This Briefing contains a general summary of developments and is not a complete or definitive statement of the law. It also updates the Briefing published in July 2012 on the Personal Insolvency Bill. Specific legal advice should be obtained where appropriate.
The Personal Insolvency Bill (the "Bill") completed its passage through both Houses of the Oireachtas on 19 December 2012 and was signed into law as the Personal Insolvency Act 2012 (the "Act") by the President of Ireland on 26 December 20121 .
The Act introduces reforms to the Bankruptcy Act 1988 (the "Bankruptcy Act") together with the following three forms of non-judicial debt settlement arrangement (the "Arrangements") which allow (subject to certain conditions being met) the write-down or restructuring of both secured and/or unsecured debt owed by certain eligible individuals:
- Personal Insolvency Arrangements ("PIAs") (the only Arrangement applicable to secured debt)
- Debt Settlement Arrangements ("DSAs")
- Debt Relief Notices ("DRNs")
There are a number of common themes between the Arrangements as follows:
- each is available in respect of debt incurred by a natural person (not a corporate) whether through personal consumption or in the course of that person’s business, trade or profession
- debtors may only avail of Arrangements where they are insolvent (i.e. unable to pay their debts as they fall due) and meet certain other eligibility criteria
- debtors must have no likelihood of becoming solvent within the 5 years following an application for a DSA or a PIA (3 years in the case of an application for a DRN)
- the application must be made through a third party (in the case of DRNs, an approved intermediary (an "Approved Intermediary") and in the case of DSAs and PIAs, a personal insolvency practitioner (an "Insolvency Practitioner")) who will also offer advice to the debtor
- DSAs and PIAs will generally not affect the obligation to pay "preferential debts" (such as rates and income tax) as defined in the Bankruptcy Act
- certain "excludable debts" (largely debts owed to the State) may also be included in an Arrangement with creditor consent
- creditors can object to an Arrangement but, in the case of a DRN, creditor consent is not needed
- a debtor may only avail of each Arrangement once
- a debtor cannot apply for any Arrangement where 25% or more of the relevant debts were incurred during the 6 months preceding the application
- a debtor has no right of appeal against a decision taken at a creditors’ meeting in respect of a DSA or a PIA
- a debtor cannot be forced to leave a principal private residence ("PPR") under a DSA or a PIA, but may opt to do so
Key Points To Note
- The inclusion of PIAs in the Act is particularly noteworthy as secured debt (including residential mortgages and buy-to-let mortgages) up to €3,000,000 can come within a PIA’s scope. While, as drafted, it is unlikely that mortgage lenders will frequently be compelled to accept a write-down of secured debt, the Act does provide debtors with a process whereby they can apply for write-downs. The process should be sufficiently robust so as to differentiate between "can’t-pays" and "won’t-pays", meaning that it is unlikely that there will be a flood of secured debt write-downs, but in many cases a write-down may be the only option. It is worth noting that the Act does provide certain protections for secured creditors, including a claw-back provision.
- In the course of the drafting of the Act, one of the most contentious points was the extent to which secured creditors could block, or not block, PIAs or whether they could be squeezed-out if in a minority. While a majority of creditors representing not less than 65% in value of the total debt (secured and unsecured) who are attending and voting at the creditors’ meeting must still vote in favour of a PIA as a prerequisite to it taking effect, only 50% in value of secured creditors attending and voting at that meeting, and 50% in value of unsecured creditors attending and voting at that meeting, must do so (a lower threshold than that contemplated when the Heads of Bill were drafted). Certain consumer advocacy groups still believe that this provides secured creditors with an effective veto (as persons with secured debt tend to concentrate their debt with one institution) but where an individual has an equal amount of secured debt with two institutions and also has unsecured debt, all of which is proposed to come within a PIA, it would still be possible for a secured creditor to be squeezed-out by the terms of the PIA being forced upon it if it is approved by the other creditors. Likewise, secured debt includes PPRs and other properties (such as buy-to-lets and commercial investments) and it is therefore possible that the creditor secured on a PPR could be out-voted by other secured creditors.
- The Act provides significant protections against abuse and contains a number of features to distinguish between "won’t-pays" and "can’t pays". Debtors must meet certain criteria and (in the case of a PIA) must have complied with any mortgage arrears process required by the Central Bank of Ireland (the "Central Bank") and operated by the relevant secured creditor for at least 6 months to be eligible to apply for an Arrangement.
- Each Arrangement must be approved by the "appropriate court"2 and will take effect when published by the Insolvency Service on the appropriate register.3
- A review by the Minister for Justice and Equality (the "Minister") (together with the Minister for Finance) of the operation of the provisions of the Act as regards Arrangements must be started within 3 years of the commencement of the part of the Act dealing with Arrangements.
- Further details in relation to the Insolvency Service, Approved Intermediaries and Insolvency Practitioners are set out later in this Briefing.
Personal Insolvency Arrangements (PIAs)
A PIA allows for the settlement of secured debt up to €3,000,000, and unsecured debt, over a 6 year period (with a possible 1 year extension) as a possible alternative to bankruptcy. The €3,000,000 cap means that secured business debt could be the subject of a PIA, as many PPR loans will have been for less than that cap amount
An insolvent debtor who meets certain criteria may propose a PIA to one or more secured and unsecured creditors, which proposal must be formulated in conjunction with an Insolvency Practitioner. There must be at least one secured creditor (which could include a judgment mortgagee) holding security over an asset or property of the debtor situated in Ireland. Notably, if all secured creditors agree, the €3,000,000 cap can be waived.
The Insolvency Practitioner will, following discussions with the debtor and the completion by the debtor of a prescribed-form financial statement, make the application to the Insolvency Service on the debtor’s behalf accompanied by a statement that the Insolvency Practitioner is of the opinion that the information in the debtor’s financial statement is correct, that the debtor satisfies the eligibility criteria, that there is no likelihood of the debtor becoming solvent within the next 5 years and that it is appropriate for the debtor to apply for a PIA. That statement will also be accompanied by a statutory declaration from the debtor. Further, where the proposed PIA relates to PPR mortgage debt, the debtor must confirm in writing that he has cooperated with the secured creditor’s Mortgage Arrears Resolution Process under the Central Bank’s Code of Conduct on Mortgage Arrears for at least 6 months following which an alternative repayment arrangement ("ARA") was not capable of being agreed, or that the secured creditor was not prepared to offer an ARA to the debtor.
The Insolvency Service will, if it is satisfied that the application is in order, issue a certificate to that effect and forward the certificate, the application and any supporting documentation to the appropriate court. The court will then decide whether or not to issue the protective certificate and may hold a hearing if it requires further information or evidence. The protective certificate will last for 70 days (with a possible 40 day extension). Once the protective certificate issues, certain enforcement proceedings and other actions may not be initiated while it is in force.
The Insolvency Practitioner must then notify the relevant creditors of the issue of the protective certificate and the proposed PIA, seek creditor submissions and provide them with certain documents.
Where a PIA includes terms providing for a write-down of secured debt to a specified amount the terms of the PIA shall (unless the secured creditor agrees otherwise) provide that such written down amount shall rank equally with and abate in equal proportion to the unsecured debts covered by the PIA and shall be discharged with those unsecured debts on completion of the obligations specified in the PIA.
The Act sets out a non-exhaustive list of repayment options that can be included in a PIA and sets out certain mandatory provisions regarding the treatment of security. Specific provisions are included which are designed to ensure that a minimum amount is payable to secured creditors and that any write-down does not reduce the amount to be paid to the secured creditor on the sale of the property below the lesser of (a) the value of the security or (b) the amount of the debt secured thereby. It also provides for a claw-back if the property is subsequently sold for an amount greater than the written-down value of the debt it secured, unless agreed otherwise.
The value of the security is to be determined by agreement between the debtor, the Insolvency Practitioner and the relevant secured creditor. In the absence of agreement, those parties must appoint an independent expert and, where the parties cannot agree on an independent expert, they may refer the issue to the Insolvency Service which will then appoint an independent expert whose valuation will be binding.
Where a PIA relates to PPR mortgage debt, it should be borne in mind that all secured debt (mortgages over PPRs and buy-to-let properties, and second charges) are treated the same. Judgment mortgages will also be treated as secured debt. This could produce unfair results at PIA creditors’ meetings in respect of holders of PPR mortgages. For a proposed PIA to be approved at a creditors meeting, it must be approved by:
- a majority of creditors representing not less than 65% in value of the total of the debtor’s debts owed to the creditors participating in, and voting at, the meeting
- creditors representing more than 50% of the value of secured debts owed to creditors participating in, and voting at, the meeting
- creditors representing more than 50% of the value of the unsecured debts owed to creditors participating in, and voting at, the meeting
If the PIA is approved, it must then be sent to the Insolvency Service which, in turn, must notify the appropriate court. If no creditor objection is lodged with the appropriate court within 14 days, or if such a creditor objection is not approved by the appropriate court which then approves the PIA, the appropriate court must notify the Insolvency Service which will then register the PIA in the Register of Personal Insolvency Arrangements, following which it will come into effect.
If a PIA is not agreed, the process terminates and the debtor will be open to bankruptcy and other enforcement proceedings.
Ongoing obligations are imposed on both the Insolvency Practitioner and the debtor for the duration of the PIA, including an obligation on the Insolvency Practitioner to ensure that proceeds under the PIA are applied in accordance with its terms and an obligation to review the PIA at least annually. Notably, payments to creditors of the same class will be apportioned on a pari passu basis unless otherwise provided in the PIA. Unless terminated during its term (for example, if a 6 month arrears default occurs), the debtor will be discharged from the unsecured debts specified in the PIA and secured debts to the extent specified in the PIA once the PIA reaches its conclusion. Where a PIA terminates prematurely, the debtor will be liable in full for all debts covered by the PIA unless otherwise provided for in the PIA or unless the appropriate court makes an order to the contrary. It is possible for a PIA to be varied with the consent of a debtor, and subject to approval at a creditors’ meeting. The same approval thresholds apply as with the original approval of the PIA.
Debt Settlement Arrangements (DSAs)
A DSA allows for settlement of unsecured debt; secured debt is unaffected.
A DSA may be proposed by a debtor to one or more creditors in respect of the settlement of unsecured debts. Again, the debtor must be insolvent and meet certain eligibility criteria.
The debtor must provide a written statement in relation to his financial affairs to an Insolvency Practitioner following which a meeting between the debtor and the Insolvency Practitioner will take place. The debtor will then complete a prescribed financial statement and the Insolvency Practitioner will advise the debtor of his options, and manage the debtor’s DSA proposal. The Insolvency Practitioner will make the application to the Insolvency Service on the debtor’s behalf accompanied by a statement that the Insolvency Practitioner is of the opinion that the information in the debtor’s financial statement is correct, that the debtor satisfies the eligibility criteria, that there is no likelihood of the debtor becoming solvent within the next 5 years and that it is appropriate for the debtor to apply for a DSA. The application will also be accompanied by a statutory declaration from the debtor.
The Insolvency Service will, if it is satisfied that the application is in order, issue a certificate to that effect and forward the certificate, the application and any supporting documentation to the appropriate court. The court will then decide whether or not to issue the protective certificate, and may hold a hearing if it requires further information or evidence. A protective certificate will last for 70 days, with provision for extension by a further 40 days in certain circumstances. Once the protective certificate issues, certain enforcement proceedings and other actions may not be initiated in relation to the debts specified therin while it is in force. The Insolvency Practitioner must then notify the relevant creditors, and invite submissions as to how the debts might be settled.
While secured debt cannot form part of a DSA, the Insolvency Practitioner may share information with secured creditors. The Insolvency Practitioner must arrange a creditors’ meeting at which creditors representing not less than 65% in value of the debts due to creditors participating in the meeting must approve the DSA for it to move forward. If approved, the Insolvency Practitioner must notify the Insolvency Service, which must provide a copy of the DSA to the appropriate court. If approved by the court (and no creditor objection is entered within 14 days or where any creditor objection has been dismissed) the DSA will take effect once registered by the Insolvency Service in the Register of Debt Settlement Arrangements.
A DSA may include provisions for the payment of lump sums, the transfer of assets to creditors or the sale of assets. Unless otherwise specified, payments shall be made to creditors who are party to the DSA on a pari passu basis, and provision may also be included for a charge or guarantee to be provided by the debtor or another person.
A DSA will last for 5 years (with a possible 1 year extension) during which time certain enforcement and other action is stayed. Ongoing obligations are imposed on both the Insolvency Practitioner and the debtor for the duration of the DSA and, unless terminated during its term (for example, if a 6 month arrears default occurs), the debtor will be discharged from the debts specified in the DSA once it expires.
Debt Relief Notices (DRNs)
A DRN allows a full write-off of qualifying unsecured debt up to €20,000 following a 3 year "supervision period". Secured debt is unaffected.
The DRN procedure is designed to provide debt forgiveness to those debtors with little or no ability to pay off their debts and is available in respect of certain qualifying unsecured debts including credit card debt, utility bills and overdrafts. In addition to the requirement that the debtor be insolvent and have no likelihood of becoming solvent within 3 years of the application date, the eligibility criteria for a DRN also include the debtor having net disposable income of less than €60 per month, assets or savings worth less than €400 and Irish domicile or ordinary residence. Further, a debtor may not apply for a DRN where, within the 2 years preceding the application date, he has entered into a transaction at an undervalue which has contributed towards his financial difficulties, or he has given a preference to a person that has substantially reduced the amount available to discharge his other debts. A debtor will, however, be allowed to exclude from a DRN certain household items and business-related books, tools and equipment up to €6,000, an item of personal jewellery valued up to €750 and a motor vehicle worth less than €2,000. Applications are managed by an Approved Intermediary who must meet with the debtor, advise as to possible options, assist in the completion of a prescribed financial statement and make the DRN application on the debtor’s behalf to the Insolvency Service. If satisfied that a DRN application is in order, the Insolvency Service will issue a certificate to that effect and refer the application and supporting documentation to the appropriate court for approval. If approved by the court (the court has a right to hold a hearing where it requires further information or evidence to enable it to reach its decision) the court will issue the DRN and notify the Insolvency Service. The DRN will take effect once registered by the Insolvency Service in the Register of Debt Relief Notices.
A DRN will remain in place for a 3 year period. Where a debtor’s income increases by €400 or more per month during the supervision period, he must surrender at least 50% of that increase to the Insolvency Service. The debtor may also buy himself out of the DRN by making repayments equivalent to at least 50% in value of the qualifying debt (the balance then being written-off). At the end of the 3 year moratorium, the qualifying debts are written-off without affecting the rights of the debtor’s secured creditors to enforce their security.
Treatment of Pensions
Additional provisions were approved at Report Stage in the Seanad regarding the treatment of pensions. In the case of a DRN, a pension will not be counted when calculating the assets and savings threshold of €400 however payments which the debtor is entitled to receive but has not yet received will be regarded as income. In the case of DSAs and PIAs a debtor cannot be required to hand over his ‘pension pot’ nor can he be required to draw his pension early. However, the Act does include provision whereby a creditor or Insolvency Practitioner can apply to the appropriate court for relief where it believes that excessive contributions to a pension arrangement were made within the 3 years prior to the issuing of the protective certificate with a view to putting funds out of reach of creditors. Further, amendments have also been made to the Bankruptcy Act whereby future entitlements to payment under a "relevant pension arrangement" will not vest in the official assignee in bankruptcy, subject to certain conditions. Income from that pension may, however, be claimed.
The Insolvency Service
Under the Act, an independent body known as the Insolvency Service is being established. It will be responsible for monitoring the operation of the Arrangements, considering applications for DRNs, processing applications for protective certificates, maintaining registers of Arrangements, providing information to the public, preparing and issuing guidelines as to what constitutes "a reasonable standard of living" and "reasonable living expenses" and authorising, supervising and regulating Insolvency Practitioners. The Insolvency Service will be required to prepare and adopt a business plan each year, and submit annual reports to the Minister. The Director Designate of the Insolvency Service, Lorcan O’Connor, was appointed by the Minister in September 2012.
As mentioned above, for the purposes of applications for an Arrangement, the Insolvency Service will be required to issue guidelines as to what constitutes "a reasonable standard of living" and "reasonable living expenses" following consultation with the Minister, the Minister for Finance and the Minister for Social Protection. In preparing those guidelines, the Insolvency Service will be required to have regard to Government policy publications on poverty, official statistics and surveys published by the Central Statistics Office, the Consumer Price Index, individual needs and the principle of social inclusion. The guidelines, which must be publicly available on the website of the Insolvency Service and which must be updated annually, may provide examples of expenses which are, and are not, allowable.
Approved Intermediaries and Insolvency Practitioners
In the case of DRNs, the debtor must apply through an Approved Intermediary who must be authorised by the Insolvency Service. The Insolvency Service may also (with the Minister’s consent) prescribe criteria that persons must meet to be so authorised. It is expected that the Money Advice and Budgeting Service will be the Approved Intermediary in the majority of cases. In the case of DSAs and PIAs the Minister introduced, at Seanad stage, detailed provisions relating to Insolvency Practitioners which address the manner in which Insolvency Practitioners are to be authorised, regulated, investigated and sanctioned. Applications for authorisation will be to the Insolvency Service, will be valid for 1 year and can be renewed. The Insolvency Service will require detailed information from applicants including reports from qualified accountants, and may also require additional evidence of character, competence or financial position. Unsuccessful applicants for authorisation or for renewal of authorisation will have a right of appeal to the Circuit Court. The Act also sets out general provisions regarding Insolvency Practitioners’ record-retention obligations (6 years following completion of his involvement in an Arrangement) and the obligation to hold professional indemnity insurance. The Insolvency Service may also make regulations regarding the types of bank accounts that Insolvency Practitioners may open, how they are to be managed, and what records must be kept. The Insolvency Service may also apply to the High Court for orders directing that payments not be made from particular accounts, or that disposals not take place. The Act also provides for the establishment of a Complaints Committee by the Insolvency Service and the appointment of inspectors to investigate those complaints. Inspectors will have wide-ranging powers and will be able to apply to the District Court for search warrants. The Act contemplates two types of sanction for Insolvency Practitioners: major sanctions (revocation of authorisation, suspension of authorisation, prohibition from future authorisation, a fine of up to €30,000 or a combination of the foregoing) and minor sanctions (an advice, a caution, a warning, a reprimand or a combination of the foregoing). The Insolvency Service may seek the assistance of the Central Bank and the Garda Síochána in connection with the performance of its functions. Separately, the Act also contains provisions dealing with the resignation and removal of Approved Intermediaries and Insolvency Practitioners.
Specialist Judges of the Circuit Court
Part 6 of the Act establishes a new role - that of a specialist judge of the Circuit Court, for the purposes of performing and exercising the functions, powers and jurisdiction conferred on the Circuit Court by the Act. These roles will initially be filled by appropriately qualified serving county registrars.
The main changes which the Act will make to the Bankruptcy Act are as follows:
- for a creditor to petition, the minimum amount owed must be €20,000
- where the petition is presented by a debtor, the debtor must provide an affidavit that he has made reasonable efforts to reach an arrangement with his creditors by proposing a DSA or a PIA and show that his debts exceed his assets by at least €20,000 and the court must be satisfied that he is unable to meet his engagements with creditors for him to be declared bankrupt
- where the petition is presented by a creditor, the court shall consider whether a DSA or a PIA would be a more appropriate solution
- certain provisions regarding fraudulent preference and avoidance of certain transactions have been extended to 3 years
- the automatic discharge period has been reduced from 12 years to 3 years
- where a debtor has been adjudicated bankrupt more than 3 years before the Act came into force, he shall be discharged 6 months later (subject to the rights of creditors to raise objections)
- the court may suspend an automatic discharge up to the eighth anniversary of the debtor being adjudicated bankrupt
- once a debtor is discharged from bankruptcy, he will remain under a duty to cooperate with the Official Assignee in the realisation and distribution of such property as is vested in the Official Assignee
- The introduction of non-judicial debt settlement arrangements is a welcome step, aimed at bringing a consensual end to the difficulties of eligible debtors. Both DSAs and PIAs will offer debtors options to resolve their positions while ensuring that creditors play a part in the process so that they can recover as much as possible. The uncertainty and absence of non-judicial debt settlement arrangements that pre-dated the enactment of this Act helped neither borrowers nor lenders and has been a significant source of concern for potential purchasers of and investors in bank assets (in particular, consumer and mortgage loans). The Act seeks to achieve a more balanced position for both creditors and debtors. Detailed provisions regarding offences such as the provision of false information, the provision of misleading information, fraudulent disposals of property, or obtaining credit in excess of €650 without notifying the relevant creditor of the existence of an Arrangement, should act as a deterrent to unfounded applications for Arrangements. Furthermore, the provisions of the Act which oblige Insolvency Practitioners to advise and assist debtors, explore options and assess appropriateness are welcome inclusions from the perspective of making the pre-application process as robust as possible. Similarly the requirement for a debtor to swear a statutory declaration as to his assets is a welcome protection against abuse.
- While creditors may vote against a DSA or a PIA, the effect of such a course of action would be to leave debtors with the option of seeking bankruptcy, which would generally free them of all debts within 3 years. As mentioned above, the approval thresholds for PIAs may make it difficult for a secured creditor to block a proposed PIA, however the requirement that final approval of any Arrangement rests with the appropriate court is a welcome additional protection for secured creditors.
- Where more than one secured creditor is participating in a creditors’ meeting in respect of a PIA, given that distributions to creditors of the same class under a PIA will be on a pari passu basis unless the contrary is provided for in the PIA, which could result in a judgment mortgagee being placed on the same footing as a secured PPR lender, the PIAs provisions regarding the allocation of amounts received will likely form a key point of discussion at PIA creditors’ meetings.
- There are protections for PPRs and a PIA cannot provide for the sale of the PPR unless the costs of continuing to reside there are disproportionately large. So there will not be wholesale evictions but neither will borrowers be allowed stay in PPRs they clearly cannot afford. This appears to be a good balance.
- When presenting the Bill to Seanad Eireann on 21 November, the Minister set out his estimates as to the numbers that will avail of an Arrangement, or apply for bankruptcy, during the first full year of the Act’s operation. He anticipates (based on experiences under similar legislation in the United Kingdom and in Northern Ireland) 15,000 applications for the two main Arrangements: DSAs and PIAs, 3,000-4,000 applications for DRNs and 3,000 bankruptcy applications. He also noted his expectation that "…the certainty brought to the future legal landscape by this Bill will encourage debtors and creditors to agree bilaterally on alternative solutions. These solutions could involve settlement of mortgage debt under the mortgage arrears resolution process operated by mortgage lenders under the supervision of the Central Bank or otherwise".
Regarding timing, the Minister's statements indicate that the Insolvency Service should be formally launched during Q1 2013, with the regulatory and operational frameworks required before applications for Arrangements can be made being put in place during Q2 2013. It is difficult to estimate how long the process will take for each type of Arrangement, and this will also depend on the numbers who seek authorisation as Insolvency Practitioners. The length of each application process will become clearer over coming months. Noteably, the Minister has also signalled that, if additional provisions need to be included in the Act, or errors corrected, he will intervene with amending legislation.
The Act is of interest not just to secured and unsecured lenders in the Irish market, but will also be of interest to others as it proceeds through the legislative process, including:
- investors in Irish residential mortgage backed securities and covered bonds, who will be concerned that collateral could be written-down
- unsecured investors and shareholders in Irish banks who may fear that large write-downs will result in bank losses which exceed current capital buffers
- potential purchasers of Irish residential mortgage books or commercial real estate books who may also fear wholesale debt write-downs, but may welcome the taking of a first step towards formalising a process for working-out unsustainable debt