In a High Court decision of 22 May 2017 Baker J rejected a proposal by a secured lender to write down a portion of a debtor couple's mortgage debt and warehouse half of the debt as future repayment of the warehoused part of the loan was not predicated on an ability to repay. Thus, the proposal was capable of creating circumstances amounting to insolvency at the end of the mortgage term in approximately 23 years.
The decision arose in the context of an appeal to the High Court taken by KBC following the approval by the Circuit Court of a Personal Insolvency Arrangement (PIA).
Under the secured lender's proposal reduced mortgage repayments were to be made in respect of half of the mortgage debt with the balance of the debt warehoused. The proposal also provided the debtors with lifetime tenure in their property and a deferral of the secured lender's rights of enforcement under its security until after their death. The debtors would also be permitted to repay the warehoused amount during their lifetimes, if their means allowed. The PIA included an alternative proposal for dealing with the secured debt which the secured lender rejected.
Whilst refusing the appeal, the Judge rejected the debtor's argument that the personal insolvency legislation precludes a PIA which includes a provision whereby secured debt is warehoused. The Judge also acknowledged that the personal insolvency legislation does not mandate the means by which secured debt may be restructured and does not preclude a warehoused amount becoming payable after the expiration of the term of a PIA.
However, the Judge said that in this instance the secured lender's proposal was "predicated on assumptions and conjecture regarding living arrangements of the debtors far into the unknown future to a time at the expiration of the mortgage term" which was "capable of creating circumstances amounting to insolvency at the end of the mortgage term in approximately 23 years' time."
The Judge indicated that although the Court will not make assumptions regarding the likely financial or other circumstances of a debtor far into the future, she decided that in this case, the repayment of the proposed warehoused debt was not predicated on any anticipated ability of the debtors to pay in the future. She said that this resulted in material unfairness, and for this reason, decided that the personal insolvency practitioner had correctly taken the view that the secured lender's proposal was not reasonable.
The ruling is likely to encourage debtors to seek more favourable terms from their secured creditors and may prompt an increase in the volume of PIAs coming before the Courts. Although the Judge has confirmed that warehousing of mortgage debt is not impermissible, the ruling is likely to impact upon the ability of secured creditors to propose mortgage warehousing as an alternative to personal insolvency arrangements if there is uncertainty as to the debtor's ability to make repayments in the future.