In a significant judgment, the High Court has held that there is no bar on a personal insolvency arrangement including a split-mortgage. The court also held that while a Personal Insolvency Practitioner is required to have regard to a creditor’s proposed solution for resolution of mortgage debt (eg a split-mortgage), the PIP will not be acting unreasonably by failing to adopt that solution and instead adopting another reasonable solution (eg debt write-down). The type of warehousing solutions that will be considered reasonable are those that on present or known figures offer a solution to indebtedness that is likely to be achieved.
In a recent case involving KBC Bank Ireland plc (“KBC”) and a Drogheda couple,1 the homeowners had fallen into arrears with their €285,647 mortgage with KBC. Under a proposed PIA an amount of €165,647 was to be written off leaving a live mortgage balance of €120,000. The value of the property in accordance with the Personal Insolvency Acts was €105,000.
The proposed PIA was rejected by the creditors including KBC. Instead, KBC proposed that only approximately €15,000 of the debt be written down so that it would be reduced to €270,000 and that would then be split into two equal amounts of €135,000 each. While one half of this would remain active, the second half would be treated as inactive and placed in a warehouse account with 0% interest. The debtors would be given “lifetime tenure” in their home and the security would not be enforceable until after the survivor of them died though they could choose to repay some or all of this amount during their lifetimes if their means allowed. This counterproposal was considered but rejected by the PIP. The proposed PIA was then confirmed by the Circuit Court notwithstanding KBC’s objection that it was unfairly prejudicial to its interests. KBC appealed to the High Court.
On appeal, Baker J held that the legislation did not preclude a PIA that made provision for warehousing part of a debt that would then be treated outside of the period of the PIA. Whether a creditor’s proposal for long term warehousing could be reasonably rejected without risk of being characterised as unfairly prejudicial to that creditor would depend on the facts of each individual case, including whether the creditor’s proposal provided a better return for creditors than the proposed PIA, or on bankruptcy, and made provision for the repayment of debt in light of the means of the debtor.
Here, Baker J was not satisfied that KBC’s proposal actually offered it a better return. If there was significant inflation, the warehoused amount might have no real value when payment fell due. She did not consider that a superficial comparison of the financial elements of the proposal was the correct approach and she had no evidence to support the argument beyond a mere arithmetic calculation.
She also held that the court must be satisfied taking all matters into account that the proposed PIA enabled the creditors to recover the debts due to them to the extent of the means of the debtor. “Means” referred to present income and capital assets and not the projected means at a time so far into the future that the test was based on hypotheses or conjecture though in certain circumstances future certain or ascertainable means could be taken into account. It was also inappropriate to consider whether the estate of the last surviving debtor would be insolvent having regard to the young age of the debtors and the impossibility of calculating how property prices would evolve over their lifetimes.
She added that the fact that the court would not require that a PIA guarantee the solvency of a debtor into the future2 had the corollary that a court would equally not make assumptions regarding the financial or other circumstances of a debtor far into the future. While KBC’s proposal provided for the debtors’ continued occupation of their home for their lifetimes, it was predicated on assumptions and conjecture regarding their living arrangements far into the unknown future. Also, the proposal did not take into account that life events could mean that they could wish or need to live elsewhere.
KBC’s proposal was capable of creating circumstances amounting to insolvency at the end of the mortgage term. As a PIA was a once in a lifetime solution, it would be wrong to test the reasonableness of a proposed PIA in the light of a counterproposal that could result in insolvency at a later date. A warehousing solution should on present or known figures offer a solution to indebtedness that was likely to be achieved. Neither of the debtors had a pension which might provide a lump sum on retirement to deal with the warehoused amount. The repayment of the inactive account therefore was not predicated on the anticipated ability to pay in the future. This resulted in a material unfairness.
In summary, the proposal here to warehouse more than 125% of the current value of the dwelling was not proportionate to, or reasonably derived from the current income and capital assets or any future ascertainable means of the debtors. Baker J was not satisfied that the PIA proposed by the PIP was unfairly prejudicial to KBC on account of failing to fully bring into account hypothetical or future means for which there existed no present expectation. In the circumstances, she was satisfied the PIP involved did not unreasonably fail to adopt the counterproposal and that the means of the debtors had been reasonably and adequately brought to bear on the PIA. A court would not interfere unduly with a proposal even if another and possibly equally reasonable proposal could be formulated and the objection of a creditor would not be upheld merely on account of the fact that it could offer an alternative proposal.
This judgment highlights the flexibility of the debt resolution options that can be accommodated within a PIA. This is significant both for lenders and debtors. It suggests that in future a greater writedown of unaffordable mortgage debt may be available to struggling homeowners. For lenders, it may signal the crystallisation of losses at an earlier date and in greater amounts unless lenders put forward attractive alternatives. The High Court has confirmed beyond doubt that a split mortgage is a legitimate alternative to a debt write-down. However, the debtor and the PIP will not be acting unreasonably where they prefer a write-down to a split mortgage on terms that would likely result in material unfairness to the debtor. Accordingly, drafting the terms of the split mortgage proposal to avoid such unfairness will be important where the creditor wishes to avoid a write-down.