankruptcy legislation, include:
- The reduction of the discharge period from 12 years to 3 years
- The court can delay the discharge from bankruptcy for up to 8 years where the bankrupt does not cooperate with the official assignee or where he behaves in a fraudulent or dishonest manner during the bankruptcy process
- The court can order the bankrupt to make payments to creditors for up to 5 years after discharge
- New eligibility criteria, including a minimum debt amount of €20,000 in respect of a creditor petition for bankruptcy, and
- The possibility to carve out certain pension assets from a bankrupt’s estate, which will be unavailable to creditors. The court can order recovery where excessive pension contributions were made by a bankrupt within 3 years prior to adjudication.
A DRN/DSA/PIA is deemed to have failed after a six-month arrears default arises. A rise in the number of bankruptcies is consequently anticipated. A recent Stubbs Gazette/Red C poll predicted 6,900 bankruptcy applications and approximately 25,000 applications for DRN/DSA/PIAs in the first year of the operation of the Act.