The High Court recently rejected an appeal by KBC Bank Ireland (“KBC”) to write down a portion of a debtor couple’s mortgage due to the uncertainty in the ability of the debtors to repay the warehousing portion of the loan. The Personal Insolvency Arrangement (“PIA”) which had been approved by the Circuit Court was upheld.
A Personal Insolvency Arrangement (“PIA”) is an insolvency procedure under the Personal Insolvency Act 2012 whereby a formal agreement is entered into between a debtor and one or more of his creditors. A PIA can include both secured and unsecured debts and will typically write off some unsecured debt and restructure any remaining secured debt.
In this case the wife was unable to work due to ill health and had only recently begun to receive an invalidity pension. The husband had been out of work for some time.
The PIA proposed by the Personal Insolvency Practitioner in this case allowed for a ‘negative equity’ write off of a large portion of the mortgage debt and allowed for a reduced mortgage interest rate.
KBC’s counterproposal involved an arrangement which would allow the couple to remain in their home and would enable the bank to recover a greater portion of the debt. The proposal involved splitting the secured debt into two amounts. The first part would be “warehoused” with a 0% interest rate. The debtors could repay some or all of the warehoused amount during their lifetimes, whether during the period of the active mortgage or afterwards. The second part of the proposal involved reduced mortgage repayments which would be made in respect of half of the mortgage debt. In addition, KBC would refrain from seeking to enforce its security.
Ms Justice Baker identified a number of aspects of KBC’s proposal that she regarded as being unreasonable. She stated that a warehousing solution could only be reasonable if it used present or known figures that would contribute to rectifying the indebtedness. The Court held KBC’s proposal was not reasonable because it failed to take the ability of the debtors to make repayments in the future into consideration.
Ms Justice Baker noted that a Personal Insolvency Practitioner has a “broad discretion” to devise a proposal for a PIA based on the individual financial circumstances of each debtor. She stated that the Personal Insolvency Acts permit a PIA to include provisions whereby a portion of the repayment of debt can be deferred or “warehoused” and then repaid at a future date, but these provisions would have to be reasonable in light of the means of a debtor to repay and other circumstances such as the debtors’ occupation.
Ms Justice Baker stated that KBC’s proposal could lead to a situation of insolvency twenty three years later, at the end of the mortgage term, and that this was deemed unreasonable. Ms Justice Baker also stated that it was not reasonable to assume that the couple would be living in the same property for the rest of their working lives.
This decision highlights the need for PIAs to be a genuine and balanced route out of insolvency. It does not exclude the possibility of ‘warehousing’ portions of secured debt as part of a PIA but such a measure should not scupper the rationale of PIAs, namely a way out of life-long debt.