The Personal Insolvency Act 2012 (the “PI Act”) was signed into law on 26 December 2012 and introduces significant changes to the personal insolvency regime in Ireland, as described in our previous client briefing concerning the PI Act (issued in December 2012 and available on our website). All provisions of the PI Act, other than Part 4 which relates to bankruptcy, have now been commenced and it is expected that debtors will shortly be able to avail of the new insolvency measures. Since December 2012, much of the infrastructure necessary for the new regime’s operation has been put in place and a number of important amendments have been made to the PI Act by way of the Finance Act 2013 and the Courts and Civil Law (Miscellaneous Provisions) Act 2013.
Who is affected by the PI Act?
The PI Act will affect any person owed a debt or other liability (such as a personal guarantee) by an individual. The PI Act applies regardless of whether the debtor incurred the debt or liability solely or jointly (including in a partnership) and whether as a consumer or in the course of the debtor’s business. Creditors such as banks, credit unions, retail credit firms, hire purchase and lease providers, landlords and utilities (telephone, electricity, gas) are likely to be particularly affected by the PI Act. In addition, the PI Act is relevant to creditors who are investors in portfolios of Irish debt, particularly consumer, mortgage and small and medium enterprise (“SME”) debt and other investors in Irish financial assets where the underlying debtors include individuals.
How are creditors affected by the PI Act?
The PI Act introduces three new insolvency measures to enable insolvent debtors to resolve their indebtedness in an orderly and rational manner without recourse to bankruptcy. The three new debt measures are:
- debt relief notice, available in respect of unsecured and secured debts where the aggregate debt value is €20,000 or less;
- debt settlement arrangement, available in respect of unsecured debts only of any value; and
- personal insolvency arrangement, available in respect of secured debts up to €3 million (but without any limit of value where every secured creditor agrees) and unsecured debts (without any limit of value).
Unsecured debts will be discharged at the end of each of the insolvency procedures, although a dividend may be payable to the unsecured creditors during the relevant procedure. Under the personal insolvency arrangement procedure, secured debts can either be discharged at the end of the procedure or otherwise restructured so that they are sustainable beyond the procedure. A variety of restructuring options are possible, including a write-down of some or all of the negative equity, a change of interest rate or interest basis (e.g. variable to fixed) or a split mortgage.
The PI Act imposes significant restrictions on creditors. From a legal compliance perspective, it will be essential for creditors to ensure that systems and processes are in place to meet their obligations under the PI Act and to protect their interests as creditors (particularly in light of certain provisions of the PIA Act whereby a nonparticipating creditor’s interest may be adversely affected). It is important to note that a creditor’s obligations under the PI Act apply whether or not a creditor chooses to actively participate in the insolvency procedure concerned. Under the PI Act, a creditor is subject to restrictions on taking steps to recover a debt, contacting the debtor, initiating or continuing legal proceedings and, in the case of a personal insolvency arrangement, enforcing security. The restrictions will affect creditors’ arrears, collections and payment processes. Receivers and mortgagees-inpossession may also be affected.
The PI Act facilitates creditor involvement in the new insolvency procedures and creditors can accordingly take action to safeguard their position and minimise losses. Amongst other things, the PI Act contains provisions relating to creditors’ submissions, proof of debts, proof of security, valuation of security, creditors’ meetings and voting rights, creditor protections and creditors appeals to court.
The PI Act makes important amendments to the Bankruptcy Act 1988, including a reduction of the automatic discharge period to 3 years (from the current 12 years). Of major significance to creditors is the substantial extension of the bankruptcy ‘hardening periods’, such as with respect to fraudulent preferences which has been extended from 12 months to 3 years. Certain transactions with a debtor during that period are at risk of being set aside should the debtor subsequently be adjudicated bankrupt and the creditor may be required to repay monies received from the debtor during the period. Creditors considering entering into restructuring arrangements outside of the PI Act with any debtor at risk of insolvency will need to carefully consider such arrangements in light of the amended bankruptcy provisions.
Commencement of the PI Act
To date, three commencement orders have been made by the Minister for Justice and Equality under the PI Act. The cumulative effect of these orders is that, from 31 July 2013, all provisions of the PI Act other than those with respect to bankruptcy have been commenced. Applications for the three new measures under the PI Act are expected to being shortly. The Insolvency Service of Ireland (the “Insolvency Service”) has publicly indicated that the courts may begin making orders in respect of those new measures as early as September 2013.
Establishment of Insolvency Service of Ireland
The Insolvency Service was formally established by order of the Minister for Justice and Equality on 1 March 2013 to oversee and operate the new personal insolvency measures and authorise and regulate personal insolvency practitioners and approved intermediaries. Since its establishment, the Insolvency Service has launched an information campaign in relation to its functions, including a website (www.isi.gov.ie) and an information telephone helpline. The Insolvency Service has published guides explaining the new insolvency measures along with illustrative scenario packs.
In accordance with section 23 of the PI Act, the Insolvency Service has prepared and issued guidelines as to what constitutes a reasonable standard of living and reasonable living expenses. The Insolvency Service has also exercised its powers to make certain regulations under the PI Act.
The Courts and Civil Law (Miscellaneous Provisions) Act 2013 provides for the integration of the Office of the Official Assignee in Bankruptcy with the Insolvency Service. This is an important development and means that the Insolvency Service will have oversight of bankruptcy proceedings under the Bankruptcy Act 1988 along with the three new insolvency measures under the PI Act.
Appointment of Specialist Judges of the Circuit Court
Six new Specialist Judges of the Circuit Court were appointed in July 2013 for the purposes of performing and exercising the functions, powers and jurisdiction conferred on the Circuit Court by the PI Act. The new judges will have jurisdiction to deal with cases involving debts of up to €2.5 million. The High Court will have jurisdiction for cases involving debts in excess of €2.5 million.
Approved Intermediaries and Personal Insolvency Practitioners
In June 2013, the Insolvency Service made regulations to prescribe the qualification criteria, authorisation requirements and regulatory standards applicable to approved intermediaries (who will act on a no-fee basis in relation to the debt relief notice measure) and personal insolvency practitioners (who will act on a commercial basis in relation to the debt settlement arrangement and personal insolvency arrangement measures).
It is anticipated that approved intermediaries will be financial advisors employed by the Money Advice and Budgeting Service. Regulations made by the Insolvency Service require an applicant for authorisation as a personal insolvency practitioner to be qualified as an accountant, solicitor, barrister, qualified financial advisor (QFA) or to hold a qualification in either law, business, finance or other appropriate similar qualification recognised to at least level 7 of the National Qualifications Framework by Quality and Qualifications Ireland (or equivalent). Applicants for qualification must have completed a course of study and passed an examination (accredited by the Insolvency Service), have professional indemnity insurance and meet various other eligibility criteria. The Insolvency Service publishes a register of personal insolvency practitioners on its website; as of 12 August 2013, the register shows that 14 practitioners have been authorised.
Amendments to the PI Act
The Finance Act 2013 makes a number of changes to tax law in connection with the PI Act. In addition, the Finance Act 2013 inserted new provisions in the PI Act to ensure that certain tax liabilities will be paid during the course of a debt settlement arrangement or personal insolvency arrangement.
The Courts and Civil Law (Miscellaneous Provisions) Act 2013 makes a number of amendments to the PI Act. While some of these are technical in nature, key substantive changes have been made in relation to some of the restrictions applicable to creditors (notably, including changes of particular importance to creditors under hire purchase or lease contracts or with retention of title clauses). Also, there are new provisions regarding the variation of debt settlement arrangements and personal insolvency arrangements and the removal of debtor information from the public insolvency registers maintained by the Insolvency Service.
The PI Act (and in particular the new personal insolvency arrangement measure) is expected to have a major impact on the resolution of mortgage arrears. It is possible under the PI Act for a personal insolvency practitioner to formulate a personal insolvency arrangement that will provide for the restructuring of mortgage debt, including by way of a write-down of principal. There are protections in the PI Act for a debtor’s occupation and ownership of his or her principal private residence. There are also specific protections for secured creditors to ensure that they are not unjustly deprived of the economic value of their security. The PI Act contains provisions to encourage a debtor, before resorting to a personal insolvency arrangement, to co-operate with his or her mortgage lender in accordance with the lender’s mortgage arrears resolution process required under the Central Bank of Ireland’s Code of Conduct on Mortgage Arrears. That Code was revised with effect from 1 July 2013 to take account of the PI Act and includes provisions requiring mortgage lenders to give debtors information about the new insolvency measures.
The Land and Conveyancing Law Reform Act 2013, which was signed into law on 25 July 2013, also takes account of the PI Act in proceedings seeking possession of principal private residences. Where a mortgage lender seeks such possession, the court may adjourn the proceedings for up to 2 months to enable the debtor to consult with a personal insolvency practitioner and where appropriate, apply for a personal insolvency arrangement.