Personal Insolvency Bill, July 2012 -

This Briefing contains a general summary of developments, and is not a complete or definitive statement of the law. Specific legal advice should be obtained where appropriate.

On 26 June 2012, the Taoiseach announced that the Personal Insolvency Bill 2012 (the "Bill") had been approved by the Government (some two months after its originally-expected publication date of end-April).¹ The leading banks, following a meeting with the Economic Management Council, then issued statements regarding their approaches to mortgage arrears and, in some cases, details of their proposed modification and forbearance techniques. The Bill itself was published on 29 June, and sets out further detail on three proposed non-judicial debt settlement arrangements (the "Arrangements") (with some variations from the heads of bill published on 25 January 2012 (the "Heads of Bill")) and the proposed reforms to the Bankruptcy Act 1988 (the "Bankruptcy Act"). It is expected to be passed into law later this year.

Arrangements

The three Arrangements proposed by the Bill are:

Personal Insolvency Arrangements (PIAs) (the only Arrangement applicable to secured debt)
Debt Settlement Agreements (DSAs)
Debt Relief Notices (DRNs)

There are a number of common themes in 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 a five year period following the making of an application for an Arrangement
the application must be made through a third party (an approved intermediary (an "Approved Intermediary") in the case of DRNs, and a personal insolvency practitioner (an "Insolvency Practitioner") in the case of DSAs and PIAs) 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
creditors can object to an Arrangement but, in the case of a DRN, their consent is not needed
a debtor may only avail of each Arrangement once
a debtor has no right of appeal against a decision taken at a creditors' meeting in respect of a DSA or 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 Heads of Bill, and in the Bill itself, is particularly noteworthy as secured debt (including residential mortgages and buy-to-let mortgages) up to €3,000,000 can come within the scope of a PIA. While, as drafted, it is unlikely that mortgage lenders will frequently be compelled to accept a write-down of secured debt, the Bill does provide debtors with a process by which they can apply for this. The process should be robust enough 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 Bill does still provide protections for secured creditors, including a claw-back provision.
Possibly the most contentious point in the Heads of Bill was the question of the extent to which secured creditors could block, or not block, PIAs, or could be squeezed-out if in a minority. Notably, while the Heads of Bill required 65% in value of creditors (secured and unsecured) together with 75% of secured creditors and 55% of unsecured creditors to vote in favour of a PIA, this has been revised downwards in the Bill. 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 now do so. 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 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 (e.g. buy to lets and commercial investments) and it is therefore possible that the secured creditor on a PPR could be out-voted by other secured creditors.
The Heads of Bill and the Bill provide significant protections against abuse and contain 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 non-statutory resolution processes for at least six months before being eligible to apply for an Arrangement.
The process for approving Arrangements, and their effective dates, has also been updated between the Heads of Bill and the Bill itself. Each arrangement must now be approved by the "appropriate court"² and will take effect when published by the Insolvency Service on the appropriate register³.
Further details in relation to the Insolvency Service, Approved Intermediaries and Insolvency Practitioners are set out later in this Briefing.

Personal Insolvency Arrangements (PIAs)⁴

A PIA allows for the settlement of secured debt up to €3,000,000, and unsecured debt, over a six year period (with a possible one 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 judgement 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 initial application by the Insolvency Practitioner is to the Insolvency Service for a protective certificate that will last for seventy days (with a possible forty day extension).⁵ While the Heads of Bill contemplated an application being accompanied by a statutory declaration from the Insolvency Practitioner, such an application must instead now be accompanied by, amongst other documents, a statutory declaration from the debtor, confirmation from the debtor that he meets the relevant eligibility criteria and a statement from the Insolvency Practitioner that he 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 five years and that it is appropriate for the debtor to apply for a PIA. Further, where the proposed PIA relates to PPR mortgage debt, the debtor must confirm that he has cooperated with the secured creditor's Mortgage Arrears Resolution Process under the Code of Conduct on Mortgage Arrears published by the Central Bank of Ireland (the "Central Bank") for at least six months, following which an alternative repayment arrangement ("ARA") was not capable of being agreed, or the secured creditor was not prepared to offer an ARA to the debtor. The Insolvency Practitioner must then notify the relevant creditors of the protective certificate and the proposed PIA, seeking submissions.

The Bill 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 whereby, if a PIA requires the sale of a property and the realised value is less than the amount due to the secured creditor, the remaining balance will abate in equal proportion to the unsecured debts covered by the PIA and shall be discharged with them on completion of the PIA. The PIA proposals also include certain protections for secured creditors so that a minimum amount is payable to secured creditors. This is aimed at ensuring that any write-down does not reduce the principal below the lesser of (a) the value of the security or (b) the amount of the debt secured thereby. It also provides for a clawback if the property is subsequently sold, unless agreed otherwise. Regarding the valuation of security, this is to be determined by agreement between the debtor (via the Insolvency Practitioner) and the relevant secured creditor. Where the Insolvency Practitioner does not accept the secured creditor's estimate, both sides must endeavour to agree a market value having regard to certain factors. In the absence of agreement, the valuation will be performed by an independent person.

Where a PIA relates to PPR mortgage debt, it is interesting to note that all secured debt (mortgages over PPRs and buy to-let properties, and second charges) are treated the same. Judgement mortgages will also be treated as secured debt. This could produce unfair results at PIA creditors' meetings in respect of holders of PPR mortgages.

The creditors must be given certain documents by the Insolvency Practitioner when he calls the creditors' meeting. 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 per cent 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 per cent⁶ of the value of secured debts owed to creditors participating in, and voting at, the meeting
creditors representing more than 50 per cent⁷ of the value of the unsecured debts owed to creditors participating in, and voting at, the meeting.

If the PIA is approved, it must be sent to the Insolvency Service. If no creditor objection is lodged with the appropriate court within twenty-one days, or if such a creditor objection is not approved by the court, and the appropriate court 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. 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 six 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 unaffected⁸.

A DSA may be proposed by a debtor to one or more creditors⁹ in respect of the settlement of unsecured debts. Again, the debtor must be insolvent and meet certain eligibility criteria. The application for a DSA setting out a repayment proposal in respect of so much of the debt as the debtor believes can be repaid must be made via an Insolvency Practitioner who must first apply for a protective certificate from the Insolvency Service. While the Heads of Bill contemplated an application being accompanied by a statutory declaration from the Insolvency Practitioner, such an application must instead now be accompanied by, amongst other documents, a statutory declaration from the debtor, confirmation from the debtor that he meets the relevant eligibility criteria and a statement from the Insolvency Practitioner that he 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 five years and that it is appropriate for the debtor to apply for a DSA. A protective certificate will last for seventy days, with provision for extension by a further forty days in certain circumstances.¹⁰

Once the protective certificate issues, certain enforcement proceedings and other actions cannot be initiated 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 per cent in value 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 ten 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 will last for five years (with a possible one 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 six 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 three year "supervision period" (the Heads of Bill had provided for a one year moratorium only). 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", 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. Notably, a debtor cannot apply for a DRN where 25 per cent or more of the qualifying debts were incurred within the six months preceding the application.

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 application on the debtor's behalf to the Insolvency Service for consideration. If satisfied that the application is in order, the Insolvency Service will refer the application to the appropriate court for approval and the DRN will take effect once registered in the Register of Debt Relief Notices.

A DRN will remain in place for a three year moratorium period (subject to extension or termination) subject to the debtor's ability to buy himself/herself out of the DRN by making repayments equivalent to at least 50 per cent in value of the qualifying debt (the balance then being written-off). At the end of the three year moratorium, the qualifying debts are written-off, without affecting the rights of the debtor's secured creditors to enforce their security.

The Insolvency Service

The Bill proposes the establishment of an independent body, to be known as the Insolvency Service, which will be responsible for monitoring the operation of the Arrangements. Its role will involve considering applications for DRNs, processing applications for protective certificates, and maintaining registers of Arrangements agreed under the new legislation. The Director Designate of the Insolvency Service is expected to be appointed by the Minister for Justice (the "Minister") over the summer.

Approved Intermediaries and Personal Insolvency Advisors

In the case of DRNs, the debtor must apply through an Approved Intermediary (who must be authorised by the Insolvency Service and is generally expected to be the Money Advice and Budgeting Service ("MABS")). In the case of DSAs and PIAs, the debtor must appoint an Insolvency Practitioner to provide advice and make the application. Insolvency Practitioners are likely to be accountants and lawyers; an indemnity bond of at least €600,000 must be in place in respect of each Insolvency Practitioner, and a compensation fund of not less than €9,000,000 is envisaged for the compensation of debtors and creditors who could suffer a loss due to the theft or misappropriation of their funds. The Minister may also designate a person to regulate Insolvency Practitioners, which will provide additional protections to debtors and creditors negotiating DSAs and PIAs. Further, the draft Bill contains detailed provisions regarding the functions of an Insolvency Practitioner, in particular as regards meeting with the debtor, providing advice and assistance, assessing appropriate options and the factors which the Insolvency Practitioner must take into account prior to making an application on behalf of a debtor.

Bankruptcy

The main changes proposed by the Bill 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, there is no longer a requirement for the debtor to possess assets capable of raising at least €1,900; the court shall, on proof that the debtor is insolvent and unable to meet his obligations to his creditors, declare the debtor bankrupt
certain provisions regarding fraudulent preference and avoidance of certain transactions have been extended to three years
the automatic discharge period has been reduced from twelve years to three years
where a debtor has been adjudicated bankrupt more than three years before the Bill comes into force, he shall be discharged six 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, the debtor 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

Comment

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 current uncertainty and absence of non-judicial debt settlement arrangements helps neither borrowers nor lenders, and is a significant source of concern for potential purchasers of and investors in bank assets (in particular, consumer and mortgage loans).¹¹ The Bill builds on the provisions of the Heads of Bill, but provides for additional requirements and protections, leading to 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 €1,000 without notifying the creditor of the existence of an Arrangement, should act as a deterrent to unfounded applications for Arrangements. Furthermore, the provisions of the Bill regarding the obligations on an Insolvency Practitioner to advise and assist the debtor, explore options and assess appropriateness are a welcome inclusion 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 or her 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 three years. As mentioned above, the approval threshold for PIAs has been reduced in the draft Bill, which may lead to it being more difficult for a secured creditor to block a proposed PIA. Balanced against that, the inclusion of a 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 judgement 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 a PPR 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.
The Bill contemplates the issuing of guidance, by way of Codes of Practice to be published by the Insolvency Service, regarding the mandatory requirements for DSA and PIA proposals, which may include guidelines regarding the assessment of reasonable expenditure and essential income when determining what a debtor might need to enable him to maintain a "reasonable standard of living".

The Bill 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 (RMBS) 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 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

Footnotes

1 The publication of the Heads of Bill was preceded by the publication, in November 2010, of the Final Report of the Mortgage Arrears and Personal Debt Group, and the publication in December 2010 of the Law Reform Commission's Report on Personal Debt Management and Debt Enforcement. The Heads of Bill set out the Government's proposals for three non-judicial debt settlement arrangements which would allow for the write-down or restructuring of both secured and unsecured debt owed by certain eligible individuals, and contemplated a reform of existing Irish bankruptcy law (currently set out in the Bankruptcy Act 1988).

2 The Circuit Court where the total liabilities in respect of an Arrangement are up to €2,500,000 and, if above €2,500,000, the High Court.

3 The Insolvency Service will be tasked with establishing a Register of Debt Relief Notices, a Register of Protective Certificates, a Register of Debt Settlement Arrangements and a Register of Personal Insolvency Arrangements.

4 The Bill provides for a review of the operation of this particular type of Arrangement every five years.

5 The time-frame in the Bill for the duration of a protective certificate has been extended beyond that contained in the Heads of Bill.

6 The Heads of Bill required approval of at least 75% of secured creditors.

7 The Heads of Bill required approval of at least 55% of unsecured creditors

8 The requirement in the Heads of Bill that the unsecured debt be a minimum of €20,001 has been removed.

9 The requirement in the Heads of Bill that the proposal be in respect of at least two creditors has been reduced to one creditor

10 The time-frame in the Bill for the duration of a protective certificate has been extended beyond that contained in the Heads of Bill.

11 On 8 June 2012, the Central Bank announced that it had started to receive supplemental information from leading mortgage lenders in relation to their mortgage arrears resolution strategies and, in particular, details of proposed loan forbearance and modification techniques, "broadly in line with the recommendations of the Keane Report" (the 30 September 2011 report of the Inter-Departmental Mortgage Arrears Working Group) and scheduled for implementation in the final quarter of 2012. In light of the Central Bank's requirement that such techniques be implemented promptly, over the course of the last week various Irish lenders have issued statements regarding their respective approaches to mortgage arrears and loan forbearance. Bank of Ireland has stated its policy as being one of dealing with arrears "on a case by case basis", having already "extended significant support to customers who are experiencing current difficulties in repaying their mortgage". AIB and EBS confirmed that they are working towards ensuring full alignment with the requirements of the draft Bill, and that options such as split mortgages, negative equity mortgages and voluntary sale-for-loss are being examined. KBC announced that it will be piloting medium-term mortgage arrears solutions, including a loan term extension option, and a three year interest only option. Permanent TSB announced that it is examining a number of initiatives, including term extensions, reduced repayments, split mortgages, equity participations and negative equity mortgages. Ulster Bank confirmed that its forbearance arrangements are "tailored to reflect individual circumstances".

This article contains a general summary of developments and is not a complete or definitive statement of the law. Specific legal advice should be obtained where appropriate.