Debt relief procedure

When the debt relief procedure for natural persons was introduced in 2008 it was considered that it should be available only for a natural person's non business debts. One of the amendments to the Insolvency Act which came into force on 1st January 2014 is the possibility for natural persons who are insolvent entrepreneurs to make use of the debt relief procedure to deal with their business and non-business debts. This may at first sight seem to be a radical change. Yet if one considers the prior case-law of the Supreme Court, it is simply a reflection of that court’s attitude to the Insolvency Act prior to its amendment. The Supreme Court had decided on a number of occasions that the debt relief process was available in some circumstances where both private and business debts were to be compromised under the debt relief procedure.

Amended law

The 2014 amendment to the Insolvency Act now makes it clear that the fact that a certain debt is a business debt does not prevent the use of the debt relief process to solve the debtor's actual or impending insolvency, provided certain criteria are fulfilled. In order to be able to use the debt relief procedure in this context the debtor needs to show that:   

  • the relevant creditor(s) agrees to the debt relief process being used;or
  • the creditors claim is secured; or
  • the creditor's claim was one which could have been dealt with in a prior bankruptcy but which was not because that bankruptcy was annulled on the ground there was a lack of debtor assets.

An inherent aspect of a debt relief, as opposed to other ways of resolving insolvency, is that, for social reasons, the return of the debtor into a debt-free economic life is given priority over the full satisfaction of creditors. However, the creditors should not feel cheated. In the first scenario the creditor agrees to the debt relief, while in the third, where the reasons for annulling insolvency are insufficient assets of the debtor, there is no greater return available to such creditors. Where the claim is secured over the debtor's assets the creditor retains a degree of control which should offer protection.

Effect of amendments

The amendment also renders pointless the debate on whether the Supreme Court departed from the actual wording of the “old” Act, and if so, whether it was excusable as it was in line with the purpose of the Act.

Given that debt relief has been created for non-businessmen, the courts will have to deal with practical questions such as ensuring that the newly expanded process does not become a means by which businessmen can easily avoid the legitimate claims of business creditors.