In the recent decision of Re JD (a debtor), the High Court upheld a debtor’s challenge to a lender’s decision to reject a Personal Insolvency Agreement (“PIA”) proposal.

Section 115A of the Personal Insolvency Acts 2012- 2015 (“the Acts”) provides a new mechanism by which a debtor may seek the Court’s approval of a PIA notwithstanding its rejection by creditors.

This case is particularly significant as:

  1. the applicant debtor was a co-mortgagor together with her former husband, who had stopped contributing to the mortgage repayments; and
  2. it provides debtors and creditors with useful guidance on the application of section 115A of the Acts.

Background

JD the debtor had a mortgage with EBS over her principal private residence which she held jointly with her former husband. The couple informally separated and JD continued to live in the property. The husband stopped contributing to the mortgage and the loan fell into arrears. JD presented a PIA to a meeting of her creditors. The PIA was rejected by EBS. JD then brought a Circuit Court application under section 115A of the Acts.

The Circuit Court upheld EBS’s rejection of the PIA. However this decision was subsequently appealed to the High Court where Baker J reversed the Circuit Court decision.

The basis of objection

EBS objected to the PIA on the following grounds:

  1. there was an underlying unfairness in the PIA because the debtor’s former husband did not agree to the proposed changes and the arrangement might have prevented EBS from pursuing any claims against him as a co-debtor on the mortgage;
  2. there were insufficient grounds to demonstrate that the debtor could meet the terms of the PIA, primarily because EBS had not been furnished with evidence that the debtor’s husband would fulfil his maintenance obligations;
  3. certain calculations regarding the income of the debtor were incorrect; and
  4. the conduct of the debtor after she fell into arrears.

Observations of the court

Baker J acknowledged that the power of the Court under section 115A of the Acts to overturn a creditor’s veto of a PIA, can only be exercised once the Court is satisfied that it would be fair to both parties in the circumstances. One factor relevant to the consideration of fairness is the public interest in the maintenance of a debtor’s occupation and ownership of a principal private residence.

Baker J found that the PIA was not unfairly prejudicial to EBS stating that the proposed PIA would be more beneficial to it than bankruptcy. In terms of sustainability of the PIA, Baker J noted that under section 115A (9) (c) of the Acts, the Court should be satisfied that the debtor was “reasonably likely” to be able to comply with the PIA by having regard to the extent to which the debt is secured. In this case, the debtor had secured an attachment of earnings Order against her husband. In relation to the accuracy of income figures submitted by the debtor, Baker J was of the view that whilst Christmas and back-to-school expenses for the children should have been included in the calculation of income the omission of such was de minimis. Finally, Baker J considered that the debtor rationally approached her finances in the circumstances as she understood them, albeit she had previously been led astray by her engagement with an unregulated entity.

The position of the joint debtor/mortgagor

Baker J rejected EBS’s argument that it would lose rights against the co-debtor and co-mortgagor. The judge said that the Acts provide for an application by a joint debtor without the involvement of his or her co-debtor. Baker J stated that EBS was not deprived of any right to pursue the husband as a co-debtor or co-mortgagor because of (i) the express provision in the PIA which stipulated that the PIA would not affect any rights the creditor had regarding persons other than the debtor and (ii) the statutory protection from section 17 of the Civil Liability Act 1961 which provides that the release of, or accord with, one concurrent wrongdoer shall only discharge the others if such release indicates an intention that the others are to be discharged.

Conclusion

An increasing number of personal insolvency cases involving separated couples are emerging. Lending institutions were previously unable to enter into arrangements with one spouse without the involvement or co-operation of both parties. Whilst this decision demonstrates that the Courts will not be slow to overturn a creditor’s veto of a PIA, on a positive note the decision gives guidance to secured creditors when dealing with joint borrowers. Lending institutions may now be able to put in place arrangements where they wanted to in the past but were not in a position to do so which will in turn benefit debtors who are seeking a resolution to debts for which they are jointly and severally liable.

Please click here to access the full judgment of the High Court in Re JD (a debtor).